Stanadyne 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number	Exact name of registrant as specified in its charter, Principal Executive Office Address and Telephone Number	State of Incorporation	I.R.S. Employer Identification No.
333-124154	Stanadyne Holdings, Inc. 92 Deerfield Road Windsor, CT 06095 (860) 525-0821	Delaware	20-1398860
333-45823	Stanadyne Corporation 92 Deerfield Road Windsor, CT 06095 (860) 525-0821	Delaware	22-2940378

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Stanadyne Holdings, Inc.	Yes  x	No  ¨
Stanadyne Corporation	Yes  x	No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

Stanadyne Holdings, Inc.	Large Accelerated Filer  ¨	Accelerated Filer  ¨	Non-Accelerated Filer  x	Smaller Reporting Company  ¨
Stanadyne Corporation	Large Accelerated Filer  ¨	Accelerated Filer  ¨	Non-Accelerated Filer  x	Smaller Reporting Company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Stanadyne Holdings, Inc.	Yes  ¨	No  x
Stanadyne Corporation	Yes  ¨	No  x

As of March 31, 2008, there was no established public trading market for the shares of either of the registrant’s common stock and no shares of common stock were held by non-affiliates of either registrant.

The number of shares of the registrant’s common stock (only one class for each registrant) outstanding as of March 1, 2008:

Stanadyne Holdings, Inc.	106,065,081 shares
Stanadyne Corporation	1,000 shares (100% owned by Stanadyne Automotive Holding Corp., a direct and wholly-owned subsidiary of Stanadyne Holdings, Inc.)

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

Part I Financial Information
	Item 1 Financial Statements
Stanadyne Holdings, Inc.
Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 (unaudited)		4
Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)		5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)		6
Stanadyne Corporation
Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 (unaudited)		7
Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)		8
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)		9
Notes to Condensed Consolidated Financial Statements		10-21
	Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	22-27
	Item 3 Quantitative and Qualitative Disclosures About Market Risk	28
	Item 4T Controls and Procedures	29
Part II Other Information
	Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	30
	Item  6 Exhibits	30
Signatures		31

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

Explanatory Note

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Stanadyne Holdings, Inc. and Stanadyne Corporation. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Stanadyne Holdings, Inc., and any reference to “Stanadyne” refers to Stanadyne Corporation, the indirect wholly-owned subsidiary of Holdings. The “Company,” “we,” “us” and “our” refer to Stanadyne Holdings, Inc. together with its direct and indirect subsidiaries, including Stanadyne Corporation. Each Registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such Registrant. Each Registrant hereto is not filing any information that does not relate to such Registrant, and therefore makes no representation as to any such information.

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PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

	March 31, 2008			December 31, 2007
ASSETS
Current Assets:
Cash and cash equivalents	$	26,021		$	37,950
Accounts receivable, net of allowance for uncollectible accounts of $203 as of March 31, 2008 and $200 at December 31, 2007		42,457			38,813
Inventories, net		33,365			29,228
Prepaid expenses and other assets		1,478			1,772
Deferred income taxes		2,900			2,818
Total current assets		106,221			110,581
Property, plant and equipment, net		92,922			93,037
Goodwill		144,575			144,575
Intangible and other assets, net		86,826			88,306
Total assets	$	430,544		$	436,499
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	22,081		$	23,967
Accrued liabilities		26,524			35,778
Current maturities of long-term debt		12,786			4,298
Current portion of capital lease obligations		220			247
Total current liabilities		61,611			64,290
Long-term debt, excluding current maturities		260,386			264,136
Deferred income taxes		27,320			27,749
Capital lease obligations, excluding current portion		225			256
Other non current liabilities		25,716			26,311
Total liabilities		375,258			382,742
Minority interest in consolidated subsidiary		100			76
Commitments and Contingencies
Stockholders’ equity:
Common stock		1,064			1,064
Additional paid-in capital		54,118			54,085
Other accumulated comprehensive income		6,646			5,994
Accumulated deficit		(6,357	)		(7,233	)
Treasury stock, at cost		(285	)		(229	)
Total stockholders’ equity		55,186			53,681
Total liabilities and stockholders’ equity	$	430,544		$	436,499

See notes to condensed consolidated financial statements

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
Net sales	$	70,429		$	74,487
Cost of goods sold		50,594			56,548
Gross profit		19,835			17,939
Selling, general and administrative expenses		9,468			9,219
Amortization of intangible assets		816			1,024
Management fees		188			188
Pension plan curtailment gain		—			(10,015	)
Operating income		9,363			17,523
Interest expense		(7,204	)		(6,977	)
Income from operations before income taxes and minority interest		2,159			10,546
Income tax expense		1,259			4,125
Income from operations before minority interest		900			6,421
Minority interest in income of consolidated subsidiary		(24	)		(77	)
Net income	$	876		$	6,344

See notes to condensed consolidated financial statements

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
Cash flows from operating activities:
Net income	$	876		$	6,344
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		5,248			5,483
Amortization of debt discount and deferred financing fees		3,013			2,744
Stock-based compensation expense		26			88
Deferred income tax (benefit) expense		(477	)		2,265
Income applicable to minority interest		24			77
Loss on disposal of property, plant and equipment		—			1
Pension plan curtailment gain		—			(10,015	)
Changes in operating assets and liabilities		(19,774	)		(11,338	)
Net cash used in operating activities		(11,064	)		(4,351	)
Cash flows from investing activities:
Net proceeds from sale of discontinued operations		—			104
Increase in restricted cash		—			(116	)
Capital expenditures		(2,820	)		(932	)
Proceeds from disposal of property, plant and equipment		—			2
Net cash used in investing activities		(2,820	)		(942	)
Cash flows from financing activities:
Payments on foreign term loan		—			(62	)
Proceeds (payments) on foreign overdraft facilities		2,105			(876	)
Payments of capital lease obligations		(73	)		(72	)
Proceeds from exercise of stock options		7			—
Purchase of treasury stock		(56	)		—
Net cash provided by (used in) financing activities		1,983			(1,010	)
Cash and cash equivalents:
Net decrease in cash and cash equivalents		(11,901	)		(6,303	)
Effect of exchange rate changes on cash		(28	)		47
Cash and cash equivalents at beginning of period		37,950			25,394
Cash and cash equivalents at end of period	$	26,021		$	19,138

See notes to condensed consolidated financial statements

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STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

	March 31, 2008		December 31, 2007
ASSETS
Current Assets:
Cash and cash equivalents	$	25,836	$	37,711
Accounts receivable, net of allowance for uncollectible accounts of $203 as of March 31, 2008 and $200 December 31, 2007		42,457		38,813
Inventories, net		33,365		29,228
Prepaid expenses and other assets		1,469		1,772
Deferred income taxes		2,900		2,818
Total current assets		106,027		110,342
Property, plant and equipment, net		92,922		93,037
Goodwill		144,575		144,575
Intangible and other assets, net		85,231		86,653
Total assets	$	428,755	$	434,607
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	22,081	$	23,967
Accrued liabilities		26,523		35,769
Current maturities of long-term debt		12,786		4,298
Current portion of capital lease obligations		220		247
Total current liabilities		61,610		64,281
Long-term debt, excluding current maturities		175,137		181,336
Deferred income taxes		34,999		34,758
Capital lease obligations, excluding current portion		225		256
Other noncurrent liabilities		25,716		26,311
Due to Stanadyne Holdings, Inc.		995		1,251
Total liabilities		298,682		308,193
Minority interest in consolidated subsidiary		100		76
Commitments and Contingencies
Stockholder’s equity:
Common stock		—		—
Additional paid-in capital		105,000		105,000
Other accumulated comprehensive income		6,646		5,994
Retained earnings		18,327		15,344
Total stockholder’s equity		129,973		126,338
Total liabilities and stockholder’s equity	$	428,755	$	434,607

See notes to condensed consolidated financial statements

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STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
Net sales	$	70,429		$	74,487
Cost of goods sold		50,594			56,548
Gross profit		19,835			17,939
Selling, general and administrative expenses		9,456			9,200
Amortization of intangible assets		816			1,024
Management fees		188			188
Pension plan curtailment gain		—			(10,015	)
Operating income		9,375			17,542
Interest expense		(4,698	)		(4,743	)
Income from operations before income taxes and minority interest		4,677			12,799
Income tax expense		1,670			4,728
Income from operations before minority interest		3,007			8,071
Minority interest in income of consolidated subsidiary		(24	)		(77	)
Net income	$	2,983		$	7,994

See notes to condensed consolidated financial statements

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STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
Cash flows from operating activities:
Net income	$	2,983		$	7,994
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		5,248			5,483
Amortization of deferred financing fees		506			506
Stock-based compensation expense		26			88
Deferred income tax expense		192			2,966
Income applicable to minority interest		24			77
Loss on disposal of property, plant and equipment		—			1
Pension plan curtailment gain		—			(10,015	)
Changes in operating assets and liabilities		(20,038	)		(11,455	)
Net cash used in operating activities		(11,059	)		(4,355	)
Cash flows from investing activities:
Net proceeds from sale of discontinued operations		—			104
Increase in restricted cash		—			(116	)
Capital expenditures		(2,820	)		(932	)
Proceeds from disposal of property, plant and equipment		—			2
Net cash used in investing activities		(2,820	)		(942	)
Cash flows from financing activities:
Payments on foreign term loan		—			(62	)
Proceeds (payments) on foreign overdraft facilities		2,105			(876	)
Payments of capital lease obligations		(73	)		(72	)
Net cash provided by (used in) financing activities		2,032			(1,010	)
Cash and cash equivalents:
Net decrease in cash and cash equivalents		(11,847	)		(6,307	)
Effect of exchange rate changes on cash		(28	)		48
Cash and cash equivalents at beginning of period		37,711			25,118
Cash and cash equivalents at end of period	$	25,836		$	18,859

See notes to condensed consolidated financial statements

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(1) Business, Organization and Significant Accounting Policies

Description of Business. Stanadyne Holdings, Inc. (“Holdings”) owns all of the outstanding common stock of Stanadyne Automotive Holdings Corp. (“SAHC”). SAHC owns all of the outstanding common stock of Stanadyne Corporation (together with its consolidated subsidiaries, “Stanadyne”). A majority of the outstanding common stock of Holdings is owned by funds managed by Kohlberg Management IV, L.L.C. Collectively, Holdings, SAHC and Stanadyne hereinafter are referred to as the “Company.” Holdings and Stanadyne are separate reporting companies. Holdings is a holding company with no operations beyond those of its indirectly, wholly-owned subsidiary, Stanadyne. Stanadyne is a leading designer and manufacturer of highly engineered, precision manufactured engine components, including fuel injection equipment for diesel engines. Stanadyne sells engine components to original equipment manufacturers in a variety of applications, including agricultural and construction vehicles and equipment, industrial products, automobiles, light duty trucks and marine equipment. The aftermarket is a core element of Stanadyne’s operations.

Basis of Presentation. The financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals but subject to normal year end adjustments) necessary for a fair presentation for the periods presented. The Company’s quarterly results are subject to fluctuation; consequently, the results of operations and cash flows for any quarter are not necessarily indicative of the results and cash flows for any future period. These notes to condensed consolidated financial statements apply to Holdings and Stanadyne unless otherwise noted.

Principles of Consolidation. The condensed consolidated financial statements of Holdings include the accounts of Holdings and all of Holdings’ direct and indirect wholly-owned subsidiaries: SAHC, Stanadyne, Stanadyne, SpA (“SpA”), and Stanadyne Changshu Corporation (“SCC”). The condensed consolidated financial statements of Stanadyne include the accounts of Stanadyne and of Stanadyne’s wholly-owned subsidiaries: SpA and SCC. A joint venture, Stanadyne Amalgamations Private Limited (“SAPL”), is fully consolidated with Holdings and Stanadyne based on the Company’s 51% controlling share, while the remaining 49% is recorded as a minority interest. Intercompany balances have been eliminated in consolidation.

Stock Options. In 2004, Holdings established the 2004 Equity Incentive Plan to provide for the award of non-qualified stock options to attract and retain people who are in a position to make a significant contribution to the success of the Company and its subsidiaries. Awards granted under the 2004 Equity Incentive Plan vest over a period of three to four years contingent upon achievement of certain financial performance targets as defined by the 2004 Equity Incentive Plan and expire 10 years after the date of grant.

The Company uses a Black-Scholes option-pricing model to calculate the fair value of options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. The following table summarizes information about our stock option plan for the three month period ended March 31, 2008:

	Outstanding				Exercisable
	Stock Options		Weighted Average Exercise Price*		Stock Options		Weighted Average Exercise Price*
January 1, 2008	13,690,000		$	0.50	3,146,250		$	0.47
Exercised	(15,000	)		0.47	(15,000	)		0.47
Cancelled	(67,500	)		0.47	—			—
March 31, 2008	13,607,500		$	0.50	3,131,250		$	0.47

* Represents per share price.

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During the first quarter of 2008, one former employee exercised 15,000 vested stock options resulting in proceeds to the Company of $7. Also during the first quarter of 2008, two employees left the Company resulting in the cancellation of 67,500 unvested stock options. No options were granted in the first quarter of 2008.

As of March 31, 2008, there was $181 of total unrecognized compensation cost related to non-vested share-based compensation awards granted under the 2004 Equity Incentive Plan. The total stock-based employee compensation expense for the year ending December 31, 2008 for the stock options awarded through March 31, 2008 is expected to be $102.

Fair Value Measurements. Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a new framework for measuring fair value and expands related disclosures. Broadly, the SFAS 157 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. SFAS 157 establishes market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.

As of January 1, 2008 and March 31, 2008, the Company did not have any financial or non-financial instruments accounted for at fair value on a recurring or non-recurring basis.

New Accounting Pronouncements.In December 2007, the FASB issued SFAS No. 141R, Business Combinations. The objective of this statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. This statement establishes principles and requirements for how the acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement applies to business combinations for which the acquisition date is on or after December 15, 2008. The areas that are most applicable to the Company with regard to SFAS No. 141R are (1) that the statement requires companies to expense transaction costs as incurred (2) that any subsequent adjustments to a recorded performance-based liability after its initial recognition will be adjusted through income as opposed to goodwill, and (3) any liabilities related to non-controlling interests will be recorded at fair value.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. The objective of this statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective beginning in fiscal 2009. This statement shall be applied prospectively as of the beginning of 2009, except for the presentation and disclosure requirements which shall be applied retrospectively for all periods presented. The Company is currently evaluating the effect of this statement to determine what impact it will have.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. . This statement changes the disclosure requirements for derivative instruments and hedging activities requiring enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

financial position, financial performance, and cash flows. This statement is effective beginning in fiscal 2009. As of and for the three months ended March 31, 2008, the Company did not use any derivative instruments.

(2) Inventories

Components of inventories are as follows:

	As of March 31, 2008		As of December 31, 2007
Raw materials and purchased parts	$	15,775	$	14,559
Work-in-process		11,530		10,962
Finished goods		6,060		3,707
	$	33,365	$	29,228

(3) Intangible and Other Assets

Major components of intangible and other assets at March 31, 2008 and December 31, 2007 are listed below:

Holdings:	As of March 31, 2008				As of December 31, 2007
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Trademarks / trade names	$	51,100	$	—	$	51,100	$	—
Technology / patents		24,300		8,789		24,300		8,359
Customer contracts		15,252		5,571		15,252		5,190
Debt issuance costs		18,447		8,162		18,447		7,598
Other		311		62		411		57
	$	109,410	$	22,584	$	109,510	$	21,204
Stanadyne:	As of March 31, 2008				As of December 31, 2007
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Trademarks / trade names	$	51,100	$	—	$	51,100	$	—
Technology / patents		24,300		8,789		24,300		8,359
Customer contracts		15,252		5,571		15,252		5,190
Debt issuance costs		16,090		7,400		16,090		6,894
Other		311		62		411		57
	$	107,053	$	21,822	$	107,153	$	20,500

Amortization expense of intangible assets for the Company, exclusive of debt issuance costs, was $816 and $1,024 for the three months ended March 31, 2008 and 2007, respectively. Estimated annual amortization expense for the Company’s intangible assets is expected to be $3,264 in 2008, $3,249 in 2009, $3,160 in 2010, $2,944 in 2011 and $2,816 in 2012.

Amortization of debt discount and debt issuance costs is included as interest expense in the accompanying condensed consolidated statements of operations for Holdings of $3,013 and $2,744 for the three months ended March 31, 2008 and 2007, respectively. Amortization of debt issuance costs for Stanadyne is $506 for the three months ended March 31, 2008 and 2007, and is included as interest expense in the accompanying condensed consolidated statements of operations of Stanadyne.

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(4) Long-term Debt

Long-term debt consisted of:

	Holdings				Stanadyne
	March 31, 2008		December 31, 2007		March 31, 2008		December 31, 2007
Revolving credit lines	$	—	$	—	$	—	$	—
Term loan		21,200		21,200		21,200		21,200
Stanadyne Senior Subordinated Notes		160,000		160,000		160,000		160,000
Holdings Senior Discount Notes, net of unamortized discount		85,249		82,800		—		—
SAPL debt		1,062		1,095		1,062		1,095
SpA debt		5,661		3,339		5,661		3,339
Long-term debt		273,172		268,434		187,923		185,634
Less current maturities of long-term debt		12,786		4,298		12,786		4,298
Long-term debt, excluding current maturities	$	260,386	$	264,136	$	175,137	$	181,336

(5) Pension Plans, Defined Contribution Plan and Other Postretirement Health Care and Life Insurance

Pension Plans

The Company has a noncontributory defined benefit pension plan for eligible domestic employees and also has two nonqualified plans, which are designed to supplement the benefits payable to designated employees. The components of the net periodic pension cost (income) cost for the periods shown are as follows:

	Three Months Ended March 31,
	2008			2007
Service cost	$	—		$	776
Interest cost		1,412			1,279
Expected return on plan assets		(1,685	)		(1,273	)
Amortization of prior service costs		9			(15	)
Recognized net actuarial loss		—			27
Curtailment gain		—			(10,015	)
Net periodic pension income	$	(264	)	$	(9,221	)

The Company funds the pension plan in an amount at least equal to the minimum required contribution as determined by the plan’s actuaries, but not in excess of the maximum tax-deductible amount under Section 404 of the Internal Revenue Code. The Company may make discretionary contributions of any amount within this range based on financial circumstances and strategic considerations, which typically vary from year to year.

Effective March 31, 2007, Stanadyne amended the Stanadyne Corporation Pension Plan (a defined benefit plan) (the “Pension Plan”) to freeze the Pension Plan with respect to all participants so that no future benefits would accrue after that date. As required by law, benefits already accrued as of such date were not affected. With respect to such benefits, participants continue to vest and all other retirement options, including early retirement reduction factors, remained unchanged. The assets continue to be held in trust for participants until they retire. The accrual of benefits for certain executives participating in the Supplemental Retirement Benefit Plan is based on the accrual of benefits under the Pension Plan. Therefore, the freeze of the Pension Plan also resulted in the freeze of the Supplemental Retirement Benefit Plan.

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

The effect of the Pension Plan freeze resulted in curtailment gains of $9,996 for the Pension Plan and $19 for the Supplemental Retirement Benefit Plan and are included in the condensed consolidated statement of operations for the three months ended March 31, 2007. These one-time curtailment gains are equal to the reduction in the plans’ projected benefit obligations due to the freeze of $9,382 and unrecognized prior service costs of $633.

Defined Contribution Plan

Effective April 1, 2007, Stanadyne amended the Stanadyne Corporation Savings Plus Plan (a 401(k) plan) to:

(i) increase Stanadyne’s matching contribution to 100% of employee pre-tax contributions on the first 1% of compensation and 50% of employee pre-tax contributions on the next 5% of compensation so that if an employee contributes 6% of compensation, the Stanadyne match would total 3.5% of that employee’s compensation; and

(ii) provide for automatic enrollment at 3% of compensation for all new employees and all current employees who are not then contributing 3% or more of compensation.

The 401(k) plan expense representing the Company’s cost for matching contributions was $0.5 million and less than $0.1 million for the three months ended March 31, 2008 and 2007, respectively.

Postretirement Health Care and Life Insurance

The Company’s domestic subsidiaries make available certain health care and life insurance benefits for eligible retired employees. The components of the net periodic benefit costs for the periods shown were as follows:

	Three Months Ended March 31,
	2008			2007
Service cost	$	48		$	54
Interest cost		110			122
Recognized net actuarial income		(64	)		(13	)
Net periodic postretirement benefit cost	$	94		$	163

(6) Income Taxes

Holdings had an effective income tax rate of 58.3% for the three months ended March 31, 2008 compared to 39.1% for the three months ended March 31, 2007. Holdings’ tax rate is affected by a limitation on the deductibility of interest on the Discount Notes for U.S. federal income tax purposes. The yield-to-maturity for the interest expense on the Discount Notes exceeded the applicable federal rate by six percentage points, resulting in a reduction in the deductible interest expense (including original issue discount) accrued on the notes to the extent attributable to such excess.

Stanadyne had an effective income tax rate of 35.7% for the three months ended March 31, 2008, compared to 36.9% for the three months ended March 31, 2007.

The Company applies the estimated annual tax rate to the year to date earnings to provide consistent quarterly tax rates based on the estimated effective tax rate for the year. To the extent there are differences between components of planned and actual pre-tax income, the estimated annual tax rate for the year could change and, in turn, have an impact on future quarterly tax rates.

-14-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a decrease in the liability for unrecognized tax benefits of approximately $627, which was accounted for as a decrease to income taxes payable and an increase to retained earnings for Holdings and Stanadyne, respectively, as of January 1, 2007. At March 31, 2008, the Company had $241 of unrecognized tax benefits, all of which would impact our effective tax rate if recognized. A liability of $41 for interest and penalties related to the unrecognized tax benefits has been recorded. The Company does not expect any material changes to the unrecognized benefits to occur over the next twelve months.

The Company files income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and the Company is subject to routine audit by many different tax authorities. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2003.

(7) Contingencies

The Company is involved in various legal and regulatory proceedings generally incidental to its business. While the results of any litigation or regulatory issue contain an element of uncertainty, management believes that the outcome of any known, pending or threatened legal proceeding, or all of them combined, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Company is subject to potential environmental liabilities as a result of various claims and legal actions, which are pending or may be asserted against the Company. Reserves for such liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. In management’s opinion, the aforementioned claims will be resolved without material adverse effect on the consolidated results of operations, financial position or cash flows of the Company. In conjunction with the acquisition of SAHC from Metromedia Company (“Metromedia”) on December 11, 1997, Metromedia agreed to partially indemnify Stanadyne and American Industrial Partners Capital Fund II, L.P. for certain environmental matters. The effect of this indemnification is to limit the Company’s financial exposure for known environmental issues.

The Company estimates and records the liability associated with its manufactured products at the time they are sold. The changes in the Company’s warranty accrual are provided below:

	Three Months Ended March,
	2008			2007
Warranty liability, beginning of period	$	2,536		$	5,667
Warranty expense based on products sold		240			277
Warranty claims paid		(1,321	)		(379	)
Warranty liability, end of period	$	1,455		$	5,565

The Company’s warranty accrual is included as a component of accrued liabilities on the condensed consolidated balance sheets.

(8) Comprehensive Income

Comprehensive income is as follows:

	Holdings
	Three Months Ended March 31,
	2008		2007
Net income	$	876	$	6,344
Other comprehensive income:
Foreign currency translation adjustments		653		56
Comprehensive income	$	1,529	$	6,400

-15-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

	Stanadyne
	Three Months Ended March 31,
	2008		2007
Net income	$	2,983	$	7,994
Other comprehensive income:
Foreign currency translation adjustments		653		56
Comprehensive income	$	3,636	$	8,050

(9) Segments

The Company has one reportable segment. Precision Products manufactures its own proprietary products including fuel pumps for diesel and gasoline engines, injectors and filtration systems for diesel engines, and various non-proprietary products manufactured under contract for other companies. The Company’s proprietary products currently account for the majority of Precision Products’ sales.

(10) Supplemental Consolidating Condensed Financial Statements

The Notes issued August 6, 2004 by Stanadyne are guaranteed jointly, fully, severally and unconditionally by PEPC (the “Subsidiary Guarantor”) on a subordinated basis and are not guaranteed by SpA, SCC and SAPL (the “Non-Guarantor Subsidiaries”).

Supplemental consolidating condensed financial statements for Stanadyne (“Parent”), the Subsidiary Guarantor and the Non-Guarantor Subsidiaries are presented below. Separate complete financial statements of the Subsidiary Guarantor are not required.

-16-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(10) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Balance Sheet March 31, 2008
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries		Eliminations			Stanadyne Corporation & Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents	$	23,905		$	—	$	439	$	1,492	(a)	$	25,836
Accounts receivable, net		35,171			—		7,286		—			42,457
Inventories, net		27,443			—		6,696		(774	) (a)		33,365
Other current assets		3,324			—		1,045		—			4,369
Total current assets		89,843			—		15,466		718			106,027
Property, plant and equipment, net		66,683			—		26,239		—			92,922
Intangible and other assets, net		224,060			—		6,153		(407	)		229,806
Investment in subsidiaries		17,855			—		—		(17,855	) (b)		—
Total assets	$	398,441		$	—	$	47,858	$	(17,544	)	$	428,755
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	40,329		$	—	$	8,082	$	193		$	48,604
Current maturities of long-term debt and capital lease obligations		6,200			—		6,806		—			13,006
Total current liabilities		46,529			—		14,888		193			61,610
Long-term debt and capital lease obligations		175,000			—		362		—			175,362
Other non-current liabilities		54,286			—		6,836		(407	)		60,715
Intercompany accounts		(3,805	)		—		3,859		941			995	(c)
Minority interest in consolidated subsidiary		—			—		—		100			100
Stockholder’s equity		126,431			—		21,913		(18,371	)		129,973
Total liabilities and stockholder’s equity	$	398,441		$	—	$	47,858	$	(17,544	)	$	428,755

(a) Amount represents the elimination of intercompany transactions.

(b) Elimination of investments in subsidiaries of the Parent.

(c) Amount due to Stanadyne Holdings, Inc.

-17-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(10) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Balance Sheet December 31, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries		Eliminations			Stanadyne Corporation & Subsidiaries
ASSETS
Cash and cash equivalents	$	34,900		$	—	$	1,915	$	896	(a)	$	37,711
Restricted cash
Accounts receivable, net		32,798			—		6,015		—			38,813
Inventories, net		23,335			—		6,226		(333	) (a)		29,228
Other current assets		3,558			—		1,032		—			4,590
Total current assets		94,591			—		15,188		563			110,342
Property, plant and equipment, net		67,428			—		25,609		—			93,037
Intangible and other assets, net		225,382			—		5,909		(63	)		231,228
Investment in subsidiaries		18,588			—		—		(18,588	) (b)		—
Total assets	$	405,989		$	—	$	46,706	$	(18,088	)	$	434,607
LIABILITIES AND STOCKHOLDER’S EQUITY
Accounts payable and accrued liabilities	$	49,174		$	—	$	10,423	$	139		$	59,736
Current maturities of long-term debt and capital lease obligations		—			—		4,545		—			4,545
Total current liabilities		49,174			—		14,968		139			64,281
Long-term debt and capital lease obligations		181,200			—		392		—			181,592
Other non-current liabilities		54,313			—		6,819		(63	)		61,069
Intercompany accounts		(2,112	)		—		2,474		889			1,251	(c)
Minority interest		—			—		—		76			76
Stockholder’s equity		123,414			—		22,053		(19,129	)		126,338
Total liabilities and stockholder’s equity	$	405,989		$	—	$	46,706	$	(18,088	)	$	434,607

(a) Amount represents the elimination of intercompany transactions.

(b) Elimination of investments in subsidiaries of the Parent.

(c) Amount due to Stanadyne Holdings, Inc.

-18-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(10) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Three Months Ended March 31, 2008
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	64,696		$	—		$	8,166		$	(2,433	) (a)	$	70,429
Cost of goods sold		44,857			—			8,182			(2,445	) (a)		50,594
Gross profit (loss)		19,839			—			(16	)		12			19,835
Selling, general, administrative and other operating expenses		9,554			—			906			—			10,460
Operating income (loss)		10,285			—			(922	)		12			9,375
Interest expense		(4,600	)		—			(98	)		—			(4,698	)
Income (loss) from operations before income tax expense (benefit) and minority interest		5,685			—			(1,020	)		12			4,677
Income tax expense (benefit)		1,957			—			(287	)		—			1,670
Income (loss) from operations before minority interest		3,728			—			(733	)		12			3,007
Minority interest in loss of consolidated subsidiary		—			—			—			(24	)		(24	)
Net income (loss)	$	3,728		$	—		$	(733	)	$	(12	)	$	2,983
	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Three Months Ended March 31, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	70,386		$	—		$	6,968		$	(2,867	) (a)	$	74,487
Cost of goods sold		51,517			—			7,818			(2,787	) (a)		56,548
Gross profit (loss)		18,869			—			(850	)		(80	)		17,939
Selling, general, administrative and other operating income (expenses)		(119	)		8			508			—			397
Operating income (loss)		18,988			(8	)		(1,358	)		(80	)		17,542
Interest expense		(4,674	)		—			(69	)		—			(4,743	)
Income (loss) from continuing operations before income tax expense (benefit) and minority interest		14,314			(8	)		(1,427	)		(80	)		12,799
Income tax expense (benefit)		5,356			2			(630	)		—			4,728
Income (loss) from continuing operations before minority interest		8,958			(10	)		(797	)		(80	)		8,071
Minority interest in income of consolidated subsidiary		—			—			—			(77	)		(77	)
Net income (loss)	$	8,958		$	(10	)	$	(797	)	$	(157	)	$	7,994

(a) Elimination of intercompany sales and cost of goods sold.

-19-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(10) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Cash Flows Three Months Ended March 31, 2008
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Cash flows from operating activities:
Net income (loss)	$	3,728		$	—	$	(733	)	$	(12	)	$	2,983
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		4,293			—		955			—			5,248
Amortization of debt discount and deferred financing fees		506			—		—			—			506
Stock-based compensation expense		26			—		—			—			26
Deferred tax expense (benefit)		584			—		(392	)		—			192
Income applicable to minority interest		—			—		—			24			24
Changes in operating assets and liabilities		(18,053	)		—		(2,625	)		640			(20,038	)
Net cash used in operating activities		(8,916	)		—		(2,795	)		652			(11,059	)
Cash flows from investing activities:
Capital expenditures		(2,089	)		—		(731	)		—			(2,820	)
Net cash used in investing activities		(2,089	)		—		(731	)		—			(2,820	)
Cash flows from financing activities:
Net proceeds from debt		—			—		2,105			—			2,105
Payments of capital lease obligations		—			—		(73	)		—			(73	)
Net cash provided by financing activities		—			—		2,032			—			2,032
Net (decrease) increase in cash and cash equivalents		(11,005	)		—		(1,494	)		652			(11,847	)
Effect of exchange rate changes on cash		10			—		18			(56	)		(28	)
Cash and cash equivalents at beginning of period		34,900			—		1,915			896			37,711
Cash and cash equivalents at end of period	$	23,905		$	—	$	439		$	1,492		$	25,836

-20-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(10) Supplemental Consolidating Condensed Financial Statements (concluded)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Cash Flows Three Months Ended March 31, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Cash flows from operating activities:
Net income (loss)	$	8,958		$	(10	)	$	(797	)	$	(157	)	$	7,994
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		4,585			—			898			—			5,483
Amortization of deferred financing fees		506			—			—			—			506
Loss on sale of discontinued operations
Stock-based compensation expense		88			—			—			—			88
Other adjustments		3,571			112			(717	)		—			2,966
Loss applicable to minority interest		—			—			—			77			77	��
Changes in operating assets and liabilities		(20,453	)		(205	)		(1,139	)		328			(21,469	)
Net cash used in operating activities		(2,745	)		(103	)		(1,755	)		248			(4,355	)
Cash flows from investing activities:
Increase in restricted cash		(116	)		—			—			—			(116	)
Capital expenditures		(467	)		—			(440	)		(23	)		(930	)
Proceeds from disposal of property, plant and equipment		—			104			—			—			104
Investment in subsidiary		(3,351	)		—			—			3,351			—
Net cash (used in) provided by investing activities		(3,934	)		104			(440	)		3,328			(942	)
Cash flows from financing activities:
Net payments on debt		—			—			(1,010	)		—			(1,010	)
Net proceeds from equity		—			—			3,385			(3,385	)		—
Net cash provided by (used in) financing activities		—			—			2,375			(3,385	)		(1,010	)
Net (decrease) increase in cash and cash equivalents		(6,679	)		1			180			191			(6,307	)
Effect of exchange rate changes on cash		27			—			35			(14	)		48
Cash and cash equivalents at beginning of period		24,462			9			107			540			25,118
Cash and cash equivalents at end of period	$	17,810		$	10		$	322		$	717		$	18,859

-21-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

This Management Discussion and Analysis of Financial Condition and Results of Operations reflects the results of operations and financial condition of Holdings and its subsidiaries, which are materially the same as the results of operations and financial condition of Stanadyne and its subsidiaries. Therefore, the discussions provided are applicable to both Holdings and Stanadyne except where otherwise noted.

We are a leading designer and manufacturer of highly-engineered, precision manufactured engine components, primarily for the off-highway markets. We manufacture our own proprietary products including fuel pumps for diesel and gasoline engines, injectors and filtration systems for diesel engines, and various non-proprietary products manufactured under contract for other companies.

Our results for the first quarter of 2008 when compared to the same period a year ago included lower sales to certain of our original equipment manufacturers (“OEM’s”) which were partially offset by stronger demand from the service markets. The first quarter year-over-year comparison included improved gross profit, reflecting a realization of several cost reduction measures taken last year. Cash flows from operations in the first quarter of 2008 were less than the first quarter of 2007 due primarily to increased working capital requirements.

Sales for the first three months of 2008 totaled $70.4 million and were $4.1 million or 5.4% less than the first three months of 2007. Sales to our OEM customers were $9.2 million less in the first quarter of 2008, reflecting lower demand than experienced in the comparatively strong first quarter of 2007. Lower OEM revenues were primarily due to less demand from Deere and Company (“Deere”) for product used in construction and forestry equipment as well as for older style fuel injection equipment that is no longer emissions compliant. Sales to the service markets increased by $5.2 million or 19.2% in the first quarter of 2008 when compared to the same period in 2007. Service sales to Deere increased by $3.6 million and service demand from General Motors (“GM”) added $2.4 million in higher first quarter 2008 sales.

Gross profit for the first quarter of 2008 totaled $19.8 million and 28.2% of net sales, reflecting an improvement of $1.9 million from the first quarter of 2007. In addition to a more profitable mix of products sold in the first quarter of 2008, factory overhead costs in the U.S. operations were $1.3 million less, reflecting savings from organizational restructuring, staff reductions and consolidation of operations in the Windsor, Connecticut location. Gross profit in the Brescia, Italy plant, improved by $1.0 million when compared to the prior year first quarter, indicating the benefits of the organizational changes made last year.

Stanadyne’s cash flows from operating activities in the first quarter of 2008 were negative $11.1 million, with the benefit of higher gross profit offset by $7.6 million cash used for working capital and other asset and liability accounts. Overall liquidity remained strong, with cash on hand totaling $26.0 million as of March 31, 2008 and availability under the U.S.-based Revolving Credit Facility of $26.4 million.

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

Basis of Presentation

The following table displays unaudited information for the three month periods ended March 31, 2008 and 2007 for Holdings and Stanadyne. Amounts are presented in thousands of dollars and as a percentage of net sales. Historical results and percentage relationships are not necessarily indicative of the results that may be expected for any future period.

	Holdings
	Three Months Ended March 31, 2008		Three Months Ended March 31, 2007
	$	%	$		%
Net sales	70,429	100.0	74,487		100.0
Cost of goods sold	50,594	71.8	56,548		75.9
Gross profit	19,835	28.2	17,939		24.1
SG&A	9,468	13.4	9,219		12.4
Amortization of intangibles	816	1.2	1,024		1.4
Management fees	188	0.3	188		0.3
Pension plan curtailment gain	—	—	(10,015	)	(13.4	)
Operating income	9,363	13.3	17,523		23.5
Net income	876	1.2	6,344		8.5
	Stanadyne
	Three Months Ended March 31, 2008		Three Months Ended March 31, 2007
	$	%	$		%
Net sales	70,429	100.0	74,487		100.0
Cost of goods sold	50,594	71.8	56,548		75.9
Gross profit	19,835	28.2	17,939		24.1
SG&A	9,456	13.4	9,200		12.4
Amortization of intangibles	816	1.2	1,024		1.4
Management fees	188	0.3	188		0.3
Pension plan curtailment gain	—	—	(10,015	)	(13.4	)
Operating income	9,375	13.3	17,542		23.6
Net income	2,983	4.2	7,994		10.7

-23-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

Comparison of Results of Operations:

The Three Months Ended March 31, 2008 for Holdings and Stanadyne

Compared to

The Three Months Ended March 31, 2007 for Holdings and Stanadyne

Net Sales. Net sales for the three months ended March 31, 2008 totaled $70.4 million and were $4.1 million or 5.4% less than sales of $74.5 million for the comparable period in 2007. Lower sales to the OEM market during the first quarter of 2008 were partially offset by higher demand from the service market.

OEM sales represented 54.4% of our total first quarter sales in 2008 as compared to 63.8% in the first quarter of 2007. When compared to the very strong first quarter of 2007, sales to our OEM customers were $9.2 million less in the first quarter of 2008. Lower OEM revenues were primarily due to less demand from Deere for product used in construction and forestry equipment as well as for older style fuel injection equipment that is no longer emissions compliant. Sales to Cummins Inc. (“Cummins”) and General Engine Products (“GEP”) were $1.3 million more in the first quarter of 2008 than the same period a year ago.

Sales to the service markets were $5.2 million or 19.2% greater in the first quarter of 2008 than the same period in 2007. Demand from Deere increased by $3.6 million and accounted for a majority of the higher service sales in the first quarter of 2008. Following four quarters of lower demand in 2007, service demand from GM increased in the first quarter of 2008, resulting in $2.4 million higher sales when compared to the first quarter of last year.

First quarter sales by major product line reflected lower sales of our fuel pump and fuel injector products, partially offset by a $3.7 million increase in our fuel filtration and Precision Components and Assembly (“PCA”) businesses.

Gross Profit.Gross profit totaled $19.8 million and 28.2% of net sales in the first quarter of 2008, compared to $17.9 million and 24.1% of net sales in the first quarter of 2007. Despite lower OEM sales volumes, a more profitable mix of products sold provided an additional $0.4 million of gross profit in the first quarter of 2008 when compared to the same period of 2007. Factory overhead costs in the U.S. operations were $1.3 million less in the first quarter of 2008 reflecting savings from organizational restructuring, staff reductions and consolidation of operations in the Windsor, Connecticut location. First quarter gross profit in the Brescia, Italy plant, while still marginally negative, improved by $1.0 million when compared to the prior year first quarter. Much of the reorganization has been completed in this location, although management will continue to target further overhead cost savings this year.

Selling, General and Administrative Expenses (“SG&A”) totaled $9.5 million or 13.4% of net sales in the first quarter of 2008, as compared to $9.2 million or 12.4% of net sales for the same period of 2007. SG&A costs increased by $0.3 million in the first quarter of 2008 due to added development costs for high pressure gasoline and diesel fuel systems. Savings in SG&A expenses related to the 2007 staff reductions and closure of the Trappes, France office were offset by higher costs in the first quarter of 2008 for start up costs for the Changshu, China facility and building exit costs for the former Trappes location.

Pension Plan Curtailment Gain. Changes to the U.S.-based defined benefit pension plans at the end of the first quarter of 2007 resulted in a curtailment gain of the liability associated with future benefits. Effective March 31, 2007, Stanadyne amended the Stanadyne Corporation Pension Plan (a defined benefit plan) to freeze the benefits for all participants so that no future benefits accrue after that date. The effect of the Pension Plan freeze resulted in a curtailment gain of $10.0 million. This one-time curtailment gain is equal to the reduction in the projected benefit obligations (PBO) due to the freeze, offset by any unrecognized losses immediately prior to the freeze, plus remaining unrecognized prior service costs.

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Amortization of Intangible Assets.Amortization of intangible assets totaled $0.8 million in the first quarter of 2008 and was $0.2 million less than the amount in the first quarter of 2007 due to the expiration of certain product design patents at mid-year 2007.

Operating Income. Operating income in the first quarter of 2008 totaled $9.4 million and 13.3% of net sales and was $8.1 million less than the $17.5 million and 23.6% of net sales in the first quarter of 2007. Without the 2007 pension curtailment gain of $10.0 million, comparison to the first quarter 2008 operating income reflects an increase of $1.9 million. This $1.9 million increase in first quarter operating income resulted from $1.9 million higher gross profit and $0.2 million lower amortization expenses partially offset by $0.3 million higher SG&A expense.

Net Income. Net income for Stanadyne totaled $3.0 million and 4.2% of sales in the first quarter of 2008 and was $5.0 million less than the $8.0 million and 10.7% of sales in the first quarter of 2007. Lower operating income of $8.1 million in the first quarter of 2008, driven primarily by the 2007 pension plan curtailment gain, was partially offset by $3.1 million lower tax expense.

Net income for Holdings in the first quarter of 2008 totaled $0.9 million and was $2.1 million less than the amount reported for Stanadyne due to $2.5 million of additional interest expense on the Discount Notes, partially offset by $0.4 million of lower income taxes. Net income for Holdings in the first quarter of 2007 totaled $6.3 million, which was $1.7 million lower compared to Stanadyne due to $2.3 million of additional interest expense on the Discount Notes, partially offset by $0.6 million of income tax benefits.

Liquidity and Capital Resources

Stanadyne’s principal sources of liquidity are cash on hand, which totaled $25.8 million on March 31, 2008, and cash flows from operations. Stanadyne also maintains a U.S.-based revolving credit facility under which $33.6 million was available for borrowing as of March 31, 2008, of which $7.2 million was used to secure standby letters of credit. Stanadyne occasionally utilizes capital leasing and, for its foreign operations in Italy and India, maintains a combination of overdraft, working capital and term loan facilities with local financial institutions on an as-needed basis.

Indebtedness for Stanadyne as of March 31, 2008 totaled $187.9 million and was comprised of $160.0 million of Notes, $21.2 million in domestic term loans, no borrowings under the domestic revolving credit facility, $6.2 million in foreign overdraft facilities and $0.5 million in foreign term loans. Unless the availability of funds under the Revolving Credit Line is less than $5.0 million, the U.S.-based Senior Credit Facilities are not subject to financial covenants.

Indebtedness for Holdings as of March 31, 2008 totaled $273.2 million, comprised of the same debt balances for Stanadyne, plus an additional $85.3 million of Discount Notes. Holdings has no independent financial resources of its own. The Senior Credit Facilities and the indenture governing the Notes limit the ability of Stanadyne and its subsidiaries to pay dividends or make other distributions to Holdings. There were no dividends paid to Holdings by any of its direct or indirect subsidiaries in the three months ended March 31, 2008.

Cash Flows From Operating Activities. Stanadyne’s cash flows used in operating activities for the three months ended March 31, 2008 were $11.1 million as compared to $4.4 million for the same period of 2007. Cash flows from operating activities before changes in asset and liability accounts and excluding the non-cash pension curtailment gain in 2007, reflected $1.6 million more cash in the first quarter of 2008 than in the first quarter of 2007 due to higher operating income partially offset by higher taxes.

Changes in asset and liability accounts, primarily working capital accounts, required $8.6 million more cash in the first quarter of 2008 versus the comparable period in 2007. Inventory levels increased in the first quarter of 2008 consuming $3.2 million more cash than during the first quarter of 2007. Approximately $0.9 million of this difference was traceable to the U.S. operations where increased first quarter 2008 stocks of several purchased components were required to manage the transition to a lower cost supply base over the next several months. An additional $0.6 million of inventory growth in the first quarter of 2008 occurred due to expected demand for fuel

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injection equipment in the construction and forestry market that did not materialize. The remainder of the growth in inventory during the first quarter of 2008 was due to purchase of raw materials and production of other components in excess of customer demand. These added inventories will be consumed over the balance of 2008. Lower accounts payable balances in the first quarter of 2008, compared to relatively unchanged accounts payable balances in the same period of 2007, resulted in a $2.2 million year-over-year negative change in cash flows. This difference is attributable to differences in timing of quarter end cash disbursements to the supply base. Cash changes to accrued liability accounts in the first quarter of 2008 consumed $2.7 million more cash than in the comparable period in 2007, excluding the non-cash pension curtailment gain. Significant changes in liability accounts that resulted in a reduction in cash flows from operations in the first quarter of 2008 included $0.7 million for pension plan contributions; $1.0 million for product warranty claims; and $1.0 million for severance benefits related to staff reductions in 2007.

Cash flows from operating activities for Holdings for the first quarter of 2008 were substantially the same as the amounts reported for Stanadyne.

Cash Flows From Investing Activities. Cash flows from investing activities for the first quarter of 2008 consumed $2.8 million of cash. Capital expenditures in the first quarter of 2008 totaled $2.8 million compared to $0.9 million for the first quarter of 2007. Capital expenditures in 2008 reflected necessary investments in equipment to support our operations, including approximately $0.5 million for manufacturing equipment in the new Changshu, China location.

Cash Flows From Financing Activities. Cash flows from financing activities for the Company in the first quarter of 2008 provided cash of $2.1 million compared to a consumption of cash of $1.0 million for the first quarter of 2007.

There were no cash flows from financing activities in our U.S.-based operations during both first quarters of 2008 and 2007. Remaining balances under the Term Loan are not due until 2010, although the Company is required to make a $6.2 million payment in the second quarter of 2008 based on the Excess Cash Flow calculated for 2007 as defined by the terms of the Senior Credit Facilities. There were no borrowings under the U.S.-based Revolving Credit Line as of March 31, 2008 and 2007, which after reductions for outstanding letters of credit, provided available liquidity of $26.4 million and $27.5 million at each date, respectively.

Cash flows from financing activities in our foreign operations in the first quarter of 2008 included a $2.1 million increase in overdraft borrowings at SpA as well as payments of capital lease obligations totaling $0.1 million. Cash flows from financing activities in SAPL were negligible in the first quarter of 2008.

Pension Plans. We maintain the Stanadyne Corporation Pension Plan, a qualified defined benefit pension plan (the “Pension Plan”), which covers substantially all domestic hourly and salary employees and the Supplemental Retirement Benefit Plan, an unfunded nonqualified plan to provide benefits in excess of amounts permitted to be paid under the provisions of the tax law to participants in the Qualified Plan.

Effective March 31, 2007, Stanadyne amended the Pension Plan to freeze the Pension Plan with respect to all participants so that no future benefits will accrue after that date. As required by law, benefits already accrued as of such date will not be affected. With respect to such benefits, participants continue to vest and all other retirement options, including early retirement reduction factors, continue unchanged. The assets continue to be held in trust for participants until they retire. The accrual of benefits for certain executives participating in the Supplemental Retirement Benefit Plan is based on the accrual of benefits under the Pension Plan. Therefore, the freeze of the Pension Plan also resulted in the freeze of the Supplemental Retirement Benefit Plan.

The effect of the Pension Plan freeze resulted in curtailment gain of $10.0 million for the Pension Plan. This one-time curtailment gain resulted from the reduction in the plans’ projected benefit obligations (“PBO”) due to the freeze of $9.4 million and unrecognized prior service costs of $0.6 million.

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The value of the Pension Plan assets increased to $80.8 million at December 31, 2007 from $72.9 million at December 31, 2006. The combined effect of the Pension Plan freeze and positive investment performance in 2007 reduced the Pension Plan unfunded benefit obligation to $11.8 million at December 31, 2007 from $30.0 million at December 31, 2006. The Company contributed $0.7 million to the Pension Plan during the first quarter of 2008 and expects the minimum required contributions to the Pension Plan in 2008 to total approximately $3.4 million. The Company contributed $5.9 million to the Pension Plan in 2007.

Critical Accounting Policies

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include: product warranty reserves, inventory reserves for excess or obsolescence, pension and postretirement benefit liabilities, self-insurance reserves and stock-based compensation.

Product Warranty Reserves. We provide a limited warranty for specific products and recognize the projected cost for this warranty in the period the products are sold. Liability reserves are determined by applying historical warranty experience rates to current period product sales. Warranty accruals are adjusted for known or anticipated warranty claims as new information becomes available.

Inventory Reserves. We maintain our inventories at the lower of cost or market value. Cost is determined on a last-in, first-out (“LIFO”) basis for all domestic inventory and on a first-in, first-out (“FIFO”) basis for all foreign inventory. When conditions warrant (usually highlighted by slow-moving product or products with pricing constraints), reserves are established to reduce the value of inventory to net realizable values. Annually, we review and identify all inventories in excess of three years sales requirements. We reserve for this “slow moving” inventory as it has no realizable value. If business conditions change during the year, this evaluation is conducted more frequently.

Pension and Other Postretirement Benefits. We provide for pension and other postretirement benefits and make assumptions with the assistance of independent actuaries about discount rates, expected long-term rates of return on plan assets and health care cost trends to determine the net periodic pension and postretirement health care cost. These estimates are based on our best judgment, including consideration of both current and future market conditions. We consider both internal and external evidence to determine the appropriate assumptions. In the event a change in any of the assumptions is warranted, future pension cost as determined under Statement of Financial Accounting Standards No. 87 “Employers’ Accounting for Pensions” could increase or decrease.

Self-Insurance Reserves. We are self-insured for a substantial portion of our health care and workers’ compensation insurance programs. With advice and assistance from outside experts, reserves are established using estimates based on, among other factors, reported claims to date, prior claims history, and projections of claims incurred but not reported. Future medical cost trends are incorporated in the projected costs to settle existing claims. If actual results in any of these areas change from prior periods, adjustments to recorded reserves may be required.

Revenue Recognition. We record sales and related cost of goods sold when products are shipped to customers, unless delivery terms specify transfer of title at point of destination in which case the sales and related cost of sales are recognized when goods are delivered. The Company enters into long-term contracts with certain customers for the supply of parts during the contract period. We establish estimates for sales returns and allowances based on historical experience. We do not provide customers with general rights of return for products sold, however in limited circumstances, we will allow sales returns and allowances from customers if the products sold do not conform to specification.

Cautionary Statement

This quarterly report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements with respect to the financial condition, results of operations and business of the Company and management’s discussion and analysis of financial condition and results of operations. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or the negative thereof or other similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially.

Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all the risks and uncertainties that could affect future events and should not consider the following list to be a complete statement of all potential risks and uncertainties.

Any change in the following factors may materially adversely affect our business and our financial results:

• changes in technology, manufacturing techniques or customer demands;

• loss or adverse change in our relationship with our material customers;

• changes in the performance or growth of our customers;

• increased competition and pricing pressures in our existing and future markets;

• changes in the price and availability of raw materials, particularly steel and aluminum;

• risks associated with international operations;

• the loss of key members of management;

• risk that our intellectual property may be misappropriated;

• loss of any of our key manufacturing facilities;

• adverse state or federal legislative or regulatory developments or litigation or other disputes;

• changes in the business, market trends, projected growth rates and general economic conditions related to the markets in which we operate, including agricultural and construction equipment, industrial machinery, trucks, marine equipment and automobiles;

• our ability to satisfy our debt obligations, including related covenants; and

• increases in our cost of borrowing or inability or unavailability of additional debt or equity capital.

The forgoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. Except to the extent required by law, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risks which include changes in interest rates and changes in foreign currency exchange rates as measured against the U.S. dollar.

Interest Rate Risk. The carrying values of Stanadyne’s revolving credit lines and term loans approximate fair value. The term loans are primarily LIBOR-based borrowings and are re-priced every one to three months. A 10% change in the interest rate on the term loans would have changed the recorded interest expense for the first three months of 2008 by less than $0.1 million. The Notes and Discount Notes bear interest at a fixed rate and, therefore, are not sensitive to interest rate fluctuation. The fair value of Stanadyne’s $160.0 million in Notes based on bid prices on March 31, 2008 was approximately $145.0 million. The fair value of Holdings’ Discount Notes based on bid prices at March 31, 2008 was $66.6 million.

Foreign Currency Risk. The Company has operating subsidiaries in China, Italy, and India, and therefore is exposed to changes in foreign currency exchange rates. Changes in exchange rates may positively or negatively affect the Company’s sales, gross margins, and retained earnings. However, historically, these locations have contributed less than 15% of the Company’s net sales and retained earnings, with most of these sales attributable to the Italian subsidiary. The Company also sells its products from the United States to foreign customers for payment in foreign currencies as well as U.S. dollars. The impact of foreign currency exchange was immaterial for the three months ended March 31, 2008 and 2007. Foreign currency exchange for the three months ended March 31, 2008 and 2007 were net gains of $0.01 million and $0.04 million, respectively. The Company does not hedge against foreign currency risk.

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ITEM 4T: CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

As of the end of the period covered by this quarterly report, an evaluation of the effectiveness of the design and operation of Holdings’ disclosure controls and procedures was conducted under the supervision and with the participation of the President and Chief Financial Officer of Holdings. Based on this evaluation, the President and Chief Financial Officer of Holdings have concluded that Holdings’ disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by Holdings in this report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the President and Chief Financial Officer of Holdings, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this quarterly report, an evaluation of the effectiveness of the design and operation of Stanadyne’s disclosure controls and procedures was conducted under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of Stanadyne. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of Stanadyne have concluded that Stanadyne’s disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by Stanadyne in this report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of Stanadyne, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls

We routinely review Holdings’ internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. There was no change in internal control over financial reporting that materially affected or is reasonably likely to materially affect Holdings’ internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, subsequent to the evaluation described above.

Reference is made to the Certifications of the President and Chief Financial Officer of Holdings about these and other matters filed as exhibits to this report.

We routinely review Stanadyne’s internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. There was no change in internal control over financial reporting that materially affected or is reasonably likely to materially affect Stanadyne’s internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, subsequent to the evaluation described above.

Reference is made to the Certifications of the Chief Executive Officer and Chief Financial Officer of Stanadyne about these and other matters filed as exhibits to this report.

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PART II: OTHER INFORMATION

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On January 13, 2008, Holdings issued 15,000 shares of Holdings Common Stock for $0.47 cash per share to a former employee upon exercise of options, which shares Holdings immediately repurchased for $0.86 per share. Holdings issued such shares in reliance upon the exemption from the registration requirements of the Securities Act of 1933 as amended, under Section 4(2) of the Securities Act.

In claiming the exemption under Section 4(2), Holdings relied in part on the following facts: (1) the offer and sale involved one former employee; (2) the employee had access to information regarding Holdings and Stanadyne; and (3) the employee represented that he (a) had the requisite knowledge and experience in financial and business matters to evaluate the merits and risks of an investment in Holdings; and (b) was able to bear the economic risk of an investment in Holdings.

ITEM 6: EXHIBITS

31.1	Certification of President of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Executive Officer of Stanadyne Corporation Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	Certification of Chief Financial Officer of Stanadyne Corporation Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of President and Chief Financial Officer of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Executive Officer and Chief Financial Officer of Stanadyne Corporation Pursuant to Rule 15d-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Stanadyne Holdings, Inc.
	(Registrant)
Date: May 15, 2008	/s/ Stephen S. Langin
	Stephen S. Langin
	Chief Financial Officer

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Stanadyne Corporation
	(Registrant)
Date: May 15, 2008	/s/ Stephen S. Langin
	Stephen S. Langin
	Vice President and Chief Financial Officer

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EXHIBIT INDEX:

31.1	Certification of President of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Executive Officer of Stanadyne Corporation Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	Certification of Chief Financial Officer of Stanadyne Corporation Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of President and Chief Financial Officer of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Executive Officer and Chief Financial Officer of Stanadyne Corporation Pursuant to Rule 15d-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002