-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TSY7Ldjd4sYqbsC5Cso33nKr3yDGirlTLrLZ8JZvPLf8fefmbeeovrMgeOyEFRmZ 01bLfg6feeNiL7MOH9ZTPw== 0000950123-99-006422.txt : 19990713 0000950123-99-006422.hdr.sgml : 19990713 ACCESSION NUMBER: 0000950123-99-006422 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990709 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MOTOR PRODUCTS INC CENTRAL INDEX KEY: 0000093389 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 111362020 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-79177 FILM NUMBER: 99662291 BUSINESS ADDRESS: STREET 1: 37 18 NORTHERN BLVD CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 BUSINESS PHONE: 7183920200 MAIL ADDRESS: STREET 1: 3718 NORTHERN BLVD CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 S-3/A 1 AMENDMENT #1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999 REGISTRATION NO. 333-79177 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ STANDARD MOTOR PRODUCTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK, NEW YORK 11-1362020 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
------------------------ 37-18 NORTHERN BOULEVARD LONG ISLAND CITY, NEW YORK 11101 (718) 392-0200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ LAWRENCE I. SILLS, PRESIDENT STANDARD MOTOR PRODUCTS, INC. 37-18 NORTHERN BOULEVARD LONG ISLAND CITY, NEW YORK 11101 (718) 392-0200 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ WITH COPIES TO: BUD G. HOLMAN, ESQ. KIRK A. DAVENPORT, ESQ. BRIAN J. CALVEY, ESQ. LATHAM & WATKINS KELLEY DRYE & WARREN LLP 885 THIRD AVENUE, SUITE 1000 101 PARK AVENUE NEW YORK, NEW YORK 10022-4802 NEW YORK, NEW YORK 10178
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as possible after the effective date of this registration statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED JULY 9, 1999. $75,000,000 STANDARD MOTOR PRODUCTS, INC. % Convertible Subordinated Debentures due 2009 ------------------ You may convert the Convertible Debentures into shares of Standard Motor Products' common stock prior to their maturity or redemption by Standard Motor Products. If you convert the Convertible Debentures into shares of Standard Motor Products common stock, you will receive shares for each $1,000 of Convertible Debentures that you convert (equivalent to a conversion price of approximately $ per share). The number of shares of Standard Motor Products' common stock to be issued upon conversion is subject to certain adjustments which are described in more detail under "Description of Convertible Debentures." Standard Motor Products' common stock is listed on the New York Stock Exchange under the symbol "SMP." On July 8, 1999, the common stock closed at $29.625 per share. You will earn interest at an annual rate of % for so long as you own the Convertible Debentures. Standard Motor Products will pay you interest every six months on and . The Convertible Debentures will mature on , 2009. Standard Motor Products may, at its option, redeem some or all of the Convertible Debentures at any time on or after , 2004, at the prices listed under "Description of Convertible Debentures." Upon certain specific kinds of change of control events relating to Standard Motor Products, Standard Motor Products will be required to make an offer to purchase the Convertible Debentures from you at a purchase price equal to 101% of their aggregate principal amount on the date of purchase, plus accrued interest, if any. The Convertible Debentures are subordinated in right of payment to all of Standard Motor Products' existing and future senior indebtedness. See "Risk Factors" beginning on page 10 to read about certain factors you should consider before buying any of the Convertible Debentures. ------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------
Per Debenture Total ------------- ----- Initial public offering price............................... % $ Underwriting discount....................................... % $ Proceeds, before expenses, to Standard Motor Products....... % $
The initial public offering price set forth above does not include accrued interest, if any. Interest on the Convertible Debentures will accrue from and must be paid by the purchaser if the Convertible Debentures are delivered after . The underwriters may, under certain circumstances, purchase up to an additional $11,250,000 principal amount of Convertible Debentures. ------------------ The underwriters expect to deliver the Convertible Debentures in book-entry form only through the facilities of The Depository Trust Company against payment in New York, New York on , 1999. GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER ------------------ Prospectus dated , 1999. 3 PROSPECTUS SUMMARY This summary highlights selected information from this document and may not contain all of the information that is important to you. To better understand the offering, you should carefully review this entire document and the documents we have referred you to. In this Prospectus, the words "we," "our," "ours," and "us" refer only to Standard Motor Products, Inc. and its subsidiaries and not to any of the underwriters, the words "the Company" refer only to Standard Motor Products, Inc. and not to any of its subsidiaries. THE COMPANY Standard Motor Products is a leading independent manufacturer and distributor of replacement parts for motor vehicles. We are organized into two divisions, each focused on a specific type of replacement part: (1) Engine Management (ignition and emission parts, fuel system parts and wire and cable) and (2) Temperature Control (compressors, other air conditioning parts and heating parts). We sell our products primarily to warehouse distributors and large auto parts retail chains. In 1998, our customers included most of the top warehouse distributors and all of the leading auto parts retail chains. Our customers include Advance Auto Parts, AutoZone, Carquest and NAPA Auto Parts. We distribute parts under our own brand names, such as Standard, Blue Streak and Four Seasons, and also under private labels for our key customers such as Advance Auto Parts, Carquest and NAPA Auto Parts. In 1998, our net sales were $649 million and our operating income was $44 million. Over the past three years, our net sales have grown at a compound annual rate of 13% and our operating income has grown at a compound annual rate of 14%. This strong performance has continued in 1999, as first quarter revenues were 40% higher than the comparable quarter in 1998. Excluding revenues from acquisitions, net sales increased 12% during the three months ended March 31, 1999, compared to the three months ended March 31, 1998. The following charts set forth our net sales by manufacturing division, geographic region and customer group as a percentage of total net sales for the year ended December 31, 1998. [NET SALES PIE CHARTS] We believe the key elements that have led to our success are as follows: - SHARPENED BUSINESS FOCUS. Beginning in mid-1997, we implemented a restructuring program to focus on our strong core businesses of Engine Management and Temperature Control. We exited our unprofitable and non-strategic brake, service line and fuel pump businesses. We acquired the temperature control business of Cooper Industries and made several other strategic acquisitions. In sum, from mid-1997 to mid-1998, we repositioned approximately 30% of our revenue base. We believe this strategy of developing critical mass in two core businesses has allowed us to improve our cost position, to access new markets and to focus our engineering development efforts. 3 4 - CONTINUED SUBSTANTIAL MARKET SHARE. Following the restructuring, our two divisions have substantial market shares in their respective product lines. In Engine Management, we have more than 30% of the North American aftermarket and we believe that we are the number one manufacturer serving this market. In Temperature Control, we have more than 50% of the North American aftermarket and are the number one manufacturer serving this market. Our significant market position allows us to maximize our production and distribution efficiencies and to leverage access to our customer base. - IMPROVED OPERATING AND FINANCIAL PERFORMANCE. In late 1997, we adopted Economic Value Added (EVA(R)) as our primary financial measurement for evaluating investments and for determining incentive compensation. Since adopting EVA, our operating margin improved from 1.7% in 1997 to 6.8% in 1998. Our return on average stockholders' equity improved from a loss in 1997 to 11.4% in 1998. Our management places significant emphasis on improving our financial performance, achieving operating efficiencies and improving asset utilization. - EXPANDED CHANNEL BREADTH. We have greatly expanded our coverage of the channels of distribution in North America since the early 1990's, when we focused primarily on wholesale distributors. Today we ship products to all channels of distribution, including wholesale distributors, retail chains, service chains and original equipment dealer service. The most dramatic expansion has been in the growing retail segment. In 1992, we sold approximately $12 million to retailers (representing 3% of net sales from continuing operations for that year) and in 1998 we sold approximately $119 million to retailers (representing 18% of net sales from continuing operations for that year). We believe that the breadth of our distribution channel coverage positions us to take advantage of any future shifts in market distribution channels. COMPANY STRATEGY Our goal is to drive revenue and earnings growth by providing high quality, low cost replacement parts in the engine management and temperature control automotive aftermarkets. The key elements of our strategy are as follows: - MAINTAIN TECHNOLOGICAL LEADERSHIP. We are committed to investing the resources necessary to maintain our technological leadership in emerging aftermarket product areas such as computer-controlled engine management systems, distributorless ignition systems, sensors and fuel injection parts. - EXPAND INTERNATIONAL PRESENCE. We have developed a base for European expansion through four acquisitions and internal growth, and we intend to capitalize on what we believe to be major opportunities to broaden our international sales. - BROADEN CUSTOMER BASE. We intend to continue efforts to market our products more broadly to certain repair chains, original equipment vehicle manufacturers for dealer service and other aftermarket parts manufacturers. - DEVELOP NEW PRODUCT LINES AND PRODUCT LINE EXTENSIONS. We intend to continue to expand the range of engine management and temperature control products we offer our customers through a combination of internal development and selective acquisitions. - IMPROVE OPERATING EFFICIENCY AND COST POSITION. We intend to continue to improve our operating efficiency and cost position, by: -- increasing cost-effective vertical integration, 4 5 -- focusing on efficient inventory management, -- adopting company-wide programs geared toward manufacturing and distribution efficiency, and -- implementing company-wide overhead (operating expense) cost reductions. RECENT EVENTS In January 1999, we acquired 85% of the stock of Webcon UK Limited and, through our United Kingdom joint venture Blue Streak Europe Limited, 87.2% of the stock of Webcon's affiliate, Injection Correction UK Limited, for $3.5 million in cash. Both Webcon UK Limited and Injection Correction UK Limited are United Kingdom-based producers and distributors of fuel system and ignition parts. In April 1999, we acquired Lemark Auto Accessories Limited, a United Kingdom-based manufacturer and distributor primarily of ignition wire and other engine management products for $2.0 million in cash. These manufacturers and distributors of engine management products will be consolidated with our existing European operations. These transactions reflect our strategy to expand in Europe. In February 1999, we acquired 100% of the stock of Eaglemotive Corporation for approximately $13.4 million in cash. Eaglemotive manufactures and distributes fan clutches and oil coolers, and will be consolidated with our existing Hayden business which produces similar products. Standard Motor Products was founded in 1919 and our common stock is traded on the New York Stock Exchange under the symbol "SMP". On July 8, 1999, our common stock closed at $29.625 per share. Standard Motor Products is a New York corporation. Our corporate headquarters are located at 37-18 Northern Blvd., Long Island City, NY 11101. Our telephone number is (718) 392-0200. Our website is located at http://www.smpcorp.com. Information contained on our website is not a part of this Prospectus. 5 6 THE OFFERING SECURITIES OFFERED............ We are offering a total of $75,000,000 in principal amount of % Convertible Debentures. ADDITIONAL SECURITIES......... We have granted the Underwriters an option for 30 days to purchase up to an additional $11,250,000 in principal amount of Convertible Debentures to cover over-allotments. See "Underwriting." ISSUE PRICE................... We are offering the Convertible Debentures for $1,000 per Convertible Debenture purchased. MATURITY...................... , 2009. INTEREST...................... We will pay interest on the Convertible Debentures at an annual rate of %. INTEREST PAYMENT DATES........ We will pay the interest due on the Convertible Debentures every six months on and . We will make the first payment on , . CONVERSION RIGHTS............. You may convert the Convertible Debentures into shares of our common stock. If you convert the Convertible Debentures into shares of our common stock, you will receive shares for each $1,000 of Convertible Debentures that you convert (equivalent to a conversion price of approximately $ per share). The number of shares of our common stock to be issued upon conversion is subject to certain adjustments which are described in more detail under "Description of Convertible Debentures" under the subheading "Conversion Rights." SUBORDINATION................. The Convertible Debentures: - are subordinated to all of the Company's existing debts and future indebtedness, except trade payables and indebtedness that expressly provides that it ranks equal or subordinate in right of payment to the Convertible Debentures (assuming that the Company had completed this offering on March 31, 1999 and applied the net proceeds from the offering as contemplated under "Use of Proceeds", the Company would have had approximately $156 million of senior debt, excluding trade payables, outstanding); and - are also effectively subordinated to all of the existing debts and future indebtedness of the Company's subsidiaries, including trade payables (assuming that we had completed this offering on March 31, 1999 and applied the net proceeds from the offering as contemplated under "Use of Proceeds", these subsidiaries would have had approximately $30 million of debt and other liabilities, including trade payables of approximately $10 million, outstanding). See "Description of Convertible Debentures -- Subordination." OPTIONAL REDEMPTION........... We may, at our option, redeem some or all of the Convertible Debentures at any time on or after 6 7 , 2004, at the prices listed under "Description of Convertible Debentures -- Optional Redemption," plus any interest that is accrued to the date we redeem the Convertible Debentures. See "Description of Convertible Debentures -- Optional Redemption." REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL..................... Upon certain specified kinds of change of control events relating to Standard Motor Products, we are required to make an offer to purchase the Convertible Debentures from you at a purchase price equal to 101% of their aggregate principal amount on the date of purchase, plus accrued interest, if any. See "Description of Convertible Debentures -- Repurchase at Option of Holders Upon a Change of Control." USE OF PROCEEDS............... We intend to use the proceeds from this offering to repay certain borrowings, to repurchase shares of our common stock for use in connection with our employee benefit plans, and for general corporate purposes, including acquisitions. Any proceeds derived from the exercise of the Underwriters' over-allotment option will be used for general corporate purposes. See "Use of Proceeds." COMMON STOCK.................. Our common stock is listed on the New York Stock Exchange under the symbol "SMP." RISK FACTORS See "Risk Factors" immediately following this summary for a discussion of certain factors that you should consider in connection with your investment in the Convertible Debentures. 7 8 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------- ------------------------------- 1999 1998 1998 1997(1) 1996 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net sales....................................... $176,789 $126,045 $649,420 $559,823 $513,407 Gross profit.................................... 53,220 43,790 205,622 179,488 178,295 Operating income................................ 8,788 6,285 43,931 9,455 44,734 Earnings from continuing operations before interest, taxes and minority interest......... 8,475 6,517 42,509 10,453 46,444 Earnings (loss) from continuing operations...... 3,648 2,653 22,257 (1,620) 23,866 Loss from discontinued operations............... -- -- -- (32,904) (9,208) Net earnings (loss)............................. 3,648 2,653 22,257 (34,524) 14,658 Ratio of earnings to fixed charges(2)........... 2.2x 1.8x 2.3x -- 3.2x PER SHARE DATA: Net earnings (loss) from continuing operations per common share: Basic......................................... $ 0.28 $ 0.20 $ 1.70 $ (0.12) $ 1.82 Diluted....................................... 0.28 0.20 1.69 (0.12) 1.82 Net earnings (loss) per common share: Basic......................................... $ 0.28 $ 0.20 $ 1.70 $ (2.63) $ 1.12 Diluted....................................... 0.28 0.20 1.69 (2.63) 1.12 OTHER OPERATING DATA: EBITDA(3)....................................... $ 12,948 $ 10,460 $ 58,426 $ 25,225 $ 59,234 EBITDA margin(4)................................ 7.3% 8.4% 9.0% 4.5% 11.5% Depreciation and amortization(5)................ $ 4,473 $ 3,943 $ 15,917 $ 14,772 $ 12,790 Capital expenditures............................ 3,764 1,709 15,325 15,597 21,389 Dividends....................................... 1,051 -- 2,092 4,197 4,260 CASH FLOW DATA: Cash provided by (used in): Operating activities.......................... $(58,171) $ (6,099) $108,711 $ 71,692 $(21,153) Investing activities.......................... (19,263) (1,709) (21,812) (31,910) (60,360) Financing activities.......................... 55,018 (1,541) (80,141) (27,352) 75,447
AS OF MARCH 31, 1999 -------------------------- ACTUAL AS ADJUSTED(6) -------- -------------- BALANCE SHEET DATA: Cash and cash equivalents................................... $ 1,266 $ 21,303 Working capital............................................. 166,166 196,458 Total assets................................................ 610,177 638,370 Long-term debt, excluding current portion................... 123,091 166,984 Stockholders' equity........................................ 209,496 204,323
- --------------- (1) The results for the year ended December 31, 1997 were negatively impacted by several items, including an increase of $10.5 million in bad debt expense from continuing operations as a result of a bankruptcy filing by our customer, A.P.S., Inc., a $3.0 million provision for severance payments related to a reduction in the workforce, and $27.0 million of estimated losses associated with the divestitures of our discontinued Brake and Service Line divisions. (2) The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (income or loss from continuing operations before interest expense and income taxes plus fixed charges) by fixed charges. Fixed charges consist of interest expense (including amortization of 8 9 deferred financing costs) and an estimate of the portion of rental expense that is representative of the interest factor (currently deemed to be one-third of all rental expense). As a result of the loss incurred in 1997, fixed charges exceeded earnings available for fixed charges by $4.0 million. (3) EBITDA is defined as earnings or loss from continuing operations before interest expense, minority interest, income taxes, depreciation and amortization. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income or net earnings or loss for purposes of analyzing our operating performance or financial position. EBITDA is not necessarily comparable to similarly titled measures for other companies. (4) EBITDA margin represents EBITDA as a percentage of net sales. (5) Represents depreciation and amortization from continuing operations. (6) Adjusted to give effect to $72.2 million of net proceeds from the sale of the Convertible Debentures we are offering and our initial application of the net proceeds from the sale. 9 10 RISK FACTORS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, in particular, the statements about our plans, strategies, and prospects under the headings "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business." Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Prospectus are set forth below and elsewhere in this Prospectus. All forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the following cautionary statements. WE HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS We have now and, after the offering, will continue to have a significant amount of indebtedness. The following chart shows certain important credit statistics and is presented assuming we had completed this offering as of the date, or at the beginning of the period, specified below and applied the proceeds as intended:
AT MARCH 31, 1999 ----------------- (IN THOUSANDS) Total indebtedness.......................................... $250,753 Stockholders' equity........................................ $204,323 Debt to equity ratio........................................ 1.23x
THREE MONTHS ENDED MARCH 31, 1999 ------------------ Ratio of earnings to fixed charges........................ 1.4x
The actual ratio of earnings to fixed charges for the three months ended March 31, 1999 was 2.2x. Our indebtedness could have important consequences to you. For example, it could: - increase our vulnerability to general adverse economic and industry conditions; - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts and other general corporate requirements; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - place us at a competitive disadvantage compared to those of our competitors who have less debt; - limit our ability to pay dividends; - limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds; and - make it more difficult for us to complete additional acquisitions. 10 11 WE MAY INCUR MORE INDEBTEDNESS IN THE FUTURE We may have to incur substantial additional indebtedness in the future. At July 8, 1999, our credit facilities permitted borrowings of approximately $114 million, of which $84 million was in use, leaving $30 million available as additional borrowings. All of those borrowings would be senior to the Convertible Debentures. If new debt is added to our current debt levels, the related risks that we now face could intensify. See "Capitalization," "Selected Consolidated Financial Data" and "Description of Convertible Debentures -- Repurchase at Option of Holders Upon a Change of Control." WE WILL HAVE SIGNIFICANT DEBT SERVICE REQUIREMENTS AND MAY NEED TO REFINANCE ALL OR A PORTION OF OUR DEBT Our ability to make payments on our indebtedness, including the Convertible Debentures, and to fund planned capital expenditures, product development efforts and acquisitions will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow from operations, available cash and available borrowings under our credit facilities, will be adequate to meet our future liquidity needs and service our debt requirements for at least the next 12 months. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements. If we are unable to service our debt, we will be forced to adopt an alternative strategy that may include actions such as: - delaying or forgoing acquisitions, - reducing capital expenditures, - selling assets, - reducing or delaying dividends, - restructuring or refinancing our indebtedness, or - seeking additional equity capital. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule, or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness, including the Convertible Debentures, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the Convertible Debentures, at or before maturity. If we need to refinance our debt, we cannot assure you that we will be able to refinance the debt on commercially reasonable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." THE CONVERTIBLE DEBENTURES WILL BE SUBORDINATED TO ALL OF THE COMPANY'S EXISTING SENIOR INDEBTEDNESS AND MAY BE SUBORDINATE TO FUTURE SENIOR INDEBTEDNESS The Convertible Debentures rank behind all of the Company's existing indebtedness and all of the Company's future borrowings, except trade payables and any future indebtedness that expressly provides that it ranks equal with, or subordinated in right of payment to, the Convertible Debentures. As a result, upon any distribution to the Company's creditors in a bankruptcy, liquidation or reorganization or similar proceeding relating to the Company or its property, the holders of the Company's senior debt will be entitled to be paid in full in cash before any payment may be made with respect to the Convertible Debentures. 11 12 In addition, all payments on the Convertible Debentures will be blocked in the event of a payment default on senior debt, and may be blocked for up to 179 of 360 consecutive days in the event of certain non-payment defaults on senior debt. In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to the Company, holders of the Convertible Debentures will participate with all other holders of the Company's subordinated indebtedness in the assets remaining after the Company has paid all of the senior debt. In any of these cases, the Company may not have sufficient funds to pay all of its creditors and holders of Convertible Debentures may receive less, ratably, than the holders of senior debt. Assuming the Company had completed this offering on March 31, 1999, the Convertible Debentures would have been subordinated to approximately $156 million of senior debt and approximately $54 million would have been available for borrowing as additional senior debt under our credit facilities. The Company will be permitted to borrow substantial additional indebtedness, including senior debt, in the future under the terms of the Indenture. As a result of our business being seasonal, at times our borrowings may increase. At July 8, 1999 the Company had available to it borrowings in the amount of $30 million under its credit facilities. THE CONVERTIBLE DEBENTURES WILL BE EFFECTIVELY SUBORDINATED TO THE OUTSTANDING INDEBTEDNESS AND OTHER LIABILITIES OF THE COMPANY'S SUBSIDIARIES Holders of indebtedness of, and trade creditors of, the Company's subsidiaries would generally be entitled to payment of their claims from the assets of the affected subsidiaries before such assets were made available for distribution to the Company. In the event of a bankruptcy, liquidation or reorganization of one of the Company's subsidiaries, holders of any of such subsidiary's indebtedness will have a claim to the assets of the subsidiary that is prior to the Company's interest in those assets. Assuming we had completed this offering on March 31, 1999, the aggregate amount of indebtedness and other liabilities of the Company's subsidiaries (including trade payables of approximately $10 million) would have been approximately $30 million and approximately $2 million would have been available to the Company's subsidiaries for additional borrowing under their credit facilities. If any subsidiary indebtedness were to be accelerated, there can be no assurance that the assets of such subsidiary would be sufficient to repay such indebtedness or that the Company's assets and the assets of the Company's other subsidiaries would be sufficient to repay in full the Company's indebtedness, including the Convertible Debentures. OUR BUSINESS IS DEPENDENT ON THE AUTOMOTIVE INDUSTRY, WHICH IS CYCLICAL Our business is dependent upon sales of the automotive industry, which creates the total number of vehicles available for repair. This industry is cyclical and has historically experienced periodic downturns. These downturns are difficult to predict and historically have not had an immediate impact on the aftermarket. The primary market for replacement parts is vehicles that have been on the road for at least five years. A protracted downturn in the automotive industry could, however, impact the performance of the aftermarket parts industry in general and our performance in particular. Our future performance may be adversely affected by automotive industry downturns. THE MARKET FOR REPLACEMENT PARTS IS EXPECTED TO EXPERIENCE MINIMAL GROWTH OVER THE NEXT FEW YEARS The replacement parts market is expected to have minimal growth over the next few years. The size of the replacement parts market depends, in part, upon the average age and number of cars on the road and the number of miles driven per year. These factors are exhibiting minimal growth. The replacement parts market also has been negatively impacted by the fact that the 12 13 quality of today's automotive vehicles and their component parts has improved, thereby lengthening the repair cycle. See "Industry -- Factors Influencing the Automotive Aftermarket -- New Cars Are Being Made Better and Have Longer Warranties." OUR BUSINESS IS SEASONAL AND SUBJECT TO SUBSTANTIAL QUARTERLY FLUCTUATIONS Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year. It is in these quarters that demand for our products is typically the highest; thus, it is in these quarters that a high volume of our products are shipped to customers, with revenues being recognized at the time of shipment. As a result, we experience significant variability in our quarterly results. We anticipate that these quarterly fluctuations will become more pronounced as a result of the divestiture of our brake business to Cooper Industries and the expansion of our seasonal air conditioning parts business, through our acquisition of the temperature control business of Cooper Industries. In addition to the seasonal nature of our business, the following factors, among others, may cause our quarterly operating results to fluctuate significantly in the future: - changes in our and our competitors' pricing policies; - changes in the mix of products we sell or the channels through which we sell our products; - decreases in user demand resulting from continued improvements in the quality of parts originally installed in new automobiles; - technological changes; - the structure and timing of future acquisitions of businesses and products, if any; - increased competition; and - our ability to introduce and market new products on a timely basis. OUR INDUSTRY IS HIGHLY COMPETITIVE; SOME OF OUR COMPETITORS HAVE GREATER RESOURCES THAN WE DO The automotive aftermarket industry is highly competitive. Competition is based primarily on price, product quality and customer service, with the relative importance of the factors varying among products and customers. Our current competitors include a number of other larger, established independent manufacturers, as well as divisions of companies having greater financial resources than we do. In addition, we also have begun to experience limited competition from new entrants in the automotive aftermarket industry. Some of our competitors include Dana Corporation, Wells Manufacturing Corporation (a UIS, Inc. subsidiary) and Delphi Automotive Systems Corp. We cannot assure you that other companies involved in the automotive aftermarket industry, but which do not presently offer competitive products, will not expand their operations in the future into product lines that we produce and sell, nor can we assure you that additional new entrants will not enter the automotive aftermarket industry. OUR BUSINESS IS DEPENDENT ON CERTAIN KEY CUSTOMERS In the year ended December 31, 1998, our five largest customers accounted for approximately 30% of our sales. The loss of one or more of these customers could have a material adverse impact on our business, financial condition and results of operations and our ability to make required payments on the Convertible Debentures. Also, it has been our practice with respect to certain customers to allow for the redating of receivables. The financial health of our major customers and their future ability to pay these redated receivables could have a material adverse effect on our business, financial condition and results of operations and our ability to make required payments on the Convertible Debentures. 13 14 OUR BUSINESS IS DEPENDENT UPON OUR MAINTAINING SATISFACTORY RELATIONSHIPS WITH OUR SUPPLIERS Our business depends upon our relationships with suppliers of raw materials and certain components which we use in our product lines, and on our ability to purchase these raw materials and components at prices and on terms comparable to similarly situated companies. We maintain certain supply contracts with selected suppliers to gain favorable concessions. The loss of several major suppliers could have an adverse impact on our business, financial condition and results of operations and, if new suppliers were not obtained in a timely manner and upon acceptable terms, our results of operations and our ability to make required payments on the Convertible Debentures could be materially adversely affected. THERE IS SUBSTANTIAL PRICE COMPETITION IN OUR INDUSTRY AND OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO MAINTAIN A COMPETITIVE PRICE AND COST STRUCTURE Our ability to continue to sell products is conditioned upon, among other things, our prices remaining competitive. Our future profitability will depend upon, among other things, our ability to continue to improve our manufacturing efficiencies and maintain a cost structure that will enable us to offer competitive prices profitably. Our inability to maintain a competitive cost structure could have an adverse effect on our business, financial performance and results of operations and on our ability to make required payments on the Convertible Debentures. We may have to reduce prices in the future to remain competitive. ADVERSE EFFECT OF REGULATION AND GOVERNMENT POLICY; ENVIRONMENTAL LAWS Domestic and foreign political developments and government regulations and policies directly affect automotive consumer products in the United States and abroad. Regulations and policies relating to over-the-highway vehicles include standards established by the United States Department of Transportation for motor vehicle safety and emissions. The modification of existing laws, regulations or policies, or the adoption of new laws, regulations or policies, could have an adverse impact on our business, financial condition and results of operations and our ability to make required payments on the Convertible Debentures. Our failure to comply with these laws and regulations could also subject us to civil and criminal penalties. Like similar companies, our operations and properties are subject to a wide variety of increasingly complex and stringent federal, state, local and international laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials, substances and wastes, the remediation of contaminated soil and groundwater, and the health and safety of employees. These laws and regulations, including but not limited to those under the U.S. Comprehensive Environmental Response, Compensation, & Liability Act, may impose joint and several liability and may apply to conditions at properties presently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or other contamination attributable to an entity or its predecessors have been sent or otherwise come to be located. The nature of our operations exposes us to the risk of claims with respect to such matters and there can be no assurance that violations of such laws have not occurred or will not occur or that material costs or liabilities will not be incurred in connection with such claims. Based upon our experience to date, we believe that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to those laws, will not have a material adverse effect on our business, financial position or results of operations. However, future events, such as new information, changes in existing environmental or health and safety laws or their interpretation or the enactment of new environmental or health and safety laws, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. 14 15 CONTROL BY PRINCIPAL SHAREHOLDERS At April 30, 1999, members of the Sills and Fife families, descendents of the original founders of Standard Motor Products, beneficially owned approximately 39.9% of our common stock. Specifically, shares of common stock beneficially owned by members of the Sills family aggregated 2,387,170 shares (approximately 18.1% of our outstanding common stock), and shares of common stock beneficially owned by members of the Fife family aggregated 3,206,205 shares (approximately 24.4% of our outstanding common stock). Certain of these shares are deemed to be beneficially owned by members of both Sills and Fife families, because certain members of such families act as trustees for the same trusts. To the extent that these shareholders exercise their voting rights in concert, they effectively will have the ability to control the election of our Board of Directors, to control the outcome of matters submitted to a vote of the holders of common stock and generally to direct our affairs. THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH OUR ACQUISITION ACTIVITIES Our future operations and earnings will be dependent in part on our ability to integrate further the temperature control operations which we acquired from Cooper Industries into our current operations. We cannot assure you that we will be able to successfully integrate these operations. Additionally, in the future we may seek to acquire other companies or product lines which are complementary to our existing product lines or add new product lines. Any such future acquisitions will be accompanied by the risks commonly encountered in such transactions. Such risks include, among others: - the difficulty of identifying appropriate acquisition candidates; - the difficulty of assimilating the operations and personnel of the acquired entities; - the potential disruption of our ongoing business; - our inability to capitalize on the opportunities presented by acquisitions; - our failure to maintain uniform standards, controls, procedures and policies; and - the impairment of relationships with employees as a result of changes in management and ownership. Further, to the extent that any such transaction involves businesses located outside the United States, the transaction would involve the additional risks associated with international operations. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered with such acquisitions. Any failure to overcome these risks and successfully integrate acquired businesses could have a material adverse effect on our business, financial condition and results of operations and our ability to make required payments on the Convertible Debentures. See "-- There Are Significant Risks Associated with the Expansion of Our International Operations." THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE EXPANSION OF OUR INTERNATIONAL OPERATIONS During 1998, we derived approximately 90% of our sales from products sold in the United States. International sales for 1998 (including revenues from Canada) accounted for approximately 10% of our total sales. We believe that our future success will depend, in part, upon our ability to expand our operations internationally. As we expand our international operations, we will become subject to certain risks inherent in conducting an international business. These risks include: - unexpected changes in regulatory requirements; - tariffs, customs, duties and other trade barriers; 15 16 - delays from customs brokers or government agencies; - difficulties in staffing and managing foreign operations; - longer payment cycles; - problems in collecting accounts receivable; - political risks; - fluctuations in currency exchange rates; - foreign exchange controls which restrict or prohibit repatriation of funds; - technology export and import restrictions or prohibitions; and - potentially adverse tax consequences resulting from operating in multiple jurisdictions with different tax laws. Any failure to overcome these risks could have a material adverse effect on our business, financial condition and results of operations and our ability to make required payments on the Convertible Debentures. See "Business -- Strategy." EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Some of the provisions of our certificate of incorporation and by-laws could make a takeover of Standard Motor Products more difficult, even if such a transaction would be beneficial to shareholders. Specifically, our certificate of incorporation requires the affirmative vote of the holders of (a) at least 75% of the outstanding shares of each class of our capital stock entitled to vote in an election of directors and (b) at least a majority of the remaining outstanding shares, which are not directly or indirectly beneficially owned by such other corporation, person or entity to the transaction, of each such class of our capital stock entitled to vote in elections of directors, if, as of the record date for the determination of shareholders entitled to notice thereof and to vote thereon, such other party to the transaction is the beneficial owner, directly or indirectly, of 5% or more of the outstanding shares of any class entitled to so vote. Our certificate of incorporation and by-laws also provide that our Board of Directors may be removed without cause only by a vote of the holders of at least 75% of the outstanding shares of each class of our stock entitled to vote. See "Description of Capital Stock -- Certificate of Incorporation and By-laws." Section 912 of the New York Business Corporation Law also would prohibit certain business combinations with an "interested shareholder," which is generally a person who beneficially owns 20% or more of a company's voting stock, for five years after that person becomes an "interested shareholder," unless our Board of Directors approves the transaction before the person becomes an interested shareholder. See "Description of Capital Stock -- New York Business Corporation Law." This provision may also have the effect of making a takeover of Standard Motor Products more difficult. In addition, in 1996 we declared a dividend to the shareholders of record of our common stock of one preferred share purchase right for each outstanding share of our common stock. Each of these purchase rights entitles the holder to purchase from us one one-thousandth of a share of our Series A Participating Preferred Stock, $20.00 par value per share, at a price of $80.00 per one one-thousandth of a share, subject to certain adjustments. The purchase rights will, in effect, prevent a person or group from acquiring more than 20% of our common stock without approval from our Board of Directors. For a further description of the purchase rights, see "Description of Capital Stock -- Rights Agreement". 16 17 THE FUTURE SUCCESS OF OUR BUSINESS DEPENDS UPON CERTAIN KEY PERSONNEL The success of our business is dependent, to a significant extent, upon the abilities and continued efforts of Lawrence I. Sills, our President and Chief Operating Officer, Michael J. Bailey, our Senior Vice President of Finance and Administration and Chief Financial Officer, John P. Gethin, our Senior Vice President of Operations and General Manager of our Four Seasons Division and Joseph G. Forlenza, our Vice President and General Manager of the Standard Division, none of whom currently has an employment agreement with Standard Motor Products. The loss of any of these persons and our inability to attract replacements for these key personnel could have a material adverse effect on our business, financial condition and results of operations and our ability to make required payments on the Convertible Debentures. We do not currently maintain key-man life insurance on any of our executive officers. IF YOU CONVERT ANY CONVERTIBLE DEBENTURES, THE VALUE OF THE COMMON STOCK WHICH YOU RECEIVE WILL BE SUBJECT TO SECURITIES MARKET VOLATILITY In recent years, the securities markets have experienced a high level of volume volatility and market price fluctuation for many companies. Specifically, the market price of our common stock traditionally has fluctuated over a wide range and may continue to do so in the future. Factors such as quarterly variations in our operating results, changes in concentration of equity ownership by members of the Sills and Fife families, factors affecting the automobile and aftermarket industries generally and changes in general market conditions may have a significant impact on the market for our securities. General market price declines or market volatility in the future could adversely affect the future price of our securities. See "Price Range of Common Stock and Dividend Policy." THERE ARE A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND IMPAIR OUR ABILITY TO RAISE CAPITAL THROUGH THE SALE OF ADDITIONAL EQUITY As of July 8, 1999, we had 7,871,026 shares of common stock outstanding which were freely tradeable, and an additional 5,278,222 shares which were eligible for public sale subject to the provisions of Rule 144 promulgated under the Securities Act of 1933. The volume limitations of Rule 144 will apply to the sale of all of such shares of common stock held by directors, certain executive officers and shareholders owning over 10% of our outstanding common stock. Sales of substantial amounts of shares of common stock in the public market, or even the potential for such sales, could adversely affect the prevailing market price of the common stock and impair our ability to raise capital through the sale of equity securities. WE COULD EXPERIENCE SYSTEM FAILURES AND OPERATIONAL DISRUPTIONS AS A RESULT OF THE YEAR 2000 PROBLEM We are currently working to resolve the potential impact of the Year 2000 "bug" on the processing of date-sensitive information by our computerized information systems. We also are communicating with our suppliers, customers, financial institutions and others with which we conduct business to determine the extent to which we would be vulnerable to these third parties' failure to remediate their own potential Year 2000 problems. Our inability, or the inability of certain of our significant business partners to adequately address the Year 2000 issues, could cause disruption of our operations which could have a material adverse effect on our business, financial condition and results of operations and our ability to make required payments on the Convertible Debentures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." 17 18 OUR ABILITY TO REPURCHASE CONVERTIBLE DEBENTURES UPON A CHANGE OF CONTROL WILL BE SUBJECT TO SIGNIFICANT LIMITATIONS Upon certain change of control events involving Standard Motor Products, you will have the right, at your option, to require us to repurchase all or a portion of your Convertible Debentures. We cannot assure you that, if a change of control event were to occur, we would have sufficient funds to pay the repurchase price for all Convertible Debentures tendered. We may elect, subject to certain conditions, to make such payment using shares of common stock. In addition, our repurchase of Convertible Debentures as a result of the occurrence of a change of control event may be prohibited or limited by, or create an event of default under, the terms of agreements related to borrowings which we may enter into from time to time, including agreements relating to our senior debt. See "Description of Convertible Debentures -- Repurchase at Option of Holders Upon a Change of Control." THERE IS CURRENTLY NO PUBLIC TRADING MARKET FOR THE CONVERTIBLE DEBENTURES AND YOUR ABILITY TO TRANSFER THEM WILL BE LIMITED The Convertible Debentures will be a new issue of securities with no established trading market. Although the underwriters have advised us that they intend to make a market in the Convertible Debentures, they are not obligated to do so, and may discontinue such market making at any time in their sole discretion without notice. We cannot assure you that an active market for the Convertible Debentures will develop and continue upon completion of this offering or that the market price of the Convertible Debentures will not decline. Various factors could cause the market price of the Convertible Debentures to fluctuate significantly, including changes in prevailing interest rates or changes in perceptions of our creditworthiness. The trading price of the Convertible Debentures also could be significantly affected by the market price of our common stock, which could be subject to wide fluctuations in response to a variety of factors, including quarterly variations in operating results and general economic and market conditions. The Convertible Debentures will not be listed on any securities exchange or quoted on the New York Stock Exchange. See "Underwriting." 18 19 USE OF PROCEEDS The net proceeds from the sale of the Convertible Debentures are estimated to be $72.2 million ($83.1 million if the Underwriters' over-allotment option is exercised in full), after deducting estimated discounts and commissions and other fees and expenses related to this offering payable by us. We currently intend to use the net proceeds from this offering to repay certain borrowings, to repurchase shares of our common stock, which shares will be contributed to our long standing Employee Stock Ownership Plan and issued upon exercise of options under our incentive stock option plan, and for general corporate purposes, including acquisitions. Any proceeds derived from the exercise of the Underwriters' over-allotment option will be used for general corporate purposes.
(IN MILLIONS) ------------- SOURCES OF FUNDS % Senior Subordinated Convertible Debentures due 2009.................................................. $75.0 ----- TOTAL SOURCES OF FUNDS............................ $75.0 ===== USES OF FUNDS Prepay 8.60% note due 2002 (including approximately $2 million in prepayment penalty)........................ $39.1 Prepay 10.22% note due 2003............................ 3.2 Purchase of certain minority interests in subsidiaries.......................................... 6.2 Repurchase of common stock............................. 3.7 General corporate purposes............................. 20.0 Estimated transaction fees and expenses................ 2.8 ----- TOTAL USES OF FUNDS............................... $75.0 =====
An important component of our growth strategy is the ability to pursue acquisitions. The purpose of this offering is to provide us with increased financial flexibility to pursue acquisitions of other businesses or lines of business that are consistent with our growth strategy. There are currently no agreements or understandings with respect to any material acquisition transactions. Pending use of the net proceeds of this offering, we may make temporary investments in interest-bearing savings accounts, certificates of deposit, United States Government obligations, money market accounts, interest-bearing securities or other insured short-term, interest-bearing investments. 19 20 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Our common stock is listed on the New York Stock Exchange under the symbol "SMP." The following table sets forth the high and low sale prices for a share of common stock and the cash dividends paid per share of common stock during the periods shown.
DIVIDENDS HIGH LOW PAID ---- --- --------- FISCAL 1999 Third Quarter (through July 8, 1999).................... $ 29.63 $ 24.50 $ -- Second Quarter.......................................... 25.25 20.44 $ 0.08 First Quarter........................................... 25.00 20.50 0.08 FISCAL 1998 Fourth Quarter.......................................... $ 24.69 $ 19.75 $ 0.08 Third Quarter........................................... 26.50 21.00 0.08 Second Quarter.......................................... 25.00 19.13 -- First Quarter........................................... 23.50 16.31 -- FISCAL 1997 Fourth Quarter.......................................... $ 25.00 $ 19.50 $ 0.08 Third Quarter........................................... 23.38 13.56 0.08 Second Quarter.......................................... 14.63 13.13 0.08 First Quarter........................................... 14.75 13.13 0.08 FISCAL 1996 Fourth Quarter.......................................... $ 14.50 $ 13.38 $ 0.08 Third Quarter........................................... 17.88 13.63 0.08 Second Quarter.......................................... 18.25 16.00 0.08 First Quarter........................................... 16.25 12.63 0.08
The closing price of the common stock on July 8, 1999 was $29.625. As of July 8, 1999, there were 666 holders of record of common stock. The Board of Directors will consider the payment of future dividends on the basis of our earnings, capital requirements and financial condition. Our loan agreements limit dividends and distributions by us. In the first and second quarters of 1998, we paid no dividends due to losses we incurred during the fourth quarter of 1997 and continued weak results in the first quarter of 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 20 21 CAPITALIZATION The following table sets forth our capitalization at March 31, 1999, and as adjusted to give effect to the sale of $75,000,000 principal amount of Convertible Debentures offered hereby, and the application of the estimated net proceeds thereof. The table should be read in conjunction with the selected financial data, the Consolidated Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
MARCH 31, 1999 -------------- AS ACTUAL ADJUSTED ------ -------- (IN THOUSANDS) Cash and cash equivalents................................... $ 1,266 $ 21,303 ======== ======== Short-term debt(1).......................................... $ 60,350 $ 60,350 -------- -------- Long-term debt:(2)(3) % Convertible Subordinated Debentures due 2009.......... -- 75,000 7.56% senior note payable................................. 73,000 73,000 8.60% senior note payable................................. 37,143 -- 10.22% senior note payable................................ 21,500 18,250 Credit Facility ($17 Million Canadian).................... 11,230 11,230 Other..................................................... 12,923 12,923 -------- -------- Total long-term debt.............................. 155,796 190,403 -------- -------- Stockholders' equity: Common stock -- par value $2.00 per share Authorized -- 30,000,000 shares Issued -- 13,324,476 shares in 1999 (including 196,458 shares held as treasury shares in 1999)(4)............. $ 26,649 $ 26,649 Capital in excess of par value............................ 2,712 2,712 Retained earnings......................................... 184,276 182,823 Accumulated other comprehensive income.................... 25 25 Less: treasury stock -- at cost........................... 4,166 7,886 -------- -------- Total stockholders' equity........................ 209,496 204,323 -------- -------- Total capitalization.............................. $425,642 $455,076 ======== ========
- --------------- (1) Reflects borrowings under our credit facilities. At July 8, 1999, our credit facilities permitted borrowings of approximately $114 million, of which $84 million was in use, leaving $30 million available as additional borrowings. (2) Includes current portion of long-term debt of $32.7 million for the three months ended March 31, 1999 and $23.4 million for the three months ended March 31, 1999, as adjusted. (3) Assumes no exercise of the over-allotment option. (4) Excludes approximately 903,000 shares of common stock reserved for issuance upon the exercise of stock options available for grant under the incentive option plan, under which plan options to purchase approximately 725,000 shares of common stock are outstanding at exercise prices ranging from $13.63 to $23.72. 21 22 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA) The selected consolidated financial data for, and as of the end of, each of the years in the five year period ended December 31, 1998 are derived from our Consolidated Financial Statements included in our Annual Reports on Form 10-K which have been audited by KPMG LLP, independent certified public accountants. The selected consolidated financial data as of and for the three months ended March 31, 1999 and 1998 have been derived from our unaudited consolidated financial statements included in our Quarterly Report on Form 10-Q, which, in the opinion of our management, includes all adjustments necessary for a fair presentation of our financial condition and results of operations for such periods. The results of operations for interim periods are not necessarily indicative of a full year's operations. You should read this information in conjunction with the Consolidated Financial Statements and Notes thereto, the independent auditors' report and with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997(1) 1996 1995 1994 ---- ---- ---- ------- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales..................... $176,789 $126,045 $649,420 $559,823 $513,407 $452,253 $434,252 Cost of goods sold............ 123,569 82,255 443,798 380,335 335,112 295,807 269,524 -------- -------- -------- -------- -------- -------- -------- Gross profit.................. 53,220 43,790 205,622 179,488 178,295 156,446 164,728 Selling, general and administrative expenses..... 44,432 37,505 161,691 170,033 133,561 127,100 124,544 -------- -------- -------- -------- -------- -------- -------- Operating income.............. 8,788 6,285 43,931 9,455 44,734 29,346 40,184 Other income (expense), net... (313) 232 (1,422) 998 1,710 2,274 1,208 -------- -------- -------- -------- -------- -------- -------- Earnings from continuing operations before interest, taxes and minority interest.................... 8,475 6,517 42,509 10,453 46,444 31,620 41,392 Interest expense.............. 3,441 3,375 16,419 14,158 13,091 10,403 8,332 Minority interest............. (138) (118) (256) (332) (87) -- -- Taxes......................... 1,248 371 3,577 (2,417) 9,400 4,366 11,131 -------- -------- -------- -------- -------- -------- -------- Earnings (loss) from continuing operations....... 3,648 2,653 22,257 (1,620) 23,866 16,851 21,929 Earnings (loss) from discontinued operations..... -- -- -- (32,904) (9,208) (719) 1,736 -------- -------- -------- -------- -------- -------- -------- Net earnings (loss)........... $ 3,648 $ 2,653 $ 22,257 $(34,524) $ 14,658 $ 16,132 $ 23,665 ======== ======== ======== ======== ======== ======== ======== PER SHARE DATA: Net earnings (loss) from continuing operations per common share: Basic....................... $ 0.28 $ 0.20 $ 1.70 $ (0.12) $ 1.82 $ 1.28 $ 1.67 Diluted..................... 0.28 0.20 1.69 (0.12) 1.82 1.28 1.67 Net earnings (loss) per common share: Basic....................... $ 0.28 $ 0.20 $ 1.70 $ (2.63) $ 1.12 $ 1.23 $ 1.80 Diluted..................... 0.28 0.20 1.69 (2.63) 1.12 1.23 1.80 OTHER OPERATING DATA: EBITDA(2)..................... $ 12,948 $ 10,460 $ 58,426 $ 25,225 $ 59,234 $ 42,215 $ 50,898 EBITDA margin(3).............. 7.3% 8.4% 9.0% 4.5% 11.5% 9.3% 11.7% Depreciation and amortization(4)............. $ 4,473 $ 3,943 $ 15,917 $ 14,772 $ 12,790 $ 10,595 $ 9,505 Capital expenditures.......... 3,764 1,709 15,325 15,597 21,389 16,651 12,509 Dividends..................... 1,051 -- 2,092 4,197 4,260 4,199 4,217
22 23
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997(1) 1996 1995 1994 ---- ---- ---- ------- ---- ---- ---- CASH FLOW DATA: Cash provided by (used in): Operating activities........ (58,171) (6,099) 108,711 71,692 (21,153) 801 21,104 Investing activities........ (19,263) (1,709) (21,812) (31,910) (60,360) (26,985) (20,299) Financing activities........ 55,018 (1,541) (80,141) (27,352) 75,447 34,201 (10,335) BALANCE SHEET DATA: Working capital............... 166,166 189,797 178,324 177,426 210,962 232,173 189,207 Total assets.................. 610,177 595,726 521,556 577,137 624,806 521,230 469,387 Long-term debt excluding current portion............. 123,091 159,586 133,749 159,109 172,387 148,665 109,927 Stockholders' equity.......... 209,496 187,866 205,025 183,782 222,576 210,400 195,089 Stockholders' equity per share....................... 16.01 14.37 15.68 14.01 16.95 16.03 14.82 Cash dividends per common share....................... 0.08 -- 0.16 0.32 0.32 0.32 0.32
- --------------- (1) The results for the year ended December 31, 1997 were negatively impacted by several items, including an increase of $10.5 million in bad debt expense from continuing operations as a result of a bankruptcy filing by our customer, A.P.S., Inc., a $3.0 million provision for severance payments related to a reduction in the workforce, and $27.0 million of estimated losses associated with the divestitures of our discontinued Brake and Service Line divisions. (2) EBITDA is defined as earnings or loss from continuing operations before interest expense, minority interest, income taxes, depreciation and amortization. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income or net earnings or loss for purposes of analyzing our operating performance or financial position. EBITDA is not necessarily comparable to similarly titled measures for other companies. (3) EBITDA margin represents EBITDA as a percentage of net sales. (4) Represents depreciation and amortization from continuing operations. 23 24 RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the ratio of earnings to our fixed charges for the periods indicated. There were no shares of our preferred stock issued or outstanding during the periods indicated below and therefore the combined ratio of earnings to fixed charges and preferred dividends would have been the same as set forth below.
THREE MONTHS ENDED MARCH 31, 1999, THREE MONTHS AS ENDED ADJUSTED(1) MARCH 31,(1) YEARS ENDED DECEMBER 31, ------------ ------------ ----------------------------------------- 1999 1998 1998 1997(2) 1996 1995 1994 ---- ---- ---- ------- ---- ---- ---- Ratio of earnings to fixed charges....... 1.4x 2.2x 1.8x 2.3x -- 3.2x 2.8x 4.3x ---- ---- ---- ---- ---- ---- ---- ----
The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (income (loss) from continuing operations before interest expense and income taxes plus fixed charges) by fixed charges. Fixed charges consist of interest expense (including amortization of deferred financing costs) and an estimate of the portion of rental expense that is representative of the interest factor (currently deemed to be one-third of all rental expense). - --------------- (1) Due to the seasonality of our business, the ratios of earnings to fixed charges for the first and fourth quarters have historically been lower than those for the second and third quarters. (2) As a result of the loss incurred in 1997, fixed charges exceeded earnings available for fixed charges by $4.0 million. 24 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are a leading independent manufacturer and distributor of replacement parts for motor vehicles. We are organized into two divisions, each focused on a specific type of replacement part: (1) Engine Management (ignition and emission parts, fuel system parts and wire and cable) and (2) Temperature Control (compressors, other air conditioning parts, and heating parts). We sell our products primarily to warehouse distributors and large auto parts retail chains. In 1998, our customers included many of the top warehouse distributors and all of the leading auto parts retail chains. Our customers include Advance Auto Parts, AutoZone, Carquest and NAPA Auto Parts. We distribute parts under our own brand names, such as Standard, Blue Streak and Four Seasons, and also under private labels for our key customers such as Advance Auto Parts, Carquest and NAPA Auto Parts. In 1998, our net sales were $649 million and our operating income was $44 million. Over the past three years, our net sales have grown at a compound annual rate of 13% and our operating income has grown at a compound annual rate of 14%. This strong performance has continued in 1999 as first quarter revenues were 40% higher than the comparable quarter in 1998. Excluding revenues from acquisitions, sales increased 12% during the three months ended March 31, 1999, as compared to the three months ended March 31, 1998. The temperature control business is a seasonal business, and we benefit by having our products on our customers' shelves in advance of the peak summer selling season through a pre-season stocking program. Sales under our 1999 pre-season program were stronger than we anticipated and may have resulted in a pull ahead into the first quarter of sales that would have normally occurred in the second quarter, when pre-season program discounts and terms are not available to the same extent. Our restructuring has resulted in a material increase in the portion of our sales represented by temperature control products. Temperature control products, which are primarily air conditioning parts, are seasonal and are impacted by weather. The variability in our quarterly earnings has increased as a result of this shift in sales mix, with the second and third quarters generating a majority of our sales and earnings. During these quarters, a significant portion of annual temperature control sales are made. RESULTS OF OPERATIONS The following table summarizes the breakdown of our results of operations as a percentage of net sales:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------- ------------------------ 1999 1998 1998 1997 1996 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales............................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold...................................... 69.9 65.3 68.3 68.0 65.3 Gross profit............................................ 30.1 34.7 31.7 32.0 34.7 Selling, general & administrative expenses.............. 25.1 29.7 24.9 30.4 26.0 Operating income........................................ 5.0 5.0 6.8 1.6 8.7 Other income (expense).................................. (0.2) 0.2 (0.2) 0.2 0.3 Earnings from continuing operations before interest, taxes and minority interest........................... 4.8 5.2 6.6 1.8 9.0 Interest expense........................................ 2.0 2.7 2.5 2.5 2.6 Minority interest....................................... (0.1) (0.1) -- (0.1) -- Taxes................................................... 0.7 0.3 0.6 (0.4) 1.8 Earnings (loss) from continuing operations.............. 2.0 2.1 3.5 (0.4) 4.6
25 26 COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 TO THE THREE MONTHS ENDED MARCH 31, 1998 Our net sales for the current quarter increased by $50.7 million or 40.3% from the comparable period in 1998. Excluding revenues from acquisitions not present in the first quarter of last year, our revenues increased by approximately $14.9 million or 11.8%. This sales increase, excluding acquisitions, is primarily due to a pre-season selling program for products in our Temperature Control division. This program, which resulted in increased sales in the first quarter, may have caused a pull ahead from future sales. The magnitude of the pull ahead will not be known, however, until late in the second quarter. We anticipate that the pre-season selling program will result in improvements to our customer order fill rates, as we enter the peak period for our temperature control products with our distributors fully stocked. Our gross profit for the first quarter of 1999 increased by $9.4 million or 21.5% from the comparable period in 1998, reflecting the strong growth of temperature control product sales. The gross margin as a percent of net sales, however, declined from 34.7% in the first quarter of 1998 to 30.1% in the first quarter of 1999. The decline in the gross margin percentage was primarily due to the higher mix of temperature control product sales in relation to our total sales. Temperature control products have lower average gross margins than products sold by our Engine Management division and therefore result in a lower margin percentage for us. The gross margin percentage also was negatively impacted by discounts related to the pre-season selling program at the Temperature Control division, which were not present in 1998. Selling, general and administrative (SG&A) expenses increased by $6.9 million or 18.5% over the comparable quarter in 1998 reflecting higher expenses to support the growth within the Temperature Control division. However, as a percent of net sales SG&A expenses decreased by 4.7 percentage points (25.1% in 1999 versus 29.8% in 1998). This percentage improvement is primarily due to the leverage achieved from higher sales and synergies which have begun to be realized from the consolidation of the temperature control business of Cooper Industries. Additional cost reductions from the consolidation of the temperature control business of Cooper Industries will continue, with the full implementation scheduled to be completed early in the year 2000. Our operating income increased by $2.5 million or 39.8% over the comparable quarter in 1998, primarily due to the significant sales volume increases we experienced during the first quarter of 1999. As a percentage of net sales, our operating income has remained relatively flat at 5%. The Engine Management division, as compared to a year ago, experienced a reduction in operating income of $3.2 million as a result of lower sales and a decline in gross margin, attributable to shifts in sales mix and changes in overhead absorption. The sales decline was primarily the result of our divestiture of our fuel pump business, which occurred in the third quarter of 1998, and lower orders from certain customers as they absorbed inventory acquired from A.P.S., Inc. The negative impact from sales mix was a result of a shift towards second line sales. The under-absorption of overhead experienced at certain facilities was a result of our divestiture of our Service Line business, which shared these facilities. We are currently developing plans which should reduce these costs. Our Temperature Control division improved operating income by $5.0 million, compared to a year ago, primarily due to incremental sales volume of $54.3 from the temperature control business of Cooper Industries and increases in unit volume as a result of the pre-season selling program. Efficiencies achieved from consolidating the temperature control business of Cooper Industries also improved our income. The temperature control business of Cooper Industries was not present in the prior year results, as the acquisition was completed on March 28, 1998. Other income -- net for the first quarter of 1999 decreased by $0.5 million, primarily due to losses recognized in connection with our continuing original equipment ventures. These losses were attributed to costs incurred in developing and launching these projects. 26 27 Interest expense attributable to continuing operations remained flat as compared to 1998. Including amounts related to discontinued operations in 1998, interest expense decreased by $1.2 million in 1999. Taxes based on earnings increased by $0.9 million primarily due to improved pre-tax earnings. At December 31, 1998, we had a $14.2 million deferred tax asset valuation allowance. Due to the seasonal nature of our business, we did not deem adjustments to this valuation allowance necessary during the three month period ended March 31, 1999. However, management is continuing to evaluate the likelihood of our achieving sufficient future profitability that would enable us to utilize all or a portion of these deferred tax assets. If management determines, based on these evaluations, that it is more likely than not that deferred tax assets will be realized, then the valuation allowance will be adjusted. COMPARISON OF 1998 TO 1997 Our net sales in 1998 were $649.4 million, an increase of $89.6 million or 16.0% from the comparable period in 1997. Excluding revenues from acquisitions not present in 1997, our total net sales increased by $11.6 million, or 2.1%, as compared to 1997. Sales increases in our Temperature Control division, reflecting market share gains, product line expansions and the impact of an extremely hot summer were partially offset by sales declines in our Engine Management division reflecting the weakness in the automotive aftermarket and reduced sales to A.P.S., Inc., one of our largest customers, as it worked its way through bankruptcy proceedings. Our sales remain focused in the U.S., as 90% of sales were to domestic customers. Sales to Canada, Europe and other export markets remained relatively flat in 1998. Our cost of goods sold increased $63.5 million from $380.3 million to $443.8 million. Our gross margins, as a percentage of net sales, decreased from 32.1% in 1997 to 31.7% in 1998. This decline reflects a higher mix of temperature control products with lower average gross margins than engine management products. Our gross margins also were negatively affected by the Cooper transaction due to the higher carrying cost of the acquired inventory compared with comparable products produced by our existing temperature control business. We sold the majority of this inventory in 1998 and temperature control gross margins should improve in 1999. Our SG&A expenses in 1998, excluding bad debt expenses, increased $1.6 million, or 1.0%, while our net sales increased 16%. As a percentage of net sales, our SG&A expenses, excluding bad debt expense, decreased from 28.1% in 1997 to 24.5% in 1998. The 3.6 percentage point improvement in our SG&A expenses, excluding bad debt expenses, resulted primarily from lower new customer acquisition costs and the partial integration of Cooper Industries' temperature control business into the existing Temperature Control infrastructure. We also reduced selling expenses as we completed a further restructuring of our sales force. We have largely completed our restructuring program and are now entirely focused on the product lines in our two divisions where we are a market leader. In 1999 and into the year 2000, we anticipate that the full impact of our cost reduction programs will take effect and that synergies from the consolidation of the temperature control business of Cooper Industries and other acquisitions will begin to be fully realized and provide further earnings benefits. Other income (expense), net, decreased by $2.4 million, primarily due to losses related to our continuing joint ventures and the writeoff of the carrying value of our Chinese joint venture and one of our original equipment ventures. Our earnings before interest and taxes increased to $42.5 million in 1998 from $10.5 million in 1997. This increase was a direct result of the cost reductions discussed above, combined with the non-recurrence of the $10.5 million in bad debt expense recorded in 1997, due to the bankruptcy filing of A.P.S., Inc. 27 28 Our interest expense increased by $2.3 million to $16.4 million resulting from several factors including: interest costs related to discontinued operations in 1997 and higher average interest rates in 1998 partially offsetting lower outstanding borrowings during 1998. Including amounts related to discontinued operations, interest expense decreased by $2.2 million, primarily as a result of lower outstanding borrowings. In 1998, we focused significant attention on reducing debt and strengthening our balance sheet. Total debt was reduced by $79.7 million, and we succeeded in completing a multi-year committed revolving credit line. In addition, we reduced receivables by $29.0 million and inventories by $14.9 million and increased cash and short term investments by $6.6 million. The progress made in asset management and debt reduction is reflected by a reduction in our total debt to capitalization percentage from 56.6% in 1997 to 43.8% in 1998. Income tax expense related to continuing operations in 1998 was $3.6 million, compared to a benefit of $2.4 million in 1997, when we posted a net loss. Earnings from our Puerto Rico and Hong Kong subsidiaries resulted in a 1998 effective tax rate that is lower than the statutory corporate rate in the U.S. COMPARISON OF 1997 TO 1996 Net sales in 1997 were $559.8 million, up 9.0% from sales of $513.4 million in 1996. Excluding revenues from acquisitions not present in 1996, net sales remained relatively flat as compared to 1996. Sales increases in our Temperature Control division, reflecting market share gains and product line expansions, were offset by sales declines in our Engine Management division, reflecting the general weakness in the automotive aftermarket. Cost of goods sold increased $45.2 million in 1997, from $335.1 million in 1996 to $380.3 million in 1997. Gross margins, as a percentage of net sales, decreased from 34.7% in 1996 to 32.1% in 1997. This decline reflects a higher mix of temperature control products and non-traditional business which have lower gross margins and reduced manufacturing efficiencies, as production schedules were lowered to reduce inventories. SG&A expenses from continuing operations in 1997, excluding bad debt expenses, increased $23.4 million in 1997 and as a percentage of net sales from continuing operations, increased from 26.1% in 1996 to 28.1% in 1997. The increase in these expenses resulted primarily from a $3.0 million provision for severance payments related to personnel reductions, higher new customer acquisition costs, increases in overhead costs as a result of our acquisition of the Filko Automotive Division of F&B Manufacturing (these costs are reduced significantly in 1998 as Filko has been integrated into Standard Motor Products), and finally due to increases in costs to support our high technology original equipment programs. Bad debt expenses from continuing operations increased significantly in 1997 as a result of the bankruptcy filing of A.P.S., Inc., one of our largest customers. We continued to supply this customer on a cash-in-advance basis in 1998, but did not subject ourselves to any additional exposure. Other income (expense), net, from continuing operations decreased by $0.7 million in 1997 primarily due to lower interest income as available cash early in 1997 was used to reduce short-term borrowings under credit lines. Interest expense from continuing operations increased by $1.1 million in 1997 to $14.2 million, resulting from higher average interest rates. Taxes based on earnings from continuing operations reflect a benefit of $2.4 million for 1997 as compared to an expense of $9.4 million for 1996. The significant decrease in tax expense is a result of the losses incurred by us during 1997. The current year tax benefit recognized was a function of the significant losses from our United States operations being partially offset by earnings of our Puerto Rico and Hong Kong subsidiaries, which have lower tax rates than the 28 29 United States statutory rate. The combination of the foreign earnings and domestic losses results in a favorable effective tax rate of 65.2% against losses. LIQUIDITY AND CAPITAL RESOURCES During the first quarter of 1999, cash used in operations amounted to $58.2 million, compared to $6.1 million for the first quarter of 1998. The increase is due primarily to higher accounts receivable and inventories resulting from a pre-season selling program for temperature control products, that was not in effect in 1998, partially offset by increased payables and accrued expenses. Cash used in investing activities amounted to $19.3 million in the first quarter of 1999 and $1.7 million for the comparable period in 1998. The increase is mainly due to the acquisitions of Eaglemotive Corporation and Webcon UK Limited, discussed below. Capital expenditures amounted to $3.8 million during the first quarter of 1999 and $1.7 million for the comparable period in 1998. Cash provided by financing activities totaled $55.0 million in the first quarter of 1999. In the prior year's first quarter, cash used in financing activities amounted to $1.5 million. The change is due to increased short term borrowings to finance the seasonal working capital needs of our Temperature Control division, which have become more significant due to the inclusion of the temperature control business of Cooper Industries. In the first quarter of 1999, we paid dividends amounting to $1.1 million. We did not pay dividends in the comparable period for 1998. In 1998, cash provided by operations amounted to $108.7 million. This compares favorably to 1997 and 1996 when cash provided by (used in) operations was $71.7 million and $(21.1) million, respectively. The strong cash flow performance resulted primarily from net earnings for 1998 of $22.3 million and decreases in inventories and accounts receivable of $27.7 million and $27.5 million, respectively. Cash used in investing activities in 1998 was $21.8 million, as capital expenditures and payments related to the Cooper transaction were partially offset by proceeds from the sale of businesses and property, plant and equipment. For the three years ended December 31, 1998, 1997 and 1996 capital expenditures totaled $15.3 million, $15.6 million and $21.4 million, respectively. Cash used in financing activities in 1998 was $80.1 million, which was primarily due to the repayment of $52.3 million in borrowings from bank lines, and $27.0 million in principal repayments on long-term financing. Dividends paid for the three years ended December 31, 1998, 1997 and 1996 were $2.1 million, $4.2 million and $4.3 million, respectively. In the first two quarters of 1998 we suspended the dividend due to a deterioration in financial performance. We reinstated our dividend in the third quarter of 1998 as our financial results and prospects greatly improved. On November 30, 1998, we entered into a new three-year revolving credit facility. The new facility with eight lending institutions, provides a $110.0 million unsecured line of credit, subject to a borrowing base. The facility allows us to select from two interest rate options, one a function of LIBOR and the other a function of the United States prime rate. The spread above each interest rate option is determined by our ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization. The interest rates available to us under this facility should compare favorably with the short term credit rates obtained by us during most of 1998 and should result in lower interest costs in 1999 compared to 1998. The terms of this revolving credit facility include, among other provisions, the requirement for a "clean-down" to $10.0 million, for any consecutive thirty days during each 12 month period of the facility, maintenance of defined levels of tangible net worth, various financial performance ratios and restrictions on capital expenditures, dividend payments, acquisitions and additional indebtedness. We have already satisfied the requirement for a clean-down to $10.0 million for the initial twelve month period and are presently in compliance with the other provisions of the facility. We have renewed our existing agreement to sell certain of our accounts receivable. The agreement as renewed extends through March 2002. 29 30 As of March 31, 1999, we had stockholders' equity of $209.5 million and working capital of $166.2 million. We expect capital expenditures, primarily for new machinery and equipment, to be approximately $14.0 million, for the remainder of 1999. At December 31, 1997, we were not in compliance with certain covenant requirements associated with certain long term notes payable; however, we received the appropriate waivers and certain amendments were made to the note agreements. The amendments contained, among other things, provisions for the payment of up front fees of 1.5% and an increase in the interest rate on each note payable of 1.25%. The increased interest rate was reduced by 50 basis points when we refinanced our short-term credit facility on November 30, 1998 and a further reduction is possible as our balance sheet is strengthened. As of March 31, 1999, our remaining required long term debt repayments for the balance of the year are approximately $22.0 million. Total debt (current and non-current) at December 31, 1998 decreased $79.7 million as compared to December 31, 1997. This was mainly due to decreased requirements to support inventories and accounts receivable. We continue to aggressively pursue ways to reduce inventories. We are focusing significant efforts on pack-to-order systems and improved requirements forecasting systems. Pack-to-order systems retain certain parts in a bulk state until an order is received for a specific brand of product. In January 1999, we acquired, through our European subsidiary Standard Motor Products Holdings Limited, 85% of the stock of Webcon UK Limited, and through our United Kingdom joint venture Blue Streak Europe Limited, Webcon's affiliate, Injection Correction UK Limited. The total acquisition price amounted to approximately $3.5 million and was funded from our operating cash flow. In February 1999, we acquired 100% of the stock of Eaglemotive Corporation for approximately $13.4 million. Located in Fort Worth Texas, Eaglemotive assembles and distributes fan clutches and other cooling products to the automotive aftermarket. The acquisition was funded from short term borrowings. The reductions in capital employed by Standard Motor Products, coupled with our increased earnings have resulted in a year-over-year improvement in EVA(R). We have expanded our EVA focus to ensure that we invest capital wisely in programs that exceed our cost of capital and improve our asset utilization. SEASONALITY As with profitability, our 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 funding by borrowings from our lines of credit. Our peak borrowing for the second quarter of 1998 and 1999 were $82.4 and $89.0 million, respectively. DEBT SERVICE Our ability to make payments on and to refinance our indebtedness, including the Convertible Debentures, and to fund planned capital expenditures, product development efforts and acquisitions will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that 30 31 are beyond our control. Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow from operations, available cash and available borrowings under our credit facilities, will be adequate to meet our future liquidity needs for at least the next 12 months. See "Risk Factors -- We Will Have Significant Debt Service Requirements and May Need to Refinance All or a Portion of Our Debt." We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule, or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness, including the Convertible Debentures, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the Convertible Debentures, at or before maturity. If we need to refinance our debt, we cannot assure you that we will be able to refinance the debt on commercially reasonable terms or at all. See "-- Liquidity and Capital Resources." IMPACT OF INFLATION Inflation is not a significant issue and our management believes that we 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 We continue to face competitive pressures. In order to sell at competitive prices while maintaining profit margins, we are continuing to focus on overhead and cost reduction. We have completed much of our restructuring program, and are now focused on the two industry segments in which we are a market leader. We anticipate that significant cost savings will continue to develop from the consolidation of the temperature control business of Cooper Industries with our existing Temperature Control division. These savings commenced during 1998 and should have a favorable impact on our 1999 and 2000 results. Additional cost reductions in other areas that were implemented in 1998 should have significant benefits in 1999. These actions, coupled with the continued focus on EVA, are intended to ensure that we invest only in programs that exceed the cost of capital and focus on improving margins and asset utilization. YEAR 2000 We are currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by our computerized information system. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of our programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. We have established a comprehensive response to our Year 2000 exposure. Generally, we have Year 2000 exposure in two areas: (i) our information technology systems and (ii) our non-information technology systems. At June 1998, we completed an inventory of our internal information technology systems and made a preliminary determination of which programs were or were not Year 2000 compliant. During the period ended December 1998, we tested each significant information technology system which we believed to be Year 2000 compliant. In some cases, we will correct Year 2000 issues by implementing new programs which enhance or provide new functionality to these financial and management operating systems. We expect that the cost of this effort will be approximately $1.4 million, which includes capital costs for new software, computers and related equipment. We substantially completed Year 2000 testing and remediation on our critical information technology systems in June 1999 and we expect to substantially complete Year 2000 testing and remediation on our non-critical information technology systems and our non-information technology systems in October 1999. 31 32 As of June 30, 1999, we were nearly complete with our interviews of suppliers, customers, financial institutions and others with which we conduct business to determine the extent to which we would be vulnerable to these third parties' failure to remediate their own potential Year 2000 problems. Our inability, or the inability of these other significant business partners, to adequately address the Year 2000 issues could cause disruption of our operations. We do not presently anticipate that our costs to address the Year 2000 issue will have a material adverse impact on our financial condition, results of operations or liquidity. Although we expect our internal information technology and non-information technology systems to be Year 2000 compliant as described above, we intend to prepare a contingency plan that will specify what we plan to do if we or important external companies are not Year 2000 compliant in a timely manner. These contingency plans will address the most likely worst case Year 2000 scenarios. We expect to finalize our contingency plans by October 1999. RECENTLY ISSUED ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities": (SFAS No. 133), effective for fiscal years beginning after June 15, 1999 (the FASB has, however, voted to issue an exposure draft to propose a one-year delay in the effective date). SFAS No. 133 requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in values of derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. We have not yet completed our evaluation of the impact that SFAS No. 133 may have on our results of operations or financial position. 32 33 INDUSTRY A large, diverse number of manufacturers varying in product specialization and size makes 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, scrappage rates, total miles driven and vehicular registration), generally making aftermarket companies less susceptible to cyclical downturns that may occur in new vehicle production. New car dealer networks of original equipment manufacturers account for approximately 30% of aftermarket sales. Traditionally, the supply arms of the original equipment manufacturers and the independent manufacturers who supply the original equipment part applications have supplied a majority of this business. Ford and General Motors have moved to make their supply arms more independent, which may provide future opportunities for independent aftermarket manufacturers to supply replacement parts to the dealer networks of the original equipment vehicle manufacturers, both for warranty and out-of-warranty repairs. The primary customers of the automotive aftermarket manufacturers are national and regional warehouse distributors, large retail chains, automotive repair chains and the dealer service networks of the original equipment vehicle manufacturers, as illustrated below. [DISTRIBUTION CHANNELS OF AFTERMARKET PARTS FLOW CHARTS] 33 34 In the traditional distribution network, automotive replacement parts are distributed through a number of levels before reaching the final users. Standard Motor Products and its competitors sell their products to warehouse distributors who supply over 15,000 local auto parts jobbers. These jobbers, in turn, sell primarily to professional mechanics at service stations, garages, and repair shops, and also to consumers who perform automotive repairs themselves (known as "do-it-yourselfers"). Over the last ten years, there has been a trend toward consolidation in the distribution chain, both by warehouse distributors and retailers, as large firms, with their superior buying power and more efficient distribution systems, have gained market share at the expense of smaller, localized firms. The proliferation of new car models, which are both produced in greater varieties and carry more complex parts, may have hastened consolidation. This proliferation of new car models requires a much greater capital base to support a higher number and variety of parts that must be maintained in a warehouse distributor's inventory for same day delivery to mechanics. Retail chains such as Advance Auto Parts, AutoZone, CSK Auto, Discount Auto Parts and Pep Boys/Parts USA sell a substantial amount of automotive aftermarket parts. A key difference between warehouse distributors and retailers is the substantially lower number of parts carried in inventory by retailers. A retailer's inventory is focused on fast-moving items and those used in easier repair jobs, and thus relies on overnight emergency orders to fill in slower moving parts as required. A retailer may carry only 20,000 parts, compared with 80,000 to 100,000 parts carried by warehouse distributors. While both mechanics and do-it-yourselfers purchase aftermarket parts from retail chains, as automotive parts grow more complex, consumers may be less likely to service their own vehicles and may have to become more reliant on dealers and mechanics that have traditionally used warehouse distributors as their parts suppliers. Retailers are currently expanding into the jobber market and warehouse distributors are seeking means to better serve "do-it-yourselfers", possibly resulting in a long-term consolidation of the market. Through our strategy of serving all levels of the aftermarket industry, we believe that we are well-positioned to take advantage of this consolidation. A listing of some of the major automotive retailers and warehouse distributors that distribute aftermarket parts is below. TOP FIVE AUTO PARTS RETAILERS AND WAREHOUSE DISTRIBUTORS
RANK CHAIN 1998 STORES 1998 SALES(1) - ---- ----- ----------- ------------- (IN THOUSANDS) 1 AutoZone................................................... 2,001 $2,691,440 2 General Parts/Carquest (warehouse distributor)(2).......... 860 800,000 3 Advance Auto Parts......................................... 814 848,000 4 Genuine Parts/NAPA (warehouse distributor)................. 758 925,000 5 CSK Auto................................................... 718 845,700
- --------------- Source: Automotive Marketing (1) Includes all sales volume for these entities, including sales generated from products not sold by us. (2) Only General Parts-owned stores. 34 35 FACTORS INFLUENCING THE AUTOMOTIVE AFTERMARKET The automotive aftermarket is going through a period of changes in its structure. Several factors are driving these changes, including: - Growth in the number of vehicles on the road - Increases in the driving age population and number of vehicles per household - Vehicles are on the road longer and driven more miles per year - New cars are being priced more out of reach of the average first-time buyer - Automotive parts retailers are attempting to displace traditional jobbers - Environmental laws are becoming more stringent - Broader range in prices for replacement parts - Vehicles are comprised of more complex systems, requiring a greater specialization of parts - New cars are being made better and have longer warranties - Effects of dealer versus non-dealer servicing We believe that the above factors also are driving changes in the structure of the European aftermarket. GROWTH IN THE NUMBER OF VEHICLES ON THE ROAD. From 1988 to 1997, the number of registered vehicles in the United States increased at an annual rate of approximately 1.8% to approximately 201.1 million vehicles, as represented by the graph below. Growth in light trucks in particular has been strong, increasing 3.7% in 1997 compared to 1996, continuing a decade of steady growth. Canada and Mexico contribute another estimated 17.5 million and 8 million light vehicles on the road, respectively, bringing the 1997 North American market to roughly 227 million potential customers. [VEHICLES IN USE BAR GRAPH] ------------------------- SOURCE: U.S. DEPARTMENT OF TRANSPORTATION. INCREASES IN THE DRIVING AGE POPULATION AND NUMBER OF VEHICLES PER HOUSEHOLD. The size of the driving age population and the number of vehicles per household (vehicle penetration) impact the size of the aftermarket. In 1997, the driving age population reached roughly 183 million drivers, continuing an annual growth rate of 1.6% since 1990. On a per household basis, the number of vehicles increased to 1.99 per family in 1997, reflecting an annual growth rate of 0.5% since 1990. In addition, there were approximately 1.10 vehicles per person of driving age, representing an annual growth rate of 1.2%. 35 36 VEHICLES ARE ON THE ROAD LONGER AND MORE MILES ARE BEING DRIVEN PER YEAR. Approximately 44% of the 1997 vehicle population was ten years of age or older. More importantly, 74% of the vehicles on the road are over five years of age, a segment which represents the primary customer base of the independent aftermarket. Dealerships typically service vehicles newer than five years old, which do not contribute significant sales to aftermarket distributors or retailers. In 1997, the average car was 8.8 years old, compared to 6.9 years old in 1980. Trucks have also extended their average life to 9.3 years (see the following graph). The increase in average life per vehicle is attributable, among other things, to an increase in the structural integrity of vehicles as well as significant technological innovations in protecting autos from structural and exterior corrosion and improved quality in the major parts systems such as engines and transmissions. Vehicles also are being driven more miles per year. This number of miles driven has been steadily rising for the past decade, possibly due to the declining price of gasoline (adjusted for inflation), over the same period. This results in greater wear on a vehicle and therefore a greater need for replacement parts sold in the aftermarket. See "-- New Cars Are Being Made Better and Have Longer Warranties." [AVERAGE AGE OF VEHICLE FLEET GRAPH] - --------------- Source: R.L. Polk & Co. NEW CARS ARE BEING PRICED MORE OUT OF REACH OF THE AVERAGE FIRST-TIME BUYER. While cars and light trucks are increasingly incorporating technology in both their design and engineering, such technology comes at a price to the consumer in the show room. In 1989, the average number of weeks of income that it took to pay off a new car was approximately 21.5 based on an average new car price and household median income. As of 1997, this number increased to 31.8 weeks required to pay off the purchase price of a new vehicle. Therefore, more people are driving older cars which are more likely to need replacement parts. AUTOMOTIVE PARTS RETAILERS ARE ATTEMPTING TO DISPLACE TRADITIONAL JOBBERS. More aftermarket parts are now being sold through the retail channel as these stores begin to serve professional mechanics as well as their traditional retail clients. Given that retailers have conveniently located stores already in place, they have been able to sell certain fast-moving product lines to the jobber client base by simply adding more inventory coverage, a same day delivery service and an overnight emergency order system. The increase in the number of retail outlets, serving a broader market volume (partially offset by a decrease in the number of jobbers), results in a net increase in the number of locations carrying a broader range of replacement parts. ENVIRONMENTAL LAWS ARE BECOMING MORE STRINGENT. Environmental pressures have forced new measures onto the average driver as well as the original equipment manufacturers at the point of vehicle origination. Recently, several states have begun to impose tighter emission controls at the inspection station, requiring otherwise "clean" vehicles to undergo repair of their emissions systems in order to pass. This translates into a higher utilization of jobbers and service bays as these vehicles are forced to conform to tighter regulatory standards. The end 36 37 result is a greater demand for aftermarket emission parts. In addition, the growth in anti-fluorocarbon legislation has made similar demands on the interior temperature control systems of the average vehicle. United States production of R-12 based refrigerants such as Freon was no longer permitted as of December 31, 1995. This has forced original equipment manufacturers to replace the system with a recyclable coolant variant. As anti-ozone legislation increases, the average driver will be forced to replace his or her system as well with a variant that is not only more costly, but also requires a lengthy service bay visit. BROADER RANGE IN PRICES FOR REPLACEMENT PARTS. Many price conscious consumers have balked at paying a higher price to get original equipment quality replacement parts for their aging cars with a limited remaining life. Aftermarket suppliers responded by supplying multiple versions of the same product at differing price/quality points. This has hurt margins among primarily the smaller suppliers who do not have the efficient distribution channels and production capabilities needed to handle lower margin sales. This factor is contributing heavily to the consolidation of automotive suppliers. Lower margin products have also made many of the aftermarket supplier products more attractive compared to original equipment supplier products in the replacement market. This may work to increase aftermarket firms' share of the automotive replacement parts business. Ultimately, we believe that the larger surviving aftermarket firms will benefit. VEHICLES ARE COMPRISED OF MORE COMPLEX SYSTEMS, REQUIRING A GREATER SPECIALIZATION OF PARTS. Vehicles are becoming increasingly complex in terms of their electronics, on a content per vehicle basis. While on average these parts have a greater longevity than the electromechanical parts they are replacing, we believe that the sheer volume of parts required and higher average prices per part outweigh any of the negative effects that longevity may have on aftermarket sales. In short, we believe that the more complicated the system, the greater the chance that a replacement part will be needed in some capacity. NEW CARS ARE BEING MADE BETTER AND HAVE LONGER WARRANTIES. As new technology makes its way into the interior of cars, it is also entering vehicles in terms of structural materials. New, corrosive resistant steel and other materials make the average vehicle on the road today less likely to fail structurally, raising the life of the vehicle considerably. Many functional parts are now being designed to last for 100,000 miles of usage. The extension of the average new car warranty evidences the change in durability and quality in the structural and functional components of the vehicle. These longer warranties are likely to keep car owners returning to their dealer for servicing for a longer period of time, thus hurting aftermarket sales. The extent of this influence is uncertain. EFFECTS OF DEALER VERSUS NON-DEALER SERVICING. Late model domestic cars and imported vehicles require more expertise and technology to repair. As these have become a greater percentage of the vehicles on the road, non-dealer mechanics have had to invest in greater amounts of equipment and training to service them or risk losing business. While import vehicle owners may return more often to their dealer for servicing, we do not believe that this will substantially hurt aftermarket part sales. Non-dealer repair shops have been rapidly investing in technology and expertise to compete effectively with dealers in servicing import cars. The major replacement parts manufacturers have also responded by providing enhanced ongoing training of professional mechanics and telephonic services that assist mechanics in diagnosing repairs and installing parts. In addition, independent manufacturers are designing parts for ease of installation and providing specialty tools to speed the installation process. The net impact of the foregoing factors results in a forecast for the North American automotive aftermarket industry to grow at a minimal rate over the next several years. Because of this limited projected growth, companies are looking for other ways to achieve growth and increase profitability. One of the primary ways to do this is through consolidation. Therefore, companies are looking for acquisition targets that can enhance market share, decrease overhead costs or reduce the numbers of competitors in a product area. See "Risk Factors -- The Market for Replacement Parts is Expected to Experience Minimal Growth Over the Next Few Years." 37 38 BUSINESS COMPANY OVERVIEW Standard Motor Products is a leading independent manufacturer and distributor of replacement parts for motor vehicles. We are organized into two divisions, each focused on a specific type of replacement part: (1) Engine Management (ignition and emission parts, fuel system parts and wire and cable) and (2) Temperature Control (compressors, other air conditioning parts and heating parts). We sell our products primarily to warehouse distributors and large auto parts retail chains. In 1998, our customers included most of the top warehouse distributors and all of the leading auto parts retail chains. Our customers include Advance Auto Parts, AutoZone, Carquest and NAPA Auto Parts. We distribute parts under our own brand names, such as Standard, Blue Streak and Four Seasons, and also under private labels for our key customers such as Advance Auto Parts, Carquest and NAPA Auto Parts. In 1998, our net sales were $649 million and our operating income was $44 million. Over the past three years, our net sales have grown at a compound annual rate of 13% and our operating income has grown at a compound annual rate of 14%. This strong performance has continued in 1999, as first quarter revenues were 40% higher than the comparable quarter in 1998. Excluding revenues from acquisitions, net sales increased 12% during the three months ended March 31, 1999, compared to the three months ended March 31, 1998. The following charts set forth our net sales by manufacturing division, geographic region and customer group as a percentage of total net sales for the year ended December 31, 1998. [THREE PIE CHARTS] We believe that the key elements that have led to our success are as follows: - SHARPENED BUSINESS FOCUS. Beginning in mid-1997, we implemented a restructuring program to focus on our strong core businesses of Engine Management and Temperature Control. We exited our unprofitable and non-strategic brake, service line and fuel pump businesses. We acquired the temperature control business of Cooper Industries and made several other strategic acquisitions. In sum, from mid-1997 to mid-1998, we repositioned approximately 30% of our revenue base. We believe this strategy of developing critical mass in two core businesses has allowed us to improve our cost position, to access new markets and to focus our engineering efforts. - CONTINUED SUBSTANTIAL MARKET SHARE. Following the restructuring, our two divisions have substantial market shares in their respective product lines. In Engine Management, we have more than 30% of the North American aftermarket and we believe that we are the number one manufacturer serving this market. In Temperature Control, we have more than 50% of the North American aftermarket and are the number one manufacturer serving this market. Our significant market position allows us to maximize our production and distribution efficiencies and to leverage access to our customer base. 38 39 - IMPROVED OPERATING AND FINANCIAL PERFORMANCE. In late 1997, we adopted Economic Value Added (EVA(R)) as our primary financial measurement for evaluating investments and for determining incentive compensation. Since adopting EVA, our operating margin improved from 1.7% in 1997 to 6.8% in 1998. Our return on average stockholders' equity improved from a loss in 1997 to 11.4% in 1998. EVA is equal to net operating profits after economic taxes, less a charge for capital invested in Standard Motor Products. The charge for invested capital is equal to the product of the total capital invested in Standard Motor Products and the weighted average cost of capital for Standard Motor Products' target blend of debt and equity (12% for us). Our management places significant emphasis on improving our financial performance, achieving operating efficiencies and improving asset utilization. As we continue to expand both our product base and geographic scope and as we identify programs to reduce costs, our management will evaluate investments and acquisitions based on both EVA and strategic importance. In addition, we currently determine compensation for all top managers using an EVA-based system and in 1999 increased the number of managers participating in our EVA-based compensation system to more than 200 participants. - EXPANDED CHANNEL BREADTH. We have greatly expanded our coverage of the channels of distribution in North America since the early 1990's, when we focused primarily on wholesale distributors. Today we ship products to all channels of distribution including wholesale distributors, retail chains, service chains and original equipment dealer service. The most dramatic expansion has been in the growing retail segment. In 1992, we sold approximately $12 million to retailers (representing 3% of net sales from continuing operations for that year) and in 1998 we sold approximately $119 million to retailers (representing 18% of net sales from continuing operations for that year). We believe that the breadth of our distribution channel coverage positions us to take advantage of any future shifts in market distribution channels. We believe that our success also is attributable to our emphasis on product quality; the breadth and depth of our product lines for both domestic and imported automobiles; and our reputation for outstanding customer service, as measured by rapid order turn-around times and high order fill rates. In addition, we have a highly regarded direct sales force of approximately 300 people marketing all of our product lines, which serves to generate strong name recognition and customer loyalty. Our sales force is acknowledged as an industry leader in technical competence and training. We also use independent sales representatives to complement our sales force in certain product lines and distribution channels. STRATEGY Our goal is to drive revenue and earnings growth by providing high quality, low cost replacement parts in the engine management and temperature control automotive aftermarkets. We intend to achieve this goal by focusing on further penetration of domestic markets, by broadening our product range while focusing on developing technology, leveraging our significant market share, pursuing cost cutting initiatives and acquiring businesses complementary to our two product lines. We also are expanding our presence in the original equipment service and international arenas. The key elements of our strategy are as follows: - MAINTAIN TECHNOLOGICAL LEADERSHIP. We are committed to investing the resources necessary to maintain our technological leadership in emerging aftermarket product areas such as computer-controlled engine management systems, distributorless ignition systems, sensors and fuel injection parts. We are actively working to develop further applications of our present product lines to incorporate the latest technologies in North America and Europe. We have established Blue Streak Electronics, Inc., a joint 39 40 venture which is today a leader in remanufactured automotive computers. Other examples of our commitment to technology include our oxygen sensor business' expansion into the latest four wire sensors, our motor business' expansion into four pole motors and our electronic ignition business' expansion into state-of-the-art applications. We believe that this assures our access to the replacement parts business for the latest vehicles introduced. We have expanded our product lines to include certain sensors, air conditioning controls and other automotive computers. - EXPAND INTERNATIONAL PRESENCE. International sales for the year ended December 31, 1998 made up approximately 10% of our revenues, approximately 40% of which were in Canada. We believe that major opportunities exist to broaden our international base. We have developed a base for European expansion through four acquisitions and internal growth because we believe that the following present an opportunity for us in the European market: -- the fragmentation of the market for European automotive aftermarket parts and the increasing presence of many non-original equipment, independent suppliers in this market, -- the increasing pan-European nature of distribution of automotive aftermarket parts in Europe due to the establishment of the European Union, and pan-European distribution groups, -- the replacement of original equipment service outlets with additional independent jobber and retail outlets, and -- the dramatic growth in the number of automobiles on the road with installed air conditioners and engine electronics. We believe that these factors will create consolidation in the European automotive aftermarket parts market, allow for increased distribution channels throughout Europe and present an opportunity for independent suppliers, such as Standard Motor Products, who provide a full range of products for European applications. The demographic factors for this market are the same as in North America. We are currently evaluating opportunities in Europe to broaden our product lines and establish enhanced geographic distribution through established brand names. To date, we have established a distribution center for temperature control products in Strasbourg, France, established a joint venture for the remanufacture of air conditioning compressors, and launched a remanufacturing site for engine computers and sensors in England to support the European market. Early in 1999, we acquired Webcon and Injection Correction to further expand our engine management presence in Europe. In April 1999, we continued our European expansion effort with the acquisition of Lemark Auto Accessories Limited, a United Kingdom-based manufacturer and distributor, primarily of ignition wire and other engine management products, improving our market share position to number two in the United Kingdom market. The shift in Europe to engine management and temperature control products such as those sold by Standard Motor Products is occurring much later than in the United States. In 1999, the installation rate of air conditioning systems in European cars was approaching 61%, as opposed to 98% in the United States. The mass introduction of electronics for fueling and engine controls in Europe was nearly ten years behind that in the United States. Today, most European vehicles have electronic injection fueling systems and engine management systems. - BROADEN CUSTOMER BASE. We intend to continue efforts to market our products more broadly to certain repair chains, original equipment vehicle manufacturers for dealer service and other aftermarket parts manufacturers. These customer groups have 40 41 historically been underrepresented in our sales. We have grown our direct sales to retailers over the past five years from $12 million in 1992 to $119 million in 1998. We believe that the move to create independent component manufacturing companies at Ford and General Motors will present us with increased original equipment service opportunities. We are actively working on and have received several small orders for original equipment service parts. In addition, we are continuing to utilize cross-marketing to increase sales to existing customers who are currently purchasing only some of our product lines. - DEVELOP NEW PRODUCT LINES AND PRODUCT LINE EXTENSIONS. We intend to continue to expand the range of engine management and temperature control products we offer our customers through a combination of internal development and selective acquisitions. By adding new products manufactured by us, such as small motors, oxygen sensors and fan clutches, we have been able to increase our sales to existing customers and to attract new customers. As part of this strategy, we also are expanding our product penetration by increasingly developing multiple brands and private label brands under a "good-better-best" concept to address different market segments and price points. - IMPROVE OPERATING EFFICIENCY AND COST POSITION. We intend to continue to improve our operating efficiency and cost position, by: -- increasing cost-effective vertical integration, -- focusing on efficient inventory management, -- adopting company-wide programs geared toward manufacturing and distribution efficiency, and -- implementing company-wide overhead (operating expense) cost reductions. We have increased vertical integration in key product lines through both internal development and acquisitions. Examples of this include our 1995 establishment of our blower motor business and our acquisitions of the Hayden division of The Equion Corporation and of Eaglemotive Corporation, which make us a more vertically integrated manufacturer in the air conditioning business, and our acquisition of AlliedSignal's oxygen sensor manufacturing business in the engine management business. We have improved our asset management, as reflected in the $55 million decline in inventory from 1996 to 1998. This decline was the result of several factors, including the divestiture of our discontinued Brake and Service Line divisions, offset by acquisitions, and approximately $22 million related to inventory management systems we have implemented in our Engine Management division. We expect further improvements in 1999. We have instituted a number of company-wide cost containment programs including reducing new customer acquisition costs, implementing administrative headcount reductions, reorganizing our sales force, and rationalizing our existing manufacturing facilities into lower cost locations. Examples of this are the consolidations within our wire business and within our small motor business, and the pending consolidation of five temperature control facilities into two. During the same time period, we have decreased our selling, general and administrative expenses (excluding debt expense) from 28.1% of sales in 1997 to 24.5% in 1998. We also are focusing heavily on lowering in-house manufacturing cost for key products to ensure high quality, competitive cost and availability. ACQUISITION HISTORY We have established an acquisition strategy covering specific areas in engine management and temperature control, namely: the broadening of new product lines; the addition of low cost 41 42 lines within the main areas of our business; vertical integration; and international expansion. We have made several acquisitions since our strategy was implemented in 1995, and plan to continue with our acquisition strategy. Our management has adhered to a disciplined business strategy and EVA(R) in assessing acquisition opportunities, including a requirement that any acquisition be accretive to earnings no later than the second full year after its completion. On March 28, 1998, we completed the exchange of our brake business for the temperature control business of Cooper Industries. This exchange was the largest component of our restructuring program as we exited the unprofitable and non-strategic brake business. The acquisition of Cooper's temperature control business increased the division's revenues for the three month period ended March 31, 1999 by $30.8 million or 87.3% and provided us with more than a 50% North American market share. This restructuring has allowed us to develop critical mass and to improve our cost position in temperature control and access new markets. We recently began the process of consolidating the acquired business into our Four Seasons division, and expect to realize the full benefits of the acquisition by fiscal year 2000. The following table summarizes acquisitions and divestitures we have made since January 1, 1996:
ACQUISITION BUSINESS OF ACQUIRED ACQUISITION DATE LOCATION COMPANY - ----------- ----------- -------- -------------------- Lemark Auto Accessories Limited....... April 1999 United Kingdom Manufacture and distribution primarily of ignition wire and other engine management products Eaglemotive Corporation............... February 1999 Fort Worth, Manufacture and distribution of fan Texas clutches and oil coolers Webcon UK Limited and Injection Correction UK Limited............... January 1999 Two locations Manufacture and distribution of in the United full-line engine management products Kingdom Temperature control division of Cooper Industries.......................... March 1998 Multiple Manufacture and distribution of locations in full-line temperature control products the United States Oxygen sensor manufacturing business of AlliedSignal..................... September 1997 Wilson, North Manufacture of oxygen sensors Carolina Filko Automotive Division of F&B Manufacturing....................... January 1997 Bradenton, Manufacture and distribution of Florida ignition wire and other engine management products Hayden Division of The Equion Corporation......................... December 1996 Corona, Assembly and distribution of heavy California duty cooling products Fibro Friction, Inc. (since divested)........................... July 1996 Montreal, Formulation of friction materials and Canada supply of integrally molded brake pads Intermotor Holdings Limited........... July 1996 Nottingham, Manufacture and distribution of engine England management products, primarily to the European market Federal Parts Corporation............. February 1996 Dallas, Texas Manufacture and distribution of ignition wire products
42 43
DISPOSITION BUSINESS OF DISPOSED DISPOSITION DATE LOCATION COMPANY ----------- ----------- -------- -------------------- Champ/ASL............................. Fall 1998 Edwardsville, General service line Kansas Pik-A-Nut............................. Fall 1998 Huntington, General service line Indiana Fuel Pump business.................... October 1998 Long Island City, Manufacture and distribution of fuel New York pumps EIS Brake parts....................... March 1998 Berlin, Manufacture of brake parts Connecticut EIS Brake Manufacturing (EBM)......... March 1998 Ontario, Canada Manufacture of brake parts Fibro Friction, Inc................... March 1998 Montreal, Canada Formulation of friction materials and supply of integrally molded brake pads
DESCRIPTION OF OPERATIONS The table below shows our sales by product groups for the last three years(1):
1998(2) 1997 1996 --------------------- --------------------- --------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL -------- ---------- -------- ---------- -------- ---------- (IN THOUSANDS) ENGINE MANAGEMENT: Ignition and Emission Parts..................... $256,913 39.6% $265,662 47.4% $259,782 50.6% Fuel Systems................. 22,911 3.5 29,678 5.3 32,909 6.4 Wire and Cable............... 68,840 10.6 70,484 12.6 60,718 11.9 -------- ------ -------- ------ -------- ------ Subtotal.................. 348,664 53.7 365,824 65.3 353,409 68.9 -------- ------ -------- ------ -------- ------ TEMPERATURE CONTROL: Compressors.................. 131,154 20.2 79,237 14.2 72,522 14.1 Other Air Conditioning Parts..................... 145,207 22.4 94,744 16.9 70,677 13.8 Heating Parts................ 20,783 3.2 13,937 2.5 13,224 2.5 -------- ------ -------- ------ -------- ------ Subtotal.................. 297,144 45.8 187,918 33.6 156,423 30.4 -------- ------ -------- ------ -------- ------ Other........................ 3,612 0.5 6,081 1.1 3,575 0.7 -------- ------ -------- ------ -------- ------ Total................ $649,420 100.0% $559,823 100.0% $513,407 100.0% ======== ====== ======== ====== ======== ======
- --------------- (1) This table reflects continuing operations only and has excluded our discontinued Brake and Service Line divisions. (2) The decline in 1998 sales reflects the divestiture of our fuel pump business in October 1998 and reduced sales to A.P.S., Inc., one of our largest customers, as A.P.S., Inc. went through bankruptcy proceedings. ENGINE MANAGEMENT DIVISION Our Engine Management Division manufactures and distributes a broad range of parts including ignition and emission parts, rebuilt engine computers and various sensors, fuel system components, wire and cable products for domestic and import vehicles. As shown in the table above, this division had sales of $348.7 million in 1998, which represented a 4.7% decrease over 1997. The decline in sales was primarily due to the sale of our fuel pump business and reduced sales to A.P.S., Inc., one of our largest customers, as A.P.S., Inc. went through bankruptcy proceedings. Replacement parts for automotive ignition and emission control systems accounted for 39.6% of our total sales in 1998. These parts include distributor caps and rotors, electronic ignition control modules, voltage regulators, engine control modules, coils, switches, sensors and EGR valves. We are a basic manufacturer of many ignition parts we market. These products cover a 43 44 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 farm, off-road and marine applications. We offer products at three different price points under a "good-better-best" concept. We 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, we pioneered the concept of offering higher quality parts, sold under the Blue Streak brand name, that were significantly better than original equipment. We priced these products at a premium. We now offer 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 computer monitors inputs from many types of sensors located throughout the vehicle, and controls a myriad of valves, switches and motors. We are 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 20 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 the level of hazardous fumes in exhaust gases. Electronic control modules and electronic voltage regulators comprise a significant and growing portion of our total ignition sales. In 1998, electronic components comprised 13.2% of our total ignition sales. In 1992, we entered into a 50/50 joint venture, Blue Streak Electronics, Inc., in Canada to rebuild automotive engine management computers and mass air flow sensors. This joint venture's volume is sold primarily to Standard Motor Products and has positioned us as a key supplier in the rapidly growing remanufactured electronics markets. In 1994, we vastly increased our offering of remanufactured computers and instituted a program of offering slower moving items by overnight shipment from our factory. This has enabled our 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 and in 1997 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. We divide our electronic operations between product design and highly automated manufacturing operations we perform in Orlando, Florida, and assembly operations, which we perform in assembly plants in Orlando, Florida and Hong Kong. Our sales of sensors, valves, solenoids and related parts have increased steadily as auto 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/M240 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 test have required repairs utilizing parts sold by us. Although we have completed the sale of our fuel pump business, we remain in the business of selling carburetor repair kits worldwide and carburetor systems in Europe and fuel injectors worldwide. 44 45 TEMPERATURE CONTROL DIVISION We market a broad line of replacement parts for automotive temperature control systems (air conditioning and heating), primarily under the brand names Four Seasons, Factory Air, Tru-Tech, Everco, Murray, NAPA and Carquest. In recent years Four Seasons has offered private label packaging to its larger accounts. The major product groups we sell are compressors, small motors, fan clutches, dryers, evaporators, accumulators, hoses, heater cores and valves. Revenues from our Temperature Control division increased 58.1% in 1998 to $297.1 million and accounted for approximately 45.8% of our total sales. Excluding revenues from acquisitions not present in 1997, revenues increased by $31.5 million or 16.8% in 1998. Following is a breakdown of this division's 1998 sales by major product category:
MAJOR PRODUCT CATEGORY 1998 SALES - ---------------------- -------------- (IN THOUSANDS) Compressors................................................. $131,154 Other Air Conditioner Parts................................. 145,207 Heating Parts............................................... 20,783 -------- Total............................................. $297,144 ========
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 retrofitted to use the new R-134a refrigerant. New vehicles began to use the new refrigerants in 1993. Installers continue to seek training and certification in the new technology and our Temperature Control division has taken the lead in providing this training and certification. Technological changes necessitate many new parts, as well as new service equipment. In anticipation of the CFC phaseout, in 1994 we re- engineered our compressor line to be able to operate efficiently utilizing either R-12 or R-134a refrigerants. This was the first such move in the industry. We remain a leader in providing retro-fit kits for conversion of R-12 systems. In June 1995, we 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. manufactures 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 (such as BMW and Porsche), in the United States. Air Parts, Inc. is a distributor of a limited, no-frills line of parts for mobile air conditioning systems. These acquisitions expanded the manufacturing and distribution capabilities of our Temperature Control division. Air Parts, Inc. also has provided us with our first temperature control sales to NAPA, the largest automotive aftermarket distributor in the United States. In December 1996, we acquired the Hayden Division of The Equion Corporation, a basic manufacturer of fan clutches and oil coolers. This acquisition expanded Four Seasons' profitable manufacturing base and greatly expanded the distribution channels for this key product line. To further leverage our strong base with retailers, in 1996 Four Seasons launched a small electric motor manufacturing and assembly facility in Ontario, Canada. This has greatly enhanced the sale of parts requiring small motors. In 1999, Four Seasons plans to launch production of the latest motor technology to further enhance its market position. In 1997, we also launched a facility to produce aluminum evaporators. This product enhanced Four Seasons' position in both aftermarket and original equipment channels. Four Seasons is the world's leader in the remanufacture of compressors for mobile air conditioning systems. We believe that Four Seasons has the highest quality and lowest cost 45 46 product. To further enhance its market position, in 1997 Four Seasons began the manufacture of select models of new compressors. These new compressors are generally for models whose cores used for remanufacturing are difficult to find and are expensive. Four Seasons is the only replacement parts manufacturer to provide such models of new compressors. In March 1998, we exchanged our brake business for the temperature control business of Cooper Industries. In addition to further strengthening our market share of the air conditioning replacement parts market, it greatly expanded our position in the small motor and heater parts market. Work has begun to consolidate the two businesses, and by early 2000 we expect to have closed three manufacturing facilities and consolidated three distribution sites into one. We have begun to achieve significant cost reductions, with the full impact not expected to be realized until the year 2000. With our leading technical, manufacturing and distribution skills, we are well positioned to play a significant role in the expanding European market for air conditioning replacement parts. As the installation rates of air conditioning in new vehicles grow and this expanding population of air conditioning equipped vehicles ages, this will create a significant growth opportunity for us. Work has begun for us to be positioned to take advantage of this future opportunity through the launch of a remanufactured compressor joint venture in France and a Four Seasons distribution center in Strasbourg, France. The compressor joint venture with Valeo S.A. will provide products for both original equipment service requirements and independent distribution channels throughout Europe. We are evaluating other pan-European channels of distribution for our products to serve this expanding market. INTERNATIONAL SALES We sell to the international markets primarily through our Canadian subsidiaries, direct exports and through a growing local presence in Europe. During 1998, approximately 10% of our total sales, or $63.3 million, were international, of which approximately 40%, or $25.5 million, were to the Canadian market. Our sales to the Canadian market in 1998 remained relatively flat compared to 1997. Our remaining international sales are largely in Europe and through direct exports to Latin America. The table below shows our international sales for the last three years, excluding sales from discontinued operations:
YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Canada.............................................. $25,513 $25,748 $24,470 All Other........................................... 37,863 40,252 14,226 ------- ------- ------- Total............................................... $63,376 $66,000 $38,696 ------- ------- -------
The European automotive aftermarket has historically been regional in nature and more dependent on original equipment dealers, making penetration by non-original equipment suppliers very difficult. However, it is currently undergoing large scale changes, evolving into a Pan-European market, with broader availability of independent replacement parts. We believe that opportunities exist through acquisitions, internal direct investment and the establishment of joint ventures with European partners whereby we would combine the export of products with manufacturing operations in European countries. We would provide technical and production expertise while the joint venture partner would assume primary distribution responsibility under an established brand. Products that we believe are good candidates for such joint ventures include remanufactured computers, temperature control parts, and ignition and emission control products. In July 1996, we acquired a 73% interest in Intermotor Holdings Limited, which we believe is the leading manufacturer of ignition replacement parts in the United Kingdom. We are 46 47 in the process of expanding this business by adding new products and seeking acquisitions. In 1997, Blue Streak Electronics, a joint venture 50% owned by us, launched a venture in Europe to produce re-manufactured engine computers. In late 1996, we also launched Four Seasons Europe, a business which distributes temperature control products in Europe. In late 1998, Standard Motor Products Holdings Limited acquired an 85% interest in Webcon UK Limited, a leading distributor of carburetor and engine management products and, through Blue Streak Electronics, an 87.5% interest in Injection Correction UK Limited, a remanufacturer of engine computers. In April 1999, we acquired Lemark Auto Accessories Limited, a United Kingdom-based manufacturer and distributor primarily of ignition wire and other engine management products. We will integrate these businesses within our existing European operations. SALES AND DISTRIBUTION We sell products under our proprietary brand names throughout the United States, Canada, Latin America, Europe and the Middle East. The Company's products are then distributed to warehouse distributors, including approximately 15,000 jobber outlets located throughout the United States and Canada. The jobbers sell our products primarily to professional mechanics and to consumers who perform their own automobile repairs. In addition, we sell directly to large auto parts retail chains such as Advance Auto Parts, AutoZone, CSK Auto, Discount Auto Parts and Pep Boys/Parts USA. As of March 31, 1999, we sold and serviced our products through a direct sales force of approximately 300 people and, in certain instances, through independent sales representatives. Independent surveys have indicated that our sales force is the premier direct sales force for our two product lines. We believe the primary reason for this reputation is our high concentration of highly qualified, well-trained salespeople dedicated to geographic territories. This allows us to provide a level of customer service that is unmatched. The United States sales force is divided into four regions, each with five to six zones and approximately eight salespeople per zone. We also have two dedicated sales forces, one for Carquest customers in the United States and the second for Canadian customers. These two dedicated sales forces aggregate approximately 100 people. From the outset, we thoroughly train our salespeople both in the function and application of every product line we sell, as well as in proven sales techniques. Customers therefore depend on these salespeople as a reliable source for technical information. We give newly hired salespeople extensive instruction at our training facility in Grapevine, Texas and have a policy of continuing education that allows our sales force to stay current on troubleshooting and repair techniques, as well as the latest automotive parts and systems technology. We employ a comprehensive CD-ROM training program that further broadens our capability to provide real-time updated training to our salespeople. We generate demand for our products by directing a significant portion of our sales effort to our customers' customers (i.e., jobbers and professional mechanics), creating a demand-pull through our traditional distribution system. To help our salespeople to be teachers and trainers, we focus our recruitment efforts on candidates who already have strong technical backgrounds as well as sales experience. Many are certified mechanics in their area of expertise under industry-accepted tests developed by the National Institute for Automotive Service Excellence (ASE). Our sales force has collectively earned almost 1,000 ASE certificates in engine performance, electrical systems and air conditioning. We also create pull-through demand for our products through the Standard Plus Club. The Standard Plus Club, a professional service dealer network comprised of approximately 13,000 members, offers technical and business development support and has a technical service telephone hotline which provides diagnostics and installation support. This club is available to any jobber or installer and provides training, special discount programs, on-line diagnostics assistance and logo merchandise. 47 48 Our salespeople are responsible for training the sales forces of warehouse distributors and jobbers and the mechanics who work with our products. With constant changes in automobile models, our salespeople ensure that our customers are informed of the latest technological advances. One means of educating mechanics, warehouse distributors and jobber salespeople is through clinics, usually consisting of a lecture supported by visual aids. Our salespeople frequently give clinics with the sponsorship of local warehouse distributors and/or jobbers. They set up field classrooms and examine specific vehicle systems in-depth. Another new training tool that we have found highly successful is the use of instructional videotapes which we produce. In 1998 we conducted approximately 4,000 instructional clinics to teach mechanics how to diagnose and repair complex systems related to our products. We also publish and sell related service manuals and video/cassettes and provide a free technical information bulletin service to registered mechanics. While we make minimal use of advertising, the use of catalogues is a major marketing tool. During 1998, we utilized approximately 25 different catalogues. We also use promotions such as cooperative advertising programs. CUSTOMERS Our customer base is comprised largely of warehouse distributors, jobber outlets, retailers, other manufacturers and export customers. No single customer accounted for more than 10% of our 1998 sales. Warehouse distributors were our largest customer group, representing approximately 82% of our total sales in 1998. Our major customers in this category include the rapidly growing company General Parts, Inc. (an operator of warehouse distributors and jobber stores under the Carquest name) and the largest wholesale distributor, Genuine Parts Company (NAPA Auto Parts). In addition to serving our traditional customer base, we have expanded into the retail market by commencing sales to large retail chains such as Advance Auto Parts, AutoZone, CSK Auto, Discount Auto Parts and Pep Boys/Parts USA, among others. Sales to retail chains totaled approximately $119 million in 1998. The acquisition of new customers typically involves sizable start-up costs, including stocklifts, new packaging, sales aids and sales training. In the aftermarket, large initial changeover costs are an unavoidable and necessary part of acquiring a new customer. Conversely, due to their physical complexity, cost and size, such changeovers also create significant barriers to entry for new competitors. In certain instances, we have made acquisitions of smaller competitors as a cost-effective means of gaining access to new customers and markets. In addition to our core customer base, we see growth opportunities in two new customer categories: other aftermarket manufacturers and original equipment dealers and the parts and service network of the original equipment vehicle manufacturers. Sales to other aftermarket manufacturers ("co-manufacturing") have evolved with parts proliferation. The setup and production of a new line of products can be expensive and time consuming. Consequently, aftermarket manufacturers outsource the production of certain parts while still offering such products under their existing brand names. This results in manufacturers concentrating on their core competencies, while still being able to offer a broad product line. We believe that co-manufacturing sales will continue to grow and we currently sell certain parts to Dana and Federal Mogul, among others. COMPETITION We are among the largest manufacturers of replacement parts for product lines in our two divisions, namely engine management and temperature control. We compete primarily on the 48 49 basis of product quality, price, customer service, product coverage, product availability, order turn-around time and order fill-rate. Our management believes that we differentiate ourselves primarily through our value-added, knowledgeable sales force; our extensive product coverage; our sophisticated parts cataloguing systems; and inventory levels sufficient to meet the rapid delivery requirements of customers. In the engine management business, we are the top aftermarket manufacturer in the United States. We estimate that our market share in 1998 was approximately 30%. Dana and Delco Electronics Corporation (a GM subsidiary) each have a 25% to 30% share of the market, followed by Wells Manufacturing Corporation (a UIS, Inc. subsidiary) which we estimate has a 10% market share. Our temperature control business is the primary producer and distributor of a full line of temperature control products in the North American market. With a market share of over 50%, we are greater in size and scope than any of our competitors. Delco Electronics Corporation, Filters, Go Dan and Stant are key competitors in this market, but each produces a limited product line. Although we are a leading independent manufacturer of automotive replacement parts with strong brand name recognition, we face substantial competition in all markets that we serve. Certain major manufacturers of replacement parts are divisions of companies having greater financial resources than Standard Motor Products. In addition, automobile manufacturers supply virtually every replacement part sold by us, although these manufacturers generally supply parts only for cars they produce. See "Risk Factors -- Our Industry is Highly Competitive; Some of Our Competitors Have Greater Resources Than We Do." 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. Consequently, our inventory rose to historically high levels and, in response, in early 1991 we initiated a major program to reduce excess inventory which included the following elements: - single point distribution, - introduction of just-in-time cellular manufacturing techniques, and - the consolidation of distribution facilities. In recent years, we have reduced inventories from $229.2 million at December 31, 1996 (with inventory turns at 2.3x for that year) to $174.1 million at December 31, 1998 (with inventory turns at 2.4x for that year). Since 1996, we have made significant changes to our inventory management system to reduce inventory requirements. We launched a new forecasting system in our Engine Management division that permitted a significant reduction in safety stocks. Our Engine Management division also is introducing a new distribution system in the second half of 1999, which will permit pack-to-order systems to be implemented. Such systems permit us to retain slow moving items in a bulk storage state until an order for a specific brand part is received. This system reduces the volume of a given part in inventory and reduces the labor requirements to package and repackage inventory. Significant benefits from these systems will accrue once they are fully implemented by year end 1999. As discussed above, one of the cost savings measures we adopted in the early 1990s was a single point distribution system that eliminated cross-shipping between distribution centers. Historically, we had stocked a complete selection of products at each distribution center to minimize delivery times to our customers. This resulted in shipping costs and inventory levels that were higher than necessary. In 1991, we dramatically reduced this practice. We began 49 50 shipping products primarily from those distribution centers located closest to the manufacturing facility where each respective product line was produced. We are continuing to refine this practice. While a slight increase in delivery times to customers has been experienced, we have improved service fill rates and there has been no significant impact on our reputation for outstanding customer service. Average accounts receivable have increased from 23.9% of sales as of March 31, 1996 to 27.2% of sales as of March 31, 1999. Meanwhile, receivable days outstanding have increased from 100.7 days as of March 31, 1996 to 123.2 days as of March 31, 1999. This trend is primarily due to a change in our customer mix. We expect the average terms of accounts receivable to improve during 1999. Bad debt expense from continuing operations typically has been less than 1% of sales for the past several years, except for 1997 when a $10.5 million reserve was established for the write-off of receivables from A.P.S., Inc., which filed for Chapter 11 bankruptcy protection in February 1998. We are implementing a new accounts receivable system in 1999 that should provide the necessary tools for improved collection efforts to reduce past due accounts and days outstanding. SUPPLIERS Our raw material purchases consist principally of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), ignition wire, stainless steel coils and rods, aluminum coils and rods, lead, rubber molding compound, thermo-set and thermo-plastic molding powders. Additionally, we use components and cores (used parts) in our remanufacturing processes for computerized electronics and air conditioning compressors. We purchase most materials in the open market, but we do have a limited number of supply agreements on key components. A number of prime suppliers make these materials available. In the case of cores, we obtain them either from exchanges with customers who return cores when purchasing remanufactured parts, or through direct purchases from a network of core brokers. We believe there is an adequate supply of primary raw materials and cores. In order to ensure a consistent, high quality, low cost supply of key components for each product line, we continue to develop our own sources through internal manufacturing capacity and/or acquisitions. PRODUCTION AND ENGINEERING We engineer, tool and manufacture many of the components for our products. We purchase certain commonly available small component parts from outside suppliers. We also perform our own plastic and rubber molding operations, stamping and machining operations, automated electronics assembly and a wide variety of other processes. In the case of remanufactured components, we conduct our own teardown, diagnostics, and rebuilding for computer modules and air conditioning compressors. We have found that this level of vertical integration provides advantages in terms of cost, quality and availability. We intend to selectively continue efforts toward further vertical integration to ensure a consistent quality and supply of low cost components. We have an engineering department staffed by approximately 120 people, approximately 65% of whom are graduate engineers. The department performs product development and quality control, and, wherever practical, designs machinery for the automation of our processes. A unique facility at the Orlando, Florida plant is the Class 10,000 clean room. At this location, hybrid thick film circuits are screen printed on ceramic substances. We also make the metal screens used in printing at this facility, utilizing an advanced photographic process. This facility allows us to go from design to production in a matter of days rather than weeks. In 1990, we 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 inefficient 50 51 operations that burden many manufacturing processes. We originally implemented "just-in-time" cellular manufacturing on a limited scale to test the concept and its impact on the cost of production. To date, we have substantially implemented the just-in-time manufacturing program at the majority of our manufacturing facilities and plan to convert the remaining facilities to cellular production over the next few years. EMPLOYEES At March 31, 1999, we employed approximately 3,850 people at 35 offices, factories and distribution centers located in the United States, Canada, Mexico, Puerto Rico, Europe and Hong Kong. In addition, we have joint venture operations in Canada and France. Of these, approximately 2,450 were production employees. Long Island City, New York production employees are unionized. On October 1, 1998, the hourly workers at the Long Island City facility, which produces products for our Engine Management Division, initiated a work stoppage. Our labor contract with the workers expired on that date and we did not reach agreement with the workers on the terms of a new contract at that time. The workers returned to work on November 13, 1998 and on June 21, 1999 we signed a three-year labor contract, retroactively effective as of October 2, 1998, with the workers. Production operated satisfactorily while the workers worked without a contract. We now have binding labor agreements with the workers at all of our unionized facilities. 51 52 MANAGEMENT The following table sets forth certain information concerning our executive officers and directors as of June 30, 1999.
NAME AGE POSITION - ---- --- -------- Nathaniel L. Sills..... 92 Chairman, Director Lawrence I. Sills...... 59 President, Chief Operating Officer and Director Michael J. Bailey...... 46 Senior Vice President of Finance and Administration, Chief Financial Officer John P. Gethin......... 51 Senior Vice President of Operations and General Manager, the Four Seasons Division Joseph G. Forlenza..... 56 Vice President and General Manager, Standard Division Donald E. Herring...... 57 Vice President of Aftermarket Sales Sanford Kay............ 56 Vice President of Human Resources, Secretary Nitin Parikh........... 59 Vice President of Information Systems James J. Burke......... 43 Director of Finance, Chief Accounting Officer David Kerner........... 62 Treasurer and Assistant Secretary Marilyn F. Cragin...... 47 Director Arthur D. Davis........ 51 Director Susan F. Davis......... 50 Director Robert M. Gerrity...... 61 Director John L. Kelsey......... 74 Director Andrew M. Massimilla... 58 Director Arthur S. Sills........ 56 Director Robert J. Swartz....... 73 Director William H. Turner...... 59 Director
NATHANIEL L. SILLS has been our sole Chairman of the Board since May 1998 and served as Co-Chairman of the Board from May 1987 to May 1998. Mr. Sills has served as a director of Standard Motor Products since 1946. LAWRENCE I. SILLS has been our President, Chief Operating Officer and a director since 1986. From 1983 to 1986, Mr. Sills served as our Vice President of Operations. Mr. Sills is the son of Nathaniel L. Sills and brother of Arthur S. Sills. Mr. Sills serves as Chairman of Seedco, a non-profit corporation. JOSEPH G. FORLENZA has served as Vice President and General Manager of our Standard Division since July 1993. Prior to that time Mr. Forlenza served as Vice President and General Manager of the Champ Service Line, a Division of Standard Motor Products, from May 1988 to June 1993. MICHAEL J. BAILEY has served as our Senior Vice President of Finance and Administration since December 1997 and as our Chief Financial Officer since June 1993. Prior to becoming Senior Vice President of Finance, Mr. Bailey was our Vice President of Finance from June 1993 to December 1997. From June 1990 to June 1993, Mr. Bailey was Executive Vice President and Chief Financial Officer of Breed Technologies, Inc., an automotive component supplier. JOHN P. GETHIN has served as our Senior Vice President of Operations since December 1997 and as General Manager of the Four Seasons Division since October 1998. Prior to his present position, Mr. Gethin was Vice President and General Manager of our EIS Brake Parts division, from October 1995 to December 1997. From 1989 to 1994, Mr. Gethin was President of Wagner Electric, a division of Cooper Industries that supplies automotive electrical components. 52 53 DONALD E. HERRING has served as our Vice President of Aftermarket Sales since January 1993. Prior to that time, Mr. Herring served as our National Sales Manager from January 1990 to December 1992. SANFORD KAY has served as our Vice President of Human Resources since June 1988 and as our Secretary since May 1993. Prior to becoming Vice President of Human Resources, Mr. Kay served as our Director of Labor Relations from January 1987 to June 1988. NITIN PARIKH has served as our Vice President of Information Systems since June 1985. Prior to that time, Mr. Parikh served as our Manager of Information Systems from June 1978 to June 1985. From 1973 to 1978, Mr. Parikh served as a Systems and Program Manager at Standard Motor Products. JAMES J. BURKE has served as our Director of Finance and Chief Accounting Officer since December 1997. Prior to his present position, Mr. Burke served as our Corporate Controller from March 1993 to December 1997 and before that as our Assistant Corporate Controller from June 1987 to March 1993. DAVID KERNER has served as our Treasurer since February 1993. Prior to that time, Mr. Kerner served as our Corporate Controller from December 1982 to February 1993. MARILYN F. CRAGIN has served as a director of Standard Motor Products since October 1995. Ms. Cragin is currently the co-owner of an art gallery. Prior to opening the art gallery, Ms. Cragin was a practicing psychotherapist for more than 10 years. Ms. Cragin is the daughter of Bernard Fife and the sister of Susan F. Davis. ARTHUR D. DAVIS has served as a director of Standard Motor Products since May 1986. Mr. Davis is currently retired. Mr. Davis served as our Vice President of Materials Management from May 1986 to January 1989. Mr. Davis is the son-in-law of Bernard Fife and the husband of Susan F. Davis. SUSAN F. DAVIS has served as a director of Standard Motor Products since May 1998. Ms. Davis is the daughter of Bernard Fife and the wife of Arthur D. Davis and sister of Marilyn F. Cragin. ROBERT M. GERRITY has served as a director of Standard Motor Products since July 1996. Mr. Gerrity has served as Chairman and Chief Executive Officer of Antrium Group, Inc., a venture capital company, since February 1996. Prior to February 1996, Mr. Gerrity served as Vice Chairman of New Holland, n.v. from January 1990 to December 1994. Mr. Gerrity has also been a director of Harnischfeger Industries, Inc. since June 1994 and Libralter Engineering Systems, Inc. since February 1993. JOHN L. KELSEY has served as director of Standard Motor Products since 1964. Mr. Kelsey is currently retired. From January 1989 to March 1991 Mr. Kelsey served as Advisory Director at PaineWebber Inc. Prior to that time, Mr. Kelsey served as Managing Director of PaineWebber Inc. (and its predecessor firms) for more than 30 years. ANDREW M. MASSIMILLA has served as director of Standard Motor Products since October 1996. Mr. Massimilla has been a business consultant since December 1991. From October 1988 to June 1995, Mr. Massimilla held positions of Consultant and Managing Director of the Henley Group and Affiliated Companies. Mr. Massimilla is also a director of Amtrol, Inc. ARTHUR S. SILLS has served as a director of Standard Motor Products since October 1995. Mr. Sills has been an educator and administrator in Cambridge, Massachusetts for more than the past twenty years. Mr. Sills is a son of Nathaniel L. Sills and a brother of Lawrence I. Sills. ROBERT J. SWARTZ has served as a director of Standard Motor Products since May 1992. Mr. Swartz has been an independent financial consultant since March 1991. Prior to March 1991, 53 54 Mr. Swartz was a senior partner in the predecessor firm of KPMG LLP for more than 30 years. Mr. Swartz is a director of ALCO Capital Group, Inc. and Bed Bath & Beyond, Inc. WILLIAM H. TURNER has served as director of Standard Motor Products since May 1990. Mr. Turner is currently the President of PNC Bank N.A. New Jersey, a position he has held since August 1997. Prior to August 1997, Mr. Turner served as President and Co-Chief Executive Officer of Franklin Electronic Publishers, Inc. from October 1996 to July 1997. Prior to holding that position, Mr. Turner was Vice Chairman of the Board at Chase Manhattan Bank from March 1996 to October 1996. Prior to that time, Mr. Turner served as Senior Executive Vice President of Chemical Banking Corporation from January 1992 to March 1996. Mr. Turner is also a director of Franklin Electronic Publishers, Inc. and Volt Information Services Inc. 54 55 PRINCIPAL SHAREHOLDERS The following table sets forth certain information, as of April 30, 1999, with respect to the beneficial ownership of our common stock, by (a) each person known by us to be the beneficial owner of more than five percent of the outstanding shares of common stock, (b) our principal executive officer during 1998 and each of our other five most highly compensated executive officers during 1998, (c) each of our directors, and (d) all of our executive officers and directors as a group.
AMOUNT AND NATURE OF NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) PERCENTAGE OF CLASS - ---------------- ----------------------- ------------------- Gabelli Funds, Inc............... 2,136,150(2) 16.3% One Corporate Center Rye, New York Bernard Fife..................... 1,090,364(3)(5)(10)(13) 8.3 37-18 Northern Boulevard Long Island City, New York Nathaniel L. Sills............... 630,077(3)(5)(6)(7)(11) 4.8 37-18 Northern Boulevard Long Island City, New York Lawrence I. Sills................ 561,385(3)(5)(6) 4.3 37-18 Northern Boulevard Long Island City, New York Joseph G. Forlenza............... 25,750(5) * 37-18 Northern Boulevard Long Island City, New York John P. Gethin................... 27,150(5) * 37-18 Northern Boulevard Long Island City, New York Michael J. Bailey................ 25,750(5) * 37-18 Northern Boulevard Long Island City, New York Stanley Davidow(9)............... 60,300(5) * 37-18 Northern Boulevard Long Island City, New York Marilyn F. Cragin................ 1,222,525(3)(4)(13) 9.3 37-18 Northern Boulevard Long Island City, New York Arthur D. Davis.................. 1,418,622(3)(6)(8)(12)(13) 10.8 37-18 Northern Boulevard Long Island City, New York Robert M. Gerrity................ 3,873(5) * 114 Division Street Bellaire, Michigan John L. Kelsey................... 4,998(5) * 460 Coconut Palm Road Vero Beach, Florida Andrew M. Massimilla............. 3,873(5) * One Peninsula Dr. Stratham, New Hampshire Arthur S. Sills.................. 519,471(4) 4.0 37-18 Northern Boulevard Long Island City, New York Robert J. Swartz................. 3,873(5) * 1500 Palisade Avenue Ft. Lee, New Jersey
55 56 William H. Turner. (5) 4,873 * 2 Tower Center Blvd. East Brunswick, New Jersey Susan F. Davis................... 1,223,740(3)(4)(8)(13) 9.3 37-18 Northern Boulevard Long Island City, New York Executive officers and directors as a group (19 persons)........ 4,126,291(6) 30.9
- --------------- * Represents beneficial ownership of less than 1% of the outstanding shares of common stock. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days of April 30, 1999 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, the shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder's name. (2) We have based the information relating to the number of shares of common stock for such shareholders on information contained in Reports on Schedule 13-D, as amended, filed by Gabelli Funds, Inc. on May 5, 1999. (3) Includes shares of common stock deemed beneficially owned by the following persons, who act as trustees of trusts that hold shares of common stock, as follows: Bernard Fife: 625,194 shares, including 335,507 shares held as co-trustee with Nathaniel L. Sills; Nathaniel L. Sills: 335,507 shares all of which are held as co-trustee with Bernard Fife; Marilyn F. Cragin: 642,069 shares all of which are held as co-trustee with Arthur D. Davis and Susan F. Davis; Arthur D. Davis: 819,855 shares, of which 642,069 shares are held as co-trustee with Susan D. Davis and Marilyn F. Cragin; and Susan F. Davis: 819,855 shares, including 642,069 shares held as co-trustee with Arthur D. Davis and Marilyn F. Cragin and 177,786 shares are held by her spouse, Arthur D. Davis, as trustee. Each of the foregoing individuals disclaims beneficial ownership of the shares so deemed beneficially owned by such person within the meaning of Rule 13d-3 of the Exchange Act. (4) Includes shares of common stock held by these individuals as custodians for minor children, as follows: Marilyn F. Cragin: 26,387 shares; Arthur S. Sills: 36,324 shares; Arthur D. Davis (through his spouse, Susan F. Davis): 43,562 shares; and Susan F. Davis: 43,562 shares. (5) Includes shares of common stock which these individuals have the right to acquire through the exercise of options within 60 days of April 30, 1999, as follows: Bernard Fife: 30,000 shares; Nathaniel L. Sills: 30,000 shares; Lawrence I. Sills: 51,000 shares; Joseph G. Forlenza: 17,750 shares; Stanley Davidow: 54,000 shares; John Gethin: 20,750 shares; Michael J. Bailey: 19,250 shares; Robert M. Gerrity: 3,000 shares; John L. Kelsey: 3,000 shares; Andrew M. Massimilla: 3,000 shares; Robert J. Swartz: 3,000 shares; and William H. Turner: 3,000 shares. (6) Excludes shares allocated to such persons under our Employee Stock Ownership Plan but held by the trustee thereof. (7) Excludes 143,062 shares of common stock held in the Sills Family Foundation, Inc. (8) Excludes 114,063 shares of common stock held in the Fife Family Foundation, Inc. (9) In October 1998, Mr. Davidow resigned from Standard Motor Products. 56 57 (10) Mr. Bernard Fife is the father of Marilyn F. Cragin and Susan F. Davis, the father-in-law of Arthur D. Davis, the brother-in-law of Nathaniel L. Sills, and the uncle of Lawrence I. Sills and Arthur S. Sills. (11) Mr. Nathaniel L. Sills is the father of Lawrence I. Sills and Arthur S. Sills, the brother-in-law of Bernard Fife and the uncle of Marilyn F. Cragin and Susan F. Davis. (12) Arthur Davis is the spouse of Susan F. Davis. (13) Includes shares of common stock deemed beneficially owned by the following persons through direct ownership by their spouse: Bernard Fife: 193,958 shares; Marilyn F. Cragin: 9,307 shares; Arthur D. Davis: 467,836 shares owned by his spouse Susan F. Davis; and Susan F. Davis: 87,369 shares owned by her spouse, Arthur D. Davis. 57 58 DESCRIPTION OF CONVERTIBLE DEBENTURES The Convertible Debentures will be issued under an Indenture, to be dated as of , 1999, between Standard Motor Products and HSBC Bank USA, as Trustee, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part. Wherever particular defined terms of the Indenture are referred to, such defined terms are incorporated herein by reference. The following summaries of certain provisions of the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the detailed provisions of the Convertible Debentures and the Indenture, including the definitions therein of certain terms. GENERAL The Convertible Debentures will be our general unsecured subordinated obligations, will be limited to $86.25 million aggregate principal amount and will mature on , 2009. The Convertible Debentures will bear interest at the rate per annum set forth on the front cover of this Prospectus from , 1999 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semi-annually on and of each year, commencing until the principal thereof is paid or made available for payment, to the Person in whose name the Convertible Debenture (or any Predecessor Debenture) is registered at the close of business on the preceding . Interest on the Convertible Debentures at such rate will be computed on the basis of a 360-day year, comprised of twelve 30-day months. You may convert the Convertible Debentures into shares of common stock initially at the conversion rate stated on the front cover of this Prospectus, subject to adjustment upon the occurrence of certain events described under "-- Conversion Rights," at any time prior to the close of business on and , unless previously redeemed or repurchased. We may redeem the Convertible Debentures at our option, at any time on or after , 2004, in whole or in part, at the redemption prices set forth below under "-- Optional Redemption," plus accrued interest to the redemption date. We also may repurchase the Convertible Debentures at the option of the Holders, as described below under "-- Repurchase at Option of Holders Upon a Change of Control." The principal of, premium, if any, and interest on the Convertible Debentures will be payable, and the Convertible Debentures may be surrendered for registration of transfer, exchange and conversion, at the office or agency of the Trustee. In addition, we may at our option pay interest by check mailed to the address of the Person entitled thereto as it appears in the Security Register. See "-- Payment and Conversion." Payments, transfers, exchanges and conversions relating to beneficial interests in Convertible Debentures issued in book-entry form will be subject to the procedures applicable to Global Debentures described below. We initially will appoint the Trustee at its Corporate Trust Office as our paying agent, transfer agent, registrar and conversion agent for the Convertible Debentures. In such capacities, the Trustee will be responsible for, among other things, (i) maintaining a record of the aggregate holdings of Convertible Debentures represented by the Global Debenture (as defined below) and accepting Convertible Debentures for exchange and registration of transfer, (ii) ensuring that payments of principal, premium, if any, and interest received from us by the Trustee in respect of the Convertible Debentures are duly paid to The Depository Trust Company ("DTC") or its nominees, (iii) transmitting to us any notices from Holders of the Convertible Debentures, (iv) accepting conversion notices and related documents and transmitting the relevant items to us and (v) delivering certificates for common stock issued upon conversion of the Convertible Debentures. 58 59 We will cause each transfer agent to act as a registrar and will cause to be kept at the office of such transfer agent a register in which, subject to such reasonable regulations as the transfer agent may prescribe, we will provide for registration of transfers of the Convertible Debentures. We may vary or terminate the appointment of any paying agent, transfer agent or conversion agent, or appoint additional or other such agents or approve any change in the office through which any such agent acts, provided that there shall at all times be maintained by us, a paying agent, a transfer agent and a conversion agent in the Borough of Manhattan, The City of New York. We will cause notice of any resignation, termination or appointment of the Trustee or any paying agent, transfer agent or conversion agent, and of any change in the office through which any such agent will act, to be provided to Holders of the Convertible Debentures. We will not charge a service charge for registration of transfer or exchange of Convertible Debentures, but we may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES Convertible Debentures will be issued only in fully registered form, without interest coupons, in minimum denominations of $1,000 and integral multiples in excess thereof. Convertible Debentures sold in the offering will be issued only against payment therefor in immediately available funds. The Convertible Debentures initially will be represented by one or more Convertible Debentures in registered, global form without interest coupons (collectively, the "Global Convertible Debentures" or "Global Convertible Debenture"). The Global Convertible Debentures will be deposited upon issuance with the Trustee as custodian for DTC, in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant in DTC as described below. Transfers of beneficial interests in the Global Convertible Debentures will be subject to the applicable rules and procedures of DTC and its direct or indirect participants, which may change from time to time. Except as set forth below, the Global Convertible Debentures may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. You may not exchange beneficial interests in the Global Convertible Debentures for Convertible Debentures in certificated form except in the limited circumstances described below under "-- Exchanges of Book-Entry Convertible Debentures for Certificated Convertible Debentures." EXCHANGES OF BOOK-ENTRY CONVERTIBLE DEBENTURES FOR CERTIFICATED CONVERTIBLE DEBENTURES. You may not exchange a beneficial interest in a Global Convertible Debenture for a Convertible Debenture in certificated form unless (i) DTC (x) notifies us that it is unwilling or unable to continue as depositary for the Global Convertible Debenture or (y) has ceased to be a clearing agency registered under the Securities Exchange Act of 1934, and in either case we then fail to appoint a successor depositary, (ii) we, at our option, notify the Trustee in writing that we elect to cause the issuance of the Convertible Debentures in certificated form or (iii) there shall have occurred and be continuing an event of default or any event which after notice or lapse of time or both would be an event of default with respect to the Convertible Debentures. In all cases, certificated Convertible Debentures delivered in exchange for any Global Convertible Debenture or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures). 59 60 CERTAIN BOOK-ENTRY PROCEDURES FOR GLOBAL CONVERTIBLE DEBENTURES. The descriptions of the operations and procedures of DTC that follow are provided solely as a matter of convenience. These operations and procedures are solely within DTC's control and are subject to changes by DTC from time to time. We take no responsibility for these operations and procedures and urge investors to contact DTC or its participants directly to discuss these matters. DTC has advised us as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC was created to hold securities for its participants ("participants") and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical transfer and delivery of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). DTC has advised us that its current practice, upon the issuance of a Global Convertible Debenture, is to credit, on its internal system, the respective principal amount of the individual beneficial interests represented by such Global Convertible Debenture to the accounts with DTC of the participants through which such interests are to be held. Ownership of beneficial interests in the Global Convertible Debenture will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominees (with respect to interests of participants) and the records of participants and indirect participants (with respect to interests of persons other than participants). AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL CONVERTIBLE DEBENTURE, DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND HOLDER OF THE CONVERTIBLE DEBENTURES REPRESENTED BY SUCH GLOBAL CONVERTIBLE DEBENTURE FOR ALL PURPOSES UNDER THE INDENTURE AND THE CONVERTIBLE DEBENTURES. Except in the limited circumstances described above under "-- Exchanges of Book-Entry Convertible Debentures for Certificated Convertible Debentures," owners of beneficial interests in a Global Convertible Debenture will not be entitled to have any portions of such Global Convertible Debenture registered in their names, will not receive or be entitled to receive physical delivery of Convertible Debentures in definitive form and will not be considered the owners or Holders of the Global Convertible Debenture (or any Convertible Debentures represented thereby) under the Indenture or the Convertible Debentures. Investors may hold their interests in the Global Convertible Debenture directly through DTC, if they are participants in such system, or indirectly through organizations that are participants in such system. All interests in a Global Convertible Debenture will be subject to the procedures and requirements of DTC. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Convertible Debenture to such persons may be limited to that extent. Because DTC can act only on behalf of its participants, which in turn act on behalf of indirect participants and certain banks, the ability of a person having beneficial interests in a Global Convertible Debenture to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. 60 61 Payments of the principal of, premium, if any, and interest on the Convertible Debenture will be made to DTC or its nominee, as the case may be, as the registered owner of the Global Convertible Debenture. We, the Trustee and our agents will not have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Convertible Debenture or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. We expect that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Convertible Debenture representing any Convertible Debentures held by it or its nominee, will immediately credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Convertible Debenture for such Convertible Debentures as shown on the records of DTC or its nominee. We also expect that payments by participants to owners of beneficial interests in such Global Convertible Debenture held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in "street name." Such payments will be the responsibility of such participants. Interests in the Global Convertible Debentures will trade in DTC's Same-Day Funds Settlement System, and secondary market trading activity in such interests will therefore settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its participants. Transfers between participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds. DTC has advised us that it will take any action permitted to be taken by a holder of Convertible Debentures (including the presentation of Convertible Debentures for exchange as described below and the conversion of Convertible Debentures) only at the direction of one or more participants to whose account with DTC interests in the Global Debentures are credited and only in respect of such portion of the aggregate principal amount of the Convertible Debentures as to which such participant or participants has or have given such direction. However, if there is an Event of Default (as defined below) under the Convertible Debentures, DTC reserves the right to exchange the Global Convertible Debentures for Convertible Debentures in certificated form, and to distribute such Convertible Debentures to its participants. We, the Trustee and our agents will not have any responsibility for the performance by DTC, its participants or indirect participants of its respective obligations under the rules and procedures governing its operations, including maintaining, supervising or reviewing the records relating to, or payments made on account of, beneficial ownership interests in Global Convertible Debentures. PAYMENT AND CONVERSION The principal of the Convertible Debentures will be payable in U.S. dollars, against surrender thereof at the office or agency of the Trustee, in U.S. currency by dollar check or by transfer to a dollar account (such a transfer to be made only to a Holder of an aggregate principal amount of Convertible Debentures of at least $2,000,000 and only if such Holder shall have furnished wire instructions to the Trustee in writing no later than 15 days prior to the relevant payment date) maintained by the Holder with a bank in the United States. Payment of interest on a Convertible Debenture may be made by dollar check mailed to the address of the person entitled thereto as such address shall appear in the Security Register, or, upon written application by the Holder to the Security Registrar setting forth instructions not later than the relevant Record Date, by transfer to a dollar account (such a transfer to be made only to a Holder of an aggregate principal amount of Convertible Debentures of at least $2,000,000 and only if such Holder shall have furnished wire instructions in writing to the Trustee no later than 15 days prior to the relevant payment date) maintained by the Holder with a bank in the United States. 61 62 Any payment on a Convertible Debenture due on any day that is not a Business Day need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on such due date, and no interest shall accrue on such payment for the period from and after such date. "Business Day," when used with respect to any place of payment, place of conversion or any other place, as the case may be, means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in such place of payment, place of conversion or other place, as the case may be, are authorized or obligated by law or executive order to close. Convertible Debentures may be surrendered for conversion at our office or agency in the Borough of Manhattan, The City of New York, at any other office or agency we maintain for such purpose. In the case of Global Convertible Debentures, DTC will effect conversion upon notice from the holder of a beneficial interest in a Global Convertible Debenture in accordance with its rules and procedures. Convertible Debentures surrendered for conversion must be accompanied by a conversion notice and any payments in respect of interest, as applicable, as described below under "-- Conversion Rights." CONVERSION RIGHTS The Holder of any Convertible Debenture will have the right, at the Holder's option, to convert any portion of the principal amount of a Convertible Debenture that is an integral multiple of $1,000,000 into shares of common stock, unless previously redeemed or repurchased, at a conversion rate equal to the number of shares per $1,000 principal amount of Convertible Debentures shown on the front cover of this Prospectus (the "Conversion Rate"), subject to adjustment as described below. The right to convert a Convertible Debenture called for redemption or delivered for repurchase will terminate at the close of business on the Redemption Date or Repurchase Date for such Convertible Debenture, unless we default in making the payment due upon redemption or repurchase, as the case may be. The right of conversion attaching to any Convertible Debenture may be exercised by the Holder by delivering the Convertible Debenture at our office or agency in the Borough of Manhattan, The City of New York, at any other office or agency we maintain for such purpose and at the office or agency of any additional conversion agent appointed by us, accompanied by a duly signed and completed notice of conversion. The Trustee or any conversion agent will provide you with a copy of the notice of conversion. The conversion date will be the date on which the Convertible Debenture and the duly signed and completed notice of conversion are so delivered. As promptly as practicable on or after the conversion date, we will issue and deliver to the Trustee a certificate or certificates for the number of full shares of common stock issuable upon conversion, together with payment in lieu of any fraction of a share or, at our option, rounded up to the next whole number of shares. The Trustee will send such certificate to the Conversion Agent for delivery to the Holder. Such shares of common stock issuable upon conversion of the Convertible Debentures, in accordance with the provisions of the Indenture, will be fully paid and nonassessable and will also rank pari passu with the other shares of common stock outstanding from time to time. Holders that surrender Convertible Debentures for conversion on a date that is not an interest Payment Date are not entitled to receive any interest for the period from the next preceding Interest Payment Date to the date of conversion, except as described below. However, Holders of Convertible Debentures on a Regular Record Date, including Convertible Debentures surrendered for conversion after the Regular Record Date, will receive the interest payable on such Convertible Debentures on the next succeeding Interest Payment Date. Accordingly, any Convertible Debenture surrendered for conversion during the period from the close of business on a Regular Record Date to the opening of business on the next succeeding Interest Payment Date must be accompanied by payment of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Convertible Debentures being surrendered for 62 63 conversion; provided, however, that no such payment will be required upon the conversion of any Convertible Debenture (or portion thereof) that has been called for redemption or that is eligible to be delivered for repurchase if, as a result, the right to convert such Convertible Debenture would terminate during the period between such Regular Record Date and the close of business on the next succeeding Interest Payment Date. No other payment or adjustment for interest, or for any dividends in respect of common stock, will be made upon conversion. Holders of common stock issued upon conversion will not be entitled to receive any dividends payable to holders of common stock as of any record date before the close of business on the conversion date. No fractional shares will be issued upon conversion but, in lieu thereof, we will calculate an appropriate amount to be paid in cash on the basis set forth in the Indenture or, at our option, round up to the next whole number of shares. A Holder delivering a Convertible Debenture for conversion will not be required to pay any taxes or duties in respect of the issue or delivery of common stock on conversion. However, we shall not be required to pay any tax or duty that may be payable in respect of any transfer involved in the issue or delivery of the common stock in a name other than that of the Holder of the Convertible Debenture. Certificates representing shares of common stock will not be issued or delivered unless the person requesting such issue has paid to us the amount of any such tax or duty or has established to our satisfaction that such tax or duty has been paid. The Conversion Rate is subject to adjustment in certain events, including: (a) dividends (and other distributions) payable in common stock on shares of our capital stock; (b) the issuance to all holders of our common stock of certain rights, options or warrants entitling them to subscribe for or purchase common stock at less than the then current market price (determined as provided in the Indenture) of common stock as of the record date for holders entitled to receive such rights, options or warrants; (c) subdivisions, combinations and reclassifications of our common stock; (d) distributions to all holders of our common stock of evidences of our indebtedness, shares of capital stock or other property (including securities, but excluding those dividends, rights, options, warrants and distributions referred to in clauses (a) and (b) above, dividends and distributions paid exclusively in cash and distributions upon mergers or consolidations to which the next succeeding paragraph applies); (e) distributions consisting exclusively of cash (excluding any cash portion of distributions referred to in clause (d) above, or cash distributed upon a merger or consolidation to which the next succeeding paragraph applies) to all holders of common stock in an aggregate amount that, combined together with (i) other such all-cash distributions made within the preceding 12 months in respect of which no adjustment has been made and (ii) any cash and the fair market value of other consideration payable in respect of any tender offer by us or any of our subsidiaries for common stock, to the extent that the cash and value of any other consideration included in such payment per share of common stock exceeds the current market price per share of common stock on the Trading Day next succeeding the date of payment (the "Current Market Price"), concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 10% of our market capitalization (being the product of the then current market price of the common stock and the number of shares of common stock then outstanding) on the record date for such distribution; and (f) the successful completion of a tender offer made by us or any of our subsidiaries for common stock, to the extent that the cash and value of any other consideration included in such payment per share of common stock exceeds the Current Market Price at such time, the aggregate amount of which, together with (i) any cash and other consideration in excess of the 63 64 then current market price paid in a tender offer by us or any of our subsidiaries for common stock expiring within the 12 months preceding the expiration of such tender offer in respect of which no adjustment has been made and (ii) the aggregate amount of any such all-cash distributions referred to in (a) above to all holders of common stock within the 12 months preceding the expiration of such tender offer in respect of which no adjustments have been made, exceeds 10% of our market capitalization on the expiration of such tender offer. We reserve the right to make such increases in the conversion rate in addition to those required in the foregoing provisions as we consider to be advisable in order that any event treated for income tax purposes as a dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock will not be taxable to the recipients. No adjustment of the conversion rate will be required to be made until the cumulative adjustments amount to 1.0% or more of the conversion rate. We shall compute any adjustments to the conversion price and will give notice to the Holders of any such adjustments. In case we consolidate or merge with or into another Person or another Person merges into us (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of the common stock), or in the case of any conveyance, sale, transfer or lease of all or substantially all of our properties and assets, each Convertible Debenture then outstanding will, without the consent of the Holder of any Convertible Debenture, become convertible only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale, conveyance, lease or other transfer by a holder of the number of shares of common stock into which such Convertible Debenture was convertible immediately prior thereto (assuming such holder of Common Stock failed to exercise any rights of election and that such Convertible Debenture was then convertible). We from time to time may increase the Conversion Rate by any amount for any period of at least 20 days, in which case we shall give at least 15 days' notice of such increase, if our Board of Directors has made a determination that such increase would be in our best interests, which determination shall be conclusive. No such increase shall be taken into account for purposes of determining whether the closing price of the common stock exceeds the Conversion Price (as defined below) by 105% in connection with an event which otherwise would be a Change of Control. If at any time we make a distribution of property to our shareholders that would be taxable to such shareholders as a dividend for federal income tax purposes (e.g., distributions of evidences of our indebtedness or assets, but generally not stock dividends on common stock or rights to subscribe for common stock) and, pursuant to the anti-dilution provisions of the Indenture, the number of shares into which Convertible Debentures are convertible is increased, such increase may be deemed for federal income tax purposes to be the payment of a taxable dividend to Holders of Convertible Debentures. See "Certain Federal Tax Considerations." SUBORDINATION The payment of the principal of, premium, if any, and interest on the Convertible Debentures (including amounts payable on any redemption or repurchase) will be subordinated in right of payment to the extent set forth in the Indenture to the prior full and final payment of all of our Senior Debt. "Senior Debt" means the principal of (and premium, if any) and interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding) on, and all fees and other amounts (including collection expenses, attorney's fees and late charges) owing with respect to, the following, whether direct or indirect, absolute or contingent, 64 65 secured or unsecured, due or to become due, outstanding at the date of execution of the Indenture or thereafter incurred, created or assumed: (a) our indebtedness for money borrowed or evidenced by bonds, Convertible Debentures or similar instruments; (b) our reimbursement obligations with respect to letters of credit, bankers' acceptances and similar facilities issued for our account; (c) every obligation we issue or assume as the deferred purchase price of property or services purchased by us, excluding any trade payables and other accrued current liabilities incurred in the ordinary course of business; (d) our obligations as lessee under leases required to be capitalized on the balance sheet of the lessee under United States generally accepted accounting principles, (e) our obligations under interest rate and currency swaps, caps, floors, collars or similar arrangements intended to protect us against fluctuations in interest or currency exchange rates; (f) others' indebtedness of the kinds described in the preceding clauses (a) through (e) that we have assumed, guaranteed or otherwise assured the payment thereof, directly or indirectly; and (g) deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any indebtedness or obligation described in the preceding clauses (a) through (f) whether or not there is any notice to or consent of the Holders of Convertible Debentures. Despite the above, the following shall not constitute Senior Debt: (i) any particular indebtedness or obligation that the Company owes to any of its direct and indirect subsidiaries and (ii) any particular indebtedness, deferral, renewal, extension or refunding if it is expressly stated in the governing terms or in the assumption thereof that the indebtedness involved is not senior in right of payment to the Convertible Debentures or that such indebtedness is pari passu with or junior to the Convertible Debentures. No payment on account of principal of or premium, if any, or interest on the Convertible Debentures may be made if (a) there shall have occurred and be continuing (i) a default in the payment of any Senior Debt or (ii) any other default with respect to any Senior Debt permitting the holders thereof to accelerate the maturity thereof, provided that, in the case of this clause (ii), such default shall not have been cured or waived or ceased to exist after written notice of such default shall have been given to us and the Trustee by any holder of Senior Debt, or (b) in the event any judicial proceeding shall be pending with respect to any such default in payment or event of default. Upon any acceleration of the principal due on the Convertible Debentures or payment or distribution of our assets to creditors upon any dissolution, winding up, liquidation or reorganization, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all amounts due on all Senior Debt must be paid in full before the Holders of the Convertible Debentures are entitled to receive any payment. By reason of such subordination, in the event of our insolvency, our creditors who are holders of Senior Debt may recover more, ratably, than the Holders of the Convertible Debentures, and such subordination may result in a reduction or elimination of payments to the Holders of the Convertible Debentures. As of March 31, 1999, the Company had approximately $156 million of Senior Debt, excluding trade payables, outstanding, and its subsidiaries had approximately $30 million of debt, including trade payables of approximately $10 million, outstanding. In addition, the Convertible Debentures will be effectively subordinated to all indebtedness and other liabilities (including trade payables and lease obligations) of the Company's subsidiaries. 65 66 The Indenture does not limit the Company's ability or the ability of any of its subsidiaries to incur indebtedness, including Senior Debt. OPTIONAL REDEMPTION The Convertible Debentures may not be redeemed prior to the close of business on , 2004. Thereafter, we may redeem the Convertible Debentures, in whole or in part at our option, upon not less than 30 nor more than 60 days' prior notice as provided under "Notices" below, at the redemption prices set forth below. Such redemption prices (expressed as a percentage of principal amount) are as follows for the 12-month period beginning on of the following years: REDEMPTION
YEAR PRICE ---- ----- 2004 ................................................. % 2005 ................................................. 2006 ................................................. 2007 .................................................
and 100% of the principal amount on , 200 and thereafter, in each case together with accrued interest to the redemption date. REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL If a Change of Control (as defined below) occurs, each Holder of Convertible Debentures shall have the right, at the Holder's option, to require us to repurchase all of such Holder's Convertible Debentures, or any portion of the principal amount thereof that is equal to $1,000 or an integral multiple of $1,000 in excess thereof, on the date (the "Repurchase Date") that is 45 days after the date of the Company Notice (as defined below), at a price in cash equal to 101% of the principal amount of the Convertible Debentures to be repurchased, together with interest accrued to the Repurchase Date (the "Repurchase Price"). We may, at our option, in lieu of paying the Repurchase Price in cash, pay the Repurchase Price by issuing shares of common stock. The number of shares of common stock tendered in payment shall be determined by dividing the Repurchase Price by the value of the common stock, which for this purpose shall be equal to % of the average of the closing sale prices of the common stock for the five consecutive Trading Days ending on and including the third Trading Day preceding the Repurchase Date. Such payment may not be made in common stock unless we satisfy certain conditions with respect thereto prior to the Repurchase Date as provided in the Indenture. On or before the 30th day after the occurrence of a Change of Control, we are obligated to give to all Holders of the Convertible Debentures notice, as provided in the Indenture (the "Company Notice"), of the occurrence of such Change of Control and of the repurchase right arising as a result thereof. To exercise the repurchase right, a Holder of Convertible Debentures must deliver on or before the fifth day prior to the Repurchase Date irrevocable written notice to the Trustee of the Holder's exercise of such right, together with the Convertible Debentures with respect to which the right is being exercised. After the Convertible Debentures are issued, the following events will be deemed to be Changes in Control: (i) any Person's acquisition of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of our capital stock entitling such Person to exercise 50% or more of the total voting power of all 66 67 shares of our capital stock entitled to vote generally in elections of directors, other than any such acquisition by us or any of our employee benefit plans; or (ii) our consolidation or merger with or into any other Person, any merger of another Person into us, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of our properties and assets to another Person (other than (a) any such transaction (x) that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of our common stock and (y) pursuant to which holders of our common stock immediately prior to the transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of directors of the continuing or surviving person immediately after such transaction and (b) any merger which is effected solely to change our jurisdiction of incorporation and results in a reclassification, conversion or exchange of outstanding shares of common stock solely into shares of common stock of the surviving entity). A Change of Control will not be deemed to have occurred if the closing sale price per share of our common stock for any five Trading Days within the period of 10 consecutive Trading Days ending immediately after the later of the date of the Change of Control or the date of public announcement of the Change of Control (in the case of a Change of Control under clause (i) above) or ending immediately before the Change of Control (in the case of a Change of Control under clause (ii) above) equals or exceeds 105% of the Conversion Price of the Convertible Debentures in effect on each such Trading Day. We may, to the extent permitted by applicable law, at any time purchase Convertible Debentures in the open market or by tender at any price or by private agreement. Subject to certain limitations imposed by the Underwriting Agreement with the Underwriters, any Convertible Debenture so purchased by us may be reissued or resold or may, at our option, be surrendered to the Trustee for cancellation. Any Convertible Debentures surrendered as aforesaid may not be reissued or resold and will be cancelled promptly. The foregoing provisions would not necessarily afford Holders of the Convertible Debentures protection in the event of highly leveraged or other transactions involving us that may adversely affect Holders. MERGERS AND SALES OF ASSETS We may not consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell or lease all or substantially all of our properties and assets to any Person, and we may not permit any Person to consolidate with or merge into us or convey, transfer, sell or lease all or substantially all of its properties and assets to us, unless: (a) the Person formed by such consolidation or into or with which we are merged or the Person to which our properties and assets are so conveyed, transferred, sold or leased, is a corporation, limited liability company, partnership or trust organized and existing under the laws of the United States, any State thereof or the District of Columbia and expressly assumes the due and punctual payment of the principal of and, premium, if any, and interest on the Convertible Debentures and the performance of our other covenants under the Indenture and has provided for conversion rights as described above under "-- Conversion Rights"; (b) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, has occurred and is continuing; and (c) we have provided to the Trustee an Officer's Certificate and Opinion of Counsel as provided in the Indenture. 67 68 EVENTS OF DEFAULT The following will be Events of Default under the Indenture: (a) our failure to pay principal of or premium, if any, on any Convertible Debenture when due, whether or not the subordination provisions of the Indenture prohibit such payment; (b) our failure to pay any interest on any Convertible Debenture when due, continuing for 30 days, whether or not the subordination provisions of the Indenture prohibit such payment; (c) our default in our obligation to provide notice of a Change of Control; (d) our failure to perform any of our other material covenants or warranties in the Indenture, continuing for 60 days after the Trustee or the Holders of at least 25% in aggregate principal amount of outstanding Convertible Debentures give us written notice; (e) our failure to pay when due the principal of, or acceleration of, any indebtedness for money borrowed by us in excess of $10 million if we have not discharged such indebtedness, or such acceleration is not annulled, within 30 days after the Trustee or the Holders of at least 25% in aggregate principal amount of outstanding Convertible Debentures give us written notice; and (f) certain events of our bankruptcy, insolvency or reorganization. Subject to the provisions of the Indenture relating to the duties of the Trustee in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders, unless such Holders shall have offered the Trustee reasonable indemnity. Subject to such provisions for the indemnification of the Trustee, the Holders of a majority in aggregate principal amount of the outstanding Convertible Debentures will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. If an Event of Default (other than an Event of Default specified in clause (f) above) occurs and is continuing, either the Trustee or the Holders of not less than 25% in aggregate principal amount of the outstanding Convertible Debentures may accelerate the maturity of all Convertible Debentures. If an Event of Default specified in clause (f) occurs and is continuing, the principal of and any accrued interest on all of the Convertible Debentures then outstanding shall ipso facto become due and payable immediately without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made but before a judgment or decree based on acceleration has been issued, the Holders of a majority in aggregate principal amount of outstanding Convertible Debentures may, under certain circumstances as set forth in the Indenture, rescind and annul such acceleration if all Events of Default, other than the nonpayment of accelerated principal and interest, have been cured or waived as provided in the Indenture. For information as to waiver of defaults, See "-- Modification and Waiver." No Holder of any Convertible Debenture will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless such Holder shall have previously given to the Trustee written notice of a continuing Event of Default and unless also the Holders of at least 25% in aggregate principal amount of the outstanding Convertible Debentures shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and the Trustee shall not have received from the Holders of a majority in aggregate principal amount of the outstanding Convertible Debentures a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. However, 68 69 such limitations do not apply to a suit instituted by a Holder of a Convertible Debenture for the enforcement of payment of the principal of or premium, if any, or interest on such Convertible Debenture on or after the respective due dates expressed in such Convertible Debenture or of the right to convert such Convertible Debenture in accordance with the Indenture. We will be required to furnish to the Trustee annually a statement as to our performance of certain of our obligations under the Indenture and as to any default in such performance. MODIFICATION AND WAIVER The Indenture will contain provisions permitting Standard Motor Products and the Trustee to enter into a supplemental indenture for certain limited purposes without the consent of the Holders. Generally, modifications and amendments of the Indenture can only be made with the written consent of the Holders of not less than a majority in principal amount of the Convertible Debentures at the time outstanding. However, no such modification or amendment may, without the consent of the Holder of each outstanding Convertible Debenture affected thereby, (a) change the Stated Maturity of the principal of, or any installment of interest on, any Convertible Debenture, (b) reduce the principal amount of, or the premium, if any, or rate of interest on, any Convertible Debenture, (c) modify the provisions with respect to the repurchase right of the Holders in a manner adverse to the Holders, (d) change the place or currency of payment of principal of, premium, if any, or interest on any Convertible Debenture, (e) impair the right to institute suit for the enforcement of any payment on or with respect to, or the right to convert, any Convertible Debenture, (f) except as otherwise permitted or contemplated by provisions concerning consolidation, merger, conveyance, transfer, sale or lease of all or substantially all of our property and assets, adversely affect the right to convert Convertible Debentures, (g) modify the subordination provisions in a manner adverse to the Holders of the Convertible Debentures or (h) reduce the above-stated percentage of aggregate principal amount of Outstanding Convertible Debentures necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults. The Holders of a majority in aggregate principal amount of outstanding Convertible Debentures may waive our compliance with certain restrictive provisions of the Indenture. The Holders of a majority in aggregate principal amount of the outstanding Convertible Debentures may waive any past default by us under the Indenture, except a default in the payment of principal, premium, if any, or interest or a default in any covenant or provision which under the Indenture cannot be modified or amended without the consent of each Holder of outstanding Convertible Debentures. NOTICES Notice to Holders of the Convertible Debentures will be given by mail to the addresses of such Holders as they appear in the Security Register. Such notices will be deemed to have been given on the date of mailing of the notice. Notice of a redemption of Convertible Debentures will be given at least once not less than 30 nor more than 60 days prior to the Redemption Date (which notice shall be irrevocable) and will specify the Redemption Date and the Redemption Price. 69 70 PAYMENT OF STAMP AND OTHER TAXES We shall pay all stamp and other duties, if any, which may be imposed by the United States or any political subdivision thereof or taxing authority thereof or therein with respect to the issuance of the Convertible Debentures. We will not be required to make any payment with respect to any other tax, assessment or governmental charge imposed by any government or any political subdivision thereof or taxing authority therein. GOVERNING LAW The Indenture and the Convertible Debentures will be governed by and construed in accordance with the laws of the State of New York without regard to conflict of laws provisions. THE TRUSTEE The Trustee for the holders of Convertible Debentures issued under the Indenture will be HSBC Bank USA. 70 71 DESCRIPTION OF CAPITAL STOCK We are currently authorized by our Restated Certificate of Incorporation, as amended, to issue up to 30,000,000 shares of common stock and 500,000 shares of preferred stock, of which 30,000 shares of preferred stock have been designated as Series A Preferred Stock and reserved for future issuance upon exercise of Series A Preferred Stock purchase rights. As of June 30, 1999, there were 13,145,080 shares of common stock outstanding held of record by 673 holders of record, and no shares of preferred stock outstanding. The statements under this caption are brief summaries of certain material provisions of our Certificate of Incorporation, our Restated By-laws and the Rights Agreement between Standard Motor Products and Registrar and Transfer Co., as Rights Agent. Such summaries do not purport to be complete, and are subject to, and are qualified in their entirety by reference to, such documents. COMMON STOCK Holders of common stock are entitled to one vote per share on all matters on which holders of common stock are entitled to vote. The holders of shares of common stock do not have cumulative voting rights. Therefore, the holders of more than 50% of the shares of common stock voting for the election of directors can elect all of the directors, and the remaining holders will not be able to elect any directors. Subject to the rights of the holders of any shares of preferred stock, holders of common stock are entitled to receive ratably such dividends as may from time to time be declared by our Board of Directors out of funds legally available therefor. See "Price Range of Common Stock and Dividend Policy." Holders of common stock have no pre-emptive, conversion, redemption, subscription or similar rights. In the event of our liquidation, dissolution or winding up, whether voluntary or involuntary, holders of shares of common stock are entitled to share ratably in our assets which are legally available for distribution, if any, remaining after the payment or provision for the payment of all of our debts and other liabilities and the payment of any preferential amount due to the holders of shares of any series of preferred stock. All of the outstanding shares of common stock are fully paid and non-assessable. See "-- Certificate of Incorporation and By-laws" below for a discussion of supermajority voting requirements contained in the Restated Certificate of Incorporation and Restated By-laws. The transfer agent for the common stock is Registrar and Transfer Co. PREFERRED STOCK Our Restated Certificate of Incorporation authorizes our Board of Directors to issue from time to time up to 500,000 shares of preferred stock in one or more series and to establish and fix the number of shares of such series and the relative rights, preferences and limitations of each series. Preferred stock, if issued, will rank senior to the common stock as to dividends and as to liquidation preference and could decrease the amount of earnings and assets available for distribution to holders of common stock. The issuance of the preferred stock may have the effect of delaying, deterring, or preventing a change in control of Standard Motor Products and may adversely affect the rights of holders of common stock. Preferred stock, upon issuance, against full payment of the purchase price therefor, will be fully paid and non-assessable. As of the date of this Prospectus, no shares of preferred stock are outstanding; however, 30,000 shares of preferred stock have been reserved for issuance of Series A Preferred Stock upon exercise of the Series A Preferred Stock purchase rights. See "-- Rights Agreement." RIGHTS AGREEMENT On January 17, 1996, our Board of Directors declared a dividend of one Series A Preferred Stock purchase right for each outstanding share of our common stock. The dividend was payable on March 1, 1996 to the shareholders of record as of February 15, 1996 (the "Record Date"). 71 72 All shares of common stock issued subsequently also include these purchase rights. Under certain conditions, each purchase right may be exercised to purchase from us one one-thousandth of a share of Series A Preferred Stock at a price of $80.00 per one one-thousandth of a share of Series A Preferred Stock, subject to adjustment. Our Restated Certificate of Incorporation provides that holders of Series A Preferred Stock will be entitled to 1,000 votes per share of Series A Preferred Stock, to a minimum preferential quarterly dividend payment of $10.00 per share and to an aggregate dividend of 1,000 times the dividend declared per share of common stock. Further, holders of Series A Preferred Stock will be entitled to a minimum preferential liquidation payment of $1,000 per share but will be entitled to an aggregate payment of 1,000 times the payment made per share of common stock. In addition, whenever dividends payable on Series A Preferred are in default, holders of Series A Preferred Stock will be entitled to vote together as a class to elect two directors to our Board of Directors. The purchase rights are exercisable only if, without the prior written consent of our Board of Directors, a person or group acquires, or announces a tender offer to acquire, 20% or more of the shares of common stock (a "20% acquisition"). In addition, if we are acquired in a merger or other business combination, or if 50% or more of our consolidated assets or earning power is sold after a person or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding shares of common stock, each purchase right (other than purchase rights beneficially owned by the acquiring person, which will thereafter be void) will entitle its holder to purchase, at the purchase right's then current exercise price, a number of shares of equity securities of the acquiring company having a market value of two times the exercise price of the purchase right. Moreover, if a person, or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding shares of common stock, each holder of a purchase right, other than the acquiring person, will have the right to receive, upon exercise, that number of one-thousandths of a share having a market value of two times the exercise price of the purchase right. We may redeem the purchase rights at our option at any time prior to a 20% acquisition at a purchase price of $.001 or one-tenth of one cent per purchase right, and we may exchange the purchase rights, in whole or in part, at any time after a 20% acquisition but before a person or group acquires 50% or more of the outstanding common stock at an exchange ratio of one share of common stock, or one one-thousandth of a share of preferred stock, per purchase right. Until a purchase right is exercised, the holder thereof, as such, has no rights as a shareholder of Standard Motor Products, including, without limitation, the right to vote or to receive dividends. The purchase rights expire on February 28, 2006, unless we extend them or unless they have been earlier redeemed or exchanged. The purchase rights are designed to protect and maximize the value of the outstanding shares of common stock in the event of an unsolicited attempt by an acquiror to take over Standard Motor Products, in a manner or on terms not approved by the Board of Directors. The purchase rights may have the effect of rendering more difficult or discouraging an acquisition of us deemed undesirable by our Board of Directors. The purchase rights may cause substantial dilution to a person or group that attempts to acquire us on terms or in a manner not approved by the Board of Directors, except an offer conditioned upon the negation, purchase or redemption of the purchase rights. NEW YORK BUSINESS CORPORATION LAW We are subject to Section 912 of the New York Business Corporation Law, which prohibits certain "business combinations" (as defined in Section 912 generally to include mergers, sales and leases of assets, issuances of securities and similar transactions) by us or one of our subsidiaries with an "interested shareholder" (as defined in Section 912 generally to mean any person, other than us or any of our subsidiaries, that beneficially owns, directly or indirectly, 20% 72 73 or more of our outstanding voting stock or is one of such person's affiliates or associates) for five years after the person or entity becomes an interested shareholder unless (1) our Board of Directors shall have approved the transaction before the person became an interested shareholder, or (2) the business combination is approved by the holders of our outstanding voting stock, excluding shares held by the interested shareholder, at a meeting called for such purpose not earlier than five years after such interested shareholder's acquisition. In addition, Article 16 of the New York Business Corporation Law requires that any offeror making a takeover bid for a New York corporation file with the New York Attorney General, as soon as practicable on the date of commencement of the takeover bid, a registration statement containing specified details regarding the proposed takeover. The New York Business Corporation Law also contains provisions permitting directors in taking action (including taking action relating to a change in control) to consider employees, retirees, customers, creditors and the community, and preventing New York corporations from paying "greenmail" without a shareholder vote. These statutory provisions may have the effect of delaying, deterring or preventing a future takeover or change in control of Standard Motor Products, unless such takeover or change in control is approved by our Board of Directors. CERTIFICATE OF INCORPORATION AND BY-LAWS In addition to the purchase rights discussed above, our Restated Certificate of Incorporation and Restated By-laws include certain other provisions which are intended to enhance the likelihood of continuity and stability in our ownership and which may have the effect of delaying, deterring or preventing a future takeover or change in control of Standard Motor Products, unless such takeover or change in control is approved by our Board of Directors. Specifically, our Restated Certificate of Incorporation requires that, absent Board approval, any merger or consolidation of us or any of our subsidiaries with or into any other corporation; any sale, lease, exchange or other disposition by us or any of our subsidiaries of all or substantially all of our or any of our subsidiaries' assets to any other corporation, person or entity; or any purchase, lease or other acquisition by us or any of our subsidiaries, of any assets and/or securities from any other corporation, person or entity in exchange for our voting securities (or securities convertible thereinto, or options, warrants or rights to purchase any such securities) or those of any of our subsidiaries, requires the affirmative vote of the holders of (a) at least 75% of the outstanding shares of each class of our capital stock entitled to vote in an election of directors and (b) at least a majority of the remaining outstanding shares, which are not directly or indirectly beneficially owned by such other corporation, person or entity to the transaction, of each such class of our capital stock entitled to vote in elections of directors, if, as of the record date for the determination of shareholders entitled to notice thereof and to vote thereon, such other party to the transaction is the beneficial owner, directly or indirectly, of 5% or more of the outstanding shares of any class entitled to so vote. Repeal or amendment of the foregoing provisions of the Restated Certificate of Incorporation requires a vote of the holders of at least 75% of the outstanding shares of each class of our stock entitled to vote on such repeal or amendment. Our Restated Certificate of Incorporation and Restated By-laws also provide that any director may be removed at any time, without cause, by the affirmative vote, at any shareholders' meeting, of the holders of at least 75% of the outstanding shares of each class of our capital stock entitled to vote at such meeting. 73 74 CERTAIN FEDERAL TAX CONSIDERATIONS The following is a summary of certain material United States federal income tax consequences, as of the date hereof, relating to the purchase, ownership and disposition of the Convertible Debentures and of the common stock into which the Convertible Debentures may be converted, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury Regulations, judicial authority, and current administrative rulings and pronouncements of the Internal Revenue Service (the "Service"), all of which are subject to change, possibly with retroactive effect. We have not sought any ruling from the Service with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the Service will agree with such statements and conclusions. This summary deals only with holders that will hold the Convertible Debentures and the common stock into which the Convertible Debentures may be converted as "capital assets" (within the meaning of Section 1221 of the Code), and does not address all tax aspects that may be relevant to particular holders of the Convertible Debentures and the common stock into which the Convertible Debentures may be converted in light of their personal investment or tax circumstances, or to certain types of investors (including, individual retirement accounts and other tax-deferred accounts, insurance companies, financial institutions, broker-dealers, tax-exempt organizations, holders holding the Convertible Debentures as part of a hedge, straddle or conversation transaction, holders whose functional currency is not the United States dollar, or holders who are not United States Holders) subject to special treatment under the United States federal income tax laws. This summary discusses the tax considerations applicable to an initial purchaser of the Convertible Debentures who purchases the Convertible Debentures at their issue price in this offering and does not discuss the tax considerations applicable to subsequent purchasers of the Convertible Debentures. Moreover, the effect of any applicable state, local or foreign tax law is not discussed. As used herein, the term "United States Holder" means a beneficial holder of Convertible Debentures or common stock received on conversion of the Convertible Debentures that is for United States federal income tax purposes a citizen or resident of the United States, a corporation, limited liability company or partnership organized under the laws of the United States or any political subsidiaries thereof, an estate the income of which is includable in gross income for United States federal income tax purposes regardless of its source, or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all of the substantial decisions of the trust. THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT MAY VARY DEPENDING UPON AN INVESTOR'S PARTICULAR SITUATION. INVESTORS CONSIDERING THE PURCHASE OF CONVERTIBLE DEBENTURES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY. CHARACTERIZATION OF CONVERTIBLE DEBENTURES AS DEBT Under applicable authorities, we intend to treat the Convertible Debentures as indebtedness for United States federal income tax purposes. However, it is possible that the Service will contend that the Convertible Debentures should be treated as an equity interest in Standard Motor Products, rather than indebtedness of Standard Motor Products. In the event that the Service treats the Convertible Debentures as equity, the amount of any actual or constructive 74 75 payments on any such Convertible Debenture would first be taxable to the holder as dividend income to the extent of our current or accumulated earnings and profits, and next would be treated as a return of capital to the extent of the holder's adjusted tax basis in the Convertible Debenture, with any remaining amount treated as gain from the sale of a Convertible Debenture. As a result, until such time as we have earnings and profits for United States federal income tax purposes, payments on any Convertible Debenture treated as equity will be a nontaxable return of capital and will be applied against and reduce the adjusted tax basis of such Convertible Debenture in the hands of its holder (but not below zero) and any excess will be treated as gain from the sale of the Convertible Debenture. In addition, in the event of equity treatment, we would not be entitled to deduct interest on the Convertible Debentures for United States federal income tax purposes. The remainder of this discussion assumes that the Convertible Debentures will constitute our indebtedness for United States federal income tax purposes. PAYMENT OF INTEREST Interest on a Convertible Debenture generally will be includable in the income of a United States Holder as ordinary income at the time such interest is received or accrued, in accordance with such holder's method of accounting for United States federal income tax purposes. MANDATORY AND OPTIONAL REDEMPTION In the event of a change of control, we will be required to offer to redeem all of the Convertible Debentures at a redemption price equal to 101% of their aggregate principal amount on the date of purchase. Under Treasury Regulations issued under provisions of the Code relating to original issue discount (the "OID Regulations"), computation of yield and maturity of the Convertible Debentures is not affected by such redemption rights and obligations if, based on all the facts and circumstances as of the issue date, payments on the Convertible Debentures are significantly more likely than not to occur in accordance with the stated payment schedule of the Convertible Debentures (which does not reflect a change in control). We believe, based on all the facts and circumstances as of the issue date, it is significantly more likely than not that the Convertible Debentures will be paid according to their stated schedule. Therefore, we will not take the redemption rights and obligations into account in determining the yield and maturity of the Convertible Debentures. Standard Motor Products may redeem the Convertible Debentures, in whole or in part, at any time after , 2004, at prices specified elsewhere herein, plus accrued and unpaid interest to the date of redemption. The OID Regulations contain rules for determining yield and maturity of any instrument that may be redeemed prior to its stated maturity date at the option of the issuer. Under the OID Regulations, solely for purposes of the accrual of OID, it is assumed that the issuer will exercise any option to redeem a debt instrument if such exercise will lower the yield-to-maturity of the debt instrument. We believe that Standard Motor Products will not be presumed to redeem the Convertible Debentures prior to their stated maturity under the foregoing rules because the exercise of such option would not lower the yield-to-maturity of the Convertible Debentures. SALE, EXCHANGE OR REDEMPTION OF THE CONVERTIBLE DEBENTURES Upon the sale, exchange or redemption of a Convertible Debenture (other than the conversion of a Convertible Debenture into common stock), a United States Holder generally will recognize capital gain or loss equal to the difference between (i) the amount of cash and the fair market value of any other property received on the sale, exchange or redemption (except to the extent such amount is attributable to accrued interest income not previously included in income, which is taxable as ordinary income) and (ii) such holder's adjusted tax basis in the Convertible Debenture. A United States Holder's adjusted tax basis in a Convertible Debenture generally will equal the cost of the Convertible Debenture to such holder. Generally, such gain or loss will be 75 76 capital gain or loss and will be long-term capital gain or loss if the United States Holder's holding period in the Convertible Debenture is more than one year at the time of sale, exchange or redemption. Long-term capital gain of a non-corporate United States Holder is generally subject to a maximum tax rate of 20%. The characterization of income as capital gain or loss is also relevant for purposes of, among other things, limitations with respect to the deductibility of capital losses. CONSTRUCTIVE DISTRIBUTIONS The conversion price of the Convertible Debentures may change under certain circumstances. Section 305 of the Code and applicable Treasury Regulations provide that under certain circumstances, adjustments in the conversion price of convertible securities (including the failure to adjust the conversion rate) may be treated as a constructive distribution of stock taxable as a dividend (to the extent of Standard Motor Products' current or accumulated earnings and profits) if, as a result of such adjustment, the proportionate interest of the holder of such convertible security in the assets or earnings and profits of the issuer is increased. Adjustments in the conversion price (or the failure to make such adjustments) of the Convertible Debentures may result in constructive distributions to United States Holders if, and to the extent that, the adjustment in the conversion price increases any such holder's proportionate interest in the assets or earnings and profits of Standard Motor Products. Any such constructive distribution will be taxed as ordinary income (subject to a possible dividends-received deduction for corporate holders) to the extent of our current or accumulated earnings and profits. CONVERSION OF THE CONVERTIBLE DEBENTURES A United States Holder generally will not recognize any income, gain or loss upon conversion of a Convertible Debenture into common stock except to the extent of cash, if any, received in lieu of a fractional share of common stock and for shares of common stock that are attributable to accrued interest not previously included in income. A holder's tax basis in the common stock received on conversion of a Convertible Debenture will be the same as such holder's adjusted tax basis in the Convertible Debenture at the time of conversion (reduced by any basis allocable to a fractional share interest for which cash is received), and the holding period for the common stock received on conversion will generally include the holding period of the Convertible Debenture converted. However, a holder's tax basis in shares of common stock considered attributable to any accrued interest generally will equal the amount of such accrued interest included in income, and the holding period for such shares will begin on the day following the date of conversion. Cash received in lieu of a fractional share of common stock upon conversion will be treated as a payment in exchange for the fractional share. Accordingly, cash received in lieu of a fractional share of common stock generally will result in capital gain or loss (measured by the difference between the cash received for the fractional share and the holder's adjusted tax basis in the fractional share). DISTRIBUTIONS ON COMMON STOCK The gross amount of a distribution with respect to the common stock received upon a conversion of Convertible Debentures will be treated as a dividend taxable as ordinary income on the date of receipt, to the extent of our current or accumulated earnings and profits as determined for United States federal income tax purposes. Distributions in excess of such current or accumulated earnings and profits will first constitute a non-taxable return of capital to the extent of a holder's adjusted tax basis in the common stock and then will be treated as a capital gain realized on the disposition of the common stock. The portion of any distribution treated as a non-taxable return of capital will reduce such United States Holder's tax basis in such common stock. 76 77 Subject to numerous limitations, to the extent distributions made by Standard Motor Products are treated as dividends, a United States Holder that is taxed as a domestic corporation and that meets the applicable holding period and taxable income requirements of the Code may be entitled to a deduction under Section 243 of the Code in an amount equal to 70% of such dividend (the "Dividends-Received-Deduction"). With respect to common stock considered to be "portfolio stock," as defined in Section 246A of the Code, the Dividends-Received-Deduction will be reduced to the extent that the common stock constitutes "debt financed portfolio stock." In addition, under certain circumstances, the receipt of a dividend on the common stock determined to be an "extraordinary dividend" may cause the holder's tax basis in the common stock to be reduced by the "untaxed portion" of the dividend and could result in gain recognition pursuant to Section 1059 of the Code. SALE OF COMMON STOCK Upon the sale or exchange of common stock, a United States Holder generally will recognize capital gain or loss equal to the difference between (i) the amount of cash and the fair market value of any other property received upon the sale or exchange and (ii) such holder's adjusted tax basis in the common stock. Such capital gain or loss will be subject to the rules relating to tax rates and holding periods discussed above under "-- Sale, Exchange or Redemption of the Convertible Debentures." A United States Holder's basis and holding period in common stock received upon conversion of a Convertible Debenture are determined as discussed above under "-- Conversion of the Convertible Debentures." INFORMATION REPORTING AND BACKUP WITHHOLDING TAX In general, information reporting requirements will apply to payments to certain non-corporate United States Holders of (i) principal and interest on a Convertible Debenture, (ii) dividends on Common Stock, (iii) proceeds of the sale of a Convertible Debenture and (iv) proceeds of the sale of Common Stock. In addition, a 31% backup withholding tax may apply to such payments if the United States Holder (i) fails to furnish or certify his correct taxpayer identification number to the payor in the manner required, or (ii) does not otherwise establish his entitlement to an exemption. Any amounts withheld under the backup withholding rules from a payment to a United States Holder will be allowed as a credit against such holder's United States federal income tax and may entitle the United States Holder to a refund, provided that the required information is furnished to the Service. LEGAL MATTERS The validity of the Convertible Debentures offered hereby has been passed upon for us by Kelley Drye & Warren LLP, New York, New York. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Latham & Watkins, New York, New York. EXPERTS The consolidated financial statements of Standard Motor Products as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, have been included herein and incorporated by reference in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere and incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. 77 78 DOCUMENTS INCORPORATED BY REFERENCE The following documents heretofore filed with the Securities and Exchange Commission (the "Commission") by us pursuant to the Exchange Act are incorporated herein by reference: 1. Our Annual Report on Form 10-K for the fiscal year ended December 31, 1998; and 2. Our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the Offering shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained therein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. We will provide without charge to each person, including any beneficial owner of the securities, to whom a copy of this Prospectus is delivered, upon written or oral request of such person, a copy of any or all documents incorporated by reference in this Prospectus (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into such documents). Written requests for such copies should be directed to Standard Motor Products, Inc., 37-18 Northern Boulevard, Long Island City, New York, 11101 (telephone (718) 392-0200). We are subject to the informational requirements of the Securities Exchange Act of 1934, and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be read and copied at the Public Reference Room maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's following Regional Offices: 7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1300, Chicago, Illinois 60661-2511. Copies of such material also may be obtained from the Public Reference Section of the Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Information regarding the operation of the Commission's Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is http://www.sec.gov. The common stock is listed on the New York Stock Exchange and reports, proxy statements and other information concerning us can be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. Information regarding us may also be obtained from our website at http://www.smpcorp.com. This Prospectus does not contain all of the information set forth in the Registration Statement filed with the Commission by us, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Reference is made to the Registration Statement and the exhibits thereto for further information. Exhibits to the Registration Statement that are omitted from this Prospectus may also be obtained at the Commission's Web site described above. Statements contained or incorporated by reference herein concerning the provisions of any agreement or other document filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and readers are referred to the copy so filed for more detailed information, each such statement being qualified in its entirety by such reference. 78 79 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No. CONSOLIDATED FINANCIAL STATEMENTS -------- Independent Auditors' Report................................ F-2 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.......................... F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996...... F-6 Notes to Consolidated Financial Statements.................. F-7 CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998 (Unaudited) Consolidated Statements of Operations and Retained Earnings for the three months ended March 31, 1999 and 1998........ F-28 Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998......................................... F-29 Consolidated Statements of Cash Flows for the quarters ended March 31, 1999 and 1998................................... F-30 Notes to Consolidated Financial Statements.................. F-31
F-1 80 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Standard Motor Products, Inc.: We have audited the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in Stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Standard Motor Products, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP New York, New York March 2, 1999 F-2 81 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in thousands, except per share amounts) Net sales.......................................... $ 649,420 $ 559,823 $ 513,407 Cost of sales...................................... 443,798 380,335 335,112 ---------- ---------- ---------- Gross profit..................................... 205,622 179,488 178,295 Selling, general and administrative expenses....... 161,691 170,033 133,561 ---------- ---------- ---------- Operating income................................. 43,931 9,455 44,734 Other income (expense), net (Note 14).............. (1,422) 998 1,710 ---------- ---------- ---------- Earnings from continuing operations before interest, taxes and minority interest............ 42,509 10,453 46,444 Interest expense (Note 3)........................ 16,419 14,158 13,091 ---------- ---------- ---------- Earnings (loss) from continuing operations before taxes and minority interest................... 26,090 (3,705) 33,353 ---------- ---------- ---------- Minority interest.................................. (256) (332) (87) ---------- ---------- ---------- Taxes based on earnings (Note 15) Current: Federal.......................................... 308 (276) 8,403 State and local.................................. 280 260 560 ---------- ---------- ---------- 588 (16) 8,963 Deferred......................................... 2,989 (2,401) 437 ---------- ---------- ---------- Total taxes based on earnings............ 3,577 (2,417) 9,400 ---------- ---------- ---------- Earnings (loss) from continuing operations......... 22,257 (1,620) 23,866 ---------- ---------- ---------- Discontinued operations (Note 3) Loss from operations of discontinued Brake Group......................................... -- (568) (7,506) Estimated loss on disposal of Brake Group........ -- (14,500) -- Loss from operations of discontinued Service Line Group......................................... -- (5,336) (1,702) Estimated loss on disposal of Service Line Group......................................... -- (12,500) -- ---------- ---------- ---------- Loss from discontinued operations................ -- (32,904) (9,208) ---------- ---------- ---------- Net earnings (loss).............................. $ 22,257 $ (34,524) $ 14,658 ========== ========== ========== Net earnings (loss) from continuing operations per common share: Basic......................................... $ 1.70 $ (0.12) $ 1.82 Diluted....................................... 1.69 (0.12) 1.82 Net earnings (loss) per common share: Basic......................................... $ 1.70 $ (2.63) $ 1.12 Diluted....................................... 1.69 (2.63) 1.12 Average number of common shares.................... 13,077,392 13,119,404 13,130,849 Average number of common shares and dilutive common shares........................................... 13,167,842 13,119,404 13,130,849
See accompanying notes to consolidated financial statements. F-3 82 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 1998 1997 ---- ---- (Dollars in thousands) ASSETS Current assets: Cash and cash equivalents................................. $ 23,457 $ 16,809 Accounts receivable, less allowances for discounts and doubtful accounts of $4,525 (1997 -- $18,654) (Note 4)..................................................... 122,008 151,026 Inventories (Note 5)...................................... 174,092 189,006 Deferred income taxes (Note 15)........................... 11,723 22,005 Prepaid expenses and other current assets................. 11,231 11,630 -------- -------- Total current assets.............................. 342,511 390,476 -------- -------- Property, plant and equipment, net (Notes 6 and 9).......... 109,404 126,024 -------- -------- Goodwill, net............................................... 39,232 30,674 -------- -------- Other assets (Note 7)....................................... 30,409 29,963 -------- -------- Total assets...................................... $521,556 $577,137 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable -- banks (Note 8)........................... $ 3,555 $ 55,897 Current portion of long-term debt (Note 9)................ 22,404 24,373 Accounts payable.......................................... 48,414 36,421 Sundry payables and accrued expenses...................... 60,905 67,224 Accrued customer returns.................................. 16,296 17,955 Payroll and commissions................................... 12,613 11,180 -------- -------- Total current liabilities......................... 164,187 213,050 -------- -------- Long-term debt (Note 9)..................................... 133,749 159,109 -------- -------- Deferred income taxes (Note 15)............................. -- 3,124 -------- -------- Postretirement benefits other than pensions and other accrued liabilities (Note 13)............................. 18,595 18,072 -------- -------- Commitments and contingencies (Notes 9, 10, and 18) Stockholders' equity (Notes 9, 10, and 11): Common Stock -- par value $2.00 per share: Authorized 30,000,000 shares, issued 13,324,476 shares in 1998 and 1997 (including 268,126 and 247,781 shares held as treasury shares in 1998 and 1997, respectively).......................................... 26,649 26,649 Capital in excess of par value.............................. 2,951 2,763 Loan to Employee Stock Ownership Plan (ESOP)................ 0 (1,665) Retained earnings........................................... 181,679 161,514 Accumulated other comprehensive income (loss)............... (516) (454) -------- -------- 210,763 188,807 Less: Treasury stock -- at cost............................. 5,738 5,025 -------- -------- Total stockholders' equity........................ 205,025 183,782 -------- -------- Total liabilities and stockholders' equity........ $521,556 $577,137 ======== ========
See accompanying notes to consolidated financial statements. F-4 83 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Net earnings (loss)..................................... $ 22,257 $(34,524) $ 14,658 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization......................... 17,274 18,980 16,326 Provision for loss on disposal of assets of discontinued operations............................ -- 27,000 -- Loss on sale of business.............................. 1,500 -- -- (Gain) loss on disposal of property, plant & equipment.......................................... 226 64 (509) Proceeds from sales of trading securities............. -- -- 7,646 Purchases of trading securities....................... -- -- (6,803) (Increase) in deferred income taxes................... 2,992 (2,393) (68) Change in assets and liabilities, net of effects from acquisitions and disposals: (Increase) decrease in accounts receivable, net....... 27,534 10,210 (26,025) (Increase) decrease in inventories.................... 27,733 42,478 (13,303) (Increase) decrease in other assets................... 2,209 11,031 (6,396) Increase (decrease) in accounts payable............... 12,833 1,899 784 Increase (decrease) in other current assets and liabilities........................................ 742 (4,808) (251) Increase (decrease) in sundry payables and accrued expenses........................................... (6,589) 1,755 (7,212) -------- -------- -------- Net cash provided by (used in) operating activities..... 108,711 71,692 (21,153) -------- -------- -------- Proceeds from held-to-maturity securities............... -- -- 6,252 Purchases of held-to-maturity securities................ -- -- (163) Proceeds from the sale of property, plant and equipment............................................. 702 -- -- Capital expenditures, net of effects from acquisitions.......................................... (15,325) (15,597) (21,389) Payments for acquisitions, net of cash acquired......... (13,997) (16,313) (45,060) Proceeds from sale of business.......................... 6,808 -- -- -------- -------- -------- Net cash (used in) investing activities................. (21,812) (31,910) (60,360) -------- -------- -------- Net (repayments) borrowings under line-of-credit agreements............................................ (52,333) (18,671) 58,625 Proceeds from issuance of long-term debt................ 700 13,096 35,469 Principal payments of long-term debt.................... (27,046) (17,924) (16,104) Reduction of loan to ESOP............................... 1,665 1,680 1,680 Proceeds from exercise of employee stock options........ 1,579 192 184 Purchase of treasury stock.............................. (2,614) (1,528) (147) Dividends paid.......................................... (2,092) (4,197) (4,260) -------- -------- -------- Net cash provided by (used in) financing activities..... (80,141) (27,352) 75,447 -------- -------- -------- Effect of exchange rate changes on cash................. (110) (287) (126) -------- -------- -------- Net increase (decrease) in cash and cash equivalents.... 6,648 12,143 (6,192) Cash and cash equivalents at beginning of year.......... 16,809 4,666 10,858 -------- -------- -------- Cash and cash equivalents at end of year................ $ 23,457 $ 16,809 $ 4,666 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest........................................... $ 17,840 $ 20,154 $ 17,136 Income taxes....................................... $ 1,799 $ 3,391 $ 5,436
See accompanying notes to consolidated financial statements. F-5 84 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -------------------------------------------------------------------------------- ACCUMULATED CAPITAL IN LOAN OTHER COMMON EXCESS OF TO RETAINED COMPREHENSIVE TREASURY STOCK PAR VALUE ESOP EARNINGS INCOME (LOSS) STOCK TOTAL ------ ---------- ---- -------- ------------- -------- ----- (In thousands) BALANCE AT DECEMBER 31, 1995................... $26,649 $2,651 $(5,025) $189,837 $ 123 $(3,835) $210,400 Comprehensive income Net earnings.................................. 14,658 14,658 Minimum pension liability adjustment.......... 27 27 Foreign currency translation adjustment....... (79) (79) -------- Total comprehensive income..................... 14,606 Cash dividends paid............................ (4,260) (4,260) Exercise of employee stock options............. (59) 243 184 Tax benefits applicable to Employee Stock Ownership Plan................................ 113 113 Employee Stock Ownership Plan.................. 1,680 1,680 Purchase of treasury stock..................... (147) (147) ------- ------ ------- -------- ----- ------- -------- BALANCE AT DECEMBER 31, 1996................... 26,649 2,705 (3,345) 200,235 71 (3,739) 222,576 Comprehensive income Net loss...................................... (34,524) (34,524) Foreign currency translation adjustment....... (525) (525) -------- Total comprehensive income (loss).............. (35,049) Cash dividends paid............................ (4,197) (4,197) Exercise of employee stock options............. (50) 242 192 Tax benefits applicable to Employee Stock Ownership Plan................................ 108 108 Employee Stock Ownership Plan.................. 1,680 1,680 Purchase of treasury stock..................... (1,528) (1,528) ------- ------ ------- -------- ----- ------- -------- BALANCE AT DECEMBER 31, 1997................... 26,649 2,763 (1,665) 161,514 (454) (5,025) 183,782 Comprehensive income Net earnings.................................. 22,257 22,257 Foreign currency translation adjustment....... (62) (62) -------- Total comprehensive income..................... 22,195 Cash dividends paid............................ (2,092) (2,092) Exercise of employee stock options............. (322) 1,901 1,579 Tax benefits applicable to exercise of employee stock options........................ 510 510 Employee Stock Ownership Plan.................. 1,665 1,665 Purchase of treasury stock..................... (2,614) (2,614) ------- ------ ------- -------- ----- ------- -------- BALANCE AT DECEMBER 31, 1998................... $26,649 $2,951 $ -- $181,679 $(516) $(5,738) $205,025 ======= ====== ======= ======== ===== ======= ========
See accompanying notes to consolidated financial statements. F-6 85 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 we have more than a 50% equity ownership. Our investments in unconsolidated affiliates are accounted for on the equity method. All significant intercompany items have been eliminated. USE OF ESTIMATES. In conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Actual results could differ from those estimates. RECLASSIFICATIONS. Where appropriate, certain amounts in 1996 and 1997 have been reclassified to conform with the 1998 presentation. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. MARKETABLE SECURITIES. At December 31, 1998 and 1997, held-to-maturity securities amounted to $7,200,000. Held-to-maturity securities consist primarily of U.S. Treasury Bills and corporate debt securities which are reported at unamortized cost which approximates fair value. As of December 31, 1998, the held-to-maturity securities mature within five years. The first-in, first-out method is used in computing realized gains or losses. INVENTORIES. Inventories are stated at the lower of cost (determined by means of the first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT. These assets are recorded at cost and are depreciated using the straight-line method of depreciation over the estimated useful lives as follows:
ESTIMATED LIFE -------------- Buildings and Improvements.......................... 10 to 33 1/2 years Machinery and equipment............................. 7 to 12 years Tools, dies and auxiliary equipment................. 3 to 8 years Furniture and fixtures.............................. 3 to 12 years Leasehold improvements.............................. 10 years or life of lease
GOODWILL. Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Accumulated amortization at December 31, 1998 and 1997, was $5,906,000 and $4,402,000, respectively. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such F-7 86 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell (see note 3). FOREIGN CURRENCY TRANSLATION. Assets and liabilities are translated into U.S. dollars at year end exchange rates and revenues and expenses are translated at average exchange rates during the year. The resulting translation adjustments are recorded in a separate component of accumulated other comprehensive income. REVENUE RECOGNITION. The Company recognizes revenues from product sales upon shipment to customers. The Company estimates and records provisions for cash discounts, quantity rebates, sales returns and warranties, in the period the sale is recorded, based upon its prior experience. INCOME TAXES. Deferred income taxes result from temporary differences in methods of recording certain revenues and expenses for financial reporting and income tax purposes (see Note 15). NET EARNINGS PER COMMON SHARE. The Company presents two calculations of earnings per common share. "Basic" earnings per common share shall equal net income divided by weighted average common shares outstanding during the period. "Dilutive" earnings per common share shall equal net income divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents. Common stock equivalents that are anti-dilutive are excluded from net income per common share. Following is a reconciliation of the shares used in calculating basic and dilutive net income per common share (net income as reported is the numerator in each calculation):
1998 1997 1996 ---- ---- ---- Weighted average common shares outstanding..... 13,077,392 13,119,404 13,130,849 Effect of dilutive securities -- options....... 90,450 -- -- ---------- ---------- ---------- Weighted average common equivalent shares outstanding -- assuming dilution............. 13,167,842 13,119,404 13,130,849 ========== ========== ==========
COMPREHENSIVE INCOME. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," on January 1, 1998. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statements of Changes in Stockholders' Equity. This statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. SEGMENT REPORTING. During 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments and for related disclosures about products, geographic areas and major customers. (See Note 16.) PENSION AND OTHER POSTRETIREMENT PLANS. On January 1, 1998, the Company adopted SFAS No. 132, "Employers Disclosures about Pension and Other Postretirement Benefits." This statement revises employers disclosures about pensions and other postretirement benefit plans. F-8 87 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS No. 132 does not change the method of accounting for such plans. (See Notes 12 and 13.) STOCK OPTION PLANS. The Company accounts for its stock option plans in accordance with the provisions of SFAS No. 123 "Accounting for Stock Based Compensation." As permitted by this statement, the Company has chosen to continue to apply the intrinsic value-based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense has been recognized for options granted. As required, the Company provides pro forma net income and pro forma earnings per share disclosures for stock option grants, as if the fair value based method defined in SFAS No. 123 had been applied. (See Note 11.) CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. With respect to accounts receivable, such receivables are primarily from warehouse distributors and major retailers in the automotive aftermarket industry located in the United States. The Company performs ongoing credit evaluations of its customers' financial conditions. Members of one marketing group represent the Company's largest group of customers and accounted for approximately 13%, 14% and 16% of consolidated net sales (including sales of discontinued operations) for the years ended December 31, 1998, 1997 and 1996, respectively. One individual member of this marketing group accounted for 10%, 9% and 11% of net sales for the years ended December 31, 1998, 1997 and 1996, respectively. The Company's five largest individual customers, including the members of this marketing group, accounted for 30%, 32% and 34% of net sales in 1998, 1997 and 1996, respectively. 2. ACQUISITIONS During 1998 and 1997, the Company acquired and accounted for as a purchase, three businesses as follows: In January 1997, the Company acquired the assets of the Filko Automotive division of F&B Manufacturing Company for approximately $7,900,000. Filko Automotive headquarters were located in Des Plaines, Illinois, when acquired but have been subsequently merged into the Standard Division by the end of 1997. The acquisition increased consolidated net sales by approximately $14,200,000 in 1998 and $19,000,000 in 1997 and had an immaterial effect on consolidated net earnings, from continuing operations, for the same period. In September 1997, the Company acquired the oxygen sensor manufacturing business of AlliedSignal for approximately $10,200,000 and has relocated the manufacturing assets from the AlliedSignal's plant to a new facility in North Carolina. The acquisition had an immaterial effect on consolidated net sales and consolidated net earnings, from continuing operations, for the years ended December 31, 1998 and 1997. In March 1998, the Company completed the exchange of its brake business for the Moog Automotive temperature control business of Cooper Industries. The total acquisition price amounted to $79,200,000, which included the exchange of certain net assets, principally inventory and property, plant and equipment and a cash payment of $13,997,000. F-9 88 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On the basis of a pro forma consolidation, as if the Moog Automotive temperature control business had been acquired at the beginning of 1997, the Company's consolidated results would have been as follows:
PRO FORMA RESULTS ---------------------- 1998 1997 -------- -------- (Dollars in thousands except per share data) Net sales.................................................. $671,891 $685,570 Net earnings (loss) from continuing operations............. $ 21,464 $ (4,840) Net earnings (loss) from continuing operations per common share......................................... $ 1.64 $ (0.37)
Such pro forma information does not purport to be indicative of the results of operations that would have actually been attained if the acquisition had been consummated as of January 1, 1997. In addition, the pro forma financial information does not purport to be indicative of future results of operations. The Company's acquisitions, with the exception of the exchange for the Moog Automotive temperature control business, were funded from cash and short term borrowings. Assets acquired in all of the acquisitions consisted primarily of inventory and property, plant and equipment. The purchase prices have been allocated to the assets acquired and liabilities assumed based on the fair value at the dates of acquisition. In aggregate, the excess of the purchase prices over the fair value of the net assets acquired during 1998 and 1997 were approximately $11,650,000 and $8,500,000 respectively. The operating results of these acquired businesses have been included in the consolidated financial statements from the time of each respective acquisition. 3. DISCONTINUED OPERATIONS BRAKE BUSINESS. In connection with the exchange transaction described in note 2, during the fourth quarter of 1997 the Company recorded a provision of $14,500,000, consisting of an estimated loss on the disposal of the business of $14,000,000 and a provision of $500,000 for anticipated operating losses until the completion of the disposal. The income (loss) from operations of the discontinued Brake Business includes an allocation of consolidated interest based upon the ratio of net assets of the discontinued Brake Business to the total net assets of the Company, which are applicable to interest bearing expenses. The interest allocated to the discontinued Brake Business amounted to $1,112,000, $5,183,000 and $4,594,000 for the years ended December 31, 1998, 1997 and 1996, respectively. F-10 89 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The operating results of the discontinued Brake Business are summarized as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Net Sales......................................... $34,088 $164,202 $165,800 ------- -------- -------- Income (loss) from operations before income taxes........................................... -- (568) (10,573) Income taxes...................................... -- -- (3,067) ------- -------- -------- Income (loss) from operations..................... -- (568) (7,506) ------- -------- -------- Estimated loss on disposal........................ -- (14,500) -- Income taxes...................................... -- -- -- ------- -------- -------- Net loss on disposal.............................. -- (14,500) -- ------- -------- -------- Total loss on discontinued operation.... $ -- $(15,068) $ (7,506) ======= ======== ========
The $14,500,000 loss associated with the disposal of the Brake business reflects no income tax benefit. As of December 31, 1998, substantially all of the assets of the discontinued Brake business were either sold or disposed of. The net assets retained and held for sale at December 31, 1997, of the discontinued Brake Business are summarized as follows:
HELD TOTAL RETAINED FOR SALE ----- -------- -------- (In thousands) Current Assets............................................ $ 77,266 $ 32,161 $45,105 Property, plant and equipment, net........................ 28,952 465 28,487 Other non-current assets net of amortization.............. 1,202 -- 1,202 Current Liabilities....................................... (22,253) (18,167) (4,086) Other Liabilities......................................... (12,447) (12,447) -- -------- -------- ------- Net assets of the discontinued Brake business............. $ 72,720 $ 2,012 $70,708 ======== ======== =======
SERVICE LINE BUSINESS. In the fourth quarter of 1998, the Company completed the two largest phases of its agreement to sell its Service Line business to R&B, Inc. This transaction involved the sale of selected assets of Champ and APS Service Lines and the Pik-A-Nut Fastener Line. The third and final phase, involving the sale of the Everco Brass & Brake Line, acquired in the Moog automotive exchange, was completed in early 1999. In the fourth quarter of 1997, the Company recorded a provision of $12,500,000, consisting of an estimated loss on the sale of the business of $12,000,000 and a provision of $500,000 for anticipated operating losses until the closing of the sale. The loss from operations of the discontinued Service Line business included an allocation of consolidated interest based upon the ratio of net assets of the discontinued Service Line business to the total net assets of the Company which are applicable to interest bearing expenses. The interest allocated to the discontinued Service Line Business amounted to $629,000, $975,000, and $1,110,000 for the years ended December 31, 1998, 1997, and 1996 respectively. The Company's 1998 results do not include any income or loss from the discontinued Service Line business as these anticipated losses were included in the 1997 provision. F-11 90 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The operating results of the discontinued Service Line Business are summarized as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Net Sales.......................................... $23,254 $ 39,147 $42,598 ------- -------- ------- Income (loss) from operations before income taxes............................................ -- (5,336) (2,935) Income taxes....................................... -- -- (1,233) ------- -------- ------- Loss from operations............................... -- (5,336) (1,702) ------- -------- ------- Estimated loss on disposal......................... -- (12,500) -- Income taxes....................................... -- -- -- ------- -------- ------- Net loss on disposal............................... -- (12,500) -- ------- -------- ------- Total loss on discontinued operation..... $ -- $(17,836) $(1,702) ======= ======== =======
The $12,500,000 loss associated with the disposal of the Service Line Business reflects no income tax benefit. As of December 31, 1998, substantially all of the assets of the discontinued Service Line business were either sold or disposed of. The net assets of the discontinued Service Line Business retained and held for sale at December 31, 1997, are summarized as follows:
HELD TOTAL RETAINED FOR SALE ----- -------- -------- (In thousands) Current Assets....................................... $12,933 $ 5,196 $7,737 Property, plant and equipment, net................... 662 -- 662 Other non-current assets net of amortization....... 184 184 -- Current Liabilities.................................. (8,020) (8,020) -- Other Liabilities.................................... -- -- -- ------- ------- ------ Net assets of the discontinued Service Line Business........................................... $ 5,759 $(2,640) $8,399 ======= ======= ======
4. SALE OF ACCOUNTS RECEIVABLE The Company sells certain accounts receivable to its wholly-owned subsidiary, Standard Motor Products Credit Corp., a qualifying special-purpose corporation. On March 19, 1997, Standard Motor Products Credit Corp., entered into a two year agreement whereby it can sell up to a $25,000,000 undivided ownership interest in a designated pool of certain of these eligible receivables. At December 31, 1998 and 1997, net accounts receivables amounting to $25,000,000 had been sold under this agreement. These sales were reflected as reductions of trade accounts receivable in 1998 and 1997 and the related fees and discounting expense were recorded as other expense. The Company has received an extension of this agreement until April 30, 1999 while it completes negotiations on a three year renewal with similar terms and conditions. F-12 91 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INVENTORIES
DECEMBER 31, -------------------- 1998 1997 ---- ---- (In thousands) Inventories consist of: Finished goods............................................ $120,108 $124,224 Work in process........................................... 4,867 5,392 Raw materials............................................. 49,117 59,390 -------- -------- Total inventories................................. $174,092 $189,006 ======== ========
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, -------------------- 1998 1997 ---- ---- (In thousands) Property, plant and equipment consist of the following: Land, buildings and improvements.......................... $ 64,080 $ 75,752 Machinery and equipment................................... 88,282 104,178 Tools, dies and auxiliary equipment....................... 8,412 10,029 Furniture and fixtures.................................... 21,542 22,841 Leasehold improvements.................................... 5,130 7,213 Construction in progress.................................. 18,068 8,840 -------- -------- 205,514 228,853 Less accumulated depreciation and amortization.............. 96,110 102,829 -------- -------- Total property, plant and equipment, net.......... $109,404 $126,024 ======== ========
7. OTHER ASSETS
DECEMBER 31, ------------------ 1998 1997 ---- ---- (In thousands) Other assets consist of the following: Marketable securities..................................... $ 7,200 $ 7,200 Unamortized customer supply agreements.................... 3,311 537 Equity in joint ventures.................................. 4,698 7,434 Deferred income taxes..................................... 4,169 -- Other..................................................... 11,031 14,792 ------- ------- Total other assets................................ $30,409 $29,963 ======= =======
Included in Other is a preferred stock investment in a customer of the Company. Net sales to such customer amounted to $72,754,000, $72,529,000 and $76,283,000 in 1998, 1997 and 1996, respectively. 8. NOTES PAYABLE -- BANKS During 1997 and the first quarter of 1998, the Company's short-term facilities consisted primarily of one year uncommitted demand revolving credit agreements negotiated separately with each of its six lending institutions. The amount of short-term bank borrowings outstanding F-13 92 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under those facilities was $52,900,000 at December 31, 1997. The weighted average interest rate at December 31, 1997 on those borrowings was 9.1%. On March 30, 1998, the Company entered into an eight-month committed revolving credit facility with its then existing banking group and incurred commitment fees of approximately 1.25% of the facility. This facility provided for unsecured lines of credit in the aggregate amount of $108,500,000. On November 30, 1998, the Company entered into a new three year revolving credit facility. The new facility, with eight lending institutions, provides a $110,000,000 unsecured line of credit, subject to a borrowing base as defined. This facility consists primarily of two borrowing options, one a function of LIBOR and the other a function of the prime rate. The spread above each borrowing option rate is determined by the Company's ratio of consolidated debt to Earnings Before Interest, Taxes, Depreciation and Amortization. The terms of this revolving credit facility include, among other provisions, the requirement for a clean-down to $10,000,000 or less, for any consecutive 30 days during each 12 month period of the facility, maintenance of defined levels of tangible net worth, various financial performance ratios and restrictions on capital expenditures, dividend payments, acquisitions and additional indebtedness. There were no outstanding borrowings under this facility at December 31, 1998. The Company incurred commitment fees of approximately .70% of the total facility. A foreign subsidiary of the Company had a revolving credit facility during 1998 and 1997. The amount of short-term bank borrowings outstanding under that facility was $3,555,000 at December 31, 1998, and $2,997,000 at December 31, 1997. The weighted average interest rate on these borrowings at December 31, 1998 and 1997 was 8.4% and 7.7%, respectively. 9. LONG-TERM DEBT
DECEMBER 31, -------------------- 1998 1997 ---- ---- (In thousands) Long-term debt consists of: 7.56% senior note payable................................. $ 73,000 $ 73,000 8.60% senior note payable................................. 37,143 46,429 10.22% senior note payable................................ 21,500 30,000 Credit Facility ($17 million Canadian).................... 10,960 13,935 7.50%-10.50% purchase obligations......................... 2,833 4,840 5.0%-8.8% Facilities...................................... 6,411 7,524 5.0% Notes Payable -- AlliedSignal........................ 3,000 5,000 Credit Agreement (ESOP)................................... 0 1,674 Other..................................................... 1,306 1,080 -------- -------- 156,153 183,482 Less current portion........................................ 22,404 24,373 -------- -------- Total noncurrent portion of long-term debt........ $133,749 $159,109 ======== ========
Under the terms of the $73,000,000 senior note agreement, the Company is required to repay the loan in seven equal annual installments beginning in 2000. Under the terms of the $37,143,000 senior note agreement, the Company is required to repay the remaining loan in four equal annual installments from 1999 through 2002. F-14 93 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the terms of the $21,500,000 senior note agreement, the Company is required to repay the loan in five varying annual installments beginning in 1999. Subject to certain restrictions, the Company may make prepayments without premium. Under the terms of the $17,000,000 CDN credit agreement, the Company is required to repay the loan as follows: $7,000,000 CDN in 1999, $2,000,000 CDN in 2000, and 2001, and a final payment of $6,000,000 CDN in 2002. Subject to certain restrictions, the Company can make prepayments without premium. The credit agreement has various interest rate options which averaged 4.9% for 1998. The purchase obligations, due under agreements with municipalities, mature in annual installments through 2003, and are secured by properties having a net book value of approximately $13,390,000 at December 31, 1998. The Company holds a 73.4% equity interest in Standard Motor Products Holdings Limited, formerly Intermotor Holdings Limited, which has various existing credit facilities that mature by 2003. Under the terms of the unsecured note agreement with AlliedSignal, the Company is required to repay $2,000,000 in September 1999 with a final payment of $1,000,000 due in 2000. The proceeds of the Credit Agreement were loaned to the Company's Employee Stock Ownership Plan (ESOP) to purchase 1,000,000 shares of the Company's common stock to be distributed in accordance with the terms of the ESOP established in 1989 (see Note 12). In January 1998, the Company made the final required payment and as such the credit agreement has been paid in full. Maturities of long-term debt during the five years ending December 31, 1999 through 2003, are $22,404,000, $28,421,000, $27,282,000, $29,815,000 and $16,416,000 respectively. The senior note payable agreements contain restrictive covenants which require the maintenance of defined levels of working capital, tangible net worth and earnings and limit, among other items, investments, indebtedness and distributions for the payment of dividends and the acquisition of capital stock. At December 31, 1997, the Company did not comply with certain covenant requirements for which the Company received waivers and amendments on March 27, 1998. These amendments contained provisions for the payment of up front fees of 1.5% and an increase in the interest rate on each senior note by 1.25%. The increased interest rate was reduced by 0.50% based upon the refinancing of our revolving credit facility on November 30, 1998 (see Note 8). 10. STOCKHOLDERS' EQUITY The Company has authority to issue 500,000 shares of preferred stock, $20 par value, and the Board of Directors is vested with the authority to establish and designate series of preferred, to fix the number of shares therein and the variations in relative rights as between series. On December 18, 1995, the Board of Directors established a new series of preferred shares designated as Series A Participating Preferred Stock. The number of shares constituting the Series A Preferred Stock is 30,000. The Series A Preferred Stock is designed to participate in dividends, ranks senior to the Company's common stock as to dividends and liquidation rights and has voting rights. Each share of the Series A Preferred Stock shall entitle the holder to one thousand votes on all matters submitted to a vote of the stockholders of the Company. No such shares were outstanding at December 31, 1998. F-15 94 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. On December 22, 1998, the Company announced that the Board of Directors has authorized the repurchase by the Company of up to an additional 300,000 shares of its common stock at a cost of up to $7,000,000, to be used to meet present and future requirements of its stock option program. As of December 31, 1998, 78,400 shares were repurchased at a cost of $1,881,000. 11. STOCK OPTIONS The Company has principally two fixed stock-based compensation plans. Under the 1994 Omnibus Stock Option Plan, the Company is authorized to issue 400,000 stock options. The options become exercisable over a four year period and expire at the end of five years following the date they become exercisable. The 1994 Omnibus Stock Option Plan was amended during 1997 to increase the number of shares authorized for issuance to 1,000,000 shares. Under the 1996 Independent Director's Stock Option Plan, the Company is authorized to issue 50,000 stock options. The options become exercisable one year after the date of grant and expire at the end of ten years following the date of grant. At December 31, 1998, in aggregate 969,000 shares of authorized but unissued common stock were reserved for issuance under our stock option plans. As permitted under SFAS 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:
1998 1997 1996 ---- ---- ---- (Dollars in thousands except per share data) Net Earnings As reported............... $22,257 $(34,524) $14,658 (loss) Pro forma................. $21,610 $(34,849) $14,544 Basic Earnings As reported............... $ 1.70 $ (2.63) $ 1.12 (loss) per share Pro forma................. $ 1.65 $ (2.66) $ 1.11
For pro forma calculations, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average F-16 95 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assumptions used for grants in 1998, 1997 and 1996 respectively: expected volatility of 33.5%, 33.5% and 25.5%, expected life of 4.3 years, 4.4 years and 4.4 years, dividend yield of 1.5%, 1.5% and 2.0%, and risk free interest rate of 5.2%, 5.6% and 6.0% for issued options. A summary of the status of the Company's option plans follows:
1998 1997 1996 ----------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ -------- (Shares in thousands) Outstanding at beginning of year... 636 $18.45 424 $16.50 281 $16.54 Granted............................ 263 21.54 231 21.87 157 16.27 Exercised.......................... (91) 17.08 (10) 16.39 (11) 14.40 Forfeited.......................... (15) 21.50 (9) 16.36 (3) 16.39 --- --- --- Outstanding at end of year......... 793 $19.58 636 $18.45 424 $16.50 === === === Options exercisable at end of year............................. 335 230 142 === === === Weighted-average fair value of options granted during the year............................. $ 6.30 $ 6.11 $ 4.28
OPTIONS OUTSTANDING
NUMBER WEIGHTED-AVERAGE RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE --------------- ----------- ------------------------ ---------------- $13.63 - $14.50 6,000 8.3 $13.77 $16.00 - $16.94 314,000 3.9 $16.34 $20.50 - $23.72 473,000 6.2 $21.80
OPTIONS EXERCISABLE
RANGE OF NUMBER EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICES AT 12/31/98 EXERCISE PRICE --------------- ------------------ ---------------- $13.63 - $23.59 334,500 $17.34
12. EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan covering certain former employees of the Company's discontinued Brake business. (see Note 3). F-17 96 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, ------------------ 1998 1997 ---- ---- (In thousands) CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year..................... $10,109 $10,036 Service cost................................................ 97 188 Interest cost............................................... 665 672 Actuarial gain.............................................. (121) (33) Benefits paid............................................... (835) (754) ------- ------- Benefit obligation at end of year........................... 9,915 10,109 ------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year.............. 11,120 10,418 Actual return on plan assets................................ 1,399 1,456 Employer contributions...................................... -- -- Benefits paid............................................... (835) (754) ------- ------- Fair value of plan assets at end of year.................... 11,684 11,120 ------- ------- Funded status............................................... 1,769 1,011 Unrecognized prior service cost............................. -- 263 Unrecognized net actuarial gain............................. (2,083) (1,452) Unrecognized transition cost................................ -- 72 ------- ------- (Accrued)/prepaid benefit cost.............................. $ (314) $ (106) ======= =======
DECEMBER 31, -------------------- 1998 1997 1996 ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS: Discount rates.............................................. 6.75% 7.00% 7.00% Expected long-term rate of return on assets................. 8.00% 8.00% 8.00%
DECEMBER 31, ------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost.......................................... $ 97 $ 188 $ 219 Interest cost......................................... 665 672 653 Return on assets...................................... (816) (1,456) (1,135) Amortization of prior service cost.................... 19 70 70 Recognized actuarial (gain)/loss...................... (72) 655 373 ----- ------ ------ Net periodic (benefit) cost........................... $(107) $ 129 $ 180 ===== ====== ======
In addition, the Company participates in several multiemployer plans which provide defined benefits to substantially all unionized workers. The Multiemployer Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers associated with multiemployer plans. The Company has not received information from the plans' administrators to determine its share, if any, of unfunded vested benefits. F-18 97 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company and certain of its subsidiaries also maintain various defined contribution plans, which include profit sharing, providing retirement benefits for other eligible employees. The provisions for retirement expense in connection with the plans are as follows:
MULTI-EMPLOYER DEFINED CONTRIBUTION YEAR-END DECEMBER 31, PLANS AND OTHER PLANS --------------------- -------------- -------------------- 1998....................................... $302,000 $4,350,000 1997....................................... $365,000 $2,840,000 1996....................................... $383,000 $2,175,000
In January 1989, the Company established an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. The ESOP authorized the Trust to purchase up to 1,000,000 shares of the Company's common stock in the open market. In 1989, the Company entered into an agreement with a bank authorizing the Company to borrow up to $18,000,000 in connection with the ESOP. Under this agreement, the Company borrowed $16,729,000, payable in annual installments through 1998 (see Note 9), which was loaned on the same terms to the ESOP for the purchase of common stock. During 1989, the ESOP made open market purchases of 1,000,000 shares at an average cost of $16.78 per share. In January 1998, the Company made the final required payment and as such, the credit agreement has been paid in full. During 1998, 1997 and 1996, 106,900, 98,000 and 96,800 shares were allocated to the employees, leaving no unallocated shares in the ESOP trust at December 31, 1998. Contributions to the ESOP are based on a predetermined formula which is primarily tied into dividends earned by the ESOP and loan repayments. The provision for expense in connection with the ESOP was approximately $1,664,000 in 1998, $1,406,000 in 1997 and $1,391,000 in 1996. The expense was calculated by subtracting dividend and interest income earned by the ESOP, which amounted to approximately $1,000, $274,000 and $289,000 for the years ended December 31, 1998, 1997 and 1996, respectively, from the principal repayment on the outstanding bank loan. Interest costs amounted to approximately $56,000, $208,000 and $360,000 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1997, indebtedness of the ESOP to the Company in the amounts of $1,665,000 is shown as deductions from stockholders' equity in the consolidated balance sheets. Dividends paid on ESOP shares are recorded as reductions in retained earnings in the consolidated balance sheets. In August 1994, the Company established an unfunded Supplemental Executive Retirement Plan for key employees of the Company. Under the plan, employees may elect to defer a portion of their compensation and, in addition, the Company may at its discretion make contributions to the plan on behalf of the employees. Such contributions were not significant in 1998, 1997 and 1996. 13. POSTRETIREMENT BENEFITS The Company provides certain medical and dental care benefits to eligible retired employees. The Company's current policy is to fund the cost of the health care plans on a pay-as-you-go basis. F-19 98 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table represents a reconciliation of the beginning and ending benefit obligation and the funded status of the plan.
DECEMBER 31, -------------------- 1998 1997 ---- ---- (In thousands) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year..................... $ 15,783 $ 20,888 Service cost................................................ 975 671 Interest cost............................................... 1,082 1,139 Amendments.................................................. 1,410 -- Curtailments................................................ -- (2,120) Actuarial (gain)/loss....................................... (844) (4,319) Benefits paid............................................... (778) (476) -------- -------- Benefit obligation at end of year........................... $ 17,628 $ 15,783 ======== ======== Funded status............................................... $(17,628) $(15,783) Unrecognized prior service cost............................. 1,286 -- Unrecognized net actuarial (gain)/loss...................... (766) -- -------- -------- (Accrued)/prepaid benefit cost.............................. $(17,108) $(15,783) ======== ========
1998 1997 ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rates.............................................. 6.75% 7.0%
For measurement purposes, an 8% and 9% annual rate of increase in the per capita cost of covered medical benefits was assumed for 1998 and 1997 respectively. The rate was assumed to decrease gradually to 5% in 2002 and remain at that level thereafter. A 6.5% annual rate of increase in the per capita cost of covered dental benefits was assumed for 1998. The rate was assumed to decrease gradually to 5% in 2001 and remain at that level thereafter.
DECEMBER 31, --------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) COMPONENTS OF NET PERIODIC BENEFIT COST Service cost................................................ $ 975 $ 671 $ 837 Interest cost............................................... 1,082 1,139 1,419 Amortization of prior service cost.......................... 124 0 0 Recognized actuarial gain/(loss)............................ (78) (235) 408 ------ ------- ------ Net periodic benefit cost................................... 2,103 1,575 2,664 Curtailment (gain).......................................... 0 (1,492) 0 ------ ------- ------ Total benefit cost.......................................... $2,103 $ 83 $2,664 ====== ======= ======
F-20 99 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for 1998:
1-PERCENTAGE- 1-PERCENTAGE- POINT INCREASE POINT DECREASE -------------- -------------- (In thousands) Effect on total of service and interest cost components........................................... $ 327 $ (274) Effect on postretirement benefit obligation............ $2,209 $(1,882)
14. OTHER INCOME (EXPENSE), NET
1998 1997 1996 ---- ---- ---- (In thousands) Other income (expense), net consists of: Interest and dividend income........................ $ 1,856 $ 898 $ 1,668 (Loss) on sale of accounts receivable (Note 4)...... (1,410) (1,358) (1,266) Income (loss) from joint ventures................... (2,078) 1,335 1,336 Other -- net........................................ 210 123 (28) ------- ------- ------- Total other income (expense), net................... $(1,422) $ 998 $ 1,710 ======= ======= =======
15. TAXES BASED ON EARNINGS Reconciliations between the U.S. federal income tax rate and the Company's effective income tax rate as a percentage of earnings from continuing operations before income taxes are as follows:
1998 1997 1996 ---- ---- ---- U.S. federal income tax rate................................ 35.0% (35.0)% 35.0% Increase (decrease) in tax rate resulting from: State and local income taxes, net of federal income tax benefit............................................... 0.7 4.6 1.1 Non-deductible items, net................................... 0.6 2.3 0.1 Benefits of income subject to taxes at lower than the U.S. federal rate.............................................. (18.3) (87.8) (7.4) (Decrease) increase in valuation allowance.................. (4.2) 50.7 -- Other....................................................... -- -- (0.6) ----- ----- ---- Effective tax rate.......................................... 13.8% (65.2)% 28.2% ===== ===== ====
F-21 100 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, -------------------- 1998 1997 ---- ---- (In thousands) Deferred tax assets: Accrued costs related to disposal of discontinued operations............................................. $ 983 $ 7,584 Inventories............................................... 8,495 11,647 Allowance for customer returns............................ 6,023 6,733 Postretirement benefits................................... 6,725 6,825 Allowance for doubtful accounts........................... 1,545 7,070 Accrued salaries and benefits............................. 3,347 4,125 Other..................................................... 12,361 8,540 Valuation allowance....................................... (14,171) (15,271) -------- -------- Total..................................................... $ 25,308 $ 37,253 -------- -------- Deferred tax liabilities: Depreciation.............................................. $ 4,032 $ 10,796 Promotional costs......................................... 1,054 1,610 Other..................................................... 4,330 5,966 -------- -------- Total............................................. 9,416 18,372 -------- -------- Net deferred tax assets................................... $ 15,892 $ 18,881 ======== ========
The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. However, if the Company is unable to generate sufficient taxable income in the future through its operations, increases in the valuation allowance may be required. The Company has not provided for federal income taxes on the undistributed income of its foreign subsidiaries because of the availability of foreign tax credits and/or the Company's intention to permanently reinvest such undistributed income. Cumulative undistributed earnings of foreign subsidiaries on which no United States income tax has been provided were $12,159,000 at the end of 1998, $17,562,000 at the end of 1997 and $11,858,000 at the end of 1996. Earnings from continuing operations, before income taxes, for foreign operations (including Puerto Rico) amounted to approximately $19,000,000, $16,000,000 and $14,000,000 in 1998, 1997 and 1996 respectively. Earnings of the Puerto Rico subsidiary are not subject to United States income taxes, and are partially exempt from Puerto Rican income taxes under a tax exemption grant expiring on December 31, 2002. The tax benefits of the exemption, reduced by a minimum tollgate tax instituted in 1993, amounted to $.20 per share in 1998 (1997 -- $.26; 1996 -- $.27). Foreign income taxes amounted to approximately $2,525,000, $2,136,000 and $1,639,000 for 1998, 1997 and 1996, respectively. 16. INDUSTRY SEGMENT AND GEOGRAPHIC DATA Under the provisions of SFAS No. 131, the Company has two reportable operating segments which are the major product areas of the automotive aftermarket in which the Company competes. F-22 101 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Engine Management Division consists primarily of ignition and electrical parts, emission and engine controls, on-board computers, sensors, ignition wires, battery cables, carburetor and fuel system parts. The Temperature Control Division consists primarily of air conditioning compressors, clutches, accumulators, filter/driers, blower motors, heater valves, heater cores, evaporators, condensers, hoses and fittings. The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1). The following tables contain financial information for each reportable segment:
FOR THE YEAR ENDING DECEMBER 31, 1998 ----------------------------------------------------- ENGINE TEMPERATURE OTHER MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED ---------- ----------- ----------- ------------ (In thousands) Net Sales......................... $348,664 $297,144 $ 3,612 $649,420 Depreciation and amortization..... 10,068 4,473 2,733 17,274 Operating income.................. 32,243 19,672 (7,984) 43,931 Investment in equity affiliates... 105 516 4,077 4,698 Capital expenditures.............. 10,597 4,598 130 15,325 Total Assets...................... $311,716 $183,197 $26,643 $521,556 ======== ======== ======= ========
FOR THE YEAR ENDING DECEMBER 31, 1997 ----------------------------------------------------- ENGINE TEMPERATURE OTHER MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED ---------- ----------- ----------- ------------ (In thousands) Net Sales......................... $365,824 $187,918 $ 6,081 $559,823 Depreciation and amortization..... 9,948 3,284 5,748 18,980 Operating income.................. 28,179 7,302 (26,026) 9,455 Investment in equity affiliates... 1,105 396 5,933 7,434 Capital expenditures.............. 9,679 3,138 2,780 15,597 Total Assets...................... $317,162 $107,406 $152,569 $577,137 ======== ======== ======== ========
FOR THE YEAR ENDING DECEMBER 31, 1996 ----------------------------------------------------- ENGINE TEMPERATURE OTHER MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED ---------- ----------- ----------- ------------ (In thousands) Net Sales......................... $353,409 $156,423 $ 3,575 $513,407 Depreciation and amortization..... 7,960 2,160 6,206 16,326 Operating income.................. 43,149 13,712 (12,127) 44,734 Investment in equity affiliates... 1,144 -- 5,009 6,153 Capital expenditures.............. 12,024 6,461 2,904 21,389 Total Assets...................... $317,761 $120,912 $186,133 $624,806 -------- -------- -------- --------
Other Adjustments consists of items pertaining to the corporate headquarters function, a Canadian business unit that does not meet the criteria of a reportable operating segment under SFAS No. 131 and businesses that have been sold. F-23 102 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table reconciles the measure of profit used in the previous disclosure to the Company's consolidated Earnings (loss) from continuing operations before taxes:
1998 1997 1996 ---- ---- ---- (In thousands) Operating income.................................... $43,931 $ 9,455 $44,734 Other income (expense).............................. (1,422) 998 1,710 Interest expense.................................... 16,419 14,158 13,091 ------- ------- ------- Earnings (loss) from continuing operations before taxes and minority interest....................... $26,090 $(3,705) $33,353 ======= ======= =======
GEOGRAPHIC INFORMATION FOR THE YEAR ENDED DECEMBER 31,
REVENUES -------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) United States................................... $586,044 $493,823 $474,711 Canada.......................................... 25,513 25,748 24,470 Other Foreign................................... 37,863 40,252 14,226 -------- -------- -------- Total........................................... $649,420 $559,823 $513,407 ======== ======== ========
LONG LIVED ASSETS -------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) United States................................... $125,627 $126,854 $121,126 Canada.......................................... 3,719 8,615 17,377 Other Foreign................................... 19,290 21,229 22,833 -------- -------- -------- Total........................................... $148,636 $156,698 $161,336 ======== ======== ========
Revenues are attributed to countries based on the location of customer. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value because of the short maturity of those instruments. MARKETABLE SECURITIES. The fair values of investments are estimated based on quoted market prices for these or similar instruments. LONG-TERM DEBT. The fair value of the Company's long-term debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities. F-24 103 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 1998 CARRYING AMOUNT FAIR VALUE - ----------------- --------------- ---------- (In thousands) Cash and cash equivalents.............................. $ 23,457 $ 23,457 Marketable securities.................................. 7,200 7,200 Long-term debt......................................... (156,153) (143,938)
DECEMBER 31, 1997 CARRYING AMOUNT FAIR VALUE - ----------------- --------------- ---------- (In thousands) Cash and cash equivalents.............................. $ 16,809 $ 16,809 Marketable securities.................................. 7,200 7,200 Long-term debt......................................... (183,482) (175,053)
18. COMMITMENTS AND CONTINGENCIES Total rent expense for the three years ended December 31, 1998 was as follows:
TOTAL REAL ESTATE OTHER ----- ----------- ----- (In thousands) 1998................................................. $5,747 $3,619 $2,128 1997................................................. $7,437 $4,593 $2,844 1996................................................. $6,568 $3,244 $3,324
At December 31, 1998, the Company is obligated to make minimum rental payments (exclusive of real estate taxes and certain other charges) through 2011, under operating leases for real estate, as follows:
(In thousands) 1999........................................................ $ 4,525 2000........................................................ 3,288 2001........................................................ 3,233 2002........................................................ 2,407 2003........................................................ 1,844 Thereafter.................................................. 3,644 ------- $18,941 =======
At December 31, 1998, the Company had outstanding letters of credit aggregating approximately $2,300,000. The contract amount of the letters of credit is a reasonable estimate of their value as the value for each is fixed over the life of the commitment. The Company is involved in various litigation matters arising in the ordinary course of business. Although the final outcome of these matters cannot be determined, it is management's opinion that the final resolution of these matters will not have a material effect on the Company's financial position and results of operations. F-25 104 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, QUARTER ENDED 1998 1998 1998 1998 ------------- -------- --------- -------- -------- (In thousands, except per share amounts) Net Sales................................... $113,316 $201,293 $208,766 $126,045 Gross Profit................................ 36,352 62,408 63,072 43,790 Earnings from continuing operations......... 1,391 9,574 8,639 2,653 Earnings (loss) from discontinued operations................................ -- -- -- -- Net Earnings................................ 1,391 9,574 8,639 2,653 Net Earnings from continuing operations per common share: Basic....................................... $ .11 $ .73 $ .66 $ .20 Diluted..................................... .11 .72 .65 .20 Net Earnings per common share: Basic....................................... $ .11 $ .73 $ .66 $ .20 Diluted..................................... .11 .72 .65 .20
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, QUARTER ENDED 1997 1997 1997 1997 ------------- -------- --------- -------- -------- (In thousands, except per share amounts) Net Sales................................... $103,662 $155,246 $163,181 $137,734 Gross Profit................................ 32,512 49,938 53,458 43,580 Earnings (loss) from continuing operations................................ (13,967) 6,917 5,571 (141) Earnings (loss) from discontinued operations................................ (34,057) 1,000 947 (794) Net Earnings (loss)......................... $(48,024) $ 7,917 $ 6,518 $ (935) ======== ======== ======== ======== Net Earnings (loss) from continuing operations per common share: Basic....................................... $ (1.07) $ .53 $ .42 $ (.01) Diluted..................................... (1.07) .53 .42 (.01) Net Earnings (loss) per common share: Basic....................................... $ (3.67) $ .60 $ .50 $ (.07) Diluted..................................... (3.67) .60 .50 (.07)
The fourth quarter of 1997 reflects several unfavorable year-end adjustments including a $10,500,000 increase in bad debt expense for continuing operations and a $2,500,000 increase in bad debt expense for discontinued operations related to the bankruptcy filing of a significant customer, APS, Inc., a $3,000,000 provision for severance payments related to personnel reductions, and the estimated loss on disposal of $27,000,000 associated with the Brake and Service Line businesses (see Note 3). F-26 105 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 20. SUBSEQUENT EVENTS (UNAUDITED) In January 1999, the Company acquired through its European subsidiary Standard Motor Products Holding Ltd., 85% of the stock of Webcon UK Ltd., and acquired through its United Kingdom-based joint venture Blue Streak Europe Ltd., Webcon's affiliate Injection Correction UK Ltd. The total acquisition price amounted to approximately $3,500,000 and was funded from the Company's operating cash flow. In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $13,400,000. Located in Fort Worth, Texas, Eaglemotive assembles and distributes fan clutches and other cooling products to the automotive aftermarket. The acquisition was funded from operating cash and short term borrowings. F-27 106 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited)
FOR THREE MONTHS ENDED MARCH 31, ------------------------------------ 1999 1998 ---- ---- (Dollars in thousands, except share and per share data) Net sales................................................... $ 176,789 $ 126,045 Cost of sales............................................... 123,569 82,255 ----------- ----------- Gross profit.............................................. 53,220 43,790 Selling, general and administrative expenses................ 44,432 37,505 ----------- ----------- Operating income.......................................... 8,788 6,285 Other income (expense) -- net............................... (313) 232 ----------- ----------- Earnings before interest, taxes and minority interest..... 8,475 6,517 Interest expense............................................ 3,441 3,375 ----------- ----------- Earnings before taxes and minority interest................. 5,034 3,142 Minority interest........................................... (138) (118) Income taxes (Note 4)....................................... 1,248 371 ----------- ----------- Net earnings................................................ 3,648 2,653 ----------- ----------- Retained earnings at beginning of period.................... 181,679 161,514 ----------- ----------- 185,327 164,167 Less: cash dividends for period............................. 1,051 -- ----------- ----------- Retained earnings at end of period.......................... $ 184,276 $ 164,167 =========== =========== PER SHARE DATA: - ------------------------------------------------------------ Net earnings per common share: Basic..................................................... $ 0.28 $ 0.20 Diluted................................................... 0.28 0.20 Dividends per common share.................................. $ 0.08 -- Average number of common shares............................. 13,087,650 13,076,695 Average number of common and dilutive common shares......... 13,183,235 13,139,017
See accompanying notes to consolidated financial statements. F-28 107 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ ASSETS (Unaudited) ------ (Dollars in thousands) Current Assets: Cash and cash equivalents................................. $ 1,266 $ 23,457 Accounts and notes receivable -- net of allowance for doubtful accounts and discounts of $6,586 (1998 -- $4,525) (Note 10)............................. 205,604 122,008 Inventories (Note 2)...................................... 193,247 174,092 Deferred income taxes..................................... 11,723 11,723 Prepaid expenses and other current assets................. 13,110 11,231 -------- -------- Total current assets.............................. 424,950 342,511 -------- -------- Property, plant and equipment, net of accumulated depreciation (Note 3)..................................... 111,596 109,404 -------- -------- Goodwill, net............................................... 42,507 39,232 -------- -------- Other assets (Note 8)....................................... 31,124 30,409 -------- -------- Total assets...................................... $610,177 $521,556 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable............................................. $ 60,350 $ 3,555 Current portion of long-term debt (Note 6)................ 32,705 22,404 Accounts payable.......................................... 65,803 48,414 Sundry payables and accrued expenses...................... 65,127 60,905 Accrued customer returns.................................. 23,673 16,296 Payroll and commissions................................... 11,126 12,613 -------- -------- Total current liabilities......................... 258,784 164,187 -------- -------- Long-term debt (Note 6)..................................... 123,091 133,749 -------- -------- Postretirement benefits other than pensions and other accrued liabilities....................................... 18,806 18,595 -------- -------- Total liabilities................................. $400,681 $316,531 -------- -------- Commitments and contingencies (Note 6) Stockholders' equity (Notes 5 and 6): Common stock -- par value $2.00 per share Authorized -- 30,000,000 shares Issued -- 13,324,476 shares in 1999 and 1998 (including 196,458 and 268,126 shares held as treasury shares in 1999 and 1998, respectively).......................... 26,649 26,649 Capital in excess of par value......................... 2,712 2,951 Retained earnings...................................... 184,276 181,679 Accumulated other comprehensive income (loss).......... 25 (516) -------- -------- 213,662 210,763 Less: treasury stock-at cost................................ 4,166 5,738 -------- -------- Total stockholders' equity........................ 209,496 205,025 -------- -------- Total liabilities and stockholders' equity........ $610,177 $521,556 ======== ========
See accompanying notes to consolidated financial statements. F-29 108 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, ----------------------- 1999 1998 ---- ---- (Dollars in thousands) Cash flows from operating activities: Net earnings.............................................. $ 3,648 $ 2,653 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization........................... 4,473 4,984 Change in assets and liabilities, net of effects from acquisitions: (Increase) decrease in accounts receivable, net......... (76,540) (13,710) (Increase) decrease in inventories...................... (11,704) (317) (Increase) decrease in other assets..................... (662) (705) Increase (decrease) in accounts payable................. 14,203 5,375 Increase (decrease) in other current assets and liabilities............................................ (1,857) (1,459) Increase (decrease) in sundry payables and accrued expenses............................................... 10,268 (2,920) -------- -------- Net cash provided by (used in) operating activities....... (58,171) (6,099) Cash flows from investing activities: Capital expenditures, net of effects from acquisitions.... 3,764 (1,709) -------- -------- Payments for acquisitions, net of cash acquired........... (15,499) -- -------- -------- Net cash provided by (used in) investing activities....... (19,263) (1,709) Cash flows from financing activities: Net borrowings under line-of-credit agreements............ 56,891 116 Principal payments of long-term debt...................... (416) (3,322) Reduction of loan to ESOP................................. -- 1,665 Proceeds from exercise of employee stock options.......... 1,089 -- Purchase of treasury stock................................ (1,495) -- Dividends paid............................................ (1,051) -- -------- -------- Net cash provided by (used in) financing activities....... 55,018 (1,541) Effect of exchange rate changes on cash..................... 225 88 -------- -------- Net increase (decrease) in cash............................. (22,191) (9,261) Cash and cash equivalents at beginning of the period........ 23,457 16,809 -------- -------- Cash and cash equivalents at end of the period.............. $ 1,266 $ 7,548 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest................................................ $ 3,733 $ 2,925 Income taxes............................................ $ (340) $ 1,131
See accompanying notes to consolidated financial statements. F-30 109 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 The accompanying unaudited financial information should be read in conjunction with the consolidated financial statements, including the notes thereto, for the year ended December 31, 1998. The consolidated financial statements include the accounts of the Company and all domestic and international companies in which the Company has more than a 50% equity ownership. The Company's investments in unconsolidated affiliates are accounted for on the equity method. All significant inter-company items have been eliminated. Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments considered necessary, in the opinion of management, for a fair statement of the results of interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year. NOTE 2 INVENTORIES
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ (Unaudited) (Dollars in thousands) Finished goods.............................................. $123,384 $120,108 Work in process............................................. 4,402 4,867 Raw materials............................................... 65,461 49,117 -------- -------- Total inventories......................................... $193,247 $174,092 ======== ========
NOTE 3 PROPERTY, PLANT AND EQUIPMENT
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ (Unaudited) (Dollars in thousands) Land, buildings and improvements............................ $ 64,042 $ 64,080 Machinery and equipment..................................... 88,926 88,282 Tools, dies and auxiliary equipment......................... 8,484 8,412 Furniture and fixtures...................................... 23,167 21,542 Leasehold improvements...................................... 5,682 5,130 Construction in progress.................................... 21,148 18,068 -------- -------- 211,449 205,514 Less accumulated depreciation............................... 99,853 96,110 -------- -------- Total property, plant and equipment -- net................ $111,596 $109,404 ======== ========
F-31 110 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 The provision for taxes is less than the normal statutory rate primarily because earnings of a subsidiary operating in Puerto Rico, amounting to approximately $2,573,000 and $1,972,000 for the three months ended March 31, 1999 and 1998, respectively, are exempt from United States income taxes and are partially exempt from Puerto Rican income taxes. NOTE 5 The Company granted an option to purchase 1,000 shares of common stock in February 1999, at the stock's fair market value at the time of issuance. At March 31, 1999, 903,000 shares of authorized but unissued common stock were reserved for issuance under the Company's stock option plans, of which 725,000 shares were subject to outstanding options. 349,000 of these outstanding options were vested at March 31, 1999. NOTE 6 LONG-TERM DEBT
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ (Unaudited) (Dollars in thousands) Long-term debt consists of: 7.56% senior note payable................................... $ 73,000 $ 73,000 8.60% senior note payable................................... 37,143 37,143 10.22% senior note payable.................................. 21,500 21,500 Credit Facility ($17 Million Canadian)...................... 11,230 10,960 5.0% Notes Payable -- AlliedSignal.......................... 3,000 3,000 5.00% -- 8.8% Facilities.................................... 6,008 6,411 5.00% -- 10.5% Purchase Obligations......................... 2,666 2,833 Other....................................................... 1,249 1,306 -------- -------- 155,796 156,153 Less current portion........................................ 32,705 22,404 -------- -------- Total noncurrent portion of long-term debt.................. $123,091 $133,749 ======== ========
Under the terms of the $73,000,000 senior note agreement, the Company is required to repay the loan in seven equal annual installments beginning in 2000. Under the terms of the $37,143,000 senior note agreement, the Company is required to repay the loan in four equal annual installments from 1999 through 2002. Under the terms of the $21,500,000 senior note agreement, the Company is required to repay the loan in five varying annual installments beginning in 1999. Subject to certain restrictions, the Company may make prepayments without premium. Under the terms of the $17,000,000 CDN credit agreement, the Company is required to repay the loan as follows: $7,000,000 CDN in 1999, $2,000,000 CDN in 2000 and 2001 and a final payment of $6,000,000 CDN in 2002. Subject to certain restrictions, the Company can make prepayments without premium. The credit agreement has various interest rate options. F-32 111 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the terms of the unsecured note agreement with AlliedSignal, the Company is required to repay $2,000,000 in September 1999 with a final payment of $1,000,000 due in 2000. The Company holds a 73.4% equity interest in Standard Motor Products Holdings Limited, formerly Intermotor Holdings Limited, which has various existing credit facilities which mature by 2003. The purchase obligations, due under agreements with municipalities, mature in annual installments through 2003, and are secured by certain property, plant, and equipment. The senior note agreements contain restrictive covenants which require the maintenance of defined levels of working capital, tangible net worth and earnings and limit, among other items, investments, indebtedness and distributions for the payment of dividends and the acquisition of capital stock. NOTE 7 In January 1999, the Company acquired through its European subsidiary Standard Motor Products Holdings Limited, 85% of the stock of Webcon UK Limited, and through its UK joint venture Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited. The total acquisition price amounted to approximately $3,500,000 and was funded from the Company's operating cash flow. In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $13,400,000. Located in Fort Worth, Texas, Eaglemotive assembles and distributes fan clutches and other cooling products to the automotive aftermarket. The acquisition was funded from short term borrowings. These acquisitions have been accounted for as purchases, and resulted in goodwill of $4,041,000 which is being amortized over its estimated useful life of 15 years. NOTE 8 Other assets primarily consist of certain held-to-maturity securities, unamortized customer supply agreements, equity in joint ventures and pension assets. NOTE 9 Total comprehensive income was $4,189,000 and $2,419,000 for the three month periods ended March 31, 1999 and 1998, respectively. NOTE 10 The Company sells certain accounts receivable to its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. On March 19, 1997, SMP Credit Corp., entered into a two year agreement whereby it can sell up to a $25,000,000 undivided ownership interest in a designated pool of certain of these eligible receivables. The Company has received an extension of this agreement until June 30, 1999 while it completes negotiations on a three year renewal with similar terms and conditions. F-33 112 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 Following is a reconciliation of the shares used in calculating basic and dilutive net income per common share:
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------ 1999 1998 ---- ---- Weighted average common shares outstanding................ 13,087,650 13,076,695 Effect of dilutive securities -- options.................. 95,585 62,322 ---------- ---------- Weighted average common equivalent shares outstanding assuming dilution....................................... 13,183,235 13,139,017 ========== ==========
NOTE 12 The Company's two reportable operating segments, Engine Management and Temperature Control, are the areas within the automotive aftermarket in which the Company operates. The following tables contain financial information for each reportable segment. INDUSTRY SEGMENTS
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------------------ 1999 1998 ---------------------- ---------------------- Operating Operating Net Sales Income Net Sales Income --------- --------- --------- --------- (Dollars in thousands) Engine Management............................. $ 87,423 $ 7,572 $ 90,279 $10,798 Temperature Control........................... 91,304 7,385 37,008 2,435 Other Adjustments............................. (1,938) (6,169) (1,242) (6,948) -------- ------- -------- ------- Consolidated................................ $176,789 $ 8,788 $126,045 $ 6,285 ======== ======= ======== =======
Other adjustments consist of items pertaining to the corporate headquarters function and a Canadian business unit that does not meet the criteria of a reportable segment. The following table reconciles the measure of profit used in the previous disclosure to the Company's consolidated Earnings Before Taxes:
1999 1998 ---- ---- Operating Income............................................ $8,788 $6,285 Other income (expense)...................................... (313) 232 Interest expense............................................ 3,441 3,375 ------ ------ Earnings before taxes and minority interest............... $5,034 $3,142 ====== ======
F-34 113 UNDERWRITING The Company and the Underwriters named below have entered into an Underwriting Agreement with respect to the Convertible Debentures being offered. Subject to certain conditions, each Underwriter has severally agreed to purchase the aggregate principal amount of Convertible Debentures indicated in the following table:
Principal Amount Underwriters of Debentures ------------ ------------- Goldman, Sachs & Co. ....................................... Morgan Stanley & Co. Incorporated........................... ----------- Total............................................. $75,000,000 ===========
If the Underwriters sell more Convertible Debentures than the total number set forth in the table above, the Underwriters have an option exercisable for 30 days after the date of this Prospectus to buy up to an additional $11,250,000 principal amount of Convertible Debentures from the Company to cover such sales. If any Convertible Debentures are purchased pursuant to this option, the Underwriters will severally purchase the Convertible Debentures in approximately the same proportion as set forth in the table above. The Convertible Debentures sold by the Underwriters to the public will initially be offered at the initial public offering price set forth on the cover page of this Prospectus. Any Convertible Debentures sold by the Underwriters to securities dealers may be sold at a discount from the initial public offering price of up to % of the principal amount of the Convertible Debentures. Any such securities dealers may resell any Convertible Debentures purchased from the Underwriters to certain other brokers or dealers at a discount from the initial public offering price of up to % of the principal amount of the Convertible Debentures. If all of the Convertible Debentures are not sold at the initial public offering price, the Underwriters may change the offering price and the other selling terms. The Company, its directors and its executive officers have agreed with the Underwriters not to dispose of or hedge any securities of the Company which are substantially similar to the shares of common stock or any securities which are convertible or exchangeable into securities which are substantially similar to the shares of common stock, except with the prior written consent of Goldman, Sachs & Co. This agreement covers the period from the date of this Prospectus through the date 90 days after the date of this Prospectus. This agreement does not apply to any of our existing employee benefit plans. The Convertible Debentures are a new issue of securities with no established trading market. The Underwriters have advised the Company that the Underwriters intend to make a market in the Convertible Debentures but are not obligated to do so and may discontinue market making at any time without notice. No assurance can be given as to the liquidity of the trading market for the Convertible Debentures. In connection with the offering, the Underwriters may purchase and sell the Convertible Debentures in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the Underwriters of a greater aggregate principal amount of Convertible Debentures than they are required to purchase in the offering by the Company. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the Convertible Debentures while the offering is in progress. The Underwriters also may impose a penalty bid. This occurs when a particular Underwriter repays to the Underwriters a portion of the underwriting discount received by it because the U-1 114 Underwriters have repurchased Convertible Debentures sold by or for the account of such Underwriter in stabilizing or short covering transactions. These activities by the Underwriters may stabilize, maintain or otherwise affect the market price of the Convertible Debentures, and the Company's common stock. As a result, the price of the Convertible Debentures, and the Company's common stock may be higher than the price that might otherwise exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters at any time. These transactions may be effected in the over- the-counter market or otherwise. Gabelli & Company, Inc., an affiliate of the Company, will participate in the offering. Because of the relationship between Gabelli & Company, Inc. and the Company, the Offering is being conducted in accordance with Rule 2720 of the National Association of Securities Dealers. That rule requires that the public offering price of the Convertible Debentures can be no higher than that recommended by a "qualified independent underwriter", as defined by the NASD. Goldman, Sachs & Co. will serve in that capacity and has performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this Prospectus forms a part. Goldman, Sachs & Co. will receive $10,000 from the Company as compensation for such role. Standard Motor Products estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . Standard Motor Products has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. U-2 115 ------------------------------------------------------ ------------------------------------------------------ No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this Prospectus. You must not rely on any unauthorized information or representations. This Prospectus is an offer to sell or to buy only the securities offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this Prospectus is current only as of its date. ------------------ TABLE OF CONTENTS
Page ---- Prospectus Summary.................... 3 Risk Factors.......................... 10 Use of Proceeds....................... 19 Price Range of Common Stock and Dividend Policy..................... 20 Capitalization........................ 21 Selected Consolidated Financial Data................................ 22 Ratio of Earnings to Fixed Charges.... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25 Industry.............................. 33 Business.............................. 38 Management............................ 52 Principal Shareholders................ 55 Description of Convertible Debentures.......................... 58 Description of Capital Stock.......... 71 Certain Federal Tax Considerations.... 74 Legal Matters......................... 77 Experts............................... 77 Documents Incorporated by Reference... 78 Index to Consolidated Financial Statements.......................... F-1 Underwriting.......................... U-1
------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ $75,000,000 STANDARD MOTOR PRODUCTS, INC. % Convertible Subordinated Debentures due 2009 ------------------ LOGO ------------------ GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER ------------------------------------------------------ ------------------------------------------------------ 116 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the issuance and distribution of the securities being registered, other than underwriting compensation, are as follows. All of such expenses will be paid for by the Company. SEC Registration Fee........................................ $ 23,978 Legal Fees and Expenses..................................... 125,000 Accounting Fees and Expenses................................ 150,000 Printing Fees............................................... 100,000 Miscellaneous............................................... 15,000 -------- Total............................................. $413,978 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. In 1986 various Sections of Article 7 of the New York Business Corporation Law (the "BCL") were amended to broaden the indemnification rights of directors, officers and employees. In 1987, BCL Section 402(b) was further amended to permit a provision to be included in a certificate of incorporation shielding directors from personal liability for breach of their duties as directors. In order to protect its directors, officers and employees, as applicable, to the fullest extent permitted by these statutory amendments, the Company amended the By-laws and Restated Certificate of Incorporation. In general, the Company's Restated By-laws provide that, except to the extent expressly prohibited by the BCL, the Company shall indemnify each person made or threatened to be made a party to, or called as a witness in, or asked to submit information in, any action or proceeding by reason of the fact that such person is or was a director or officer of the Company, or serves or served, at the request of the Company, any other entity in any capacity, against judgments, fines, penalties, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with such action or proceeding, or any appeal therein. This indemnification requirement covers any pending or threatened action, proceeding, hearing or investigation, whether civil or criminal, whether judicial, administrative or legislative in nature, and whether or not in the nature of a direct or shareholders' derivative action brought by or on behalf of the Company or any other corporation or enterprise which the director or officer of the Company serves or has served at the Company's request. The By-laws prohibit indemnification if a judgment or other final adjudication adverse to such person establishes that his or her acts were committed in bad faith or were the result of active or deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled. The By-laws further provide that no indemnification shall be required with respect to any settlement or other non-adjudicated disposition of any threatened or pending action or proceeding unless the Company has given its prior consent to such settlement or other disposition. The By-laws require the Company to advance or promptly reimburse upon request any person entitled to indemnification for all expenses, including attorneys' fees, reasonably incurred in defending any action or proceeding in advance of the final disposition thereof upon receipt of an undertaking by such person to repay such amount if such person is ultimately not to be entitled to indemnification; provided, however, that such person cooperates with any request by the Company that counsel be utilized by the parties to an action or proceeding similarly situated unless to do so would be inappropriate due to actual or potential conflicts of interest. II-1 117 The Restated Certificate of Incorporation provides that the personal liability of the directors of the Company be eliminated to the fullest extent permitted by the provisions of BCL Section 402(b). It also provides that the Company shall, to the fullest extent permitted by Article 7 of the BCL, indemnify under that statute from and against any and all of the expenses, liabilities or other matters covered by the statute. The By-Laws, summarized above, contain the detailed terms and conditions under which this indemnification requirement of the Restated Certificate of Incorporation is to be effected. The Company maintains an officers' and directors' liability insurance policy insuring Company's officers and directors against certain liabilities and expenses incurred by them in their capacities as such. The policy does not reimburse the Company for indemnification obligations to its officers and directors. Additionally, the Underwriting Agreement provides that each Underwriter shall indemnify each director of the Company, each officer of the Company who signed the Registration Statement, and each person who controls the Company for certain liabilities, including certain liabilities under the Securities Act of 1933. ITEM 16. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 1* Form of Underwriting Agreement among Standard Motor Products, Inc. and Goldman Sachs & Co. and Morgan Stanley & Co. Incorporated as representatives of the several underwriters 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. (incorporated by reference to Exhibit 2.1 of Registrant's Current Report on Form 8-K dated March 28, 1998) 3.1 Restated Certificate of Incorporation, dated July 31, 1990 (incorporated by reference to Exhibit 4.2 of Registrant's Report on Form S-8 dated May 1, 1998 (333-51565)) 3.2 Certificate of Amendment to the Certificate of Incorporation, dated February 15, 1996 (incorporated by reference to Exhibit 4.3 of Registrant's Report on Form S-8 dated May 1, 1998 (333-51565)) 3.3 Restated By-Laws dated May 23, 1996 (incorporated by reference to Exhibit 3.4 of the Registrant'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) 4.2 Registration of Preferred Share Purchase Rights (incorporated by reference to Registrant's Report on Form 8-A dated February 29, 1996) 5* Opinion of Kelley Drye & Warren LLP, special counsel to Standard Motor Products, Inc. 10.1 Note Purchase Agreement dated October 15, 1989 between the Registrant and the American United Life Insurance Company, the General American Life Insurance Company, the Jefferson-Pilot Life Insurance Company, the Ohio National Life Insurance Company, the Crown Insurance Company, the Great-West Life Assurance Company, the Guarantee Mutual Life Company, the Security Mutual Life Insurance Company of Lincoln, Nebraska, and the Woodmen Accident and Life Company
II-2 118
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.2 Note Agreement of November 15, 1992 between the Registrant and Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life Association, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, Allstate Life Insurance Company, Teachers Insurance & Annuity Association of America, and Phoenix Home Life Mutual Insurance Company 10.3 Employee Stock Ownership Plan and Trust dated January 1, 1989 (incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989) 10.4 Supplemental Executive Retirement Plan dated August 15, 1994 (incorporated by reference to Exhibit A of Registrant'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., as amended (incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-8 dated May 1, 1998 (333-51565)) 10.6 Note Purchase Agreement dated December 1, 1995 between the Registrant and Metropolitan Life Insurance Company, the Travelers Insurance Company Connecticut Life Insurance Company, CIGNA Property and Casualty Insurance Company, Life Insurance Company of North America and American United Life Insurance Company (incorporated by reference to Exhibit 10 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1995) 10.7 Limited Waiver and First Amendment to Note Agreement, dated as of September 30, 1996, amending the Note Agreement between the Registrant and Principal 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 (incorporated by reference to Exhibit 10.15 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996) 10.8 Limited Waiver and Second Amendment to Note Agreement, dated as of November 22, 1996, amending the Note Agreement between the Registrant and Principal 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 (incorporated by reference to Exhibit 10.16 of Registrant's annual report on Form 10-K for the year ended December 31, 1996) 10.9 Independent Directors', Stock Option Plan of Standard Motors Products, Inc. (incorporated by reference to Exhibit 10.17 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996) 10.10 Override and Amendment Agreement of March 27, 1998 amending the Note Agreement between the Registrant and the American United Life Insurance Company, the Great American Life Insurance Company, the Jefferson-Pilot Life Insurance Company, the Ohio National Life Insurance Company, the Crown Insurance Company, the Great-West Life Insurance Company, the Security Mutual Life Insurance Company, Woodmen Accident and Life Insurance Company and Nomura Holding America, Inc. dated October 15, 1989 (incorporated by reference to Exhibit 10.17 of Registrant's Current Report on Form 8-K dated March 28, 1998)
II-3 119
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.11 Override and Amendment Agreement of March 27, 1998 amending the Note Agreement between the Registrant and Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life Association, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, Allstate Life Insurance Company, Teachers Insurance & Annuity Association of America, and Phoenix Home Life Mutual Insurance Company dated November 15, 1992 (incorporated by reference to Exhibit 10.18 of Registrant's Current Report on Form 8-K dated March 28, 1998) 10.12 Override and Amendment Agreement of March 27, 1998 amending the Note Agreement between the Registrant and Metropolitan Life Insurance Company, the Travelers Insurance Company, Connecticut Life Insurance Company, CIGNA Property and Casualty Insurance Company, Life Insurance Company of North America and American United Life Insurance Company dated December 1, 1995 (incorporated by reference to Exhibit 10.19 of Registrant's Current Report on Form 8-K dated March 28, 1998) 10.13 Credit Agreement dated November 30, 1998 among Registrant, Chase Manhattan Bank and Canadian Imperial Bank of Commerce (incorporated by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998) 12** Statement relating to Computation of Ratios 23.1 Consent of KPMG LLP, Independent Auditors 23.2* Consent of Kelley Drye & Warren LLP 24** Powers of Attorney of Directors and Certain Officers of Standard Motor Products, Inc. 25* Statement of Eligibility of the Trustee 27 Financial Data Schedule for 1998 (incorporated by reference to Exhibit 27 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998)
- --------------- * To be filed by amendment. ** Filed on May 24, 1999 as the same numbered exhibit to the initial filing of the Registration Statement on Form S-3 (333-79177). ITEM 17. UNDERTAKINGS. A. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. B. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. II-4 120 (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. C. The Registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report, to security holders that is incorporated by reference in the prospectus is sent or given, that latest annual report, to security holders that is incorporated by reference in the prospectus and furnished pursuant to an meeting the requirements or Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where interim financial information required to be presented by Article 3 or Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. D. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such directors, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 121 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Long Island City, State of New York, on July 9, 1999. STANDARD MOTOR PRODUCTS, INC. By: /s/ LAWRENCE I. SILLS ------------------------------------ Lawrence I. Sills President, Director and Chief Operating Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - --------- ----- ---- /s/ LAWRENCE I. SILLS President, Director and Chief Operating July 9, 1999 - ------------------------------------------ Officer (Principal Executive Officer) Lawrence I. Sills * Senior Vice President, Administration and July 9, 1999 - ------------------------------------------ Finance, Chief Financial Officer Michael J. Bailey (Principal Financial Officer) * Director of Finance (Chief Accounting July 9, 1999 - ------------------------------------------ Officer) James J. Burke * Chairman, Director July 9, 1999 - ------------------------------------------ Nathaniel L. Sills * Director July 9, 1999 - ------------------------------------------ Marilyn F. Cragin * Director July 9, 1999 - ------------------------------------------ Arthur D. Davis * Director July 9, 1999 - ------------------------------------------ Robert J. Swartz * Director July 9, 1999 - ------------------------------------------ William H. Turner * Director July 9, 1999 - ------------------------------------------ Susan F. Davis * Director July 9, 1999 - ------------------------------------------ Robert M. Gerrity
122
SIGNATURE TITLE DATE - --------- ----- ---- * Director July 9, 1999 - ------------------------------------------ John L. Kelsey * Director July 9, 1999 - ------------------------------------------ Andrew M. Massimilla * Director July 9, 1999 - ------------------------------------------ Arthur S. Sills By: /s/ LAWRENCE I. SILLS - ----------------------------------------- Lawrence I. Sills, Attorney-in-Fact
123 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1* Form of Underwriting Agreement among Standard Motor Products, Inc. and Goldman Sachs & Co. and Morgan Stanley & Co. Incorporated as representatives of the several underwriters 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. (incorporated by reference to Exhibit 2.1 of Registrant's Current Report on Form 8-K dated March 28, 1998) 3.1 Restated Certificate of Incorporation, dated July 31, 1990 (incorporated by reference to Exhibit 4.2 of Registrant's Report on Form S-8 dated May 1, 1998 (333-51565)) 3.2 Certificate of Amendment to the Certificate of Incorporation, dated February 15, 1996 (incorporated by reference to Exhibit 4.3 of Registrant's Report on Form S-8 dated May 1, 1998 (333-51565)) 3.3 Restated By-Laws dated May 23, 1996 (incorporated by reference to Exhibit 3.4 of the Registrant'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) 4.2 Registration of Preferred Share Purchase Rights (incorporated by reference to Registrant's Report on Form 8-A dated February 29, 1996) 5* Opinion of Kelley Drye & Warren LLP, special counsel to Standard Motor Products, Inc. 10.1 Note Purchase Agreement dated October 15, 1989 between the Registrant and the American United Life Insurance Company, the General American Life Insurance Company, the Jefferson-Pilot Life Insurance Company, the Ohio National Life Insurance Company, the Crown Insurance Company, the Great-West Life Assurance Company, the Guarantee Mutual Life Company, the Security Mutual Life Insurance Company of Lincoln, Nebraska, and the Woodmen Accident and Life Company 10.2 Note Agreement of November 15, 1992 between the Registrant and Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life Association, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, Allstate Life Insurance Company, Teachers Insurance & Annuity Association of America, and Phoenix Home Life Mutual Insurance Company 10.3 Employee Stock Ownership Plan and Trust dated January 1, 1989 (incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989) 10.4 Supplemental Executive Retirement Plan dated August 15, 1994 (incorporated by reference to Exhibit A of Registrant'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., as amended (incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-8 dated May 1, 1998 (333-51565)) 10.6 Note Purchase Agreement dated December 1, 1995 between the Registrant and Metropolitan Life Insurance Company, the Travelers Insurance Company Connecticut Life Insurance Company, CIGNA Property and Casualty Insurance Company, Life Insurance Company of North America and American United Life Insurance Company (incorporated by reference to Exhibit 10 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1995)
124
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.7 Limited Waiver and First Amendment to Note Agreement, dated as of September 30, 1996, amending the Note Agreement between the Registrant and Principal 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 (incorporated by reference to Exhibit 10.15 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996) 10.8 Limited Waiver and Second Amendment to Note Agreement, dated as of November 22, 1996, amending the Note Agreement between the Registrant and Principal 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 (incorporated by reference to Exhibit 10.16 of Registrant's annual report on Form 10-K for the year ended December 31, 1996) 10.9 Independent Directors' Stock Option Plan of Standard Motors Products, Inc. (incorporated by reference to Exhibit 10.17 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996) 10.10 Override and Amendment Agreement of March 27, 1998 amending the Note Agreement between the Registrant and the American United Life Insurance Company, the Great American Life Insurance Company, the Jefferson-Pilot Life Insurance Company, the Ohio National Life Insurance Company, the Crown Insurance Company, the Great-West Life Insurance Company, the Security Mutual Life Insurance Company, Woodmen Accident and Life Insurance Company and Nomura Holding America, Inc. dated October 15, 1989 (incorporated by reference to Exhibit 10.17 of Registrant's Current Report on Form 8-K dated March 28, 1998) 10.11 Override and Amendment Agreement of March 27, 1998 amending the Note Agreement between the Registrant and Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life Association, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, Allstate Life Insurance Company, Teachers Insurance & Annuity Association of America, and Phoenix Home Life Mutual Insurance Company dated November 15, 1992 (incorporated by reference to Exhibit 10.18 of Registrant's Current Report on Form 8-K dated March 28, 1998) 10.12 Override and Amendment Agreement of March 27, 1998 amending the Note Agreement between the Registrant and Metropolitan Life Insurance Company, the Travelers Insurance Company, Connecticut Life Insurance Company, CIGNA Property and Casualty Insurance Company, Life Insurance Company of North America and American United Life Insurance Company dated December 1, 1995 (incorporated by reference to Exhibit 10.19 of Registrant's Current Report on Form 8-K dated March 28, 1998) 10.13 Credit Agreement dated November 30, 1998 among Registrant, Chase Manhattan Bank and Canadian Imperial Bank of Commerce (incorporated by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998) 12** Statement relating to Computation of Ratios 23.1 Consent of KPMG LLP, Independent Auditors 23.2* Consent of Kelley Drye & Warren LLP 24** Powers of Attorney of Directors and Certain Officers of Standard Motor Products, Inc. 25* Statement of Eligibility of the Trustee
125
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule for 1998 (incorporated by reference to Exhibit 27 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998).
- --------------- * To be filed by amendment. ** Filed on May 24, 1999 as the same numbered exhibit to the initial filing of the Registration Statement on Form S-3 (333-79177). EX-10.1 2 NOTE PURCHASE AGREEMENT 1 Exhibit 10.1 STANDARD MOTOR PRODUCTS, INC. NOTE AGREEMENT Dated as of October 15, 1989 Re: $30,000,000 9.47% Senior Notes Due November 1, 2004 2 STANDARD MOTOR PRODUCTS, INC.. 37-18 NORTHERN BOULEVARD LONG ISLAND, NEW YORK 11101 NOTE AGREEMENT RE: $30,000,000 9.47% SENIOR NOTES DUE NOVEMBER 1, 2004 Dated as of October 15, 1989 To the Purchaser named in Schedule I which is a signatory to this Agreement Gentlemen: The undersigned, STANDARD MOTOR PRODUCTS, INC., a New York corporation (the "Company"), agrees with you as follows: SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT. 1.1. Description of Notes. The Company will authorize the issue and sale of $30,000,000 aggregate principal amount of its 9.47% Senior Notes (the "Notes") to be dated the date of issue, to bear interest from such date at the rate of 9.47% per annum, payable semiannually on the first day of each May, and November in each year (commencing May 1, 1990) and at maturity and to bear interest on overdue principal (including any overdue required or optional prepayment of principal) and premium, if any, and (to the extent legally enforceable) on any overdue installment of interest at the rate of 10.47% per annum after maturity, whether by acceleration or otherwise, until paid, to be expressed to mature on November 1, 2004, and to be substantially in the form attached hereto as Exhibit A. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. The Notes are not subject to prepayment or redemption, at the option of the Company prior to their expressed maturity dates except on the terms and conditions and in the amounts and with the premium, if any, set forth in Section 2 of this Agreement. The term "Notes" as used herein shall include each Note delivered pursuant to this Agreement and the separate agreements with the other purchasers named in Schedule I. You and the other purchasers named in Schedule I are hereinafter sometimes referred to as the "Purchasers". 1.2. Commitment, Closing Date. Subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to you, and you agree to purchase from the Company, Notes of the Company in the aggregate principal amount set forth opposite your name in Schedule I, at a price of 100% of the principal amount thereof on the Closing Date hereinafter mentioned. 3 Standard Motor Products, Inc. Note Agreement Delivery of the Notes will be made at the offices of Bondy & Schloss, 8 East 43rd Street, New York, New York 10017, against payment therefor in Federal or other funds current and immediately available at the principal office of Bankers Trust Company, One Bankers Trust Plaza, New York, New York, ABA #021-001-033, for credit to Standard Motor Products, Inc., Account No. 00027748, in the amount of the purchase price at 11:00 A.M., New York time, on December 12, 1989 or such later date (not later than December 21, 1989) as shall be mutually agreed upon by the Company and the Purchasers (the "Closing Date"). The Notes delivered to you on the Closing Date will be delivered to you in the form of a single registered Note for the full amount of your purchase (unless different denominations are specified by you), registered in your name or in the name of such nominee as you may specified and in substantially the form attached hereto as Exhibit A, all as you may specify at any time prior to the date fixed for delivery. 1.3. Other Agreements. Simultaneously, with the execution and delivery of this Agreement, the Company is entering into similar agreements with the other Purchasers under which such other Purchasers agree to purchase from the Company the principal amount of Notes set opposite such Purchasers' names in Schedule 1, and your obligation and the obligations of the Company hereunder are subject to the execution and delivery of the similar agreements by the other Purchasers. The obligations of each Purchaser shall be several and not joint and no Purchaser shall be liable or responsible for the acts of any other Purchaser. SECTION 2. PREPAYMENT OF NOTES. 2.1. Required Prepayments. The Company agrees that on the first day of November in each year, commencing November 1, 1998 and ending November 1, 2003, both inclusive (herein called "Fixed Payment Dates"), it will prepay and apply and there shall become due and payable the sum of $4,250,000 on the principal indebtedness evidenced by the Notes. The entire unpaid principal amount of the Notes shall become due and payable on November 1, 2004. No premium shall be payable in connection with any required prepayment made pursuant to this Section2.1. For the purposes of this Section2.1, any prepayment of less than all of the outstanding Notes (i) if made pursuant to Section2.2 shall be deemed to be applied first, to the amount of principal scheduled to remain unpaid on November 1, 2004, and then to the remaining scheduled principal payments in inverse chronological order or (ii) if made pursuant to SectionSection2.3, 2.4 or 5.13 shall be deemed to be applied to the payment at maturity and all remaining principal payments required by this Section2.1 on a pro raTA basis so that each such remaining payment of principal shall thereupon be reduced in the same proportion that the principal amount of Notes outstanding immediately preceding the payment pursuant to SectionSection2.3, 2.4 or 5.13 was reduced by such repayment. 2.2. Optional Prepayment. In addition to the payments required by Section2.1, upon compliance with Section2.5, and subject to the following limitations: (a) Without Premium. The Company shall have the privilege (which shall be non-cumulative), of prepaying, outstanding Notes on any Fixed Payment Date (in units of $100,000 or an integral multiple of $10,000 in excess thereof), by payment of the principal amount of the Notes to be prepaid and accrued interest thereon to the date of such prepayment and without premium; provided, however, that (i) the principal amount of Notes prepaid pursuant to this Section2.2(a) on any one Fixed Payment Date shall not exceed the principal amount of Notes -2- 4 Standard Motor Products, Inc. Note Agreement required to be prepaid pursuant to Section2.1 on such Fixed Payment Date, and (ii) the aggregate principal amount of all Notes prepaid pursuant to this Section2.2(a) shall not exceed $7,500,000; AND (b) With Premium. In addition to the prepayments required by Section2.1 and the right of prepayment set forth in Section2.2(a), the Company shall have the privilege, at any time and from time to time, of prepaying the outstanding Notes, either in whole or in part (but if in part then in units of $100,000 or an integral multiple of $10,000 in excess thereof) by payment of the principal amount of the Notes, or portion thereof to be prepaid, and accrued interest thereon to the date of such prepayment, together with a premium determined as follows: (1) In the event of a prepayment made pursuant to the provisions of this Section2.2(b) occurring on or prior to September 30, 2001, the premium shall be an amount equal to the Make Whole Premium Amount, determined as of five business days prior to the date of such prepayment; and (2) In the event of a prepayment made pursuant to the provisions of this Section2.2(b) occurring on or after November 1, 2001, the premium shall be an amount equal to the applicable percentage of such principal amount of the Notes then to be prepaid, as follows:
If Prepaid During the 12-Month Period Percentage of Beginning: Principal Amount November 1, 2001 1.3529% November 1, 2002 0.6764% November 1, 2003 Zero
"Make-Whole Premium Amount" shall mean, in connection with any prepayment, the excess, if any, of (i) the aggregate present value as of the date of such prepayment of each dollar of principal being prepaid (taking into account the application of such prepayment required by Section2.1) and the amount of interest (excluding interest accrued through the date of prepayment) that would have been payable in respect of such dollar if such prepayment had not been made, determined by discounting such amounts (on a semiannual basis) at the Reinvestment Rate from the respective dates on which they would have been payable, over (ii) 100% of the principal amount of the outstanding Notes being prepaid. If the Reinvestment Rate is equal to or higher than 9.47%, the Make-Whole Premium Amount shall be zero. "Reinvestment Rate" shall mean 0.50% plus the arithmetic mean of the yields listed under the respective headings "This Week" and "Last Week" published in the Statistical Release under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the Weighted Average Life to Maturity of the principal being prepaid (taking into account the application of such prepayment required by Section2.1). If no maturity exactly corresponds to such Weighted Average Life to Maturity, yields for the two published maturities most closely corresponding to such Weighted Average Life to Maturity -3- 5 Standard Motor Products, Inc. Note Agreement shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. For the purposes of calculating the Reinvestment Rate, the most recent Statistical Release published prior to the date of determination of the Make Whole Premium Amount hereunder shall be used. "Statistical Release" shall mean the statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded U.S. Government Securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination hereunder, then such other reasonably comparable index which shall be designated by the holders of 66-2/3% in aggregate principal amount of the outstanding Notes. "Weighted Average Life to Maturity" of the principal amount of the Notes being prepaid shall mean, as of the time of any determination thereof, the number of years obtained by dividing the then Remaining Dollar-Years of such principal by the aggregate amount of such principal. The term "Remaining Dollar-Years" of such principal shall mean the amount obtained by (i) multiplying for each scheduled payment date of the Notes (1) the remainder of (A) the amount of principal that would have become due on each scheduled payment date if the subject prepayment had not been made, less (B) the amount of principal on the Notes scheduled to become due on each such corresponding date, after giving effect to the subject prepayment and the application thereof in accordance with the provisions of Section2.1, by (2) the number of years (calculated to the nearest one-twelfth) which will elapse between the date of determination and such scheduled payment date, and (ii) totaling the products obtained in (i). 2.3. Prepayment on Failure of Holders to Consent to Sale and Leaseback. At least ninety (90) days in advance of any date on which the Company proposes to enter (and does in fact enter) into a lease of the nature to which Section5.10(b) relates, the Company shall give written notice to each holder of Notes, stating (i) that the Company proposes to enter into a lease of that nature, (ii) the essential terms of the proposed lease and of the preceding sale of the property proposed to be leased, (iii) that such notice constitutes the Company's offer to prepay all or any portion of the Notes held by such holder at the principal amount thereof plus accrued interest to the date of prepayment, and (iv) that such offer may be accepted by such holder giving written notice to the Company (an "Acceptance") not later than thirty (30) days after the date of receipt of the Company's notice (the "30-Day Period"), specifying in such Acceptance the principal amount of Notes such holder wishes to have prepaid. The Company shall then (x) give written notice of prepayment of the aggregate principal amount of Notes so specified to each holder of Notes fixing the time of prepayment, which shall be the time when such lease is entered into, and setting forth the pro forma holdings of each holder of the Notes after giving effect the subject prepayment of the Notes, and (y) make such prepayment in accordance with such notice, without premium but together with all interest accrued thereon to the date of prepayment. 2.4. Prepayment on Change of Control. In the event a Change of Control shall occur, the Company will, within ten business days after such Change of Control, give written notice (the "Company Notice") of such event to all holders of the Notes. Any Company Notice pursuant to this Section2.4 shall set forth, to the best knowledge and belief of the Company, (a) a summary in reasonable detail of the transaction or transactions causing the Change of Control -4- 6 Standard Motor Products, Inc. Note Agreement and (b) the date set for prepayment of the Notes. Forty-five (45) days after the date of the Company Notice, the Company will prepay all Notes held by all holders that have requested prepayment in writing at least ten business days prior to the date specified for prepayment, by payment of the principal amount thereof, plus accrued interest thereon to the date of prepayment, but without premium. "Change of Control" shall mean any event which results in the legal or beneficial ownership of less than 20% of the outstanding shares of Voting Stock of the Company being owned of record and beneficially by (i) Bernard Fife and Nathaniel Sills, (ii) their respective spouses or lineal descendants, (iii) the estate of any such individual and/or (iv) any trust exclusively for the benefit of any such individual. 2.5. Notice of Prepayments. The Company will give notice of any prepayment of the Notes pursuant to Section2.2 to each holder thereof not less than 30 days nor more than 60 days before the date fixed for such optional prepayment specifying (i) such date set for prepayment, (ii) the section of this Agreement under which the prepayment is to be made, (iii) the principal amount of the holder's Notes to be prepaid on such date, (iv) whether a premium is or may be payable, (v) if there is or may be a premium payable, the amount of the premium or, if not determinable on the date of the giving of notice, the date when such premium will be calculated, and (vi) the accrued interest applicable to the prepayment. Such notice of prepayment shall also certify all facts which are conditions precedent to any such prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Notes specified in such notice, together with the premium, if any, and accrued interest thereon shall become due and payable on the prepayment date. A computation of the amount, if any, of the premium payable in connection with a prepayment shall be furnished in writing by telecopy or other same-day written communication to each of the holders of the Notes to be prepaid as soon as practicable after determination of such premium and, in any event, at least three days prior to the date fixed for such prepayment. 2.6. Allocation of Prepayments. All partial prepayments shall be applied on all outstanding Notes ratably in accordance with the unpaid principal amounts thereof but only in units of $1,000, and to the extent that such ratable application shall not result in an even multiple of $10,000, adjustment may be made by the Company to the end that successive applications shall result in substantially ratable payments. 2.7. Direct Payment. Notwithstanding anything to the contrary in this Agreement or the Notes, in the case of any Note owned by a Purchaser or its nominee or owned by any other institutional holder who has given written notice to the Company requesting that the provisions of this Section shall apply, the Company will, by 11 A.M. New York time, punctually pay when due the principal thereof and premium, if any, and interest thereon, without any presentment thereof, directly to such Purchaser or such subsequent holder at the address of' such Purchaser set forth in Schedule I or at such other address as such Purchaser or such subsequent holder may from time to time designate in writing to the Company (not less than five (5) days prior to the next payment) or, if a bank account is designated for such Purchaser on Schedule I hereto or in any written notice to the Company from such Purchaser or any such subsequent holder (not less than five (5) days prior to the next payment), the Company will make such payments in immediately available funds to such bank account, marked for attention as -5- 7 Standard Motor Products, Inc. Note Agreement indicated, or in such other manner or to such other account of such Purchaser or such holder in any bank in the United States as the Purchaser or any such subsequent holder may from time to time direct in writing (not less than five (5) days prior to the next payment). The holder of any Notes to which this Section applies agrees that in the event it shall sell or transfer any such Notes (i) it will, prior to the delivery of such Notes (unless it has already done so), make a notation thereon of all principal, if any, prepaid on such Notes and will also note thereon the date to which interest has been paid on such Notes, and (ii) it will promptly notify the Company of the name and address of the transferee of any Notes so transferred. With respect to Notes to which this Section applies, the Company shall be entitled to presume conclusively that the original or such subsequent institutional holder as shall have requested the provisions hereof to apply to its Notes remains the holder of such Notes until (y) the Company shall have received written notice of the transfer of such Notes, and of the name and address of the transferee, or (z) such Notes shall have been presented to the Company as evidence of the transfer, whichever shall occur earlier. SECTION 3. REPRESENTATIONS. 3.1. Representations of the Company. The Company represents and warrants that all representations set forth in the form of certificate attached hereto as Exhibit B are true and correct as of the date hereof (except as affected by the transactions contemplated by this Agreement) and are incorporated herein by reference with the same force and effect as though herein set forth in full. 3.2. Representations of the Purchasers. You represent, and in entering into this Agreement the Company understands, that you are acquiring the Notes for the purpose of investment and not with a view to the resale or distribution thereof, and that you have no present intention of selling, negotiating or otherwise disposing of the Notes; provided that the disposition of your property shall at all times be and remain within your control. You further represent that either (i) you are acquiring the Notes for your own account and with your general corporate assets and not with the assets of any separate account in which any employee benefit plan has any interest or (ii) if any of the funds being used by you to purchase the Notes shall come from assets allocated to such a separate account, you represent that no part of the funds to be used by you to acquire the Notes constitutes assets allocated to any separate account maintained by you with respect to which the assets of any employee benefit plan (other than any employee benefit plan or plans disclosed to the Company in writing) exceed five percent (5%) of the total of all assets in such separate account. The Company acknowledges that your representation set forth in clause (ii) of the preceding sentence is made in reliance upon and subject to the accuracy of the representations of the Company set forth in paragraph 16 of Exhibit B hereto. As used in this Section, the terms "separate account" and "employee benefit plan" shall have the respective meanings assigned to them in the Employee Retirement Income Security Act of 1974. SECTION 4. CLOSING CONDITIONS. Your obligation to purchase the Notes on the Closing Date shall be subject to the performance by the Company of its agreements hereunder which by the terms hereof are to be performed at or prior to the time of delivery of the Notes and to the following further conditions precedent: -6- 8 Standard Motor Products, Inc. Note Agreement 4.1. Closing Certificate. Concurrently with the delivery of Notes to you on the Closing Date, you shall have received a certificate dated the Closing Date, signed by the President or a Vice President of the Company substantially in the form attached hereto as Exhibit B, the truth and accuracy of which shall be a condition to your obligation to purchase the Notes proposed to be sold to you. 4.2. Legal Opinions. Concurrently with the delivery of Notes to you on the Closing Date, you shall have received from Chapman and Cutler, who are acting as your special counsel in this transaction, and from Bondy & Schloss, counsel for the Company, their respective opinions dated the Closing Date, in form and substance satisfactory to you, and covering the matters set forth in Exhibits C and D, respectively, hereto. 4.3. Related Transactions. Prior to or concurrently with the issuance and sale of Notes to you, the Company shall have consummated the sale of the entire principal amount of the Notes scheduled to be sold on the Closing Date pursuant to this Agreement and the other agreements referred to in Section1.3. 4.4. Satisfactory Proceedings. All proceedings taken in connection with the transactions contemplated by this Agreement, and all documents necessary to the consummation thereof, shall be satisfactory in form and substance to you and your special counsel, and you shall have received a copy (executed or certified as may be appropriate) of all legal documents or proceedings taken in connection with the consummation of said transactions. 4.5. Legality. The Notes shall qualify as a legal investment for you under the laws and regulations of each jurisdiction to which you are subject (without reference to any so-called "basket" provision which permits the making of an investment without restrictions as to the character of the particular Investment being made) and you shall have received such information as you shall reasonably request from the Company to establish such fact. 4.6. Waiver of Conditions. If on the Closing Date the Company falls to tender to you the Notes to be issued to you on such date or if the conditions specified in this Section4 have not been fulfilled, you may thereupon elect to be relieved of all further obligations under this Agreement. Without limiting the foregoing, if the conditions specified in this Section4 have not been fulfilled, you may waive compliance by the Company with any such condition to such extent as you may in your sole discretion determine. Nothing in this Section4.6 shall operate to relieve the Company of any of its obligations hereunder or to waive any of your rights against the Company. SECTION 5. COMPANY COVENANTS. From and after the Closing Date and continuing so long as any amount remains unpaid on any Note: 5.1. Corporate Existence, etc. The Company will preserve and keep in force and effect, and will cause each Restricted Subsidiary to preserve and keep in force and effect, its corporate existence, rights and franchises necessary to the proper conduct of its business, provided that the foregoing shall not prevent (i) any transaction permitted by Section5.11 or (ii) the abandonment or termination of the rights or franchises of the Company or of the corporate existence, rights and franchises of any Restricted Subsidiary if, in the opinion of the Board of -7- 9 Standard Motor Products, Inc. Note Agreement Directors of the Company, such abandonment or termination is in the best interest of the Company and of the holders of the Notes, and if such abandonment or termination does not in any way constitute a Default or Event of Default hereunder. 5.2. Insurance. The Company will maintain, and will cause each Restricted Subsidiary to maintain, insurance coverage by financially sound and reputable insurers in such forms and amounts and against such risks as are customary for corporations of established reputation engaged in the same or a similar business and owning and operating similar properties. 5.3. Taxes, Claims for Labor and Materials, Compliance with Laws. The Company will promptly pay and discharge, and will cause each Restricted Subsidiary promptly to pay and discharge, all lawful taxes, assessments, judgments and governmental charges or levies imposed upon the Company or such Restricted Subsidiary, respectively, or upon or in respect of all or any part of the property or business of the Company or such Restricted Subsidiary, all trade accounts payable in accordance with usual and customary business terms, and all claims for work, labor or materials, which if unpaid might become a lien or charge upon any property of the Company or such Restricted Subsidiary; provided the Company or such Restricted Subsidiary shall not be required to pay any such tax, assessment, charge, levy, account payable or claim if (i) the validity, applicability or amount thereof is being contested in good faith by appropriate actions or proceedings which will prevent the forfeiture or sale of any property of the Company or such Restricted Subsidiary or any material interference with the use thereof by the Company or such Restricted Subsidiary, and (ii) the Company or such Restricted Subsidiary shall set aside on its books, reserves deemed by it to be adequate with respect thereto. The Company will promptly comply and will cause each Subsidiary to comply with all laws, ordinances or governmental rules and regulations to which it is subject including, without limitation, the Occupational Safety and Health Act of 1970, the Employee Retirement Income Security Act of 1974 and all laws, ordinances, governmental rules and regulations relating to environmental protection in all applicable jurisdictions, the violation of which would materially and adversely affect the properties, business, prospects, profits or condition of the Company and its Subsidiaries or would result in any lien or charge upon any property of the Company or any Subsidiary which would materially and adversely affect the properties, business, prospects, profits or condition of the Company and its Subsidiaries. 5.4. Maintenance, etc. The Company will maintain, preserve and keep, and will cause each Restricted Subsidiary to maintain, preserve and keep, its properties which are used or useful in the conduct of its business (whether owned in fee or a leasehold interest) in good repair and working order (normal wear and tear excepted) and from time to time will make all necessary repairs, replacements, renewals and additions so that at all times the efficiency thereof shall be maintained, provided, that nothing contained in this Section5.4 shall be construed to require the Company or any Restricted Subsidiary to keep or maintain any building, structure, machinery or other equipment the retention or maintenance of which is determined by the Board of Directors of the Company or of such Restricted Subsidiary not to be in the Company's or such Restricted Subsidiary's best interest in the conduct of its business, if and so long as the failure to so retain or maintain such building, structure, machinery or other equipment would not constitute a Default or Event of Default hereunder. -8- 10 Standard Motor Products, Inc. Note Agreement 5.5. Nature of Business. Neither the Company nor any Restricted Subsidiary will engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would than be engaged in by the Company and its Restricted Subsidiaries would be substantially changed from the general nature of the business engaged in by the Company and its Restricted Subsidiaries on the date of this Agreement. 5.6. Consolidated Working Capital. The Company will at all times keep and maintain Consolidated Working Capital in an amount not less than 50% of Consolidated Funded Debt. 5.7. Limitations on Indebtedness. (a) The Company will not and will not permit any Restricted Subsidiary to create, assume or incur or in any manner be or become liable in respect of any Current Debt or Funded Debt, except: (1) the Notes; (2) Funded Debt of the Company and its Restricted Subsidiaries outstanding as of the date of this Agreement and reflected on the consolidated balance sheet of the Company and its Restricted Subsidiaries as at June 30, 1989; (3) unsecured Senior Funded Debt of the Company and unsecured Funded Debt of Restricted Subsidiaries, provided that at the time of issuance thereof and after giving effect thereto and to the application of the proceeds thereof: (i) Consolidated Net Tangible Assets shall not be less than 190% of Consolidated Senior Funded Debt, (ii) Consolidated Net Tangible Assets shall not be less than 170% of Consolidated Funded Debt, (iii) the total of Consolidated Net Tangible Assets plus Average Daily Current Debt in excess of $15,000,000 shall not be less than 175% of the total of Consolidated Senior Funded Debt plus Average Daily Current Debt in excess of $15,000,000; and (iv) the aggregate outstanding amount of (a) Funded Debt of Restricted Subsidiaries plus (b) Current Debt of Restricted Subsidiaries shall not exceed 7.5% of Consolidated Net Tangible Assets; (4) Subordinated Debt of the Company, provided that at the time of issuance thereof and after giving effect thereto and to the application of the proceeds thereof, Consolidated Net Tangible Assets plus Average Daily Current Debt in excess of $15,000,000 shall not be less than 170% of the total of Consolidated Funded Debt plus Average Daily Current Debt in excess of $15,000,000; -9- 11 Standard Motor Products, Inc. Note Agreement (5) unsecured Current Debt of the Company and its Restricted Subsidiaries, provided that (i) either (x) during the period of the twelve (12) calendar months then most recently ended, there shall have been a period of at least 45 consecutive days in which the Company and its Restricted Subsidiaries shall have had no Current Debt (excluding current maturities of Funded Debt otherwise included therein) outstanding in excess of $15,000,000, or (y) the Company and its Restricted Subsidiaries would have been permitted underSection5.7(a)(3)(iii) hereof to incur additional Senior Funded Debt during each and every day of the most recent Designated Period, in an amount equal to the amount by which the Average Daily Current Debt of the Company and its Restricted Subsidiaries during such Designated Period exceeds $15,000,000 (and for all other purposes under this Agreement, the Company shall be deemed to have remained liable with respect to said amount of additional Senior Funded Debt for the entire Designated Period); and (ii) after giving effect to the principal amount of Current Debt proposed to be incurred, (x) the aggregate amount of Current Debt (excluding current maturities of Funded Debt otherwise included therein) of Restricted Subsidiaries shall not exceed 2.5% of Consolidated Net Tangible Assets, and (y) the aggregate amount of Current Debt and Funded Debt of Restricted Subsidiaries, outstanding as of such date, shall not exceed 7.5% of Consolidated Net Tangible Assets; (6) Current Debt and Funded Debt of the Company and its Restricted Subsidiaries secured by liens permitted by Sections5.8(a) (vi), (vii) or (viii), provided that at the time of issuance thereof AND after giving effect thereto and to the application of the proceeds thereof: (i) the aggregate amount of (a) Current Debt and Funded Debt of Restricted Subsidiaries plus (b) all Current Debt and Funded Debt of the Company secured by liens permitted by Sections5.8(A) (vi), (vii) or (viii) shall not exceed 10% of Consolidated Net Tangible Assets; and (ii) the Company could incur $1.00 of additional unsecured Senior Funded Debt pursuant to the provisions of Section5.7(a) (3); and (7) Current Debt or Funded Debt of a Restricted Subsidiary to the Company or to a Restricted Subsidiary. (b) Any corporation which becomes a Restricted Subsidiary after the date hereof shall for all purposes of this Section5.7 be deemed to have created, assumed or incurred at the time it becomes a Restricted SubsidiarY all Funded Debt and Current Debt of such corporation existing immediately after it becomes a Restricted Subsidiary. -10- 12 Standard Motor Products, Inc. Note Agreement 5.8. Limitation on Liens. (a) The Company will not, and will not permit any Restricted Subsidiary to, create or incur, or suffer to be incurred or to exist, any mortgage, pledge, security interest, encumbrance, lien or charge of any kind on its or their property or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, or transfer any property for the purpose of subjecting the same to the payment of obligations in priority to the payment of its or their general creditors, or acquire or agree to acquire, or permit any Restricted Subsidiary to acquire, any property or assets upon conditional sales agreements or other title retention devices, except: (i) liens for property taxes and assessments or governmental charges or levies, provided that payment thereof is not at the time required by Section5.3; (ii) liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which the Company or a Restricted Subsidiary shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; (iii) liens, charges, encumbrances and priority claims incidental to the conduct of business or the ownership of properties and assets (including warehousemen's and attorneys' liens and statutory landlords' liens), liens securing claims and demands of mechanics and materialmen, and deposits, pledges or liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money, provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; (iv) minor survey exceptions or minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which are necessary for the conduct of the activities of the Company and its Restricted Subsidiaries or which customarily exist on properties of corporations engaged in similar activities and similarly situated and which do not in any event materially impair their current use in the operation of the business of the Company and its Restricted Subsidiaries; (v) mortgages, liens or security interests securing Indebtedness of a Restricted Subsidiary to the Company; (vi) mortgages, conditional sale contracts, security interests or other arrangements for the retention of title (including Capitalized Leases) existing as of June 30, 1989, securing Current or Funded Debt of the -11- 13 Standard Motor Products, Inc. Note Agreement Company or any Restricted Subsidiary outstanding on such date (including any renewals, extensions or replacements thereof, provided that there is no increase in the aggregate principal amount of Funded Debt secured thereby and no additional property is encumbered); and (vii) mortgages, conditional sale contracts, security interests or other arrangements for the retention of title (including Capitalized Leases) incurred after the date hereof (including any renewals, extensions or replacements thereof, provided that there is no increase in the aggregate principal amount of Funded or Current Debt secured thereby and no additional property is encumbered) given to secure the payment of the purchase price incurred in connection with the acquisition or construction of, or incurred to secure obligations in respect of the financing or refinancing of, and incurred within 180 days of the acquisition or completion of construction of, fixed assets useful and intended to be used in carrying on the business of the Company or a Restricted Subsidiary, including liens existing on such fixed assets at the time of acquisition thereof or at the time of acquisition by the Company or a Restricted Subsidiary of any business entity then owning such fixed assets, whether or not such existing liens were given to secure the payment of the purchase price of the fixed assets to which they attach so long as they were not incurred, extended or renewed in contemplation of such acquisition, provided that (i) the lien or charge shall be created within 180 days of the acquisition or completion of construction of such property and shall attach solely to the property acquired, purchased or constructed, (ii) at the time of acquisition or construction of such fixed assets, the aggregate amount remaining unpaid on all Indebtedness secured by liens on such fixed assets whether or not assumed by the Company or a Restricted Subsidiary shall not exceed an amount equal to 100% of the lesser of the total purchase price or fair market value at the time of acquisition or construction of such fixed assets (as determined in good faith by the Board of Directors of the Company), and (iii) all such Indebtedness shall have been incurred within the applicable limitations provided inSection5.7; and (viii) liens securing Current Debt or Funded Debt of the Company or any Restricted Subsidiary not otherwise permitted by this Section5.8(a), provided that the incurrence of such Current Debt oR Funded Debt is permitted by the Applicable provisions of Section5.7. (b) Any corporation which becomes a Restricted Subsidiary after the date hereof shall, for purposes of Section5.8(a)(vii), be deemed to have been acquired at the time it becomes a Restricted Subsidiary. (c) In the event that any property of the Company or its Restricted Subsidiaries is subjected to a lien in violation of Section5.8(a) (the Indebtedness secured by such lien being referred to as "Prohibited Secured Indebtedness"), such violation of Section 5.8(a) shall not constitute an Event of Default hereunder if the Company substantially simultaneously with the incurrence of such lien, -12- 14 Standard Motor Products, Inc. Note Agreement makes or causes to be made a provision whereby the Notes will be secured equally and ratably with all Prohibited Secured Indebtedness pursuant to security arrangements satisfactory in form, scope and substance to the holder or holders of not less than 66-2/3% in aggregate principal amount of the Notes then outstanding, and, in any case, the Notes shall have the benefit, to the full extent that, and with such priority as, the holders of the Notes may be entitled thereto under applicable law, of an equitable lien to secure the Notes on such property of the Company or its Restricted Subsidiaries that secures Prohibited Secured Indebtedness. 5.9. Dividends, Stock Purchases. The Company will not except as hereinafter provided: (a) declare or pay any dividends, either in cash or property, on any shares of its capital stock of any class (except dividends or other distributions payable solely in shares of capital stock of the Company); or (b) directly or indirectly, or through any Subsidiary, purchase, redeem or retire any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock (other than in exchange for or out of the net cash proceeds to the Company from the substantially concurrent issue or sale of other shares of capital stock of the Company or warrants, rights or options to purchase or acquire any shares of its capital stock); or (c) make any other payment or distribution, either directly or indirectly or through any Subsidiary, in respect of its capital stock; or (d) make, directly or indirectly, or through any Subsidiary or Affiliate, any voluntary or optional payment, prepayment, redemption or repurchase in respect of the principal amount of any Subordinated Debt of the Company (except with the proceeds derived from the substantially concurrent issuance of additional Subordinated Debt); or (e) make or permit any Restricted Subsidiary to make any Restricted Investment; (such declarations or payments of dividends, purchases, redemptions or retirements of capital stock and warrants, rights or options, and all such other distributions , payments, prepayments, redemptions or repurchases in respect of Subordinated Debt and the making or authorization of Restricted Investments being herein collectively called "Restricted Payments"), if after giving effect thereto (A) the aggregate amount of Restricted Payments made during the period from and after December 31, 1988 to and including the date of the making of the Restricted Payment in question, would exceed the sum of (i) $36,000,000 plus (ii) 100% of Consolidated Net Income for such period, computed on a cumulative basis for said entire period (or if such Consolidated Net Income is a deficit figure, then minus 100% of such deficit) and (B) the Company would be permitted to incur at least $1.00 of additional Senior Funded Debt pursuant to the provisions of Section5.7(a)(3). The Company will not declare any dividend which constitutes a Restricted Payment payable more than 60 days after the date of declaration thereof. -13- 15 Standard Motor Products, Inc. Note Agreement For the purposes of this Section5.9 the amount of any Restricted Payment declared, paid or distributed in property of the Company shall be deemed to be the net book value (as determined by the Company's regular independent public accounts in accordance with generally accepted accounting principles consistently applied) of such property at the time of the making of the Restricted Payment in question. In valuing any investments, loans and advances for the purpose of applying the limitations set forth in this Section5.9, such investments, loans and advances shall be taken at the original cost thereof, without allowance for any subsequent write-offs or appreciation or depreciation therein, but less any amount repaid or recovered on account of capital or principal. 5.10. Limitation on Long-Term Leases, Sale and Leasebacks. (a) The Company will not and will not permit any Restricted Subsidiary to become obligated, as lessee, under any Long-Term Lease if at the time of entering into any such Long-Term Lease and after giving effect thereto, the aggregate Rentals payable by the Company and all of its Restricted Subsidiaries on a consolidated basis in any one fiscal year thereafter under all Long-Term Leases would exceed 10% of Consolidated Net Tangible Assets. For purposes of this Section5.10, any Long-Term Lease, the lease payments of which are, directly or indirectly, guaranteed by the Company or any Restricted Subsidiary shall be deemed to be a Long-Term Lease entered into by the Company or such Restricted Subsidiary. (b) The Company will not, and will not permit any Restricted Subsidiary to, enter into any arrangement whereby the Company or any Restricted Subsidiary shall sell or transfer any property owned by the Company or any Restricted Subsidiary to any Person other than the Company or a Restricted Subsidiary and thereupon the Company or any Restricted Subsidiary shall lease or intend to lease, as lessee, the same property where the aggregate book value of all such assets then subject to any such arrangement shall exceed 10% of Consolidated Net Tangible Assets, provided, however, the Company or any Restricted Subsidiary may enter into such arrangements if both of the following conditions are met: (i) the net proceeds of the sale are not less than the fair market value of the property sold, as determined by the Board of Directors of the Company; and (ii) the Company complies with the provisions of Section2.3. 5.11. Mergers, Consolidations and Sales of Assets. (a) The Company will not, and will not permit any Restricted Subsidiary to (i) consolidate with or be a party to a merger with any other corporation or (ii) sell, lease or otherwise dispose of all or any substantial part (as defined in paragraph (d) of this Section5.11) of the assets of the Company and its RestricTED Subsidiaries, provided, however, that: (1) any Restricted Subsidiary may merge or consolidate with or into the Company or any Wholly-owned Restricted Subsidiary so long as in any merger or consolidation involving the Company, the Company shall be the surviving or continuing corporation; -14- 16 (2) the Company may consolidate or merge with any other corporation if (i) the Company shall be the surviving or continuing corporation, (ii) at the time of such consolidation or merger and after giving effect thereto no Default or Event of Default shall have occurred and be continuing, (iii) after giving effect to such consolidation or merger the Company would be permitted to incur at least $1.00 of additional Senior Funded Debt under the provisions of Section5.7(a)(3) and (iv) at the time such merger or consolidation is effected, the Company shall deliver to each holder of the Notes a certificate indicating that after giving effect to the subject transaction, there has been no violation of Section5.5 or this Section5.11; and (3) any Restricted Subsidiary may sell, lease or otherwise dispose of all or any substantial part of its assets to the Company or any Wholly-owned Restricted Subsidiary. (b) Except in connection with a merger or consolidation permitted by the provisions of Section5.11(a), the Company will not permit any Restricted Subsidiary to issue or sell any shares of stock of any class (including as "stock" for the purposes of this Section5.11, any warrants, rights or options to purchase or otherwise acquire stock or other Securities exchangeable for or convertible into stock) of Such Restricted Subsidiary to any Person other than the Company or a Restricted Subsidiary, except for the purpose of qualifying directors, or except in satisfaction of the validly pre-existing preemptive rights of minority shareholders in connection with the simultaneous issuance of stock to the Company and/or a Restricted Subsidiary whereby the Company and/or such Restricted Subsidiary maintain their same proportionate interest in such Restricted Subsidiary, provided, in the case of shares issued for the purpose of qualifying directors, such shares are subject to a written agreement between the Company and each of such directors requiring the resale of the shares to the Company at the time any such director ceases to be a director. (c) The Company will not sell, transfer or otherwise dispose of any shares of stock in any Restricted Subsidiary (except to qualify directors, provided, such shares issued for the purpose of qualifying directors are subject to a written agreement between the Company and each of such directors requiring the resale of the shares to the Company at the time any such director ceases to be a director) or any Indebtedness of any Restricted Subsidiary, and will not permit any Restricted Subsidiary to sell, transfer or otherwise dispose of (except to the Company or a Restricted Subsidiary) any shares of stock or any Indebtedness of any other Restricted Subsidiary, unless: (1) simultaneously with such sale, transfer, or disposition, all shares of stock and all Indebtedness of such Restricted Subsidiary at the time owned by the Company and by every other Subsidiary shall be sold, transferred or disposed of as an entirety; (2) the Board of Directors of the Company shall have determined, as evidenced by a resolution thereof, that the retention of such stock and Indebtedness is no longer in the best interests of the Company; -15- 17 (3) such stock and Indebtedness is sold, transferred or otherwise disposed of to a Person, for a cash consideration and on terms reasonably deemed by the Board of Directors to be adequate and satisfactory, provided, such stock and Indebtedness may be sold, transferred or otherwise disposed of for (i) shares of stock of another corporation if, after giving effect to such transaction, the corporation whose stock is given as consideration shall be a Restricted Subsidiary of which the Company and its Restricted Subsidiaries own a percentage of the outstanding shares of capital stock at least equal to that which they owned in the Restricted Subsidiary that was sold, transferred or otherwise disposed of or (ii) Indebtedness of another Person if such Indebtedness shall be secured by a pledge of or lien upon all Securities of the Restricted Subsidiary being sold, transferred or otherwise disposed of and such pledge or lien shall rank prior to all other pledges thereof or liens thereon; (4) the Restricted Subsidiary being disposed of shall not have any continuing investment in the Company or any other Subsidiary not being simultaneously disposed of; (5) such sale or other disposition does not involve a substantial part (as hereinafter defined) of the assets of the Company and its Restricted Subsidiaries; and (6) immediately after giving effect to such sale, transfer or disposal of such stock or Indebtedness, no Default or Event of Default shall have occurred and be continuing and the Company would be permitted to incur at least $1.00 of additional Senior Funded Debt under the provisions of Section5.7(a)(3). (d) As used in this Section5.11, a sale, lease or other disposition of assets shall be deemed to be a "substantial part" of the assets of the Company and its Restricted Subsidiaries only if the aggregate net book value of such assets, when added to the aggregate net book value of all other assets sold, leased or otherwise disposed of by the Company and its Restricted Subsidiaries (other than in the ordinary course of business and as provided in Section5.11(e)) hereof during the same fiscal year, exceeds 15% of the Consolidated Net Tangible Assets of the Company and its Restricted Subsidiaries determined as of the end of the immediately preceding fiscal year. (e) Notwithstanding the foregoing provisions of this Section5.11, the Company and its Restricted Subsidiaries may discount (without recourse to the Company or its Restricted Subsidiaries), hypothecate or sell to any commercial banking institution its trade accounts receivable arising in the ordinary course of the Company's business; provided, that the Company and its Restricted Subsidiaries shall receive no less than the greater of fair market value or 80% of face value of such trade accounts receivable being discounted, hypothecated or sold. 5.12. Guaranties. The Company will not and will not permit any Restricted Subsidiary to become or be liable in respect of any Guaranty except Guaranties of the Company or any Restricted Subsidiary which are limited in amount to a stated maximum dollar exposure and included in Current Debt or Consolidated Senior Funded Debt. -16- 18 5.13. Repurchase of Notes. Neither the Company nor any Restricted Subsidiary or Affiliate, directly or indirectly, may repurchase or make any offer to repurchase any Notes, or portion thereof, unless the offer has been made to repurchase Notes, pro rata, from all holders of the Notes at the same time and upon the same terms. In case the Company repurchases any Notes, such Notes shall thereafter be cancelled and no Notes shall be issued in substitution therefor and the Company shall give prompt written notice of such repurchases to all remaining holders of the Notes. 5.14. Transactions with Affiliates. The Company will not, and will not permit any Restricted Subsidiary to, enter into or be a party to any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such Restricted Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would be obtained in a comparable arm's-length transaction with a Person other than an Affiliate. 5.15. Restricted and Unrestricted Subsidiaries. (a) The Company may designate each Subsidiary either a Restricted Subsidiary or an Unrestricted Subsidiary. Any Subsidiary which is not designated an Unrestricted Subsidiary within 60 days of its organization or acquisition shall be a Restricted Subsidiary if such Subsidiary (i) is organized under the laws of one of the United States or the District of Columbia, or Canada, or a Canadian province, (ii) has a major part of its properties located in, and does substantially all of its business in, the United States, Canada, or Puerto Rico and (iii) has all of its voting capital stock or other Voting Stock, other than directors' qualifying shares, owned by the Company or a Restricted Subsidiary. (b) The Board of Directors may at any time designate or redesignate any Restricted Subsidiary as an Unrestricted Subsidiary if all of the following conditions are met: (i) such Subsidiary does not own, directly or indirectly, any capital stock or Indebtedness of the Company or any Restricted Subsidiary; (ii) after giving effect to the proposed redesignation, the Company would be permitted to incur at least $1.00 of additional Senior Funded Debt pursuant to the provisions of Section5.7(a)(3); and (iii) immediately following the proposed redesignation, there shall exist no condition constituting, or which, after notice, lapse of time, or both could constitute, an Event of Default. For purposes of this Section5.15(b), capital stock (or other Voting Stock) of a corporation shall be deemed an asset not located in the United States or Canada (regardless of location of the certificate evidencing the same). (c) The Board of Directors may at any time designate or redesignate any Unrestricted Subsidiary as a Restricted Subsidiary if all of the following conditions are met: (i) after giving effect to the proposed redesignation, the Company would be permitted to incur at least $1.00 of additional Senior Funded Debt pursuant to the provisions of Section5.7(a)(3); (ii) immediately following the proposed redesignation, there shall exist no condition constituting, or which, after notice, lapse of time, or both could constitute, an Event of Default and (iii) such Subsidiary, while an Unrestricted Subsidiary, has taken no action that it would have been -17- 19 prohibited by the terms of this Agreement from taking had it been a Restricted Subsidiary at the time it took such action. 5.16. Termination of Pension Plans. The Company will not and will not permit any Subsidiary to permit any employee benefit plan maintained by it to be terminated in a manner which could result in the imposition of a lien on any property of the Company or any Subsidiary pursuant to Section 4068 of the Employee Retirement Income Security Act of 1974, as amended. 5.17. Reports and Rights of Inspection. The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in which full and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the Company or such Subsidiary, in accordance with generally accepted principles of accounting consistently maintained (except for changes disclosed in the financial statements furnished to you pursuant to this Section5.17 and concurred in by the independent public accountants referred to in Section5.17(b) hereof), and will furnish to you so long as you are the holder of any Note and to each other institutional holder of the then outstanding Notes (in duplicate if so specified below or otherwise requested): (a) Quarterly Statements. As soon as available and in any event within 45 days after the end of each quarterly fisca1 period (except the last) of each fiscal year, duplicate copies of: (1) consolidated and consolidating balance sheets of the Company and its Restricted Subsidiaries as of the close of such quarter setting forth in comparative form the consolidated figures for the end of the preceding fiscal year, (2) consolidated and consolidating statements of income and retained earnings of the Company and its Restricted Subsidiaries for such quarterly period, setting forth in comparative form the consolidated figures for the corresponding period of the preceding fiscal year, and (3) consolidated and consolidating statements of cash flows of the Company and its Restricted Subsidiaries for the portion of the fiscal year ending with such quarter, setting forth in comparative form the consolidated figures for the corresponding period of the preceding fiscal year, all in reasonable detail and certified as complete and correct, by an authorized financial officer of the Company; (b) Annual Statements. As soon as available and in any event within 90 days after the close of each fiscal year of the Company, duplicate copies of: (1) consolidated and consolidating balance sheets of the Company and its Restricted Subsidiaries as of the close of such fiscal year, and -18- 20 (2) consolidated and consolidating Statements of income and retained earnings and of cash flows of the Company and its Restricted Subsidiaries for such fiscal year, in each case setting forth in comparative form the consolidated figures for the preceding fiscal year, all in reasonable detail and accompanied by a report thereon of a firm of independent public accountants of recognized national standing selected by the Company to the effect that the consolidated financial statements have been prepared in accordance with generally accepted accounting principles and present fairly, in all material respects, the financial condition of the Company and its Restricted Subsidiaries and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and accordingly includes such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances; (c) Audit Reports. Promptly upon receipt thereof, one copy of each interim or special audit made by independent accountants of the books of the Company or any Restricted Subsidiary; (d) SEC and Other Reports. Promptly, upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by the Company to stockholders generally and of each regular or periodic report, and any registration statement or prospectus filed by the Company or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency, and copies of any orders in any proceedings to which the Company or any of its Subsidiaries is a party, issued by any governmental agency, Federal or state, having jurisdiction over the Company or any of its Subsidiaries; (e) Requested Information. With reasonable promptness, such other data and information as may be reasonably requested from (i) you or (ii) any Person holding 10% or more in aggregate principal amount of the Notes or (iii) any Person holding 100% of the Notes originally issued to any Purchaser that are, on the date of such request, then outstanding; (f) Officer's Certificates. Within the periods provided in paragraphs (a) and (b) above, a certificate of an authorized financial officer of the Company stating that such officer has reviewed the provisions of this Agreement and setting forth: (i) the information and computations (in sufficient detail) required in order to establish whether the Company was in compliance with the requirements of Section5.6 through Section5.11, inclusive, at the end of the period covered by the financial statements then being furnished, (ii) whether there existed as of the date of such financial statements and whether, to the best of such officer's knowledge, there exists on the date of the certificate or existed at any time during the period covered by such financial statements any Default or Event of Default and, if any such condition or event exists on the date of the certificate, specifying the nature and period of existence thereof and the action the Company is taking and proposes to take with respect thereto, (iii) one of the following (as appropriate): (x) the period within the most recent year during which the Company and its Restricted Subsidiaries had no Current Debt exceeding $15,000,000 or (y) the Designated Period and the amount of Current Debt deemed to be Senior Funded Debt pursuant to Section 5.7(a)(5). -19- 21 (g) Accountants' Certificates. Within the period provided in paragraph (b) above, a certificate of the accountants who render an opinion with respect to such financial statements, stating (i) that they have reviewed this Agreement, (ii) whether, in making their audit, such accountants have become aware of any Default or Event of Default under any of the terms or provisions of this Agreement insofar as any such terms or provisions pertain to or involve accounting matters or determinations, and if any such condition or event then exists, specifying the nature and period of existence thereof, (iii) specifying the amount available as at the end of such period for Restricted Payments in compliance with Section5.9, and showing in reasonable detaIL the calculation of such amount, (iv) demonstrating compliance during such period with clause (x) of Section5.7(a)(5)(i) by specifying the period within the most recent year during which the Company and its Restricted Subsidiaries had no Current Debt exceeding $15,000,000 or, alternatively, specifying the amount of Current Debt deemed to be Senior Funded Debt pursuant to Section5.7(5)(i)(y) and the period during which this was deemed to be the case, and (v) demonstrating in reasonable detail compliance, during and as at the end of such period, with Section5.5, Section5.7(a)(3), Section5.7(a)(4), Section5.10 and Section5.11; and (h) Unrestricted Subsidiaries. Within the respective periods provided in paragraph (b) above, financial statement of the character and for the dates and periods as in said paragraph (b) provided covering each Unrestricted Subsidiary (or groups of Unrestricted Subsidiaries on a consolidated basis). Without limiting the foregoing, the Company will permit (i) you, so long as you are the holder of any Note, and (ii) each institutional holder of not less than 5% in aggregate of the then outstanding Notes and (iii) each institutional holder holding 100% of the outstanding Notes originally issued to any Purchaser that are, as of the date of such proposed inspection, then outstanding (or such Persons as you or any such holder may designate), to visit and inspect, under the Company's guidance, any of the properties of the Company or any Subsidiary, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, employees, and independent public accountants (and by this provision the Company authorizes said accountants to discuss with you the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested. Notwithstanding the foregoing, any holder of Notes who is a Competitor shall have no rights of inspection pursuant to this paragraph so long as it is a Competitor. If (and only if) an Event of Default shall at the time have occurred and be continuing, the Company shall be required to pay or reimburse you or any such holder for expenses which you or any such holder may incur in connection with any such visitation or inspection. SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR. 6.1. Events of Default. Any one or more of the following shall constitute an "Event of Default" as the term is used herein: (a) Default shall occur in the payment of interest on any Note when the same shall have become due and such default shall continue for more than ten days; or -20- 22 (b) Default shall occur in the making of any required prepayment on any of the Notes as provided in Section2.1; or (c) Default shall occur in the making of any other payment of the principal of any Note or the premium thereon at the expressed or any accelerated maturity date or at any date fixed for Prepayment; or (d) Default shall be made in the payment of the principal of or interest on any Material Indebtedness of the Company or any Restricted Subsidiary for borrowed money, as and when the same shall become due and payable by the lapse of time, by declaration, by call for redemption or otherwise, and such default shall continue beyond the period of grace, if any, allowed with respect thereto; or (e) Default or the happening of any event shall occur under any indenture, agreement, or other instrument under which any Material Indebtedness of the Company or any Restricted Subsidiary for borrowed money may be issued and such default or event shall continue for a period of time sufficient to permit the acceleration of the maturity of any Material Indebtedness of the Company or any Restricted Subsidiary outstanding thereunder; or (f) Default shall occur in the observance or performance of any covenant or agreement contained in Section5.6 through Section5.15, hereof; or (g) Default shall occur in the observance or performance of any other provision of this Agreement which is not remedied within 30 days after notice thereof to the Company by the holder of any Note; or (h) Any representation or warranty made by the Company herein, or made by the Company in any statement or certificate furnished by the Company in connection with the consummation of the issuance and delivery of the Notes or furnished by the Company pursuant hereto, is untrue in any material respect as of the date of the issuance or making thereof; or (i) The Company or any Restricted Subsidiary becomes insolvent or bankrupt, is generally not paying its debts as they become due or makes an assignment for the benefit of creditors, or the Company or any Restricted Subsidiary applies for or consents to the appointment of a custodian, trustee or receiver for the Company or such Restricted Subsidiary or for the major part of the property of either; or (j) A custodian, trustee or receiver is appointed for the Company or any Restricted Subsidiary or for the major part of the property of either and is not discharged within 60 days after such appointment; or (k) Final judgment or judgments for the payment of money aggregating in excess of $500,000 is or are outstanding against the Company or any Restricted Subsidiary or against any property or assets of either and any one of such judgments has remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of 60 days from the date of its entry; or -21- 23 (l) Bankruptcy reorganization, arrangement or insolvency proceedings, or other proceedings for relief under any bankruptcy or similar law or laws for the relief of debtors, are instituted by or against the Company or any Restricted Subsidiary and, if instituted against the Company or any Restricted Subsidiary, are consented to or are not dismissed within 60 days after such institution. 6.2. Notice to Holders. When any Event of Default described in the foregoing Section6.1 has occurred, or if the holder of any Note or of any other evidence of Indebtedness of the Company gives any notice or takes any other action with respect to a claimed default, the Company agrees to give notice within three business days of such event to all holders of the Notes then outstanding, such notice to be in writing and sent by registered or certified mail, by telegram or by telecopy (with a return telecopied confirmation of receipt). 6.3. Acceleration of Maturities. When any Event of Default described in paragraph (a), (b) or (c) of Section6.1 has happened and is continuing, any holder of any Note may, and when any Event of Default described in paragraphs (d) through (k), inclusive, of said Section6.1 has happened and is continuing, the holder or holders of 25% or more of the principal amount of Notes at the time outstanding may, by notice in writing sent by registered or certified mail to the Company, declare the entire principal and all interest accrued on all Notes to be, and all Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. When any Event of Default described in paragraph (i), (j) and (l) of Section6.1 has occurred, then all outstanding Notes shall immediately become due and payable without presentment, demand or notice of any kind. Upon the Notes becoming due and payable as a result of any Event of Default as aforesaid, the Company will forthwith pay to the holders of the Notes the entire principle and interest accrued on the Notes and, to the extent permitted by law, a premium in the amount, if any, which would be payable if the Company then had elected to prepay the Notes pursuant to Section2.2(b). No course of dealing on the part of any Noteholder nor any delay or failure on the part of any Noteholder to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. The Company further agrees, to the extent permitted by law, to pay to the holder or holders of the Notes all costs and expenses incurred by them in the collection of any Notes upon any default hereunder or thereon, including reasonable compensation to such holder's or holders' attorneys for all services rendered in connection therewith. 6.4. Rescission of Acceleration. The provisions of Section6.3 are subject to the condition that if the principal of and accrued interest on all or any outstanding Notes have been declared immediately due and payable by reason of the occurrence of any Event of Default described in paragraphs (a) through (h) and (k), inclusive, of Section6.1, the holders of 66-2/3% in aggregate principal amount of the Notes then outstanding may, by written instrument filed with the Company, rescind and annul such declaration and the consequences thereof, provided that at the time such declaration is annulled and rescinded: (a) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes or this Agreement; (b) all arrears of principal and interest upon all the Notes and all other sums payable under the Notes and under this Agreement (except any principal, interest or premium on -22- 24 the Notes which has become due and payable solely by reason of such declaration under Section6.3) shall have been duly paid; and (c) each and every other Default and Event of Default shall have been made good, cured or waived pursuant to Section7.1; and provided further, that no such rescission and annulment shall extend to or affect any subsequent Default, or Event of Default or impair any right consequent thereto. SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS. 7.1. Consent Required. Any term, covenant, agreement or condition of this Agreement may, with the consent of the Company, be amended or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), if the Company shall have obtained the consent in writing of the holders of at least 66-2/3% in aggregate principal amount of outstanding Notes; provided that without the written consent of the holders of all of the Notes then outstanding, no such waiver, modification, alteration or amendment shall be effective (i) which will change the time of payment (including any prepayment required by Section2.1) of the principal of or the interest on any Note or reduce the principal amount thereof or change the rate of interest thereon, or (ii) which will change any of the provisions with respect to optional prepayments, or (iii) which will change the percentage of holders of the Notes required to consent to any such amendment, alteration or modification or any of the provisions of Section6 or this Section7. 7.2. Solicitation of Noteholders. The Company will not solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement or the Notes unless each holder of the Notes (irrespective of the amount of Notes then owned by it) shall be informed thereof by the Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Section7 shall be delivered by the Company to each holder of outstanding Notes forthwith following the date on which the same shall have been executed and delivered by the holder or holders of the requisite percentage of outstanding Notes. The Company will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any holder of the Notes for any waiver or amendment of any of the terms and provisions of this Agreement unless such remuneration is concurrently paid, on the same terms, ratably to the holders of all of the Notes then outstanding. 7.3. Effect of Amendment or Waiver. Any such amendment or waiver shall apply equally to all of the holders of the Notes and shall be binding upon them, upon each future holder of any Note and upon the Company, whether or not such Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation not expressly amended or waived or impair any right consequent thereon. -23- 25 SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS. 8.1. Definitions. Unless the context otherwise requires, the terms hereinafter set forth when used herein shall have the following meanings and the following definitions shall be equally applicable to both the singular and plural forms of any of the terms herein defined: "Affiliate" shall mean any Person (other than a Restricted Subsidiary) (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company, (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of the Company or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by the Company or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. "Average Daily Current Debt" shall mean, with respect to any Designated Period, the sum of the aggregate amounts of Current Debt (excluding current maturities of Funded Debt otherwise included therein) of the Company and its Restricted Subsidiaries outstanding at the close of each day of such Designated Period, divided by 45. "Capitalized Lease" shall mean any lease the obligation for Rentals with respect to which is required to be capitalized on a balance sheet of the lessee in accordance with generally accepted accounting principles. "Capitalized Rentals" shall mean as of the date of any determination the amount at which the aggregate Rentals due and to become due under all Capitalized Leases under which the Company or any Restricted Subsidiary is a lessee would be reflected as a liability on a consolidated balance sheet of the Company and its Restricted Subsidiaries. "Competitor" shall mean any Person (and any Affiliate of such Person) which, at the time it owns and holds any Notes, in the ordinary course of its business offers to furnish substantially the same merchandise or render substantially the same services as the Company and its Subsidiaries taken as a whole furnish or render at such time in the ordinary course of their business taken as a whole provided, that, neither any Purchaser or any Affiliate or subsidiary thereof shall be deemed to be a Competitor and, provided further, that no Person (or any Affiliate of such Person) which is substantially in the business of insurance and/or financial services (and financial activities reasonably related thereto) and is not in the business of manufacturing automobile parts shall be deemed to be a Competitor. "Consolidated Current Assets" and "Consolidated Current Liabilities" shall mean such assets and liabilities of the Company and its Restricted Subsidiaries on a consolidated basis as shall be determined in accordance with generally accepted accounting principles to constitute current assets and current liabilities, respectively. "Consolidated Net Income" for any period shall mean the gross revenues of the Company and its Restricted Subsidiaries for such period less all expenses and other proper charges (including taxes on income), determined on a consolidated basis in accordance with -24- 26 Standard Motor Products, Inc. Note Agreement generally accepted accounting principles consistently applied and after eliminating earnings or losses attributable to outstanding Minority Interests, but excluding in any event: (a) any gains or losses on the sale or other disposition of investments or fixed or capital assets (excluding any Consolidated Current Assets), and any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses; (b) the proceeds of any life insurance policy; (c) net earnings and losses of any Restricted Subsidiary accrued prior to the date it became a Restricted Subsidiary; (d) net earnings and losses of any corporation (other than a Restricted Subsidiary), substantially all the assets of which have been acquired in any manner, realized by such other corporation prior to the date of such acquisition; (e) net earnings and losses of any corporation (other than a Restricted Subsidiary) with which the Company or a Restricted Subsidiary shall have consolidated or which shall have merged into or with the Company or a Restricted Subsidiary prior to the date of such consolidation or merger; (f) net earnings of any business entity (other than a Restricted Subsidiary) in which the Company or any Restricted Subsidiary has an ownership interest unless such net earnings shall have actually been received by the Company or such Restricted Subsidiary in the form of cash distributions; (g) any portion of the net earnings of any Restricted Subsidiary which for any reason is unavailable for payment of dividends to the Company or any other Restricted Subsidiary; (h) earnings resulting from any reappraised, revaluation or write-up of assets; (i) any deferred or other credit representing any excess of the equity in any Subsidiary at the date of acquisition thereof over the amount invested in such Subsidiary; (j) any gain arising from the acquisition of any Securities of the Company or any Restricted Subsidiary; (k) extraordinary gains and losses (including, without limitation, capital gains or losses in aggregate amounts exceeding $100,000 in any one fiscal year, and extraordinary charges or credits) and any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses; and (l) any amounts paid or payable in any currency that at the time of determination of Consolidated Net Income is not fully convertible into United States dollars. -25- 27 Standard Motor Products, Inc. Note Agreement "Consolidated Net Tangible Assets" shall mean as of the date of any determination thereof the total amount of all Tangible Assets of the Company and its Restricted Subsidiaries after deducting (i) all investments in and loans, advances and extensions of credit to Unrestricted Subsidiaries (ii) Restricted Investments (other than the Limited Dividend Rollover Investments) (iii) Minority Interests, and (iv) all items which in accordance with generally accepted accounting principles would be included on the liability side of a consolidated balance sheet, except deferred income taxes, deferred investment tax credits, capital stock of any class, surplus, and Funded Debt. "Consolidated Working Capital" shall mean the excess of Consolidated Current Assets over Consolidated Current Liabilities of the Company and its Restricted Subsidiaries. "Current Debt" shall mean, as of the date of any determination thereof, (i) all Indebtedness for money borrowed other than Funded Debt and (ii) Guaranties of Current Debt of others. "Default" shall mean any event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, constitute an Event of Default as defined in Section 6.1. "Designated Period" shall mean, at any time, a period of 45 consecutive days (i) all of which are included within the period of the twelve calendar months then most recently ended, and (ii) specified by the Company. "Funded Debt" of any Person shall mean (i) all indebtedness for borrowed money or which has been incurred in connection with the acquisition of assets in each case having a final maturity of one or more than one year from the date of determination thereof (or which is renewable or extendible at the option of the obligor for a period or periods more than one year from the date of determination), (ii) all Capitalized Rentals, and (iii) all Guaranties of Funded Debt of others. "Consolidated" when used as a prefix to any Funded Debt shall mean the aggregate amount of all such Funded Debt of the Company and its Restricted Subsidiaries on a consolidated basis eliminating intercompany items. "Guaranties" by any Person shall mean all obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, all obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any property or assets constituting security therefor, (ii) to advance or supply funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to maintain working capital or other balance sheet condition or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation, or (iii) to lease property or to purchase Securities or other property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against -26- 28 Standard Motor Products, Inc. Note Agreement loss in respect thereof. For the purposes of all computations made under this Agreement, a Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the principal amount of such Indebtedness for borrowed money which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Indebtedness" of any Person shall mean and include all obligations of such Person which in accordance with generally accepted accounting principles shall be classified upon a balance sheet of such Person as liabilities of such Person, and in Any event shall include all (i) obligations of such Person for borrowed money or which has been incurred in connection with the acquisition of property or assets, (ii) obligations secured by any lien or other charge upon property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (iii) obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of property, and (iv) Capitalized Rentals under any Capitalized Lease. For the purpose of computing the "Indebtedness" of any Person, there shall be excluded any particular Indebtedness to the extent that, upon or prior to the maturity thereof, there shall have been deposited with the proper depositary in trust the necessary funds (or evidences of such Indebtedness, if permitted by the instrument creating such Indebtedness) for the payment, redemption or satisfaction of such Indebtedness; and thereafter such funds and evidences of Indebtedness so deposited shall not be included in any computation of the assets of such Person. "Limited Dividend Rollover Investments" shall mean all amounts invested by the Company and/or Mardevco Credit Corp. in dividend rollover programs managed by independent professional investment managers of recognized national standing, but only to the extent the aggregate amount of all such investments does not exceed $15,000,000. "Long-Term Lease" shall mean any lease of real or personal property (other than a Capitalized Lease) having an original term, including any period for which the lease may be renewed or extended at the option of the lessor, of more than three years. "Material Indebtedness" shall mean at any time one or more obligations of the Company or any Restricted Subsidiary for borrowed money or in respect of interest rate swaps, interest rate exchange agreements, currency swaps or currency exchange agreements (however denominated) which, individually or in the aggregate, have or relate to an unpaid principal amount of more than $250,000. "Minority Interests" shall mean any shares of stock of any class of a Restricted Subsidiary (other than directors' qualifying shares as required by law) that are not owned by the Company and/or one or more of its Restricted Subsidiaries. Minority Interests shall be valued by valuing Minority Interests constituting preferred stock at the voluntary or involuntary liquidating value of such preferred stock, whichever is greater, and by valuing Minority Interests constituting common stock at the book value of capital and surplus applicable thereto adjusted, if -27- 29 Standard Motor Products, Inc. Note Agreement necessary, to reflect any changes from the book value of such common stock required by the foregoing method of valuing Minority Interests in preferred stock. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof. "Rentals" shall mean and include all fixed rents (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Company or a Restricted Subsidiary, as lessee or sublessee under a lease of real or personal property, but shall be exclusive of any amounts required to be paid by the Company or a Restricted Subsidiary (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and similar charges. Fixed rents under any so-called "percentage leases" shall be computed solely on the basis of the minimum rents, if any, required to be paid by the lessee regardless of sales volume or gross revenues. "Restricted Investment" shall mean any investment in any Person or property, whether directly or indirectly made, and whether by purchase or other acquisition of shares or Indebtedness or other securities or by loan, advance, extension of credit, capital contribution or otherwise, other, than: (i) investments made by the Company or a Restricted Subsidiary in any Restricted Subsidiary after the Closing Date; (ii) investments in direct obligations of the United States of America or any agency thereof, or obligations guaranteed or insured by the United States of America or any agency thereof, provided that such obligations shall mature within one (1) year from the date of acquisition thereof; (iii) investments in commercial paper of issuers organized under the laws of the United States of America or any state thereof which is given a rating of at least P-2 by Moody's Investor Services, Inc. or A-2 by Standard and Poor's Inc. and which matures not more than two hundred seventy (270) days from the date of creation thereof; (iv) investments in certificates of deposit maturing within one (1) year from the date of acquisition thereof by the Company or a Restricted Subsidiary which are issued by a commercial bank or trust company (i) organized and doing business under the laws of the United States of America or any state thereof, (ii) having combined capital, surplus and undivided profits aggregating at least One Hundred Million Dollars ($100,000,000) and (iii) which is a member of the Federal Deposit Insurance Corporation; (v) investments in so called auction rate or money market preferred stock (a) which is rated A or the equivalent to A or higher by a credit rating agency of recognized national standing and (b) the issuer of -28- 30 Standard Motor Products, Inc. Note Agreement which was, at the time of the issuance of such preferred stock, subject to and in compliance with, and is, at the time of the investment in such preferred stock, subject to and in compliance with, all applicable guidelines and regulations of the Federal Deposit Insurance Corporation; (vi) investments in tax-exempt, floating rate, tender option bonds rated A (or the equivalent of A) or higher by a credit rating agency of recognized national standing and which are backed by a letter of credit issued by a commercial bank which would qualify as an issuer under clause (iv) above; (vii) investments in Eurodollar deposits in a commercial bank given a rating of P-1 by Moody's Investor Services Inc. or A-1 by Standard and Poor's Inc., provided that (i) such Investments are purchased in the United States of America and mature within ninety (90) days of the date of the acquisition thereof, (ii) the aggregate amount of such Investments in any one bank shall not at any time exceed Three Million Dollars ($3,000,000), and (iii) the aggregate amount of all such Investments shall not at any time exceed Five Million Dollars ($5,000,000); (viii) other investments provided that the funds used to acquire such investment have been obtained from the concurrent sale of capital stock of the Company; (ix) advances to suppliers in the ordinary course of business in connection with the purchase of machinery, equipment or other supplies, not in excess of $500,000 in the aggregate; and (x) investments in property to be used in the ordinary course of business. "Restricted Subsidiary" shall mean: (i) any Subsidiary so designated on Annex A to Exhibit B hereto, (ii) any other Subsidiary designated as a Restricted Subsidiary pursuant to and in accordance with the provisions of Section 5.15. "Security" shall have the same meaning as in Section 2(l) of the Securities Act of 1933, as amended. "Senior Funded Debt" shall mean all Funded Debt other than Subordinated Debt. "Subordinated Debt" shall mean all unsecured Current Debt or Funded Debt of the Company (a) which shall have (i) a final maturity later than November 1, 2004 and (ii) an Average Life as at the date of issuance that is greater than the Average Life of Notes at such date -29- 31 Standard Motor Products, Inc. Note Agreement and (b) which shall contain or have applicable thereto subordination provisions substantially in the form set forth in Exhibit E attached hereto or such other provisions as may be approved in writing by the holders of not less than 66-2/3% in aggregate principal amount of the outstanding Notes, "Average Life" of any Indebtedness, as used in this definition of "Subordinated Debt," shall mean the number obtained by dividing the then Remaining Dollar-Years of such Indebtedness by the then outstanding principal amount of such Indebtedness; "Remaining Dollar Years" being the sum of the individual products obtained by multiplying the amount of each required payment and prepayment of the principal amount of such Indebtedness by the number of years (to the nearest one-twelfth) between the date of any determination and the date on which such payment or prepayment is required to be made. The term "subsidiary" shall mean, as to any particular parent corporation, any corporation of which more than 50% (by number of votes) of the Voting Stock shall be owned by such parent corporation and/or one or more corporations which are themselves subsidiaries of such parent corporation. The term "Subsidiary" shall mean a subsidiary of the Company. "Tangible Assets" shall mean, as of the date of any determination thereof, the total amount of all assets of the Company and its Restricted Subsidiaries (less depreciation, depletion and other properly deductible valuation reserves) after deducting good will, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, write-ups to the book value of assets occurring after December 31, 1975 relating to assets owned on December 31, 1975, write-ups to the book value of assets acquired by the Company or its Restricted Subsidiaries after December 31, 1975 in excess of the cost thereof, deferred assets other than prepaid insurance and prepaid taxes, the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as "intangible assets" in accordance with generally accepted accounting principles. "Unrestricted Subsidiary" shall mean: (i) any Subsidiary so designated on Annex A to Exhibit B hereto, and (ii) any other Subsidiary designated as an Unrestricted Subsidiary pursuant to and in accordance with the provisions of Section 5.15. "Voting Stock" shall mean Securities of any class or classes the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). "Wholly-owned" when used in connection with any Subsidiary shall mean a Subsidiary of which all of the issued and outstanding shares of stock (except shares required as directors' qualifying shares) and all Indebtedness for borrowed money shall be owned by the Company and/or one or more of its Wholly-owned Subsidiaries. 8.2. Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same -30- 32 Standard Motor Products, Inc. Note Agreement shall be done in accordance with generally accepted accounting principles, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. 8.3. Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether the action in question is taken directly or indirectly by such Person. SECTION 9. MISCELLANEOUS. 9.1. Registered Notes. The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (hereinafter called the "Note Register"), and the Company will register or transfer or cause to be registered or transferred, as hereinafter provided and under such reasonable regulations as it may prescribe, any Note issued pursuant to this Agreement. At any time and from time to time the registered holder of any Note which has been duly registered as hereinabove provided may transfer such Note upon surrender thereof at the principal office of the Company duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney duly authorized in writing. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement. Payment of or on account of the principal, premium, if any, and interest on any registered Note shall be made to or upon the written order of such registered holder. 9.2. Exchange of Notes. At any time and from time to time, upon not less than ten days' notice to that effect given by the holder of any Note initially delivered or of any Note substituted therefor pursuant to Section 9.1, this Section 9.2 or Section 9.3, and, upon surrender of such Note at its office, THE Company will deliver in exchange therefor, without expense to the holder, except as set forth below, Notes for the same aggregate principal amount as the then unpaid principal amount of the Note so surrendered, in the denomination of $100,000 or any amount in excess thereof as such holder shall specify, dated as of the date to which interest has been paid on the Note so surrendered or, if such surrender is prior to the payment of any interest thereon, then dated as of the date of issue, payable to such Person or Persons, or registered assigns, as may be designated by such holder, and otherwise of the same form and tenor as the Notes so surrendered for exchange. The Company may require the payment of a sum sufficient to cover any stamp tax or governmental charge imposed upon such exchange or transfer. 9.3. Loss, Theft, etc. of Notes. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of any Note, and in the case of any such loss, theft or destruction upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or in the event of such mutilation upon surrender and cancellation of the Note, the Company will make and deliver without expense to the holder thereof, a new Note, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Note. If the Purchaser or any subsequent institutional holder is the owner of any such lost, stolen or -31- 33 Standard Motor Products, Inc. Note Agreement destroyed Note, then the affidavit of an authorized officer of such owner, setting forth the fact of loss, theft or destruction and of its ownership of the Note at the time of such loss, theft or destruction shall be accepted as satisfactory evidence thereof and no further indemnity shall be required as a condition to the execution and delivery of a new Note other than the written agreement of such owner to indemnify the Company. 9.4. Expenses, Stamp Tax Indemnity. Whether or not the transactions herein contemplated shall be consummated, the Company agrees to pay directly all of your out-of-pocket expenses in connection with the preparation, execution and delivery of this Agreement and the transactions contemplated hereby, including but not limited to the reasonable charges and disbursements of Chapman and Cutler, your special counsel, costs incurred in obtaining a Private Placement Number, from Standard and Poor's, duplicating and printing costs and charges for shipping the Notes, adequately insured to you at your home office or at such other place as you may designate, and all such expenses relating to any amendment, waivers or consents pursuant to the provisions hereof, including, without limitation, any amendments, waivers or consents resulting from any work-out, restructuring or similar proceedings relating to the performance by the Company of its obligations under this Agreement and the Notes. Without limiting the provisions of the last sentence of Section 9.2, the Company also agrees that it will pay and save you harmless against any and all liability with respect to stamp and other taxes, if any, which may be payable or which may be determined to be playable in connection with the execution and delivery of this Agreement or the Notes, whether or not any Notes are then outstanding. The Company agrees to protect and indemnify you against any liability for any and all brokerage fees and commissions payable or claimed to be payable to any Person engaged by the Company in connection with the transactions contemplated by this Agreement. 9.5. Powers and Rights Not Waived; Remedies Cumulative. No delay or failure on the part of the holder of any Note in the exercise of any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of the same preclude any other or further exercise thereof, or the exercise of any other power or right, and the rights and remedies of the holder of any Note are cumulative to and are not exclusive of any rights or remedies any such holder would otherwise have, and no waiver or consent, given or extended pursuant to Section 7 hereof, shall extend to or affect any obligation or right not expressly waived or consented to. 9.6. Notices. All communications provided for hereunder shall be in writing and, if to you, delivered or mailed by registered or certified mail or by overnight air courier, in each case prepaid and addressed to you at your address appearing on Schedule I to this Agreement or such other address as you or the subsequent holder of any Note initially issued to you may designate to the Company in writing, and if to the Company, delivered or mailed by registered or certified mail or by overnight air courier, in each case prepaid and addressed to the Company at 37-18 Northern Boulevard, Long Island, New York 11101, Attention: Mark S. Chanko, Vice President, or to such other address as the Company may in writing designate to you or to a subsequent holder of the Note initially issued to you. 9.7. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to your benefit and to the benefit of your successors and assigns, including each successive holder or holders of any Notes. -32- 34 Standard Motor Products, Inc. Note Agreement 9.8. Survival of Covenants and Representations. All covenants, representations and warranties made by the Company herein and in any certificates delivered pursuant hereto, whether or not in connection with the Closing Date, shall survive the closing and the delivery of this Agreement and the Notes. 9.9. Severability. Should any part of this Agreement for any reason be declared invalid, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in force and effect as if this Agreement had been executed with the invalid portion thereof eliminated and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any such part, parts, or portion which may, for any reason, be hereafter declared invalid. 9.10. Governing Law. This Agreement and the Notes issued and sold hereunder shall be governed by and construed in accordance with New York law. 9.11. Captions. The descriptive headings of the various Sections or parts of this Agreement are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. The execution hereof by you shall constitute a contract between us for the uses and purposes hereinabove set forth, and this Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. STANDARD MOTOR PRODUCTS, INC. By________________________________ Its Accepted as of October 15, 1989. [VARIATION] By________________________________ Its -33- 35 TABLE OF CONTENTS (NOT A PART OF THE AGREEMENT)
SECTION HEADING PAGE SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT............................................................1 1.1. Description of Notes...........................................................................1 1.2. Commitment, Closing Date.......................................................................1 1.3. Other Agreements...............................................................................2 SECTION 2. PREPAYMENT OF NOTES............................................................................2 2.1. Required Prepayments...........................................................................2 2.2. Optional Prepayment............................................................................2 2.3. Prepayment on Failure of Holder to Consent to Sale and Leaseback...............................4 2.4. Prepayment on Change of Control................................................................4 2.5. Notice of Prepayments..........................................................................5 2.6. Allocation of Prepayments......................................................................5 2.7. Direct Payment.................................................................................5 SECTION 3. REPRESENTATIONS................................................................................6 3.1. Representations of the Company.................................................................6 3.2. Representations of the Purchasers..............................................................6 SECTION 4. CLOSING CONDITIONS.............................................................................6 4.1. Closing Certificate............................................................................7 4.2. Legal Opinions.................................................................................7 4.3. Related Transactions...........................................................................7 4.4. Satisfactory Proceedings.......................................................................7 4.5. Legality.......................................................................................7 4.6. Waiver of Conditions...........................................................................7 SECTION 5. COMPANY COVENANTS..............................................................................7 5.1. Corporate Existence, etc.......................................................................7 5.2. Insurance......................................................................................8 5.3. Taxes, Claims for Labor and Materials, Compliance with Laws....................................8 5.4. Maintenance, etc...............................................................................8 5.5. Nature of Business.............................................................................9 5.6. Consolidated Working Capital...................................................................9
-i- 36
SECTION HEADING PAGE 5.7. Limitations on Indebtedness....................................................................9 5.8. Limitation on Liens...........................................................................11 5.9. Dividends, Stock Purchases....................................................................13 5.10. Limitation on Long-Term Leases, Sale and Leasebacks...........................................14 5.11. Mergers, Consolidations and Sales of' Assets..................................................14 5.12. Guaranties....................................................................................16 5.13. Repurchase of Notes...........................................................................17 5.14. Transactions with Affiliates..................................................................17 5.15. Restricted and Unrestricted Subsidiaries......................................................17 5.16. Termination of Pension Plans..................................................................18 5.17. Reports and Rights of Inspection..............................................................18 SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR.......................................................20 6.1. Events of Default.............................................................................20 6.2. Notice to Holders.............................................................................22 6.3. Acceleration of Maturities....................................................................22 6.4. Rescission of Acceleration....................................................................22 SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS..............................................................23 7.1. Consent Required..............................................................................23 7.2. Solicitation of Noteholders...................................................................23 7.3. Effect of Amendment or Waiver.................................................................23 SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS......................................................23 8.1. Definitions...................................................................................24 8.2. Accounting Principles.........................................................................30 8.3. Directly or Indirectly........................................................................31 SECTION 9. MISCELLANEOUS.................................................................................31 9.1. Registered Notes..............................................................................31 9.2. Exchange of Notes.............................................................................31 9.3. Loss, Theft, etc. of Notes....................................................................31 9.4. Expenses, Stamp Tax Indemnity.................................................................32 9.5. Powers and Rights Not Waived; Remedies Cumulative.............................................32
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SECTION HEADING PAGE 9.6. Notices.......................................................................................32 9.7. Successors and Assigns........................................................................32 9.8. Survival of Covenants and Representations.....................................................33 9.9. Severability..................................................................................33 9.10. Governing Law.................................................................................33 9.11. Captions......................................................................................33
-iii- 38 An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. EX-10.2 3 NOTE AGREEMENT 1 Exhibit 10.2 STANDARD MOTOR PRODUCTS, INC. NOTE AGREEMENT Dated as of November 15, 1992 To Each of the Purchasers Named in the Attached Schedule I Ladies and Gentlemen: STANDARD MOTOR PRODUCTS, INC., a New York corporation (the "Company"), agrees with you as follows: Section 1. DESCRIPTION OF NOTES AND COMMITMENT 1.1 Description of Notes. The Company has authorized the issuance and sale of $65,000,000 aggregate principal amount of its Senior Notes (the "Notes"), to be dated the date of issuance, to bear interest from such date (computed on the basis of a 360-day year comprised of twelve 30-day months) , payable semi-annually on June 15 and December 15 of each year, commencing June 15, 1993, and at maturity, at the rate of 7.85% per annum prior to maturity and to bear interest on any overdue principal (including any overdue optional or required prepayment), on any overdue Make-Whole Amount, and (to the extent legally enforceable) on any overdue installment of interest at a per annum rate equal to the greater of the rate of 9.85% and the reference rate of Chemical Bank from time to time in effect plus 2%. The Notes shall be expressed to mature on December 15, 2002 and shall be substantially in the form attached as Exhibit A. The term "Notes" as used herein shall include each Note delivered pursuant to this Note Agreement (the "Agreement") and each Note delivered in substitution or exchange therefor and, where applicable, 5 hall include the singular number as well as the plural. Any reference to you in this Agreement shall in all instances be deemed to include any nominee of yours or any separate account or other person on whose behalf you are purchasing Notes. You and the other purchasers are sometimes referred to herein individually as a "Purchaser" and collectively as the "Purchasers." 1.2 Commitment; Closing Date. Subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to you, and you agree to purchase from the Company, Notes in the aggregate principal amount set forth opposite your name in the attached Schedule I at a price of 100% of the principal amount thereof. Delivery of and payment for the Notes shall be made at the offices of Gardner, Carton & Douglas, 321 North Clark Street, Quaker Tower, Chicago, Illinois 60610, at 9:00 a.m., Chicago Time, on December 15, 1992, or at such later time or on such later date, not later than Noon, Chicago Time, on December 30, 1992 as may be mutually agreed upon by the Company and the Purchasers (the "Closing Date"). The Notes shall be delivered to you in the form of one or more Notes in fully registered form, issued in your name or in the name of your nominee. Delivery of 2 the Notes to you on the Closing Date shall be against payment of the purchase price thereof in Federal funds or other funds in U.S. dollars immediately available at Chemical Bank, 270 Park Avenue, 7th Floor, New York, New York, A.B.A. No. 021000128, for deposit in the Company's Account No. 027-022048. If on the Closing Date the Company shall fail to tender the Notes to you, you shall be relieved of all remaining obligations under this Agreement. Nothing in the preceding sentence shall relieve the Company, of any liability occasioned by such failure to deliver the Notes. The funding and other obligations of the Purchasers under this Agreement shall be several and not joint. Section 2. PREPAYMENT OF NOTES 2.1 Required Prepayments. In addition to payment of all outstanding principal of the Notes at maturity and regardless of the amount of Notes which may be outstanding from time to time, the Company shall prepay and there shall become due and payable on December 15 in each year, $9,285,714 of the principal amount of the Notes or such lesser amount as would constitute payment in full on the Notes, commencing December 15, 1996 and ending December 15, 2001, inclusive, with the remaining principal payable on December 15, 2002. Each such prepayment shall be at a price of 100% of the principal amount prepaid, together with interest accrued thereon to the date of prepayment. 2.2 Optional Prepayments. (a) Upon notice as provided in Section 2.3, the Company may prepay the Notes, in whole or in part, at any time, in an amount not less than $1,000,000, an integral multiple of $100,000 in excess thereof or such lesser amount as shall constitute payment in full of the Notes, provided that a prepayment pursuant to this Section 2.2(a) shall be made only in conjunction with the contemporaneous pro rata prepayment of the 6.01% Notes. Each such prepayment shall be at a price of 100% of the principal amount to be prepaid, plus interest accrued thereon to the date of prepayment, plus the Make-Whole Amount. (b) Promptly following the day on which the Company first learns of a proposed Change of Control, the Company shall give notice thereof to the holders of the Notes, which notice shall include the estimated date (if known) on which such Change of Control may occur. In the event of a Change of Control, the Company shall immediately and in any event not later than 5 calendar days after such date, give written notice to each holder of a Note of the Change of Control, accompanied by a certificate of an authorized officer of the Company specifying the nature of the Change of Control. Such notice shall (i) contain the written, irrevocable offer of the Company to prepay, on a date specified in such notice which shall be not less than 30 or more than 45 calendar days after the effective date of such Change of Control, the entire principal amount of the Notes held by each holder at a price equal to 100% thereof, plus interest accrued thereon to the date of prepayment, (ii) state that notice of acceptance of the Company's offer to prepay under this Section 2.2(b) must be delivered to the Company not later than 10 calendar days prior to the date fixed for prepayment, and (iii) contain the information specified in clauses (iii), (iv) and (v) of the first sentence of Section 2.3. Upon receipt by the Company of such notice of acceptance from any holder, but subject to the following sentence, the aggregate principal amount of Notes held by such holder plus the interest accrued thereon shall become due and payable on the day specified in the Company's notice. Not earlier than 7 calendar days prior to the date fixed for prepayment, the Company shall give written notice to each holder of those holders who have given notices of acceptance of the Company's offer and 2 3 the principal amount of Notes held by each, and thereafter any holder may change its response to the Company's offer by written notice to such effect delivered to the Company not less than 3 business days prior to the date fixed for prepayment. (c) Any optional prepayment of less than all of the Notes outstanding pursuant to Section 2.2(a) or 2.2(b) shall be applied to reduce, pro rata the prepayments and payment at maturity required by Section 2.1. (d) Except as provided in Section 2.1 and this Section 2.2, the Notes shall not be prepayable in whole or in part. 2.3 Notice of Prepayments. (a) The Company shall give notice of any optional prepayment of the Notes pursuant to Section 2.2(a) to each holder of the Notes not less than 30 days nor more than 60 days before the date fixed for prepayment, specifying (i) such date, (ii) the principal amount of the holder's Notes to be prepaid on such date, (iii) the Determination Date for calculating the Make Whole Amount, (iv) a calculation of the estimated amount of the Make-Whole Amount showing in detail the method of calculation and (v) the accrued interest applicable to the prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Notes specified in such notice, together with the Make-Whole Amount, if any, and accrued interest thereon shall become due and payable on the prepayment date. (b) The Company also shall give notice to each holder of the Notes to be prepaid pursuant to Section 2.2(a) by telecopy, telegram, telex or other same-day written communication, confirmed by notice delivered by overnight courier, as soon as practicable but in any event no less than 2 Business Days prior to the prepayment date, of the Make-Whole Amount applicable to such prepayment and the details of the calculations used to determine the amount of such Make-Whole Amount. 2.4 Surrender of Notes on Prepayment or Exchange. Subject to Section 2.5, upon any partial prepayment of a Note pursuant to this Section 2 or partial exchange of a Note pursuant to Section 10.3, such Note may, at the option of the holder thereof, (i) be surrendered to the Company pursuant to Section 10.3 in exchange for a new Note or Notes equal to the principal amount remaining unpaid on the surrendered Note, or (ii) be made available to the Company, at the Company's principal office, for notation thereon of the portion of the principal so prepaid or exchanged. In case the entire principal amount of any Note is prepaid or exchanged, such Note shall be surrendered to the Company for cancellation and shall not be reissued, and no Note shall be issued in lieu of such Note. 2.5 Direct Payment and Deemed Date of Receipt. Notwithstanding any other provision contained in the Notes or this Agreement, the Company will pay all sums becoming due on each Note held by you or any subsequent Institutional Holder by wire transfer of immediately available funds to such account as you or such subsequent Institutional Holder have designated in Schedule I, or as you or such subsequent Institutional Holder may otherwise designate by notice to the Company, in each case without presentment and without notations being made thereon, except that any such Note so paid or prepaid in full shall be surrendered to the Company for cancellation following such payment. Any wire transfer shall identify such payment in the manner set forth in Schedule I and shall identify the payment as principal, Make- 3 4 Whole Amount, if any, and/or interest. You and any subsequent Institutional Holder of a Note to which this Section 2.5 applies agree that, before selling or otherwise transferring any such Note, you or it will make a notation thereon of the aggregate amount of all payments of principal theretofore made and of the date to which interest has been paid and, upon written request of the Company, will provide a copy of such notations to the Company. Any payment made pursuant to this Section 2.5 shall be deemed received on the payment date only if received before 10:00 A.M., Chicago time. Payments received after 10:00 A.M., Chicago Time, shall be deemed received on the next succeeding Business Day. 2.6 Allocation of Payments. In the case of a prepayment pursuant to Section 2.1 or Section 2.2(a), if less than the entire principal amount of all of the Notes Outstanding is to be paid, the Company will prorate the aggregate principal amount to be prepaid among the outstanding Notes in proportion to the unpaid principal amounts thereof. 2.7 Payments Due on Saturdays, Sundays and Holidays. In any case where the date of any required prepayment of the Notes or any interest payment date on the Notes or the date fixed for any other payment of any Note or exchange of any Note is a Saturday, Sunday or a legal holiday or a day on which banking institutions in the United States of America generally are authorized by law to close, then such payment, prepayment or exchange need not be made on such date but may be made on the next succeeding Business Day which is not a Saturday, Sunday or a legal holiday or a day on which banking institutions in the United States of America generally are authorized by law to close, with the same force and effect as if made on the due date, except that interest shall be payable to the actual date of payment. Section 3. REPRESENTATIONS 3.1 Representations of the Company. As an inducement to, and as part of the consideration for, your purchase of the Notes pursuant to this Agreement, the Company represents and warrants to you as follows: (a) Corporate Organization and Authority. The Company is a solvent corporation duly organized, validly existing and in good standing under the laws of the State of New York, has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as presently proposed to be conducted, to enter into and perform the Agreement and to issue and sell the Notes as contemplated in the Agreement. (b) Qualification to Do Business. The Company is duly qualified or licensed and in good standing as a foreign corporation authorized to do business in each jurisdiction where the nature of, the business transacted by it or the character of its properties owned or leased makes such qualification or licensing necessary, except for jurisdictions, individually or in the aggregate, where the failure to be so licensed or qualified could not have a material adverse effect on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. (c) Subsidiaries. The Company has no Subsidiaries except those listed in the attached Annex I, which correctly sets forth the jurisdiction of incorporation and the percentage of the outstanding voting Stock or equivalent interest of each Subsidiary which is owned, of 4 5 record or beneficially, by the Company and/or one or more Subsidiaries. Each Subsidiary which is a Restricted Subsidiary is so designated in Annex I. Each Subsidiary has been duly organized and is validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly licensed or qualified and in good standing as a foreign corporation in each other jurisdiction where the nature of the business transacted by it or the character of its properties owned or leased makes such qualification or licensing necessary, except for jurisdictions, individually or in the aggregate, where the failure to be so licensed or qualified would not have a material adverse effect on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries, taken as a whole. Each Subsidiary has full corporate or other power and authority to own and operate its properties and to carry on its business as now conducted and as presently proposed to be conducted. The Company and each Subsidiary have good and marketable title to all of the shares they purport to own of the capital stock or equivalent interest of each Subsidiary, free and clear in each case of any Lien, except as otherwise disclosed in the attached Annex II, and all such shares have been duly issued and are fully paid and nonassessable. (d) Financial Statements. The consolidated balance sheets of the Company and its Subsidiaries as of December 31, 1990 and 1991, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the years ended December 31, 1987, 1988, 1989, 1990 and 1991, accompanied by the reports and unqualified opinions of (i) Peat Marwick, independent public accountants, with respect to the financial statements for the years ended December 31, 1987, 1988 and 1989 and (ii) David Berdon & Co., independent public accountants, with respect to the financial statements for the years ended December 31, 1990 and 1991, copies of which have heretofore been delivered to you, were prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein) and present fairly the consolidated financial condition of the Company and its Subsidiaries on such dates and their consolidated results of operations and cash flows for the years then ended. The unaudited condensed consolidated balance sheets of the Company and its Subsidiaries as of September 30, 1992 and the related unaudited condensed consolidated statements of earnings for the three months and nine months, and cash flows for the nine months, ended September 30, 1991 and 1992, copies of which have heretofore been delivered to you, were prepared in accordance with generally accepted accounting principles and present or will present fairly the consolidated financial condition of the Company and its Subsidiaries as of such dates and the consolidated results of their operations and changes in their cash flows for the periods then ended. (e) No Contingent Liabilities or Adverse Changes. Neither the Company nor any of its Subsidiaries has any contingent liabilities which, individually or in the aggregate, are material to the Company and its Subsidiaries taken as a whole, other than as indicated in the most recent audited and unaudited financial statements described in the foregoing paragraph (d) of this Section 3.1, and, since September 30, 1992, there have been no changes in the condition, financial or otherwise, of the Company and its Subsidiaries except changes occurring in the ordinary course of business, none of which, individually or in the aggregate, has been materially adverse. (f) No Pending Litigation or Proceedings. There are no actions, suits or proceedings pending or threatened against or affecting the Company or any of its Subsidiaries, at 5 6 law or in equity or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which could have a material adverse effect, either individually or in the aggregate, on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. (g) Compliance with Law. (i) Neither the Company nor any of its Subsidiaries is: (x) in default with respect to any order, writ, injunction or decree of any court to which it is a named party; or (y) in default under any law, rule, regulation, ordinance or order relating to its or their respective businesses, the sanctions and penalties resulting from which defaults described in clauses (x) and (y) could have a material adverse effect on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole, or on the Company's ability to perform its obligations under this Agreement or the Notes. (ii) Neither the Company nor any Subsidiary nor any Affiliate of the Company is an entity defied as a "designated national" within the meaning of the Foreign Assets Control Regulations, 31 C.F.R. Chapter V, or is in violation of any Federal statute or Presidential Executive Order, or any rules or regulations of any department, agency or administrative body promulgated under any such statute or Order, concerning trade or other relations with any foreign country or any citizen or national thereof or the ownership or operation of any property and no restriction or prohibition under any such statute, Order, rule or regulation has a material adverse effect on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. (h) Pension Reform Act of 1974. Neither the purchase of the Notes by you nor the consummation of any of the other transactions contemplated by this Agreement is or will constitute a "prohibited transaction" within the meaning of Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), or Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Internal Revenue Service has issued a determination that each "employee pension benefit plan," as defined in Section 3 of ERISA (a "Plan"), established, maintained or contributed to by the Company or any Subsidiary (except for any Plan which is unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees) is qualified under Section 401(a) and related provisions of the Code and that each related trust or custodial account is exempt from taxation under Section 501(a) of the Code. All Plans of the Company or any Subsidiary comply in all material respects with ERISA and other applicable laws. There exist with respect to the Company or any Subsidiary no "multi-employer plans," as defined in the Multiemployer Pension Plan Amendments Act of 1980, for which a material withdrawal or termination liability may be incurred. There exist with respect to all Plans or trusts established or maintained by the Company or any Subsidiary: (i) no accumulated funding deficiency within the meaning of ERISA; (ii) no termination of any Plan or trust which could result in any liability to the Pension Benefit Guaranty Corporation ("PBGC") or any "reportable event," as that term is defined in ERISA, which could constitute grounds for termination of any Plan or trust by the PBGC; and (iii) no "prohibited transaction," as that term is defined in ERISA, which could 6 7 subject any Plan, trust or party dealing with any such Plan or trust to any tax or penalty on prohibited transactions imposed by Section 4975 of the Code. (i) Title to Properties. Except as disclosed on the most recent audited consolidated balance sheet described in the foregoing paragraph (d) of this Section 3.1, the Company and each Subsidiary has (i) good and marketable title in fee simple or its equivalent under applicable law to all the real property owned by it and (ii) good and marketable title to all of the other property reflected in such balance sheet or subsequently acquired by the Company or any Subsidiary (except as sold or otherwise disposed of in the ordinary course of business), in each case free from all Liens or defects in title except Liens permitted by Section 7.5. (j) Leases. The Company and each Subsidiary enjoy peaceful and undisturbed possession under all leases under which the Company or such Subsidiary is a lessee or is operating, except for leases which, if terminated, would not, individually or in the aggregate, have a material adverse effect on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries, taken as a whole. (k) Franchises, Patents, Trademarks and Other Rights. The Company and each Subsidiary have all franchises, permits, licenses and other authority necessary to carry on their businesses as now being conducted, and none are in default under any of such franchises, permits, licenses or other authority which are material to their businesses, properties, profits, prospects, operations or condition, financial or otherwise. The Company and each Subsidiary own or possess all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing necessary for the present conduct of their businesses, without any known conflict with the rights of others which could have, individually or in the aggregate, a material adverse, effect on their businesses, properties, profits, prospects, operations or condition, financial or otherwise. (l) Authorization. This Agreement and the Notes have been duly authorized on the part of the Company and the Agreement does, and the Notes when issued will, constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their terms, except to the extent that enforcement of the Notes may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application relating to or affecting the enforcement of the rights of creditors or by equitable principles, regardless of whether enforcement is sought in equity or at law. The sale of the Notes and compliance by the Company with all of the provisions of this Agreement and of the Notes (i) are within the corporate powers of the Company, (ii) have been duly authorized by proper corporate action, (iii) are legal and will not violate any provisions of any law or regulation or order of any court, governmental authority or agency and, (iv) will not result in any breach of any of the provisions of, or constitute a default under, or result in the creation of any Lien on any property of the Company or any Subsidiary under the provisions of, any charter document, by-law, loan agreement or other agreement or instrument to which the Company or any Subsidiary is a party or by which any of them or their property may be bound. 7 8 (m) No Defaults. No event has occurred and no condition exists which, upon the issuance of the Notes, would constitute a Default or an Event of Default under this Agreement. Neither the Company nor any Subsidiary is in default under any charter document, by-law, loan agreement or other material agreement or material instrument to which it is a party or by which it or its property may be bound. (n) Governmental Consent. Neither the nature of the Company or any of its Subsidiaries, their respective businesses or properties, nor any relationship between the Company or any of its Subsidiaries and any other Person, nor any circumstances in connection with the offer, issuance, sale or delivery of the Notes is such as to require a consent, approval or authorization of, or withholding of objection on the part of, or filing, registration or qualification with, any governmental authority on the part of the Company in connection with the execution and delivery of this Agreement or the offer, issuance, sale or delivery of the Notes. (o) Taxes. All income tax returns and all other material tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have been filed, and all taxes, assessments, fees and other governmental charges upon the Company or any Subsidiary, or upon any of their respective properties, income or franchises, which are due and payable, have been paid timely or within appropriate extension periods or contested in good faith by appropriate proceedings and the collection thereof has been stayed by the applicable governmental authority during the period of the contest. The Company does not know of any proposed additional tax assessment against it or any Subsidiary for which adequate provision has not been made on its books. The statute of limitations with respect to Federal income tax liability of the Company and its Subsidiaries has expired for all taxable years up to and including the taxable year ended December 31, 1988 and no material controversy in respect of additional taxes due since such date is pending or, to the Company's knowledge, threatened. To the best knowledge of the Company, the provisions for taxes on the books of the Company and each Subsidiary are adequate for all open years and for the current fiscal period. (p) Statues under Certain Statutes. Neither the Company nor any Subsidiary is: (i) a "public utility company" or a "holding company," or an "affiliate" or a "subsidiary company" of a "holding company," or an "affiliate" of such a "subsidiary company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, or (ii) a "public utility" as defined in the Federal Power Act,, as amended, or (iii) an "investment company" or an "affiliated person" thereof or an "affiliated person" of any such "affiliated person," as such terms are defined in the Investment Company Act of 1940, as amended. (q) Private Offering. Neither the Company, Chemical Bank, NBD Bank, N.A., nor SPP Hambro & Company (the only Persons authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering of the Notes or any similar security of the Company) has offered any of the Notes or any similar security of the Company for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser, other than institutional investors, including the Purchasers, each of whom was offered all or a portion of the Notes at private sale for investment. Neither the Company nor anyone acting on its authorization will offer the Notes or any part thereof or any similar security for issuance or sale to, or solicit any offer to acquire any 8 9 of the same from, anyone so as to bring the issuance and sale of the Notes within the provisions of Section 5 of the Securities Act. (r) Effect of Other Instruments. Neither the Company nor any Subsidiary is bound by any agreement or instrument or subject to any charter or other corporate restriction which (i) in any way restricts the Company's ability to perform its obligations under this Agreement or the Notes or any Subsidiary's ability to pay dividends or make advances to the Company or (ii) materially and adversely affects the business, properties, profits, prospects, operations, or condition, financial or otherwise, of the Company and its Subsidiaries, taken as a whole. (s) Use of Proceeds. The Company will apply the net proceeds from the sale of the Notes, together with the net proceeds from the contemporaneous sale of the 6.01% Notes, to the repayment of Indebtedness to banks and Funded Debt. None of the transactions contemplated in this Agreement (including, without limitation thereof, the use of the proceeds from the sale of the Notes) will violate or result in a violation of Section 7 of the Exchange Act, or any regulations issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System (12 C.F.R., Chapter II). Neither the Company nor any Subsidiary owns or intends to carry or purchase any "margin stock" within the meaning of Regulation G, and none of the proceeds from the sale of the Notes will be used to purchase or carry or refinance any borrowing the proceeds of which were used to purchase or carry any "margin stock" or "margin security" in violation of Regulations G, T, U or X. (t) Condition of Property. All of the facilities of the Company and its Subsidiaries are in sound operating condition and repair, except for facilities being repaired in the ordinary course of business or facilities which,, individually or in the aggregate, are not material to the Company and its Subsidiaries taken as a whole. (u) Books and Records. The Company and each of its Subsidiaries (i) maintain books, records and accounts in reasonable detail which accurately and fairly reflect their respective transactions and business affairs, and (ii) maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in accordance with management's general or specific authorization and to permit preparation of financial statements in accordance with generally accepted accounting principles. (v) Environmental Compliance. The Company and each Subsidiary (including their operations and the conditions at or in their Facilities) comply in all material respects with all Environmental Laws, except for instances of alleged noncompliance which the Company or such Subsidiary is contesting in good faith and which, individually or in the aggregate, if determined adversely to the Company or such Subsidiary, would not have a material adverse effect an the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole; the Company and each Subsidiary have obtained all permits under Environmental Laws necessary to their respective operations, all such permits are in good standing, and the Company and each Subsidiary are in compliance with all material terms and conditions of such permits; and neither the Company nor any of its Subsidiaries has any liability (contingent or otherwise) in connection with any Release of any Hazardous Material or the existence of any Hazardous material on, 9 10 under or about any Facility that could give rise to an Environmental Claim that could have a material adverse effect on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. (w) NAIC Rating. The Notes have received a preliminary rating of "2" from The National Association of Insurance Commissioners. (x) Full Disclosure. Neither the Private Placement Memorandum dated October 1992 (including the attachments and enclosures), the financial statements referred to in paragraph (d) of this Section 3.1, nor this Agreement, nor any other written statement or document furnished by the Company to you in connection with the negotiation of the sale of the Notes, taken together, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading in light of the circumstances under which they were made. There is no fact (exclusive of general economic, political or social conditions or trends) particular to the Company and known by the Company that the Company has not disclosed to you in writing and that has a material adverse effect on or, so far as the Company can now foresee, will have a material adverse effect on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or on the ability of the Company to perform its undertakings under and in respect of this Agreement and the Notes. 3.2 Representations of the Purchasers. You represent, and in entering into this Agreement the Company understands, that you are acquiring the Notes for your own account and not with a view to any distribution thereof, provided that the disposition of your property shall at all times be and remain within your control, subject, however, to compliance with Federal securities laws. You acknowledge that the Notes have not been registered under the Securities Act and you understand that the Notes must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. You have been advised that the Company does not contemplate registering, and is not legally required to register, the Notes under the Securities Act. You further represent that either: (i) no part of the funds to be used by you to purchase the Notes will constitute assets allocated to any separate account maintained by you; or (ii) no part of the funds to be used by you to purchase the Notes will constitute assets allocated to any separate account maintained by you such that the application of such funds will constitute a prohibited transaction under Section 406 of ERISA; or (iii) all or a part of such funds will constitute assets of one or more separate accounts maintained by you, and you have disclosed to the Company the names of such employee benefit plans whose assets in such separate account or accounts exceed 10% of the total assets or are expected to exceed 10% of the total assets of such account or accounts as of the date of such purchase, and the Company has advised you in writing that the Company is not a party-in-interest nor are the Notes employer securities with respect to the particular employee benefit plans disclosed to the Company by you as aforesaid. (For the purpose of this clause (iii), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan.) As used herein, the terms "separate account," "party-in-interest," "employer securities," and "employee benefit plan" have the meanings assigned to them in ERISA. 10 11 Section 4. CLOSING CONDITIONS Your obligation to purchase the Notes on the Closing Date shall be subject to the performance by the Company of its agreements hereunder, which are to be performed at or prior to the time of delivery of the Notes, and to the following conditions to be satisfied on or before the Closing Date: 4.1 Representations and Warranties. The representations and warranties of the Company contained in this Agreement or otherwise made in writing in connection herewith shall be true and correct on or as of the Closing Date and the Company shall have delivered to you a certificate to such effect, dated the Closing Date and executed by the president, the chief financial officer or the chief accounting officer of the Company. 4.2 Legal Opinions. You shall have received from Gardner, Carton & Douglas, who is acting as your special counsel in this transaction, and from Bondy & Schloss, counsel for the Company, their respective opinions, dated such Closing Date, in form and substance satisfactory to you and covering substantially the matters set forth or provided in the attached Exhibits B and C. 4.3 Events of Default. No event shall have occurred and be continuing on the Closing Date which would constitute a Default or an Event of Default, and the Company shall have delivered to you a certificate to such effect, dated the Closing Date and executed by the president or the chief financial officer of the Company. 4.4 Payment of Fees and Expenses. The Company shall have paid all fees, expenses, costs and charges, including the fees and expenses of Gardner, Carton & Douglas, your special counsel, incurred by you through the Closing Date and incident to the proceedings in connection with, and transactions contemplated by, this Agreement and the Notes. 4.5 Sale of Notes to Other Purchasers; Sale of 6.01% Notes. The Company shall have consummated the sale of the entire $65,000,000 principal amount of the Notes to be sold on the Closing Date pursuant to this Agreement and shall have consummated the sale of the entire $15,000,000 principal amount of the 6.01% Notes. 4.6 Legality of Investment. Your acquisition of the Notes shall constitute a legal investment as of the Closing Date under the laws and regulations of each jurisdiction to which you may be subject (without resort to any "basket" or "leeway" provision which permits the making of an investment without restrictions as to the character of the particular investment being made), and such acquisition shall not subject you to any penalty or other onerous condition in or pursuant to any such law or regulation; and you shall have received such certificates or other evidence as you may reasonably request to establish compliance with this condition. 4.7 Private Placement Number. A Private placement number with respect to the Notes shall have been issued by Standard & Poor's Corporation. 4.8 Consent of NBD. N.A. NBD, N.A., as assignee of Chemical Bank, shall have granted its consent in writing to the issuance of the Notes and the 6.01% Notes pursuant to the 11 12 Credit Agreement dated as of March 10, 1989, among the Company, as borrower, and certain of its subsidiaries, as guarantors, and Chemical Bank, as lender, as amended. 4.9 Proceedings and Documents. All proceedings taken in connection with the transactions contemplated by this Agreement, and all documents necessary to the consummation of such transactions shall be satisfactory in form and substance to you and your special counsel, and you and your special counsel shall have received copies (executed or certified as may be appropriate) of all legal documents or proceedings which you and they may reasonably request. Section 5. INTERPRETATION OF AGREEMENT 5.1 Certain Terms Defined. The terms hereinafter set forth when used in this Agreement shall have the following meanings: Affiliate - Any Person (other than a Restricted Subsidiary) (i) who is a director or executive officer of the Company or any Subsidiary, (ii) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company, (iii) which beneficially owns or holds securities representing 5% or more of the combined voting power of the Voting Stock of Company or any Subsidiary or (iv) of which securities representing 5% or more of the combined voting power of its Voting Stock (or in the case of a Person not a corporation, 5% or more of its equity) is beneficially owned or held by the Company or any Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Agreement - As defined in Section 1.1. Business day - Any day, other than Saturday, Sunday or a legal holiday or any other day on which banking institutions in the United States of America generally are authorized by law to close. Capital Losses - Capital losses in the amount of $1,464,152 as of September 30, 1992 in the investment portfolio of Mardevco Credit Corp. Capitalized Lease - Any lease the obligation for Rentals with respect to which, in accordance with generally accepted accounting principles, would be required to be capitalized on a balance sheet of the lessee or for which the amount of the asset and liability thereunder, as if so capitalized, would be required to be disclosed in a note to such balance sheet. Change of Control - The acquisition, through purchase or otherwise, by any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than Bernard Fife, Nathaniel Sills and Lawrence Sills, their spouses and heirs and trusts created for the exclusive benefit of their families, who is or becomes a "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act) of shares of Voting Stock representing more than 50% of' the combined voting power of all classes of Voting Stock of the Company. Closing Date - As defined in Section l.2. 12 13 Code - As defined in Section 3.1(h). Consolidated Capitalization - The sum of Consolidated Debt and Consolidated Tangible Net Worth. Consolidated Current Assets and Consolidated Current Liabilities - Such consolidated assets and liabilities of the Company and its Restricted Subsidiaries as shall be determined to constitute current assets and current liabilities, respectively, in accordance with generally accepted accounting principles. Consolidated Debt - The sum of Current Debt and Funded Debt of the Company and its Restricted Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. Consolidated Net Income - For any period, the consolidated net income (or net loss) of the Company and its Restricted Subsidiaries determined in accordance with generally accepted accounting principles, but excluding therefrom (i) the net income of any Subsidiary (other than a Restricted Subsidiary) or any other Person in which the Company or a Restricted Subsidiary has an interest to the extent that such income has not been received by the Company or a Restricted Subsidiary in the form of cash dividends or other similar cash distributions, or the net loss of any Subsidiary (other than a Restricted Subsidiary) or any other Person in which the Company or a Restricted Subsidiary has an interest, (ii) the net income or net loss of any Restricted Subsidiary for any period prior to the date it becomes a Restricted Subsidiary, (iii) any gain or loss (net of any tax effect) resulting from the reappraisal, reevaluation or write-up of assets, (iv) any extraordinary, unusual or nonrecurring gain or loss, (v) earnings or losses attributable to minority interests, (vi) proceeds of any life insurance policy, (vii) net income of a Restricted Subsidiary which for any reason cannot be distributed as a dividend, (viii) reversal of a contingency reserve except to the extent that provision therefor was made from income during such period, and (ix) one-time and recurring non-cash charges for post-retirement benefits made in accordance with Financial Accounting Standards Board Bulletin No. 106). Consolidated Operating Cash Flow - For any period, the sum of (i) Consolidated Net Income or such period, (ii) all provisions for federal, state and other income taxes made by the Company and its Restricted Subsidiaries for such period, (iii) Interest Charges for such period and (iv) depreciation and amortization expense for such period. Consolidated Tangible Net Worth - The consolidated stockholders' equity of the Company and its Restricted Subsidiaries determined in accordance with generally accepted accounting principles, less all goodwill, trade names, trademarks, patents, organization expense, unamortized debt discount and expense and similar intangibles properly classified as intangibles in accordance with generally accepted accounting principles. Consolidated Total Assets - The total assets of the Company and its Restricted Subsidiaries determined on a consolidated basis in accordance with generally accepted principles. 13 14 Current Debt - All indebtedness for borrowed money and Capitalized Leases other than Funded Debt. Default - Any event which, with the lapse of time or the giving of notice, or both, would become an Event of Default. Determination Date - The day 3 Business Days before the date fixed for a prepayment pursuant to Section 2.2(a) or (b) or the date of declaration pursuant to Section 8.2. Environmental Claim - Any notice of violation, claim, demand, abatement order or other order by any Person for any damage, including personal injury (including sickness, disease or death), tangible or intangible property damage, contribution, indemnity, indirect or consequential damages, damage to the environment, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, resulting from or based upon (i) the existence of a Release (whether sudden or non-sudden or accidental or nonaccidental) of, or exposure to, any Hazardous Material in, into or onto the environment at, in, by, from or related to any Facility, (ii) the use, handling, transportation, storage, treatment or disposal of Hazardous Materials in connection with the operation of any Facility, or (iii) the violation, or alleged violation, of any statutes, rules, regulations, ordinances, orders, permits, licenses or authorizations of or from any governmental authority, agency or court relating to environmental matters pertaining to the Facilities. Environmental Laws. All laws relating to environmental matters, including those relating to (i) files, orders, injunctions, penalties, damages, contribution, cost recovery compensation, losses or injuries resulting from the Release or threatened Release of Hazardous Materials and to the generation, use, storage, transportation, or disposal of Hazardous Materials, in any manner applicable to the Company or any of its Subsidiaries or any of their respective properties, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. S Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.), and the Emergency Planning and Community Right-to Know Act (42 U.S.C. Section 11001 et seq.), and (ii) environmental protection, including the National Environmental Policy Act (42 U.S.C. Section 4321 et seq.), and comparable state laws, each as amended or supplemented, and any similar or analogous local, state and federal statutes and regulations promulgated pursuant thereto, each as in effect as of the date of determination. ERISA - As defined in Section 3.1(h). Event of Default - As defined in Section 8.1. Exchange Act - The Securities Exchange Act of 1934, as amended, and as it may be further amended from time to time. 14 15 Facility - Any and all real property (including all buildings, fixtures or other improvements located thereon) now or heretofore owned, leased, operated or used (under permit or otherwise) by the Company or any of its Subsidiaries. Fixed Charges - For any period, the sum of Interest Charges and Rentals paid or accrued. Forward Conversion - The purchase of common stock of a company satisfying the conditions of the following sentence together with the contemporaneous purchase of a put option and writing of a call option, having identical expirations and striking prices, covering shares of such common stock. The common stock subject to such transactions must be listed on the New York or American Stock Exchange or reported on the National Association of Securities Dealers, Inc. National Market Automated Quotation System and shall be issued by a corporation with outstanding senior unsecured Indebtedness rated "A" or better by Standard & Poor's Corporation or the equivalent by Moody's Investors Service, Inc. Funded Debt - All Indebtedness for borrowed money and Capitalized Leases which by their terms matures more than one year from the date of creation (including any portion thereof payable within a year) or which may be renewed or extended at the option of the obligor for more than one year from such date whether or not theretofore renewed or extended. Guaranties - All obligations (other then endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of a Person guaranteeing or, in effect, guaranteeing any Indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including, without limitation, all obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any property or assets constituting security therefor, (ii) to advance or supply funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to maintain working capital or other balance sheet condition or (z) otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation, (iii) to lease property or to purchase securities or other property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation against loss in respect thereof, or (iv) otherwise to assure the owner of the Indebtedness or obligation against loss in respect thereof. For the purposes of all computations made under this Agreement, Guaranties in respect of any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the principal amount of such Indebtedness for borrowed money which has been guaranteed, and Guaranties in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. Hazardous Materials - (i) Any chemical, material or substance defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous waste," "restricted hazardous waste," or "toxic substances" or words of similar import under any Environmental Laws; (ii) any oil, petroleum or petroleum derived substance, any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, any flammable substances or explosives, any radioactive materials, any hazardous wastes or substances, any toxic wastes or substances or any other materials or pollutants that (x) pose a hazard to any property of the Company or any of its Subsidiaries or to 15 16 Persons on or about such property or (y) cause such property to be in violation of any Environmental Law; (iii) friable asbestos, urea formaldehyde foam insulation, electrical equipment which contains any oil or dielectric fluid with levels of polychlorinated biphenyls in excess of fifty parts per million; and (iv) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority. Indebtedness - Without duplication, (i) all items of borrowings, including Capitalized Leases, which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet as of the date at which Indebtedness is to be determined, (ii) all obligations secured by any Lien whether or not a Person has assumed or become liable for the payment thereof, (iii) all obligations under conditional sale or other title retention agreements and (iv) all Guaranties of obligations of other Persons of the character referred to in clauses (ii) and (iii) of this definition. Institutional Holder - Any bank, trust company, insurance company, pension fund, mutual fund or other similar financial institution, including, without limiting the foregoing, any "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act, which is or becomes a holder of any Note. Interest Charges - For any period, all amounts paid or accrued which are properly classifiable as interest expense in accordance with generally acceptable accounting principles. Investments- All investments made, in cash or by delivery of property, directly or indirectly, in any Person or any property, whether by acquisition of shares of capital stock, indebtedness or other obligations or securities or by loan, advance, capital contribution or otherwise; provided, however, that "Investments" shall not mean or include investments in property to be used or consumed in the ordinary course of business permitted by Section 7.13. Lien - Any mortgage, pledge, security interest, encumbrance, lien or charge of any kind, including any agreement to grant any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, or the filing of or agreement to file any financing statement under the Uniform Commercial Code of any jurisdiction in connection with any of the foregoing. Make-Whole Amount - As of any Determination Date, to the extent that the Reinvestment Yield on such Determination Date is lower than the interest rate payable on or in respect of the Notes, the excess of (a) the present value of the principal and interest payments to be foregone by any prepayment (exclusive of accrued interest on such Notes through the date of prepayment) on such Notes to be prepaid (taking into account the manner of application of such prepayment required by section 2.2(c)), determined by discounting (semi-annually on the basis of a 360-day year composed of twelve 30-day months), such payments at a rate that is equal to the Reinvestment Yield over (b) the aggregate principal amount of such Notes then to be paid or prepaid. To the extent that the Reinvestment Yield on any Determination Date is equal to or higher than the interest rate payable on or in respect of such Notes, the Make-Whole Amount is zero. 16 17 Notes - As defined in Section 1.1. PBGC - As defined in Section 3.1(h). Permitted Investments - (i) Investments in Restricted Subsidiaries, including any Investment in a Person which, after giving effect to such Investment, immediately becomes a Restricted Subsidiary; (ii) Investments in direct obligations of the U.S. government or obligations of any U.S. government agency backed by the full faith and credit if the U.S. government, in each case having maturities of one year or less from the date of acquisition thereof; (iii) Investments in certificates of deposit or banker's acceptances in each case maturing within one year of the date of issuance issued by commercial banks or trust companies located and organized in the United States having combined capital, surplus and undivided profits aggregating at least $500 million and whose parent company has senior unsecured Indebtedness rated "A+" or better by Standard & Poor's Corporation or the equivalent by Moody's Investors Service, Inc.; (iv) Investments not exceeding $2,000,000 in the aggregate in preferred stock listed on the New York or American Stock Exchange, rated "A" or better by Standard & Poor's Corporation or the equivalent by Moody's Investors Service, Inc. and the payment of which is secured by one or more letters of credit issued by a commercial bank or trust company satisfying the requirements of clause (iii); (v) Investments in commercial paper maturing within 270 days from the date of issuance and rated A-1 or P-1 at the date of acquisition by Standard & Poor's Corporation or Moody's Investors Service, Inc.; (vi) Investments in money market mutual funds having assets in excess of $2,000,000,000; (vii) Investments in Forward Conversions (A) not exceeding $1,000,000 with respect to the common stock of a single issuer or $10,000,000 in the aggregate, (B) no more than $1,000,000 of which expire during any 10 day period and (C) only to the extent that Capital Losses are available to offset capital gains arising from such Investments in Forward Conversions; (viii) relocation, travel and miscellaneous advances not exceeding $1,500,000 in the aggregate to directors, officers and employees made in the ordinary course of business; (ix) Investments not exceeding $10,000,000 in the aggregate in receivables arising from the sale of goods and services in the ordinary course of business; and (x) Investments in addition to those described in clauses (i) through (ix) (including Investments in Forward Conversions which do not fall within the parameters of (vii) above) not exceeding $15,000,000 in the aggregate; provided, however, that if any Forward Conversion results in a loss, Forward Conversions thereafter will be Permitted Investments only if permitted by clause (x) and clause (vii) shall be of no further force and effect. Person - Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any governmental authority, agency or political subdivision. Plan - As defined in Section 3.1(h). Purchaser - As defined in Section 1.1. Reinvestment Yield - The sum of (i) 0.50% plus (ii) the yield as set forth on page "USD" of the Bloomberg Financial Markets Service (or other on-the-run service acceptable to the holders of not less than a majority in principal amount of the outstanding Notes) at 10:00 A.M. 17 18 (Chicago time) on the Determination Date for actively traded U.S. Treasury securities having a maturity equal to the then remaining Weighted Average Life to Maturity of the Notes then being prepaid or paid as of the date of prepayment or payment, rounded to the nearest month, or if such yields shall not be reported as of such time or the yields reported as of such time are not ascertainable in accordance with the preceding clause, then the arithmetic mean of the yields published in the statistical release designated H.15(5179) of the Board of Governors of the Federal Reserve System under the caption "U.S. Government Securities -- Treasury Constant Maturities" (the "statistical release") for the maturity corresponding to the remaining Weighted Average Life to Maturity of the Notes then being prepaid or paid as of the date of such prepayment or payment rounded to the nearest month. For purposes of calculating the Reinvestment Yield, the most recent weekly statistical release published prior to the applicable Determination Date shall be used. If no maturity exactly corresponding to such rounded Weighted Average Life to Maturity shall appear therein, yields for the two most. closely corresponding published maturities (one of which occurs prior and the other subsequent to the Weighted Average Life to Maturity) shall be calculated pursuant to the foregoing sentence and the Reinvestment Yield shall be interpolated from such yields on a straight-line basis (rounding, in each of such relevant periods, to the nearest month). Release - Any release, spill, emission, leaking, pumping, pouring, emptying, dumping, injection, escaping, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment (including the abandonment or disposal of any barrel, container or other closed receptacle containing any Hazardous Material), or into or out of any Facility, including the movement of any Hazardous Material through the air, soil, surface water, groundwater or property. Rentals - As of the date of any determination thereof, all fixed payments (including all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Company or a Subsidiary, as lessee or sublessee under a lease of real or personal property, but exclusive of any amounts required to be paid by the Company or a Subsidiary (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes, assessments, amortization and similar charges. Fixed rents under any so-called "percentage leases" shall be computed on the basis of the minimum rents, if any, required to be paid by the lessee, regardless of sales volume or gross revenues. Restricted Subsidiary - Any Subsidiary of which shares of Voting Stock representing 100% of the combined voting power of each outstanding class of Voting Stock are owned by the Company and/or one or more Wholly-Owned Subsidiaries and which has been designated as a Restricted Subsidiary in the attached Annex I or is subsequently designated as a Restricted Subsidiary by the Board of Directors of the Company and accompanied by written notice to each holder of a Note. No Subsidiary designated as a Restricted Subsidiary may thereafter be re-designated as an Unrestricted Subsidiary. Sale and Leaseback - Any arrangement, directly or indirectly, with any Person whereby a seller or a transferor shall sell or otherwise transfer any real or personal property and then or thereafter lease (whether or not by means of a Capitalized Lease), or repurchase under an 18 19 extended purchase contract, the same or similar property from the purchaser or the transferee of such property. Securities Act - The Securities Act of 1933, as amended, and as it may be further amended from time to time. 6.01% Notes - The $15,000,000 aggregate principal amount of the Company's 6.01% Senior Notes due December 15, 1995 being issued and sold by the Company pursuant to a Note Agreement dated as of November 15, 1992 between the Company and the Purchasers named in Schedule I thereto. Subsidiary - Any corporation of which shares of Voting Stock representing more than 50% of the combined voting power of each outstanding class of Voting Stock are owned or controlled, directly or indirectly, by the Company. Unrestricted Subsidiary - Any Subsidiary which is not designated a Restricted Subsidiary. Voting Stock - Capital stock of any class of a corporation having power to vote for the election of members of the board of directors of such corporation, or persons performing similar functions. Weighted Average Life to Maturity - As applied to any payment or prepayment of principal of the Notes, at any date, the number of years obtained by dividing (a) the principal amount of the Notes to be paid or prepaid into (b) the sum of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity, or other required payment, including payment at final maturity, foregone by virtue of such payment or prepayment by (ii) the number of years (calculated to the nearest 1/12th) which would have elapsed between such date and the making of such required payment. Wholly-Owned - When applied to a Subsidiary, any Subsidiary 100% of the Voting Stock of all classes of which is owned by the Company and/or its Wholly-Owned Subsidiaries. Terms which are defined in other Sections of this Agreement shall have the meanings specified therein. 5.2 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be done in accordance with United States generally accepted accounting principles as in effect from time to time, except where such principles are inconsistent with the requirements of this Agreement. 5.3 Valuation Principles. Except where indicated expressly to the contrary by the use of terms such as "fair value", "fair market value" or "market value," each asset, each liability and each capital item of any Person, and any quantity derivable by a computation involving any of such assets, liabilities or capital items, shall be taken at the net book value thereof for all purposes of this Agreement. "Net book value" with respect to any asset, liability or capital item of any Person shall mean the amount at which the same is recorded or, in effect from time to 19 20 time in accordance with generally accepted accounting principles, should have been recorded in the books of account of such Person, as reduced by any reserves which have been or, in accordance with generally accepted accounting principles, should have been set aside with respect thereto, but in every case (whether or not permitted in accordance with generally accepted accounting principles) without giving effect to any write-up, write-down or write-off (other than any write-down or write-off the entire amount of which was charged to Consolidated Net Income or to a reserve which was a charge to Consolidated Net Income) relating thereto which was made after the date of this Agreement. 5.4 Direct or Indirect Actions. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether the action in question is taken directly or indirectly by such Person. Section 6. AFFIRMATIVE COVENANTS The Company agrees that, for so long as any amount remains unpaid on any Note: 6.1 Corporate Existence. The Company will maintain and preserve, and will cause each Restricted Subsidiary to maintain and preserve, its corporate existence and right to carry on its business and maintain, preserve, renew and extend all of its rights, powers, privileges and franchises necessary to the proper conduct of its business; provided, however, that the foregoing shall not prevent any transaction permitted by Section 7.7 or Section 7.8 or the termination of the corporate existence of any Restricted Subsidiary if, in the opinion of the Board of Directors of the Company, such termination is in the best interests of the Company, is not disadvantageous to holders of the Notes and is not otherwise prohibited by this Agreement. 6.2 Insurance. The Company will, and will cause each Restricted Subsidiary to, maintain insurance coverage with financially sound and reputable insurers in such forms and amounts, with such deductibles and against such risks as are required by law or sound business practice and are customary for corporations engaged in the same or similar businesses and owning and operating similar properties as the Company and its Restricted Subsidiaries. All such insurances shall be carried with insurers in Financial Site Category Class XII or higher that are accorded an A rating or better from A.M. Best Company, Inc. 6.3 Taxes, Claims for Labor and Materials. The Company will pay and discharge when due, and will cause each Restricted Subsidiary to pay and discharge when due, all taxes, assessments and governmental charges or levies imposed upon it or its property or assets, or upon properties leased by it (but only to the extent required to do so by the applicable lease), other than taxes which individually and in the aggregate are not material in amount and the non-payment of which could not have a material adverse effect on the business, properties, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien upon its property or assets, provided that neither the Company nor any Restricted Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim, the payment of which is being contested in good faith and by proper proceedings that will stay the forfeiture or sale of any property and with respect to which adequate reserves are maintained in accordance with generally accepted accounting principles. 20 21 6.4 Maintenance of Properties. The Company will maintain, preserve and keep, and will cause each Restricted Subsidiary to maintain, preserve and keep, its properties (whether owned in fee or a leasehold interest) in good repair and working order, ordinary wear and tear excepted, and from time to time will make all necessary repairs, replacements, renewals and additions. 6.5 Maintenance of Records. The Company will keep, and will cause each Restricted Subsidiary to keep, at all times proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the Company or such Restricted Subsidiary, in accordance with generally accepted accounting principles consistently applied throughout the period involved (except for such changes as are disclosed in such financial statements or in the notes thereto and concurred in by the independent certified public accountants), and the Company will, and will cause each Restricted Subsidiary to, provide reasonable protection against loss or damage to such books of record and account. 6.6 Financial Information and Reports. The Company will furnish to the Securities Valuation Office of the National Association of Insurance Commissioners, 195 Broadway, New York, New York 10007, a copy of the financial statements referred to in Sections 6.6(a) and (b) as soon as they are available. The Company will furnish to you and to any other Institutional Holder (in duplicate if you or such other holder so request) the following: (a) As soon as available and in any event within 45 days after the end of each of the first three quarterly accounting periods of each fiscal year of the Company, a consolidated balance sheet of the Company and its Restricted Subsidiaries as of the end of such period and consolidated statements of income and retained earnings and cash flows of the Company and its Restricted Subsidiaries for the periods beginning on the first day of such fiscal year and the first day of such quarterly accounting period and ending on the date of such balance sheet, setting forth in comparative form the corresponding consolidated figures for the corresponding periods of the preceding fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied throughout the period involved (except for changes disclosed in such financial statements or in the notes thereto and concurred in by the Company's independent certified public accountants) and certified by the chief financial officer or chief accounting officer of the company (i) outlining the basis of presentation, and (ii) stating that the information presented in such statements presents fairly the financial condition of the Company and its Restricted Subsidiaries and the results of operations for the period, subject to customary year-end audit adjustments; (b) As soon as available and in any event within 90 days after the last day of each fiscal year, a consolidated balance sheet of the Company and its Restricted Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and changes in stockholders' equity, and cash flows for such fiscal year, in each case setting forth in comparative form figures for the preceding fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied throughout the period involved (except for changes disclosed in such financial statements or in the notes thereto and concurred in by independent certified public accountants) and accompanied by a report unqualified as to scope of audit and unqualified as to going concern as to the consolidated balance sheet. and the related consolidated statements of income and retained earnings, and cash 21 22 flows by David Berdon & Co., or any other firm of independent public accountants of recognized national standing selected by the Company, to the effect that such financial statements have been prepared in conformity with generally accepted accounting principles and present fairly, in all material respects, the financial condition of the Company and its Restricted Subsidiaries and that the examination of such financial statements by such accounting firm has been made in accordance with generally accepted auditing standards; (c) Together with the financial statements delivered pursuant to paragraphs (a) and (b) of this Section 6.6, (i) a management's discussion and analysis of the financial condition and results of operations for the periods reported upon by such financial statements, which discussion and analysis shall satisfy the requirements of Item 303 of Securities and Exchange Commission Regulation S-K, and (ii) a certificate of the chief financial officer or chief accounting officer, (x) to the effect that such officer has re-examined the terms and provisions of this Agreement and that at the date of such certificate, during the periods covered by such financial reports and as of the end of such periods, the Company is not, or was not, in default in the fulfillment of any of the terms, covenants, provisions and conditions of this Agreement and that no Default or Event of Default is occurring or has occurred as of the date of such certificate, during such periods and as of the end of such periods, or if the signer is aware of any Default or Event of Default, such officer shall disclose in such statement the nature thereof, its period of existence and what action, if any, the Company has taken or proposes to take with respect thereto, (y) stating whether the Company in compliance with Sections 7.1 through 7.14 and setting forth, in sufficient detail, the information and computations required to establish whether or not the Company was in compliance with the requirements of Sections 7.1 through 7.9 during the periods covered by the financial reports then being furnished and as of the end of such periods and (z) setting forth a schedule of Investments in Forward Conversions containing a listing of each security and issuer thereof, the amount of such Investment, the purchase date, sale date, dollar return and percentage return. In addition, the officers certificate to accompany financial statements delivered pursuant to paragraph (b) shall set forth the remaining balance of capital loss carry forwards of Mardevco Credit Corp; (d) Together with the financial reports delivered pursuant to paragraph (b) of this Section 6.6, a letter of the independent certified public accountants stating that in making the examination necessary for expressing an opinion on such financial statements, nothing came to their attention that caused them to believe that there is in existence or has occurred any Default or Event of Default hereunder (the occurrence of which is ascertainable by accountants in the course of normal audit procedures) or, if such accountants shall have obtained knowledge of any such Default or Event of Default, describing the nature thereof and the length of time it has existed; (e) Promptly after the Company obtains knowledge thereof, notice of any litigation or any governmental proceeding pending against the Company or any Subsidiary in which the damages sought exceed $500,000, individually or in the aggregate, or which might reasonably be expected to otherwise materially adversely affect the business, property, profits, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole; 22 23 (f) As soon as available, copies of each financial statement, notice, report and proxy statement which the Company shall furnish to its stockholders; copies of each registration statement and periodic report which the Company may file with the Securities and Exchange Commission, and any similar or successor agency of the Federal government administering the Securities Act, the Exchange Act or the Trust Indenture Act of 1939, as amended; without duplication, copies of each report (other than reports relating solely to the issuance of, or transactions by others involving, its securities) relating to the Company or its securities which the Company may file with any securities exchange on which any of the Company's securities may be registered; copies of any orders in any material proceedings to which the Company or any of its Subsidiaries is a party, issued by any governmental agency, Federal or state, having jurisdiction over the Company or any of its Subsidiaries; and, except at such times as the Company is a reporting company under Section 13 or 15(d) of the Exchange Act or has complied with the requirements for the exemption from registration under the Exchange Act set forth in Rule 12g-3-2(b), such financial or other information as any holder of the Notes or prospective purchaser of the Notes may reasonably determine is required to permit such holder to comply with the requirements of Rule 144A under the Securities Act in connection with the resale by it of the Notes; (g) As soon as available, a copy of each other report submitted to the Company or any Restricted Subsidiary by independent accountants retained by the Company or any Restricted Subsidiary in connection with any interim or special audit made by them of the books of the Company or any Restricted Subsidiary; (h) As soon as available, a copy of each management letter delivered to the Company or any Restricted Subsidiary by its independent accountants and management's response to such letter; (i) Promptly following any change in the composition of the Company's Subsidiaries from that set forth in Annex I, as theretofore updated pursuant to this paragraph, an updated list setting forth the information specified in Annex I; (j) If at any time the Company provides consolidating financial statements to any Person other than an Affiliate, copies of consolidating financial statements; and (k) Such additional information as you or such other Institutional Holder of the Notes may reasonably request concerning the Company and its Subsidiaries. 6.7 Inspection of Properties and Records. The Company will allow, and will cause each Restricted Subsidiary to allow, any representative of you or any other Institutional Holder, so long as you or such other Institutional Holder holds any Note, to visit and inspect any of its properties, to examine its books of record and account and to discuss its affairs, finances and accounts with its officers and its public accountants (and by this provision the Company authorizes such accountants to discuss with you or such Institutional Holder its affairs, finances and accounts), all at such reasonable times and as often as you or such Institutional Holder may reasonably request and, if at the time thereof any Default or Event of Default has occurred and is continuing, at the Company's expense. 23 24 6.8 ERISA. (a) All assumptions and Methods used to determine the actuarial valuation of employee benefits, both vested and unvested, under any Plan of the Company or any Subsidiary, and each such Plan, whether now existing or adopted after the date hereof, will comply in all material respects with ERISA and other applicable laws. (b) The Company will not at any time permit any Plan established, maintained or contributed to by it or any Subsidiary or "affiliate" (as defined in Section 407(d)(7) of ERISA) to: (i) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Code or in Section 406 of ERISA; (ii) incur any "accumulated funding deficiency, as such term is defined in Section 302 of ERISA, whether or not waived; or (iii) be terminated under circumstances which are likely to result in the imposition of a lien on the property of the Company or any Subsidiary pursuant to Section 4068 of ERISA, if and to the extent such termination is within the control of the Company; if the event or condition described in classes (i), (ii) or (iii) above is likely to subject the Company or any Subsidiary or ERISA affiliate to a liability which, in the aggregate, is material in relation to the business, properties, profits, prospects, operations, or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. (c) The Company will furnish you or any other Institutional Holder a copy of the annual report of each Plan (Form 5500) required to be filed with the Internal Revenue Service no later than 30 days after the date such report has been filed with the Internal Revenue Service. (d) Promptly upon the occurrence thereof, the Company will give you and each other Institutional Holder notice of (i) a reportable event with respect to any Plan; (ii) the institution of any steps by the Company, any Subsidiary, any ERISA affiliate, the PBGC or any other Person to terminate any Plan; (iii) the institution of any steps by the Company, any Subsidiary, or any ERISA affiliate to withdraw from any Plan; (iv) a prohibited transaction in connection with any Plan; (v) any material increase in the contingent liability of the Company or any Subsidiary with respect to any post-retirement welfare liability; or (vi) the taking of any action by the Internal Revenue Service, the Department of Labor or the PBGC with respect to any of the foregoing which, in any of the events specified above, would result in any material liability of the Company or any of its Subsidiaries. 6.9 Compliance with Laws. (a) The Company will comply, and will cause each Restricted Subsidiary to comply, with all laws, rules and regulations, including Environmental Laws, relating to its or their respective businesses, other than laws, rules and regulations the failure to comply with which or the sanctions and penalties resulting therefrom, individually or in the aggregate, would not have a material adverse effect on the business, properties, prospects, profits, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken 24 25 as a whole, and would not result in the creation of a Lien which, if incurred in the ordinary course of business, would not be permitted by Section 7.5 on any of the property of the Company or any Restricted Subsidiary; provided, however, that the Company and its Restricted Subsidiaries shall not be required to comply with laws, rules and regulations the validity or applicability of which are being contested in good faith and by appropriate proceedings and as to which the Company has established adequate reserves on its books. (b) Promptly upon the occurrence thereof, the Company will give you and each other Institutional Holder notice of the institution of any proceedings against, or the receipt of notice of potential liability or responsibility of, the Company or any Restricted Subsidiary for violation, or the alleged violation, of any Environmental Law which violation could give rise to a material liability of the Company and its Subsidiaries taken as a whole. 6.10 Acquisition of Notes. Neither the Company nor any Subsidiary or Affiliate, directly or indirectly, will repurchase or offer to repurchase any Notes unless the offer is made to repurchase Notes pro rata from all holders at the same time and on the same terms. The Company will forthwith cancel any Notes in any manner or at any time acquired by the Company or any Subsidiary or Affiliate and such Notes shall not be deemed to be outstanding for any of the purposes of this Agreement or the Notes. 6.11 Private Placement Number. The Company consents to the filing of copies of this Agreement with Standard & Poor's Corporation to obtain a private placement number and with the National Association of Insurance Commissioners. SECTION 7. NEGATIVE COVENANTS The Company agrees that, for so long as any amount remains unpaid on any Note: 7.1 Tangible Net Worth. The Company will not permit its Consolidated Tangible Net Worth to be less than $120,000,000 at any time. 7.2 Consolidated Debt. The Company will not permit Consolidated Debt to exceed 65% of Consolidated Capitalization at any time through December 31, 1995 or to exceed 60% of Consolidated Capitalization at any time thereafter. 7.3 Subsidiary Indebtedness. The Company will not permit any Restricted Subsidiary to create, assume, incur or otherwise become liable for, directly or indirectly, any Indebtedness, other than Indebtedness of a Restricted Subsidiary to the Company or another Restricted Subsidiary, unless, after giving effect thereto and to the application of the proceeds thereof, the sum of (i) Indebtedness of Restricted Subsidiaries then to be outstanding, other than Indebtedness of a Restricted Subsidiary to the Company or another Restricted Subsidiary, and (ii) outstanding Indebtedness of the Company and its Restricted Subsidiaries secured by Liens permitted by Section 7.5(h), does not exceed 15% of Consolidated Tangible Net Worth. 7.4 Fixed Charge Ratio. The Company will not permit as of the end of any fiscal quarter the ratio of Consolidated Operating Cash Flow for any four of the six !immediately preceding fiscal quarters to Fixed Charges for such quarters to be less than (i) 1.50 to 1.00 for 25 26 quarters ending on or prior to December 31, 1995 and (ii) 1.75 to 1.00 for quarters ending after December 31, 1995. 7.5 Liens. The Company will not, and will not permit any Restricted Subsidiary to, permit to exist, create, assume or incur, directly or indirectly, any Lien on its properties or assets, whether now owned or hereafter acquired, except: (a) Liens existing on property or assets of the Company or any Restricted Subsidiary as of the date of this Agreement that are described in the attached Annex II; (b) Liens for taxes, assessments or governmental charges not then due and delinquent or the validity of which is being contested in good faith and as to which the Company has established adequate reserves on its books; (c) Construction, mechanics' materialmen's or warehousemen's Liens securing obligations not due or, if overdue, being contested in good faith by appropriate proceedings. (d) Liens arising in connection with court proceedings, provided the execution of such Liens is effectively stayed, such Liens are being contested in good faith and the Company has established adequate reserves therefor on its books; (e) Liens arising in the ordinary course of business and not incurred in connection with the borrowing of money (including encumbrances in the nature of zoning restrictions, easements, rights and restrictions of record on the use of real property and landlord's and lessor's liens) that in the aggregate do not materially interfere with the Conduct of the business of the Company and its Restricted Subsidiaries taken as a whole or materially impair the value of the property or assets subject thereto; (f) Liens securing Indebtedness of a Restricted Subsidiary to the Company; (g) Liens on fixed assets created substantially contemporaneously with the date of acquisition, to secure or provide for all or a portion of the purchase price or cost of construction of such fixed assets, provided that such Liens do not extend to other property of the Company or any Restricted Subsidiary and that the aggregate principal amount of Indebtedness secured by each such Lien does not exceed 100% of the cost of the property subject thereto and that incurrence of the Indebtedness secured by such Liens does not result in a breach of Section 7.2, 7.3 or 7.4; (h) Liens not otherwise permitted by paragraphs (a) through (g) above incurred subsequent to the Closing Date to secure Indebtedness, including Sale and Leaseback transactions, provided that the sum of (i) Indebtedness secured by Liens incurred pursuant to this paragraph (h) plus, (ii) without duplication, Indebtedness of Restricted Subsidiaries does not at any time exceed 15% of Consolidated Tangible Net Worth; and (i) Liens resulting from extensions, renewals, refinancings and refundings of Indebtedness secured by Liens permitted by paragraphs (a) through (g) above, provided there is no increase in the principal amount of Indebtedness secured thereby at the time of renewal, and 26 27 any new Lien attaches only to the same property or assets theretofore subject to such earlier Lien. 7.6 Restricted Payments. The Company will not, except as hereinafter provided: (a) declare or pay any dividends, either in cash or property, on any shares of its capital stock of any class (except dividends or other distributions payable solely in shares of capital stock of the Company); (b) directly or indirectly, or through any Subsidiary or Joint Venture, purchase, redeem, retire or otherwise acquire any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock; or (c) make any other payment or distribution, either directly or indirectly, or through any Subsidiary in respect of its capital stock; (all such non-permitted declarations, payments purchases, redemptions, retirements, acquisitions or distributions being hereinafter referred to as "Restricted Payments") unless, after giving effect thereto, (i) the aggregate amount of Restricted Payments made after December 31, 1992 to and including the date of making the Restricted Payment in question would not exceed the sum of: (x) $5,000,000; (y) 60% of cumulative Consolidated Net Income since December 31, 1992 (less 100% thereof in case of a deficit); and (z) the net proceeds of the issuance or sale of any of the Company's capital stock after December 31, 1992; and (ii) no Default or Event of Default would exist. 7.7 Merger or Consolidation. The Company will not, and will not permit any Restricted Subsidiary to, merge or consolidate with, or sell all or substantially all of its assets to, any Person, except that: (a) The Company may merge into or consolidate with, or sell all or substantially all of its assets to, any Person or permit any Person to merge into it, provided that immediately after giving effect thereto, (i) The Company is the successor corporation or, if the Company is not the successor corporation, the successor corporation is a solvent corporation organized under the laws of a state of the United States of America, the District of Columbia or Canada and expressly assumes in writing the Company's obligations under the Notes and this Agreement and (y) the holders of the Notes shall have received an opinion of legal counsel reasonably acceptable to them that this Agreement and the Notes are legal, valid and binding obligations of the successor corporation, enforceable against the successor corporation in accordance with their terms; (ii) There shall exist no Default or Event of Default; and (iii) The Company or such successor corporation could incur at least $1.00 of additional Indebtedness; and 27 28 (b) Any Restricted Subsidiary may (i) merge into the Company or another Restricted Subsidiary or (ii) sell, transfer or lease all or any part of its assets to the Company or to another Restricted Subsidiary or (iii) merge into any Person which, as a result of such merger, becomes a Restricted Subsidiary, or (iv) merge with any Person which does not become a Restricted Subsidiary as a result of such merger so long as such merger is otherwise permitted by this Section 7.7; provided in each such instance that immediately after giving effect thereto there shall exist no Default or Event of Default. 7.8 Sale of Assets; Sale of Receivables. (a) The Company will not, and will not permit any Restricted Subsidiary to, sell, lease, transfer or otherwise (including by way of merger) dispose of (collectively a "Disposition") any assets (including capital stock of Subsidiaries), in one or a series of transactions (other than in the ordinary course of business or as permitted by Section 7.7) to any Person, except the Company or a Restricted Subsidiary, if, after giving effect to such Disposition, the aggregate net book value of assets subject to Dispositions (i) during the fiscal year in which such Disposition occurs would exceed 15% of Consolidated Tangible Net Worth as of the end of the immediately preceding fiscal quarter or (ii) subsequent to the Closing Date would exceed 30% of Consolidated Tangible Net Worth as of the end of the immediately preceding fiscal quarter; provided, that such Disposition shall not be subject to or included in the foregoing limitation and computation if within six months of such Disposition the net proceeds thereof are either (x) reinvested in productive fixed assets of the Company or a Restricted Subsidiary, or (y) applied to repay Indebtedness, including prepayment of the Notes at a price equal to 100% of the principal amount to be prepaid plus interest accrued to the date of prepayment, of the Company or its Restricted Subsidiaries on a pro rata basis. (b) Notwithstanding the foregoing paragraph (a), the Company and its Restricted Subsidiaries may (ii) sell, with or without recourse., not in excess of $35,000,000 face amount of accounts receivable through December 31, 1995 and not in excess of $50,000,000 face amount of accounts receivable thereafter, provided that (i) on a pro forma basis after giving effect to any such sale, the ratio of Consolidated Current Assets to Consolidated Current Liabilities would not be less than 1.25 to 1.00, and (ii) the discount on receivables sold with recourse is not more than 20% of the face amount or fair market value of such receivables, whichever is greater, and the net proceeds from the sale of receivables without recourse is not less than 80% of the face amount or fair market value of such receivables, whichever is greater. 7.9 Disposition of Stock of Restricted Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary to, issue, sell or transfer the capital stock of a Restricted Subsidiary unless (i) all shares of capital stock of such Restricted Subsidiary and all Indebtedness of such Restricted Subsidiary owned by the Company and by every other Restricted Subsidiary shall simultaneously be sold, transferred or otherwise disposed of, (ii) such Restricted Subsidiary does not thereafter own any shares of capital stock or Indebtedness of the Company or another Restricted Subsidiary and, in each such case, such sale would not be prohibited under Section 7.7 and (iii) the Board of Directors of the Company shall have made a good faith determination that such sale or transfer is in the best interests of the Company. 7.10 Permitted Investments. The Company will not, and will not permit any Restricted Subsidiary to, make any Investment other than a Permitted Investment. 28 29 7.11 Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, enter into any transaction (including the furnishing of goods or services) with an Affiliate except in the ordinary course of business on terms and conditions no less favorable to the Company or such Subsidiary than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. 7.12 Consolidated Tax Returns. The Company will not file, or consent to the filing of, any consolidated Federal income tax return with any Person other than a Restricted Subsidiary, except to the extent that the Company is required under the Code to do otherwise. 7.13 Nature of Business. The Company will not, and will not permit any Restricted Subsidiary to, enrage in any business if, as a result thereof, the business then to be conducted by the Company and its Restricted Subsidiaries, taken as a whole, would be materially different than the automotive parts business described in the Private Placement Memorandum dated October 1992. 7.14 Guaranties. The Company will not, and will not permit any Restricted Subsidiary to, become or be liable in respect to any guaranty of Indebtedness except Guaranties which are limited in amount to a stated maximum principal amount dollar exposure. SECTION 8. EVENTS OF DEFAULT AND REMEDIES THEREFOR 8.1 Nature of Events. An "Event of Default" shall exist if any one or more of the following occurs: (a) Any default in the payment of interest when due on any of the Notes and continuance of such default for a period of 5 days; (b) Any default in the payment of the principal of any of the Notes or the Make-Whole Amount thereon, if any, at maturity, upon acceleration of maturity or at any date fixed for prepayment; (c) Any default (i) in the payment of the principal of, or interest or premium on, any other Indebtedness of the Company and its Restricted Subsidiaries as and when due and payable (whether by lapse of time, declaration, call for redemption or otherwise) and the continuation of such default beyond the period of grace, if any, allowed with respect thereto, or (ii) (other than a payment default) under any mortgages, agreements or other instruments of the Company and its Subsidiaries under or pursuant to which Indebtedness is issued, resulting in the acceleration of such Indebtedness; (d) Any default in the observance of any covenant or agreement contained in Sections 7.6, 7.7, 7.8 or 8.7; (e) Any default in the observance or performance of any other covenant or provision of this Agreement which is not remedied within 30 days after the Company obtains knowledge thereof; 29 30 (f) Any representation or warranty made by the Company in this Agreement, or made by the Company in any written statement or certificate furnished by the Company in connection with the issuance and sale of the Notes or furnished by the Company pursuant to this Agreement, proves incorrect in any material respect as of the date of the issuance or making thereof; (g) Any judgment, writ or warrant of attachment or any similar process in an aggregate amount in excess of $500,000 shall be entered or filed against the Company or any Restricted Subsidiary or against any property or assets of either and remain unpaid, unvacated, unbonded or unstayed (through appeal or otherwise) for a period of 60 days after the Company or any Restricted Subsidiary receives notice thereof; or (h) The Company or any Restricted Subsidiary shall (i) generally not pay its debts as they become due or admit in writing its inability to pay its debts generally as they become due; (ii) file a petition in bankruptcy or for reorganization or for the adoption of an arrangement under the Federal Bankruptcy Code, or any similar applicable bankruptcy or insolvency law, as now or in the future amended (herein collectively called "Bankruptcy Laws"); file an answer or other pleading admitting or failing to deny the material allegations of such a petition; fail to file, within the time allowed for such purpose, an answer or other pleading denying or otherwise controverting the material allegations of such a petition; or file an answer or other pleading seeking, consenting to or acquiescing in relief provided for under the Bankruptcy Laws; (iii) make an assignment of all or a substantial part of its property for the benefit of its creditors; (iv) seek or consent to or acquiesce in the appointment of a receiver, liquidator, custodian or trustee of it or for all or a substantial part of its property; (v) be finally adjudicated a bankrupt or insolvent; (vi) be subject to the entry of a court order, which shall not be vacated, set aside or stayed within 90 days from the date of entry, (A) appointing a receiver, liquidator, custodian or trustee of it or for all or a substantial part of its property, or (B) for relief pursuant to an involuntary case brought under or effecting an arrangement in, bankruptcy or (C) for a reorganization pursuant to the Bankruptcy Laws or (D) for any other judicial modification or alteration of the rights of creditors; or (vii) be subject to the assumption of custody or sequestration by a court of competent jurisdiction of all or a substantial part of its property, which custody or sequestration shall not be suspended or terminated within 60 days from its inception. 30 31 8.2 Remedies on Default. When any Event of Default described in paragraphs (a) through (g) of Section 8.1 has occurred and is continuing, the holders of more than 50% in aggregate principal amount of the Notes then outstanding may, by notice to the Company, declare the entire principal, together with the Make-Whole Amount (to the extent permitted by law) and all interest accrued on all Notes to be, and such Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are expressly waived. Notwithstanding the foregoing, (i) when any Event of Default described in paragraphs (a) or (b) of Section 8.1 has occurred and is continuing, any holder may by notice to the Company declare the entire principal, together with the Make-Whole Amount (to the extent permitted by law) and all interest accrued on the Notes then held by such holder to be, and such Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are expressly waived and (ii) when any Event of Default described in paragraph (h) of Section 8.1 has occurred, then the entire principal, together with the Make-Whole Amount (to the extent permitted by law) and all interest accrued on all outstanding Notes shall immediately become due and payable without presentment, demand or notice of any kind. Upon the Notes or any of them becoming due and payable as aforesaid, the Company will forthwith pay to the holders of such Notes the entire principal of and interest accrued on such Notes, plus the Make-Whole Amount which shall be calculated on the Determination Date. 8.3 Annulment of Acceleration of Notes. The provisions of Section 8.2 are subject to the condition that if the principal of, the Make-Whole Amount and accrued interest on the Notes have been declared immediately due and payable by reason of the occurrence of any Event of Default described in paragraphs (a) through (g)., inclusive, of Section 8.1, the holder or holders of 66-2/3% in aggregate principal amount of the Notes then outstanding may, by written instrument filed with the Company, rescind and annul such declaration and the consequences thereof, provided that (i) at the time such declaration is annulled and rescinded no judgment or decree has been entered for the payment of any monies due pursuant to the Notes or this Agreement, (ii) all arrears of interest upon all the Notes and all other sums payable under the Notes and under this Agreement (except any principal, Make-Whole Amount or interest on the Notes which has become due and payable solely by reason of such declaration under Section 8.2) shall have been duly paid and (iii) each and every Default or Event of Default shall have been cured or waived; and provided further, that no such rescission and annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereto. 8.4 Other Remedies. If any Event of Default shall be continuing, any holder of Notes may enforce its rights by suit in equity, by action at law, or by any other appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or in the Notes or in aid of the exercise of any power granted in this Agreement, and may enforce the payment of any Note held by such holder and any of its other legal or equitable rights. 8.5 Conduct No Waiver; Collection Expenses. No course of dealing on the part of any holder of Notes, nor any delay or failure on the part of any holder of Notes to exercise any of its rights, shall operate as a waiver of such rights or otherwise prejudice such holder's rights, powers and remedies. If the Company fails to pay, when due, the principal of, the Make-Whole Amount, or the interest on, any Note, or fails to comply with any other provision of this 31 32 Agreement, the Company will pay to each holder, to the extent permitted by law, on demand, such further amounts as shall be sufficient to cover the cost and expenses, including but not limited to reasonable attorneys' fees, incurred by such holders of the Notes in collecting any sums due on the Notes or in otherwise enforcing any of their rights. 8.6 Remedies Cumulative. No right or :remedy conferred upon or reserved to any holder of Notes under this Agreement is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy given under this Agreement or now or hereafter existing under any applicable law. Every right and remedy given by this Agreement or by applicable law to any holder of Notes may be exercised from time to time and as often as may be deemed expedient by such holder, as the case may be. 8.7 Notice of Default. With respect to Defaults, Events of Default or claimed defaults, the Company will give the following notices: (a) The Company promptly, but in any event within 5 days after an officer of the Company obtains knowledge, will furnish to each holder of a Note written notice of the occurrence of a Default or an Event of Default. Such notice shall specify the nature of such default, the period of existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto. (b) If the holder of any Note or of any other evidence of Indebtedness of the Company or any Subsidiary gives any notice or takes any other action with respect to a claimed default, the Company will forthwith give written notice thereof to each holder of the then outstanding Notes, describing the notice or action and the nature of the claimed default. SECTION 9. AMENDMENTS, WAIVERS AND CONSENTS 9.1 Matters Subject to Modification. Any term, covenant, agreement or condition of this Agreement may, with the consent of the Company, be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), if the Company shall have obtained the consent in writing of the holder or holders of at least 66-2/3% in aggregate principal amount of outstanding Notes; provided, however, that, without the written consent of the holder or holders of all of the Notes then outstanding, no such waiver, modification, alteration or amendment shall be effective which will (i) change the time of payment (including any required prepayment or optional prepayment) of the principal of or the interest on any Note, (ii) reduce the principal amount thereof or the Make-Whole Amount, if any, or change the rate of interest thereon, (iii) change any provision of any instrument affecting the preferences between holders of the Notes or between holders of the Notes and other creditors of the Company, or (iv) change any of the provisions of Section 8.2, Section 8.3 or this Section 9. For the purpose of determining whether holders of the requisite principal amount of Notes have made or concurred in any waiver, consent, approval, notice or other communication 32 33 under this Agreement, Notes held in the name of, or owned beneficially by, the Company, any Subsidiary or any Affiliate thereof, shall not be deemed outstanding. 9.2 Solicitation of Holders of Notes. The Company will not solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement or the Notes unless each holder of the Notes (irrespective of the amount of Notes then owned by it) shall concurrently be informed thereof by the Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Section 9 shall be delivered by the Company to each holder of outstanding Notes forthwith following the date on which the same shall have been executed and delivered by the holder or holders of the requisite percentage of outstanding Notes. The Company will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interests, fee or otherwise, to any holder of the Notes as consideration for or as an inducement to the entering into by any holder of the Notes of any waiver or amendment of any of the terms and provisions of this Agreement unless such remuneration is concurrently paid, on the same terms, ratably to each holder of the then outstanding Notes. 9.3 Binding Effect. Any such amendment or waiver shall apply equally to all the holders of the Notes and shall be binding upon them, upon each future holder of any Note and upon the Company whether or not such Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation not expressly amended or waived or impair any right related thereto. SECTION 10. FORM OF NOTES, REGISTRATION, TRANSFER, EXCHANGE AND REPLACEMENT 10.1 Form of Notes. Each Note initially delivered under this Agreement will be in the form of one fully registered Note in the form attached as Exhibit A. The Notes are issuable only in fully registered form and in denominations of at least $100,000 (or the remaining outstanding balance thereof, if less than $100,000). 10.2 Note Register. The Company shall cause to be kept at its principal office a register (the "Note Register") for the registration and transfer of the Notes. The names and addresses of the holders of Notes, the transfer thereof and the names and addresses of the transferees of the Notes shall be registered in the Note Register. The Company may deem and treat the person in whose name a Note is so registered as the holder and owner thereof for all purposes and shall not be affected by any notice to the contrary, until due presentment of such Note for registration of transfer as provided in this Section 10. 10.3 Issuance of New Notes upon Exchange or Transfer. Upon surrender for exchange or registration of transfer of any Note at the office of the Company designated for notices in accordance with Section 11.2, the Company shall execute and deliver, at its expense, one or more new Notes of any authorized denominations requested by the holder of the surrendered Note, each dated the date to which interest has been paid on the Notes so surrendered (or, if no interest has been paid, the date of such surrendered Note), but in the same aggregate unpaid 33 34 principal amount as such surrendered Note, and registered in the name of such person or persons as shall be designated in writing by such holder. Every Note surrendered for registration of transfer shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or by his attorney duly authorized in writing. The Company may condition its issuance of any new Note in connection with a transfer by any Person on compliance with Section 3.2, by Institutional Holders on compliance with Section 2.5 and on the payment to the Company of a sum sufficient to cover any stamp tax or other governmental charge imposed in respect of such transfer. 10.4 Replacement of Notes. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of any Note, and in the case of any such loss, theft or destruction upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company or in the event of such mutilation upon surrender and cancellation of the Note, the Company, without charge to the holder thereof, will make and deliver a new Note, of like tenor in lieu of such lost, stolen, destroyed or mutilated Note. If any such lost, stolen or destroyed Note is owned by you or any other Institutional Holder, then the affidavit of an authorized officer of such owner setting forth the fact of such loss, theft or destruction and of its ownership of the Note at the time of such loss, theft or destruction shall be accepted as satisfactory evidence thereof, and no further indemnity shall be required as a condition to the execution and delivery of a new Note, other than a written agreement oil! such owner (in form reasonably satisfactory to the Company) to indemnify the Company. SECTION 11. MISCELLANEOUS 11.1 Expenses. Whether or not the purchase of Notes herein contemplated shall be consummated, the Company agrees to pay directly all reasonable expenses in connection with the preparation, execution and delivery of this Agreement and the transactions contemplated by this Agreement, including, but not limited to, out-of-pocket expenses, filing fees of Standard Poor's Corporation in connection with obtaining a private placement number, filing fees of the National Association of Insurance Commissioners, charges and disbursements of special counsel, photocopying and printing costs and charges for shipping the Notes, adequately insured, to you at your home office or at such other address as you may designate, and all similar expenses (including the fees and expenses of counsel) relating to any amendments , waivers or consents in connection with this Agreement or the Notes, including, but not limited to, any such amendments, waivers or consents resulting from any work-out, renegotiation or restructuring relating to the performance by the Company of its obligations under this Agreement and the Notes. The Company also agrees that it will pay and save you harmless against any and all liability with respect to stamp and other documentary taxes, if any, which may be payable, or which may be determined to be payable in connection with the execution and delivery of this Agreement or the Notes (but not in connection with a transfer of any Notes), whether or not any Notes are then outstanding. The obligations of the Company under this Section 11.1 shall survive the retirement of the Notes. 11.2 Notices. Except as otherwise expressly provided herein, all communications provided for in this Agreement shall be in writing and delivered or sent by registered or certified mail, return receipt requested, or by overnight courier (i) if to you, to the address set forth below your name in Schedule I, or to such other address as you may in writing designate, (ii) if to any 34 35 other holder of the Notes, to such address as the holder may designate in writing to the Company, and (iii) if to the Company, to Standard Motor Products, Inc., 37-18 Northern Boulevard, Long Island City, New York 11101 Attention: Treasurer, or to such other address as the Company may in writing designate. 11.3 Reproduction of Documents. This Agreement and all documents relating hereto, including, without limitation, (i) consents, waivers and modifications which may hereafter be executed, (ii) documents received by you at the closing of the purchase of the Notes (except the Notes themselves), and (iii) financial statements, certificates and other information previously or hereafter furnished to you may be reproduced by you by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process, and you may destroy any original document so reproduced. The Company agrees and stipulates that any such reproduction which is legible shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence; provided that nothing herein contained shall preclude the Company from objecting to the admission of any reproduction on the basis that such reproduction is not accurate, has been altered or is otherwise incomplete. 11.4 Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 11.5 Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 11.6 Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11.7 Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart or reproduction thereof permitted by Section 11.3. 11.8 Reliance on and Survival of Provisions. All covenants, representations and warranties made by the Company herein and in any certificates delivered pursuant to this Agreement, whether or not in connection with a closing, (i) shall be deemed to have been relied upon by you, notwithstanding any investigation heretofore or hereafter made by you or on your behalf and (ii) shall survive the delivery of this Agreement and the Notes. 11.9 Integration and Severability. This Agreement embodies the entire agreement and understanding between you and the Company, and supersedes all prior agreements and understandings relating to the subject matter hereof. In case any one or more of the provisions contained in this Agreement or in any Note or application thereof, shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained in this Agreement and in any Note, and any other application thereof, shall not in any way be affected or impaired thereby. 35 36 IN WITNESS WHEREOF, the Company and the Purchasers have caused this Agreement to be executed and delivered by their respective officer or officers thereunto duly authorized. STANDARD MOTOR PRODUCTS, INC. By: _______________________________ Title: President KEMPER INVESTORS LIFE INSURANCE COMPANY By: _______________________________ Title: Authorized Signatory By: _______________________________ Title: Authorized Signatory FEDERAL KEMPER LIFE ASSURANCE COMPANY By: _______________________________ Title: Authorized Signatory By: _______________________________ Title: Authorized Signatory LUMBERMENS MUTUAL CASUALTY COMPANY By: _______________________________ Title: Authorized Signatory By: _______________________________ Title: Authorized Signatory 37 FIDELITY LIFE ASSOCIATION By: _______________________________ Title: Authorized Signatory By: _______________________________ Title: Authorized Signatory AMERICAN MOTORISTS INSURANCE COMPANY By: _______________________________ Title: Authorized Signatory By: _______________________________ Title: Authorized Signatory AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY By: _______________________________ Title: Authorized Signatory By: _______________________________ Title: Authorized Signatory ALLSTATE LIFE ]INSURANCE COMPANY By: _______________________________ Title: Authorized Signature By: _______________________________ Title: Authorized Signatory TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA By: _______________________________ Title: 38 PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY By: _______________________________ Title: 39 ================================================================================ STANDARD MOTOR PRODUCTS, INC. NOTE AGREEMENT Dated as of November 15, 1992 $65,000,000 Principal Amount 7.85% Senior Notes Due December 15, 2002 ================================================================================ 40 TABLE OF CONTENTS
PAGE Section 1. DESCRIPTION OF NOTES AND COMMITMENT......................... 1 1.1 Description of Notes........................................ 1 1.2 Commitment; Closing Date.................................... 1 Section 2. PREPAYMENT OF NOTES......................................... 2 2.1 Required Prepayments........................................ 2 2.2 Optional Prepayments........................................ 2 2.3 Notice of Prepayments....................................... 3 2.4 Surrender of Notes on Prepayment or Exchange................ 3 2.5 Direct Payment and Deemed Date of Receipt................... 3 2.6 Allocation of Payments...................................... 4 2.7 Payments Due on Saturdays, Sundays and Holidays............. 4 Section 3. REPRESENTATIONS............................................. 4 3.1 Representations of the Company.............................. 4 3.2 Representations of the Purchasers.......................... 10 Section 4. CLOSING CONDITIONS......................................... 11 4.1 Representations and Warranties............................. 11 4.2 Legal Opinions............................................. 11 4.3 Events of Default.......................................... 11 4.4 Payment of Fees and Expenses............................... 11 4.5 Sale of Notes to Other Purchasers; Sale of 6.01% Notes..... 11 4.6 Legality of Investment..................................... 11 4.7 Private Placement Number................................... 11 4.8 Consent of NBD. N.A........................................ 11 4.9 Proceedings and Documents.................................. 12 Section 5. INTERPRETATION OF AGREEMENT................................ 12 5.1 Certain Terms Defined...................................... 12 5.2 Accounting Principles...................................... 19 5.3 Valuation Principles....................................... 19 5.4 Direct or Indirect Actions................................. 20
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PAGE Section 6 AFFIRMATIVE COVENANTS...................................... 20 6.1 Corporate Existence........................................ 20 6.2 Insurance.................................................. 20 6.3 Taxes, Claims for Labor and Materials...................... 20 6.4 Maintenance of Properties.................................. 21 6.5 Maintenance of Records..................................... 21 6.6 Financial Information and Reports.......................... 21 6.7 Inspection of Properties and Records....................... 23 6.8 ERISA...................................................... 24 6.9 Compliance with Laws....................................... 24 6.10 Acquisition of Notes....................................... 25 6.11 Private Placement Number................................... 25 Section 7 NEGATIVE COVENANTS......................................... 25 7.1 Tangible Net Worth......................................... 25 7.2 Consolidated Debt.......................................... 25 7.3 Subsidiary Indebtedness.................................... 25 7.4 Fixed Charge Ratio......................................... 25 7.5 Liens...................................................... 26 7.6 Restricted Payments........................................ 27 7.7 Merger or Consolidation.................................... 27 7.8 Sale of Assets; Sale of Receivables........................ 28 7.9 Disposition of Stock of Restricted Subsidiaries............ 28 7.10 Permitted Investments...................................... 28 7.11 Transactions with Affiliates............................... 29 7.12 Consolidated Tax Returns................................... 29 7.13 Nature of Business......................................... 29 7.14 Guaranties................................................. 29 Section 8 EVENTS OF DEFAULT AND REMEDIES THEREFOR.................... 29 8.1 Nature of Events........................................... 29 8.2 Remedies on Default........................................ 31
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PAGE 8.3 Annulment of Acceleration of Notes......................... 31 8.4 Other Remedies............................................. 31 8.5 Conduct No Waiver; Collection Expenses..................... 31 8.6 Remedies Cumulative........................................ 32 8.7 Notice of Default.......................................... 32 Section 9 AMENDMENTS, WAIVERS AND CONSENTS........................... 32 9.1 Matters Subject to Modification............................ 32 9.2 Solicitation of Holders of Notes........................... 33 9.3 Binding Effect............................................. 33 Section 10 FORM OF NOTES, REGISTRATION, TRANSFER, EXCHANGE AND REPLACEMENT................................................ 33 10.1 Form of Notes.............................................. 33 10.2 Note Register.............................................. 33 10.3 Issuance of New Notes upon Exchange or Transfer............ 33 10.4 Replacement of Notes....................................... 34 Section 11 MISCELLANEOUS.............................................. 34 11.1 Expenses................................................... 34 11.2 Notices.................................................... 34 11.3 Reproduction of Documents.................................. 35 11.4 Successors and Assigns..................................... 35 11.5 Law Governing.............................................. 35 11.6 Headings................................................... 35 11.7 Counterparts............................................... 35 11.8 Reliance on and Survival of Provisions..................... 35 11.9 Integration and Severability............................... 35 ANNEXES I. Subsidiaries II. Liens EXHIBITS A. Form of Senior Note
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PAGE B. Form of Legal Opinion of Purchasers' Counsel C. Form of Legal Opinion of Company Counsel
-iv- 44 An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/ Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. EX-23.1 4 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 23.1 The Board of Directors and Stockholders Standard Motor Products, Inc.: We consent to the use of our reports included herein and incorporated herein by reference and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. KPMG LLP New York, New York May 21, 1999 -----END PRIVACY-ENHANCED MESSAGE-----