-----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, ITUl1mk1mS9Nwh5zrqc1QUjarvPJ6+MRk4Mvcgp0sLHt7O2fEDp6XdARwmwH19PV 6kqqZTI5WHwTuU9tnTyKVQ== 0000909012-99-000260.txt : 19990403 0000909012-99-000260.hdr.sgml : 19990403 ACCESSION NUMBER: 0000909012-99-000260 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 10-K SEC ACT: SEC FILE NUMBER: 001-04743 FILM NUMBER: 99583732 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 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1998 ------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number 1-4743 ------ 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 BLVD., LONG ISLAND CITY, N.Y. 11101 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (718) 392-0200 --------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- ----------------------------------------- COMMON STOCK NEW YORK STOCK EXCHANGE ------------ ----------------------- Securities registered pursuant to Section 12(g) of the Act: NONE - -------------------------------------------------------------------------------- (TITLE OF CLASS) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common voting stock based on a closing price on the New York Stock Exchange on February 28, 1999 of $21.4375 per share held by non-affiliates of the registrant was $165,689,366. For purposes of the foregoing calculation, all directors and officers have been deemed to be affiliates, but the registrant disclaims that any of such are affiliates. As of the close of business on February 28, 1999 there were 13,051,350 shares outstanding of the Registrant's Common Stock. 1 PART I ITEM 1. BUSINESS -------- (A) GENERAL DEVELOPMENT OF BUSINESS ------------------------------- Registrant manufactures replacement parts and automotive related items for the automotive industry. The Registrant's continuing operations consist of two product segments. The Engine Management segment consists primarily of ignition and electrical parts, emission and engine controls, on-board computers, sensors, ignition wires, battery cables, carburetor and fuel system parts. The Temperature Control segment consists primarily of air conditioning compressors, clutches, accumulators, filter/driers, blower motors, heater valves, heater cores, evaporators, condensers, hoses and fittings. In March 1998 the Registrant completed the exchange of its brake business for the temperature control business of Moog Automotive, Inc., a subsidiary of Cooper Industries. This transaction involved an exchange of certain assets, assumption of certain liabilities, and payment of cash to achieve an equivalent exchange value. The Registrant filed the transaction with the Department of Justice and received regulatory approval of the exchange in December of 1997. The brake business is accounted for in the Registrant's consolidated financial statements as a discontinued operation. The Registrant's December 31, 1997 consolidated financial statements reflect a $14,500,000 loss on the disposal of the brake business, which consists of an estimated loss on the exchange of the business of $14,000,000 and a provision of $500,000 for anticipated losses until the completion of the disposal. No additional income or loss was recorded for the brake business in 1998. In the fourth quarter of 1998, the Registrant completed the largest phase of its agreement to sell the Service Line business to R&B, Inc. This transaction involved the sale of selected assets of the Champ Service Line and the Pik-A-Nut Fastener Line. Completion of the smallest and final phase of the sale, for the assets of the Everco Brass and Brake Lines, was completed in the first quarter of 1999. The Service Line Business is accounted for in the Registrant's consolidated financial statements as a discontinued operation. The Registrant's December 31, 1997 consolidated financial statements reflect a loss on the disposal of the Service Line business of $12,500,000, consisting of an estimated loss on the sale of the business of $12,000,000 and a provision of $500,000 for anticipated operating losses until the closing of the sale. No additional income or loss was recorded for the service line business in 1998. On October 19, 1998, the Registrant sold substantially all of the assets related to its Fuel Pump business to the Pierce Company, Inc. The Registrant's consolidated financial statements at December 31, 1998 reflect a loss on disposal of $1,500,000 pertaining to the Fuel Pump business. In January 1999, the Registrant acquired, through its European subsidiary Standard Motor Products Holdings Limited, 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, for approximately $3.5 million. Webcon is an assembler and distributor of automotive fuel system components and other engine management and motor sport performance products. Injection Correction is a leading remanufacturer of engine computers and has developed a line of engine diagnostic equipment. In February 1999, the Registrant acquired the Eaglemotive unit of Mark IV Industries, Inc. for $13,400,000. Eaglemotive, located in Fort Worth, Texas, manufactures and distributes fan clutches and oil coolers, and will compliment the Registrant's Temperature Control operations. 2 AUTOMOTIVE AFTERMARKET Factors favorably impacting the outlook for the ---------------------- automotive aftermarket include the growth in the number of vehicles on the road, an increase in the driving age population, an increase in longer duration vehicles and in the miles driven per year per vehicle, the high price of new cars, the attempt by retailers to displace traditional jobbers, and more stringent environmental laws. Conversely, the automotive aftermarket has been negatively impacted by the broader range in prices for replacement parts, the increased complexity of vehicle systems requiring a greater specialization of parts, higher quality new cars with longer service warranties and the effect of foreign imports and dealer versus non-dealer servicing. The net impact of these factors result in a forecast for the automotive aftermarket to grow at one to two percent over the next several years. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS --------------------------------------------- DISTRIBUTION OF SALES The table below shows the registrant's sales by --------------------- operating segment.
YEARS ENDED DECEMBER 31, ------------------------ (Dollars in thousands) 1998 1997 1996 ------------------- -------------------- ------------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ENGINE MANAGEMENT: Ignition Parts $256,913 39.6% $265,662 47.4% $259,782 50.6% Wires and Cables 68,840 10.6% 70,484 12.6% 60,718 11.9% Fuel System Parts 22,911 3.5% 29,678 5.3% 32,909 6.4% -------- ----- -------- ----- -------- ----- TOTAL ENGINE MANAGEMENT 348,664 53.7% 365,824 65.3% 353,409 68.9% TEMPERATURE CONTROL SYSTEMS 297,144 45.8% 187,918 33.6% 156,423 30.4% All Other 3,612 0.5% 6,081 1.1% 3,575 0.7% -------- ----- -------- ----- -------- ----- TOTAL $649,420 100% $559,823 100% $513,407 100% -------- ----- -------- ----- -------- -----
In the year ended December 31, 1998, the registrant's five largest customers accounted for approximately 30% of sales. The loss of one or more of these customers could have an adverse effect on the Registrant's financial condition and results of operations. OPERATING PROFIT AND IDENTIFIABLE ASSETS The table below shows the ---------------------------------------- registrant's operating profit and identifiable assets by reportable operating segment.
YEARS ENDED DECEMBER 31, ------------------------ (Dollars in thousands) 1998 1997 1996 ------------------- ------------------- ------------------- Operating Identifiable Operating Identifiable Operating Identifiable Profit Assets Profit Assets Profit Assets ------ ------ ------ ------ ------ ------ Engine Management $ 32,243 $ 311,716 $ 28,179 $ 317,162 $ 43,149 $ 317,761 Temperature Control Systems 19,672 183,187 7,302 107,406 13,712 120,912 All Other (7,984) 26,643 (26,026) 152,569 (12,127) 186,133 -------- --------- -------- --------- -------- --------- TOTAL $ 43,931 $ 521,556 $ 9,455 $ 577,137 $ 44,734 $ 624,806
"All Other" consists of items pertaining to the corporate headquarters function, a business unit that does not meet the criteria of a reportable operating segment and businesses that have been sold. 3 IGNITION PARTS Replacement parts for automotive ignition and emission -------------- control systems account for about 40% of the Registrant's 1998 revenues. These parts include distributor caps and rotors, electronic ignition control modules, voltage regulators, coils, switches and sensors. The Registrant is a basic manufacturer of many of the ignition parts it markets. These products cover a wide range of applications, from 30-year old vehicles to current models, both domestic and import, including passenger car, truck, farm, off-road and marine applications. All new vehicles are factory-equipped with computer-controlled engine management systems to control ignition, emission control and fuel injection. 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. The Registrant is a leader in the manufacture and sale of these engine management component parts, including remanufactured automotive computers. Electronic control modules and electronic voltage regulators comprise a significant portion of registrant's total ignition sales. The Registrant is one of the few aftermarket companies that manufactures these parts, and the first independent aftermarket supplier to manufacture the complex electronic control modules for DIS (distributor-less ignition systems). The Registrant's Electronic Business Unit consists of design work and highly-automated manufacturing operations, which are performed in Orlando, FL, and assembly operations, which are performed in Hong Kong and Puerto Rico. The Registrant's sales of such parts as sensors, valves and solenoids have increased steadily as automobile manufacturers equip their cars with more complex engine management systems. New government emission laws such as the 1990 Federal Clean Air act are increasing automotive repair activity, creating an increase in parts sales. Although there is much controversy over how quickly these new procedures will be implemented, there is no doubt they will have a positive impact on sales of the registrant's products. The Registrant is a basic manufacturer of oxygen sensors, MAP (Manifold Absolute Pressure) sensors, throttle position sensors, coolant temperature sensors, air charge temperature sensors, EGR (Exhaust Gas Recirculation) valves, air pump check valves, idle air control valves and a number of different types of solenoids. Oxygen sensors are a leading product in emission controls, with relatively few basic manufacturers. In September 1997, the Company acquired the oxygen sensor manufacturing business of AlliedSignal and has relocated the manufacturing assets from AlliedSignal's plant to a new facility in Wilson, North Carolina. This acquisition has improved the Company's position in this growing emissions market. The joint venture entered into in 1992 with Blue Streak Electronics, Inc., A rebuilder of engine management computers and MAF sensors, has positioned the registrant as a key supplier in the fast growing remanufactured electronics market. In 1994, the registrant increased its offering of remanufactured computers, and instituted a program to offer slower-moving items by overnight shipment from its factory. This has enabled the Registrant's customers to expand their coverage without increasing inventory investment. In 1997 a branch of Blue Streak Electronics, Inc. Was opened in Boca Raton, Florida to meet the growing demand of the U.S. market for overnight repair of slower moving engine computers. This JV maintains a research and development facility in Haifa, Israel and is expanding further into European markets through its JV, Blue Streak Europe LTD., located in England. In January 1999 Blue Streak Europe acquired 100% of the stock of Injection Correction UK LTD. Injection Correction is a remanufacturer of engine computers and has developed a line of engine diagnostic equipment. 4 In 1996, the Registrant acquired a majority equity interest in Standard Motor Products Holdings Limited, and followed this action with 1999 acquisitions of majority stakes in Webcon Limited and, as mentioned above, Injection Correction Limited. These three companies, based in Great Britain, supply ignition components, fuel system components and rebuilt engine computers throughout the UK and Western Europe. They provide a solid base to increase sales in Europe, a market that is forecast to grow at a rate more than double that of the U.S. Like most automotive aftermarket suppliers, the Registrant began by offering mechanical ignition parts which were equal in quality to O.E. (Original equipment parts installed on new vehicles). A number of decades ago, the Registrant pioneered the concept of offering an alternate higher level of quality, significantly better than O.E. And priced proportionately higher. These parts were sold under the Blue Streak brand. In recent years this has evolved to a "good-better-best" concept, and a lower priced line has been made available under the registrant's Tru-Tech brand. WIRES AND CABLES Wire and cable parts account for about 11% of the ---------------- Registrant's 1998 revenues. 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. The Registrant has 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, the registrant 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. The acquisition of Federal Parts Corporation in February 1996, the leading supplier of economy wire sets in the industry, expanded the Registrant's presence in the ignition wire business. The acquisition of Filko Automotive (January 1997) further expanded wire sales within its existing presence in the retail market. FUEL SYSTEM PARTS Fuel system parts, including fuel pumps, account for ----------------- about 4% of the Registrant's 1998 revenues. The fuel pump business, with 1998 sales of approximately $6.7 Million, was sold to the Pierce Company, Inc. On October 19, 1998. As of January 1999, the Registrant manufactures and markets nearly 1500 parts for the maintenance and repair of automotive carburetors and fuel injection systems. For several decades, the Registrant's most important fuel system product was the carburetor rebuilding kit. However, nearly all new cars are equipped with electronic fuel injection systems instead of carburetors. Therefore, sales of carburetor kits have been declining in recent years. Of the 23% decline in sales of fuel system parts over the past year, 10% is due to the decrease in fuel pump sales, and the remainder can be attributed to the reduced sales of carburetor kits. Partially offsetting these aforementioned decreases is the Registrant's sales of fuel injection parts, which have steadily increased. This segment of the business is expected to grow. 5 TEMPERATURE CONTROL SYSTEMS The Registrant manufactures, re-manufactures, --------------------------- and markets a complete line of replacement parts for automotive climate control systems (air conditioning and heating), under the brand names Four Seasons, Murray, Everco, Factory Air, Trumark, API/ADI, Hayden, and Unimotor. Temperature Control also offers private label packaging to its larger accounts. 1998 Revenues from the Temperature Control Division account for approximately 46% of the Registrant's revenues. In 1998, the Registrant completed its consolidation of Cooper Industries' Moog Automotive temperature control business and is now the industry's largest aftermarket supplier of automotive climate control products. The integration of manufacturing facilities acquired from Cooper should produce operational synergies that are expected to result in substantial cost savings. Production of all heat exchange products will be consolidated into the newly acquired Fort Worth, TX manufacturing facility. Blower motor and radiator fan production has been consolidated into Temperature Control's Unimotor facility in St. Thomas, Ontario. Over the past few years, the Registrant has invested in the growing market for temperature control products through expanded manufacturing capabilities and acquisitions. During 1996, Temperature Control expanded its product offering by becoming the first aftermarket company ever to manufacture completely new air conditioning compressors. In 1997, Temperature Control offered more than ten models of new compressors manufactured in its Grapevine, TX. Facility. The 1995 acquisition of API/ADI in Cumming, Georgia, a manufacturer of steel filter dryers and accumulators, the start up of Unimotor, and the acquisition of Hayden, a basic manufacturer of fan clutches and transmission oil coolers located in Corona, California, broadened the Registrant's range of temperature control products to include powertrain cooling as well as interior climate control products. The acquisition of Eaglemotive Corporation in March 1999 will complement Hayden's product line and ensure a leading position in that market. Temperature Control strengthened its presence in the international market by opening a new European distribution center in Strasbourg, France, which became fully operational in January of 1997. Four Seasons Europe will assure the rapid availability of the Registrant's temperature control products throughout Europe, Africa, and the Middle East. A joint venture with Valeo, SA, one of the largest European automotive equipment manufacturers was begun in April of 1997 to remanufacture air conditioner compressors for the developing European market. (C) NARRATIVE DESCRIPTION OF BUSINESS --------------------------------- SALES AND DISTRIBUTION The Registrant sells its products primarily ---------------------- throughout the United States and Canada under its proprietary brand names and private labels to approximately 1,500 warehouse distributors and major retailers, who distribute to approximately 15,000 jobber outlets. The jobbers sell the Registrant's products primarily to professional mechanics, and secondarily to consumers who perform their own automobile repairs. The Registrant has a direct field sales force of approximately 280 persons. The acquisition of Standard Motor Products Holdings LTD., and the opening of a Temperature Control distribution center in France offer the Company further sales opportunities outside of North America. The Registrant generates demand for its products by directing the major portion of its sales effort to its customers' customers (i.E. Jobbers and professional mechanics). In 1998 the registrant conducted approximately 4,000 instructional clinics, which teach mechanics how to diagnose and 6 repair complex new electronic ignition systems and automotive climate control systems. The registrant also publishes and sells service manuals to registered mechanics. In addition, the Registrant's Standard Plus Club, a professional service dealer network comprising approximately 13,000 members, offers technical and business development support and has a technical service telephone hotline. The Company continues to expand into the retail market by selling its products to large retail chains, such as Autozone, Pep Boys, Advance and many others. The Registrant expects continued growth in the retail market in future years. SEASONALITY Historically, the Registrant's operating results have ----------- fluctuated by quarter, with the greatest sales and earnings occurring in the second and third quarters of the year. It is in these quarters that demand for the Registrant's products is typically the highest. It is anticipated that these quarterly fluctuations will become more pronounced in the future as a result of the divestiture of the brake business and the expansion of the more seasonal Temperature Control business. PRODUCTION AND ENGINEERING The Registrant engineers, tools and -------------------------- manufactures many of the components for its products, except for certain commonly available small parts in climate control, fuel system products and certain very low volume products in all product lines. The Company also performs its own plastic and rubber molding operations, stamping operations, automated electronics assembly and a wide variety of other processes. The Registrant has engineering departments staffed by 120 persons, approximately 65% of whom are graduate engineers. The departments perform product research and development and quality control and, wherever practical, design machinery for automation of the Registrant's factories. As new models of automobiles, trucks, tractors, buses and other equipment are introduced, the Registrant engineers and manufactures replacement parts for them. The Registrant employs and trains tool and die makers needed in its manufacturing operations. COMPETITION Although the Registrant is a leading independent manufacturer ----------- of automotive replacement parts and supplies, it faces substantial competition in all markets that it serves. A number of major manufacturers of replacement parts and supplies are divisions of companies having greater financial resources than those of the Registrant. In addition, automobile manufacturers supply virtually every replacement part sold by the Registrant. The competitive factors affecting the Registrant's products are primarily product quality, customer service and price. The Registrant's business requires that it maintain inventory levels sufficient for the rapid delivery requirements of customers. Management believes that it is able to compete effectively and that its trademarks and trade names are well known and command respect in the industry. BACKLOG Backlog is maintained at minimal levels by the Registrant. The ------- Registrant primarily fills orders, as received, from inventory and manufactures to maintain minimum inventory levels. SUPPLIES The principal raw materials purchased by the Registrant consist -------- of brass, electronic components, fabricated copper (primarily in the form of magnet wire and insulated cable), ignition wire, stainless steel coils and rods, aluminum coils and rods, lead, rubber molding compound, and thermo-set and thermo plastic molding powders. All of these materials are purchased in the open market and are available from a number of prime suppliers. Insurance the Registrant maintains basic liability coverage (general, product and automobile) of $1 million and umbrella liability coverage of 7 $50 million. Historically, the Registrant has not experienced casualty losses in any year in excess of its coverage. Management has no reason to expect this experience to change, but can offer no assurances that liability losses in the future will not exceed the Registrant's coverage. EMPLOYEES The Registrant employs approximately 3,700 people in the United --------- States, Canada, Puerto Rico, Europe and Hong Kong. In addition, the Registrant has joint venture operations in Canada and France. Of these, approximately 2,300 are production employees. Long Island City, New York production employees are unionized. On October 1, 1998, the hourly workers at the Long Island City facility, which produces products for the Company's Engine Management Division, initiated a work stoppage. The Registrant's labor contract with such workers expired on such date and the Registrant and such workers did not agree on terms of a new contract. The workers returned to work on November 13, 1998 and have since been working without a contract. Production has been operating satisfactorily since their return. Discussions are continuing with the union. The Registrant is optimistic that a new contract will be negotiated without a further work stoppage, but is prepared to operate the facility with salaried and temporary workers if a work stoppage occurs, as it did during the 1998 stoppage. Edwardsville, Kansas production employees are covered by a United Auto Workers contract that expires April 7, 2000. The Registrant believes that its facilities are in favorable labor markets with ready access to adequate numbers of skilled and unskilled workers. (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES ---------------------------------------------------------------------------- The Registrant sells its line of products primarily in the United States, with additional sales through Canada, Latin America, Europe and the Middle East. The table below shows the sales by geographic area for the last three years: (U.S. DOLLARS IN THOUSANDS) REVENUES -------------------------------------- United States $586,044 $493,823 $474,711 Canada 25,513 25,748 24,470 Other Foreign 37,863 40,252 14,226 -------- -------- -------- Total $649,420 $559,823 $513,407 ======== ======== ======== Export sales originating from the United States for the years ended December 31, 1998, 1997 and 1996 were $14,294,000, 15,843,000 and $12,243,000 respectively, and have been included in the category, Other Foreign. 8 ITEM 2. PROPERTIES ---------- The registrant maintains its executive offices and a manufacturing plant at 37-18 Northern Boulevard, Long Island City, NY. The table below describes the registrant's principal physical properties. (For information with respect to rentals, see note 18 of Notes to Consolidated Financial Statements on page F14.).
OWNED OR STATE OR SQUARE LEASE LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET EXP. DATE -------- ------- --------------------------- ---- --------- Corona CA Manufacturing and Distribution 65,400 2001 (Climate Control) Ontario CA Vacated and available for sublet 250,200 2003 Bradenton FL Manufacturing (Wire) 52,000 2004 Orlando FL Manufacturing (Ignition) 50,600 2006 Cumming GA Manufacturing (Climate Control) 32,000 2000 Cumming GA Distribution (Climate Control) 30,000 2000 Melrose Park IL Manufacturing & Distribution (Climate 63,888 1999 Control) Bensenville IL Distribution (Ignition & Wire) 14,000 2002 Edwardsville KS Administration, Manufacturing and 355,000 Owned Distribution (Wire) Holbrook MA Distribution (Ignition & Wire) 12,100 1999 Wilson NC Manufacturing (Ignition) 31,500 2008 Reno NV Distribution (Ignition) 67,000 Owned Long Island City NY Administration and 318,000 Owned Manufacturing (Ignition) Dyersburg TN Distribution 215,000 Owned Coppell TX Administration and Distribution 168,000 Owned (Climate Control) Coppell TX Distribution (Climate Control) 119,800 1999 Dallas TX Manufacturing (Climate Control) 42,700 2001 Dallas TX Distribution (Wire) 57,300 2000 Fort Worth TX Manufacturing & Distribution (Climate 204,000 Owned Control) Fort Worth TX Manufacturing, Distribution and 103,000 2004 Administration (Climate Control) Grapevine TX Manufacturing (Climate Control) 180,000 Owned Palestine TX Vacated and available for sublet 200,000 2001 Disputanta VA Distribution (Ignition) 411,000 Owned Fajardo PR Manufacturing (Ignition) 114,000 2007 Fajardo PR Manufacturing (Ignition) 24,100 2004 Mississauga CANADA Administration and Distribution 128,400 2006 (Ignition, Wire, Climate Control) St. Thomas CANADA Manufacturing (Climate Control) 40,000 Owned Strasbourg FRANCE Administration and Distribution (Climate 16,146 2002 Control) Hong Kong HK Manufacturing (Ignition) 19,300 2000
9
OWNED OR STATE OR SQUARE LEASE LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET EXP. DATE -------- ------- --------------------------- ---- --------- Nottingham ENGLAND Administration and Distribution 29,000 Owned (Ignition and Wire) Nottingham ENGLAND Manufacturing (Ignition and Wire) 29,400 Owned Nottingham ENGLAND Manufacturing (Ignition) 15,700 Owned
ITEM 3. LEGAL PROCEEDING ---------------- Currently, there are no legal proceedings which management deems would have a material economic impact on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None PART II ------- ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: ----------------------------------------------------------------- The Company's stock is listed on the New York Stock Exchange. The number of Shareholders of record of Common Stock on February 28, 1999 was approximately 685, including brokers who hold approximately 7,684,000 shares in street name. The quarterly market price and dividend information is presented in the following chart. Price Range of Common Stock and Dividends The Company's Common Stock is traded on the New York Stock Exchange under the symbol SMP. The following table shows the high and low sale prices on the composite tape of, and the dividend paid per share on, the Common Stock during the periods indicated.
- ------- ---------- --------- --------- ------------ - --------- ---------- ---------- ---------- --------------- 1998 QUARTER HIGH LOW DIVIDEND 1997 QUARTER HIGH LOW DIVIDEND ---- ------- ---- --- -------- ---- ------- ---- --- -------- 1st $23.50 $16.31 $0.00 1st $14.75 $13.13 $0.08 2nd $25.00 $19.13 $0.00 2nd $14.63 $13.13 $0.08 3rd $26.50 $21.00 $0.08 3rd $23.38 $13.56 $0.08 4th $24.69 $19.75 $0.08 4th $25.00 $19.50 $0.08 - ------- ---------- --------- --------- ------------ - --------- ---------- ---------- ---------- ---------------
The Board of Directors will consider the payment of future dividends on the basis of earnings, capital requirements and the financial condition of the Company. The Company's loan agreements limit dividends and distributions by the Company. In the first two quarters of 1998 the Company suspended the dividend due a deterioration in financial performance. The dividend was reinstated in the third quarter of 1998 as the Company's financial results and prospects greatly improved. 10 PART II (CONTINUED) ------------------- ITEM 6. SELECTED FINANCIAL DATA -----------------------
Years Ended December 31, --------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------------------------------------------------------------------- (In thousands, except per share data) Net sales $ 649,420 $ 559,823 513,407 $ 452,253 $ 434,252 Earnings (loss) from continuing operations $ 22,257 $ (1,620) 23,866 $ 16,851 $ 21,929 Net earnings (loss) $ 22,257 $ (34,524) 14,658 $ 16,132 $ 23,665 Earnings (loss) from continuing operations per common share $ 1.70 $ (0.12) 1.82 $ 1.28 $ 1.67 Net earnings (loss) per share $ 1.70 $ (2.63) 1.12 $ 1.23 $ 1.80 Working capital $ 178,324 $ 177,426 210,962 $ 232,173 $ 189,207 Total assets $ 521,556 $ 577,137 624,806 $ 521,230 $ 469,387 Long-term debt (excluding current portion) $ 133,749 $ 159,109 172,387 $ 148,665 $ 109,927 Stockholders' equity $ 205,025 $ 183,782 222,576 $ 210,400 $ 195,089 Stockholders' equity per share $ 15.68 $ 14.01 16.95 $ 16.03 $ 14.82 Cash dividends per common share $ .16 $ .32 .32 $ .32 $ .32
11 PART II (CONTINUED) ------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - In 1998, cash provided by operations amounted - ------------------------------- to $108,711,000. This compares favorably to 1997 and 1996 when cash provided by (used in) operations was $71,692,000 and $(21,153,000) respectively. The strong cash flow performance resulted primarily from net earnings for 1998 of $22,257,000 and decreases in inventories and accounts receivable of $27,733,000 and $27,534,000 respectively. Cash used in investing activities in 1998 was $21,812,000, as capital expenditures and payments related to the Cooper transaction were partially offset by proceeds from the sale of businesses and property, plant and equipment. For the three years ended December 31, 1998, 1997 and 1996 capital expenditures totaled $15,325,000, $15,597,000 and 21,389,000 respectively. Cash used in financing activities in 1998 of $80,141,000 was primarily due to the repayment of $52,333,000 in borrowings from bank lines, and $27,046,000 in principal repayments on long-term financing. Dividends paid for the three years ended December 31, 1998, 1997 and 1996 were $2,092,000, $4,197,000 and $4,260,000 respectively. In the first two quarters of 1998 the Company suspended the dividend due to a deterioration in financial performance. The dividend was reinstated in the third quarter of 1998 as the Company's financial results and prospects greatly improved. On November 30, 1998, the Company entered into a new three year revolving credit facility with eight lending institutions, providing for a $110,000,000 unsecured line of credit. The facility allows the Company to select from two interest rate options, one based on a spread over the prime rate and the other based on a spread over LIBOR. The spread above each interest rate option is determined by the Company's ratio of Consolidated Debt to Earnings Before Interest, Taxes, Depreciation and Amortization. These rates should compare favorably with the short term credit rates obtained by the Company during most of 1998 and as such should result in lower interest costs in 1999 compared to 1998. Also in 1999, the Company will explore various options for raising additional long term capital to fund future growth opportunities and further strengthen its balance sheet. At December 31, 1997, the Company was not in compliance with certain covenant requirements associated with certain long term notes payable; however the Company received the appropriate waivers and certain amendments were made to the note agreements. The amendments contained, among other things, provisions for the payment of up front fees of 1.5% and an increase in the interest rates on each note payable of 1.25%. The increased interest rate was reduced by 50 basis points when the Company refinanced its short-term credit facility on November 30, 1998 and a further reduction is possible as the Company's balance sheet is strengthened. In 1999, the Company's required long term debt repayments will be approximately $22,404,000. Total debt (current and non-current) at December 31, 1998 decreased by $79,671,000 as compared to December 31, 1997. This was mainly due to decreased requirements to support inventories and accounts receivable. The Company continues to aggressively pursue ways to reduce inventories. Significant efforts are focusing on pack-to-order systems and improved requirements forecasting systems. Pack-to-order systems retain parts in a bulk state until an order is received for a specific brand of product. 12 PART II (CONTINUED) ------------------- The Company expects capital expenditures for 1999 to be approximately $20,000,000, primarily for new machinery and equipment. The Company anticipates that its present sources of funds and the new multi-year facility entered into during 1998 will continue to be adequate to meet its near term needs. The reductions in capital employed by the Company, coupled with our increased earnings has resulted in a significant year-over-year improvement in Economic Value Added ("EVA"). The Company has expanded its EVA focus to ensure that capital is invested wisely in programs that exceed our cost of capital and improve our asset utilization. COMPARISON OF 1998 TO 1997 - -------------------------- Net sales in 1998 were $649,420,000, an increase of $89,597,000 or 16.0% from the comparable period in 1997. Excluding revenues from acquisitions not present in 1997, total net sales increased by $11,597,000, or 2.1%, as compared to 1997. Sales increases in the Temperature Control division, reflecting market share gains, product line expansions and the impact of an extremely hot summer were partially offset by sales declines in the Engine Management division reflecting the weakness in the automotive aftermarket and reduced sales to APS, one of the Company's largest customers, as it worked its way through bankruptcy proceedings. Sales remain focused in the U.S., as 90% of sales were to domestic customers. Sales to Canada, Europe and other export markets remained relatively flat in 1998. Cost of goods sold increased by $63,463,000 from $380,335,000 to $443,798,000. Gross margins, as a percentage of net sales, decreased from 32.1% to 31.7%. This decline reflects a higher mix of temperature control products with lower average gross margins than engine management products. Gross margins also were negatively affected by the Cooper transaction due to the higher carrying cost of the acquired inventory compared with comparable products produced by the Company's existing temperature control business. The majority of this inventory was sold in 1998 and temperature control gross margins should improve in 1999. Selling, general and administrative expenses (SG&A) in 1998, excluding bad debt expenses, increased by $1,604,000, or 1.0%, while net sales increased 16%. As a percentage of net sales, SG&A expenses excluding bad debt expenses decreased from 28.1% to 24.5%. The 3.6 point improvement in SG&A expenses resulted primarily from lower new customer acquisition costs and the partial integration of the Cooper Industries' temperature control business into the existing Temperature Control infrastructure. Selling expenses also were reduced, as a further restructuring of the sales force was completed. Other income (expense), net, decreased by $2,420,000, primarily due to losses related to the Company's joint ventures. The Company's earnings before interest and taxes increased to $42.5 million from $10.5 million in 1997. This increase was a direct result of the cost reductions discussed above, combined with the non-recurrence of the $10.5 million in bad debt expense recorded in 1997, due to the bankruptcy filing of APS, Inc. Interest expense increased by $2,261,000 to $16,419,000 resulting from several factors including; interest costs related to discontinued operations in 1997 and higher average interest rates in 1998 partially offsetting lower outstanding borrowings during 1998. When including interest expense related to discontinued operations, interest expense decreased by $2,156,000, primarily as a result of lower outstanding borrowings. In 1998, the Company focused significant attention on reducing debt and strengthening its balance sheet. Total debt was reduced by $79,671,000, and the Company succeeded in completing a multi-year 13 PART II (CONTINUED) ------------------- committed revolving credit line. In addition, receivables were reduced by $29,018,000, inventories were reduced by $14,914,000 and cash and short term investments increased by $6,648,000. The progress made in asset management and debt reduction is reflected by a reduction in the Company's total debt to capitalization percentage from 56.6% in 1997 to 43.8% in 1998. Income tax expense related to continuing operations in 1998 was $3,577,000, compared to a benefit of $2,417,000 in 1997, when the Company posted a net loss. Earnings from the Company's Puerto Rico and Hong Kong subsidiaries resulted in a 1998 effective tax rate that is lower than the statutory corporate rate in the U.S. The Company has largely completed its restructuring program and is now entirely focused on the two product lines where it is a market leader. In 1999 and into the year 2000, it is anticipated that the full impact of our cost reduction programs will take effect and that synergies from the consolidation of the Cooper temperature control business and other acquisitions will begin to be fully realized and provide further earnings benefits. COMPARISON OF 1997 TO 1996 - -------------------------- Net sales in 1997 were $559,823,000, up 9.0% from sales of $513,407,000 in 1996. Excluding revenues from acquisitions not present in 1996, net sales remained relatively flat as compared to 1996. Sales increases in the Temperature Control division, reflecting market share gains and product line expansions, were offset by sales declines in the Engine Management division reflecting the general weakness in the automotive aftermarket. Cost of goods sold increased $45,223,000 from $335,112,000 to $380,335,000. Gross margins, as a percentage of net sales, decreased from 34.7% to 32.1%. This decline reflects a higher mix of temperature control products and non-traditional business which have lower gross margins and reduced manufacturing efficiencies, as production schedules were lowered to reduce inventories. Selling, general and administrative expenses from continuing operations in 1997, excluding bad debt expenses, increased by 2.0% or $23,400,000 and as a percentage of net sales from continuing operations, increased from 26.1% to 28.1%. The increase in these expenses resulted primarily from a $3,000,000 provision for severance payments related to personnel reductions, higher new customer acquisition costs, increases in overhead costs as a result of the Filko acquisition (these costs are reduced significantly in 1998 as Filko has been integrated into the Company) and finally due to increases in costs to support the Company's high technology O.E. programs. Bad debt expenses from continuing operations, increased significantly in 1997 as a result of the bankruptcy filing of APS, Inc., a major customer. The Company continued to supply APS, Inc. on a limited basis in 1998, but did not subject itself to any additional exposure. Other income (expense), net, from continuing operations decreased by $712,000 primarily due to lower interest income as available cash early in 1997 was used to reduce short term borrowings under credit lines. Interest expense from continuing operations, increased by $1,100,000 to $14,200,000 resulting from higher average interest rates. Taxes based on earnings, from continuing operations, reflect a benefit of $2,417,000 for 1997 as compared to expense of $9,400,000 for 1996. The significant decrease in tax expense is a result of the losses incurred by the Company during 1997. The current year tax benefit recognized was a function of the significant 14 PART II (CONTINUED) ------------------- losses from the Company's U.S. operations being partially offset by earnings of the Company's Puerto Rico and Hong Kong subsidiaries, which have lower tax rates than the U.S. statutory rate. The combination of the foreign earnings and domestic losses results in a favorable effective tax rate of 65.2% against losses. IMPACT OF INFLATION - Although inflation is not a significant issue, the - ------------------- Company's management believes it will be able to continue to minimize any adverse effect of inflation on earnings. This will be achieved principally by cost reduction programs and, where competitive situations permit, selling price increases. FUTURE RESULTS OF OPERATIONS - The Company continues to face competitive - ---------------------------- pressures. In order to sell at competitive prices while maintaining profit margins, the Company is continuing to focus on overhead and cost reduction. The Company has completed much of its restructuring program, and is now focused on the two industry segments in which it can become the market leader. The Company anticipates that significant synergies will continue to develop from the consolidation of Cooper Industries' temperature control business with the Company's existing temperature control business. These synergies began to develop during 1998 and should have a material favorable impact on the 1999 and 2000 results. Additional cost reductions in other areas that were implemented in 1998 should have significant benefits in 1999. These actions, coupled with the continued focus on EVA, will ensure that the Company invests only in programs that exceed the cost of capital and focus on improving margins and asset utilization. YEAR 2000 - The Company is currently working to resolve the potential impact of - --------- the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company has established a comprehensive response to its Year 2000 exposure. Generally, the Company has Year 2000 exposure in two areas: (i) its information technology ("IT") systems and (ii) its non-IT systems. At June 1998, the Company had completed an inventory of its internal IT systems and made a preliminary determination of which programs were or were not Year 2000 compliant. During the period ending December 1998, the Company tested each significant IT system which is believed to be Year 2000 compliant. In some cases, Year 2000 issues will be corrected in the development of new programs, which enhance or provide new functionality to these financial and management operating systems. The Company expects the cost of this effort will be approximately $1.4 million, which includes the costs for new computers and related equipment. The Company expects to substantially complete Year 2000 testing and remediation on its IT and non-IT systems by June 1999. The Company is nearly complete with its interviews of suppliers, customers, financial institutions and others with which it conducts business to determine the extent to which the Company would be vulnerable to these third parties' failure to remediate their own potential year 2000 problems. The inability of the Company or these other significant business partners to adequately address the year 2000 issues could cause disruption of the Company's operations. The Company does not presently anticipate that the cost to address the Year 2000 issue will have a material adverse effect on the Company's financial condition, results of operations or liquidity. 15 PART II (CONTINUED) ------------------- Although the Company expects its internal IT and non-IT systems to be Year 2000 compliant as described above, the Company intends to prepare a contingency plan that will specify what it plans to do if it or important external companies are not Year 2000 compliant in a timely manner. These contingency plans will address the most likely worst case Year 2000 scenarios. These plans are expected to be finalized during the second quarter of 1999. RECENTLY ISSUED ACCOUNTING STANDARDS - In 1998, the Financial Accounting - ------------------------------------ Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in values of derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company does not expect SFAS No. 133 to have a material impact on the Company's results of operations or financial position. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in both foreign currency exchange rates and interest rates. The Company's exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than the Company' s functional currency, which is the U.S. dollar. Similarly, the Company is exposed to market risk as the result of changes in interest rates which may affect the cost of its financing. The Company does not use any significant derivative instruments, such as foreign exchange forward contracts, foreign currency options, interest rate swaps and interest rate agreements, to manage these risks, nor does it hold or issue derivative or other financial instruments for trading purposes. EXCHANGE RATE RISK - The Company has exchange rate exposure, primarily, with - ------------------ respect to the Canadian Dollar and the British Pound. The Company's financial instruments which are subject to this exposure amount to approximately $12 million, which includes $21 million of indebtedness of the Company, $3 million in accounts payable and $12 million of accounts receivable. The potential immediate loss to the Company that would result from a hypothetical 10% change in foreign currency exchange rates would be approximately $1.2 million. In addition, if such a change were to be sustained, the Company's cost of financing would increase in proportion to the change. 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 the Company's foreign-currency denominated revenues. Since consistent and simultaneous unfavorable movements in both relevant exchange rates is unlikely, this assumption may overstate the impact of exchange rate fluctuations on the Company's results of operations. INTEREST RATE RISK- At December 31, 1998 the Company had approximately $160 - ------------------ million in loans and financing outstanding, of which approximately $139 million bear interest at fixed interest rates and approximately $21 million bear interest at variable rates of interest. The Company invests its excess cash in highly liquid short-term investments. Due to the fact that the majority of the Company's debt is at fixed rates with various maturities and due to the short term nature of cash investments, the potential 16 PART II (CONTINUED) ------------------- loss to the Company over one year, that would have resulted from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial assets and liabilities on December 31, 1998 would not be expected to have a material impact on the earning or cash flows of the Company. However, due to seasonality with respect to the Company's short-term financing, which are at variable rates, the market risk may be higher at various points throughout the year. The Company's existing three year credit facility provides a $110 million unsecured line of credit, subject to a borrowing base as defined and consists of two variable based interest options. Depending upon the level of borrowings, under this credit facility, which may at times approach $110 million, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have a material impact on the earnings or cash flows of the Company. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------- 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, 1998 and 1997, 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, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP New York, New York March 2, 1999 -------------------------------- Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Operations
(Dollars in thousands, except per share amounts) Years Ended December 31, ----------------------------------- 1998 1997 1996 =============================================================================================================== Net sales ...................................................... $ 649,420 $ 559,823 $ 513,407 Cost of sales .................................................. 443,798 380,335 335,112 - --------------------------------------------------------------------------------------------------------------- Gross profit ............................................... 205,622 179,488 178,295 Selling, general and administrative expenses ................... 161,691 170,033 133,561 - --------------------------------------------------------------------------------------------------------------- Operating income ........................................... 43,931 9,455 44,734 Other income (expense), net (Note 14) .......................... (1,422) 998 1,710 - --------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before interest, taxes and minority interest ............... 42,509 10,453 46,444 - --------------------------------------------------------------------------------------------------------------- Interest expense (Note 3) ...................................... 16,419 14,158 13,091 - --------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations before taxes and minority interest ......................... 26,090 (3,705) 33,353 - --------------------------------------------------------------------------------------------------------------- Minority interest .............................................. (256) (332) (87) - --------------------------------------------------------------------------------------------------------------- Taxes based on earnings (Note 15) Current: Federal ...................................................... 308 (276) 8,403 State and local .............................................. 280 260 560 - --------------------------------------------------------------------------------------------------------------- 588 (16) 8,963 Deferred ....................................................... 2,989 (2,401) 437 Total taxes based on earnings .............................. 3,577 (2,417) 9,400 Earnings (loss) from continuing operations ..................... 22,257 (1,620) 23,866 =============================================================================================================== Discontinued operations (Note 3) Loss from operations of discontinued Brake Group ............. -- (568) (7,506) Estimated loss on disposal of Brake Group .................... -- (14,500) -- Loss from operations of discontinued Service Line Group ...... -- (5,336) (1,702) Estimated loss on disposal of Service Line Group ............. -- (12,500) -- ------------------------------------------------------------------------------------------------------------- Loss from discontinued operations ........................ -- (32,904) (9,208) --------------------------------------------------------------------------------------------------------- Net earnings (loss) ...................................... $ 22,257 $ (34,524) $ 14,658 =============================================================================================================== Net earnings (loss) from continuing operations per common share: Basic ........................................................ $ (1.70) $ (0.12) $ 1.82 Diluted ...................................................... $ (1.69) $ (0.12) $ 1.82 ============================================================================================================= Net earnings (loss) per common share: Basic ........................................................ $ (1.70) $ (2.63) $ 1.12 Diluted ...................................................... $ (1.69) $ (2.63) $ 1.12 ============================================================================================================= Average number of common shares ................................ 13,077,392 13,119,404 13,130,849 Average number of common shares and dilutive common shares ................................................ 13,167,842 13,119,404 13,130,849 ===============================================================================================================
See accompanying notes to consolidated financial statements. ------------------------------- F2 ---------------------- Standard Motor Products, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands)
December 31, ------------------- 1998 1997 =============================================================================================== ASSETS Current assets: Cash and cash equivalents .......................................... $ 23,457 $ 16,809 Accounts receivable, less allowances for discounts and doubtful accounts of $4,525 (1997 - $18,654) (Note 4) ........... 122,008 151,026 Inventories (Note 5) ............................................... 174,092 189,006 Deferred income taxes (Note 15) .................................... 11,723 22,005 Prepaid expenses and other current assets .......................... 11,231 11,630 - ----------------------------------------------------------------------------------------------- Total current assets ............................................. 342,511 390,476 - ----------------------------------------------------------------------------------------------- Property, plant and equipment, net (Notes 6 and 9) ................... 109,404 126,024 - ----------------------------------------------------------------------------------------------- Goodwill, net ........................................................ 39,232 30,674 - ----------------------------------------------------------------------------------------------- Other assets (Note 7) ................................................ 30,409 29,963 - ----------------------------------------------------------------------------------------------- Total assets ................................................... $ 521,556 $ 577,137 =============================================================================================== LIABILITIES AND STOCKERHOLDERS' EQUITY Current liabilities: Notes payable - banks (Note 8) ..................................... $ 3,555 $ 55,897 Current portion of long-term debt (Note 9) ......................... 22,404 24,373 Accounts payable ................................................... 48,414 36,421 Sundry payables and accrued expenses ............................... 60,905 67,224 Accrued customer returns ........................................... 16,296 17,955 Payroll and commissions ............................................ 12,613 11,180 - ----------------------------------------------------------------------------------------------- Total current liabilities ........................................ 164,187 213,050 - ----------------------------------------------------------------------------------------------- Long-term debt (Note 9) .............................................. 133,749 159,109 - ----------------------------------------------------------------------------------------------- Deferred income taxes (Note 15) ...................................... -- 3,124 - ----------------------------------------------------------------------------------------------- Postretirement benefits other than pensions and other accrued liabilities (Note 13) ................................ 18,595 18,072 - ----------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 9, 10, and 18) Stockholders' equity (Notes 9, 10, and 11): Common Stock - par value $2.00 per share: Authorized 30,000,000 shares, issued 13,324,476 shares in 1998 and 1997 (including 268,126 and 247,781 shares held as treasury shares in 1998 and 1997, respectively) ......................... 26,649 26,649 Capital in excess of par value ..................................... 2,951 2,763 Loan to Employee Stock Ownership Plan (ESOP) ....................... -- (1,665) Retained earnings .................................................. 181,679 161,514 Accumulated other comprehensive income (loss) ...................... (516) (454) - ----------------------------------------------------------------------------------------------- ..................................................................... 210,763 188,807 Less: Treasury stock - at cost ....................................... 5,738 5,025 - ----------------------------------------------------------------------------------------------- Total stockholders' equity ..................................... 205,025 183,782 - ----------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity ..................... $ 521,556 $ 577,137 ===============================================================================================
See accompanying notes to consolidated financial statements. -------------------------- F3 ---------------------- Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands)
Years Ended December 31, 1998 1997 1996 ========================================================================================================================= Net earnings (loss) ................................................................. $ 22,257 $(34,524) $ 14,658 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ................................................... 17,274 18,980 16,326 Provision for loss on disposal of assets of discontinued operations ............. -- 27,000 -- Loss on sale of business ........................................................ 1,500 -- -- (Gain) Loss on disposal of property, plant & equipment .......................... 226 64 (509) Proceeds from sales of trading securities ....................................... -- -- 7,646 Purchases of trading securities ................................................. -- -- (6,803) (Increase) decrease in deferred income taxes .................................... 2,992 (2,393) (68) Change in assets and liabilities, net of effects from acquisitions and disposals: (Increase) decrease in accounts receivable, net ............................... 27,534 10,210 (26,025) (Increase) decrease in inventories ............................................ 27,733 42,478 (13,303) (Increase) decrease in other assets ........................................... 2,209 11,031 (6,396) Increase (decrease) in accounts payable ....................................... 12,833 1,899 784 Increase (decrease) in other current assets and liabilities ................... 742 (4,808) (251) Increase (decrease) in sundry payables and accrued expenses ................... (6,589) 1,755 (7,212) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities ................................. 108,711 71,692 (21,153) - ------------------------------------------------------------------------------------------------------------------------- Proceeds from held-to-maturity securities ........................................... -- -- 6,252 Purchases of held-to-maturity securities ............................................ -- -- (163) Proceeds from the sale of property, plant and equipment ............................. 702 -- -- Capital expenditures, net of effects from acquisitions .............................. (15,325) (15,597) (21,389) Payments for acquisitions, net of cash acquired ..................................... (13,997) (16,313) (45,060) Proceeds from sale of business ...................................................... 6,808 -- -- - ------------------------------------------------------------------------------------------------------------------------- Net cash (used in) investing activities ............................................. (21,812) (31,910) (60,360) - ------------------------------------------------------------------------------------------------------------------------- Net (repayments) borrowings under line-of-credit agreements ........................ (52,333) (18,671) 58,625 Proceeds from issuance of long-term debt ............................................ 700 13,096 35,469 Principal payments of long-term debt ................................................ (27,046) (17,924) (16,104) Reduction of loan to ESOP ........................................................... 1,665 1,680 1,680 Proceeds from exercise of employee stock options .................................... 1,579 192 184 Purchase of treasury stock .......................................................... (2,614) (1,528) (147) Dividends paid ...................................................................... (2,092) (4,197) (4,260) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities ................................. (80,141) (27,352) 75,447 - ------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash ............................................. (110) (287) (126) - ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents ................................ 6,648 12,143 (6,192) Cash and cash equivalents at beginning of year ...................................... 16,809 4,666 10,858 - ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year ............................................ $ 23,457 $ 16,809 $ 4,666 ========================================================================================================================= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ........................................................................ $ 17,840 $ 20,154 $ 17,136 Income taxes .................................................................... 1,799 3,391 5,436 =========================================================================================================================
See accompanying notes to consolidated financial statements. ---------------------------- F4 ---------------------- Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
(In thousands) Years Ended December 31, 1998, 1997 and 1996 ==================================================================================================================================== Accumulated Capital in Loan Other Common Excess of to Retained Comprehensive Treasury Stock Par Value ESOP Earnings Income (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 ............ $ 26,649 $ 2,651 $(5,025) $189,837 $123 $(3,835) $210,400 Comprehensive Income: ................... Net earnings .......................... 14,658 14,658 Minimum pension liability adjustment .. 27 27 Foreign currency translation adjustment (79) (79) ------ Total comprehensive income .......... 14,606 Cash dividends paid ..................... (4,260) (4,260) Exercise of employee stock options ...... (59) 243 184 Tax benefits applicable to Employee Stock Ownership Plan ......... 113 113 Employee Stock Ownership Plan ........... 1,680 1,680 Purchase of treasury stock .............. (147) (147) =================================================================================================================================== Balance at December 31, 1996 ............ 26,649 2,705 (3,345) 200,235 71 (3,739) 222,576 Comprehensive Income: ................... Net loss .............................. (34,524) (34,524) ------ Foreign currency translation adjustment (525) (525) Total comprehensive income (loss) ... (35,049) Cash dividends paid ..................... (4,197) (4,197) Exercise of employee stock options ...... (50) 242 192 Tax benefits applicable to Employee Stock Ownership Plan ........ 108 108 Employee Stock Ownership Plan ........... 1,680 1,680 Purchase of treasury stock .............. (1,528) (1,528) =================================================================================================================================== Balance at December 31, 1997 ............ 26,649 2,763 (1,665) 161,514 (454) (5,025) 183,782 Comprehensive Income: ................... Net earnings .......................... 22,257 22,257 Foreign currency translation adjustment (62) (62) ------ Total comprehensive income .......... 22,195 Cash dividends paid ..................... (2,092) (2,092) Exercise of employee stock options ...... (322) 1,901 1,579 Tax benefits applicable to The Exercise of Employee Stock Options 510 510 Employee Stock Ownership Plan ........... 1,665 1,665 Purchase of treasury stock .............. (2,614) (2,614) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 ............ $ 26,649 $ 2,951 $ 0 $181,679 $(516) $(5,738) $205,025 ===================================================================================================================================
See accompanying notes to consolidated financial statements. ------------------------- F5 --------------------------------- 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. Actual results could differ from those estimates. Reclassifications Where appropriate, certain amounts in 1996 and 1997 have been reclassified to conform with the 1998 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, 1998 and 1997, held-to-maturity securities amounted to $7,200,000. Held-to-maturity securities consist primarily of U.S. Treasury Bills and corporate debt securities which are reported at unamortized cost which approximates fair value. As of December 31, 1998, the held-to-maturity securities mature within five years. The first-in, first-out method is used in computing realized gains or losses. Inventories Inventories are stated at the lower of cost (determined by means of the first-in, first-out method) or market. 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 Leasehold improvements 10 years or life of lease Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 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. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Accumulated amortization at December 31, 1998 and 1997, was $5,906,000 and $4,402,000, respectively. 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 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 (see note 3). 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). 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. Income Taxes Deferred income taxes result from temporary differences in methods of recording certain revenues and expenses for financial reporting and income tax purposes (see Note 15). 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. "Dilutive" earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents. Common stock equivalents that are anti-dilutive are excluded from net income per common share. Following is a reconciliation of the shares used in calculating basic and dilutive net income per common share (net income as reported is the numerator in each calculation): 1998 1997 1996 - -------------------------------------------------------------------------------- Weighted average common shares outstanding 13,077,392 13,119,404 13,130,849 Effect of dilutive securities - options 90,450 -- -- - -------------------------------------------------------------------------------- Weighted average common equivalent shares outstanding- assuming dilution 13,167,842 13,119,404 13,130,849 - -------------------------------------------------------------------------------- --------------------------- F6 --------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd) Comprehensive Income The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," on January 1, 1998. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income, minimum pension liability adjustments and foreign currency translation adjustments and is presented in the Consolidated Statements of Changes in Stockholders' Equity. This statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. Segment Reporting During 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments and for related disclosures about products, geographic areas and major customers. (See Note 16) Pension and Other Postretirement Plans On January 1, 1998, the company adopted SFAS No. 132, "Employers Disclosures about Pension and Other Postretirement Benefits." This statement revises employers disclosures about pensions and other postretirement benefit plans. SFAS No. 132 does not change the method of accounting for such plans. (See notes 12 and 13.) 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." Accordingly, no compensation expense has been recognized for options granted. As required, the Company provides pro forma net income and pro forma earnings per share disclosures for stock option grants, as if the fair value based method defined in SFAS No. 123 had been applied. (See Note 11.) 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 13%, 14% and 16% of consolidated net sales (including sales of discontinued operations) for the years ended December 31, 1998, 1997 and 1996, respectively. One individual member of this marketing group accounted for 10%, 9% and 11% of net sales for the years ended December 31, 1998, 1997 and 1996, respectively. The Company's five largest individual customers, including the members of this marketing group, accounted for 30%, 32% and 34% of net sales in 1998, 1997, and 1996 respectively. 2. Acquisitions - --------------- During 1998 and 1997, the Company acquired and accounted for as a purchase, three businesses as follows: In January 1997, the Company acquired the assets of the Filko Automotive division of F&B Manufacturing Company for approximately $7,900,000. Filko Automotive headquarters were located in Des Plaines, Illinois, when acquired but have been subsequently merged into the Standard Division by the end of 1997. The acquisition increased consolidated net sales by approximately $14,200,000 in 1998 and $19,000,000 in 1997 and had an immaterial effect on consolidated net earnings for the same periods. In September 1997, the Company acquired the oxygen sensor manufacturing business of AlliedSignal for approximately $10,200,000 and has relocated the manufacturing assets from AlliedSignal's plant to a new facility in North Carolina. The acquisition had an immaterial effect on consolidated net sales and consolidated net earnings for the years ended December 31, 1998 and 1997. In March 1998, the Company completed the exchange of its brake business for the Moog Automotive temperature control business of Cooper Industries. The total acquisition price amounted to $79,200,000, which included the exchange of certain net assets, principally inventory and property, plant and equipment and a cash payment of $13,997,000. On the basis of a pro forma consolidation, as if the Moog Automotive temperature control business had been acquired at the beginning of 1997, the Company's consolidated results would have been as follows: Pro forma results ---------------------- (Dollars in thousands except per share data) 1998 1997 - --------------------------------------------------------------------------- Net sales $671,891 $685,570 - --------------------------------------------------------------------------- Net earnings (loss) from continuing operations $21,464 $(4,840) - --------------------------------------------------------------------------- Net earnings (loss) from continuing operations per common share $1.64 $(0.37) - --------------------------------------------------------------------------- Such pro forma information does not purport to be indicative of the results of operations that would have actually been attained if the acquisition had been consummated as of January 1, 1997. In addition, the pro forma financial information does not purport to be indicative of future results of operations. The Company's acquisitions, with the exception of the exchange for the Moog Automotive temperature control business, 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 ------------------------- (continued on following page) F7 --------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd) at the dates of acquisition. In aggregate, the excess of the purchase price over the fair value of the net assets acquired during 1998 and 1997 was approximately $11,650,000 and $8,500,000 respectively. The operating results of these acquired businesses have been included in the consolidated financial statements from the date of each respective acquisition. 3. Discontinued Operations - -------------------------- Brake Business In connection with the exchange transaction described in note 2, during the fourth quarter of 1997 the Company recorded a provision of $14,500,000, consisting of an estimated loss on the disposal of the Brake business of $14,000,000 and a provision of $500,000 for anticipated operating losses until the completion of the disposal. The income (loss) from operations of the discontinued Brake business included an allocation of consolidated interest based upon the ratio of net assets of the discontinued Brake business to the total net assets of the Company which are applicable to interest bearing expenses. The interest allocated to the discontinued Brake business amounted to $1,112,000, $5,183,000 and $4,594,000 for the years ended December 31, 1998, 1997, and 1996 respectively. The Company's 1998 results do not include any income or loss from the discontinued Brake business as these anticipated losses were included in the 1997 provision. The operating results of the discontinued Brake business are summarized as follows: For the Years Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Net Sales $34,088 $164,202 $165,800 Income (loss) from operations before income taxes -- (568) (10,573) Income taxes -- -- (3,067) - -------------------------------------------------------------------------------- Income (loss) from operations -- (568) (7,506) - -------------------------------------------------------------------------------- Estimated loss on disposal -- (14,500) -- Income Taxes -- -- -- - -------------------------------------------------------------------------------- Net loss on disposal -- (14,500) -- - -------------------------------------------------------------------------------- Total loss on discontinued operation $ -- $(15,068) $ (7,506) - -------------------------------------------------------------------------------- The $14,500,000 loss associated with the disposal of the Brake business reflects no income tax benefit. As of December 31,1998, substantially all of the assets of the discontinued Brake business were either sold or disposed of. The net assets retained and held for sale as of December 31, 1997, were summarized as follows: Held (In thousands) Total Retained for Sale - -------------------------------------------------------------------------------- Current Assets $77,266 $32,161 $45,105 Property, plant and equipment, net 28,952 465 28,487 Other non-current assets net of amortization 1,202 -- 1,202 Current Liabilities (22,253) (18,167) (4,086) Other Liabilities (12,447) (12,447) -- - -------------------------------------------------------------------------------- Net assets of the discontinued Brake business $72,720 $2,012 $70,708 - -------------------------------------------------------------------------------- Service Line Business In the fourth quarter of 1998, the Company completed the largest phase of its agreement to sell its Service Line business to R&B, Inc. This transaction involved the sale of selected assets of the Champ Service Line and the Pik-A-Nut Fastener Line. The final phase, involving the sale of the Everco Brass & Brake Line, acquired in the Moog automotive exchange, was completed in early 1999. In the fourth quarter of 1997, the Company recorded a provision of $12,500,000, consisting of an estimated loss on the sale of the business of $12,000,000 and a provision of $500,000 for anticipated operating losses until the closing of the sale. The loss from operations of the discontinued Service Line business included an allocation of consolidated interest based upon the ratio of net assets of the discontinued Service Line business to the total net assets of the Company which are applicable to interest bearing expenses. The interest allocated to the discontinued Service Line business amounted to $629,000, $975,000, and $1,110,000 for the years ended December 31, 1998, 1997, and 1996 respectively. The Company's 1998 results do not include any income or loss from the discontinued Service Line business as these anticipated losses were included in the 1997 provision. The operating results of the discontinued Service Line business are summarized as follows: For the Years Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Net Sales ......................... $ 23,254 $ 39,147 $ 42,598 - -------------------------------------------------------------------------------- Income (loss) from operations before income taxes .............. -- (5,336) Income taxes ...................... -- -- (1,233) - -------------------------------------------------------------------------------- Loss from operations .............. -- (5,336) (1,702) - -------------------------------------------------------------------------------- Estimated loss on disposal ........ -- (12,500) -- Income taxes ...................... -- -- -- - -------------------------------------------------------------------------------- Net loss on disposal .............. -- (12,500) -- - -------------------------------------------------------------------------------- Total loss on discontinued operation ......................... $-- $(17,836) $ (1,702) - -------------------------------------------------------------------------------- The $12,500,000 loss associated with the disposal of the Service Line business reflects no income tax benefit. As of December 31,1998, substantially all of the assets of the discontinued Service Line business were either sold or disposed of. The net assets retained and held for sale as of December 31. 1997, were summarized as follows: --------------------------------- F8 --------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd) Held (In thousands) Total Retained for Sale - -------------------------------------------------------------------------------- Current Assets ........................... $ 12,933 $ 5,196 $ 7,737 Property, plant and equipment, net ....... 662 -- 662 Other non-current assets net of amortization ..................... 184 184 -- Current Liabilities ...................... (8,020) (8,020) -- Other Liabilities ........................ -- -- -- - -------------------------------------------------------------------------------- Net assets of the discontinued Service Line Business .................... $ 5,759 $ (2,640) $ 8,399 - -------------------------------------------------------------------------------- 4. Sale of Accounts Receivable - ------------------------------ The Company sells certain accounts receivable to its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. On March 19, 1997, SMP Credit Corp., entered into a two year agreement whereby it can sell up to a $25,000,000 undivided ownership interest in a designated pool of certain of these eligible receivables. At December 31, 1998 and 1997, net accounts receivables amounting to $25,000,000 had been sold under this agreement. These sales were reflected as reductions of trade accounts receivable in 1998 and 1997 and the related fees and discounting expense were recorded as other expense. The Company has received an extension of this agreement until April 30, 1999 while it completes negotiations on a three year renewal with similar terms and conditions. 5. Inventories - -------------- December 31, ------------------------ (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Inventories consist of: Finished goods ........................... $120,108 $124,224 Work in process .......................... 4,867 5,392 Raw materials ............................ 49,117 59,390 - -------------------------------------------------------------------------------- Total inventories ........................ $174,092 $189,006 - -------------------------------------------------------------------------------- 6. Property, Plant and Equipment - -------------------------------- December 31, --------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Property, plant and equipment consist of the following: Land, buildings and improvements ................. $ 64,080 $ 75,752 Machinery and equipment .......................... 88,282 104,178 Tools, dies and auxiliary equipment .............. 8,412 10,029 Furniture and fixtures ........................... 21,542 22,841 Leasehold improvements ........................... 5,130 7,213 Construction in progress ......................... 18,068 8,840 -------- -------- 205,514 228,853 Less accumulated depreciation and amortization ................................. 96,110 102,829 - -------------------------------------------------------------------------------- Total property, plant and equipment, net ................................... $109,404 $126,024 - -------------------------------------------------------------------------------- 7. Other Assets - --------------- December 31, ---------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Other assets consist of the following: Marketable securities .............................. $37,200 $27,200 Unamortized customer supply agreements ............. 3,311 537 Equity in joint ventures ........................... 4,698 7,434 Deferred income taxes .............................. 4,169 -- Other .............................................. 11,031 14,792 - -------------------------------------------------------------------------------- Total other assets ................................. $30,409 $29,963 - -------------------------------------------------------------------------------- Included in Other is a preferred stock investment in a customer of the Company. Net sales to such customer amounted to $72,754,000, $72,529,000, and $76,283,000 in 1998, 1997, and 1996 respectively. 8. Notes Payable - Banks - ------------------------ During 1997 and the first quarter of 1998, the Company's domestic short-term facilities consisted primarily of one year uncommitted demand revolving credit agreements negotiated separately with each of its six lending institutions. The amount of short-term bank borrowings outstanding under those facilities was $52,900,000 at December 31, 1997. The weighted average interest rate at December 31, 1997 on those borrowings was 9.1%. On March 30, 1998 the Company entered into an eight month committed revolving credit facility with its then existing banking group and incurred commitment fees of approximately 1.25% of the facility. This facility provided for unsecured lines of credit in the aggregate amount of $108,500,000. On November 30, 1998, the Company entered into a new three year revolving credit facility. The new facility, with eight lending institutions, provides a $110,000,000 unsecured line of credit, subject to a borrowing base as defined. This facility consists primarily of two interest rate options, one a function of LIBOR and the other a function of the prime rate. The spread above each interest rate option is determined by the Company's ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization. The terms of this revolving credit facility include, among other provisions, the requirement for a clean-down to $10,000,000 or less, for any consecutive 30 days during each 12 month period of the facility, maintenance of defined levels of tangible net worth, various financial performance ratios and restrictions on capital expenditures, dividend payments, acquisitions and additional indebtedness. There were no outstanding borrowings under this facility at December 31, 1998. The Company incurred commitment fees of approximately .70% of the total facility. A foreign subsidiary of the Company had a revolving credit facility during 1998 and 1997. The amount of short-term bank borrowings outstanding under that facility was $3,555,000 at December 31, 1998, and $2,997,000 at December 31, 1997. The weighted average interest rates on these borrowings at December 31, 1998 and 1997 were 8.4% and 7.7%, respectively. (continued on following page) ----------------------------- F9 --------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd) 9. Long-Term Debt - ----------------- December 31, ---------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Long-term debt consists of: 7.56% senior note ............................. $ 73,000 $ 73,000 8.60% senior note ............................. 37,143 46,429 10.22% senior note ............................ 21,500 30,000 Credit Facility ($17 million Canadian) ........ 10,960 13,935 7.50%-10.50% purchase obligations ............. 2,833 4,840 5.0%-8.8% Facilities .......................... 6,411 7,524 5.0% Notes Payable - AlliedSignal ............. 3,000 5,000 Credit Agreement (esop) ....................... -- 1,674 Other ......................................... 1,306 1,080 - -------------------------------------------------------------------------------- 156,153 183,482 Less current portion .......................... 22,404 24,373 - -------------------------------------------------------------------------------- Total noncurrent portion of long-term debt ................................ $133,749 $159,109 - -------------------------------------------------------------------------------- Under the terms of the $73,000,000 senior note agreement, the Company is required to repay the loan in seven equal annual installments beginning in 2000. Under the terms of the $37,143,000 senior note agreement, the Company is required to repay the remaining loan in four equal annual installments from 1999 through 2002. Under the terms of the $21,500,000 senior note agreement, the Company is required to repay the loan in five varying annual installments beginning in 1999. Subject to certain restrictions, the Company may make prepayments without premium. Under the terms of the $17,000,000 CDN credit agreement, the Company is required to repay the loan as follows: $7,000,000 CDN in 1999, $2,000,000 CDN in 2000, and 2001, and a final payment of $6,000,000 CDN in 2002. Subject to certain restrictions, the Company can make prepayments without premium. The credit agreement has various interest rate options which averaged 4.9% for 1998. The purchase obligations, due under agreements with municipalities, mature in annual installments through 2003, and are secured by properties having a net book value of approximately $13,390,000 at December 31, 1998. The Company holds a 73.4% equity interest in Standard Motor Products Holdings Limited, formerly Intermotor Holdings Limited, which has various existing credit facilities that mature by 2003. Under the terms of the unsecured note agreement with AlliedSignal, the Company is required to repay $2,000,000 in September 1999 with a final payment of $1,000,000 due in 2000. The proceeds of the Credit Agreement were loaned to the Company's Employee Stock Ownership Plan (ESOP) to purchase 1,000,000 shares of the Company's common stock to be distributed in accordance with the terms of the ESOP established in 1989 (see Note 12). In January 1998, the Company made the final required payment and as such the credit agreement has been paid in full. Maturities of long-term debt during the five years ending December 31, 1999 through 2003, are $22,404,000, $28,421,000, $27,282,000, $29,815,000 and $16,416,000 respectively. The senior note agreements contain restrictive covenants which require the maintenance of defined levels of working capital, tangible net worth and earnings and limit, among other items, investments, indebtedness and distributions for the payment of dividends and the acquisition of capital stock. At December 31, 1997, the Company did not comply with certain covenant requirements for which the Company received waivers and amendments on March 27, 1998. These amendments contained provisions for the payment of up front fees of 1.5% and an increase in the interest rate on each senior note by 1.25%. The increased interest rate was reduced by 0.50% based upon the refinancing of the Company's revolving credit facility on November 30, 1998 (see Note 8). 10. 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, 1998. 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 --------------------------- F10 --------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd) 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. On December 22, 1998 the Board of Directors authorized the repurchase by the Company of up to an additional 300,000 shares of its common stock at a cost of up to $7,000,000, to be used to meet present and future requirements of its stock option programs. As of December 31, 1998, 78,400 shares were repurchased at a cost of $1,881,000. 11. Stock Options - ----------------- The Company has principally two fixed stock-based compensation plans. Under the 1994 Omnibus Stock Option Plan, the Company is authorized to issue 400,000 stock options. The options become exercisable over a four year period and expire at the end of five years following the date they become exercisable. The 1994 Omnibus Stock Option Plan was amended during 1997 to increase the number of shares authorized for issuance to 1,000,000 shares. Under the 1996 Independent Directors' 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, 1998, in aggregate 969,000 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: (Dollars in thousands except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- Net Earnings As reported $ 22,257 $ (34,524) $ 14,658 (loss) Pro forma $ 21,610 $ (34,849) $ 14,544 Basic Earnings As reported $ 1.70 $ (2.63) $ 1.12 (loss) per share Pro forma $ 1.65 $ (2.66) $ 1.11 For pro forma calculations, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996 respectively: expected volatility of 33.5%, 33.5% and 25.5%, expected life of 4.3 years, 4.4 years and 4.4 years, dividend yield of 1.5%, 1.5% and 2.0% and risk free interest rate of 5.2%, 5.6% and 6.0% for issued options. A summary of the status of the Company's option plans follows:
1998 1997 1996 - ---------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average (Shares in thousands) Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 636 $ 18.45 424 $ 16.50 281 $ 16.54 Granted 263 21.54 231 21.87 157 16.27 Exercised (91) 17.08 (10) 16.39 (11) 14.40 Forfeited (15) 21.50 (9) 16.36 (3) 16.39 - ---------------------------------------------------------------------------------------- Outstanding at end of year 793 $ 19.58 636 $ 18.45 424 $ 16.50 - ---------------------------------------------------------------------------------------- Options exercisable at end of year 335 -- 230 -- 142 -- - ---------------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year -- $ 6.30 -- $ 6.11 -- $ 4.28
Options Outstanding - -------------------------------------------------------------------------------- Number Weighted-Average Range of Outstanding Remaining Weighted-Average Exercise Prices at 12/31/98 Contractual Life Exercise Price (Years) - -------------------------------------------------------------------------------- $13.63 - $14.50 6,000 8.3 $ 13.77 $16.00 - $16.94 314,000 3.9 $ 16.34 $20.50 - $23.72 473,000 6.2 $ 21.80 Options Exercisable - -------------------------------------------------------------------------------- Range of Number Exercisable Weighted-Average Exercise Prices at 12/31/98 Exercise Price - -------------------------------------------------------------------------------- $13.63 - $23.59 334,500 $17.34 12. Employee Benefit Plans - -------------------------- The Company has a defined benefit pension plan covering certain former employees of the Company's discontinued Brake business (see Note 3). 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, ----------------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Change in benefit obligations: Benefit obligation at beginning of year ....... $ 10,109 $ 10,036 Service cost .................................. 97 188 Interest cost ................................. 665 672 Actuarial gain ................................ (121) (33) Benefits paid ................................. (835) (754) - -------------------------------------------------------------------------------- Benefit Obligation at End of Year ............. $ 9,915 $ 10,109 - -------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year ........................... $ 11,120 $ 10,418 Actual return on plan assets .................. 1,399 1,456 Employer contributions ........................ -- -- Benefits paid ................................. (835) (754) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year ...... $11,684 $11,120 - -------------------------------------------------------------------------------- Funded status ................................. $ 1,769 $ 1,011 Unrecognized prior service cost ............... -- 263 Unrecognized net actuarial gain ............... (2,083) (1,452) Unrecognized transition cost .................. -- 72 - -------------------------------------------------------------------------------- (Accrued)/prepaid benefit cost ................ $ (314) $ (106) ================================================================================ (continued on following page) ---------------------------- F11 --------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd) December 31, Weighted-average assumptions: 1998 1997 1996 - -------------------------------------------------------------------------------- Discount rates ................................. 6.75% 7.00% 7.00% Expected long-term rate of return on assets ...................................... 8.00% 8.00% 8.00% - -------------------------------------------------------------------------------- December 31, ------------------------------ (In thousands) ................................. 1998 1997 1996 - -------------------------------------------------------------------------------- Components of Net Periodic benefit cost Service cost ................................... 97 188 219 Interest cost .................................. 665 672 653 Return on assets ............................... (816) (1,456) (1,135) Amortization of prior service cost ............. 19 70 70 Recognized actuarial (gain)/loss ............... (72) 655 373 - -------------------------------------------------------------------------------- Net periodic (benefit) cost .................... (107) 129 180 - -------------------------------------------------------------------------------- In addition, the Company participates in several multiemployer plans which provide defined benefits to substantially all unionized workers. The Multiemployer Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers associated with multiemployer 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, providing retirement benefits for other eligible employees. The provisions for retirement expense in connection with the plans are as follows: Defined Multi- Contribution employer Plans and Other Plans - -------------------------------------------------------------------------------- Year-end December 31, 1998 $ 302,000 $4,350,000 1997 $ 365,000 $2,840,000 1996 $ 383,000 $2,175,000 In January 1989 the Company established an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. The ESOP authorized the Trust to purchase up to 1,000,000 shares of the Company's common stock in the open market. In 1989, the Company entered into an agreement with a bank authorizing the Company to borrow up to $18,000,000 in connection with the ESOP. Under this agreement, the Company borrowed $16,729,000, payable in annual installments through 1998 (see Note 9), which was loaned on the same terms to the ESOP for the purchase of common stock. During 1989, the ESOP made open market purchases of 1,000,000 shares at an average cost of $16.78 per share. In January 1998, the Company made the final required payment and the credit agreement has thus been paid in full. During 1998, 1997 and 1996, 106,900, 98,000, and 96,800 shares were allocated to the employees, leaving no unallocated shares in the ESOP trust at December 31, 1998. Contributions to the ESOP are based on a predetermined formula which is primarily tied into dividends earned by the ESOP and loan repayments. The provision for expense in connection with the ESOP was approximately $1,664,000, in 1998, $1,406,000 in 1997, and $1,391,000 in 1996. The expense was calculated by subtracting dividend and interest income earned by the ESOP, which amounted to approximately $1,000, $274,000, and $289,000, for the years ended December 31, 1998, 1997 and 1996, respectively, from the principal repayment on the outstanding bank loan. Interest costs amounted to approximately $56,000, $208,000, and $360,000 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1997, indebtedness of the ESOP to the Company in the amount of $1,665,000, is shown as a deduction from stockholders' equity in the consolidated balance sheets. Dividends paid on ESOP shares are recorded as reductions in retained earnings in the consolidated balance sheets. In August 1994 the Company established an unfunded Supplemental Executive Retirement Plan 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 not significant in 1998, 1997 and 1996. 13. Postretirement 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, (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year .......... $ 15,783 $ 20,888 Service cost ..................................... 975 671 Interest cost .................................... 1,082 1,139 Amendments ....................................... 1,410 -- Curtailments ..................................... -- (2,120) Actuarial (gain)/loss ............................ (844) (4,319) Benefits paid .................................... (778) (476) - -------------------------------------------------------------------------------- Benefit obligation at end of year ................ $ 17,628 $ 15,783 ================================================================================ Funded status .................................... $(17,628) $(15,783) Unrecognized prior service cost .................. 1,286 -- Unrecognized net actuarial (gain)/loss ...................................... (766) -- - -------------------------------------------------------------------------------- (Accrued)/prepaid benefit cost ................... $(17,108) $(15,783) ================================================================================ Weighted-Averag Assumptions as of December 31 1998 1997 - -------------------------------------------------------------------------------- Discount rates . . . . . . . . . . . . . . . . . 6.75% 7.0% For measurement purposes, an 8% and 9% annual rate of increase in the per capita cost of covered medical benefits was assumed for 1998 and 1997 respectively. The rate was assumed to decrease gradually to 5% in 2002 and remain at that level thereafter. A 6.5% annual rate of increase in the per ------------------------ F12 ---------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd.) capita cost of covered dental benefits was assumed for 1998. The rate was assumed to decrease gradually to 5% in 2001 and remain at that level thereafter. December 31, --------------- (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost ..................... $ 975 $ 671 837 Interest cost .................... 1,082 1,139 1,419 Amortization of prior service cost 124 0 0 Recognized actuarial (gain)/loss . (78) (235) 408 - -------------------------------------------------------------------------------- Net periodic benefit cost ........ $ 2,103 $ 1,575 2,664 Curtailment (gain) ............... 0 (1,492) 0 - -------------------------------------------------------------------------------- Total benefit cost ............... $ 2,103 $ 83 2,664 - -------------------------------------------------------------------------------- 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 1998: 1-Percentage- 1-Percentage- (In thousands) Point Increase Point Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest cost components .............. $ 327 $(274) Effect on postretirement benefit obligation ............................ $2,209 $(1,882) 14. Other Income (Expense), Net - ------------------------------- (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Other income (expense), net consists of: Interest and dividend income .... $ 1,856 $ 898 $ 1,668 (Loss) on sale of accounts receivable (Note 4) ............. (1,410) (1,358) (1,266) Income (loss) from joint ventures (2,078) 1,335 1,336 Other - net ..................... 210 123 (28) - -------------------------------------------------------------------------------- Total other income (expense), net $(1,422) $ 998 $ 1,710 ================================================================================ 15. Taxes Based on Earnings - -------------------------------------------------------------------------------- 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: - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- 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 ..... 0.7 4.6 1.1 Non-deductible items, net ......... 0.6 2.3 0.1 Benefits of income subject to taxes at lower than the U.S. federal rate (18.3) (87.8) (7.4) (Decrease) increase in valuation allowance ......................... (4.2) 50.7 -- Other ............................. -- -- (0.6) - -------------------------------------------------------------------------------- Effective tax rate ................ 13.8% (65.2)% 28.2% ================================================================================ 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, ------------ (In thousands) 1998 1997 - ---------------------------------------------------------------- Deferred tax assets: Accrued costs related to disposal of discontinued operations ........... $ 983 7,584 Inventories ........................ 8,495 11,647 Allowance for customer returns ..... 6,023 6,733 Postretirement benefits ............ 6,725 6,825 Allowance for doubtful accounts .... 1,545 7,070 Accrued salaries and benefits ...... 3,347 4,125 Other .............................. 12,361 8,540 Valuation allowance ................ (14,171) (15,271) - ---------------------------------------------------------------- Total .............................. $ 25,308 $ 37,253 ================================================================ Deferred tax liabilities: Depreciation ....................... $ 4,032 10,796 Promotional costs .................. 1,054 1,610 Other .............................. 4,330 5,966 - ---------------------------------------------------------------- Total .............................. 9,416 18,372 ================================================================ Net deferred tax assets ............ $ 15,892 $ 18,881 ================================================================ 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. 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 $12,159,000 at the end of 1998, $17,562,000 at the end of 1997, and $11,858,000 at the end of 1996. Earnings from continuing operations, before income taxes, for foreign operations (including Puerto Rico) amounted to approximately $19,000,000, $16,000,000 and $14,000,000 in 1998, 1997 and 1996 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 tax benefits of the exemption, reduced by a minimum tollgate tax instituted in 1993, amounted to $.20 per share in 1998 (1997 - $.26; 1996 - $.27). Foreign income taxes amounted to approximately $2,525,000, $2,136,000, and $1,639,000 for 1998, 1997 and 1996, respectively. 16. 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 -------------------------- F13 ---------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd.) competes. The Engine Management Division consists primarily of ignition and electrical parts, emission and engine controls, on-board computers, sensors, ignition wires, battery cables, carburetor and fuel system parts. The Temperature Control Division consists primarily of air conditioning compressors, clutches, accumulators, filter/driers, blower motors, heater valves, heater cores, evaporators, condensers, hoses and fittings. The accounting policies of each 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, 1998 ------------------------------------ Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - -------------------------------------------------------------------------------- Net Sales $348,664 $297,144 $ 3,612 $649,420 - -------------------------------------------------------------------------------- Depreciation and amortization 10,068 4,473 2,733 17,274 - -------------------------------------------------------------------------------- Operating income 32,243 19,672 (7,984) 43,931 - -------------------------------------------------------------------------------- Investment in equity affiliates 105 516 4,077 4,698 - -------------------------------------------------------------------------------- Capital expenditures 10,597 4,598 130 15,325 - -------------------------------------------------------------------------------- Total Assets $311,716 $183,197 $ 26,643 $521,556 - -------------------------------------------------------------------------------- For the year ended December 31, 1997 ------------------------------------ Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - -------------------------------------------------------------------------------- Net Sales $365,824 $187,918 $ 6,081 $559,823 - -------------------------------------------------------------------------------- Depreciation and amortization 9,948 3,284 5,748 18,980 - -------------------------------------------------------------------------------- Operating income 28,179 7,302 (26,026) 9,455 - -------------------------------------------------------------------------------- Investment in equity affiliates 1,105 396 5,933 7,434 - -------------------------------------------------------------------------------- Capital expenditures 9,679 3,138 2,780 15,597 - -------------------------------------------------------------------------------- Total Assets $317,162 $107,406 $ 152,569 $577,137 - -------------------------------------------------------------------------------- For the year ended December 31, 1996 ------------------------------------ Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - -------------------------------------------------------------------------------- Net Sales $353,409 $156,423 $ 3,575 $513,407 - -------------------------------------------------------------------------------- Depreciation and amortization 7,960 2,160 6,206 16,326 - -------------------------------------------------------------------------------- Operating income 43,149 13,712 (12,127) 44,734 - -------------------------------------------------------------------------------- Investment in equity affiliates 1,144 -- 5,009 6,153 - -------------------------------------------------------------------------------- Capital expenditures 12,024 6,461 2,904 21,389 - -------------------------------------------------------------------------------- Total Assets $317,761 $120,912 $ 186,133 $624,806 - -------------------------------------------------------------------------------- Other Adjustments consists of items pertaining to the corporate headquarters function, a Canadian business unit that does not meet the criteria of a reportable operating segment under SFAS No. 131 and businesses that have been sold. The following table reconciles the measure of profit used in the previous disclosure to the Company's consolidated Earnings (loss) from continuing operations before taxes: (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Operating income ................ $ 43,931 $ 9,455 $44,734 Other income (expense) .......... (1,422) 998 1,710 Interest expense ................ 16,419 14,158 13,091 - -------------------------------------------------------------------------------- Earnings (loss) from continuing operations before taxes and minority interest ............... $ 26,090 $ (3,705) $33,353 ================================================================================ Geographic Information for the Year Ended December 31, Revenues --------------------- (In thousands) 1998 1997 1996 ================================================================================ United States $586,044 $493,823 $474,711 Canada 25,513 25,748 24,470 Other Foreign 37,863 40,252 14,226 - -------------------------------------------------------------------------------- Total $649,420 $559,823 $513,407 ================================================================================ Long Lived Assets --------------------- (In thousands) 1998 1997 1996 ================================================================================ United States $125,627 $126,854 $121,126 Canada 3,719 8,615 17,377 Other Foreign 19,290 21,229 22,833 - -------------------------------------------------------------------------------- Total $148,636 $156,698 $161,336 ================================================================================ Revenues are attributed to countries based upon the location of the customer 17. 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 the current rates offered to the Company for debt of the same remaining maturities. The estimated fair values of the Company's financial instruments are as follows: (In thousands) December 31, 1998 Carrying Fair Amount Value - --------------------------------------------------- Cash and cash equivalents $ 23,457 $ 23,457 Marketable securities ... 7,200 7,200 Long-term debt .......... (156,153) (143,938) - --------------------------------------------------- (In thousands) December 31, 1997 Carrying Fair Amount Value - --------------------------------------------------- Cash and cash equivalents $ 16,809 $ 16,809 Marketable securities ... 7,200 7,200 Long-term debt .......... (183,482) (175,053) - --------------------------------------------------- ---------------------------- F14 18. Commitments and Contingencies - ------------------------------------- Total rent expense for the three years ended December 31, 1998 was as follows: Real (In thousands) Total Estate Other - -------------------------------------------------------------------------------- 1998 $5,747 $3,619 $2,128 1997 7,437 4,593 2,844 1996 6,568 3,244 3,324 At December 31, 1998, 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: (In thousands) 1999 $ 4,525 2000 3,288 2001 3,233 2002 2,407 2003 1,844 Thereafter 3,644 - -------------------------------------------------------------------------------- $18,941 - -------------------------------------------------------------------------------- At December 31, 1998, the Company had outstanding letters of credit aggregating approximately $2,300,000. 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 is involved in various litigation 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 position and results of operations. 19. Quarterly Financial Data (Unaudited) ---------------------------------------- (In thousands, except per share amounts) Dec. 31, Sept. 30, June 30, Mar. 31, Quarter Ended ............. 1998 1998 1998 1998 - -------------------------------------------------------------------------------- Net Sales ................. $ 113,316 $ 201,293 $ 208,766 $126,045 - -------------------------------------------------------------------------------- Gross Profit .............. 36,352 62,408 63,072 43,790 - -------------------------------------------------------------------------------- Earnings from continuing operations ..... 1,391 9,574 8,639 2,653 - -------------------------------------------------------------------------------- Earnings (loss) from discontinued operations ... -- -- -- -- - -------------------------------------------------------------------------------- Net Earnings .............. $ 1,391 $ 9,574 $ 8,639 $ 2,653 - -------------------------------------------------------------------------------- Net Earnings from continuing operations per common share: Basic ..................... $ .11 $ .73 $ .66 $ .20 Diluted ................... $ .11 $ .72 $ .65 $ .20 - -------------------------------------------------------------------------------- Net Earnings per common share: Basic ..................... $ .11 $ .73 $ .66 $ .20 Diluted ................... $ .11 $ .72 $ .65 $ .20 - -------------------------------------------------------------------------------- (In thousands, except per share amounts) Dec. 31, Sept. 30, June 30, Mar. 31, Quarter Ended 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Net Sales ...................... $ 103,662 $155,246 $163,181 $137,734 - -------------------------------------------------------------------------------- Gross Profit ................... 32,512 49,938 53,458 43,580 - -------------------------------------------------------------------------------- Earnings (loss) from continuing operations .......... (13,967) 6,917 5,571 (141) - -------------------------------------------------------------------------------- Earnings (loss) from discontinued operations (34,057) 1,000 947 (794) - -------------------------------------------------------------------------------- Net Earnings (loss) ............ $ (48,024) $ 7,917 $ 6,518 $ (935) - -------------------------------------------------------------------------------- Net Earnings (loss) from continuing operations per common share: Basic .......................... $ (1.07) $ .53 $ .42 $ (.01) Diluted ........................ $ (1.07) $ .53 $ .42 $ (.01) - -------------------------------------------------------------------------------- Net Earnings (loss) per common share: Basic .......................... $ (3.67) $ .60 $ .50 $ (.07) Diluted ........................ $ (3.67) $ .60 $ .50 $ (.07) - -------------------------------------------------------------------------------- The fourth quarter of 1997 reflects several unfavorable year-end adjustments including a $10,500,000 increase in bad debt expense for continuing operations and a $2,500,000 increase in bad debt expense for discontinued operations related to the bankruptcy filing of a significant customer, APS, Inc., a $3,000,000 provision for severance payments related to personnel reductions, and the estimated loss on disposal of $27,000,000 associated with the Brake and Service Line businesses (see Note 3). 20. Subsequent Events (Unaudited) - --------------------------------- In January 1999, the Company acquired through its European subsidiary Standard Motor Products Holding Ltd., 85% of the stock of Webcon UK Limited, and acquired through its UK joint venture Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited. The total acquisition price amounted to approximately $3,500,000 and was funded from the Company's operating cash flow. In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $13,400,000. Located in Fort Worth, Texas, Eaglemotive assembles and distributes fan clutches and other cooling products to the automotive aftermarket. The acquisition was funded from operating cash and short term borrowings. --------------------------- F15 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ---------------------------------------------------- None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- Information relating to Directors and Executive Officers is set forth in the 1999 Annual Proxy Statement. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS ---------------------------------------- Information relating to Management Remuneration and Transactions is set forth in the 1999 Annual Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- Information relating to Security Ownership of Certain Beneficial Owners and Management is set forth in the 1999 Annual Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Information relating to Certain Relationships and Related Transactions is set forth under "Certain Transactions" in the 1999 Annual Proxy Statement. 18 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 14(A). DOCUMENT LIST (1) Among the responses to this Item 14(a) are the following financial statements. Independent Auditors' Report Financial Statements: Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Operations - Years Ended December 31, 1998, 1997 & 1996 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows - - Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) The following financial schedule for the years 1998, 1997 and 1996 is submitted herewith: Schedule Page II. Valuation and Qualifying Accounts 26 Selected Quarterly Financial Data, for the Years Ended December 31, 1998 and 1997, are included herein by reference to Part II, Item 8. All other schedules are omitted because they are not required, not applicable or the information is included in the financial statements or notes thereto. (3) Exhibits required by Item 601 of Securities and Exchange Commission Regulations S-K: See "Exhibit Index" beginning on page 20. 14(B). REPORTS ON FORM 8-K -------------------- No reports on Form 8-K were required to be filed for the three months ended December 31, 1998. 19 STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT EXHIBIT PAGE NUMBER NUMBER - ------ ------ 2.1 Asset Exchange Agreement dated as of March 28, 1998 * among SMP Motor Products, LTD., Standard Motor Products, Inc., Cooper Industries (Canada) Inc., Moog Automotive Company and Moog Automotive Products, Inc., filed as an Exhibit of Registrant's current report on Form 8-K dated March 28, 1998 is incorporated herein by reference 3.1 By-laws filed as an Exhibit of Registrant's annual * report on Form 10-K for the year ended December 31, 1986 is incorporated herein by reference. 3.2 Restated Certificate of Incorporation, dated July 31, * 1990, filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 is incorporated herein by reference. 3.3 Restated Articles of Incorporation, dated February * 15, 1996, filed as an Exhibit of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 is incorporated herein by reference. 3.4 Restated By-Laws dated May 23, 1996, filed as an * Exhibit of the Registrant's annual report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 4.1 Registration of Preferred Share Purchase Rights filed * on Form 8-A on February 29, 1996 is incorporated herein by reference. 10.1 Note Purchase Agreement dated October 15, 1989 * between the Registrant and the American United Life Insurance Company, the General American Life Insurance Company, the Jefferson-Pilot Life Insurance Company, the Ohio National Life Insurance Company, the Crown Insurance Company, the Great-West Life Assurance Company, the Guarantee Mutual Life Company, the Security Mutual Life Insurance Company of Lincoln, Nebraska, and the Woodmen Accident and Life Company filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 is incorporated herein by reference. 20 STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT EXHIBIT PAGE NUMBER NUMBER - ------ ------ 10.2 Note Agreement of November 15, 1992 between the * Registrant and Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life Association, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, Allstate Life Insurance Company, Teachers Insurance & Annuity Association of America, and Phoenix Home Life Mutual Insurance Company filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 is incorporated herein by reference. 10.3 Employee Stock Ownership Plan and Trust dated January * 1, 1989 filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 is incorporated herein by reference. 10.4 Supplemental Executive Retirement Plan dated August * 15, 1994 filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. 10.5 1994 Omnibus Stock Option Plan of Standard Motor * Products, Inc. is incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 (33-58655). 10.6 Note Purchase Agreement dated December 1, 1995 * between the Registrant and Metropolitan Life Insurance Company, the Travelers Insurance Company Connecticut Life Insurance Company, CIGNA Property and Casualty Insurance Company, Life Insurance Company of North America and American United Life Insurance Company filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 is incorporated herein by reference. 10.7 Credit Agreement of May 1, 1996 between the * Registrant and Canadian Imperial Bank of Commerce ("CIBC") filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.8 Letter Agreement dated September 25, 1996 amending * the Note Agreement between the Registrant and Canadian Imperial Bank of Commerce ("CIBC") filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 21 STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT EXHIBIT PAGE NUMBER NUMBER - ------ ------ 10.9 Letter Agreement of September 30, 1996 amending the * Note Agreement between the Registrant and Mutual Life Insurance Company, Allstate Life Insurance Company, Teachers Insurance and Annuity Association of America and Phoenix Home Life Mutual Insurance Company dated November 15, 1992 filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996 is incorporated herein by reference. 10.10 Letter Agreement of November 22, 1996 amending the * Note Agreement between the Registrant and Mutual Life Insurance Company, Allstate Life Insurance Company, Teachers Insurance and Annuity Association of America, and Phoenix Home Life Mutual Insurance Company with amendment dated September 30, 1996, dated November 15, 1992, filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.11 1996 Independent Outside Directors Stock Option Plan * of Standard Motors Products, Inc. filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996 is incorporated herein by reference. 10.12 Letter Agreement of March 27, 1998 amending the Note * Agreement between the Registrant and the American United Life Insurance Company, the Great American Life Insurance Company, the Jefferson- Pilot Life Insurance Company, the Ohio National Life Insurance Company, the Crown Insurance Company, the Great-West Life Insurance Company, the Security Mutual Life Insurance Company, Woodmen Accident and Life Insurance Company and Nomura Holding America, Inc. dated October 15, 1989, filed as an Exhibit of Registrant's current report on Form 8-K dated March 28, 1998 is incorporated herein by reference 10.13 Letter Agreement of March 27, 1998 amending the Note * Agreement * between the Registrant and Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life Association, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, Allstate Life Insurance Company, Teachers Insurance & Annuity Association of America, and Phoenix Home Life Mutual InsuranceCompany dated November 15, 1992, filed as an Exhibit of Registrant's current report on Form 8-K dated March 28, 1998 is incorporated herein by reference 22 STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT EXHIBIT PAGE NUMBER NUMBER - ------ ------ 10.14 Letter Agreement of March 27, 1998 amending the Note * Agreement between the Registrant and Metropolitan Life Insurance Company, the Travelers Insurance Company, Connecticut Life Insurance Company, CIGNA Property and Casualty Insurance Company, Life Insurance Company of North America and American United Life Insurance Company dated December 1, 1995, filed as an Exhibit of Registrant's current report on Form 8-K dated March 28, 1998 is incorporated herein by reference 10.15 1994 Omnibus Stock Option Plan of Standard Motor * Products, Inc., as amended, is incorporated herein by reference to the Company's Registration Statement on Form S-8 (333-51565), dated May 1, 1998. 10.16 Standard Motor Products, Inc. Independent Directors' * Stock Option Plan, is incorporated herein by reference to the Company's Registration Statement on Form S-8 (333-51619), dated May 1, 1998. 10.17 Credit Agreement dated November 30, 1998 among E-1 Standard Motor Products, Inc., Chase Manhattan Bank and Canadian Imperial Bank of Commerce is included as Exhibit 10.17 21. List of Subsidiaries of Standard Motor Products, Inc. is included on Page 27. 23 Consent of Independent Auditors KPMG LLP, is included on Page 28. 27. Financial Data Schedule for 1998 is included on Page 29. * Incorporated by reference. 23 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANDARD MOTOR PRODUCTS, INC. ----------------------------- (REGISTRANT) /S/ LAWRENCE I. SILLS --------------------- Lawrence I. Sills, President, Director, Chief Operating Officer /S/ MICHAEL J. BAILEY --------------------- Michael J. Bailey, Senior Vice President, Administration and Finance, Chief Financial Officer /S/ JAMES J. BURKE ------------------ James J. Burke, Director of Finance Chief Accounting Officer Dated: New York, New York March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the Capacities and on the dates indicated: March 31, 1999 /S/ LAWRENCE I. SILLS (Dated) --------------------- Lawrence I. Sills, President, Director, Chief Operating Officer March 31, 1999 /S/ NATHANIEL L. SILLS (Dated) ---------------------- Nathaniel L. Sills Chairman, Director March 31, 1999 /S/ ARTHUR D. DAVIS (Dated) ------------------- Arthur D. Davis, Director March 31, 1999 /S/ MARILYN F. CRAGIN (Dated) --------------------- Marilyn F. Cragin, Director March 31, 1999 /S/ SUSAN F. DAVIS (Dated) ------------------ Susan F. Davis, Director March 31, 1999 /S/ ARTHUR S. SILLS (Dated) ------------------- Arthur S. Sills, Director 24 The Board of Directors and Stockholders Standard Motor Products, Inc.: Under date of March 2, 1999, we reported on the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 1998, and 1997, 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, 1998, as contained in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP New York, New York March 2, 1999 25 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts Years ended December 31, 1998, 1997 and 1996
ADDITIONS --------- BALANCE AT CHARGED TO CHARGED BEGINNING COSTS AND TO OTHER BALANCE AT DESCRIPTION OF YEAR EXPENSES (1) ACCOUNTS DEDUCTIONS END OF YEAR ----------- ------- ------------ -------- ---------- ----------- YEAR ENDED DECEMBER 31, 1998: - ----------------------------- Allowance for doubtful $ 16,187,000 $ 3,811,000 $ 31,000 $ 17,365,000 $ 2,664,000 accounts Allowance for discounts 2,467,000 -- -- 606,000 1,861,000 ------------- ------------ ----------- ------------ ------------ $ 18,654,000 $ 3,811,000 $ 31,000 $ 17,971,000 $ 4,525,000 Allowance for sales returns $ 17,955,000 $ 93,299,000 $ 3,436,000 $ 98,394,000 $ 16,296,000 Allowance for inventory $ 17,178,000 $ 1,556,000 $ 1,754,000 $ 2,267,000 $ 18,221,000 valuation YEAR ENDED DECEMBER 31, 1997: - ----------------------------- Allowance for doubtful $ 3,012,000 $ 16,478,000 $ 130,000 $ 3,433,000 $ 16,187,000 accounts Allowance for discounts 2,487,000 -- -- 20,000 2,467,000 ------------- ------------ ----------- ------------ ------------ $ 5,499,000 $ 16,478,000 $ 130,000 $ 3,453,000 $ 18,654,000 Allowance for sales returns $ 15,061,000 $ 90,868,000 $ 272,000 $ 88,246,000 $ 17,955,000 Allowance for inventory $ 14,284,000 $ 2,717,000 $ 2,228,000 $ 2,051,000 $ 17,178,000 valuation YEAR ENDED DECEMBER 31, 1996: - ----------------------------- Allowance for doubtful $ 3,254,000 $ 505,000 $ 405,000 $ 1,152,000 $ 3,012,000 accounts Allowance for discounts 2,653,000 -- 23,000 189,000 2,487,000 ------------- ------------ ----------- ------------ ------------ $ 5,907,000 $ 505,000 $ 428,000 $ 1,341,000 $ 5,499,000 Allowance for sales returns $ 13,446,000 $ 91,861,000 $ 189,000 $ 90,435,000 $ 15,061,000 Allowance for inventory $ 13,016,000 $ 3,046,000 $ 1,169,000 $ 2,947,000 $ 14,284,000 valuation (1) Includes charges reflected in operations of discontinued businesses.
26 EX-10 2 CREDIT AGREEMENT EXHIBIT E-1 CREDIT AGREEMENT dated as of November 30, 1998 among STANDARD MOTOR PRODUCTS, INC., as Borrower, THE LENDERS PARTY HERETO and THE CHASE MANHATTAN BANK, as Administrative Agent and CANADIAN IMPERIAL BANK OF COMMERCE, as Documentation Agent TABLE OF CONTENTS PAGE ARTICLE I.Definitions 1 SECTION 1.01 Defined Terms. 1 SECTION 1.02 Classification of Loans and Borrowings. 21 SECTION 1.03 Terms Generally 21 SECTION 1.04 Accounting Terms; GAAP. 21 ARTICLE II.The Credits 22 SECTION 2.01 Commitments. 22 SECTION 2.02 Loans and Borrowings. 22 SECTION 2.03 Requests for Revolving Borrowings 23 SECTION 2.04 Borrowing Base. 24 SECTION 2.05 Swingline Loans. 24 SECTION 2.06 Letters of Credit. 25 SECTION 2.07 Funding of Borrowings. 30 SECTION 2.08 Interest Elections. 31 SECTION 2.09 Termination and Reduction of Commitments 32 SECTION 2.10 Repayment of Loans; Evidence of Debt. 33 SECTION 2.11 Prepayment of Loans. 34 SECTION 2.12 Fees. 34 SECTION 2.13 Interest. 36 SECTION 2.14 Alternate Rate of Interest. 36 SECTION 2.15 Increased Costs 37 SECTION 2.16 Break Funding Payments. 38 SECTION 2.17 Taxes. 39 SECTION 2.18 Payments Generally; Pro Rata Treatment; Sharing of Set-offs. 40 SECTION 2.19 Mitigation Obligations; Replacement of Lenders. 42 ARTICLE III.Representations and Warranties 43 SECTION 3.01 Organization; Powers. 43 SECTION 3.02 Authorization; Enforceability. 43 SECTION 3.03 Governmental Approvals; No Conflicts. 43 SECTION 3.04 Financial Condition; No Material Adverse Change. 44 SECTION 3.05 Properties. 44 SECTION 3.06 Litigation and Environmental Matters. 44 SECTION 3.07 Compliance with Laws and Agreements. 45 SECTION 3.08 Investment and Holding Company Status. 45 SECTION 3.09 Taxes. 45 SECTION 3.10 ERISA. 46 SECTION 3.11 Disclosure. 46 SECTION 3.12 Year 2000. 46 2 SECTION 3.13 Subsidiaries and Affiliates. 47 SECTION 3.14 Insurance. 47 SECTION 3.15 Labor Matters. 47 SECTION 3.16 Solvency. 48 SECTION 3.17 Use of Proceeds. 48 SECTION 3.18 Federal Reserve Regulations. 48 ARTICLE IV.Conditions 48 SECTION 4.01 Effective Date. 48 SECTION 4.02 Each Credit Event. 51 ARTICLE V.Affirmative Covenants 51 SECTION 5.01 Financial Statements and Other Information. 51 SECTION 5.02 Notices of Material Events. 53 SECTION 5.03 Existence; Conduct of Business. 54 SECTION 5.04 Payment of Obligations. 54 SECTION 5.05 Maintenance of Properties; Insurance. 54 SECTION 5.06 Books and Records; Inspection Rights. 54 SECTION 5.07 Compliance with Laws. 54 SECTION 5.08 Use of Proceeds and Letters of Credit. 55 SECTION 5.09 Notice of Discharge of Hazardous Material or Environmental Complaint. 55 SECTION 5.10 Environmental Compliance. 55 SECTION 5.11 Additional Subsidiaries. 55 SECTION 5.12 Strategic Business Plan. 56 SECTION 5.13 Borrowing Base Certificate. 56 ARTICLE VI.Negative Covenants 56 SECTION 6.01 Indebtedness 56 SECTION 6.02 Liens. 58 SECTION 6.03 Fundamental Changes; Sales of Assets. 59 SECTION 6.04 Investments, Loans, Advances, Guarantees and Acquisitions. 60 SECTION 6.05 Hedging Agreements. 61 SECTION 6.06 Restricted Payments. 61 SECTION 6.07 Transactions with Affiliates 62 SECTION 6.08 Restrictive Agreements. 63 SECTION 6.09 [This Section Intentionally Left Blank.] 63 SECTION 6.10 Amendment of Material Documents. 63 SECTION 6.11 Limitations on Sales and Leasebacks. 63 SECTION 6.12 Fiscal Year. 63 SECTION 6.13 Leverage Ratio. 64 SECTION 6.14 Capitalization Ratio. 64 SECTION 6.15 Consolidated Tangible Net Worth. 64 SECTION 6.16 Interest Coverage Ratio. 64 3 SECTION 6.17 Debt Service Coverage Ratio. 65 SECTION 6.18 Inventory Turnover Ratio. 65 SECTION 6.19 Capital Expenditures. 65 ARTICLE VII.Events of Default 66 ARTICLE VIII.The Administrative Agent 68 ARTICLE IX.Miscellaneous 71 SECTION 9.01 Notices. 71 SECTION 9.02 Waivers; Amendments. 71 SECTION 9.03 Expenses; Indemnity; Damage Waiver. 73 SECTION 9.04 Successors and Assigns. 74 SECTION 9.05 Survival. 77 SECTION 9.06 Counterparts; Integration; Effectiveness. 77 SECTION 9.07 Severability. 78 SECTION 9.08 Right of Setoff. 78 SECTION 9.09 Governing Law; Jurisdiction; Consent to Service of Process. 78 SECTION 9.10 WAIVER OF JURY TRIAL. 79 SECTION 9.11 Headings. 79 SECTION 9.12 Confidentiality. 79 SECTION 9.13 Interest Rate Limitation. 80 SCHEDULES Schedule 2.01 Lenders and Lenders' Commitments Schedule 3.06/3.15 Disclosed Matters Schedule 3.13 Subsidiaries and Joint Ventures Schedule 6.01 Indebtedness Existing at Closing Date Schedule 6.02 Liens on Property or Assets of Borrower Schedule 6.04 Existing Investments Schedule 6.08 Restrictions and Conditions EXHIBITS Exhibit A Form of Assignment and Acceptance Exhibit B Form of Opinion of Kelley, Drye & Warren Exhibit C Form of Subsidiary Guaranty Exhibit D Form of Borrowing Base Certificate 4 CREDIT AGREEMENT dated as of November 30, 1998, among STANDARD MOTOR PRODUCTS, INC., a New York corporation (the "BORROWER"), the LENDERS party hereto, THE CHASE MANHATTAN BANK ("CHASE"), as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT") for the Lenders and CANADIAN IMPERIAL BANK ---------------------- OF COMMERCE, as documentation agent (in such capacity, the "DOCUMENTATION -------------- AGENT") for the Lenders. - ------ W I T NE S S E T H : WHEREAS, the Borrower has requested that the Lenders make available to the Borrower a revolving credit facility in the principal amount of $100,000,000, the proceeds of which are to be used as set forth herein; and WHEREAS, the Lenders are willing to make such revolving credit loans available to the Borrower upon the terms and conditions set forth herein. NOW, THEREFORE, the Borrower, the Lenders, the Administrative Agent and the Documentation Agent hereby agree as follows: I. -- DEFINITIONS ----------- A. DEFINED TERMS. As used in this Agreement, the following terms have the -------------- meanings specified below: "ABR" when used in reference to any Loan or Borrowing, refers to ----- whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "ACCOUNT DEBTOR" shall mean any person who is or who may become ---------------- obligated to the Borrower or any of its Subsidiaries under, with respect to, or on account of, an Account Receivable. 5 "ACCOUNTS RECEIVABLE" shall mean any and all rights of the Borrower or --------------------- any of its Subsidiaries to payment for goods sold or leased, including any such right evidenced by chattel paper, or services rendered, whether due or to become due, whether or not it has been earned by performance, and whether now existing or hereafter acquired or arising in the future, which Account Receivable arose from the sale of goods and the rendering of services to unaffiliated parties in the ordinary course of business of the Borrower or its Subsidiaries, and which, to the best knowledge of the Borrower, is in full force and effect and constitutes a legal, valid and binding obligation of the Account Debtor with respect thereto enforceable in accordance with its terms. "ADJUSTED LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "ADMINISTRATIVE AGENT" means The Chase Manhattan Bank, in its capacity ---------------------- as administrative agent for the Lenders hereunder. "ADMINISTRATIVE QUESTIONNAIRE" means an Administrative Questionnaire in ------------------------------ a form supplied by the Administrative Agent. "AFFILIATE" means, with respect to a specified Person, another Person ----------- that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "AGREEMENT" means this Credit Agreement, as the same may be amended, ----------- restated, supplemented or otherwise modified from time to time. "ALTERNATE BASE RATE" means, for any day, a rate per annum equal to the --------------------- greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively. "APPLICABLE PERCENTAGE" means, with respect to any Lender, the ----------------------- percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. 6 "APPLICABLE RATE" means, for any day, with respect to any ABR Loan or ----------------- Eurodollar Revolving Loan, or with respect to the commitment fees or Letter of Credit Fees payable hereunder as the case may be, the applicable rate per annum set forth below under the caption "ABR Spread," "Eurodollar Spread," "Commitment Fee Rate," or "Letter of Credit Fee Rate" as the case may be, based upon the Leverage Ratio applicable on such date:
- ------------------------- -------- ------------ --------------------- -------------------------- ABR EURODOLLAR COMMITMENT FEE RATE LETTER OF CREDIT FEE RATE LEVERAGE RATIO SPREAD SPREAD - ------------------------- -------- ------------ --------------------- -------------------------- Greater than 4.0 to 1.0 .50% 2.50% .50% 1.25% - ------------------------- -------- ------------ --------------------- -------------------------- Greater than 3.5 to 1.0 .25% 2.25% .50% 1.00% but Equal to or Less than 4.0 to 1.0 - ------------------------- -------- ------------ --------------------- -------------------------- Greater than 3.0 to 1.0 0% 2.00% .50% .75% but Equal to or Less than 3.5 to 1.0 - ------------------------- -------- ------------ --------------------- -------------------------- Equal to or Less than 0% 1.75% .50% .75% 3.0 to 1.0 - ------------------------- -------- ------------ --------------------- --------------------------
For purposes of the foregoing, (i) the Leverage Ratio shall be deemed to be in the second category listed above for the period from the Effective Date through the date of delivery of the Borrower's financial statements in accordance with Section 5.01(a) for the fiscal year ending December 31, 1998, (ii) the Leverage Ratio shall be determined as of the end of each fiscal quarter of the Borrower's fiscal year based upon the Borrower's consolidated financial statements delivered pursuant to Section 5.01(a) or (b) and (iii) each change in the Applicable Rate resulting from a change in the Leverage Ratio shall be effective during the period (1) in the case of ABR Loans, commencing on and including the date which is five Business Days following the date of delivery to the Administrative Agent of such consolidated financial statements indicating such change, and (2) in the case of each Eurodollar Loan, commencing on and including the date which is the first day of the next succeeding Interest Period following the date of delivery to the Administrative Agent of such consolidated financial statements indicating such change, in each case ending on the date immediately preceding the effective date of the next change; PROVIDED that the Leverage Ratio shall be deemed to be in the first category listed above (A) at 7 any time that an Event of Default has occurred and is continuing or (B) if the Borrower fails to deliver the consolidated financial statements required to be delivered by it pursuant to Section 5.01(a) or (b), during the period from the expiration of the time for delivery thereof until such consolidated financial statements are delivered. "ASSESSMENT RATE" means, for any day, the annual assessment rate in ----------------- effect on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in dollars at the offices of such member in the United States; PROVIDED that if, as a result of any change in any law, rule or regulation, it is no longer possible to determine the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual rate as shall be determined by the Administrative Agent to be representative of the cost of such insurance to the Lenders. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered --------------------------- into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "AVAILABILITY PERIOD" means the period from and including the Effective --------------------- Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitments. "BANK GROUP INDEBTEDNESS" means the Indebtedness owing under the ------------------------- Existing Bank Agreement. "BASE CD RATE" means the sum of (a) the Three-Month Secondary CD Rate -------------- multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. "BOARD" means the Board of Governors of the Federal Reserve System of ------- the United States of America. "BORROWER" means Standard Motor Products, Inc., a New York corporation. ---------- "BORROWING" means (a) Revolving Loans of the same Type, made, converted ----------- or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect or (b) a Swingline Loan. 8 "BORROWING BASE" means, on any day, an amount equal to (a) the sum of ---------------- (i) 80% of the then Net Accounts Receivable PLUS (ii) 50% of the Net Inventory PLUS (iii) 50% of Net PP&E PLUS (iv) 100% of the cash then held by the Borrower and its Subsidiaries in accounts maintained in the continental United States and the Commonwealth of Puerto Rico PLUS (v) 50% of up to $5,700,000 of any cash investments maintained by Stanric, Inc. in Puerto Rico Investors Tax Free Funds which are not subject to Liens, MINUS (b) the Borrowing Base Debt. The Borrowing Base at any time shall be determined by reference to the most recent Borrowing Base Certificate delivered pursuant to Section 4.02(c) and 5.13 and shall be subject at all times to audit confirmation and review. "BORROWING BASE CERTIFICATE" shall mean a certificate substantially in ---------------------------- the form of the Exhibit D (with such changes therein as may be required by the Administrative Agent to reflect the components of, and reserves against, the Borrowing Base as provided for hereunder from time to time), executed and certified on behalf of the Borrower by a Financial Officer of the Borrower and accompanied by appropriate supporting documentation that verifies the amounts shown thereon. "BORROWING BASE DEBT" shall mean, on any day, the sum of (i) the then --------------------- outstanding principal amount of the Cooper Indebtedness, (ii) all long term debt (including the current portion thereof) which is shown as "current portion of long term debt" and "long term debt" on the Borrower's financial statement as of the date of determination (including without limitation, the principal amount of the Note Agreement Indebtedness) and (iii) the then outstanding principal amount of the "working capital line" described on Schedule 6.01 under the heading "Intermotor Holdings Limited". "BORROWING REQUEST" means a request by the Borrower for a Revolving ------------------- Borrowing in accordance with Section 2.03. "BUSINESS DAY" means any day that is not a Saturday, Sunday or other -------------- day on which commercial banks in New York City are authorized or required by law to remain closed; PROVIDED that, when used in connection with a Eurodollar Loan, the term "BUSINESS DAY" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "CIBC" means Canadian Imperial Bank of Commerce. ------ "CIBC GUARANTY" means that certain Guarantee executed by the Borrower --------------- in favor of CIBC in respect of the CIBC Loan Agreement. 9 "CIBC LOAN AGREEMENT" means that certain Committed Installment Loan --------------------- Agreement dated March 31, 1998 between CIBC and SMP Ltd. as in effect on the Effective Date. "CAPITAL EXPENDITURES" means, for any period, without duplication, the ---------------------- aggregate amount of cash expenditures, not made with the proceeds of Capital Lease Obligations or other Indebtedness (other than Revolving Loans or Swingline Loans) in respect of the additions to property, plant and equipment and other capital expenditures of the Borrower and its consolidated Subsidiaries that are (or would be) set forth in a consolidated balance sheet of the Borrower for such period prepared in accordance with GAAP, excluding, however, the amount of any Capital Expenditures paid for with proceeds of casualty insurance as evidenced in a writing submitted to the Administrative Agent. "CAPITAL LEASE OBLIGATIONS" of any Person means the obligations of such --------------------------- Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "CAPITALIZED LEASES" means leases which give rise to Capital Lease -------------------- Obligations. "CAPITALIZATION RATIO" means as of any date of determination, the ratio ---------------------- of (i) Consolidated Funded Debt on such date to (ii) the sum of (x) such Consolidated Funded Debt PLUS (y) Consolidated Tangible Net Worth on such date. "CHANGE IN CONTROL" means (a) the acquisition of ownership, directly or ------------------- indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) other than the Family Shareholders, of shares representing more than 30% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated; or (c) if the Family Shareholders shall cease to own at least 17% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower. 10 "CHANGE IN LAW" means (a) the adoption of any law, rule or regulation --------------- after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's or the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "CHASE" means The Chase Manhattan Bank. ------- "CLASS", when used in reference to any Loan or Borrowing, refers to ------- whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, or Swingline Loans. "CLIPPER RECEIVABLES FINANCING AGREEMENT" means, collectively, that ----------------------------------------- certain Purchase and Sale Agreement dated as of March 19, 1997 between the Borrower and SMP Credit Corp., that certain Receivables Purchase Agreement dated as of March 19, 1997 among SMP Credit Corp., the Borrower, Clipper Receivables Corporation, State Street Boston Capital Corporation and State Street Bank & Trust Company and the other instruments and agreements executed and delivered in connection therewith, as each may be amended or supplemented from time to time, or restated, or replaced with the same or other provider of credit from time to time on terms substantially similar to those contained in the Clipper Receivables Financing Agreement and (ii) any other successor financing involving the sale or transfer of the accounts receivable or other rights to payment of the Borrower or any of its Subsidiaries to a special purpose entity in connection with the issuance of asset-backed securities or other similar transaction on terms reasonably satisfactory to the Agent. "CODE" means the Internal Revenue Code of 1986, as amended from time to ------ time. "COMMITMENT" means, with respect to each Lender, the commitment of such ------------ Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.09 11 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders' Commitments is $100,000,000. "CONSOLIDATED EBITDA" means, for any period, operating income of the --------------------- Borrower and its Subsidiaries for such period plus net income from joint ventures to which the Borrower is a party which is included in the caption "other income" in the Borrower's financial statements for such period, determined on a consolidated basis in accordance with GAAP plus the sum of, without duplication, depreciation, amortization and all other non-cash charges for such period of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP, each to the extent deducted in determining such net income for such period and less the sum of non-cash gains for such period to the extent included in determining such net income for such period. "CONSOLIDATED FUNDED DEBT" means as of the last day of a fiscal -------------------------- quarter, without duplication, an amount equal to the average of the amounts of all Indebtedness for Borrowed Money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of each of the preceding twelve fiscal months (including the last month of the fiscal quarter ending on the date on which such covenant is being tested). "CONSOLIDATED INTEREST EXPENSE" means, for any period, the interest ------------------------------- expense of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP (after giving effect to all net payments made or received under interest rate swap, cap, collar or other interest rate hedging arrangements) in respect of such period. "CONSOLIDATED TANGIBLE NET WORTH" means, at any date of determination, --------------------------------- the sum of all amounts which would be included under shareholders' equity on a consolidated balance sheet of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP as at such date, PLUS proceeds of a high yield or convertible issue to the extent used to re-purchase stock of the Borrower during fiscal year 1999 in an amount not to exceed $18,000,000 MINUS all intangible assets of the Borrower and its Subsidiaries on a consolidated basis as at of such date, including, without limitation, unamortized debt discount and expense, unamortized deferred charges, goodwill, customer acquisition costs, patents, trademarks, service marks, trade names, copyrights and organization or developmental expenses. 12 "CONTROL" means the possession, directly or indirectly, of the power to --------- direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "CONTROLLING" and "CONTROLLED" have meanings correlative thereto. "COOPER INDEBTEDNESS" means the Indebtedness owing under that certain --------------------- Loan and Guaranty Agreement dated as of April 13, 1998 among the Borrower, the Existing Guarantors and Cooper Finance, Inc. "DEBT SERVICE COVERAGE RATIO" means, at the end of any fiscal quarter ----------------------------- the ratio of (i) Consolidated EBITDA for the period of four consecutive fiscal quarters then ended to (ii) the sum of (x) Consolidated Interest Expense for such quarters PLUS (y) the aggregate amount of principal amortization required to be made by the Borrower in respect of Indebtedness for Borrowed Money for the succeeding period of four consecutive fiscal quarters following such date. "DEFAULT" means any event or condition which constitutes an Event of --------- Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "DISCLOSED MATTERS" means the actions, suits and proceedings and the ------------------- environmental matters disclosed in Schedule 3.06. "DOCUMENTATION AGENT" means Canadian Imperial Bank of Commerce, in its --------------------- capacity as documentation agent for the Lenders hereunder. "DOLLARS" or "$" refers to lawful money of the United States of --------- America. "EFFECTIVE DATE" means the date on which the conditions specified in ---------------- Section 4.01 are satisfied (or waived in accordance with Section 9.02). "ELIGIBLE ASSIGNEES" means (i) a commercial bank having total assets in -------------------- excess of $250,000,000 and subject to the regulations of the Board; (ii) a finance company, insurance company or other financial institution or fund acceptable to the Administrative Agent which in the ordinary course of business extends credit of the type evidenced by this Agreement and has total assets in excess of $100,000,000 and being subject to the regulations of the Board, and if not so subject, acceptable to the Borrower, whose consent shall not be unreasonably withheld, PROVIDED, that during the pendency of any Default or 13 Event of Default, the Borrower's consent shall not be required; and (iii) any other financial institution satisfactory to both the Borrower and the Administrative Agent; PROVIDED that no such entity that is organized under the laws of a jurisdiction outside the United States shall be an Eligible Assignee unless such entity shall, if legally able to do so, prior to the immediately following due date of any payment by the Borrower hereunder, deliver to the Borrower such certificates, documents or other evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including those described in Section 2.17(e). "ENVIRONMENTAL LAWS" means all laws, rules, regulations, codes, -------------------- ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters and which are applicable to the Borrower, any of its Subsidiaries, or their respective property. "ENVIRONMENTAL LIABILITY" means any liability, contingent or otherwise ------------------------- (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as ------- amended from time to time. "ERISA AFFILIATE" means any trade or business (whether or not ----------------- incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA EVENT" means (a) any "reportable event", as defined in Section ------------- 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the 14 filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "EURODOLLAR", when used in reference to any Loan or Borrowing, refers ------------ to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "EVENT OF DEFAULT" has the meaning assigned to such term in Article ------------------ VII. "EXCLUDED TAXES" means, with respect to the Administrative Agent, any ---------------- Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by any other jurisdiction with which such recipient has any connection (other than a connection arising solely by virtue of the activities of such recipient pursuant to this Agreement), (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender's failure to comply with Section 2.17(e). "EXISTING BANK AGREEMENT" means that certain Revolving Credit and ------------------------- Guaranty Agreement dated as of March 30, 1998 among the Borrower, the Existing Guarantors, the Banks party thereto, Chase, as Administrative Agent, and The Bank of New York, as Documentation Agent, as amended. 15 "EXISTING GUARANTORS" means, collectively, Reno Standard Incorporated, --------------------- a Nevada corporation, Mardevco Credit Corp., a New York corporation and Stanric, Inc., a Delaware corporation. "FAMILY SHAREHOLDERS" means Bernard Fife, Nathaniel Sills and any of --------------------- their respective children, grandchildren, spouses or siblings, and any trusts created for the benefit of any of the foregoing and charitable trusts with respect to which any of the foregoing retain voting control. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, the weighted average ------------------------------ (rounded upwards, if necessary, to the next 1/16 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/16 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FINANCIAL OFFICER" means the chief financial officer, principal ------------------- accounting officer, treasurer or controller of the Borrower. "FOREIGN LENDER" means any Lender that is organized under the laws of a ---------------- jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof, the District of Columbia, and the Commonwealth of Puerto Rico shall be deemed to constitute a single jurisdiction. "GAAP" means generally accepted accounting principles in the United ------ States of America. "GOVERNMENTAL AUTHORITY" means the government of the United States of ------------------------ America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "GUARANTEE" of or by any Person (the "GUARANTOR") means any obligation, ----------- contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase 16 or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "GUARANTORS" means, collectively, the Existing Guarantors, Industrial & ------------ Automotive Associates, Inc., a California corporation, Marathon Auto Parts and Products, Inc., a New York corporation, Motortronics, Inc., a New York corporation and each domestic Subsidiary formed or acquired after the Effective Date. "HAZARDOUS MATERIALS" means all explosive or radioactive substances or --------------------- wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "HEDGING AGREEMENT" means any interest rate protection agreement, ------------------- foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "INDEBTEDNESS" means, as to any Person, without duplication, all (i) -------------- Indebtedness for Borrowed Money, (ii) obligations with respect to any conditional sale or title retention agreement, (iii) liabilities secured by any lien on any property owned by such person even though such person has not assumed or otherwise become liable for the payment thereof (other than carriers', warehousemen's, repairmen's or other like nonconsensual statutory liens arising in the ordinary course of business), (iv) all payments that such Person would have to make in the event of a termination, on the date of determination, of outstanding Hedging Agreements, after giving effect to all netting arrangements, (v) obligations of such person in respect of capital stock subject to mandatory redemption or redemption at the option of the holder thereof, in whole or in part, and (vi) guaranties of such person in respect of any of the foregoing. 17 "INDEBTEDNESS FOR BORROWED MONEY" means, as to any Person, without --------------------------------- duplication, all (i) indebtedness for borrowed money, (ii) indebtedness in respect of the deferred purchase price of property (other than trade payable incurred in the ordinary course of business), (iii) indebtedness arising under acceptance facilities and the amount available to be drawn under all letters of credit issued for the account of such person and, without duplication, all drafts drawn thereunder to the extent such person shall not have reimbursed the issuer in respect of the issuer's payment thereof, (iv) Capital Lease Obligations and (v) guaranties of such person in respect of any of the foregoing. "INDEMNIFIED TAXES" means Taxes other than Excluded Taxes. ------------------- "INFORMATION MEMORANDUM" means the Confidential Information Memorandum ------------------------ dated October 29, 1998 relating to the Borrower and the Transactions. "INTEREST COVERAGE RATIO" means, at any date of determination, the ------------------------- ratio of Consolidated EBITDA to Consolidated Interest Expense for the period of four consecutive fiscal quarters ending on such date. "INTEREST ELECTION REQUEST" means a request by the Borrower to convert --------------------------- or continue a Revolving Borrowing in accordance with Section 2.08. "INTEREST PAYMENT DATE" means (a) with respect to any ABR Loan (other ----------------------- than a Swingline Loan), the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Eurodollar Loan, and (c) with respect to any Swingline Loan, the day that such Loan is required to be repaid. "INTEREST PERIOD" means with respect to any Eurodollar Borrowing, the ----------------- period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one month or two, three or six months thereafter, as the Borrower may elect; PROVIDED, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period 18 that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "INVENTORY" shall mean all goods now owned or hereafter acquired by the ----------- Borrower or any of its Subsidiaries (wherever located, whether in the possession of the Borrower or any Subsidiary or of a bailee or other person for sale, storage, transit, processing, use or otherwise) consisting of whole goods, components, supplies, materials or consigned, returned or repossessed goods which are held for sale or to be furnished (or have been furnished) under any contract of service or which are raw materials, work in process, or materials used or consumed in the Borrower's or its Subsidiaries' business or processed by or on behalf of the Borrower or its Subsidiaries. The amount of Inventory shall be based upon the Borrower's books and records, consistently applied in accordance with the historical practices of the Borrower. "INVENTORY TURNOVER RATIO" means, at the end of any fiscal year, the -------------------------- ratio of (i) the cost of goods sold as set forth on the income statement of the Borrower and its Subsidiaries for the fiscal year ending on such date, to (ii) the value of all inventory (determined on a first in first out basis) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP as at such date. "ISSUING BANK" means The Chase Manhattan Bank, in its capacity as the -------------- issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.06(i). The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "LC DISBURSEMENT" means a payment made by the Issuing Bank pursuant to ----------------- a Letter of Credit. "LC EXPOSURE" means, at any time, the sum of (a) the aggregate undrawn ------------- amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. 19 "LENDERS" means the Persons listed on Schedule 2.01 and any other --------- Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. Unless the context otherwise requires, the term "Lenders" includes the Swingline Lender. "LETTER OF CREDIT" means any commercial letter of credit issued ------------------ pursuant to this Agreement. "LEVERAGE RATIO" means, at any date of determination, the ratio of (i) ---------------- Consolidated Funded Debt on such date to Consolidated EBITDA for the period of four consecutive fiscal quarters ending on such date. "LIBO RATE" means, with respect to any Eurodollar Borrowing for any ----------- Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO RATE" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for delivery on the date of commencement of such Interest Period. "LIEN" means, with respect to any asset, (a) any mortgage, deed of ------ trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. 20 "LOAN DOCUMENTS" means this Agreement, the Subsidiary Guaranty and any ---------------- other instrument or agreement executed and delivered in connection herewith or therewith, each as may be amended, restated, supplemented or otherwise modified from time to time. "MARGIN STOCK" means "Margin Stock" as that term is defined in -------------- Regulation U of the Board. "LOANS" means the loans made by the Lenders to the Borrower pursuant to ------- this Agreement. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the ------------------------- business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries taken as a whole, (b) the ability of the Borrower to perform any of its obligations under this Agreement or any other Loan Document or (c) the validity or enforceability of this Agreement or any other Loan Document or the rights of or benefits available to the Lenders under this Agreement or any other Loan Document. "MATERIAL INDEBTEDNESS" means Indebtedness (other than the Loans and ----------------------- Letters of Credit), of any one or more of the Borrower and its Subsidiaries in an aggregate principal amount exceeding $2,000,000. "MATURITY DATE" means November 30, 2001. --------------- "MOODY'S" means Moody's Investors Service, Inc. --------- "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section -------------------- 4001(a)(3) of ERISA. "NET ACCOUNTS RECEIVABLE" means Accounts Receivable of the Borrower and ------------------------- its Subsidiaries which are shown as "accounts receivable, net" on the Borrower's financial statements as of the date of determination. "NET INVENTORY" means Inventory of the Borrower and its Subsidiaries --------------- which is shown as "inventories, net" on the Borrower's financial statements as of the date of determination. "NET PP&E" means PP&E of the Borrower and its Subsidiaries which is ---------- shown as "property, plant and equipment, net" on the Borrower's financial statements as of the date of determination. 21 "NOTE AGREEMENT INDEBTEDNESS" means that Indebtedness owing under (i) ----------------------------- that certain Note Purchase Agreement dated as of December 1, 1995 among the Borrower and each of the purchasers listed therein pursuant to which notes in the aggregate principal amount of $73,000,000 were issued, (ii) that certain Note Agreement dated as of November 15, 1992 among the Borrower and each of the purchasers listed therein pursuant to which notes in the aggregate principal amount of $65,000,000 were issued and (iii) that certain Note Agreement dated as of October 15, 1989 among the Borrower and each of the purchasers listed therein pursuant to which notes in the aggregate principal amount of $30,000,000 were issued, each as amended. "OTHER TAXES" means any and all present or future stamp or documentary ------------- taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document. "PBGC" means the Pension Benefit Guaranty Corporation referred to and ------ defined in ERISA and any successor entity performing similar functions. "PERMITTED ENCUMBRANCES" means: ------------------------ (1) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04; (1) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.04; (1) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (1) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (1) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII; and (1) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that 22 do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; PROVIDED that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "PERMITTED INVESTMENTS" means: ----------------------- (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within six months from the date of acquisition thereof and having, at such date of acquisition, a rating of at least "P2" or the equivalent thereof from S&P or of at least "A2" or the equivalent thereof from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $250,000,000; (d) repurchase agreements with a term of not more than 90 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and (e) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (a) through (d) above. "PERSON" means any natural person, corporation, limited liability -------- company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "PLAN" means any employee pension benefit plan (other than a ------ Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 23 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PP&E" shall mean property, plant and equipment as reported on the Borrower's consolidated balance sheet net of depreciation and amortization. "PRIME RATE" means the rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "REGISTER" has the meaning set forth in Section 9.04. "RELATED PARTIES" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees and agents of such Person and such Person's Affiliates. "REQUIRED LENDERS" means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing at least 51% of the sum of the total Revolving Credit Exposures and unused Commitments at such time. "RESTRICTED PAYMENT" means any dividend or other distribution (whether in cash, securities or other property) with respect to any shares of any class of capital stock of the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such shares of capital stock of the Borrower or any option, warrant or other right to acquire any such shares of capital stock of the Borrower. "REVOLVING CREDIT EXPOSURE" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans, its LC Exposure and Swingline Exposure at such time. "REVOLVING LOAN" means a Loan made pursuant to Section 2.01. "S&P" means Standard & Poor's Rating Group. "STATUTORY RESERVE RATE" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any 24 marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject (a) with respect to the Base CD Rate, for new nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months and (b) with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "SMP LTD." means SMP Motor Products, Ltd., a Canadian corporation. "SUBSIDIARY" means, with respect to any Person (the "PARENT") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "SUBSIDIARY" means any subsidiary of the Borrower other than the joint ventures listed on Schedule 3.13. "SUBSIDIARY GUARANTY" means the guaranty in substantially the form of Exhibit C hereto executed by each of the Guarantors, as the same may be amended, restated, supplemented or otherwise modified from time to time. "SWINGLINE EXPOSURE" means, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Lender at any time shall be its Applicable Percentage of the total Swingline Exposure at such time. "SWINGLINE LENDER" means The Chase Manhattan Bank, in its capacity as lender of Swingline Loans hereunder. 25 "SWINGLINE LOAN" means a Loan made pursuant to Section 2.05. "TAXES" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "THREE-MONTH SECONDARY CD RATE" means, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Administrative Agent from three negotiable certificate of deposit dealers of recognized standing selected by it. "TRANSACTIONS" means the execution, delivery and performance by the Borrower of this Agreement, the borrowing of Loans, the use of the proceeds thereof and the issuance of Letters of Credit hereunder. "TYPE," when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. A. CLASSIFICATION OF LOANS AND BORROWINGS. For purposes of this Agreement, Loans may be classified and referred to by Class (E.G., a "Revolving Loan") or by Type (E.G., a "Eurodollar Loan") or by Class and Type (E.G., a "Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (E.G., a "Revolving Borrowing") or by Type (E.G., a "Eurodollar Borrowing") or by Class and Type (E.G., a "Eurodollar Revolving Borrowing"). 26 A. TERMS GENERALLY. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. A. ACCOUNTING TERMS; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; PROVIDED that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. I. -- THE CREDITS ----------- A. COMMITMENTS. Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrower from time to time during 27 the Availability Period in an aggregate principal amount that will not result in (a) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the total Revolving Credit Exposures exceeding the lesser of (i) the total Commitments, as the same may be reduced from time to time pursuant to Section 2.09 and (ii) the Borrowing Base. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. A. LOANS AND BORROWINGS. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; PROVIDED that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.14, each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Swingline Loan shall be an ABR Loan. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; PROVIDED that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000; PROVIDED that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.06(e). Each Swingline Loan shall be in an amount that is an integral multiple of $500,000 and not less than $1,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; PROVIDED that there shall not at any time be more than a total of eight Eurodollar Revolving Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. 28 A. REQUESTS FOR REVOLVING BORROWINGS. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 12:00 noon, New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 12:00 noon, New York City time, one Business Day before the date of the proposed Borrowing; PROVIDED that any such notice of an ABR Revolving Borrowing to finance the reimbursement of an LC Disbursement as contemplated by Section 2.06(e) may be given not later than 12:00 noon, New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (a) the aggregate amount of the requested Borrowing; (b) the date of such Borrowing, which shall be a Business Day; (c) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (d) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (e) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. 29 A. BORROWING BASE. Notwithstanding any other provision of this Agreement to the contrary, the aggregate Revolving Credit Exposure shall not at any time exceed the Borrowing Base and no Loan shall be made or Letter of Credit issued in violation of the foregoing. A. SWINGLINE LOANS. (a) Subject to the terms and conditions set forth herein, the Swingline Lender agrees to make Swingline Loans to the Borrower from time to time during the Availability Period, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding $10,000,000 or (ii) the total Revolving Credit Exposures exceeding the lesser of (x) the total Commitments, as the same may be reduced from time to time pursuant to Section 2.09 and (y) the Borrowing Base; PROVIDED that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans. (b) To request a Swingline Loan, the Borrower shall notify the Administrative Agent of such request by telephone (confirmed by telecopy), not later than 12:00 noon, New York City time, on the day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan. The Administrative Agent will promptly advise the Swingline Lender of any such notice received from the Borrower. The Swingline Lender shall make each Swingline Loan available to the Borrower by means of a credit to the general deposit account of the Borrower with the Swingline Lender (or, in the case of a Swingline Loan made to finance the reimbursement of an LC Disbursement as provided in Section 2.06(e), by remittance to the Issuing Bank) by 3:00 p.m., New York City time, on the requested date of such Swingline Loan. (c) The Swingline Lender may by written notice given to the Administrative Agent not later than 10:00 a.m., New York City time, on any Business Day require the Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which Lenders will participate. Promptly upon receipt of such notice, the Administrative Agent will give notice thereof to each Lender, specifying in such notice such Lender's Applicable Percentage of such Swingline Loan or Loans. Each Lender hereby 30 absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of the Swingline Lender, such Lender's Applicable Percentage of such Swingline Loan or Loans. Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.07 with respect to Loans made by such Lender (and Section 2.07 shall apply, MUTATIS MUTANDIS, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower of any default in the payment thereof. A. LETTERS OF CREDIT. (a) GENERAL. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of commercial Letters of Credit for its own account, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the Availability Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. (b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL, EXTENSION; CERTAIN CONDITIONS. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if 31 arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Borrower also shall submit a letter of credit application on the Issuing Bank's standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $5,000,000 and (ii) the total Revolving Credit Exposures shall not exceed the lesser of (x) the total Commitments, as the same may be reduced from time to time pursuant to Section 2.09 and (y) the Borrowing Base. (c) EXPIRATION DATE. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit and (ii) the date that is five Business Days prior to the Maturity Date. (d) PARTICIPATIONS. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. 32 (e) REIMBURSEMENT. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 12:00 noon, New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 12:00 noon, New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; PROVIDED that the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 or 2.05 that such payment be financed with an ABR Revolving Borrowing or Swingline Loan in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall, pursuant to paragraph (d) of this Section, pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.07 with respect to Loans made by such Lender (and Section 2.07 shall apply, MUTATIS MUTANDIS, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of ABR Revolving Loans or a Swingline Loan as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement. 33 (f) OBLIGATIONS ABSOLUTE. The Borrower's obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; PROVIDED that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. 34 (g) DISBURSEMENT PROCEDURES. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; PROVIDED that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such LC Disbursement. (h) INTERIM INTEREST. If the Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans; PROVIDED that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) REPLACEMENT OF THE ISSUING BANK. The Issuing Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. 35 (j) CASH COLLATERALIZATION. If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Lenders with LC Exposure representing greater than 51% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; PROVIDED that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (h) or (i) of Article VII. Such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower's risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Lenders with LC Exposure representing greater than 51% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived. A. FUNDING OF BORROWINGS. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders; PROVIDED that Swingline Loans shall be made as provided in Section 2.05. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Borrowing Request; provided that ABR Revolving Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.06(e) shall be remitted by the Administrative Agent to the Issuing Bank. 36 (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. A. INTEREST ELECTIONS. (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Revolving Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Swingline Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. 37 (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (a) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (b) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (c) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (d) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may 38 be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Revolving Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. A. TERMINATION AND REDUCTION OF COMMITMENTS. (a) Unless previously terminated, the Commitments shall terminate on the Maturity Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; PROVIDED that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.11, the sum of the Revolving Credit Exposures would exceed the lesser of (x) the total Commitments and (y) the Borrowing Base. (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; PROVIDED that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments. (d) If at any time the aggregate principal amount of the outstanding Loans exceeds the lesser of (x) the total Commitments and (y) the Borrowing Base, the Borrower shall within one Business Day prepay the Loans in an amount necessary to cause the aggregate principal amount of the outstanding Loans to be equal to or less than the total Commitments and/or the Borrowing Base, as the case may be. A. REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The Borrower hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan on the Maturity Date, (ii) to the Swingline Lender the then unpaid principal amount of each Swingline 39 Loan on the earlier of the Maturity Date or the first date after such Swingline Loan is made that is the fifth Business Day after such Swingline Loan is made; PROVIDED that on each date that a Revolving Borrowing is made, the Borrower shall repay all Swingline Loans then outstanding. (b) During each twelve month period occurring during the Availability Period, the Borrowers shall repay the aggregate principal amounts of all Revolving Loans so as to reduce, and maintain for a period of 30 days, the outstanding aggregate Loans at an amount not greater than $10,000,000. (c) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (d) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (e) The entries made in the accounts maintained pursuant to paragraph (c) or (d) of this Section shall be PRIMA FACIE evidence of the existence and amounts of the obligations recorded therein; PROVIDED that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (f) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). A. PREPAYMENT OF LOANS. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section. 40 (b) The Borrower shall notify the Administrative Agent (and, in the case of prepayment of a Swingline Loan, the Swingline Lender) by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Revolving Borrowing, not later than 12:00 noon, New York City time, three Business Days before the date of prepayment, (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 12:00 noon, New York City time, one Business Day before the date of prepayment or (iii) in the case of prepayment of a Swingline Loan, not later than 12:00 noon, New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; PROVIDED that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Revolving Borrowing shall be applied ratably to the principal amount of the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. A. FEES. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee, which shall accrue at the Applicable Rate on the daily amount of the unused Commitment of such Lender during the period from and including the Effective Date to but excluding the date on which such Commitment terminates; PROVIDED that, if such Lender continues to have any Revolving Credit Exposure after its Commitment terminates, then such commitment fee shall continue to accrue on the daily amount of such Lender's Revolving Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Revolving Credit Exposure. Accrued commitment fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the Effective Date; PROVIDED that any commitment fees accruing after the date on which the Commitments terminate shall be payable on demand. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). 41 (b) The Borrower agrees to pay (i) to the Administrative Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the Applicable Rate on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the rate or rates per annum separately agreed upon between the Borrower and the Issuing Bank on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; PROVIDED that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent. (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution. Fees paid shall not be refundable under any circumstances. A. INTEREST. (a) The Loans comprising each ABR Borrowing (including each Swingline Loan) shall bear interest at the Alternate Base Rate plus the Applicable Rate. 42 (b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate. (c) Notwithstanding the foregoing, if an Event of Default occurs and during the period such Event of Default is continuing, (i) the aggregate principal amount of the Revolving Loans shall bear interest, payable on demand, at a rate per annum equal to 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section and (ii) overdue interest, fees and other amounts shall bear interest, payable on demand, at a rate per annum equal to 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section. (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, upon termination of the Commitments; PROVIDED that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Revolving Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year). In each case interest shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. A. ALTERNATE RATE OF INTEREST. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (1) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or 43 (2) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing. A. INCREASED COSTS. (a) If any Change in Law shall: (a) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing Bank; or (b) impose on any Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of 44 such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; PROVIDED that the Borrower shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 180 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor; PROVIDED FURTHER that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof. A. BREAK FUNDING PAYMENTS. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11(b) and is revoked in accordance therewith), or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the 45 Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. A. TAXES. (a) Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; PROVIDED that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law; PROVIDED, FURTHER, that the Borrower shall not be required to pay any amounts pursuant to clause (i) of the immediately preceding proviso to any Foreign Lender or any Issuing Bank or Agent not organized in the United States that has failed to comply with paragraph (e) of this Section. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, 46 such Lender or the Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Each Lender that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrower and the Administrative Agent (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form. Each such Lender also agrees to deliver to the Borrower and the Administrative Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower, and such extensions or renewals thereof as may reasonably be requested by the Borrower or the Administrative Agent, unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States of America federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States of America backup withholding tax. Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is 47 located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate. A. PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING OF SET-OFFS. (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.15, 2.16 or 2.17, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments to be made directly to the Issuing Bank or Swingline Lender as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans or participations in LC Disbursements or Swingline Loans resulting in such Lender receiving payment of a greater 48 proportion of the aggregate amount of its Revolving Loans and participations in LC Disbursements and Swingline Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans and participations in LC Disbursements and Swingline Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans and participations in LC Disbursements and Swingline Loans; PROVIDED that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Bank hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.05(c), 2.06(d) or (e), 2.07(b) or 2.18(d), then the 49 Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. A. MITIGATION OBLIGATIONS; REPLACEMENT OF LENDERS. (a) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or Affiliates, if such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); PROVIDED that (i) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Commitment is being assigned, the Issuing Bank and Swingline Lender), which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. 50 I. -- REPRESENTATIONS AND WARRANTIES ------------------------------ The Borrower represents and warrants to the Lenders that: A. ORGANIZATION; POWERS. Each of the Borrower and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. A. AUTHORIZATION; ENFORCEABILITY. The Transactions are within the Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. A. GOVERNMENTAL APPROVALS; NO CONFLICTS. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any material payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. A. FINANCIAL CONDITION; NO MATERIAL ADVERSE CHANGE. (a) The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders' equity and cash flows (i) as of and for the 51 fiscal year ended December 31, 1997, reported on by KPMG Peat Marwick LLP, independent public accountants, and (ii) as of and for the fiscal quarter and the portion of the fiscal year ended September 30, 1998, certified by its chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. (b) Since December 31, 1997, there has been no material adverse change in the business, assets, property, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole. A. PROPERTIES. (a) Each of the Borrower and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. (b) Each of the Borrower and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. A. LITIGATION AND ENVIRONMENTAL MATTERS. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. 52 (c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. A. COMPLIANCE WITH LAWS AND AGREEMENTS. Each of the Borrower and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. Neither the Borrower nor any subsidiary is (a) a party to any judgment, order, decree or any agreement or instrument or subject to restrictions which could reasonably be likely to have a Material Adverse Effect or to materially adversely affect the ability of the Borrower to observe the covenants and agreements contained herein or any other Loan, or (b) in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party, which default has, or if not remedied within any applicable grace period could reasonably be likely to have, a Material Adverse Effect. B. INVESTMENT AND HOLDING COMPANY STATUS. Neither the Borrower nor any of its Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. C. TAXES. Each of the Borrower and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves in accordance with GAAP or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. Each of the Borrower and its Subsidiaries has provided adequate reserves for the payment of, all material Federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. 53 D. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $500,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $500,000 the fair market value of the assets of all such underfunded Plans. E. DISCLOSURE. The Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. Neither the Information Memorandum nor any of the other reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. F. YEAR 2000. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (i) the Borrower's computer systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which Borrower's systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be completed by June 30, 1999. The cost to the Borrower of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Borrower (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrower and its Subsidiaries are and, with material enhancements and ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrower to conduct its business without Material Adverse Effect. 54 G. SUBSIDIARIES AND AFFILIATES. Schedule 3.13 sets forth as of the Effective Date the name of, and the ownership interest of the Borrower in, each Subsidiary and each Affiliate of the Borrower (other than the Family Shareholders). The outstanding shares or other equity interests of each such Subsidiary and each Affiliate have been duly authorized and validly issued and are fully paid and nonassessable; and the Borrower and each such subsidiary owns beneficially and of record all the shares and other interests it is listed as owning in Schedule 3.13, free and clear of any Lien. Schedule 3.13 also sets forth a list of joint ventures in which the Borrower or one or more of its Subsidiaries is a participant. H. INSURANCE. All policies of insurance of any kind or nature owned by or issued to the Borrower and the Guarantors, including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers' compensation, employee health and welfare, title, property and liability insurance, are in full force and effect and are of a nature and provide such coverage as is sufficient and as is customarily carried by companies of the same or similar size, engaged in the same or similar businesses of the Borrower and the Guarantors. I. LABOR MATTERS. As of the Effective Date, except for the Disclosed Matters, none of the employees of the Borrower or any Subsidiary is subject to any collective bargaining agreement and there are no strikes, lockouts or slowdowns against the Borrower or any Subsidiary pending or, to the knowledge of the Borrower, threatened that are reasonably likely to have a Material Adverse Effect. The hours worked by and payments made to employees of the Borrower and the Subsidiaries have not been in material violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters except to the extent that any such violation could not reasonably be expected to result in a Material Adverse Effect. All payments due from the Borrower or any Subsidiary, or for which any claim may be made against the Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of the Borrower or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Subsidiary is bound that is reasonably likely to have a Material Adverse Effect. 55 J. SOLVENCY. Immediately after the consummation of the Transactions to occur on the Effective Date and immediately following the making of each Loan made on the Effective Date and after giving effect to the application of the proceeds of such Loans, (a) the fair value of the assets of the Borrower, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of the Borrower will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) the Borrower will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) the Borrower will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effective Date. K. USE OF PROCEEDS. The proceeds of the Loans shall be used for working capital and for other general corporate purposes of the Borrower and its Subsidiaries. L. FEDERAL RESERVE REGULATIONS. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock or any activities in violation of Regulation U. II. --- CONDITIONS ---------- A. EFFECTIVE DATE. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02): (1) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (1) The Administrative Agent (or its counsel) shall have received a counterpart of the Subsidiary Guaranty signed on behalf of each Guarantor. 56 (1) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Kelley, Drye & Warren, counsel for the Borrower and Guarantors, substantially in the form of Exhibit B, and covering such other matters relating to the Borrower and Guarantors, this Agreement or the Transactions as the Required Lenders shall reasonably request. The Borrower hereby requests such counsel to deliver such opinion. (1) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance reasonably satisfactory to the Administrative Agent and its counsel. (1) The Administrative Agent shall have received a certificate of the Borrower, dated the Effective Date and signed on its behalf by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02. (1) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder or under any other Loan Document. (1) The Borrower and the Subsidiaries shall have granted the Agent access to and the right to inspect all reports, audits and other internal information of the Borrower and the Subsidiaries relating to environmental matters, and any third party verification of certain matters relating to compliance with Environmental Laws reasonably requested by the Agent, and the Agent shall be satisfied that the Borrower and the Subsidiaries are in compliance in all material respects with all applicable Environmental Laws and be satisfied with the costs of maintaining such compliance. (1) All consents and approvals required to be obtained from any Governmental Authority or other Person as shall be required to consummate the transactions contemplated hereby shall have been obtained and shall be in full force and effect, and all applicable waiting periods and appeal periods shall have expired, in each case without the imposition of any burdensome conditions. 57 (1) The Lenders shall have received and found satisfactory (i) audited consolidated financial statements of the Borrower for the fiscal years ended December 31, 1996 and December 31, 1997, and (ii) unaudited interim consolidated financial statements of the Borrower for each fiscal month and quarterly period ended subsequent to the date of the latest financial statements delivered pursuant to clause (i) of this paragraph as to which such financial statements are available, including, without limitation, unaudited consolidated financial statements for the fiscal month and fiscal quarter ended September 30, 1998. (1) The Administrative Agent shall be satisfied with the nature and amount of all Indebtedness of the Borrower and its Subsidiaries, including, without limitation, the CIBC Guaranty and amounts owing under the Clipper Receivables Financing Agreement, and the Borrower shall have provided to the Agent copies of all operative documents in connection with the CIBC Guaranty and a detailed summary of the Clipper Receivables Financing Agreement. (1) All amounts outstanding under the Existing Bank Agreement shall have been fully and finally paid and satisfied in full and all promissory notes, credit agreements, reimbursement agreements and other documents executed in connection therewith, have been cancelled or terminated, as appropriate. (1) The Administrative Agent shall have received results of UCC-11 searches satisfactory to the Lenders (in each case dated as of a date reasonably satisfactory to the Lenders) reflecting the absence of Liens on the assets of the Borrower and its Subsidiaries (other than Permitted Liens). (1) The Administrative Agent shall have received a Borrowing Base Certificate dated as of October 1998 demonstrating the ability of the Borrower to incur Loans advanced on the Effective Date. (1) The Administrative Agent shall have received such other documents, instruments, certificates and opinions as are customary for transactions of this type or as the Agent may reasonably request, and shall be satisfied with such other conditions as it may reasonably require. The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not become effective unless each 58 of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 3:00 p.m., New York City time, on November 30, 1998 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). A. EACH CREDIT EVENT. The obligation of each Lender to make a Loan on the occasion of any Borrowing, and of the Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to the satisfaction of the following conditions: (1) The representations and warranties of the Borrower set forth in this Agreement shall be true and correct on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable. (2) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing. (3) The Administrative Agent shall have received the timely delivery of the monthly Borrowing Base Certificate required to be delivered pursuant to Section 5.13 demonstrating the Borrower's ability to incur Loans. Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section and that after giving effect to such Borrowing or Letter of Credit the outstanding Revolving Credit Exposure shall not exceed the Borrowing Base. I. -- AFFIRMATIVE COVENANTS --------------------- Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that: A. FINANCIAL STATEMENTS AND OTHER INFORMATION. The Borrower will furnish to the Administrative Agent and each Lender: 59 (1) within 90 days after the end of each fiscal year of the Borrower, its audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, reported on by KPMG Peat Marwick LLP or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit); (2) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, its unaudited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, certified by one of the Borrower's Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (3) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.13 through 6.19 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (4) concurrently with any delivery of financial statements under clause (a) above, a certificate of the accounting firm that reported on such financial statements verifying compliance with Sections 6.13 and 6.19; (5) as soon as practicable and in any event within five (5) days after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be; 60 (6) within 30 days after the end of each fiscal year of the Borrower, a preliminary budget which will include projected balance sheets, projected statements of operations and projected statements of cash flows for the then-current fiscal year (which projections shall be on a quarterly basis), which shall set forth, among other things, the Borrower's projected gross sales, projected net sales and projected results of operations of each domestic business segment and each foreign Subsidiary, for the Borrower and its Subsidiaries in form and content consistent with Borrower's official plan as presented to its Board of Directors; (7) within 120 days after the end of each fiscal year of the Borrower, projections on a quarterly basis for the upcoming two fiscal years setting forth the items described in clause (f) above; (8) promptly upon any revision of projections previously delivered to the Agent or the projections referred to in clauses (f) and (g) above, such revised projected balance sheets, projected statements of operations and projected statements of cash flows with an explanation of all material variances to the profit and loss statement from the projections as they existed prior to such revision; (9) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request. The Borrower will furnish to the Administrative Agent and each Lender prompt written notice of the following: (1) the occurrence of any Default; (2) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (3) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $1,000,000; and 61 (4) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. A. EXISTENCE; CONDUCT OF BUSINESS. The Borrower will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; PROVIDED that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03. B. PAYMENT OF OBLIGATIONS. The Borrower will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP (c) such contest effectively suspends collection of the contested obligation and the enforcement of any Lien securing such obligation and (d) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. C. MAINTENANCE OF PROPERTIES; INSURANCE. The Borrower will, and will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. D. BOOKS AND RECORDS; INSPECTION RIGHTS. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its 62 Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times during normal business hours and as often as reasonably requested. E. COMPLIANCE WITH LAWS. The Borrower will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. F. USE OF PROCEEDS AND LETTERS OF CREDIT. The proceeds of the Loans and the Letters of Credit will be used only for general working capital needs of the Borrower and its Subsidiaries in the ordinary course of business. No part of the proceeds of any Loan will be used, whether directly or indirectly, (i) for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X or (ii) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose. G. NOTICE OF DISCHARGE OF HAZARDOUS MATERIAL OR ENVIRONMENTAL COMPLIANT. The Borrower will, and will cause each of its Subsidiaries to, promptly provide to the Agent true, accurate and complete copies of any and all notices, complaints, orders, directives, claims, or citations received by the Borrower or any Subsidiary relating to any (a) violation or alleged violation by the Borrower or any Subsidiary of any applicable Environmental Laws; (b) release or threatened release by the Borrower or any Subsidiary, or at any facility or property owned or operated by the Borrower or any Subsidiary, of any Hazardous Material, except where occurring legally; or (c) liability or alleged liability of the Borrower or any Subsidiary for the costs of cleaning up, removing, remediating or responding to a release of Hazardous Materials which, in each case, in the reasonable judgment of senior officers of the Borrower could impose a liability in excess of $50,000. H. ENVIRONMENTAL COMPLIANCE. If the Borrower or any Subsidiary shall receive letter, notice, complaint, order, directive, claim or citation alleging that the Borrower or any Subsidiary has violated any Environmental Law or is liable for the costs of cleaning up, removing, remediating or responding to a release of Hazardous Materials, the Borrower shall, within the time period permitted by the 63 applicable Environmental Law or the Governmental Authority responsible for enforcing such Environmental Law, remove or remedy, or cause the applicable Subsidiary to remove or remedy, such violation or release or satisfy such liability, except where the failure to do so is not reasonably likely to result in a Material Adverse Effect or unless the applicability of the Environmental Law, the fact of such violation or liability or what is required to remove or remedy such violation is being contested by the Borrower or the applicable Subsidiary by appropriate proceedings diligently conducted and all reserves with respect thereto as may be required under GAAP, if any, have been made. I. ADDITIONAL SUBSIDIARIES. If any additional Subsidiary is formed or acquired after the Effective Date, the Borrower will notify the Administrative Agent and the Lenders thereof and the Borrower will, to the extent such Subsidiary is formed in the United States, cause such Subsidiary to become a guarantor of the Loans and other obligations hereunder within ten Business Days after such Subsidiary is formed or acquired. J. STRATEGIC BUSINESS PLAN. The Borrower will furnish to the Administrative Agent the Borrower's long-term strategic plan as soon as available, and in any event on or before March 31, 1999, and make its senior officers available to discuss same with the Administrative Agent. The Borrower will also furnish, as soon as available, all material modifications thereto. K. BORROWING BASE CERTIFICATE. The Borrower will furnish a Borrowing Base Certificate to the Administrative Agent as soon as available and in any event (i) on or before the 21st day after the end of each month for the fiscal months of March through November; (ii) on or before the 21st day of March for the combined fiscal months of January and February; and (iii) on or before the last day of January for the previous fiscal month of December (on a good faith estimated basis). II. --- NEGATIVE COVENANTS ------------------ Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that: A. INDEBTEDNESS. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except: 64 (1) Indebtedness created hereunder; (2) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; provided that any extension, renewal or replacement of the Indebtedness identified as "Note Purchase Agreements" on Schedule 6.01 shall be on terms satisfactory to the Required Lenders in their sole discretion; PROVIDED, that any determination of Required Lenders for purposes of approving such terms shall include Chase and CIBC. (3) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary; PROVIDED that such Indebtedness shall be subject to Section 6.04; (4) Guarantees by the Borrower of Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of the Borrower or any other Subsidiary; PROVIDED that such Indebtedness shall be subject to Section 6.04; (5) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; PROVIDED that (i) such Indebtedness is incurred prior to or within 120 days after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by this clause (e) shall not exceed $3,000,000 at any time outstanding; (6) trade payables in the ordinary course of business, endorsements for collection or deposit in the ordinary course of business, surplus and retained earnings, lease obligations (other than pursuant to Capitalized Leases), reserves for deferred income taxes and investment credits, other deferred credits and reserves, and deferred compensation obligations; (7) Indebtedness of any Person that becomes a Subsidiary after the date hereof; PROVIDED that (i) such Indebtedness exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary and (ii) the aggregate principal amount of Indebtedness permitted by this clause (g) shall not exceed $1,000,000 at any time outstanding; 65 (8) Indebtedness for Borrowed Money of Intermotor Holdings Limited or any of its subsidiaries in an aggregate outstanding principal amount not to exceed (pound)5,000,000 over the amount listed on Schedule 6.01; (9) the Cooper Indebtedness; (10) Indebtedness arising in connection with the purchase of foreign currency in the ordinary course of business in an aggregate outstanding notional amount not to exceed $2,000,000 at any time; (11) Indebtedness owing in respect of overdrafts and related liabilities in the ordinary course of business, PROVIDED that such Indebtedness is extinguished within two Business Days after it is incurred; (12) Indebtedness of the Borrower or any Subsidiary as an account party in respect of trade letters of credit; (13) Indebtedness of the Borrower arising under commercial letters of credit in an aggregate outstanding amount not to exceed $2,000,000 over the amount allowed under Sections 6.01(b); and (14) Indebtedness under the CIBC Loan Agreement, PROVIDED that principal amounts repaid under the CIBC Loan Agreement may not be reborrowed; and PROVIDED, FURTHER, that the CIBC Loan Agreement may be amended, modified, extended or refinanced so long as the principal amount outstanding on the date of such amendment, modification, extension or refinancing is not increased and that no security is granted for the obligor's obligations thereunder. B. LIENS. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (1) Permitted Encumbrances; 66 (2) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.02; PROVIDED that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (3) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary; PROVIDED that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary , as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower or any Subsidiary and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (4) Liens on fixed or capital assets acquired, constructed or improved by the Borrower or any Subsidiary; PROVIDED that (i) such security interests secure Indebtedness permitted by clause (e) of Section 6.01, (ii) the Indebtedness secured thereby does not exceed 90% of the cost of acquiring, constructing or improving such fixed or capital assets and (iii) such security interests shall not apply to any other property or assets of the Borrower or any Subsidiary; (5) Liens in respect of the Clipper Receivables Financing Agreement or any replacement thereof; and (6) Liens to secure Indebtedness of any Subsidiary organized outside of the United States; provided, that such Indebtedness is permitted under Section 6.01 and such Liens attach only to property or assets of such Subsidiary; (7) Liens arising in connection with the Borrower's obligations under its letter of credit facility permitted under Section 6.01(b) and (m); PROVIDED, that such Lien attaches only to the goods purchased with such letters of credit, the documents relating thereto and insurance proceeds thereof which Liens are possessory in nature and created by agreement with the issuing bank; and (8) judgment Liens that are released, stayed or bonded (or the judgment secured thereby discharged) within 45 days after the creation thereof. 67 C. FUNDAMENTAL CHANGES; SALES OF ASSETS. (a) The Borrower will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or any substantial part of its assets, or all or substantially all of the stock of any of its Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (ii) any Subsidiary may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary, (iii) any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another Subsidiary and (iv) any Subsidiary may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders; PROVIDED that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.04. It is agreed that the sale by the Borrower of its inventory in the ordinary course of business and the conveyance of its receivables under the Clipper Receivables Financing Agreement does not require the consent of any Lender hereunder. (b) The Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto. A. INVESTMENTS, LOANS, ADVANCES, GUARANTEES AND ACQUISITIONS. The Borrower will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any capital stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: 68 (1) Permitted Investments; (2) investments by the Borrower existing on the date hereof in the capital stock of its Subsidiaries; (3) loans or advances made by the Borrower to, and equity investments by the Borrower in, any domestic Subsidiary and loans or advances made by any domestic Subsidiary to the Borrower or any other domestic Subsidiary; (4) each Subsidiary Guaranty; (5) the CIBC Guaranty; (6) acquisition of the balance of the stock of Intermotor Holdings Limited; PROVIDED that such acquisition (or acquisitions) shall occur no earlier than July 1, 1999 and the aggregate amounts expended for such acquisition do not exceed $6,500,000. (7) acquisitions of the Capital Stock or assets of other Persons in an aggregate annual amount of up to $7,000,000 during each fiscal year; PROVIDED that any portion of the $7,000,000 allocated to, but not expended during, any fiscal year may be carried over and expended during the next succeeding year; PROVIDED, FURTHER, that in any year in which amounts are carried over from the prior year, amounts expended in such year will be deemed to be expended FIRST, from budgeted amounts for such year and thereafter from any amounts carried forward from the previous year; (8) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts or disputes with, customers and suppliers, in each case in the ordinary course of business; (9) investments by any foreign, Subsidiary in any other foreign Subsidiary; (10) loans and advances to employees for expenses incurred in the ordinary course of business in an aggregate outstanding amount not to exceed $1,000,000 at any time; (11) investments made on or after the date hereof in joint ventures and foreign Subsidiaries in an aggregate amount at any one time not to exceed $2,000,000, PROVIDED, that any investment made by the Borrower in SMP Ltd. for the purpose of fulfilling its obligations under the CIBC Guaranty in accordance with the provision set forth in Section 6.07(b) shall not be included in any calculation of the $2,000,000 amount referred to in this Section 6.04; 69 (12) existing investments listed on Schedule 6.04; and (13) cash or cash equivalents maintained in Canada in an amount not to exceed $5,000,000 Canadian at any one time, which may, from time to time, be used by SMP Ltd. to fund its working capital needs. B. HEDGING AGREEMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities in an aggregate notional amount not to exceed $2,000,000. C. RESTRICTED PAYMENTS. (a) The Borrower will not, and will not permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except: (a) the Borrower may declare and pay dividends with respect to its capital stock payable solely in additional shares of its common stock, (b) the Borrower may declare and pay dividends with respect to its capital stock payable in cash in an aggregate amount not to exceed $4,500,000 during any twelve-month period, (c) Subsidiaries may declare and pay dividends ratably with respect to their capital stock, and (d) the Borrower may make Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans (and in accordance with prior practices approved by the Borrower's board of directors on a current basis) for management or employees of the Borrower and its Subsidiaries. (b) The Borrower will not, and will not permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash securities or other property) of or in respect of principal of or interest on any Indebtedness, or any payment or other distribution (whether in cash, securities or other property), including any 70 sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Indebtedness, except: (i) payment of regularly scheduled interest and principal payments as and when due in respect of any Indebtedness permitted hereunder; (ii) refinancings of Indebtedness to the extent permitted by Section 6.01; (iii) one pre-payment during November 1999 in an amount not to exceed $3,250,000 in respect of the $30,000,000 Note Agreement described in item (iii) of the definition of "Note Agreement Indebtedness"; and (iv) payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness. A. TRANSACTIONS WITH AFFILIATES. (a) The Borrower will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (i) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (ii) transactions between or among the Borrower and its Subsidiaries who are Guarantors not involving any other Affiliate, (iii) any Restricted Payment permitted by Section 6.06, and (iv) ordinary and reasonable salaries and other compensation payable to employees who are Affiliates in amounts to be approved by an independent committee of the Borrower's board of directors. (b) In addition to the provisions set forth in Section 6.07(a)(ii) above, the Borrower agrees that it shall not alter in any material way the nature of the transactions presently conducted between the Borrower and SMP Ltd. The Borrower shall be permitted to make payments under the CIBC Guaranty in accordance with the terms in effect today under such Guaranty and the underlying financing documents. 71 A. RESTRICTIVE AGREEMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; PROVIDED that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by this Agreement or any other Loan Document, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.08 (but shall apply to any extension, renewal, amendment, or modification expanding the scope of any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of the capital stock or assets of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof. B. [THIS SECTION INTENTIONALLY LEFT BLANK.] C. AMENDMENT OF MATERIAL DOCUMENTS. The Borrower will not, and will not permit any Subsidiary to, amend, modify or waive any of its rights under its certificate of incorporation, by-laws or other organizational documents if the same is reasonably likely to have a Material Adverse Effect or would result in an Event of Default under this Agreement or any other Loan Documents. D. LIMITATIONS ON SALES AND LEASEBACKS. The Borrower will not, and will not permit any Subsidiary to, enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Borrower or any Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or any Subsidiary, except where the lease of such property by the Borrower or such Subsidiary constitutes Indebtedness permitted by Section 6.01(e). 72 E. FISCAL YEAR. The Borrower will not, and will not permit any Subsidiary to, change its fiscal year. F. LEVERAGE RATIO. The Borrower will not permit Leverage Ratio on the dates set forth below to be greater than the amount specified opposite such dates: - ----------------------------------------------------------- -------------------- FISCAL QUARTER ENDING LEVERAGE RATIO - ----------------------------------------------------------- -------------------- December 31, 1998 4.25 to 1 March 31, 1999 4.00 to 1 June 30, 1999 through Maturity Date 3.50 to 1 - ----------------------------------------------------------- -------------------- A. CAPITALIZATION RATIO. The Borrower will not permit Capitalization Ratio on the dates set forth below to be greater than the amount specified opposite such dates: - ----------------------------------------------------------- -------------------- FISCAL QUARTER ENDING CAPITALIZATION RATIO - ----------------------------------------------------------- -------------------- December 31, 1998 65% March 31, 1999 65% June 30, 1999 65% September 30, 1999 65% December 31, 1999 65% March 31, 2000 through the Maturity Date 60% - ----------------------------------------------------------- -------------------- A. CONSOLIDATED TANGIBLE NET WORTH. The Borrower and its Subsidiaries will not permit Consolidated Tangible Net Worth at any time to be less than $143,000,000, PLUS (i) 50% of the Borrower's consolidated net income (but not net losses) for each full fiscal year after the Effective Date, PLUS (ii) 100% of the aggregate net proceeds received by the Borrower from the sale of its capital stock after the Effective Date. B. INTEREST COVERAGE RATIO. The Borrower will not permit Interest Coverage Ratio on the dates set forth below to be less than the amount specified opposite such dates: 73 - ----------------------------------------------------- -------------------------- FISCAL QUARTER ENDING INTEREST COVERAGE RATIO - ----------------------------------------------------- -------------------------- December 31, 1998 3.0 to 1 March 31, 1999 3.0 to 1 June 30, 1999 3.0 to 1 September 30, 1999 3.0 to 1 December 31, 1999 3.0 to 1 March 31, 2000 through the Maturity Date 3.75 to 1 - ----------------------------------------------------- -------------------------- A. DEBT SERVICE COVERAGE RATIO. The Borrower will not permit Debt Service Coverage Ratio on the date set forth below to be less than the amount specified opposite such dates: - ----------------------------------------------- -------------------------------- FISCAL QUARTER ENDING DEBT SERVICE COVERAGE RATIO - ----------------------------------------------- -------------------------------- December 31, 1998 1.1 to 1 March 31, 1999 1.1 to 1 September 30, 1999 through the Maturity Date 1.25 to 1 - ----------------------------------------------- -------------------------------- A. INVENTORY TURNOVER RATIO. The Borrower will not permit Inventory Turnover Ratio on the dates forth below to be less than the amount specified opposite such dates: - ------------------------------------------------ ------------------------------- FISCAL YEAR ENDING INVENTORY TURNOVER RATIO - ------------------------------------------------ ------------------------------- December 31, 1998 through the Maturity Date 2.7 to 1 - ------------------------------------------------ ------------------------------- A. CAPITAL EXPENDITURES. The Borrower will not permit Capital Expenditures for the periods set forth below to exceed the amounts set forth opposite such dates; PROVIDED, that the Borrower may carry forward to the next year up to 20% of any budgeted amounts not used for Capital Expenditures in any fiscal year to the next following year, PROVIDED, FURTHER, that in any year in which amounts are carried over from the prior year, amounts expended in such year will be deemed to be expended FIRST, from budgeted amounts for such year and thereafter from any amounts carried forward from the previous year: 74 - ---------------------------------------------- --------------------------------- PERIOD TOTAL AMOUNT - ---------------------------------------------- --------------------------------- Fiscal Year Ending December 31, 1998 $18,000,000 Fiscal Year Ending December 31, 1999 $22,000,000 Fiscal Year Ending December 31, 2000 $18,000,000 January 1, 2001 - Maturity Date $18,000,000 - ---------------------------------------------- --------------------------------- I. -- EVENTS OF DEFAULT ----------------- If any of the following events ("EVENTS OF DEFAULT") shall occur: (1) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (2) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable; (3) any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with this Agreement or any other Loan Document or any amendment or modification thereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any other Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made; (4) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.03 (with respect to the Borrower's existence) or 5.08 or in Article VI; (5) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in this Agreement or any other Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 15 days; 75 (6) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Indebtedness, when and as the same shall become due and payable; (7) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; PROVIDED that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (8) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (9) the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (10) the Borrower or any Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due; 76 (11) one or more judgments for the payment of money in an aggregate amount in excess of $2,000,000 shall be rendered against the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 45 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment; (12) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; or (13) a Change in Control shall occur; then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. I. -- THE ADMINISTRATIVE AGENT ------------------------ Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. 77 The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or wilful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent 78 also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders and the Issuing Bank, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such 79 documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder. The Documentation Agent shall not have any rights or obligations under this Agreement except as a "Lender" hereunder. I. -- MISCELLANEOUS ------------- A. NOTICES. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (1) if to the Borrower, to it at 37-18 Northern Boulevard, Long Island City, New York 11101, Attention of Chief Financial Officer and Treasurer (Telecopy No. 718-729-4549) with a copy to Kelley, Drye & Warren, 101 Park Avenue, 30th Floor, New York, New York 10178, Attention of Bud Holman, Esq. (Telecopier No. 212-808-7897); (2) if to the Administrative Agent, to The Chase Manhattan Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Janet Belden (Telecopy No. (212) 552-5658), with a copy to The Chase Manhattan Bank, 241-02 Northern Boulevard, 3/F, Douglaston, New York 11362, Attention of John Mast (Telecopy No. (718) 229-8326) and a copy to Zalkin, Rodin & Goodman, LLP, 750 Third Avenue, New York, New York 10017, Attention of Mark F. Liscio, Esq. (Telecopy No. (212) 682-6331); (3) if to the Issuing Bank, to it at The Chase Manhattan Bank, 241-02 Northern Boulevard, 3/F, Douglaston, New York 11362, Attention of John Mast (Telecopy No. (718) 229-8326); 80 (4) if to the Swingline Lender, to it at The Chase Manhattan Bank, 241-02 Northern Boulevard, 3/F, Douglaston, New York 11362, Attention of John Mast (Telecopy No. (718) 229-8326); and (5) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. A. WAIVERS; AMENDMENTS. (a) No failure or delay by the Administrative Agent, the Issuing Bank or any Lender in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. (b) Neither this Agreement, any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; PROVIDED that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of 81 payment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) change any of the provisions of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender, (vi) release any Subsidiary (to the extent such Subsidiary is a Guarantor hereunder) from its Subsidiary Guaranty, or limit its liability in respect of such Subsidiary Guaranty, without the written consent of each Lender and (vii) increase the aggregate Commitments to an amount in excess of $110,000,000 without the written consent of each Lender; PROVIDED FURTHER that no such agreement shall amend, modify or otherwise affect (a) the rights or duties of the Administrative Agent, the Documentation Agent, the Issuing Bank or the Swingline Lender hereunder without the prior written consent of the Administrative Agent, the Documentation Agent, the Issuing Bank or the Swingline Lender, as the case may be and (b) any provision of this Agreement relating to the CIBC Loan Agreement or the CIBC Guaranty without the written consent of CIBC. A. EXPENSES; INDEMNITY; DAMAGE WAIVER. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement, any other Loan Document or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Administrative Agent, the Documentation Agent, the Issuing Bank or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent, the Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or any other Loan Document or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit. 82 (b) The Borrower shall indemnify the Administrative Agent, the Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "INDEMNITEE") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder and under the other Loan Documents or the consummation of the Transactions or any other transactions contemplated hereby and thereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; PROVIDED that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent, the Documentation Agent, the Issuing Bank or the Swingline Lender under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent, the Documentation Agent, the Issuing Bank or the Swingline Lender, as the case may be, such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; PROVIDED that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent, the Documentation Agent, the Issuing Bank or the Swingline Lender in its capacity as such. (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed 83 to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, the other Loan Documents or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable after written demand therefor that is accompanied by reasonable written supporting documentation of such amounts. A. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Documentation Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); PROVIDED that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, the Administrative Agent (and, in the case of an assignment of all or a portion of a Commitment or any Lender's obligations in respect of its LC Exposure or Swingline Exposure, the Issuing Bank and the Swingline Lender) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the 84 Administrative Agent) shall not be less than $5,000,000 and, after giving effect thereto, the assigning Lender shall retain Commitments and Loans aggregating at least $5,000,000, in each case unless each of the Borrower and the Administrative Agent otherwise consents, PROVIDED, that no such consent of the Borrower is needed during the pendency of an Event of Default and that in all events the consent of the Borrower shall not be unreasonably withheld, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "REGISTER"). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent, the Documentation Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Administrative Agent, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of 85 this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register, and shall notify the Borrower promptly of such acceptance. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower, the Administrative Agent, the Issuing Bank or the Swingline Lender, sell participations to one or more banks or other entities (a "PARTICIPANT") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); PROVIDED that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent, the Documentation Agent the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and the other Loan Documents and to approve any amendment, modification or waiver of any provision of this Agreement and the other Loan Documents; PROVIDED that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.18(c) as though it were a Lender. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e) as though it were a Lender. 86 (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; PROVIDED that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. A. SURVIVAL. All covenants, agreements, representations and warranties made by the Borrower herein and in the other Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Issuing Bank, the Documentation Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. B. COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such 87 jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. D. RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. E. GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that the Administrative Agent, the Issuing Bank, or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. 88 (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. A. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. B. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. C. CONFIDENTIALITY. Each of the Administrative Agent, the Documentation Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to 89 its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, "INFORMATION" means all information received from or on behalf of the Borrower or any Subsidiary relating to the Borrower or any Subsidiary or its business, other than any such information that is available to the Administrative Agent, the Documentation Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by the Borrower or such Subsidiary; PROVIDED that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. D. INTEREST RATE LIMITATION. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "CHARGES"), shall exceed the maximum lawful rate (the "MAXIMUM RATE") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. [SIGNATURE ON FOLLOWING PAGE] 90 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. STANDARD MOTOR PRODUCTS, INC. By___________________________________ Name: Title: THE CHASE MANHATTAN BANK, Individually and as Administrative Agent By_____________________________________ Name: Title: CANADIAN IMPERIAL BANK OF COMMERCE, Individually and as Documentation Agent By______________________________________ Name: Title: BANKBOSTON, N.A. By_____________________________________ Name: Title: BANK LEUMI USA By:____________________________________ Name: Title: 91 MARINE MIDLAND BANK By:____________________________________ Name: Title: COMERICA BANK By:____________________________________ Name: Title: FIRST UNION NATIONAL BANK By:____________________________________ Name: Title: 92 SCHEDULE 2.01 COMMITMENTS The Chase Manhattan Bank $20,000,000 Canadian Imperial Bank of Commerce 15,000,000 Comerica Bank 15,000,000 Marine Midland Bank 15,000,000 First Union National Bank 15,000,000 BankBoston, N.A. 15,000,000 Bank Leumi USA 5,000,000 93 EXHIBIT A [FORM OF] ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement dated as of [ ] (as amended and in effect on the date hereof, the "Credit Agreement"), among Standard Motor Products, Inc., the Lenders named therein (the "Lenders") and The Chase Manhattan Bank, as Administrative Agent for the Lenders and Canadian Imperial Bank of Commerce, as Documentation Agent for the Lenders. Terms defined in the Credit Agreement are used herein with the same meanings. The Assignor named on the reverse hereof hereby sells and assigns, without recourse, to the Assignee named on the reverse hereof, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Assignment Date set forth on the reverse hereof, the interests set forth on the reverse hereof (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement, including, without limitation, the interests set forth on the reverse hereof in the Commitment of the Assignor on the Assignment Date and Revolving Loans owing to the Assignor which are outstanding on the Assignment Date, together with the participations in Letters of Credit, LC Disbursements and Swingline Loans held by the Assignor on the Assignment Date, but excluding accrued interest and fees to and excluding the Assignment Date. The Assignee hereby acknowledges receipt of a copy of the Credit Agreement. From and after the Assignment Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the Assigned Interest, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of the Assigned Interest, relinquish its rights and be released from its obligations under the Credit Agreement. This Assignment and Acceptance is being delivered to the Administrative Agent together with (i) if the Assignee is a Foreign Lender, any documentation required to be delivered by the Assignee pursuant to Section 2.17(e) of the Credit Agreement, duly completed and executed by the Assignee, and (ii) if the Assignee is not already a Lender under the Credit Agreement, an Administrative Questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. The [Assignee/Assignor] shall pay the fee payable to the Administrative Agent pursuant to Section 9.04(b) of the Credit Agreement. 94 This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: Legal Name of Assignor: Legal Name of Assignee: Assignee's Address for Notices: Effective Date of Assignment ("Assignment Date"): - ---------------------------------------- --------------------------------------- Percentage Assigned of Facility/ Commitment (set forth, to at least 8 decimals, as a percentage of the Facility and the aggregate Commitments Principal Amoung of all Lenders thereunder) FACILITY Assigned - ---------------------- ------------------ ------------------------------------- Commitment Assigned: $ % - ---------------------- ------------------ ------------------------------------- Revolving Loans: - ---------------------- ------------------ ------------------------------------- Swingline Loans - ---------------------- ------------------ ------------------------------------- Letters of Credit: - ---------------------- ------------------ ------------------------------------- The terms set forth above and on the reverse side hereof are hereby agreed to: [Name of Assignor], as Assignor By:_________________________ Name: Title: [Name of Assignee], as Assignee By:________________________ Name: Title: 95 THE CHASE MANHATTAN BANK, Individually and as Administrative Agent By____________________________ Name: Title: CANADIAN IMPERIAL BANK OF COMMERCE, Individually and as Documentation Agent By__________________________ Name: Title: [OTHER LENDERS], By___________________________ Name: Title: 96 The undersigned hereby consent to the within assignment:(1) [Name of Borrower], The Chase Manhattan Bank, as Administrative Agent By___________________________ By:________________________ Name: Name: Title: Title: The Chase Manhattan Bank, as The Chase Manhattan Bank, as Swingline Lender, As Issuing Bank By:__________________________ By:______________________ Name: Name: Title: Title: - -------- (1) Consent to be included to the extent required by Section 9.04(b) of the Credit Agreement. 97 EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT AS OF FEBRUARY 28, 1999 PERCENT STATE OR OF VOTING COUNTRY OF SECURITIES NAME INCORPORATION OWNED - ---- ------------- ----- SMP Motor Products Limited Canada 100 Marathon Auto Parts and Products, Inc. New York 100 Motortronics, Inc. New York 100 Reno Standard Incorporated Nevada 100 Stanric, Inc. (1) Delaware 100 Mardevco Credit Corp. (2) New York 100 Standard Motor Products (Hong Kong) Limited Hong Kong 100 Industrial & Automotive Associates, Inc. California 100 Standard Motor Electronics, Limited Israel 100 Four Seasons Europe S.A.R.L. France 100 Standard Motor Products Holdings Limited UK 73.4 Eaglemotive Corporation Delaware 100 Standard Motor Products de Mexico S.A. Mexico 100 SMP Credit Corp. Delaware 100 All of the subsidiaries are included in the consolidated financial statements, except for Eaglemotive Corporation, which was acquired February 28, 1999. (1) Mardevco owns 12.7% of Stanric (2) Stanric owns 14.9% of Mardevco 27 EX-23 4 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- To the Board of Directors and Stockholders Standard Motor Products, Inc.: We consent to incorporation by reference in the Registration Statements (No.'s 33-58655, 333-51565 and 333-51619) on Form S-8 of Standard Motor Products, Inc. of our reports dated March 2, 1999 relating to the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows and related schedule for each of the years in the three year period ended December 31, 1998, which reports appear in the December 31, 1998 annual report on Form 10-K of Standard Motor Products, Inc. KPMG LLP New York, New York March 30, 1999 28 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 DEC-31-1998 DEC-31-1999 23,457 0 122,008 (4,525) 174,092 342,511 205,514 (96,110) 521,556 164,187 133,749 0 0 26,649 178,376 521,556 649,420 649,420 443,798 443,798 0 2,758 16,419 26,090 3,577 22,257 0 0 0 22,257 1.70 1.69
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