10-K 1 t23951.txt ANNUAL REPORT 12/31/01 ================================================================================ UNITED STATES 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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 -------------------------------------------------------------------------------- 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, 2002 of $13.56 per share held by non-affiliates of the registrant was $95,325,336. 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, 2002 there were 12,501,818 shares outstanding of the Registrant's Common Stock. ================================================================================ PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this Annual Report on Form 10-K contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, also known collectively, as the Reform Act. Some, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from our expected future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include those discussed below and those discussed in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." Standard Motor Products, Inc. undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date this Report is filed with the Securities and Exchange Commission or to reflect the occurrence of unanticipated events. ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Standard Motor Products (referred to herein as the "Company", "SMP" or "we") manufactures and distributes replacement parts for motor vehicles (automotive aftermarket industry). The Company is organized into two principal segments, each focused on a specific type of replacement part. The Engine Management Division consists primarily of ignition and emission parts, on-board computers, ignition wires, battery cables and fuel system parts. The Temperature Control Division consists primarily of air conditioning compressors, other air conditioning parts and heater parts. The Company sells its products primarily to warehouse distributors and large auto parts retail chains. SMP's customers consist of most of the top warehouse distributors and most of the leading auto parts retail chains, including Advance Auto Parts, AutoZone, Carquest and NAPA Auto Parts. The Company distributes parts under its own brand names, such as Standard, Blue Streak and Four Seasons, and also under private labels for key customers. In addition to its two principal operating segments, effective with the beginning of fiscal 2000, the Company considers its European Operations to be a separate operating segment along with its Canadian operations. Both the European and Canadian operations consist of Engine Management and Temperature Control related activities. -2- (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The table below shows the Company's sales by operating segment and by major product group within each segment. The Company's two reportable operating segments are Engine Management and Temperature Control.
YEARS ENDED DECEMBER 31, (Dollars in thousands) 2001 2000 1999 --------------------- -------------------------- ------------------------- % of % of % of AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------ ----- ------ ----- ------ ----- ENGINE MANAGEMENT: Ignition & Emission Parts $226,699 37.3% $226,297 37.5% $218,221 33.3% Wires and Cables 60,869 10.0% 61,405 10.1% 61,275 9.4% Fuel System Parts 8,380 1.3% 9,684 1.6% 12,265 1.9% ----- ---- ----- ---- ------ ---- TOTAL ENGINE MANAGEMENT 295,948 48.6% 297,386 49.2% 291,761 44.6% ------- ----- ------- ----- ------- ----- TEMPERATURE CONTROL: Compressors 120,990 19.9% 122,113 20.2% 141,657 21.7% Other Air Conditioning Parts 141,562 23.3% 130,579 21.6% 171,156 26.2% Heating Parts 13,349 2.2% 12,012 2.0% 8,677 1.2% ------ ---- ------ ---- ----- ---- TOTAL TEMPERATURE CONTROL 275,901 45.4% 264,704 43.8% 321,490 49.1% ------- ----- ------- ----- ------- ----- All Other 36,224 6.0% 41,919 7.0% 41,031 6.3% ------ ---- ------ ---- ------ ---- TOTAL $608,073 100.0% $604,009 100.0% $654,282 100.0% ======== ====== ======== ====== ======== ======
The table below shows the Company's operating profit and identifiable assets by reportable operating segment.
YEARS ENDED DECEMBER 31, (Dollars in thousands) 2001 2000 1999 --------------------- -------------------------- ------------------------- Operating Identifiable Operating Identifiable Operating Identifiable PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS ------ ------ ------ ------ ------ ------ Engine Management $ 26,415 $233,564 $ 37,964 $ 265,336 $ 26,104 $ 253,346 Temperature Control Systems 3,616 182,083 11,537 224,410 17,289 212,026 All Other (14,488) 93,782 (18,837) 59,650 (13,849) 90,649 -------- ------ -------- ------ -------- ------ TOTAL $ 15,543 $509,429 $ 30,664 $ 549,396 $ 29,544 $ 556,021 ======== ======== ======== ========= ======== =========
"All Other" consists of items pertaining to the corporate headquarters function, as well as the Canadian and European business units that do not meet the criteria of a reportable operating segment. -3- (C) NARRATIVE DESCRIPTION OF BUSINESS THE AUTOMOTIVE AFTERMARKET A large, diverse number of manufacturers varying in product specialization and size make up the automotive aftermarket industry. In addition to manufacturing, aftermarket companies also allocate resources towards an efficient distribution process and product engineering in order to maintain the flexibility and responsiveness on which their customers depend. The automotive aftermarket differs substantially from the original equipment manufacturer supply business. Aftermarket manufacturers must be efficient producers of small run lot sizes and do not have to provide systems engineering support. Aftermarket manufacturers also must distribute, with rapid turnaround times, products for a full range of vehicles on the road. While sales of original equipment manufacturer suppliers are tied closely to the North American production volumes of the "Big Three" automakers, aftermarket manufacturers tend to follow different trends (such as average vehicle age, increased pricing of new cars, total miles driven per year, environmental laws becoming more stringent and the quality of new cars and their related warranties). The primary customers of the automotive aftermarket manufacturers are national and regional warehouse distributors, large retail chains, automotive repair chains and the dealer service networks of the original equipment vehicle manufacturers. ENGINE MANAGEMENT DIVISION In the Company's Engine Management Division, replacement parts for automotive ignition and emission control systems account for about 37% of the Company's 2001 revenues. These parts include distributor caps and rotors, electronic ignition control modules, voltage regulators, coils, switches, sensors and EGR valves. The Company is a basic manufacturer of many of the ignition parts it markets and continues to look at ways at increasing the number of parts it manufactures, versus purchasing. These products cover a wide range of applications, from 30-year old vehicles to current models, both domestic and imports, including passenger cars and light trucks. The products also cover certain off-road and marine applications. SMP offers products at three different price points under a "good-better-best" concept. It began by offering ignition parts under the "Standard" brand name that were equal in quality to original equipment parts installed on new vehicles. Soon afterward, the Company pioneered the concept of offering higher quality parts, sold under the Blue Streak brand name, that were significantly better than original equipment. These products were priced at a premium. SMP now offers lower-priced lines under the Tru-Tech and Modern mechanic brand to compete with certain lower priced private labels. Nearly 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 Company is a leader in the manufacture and sale of these engine management component parts, including remanufactured automotive computers. The shift from the traditional breaker-point ignition systems to electronic ignition systems started approximately 25 years ago. The shift was a response to pressures from the government and environmental groups to reduce national fuel consumption and the level of pollutants from auto exhaust. Electronic ignition systems enable the engine to improve fuel efficiency and reduce this level of hazardous fumes in exhaust gases. In 2001, electronic control modules and electronic voltage regulators comprised approximately 10% of the Company's total ignition and emission sales. -4- In 1992 the Company entered into a 50/50 joint venture, Blue Streak Electronics, Inc., in Canada to rebuild automotive engine management computers and mass air flow ("MAF") sensors. This joint ventures volume is sold primarily to SMP and has positioned the Company as a key supplier in the rapidly growing remanufactured electronics markets. In 1994, the Company vastly 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 Company's customers to expand their coverage without increasing inventory investment. The joint venture has further expanded its product range to include temperature control computers, anti-lock brake system computers and air bag computers. In 1997 the joint venture launched an operation in Europe to serve that market and an operation in Florida to better serve the United States market in slow-moving items. In January 1999, Blue Streak Europe acquired Injection Correction UK LTD and in September 2001, it also acquired TRW Inc's electronic control unit remanufacturing division also located in the United Kingdom. The Company divides its electronic operations between product design and highly automated manufacturing operations in Orlando, Florida, and assembly operations, which are performed in assembly plants in Orlando and Hong Kong. The Company's sales of sensors, valves, solenoids and related parts have increased steadily as automobile manufacturers equip their cars with more complex engine management systems. Stricter government emission laws are being implemented in various parts of the United States. Specifically, the most significant law is 1990's Federal Clean Air Act. The I/M 240 section of the Clean Air Act imposes strict emission control test standards on existing as well as new vehicles, by means of a dynamometer test. The law is widely expected to be gradually implemented throughout the United States. In the future, we expect these new laws to have a positive impact on sales of our ignition and emission controls parts. However, the timing of such impact will depend on how quickly government agencies implement these new procedures at state levels. Vehicles failing these new, more stringent tests have required repairs utilizing parts sold by the Company. In 2001, oxygen sensors comprised approximately 8% of total ignition and emission parts sales. Wire and cable parts account for about 10% of the Company's 2001 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 Company 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 Company introduced a second line of wire and cable products in 1989. This line has steadily expanded to include import coverage, and in 1995 was reintroduced under the Tru-Tech brand name. In 1999 the Company relocated two of its wire and cable operations, one in Dallas, TX and the other in Bradenton, FL, to a new facility in Reynosa, Mexico. The Mexican operation focuses on assembly and packaging of the economy wire sets while the premium line is manufactured at the Company's facility in Edwardsville, KS. -5- TEMPERATURE CONTROL DIVISION The Company manufactures, re-manufactures, and markets a broad line of replacement parts for automotive temperature control systems (air conditioning and heating), primarily under the brand names of Four Seasons, Everco, Factory Air, Trumark, NAPA and Carquest. The major product groups sold by this division are compressors, other air conditioning parts including small motors, fan clutches, dryers, evaporators, accumulators and hoses, and heating parts, including heater cores and valves. Total Temperature Control sales account for approximately 45% of the Company's 2001 revenues. A major factor in the Temperature Control division's business is the federal regulation of chlorofluorocarbon refrigerants. United States legislation phased out production of domestic R-12 refrigerant (e.g., DuPont's Freon) completely by the end of 1995. As the law became effective, vehicle air conditioners needing repair or recharge were retro fitted to use the new R-134a refrigerant. New vehicles began to use the new refrigerants in 1993. Installers continue to seek training and certification in the new technology and the Company's Temperature Control division has taken the lead in providing this training and certification. Technological changes necessitate many new parts, as well as new service equipment. In anticipation of the CFC phaseout, in 1994 the Company reengineered its compressor line to be able to operate efficiently utilizing either R-12 or R-134a refrigerants, and remains a leader in providing retrofit kits for conversion of R-12 systems. In June 1995, the Company acquired Automotive Dryers, Inc and Air Parts, Inc. to become a more basic manufacturer of the major product supplied by the Temperature Control division and to gain access to the lower priced tier of the market through a new distribution channel. Automotive Dryers, Inc. manufacturers and distributes receiver filter dryers and accumulators for mobile air conditioning systems, and is the leading independent supplier of aftermarket evaporators and accumulators for high performance cars in the United States. Air Parts, Inc. is a distributor of a limited, no-frills line of parts for mobile air conditioning systems. In December 1996, the Company acquired the Hayden Division of The Equion Corporation, a basic manufacturer of fan clutches and oil coolers. This acquisition expanded the profitable manufacturing base and greatly expanded the distribution channels for this key product line. To further leverage our strong base with retailers, in 1996 the Company launched a small electric motor manufacturing and assembly facility in Ontario, Canada. This has enhanced the sale of parts requiring small motors. In 1998, the Company exchanged its brake business for the Moog Automotive temperature control business of Cooper Industries. The Moog acquisition also expanded the Company's position in the small motor and heater parts markets. In 1999 it acquired Eaglemotive Corporation, manufacturer of fan clutches and oil coolers. In consolidating these two businesses with its existing operations, the Company has closed three manufacturing facilities and consolidated three distribution sites into one. 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 Company'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. -6- In January 2000, the Company completed the purchase of Vehicle Air Conditioning Parts, located in England, which has subsequently been renamed "Four Seasons UK, LTD." The purchase will assist in distributing components for the repair of air conditioning systems. Total acquisition price was approximately $1.4 million. In addition, in July 2000, the Company completed the purchase of Automotive Heater Exchange SRL in Massa, Italy. THE COMPETITION The Company is among the largest manufacturers of replacement parts for product lines in our two divisions, namely Engine Management and Temperature Control. The Company competes primarily on the basis of product quality, price, customer service, product coverage, product availability, order turn-around time and order fill rate. Management believes the Company differentiates itself primarily through a value-added, knowledgeable salesforce; extensive product coverage; sophisticated parts cataloguing systems; and inventory levels sufficient to meet the rapid delivery requirements of customers. Although the Company is a leading independent manufacturer of automotive replacement parts with strong brand name recognition, the Company faces substantial competition in all markets that it serves. Certain major manufacturers of replacement parts are divisions of companies having greater financial resources than those of SMP. In addition, automobile manufacturers supply virtually every replacement part sold by the Company, although these manufacturers generally supply parts only for cars they produce. SALES AND DISTRIBUTION The Company sells its products under proprietary brand names throughout the United States, Canada, Latin America, Europe and the Middle East. Products are distributed to warehouse distributors, including jobber outlets located throughout the United States and Canada. The jobbers sell the Company's products primarily to professional mechanics and to consumers who perform their own automobile repairs. In addition, the Company sells directly to large auto parts retail chains . The Company has a direct sales force which generates demand for its products by directing the major portion of its sales effort to its customers' customers (i.e. jobbers and professional mechanics). The Company conducts instructional clinics, which teach mechanics how to diagnose and repair complex systems related to its products. It also publishes and sells related service manuals and video cassettes and provides a free technical information bulletin service to registered mechanics. The Company's Standard Plus Club, a professional service dealer network comprising approximately 7,800 members, offers technical and business development support and has a technical service telephone hotline which provides diagnostics and installation support. In connection with the Company's sales activities, the Company offers several types of discounts and or allowances. The Company believes these discounts and allowances are common practice throughout the automotive aftermarket industry. First, the Company offers cash discounts for paying invoices in accordance with the discounted terms of the invoice. Secondly, the Company offers pricing discounts based on volume and different product lines purchased from the Company. Supplementally, certain rebates and discounts are provided to customers as advertising and sales force allowances. In addition to the aforementioned discounts and rebates, allowances for warranty and overstock returns are provided. -7- CUSTOMERS The Company's customer base is comprised largely of warehouse distributors, jobber outlets, retailers, other manufacturers and export customers. In addition to serving our traditional customer base, we have expanded into the retail market by commencing sales to large retail chains. Members of one marketing group represent the Company's largest group of customers and accounted for approximately 14%, 15% and 14% of consolidated net sales for the years ended December 31, 2001, 2000 and 1999, respectively. One individual member of this marketing group accounted for 10%, 9% and 9% of net sales for the years ended December 31, 2001, 2000 and 1999, respectively. The Company's five largest individual customers, including members of this marketing group, accounted for 42%, 33% and 35% of net sales in 2001, 2000 and 1999, respectively. The loss of one or more of these customers could have a material adverse impact on the Company's business, financial condition and results of operations. SEASONALITY Historically, the Company'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 Company's products is typically the highest, specifically the Temperature Control business. This seasonality impacts profitability and working capital requirements. In addition, this seasonality offers significant operational challenges in the manufacturing and distribution functions. The Company traditionally offers a pre-season selling program (Spring promotion) to limit these challenges (e.g. rapid turnaround time of customer orders). The ultimate consumer (the car owner) wants a repair done correctly and quickly, and the Company's customers consider order turnaround time critical in evaluating SMP's performance. The pre-selling program primarily consists of two types of incentives and relates to orders placed in the months of January through May. Customers are offered a choice of an "off-invoice" discount or "dating terms" that are established whereby longer payment terms are offered on a monthly basis. WORKING CAPITAL MANAGEMENT Since the early 1990s, automotive aftermarket companies have been under increasing pressure to provide broad SKU coverage in response to parts and brand proliferation. Since 1996, the Company has made significant changes to the inventory management system to reduce inventory requirements. The Company launched a new forecasting system in our Engine Management division that permitted a significant reduction in safety stocks. The Engine Management division also has introduced a new distribution system in the second half of 1999, which permits pack-to-order systems to be implemented. Such systems permit the Company to retain slow moving items in a bulk storage state until an order for a specific brand part is received. This system reduces the volume of a given part in inventory and reduces the labor requirements to package and repackage inventory. In late 1997, we adopted Economic Value Added (EVA (R)) as our primary financial measurement for evaluating investments and for determining incentive compensation. EVA is equal to net operating profits after economic taxes, less a charge for capital invested in the Company. The charge for invested capital is equal to the product of the total capital invested in the Company and the weighted average cost of capital for the Company's target blend of debt and equity. The Company has consistently assumed a 12% cost of capital. The Company's management places emphasis on improving our financial performance, achieving operating efficiencies and improving asset utilization. -8- The Company's profitability and working capital requirements have become more seasonal with the increased sales mix of temperature control products. Our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales begin to be received. These increased working capital requirements are funded by borrowings from our lines of credit. SUPPLIERS The principal raw materials purchased by the Company consist of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), ignition wire, stainless steel coils and rods, aluminum coils and rods, lead, rubber molding compound, thermo-set and thermo plastic molding powders. Additionally, the Company uses components and cores (used parts) in its remanufacturing processes for computerized electronics and air conditioning compressors. SMP purchases most materials in the open market, but does have a limited number of supply agreements on key components. A number of prime suppliers make these materials available. In the case of cores, the Company obtains them either from exchanges with customers who return cores when purchasing remanufactured parts, or through direct purchases from a network of core brokers. The Company believes there is an adequate supply of primary raw materials and cores. In order to ensure a consistent, high quality, low cost supply of key components for each product line, the Company continues to develop its own sources through internal manufacturing capacity and/or acquisitions. PRODUCTION AND ENGINEERING The Company engineers, tools and manufactures many of the components for its products, except for certain commonly available small component parts from outside suppliers. The Company also performs its own plastic and rubber molding operations, stamping and machining operations, automated electronics assembly and a wide variety of other processes. In the case of remanufactured components, it conducts its own teardown, diagnostics, and rebuilding for computer modules and air conditioning compressors. This level of vertical integration has been found to provide advantages in terms of cost, quality and availability. The Company intends to selectively continue efforts toward further vertical integration to ensure a consistent quality and supply of low cost components. In 1990 the Company adopted the "just-in-time" cellular manufacturing concept as a major program to lower costs and improve efficiency. The main thrust of cellular manufacturing is the reduction of work-in-process and finished goods inventory, and its implementation reduces the inefficient operations that burden many manufacturing processes. To date, the Company has substantially implemented the just-in-time manufacturing program at the majority of its manufacturing facilities. The Company has also initiated lean manufacturing techniques and in 2002 is evaluating Six Sigma training with the assistance from General Electric. In 2000 the Company started working on implementing a fully integrated enterprise resource planning (ERP) system. The implementation is expected to be fully completed in 2003. At that time, the system will encompass all aspects of the supply chain, including procurement, manufacturing, sales, distribution and finance, at all of the Company's facilities. It will also serve as the foundation upon which the Company can facilitate its E-commerce strategy. -9- INSURANCE The Company maintains basic liability coverage (general, product and automobile) of $1 million and umbrella liability coverage of $50 million. Historically, the Company 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 Company's coverage. EMPLOYEES The Company employs approximately 3,300 people in the United States, Mexico, Canada, Puerto Rico, Europe and Hong Kong. Of these, approximately 2,200 are production employees. In addition, the Company has joint venture operations in Canada, England and France. The Company operates primarily in non-union facilities and has binding labor agreements with the workers at its two unionized facilities. Edwardsville, Kansas production employees of approximately 150, are covered by a United Auto Workers contract that expires April 1, 2003. Long Island City, New York production employees of approximately 100, are under a contract that expires October 2, 2004. The Company 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 Company sells its line of products primarily in the United States, with additional sales through Canada, Latin America, Europe and the Middle East. The Company's sales are substantially denominated in dollars. The table below shows the sales by geographic area for the last three years: (U.S. DOLLARS IN THOUSANDS) Revenues ------------------------------------------------ 2001 2000 1999 ---- ---- ---- United States $ 532,922 $524,747 $ 578,549 Canada 27,632 26,553 27,331 Other Foreign 47,519 52,709 48,402 ------------------------------------------------ Total $ 608,073 $604,009 $ 654,282 ================================================ Export sales originating from the United States for the years ended December 31, 2001, 2000 and 1999 were $14.1 million, $13.5 million, and $11.8 million, respectively, and have been included in the category, Other Foreign. Long-Lived Assets ------------------------------------------------ 2001 2000 1999 ---- ---- ---- United States $118,455 $ 122,825 $125,766 Canada 2,829 3,511 3,897 Other Foreign 18,402 18,885 18,534 ------------------------------------------------ Total $ 139,686 $ 145,221 $148,197 ================================================ -10- ITEM 2. PROPERTIES The Company maintains its executive offices and a manufacturing plant at 37-18 Northern Boulevard, Long Island City, NY. The table below describes the Company's principal physical properties. (For information with respect to rentals, see note 17 of Notes to Consolidated Financial Statements).
OWNED OR STATE OR LEASE LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY SQUARE FEET EXP. DATE -------- ------- --------------------------- ----------- --------- Corona CA Manufacturing and Distribution 78,200 2008 (Temperature Control) Ontario CA Vacated-subleased 250,200 2003 Orlando FL Manufacturing (Ignition) 50,600 2006 Cumming GA Manufacturing (Temperature Control) 47,000 2007 Cumming GA Distribution (Temperature Control) 30,000 2007 Elk Grove Village IL Manufacturing (Temperature Control) 25,080 2002 Bensenville IL Vacated-subleased 14,000 2002 Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned Wilson NC Manufacturing (Ignition) 31,500 2008 Reno NV Distribution (Ignition) 67,000 Owned Long Island City NY Administration and 318,000 Owned Manufacturing (Ignition) Lewisville TX Administration and Distribution 415,000 2009 (Temperature Control) Fort Worth TX Manufacturing & Distribution (Temperature 204,000 Owned Control) Fort Worth TX Manufacturing and Distribution 103,000 2004 (Temperature Control) Grapevine TX Manufacturing (Temperature Control) 180,000 Owned Grapevine TX Storage 83,125 2004 Irving TX Training Center 13,400 2004 Disputanta VA Distribution (Ignition) 411,000 Owned Rural Retreat VA Vacated-subleased 72,400 2003 Fajardo PR Manufacturing (Ignition) 114,000 2007 Mississauga CANADA Administration and Distribution 128,400 2006 (Ignition, Wire, Temperature Control) St. Thomas CANADA Manufacturing (Temperature Control) 40,000 Owned Strasbourg FRANCE Administration and Distribution 16,146 2003 (Temperature Control) Hong Kong HK Manufacturing (Ignition) 21,534 2003 Reynosa MEXICO Manufacturing (Wire) 62,500 2004 Nottingham ENGLAND Administration and Distribution 29,000 Owned (Ignition and Wire) Nottingham ENGLAND Manufacturing (Ignition and Wire) 46,777 Owned Nottingham ENGLAND Manufacturing (Ignition) 10,000 2012 Sunbury @ Thames ENGLAND Distribution (Ignition and Temperature 28,095 2007 Control) Massa ITALY Administration and Distribution 13,100 2004 (Temperature Control)
-11- ITEM 3. LEGAL PROCEEDINGS On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $0.5 million (formerly $19.8 million) of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. In addition, this former customer seeks $10.5 million from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes that these matters will not have a material effect on the Company's consolidated financial statements taken as a whole. The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. One of the product liability matters involves a former Brake business of the Company. In 1986, the Company acquired the business resulting in the assumption by the Company of certain liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller. In accordance with the related purchase agreement, the Company agreed to assume the liabilities for all new claims filed after fifteen years from the date of the purchase. The ultimate exposure to the Company will depend upon the extent to which future claims are filed and the amounts paid for indemnity and defense. At December 31, 2001, approximately 100 cases were outstanding whereby the Company is now responsible for any related liabilities. Although the final outcome of this specific matter or any other litigation or product liability matter cannot be determined, based on the Company's understanding and evaluation of the relevant facts and circumstances, it is management's opinion that the final outcome of these matters will not have a material adverse effect on the Company's financial statements taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None -12- PART II ITEM 5: MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: -------------------------------------------------- The Company's Common Stock is traded on the New York Stock Exchange under the symbol SMP. The number of Shareholders of record of Common Stock on February 28, 2002 was approximately 550 including brokers who hold approximately 8,019,000 shares in street name. 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.
----- ------- -------- --------- ----------- ------ ------- ------- ------- ------------ 2001 QUARTER HIGH LOW DIVIDEND 2000 QUARTER HIGH LOW DIVIDEND ---- ------- ---- --- -------- ---- ------- ---- --- -------- 1st $ 10.60 $7.44 $ 0.09 1st $16.50 $12.63 $ 0.09 2nd $ 14.50 $9.90 $ 0.09 2nd $15.70 $7.38 $ 0.09 3rd $ 13.70 $11.65 $ 0.09 3rd $10.63 $7.94 $ 0.09 4th $ 14.95 $10.45 $ 0.09 4th $8.44 $6.44 $ 0.09 ----- ------- -------- --------- ----------- ------ ------- ------- ------- ------------
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. Subject to the Company's credit facility, dividends and distributions may be restricted. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31, -------------------------------------------------------------------- 2001 2000 1999 1998 1997 -------------------------------------------------------------------- (In thousands, except per share data) Net sales $ 608,073 $ 604,009 $ 654,282 $ 647,096 $ 557,210 Earnings (loss) before extraordinary item $ 312 $ 10,230 $ 8,685 $ 22,257 $ (34,524) Net earnings (loss) $ (2,485) $ 9,729 $ 7,625 $ 22,257 $ (34,524) Earnings (loss) per share before extraordinary item - Basic $ 0.03 $ 0.86 $ 0.66 $ 1.70 $ (2.63) Earnings (loss) per share - Basic $ (0.21) $ 0.82 $ 0.58 $ 1.70 $ (2.63) Earnings (loss) per share - Diluted $ (0.21) $ 0.81 $ 0.58 $ 1.69 $ (2.63) Working capital $ 228,356 $ 188,091 $ 205,806 $ 178,324 $ 177,426 Total assets $ 509,429 $ 549,396 $ 556,021 $ 521,556 $ 577,137 Long-term debt (excluding current portion) $ 200,066 $ 150,018 $ 163,868 $ 133,749 $ 159,109 Stockholders' equity $ 185,687 $ 194,305 $ 203,518 $ 205,025 $ 183,782 Stockholders' equity per share $ 15.77 $ 16.28 $ 15.57 $ 15.68 $ 14.01 Cash dividends per common share $ 0.36 $ 0.36 $ 0.34 $ 0.16 $ 0.32
-13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis relates to our financial condition and our results of operations for the three years ended December 31, 2001. You should read this information in conjunction with Item 6. "Selected Consolidated Financial Data" and our consolidated Financial Statements and related notes thereto beginning on page F-1. STATEMENT ON FORWARD-LOOKING INFORMATION Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. Forward-looking statements in this report are indicated by words such as "anticipates," "expects," "believes," "intends," "plans," "estimates," "projects" and similar expressions. These statements represent our expectations based on current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to a number of factors, including economic and market conditions; the performance of the aftermarket sector; changes in business relationships with our major customers and in the timing, size and continuation of our customers' programs; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs that cannot be recouped in product pricing; successful integration of acquired businesses; as well as other risks and uncertainties, such as those described under Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the Securities and Exchange Commission. Those forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. LIQUIDITY AND CAPITAL RESOURCES In 2001, cash provided by operations amounted to $40.2 million, compared to cash used in operations of $1.0 million in 2000 and cash provided by operations of $21.0 million in 1999. The improvement is primarily attributable to the Company's efforts to reduce inventory levels from their elevated levels of December 31, 2000. This improvement was offset by a reduction in accounts payable and the decrease in earnings. Inventory decreased by $57.0 million as a result of the Company's inventory reduction program, which resulted primarily from reduced production and purchases, and where needed, the temporary closing of manufacturing facilities The reductions have effected both the Engine Management and Temperature Control segments. Inventory turnover was 2.1x in 2001 vs. 1.8 x in 2000, on a rolling twelve-month basis, reflecting the high inventory levels at December 31, 2000 and should improve as a result of the inventory reduction efforts. Future reductions are planned in 2002, however, such reductions are expected to be more modest than 2001. In comparing 2000 and 1999, there are two reasons for the increase in inventory levels and the decrease in inventory turns (1.8 x in 2000 vs. 2.7 x in 1999). First, with respect to the Temperature Control Segment, the business is highly seasonal with sales of air conditioning parts being greatest in the second and third quarters of the year. This seasonality requires the build-up of inventory levels prior to the main selling season. As discussed in our comparison of the year 2000 vs. 1999, Temperature Control sales were significantly below the prior year and forecasted amounts. Although significant reductions were made to Temperature Control production levels in 2000, the short fall in net sales more than off-set such reductions. Second, with respect to the Engine Management Segment, in the third quarter of 2000, Engine Management successfully acquired a new major customer which required inventory levels to be increased in order to fill the initial "pipeline" of orders from such customer. In addition, the customer launch for new orders was extended into 2001, versus the fourth quarter of 2000, as originally planned. -14- Cash used in investing activities was $14.2 million in 2001, compared to $18.7 million in 2000. The decrease is primarily due to a reduction in capital expenditures and acquisitions. For the three years ended December 31, 2001, 2000, and 1999 capital expenditures totaled $13.7 million, $16.7 million and $14.4 million, respectively. In December 2001, the Company signed a letter of intent to acquire Carol Cable Limited, a manufacturer and distributor of wire sets, based in England, for approximately $1.7 million. Assets consist primarily of property plant and equipment, and inventory. The purchase is expected to be completed in April 2002 with funds provided under the Company's line of credit. On January 17, 2002, the Company purchased the Temperature Control business of Hartle Industries for approximately $4.8 million. Assets acquired consist primarily of property plant and equipment, and inventory. The purchase was financed with funds provided under the Company's line of credit. On March 20, 2002 the Company reached a definitive agreement to purchase the aftermarket business of Sagem Inc., a subsidiary of Johnson Controls, for approximately $11.5 million. Sagem Inc. is a basic manufacturer of fuel injectors, a product line which prior to the acquisition, the Company has been purchasing. Assets to be acquired consist primarily of property, plant and equipment, and inventory. The purchase which is expected to close within sixty days will be partially financed by the seller (approximately $7 million to be paid over a two year period), with the remaining funds being provided under the Company's line of credit. Cash used in financing activities was $25.4 million in 2001, as compared to $11.5 million in 2000. The increase in cash used was primarily due to the Company's refinancing, as discussed below, offset by the discontinuance of stock repurchases. Dividends paid for the three years ended December 31, 2001, 2000 and 1999 were $4.2 million, $4.3 million and $4.5 million, respectively. In the third quarter of 1999, the Board of Directors increased the regular quarterly dividend from $.08 to $.09 per share. The Company, effective April 27, 2001 entered into an agreement with GE Capital Corp. and a syndicate of lenders for a new secured revolving credit facility. The former unsecured revolving credit facility was set to expire on November 30, 2001. The term of the new credit agreement is for a period of five years and provides for a line of credit up to $225 million. The initial proceeds have been used to refinance approximately $97 million of the outstanding indebtedness under the Company's former bank line of credit, the 7.56% senior note of $52 million, a $25 million accounts receivable sale arrangement and the Canadian Credit Facility of $5 million. The Company recorded an extraordinary loss of approximately $2.8 million, net of taxes, in the second quarter of 2001, for a prepayment penalty and write-off of unamortized fees for the retirement of the above related debt. Availability under the new credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. Direct borrowings bear interest at the Prime Rate plus the applicable margin (as defined) or the LIBOR Rate plus the applicable margin (as defined), at the option of the Company. Borrowings are collateralized by accounts receivable, inventory and fixed assets of the Company and its subsidiaries. The terms of the new revolving credit facility contain, among other provisions, requirements of maintaining defined levels of tangible net worth and specific limits or restrictions on additional indebtedness, capital expenditures, liens and acquisitions. -15- In July 2001, the Company entered into interest rate swap agreements to manage its exposure to interest rate changes. The swaps effectively convert a portion of the Company's variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional principal amounts. At December 31, 2001, the Company had two outstanding interest rate swap agreements maturing in January 2003 and 2004, with aggregate notional principal amounts of $75 million. Under these agreements the Company receives a floating rate based on the LIBOR interest rate, and pays a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million. On July 26, 1999, the Company issued 6.75% Convertible Subordinated Debentures in the aggregate principal amount of $90 million. The Debentures are convertible into approximately 2,796,000 shares of the Company's common stock, and mature on July 15, 2009. The proceeds from the Convertible Debentures were used to prepay an 8.6% senior note payable, reduce short term bank borrowings and repurchase a portion of the Company's common stock. The Company sold certain accounts receivable to an independent financial institution, through its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999 SMP Credit Corp. entered into a three year agreement whereby it could sell up to a $25 million undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement was terminated in 2001 as part of the new credit facility described above. At December 31, 2000, net accounts receivable amounting to $25 million had been sold under this agreement. During the years 1998 through 2000, the Board of Directors authorized multiple repurchase programs under which the Company could repurchase shares of its common stock. During such years, $26.7 million (in aggregate) of common stock has been repurchased to meet present and future requirements of the Company's stock option programs and to fund the Company's ESOP. As of December 31, 2001 the Company has Board authorization to repurchase additional shares at a maximum cost of $1.7 million. The Company expects capital expenditures for 2002 to be approximately $14 million, primarily for new machinery and equipment. The Company's profitability and working capital requirements have become more seasonal with the increased sales mix of temperature control products. Working capital requirements usually peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales begin to be received. These increased working capital requirements are funded by borrowings from our lines of credit. The Company anticipates that its present sources of funds will continue to be adequate to meet its near term needs. COMPARISON OF 2001 TO 2000 Net sales in 2001 were $608.1 million, a slight increase of $4.1 million as compared to net sales of $604.0 million in 2000. The increase in net sales was a result of new business, offsetting decreases in our existing traditional business lines. The Engine Management division benefited from a full year of sales to the new major customer acquired during the third quarter of 2000, (incremental sales of approximately $6 million in 2001) along with additional wire set business from a major group of warehouse distributors. With respect to Temperature Control, we regained a major retail customer we lost in early 2000 (net sales approximated $30 million in 2001, excluding pipeline fill). Excluding this new business, sales to existing accounts decreased, primarily a result of another cool summer for air conditioning, and the continuing inventory reduction program on the part of many of our customers. -16- Gross margins, as a percentage of net sales, decreased to 27.9% from 31.1% in 2000. The overall decrease in gross margins was primarily due to our successful inventory reduction programs. The reduction in gross margins was across all product lines as the Company originally targeted a minimum $30 million inventory reduction in 2001. Actual inventory reduction amounted to $57 million while maintaining high customer service fill levels. These changes reflect the impact of underabsorbed overhead costs as a result of cutting production and temporarily closing manufacturing facilities at both Engine Management and Temperature Control facilities. We expect 2002 gross margin increases in both Engine Management and Temperature Control as a result of price increases and improved fixed overhead absorption, despite further inventory reduction efforts. Selling, general and administrative expenses (S,G&A) decreased by $3.1 million to $154.3 million as compared to $157.4 million in 2000. This decrease reflects the focus on the Company's cost reduction efforts with benefits primarily in the marketing and distribution areas in the Temperature Control Segment. Operating income decreased by $15.1 million as compared to 2000, primarily due to the lower gross margins as discussed above. Other income, net increased by $1.8 million as compared to 2000. The increase is primarily due to the reduction of fees related to the termination of the sale of accounts receivable agreement and an increase in interest and dividend income. Interest expense decreased slightly by $0.6 million as compared to 2000, due to lower interest rates and lower average borrowings. Income tax expense decreased to $0.1 million in 2001 from $2.9 million in 2000. The decrease is primarily due to overall lower earnings. The effective tax rate increased from 22% in 2000 to 32% in 2001. The increase is primarily due to a decrease in earnings from the Company's foreign subsidiaries, which have lower tax rates then the United States statutory rate. COMPARISON OF 2000 TO 1999 Net sales in 2000 were $604.0 million, a decrease of $50.3 million or 7.7% when compared to 1999. Net sales in Temperature Control decreased by $56.8 million primarily due to a significant retail customer achieving substantial inventory reductions; loss of a major retail customer early in the year (contributed approximately $18.5 million to the overall decrease); and a very cool and wet summer in the northeast and mid-west. The customer that was lost in 2000 was reacquired in the beginning of 2001. With respect to Engine Management, net sales in 2000 were $297.4 million, an increase of $5.6 million or 1.9% when compared to 1999. The increase reflects the successful acquisition of a major new customer in the third quarter of 2000 (contributed approximately $6.4 million of net sales for the year ended December 31, 2000). Significant warranty and overstock returns in our Temperature Control Segment adversely impacted financial performance in 1999. With respect to warranty returns, after thorough analysis of related warranty claims, the Company has taken specific actions to reduce compressor warranty returns in 2000 and beyond. The Company has instituted new counterperson and installer training programs; increased emphasis on clinics and professional seminars for installers; and tightened rules for authorized warranty returns (this the Company believes to be the major improvement, which was previously not required). Beginning in 2000, it is a requirement that each and every compressor returned for warranty credit must have either a service repair work order or a purchase receipt providing proof that a number of additional auxiliary parts were replaced concurrently (i.e. accumulator, orifice tube, in-line filter, condenser) and that an air conditioning system flushing with an approved solvent was performed. If the twelve step process, is not performed as defined by the Company, the warranty is void. -17- With respect to overstock returns, 1999 was adversely impacted by the Company's decision to accept customer returns in connection with the Company's decision to discontinue the offering of certain Temperature Control products. The year 2000 was absent of any such significant decision. In addition, during 2000, the Company placed further restrictions on the amounts that customers can return as overstock returns. Gross margins, as a percentage of net sales, increased to 31.1% in 2000 from 28.8% in 1999. Temperature Control gross margins were positively impacted by reduced customer returns and an increase in net pricing. Engine Management margins were positively impacted by increased sales volume, increases in net pricing and certain cost reductions activities discussed below. In connection with cost reduction activities, the year 2000 was benefited by the consolidation of three distribution centers into one in our Temperature Control Segment; merging our existing fan clutch operations in our Temperature Control Segment; and moving two U.S. manufacturing plants to a single facility in Mexico in the Engine Management Segment. The aforementioned initiatives improved operating income of Temperature Control and Engine Management Segments by approximately $2.0 million and $1.5 million, respectively. Selling, general and administrative expenses (SG&A) decreased approximately $1.2 million in 2000, primarily a result of the cost reduction efforts described in the previous paragraph and a decrease in bad debt expense as compared to 1999. Operating income increased by $1.1 million, or 3.8% in 2000. Results of the Engine Management Division, as compared to a year ago, reflected an increase in operating income of $11.9 million due to higher sales, favorable overhead absorption and cost reduction activities. Operating Income at the Temperature Control Division decreased by $5.8 million, primarily due to the net sales decrease reasons cited above. The Company has strengthened its controls and procedures for accepting authorized customer warranty returns in 2000, and has completed the consolidation of its manufacturing and distribution facilities. These changes have had a favorable impact on 2000 results and are expected to provide future benefits. Other income, net, was approximately $.5 million, comparing favorably to other expense, net of $1.6 million in 1999. This is primarily the result of our 1999 decision to exit the Heat Battery joint venture in Canada. Interest expense increased by approximately $2.1 million to $18 million in 2000, primarily due to higher average borrowings resulting from elevated inventory levels and decreased sales. Income tax expense decreased from $3.3 million in 1999 to $2.9 million in 2000. The effective tax rate also decreased from 28% in 1999 to 22% in 2000 due to an increase in earnings from the Company's Puerto Rico and Hong Kong subsidiaries, which have lower tax rates than the United States statutory rate. On March 13, 2000, the Company prepaid the entire outstanding balance of the 10.22% senior note payable in the amount of $14 million. In connection with this prepayment, the Company incurred an extraordinary loss of $0.5 million net of taxes, for prepayment penalties and the write-off of deferred loan costs. -18- 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 reductions. However, the Company's main focus currently is to reduce inventory levels requiring reductions in production and purchasing levels. Gross margins have been, and will continue to be negatively impacted resulting from underabsorbed overhead. CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. Note that our preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. REVENUE RECOGNITION. We derive our revenue from primarily sales which include replacement parts for motor vehicles, from both our Engine Management and Temperature Control Divisions. The Company recognizes revenue from product sales upon shipment to customers. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates. SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Specifically, our management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period (See discussion on "Recently Issued Accounting Standards"). Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates. Similarly, our management must make estimates of the uncollectability of our accounts receivables. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. -19- ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $14.2 million as of December 31, 2001, due to uncertainties related to our ability to utilize some of our deferred tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations. VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business and significant negative industry or economic trends. In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" became effective and as a result, we will cease to amortize approximately $38 million of goodwill. We recorded approximately $3.6 million of amortization on these amounts during 2001. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. (See discussion on "Recently Issued Accounting Standards"). OTHER LOSS RESERVES. We have numerous other loss exposures, such as environmental claims, product liability (including asbestos matters) and litigation. Establishing loss reserves for these matters requires the use of estimates and judgment in regards to risk exposure and ultimate liability. We estimate losses using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded liabilities for loss. RECENTLY ISSUED ACCOUNTING STANDARDS In May 2000 and April 2001, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitled "Accounting for Certain Sales Incentives" and "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" respectively, (the "Guidelines"). These Guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. The Guidelines, as amended, are effective beginning January 1, 2002 and prior years' financial statements will be restated for purposes of comparability. The adoption of these guidelines will not have an effect on the Company's net earnings, however, certain costs incurred by the Company and historically recorded as selling, general and administrative expense will be reclassified and treated as a reduction from gross sales to derive at net sales. -20- In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria to determine whether intangible assets acquired in a business combination should be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. SFAS No. 142 requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 142 after its adoption. The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 is effective January 1, 2002. As of the date of adoption of SFAS No. 142, the Company has unamortized goodwill in the amount of $38 million. Amortization expense related to goodwill was $3.6 million, $3.5 million and $3.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Management is currently analyzing the impact of adoption of this Standard, but believes this Standard is likely to result in the impairment of a portion of the Company's goodwill. The Company has substantially completed the first step of the initial impairment test required by the Standard and identified approximately $16 million of goodwill that may be impaired based on the new requirements. The Company will complete the impairment testing required to determine the actual amount of goodwill impairment in the first fiscal quarter of 2002. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. In June 2001, the Financial Accounting Standards Board issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company is required and plans to adopt the provisions of Statement No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement No. 143, it is not practicable for management to estimate the impact of adopting this Statement at the date of this report. -21- In August 2001, the Financial Accounting Standards Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived assets that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement No. 142, Goodwill and Other Intangible Assets. The Company is required to adopt Statement 144 no later than the year beginning after December 15, 2001, and plans to adopt its provisions for the quarter ending March 31, 2002. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on the Company's financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures are actively monitored by management. The Company's exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than a subsidiary's functional currency. Similarly, the Company is exposed to market risk as the result of changes in interest rates which may affect the cost of its financing. It is the Company's policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. The Company does not hold or issue derivative financial instruments for trading or speculative 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 $4.0 million, which includes $7.7 million of indebtedness, $6.7 million in accounts payable and $10.4 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 not be expected to have a material impact on the earnings or cash flows of the Company. 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. -22- INTEREST RATE RISK The Company manages its exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in its debt portfolio. To manage a portion of its exposure to interest rate changes, the Company has entered into interest rate swap agreements, see Note 4 of Notes to Consolidated Financial Statements. At December 31, 2001 the Company had approximately $206 million in loans and financing outstanding, of which approximately $91 million bear interest at fixed interest rates and approximately $115 million bear interest at variable rates of interest. The Company invests its excess cash in highly liquid short-term investments. As a result of the Company's refinancing agreement during the second quarter 2001, as described in Note 8, of Notes to Consolidated Financial Statements, the Company's percentage of variable rate debt to total debt has increased from 23% at December 31, 2000 to 56% at December 31, 2001. Depending upon the level of borrowings, under this credit facility, which may at times approach $225 million, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have approximately $1 million negative impact on the earnings or cash flows of the Company. -23- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Standard Motor Products, Inc.: We have audited the accompanying consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Standard Motor Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP New York, New York February 22, 2002 F1 Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Operations ----------------------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------ (Dollars in thousands, except per share amounts) 2001 2000 1999 ----------------------------------------------------------------------------------------------------------- Net sales (Note 6) $ 608,073 $ 604,009 $ 654,282 Cost of sales 438,215 415,965 466,110 ----------------------------------------------------------------------------------------------------------- Gross profit 169,858 188,044 188,172 Selling, general and administrative expenses 154,315 157,380 158,628 ----------------------------------------------------------------------------------------------------------- Operating income 15,543 30,664 29,544 Other income (expense), net (Notes 3 and 13) 2,343 497 (1,564) Interest expense 17,430 18,045 15,951 ----------------------------------------------------------------------------------------------------------- Earnings before taxes and extraordinary item 456 13,116 12,029 ----------------------------------------------------------------------------------------------------------- Provision for income taxes (Note 14) 144 2,886 3,344 ----------------------------------------------------------------------------------------------------------- Earnings before extraordinary item 312 10,230 8,685 ----------------------------------------------------------------------------------------------------------- Extraordinary loss on early extinguishment of debt, net of taxes of $975, $364 and $707 in 2001, 2000 and 1999, respectively. (Note 7) 2,797 501 1,060 ----------------------------------------------------------------------------------------------------------- Net earnings (loss) $ (2,485) $ 9,729 $ 7,625 ----------------------------------------------------------------------------------------------------------- Net earnings (loss) Per Common Share - Basic: Earnings before extraordinary item $ 0.03 $ 0.86 $ 0.66 Extraordinary (loss) from early extinguishment of debt (0.24) (0.04) (0.08) ----------------------------------------------------------------------------------------------------------- Net earnings (loss) Per Common Share - Basic $ (0.21) $ 0.82 $ 0.58 ----------------------------------------------------------------------------------------------------------- Net earnings (loss) Per Common Share - Diluted: Earnings before extraordinary item $ 0.03 $ 0.85 $ 0.66 Extraordinary (loss) from early extinguishment of debt (0.24) (0.04) (0.08) ----------------------------------------------------------------------------------------------------------- Net earnings (loss) Per Common Share - Diluted $ (0.21) $ 0.81 $ 0.58 ----------------------------------------------------------------------------------------------------------- Average number of common shares 11,774,591 11,933,774 13,073,272 Average number of common shares and dilutive common shares 11,830,737 11,974,341 13,145,743 -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-2
Standard Motor Products, Inc. and Subsidiaries Consolidated Balance Sheets ------------------------------------------------------------------------------------ December 31, ---------------------- (Dollars in thousands) 2001 2000 ------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 7,496 $ 7,699 Accounts receivable, less allowances for discounts and doubtful accounts of $4,362 and $4,577 in 2001 and 2000, respectively (Notes 3 and 7) 117,965 106,261 Inventories (Notes 4 and 7) 177,291 234,257 Deferred income taxes (Note 14) 12,316 12,482 Prepaid expenses and other current assets 13,881 12,060 ------------------------------------------------------------------------------------ Total current assets 328,949 372,759 ------------------------------------------------------------------------------------ Property, plant and equipment, net (Notes 5 and 7) 101,646 104,536 ------------------------------------------------------------------------------------ Goodwill, net 38,040 40,685 ------------------------------------------------------------------------------------ Other assets (Notes 6 and 11) 40,794 31,416 ------------------------------------------------------------------------------------ Total assets $ 509,429 $ 549,396 ------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - (Note 7) $ 4,075 $ 38,930 Current portion of long-term debt (Note 7) 1,784 13,643 Accounts payable 26,110 56,612 Sundry payables and accrued expenses 41,968 49,671 Accrued customer returns 18,167 17,693 Payroll and commissions 8,489 8,119 ------------------------------------------------------------------------------------ Total current liabilities 100,593 184,668 ------------------------------------------------------------------------------------ Long-term debt (Notes 7 and 8) 200,066 150,018 ------------------------------------------------------------------------------------ Postretirement benefits other than pensions and other accrued liabilities (Notes 11 and 12) 23,083 20,405 ------------------------------------------------------------------------------------ Commitments and contingencies (Notes 7, 9, 10, 11, 12 and 17) Stockholders' equity (Notes 7, 8, 9,10 and 11): Common Stock - par value $2.00 per share: Authorized 30,000,000 shares, issued and outstanding 11,823,650 and 11,695,179 shares in 2001 and 2000, respectively 26,649 26,649 Capital in excess of par value 1,877 2,541 Retained earnings 183,532 190,253 Accumulated other comprehensive loss (3,722) (591) ------------------------------------------------------------------------------------ 208,336 218,852 Less: Treasury stock - at cost (1,500,826 and 1,629,297 shares in 2001 and 2000, respectively) 22,649 24,547 ------------------------------------------------------------------------------------ Total stockholders' equity 185,687 194,305 ------------------------------------------------------------------------------------ Total liabilities and stockholder' equity $ 509,429 $ 549,396 ------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-3
Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Cash Flows -------------------------------------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------------- (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ (2,485) $ 9,729 $ 7,625 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 18,909 18,922 17,230 Gain on disposal of property, plant & equipment (265) (99) (2,564) Equity (income) loss from joint ventures (844) (702) 4,118 Employee stock ownership plan allocation 713 1,032 1,739 Tax benefit related to employee stock options 48 -- 290 Increase in deferred income taxes (3,628) (897) (4,552) Extraordinary loss on repayment of debt 3,772 865 1,767 Change in assets and liabilities, net of effects from acquisitions: Decrease in accounts receivable, net 13,296 14,793 10,782 (Increase) decrease in inventories 56,966 (44,666) (5,944) (Increase) decrease in prepaid expenses and other current assets (1,821) 388 (947) (Increase) decrease in other assets (7,745) 3,811 (1,514) Increase (decrease) in accounts payable (30,502) 14,413 (10,349) Increase (decrease) in sundry payables and accrued expenses (9,749) (16,724) 1,129 Increase (decrease) in other liabilities 3,524 (1,818) 2,174 -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 40,189 (953) 20,984 -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale of property, plant and equipment 652 657 8,420 Capital expenditures, net of effects from acquisitions (13,740) (16,652) (14,423) Payments for acquisitions, net of cash acquired (1,069) (2,718) (17,381) -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (14,157) (18,713) (23,384) -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under line-of-credit agreements 71,935 36,285 (819) Net proceeds from issuance of long-term debt -- -- 86,568 Principal payments and retirement of other long-term debt (93,601) (29,119) (54,664) Proceeds from exercise of employee stock options 473 -- 1,830 Purchase of treasury stock -- (14,345) (9,765) Dividends paid (4,236) (4,324) (4,456) -------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (25,429) (11,503) 18,694 -------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (806) (1,512) 629 -------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (203) (32,681) 16,923 Cash and cash equivalents at beginning of year 7,699 40,380 23,457 -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 7,496 $ 7,699 $ 40,380 -------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 17,403 $ 18,943 $ 14,733 Income taxes $ 2,792 $ 2,776 $ 6,205 --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity (In thousands) Years Ended December 31, 2001, 2000 and 1999 -------------------------------------------------------------------------------------------------------------- Accumulated Capital in Other Common Excess of Retained Comprehensive Treasury Stock Par Value Earnings Income (Loss) Stock Total -------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 26,649 $ 2,951 $181,679 $ (516) $ (5,738) $205,025 Comprehensive Income: Net earnings 7,625 7,625 Foreign currency translation adjustment 1,230 1,230 -------- Total comprehensive income 8,855 Cash dividends paid (4,456) (4,456) Exercise of employee stock options (381) 2,211 1,830 Tax benefits applicable to the exercise of employee stock options 290 290 Employee Stock Ownership Plan 97 1,642 1,739 Purchase of treasury stock (9,765) (9,765) -------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 26,649 2,957 184,848 714 (11,650) 203,518 Comprehensive Income: Net earnings 9,729 9,729 Foreign currency translation adjustment (1,305) (1,305) -------- Total comprehensive income 8,424 Cash dividends paid (4,324) (4,324) Employee Stock Ownership Plan (416) 1,448 1,032 Purchase of treasury stock (14,345) (14,345) -------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 26,649 2,541 190,253 (591) (24,547) 194,305 Comprehensive Loss: Net loss (2,485) (2,485) Foreign currency translation adjustment (1,086) (1,086) Unrealized loss on interest rate swap agreements (2,045) (2,045) -------- Total comprehensive loss (5,616) Cash dividends paid (4,236) (4,236) Exercise of employee stock options (295) 768 473 Tax benefits applicable to the exercise of employee stock options 48 48 Employee Stock Ownership Plan (417) 1,130 713 -------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $ 26,649 $ 1,877 $183,532 $ (3,722) $(22,649) $185,687 --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Standard Motor Products, Inc. (the "Company") is engaged in the manufacture and sale of automotive replacement parts. The consolidated financial statements include the accounts of the Company and all subsidiaries in which the Company has more than a 50% equity ownership. The Company's investments in unconsolidated affiliates are accounted for on the equity method. All significant intercompany items have been eliminated. USE OF ESTIMATES In conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Some of the more significant estimates include allowances for doubtful accounts, inventory valuation reserves, depreciation and amortization of long-lived assets, product liability and litigation matters, deferred tax asset valuation allowance and sales return allowances. Actual results could differ from those estimates. RECLASSIFICATIONS Where appropriate, certain amounts in 2000 and 1999 have been reclassified to conform with the 2001 presentation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. MARKETABLE SECURITIES At December 31, 2001 and 2000, held-to-maturity securities amounted to $7.2 million. Held-to-maturity securities consist primarily of U.S. Treasury Bills and corporate debt securities which are reported at amortized cost which approximates fair value. As of December 31, 2001, the held-to-maturity securities mature within two years. INVENTORIES Inventories are stated at the lower of cost (determined by means of the first-in, first-out method) or market. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998 and June 2000, the FASB issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No.138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. For derivatives that have been formally designated as a cash flow hedge (interest rate swap agreements), the effective portion of changes in the fair value of the derivatives are recorded in "other comprehensive income (loss)". Payment or receipts on interest rate swap agreements are recorded in the "interest expense" caption in the statement of operations. The Company had no outstanding derivatives as of January 1, 2001. PROPERTY, PLANT AND EQUIPMENT These assets are recorded at cost and are depreciated using the straight-line method of depreciation over the estimated useful lives as follows: Estimated Life -------------- Buildings and Improvements 10 to 33-1/2 years Machinery and equipment 7 to 12 years Tools, dies and auxiliary equipment 3 to 8 years Furniture and fixtures 3 to 12 years Computer software 3 to 10 years Leasehold improvements 10 years or life of lease GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, has been amortized on a straight-line basis over the estimated period of expected benefit, generally 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. Accumulated amortization at December 31, 2001 and 2000 was $16.4 million and $12.8 million. Goodwill will no longer be amortized upon adoption of Statement of Financial Accounting Standards (SFAS) No.142, "Goodwill and Other Intangible Assets," (See discussion in "Recently Issued Accounting Standards"). IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. FOREIGN CURRENCY TRANSLATION Assets and liabilities are translated into U.S. dollars at year end exchange rates and revenues and expenses are translated at average exchange rates during the year. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) and remains there until the underlying foreign operation is liquidated or substantially disposed of. F-6 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- 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. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The annual net postretirement benefit liability and related expense under the Company's benefit plans are determined on an actuarial basis. Benefits are determined primarily based upon employees' length of service. INCOME TAXES Income taxes are calculated using the liability method in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No.109, "Accounting for Income Taxes." Deferred tax assets and liabilities are determined based on the estimated future tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by the current enacted tax rates. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability. NET EARNINGS PER COMMON SHARE The Company presents two calculations of earnings per common share. "Basic" earnings per common share equals net income divided by weighted average common shares outstanding during the period. "Diluted" earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus potentially dilutive common shares. Potentially dilutive common shares that are anti-dilutive are excluded from net earnings per common share. The following is a reconciliation of the shares used in calculating basic and dilutive net earnings per common share. (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- Weighted average common shares 11,775 11,934 13,073 Effect of stock options 56 40 73 -------------------------------------------------------------------------------- Weighted average common equivalent shares outstanding assuming dilution 11,831 11,974 13,146 The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented. (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- Stock options 625 861 552 Convertible debentures 2,796 2,796 1,165 -------------------------------------------------------------------------------- STOCK OPTION PLANS The Company accounts for its stock option plans in accordance with the provisions of SFAS No.123 "Accounting for Stock Based Compensation". As permitted by this statement, the Company has chosen to continue to apply the intrinsic value-based method of accounting as prescribed by Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees" and related interpretations including SFAS interpretation No.44, "Accounting for certain transactions involving stock compensation and interpretation of APB No.25," issued in March 2001. Accordingly, no compensation expense has been recognized for options granted because the exercise price is equal to the fair value of the stock at the date of grant. As required, the Company provides pro forma net income and pro forma earnings per share disclosures for stock option grants, as if the fair value based method defined in SFAS No.123 had been applied. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. With respect to accounts receivable, such receivables are primarily from warehouse distributors and major retailers in the automotive aftermarket industry located in the United States. The Company performs ongoing credit evaluations of its customers' financial conditions. Members of one marketing group represent the Company's largest group of customers and accounted for approximately 14%, 15% and14% of consolidated net sales for the years ended December 31, 2001, 2000 and 1999, respectively. One individual member of this marketing group accounted for 10%, 9%, and 9% of net sales for the years ended December 31, 2001, 2000 and 1999, respectively. The Company's five largest individual customers, including members of this marketing group, accounted for 42%, 33% and 35% of net sales in 2001, 2000 and 1999, respectively. Recently Issued Accounting Standards In May 2000 and April 2001, the FASB Emerging Issues Task force (the "EITF") issued new guidelines entitled "Accounting for Certain Sales Incentives" and "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the "Vendor's Products", respectively, (the "Guidelines"). These Guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. The Guidelines, as amended, are effective beginning January 1, 2002 and prior years' financial statements will be restated for purposes of comparability. The adoption of these guidelines will not have an effect on the Company's net earnings, however, certain costs incurred by the Company and historically recorded as selling, general and administrative expense will be reclassified and treated as a reduction from gross sales to derive at net sales. F-7 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- In June 2001, the FASB issued SFAS No.141, Business Combinations, (SFAS No.141) and SFAS No.142, Goodwill and Other Intangible Assets (SFAS No.142). SFAS No.141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No.141 also specifies criteria to determine whether intangible assets acquired in a business combination should be recognized and reported separately from goodwill. SFAS No.142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No.142. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. SFAS No.142 requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No.121 and subsequently, SFAS No.142 after its adoption. The Company adopted the provisions of SFAS No.141 as of July 1, 2001, and SFAS No.142 is effective January 1, 2002. As of the date of adoption of SFAS No.142, the Company has unamortized goodwill in the amount of $38 million. Amortization expense related to goodwill was $3.6 million, $3.5 million and $3.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Management is currently analyzing the impact of adoption of this Standard, but believes this Standard is likely to result in the impairment of a portion of the Company's goodwill. The Company has substantially completed the first step of the initial impairment test required by the Standard and identified approximately $16 million of goodwill that may be impaired based on the new requirements. The Company will complete the impairment testing required to determine the actual amount of goodwill impairment in the first fiscal quarter of 2002. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. 2. ACQUISITIONS In January 2000, the Company completed the purchase of Vehicle Air Conditioning Parts, located in England, which has subsequently been named "Four Seasons UK, LTD." In July 2000, the Company completed the purchase of Automotive Heater Exchange SRL in Massa, Italy. In addition, during 2000 and 2001, the Company increased its ownership percentage in Standard Motor Products Holdings Limited, formerly Intermotor Holdings Limited, from 74.25% to 86%. In aggregate, approximately $3.8 million was incurred in connection with these acquisitions. Such acquisitions had an immaterial effect on net earnings. During 1999, the Company acquired and accounted for as a purchase, the following business: In January 1999, the Company acquired 85% of the stock of Webcon UK Limited, and, through its UK joint venture Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited located in Sunbury-on-Thames England, for approximately $3.5 million. The remaining 15% was acquired in January 2000. The acquisition increased consolidated net sales by approximately $12 million in 1999 and had an immaterial effect on net earnings for the year ended December 31, 1999. In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $12.4 million. The acquisition increased consolidated net sales by approximately $22 million in 1999 and had an immaterial effect on net earnings for the year ended December 31, 1999. In April 1999, the Company acquired Lemark Auto Accessories Limited, located in Redditch, England, for approximately $1.9 million. The acquisition increased consolidated net sales by approximately $3 million and had an immaterial effect on net earnings for the year ended December 31, 1999. The Company's acquisitions were funded from cash and short term borrowings. Assets acquired in all of the acquisitions consisted primarily of inventory and property, plant and equipment. The purchase prices have been allocated to the assets acquired and liabilities assumed based on the fair value at the dates of acquisition. In aggregate, the excess of the purchase price over the fair value of the net assets acquired during 2001, 2000 and 1999 was approximately $1.1 million, $2.6 million and $5.7 million, respectively. The operating results of these acquired businesses have been included in the consolidated financial statements from the date of each respective acquisition. In December 2001, the Company signed a letter of intent to acquire Carol Cable Limited, a manufacturer and distributor of wire sets, based in England for approximately $1.7 million. Assets consist primarily of property plant and equipment, and inventory. The purchase is expected to be completed in April 2002 with funds provided under the Company's line of credit. 3. SALE OF ACCOUNTS RECEIVABLE The Company sold certain accounts receivable through its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999 SMP Credit Corp. and an independent financial institution entered into a three year agreement whereby SMP Credit Corp. could sell up to a $25 million undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement was terminated in 2001 as part of the new credit facility described in Note 7. At December 31, 2000, net accounts receivables amounting to $25 million had been sold under this agreement. These sales were reflected as reductions of trade accounts receivable and the related fees and discounting expense were recorded as other expense. 4. INVENTORIES December 31, --------------------------- (In thousands) 2001 2000 -------------------------------------------------------------------------------- Finished goods $141,799 $165,381 Work in process 3,155 3,552 Raw materials 32,337 65,324 -------------------------------------------------------------------------------- Total inventories $177,291 $234,257 -------------------------------------------------------------------------------- F-8 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- 5. PROPERTY, PLANT AND EQUIPMENT December 31, ----------------------- (In thousands) 2001 2000 -------------------------------------------------------------------------------- Land, buildings and improvements $ 60,665 $ 60,435 Machinery and equipment 109,617 101,884 Tools, dies and auxiliary equipment 17,815 12,035 Furniture and fixtures 27,643 28,340 Computer software 10,231 4,824 Leasehold improvements 7,450 7,475 Construction in progress 6,440 12,328 -------- -------- 239,861 227,321 Less accumulated depreciation and amortization 138,215 122,785 -------------------------------------------------------------------------------- Total property, plant and equipment, net $101,646 $104,536 -------------------------------------------------------------------------------- Depreciation expense was $15.3 million, $15.4 million and $13.8 million for 2001, 2000 and 1999, respectively. 6. Other ASSETS December 31, --------------------- (In thousands) 2001 2000 -------------------------------------------------------------------------------- Marketable securities $ 7,200 $ 7,200 Unamortized customer supply agreements 1,892 2,365 Equity in joint ventures 2,149 1,956 Deferred income taxes 12,653 8,859 Deferred loan costs 5,389 3,864 Other 11,511 7,172 -------------------------------------------------------------------------------- Total other assets $40,794 $31,416 -------------------------------------------------------------------------------- Included in Other is a preferred stock investment in a customer of the Company. Net sales to such customer amounted to $57.9 million, $57.4 million and $58.0 million in 2001, 2000 and 1999, respectively. 7. CREDIT FACILITIES AND LONG-TERM DEBT The Company, effective April 27, 2001 entered into an agreement with GE Capital Corp. and a syndicate of lenders for a new secured revolving credit facility. The former unsecured revolving credit facility was set to expire on November 30, 2001. The term of the new credit agreement is for a period of five years and provides for a line of credit up to $225 million. The initial proceeds have been used to refinance approximately $97 million of the outstanding indebtedness under the Company's former bank line of credit, a 7.56% senior note of $52 million, a $25 million accounts receivable sales arrangement and a Canadian Credit Facility of $5 million. The Company recorded an extraordinary loss of approximately $2.8 million, net of taxes, in the second quarter of 2001, for a prepayment penalty and write-off of unamortized fees for the retirement of the above related debt. Availability under the new credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. Direct borrowings bear interest at the Prime Rate plus the applicable margin (as defined) or the LIBOR Rate plus the applicable margin (as defined), at the option of the Company. At December 31, 2001 and 2000, the interest rate on the Company's revolving credit facilities was 4.30% and 9.75%, respectively. Borrowings are collateralized by accounts receivable, inventory and fixed assets of the Company and its subsidiaries. The terms of the new revolving credit facility contain, among other provisions, requirements of maintaining defined levels of tangible net worth and specific limits or restrictions on additional indebtedness, capital expenditures, liens and acquisitions. The Company was in compliance with the covenants at December 31, 2001. In addition, a foreign subsidiary of the Company has a revolving credit facility. The amount of short-term bank borrowings outstanding under that facility was $4.1 million and $3.9 million at December 31, 2001 and 2000, respectively. At December 31, 2001, the foreign subsidiary was not in compliance with certain covenants, for which it received waivers and amendments. The weighted average interest rates on these borrowings at December 31, 2001 and 2000 were 6.4% and 6.9%, respectively. On July 26, 1999, the Company completed a public offering of convertible subordinated debentures amounting to $90 million. The Convertible Debentures carry an interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009. The Debentures are convertible into approximately 2,796,000 shares of the Company's common stock. The Company may, at its option, redeem some or all of the Debentures at any time on or after July 15, 2004, for a redemption price equal to the issuance price plus accrued interest. In addition, if a change in control, as defined, occurs at the Company, the Company will be required to make an offer to purchase the convertible debentures at a purchase price equal to 101% of their aggregate principal amount, plus accrued interest. The Company incurred fees in relation to the offering of approximately $3.4 million. Net proceeds from the offering were used to pre-pay a senior note payable, including prepayment penalties, repurchase a portion of the Company's common stock and pay down short term bank borrowings. Under the terms of the 7.56% senior note agreement, the Company was required to repay the loan in seven equal annual installments beginning in 2000. This senior note was paid off as part of the new revolving credit facility. Under the terms of a Canadian (CDN) credit agreement, the Company was required to repay the loan as follows: $2 million CDN in 2001 and a final payment of $6 million CDN in 2002. This credit agreement was paid off as part of the new revolving credit facility. December 31, ---------------------- (In thousands) 2001 2000 -------------------------------------------------------------------------------- 6.75% convertible subordinated debentures $ 90,000 $ 90,000 Revolving credit facility 106,790 -- 7.56% senior note -- 62,571 Canadian Credit Facility -- 5,335 Other 5,060 5,755 -------------------------------------------------------------------------------- 201,850 163,661 Less current portion 1,784 13,643 -------------------------------------------------------------------------------- Total non-current portion of long-term debt $200,066 $150,018 -------------------------------------------------------------------------------- Maturities of long-term debt during the five years ending December 31, 2002 through 2006 are $1.8 million, $1.3 million, $1.1 million, $0.6 million and $106.9 million, respectively. F-9 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- 8. INTEREST RATE SWAP AGREEMENTS The Company does not enter into financial instruments for trading or speculative purposes. The principal financial instruments used for cash flow hedging purposes are interest rate swaps. In July 2001, the Company entered into interest rate swap agreements to manage its exposure to interest rate changes. The swaps effectively convert a portion of the Company's variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional principal amounts. At December 31, 2001, the Company had two outstanding interest rate swap agreements maturing in January 2003 and 2004, with aggregate notional principal amounts of $75 million. Under these agreements the Company receives a floating rate based on the LIBOR interest rate, and pays a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million. If, at any time, the swaps are determined to be ineffective, in all or in part, due to changes in the interest rate swap agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations in the period. It is not expected that any gain or loss will be reported in the statement of operations during the year ending December 31, 2002. 9. STOCKHOLDERS' EQUITY The Company has authority to issue 500,000 shares of preferred stock, $20 par value, and the Board of Directors is vested with the authority to establish and designate series of preferred, to fix the number of shares therein and the variations in relative rights as between series. On December 18, 1995, the Board of Directors established a new series of preferred shares designated as Series A Participating Preferred Stock. The number of shares constituting the Series A Preferred Stock is 30,000. The Series A Preferred Stock is designed to participate in dividends, ranks senior to the Company's common stock as to dividends and liquidation rights and has voting rights. Each share of the Series A Preferred Stock shall entitle the holder to one thousand votes on all matters submitted to a vote of the stockholders of the Company. No such shares were outstanding at December 31, 2001. On January 17, 1996, the Board of Directors adopted a Shareholder Rights Plan (Plan). Under the Plan, the Board declared a dividend of one Preferred Share Purchase Right (Right) for each outstanding common share of the Company. The dividend was payable on March 1, 1996, to the shareholders of record as of February 15, 1996. The Rights are attached to and automatically trade with the outstanding shares of the Company's common stock. The Rights will become exercisable only in the event that any person or group of affiliated persons becomes a holder of 20% or more of the Company's outstanding common shares, or commences a tender or exchange offer which, if consummated, would result in that person or group of affiliated persons owning at least 20% of the Company's outstanding common shares. Once the rights become exercisable they entitle all other shareholders to purchase, by payment of an $80.00 exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise price. In addition, at any time after a 20% position is acquired and prior to the acquisition of a 50% position, the Board of Directors may require, in whole or in part, each outstanding Right (other than Rights held by the acquiring person or group of affiliated persons) to be exchanged for one share of common stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per Right at any time prior to their expiration on February 28, 2006. During the years 1998 through 2000, the Board of Directors authorized multiple repurchase programs under which the Company could repurchase shares of its common stock. During such years, $26.7 million (in aggregate) of common stock has been repurchased to meet present and future requirements of the Company's stock option programs and to fund the Company's ESOP. As of December 31, 2001, the Company has Board authorization to repurchase additional shares at a maximum cost of $1.7 million. 10. STOCK OPTIONS The Company has principally two fixed stock-based compensation plans. Under the 1994 Omnibus Stock Option Plan, as amended, the Company is authorized to issue 1,500,000 stock options. The options become exercisable over a three to five year period and expire at the end of five years following the date they become exercisable. Under the 1996 Independent Directors' Stock Option Plan, the Company is authorized to issue 50,000 stock options. The options become exercisable one year after the date of grant and expire at the end of ten years following the date of grant. At December 31, 2001, in aggregate 1,320,280 shares of authorized but unissued common stock were reserved for issuance under the Company's stock option plans. As permitted under SFAS No.123, the Company continues to apply the provisions of APB Opinion No. 25 for stock-based awards granted to employees. Accordingly, no compensation cost has been recognized for the fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value method of SFAS No.123, the Company's net earnings (loss) per share would have changed to the pro forma amounts as follows: (Dollars in thousands except per share data) 2001 2000 1999 -------------------------------------------------------------------------------- Net earnings(loss) As reported $(2,485) $ 9,729 $7,625 Pro forma $(2,697) $ 8,708 $6,648 Basic earnings(loss) As reported $ (0.21) $ 0.82 $ 0.58 per share Pro forma $ (0.23) $ 0.73 $ 0.51 Diluted earnings As reported $ (0.21) $ 0.81 $ 0.58 (loss) per share Pro forma $ (0.23) $ 0.72 $ 0.51 -------------------------------------------------------------------------------- F-10 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 2001 2000 1999 -------------------------------------------------------------------------------- Expected option life 4.0 years 4.3 years 4.3 years Expected stock volatility 38.6% 39.1% 39.5% Expected dividend yield 2.8% 3.8% 1.8% Risk-free interest rate 4.2% 4.6% 6.6% Fair value of option $ 3.71 $ 2.53 $ 7.97 A summary of the status of the Company's stock option plans follow: 2001 2000 1999 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise (Shares in thousands) Shares Price Shares Price Shares Price -------------------------------------------------------------------------------- Outstanding at beginning of year 1,189 $16.60 808 $20.40 793 $ 19.58 Granted 10 13.05 498 10.73 136 23.73 Exercised (55) 9.29 -- -- (100) 17.83 Forfeited (133) 18.18 (117) 17.78 (21) 23.13 -------------------------------------------------------------------------------- Outstanding at end of year 1,011 $16.76 1,189 $16.60 808 $ 20.40 -------------------------------------------------------------------------------- Options exercisable at end of year 671 526 431 -------------------------------------------------------------------------------- STOCK OPTIONS OUTSTANDING -------------------------------------------------------------------------------- Weighted-Average Shares Remaining Range of Outstanding Contractual Life Weighted-Average Exercise Prices at 12/31/01 (Years) Exercise Price -------------------------------------------------------------------------------- $ 6.56 $11.29 386 6.1 $ 9.92 $13.05 - $16.94 139 1.6 $ 16.05 $20.50 - $24.84 486 3.5 $ 22.40 -------------------------------------------------------------------------------- STOCK OPTIONS EXERCISABLE -------------------------------------------------------------------------------- Range of Shares Exercisable Weighted-Average Exercise Prices at 12/31/01 Exercise Price -------------------------------------------------------------------------------- $6.56 - $23.84 671 $19.17 -------------------------------------------------------------------------------- 11. RETIREMENT BENEFIT PLANS The Company has a defined benefit pension plan covering certain former employees of the Company's former Brake business. The following table represents a reconciliation of the beginning and ending benefit obligation, the fair value of plan assets and the funded status of the plan: December 31, ------------------------ (In thousands) 2001 2000 -------------------------------------------------------------------------------- Benefit obligation at beginning of year $ 8,957 $ 9,271 Interest cost 629 658 Actuarial loss (gain) 93 (102) Benefits paid (866) (870) -------------------------------------------------------------------------------- Benefit Obligation at End of Year $ 8,813 $ 8,957 -------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $12,063 $12,755 Actual return on plan assets (135) 178 Benefits paid (866) (870) -------------------------------------------------------------------------------- Fair value of plan assets at end of year 11,062 $ 12,063 -------------------------------------------------------------------------------- Funded status 2,249 $ 3,106 Unrecognized net actuarial gain (1,386) (2,654) -------------------------------------------------------------------------------- Prepaid benefit cost $ 863 $ 452 -------------------------------------------------------------------------------- Weighted average assumptions are as follows: December 31, -------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------- Discount rates 7.25% 7.50% 7.50% Expected long-term rate of return on assets 8.00% 8.00% 8.00% -------------------------------------------------------------------------------- Components of net periodic (benefit) cost follow: December 31, ----------------------------------- (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- Service cost $ -- $ -- $ -- Interest cost 629 658 651 Return on assets (928) (988) (900) Amortization of prior service cost -- -- -- Recognized actuarial (gain) loss (112) (127) (60) -------------------------------------------------------------------------------- Net periodic (benefit) cost $ (411) $ (457) $ (309) -------------------------------------------------------------------------------- In addition, the Company participates in several multi employer plans which provide defined benefits to substantially all unionized workers. The Multi employer Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers associated with multi employer plans. The Company has not received information from the plans' administrators to determine its share, if any, of unfunded vested benefits. The Company and certain of its subsidiaries also maintain various defined contribution plans, which include profit sharing and provide retirement benefits for other eligible employees. The provisions for retirement expense in connection with the plans are as follows: Multi- Defined Contribution employer Plans and Other Plans -------------------------------------------------------------------------------- Years ended December 31, 2001 $299,000 $2,449,000 2000 344,000 2,319,000 1999 $348,000 $2,332,000 -------------------------------------------------------------------------------- The Company has an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. 75,000 shares each were granted to employees during 2001, 2000 and 1999, under the terms of the ESOP. These shares were funded directly from treasury stock. In fiscal 2000, the Company created an employee benefits trust to which it contributed 750,000 shares of treasury stock. The Company is authorized to instruct the trustees to distribute such shares toward the satisfaction of the Company's future obligations under employee benefit plans. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with its fiduciary duties. The provision for expense in connection with the ESOP was approximately $0.7 million in 2001, $1.0 million in 2000 and $1.7 million in 1999. F-11 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- In August 1994 the Company established an unfunded Supplemental Executive Retirement Plan (SERP) for key employees of the Company. Under the plan, these employees may elect to defer a portion of their compensation and, in addition, the Company may at its discretion make contributions to the plan on behalf of the employees. Such contributions were $37,000, $24,000 and $98,000 in 2001, 2000, and1999, respectively. On October 1, 2001, the Company adopted a second unfunded SERP. The SERP is a defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key employees upon retirement based upon the employees' years of service and compensation. For the year ended December 31, 2001, approximately $0.9 million of benefits were accrued and $0.1 million was charged to expense. The projected benefit obligation and accumulated benefit obligation were $1.3 million and $0.9 million, respectively, at December 31, 2001. The costs and benefit obligations were determined using a discount rate and an expected rate of return on assets of 7.25% at December 31, 2001. 12. POSTRETIREMENT MEDICAL BENEFITS The Company provides certain medical and dental care benefits to eligible retired employees. The Company's current policy is to fund the cost of the health care plans on a pay-as-you-go basis. The following table represents a reconciliation of the beginning and ending benefit obligation and the funded status of the plan. December 31, ---------------------- (In thousands) 2001 2000 -------------------------------------------------------------------------------- Benefit obligation at beginning of year $ 17,447 $ 18,369 Service cost 1,500 1,377 Interest cost 1,314 1,152 Actuarial (gain) loss 1,180 (2,586) Benefits paid (957) (865) -------------------------------------------------------------------------------- Benefit obligation at end of year $ 20,484 $ 17,447 -------------------------------------------------------------------------------- Funded status $(20,484) $(17,447) Unrecognized prior service cost 914 1,038 Unrecognized net actuarial gain (2,582) (3,996) -------------------------------------------------------------------------------- Accrued benefit cost $(22,152) $(20,405) -------------------------------------------------------------------------------- Components of net periodic benefit cost follow: December 31, ---------------------------------- (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- Service cost $ 1,500 $ 1,377 $ 1,284 Interest cost 1,314 1,152 1,221 Amortization of prior service cost 124 124 124 Recognized actuarial gain (232) (275) (8) -------------------------------------------------------------------------------- Net periodic benefit cost $ 2,706 $2,378 $ 2,621 -------------------------------------------------------------------------------- Actuarial assumptions used to determine costs and benefit obligations are as follows: 2001 2000 1999 --------------------------- Discount Rate 7.25% 7.50% 7.50% Current medical cost trend rate 9% 10% 7% Current dental cost trend rate 5% 5.5% 6% Ultimate medical cost trend rate 5% 5% 6% Year trend rate declines to ultimate 2005 2005 2002 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one- percentage-point change in assumed health care cost trend rates would have the following effects for 2001: 1-Percentage- 1-Percentage- (In thousands) Point Increase Point Decrease -------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 269 $ (221) Effect on post retirement benefit obligation $1,539 $(1,300) -------------------------------------------------------------------------------- 13. OTHER INCOME (EXPENSE), NET (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- Interest and dividend income $ 1,336 $ 1,038 $ 1,637 Loss on sale of accounts receivable (Note 3) (484) (1,567) (1,281) Income (loss) from joint ventures 844 702 (4,118) Gain on disposal of property, plant and equipment 265 99 2,564 Other - net 382 225 (366) -------------------------------------------------------------------------------- Total other income (expense), net $ 2,343 $ 497 $(1,564) -------------------------------------------------------------------------------- In connection with the Company's Heat Battery joint venture in Canada, in the fourth quarter of 1999, it was mutually agreed between the joint venture participants, that due to lack of significant commercial success and recurring losses, the joint venture would close. In connection with this decision, the Company recorded an approximate $4.0 million charge relating to writing down the Company's investment to net realizable value. 14. INCOME TAXES The income tax provision (benefit) consists of the following: 2001 2000 1999 -------------------------------------------------------------------------------- Current: Domestic $ 2,099 $ 1,260 $ 4,376 Foreign 1,673 2,523 3,520 -------------------------------------------------------------------------------- Total Current 3,772 3,783 7,896 -------------------------------------------------------------------------------- Deferred: Domestic (3,408) (1,103) (5,167) Foreign (220) 206 615 -------------------------------------------------------------------------------- Total Deferred (3,628) (897) (4,552) -------------------------------------------------------------------------------- Total income tax provision $ 144 $ 2,886 $ 3,344 -------------------------------------------------------------------------------- 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 $28.2 million at the end of 2001, $27.5 million at the end of 2000, and $25.5 million at the end of 1999. F-12 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- Earnings before income taxes for foreign operations (including Puerto Rico) amounted to approximately $7 million, $14 million, and $13 million in 2001, 2000, and 1999, respectively. Earnings of the Puerto Rico subsidiary are not subject to United States income taxes and are partially exempt from Puerto Rican income taxes under a tax exemption grant expiring on December 31, 2002. The Company intends on renewing grant prior to the expiration date. The tax benefits of the exemption, reduced by a minimum tollgate tax instituted in 1993, amounted to $0.12 per share share in 2001(2000 - $0.23; 1999 - $0.14). 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: 2001 2000 1999 -------------------------------------------------------------------------------- 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 21.4 1.2 2.9 Non-deductible items, net 60.5 0.1 0.8 Benefits of income subject to taxes at lower than the U.S. federal rate (85.3) (14.3) (11.0) Other -- -- 0.1 -------------------------------------------------------------------------------- Effective tax rate 31.6% 22.0% 27.8% -------------------------------------------------------------------------------- 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) 2001 2000 -------------------------------------------------------------------------------- Deferred tax assets: Inventories $ 6,044 $ 7,639 Allowance for customer returns 7,069 7,332 Postretirement benefits 8,751 8,060 Allowance for doubtful accounts 1,587 1,604 Accrued salaries and benefits 2,938 3,342 Net operating loss and tax credit carryforwards 14,990 8,270 Other 6,551 7,188 -------- -------- 47,930 43,435 -------- -------- Valuation allowance (14,171) (14,171) -------- -------- Total $ 33,759 $ 29,264 -------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 6,702 $ 4,717 Promotional costs 1,036 915 Other 1,052 2,291 -------- -------- Total 8,790 7,923 -------------------------------------------------------------------------------- Net deferred tax assets $ 24,969 $ 21,341 -------------------------------------------------------------------------------- The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. However, if the Company is unable to generate sufficient taxable income in the future through its operations, increases in the valuation allowance may be required. 15. INDUSTRY SEGMENT AND GEOGRAPHIC DATA Under the provisions of SFAS No. 131, the Company has two reportable operating segments which are the major product areas of the automotive aftermarket in which the Company competes. The Engine Management Division consists primarily of ignition and emission parts, wires and cables, and fuel system parts. The Temperature Control Division consists primarily of compressors, other air conditioning parts and heater parts. The accounting policies of each 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, 2001 ---------------------------------------------------- Engine Temperature Other (In thousands) Management Control Adjustments Consolidated -------------------------------------------------------------------------------- Net Sales $295,948 $275,901 $ 36,224 $608,073 -------------------------------------------------------------------------------- Depreciation and amortization 9,649 6,462 2,798 18,909 -------------------------------------------------------------------------------- Operating income 26,415 3,616 (14,488) 15,543 -------------------------------------------------------------------------------- Investment in equity affiliates 105 -- 2,044 2,149 -------------------------------------------------------------------------------- Capital expenditures 4,724 6,781 2,235 13,740 -------------------------------------------------------------------------------- Total Assets $233,564 $182,083 $ 93,782 $509,429 -------------------------------------------------------------------------------- For the year ended December 31, 2000 -------------------------------------------------- Engine Temperature Other (In thousands) Management Control Adjustments Consolidated -------------------------------------------------------------------------------- Net Sales $297,386 $264,704 $ 41,919 $604,009 -------------------------------------------------------------------------------- Depreciation and amortization 10,293 6,116 2,513 18,922 -------------------------------------------------------------------------------- Operating income 37,964 11,537 (18,837) 30,664 -------------------------------------------------------------------------------- Investment in equity affiliates 105 -- 1,851 1,956 -------------------------------------------------------------------------------- Capital expenditures 8,914 6,454 1,284 16,652 -------------------------------------------------------------------------------- Total Assets $265,336 $224,410 $ 59,650 $549,396 -------------------------------------------------------------------------------- For the year ended December 31, 1999 ------------------------------------------------------ Engine Temperature Other (In thousands) Management Control Adjustments Consolidated -------------------------------------------------------------------------------- Net Sales $291,761 $321,490 $ 41,031 $654,282 -------------------------------------------------------------------------------- Depreciation and amortization 8,535 5,949 2,746 17,230 -------------------------------------------------------------------------------- Operating income 26,104 17,289 (13,849) 29,544 -------------------------------------------------------------------------------- Investment in equity affiliates 105 272 1,062 1,439 -------------------------------------------------------------------------------- Capital expenditures 7,118 7,026 279 14,423 -------------------------------------------------------------------------------- Total Assets $253,346 $212,026 $ 90,649 $556,021 -------------------------------------------------------------------------------- Other Adjustments consist of items pertaining to the corporate headquarters function, as well as Canadian and European business units that do not meet the criteria of a reportable operating segment under SFAS No.131. F-13 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- Revenue ------------------------------ (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- United States $532,922 $524,747 $578,549 Canada 27,632 26,553 27,331 Other Foreign 47,519 52,709 48,402 -------------------------------------------------------------------------------- Total $608,073 $604,009 $654,282 -------------------------------------------------------------------------------- Long Lived Assets -------------------------------- (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- United States $118,455 $122,825 $125,766 Canada 2,829 3,511 3,897 Other Foreign 18,402 18,885 18,534 -------------------------------------------------------------------------------- Total $139,686 $145,221 $148,197 -------------------------------------------------------------------------------- Revenues are attributed to countries based upon the location of the customer. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value because of the short maturity of those instruments. MARKETABLE SECURITIES The fair values of investments are estimated based on quoted market prices for these or similar instruments. LONG-TERM DEBT The fair value of the Company's long-term debt is estimated based on quoted market prices or current rates offered to the Company for debt of the same remaining maturities. INTEREST RATE SWAPS The fair value of the Company's financial instruments are based on market quotes and represents the net amount required to terminate the position, taking into consideration market rates and counterparty credit risk. The estimated fair values of the Company's financial instruments are as follows: December 31, 2001 Carrying Fair (In thousands) Amount Value -------------------------------------------------------------------------------- Cash and cash equivalents $ 7,496 $ 7,496 Marketable securities 7,200 7,400 Long-term debt (201,850) (177,520) Interest rate swaps $ (2,045) $ (2,045) -------------------------------------------------------------------------------- December 31, 2000 Carrying Fair (In thousands) Amount Value -------------------------------------------------------------------------------- Cash and cash equivalents $ 7,699 $ 7,699 Marketable securities 7,200 7,200 Long-term debt $(163,661) $(107,174) -------------------------------------------------------------------------------- 17. COMMITMENTS AND CONTINGENCIES Total rent expense for the three-years ended December 31, 2001 was as follows: Real (In thousands) Total Estate Other -------------------------------------------------------------------------------- 2001 $8,673 $6,508 $2,165 2000 9,797 7,217 2,580 1999 $8,176 $5,124 $3,052 -------------------------------------------------------------------------------- At December 31, 2001, the Company is obligated to make minimum rental payments (exclusive of real estate taxes and certain other charges) through 2011, under operating leases for real estate, as follows : (In thousands) -------------------------------------------------------------------------------- 2002 $6,196 2005 3,695 2003 5,392 2006 3,532 2004 4,137 Thereafter 5,417 -------------------------------------------------------------------------------- Total $28,369 The Company also has lease and sub-lease agreements in place for various properties under its control. The Company expects to receive operating lease payments from lessees during the five years ending December 31, 2002 through 2006 of $1.7 million, $1.0 million, $0.6 million, $0.6 million, and $0.6 million, respectively. At December 31, 2001, the Company had outstanding letters of credit aggregating approximately $0.5 million. The contract amount of the letters of credit is a reasonable estimate of their value as the value for each is fixed over the life of the commitment. The Company has entered into Change in Control arrangements with two key officers of the Company. In the event of a Change of Control (as defined), each executive will receive severance payments, (as defined), and certain other benefits. On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $0.5 million (formerly $19.8 million) of preferential payments in the 90 days prior to the related bankruptcy petition. In addition, this former customer seeks $10.5 million from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes that these matters will not have a material effect on the Company's consolidated financial statements taken as a whole. F-14 Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. One of the product liability matters involves a former Brake business of the Company. In 1986, the Company acquired the business resulting in the assumption by the Company of certain liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller. In accordance with the related purchase agreement, the Company agreed to assume the liabilities for all new claims filed after fifteen years from the date of the purchase. The ultimate exposure to the Company will depend upon the extent to which future claims are filed and the amounts paid for indemnity and defense. At December 31, 2001, approximately 100 cases were outstanding whereby the Company is now responsible for any related liabilities. Although the final outcome of this specific matter or any other litigation or product liability matter cannot be determined, based on the Company's understanding and evaluation of the relevant facts and circumstances, it is management's opinion that the final outcome of these matters will not have a material adverse effect on the Company's financial statements taken as a whole. 18. SUBSEQUENT EVENTS (UNAUDITED) On January 17, 2002 the Company purchased the Temperature Control business of Hartle Industries for approximately $4.8 million. Assets acquired consist primarily of property, plant and equipment, and inventory. The purchase was financed with funds provided under the Company's line of credit. On March 20, 2002, the Company reached a definitive agreement to purchase the aftermarket business of Sagem Inc., a subsidiary of Johnson Controls for approximately $11.5 million. Sagem Inc. is a basic manufacturer of fuel injectors, a product line which prior to the acquisition, the Company has been purchasing. Assets to be acquired consist primarily of property, plant and equipment, and inventory. The purchase which is expected to close within sixty days will be partially financed by the seller (approximately $7 million to be paid over a two year period), with the remaining funds being provided under the Company's line of credit. 19. QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share amounts) Dec. 31, Sept. 30, June 30, Mar. 31, Quarter Ended 2001 2001 2001 2001 -------------------------------------------------------------------------------- Net Sales $101,947 $163,670 $186,911 $155,545 -------------------------------------------------------------------------------- Gross Profit 25,788 50,193 48,912 44,965 -------------------------------------------------------------------------------- Earnings (loss) before extraordinary item (6,330) 3,748 2,275 619 -------------------------------------------------------------------------------- Extraordinary item - loss on early extinguishment of debt, net of taxes -- -- (2,797) -- -------------------------------------------------------------------------------- Net Earnings (loss) $ (6,330) $ 3,748 $ (522) $ 619 -------------------------------------------------------------------------------- Net Earnings (loss) before extraordinary item per common share: Basic $ (0.54) $ 0.32 $ 0.19 $ 0.05 Diluted $ (0.54) $ 0.32 $ 0.19 $ 0.05 -------------------------------------------------------------------------------- Net Earnings (loss) per common share: Basic $ (0.54) $ 0.32 $ (0.05) $ 0.05 Diluted $ (0.54) $ 0.32 $ (0.05) $ 0.05 -------------------------------------------------------------------------------- (In thousands, except per share amounts) Dec. 31, Sept. 30, June 30, Mar. 31, Quarter Ended 2000 2000 2000 2000 -------------------------------------------------------------------------------- Net Sales $116,627 $166,065 $ 175,112 $ 146,205 -------------------------------------------------------------------------------- Gross Profit 33,626 51,160 56,494 46,764 -------------------------------------------------------------------------------- Earnings (loss) before extraordinary item (2,049) 4,858 7,036 385 -------------------------------------------------------------------------------- Extraordinary item - loss on early extinguishment of debt, net of taxes -- -- -- 501 -------------------------------------------------------------------------------- Net Earnings (loss) $ (2,049) $ 4,858 $ 7,036 $ (116) -------------------------------------------------------------------------------- Net Earnings (loss) before extraordinary item per common share: Basic $ (0.18) $ 0.41 $ 0.59 $ 0.03 Diluted $ (0.18) $ 0.40 $ 0.54 $ 0.03 -------------------------------------------------------------------------------- Net Earnings (loss) per common share: Basic $ (0.18) $ 0.41 $ 0.59 $ (0.01) Diluted $ (0.18) $ 0.40 $ 0.54 $ (0.01) -------------------------------------------------------------------------------- F-15 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information relating to Directors and Executive Officers is set forth in the 2002 Annual Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Information relating to Management Remuneration and Transactions is set forth in the 2002 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 2002 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 2002 Annual Proxy Statement. -24- 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, 2001 and 2000 Consolidated Statements of Operations - Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows- - Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements (2) The following financial schedule for the years 2001, 2000 and 1999 is submitted herewith: SCHEDULE Independent Auditors' Report on Schedule II. Valuation and Qualifying Accounts 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 26. 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, 2001. -25-
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 Company's report on Form 8-K dated March 28, 1998. 3.1 By-laws filed as an Exhibit of Company's annual report on * Form 10-K for the year ended December 31, 1986. 3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as * an Exhibit of Company's Annual Report on Form 10-K for the year ended December 31, 1990. 3.3 Restated Articles of Incorporation, dated February 15, 1996, filed as * an Exhibit of Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. * 3.4 Restated By-Laws dated May 23, 1996, filed as an Exhibit of the Company's annual report on Form 10-K for the year ended December 31, 1996. 4.1 Form of Subordinated Debenture Indenture (including form of convertible * debenture) (filed as Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) 4.2 Registration of Preferred Share Purchase Rights filed on Form 8-A on * February 29, 1996. 10.1 Note Purchase Agreement dated October 15, 1989 between the * Company 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 Company's Annual Report on Form 10-K for the year ended December 31, 1989. -26- STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT EXHIBIT PAGE NUMBER NUMBER ------ ------ 10.2 Note Agreement of November 15, 1992 between the Company 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 Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.3 Employee Stock Ownership Plan and Trust dated January 1, 1989 * filed as an Exhibit of Company's Annual Report on Form 10-K for the year ended December 31, 1989. 10.4 Supplemental Executive Retirement Plan dated August 15, 1994 * filed as an Exhibit of Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.5 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc. * is filed as 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 Company 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 Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.7 Credit Agreement of May 1, 1996 between the Company and * Canadian Imperial Bank of Commerce ("CIBC") filed as an Exhibit of Company's annual report on Form 10-K for the year ended December 31, 1996. 10.8 Letter Agreement dated September 25, 1996 amending the * Note Agreement between the Company and Canadian Imperial Bank of Commerce ("CIBC") filed as an Exhibit of Company's annual report on Form 10-K for the year ended December 31, 1996. -27- 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 Company 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 Company's annual report on Form 10-K for the year ended December 31, 1996. 10.10 Letter Agreement of November 22, 1996 amending the * Note Agreement between the Company 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 Company's annual report on Form 10-K for the year ended December 31, 1996. 10.11 1996 Independent Outside Directors Stock Option Plan of Standard * Motors Products, Inc. filed as an Exhibit of Company's annual report on Form 10-K for the year ended December 31, 1996. 10.12 Letter Agreement of March 27, 1998 amending the Note Agreement * between the Company 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 Company's report on Form 8-K dated March 28, 1998. 10.13 Letter Agreement of March 27, 1998 amending the Note Agreement * between the Company 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 dated November 15, 1992, filed as an Exhibit of Company's report on Form 8-K dated March 28, 1998. -28- 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 Company 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 Company's report on Form 8-K dated March 28, 1998. 10.15 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as * amended, is filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (333-51565), dated May 1, 1998. 10.16 Credit Agreement dated November 30, 1998 among Standard Motor * Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce. 10.17 Form of First Amendment, dated as of December 8, 1998 * to the Credit Agreement, dated as of November 30, 1998, among Standard Motor Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce (filed as Exhibit 10.14 to Amendment No. 2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) 10.18 Form of Second Amendment, dated as of July 16, 1999 to * the Credit Agreement, dated as of November 30, 1998, among Standard Motor Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce (filed as Exhibit 10.15 to Amendment No. 2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) 10.19 Credit Agreement of March 31, 1998, as amended & * restated as at November 30, 1998, between the Registrant and Canadian Imperial Bank of Commerce ("CIBC") filed as Exhibit 10.16 on Form 10-Q for the quarter ended June 30, 1999. 10.20 Form of Third Amendment dated October 18, 1999 to the Credit * Agreement dated November 30, 1998 among Standard Motor Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce. -29- STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT EXHIBIT PAGE NUMBER NUMBER 10.21 Form of Fourth Amendment dated March 3, 2000 to the Credit * Agreement dated November 30, 1998 among Standard Motor Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce. 10.22 Form of Fifth Amendment dated August 11, 2000 to the Credit * Agreement dated November 30, 1998 among Standard Motor Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce. 10.23 Form of Sixth Amendment dated March 14, 2001 to the Credit * Agreement dated November 30, 1998 among Standard Motor Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce. 10.24 Credit Agreement dated April 27, 2001 among Standard Motor Products, * Inc. and subsidiaries, as Borrowers and GE Capital Corp. as Agent and Lender, GMAC Commercial Credit LLC, on Lender and Syndication Agent and Bank of America, N.A., as Lender and Documentation Agent. 10.25 The 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc. as * Amended and restated, is filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (33359524), dated April 25, 2001. 10.26 Supplemental Compensation Plan effective October 1, 2001, filed with 10.26 this Report. 10.27 Change of Control Agreement dated December 12, 2001 between Standard Motor Products, Inc. and John Gethin, filed with Report. 10.27 10.28 Change of Control Agreement dated December 12, 2001 between 10.28 Standard Motor Products, Inc. and James Burke, filed with Report. 21. List of Subsidiaries of Standard Motor Products, Inc. 34 23 Consent of Independent Auditors KPMG LLP 35 * Incorporated by reference.
-30- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANDARD MOTOR PRODUCTS, INC. (COMPANY) LAWRENCE I. SILLS ------------------------------------------- Lawrence I. Sills Chairman, Chief Executive Officer and Director JAMES J. BURKE ----------------------------- James J. Burke Vice President, Finance; Chief Financial Officer New York, New York March 29, 2002 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 Company and in the Capacities and on the dates indicated: March 29, 2002 LAWRENCE I. SILLS ------------------------ Lawrence I. Sills Chairman, Chief Executive Officer and Director March 29, 2002 ARTHUR D. DAVIS --------------- Arthur D. Davis, Vice Chairman and Director March 29, 2002 MARILYN F. CRAGIN ------------------------- Marilyn F. Cragin, Director March 29, 2002 SUSAN F. DAVIS -------------- Susan F. Davis, Director March 29, 2002 ARTHUR S. SILLS --------------- Arthur S. Sills, Director March 29, 2002 PETER J. SILLS -------------- Peter J. Sills, Director -31- The Board of Directors and Stockholders Standard Motor Products, Inc.: Under date of February 22, 2002, we reported on the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2001, and 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 2001, as contained in the annual report on Form 10-K for the year 2001. 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 February 22, 2002 -32-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts Years ended December 31, 2001, 2000 and 1999 ADDITIONS BALANCE AT CHARGED TO CHARGED BEGINNING COSTS AND TO OTHER BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR ----------- ------- -------- -------- ---------- ----------- YEAR ENDED DECEMBER 31, 2001: Allowance for doubtful accounts $ 2,979,000 598,000 $ -- $ 660,000 $ 2,917,000 Allowance for discounts 1,598,000 -- -- 153,000 1,445,000 ---------------- --------------- -------------- -------------- --------------- $ 4,577,000 $ 598,000 $ -- $ 813,000 $ 4,362,000 ================ =============== ============== ============== =============== Allowance for sales returns $ 17,693,000 $ 94,122,000 $ -- $ 93,648,000 $ 18,167,000 ================ =============== ============== ============== =============== Allowance for inventory valuation $ 12,930,000 $ 4,387,000 $ -- $ 3,422,000 $ 13,895,000 ================ =============== ============== ============== =============== YEAR ENDED DECEMBER 31, 2000: Allowance for doubtful accounts $ 2,619,000 $ 699,000 $ -- $ 339,000 $ 2,979,000 Allowance for discounts 1,992,000 -- 394,000 1,598,000 ---------------- --------------- -------------- -------------- --------------- $ 4,611,000 $ 699,000 $ -- $ 733,000 $ 4,577,000 ================ =============== ============== ============== =============== Allowance for sales returns $ 22,698,000 $ 100,403,000 $ -- $ 105,408,000 $ 17,693,000 ================ =============== ============== ============== =============== Allowance for inventory valuation $ 13,766,000 $ 3,165,000 $ -- $ 4,001,000 $ 12,930,000 ================ =============== ============== ============== =============== YEAR ENDED DECEMBER 31, 1999: Allowance for doubtful accounts $ 2,664,000 $ 2,387,000 $ 611,000 $ 3,043,000 $ 2,619,000 Allowance for discounts 1,861,000 -- 131,000 -- 1,992,000 ---------------- --------------- -------------- -------------- --------------- $ 4,525,000 $ 2,387,000 $ 742,000 $ 3,043,000 $ 4,611,000 ================ =============== ============== ============== =============== Allowance for sales returns $ 16,296,000 $ 115,749,000 $ -- $ 109,347,000 $ 22,698,000 ================ =============== ============== ============== =============== Allowance for inventory valuation $ 18,221,000 $ 1,911,000 $ 599,000 $ 6,965,000 $ 13,766,000 ================ =============== ============== ============== ===============
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