<Page>
As filed with the Securities and Exchange Commission on February 13, 2003
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------
STANDARD MOTOR PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
<Table>
NEW YORK 11-1362020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</Table>
37-18 NORTHERN BOULEVARD
LONG ISLAND CITY, NEW YORK 11101
(718) 392-0200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------
LAWRENCE I. SILLS
CHIEF EXECUTIVE OFFICER, CHAIRMAN AND DIRECTOR
STANDARD MOTOR PRODUCTS, INC.
37-18 NORTHERN BOULEVARD
LONG ISLAND CITY, NEW YORK 11101
(718) 392-0200
(Name and address, including zip code, and telephone number, including
area code, of agent for service)
WITH COPIES TO:
<Table>
BUD G. HOLMAN, ESQ.
CARMINE J. BROCCOLE, ESQ. DONALD C. WALKOVIK, ESQ.
KELLEY DRYE & WARREN LLP SULLIVAN & CROMWELL LLP
101 PARK AVENUE 125 BROAD STREET
NEW YORK, NEW YORK 10178 NEW YORK, NEW YORK 10004
(212) 808-7800 (212) 558-4000
</Table>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
-------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
============================================================================================================
PROPOSED
MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
Common Stock, par value $2.00 per share..................... $67,850,000 $6,242.20
============================================================================================================
</Table>
(1) Estimated solely for the purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
================================================================================
<Page>
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject To Completion. Dated February 13, 2003.
Shares
STANDARD MOTOR PRODUCTS, INC.
Common Stock
[Logo]
-------------------
Standard Motor Products, Inc. is offering shares of common stock to
be sold in the offering.
The common stock is listed on the New York Stock Exchange under the symbol
'SMP.' The last reported sale price of the common stock on February 12, 2003 was
$13.71 per share.
See 'Risk Factors' beginning on page 8 to read about factors you should
consider before buying shares of the common stock.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------
<Table>
<Caption>
Per Share Total
--------- -----
Initial price to public..................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Standard Motor Products,
Inc. ..................................................... $ $
</Table>
To the extent that the underwriters sell more than shares of common
stock, the underwriters have the option to purchase up to an additional
shares from Standard Motor Products, Inc. at the initial price to public less
the underwriting discount.
-------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2003.
GOLDMAN, SACHS & CO. MORGAN STANLEY
-------------------
Prospectus dated , 2003.
<Page>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
and the documents incorporated by reference. This summary does not contain all
of the information that you should consider before investing in our common
stock. You should read this entire prospectus and the documents incorporated by
reference carefully, including 'Risk Factors' beginning on page 8 and the
financial statements and the notes thereto of our company and of Dana
Corporation's Engine Management Group included elsewhere in this prospectus.
Unless otherwise stated, the information contained in this prospectus is based
on the assumption that the underwriters' over-allotment option will not be
exercised.
In this prospectus, 'Standard Motor Products', 'we', 'us' and 'our' refer to
Standard Motor Products, Inc. and its subsidiaries, unless the context requires
otherwise. The words 'the Company' refer only to Standard Motor Products, Inc.
and not to any of its subsidiaries.
ABOUT STANDARD MOTOR PRODUCTS
OUR BUSINESS
We are a leading independent manufacturer and distributor of replacement
parts for motor vehicles in the automotive aftermarket industry. We are
organized into two principal operating divisions, each of which focuses on a
specific segment of replacement parts. Our Engine Management Division
manufactures ignition and emission parts, on-board computers, ignition wires,
battery cables and fuel system parts. Our Temperature Control Division
manufactures and remanufactures air conditioning compressors, and other air
conditioning and heating parts.
We sell our products primarily to warehouse distributors and large retail
chains in the United States and Canada. We also sell our products through
distributors in Latin America and Europe. Our customers consist of many of the
leading warehouse distributors, such as Carquest and NAPA Auto Parts, as well as
many of the leading auto parts retail chains, such as Advance Auto Parts,
AutoZone and O'Reilly Automotive. We distribute parts under our own brand names,
such as Standard, Blue Streak and Four Seasons, and through private labels, such
as Carquest and NAPA Auto Parts.
In 2001, our consolidated net sales were $591.7 million, and our operating
income was $15.1 million. The following charts set forth our consolidated net
sales by operating division, geographic region and customer group as a
percentage of consolidated net sales in 2001.
[PERFORMANCE GRAPH]
2001 CONSOLIDATED NET SALES BY OPERATING DIVISION
Other 7%
Temperature Control 45%
Engine Management 48%
2001 CONSOLIDATED NET SALES BY GEOGRAPHIC REGION
Canada 5%
Rest of the World 8%
United States 87%
2001 CONSOLIDATED NET SALES BY CONSUMER GROUP
Retail 27%
Warehouse Distributors 65%
Other 8%
ACQUISITION OF DANA CORPORATION'S ENGINE MANAGEMENT GROUP
On February 7, 2003, we signed an agreement to purchase Dana Corporation's
Engine Management Group, which we refer to throughout this prospectus as Dana's
EMG Business, for a purchase price equal to the closing net book value of the
business, subject to a maximum purchase price of $125 million. Dana's EMG
Business is a leading manufacturer of aftermarket parts in the automotive
industry focused exclusively on engine management, with approximately
$229 million in consolidated net sales for the nine months ended September 30,
2002 and approximately $298 million in consolidated net sales in 2001. Dana's
EMG Business manufactures ignition systems, emission parts, engine computers,
ignition wires, battery cables and fuel system
1
<Page>
parts. Customers of Dana's EMG Business include NAPA Auto Parts, CSK Auto,
O'Reilly Automotive and Pep Boys, none of which is currently a material customer
of our Engine Management Division. We believe that the acquisition will allow us
to:
increase sales in our Engine Management business;
develop new and improved products to better satisfy the increasing
requirements of customers;
rationalize manufacturing and distribution facilities to achieve more
efficient operations and lower costs for ourselves and our customers;
consolidate and centralize corporate functions to eliminate redundant
costs;
improve cost structure by realizing increased economies of scale in the
purchasing, processing, production and distribution of our products; and
increase the proportion of our total sales and profits from our Engine
Management business, which is more stable and predictable than our seasonal
Temperature Control business.
We intend to use our experience in integrating the 15 businesses we have
acquired since January 1996 to integrate successfully Dana's EMG Business into
our Engine Management Division within 18 months of the acquisition closing.
At the closing, assuming the acquisition purchase price is $121 million,
based on the September 30, 2002 audited balance sheet of Dana's EMG Business, we
will pay Dana approximately $90.8 million in cash, $15.1 million in the form of
an unsecured promissory note and $15.1 million in the form of shares of our
common stock. The acquisition is subject to our obtaining financing for the
acquisition and other customary closing conditions, including expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. We expect
to complete this acquisition on or about the date of the closing of this
offering.
OUR STRATEGY
Our goal is to grow revenues and earnings and deliver returns in excess of
our cost of capital by providing high quality, low cost replacement parts in the
engine management and temperature control automotive aftermarkets. The key
elements of our strategy are as follows:
CAPITALIZE ON THE ACQUISITION OF DANA'S EMG BUSINESS. The acquisition will
allow us to combine Dana's EMG Business with our Engine Management
Division, thereby creating opportunities to realize cost savings and grow
earnings.
MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT AND
TEMPERATURE CONTROL BUSINESSES. To maintain a strong competitive position
in our markets, we remain committed to providing our customers with broad
lines of high quality engine management and temperature control products.
PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND TECHNICAL
SUPPORT. Our goal is to increase sales to existing and new customers by
leveraging our skills in rapidly filling orders, maintaining high levels of
product availability and providing technical product support in a
cost-effective manner.
EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our sales by
continuing to develop and expand the range of Engine Management and
Temperature Control products we offer to our customers. We are committed to
investing the resources necessary to maintain and expand our technical
capability to manufacture multiple product lines that incorporate the
latest technologies developed by original equipment manufacturers in North
America and Europe.
2
<Page>
BROADEN OUR CUSTOMER BASE. Our goal is to increase our business by
marketing our products more broadly to the distribution businesses of
original equipment manufacturers who sell products to new car dealer
service areas.
IMPROVE OPERATING EFFICIENCY AND COST POSITION. We intend to continue to
improve our operating efficiency and cost position. Our management places
significant emphasis on improving our financial performance, achieving
operating efficiencies and improving asset utilization while maintaining
product quality and high customer order fill rates. In 2001, we reduced our
inventory levels by $57 million while maintaining customer fill rate levels
of approximately 93%.
REDUCE OUR DEBT. We intend to apply any excess cash flow from operations
and the management of working capital to reduce our outstanding
indebtedness.
CORPORATE INFORMATION
Our common stock is traded on the New York Stock Exchange under the symbol
'SMP'. On February 12, 2003, our common stock closed at $13.71. Members of our
founding families continue to be actively involved in our management, and such
founding family members directly or indirectly owned approximately 43% of our
outstanding common stock on December 31, 2002.
We are a New York corporation founded in 1919. Our principal executive
offices are located at 37-18 Northern Boulevard, Long Island City, New York
11101, and our main telephone number at that location is (718) 392-0200.
This prospectus contains our trademarks and trade names and also contains
trademarks and trade names of other parties.
3
<Page>
THE OFFERING
<Table>
Common stock offered by us................... shares
Common stock to be outstanding after this
offering................................... shares
Use of proceeds.............................. We intend to use all of the net proceeds from this
offering to repay a portion of our outstanding
indebtedness under our revolving credit facility. We
then intend to borrow the entire cash portion of the
purchase price of Dana's EMG Business from our
revolving credit facility to consummate the closing
of the acquisition.
New York Stock Exchange symbol............... SMP
</Table>
The number of shares of our common stock that will be outstanding after this
offering is based on our shares of common stock outstanding as of December 31,
2002 and includes shares of our common stock to be issued to Dana by us
as part of the acquisition purchase price, assuming for these purposes that the
price per share of our common stock is $ and that the acquisition
purchase price is $121 million at closing. The number of outstanding shares of
our common stock as of December 31, 2002 excludes:
909,696 shares of common stock issuable upon the exercise of options
outstanding under our stock option plans at a weighted average exercise
price of $17.15 per share;
356,745 shares of common stock reserved for future grants under our stock
option plans;
600,000 shares held by us in an employee benefits trust, which are not
currently considered outstanding for calculations of basic or diluted
earnings per share;
2,796,120 shares of common stock issuable upon conversion of our 6.75%
convertible subordinated debentures, which are presently convertible into
31.068 shares of common stock for each $1,000 of convertible debentures and
which have a conversion price equivalent to approximately $32.19 per share
of common stock; and
up to shares that may be issued to the underwriters if they
exercise their option to purchase additional shares in this offering.
4
<Page>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data at and for the years ended
December 31, 1999, 2000 and 2001 have been derived from our audited consolidated
annual financial statements. The following summary consolidated financial data
at and for the nine months ended September 30, 2001 and 2002 have been derived
from our condensed consolidated quarterly financial statements, which are
unaudited but in the opinion of our management reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for such periods. Results of
operations for interim periods are not necessarily indicative of results to be
expected for the full fiscal years. You should read this data in conjunction
with the 'Selected Consolidated Financial Data,' 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and our financial
statements and the notes thereto included elsewhere in this prospectus.
STANDARD MOTOR PRODUCTS, INC.
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1999 2000 2001 2001 2002
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales(1)............................................. $653,451 $601,392 $591,652 $492,581 $488,034
Gross profit(1).......................................... 170,809 162,701 139,055 117,774 125,870
Operating income......................................... 30,223 30,711 15,123 22,146 29,580
Earnings from continuing operations...................... 8,685 10,230 312 6,642 14,095
Net earnings (loss)(2)(3)................................ 7,625 9,729 (2,485) 3,845 (19,933)
PER SHARE DATA:
Earnings from continuing operations:
Basic................................................. $ .66 $ .86 $ .03 $ .56 $ 1.18
Diluted............................................... .66 .85 .03 .56 1.14
Net earnings (loss) per common share:
Basic................................................. .58 .82 (.21) .33 (1.68)
Diluted............................................... .58 .81 (.21) .33 (1.16)
Cash dividends per common share.......................... .34 .36 .36 .27 .27
OTHER DATA:
EBITDA(4)................................................ $ 45,210 $ 50,083 $ 36,795 $ 37,758 $ 43,020
Depreciation and amortization............................ 17,230 18,922 18,909 14,072 11,715
Capital expenditures..................................... 14,423 16,652 13,740 11,125 5,804
Dividends................................................ 4,456 4,324 4,236 3,175 3,214
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................ $ 40,380 $ 7,699 $ 7,496 $ 11,814 $ 9,672
Working capital.......................................... 205,806 188,091 228,356 271,560 254,512
Total assets............................................. 556,021 549,396 509,429 578,757 565,446
Total debt............................................... 195,425 202,591 205,925 243,796 208,350
Long-term debt........................................... 163,868 150,018 200,066 237,392 200,879
Stockholders' equity..................................... 203,518 194,305 185,687 192,407 165,753
</Table>
- ---------
(1) On January 1, 2002, we adopted the guidelines of the Emerging Issues Task
Force (EITF) entitled 'Accounting for Certain Sales Incentives' and 'Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products.' These guidelines address when sales incentives and
discounts should be recognized and the accounting for certain costs incurred
by a vendor on behalf of a customer, as well as where the related revenues
and expenses should be classified in the financial statements. Net sales and
gross profit amounts for the periods prior to 2002 included in this
prospectus have been reclassified to conform to our 2002 presentation. Costs
of approximately $18 million, $25.4 million, $30.4 million and $25.9 million
have been reclassified from selling, general and administrative expenses for
December 31, 1999, 2000 and 2001 and the nine months ended September 30,
2001, respectively.
(2) Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
('SFAS No. 142'). In accordance with SFAS No. 142, goodwill will no longer
be amortized, but instead, will be subject to an annual review for potential
impairment. As a result, we recorded an impairment loss on goodwill as a
cumulative effect of accounting change of $16 million, net of tax, or $1.35
per diluted share, during the first
(footnotes continued on next page)
5
<Page>
(footnotes continued from previous page)
quarter of 2002. The impairment loss relates to goodwill pertaining to
certain of our reporting units with our European Operations (classified as
'All Other' for segment reporting) and with our Temperature Control
Division, and we recorded charges of $8.6 million related to our European
Operations and $7.4 million related to our Temperature Control Division.
Upon adoption of SFAS No. 142, our earnings before extraordinary item and
net earnings for basic and diluted earnings per share adjusted to exclude
goodwill amortization expense (net of taxes) were as follows:
<Table>
<Caption>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------------------ SEPTEMBER 30,
1999 2000 2001 2001
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported earnings before extraordinary item................. $ 8,685 $10,230 $ 312 $6,642
Add back: goodwill amortization expense, net of tax......... 2,439 2,733 2,498 1,868
------- ------- ------- ------
Adjusted earnings before extraordinary item................. $11,124 $12,963 $ 2,810 $8,510
------- ------- ------- ------
------- ------- ------- ------
Basic earnings per share:
Reported basic earnings per share before extraordinary
item.................................................... $ 0.66 $ 0.86 $ 0.03 $ 0.56
Add back: goodwill amortization expense, net of tax...... 0.19 0.23 0.21 0.15
------- ------- ------- ------
Adjusted basic earnings per share before extraordinary
item....................................................... $ 0.85 $ 1.09 $ 0.24 $ 0.71
------- ------- ------- ------
------- ------- ------- ------
Diluted earnings per share:
Reported diluted earnings per share before extraordinary
item.................................................... $ 0.66 $ 0.85 $ 0.03 $ 0.56
Add back: goodwill amortization expense, net of tax...... 0.19 0.23 0.21 0.15
------- ------- ------- ------
Adjusted diluted earnings per share before extraordinary
item....................................................... $ 0.85 $ 1.08 $ 0.24 $ 0.71
------- ------- ------- ------
------- ------- ------- ------
Reported net earnings (loss)................................ $ 7,625 $ 9,729 $(2,485) $3,845
Add back: goodwill amortization expense, net of tax......... 2,439 2,733 2,498 1,868
------- ------- ------- ------
Adjusted net earnings....................................... $10,064 $12,462 $ 13 $5,713
------- ------- ------- ------
------- ------- ------- ------
Basic net earnings (loss) per share:
Reported basic net earnings (loss) per share............. $ 0.58 $ 0.82 $ (0.21) $ 0.33
Add back: goodwill amortization expense, net of tax...... 0.19 0.23 0.21 0.15
------- ------- ------- ------
Adjusted basic net earnings per share....................... $ 0.77 $ 1.05 $ -- $ 0.48
------- ------- ------- ------
------- ------- ------- ------
Diluted net earnings (loss) per share:
Reported diluted net earnings (loss) per share........... $ 0.58 $ 0.81 $ (0.21) $ 0.33
Add back: goodwill amortization expense, net of tax...... 0.19 0.23 0.21 0.15
------- ------- ------- ------
Adjusted diluted net earnings per share..................... $ 0.77 $ 1.04 $ -- $ 0.48
------- ------- ------- ------
------- ------- ------- ------
</Table>
(3) For the nine months ended September 30, 2002, we recorded an after tax
charge of $18 million as a loss from discontinued operations to account for
potential costs associated with our asbestos-related liability. See 'Risk
Factors -- We may be materially adversely affected by asbestos claims
arising from products sold by our former brake business, as well as by other
product liability claims' for a more detailed discussion of the risks we
face in connection with our exposure to asbestos-related claims.
(4) EBITDA is defined as earnings from continuing operations before interest
expense, income taxes, depreciation and amortization. EBITDA is a measure
commonly used by investors to analyze and compare companies on the basis of
operating performance. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be construed
as a substitute for operating income or net earnings or loss for purposes of
analyzing our operating performance or financial position. EBITDA is not
necessarily comparable to similarly titled measures for other companies.
6
<Page>
The following summary combined financial data at and for the years ended
December 31, 2000 and 2001 and for the nine months ended September 30, 2002
have been derived from the audited combined financial statements of Dana's
EMG Business. You should read this data in conjunction with the 'Selected
Consolidated Financial Data' and the financial statements and the notes
thereto of Dana's EMG Business included elsewhere in this prospectus.
DANA CORPORATION'S ENGINE MANAGEMENT GROUP(1)
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ------------------
2000 2001 2002
---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales................................................ $357,475 $297,796 $229,137
Earnings (loss) before income taxes...................... (87,797) (101,531) (46,593)
Net earnings (loss)...................................... (52,121) (62,467) (28,497)
OTHER DATA:
EBITDA(2)................................................ $(68,904) $(81,706) $(33,639)
Depreciation and amortization............................ 18,802 19,216 12,810
Capital expenditures..................................... 21,557 1,378 1,560
BALANCE SHEET DATA (AT PERIOD END)(3):
Cash and cash equivalents................................ $ -- $ 292 $ 734
Working capital.......................................... 172,548 89,392 93,347
Total assets............................................. 391,394 264,184 247,035
Combined equity.......................................... 317,940 170,342 156,864
</Table>
- ---------
(1) The combined financial data of Dana's EMG Business include its water pump
and fuel pump product lines, which product lines we will not acquire and
which product lines we deem immaterial in amount.
(2) EBITDA is defined as earnings from continuing operations before interest
expense, income taxes, depreciation and amortization. EBITDA is a measure
commonly used by investors to analyze and compare companies on the basis of
operating performance. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be construed
as a substitute for operating income or net earnings or loss for purposes of
analyzing our operating performance or financial position. EBITDA is not
necessarily comparable to similarly titled measures for other companies.
(3) Balance sheet data at December 31, 2000 were derived from the financial
records of Dana's EMG Business and are unaudited.
7
<Page>
RISK FACTORS
You should carefully consider the risks described below before deciding to
invest in our common stock. An investment in our common stock involves a high
degree of risk. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business, financial
condition and results of operations. If any of the following risks actually
occur, our business, financial condition and results of operations could be
harmed. In that case, the trading price of our common stock could decline and
you could lose all or part of your investment. In assessing these risks, you
should also refer to the other information included or incorporated by reference
in this prospectus, including the financial statements and the notes thereto of
our company and of Dana's EMG Business included elsewhere in this prospectus.
RISKS RELATED TO OUR BUSINESS
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION AND THE INTEGRATION INTO OUR
COMPANY OF DANA'S EMG BUSINESS, AND THESE RISKS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
On February 7, 2003, we entered into an agreement to purchase Dana's EMG
Business. We believe that we will integrate Dana's EMG Business into our company
within 18 months of the closing of the acquisition, but we cannot give you any
assurance that we will be able to do so successfully and within the intended
time frame.
We face a variety of uncertainties and challenges regarding the acquisition
and integration of Dana's EMG Business including:
difficulties integrating operational and financial systems -- we may
encounter difficulties integrating operational and financial systems, which
may delay our integration efforts and extend the time frame in which
integration of Dana's EMG Business into our company and realization of any
associated cost savings will occur;
higher than expected costs of restructuring and integration -- the costs of
restructuring and integration may be materially higher than we expect; and
lower than expected sales and profitability -- Dana's EMG Business may not
achieve sales and profitability that justify our investment.
These risks, and the fact that integration of the acquired business will
require a significant amount of our management's and employees' time and
resources, could disrupt our ongoing business. In addition, if we do not achieve
the perceived benefits and anticipated cost savings of the acquisition as
rapidly as, or to the extent, projected, our business, financial condition and
results of operations could be materially adversely affected.
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
COMPETE WITH SUPPLIERS OF AUTOMOTIVE AFTERMARKET PRODUCTS, SOME OF WHICH HAVE
SUBSTANTIALLY GREATER FINANCIAL, MARKETING AND OTHER RESOURCES THAN WE DO.
The automotive aftermarket industry is highly competitive and our success
depends on our ability to compete with suppliers of automotive aftermarket
products. Our competitors include a number of established independent
manufacturers as well as divisions of companies, such as Delco Electronics
Corporation, Delphi Corporation, Federal-Mogul Corporation, Ford (MotorCraft),
KEM Manufacturing Products, Inc., M. Cardone Industries, Robert Bosch
Corporation, Transpro, Inc., Visteon Corporation and Wells Manufacturing (a UIS,
Inc. subsidiary). In addition, automobile manufacturers supply virtually every
replacement part we sell.
Some of our existing competitors have larger customer bases and
significantly greater financial, technical and marketing resources than we do.
These factors may allow our competitors to:
respond more quickly than we can to new or emerging technologies and
changes in customer requirements by devoting greater resources than we can
to the development, promotion and sale of automotive aftermarket products
and services;
engage in more extensive research and development;
8
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sell products at a lower price than we do;
undertake more extensive marketing campaigns; and
make more attractive offers to existing and potential customers and
strategic partners.
We cannot assure you that our competitors will not develop products or
services that are equal or superior to our products or that achieve greater
market acceptance than our products or that in the future other companies
involved in the automotive aftermarket industry will not expand their operations
into product lines produced and sold by us. We also cannot assure you that
additional entrants will not enter the automotive aftermarket industry or that
companies in the aftermarket industry will not consolidate. Any of such
competitive pressures could cause us to lose market share or could result in
significant price decreases and could have a material adverse effect upon our
business, financial condition and results of operations.
THERE IS SUBSTANTIAL PRICE COMPETITION IN OUR INDUSTRY, AND OUR SUCCESS AND
PROFITABILITY WILL DEPEND ON OUR ABILITY TO MAINTAIN A COMPETITIVE COST AND
PRICE STRUCTURE.
There is substantial price competition in our industry, and our success and
profitability will depend on our ability to maintain a competitive cost and
price structure. We may have to reduce prices in the future to remain
competitive. Also, our future profitability will depend in part upon our ability
to continue to improve our manufacturing efficiencies and maintain a cost
structure that will enable us to offer competitive prices. Our inability to
maintain a competitive cost structure could have a material adverse effect on
our business, financial condition and results of operations.
OUR BUSINESS IS SEASONAL AND IS SUBJECT TO SUBSTANTIAL QUARTERLY FLUCTUATIONS,
WHICH IMPACT OUR QUARTERLY PERFORMANCE AND WORKING CAPITAL REQUIREMENTS.
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year and with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
and retailer inventories. For example, a cool summer may lessen the demand for
our Temperature Control products, while a hot summer may increase such demand.
As a result of this seasonality and variability in demand of our Temperature
Control products, our working capital requirements peak near the end of the
second quarter, as the inventory build-up of air conditioning products is
converted to sales and payments on the receivables associated with such sales
have yet to be received. During this period, our working capital requirements
are typically funded by borrowing from our revolving credit facility. We
believe, based upon our quarterly fluctuations in operating results, that
period-to-period comparisons of our operating results may not be meaningful.
You should not rely on our past periods as indicators of our future
performance. It is possible that in some future periods our results of
operations may be below historical performance.
WE DEPEND ON A LIMITED NUMBER OF KEY CUSTOMERS, AND THE LOSS OF ANY SUCH
CUSTOMER OR A MATERIAL REDUCTION IN BUSINESS FROM ANY SUCH CUSTOMER COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Our five largest individual customers accounted for 46% and 44% of our
consolidated net sales for the nine months ended September 30, 2002 and 2001,
respectively. Members of one marketing group represent our largest group of
customers and accounted for approximately 16% and 15% of our consolidated net
sales for the nine months ended September 30, 2002 and 2001, respectively. One
individual member of this marketing group accounted for 11% and 10% of our
consolidated net sales for the nine months ended September 30, 2002 and 2001,
respectively. In addition, a significant customer of our Temperature Control
Division is a significant customer of Dana's EMG Business, and following the
closing of the acquisition, we believe this customer
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would become a significant customer of our Engine Management Division and would
have accounted on a pro forma basis for approximately 18% of our consolidated
net sales for the nine months ended September 30, 2002 and 16% of our
consolidated net sales in 2001. In addition, following the closing of the
acquisition, two significant customers of Dana's EMG Business, one of which is a
customer of our Temperature Control Division, would have accounted on a pro
forma basis for approximately 5% and 3%, respectively, of our consolidated net
sales for the nine months ended September 30, 2002, and 6% and 2%, respectively,
of our consolidated net sales in 2001. The loss of one or more of these
customers could have a materially adverse impact on our business, financial
condition and results of operations.
Also, we do not typically enter into long-term agreements with any of our
customers. Instead, we enter into a number of purchase order commitments with
our customers, based on their current or projected needs. We have in the past
and may in the future lose customers or lose a particular product line of a
customer due to the highly competitive conditions in the automotive aftermarket
industry. A decision by any significant customer, whether motivated by
competitive conditions, financial difficulties or otherwise, to materially
decrease the amount of products purchased from us, to change their manner of
doing business with us, or to stop doing business with us, could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY INCUR MATERIAL LOSSES AND SIGNIFICANT COSTS AS A RESULT OF
WARRANTY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS.
Our products are required to meet rigorous standards imposed by our
customers and our industry. Many of our products carry a warranty ranging from a
90-day limited warranty to a lifetime limited warranty, which generally covers
defects in materials or workmanship and failure to meet industry published
specifications. In the event that there are material deficiencies or defects in
the design and manufacture of our products and/or installer error, the affected
products may be subject to warranty returns and/or product recalls. Although we
maintain a comprehensive quality control program, we cannot give any assurance
that our products will not suffer from defects or other deficiencies or that we
will not experience material warranty returns or product recalls in the future.
We accrue for warranty returns as a percentage of sales, after giving
consideration to recent historical returns. While we believe that we make
reasonable estimates for warranty returns in accordance with our revenue
recognition policies, actual returns may differ from our estimates. We may incur
material losses and significant costs as a result of our customers returning
products to us as a result of warranty-related issues in excess of anticipated
amounts. For example, our financial performance in 1999 was adversely impacted
by an unusually high number of our customers returning products to us that were
under warranty primarily in our Temperature Control Division. Deficiencies or
defects in our products in the future may result in warranty returns and product
recalls in excess of anticipated amounts and may have a material adverse effect
on our business, financial condition and results of operations.
OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF OVERSTOCK
INVENTORY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS.
We permit overstock returns of inventory that we allow customers to return
to us and that may be either new or non-defective or non-obsolete but that we
believe we can re-sell. Customers are generally limited to returning overstocked
inventory according to an annual allowance based on the prior year's purchases,
net of all discounts and allowances. In addition, a customer's annual allowance
cannot be carried forward to the upcoming year.
We accrue for overstock returns as a percentage of sales, after giving
consideration to recent historical returns. While we believe that we make
reasonable estimates for overstock returns in accordance with our revenue
recognition policies, actual returns may differ from our estimates. For example,
our financial performance in 1999 was adversely impacted by our decision to
discontinue offering selected Temperature Control products, which resulted in
customers returning products at levels in excess of anticipated amounts. To the
extent that overstocked returns are materially in
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excess of our projections, our business, financial condition and results of
operations may be materially adversely affected.
OVER THE LONG TERM, OUR BUSINESS IS DEPENDENT ON THE AUTOMOTIVE INDUSTRY, AND
OUR FUTURE PERFORMANCE MAY BE MATERIALLY ADVERSELY AFFECTED BY PERSISTENT
DECLINES IN THE AUTOMOTIVE INDUSTRY OR CHANGES IN TECHNOLOGIES AND IMPROVEMENTS
IN THE QUALITY OF NEW VEHICLE PARTS.
Over the long term, our business is dependent upon the sales of automobiles
within the automotive industry, which creates the total number of vehicles
available for repair following the expiration of vehicle warranties. A
persistent decline in automotive sales and production over the long term would
likely affect sales to our aftermarket customers. Changes in automotive
technologies, such as vehicles powered by fuel cells or electricity, could also
negatively affect sales to our aftermarket customers. These factors could result
in less demand for our products thereby resulting in a decline in our results of
operations or a deterioration in our business and financial condition and may
have a material adverse effect on our long term performance.
In addition, the size of the automobile replacement parts market depends, in
part, upon the growth in number of vehicles on the road, increase in average
vehicle age, increase in total miles driven per year, new and modified
environmental regulations, increase in pricing of new cars and new car quality
and related warranties. The automobile replacement parts market has been
negatively impacted by the fact that the quality of more recent automotive
vehicles and their component parts has improved, thereby lengthening the repair
cycle. Generally, if parts last longer, there will be less demand for our
products, and the average useful life of automobile parts has been steadily
increasing in recent years due to innovations in products and technology. These
factors could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE MATERIALLY ADVERSELY AFFECTED BY ASBESTOS CLAIMS ARISING FROM PRODUCTS
SOLD BY OUR FORMER BRAKE BUSINESS, AS WELL AS BY OTHER PRODUCT LIABILITY CLAIMS.
In 1986, we acquired a brake business, which we subsequently sold in March
1998. When we originally acquired this brake business, we assumed future
liabilities relating to any alleged exposure to asbestos-containing products
manufactured by the seller of the acquired brake business. In accordance with
the related purchase agreement, we agreed to assume the liabilities for all new
claims filed after September 1, 2001. Our ultimate exposure will depend upon the
number of claims filed against us on or after September 1, 2001 and the amounts
paid for indemnity and defense thereof.
We currently do not have insurance coverage for the defense and indemnity
costs associated with the claims we face. To date, the amounts paid for settled
claims have been immaterial, although a substantial increase in the number of
new claims or increased settlement payments or awards of damages could have a
material adverse affect on our business, financial condition and results of
operations. Actuarial consultants with experience in assessing asbestos-related
liabilities conducted a study to estimate our potential claim liability as of
September 30, 2002. The actuarial study estimated an undiscounted liability for
settlement payments ranging from $27.3 million to $58 million for the period
through 2052. Accordingly, based on the information contained in the actuarial
study and all other available information that we considered, we recorded an
after tax charge of $16.9 million as a loss from discontinued operations during
the third quarter of 2002 to reflect such liability. At December 31, 2001,
approximately 100 cases were outstanding for which we were responsible for any
related liabilities. At December 31, 2002, the number of cases outstanding for
which we were responsible for related liabilities increased to approximately
2,500, which include approximately 1,600 cases filed in December 2002 in
Mississippi. We believe that these Mississippi cases filed against us in
December 2002 were due in large part to potential plaintiffs accelerating the
filing of their claims prior to the effective date of Mississippi's tort reform
statute in January 2003, which statute eliminated the ability of plaintiffs to
file consolidated cases.
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You should be aware that we have only been responsible for dealing with
these asbestos-related claims since September 1, 2001, so our experience may not
be adequate to accurately express a view as to the future extent of our exposure
to these claims. Given the uncertainties associated with projecting
asbestos-related matters into the future, the short period of time that we have
been responsible for defending these claims, and other factors outside our
control, we cannot give any assurance that significant increases in the number
of claims filed against us will not occur, that asbestos-related damages or
settlement awards will not exceed the amount we have in reserve, or that
additional provisions will not be required. Management will continue to monitor
the circumstances surrounding these potential liabilities in determining whether
additional reserves and provisions may be necessary.
In addition to asbestos-related claims, our product sales entail the risk of
involvement in other product liability actions. We maintain product liability
insurance coverage, but we cannot give any assurance that current or future
policy limits will be sufficient to cover all possible liabilities. Further, we
can give no assurance that adequate product liability insurance will continue to
be available to us in the future or that such insurance may be maintained at a
reasonable cost to us. In the event of a successful product liability claim
against us, a lack or insufficiency of insurance coverage could have a material
adverse effect on our business, financial condition and results of operations.
OUR SUBSTANTIAL INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL HEALTH.
We have, and after the completion of this offering and the acquisition of
Dana's EMG Business will continue to have, a significant amount of indebtedness.
As of December 31, 2002, our total outstanding indebtedness was $177.2 million.
We incurred $90 million of indebtedness in July 1999 from the sale of our
convertible debentures. We have an existing revolving bank credit facility of
$225 million with General Electric Capital Corporation, as agent, and a
syndicate of lenders, which we refer to throughout this prospectus as our
revolving credit facility. As of December 31, 2002, we had $76.2 million of
outstanding indebtedness and approximately $58.7 million of availability under
this revolving credit facility. The size of the revolving credit facility
increases to $305 million upon our acquisition of Dana's EMG Business, subject
to the terms and conditions of the facility. Following this offering and our
acquisition of Dana's EMG Business, we expect our total outstanding indebtedness
to be approximately $264 million. Our substantial indebtedness could:
increase our vulnerability to general adverse economic and industry
conditions;
limit our ability to fund future working capital, capital expenditures,
research and development costs and other general corporate requirements;
limit our ability to pay future dividends;
limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
increase the amount of interest expense that we have to pay because some of
our borrowings are at variable rates of interest, which, if interest rates
increase, could result in a higher interest expense; and
limit, along with the financial and other restrictive covenants of our
indebtedness, among other things, our ability to borrow additional funds.
In addition, we have granted the lenders under our revolving credit facility
a first priority security interest in substantially all of our currently owned
and future acquired personal property, real property (other than our Long Island
City facility, which is currently unencumbered) and other assets. We have also
pledged all of the shares of stock in our subsidiaries to those lenders.
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WE MAY NOT BE ABLE TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE
OUR INDEBTEDNESS AND FUND OUR FUTURE OPERATIONS.
Our ability either to make payments on or to refinance our indebtedness, or
to fund planned capital expenditures and research and development efforts, will
depend on our ability to generate cash in the future. Our ability to generate
cash is in part subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
Based on our current level of operations and the anticipated business
opportunities provided by the acquisition of Dana's EMG Business, we believe our
cash flow from operations, available cash and available borrowings under our
revolving credit facility will be adequate to meet our future liquidity needs
for at least the next few years. Significant assumptions underlie this belief,
including, among other things, that there will be no material adverse
developments in our business, liquidity or capital requirements. If we are
unable to service our indebtedness, we will be forced to adopt an alternative
strategy that may include actions such as:
reducing capital expenditures;
reducing research and development efforts;
selling assets;
restructuring or refinancing our indebtedness; and
seeking additional funding.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, even with the anticipated sales growth, cost
improvements and increased cash flow from the acquisition of Dana's EMG
Business, or that future borrowings will be available to us under our revolving
credit facility in amounts sufficient to enable us to pay the principal and
interest on our indebtedness or to fund our other liquidity needs. We may need
to refinance all or a portion of our indebtedness on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
OUR BUSINESS IS DEPENDENT ON OUR MAINTAINING SATISFACTORY RELATIONSHIPS WITH
SUPPLIERS, AND THE LOSS OF SEVERAL MAJOR SUPPLIERS OF RAW MATERIALS OR KEY
COMPONENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
Our business depends on our relationships with suppliers of raw materials
and components that we use on our product lines and on our ability to purchase
these raw materials and key components at prices and on terms comparable to
similarly-situated companies. We purchase most materials in the U.S. open
market. Although we do not expect that the loss of any one supplier would have a
material adverse effect on us, the loss of several major suppliers would have a
material adverse effect our business, financial condition and results of
operations.
WE MAY INCUR LIABILITIES UNDER GOVERNMENT REGULATIONS AND POLICIES AND
ENVIRONMENTAL LAWS, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Domestic and foreign political developments and government regulations and
policies directly affect automotive consumer products in the United States and
abroad. Regulations and policies relating to over-the-highway vehicles include
standards established by the United States Department of Transportation for
motor vehicle safety and emissions. The modification of existing laws,
regulations or policies, or the adoption of new laws, regulations or policies,
could have a material adverse effect on our business, financial condition and
results of operations. Our failure to comply with these laws and regulations
could subject us to civil and criminal penalties.
Our operations and properties are also subject to a wide variety of
increasingly complex and stringent federal, state, local and international laws
and regulations, including those governing the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of materials,
substances and wastes, the remediation of contaminated soil and groundwater and
the
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health and safety of employees. Such environmental laws, including but not
limited to those under the Comprehensive Environmental Response Compensation &
Liability Act, may impose joint and several liability and may apply to
conditions at properties presently or formerly owned or operated by an entity or
its predecessors, as well as to conditions at properties at which wastes or
other contamination attributable to an entity or its predecessors have been sent
or otherwise come to be located. The nature of our operations exposes us to the
risk of claims with respect to such matters, and we can give no assurance that
violations of such laws have not occurred or will not occur or that material
costs or liabilities will not be incurred in connection with such claims. One of
our facilities is currently undergoing minor environmental remediation, which
costs are covered by insurance, subject to a $1.5 million deductible and a $3
million indemnity limitation. We also maintain a three year $10 million
environmental policy to cover our other existing facilities. Based upon our
experience to date, we believe that the future cost of compliance with existing
environmental laws, and liability for known environmental claims pursuant to
such environmental laws, will not give rise to additional significant
expenditures or liabilities that would be material to us. However, future
events, such as new information, changes in existing environmental laws or their
interpretation, and more vigorous enforcement policies of regulatory agencies,
may have a material adverse effect on our business, financial condition and
results of operations.
THE SUCCESS OF OUR BUSINESS IS DEPENDENT ON OUR KEY PERSONNEL, AND THE LOSS OF
ANY OF THESE PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The success of our business is dependent, to a significant extent, upon the
abilities and continued efforts of our senior management team, including
Lawrence I. Sills, our Chairman of the Board and Chief Executive Officer, John
P. Gethin, our President and Chief Operating Officer, James J. Burke, our Vice
President Finance, Chief Financial Officer, and Joseph G. Forlenza, our Vice
President and General Manager of Engine Management Division. None of our
executive officers currently has an employment agreement with us, and we do not
currently maintain key-life insurance on any of our executive officers. The loss
of any of these persons and the inability to attract qualified replacements for
these key personnel could have a material adverse effect on our business,
financial condition and results of operations.
RISKS RELATED TO OUR COMMON STOCK AND THIS OFFERING
OUR PRINCIPAL SHAREHOLDERS HAVE THE ABILITY TO CONTROL US AND THEIR INTERESTS
MAY, AT TIMES, CONFLICT WITH THE INTERESTS OF OUR OTHER SHAREHOLDERS.
At December 31, 2002, members of the families that founded Standard Motor
Products owned, directly or indirectly, approximately 43% of our outstanding
common stock. Specifically, shares of common stock owned directly or indirectly
by members of the family of Lawrence I. Sills, our Chairman of the Board and
Chief Executive Officer, aggregated 2,913,001 shares (approximately 23% of our
outstanding common stock at December 31, 2002), and shares of common stock owned
directly or indirectly by members of the family of Arthur D. Davis, Marilyn Fife
Cragin and Susan F. Davis, three of our directors who are family members of
Bernard Fife, one of our founders, aggregated 2,491,631 shares (approximately
20% of our outstanding common stock at December 31, 2002). To the extent that
these shareholders exercise their voting rights in concert, they may have the
ability to control the election of our board of directors, to appoint new
management and to control the outcome of matters submitted to a vote of the
holders of common stock, which may make it more difficult for a third party to
acquire us. The interests of these equity holders may at times conflict with the
interests of our other shareholders.
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK HELD BY DANA OR OUR
MANAGEMENT FOLLOWING THE EXPIRATION OF THEIR RESPECTIVE LOCK-UP PERIODS COULD
HAVE A MATERIAL ADVERSE EFFECT ON THE TRADING PRICE OF OUR COMMON STOCK.
In connection with the acquisition of Dana's EMG Business, assuming a
purchase price of $121 million, based on the September 30, 2002 audited balance
sheet of Dana's EMG Business,
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Dana will receive approximately shares of our common stock,
representing approximately % of our outstanding common stock as of
December 31, 2002, as part of the acquisition purchase price. Dana has agreed
not to sell or otherwise transfer these shares of common stock for a period of
two and a half years following the date of the closing of the acquisition. The
shares of common stock received by Dana are not registered under the Securities
Act. We have agreed to register these shares under the Securities Act should an
exemption to registration under the securities laws be unavailable to Dana
following the expiration of such two and a half year lock-up period.
Accordingly, all of the shares of our common stock that Dana received as part of
the acquisition purchase price will be available for sale in the public market
two and a half years after the date of the closing of the acquisition. In
addition, our directors and executive officers have agreed not to sell or
otherwise transfer the shares of common stock held directly or indirectly by
such persons for a period of 90 days following the effective date of this
offering. Sales of a substantial number of shares of common stock held by Dana
or our management following the expiration of their respective lock-up periods
could have a material adverse effect on the market price of our common stock.
OUR RESTATED CERTIFICATE OF INCORPORATION AND RESTATED BY-LAWS CONTAIN
PROVISIONS THAT MAY HINDER OR PREVENT A CHANGE OF CONTROL.
Some of the provisions of our restated certificate of incorporation and
restated by-laws could make a takeover difficult, even if such a transaction
would be beneficial to shareholders. Specifically, our restated certificate of
incorporation requires a 75% vote for transactions with the direct or indirect
beneficial owner of at least 5% of the outstanding shares of any class of our
capital stock, and our restated certificate of incorporation and restated
by-laws provide that our directors may be removed without cause only by a vote
of holders of 75% of the outstanding stock.
Section 912 of the New York Business Corporation Law would also prohibit
business combinations with an 'interested shareholder,' which includes a person
or entity who beneficially owns 20% of a company's voting stock directly or
indirectly for five years unless the board of directors of such company approves
the transaction before the person or entity becomes an interested shareholder.
This provision may have the effect of making a takeover of us even more
difficult.
In addition, our shareholder rights plan may make it more difficult for a
person to purchase our company if such purchase is not approved by our board of
directors.
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RECOVER YOUR
INVESTMENT IF OUR STOCK PRICE DECLINES.
The market price of our common stock has traditionally fluctuated over a
wide range and may continue to do so in the future. Factors that may affect our
common stock fluctuation include:
quarterly variations in our operating results;
changes in concentration of our equity ownership by families of our
founders and by our other significant shareholders, including Dana
following the acquisition;
quarterly variations in the results of operations or stock prices of
comparable companies;
announcements of new products or services offered by us or our competitors;
changes in earnings estimates or buy/sell recommendations by financial
analysts;
the stock price performance of our material customers;
existing competitive conditions and the possible entry of additional
competitors or expansion of existing competitors into our markets; and
general market conditions or market conditions specific to particular
industries.
Factors affecting the automotive aftermarket industry generally and changes
in general market conditions may also have a significant impact on the market
price for our securities.
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THE LIMITED TRADING VOLUME OF OUR COMMON STOCK MAY CONTRIBUTE TO ITS PRICE
VOLATILITY, AND AS A RESULT RELATIVELY SMALL TRADES MAY HAVE A SIGNIFICANT
IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
Our common stock is traded on The New York Stock Exchange under the symbol
'SMP.' For the fourth quarter of 2002, the average daily trading volume for our
common stock as reported by the NYSE was approximately 21,258 shares. Even if we
achieve a wider dissemination by means of the shares offered pursuant to this
prospectus, we are uncertain as to whether a more active trading market in our
common stock will develop. As a result, relatively small trades may have a
significant impact on the market price of our common stock.
IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK TO REPAY OR
RESTRUCTURE OUR INDEBTEDNESS OR FINANCE OUR OPERATING REQUIREMENTS, THERE IS A
RISK THAT YOUR STOCK OWNERSHIP COULD BE DILUTED.
In order to pay down or restructure our indebtedness or fund our general
operating requirements, we may issue additional equity securities in the future.
The issuance of additional equity securities could be dilutive to our earnings
per share and to your stock ownership, and you may not be able to recover your
investment if there is a dilution of our stock.
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SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS
Various statements contained in this prospectus or incorporated by reference
into this prospectus constitute 'forward-looking statements' within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on current expectations and are indicated by words or
phrases such as 'believe,' 'expect,' 'may,' 'will,' 'should,' 'seek,' 'plan,'
'intend' or 'anticipate' or the negative thereof or comparable terminology, or
by discussion of strategy. Forward looking statements are primarily contained in
the sections of this prospectus entitled 'Prospectus Summary,' 'Risk Factors,'
'Pro Forma Financial Information,' 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and 'Business.' Forward-looking
statements represent as of the date of this prospectus our judgment relating to,
among other things, future results of operations, growth plans, sales, capital
requirements and general industry and business conditions applicable to us. Such
forward looking statements are based largely on our current expectations and are
inherently subject to risks and uncertainties. Our actual results could differ
materially from those that are anticipated or projected as a result of certain
risks and uncertainties, including, but not limited to, a number of factors,
such as:
successful integration of acquired businesses;
economic and market conditions;
the performance of the automotive aftermarket sector;
changes in business relationships with our major customers and in the
timing, size and continuation of our customers' programs;
the ability of our customers to achieve their projected sales;
competitive product and pricing pressures;
increases in production or material costs that cannot be recouped in
product pricing;
product liability (including, without limitation, those related to
estimates to asbestos-related contingent liabilities) matters; and
the other risks and uncertainties that are described in this prospectus and
from time to time in our filings with the SEC.
Except as otherwise required to be disclosed in periodic reports required to
be filed by public companies with the SEC pursuant to the SEC's rules, we have
no duty to update these statements, and we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks and
uncertainties, we cannot assure you that the forward-looking information
contained in this prospectus will in fact transpire.
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THE ACQUISITION AND RELATED TRANSACTIONS
This offering is being made in connection with our acquisition of Dana's EMG
Business. The closing of the acquisition is subject to our financing of the
purchase price. We intend to finance the acquisition and the payment of related
fees and expenses and restructuring and integration costs by (a) drawing on our
revolving credit facility, (b) issuing shares of our common stock to Dana, and
(c) obtaining seller financing.
On February 7, 2003, we signed an agreement to purchase substantially all of
the assets and to assume substantially all of the operating liabilities of
Dana's EMG Business, excluding assets and liabilities related to its water pump
and fuel pump product lines, for a purchase price equal to the closing net book
value of the business, subject to a maximum purchase price of $125 million.
Assuming an acquisition purchase price of $121 million, based upon the
September 30, 2002 audited balance sheet of Dana's EMG Business, we will pay to
Dana:
approximately $90.8 million in cash;
an unsecured promissory note in the aggregate principal amount of
approximately $15.1 million; and
shares of our common stock with a value of approximately $15.1 million.
The acquisition purchase price is subject to a post-closing adjustment based
upon the book value of the acquired assets of Dana's EMG Business less the book
value of the assumed liabilities of Dana's EMG Business as of the close of
business on the closing date.
The acquisition is subject to our obtaining financing for the acquisition
and other customary closing conditions, including expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act. We expect to
close the acquisition substantially simultaneously with the closing of this
offering.
DANA'S EMG BUSINESS
Dana's EMG Business is a leading manufacturer of aftermarket parts in the
automotive industry focused exclusively on engine management. Dana's EMG
Business had approximately $229 million in consolidated net sales for the nine
months ended September 30, 2002 and approximately $298 million in consolidated
net sales in 2001. Dana's EMG Business customers consist of many of the leading
warehouse distributors, such as NAPA Auto Parts, as well as many of the leading
auto parts retail chains, such as O'Reilly Automotive, CSK Auto and Pep Boys.
Dana's EMG Business products enjoy strong brand recognition with its many
leading automotive product names, including Echlin, Borg Warner and Niehoff, as
well as with private labels through NAPA Auto Parts. Dana's EMG Business
currently includes nine operating facilities employing approximately 1,900
people. We intend to integrate Dana's EMG Business into our existing Engine
Management Division within 18 months of the closing of the acquisition.
Dana acquired Echlin Corporation's engine management business in 1998 and
incurred a number of charges to its earnings as a result of operating and
financial restructuring activities, including reductions in work force, the
rationalization of distribution facilities, and the introduction of new
management information systems. These activities had a negative impact on the
financial performance of Dana's EMG Business, as evidenced by Dana's EMG
Business recording an EBITDA loss (excluding the water pump and fuel pump
product lines, which are being retained by Dana) for the nine months ended
September 30, 2002 of approximately $31.3 million (which represented an EBITDA
loss of approximately $33.6 million for Dana's EMG Business for the nine months
ended September 30, 2002 excluding the loss associated with the water pump and
fuel pump product lines retained by Dana of $2.3 million, as noted in the Pro
Forma Financial Statements). Certain of these activities that occurred during
the nine months ended September 30, 2002 are reflected in restructuring charges
that Dana incurred of approximately $9.7 million. During 2002, Dana also
instituted various operating initiatives related to their distribution
facilities and the size of their workforce, resulting in cost savings that are
expected to be approximately $8 million per annum.
18
<Page>
In addition to the steps already taken by Dana, we have identified various
opportunities to improve the performance of Dana's EMG Business following the
closing of the acquisition. These opportunities include:
rationalizing excess manufacturing capacity;
improving distribution activities;
consolidating redundant activities such as management information systems,
accounting, and catalog production;
realizing the benefits of scale in purchasing materials; and
moving out of unnecessary operating facilities.
We believe that once we have fully completed the integration of Dana's EMG
Business these cost savings will range from $45 to $50 million per annum.
RELATED DEBT AND EQUITY FINANCINGS
Amendment to Our Revolving Credit Facility. On February 7, 2003, we amended
our revolving credit facility to provide for an additional $80 million
commitment, subject to the terms and conditions therein, which will become
effective upon the closing of our acquisition of Dana's EMG Business. This
additional commitment increases the total amount available for borrowing under
our revolving credit facility to $305 million. After applying all of the net
proceeds from this offering to repay a portion of our outstanding indebtedness
under our revolving credit facility, we intend to borrow the entire cash portion
of the purchase price of Dana's EMG Business from our revolving credit facility.
Following the closing of this acquisition, we expect to have approximately $58.7
million available under this amended revolving credit facility.
Seller Note. At the acquisition closing, we will deliver to Dana an
unsecured promissory note in the aggregate principal amount of approximately
$15.1 million, assuming an acquisition purchase price of $121 million, having an
interest rate of 9% per annum for the first year, with such interest rate
increasing by one-half of a percentage point (0.5%) on each anniversary of the
date of issuance. Accrued and unpaid interest is due quarterly under the
promissory note. The maturity date of the promissory note is five and a half
years from the date of issuance. The promissory note may be prepaid in whole or
in part at any time without penalty.
Seller Equity. At the acquisition closing, we will fund a portion of the
acquisition purchase price by issuing to Dana shares of our common stock with a
value of approximately $15.1 million, assuming an acquisition purchase price of
$121 million. Dana would receive approximately shares of our common
stock, which would represent approximately % of our outstanding common stock
as of December 31, 2002, assuming that the price of our common stock is $ .
19
<Page>
USE OF PROCEEDS
The net proceeds from our sale of shares of common stock in this
offering will be approximately $ million after deducting the underwriting
discount and estimated expenses. If the underwriters exercise in full their
option to purchase additional shares in this offering, our net proceeds will be
approximately $ million. We intend to use all of the net proceeds from this
offering to repay a portion of our outstanding indebtedness under our revolving
credit facility. We then intend to borrow the entire cash portion of the
purchase price of Dana's EMG Business from our revolving credit facility to
consummate the closing of the acquisition.
20
<Page>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock trades publicly on the New York Stock Exchange under the
trading symbol 'SMP.' The following table shows the high and low sales prices
per share of the common stock as reported by the New York Stock Exchange and the
dividends declared per share for the periods indicated:
<Table>
<Caption>
HIGH LOW DIVIDEND
---- --- --------
FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter......................................... $16.50 $12.63 $0.09
Second Quarter........................................ 15.70 7.38 0.09
Third Quarter......................................... 10.63 7.94 0.09
Fourth Quarter........................................ 8.44 6.44 0.09
FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter......................................... $10.60 $ 7.44 $0.09
Second Quarter........................................ 14.50 9.90 0.09
Third Quarter......................................... 13.70 11.65 0.09
Fourth Quarter........................................ 14.95 10.45 0.09
FISCAL YEAR ENDED DECEMBER 31, 2002
First Quarter......................................... $15.15 $12.90 $0.09
Second Quarter........................................ 17.04 14.30 0.09
Third Quarter......................................... 17.39 10.63 0.09
Fourth Quarter........................................ 13.90 9.45 0.09
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter (through February 12, 2003)............. $15.70 $12.78 $ --
</Table>
The last reported sale price of our common stock on the NYSE on February 12,
2003 was $13.71 per share. As of February 12, 2003, there were 503 holders of
record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our
board of directors and depend on our profitability, financial condition, capital
needs, future prospects, and other factors deemed relevant by our board. Our
current policy is to pay dividends on a quarterly basis. Our credit agreement
permits dividends and distributions by us provided specific conditions are met.
See 'Description of Capital Stock -- Common Stock' for a discussion of such
conditions under our revolving credit facility.
21
<Page>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2002:
on an actual basis, and
on an as adjusted basis, to reflect
our receipt of the estimated net proceeds of $54.3 million from the
sale of 4,500,000 shares of our common stock in this offering at an
assumed offering price of $13.00 per share, after deducting the
underwriting discount and estimated expenses, and
our acquisition of Dana's EMG Business and the related borrowing and
stock issuance.
You should read this table in conjunction with 'Use of Proceeds,' 'Selected
Consolidated Financial Data,' 'Pro Forma Financial Information,' 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
our financial statements and the notes thereto included elsewhere in this
prospectus.
The shares of common stock to be outstanding after this offering exclude:
909,696 shares of common stock issuable upon exercise of options
outstanding as of December 31, 2002 under our stock option plans at a
weighted average exercise price of $17.15 per share;
356,745 shares of common stock reserved for future grants under our
stock option plans;
600,000 shares held by us in an employee benefits trust, which are not
currently considered outstanding for calculations of basic or diluted
earnings per share;
2,796,120 shares of common stock issuable upon conversion of our
convertible debentures, which are presently convertible into 31.068
shares of common stock for each $1,000 of convertible debentures and
which have a conversion price equivalent to approximately $32.19 per
share of common stock; and
up to shares that may be issued to the underwriters if they
exercise their option to purchase additional shares in this offering.
22
<Page>
<Table>
<Caption>
AS OF
SEPTEMBER 30, 2002
----------------------
AS
ACTUAL ADJUSTED(1)
------ -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER
SHARE DATA)
Cash and cash equivalents................................... $ 9,672 $ 9,672
-------- --------
-------- --------
Notes payable............................................... 3,229 3,229
-------- --------
Payments due within one year on long-term debt.............. 4,242 4,242
-------- --------
Convertible Subordinated Debentures due 2009................ 90,000 90,000
Revolving Credit Facility(2)................................ 107,195 153,795
Other....................................................... 3,684 18,784
-------- --------
Long term debt.......................................... 200,879 262,579
-------- --------
Stockholders' equity:
Preferred stock -- par value $20.00 per share:
Authorized -- 500,000 shares, none issued
Common stock -- par value $2.00 per share:
Authorized -- 30,000,000 shares, issued and
outstanding -- 11,957,009 shares.................... 26,649 38,049
Capital in excess of par value.......................... 1,684 59,684
Retained earnings....................................... 160,385 160,385
Accumulated other comprehensive loss.................... (2,328) (2,328)
Less: Treasury stock -- at cost 1,367,467 shares........ (20,637) (20,637)
-------- --------
Total stockholders' equity.......................... 165,753 235,153
-------- --------
Total capitalization................................ $374,103 $505,203
-------- --------
-------- --------
</Table>
- ---------
(1) Assuming an acquisition purchase price of Dana's EMG Business of $121
million, based on the September 30, 2002 audited balance sheet for Dana's
EMG Business, paid for by drawing $46.6 million on our revolving credit
facility, issuing 1,200,000 shares of common stock to Dana, issuing an
unsecured promissory note in the aggregate principal amount of $15.1 million
to Dana, and a stock issuance of approximately 4,500,000 shares of our
common stock in this offering.
(2) Assumes (a) the application of all of the estimated net proceeds from this
offering to pay down a portion of our outstanding indebtedness under our
revolving credit facility, and (b) the borrowing of the entire cash portion
of the purchase price of Dana's EMG Business from our revolving credit
facility to consummate the closing of the acquisition.
23
<Page>
PRO FORMA FINANCIAL INFORMATION
On February 7, 2003, we entered into an agreement to purchase substantially
all of the assets and to assume substantially all of the operating liabilities
of Dana's EMG Business, excluding any assets related to its water pump and fuel
pump product lines, for a purchase price equal to the closing net book value of
the business. For purposes of preparing the pro forma financial information
contained in this prospectus, we have assumed the acquisition purchase price to
be $121 million, based on the September 30, 2002 audited balance sheet of Dana's
EMG Business.
The acquisition purchase price is subject to a post-closing adjustment based
upon the net book value of the acquired assets of Dana's EMG Business less the
net book value of the assumed liabilities of Dana's EMG Business as of the close
of business on the closing date.
The closing of the acquisition is subject to our financing of the purchase
price. We intend to finance the acquisition and the payment of related fees and
expenses, restructuring and integration costs by (a) drawing on our amended
revolving credit facility, (b) issuing shares of our common stock to Dana, and
(c) obtaining seller financing.
The unaudited combined pro forma statements of operations for the year ended
December 31, 2001, and for the nine months ended September 30, 2002, give effect
to the acquisition of assets and operating liabilities of Dana's EMG Business
(excluding its water pump and fuel pump product lines, which we will not
acquire), including our financing of the acquisition purchase price, as if such
acquisition had occurred on January 1, 2001. The unaudited combined pro forma
balance sheet gives effect to such acquisition as if it had occurred on
September 30, 2002.
The unaudited pro forma combined financial data is based on our historical
consolidated financial statements and the historical combined financial
statements of Dana's EMG Business (adjusted to exclude its water pump and fuel
pump product lines, which we will not acquire), and on the assumptions and
adjustments described in the notes to such unaudited pro forma combined
financial data, including assumptions relating to the allocation of the
consideration paid for Dana's EMG Business to the assets and liabilities of
Dana's EMG Business based on preliminary estimates of their respective fair
values. The actual allocation of such consideration may differ from that
reflected in the unaudited pro forma combined financial data. Amounts allocated
will be based upon the estimated fair values at the time of the acquisition of
Dana's EMG Business which could vary from the amounts assumed. In addition, the
estimated transaction fees and expenses are assumed solely for the purpose of
presenting the unaudited pro forma combined financial data.
In connection with the acquisition, our plans anticipate that we will incur
approximately $32 million of restructuring costs related to severance and exit
costs for Dana-related employees and facilities. In addition, we anticipate
$15 million of integration costs. Of the aggregate total of approximately $47
million, we expect to expend $30 to $35 million in the first 18 months.
As a result of the restructuring and integration activities, we anticipate
realizing significant cost savings. Neither the costs of the restructuring and
integration activities nor the resulting cost savings have been included in the
pro forma combined financial data.
The unaudited combined pro forma financial statements should be read in
conjunction with the financial statements and the notes thereto of our company
and of Dana's EMG Business included elsewhere in this prospectus and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.' The unaudited combined pro forma financial statements represent
management's best estimate of the effects of the acquisition of assets and
operating liabilities of Dana's EMG Business and do not purport to be indicative
of the results that would have actually been obtained had such acquisition been
consummated as of and for the dates and periods presented, or that may be
obtained in the future.
24
<Page>
STANDARD MOTOR PRODUCTS, INC.
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
STANDARD COMBINED
MOTOR PRO FORMA
PRODUCTS, DANA'S EMG RETAINED PRODUCT ACQUISITION-RELATED STATEMENT OF
INC.(1) BUSINESS(2) LINES-DANA(3) ADJUSTMENTS OPERATIONS
------- ----------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 591,652 $ 297,796 $(10,113) $ (4,231)(a) $ 875,104
Cost of sales.......................... 452,597 287,070 (14,013) (20,707)(b) 704,947
----------- --------- -------- -------- ----------
Gross profit........................ 139,055 10,726 3,900 16,476 170,157
Selling, general and administrative
expenses.............................. 123,932 66,616 190,548
Restructuring charges.................. -- 44,276 44,276
----------- --------- -------- -------- ----------
Operating income (loss)............. 15,123 (100,166) 3,900 16,476 (64,667)
Other income (expense) -- net.......... 2,763 (756) 2,007
Interest expense....................... 17,430 609 3,766(c) 21,805
----------- --------- -------- -------- ----------
Earnings (loss) from continuing
operations before taxes............ 456 (101,531) 3,900 12,710 (84,465)
Income tax (benefit)................... 144 (39,064) 17,834(d) (21,086)
----------- --------- -------- -------- ----------
Earnings (loss) from continuing
operations......................... $ 312 $ (62,467) $ 3,900 $ (5,124) $ (63,379)
----------- --------- -------- -------- ----------
----------- --------- -------- -------- ----------
PER SHARE DATA:
Basic earnings (loss) per share from
continuing operations................. $ 0.03 $ (3.63)
----------- ----------
----------- ----------
Diluted earnings (loss) per share from
continuing operations................. $ 0.03 $ (3.63)
----------- ----------
----------- ----------
Weighted average number of common
shares outstanding -- basic(5)........ 11,774,591 17,474,591
----------- ----------
----------- ----------
Weighted average number of common
shares and dilutive common shares(5).. 11,830,737 17,474,591
----------- ----------
----------- ----------
</Table>
- ---------
(1) Represents our historical statement of operations for the year ended
December 31, 2001, derived from our audited consolidated financial
statements, which are included in this prospectus.
(2) Represents the historical statement of operations of Dana's EMG Business for
the year ended December 31, 2001, derived from the related audited combined
financial statements, which are included in this prospectus.
(3) Represents the product lines of Dana's EMG Business that are being retained
by Dana and excluded from the acquisition.
(4) Represents the adjustments to give effect to the acquisition of Dana's EMG
Business as if it were consummated at January 1, 2001. The following
adjustments were made $ (in thousands):
<Table>
(a) Eliminates historical net sales of Dana's EMG
Business to us....................................... $ 4,231
--------
--------
(b) Cost of Sales:
Elimination of historical depreciation and
amortization (less $340 related to retained product
lines)............................................... $(18,876)
Depreciation of fixed assets at new cost basis....... 2,400
Elimination of historical cost of sales of Dana's
EMG Business net sales to us......................... (4,231)
--------
$(20,707)
--------
--------
(c) Interest expense:
Removal of historical interest expense for borrowings
not assumed.......................................... $ (609)
Interest on promissory note to Dana (annual interest
rate of 9%).......................................... 1,359
Interest on additional borrowings under our revolving
credit facility ($46,600 x 5.74%).................... 2,675
Increase in historical borrowing rate under our
revolving credit facility (average borrowings of
$136,375 x .25%)..................................... 341
--------
$ 3,766
--------
--------
(d) Removal of historical income tax benefit related to
the filing of consolidated tax return under Dana..... $ 39,064
Net income tax benefit associated with losses before
income taxes, adjusted for changes in depreciation,
amortization and interest expense of Dana's EMG
Business............................................. (21,230)
--------
$ 17,834
--------
--------
</Table>
(5) Pro forma weighted average number of common shares outstanding include
5,700,000 of new shares, 1,200,000 of which are assumed to be held by Dana.
25
<Page>
STANDARD MOTOR PRODUCTS, INC.
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
STANDARD COMBINED
MOTOR PRO FORMA
PRODUCTS, DANA'S EMG RETAINED PRODUCT ACQUISITION-RELATED STATEMENT OF
INC.(1) BUSINESS(2) LINES-DANA(3) ADJUSTMENTS(4) OPERATIONS
------- ----------- ------------- -------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 488,034 $ 229,137 $(7,493) $ (5,861)(a) $ 703,817
Cost of sales....................... 362,164 217,942 (9,771) (16,616)(b) 553,719
----------- --------- ------- -------- ----------
Gross profit..................... 125,870 11,195 2,278 10,755 150,098
Selling, general and administrative
expenses........................... 96,290 47,271 143,561
Restructuring charges............... -- 9,660 9,660
----------- --------- ------- -------- ----------
Operating income (loss).......... 29,580 (45,736) 2,278 10,755 (3,123)
Other income (expense) -- net....... 1,725 (713) 1,012
Interest expense.................... 10,877 144 2,634(c) 13,655
----------- --------- ------- -------- ----------
Earnings (loss) from continuing
operations before taxes........ 20,428 (46,593) 2,278 8,121 (15,766)
Income tax (benefit)................ 6,333 (18,096) 9,047(d) (2,716)
----------- --------- ------- -------- ----------
Earnings (loss) from continuing
operations..................... $ 14,095 $ (28,497) $ 2,278 $ (926) $ (13,050)
----------- --------- ------- -------- ----------
----------- --------- ------- -------- ----------
PER SHARE DATA:
Basic earnings (loss) per share from
continuing operations................. $ 1.18 $ (.74)
----------- ----------
----------- ----------
Diluted earnings (loss) per share from
continuing operations................. $ 1.14 $ (.74)
----------- ----------
----------- ----------
Weighted average number of common
shares outstanding -- basic(5)........ 11,900,800 17,600,800
----------- ----------
----------- ----------
Weighted average number of common
shares and dilutive common shares(5).. 14,805,121 17,600,800
----------- ----------
----------- ----------
</Table>
- ---------
(1) Represents our historical statement of operations for the nine months ended
September 30, 2002, derived from our unaudited condensed consolidated
financial statements, which are included in this prospectus.
(2) Represents the historical statement of operations of Dana's EMG Business for
the nine months ended September 30, 2002, derived from the related audited
combined financial statements, which are included in this prospectus.
(3) Represents the product lines of Dana's EMG Business that are being retained
by Dana and excluded from the acquisition.
(4) Represents the adjustments to give effect to acquisition of Dana's EMG
Business as if it were consummated at January 1, 2002. The following
adjustments were made:
<Table>
(a) Eliminates historical net sales of Dana's EMG
Business to us....................................... $ 5,861
--------
--------
(b) Cost of Sales:
Elimination of historical depreciation and
amortization (less $255 related to retained product
lines)............................................... $(12,555)
Depreciation of fixed assets at new cost basis....... 1,800
Elimination of historical cost of sales related to
the Dana EMG Business net sales to us................ (5,861)
--------
$(16,616)
--------
--------
(c) Interest expense:
Removal of historical interest expense for borrowings
not assumed.......................................... $ (144)
Interest on promissory note to Dana (annual interest
rate of 9%).......................................... 1,019
Interest on additional borrowings under our revolving
credit facility ($46,600 X 4.35%).................... 1,520
Increase in historical borrowing rate under our
amended revolving credit facility (average 2002
borrowings of $127,333 X .25%)....................... 239
--------
$ 2,634
--------
--------
(d) Removal of historical income tax benefit related to
the filing of consolidated tax return under Dana..... $ 18,096
Net income tax benefit associated with losses before
income taxes, adjusted for changes in depreciation,
amortization and interest expense of Dana's EMG
Business............................................. (9,049)
--------
$ 9,047
--------
--------
</Table>
(5) Pro Forma weighted average number of common shares outstanding include
5,700,000 of new shares, 1,200,000 of which are assumed to be held
by Dana.
26
<Page>
STANDARD MOTOR PRODUCTS, INC.
UNAUDITED COMBINED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
PRO FORMA ADJUSTMENTS
--------------------------------------------- COMBINED
RETAINED ACQUISITION- PRO FORMA
STANDARD MOTOR DANA'S EMG PRODUCT RELATED BALANCE
PRODUCTS, INC.(1) BUSINESS(2) LINES-DANA(3) ADJUSTMENTS(4) FINANCING(5) SHEET
----------------- ----------- ------------- -------------- ------------ -----
ASSETS:
Current assets:
Cash and cash equivalents....... $ 9,672 $ 734 $ (734) $(128,100) $128,100 $ 9,672
Accounts receivable, net........ 191,703 54,135 (1,360) 244,478
Inventories..................... 161,709 87,259 (5,804) 243,164
Other current assets............ 38,178 33,174 (32,572) 38,780
-------- -------- -------- --------- -------- --------
Total current assets......... 401,262 175,302 (40,470) (128,100) 128,100 536,094
Property, plant and equipment,
net of accumulated
depreciation.................... 106,854 68,323 (10,572) (42,751) 121,854
Goodwill, net.................... 20,017 -- 37,701 57,718
Other assets..................... 37,313 3,410 (3,366) 3,000 40,357
-------- -------- -------- --------- -------- --------
Total assets................. $565,446 $247,035 (54,408) $(133,150) $131,100 $756,023
-------- -------- -------- --------- -------- --------
-------- -------- -------- --------- -------- --------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current liabilities:
Notes payable................... $ 3,229 $ 5,337 $ (5,337) $ 3,229
Current portion of long-term
debt.......................... 4,242 -- 4,242
Accounts payable................ 47,130 31,491 (414) 78,207
Sundry payables and accrued
expenses...................... 92,149 45,127 (16,727) 120,549
-------- -------- -------- -------- --------
Total current liabilities.... 146,750 81,955 (22,478) -- $206,227
Long-term debt................... 200,879 -- $ 61,700 262,579
Other liabilities................ 52,064 8,216 (8,216) 52,064
-------- -------- -------- -------- --------
Total liabilities............ 399,693 90,171 (30,694) 61,700 520,870
-------- -------- -------- -------- --------
Stockholders' equity:
Common stock.................... 26,649 -- 11,400 38,049
Capital in excess of par
value......................... 1,684 -- 58,000 59,684
Retained earnings............... 160,385 156,864 (23,714) (133,150) 160,385
Accumulated other comprehensive
loss.......................... (2,328) -- (2,328)
-------- -------- -------- --------- -------- --------
186,390 156,864 (23,714) (133,150) 69,400 255,790
Less: Treasury stock............ 20,637 -- 20,637
-------- -------- -------- --------- -------- --------
Total stockholders' equity... 165,753 156,864 (23,714) (133,150) 69,400 235,153
-------- -------- -------- --------- -------- --------
Total liabilities and
stockholders' equity....... $565,446 $247,035 $(54,408) $(133,150) $131,100 $756,023
-------- -------- -------- --------- -------- --------
-------- -------- -------- --------- -------- --------
</Table>
- ---------
(1) Represents amounts derived from our condensed consolidated unaudited balance
sheet at September 30, 2002, which is included in this prospectus.
(2) Represents amounts derived from the combined audited balance sheet of Dana's
EMG Business at September 30, 2002, which is included in this prospectus.
(3) Represents the net assets of Dana's EMG Business that are being retained by
Dana at September 30, 2002 and excluded from the acquisition, such net
assets consist primarily of Dana's deferred income taxes, and inventory and
fixed assets of product lines we are not purchasing.
(4) The acquisition of Dana's EMG Business has been included in the pro forma
combined balance sheet as if the acquisition were consummated at
September 30, 2002. Assuming the purchase price is approximately $121
million, the excess of the purchase price over the related net assets
acquired is determined as follows:
(footnotes continued on next page)
27
<Page>
STANDARD MOTOR PRODUCTS, INC.
UNAUDITED COMBINED PRO FORMA BALANCE SHEET -- (CONTINUED)
AS OF SEPTEMBER 30, 2002
(footnotes continued from previous page)
<Table>
<Caption>
(DOLLARS IN
THOUSANDS)
Total estimated purchase price.............................. $ 121,000
Historical net assets at September 30, 2002................. (156,864)
Net assets retained by Dana................................. 23,714
Net tangible assets adjustment based on fair value.......... 42,751
---------
Net tangible assets acquired................................ 30,601
Acquisition costs........................................... 7,100
---------
Excess of purchase price over net tangible assets
acquired................................................... $ 37,701
---------
---------
</Table>
The excess of the purchase price over the related net assets excludes for
purposes of the pro forma balance sheet, approximately $32 million of
restructuring costs related to severance and exit costs for Dana-related
employees and facilities that are anticipated as a direct result of the
acquisition.
(5) Represents the net proceeds of this offering, new borrowings under our
amended revolving credit facility, common stock to be issued to Dana and an
unsecured promissory note payable to Dana.
<Table>
<Caption>
(DOLLARS IN
THOUSANDS)
Proceeds of the offering.................................... $ 59,000
Common stock to be issued to Dana........................... 15,100
--------
74,100
Less: fees associated with the offering..................... (4,700)
--------
69,400
--------
Net proceeds under our amended revolving credit facility.... 46,600
Promissory note to Dana..................................... 15,100
--------
61,700
--------
Total financing.......................................... $131,100
--------
--------
</Table>
In addition, we anticipate costs of approximately $3 million in connection
with our amended revolving credit facility.
28
<Page>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at and for the years
ended December 31, 1997, 1998, 1999, 2000 and 2001 have been derived from our
audited consolidated annual financial statements. The following selected
consolidated financial data at and for the nine months ended September 30, 2001
and 2002 have been derived from our condensed consolidated quarterly financial
statements, which are unaudited but in the opinion of our management reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for such periods. Results of
operations for interim periods are not necessarily indicative of results to be
expected for the full fiscal years. You should read this data in conjunction
with 'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and our financial statements and the notes thereto included
elsewhere in this prospectus.
STANDARD MOTOR PRODUCTS, INC.
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales(1).................... $538,405 $640,179 $653,451 $601,392 $591,652 $492,581 $488,034
Gross profit(1)................. 173,352 183,657 170,809 162,701 139,055 117,774 125,870
Operating income................ 9,446 43,781 30,223 30,711 15,123 22,146 29,580
Earnings (loss) from continuing
operations..................... (1,620) 22,257 8,685 10,230 312 6,642 14,095
Net earnings (loss)(2)(3)....... (34,524) 22,257 7,625 9,729 (2,485) 3,845 (19,933)
PER SHARE DATA:
Earnings (loss) from continuing
operations:
Basic........................ $ (0.12) $ 1.70 $ .66 $ .86 $ .03 $ .56 $ 1.18
Diluted...................... (0.12) 1.69 .66 .85 .03 .56 1.14
Net earnings (loss) per common
share:
Basic........................ (2.63) 1.70 .58 .82 (.21) .33 (1.68)
Diluted...................... (2.63) 1.69 .58 .81 (.21) .33 (1.16)
OTHER DATA:
EBITDA(4)....................... $ 29,101 $ 59,527 $ 45,210 $ 50,083 $ 36,795 $ 37,758 $ 43,020
Depreciation and amortization... 18,980 17,274 17,230 18,922 18,909 14,072 11,715
Capital expenditures............ 15,597 15,325 14,423 16,652 13,740 11,125 5,804
Dividends....................... 4,197 2,092 4,456 4,324 4,236 3,175 3,214
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents....... $ 16,809 $ 23,457 $ 40,380 $ 7,699 $ 7,496 $ 11,814 $ 9,672
Working capital................. 177,426 178,324 205,806 188,091 228,356 271,560 254,512
Total assets.................... 577,137 521,556 556,021 549,396 509,429 578,757 565,446
Total debt...................... 239,379 159,708 195,425 202,591 205,925 243,796 208,350
Long-term debt (excluding
current portion)............... 159,109 133,749 163,868 150,018 200,066 237,392 200,879
Stockholders' equity............ 183,782 205,025 203,518 194,305 185,687 192,407 165,753
</Table>
- ---------
(1) On January 1, 2002, we adopted the guidelines of the Emerging Issues Task
Force (EITF) entitled 'Accounting for Certain Sales Incentives' and 'Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products.' These guidelines address when sales incentives and
discounts should be recognized and the accounting for certain costs incurred
by a vendor on behalf of a customer, as well as where the related revenues
and expenses should be classified in the financial statements. Net sales and
gross profit amounts for the periods prior to 2002 included in this
prospectus have been reclassified to conform to our 2002 presentation. As a
result, certain costs of approximately $6.1 million, $21.8 million, $18
million, $25.4 million, $30.4 million and $25.9 million have been
reclassified for December 31, 1997, 1998, 1999, 2000 and 2001 and the nine
months ended September 30, 2001, respectively.
(2) Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
('SFAS No. 142'). In accordance with SFAS No. 142, goodwill will no longer
be amortized, but instead, will be subject to an
(footnotes continued on next page)
29
<Page>
(footnotes continued from previous page)
annual review for potential impairment. As a result, we recorded an
impairment loss on goodwill as a cumulative effect of accounting change of
$16 million, net of tax, or $1.35 per diluted share, during the first
quarter of 2002. The impairment loss relates to goodwill pertaining to
certain of our reporting units with our European Operations (classified as
'All Other' for segment reporting) and with our Temperature Control Division
and we recorded charges of $8.6 million related to our European Operations
and $7.4 million related to our Temperature Control Division. Upon adoption
of SFAS No. 142, our earnings before extraordinary item and net earnings
for basic and diluted earnings per share adjusted to exclude goodwill
amortization expense (net of taxes) are as follows:
<Table>
<Caption>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported earnings (loss)
before extraordinary item.. (1,620) 22,257 8,685 10,230 312 6,642
Add back: goodwill
amortization expense, net
of tax.................... 1,972 2,368 2,439 2,733 2,498 1,868
-------- ------- ------- ------- ------- ------
Adjusted earnings before
extraordinary item........ $ 352 $24,625 $11,124 $12,963 $ 2,810 $8,510
-------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------
Basic earnings per share:
Reported basic earnings
(loss) per share before
extraordinary item........ $ (0.12) $ 1.70 $ 0.66 $ 0.86 $ 0.03 $ 0.56
Add back: goodwill
amortization expense, net
of tax.................... 0.15 0.18 0.19 0.23 0.21 0.15
-------- ------- ------- ------- ------- ------
Adjusted basic earnings per
share before
extraordinary item........ $ 0.03 $ 1.88 $ 0.85 $ 1.09 $ 0.24 $ 0.71
-------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------
Diluted earnings per share:
Reported diluted earnings
per share before
extraordinary item........ $ (0.12) $ 1.69 $ 0.66 $ 0.85 $ 0.03 $ 0.56
Add back: goodwill
amortization expense, net
of tax.................... 0.15 0.18 0.19 0.23 0.21 0.15
-------- ------- ------- ------- ------- ------
Adjusted diluted earnings
per share before
extraordinary item........ $ 0.03 $ 1.87 $ 0.85 $ 1.08 $ 0.24 $ 0.71
-------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------
</Table>
(table continued on next page)
30
<Page>
(table continued from previous page)
<Table>
<Caption>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net earnings
(loss).................... $(34,524) $22,257 $ 7,625 $ 9,729 $(2,485) $3,845
Add back: goodwill
amortization expense, net
of tax.................... 1,972 2,368 2,439 2,733 2,498 1,868
-------- ------- ------- ------- ------- ------
Adjusted net earnings
(loss).................... $(32,552) $24,625 $10,064 $12,462 $ 13 $5,713
-------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------
Basic net earnings (loss)
per share:
Reported basic net earnings
(loss) per share......... $ (2.63) $ 1.70 $ 0.58 $ 0.82 $ (0.21) $ 0.33
Add back: goodwill
amortization expense, net
of tax................... 0.15 0.18 0.19 0.23 0.21 0.15
-------- ------- ------- ------- ------- ------
Adjusted basic net earnings
(loss) per share......... $ (2.48) $ 1.88 $ 0.77 $ 1.05 $ -- $ 0.48
-------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------
Diluted net earnings (loss)
per share:
Reported diluted net
earnings (loss) per
share.................... $ (2.63) $ 1.69 $ 0.58 $ 0.81 $ (0.21) $ 0.33
Add back: goodwill
amortization expense, net
of tax................... 0.15 0.18 0.19 0.23 0.21 0.15
-------- ------- ------- ------- ------- ------
Adjusted diluted net
earnings (loss) per
share.................... $ (2.48) $ 1.87 $ 0.77 $ 1.04 $ -- $ 0.48
-------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------
</Table>
(3) For the nine months ended September 30, 2002, we recorded an after tax
charge of $18 million as a loss from discontinued operations to account for
potential costs associated with our asbestos-related liability. See 'Risk
Factors -- We may be materially adversely affected by asbestos claims
arising from products sold by our former brake business, as well as by other
product liability claims' for a more detailed discussion of the risks we
face in connection with our exposure to asbestos-related claims.
(4) EBITDA is defined as earnings from continuing operations before interest
expense, income taxes, depreciation and amortization. EBITDA is a measure
commonly used by investors to analyze and compare companies on the basis of
operating performance. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be construed
as a substitute for operating income or net earnings or loss for purposes of
analyzing our operating performance or financial position. EBITDA is not
necessarily comparable to similarly titled measures for other companies.
31
<Page>
The following selected combined financial data at and for the years ended
December 31, 2000 and 2001 and for the nine months ended September 30, 2002
have been derived from the audited combined financial statements of Dana's
EMG Business. You should read this data in conjunction with the financial
statements and the notes thereto of Dana's EMG Business included elsewhere
in this prospectus.
DANA'S ENGINE MANAGEMENT GROUP(1)
<Table>
<Caption>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------
2000 2001 2002
---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales................................................ $357,475 $297,796 $229,137
Loss before income taxes................................. (87,797) (101,531) (46,593)
Net loss................................................. (52,121) (62,467) (28,497)
OTHER DATA:
EBITDA(2)................................................ $(68,904) $(81,706) $(33,639)
Depreciation and amortization............................ 18,802 19,216 12,810
Capital expenditures..................................... 21,557 1,378 1,560
BALANCE SHEET DATA (AT PERIOD END)(3):
Cash and cash equivalents................................ $ -- $ 292 $ 734
Working capital.......................................... 172,548 89,392 93,347
Total assets............................................. 391,394 264,184 247,035
Combined equity.......................................... 317,940 170,342 156,864
</Table>
- ---------
(1) The combined financial data of Dana's EMG Business include its water pump
and fuel pump product lines, which product lines we will not acquire and
which product lines we deem immaterial in amount.
(2) EBITDA is defined as earnings from continuing operations before interest
expense, income taxes, depreciation and amortization. EBITDA is a measure
commonly used by investors to analyze and compare companies on the basis of
operating performance. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be construed
as a substitute for operating income or net earnings or loss for purposes of
analyzing our operating performance or financial position. EBITDA is not
necessarily comparable to similarly titled measures for other companies.
(3) Balance sheet data at December 31, 2000 were derived from the financial
records of Dana's EMG Business and are unaudited.
32
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes thereto. This discussion summarizes the significant
factors affecting our results of operations and the financial condition of our
business during each of the fiscal years in the three year period ended December
31, 2001, and the first three fiscal quarters of 2002.
BUSINESS OVERVIEW
We are a leading independent manufacturer and distributor of replacement
parts for motor vehicles in the automotive aftermarket industry. We are
organized into two principal operating divisions, each of which focuses on a
specific segment of replacement parts. Our Engine Management Division
manufactures ignition and emission parts, on-board computers, ignition wires,
battery cables and fuel system parts. Our Temperature Control Division
manufactures and remanufactures air conditioning compressors, and other air
conditioning and heating parts. We sell our products primarily in the United
States and Canada. We also sell our products through distributors in Latin
America and Europe.
CUSTOMERS. We distribute our products through a variety of distribution
channels, including wholesale distributors, retail chains, service chains and
original equipment dealers. Our warehouse distribution channel represents 65% of
our consolidated net sales for the nine months ended September 30, 2002. Our
retail channel of distribution has grown significantly from approximately
$41 million in consolidated net sales to retailers in 1993 (representing 7% of
consolidated net sales) to approximately $107 million in 1997 (representing 20%
of consolidated net sales), and to approximately $159 million in 2001
(representing 27% of consolidated net sales). In 1997, we commenced distributing
our products through the original equipment service supplier channel, and sold
approximately $3 million in consolidated net sales to original equipment service
suppliers in 1997 (representing 0.6% of consolidated net sales), which increased
to approximately $10 million in 2001 (representing 1.7% of consolidated net
sales).
The automotive aftermarket is highly competitive. We have in the past and
may in the future lose customers or lose a particular product line of a customer
over time, and to generate new customers to replace ones we have lost. For
example, in early 2000 we lost a major temperature control retail customer and
then regained this customer in 2001.
SEASONALITY. Historically, our operating results have fluctuated by quarter,
with the greatest sales occurring in the second and third quarters of the year
and revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather.
For example, a cool summer may lessen the demand for our Temperature Control
products, while a hot summer may increase such demand. As a result of this
seasonality and variability in demand of our Temperature Control products, our
working capital requirements peak near the end of the second quarter, as the
inventory build-up of air conditioning products is converted to sales and
payments on the receivables associated with such sales have yet to be received.
During this period, our working capital requirements are typically funded by
borrowing from our revolving credit facility.
The seasonality of our business offers significant operational challenges in
our manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we traditionally offer a
pre-season selling program, known as our 'Spring Promotion', in which customers
are offered a choice of a price discount or longer payment terms. See 'Risk
Factors -- Our business is seasonal and is subject to substantial quarterly
fluctuations, which impact our quarterly performance and working capital
requirements' for a more detailed discussion of the risks related to the
seasonality of our business.
INVENTORY MANAGEMENT. We instituted an aggressive inventory reduction
campaign initiated in 2001. We targeted a minimum $30 million inventory
reduction in 2001, but exceeded our goal by
33
<Page>
reducing inventory by $57 million that year. Importantly, while reducing
inventory levels, we maintained customer service fill rate levels of
approximately 93%.
We face inventory management issues as a result of warranty and overstock
returns. Many of our products carry a warranty ranging from a 90-day limited
warranty to a lifetime limited warranty, which generally covers defects in
materials or workmanship and failure to meet industry published specifications.
In addition to warranty returns, we also permit our customers to return products
to us within customer-specific limits in the event that they have overstocked
their inventories. In particular, the seasonality of our Temperature Control
Division requires that we increase our inventory during the winter season in
preparation of the summer selling season and customers purchasing such inventory
have the right to make returns. In 1999, our profits were negatively affected by
warranty and overstock returns in excess of our initial estimates. See 'Risk
Factors -- We may incur material losses and significant costs as a result of
warranty-related returns by our customers in excess of anticipated amounts' and
'Risk Factors -- Our profitability may be materially adversely affected as a
result of overstock inventory-related returns by our customers in excess of
anticipated amounts' for more detailed discussions of the risks we face in
connection with warranty and overstock returns by our customers.
In order to better control warranty and overstock return levels, beginning
in 2000 we tightened the rules for authorized warranty returns, placed further
restrictions on the amounts customers can return and instituted a program so
that our management can better estimate potential future product returns. In
addition, with respect to our conducting compressors, our most significant
customer product warranty returns, we established procedures whereby a warranty
will be voided if a customer does not follow a twelve step warranty return
process.
ACQUISITION. On February 7, 2003, we signed an agreement to purchase Dana's
EMG Business, for a purchase price equal to the closing net book value of the
business, subject to a maximum purchase price of $125 million. Dana's EMG
Business is a leading manufacturer of aftermarket parts in the automotive
industry focused exclusively on engine management. Dana's EMG Business
manufactures ignition systems, emission parts, engine computers, ignition wires,
battery cables and fuel system parts. Customers of Dana's EMG Business include
NAPA Auto Parts, CSK Auto, O'Reilly Automotive and Pep Boys, none of which is
currently a material customer of our Engine Management Division. We intend to
integrate Dana's EMG Business into our Engine Management Division within 18
months from the closing of the acquisition.
ASBESTOS CONTINGENCIES. In 1986, we acquired a brake business, which we
subsequently sold in March 1998 and which is accounted for as a discontinued
operation in the accompanying consolidated annual and quarterly financial
statements. When we originally acquired this brake business, we assumed future
liabilities relating to any alleged exposure to asbestos-containing products
manufactured by the seller of the acquired brake business. In accordance with
the related purchase agreement, we agreed to assume the liabilities for all new
claims filed on or after September 1, 2001. Our ultimate exposure will depend
upon the number of claims filed against us on or after September 1, 2001 and the
amounts paid for indemnity and defense thereof. To date, the amounts paid for
settled claims have been immaterial. We do not have insurance coverage for the
defense and indemnity costs associated with the claims we face.
In evaluating our potential asbestos-related liability, we have considered
various factors including, among other things, an actuarial study performed by a
leading actuarial firm with expertise in assessing asbestos-related liabilities,
our settlement amounts to date, the incidence of claims, the mix of the injuries
of the plaintiffs, the number of cases pending against us and whether there are
any co-defendants, the jurisdiction in which lawsuits are filed, and the status
and results of settlement discussions. Actuarial consultants with experience in
assessing asbestos-related liabilities conducted a study to estimate our
potential claim liability as of September 30, 2002. The methodology used to
project asbestos-related liabilities and costs in the study considered:
(1) historical data available from publicly available studies; (2) an analysis
of our recent claims history to estimate likely filing rates for the remainder
of 2002 through 2052; (3) an analysis of our currently pending claims; and
(4) an analysis of our settlements to date in order to develop average
settlement values. Based upon all the information considered by the actuarial
34
<Page>
firm, the actuarial study estimated an undiscounted liability for settlement
payments ranging from $27.3 million to $58 million for the period through 2052.
Accordingly, based on the information contained in the actuarial study and
all other available information that we considered, we recorded an after tax
charge of $16.9 million as a loss from discontinued operations during the third
quarter of 2002 to reflect such liability. At December 31, 2001, approximately
100 cases were outstanding for which we were responsible for any related
liabilities. At December 31, 2002, the number of cases outstanding for which we
were responsible for related liabilities increased to approximately 2,500, which
include approximately 1,600 cases filed in December 2002 in Mississippi. We
believe that these Mississippi cases filed against us in December 2002 were due
in large part to potential plaintiffs accelerating the filing of their claims
prior to the effective date of Mississippi's tort reform statute in January
2003, which statute eliminated the ability of plaintiffs to file consolidated
cases. We concluded that no amount within the range of settlement payments was
more likely than any other and, therefore, recorded the low end of the range as
the liability associated with future settlement payments through 2052 in our
condensed consolidated financial statements, in accordance with generally
accepted accounting principles. Given the uncertainties associated with
projecting such matters into the future, the short period of time that we have
been responsible for defending these claims, and other factors outside our
control, we can give no assurance that additional provisions will not be
required. We will continue to monitor the circumstances surrounding these
potential liabilities in determining whether additional provisions may be
necessary. At the present time, however, we do not believe that any additional
provisions would be reasonably likely to have a material adverse effect on our
liquidity or consolidated financial position. See 'Risk Factors -- We may be
materially adversely affected by asbestos claims arising from products sold by
our former brake business, as well as by other product liability claims' for a
more detailed discussion of the risks we face in connection with our exposure to
asbestos-related claims.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2001
SALES. On a consolidated basis, net sales in the third quarter of 2002 were
$182.6 million, $25.9 million, or 16.5%, higher, compared to $156.7 million of
net sales recorded in the third quarter of 2001. The sales increase was
attributable to increased sales of Temperature Control products and Engine
Management products. Temperature Control consolidated net sales increased
$15.7 million, or 21.4%, compared to the third quarter of 2001, as a result of
warmer temperatures in key demographic areas. Engine Management consolidated net
sales also improved $9.1 million, or 12.3%, in the third quarter of 2002
compared to the third quarter of 2001, assisted by the acquisition of new
accounts.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
improved 1.5 percentage points to 27.2% in the third quarter of 2002 from 25.7%
in the comparable quarter of 2001. Gross margins in our Engine Management
Division were 29.4% for the three months ended September 30, 2002 compared to
29.5% for the three months ended September 30, 2001. Gross margins in
Temperature Control Division were 25% for the three months ended September 30,
2002 compared to 21.3% for the three months ended September 30, 2001. The
improvement in gross margins reflects the return to more normal production
levels and our ongoing cost reduction activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $32.5 million in the third quarter of 2002,
compared to $31.1 million in the third quarter of 2001. The increase was
primarily attributable to higher insurance and employee benefit costs. As a
percentage of net sales, however, selling, general and administrative expenses
decreased to 17.8% in 2002 from 19.8% in 2001.
Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). In accordance with
35
<Page>
SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject
to an annual review for potential impairment. The adoption of the new accounting
standard eliminated goodwill amortization expense of $0.6 million after tax for
the third quarter of 2002.
INCOME FROM OPERATIONS. Operating income increased by $7.9 million to $17.1
million in the third quarter of 2002, compared to $9.2 million in the third
quarter of 2001, primarily due to improvements in net sales and gross margins,
as discussed above.
INTEREST EXPENSE. Interest expense decreased by $1.2 million in the third
quarter of 2002, compared to the same period in 2001, due to lower average
borrowings and lower interest rates.
INCOME TAX PROVISION. The effective tax rate was 32% for the third quarter
of 2002 and the third quarter of 2001. The effective tax rate increased in the
third quarter of 2002 from 28% recorded in the first six months of 2002 due to
higher domestic earnings and lower earnings from foreign subsidiaries.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
SALES. On a consolidated basis, net sales for the nine month period ended
September 30, 2002 were $488 million, a slight decrease of $4.6 million, or
0.9%, compared to $492.6 million in the same period in 2001. The decrease
resulted from a $19.3 million decrease in the comparative year-to-date net sales
in our Temperature Control Division. Consolidated net sales were unfavorable due
to a combination of a loss of a few locations at a major retailer and a
continued reduction of distributor inventories during the first six months of
the year, as those distributors worked off inventory left over from previous
mild summer seasons. Our Engine Management Division's net sales increased by
$12.9 million for reasons discussed previously, mitigating the overall decrease.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
increased 1.9 percentage points to 25.8% for the nine months ended
September 30, 2002 from 23.9% in the same period of 2001. The improvement in
gross margins reflects the return to more normal production levels as the
aggressive and successful inventory reduction campaign in 2001 is now
benefitting 2002. Gross margins in our Engine Management Division were 30.0% for
the nine months ended September 30, 2002 compared to 26.9% for the nine months
ended September 30, 2001. Gross margins in our Temperature Control Division were
20.7% for the nine months ended September 30, 2002 compared to 18.9% for the
nine months ended September 30, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased slightly to $96.3 million for the nine month
period ended September 30, 2002, compared to $95.6 million in the same period of
2001. The increase is primarily attributable to insurance and employee benefit
costs.
Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
('SFAS No. 142'). In accordance with SFAS No. 142, goodwill will no longer be
amortized, but instead, will be subject to an annual review for potential
impairment. Using the discounted cash flows method, based on our weighted
average cost of capital and market multiples, we reviewed the fair values of
each of our reporting units. The recent decline in economic and market
conditions, higher integration costs than anticipated and the general softness
in the automotive aftermarket has caused a decrease in the fair values of
certain of our reporting units. As a result, we recorded an impairment loss on
goodwill as a cumulative effect of accounting change of $16 million, net of tax,
or $1.35 per diluted share during the first quarter of 2002. The impairment loss
relates to goodwill pertaining to certain of our reporting units within our
European operations (classified as 'All Other' for segment reporting) and within
our Temperature Control Division and we recorded charges of $8.6 million related
to our European Operations and $7.4 million related to our Temperature Control
Division. The adoption of the new accounting standard eliminated goodwill
amortization expense of $1.9 million after tax for the nine months ended
September 30, 2002.
36
<Page>
INCOME FROM OPERATIONS. Operating income increased by $7.5 million to $29.6
million for the nine month period ended September 30, 2002, as compared to $22.1
million for the same period of 2001, primarily due to improved gross margins, as
discussed above.
INTEREST EXPENSE. Interest expense decreased $3.1 million for the nine month
period ended September 30, 2002, compared to the same period in 2001, due to
lower average borrowings and lower interest rates.
COMPARISON OF FISCAL YEARS 2001 AND 2000
SALES. After giving consideration to the adoption of Emerging Issues Task
Force guidelines entitled 'Accounting for Certain Sales Incentives' and 'Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products', consolidated net sales in 2001 were $591.7 million, a
decrease of $9.7 million compared to consolidated net sales of $601.4 million in
2000. The decrease in consolidated net sales was a result of decreases in our
existing traditional business lines and higher costs for adding a new customer.
The decrease was mitigated by the Engine Management Division, which benefited
from a full year of sales to the new major customer added during the third
quarter of 2000 (with incremental sales of approximately $6 million in 2001),
along with additional wire set business from a major group of warehouse
distributors. The Temperature Control Division regained a major retail customer
we had lost in early 2000 (this customer accounted for consolidated net sales of
approximately $30 million in 2001, excluding filling the initial 'pipeline' of
orders from such customer). Excluding this new business, sales to existing
accounts decreased, primarily a result of another cool summer for air
conditioning, and the continuing inventory reduction program on the part of many
of our customers.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased to 23.5% in 2001, from 27.1% in 2000. Gross margins in our Engine
Management Division were 26.4% in 2001 compared to 29.4% in 2000. Gross margins
in our Temperature Control Division were 18.2% in 2001 compared to 23.4% in
2000. The decrease in gross margins was primarily due to our planned inventory
reduction programs. The reduction in gross margins was across all product lines
as we originally targeted a minimum $30 million inventory reduction in 2001.
Actual inventory reduction amounted to $57 million, while we maintained high
customer service fill levels. These changes reflect the impact of underabsorbed
overhead costs as a result of cutting production and temporarily closing
manufacturing facilities at both Engine Management and Temperature Control
facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $8 million to $124 million in 2001,
compared to $132 million in 2000. This decrease reflected the focus on our cost
reduction efforts, with benefits primarily in the marketing and distribution
areas in our Temperature Control Division.
INCOME FROM OPERATIONS. Operating income decreased by $15.6 million compared
to 2000, primarily due to the lower gross margins as discussed above.
OTHER (INCOME) EXPENSES, NET. Other income, net increased by $2.3 million
compared to 2000. The increase was primarily due to the reduction of fees
related to the termination of the sale of accounts receivable agreement and an
increase in interest and dividend income.
INTEREST EXPENSE. Interest expense decreased slightly by $0.6 million in
2001 compared to 2000, due to lower interest rates and lower average borrowings.
INCOME TAX PROVISION. Income tax expense decreased to $0.1 million in 2001
from $2.9 million in 2000. The decrease was primarily due to overall lower
earnings. The effective tax rate increased from 22% in 2000 to 32% in 2001. The
increase was primarily due to a decrease in earnings from our foreign
subsidiaries, which have lower tax rates than the United States statutory rate.
37
<Page>
COMPARISON OF FISCAL YEARS 2000 AND 1999
SALES. After giving consideration to the adoption of Emerging Issues Task
Force guidelines entitled 'Accounting for Certain Sales Incentives' and 'Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products', consolidated net sales in 2000 were $601.4 million, a
decrease of $52.1 million or 8% when compared to 1999. Consolidated net sales in
our Temperature Control Division decreased by $49.2 million primarily due to a
significant retail customer achieving substantial inventory reductions, loss of
a major retail customer early in the year (contributed approximately $18.5
million to the overall decrease), and a very cool and wet summer in the
northeast and mid-west. The customer that was lost in 2000 was regained in the
beginning of 2001. The Engine Management Division's consolidated net sales in
2000 were $288.2 million, an increase of $3 million or 1% when compared to 1999.
The slight increase reflects the successful addition of a major new customer in
the third quarter of 2000 (this contributed approximately $6.4 million of
consolidated net sales in 2000) offsetting declines in our traditional business.
Significant warranty and overstock returns in our Temperature Control
Division adversely impacted financial performance in 1999. With respect to
warranty returns, after thorough analysis of related warranty claims, we have
taken specific actions to reduce compressor warranty returns in 2000 and beyond.
We have instituted new counterperson and installer training programs, increased
emphasis on clinics and professional seminars for installers and tightened rules
for authorized warranty returns.
In 2000, we began to require that any compressor returned for warranty
credit must have either a service repair work order or a purchase receipt
providing proof that a number of additional auxiliary parts were replaced
concurrently (i.e., accumulator, orifice tube, in-line filter and condenser) and
that an air conditioning system flushing with an approved solvent was performed.
If our defined twelve step process is not performed by the customer, the
warranty is void.
With respect to overstock returns, 1999 was adversely impacted by our
decision to accept customer returns in connection with our decision to
discontinue the offering of certain Temperature Control products. We did not
have to make any such decisions in 2000. In addition, during 2000, we placed
further restrictions on the amounts that customers can return as overstock
returns.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
increased to 27.1% in 2000, from 26.1% in 1999. Gross margins in our Engine
Management Division were 29.4% in 2000 compared to 29.5% in 1999. Gross margins
in our Temperature Control Division were 23.4% in 2000 compared to 21.1% in
1999. Temperature Control gross margins were positively impacted by reduced
customer returns and an increase in net pricing. Engine Management margins were
positively impacted by increased sales volume, increased net pricing and certain
cost reduction activities discussed below.
In connection with cost reduction activities, the year 2000 was benefited by
the consolidation of three distribution centers into one in our Temperature
Control Division, consolidation of our two fan clutch operations into one in our
Temperature Control Division, and the moving of two U.S. manufacturing plants to
a single facility in Mexico in the Engine Management Division. The
aforementioned initiatives improved the operating income of our Temperature
Control Division by approximately $2 million and that of our Engine Management
Division by approximately $1.5 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $8.6 million in 2000, primarily
due to the cost reduction efforts described in the previous paragraph and a
decrease in bad debt expense compared to 1999.
INCOME FROM OPERATIONS. Operating income increased by $0.5 million, or 1.6%
in 2000. Results of the Engine Management Division, compared to a year ago,
reflected an increase in operating income of $11.8 million due to higher sales,
favorable overhead absorption and cost reduction activities. Operating income at
the Temperature Control Division decreased by $6 million, primarily due to the
same reasons for the consolidated net sales decrease cited above. We
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strengthened our controls and procedures for accepting authorized customer
warranty returns in 2000, and have completed the consolidation of our
manufacturing and distribution facilities. These changes had a favorable impact
on 2000 results and are expected to provide future benefits.
OTHER (INCOME) EXPENSES, NET. Other income, net, was approximately $0.5
million, comparing favorably to other expense, net of $2.2 million in 1999. This
is primarily the result of our 1999 decision to exit the Heat Battery joint
venture in Canada.
INTEREST EXPENSE. Interest expense increased by approximately $2.1 million
to $18 million in 2000, primarily due to higher average borrowings resulting
from elevated inventory levels and decreased sales.
INCOME TAX PROVISION. Income tax expense decreased from $3.3 million in 1999
to $2.9 million in 2000. The effective tax rate also decreased from 28% in 1999,
to 22% in 2000, due to an increase in earnings from our Puerto Rico and Hong
Kong subsidiaries, which have lower tax rates than the United States statutory
rate.
On March 13, 2000, we prepaid the entire outstanding balance of the 10.22%
senior note payable in the amount of $14 million. In connection with this
prepayment, we incurred an extraordinary loss of $0.5 million net of taxes, for
prepayment penalties and the write-off of deferred loan costs.
IMPACT OF INFLATION
Although inflation is not a significant issue, management believes it will
be able to continue to minimize any adverse effect of inflation on earnings
through cost reduction programs, including the sale of manufactured products,
and, where competitive situations permit, selling price increases.
FUTURE RESULTS OF OPERATIONS
We continue to face competitive pressures. In order to sell at competitive
prices while maintaining profit margins we are continuing to focus on overhead
and cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the nine months ended September 30, 2002, cash
provided by operations amounted to $26.4 million, compared to $4.3 million in
the same period of 2001. The increase is primarily attributable to improved
earnings from continuing operations, higher accounts payable and continued
reductions in inventory initially offset by an increase in accounts receivable,
a direct result of net sales increasing by $25.9 million for the quarter.
In 2001, cash provided by operations amounted to $40.2 million, compared to
cash used in operations of $1 million in 2000 and cash provided by operations of
$21 million in 1999. The improvement is primarily attributable to our efforts to
reduce inventory levels from their elevated levels of December 31, 2000. This
improvement was offset by a reduction in accounts payable and a decrease in
earnings.
For the fiscal year ended December 31, 2001, inventory decreased by $57
million as a result of our inventory reduction program, which resulted primarily
from reduced production and purchases, and where needed, the temporary closing
of manufacturing facilities. Reductions were realized in both the Engine
Management and Temperature Control Divisions. Inventory turnover was 2.1x in
2001, versus 1.8x in 2000, on a rolling twelve-month basis, reflecting the high
inventory levels at December 31, 2000. During the nine months ended
September 30, 2002, inventory was further decreased by $21 million.
In comparing 2000 and 1999, there are two reasons for the increase in
inventory levels and the decrease in inventory turns (1.8x in 2000 versus 2.7x
in 1999). First, with respect to the Temperature Control Division, the business
is highly seasonal with sales of air conditioning parts being greatest in the
second and third quarters of the year. This seasonality requires the build-up of
inventory levels prior to the main selling season. As discussed in our
comparison of the year
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2000 and 1999, Temperature Control sales were significantly below the prior year
and forecasted amounts. Although significant reductions were made to Temperature
Control production levels in 2000, the shortfall in consolidated net sales more
than off-set such reductions. Second, with respect to the Engine Management
Division, in the third quarter of 2000, Engine Management successfully added a
new major customer which required inventory levels to be increased in order to
fill the initial 'pipeline' of orders. In addition, the customer launch for new
orders was extended into 2001, versus the fourth quarter of 2000, as originally
planned.
INVESTING ACTIVITIES. Cash used in investing activities was $24.7 million in
the nine months ended September 30, 2002, compared to $12.2 million in the same
period of 2001. The increase was primarily due to acquisitions, partially offset
by decreases in capital expenditures. Assets acquired consist primarily of
property, plant and equipment, receivables and inventory. All acquisitions were
financed with funds provided under our revolving credit facility and seller
financing.
In January 2002, we acquired the assets of a temperature control business
from Hartle Industries for $4.8 million. The assets consist primarily of
property, plant and equipment, and inventory. In April 2002, we acquired Carol
Cable Limited, a manufacturer and distributor of wire sets based in the United
Kingdom, for approximately $1.7 million. The assets from this acquisition
consist primarily of property, plant and equipment, and inventory. In May 2002,
we purchased the aftermarket fuel injector business of Sagem Inc., a subsidiary
of Johnson Controls, for $10.5 million. Sagem Inc. is a basic manufacturer of
fuel injectors and was our primary supplier prior to the acquisition. Assets
acquired from this acquisition consist primarily of property, plant and
equipment, and inventory. The purchase was partially financed by the seller
($5.4 million to be paid over a two year period), with the remaining funds being
provided under our revolving credit facility.
In 2001, cash used in investing activities was $14.2 million, compared to
$18.7 million in 2000. The decrease is primarily due to a reduction in capital
expenditures and acquisitions. Capital expenditures for the three most recent
fiscal years ended December 31 totaled $13.7 million in 2001, $16.7 million in
2000 and $14.4 million in 1999.
FINANCING ACTIVITIES. Cash used in financing activities was $0.3 million in
the nine months ended September 30, 2002, compared to cash provided by financing
activities of $13.2 million in the same period of 2001. The decreased borrowings
reflect our focus on reducing capital employed in the business.
Cash used in financing activities was $25.4 million in 2001, compared to
$11.5 million in 2000. The increase in cash used was primarily due to our
refinancing, as discussed below, offset by the discontinuance of stock
repurchases. Dividends paid for the three most recent fiscal years ended
December 31 were $4.2 million in 2001, $4.3 million in 2000 and $4.5 million in
1999.
On February 7, 2003, we amended our revolving credit facility to provide for
an additional $80 million commitment, subject to the terms and conditions
therein, which will become effective upon the closing of our acquisition of
Dana's EMG Business. This additional commitment increases the total amount
available for borrowing under our revolving credit facility to $305 million.
After applying all of the net proceeds from this offering to repay a portion of
our outstanding indebtedness under our revolving credit facility, we intend to
borrow the entire cash portion of the purchase price of Dana's EMG Business from
our revolving credit facility upon the closing of the offering. Following the
closing of the acquisition, we expect to have approximately $58.7 million of
availability under this revolving credit facility. Availability under our
revolving credit facility is based on a formula of eligible accounts receivable,
eligible inventory and eligible fixed assets, and includes the purchased assets
of Dana's EMG Business. We expect such availability under the revolving credit
facility, following the initial draw down at the acquisition closing, to be
sufficient to meet our ongoing operating and integration costs.
Direct borrowings under our revolving credit facility bear interest at the
prime rate plus the applicable margin (as defined) or the LIBOR rate plus the
applicable margin (as defined), at our option. Borrowings are collateralized by
substantially all of our assets, including accounts
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receivable, inventory and fixed assets, and those of our domestic and Canadian
subsidiaries. Our credit facility prior to the acquisition provides for certain
financial covenants limiting our capital expenditures and requiring us to
maintain a certain tangible net worth at the end of each fiscal quarter. As of
December 31, 2002, we were in compliance with our applicable financial
covenants. Following our acquisition of Dana's EMG Business, the terms of our
revolving credit facility provide for, among other provisions, new financial
covenants requiring us, on a consolidated basis, (1) to maintain specified
levels of EBITDA at the end of each fiscal quarter for the 12-month period then
ended, through June 30, 2004, (2) to fall within specified levels of a fixed
charge coverage ratio at the end of each fiscal quarter for the 12-month period
then ended, and (3) to limit capital expenditure levels for each fiscal year
through 2007.
Our profitability and working capital requirements became more seasonal with
the sales mix of our Temperature Control products. Our working capital
requirements usually peak near the end of the second quarter, as the inventory
build-up of air conditioning products is converted to sales, and payments on the
receivables associated with such sales have yet to be received. These increased
working capital requirements are funded by borrowings from our revolving credit
facility. We anticipate that our present sources of funds will continue to be
adequate to meet our needs for the next several years.
During the years 1998 through 2000, our board of directors authorized
multiple repurchase programs under which we could repurchase shares of our
common stock. During such years, an aggregate of $26.7 million of common stock
was repurchased to meet present and future requirements of our stock option
programs and to fund our employee stock option plan. As of September 30, 2002,
we had board authorization to repurchase additional shares at a maximum cost of
$1.7 million. During the nine months ended September 30, 2002 and 2001, we did
not repurchase any shares of our common stock.
In July 2001, we entered into interest rate swap agreements to manage our
exposure to interest rate changes. The swaps effectively convert a portion of
our variable rate debt under the revolving credit facility to a fixed rate,
without exchanging the notional principal amounts. At September 30, 2002, we had
two outstanding interest rate swap agreements (in an aggregate notional
principal amount of $75 million), one of which matured in January 2003 and one
of which is scheduled to mature in January 2004. Under these agreements, we
receive a floating rate based on the LIBOR interest rate, and pay a fixed rate
of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of
$30 million. If, at any time, the swaps are determined to be ineffective, in
whole or in part, due to changes in the interest rate swap agreements, the fair
value of the portion of the interest rate swap determined to be ineffective will
be recognized as gain or loss in the statement of operations for the applicable
period.
On July 26, 1999, we issued our convertible debentures, payable
semi-annually, in the aggregate principal amount of $90 million. The debentures
are convertible into 2,796,120 shares of our common stock, and mature on July
15, 2009. The proceeds from the sale of the debentures were used to prepay an
8.6% senior note, reduce short term bank borrowings and repurchase a portion of
our common stock.
We sold certain accounts receivable to an independent financial institution
through our wholly-owned subsidiary, SMP Credit Corp., a qualifying
special-purpose corporation. In May 1999, SMP Credit Corp. entered into a three
year agreement whereby it could sell up to a $25 million undivided ownership
interest in a designated pool of certain of these eligible receivables. This
agreement was terminated in 2001 as part of our revolving credit facility
described above. These sales were reflected as reductions of trade accounts
receivable and the related fees and discounting expense were recorded as other
expense.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations
and the understanding of our results of operations. The impact and any
associated risks related to these policies on our business operations is
discussed throughout 'Management's Discussion and
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Analysis of Financial Condition and Results of Operations,' where such policies
affect our reported and expected financial results. For a detailed discussion on
the application of these and other accounting policies, see Note 1 of the notes
to our consolidated annual financial statements and Notes 2 and 3 of the notes
to our condensed consolidated quarterly financial statements included elsewhere
in this prospectus. Preparation of our consolidated annual and quarterly
financial statements requires us to make estimates and assumptions that affect
the reported amount of assets and liabilities, disclosure of contingent assets
and liabilities at the date of our financial statements, and the reported
amounts of revenue and expenses during the reporting periods. We can give no
assurance that actual results will not differ from those estimates.
REVENUE RECOGNITION. We derive our revenue primarily from sales of
replacement parts for motor vehicles, from both our Engine Management and
Temperature Control Divisions. We recognize revenue from product sales upon
shipment to customers. As described below, significant management judgments and
estimates must be made and used in connection with the revenue recognized in any
accounting period.
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The
preparation of financial statements requires our management to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, our management must make estimates of potential future product
returns related to current period product revenue. Management analyzes
historical returns, current economic trends, and changes in customer demand when
evaluating the adequacy of the sales returns and other allowances. Significant
management judgments and estimates must be made and used in connection with
establishing the sales returns and other allowances in any accounting period.
Similarly, our management must make estimates of the uncollectability of our
accounts receivables. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income, and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. At September 30, 2002,
we had a valuation allowance of $14.2 million, due to uncertainties related to
our ability to utilize some of our deferred tax assets. The valuation allowance
is based on our estimates of taxable income by jurisdiction in which we operate
and the period over which our deferred tax assets will be recoverable.
In the event that actual results differ from these estimates, or we adjust
these estimates in future periods, we may need to establish an additional
valuation allowance which could materially impact our business, financial
condition and results of operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the
impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important, which could trigger an impairment
review, include the following: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of our use of the acquired assets or the strategy for our overall
business; and significant negative
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industry or economic trends. With respect to goodwill, we test for potential
impairment in the fourth quarter of each year as part of our annual budgeting
process. We review the fair values of each of our reporting units using the
discounted cash flows method and market multiples.
OTHER LOSS RESERVES. We have numerous other loss exposures, such as
environmental claims, product liability (including asbestos matters) and
litigation. Establishing loss reserves for these matters requires the use of
estimates and judgment of risk exposure and ultimate liability. We estimate
losses using consistent and appropriate methods; however, changes to our
assumptions could materially affect our recorded liabilities for loss.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ('FASB') issued
Statement No. 143, Accounting for Asset Retirement Obligations ('Statement
No. 143'), which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, we
will recognize a gain or loss on settlement.
We are required and plan to adopt the provisions of Statement No. 143 for
the quarter ending March 31, 2003. To accomplish this, we must identify all
legal obligations for asset retirement obligations, if any, and determine the
fair value of these obligations on the date of adoption. The determination of
fair value is complex and will require us to gather market information and
develop cash flow models. Additionally, we will be required to develop processes
to track and monitor these obligations. The adoption of Statement No. 143 is not
expected to have a material adverse effect on our financial statements.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ('Statement No. 144'). Statement
No. 144 requires that long-lived assets be reviewed for impairment whenever
events and circumstances indicate that the carrying amount of the asset may not
be recoverable. If the carrying amount of the asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Additionally,
Statement No. 144 broadens the presentation of discontinued operations to
include components of an entity rather than being limited to a segment of the
business. We adopted the provisions of Statement No. 144 as of January 1, 2002.
The adoption had no effect on our financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections
('Statement No. 145'). Statement No. 145 eliminates the automatic classification
of gain or loss on extinguishment of debt as an extraordinary item of income and
requires that such gain or loss be evaluated for extraordinary classification
under the criteria of Accounting Principles Board No. 30, Reporting Results of
Operations. Statement No. 145 also requires sales-leaseback accounting for lease
modifications that have economic effects that are similar to sales-leaseback
transactions, and makes various other technical corrections to existing
pronouncements. Statement No. 145 will be effective for the year ending December
31, 2003. The adoption of Statement No. 145 is not expected to have a material
effect on our financial statements.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associates with Exit or Disposal Activities ('Statement No. 146'). Statement
No. 146, which is effective prospectively for exit or disposal activities
initiated after December 31, 2002, applies to costs associated with an exit
activity, including restructurings, or with a disposal of long-lived assets.
Those activities
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can include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Statement No. 146
requires that exit or disposal costs are recorded as an operating expense when
the liability is incurred and can be measured at fair value. Commitment to an
exit plan or a plan of disposal by itself will not meet the requirement for
recognizing a liability and the related expense under Statement No. 146.
Statement No. 146 grandfathers the accounting for liabilities that were
previously recorded under EITF Issue 94-3. Statement No. 146 will have no effect
on the restructuring costs recorded by us in 2002.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency
exchange and interest rates. These exposures are actively monitored by
management. Our exposure to foreign exchange rate risk is due to certain costs,
revenues and borrowings being denominated in currencies other than one of our
subsidiary's functional currency. Similarly, we are exposed to market risk as
the result of changes in interest rates which may affect the cost of our
financing. It is our policy and practice to use derivative financial instruments
only to the extent necessary to manage exposures. We do not hold or issue
derivative financial instruments for trading or speculative purposes.
EXCHANGE RATE RISK
We have exchange rate exposure, primarily, with respect to the Canadian
dollar and the British pound. As of September 30, 2002, our financial
instruments which are subject to this exposure are immaterial, therefore the
potential immediate loss to us that would result from a hypothetical 10% change
in foreign currency exchange rates would not be expected to have a material
impact on our earnings or cash flows. This sensitivity analysis assumes an
unfavorable 10% fluctuation in both of the exchange rates affecting both of the
foreign currencies in which the indebtedness and the financial instruments
described above are denominated and does not take into account the offsetting
effect of such a change on our foreign-currency denominated revenues.
INTEREST RATE RISK
We manage our exposure to interest rate risk through the proportion of fixed
rate debt and variable rate debt in our debt portfolio. To manage a portion of
our exposure to interest rate changes, we have entered into interest rate swap
agreements. At September 30, 2002, we had approximately $208.3 million in loans
and financing outstanding, of which approximately $96.2 million bear interest at
fixed interest rates and approximately $112.1 million bear interest at variable
rates of interest. We invest our excess cash in highly liquid short-term
investments. As a result of our refinancing agreement during the second quarter
2001, as described in the notes to our consolidated annual financial statements
and our consolidated quarterly financial statements found elsewhere in this
prospectus, our percentage of variable rate debt to total debt has increased
from 32% at December 31, 2000 to 56% at December 31, 2001 and decreased to 54%
at September 30, 2002. Depending upon the level of borrowings under our
revolving credit facility, which may at times approach $200 million, the effect
of a hypothetical, instantaneous and unfavorable change of 100 basis points in
the interest rate may have approximately $1 million negative impact on our
earnings or cash flows.
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THE AUTOMOTIVE AFTERMARKET
Unless otherwise indicated, industry statistics included throughout this
prospectus are based on reports of independent, third-party sources.
The automotive aftermarket industry is comprised of a large, diverse number
of manufacturers varying in product specialization and size. In addition to
manufacturing, aftermarket companies allocate resources towards an efficient
distribution process and product engineering in order to maintain the
flexibility and responsiveness on which their customers depend. Aftermarket
manufacturers must be efficient producers of small lot sizes and do not have to
provide systems engineering support. Aftermarket manufacturers also must
distribute, with rapid turnaround times, products for a full range of vehicles
on the road.
During periods of economic decline or weakness, more automobile owners may
choose to repair their current automobiles using replacement parts rather than
purchasing new automobiles, which benefits the automotive aftermarket industry,
including suppliers like us. The automotive aftermarket industry is also
dependent on new car sales, although to a lesser degree than original equipment
manufacturers, or OEMs, and their suppliers, because these sales create the
total number of cars available for repair. Despite the current economic climate,
the current interest rate environment and aggressive financing programs by
automakers has increased demand for new cars and trucks, which should benefit
the automotive aftermarket manufacturers in the long term as vehicles age.
The automotive aftermarket industry generated sales of approximately $179
billion in 2001. The automotive aftermarket industry has grown at a compound
annual growth rate of 5.8% from 1992 through 2001. Despite significant
consolidation in the industry, the automotive aftermarket continues to be very
competitive and highly fragmented.
The automotive aftermarket industry differs substantially from the OEM
supply business. Unlike the OEM supply business that primarily follows trends in
new car production, the automotive aftermarket industry's performance primarily
tends to follow different trends, such as:
growth in number of vehicles on the road;
increase in average vehicle age;
increase in total miles driven per year;
new and modified environmental regulations;
increase in pricing of new cars; and
new car quality and related warranties.
Traditionally, the supply arms of OEMs and the independent manufacturers who
supply the original equipment part applications have supplied a majority of the
business to new car dealer networks. However, Ford and General Motors have
recently moved to make their supply arms more independent, which may provide
future opportunities for independent automotive aftermarket manufacturers to
supply replacement parts to the dealer networks of the original equipment
vehicle manufacturers, both for warranty and out-of-warranty repairs.
The primary customers of the automotive aftermarket manufacturers are
national and regional warehouse distributors, large retail chains, automotive
repair chains and the dealer service networks of the original equipment vehicle
manufacturers, as illustrated below.
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DISTRIBUTION CHANNELS
[FLOW CHART]
TRADITIONAL DISTRIBUTION CHANNEL RETAIL DISTRIBUTION CHANNEL
STANDARD MOTOR PRODUCTS, INC. STANDARD MOTOR PRODUCTS, INC.
WAREHOUSE DISTRIBUTOR AUTOMOBILE PARTS RETAILER
JOBBING STORE Do-it-Yourselfer
Installer Installer
Dealer
Do-it-Yourselfer
ORIGINAL EQUIPMENT SERVICES
VEHICLE MANUFACTURER
PARTS AND SERVICES
DEALER
Installer
Do-it-Yourselfer
Jobber
TRADITIONAL DISTRIBUTION CHANNEL. In the traditional distribution network,
automotive replacement parts are distributed through a number of levels before
reaching the final users. Standard Motor Products and its competitors sell their
products to warehouse distributors who supply over 20,000 local auto parts
jobbers. These jobbers, in turn, sell primarily to professional mechanics at
service stations, garages and repair shops, and also to consumers who perform
automotive repairs themselves (known as 'do-it-yourselfers').
Over the last ten years, there has been a trend toward consolidation in the
distribution chain, both by warehouse distributors and retailers, as large
firms, with their superior buying power and more efficient distribution systems,
have gained market share at the expense of smaller, localized firms. The
proliferation of new car models, which are both produced in greater varieties
and carry more complex parts, may have hastened consolidation. This
proliferation of new car models requires a much greater capital base to support
a higher number and variety of parts that must be maintained in a warehouse
distributor's inventory for same day delivery to mechanics.
RETAIL DISTRIBUTION CHANNEL. Retail chains such as AutoZone, Advance Auto
Parts, Pep Boys, CSK Auto and O'Reilly Automotive sell a substantial amount of
automotive aftermarket parts. While both mechanics and do-it-yourselfers
purchase aftermarket parts from retail chains, as automotive parts grow more
complex, consumers may be less likely to service their own vehicles and may
become more reliant on dealers and mechanics that have traditionally used
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warehouse distributors as their parts suppliers. Retailers are currently
expanding into the jobber market and warehouse distributors are seeking means to
better serve do-it-yourselfers, possibly resulting in a long-term consolidation
of the market. Through our strategy of serving all levels of the aftermarket
industry, we believe that we are well-positioned to take advantage of this
consolidation. A listing of the top five independent automotive retailers that
distribute aftermarket parts is below.
TOP FIVE INDEPENDENT AUTO PARTS RETAILERS
<Table>
<Caption>
FISCAL YEAR
RANK CHAIN 2001 STORES 2001 SALES(1)
- ---- ----- ----------- -------------
1 AutoZone (2)................................................ 3,040 $4,818,185
2 Advance Auto Parts (3)...................................... 2,484 2,517,639
3 Pep Boys (4)................................................ 628 1,765,314
4 CSK Auto (5)................................................ 1,130 1,438,585
5 O'Reilly Automotive (6)..................................... 875 1,092,112
</Table>
Source: Annual Reports on Form 10-K filed with the SEC by each of the companies
listed above.
- ---------
(1) Includes all sales volumes for these companies, which sales are provided in
thousands.
(2) For fiscal year ending August 25, 2001.
(3) For fiscal year ending December 29, 2001.
(4) For fiscal year ending February 2, 2002.
(5) For fiscal year ending February 3, 2002.
(6) For fiscal year ending December 31, 2001.
ORIGINAL EQUIPMENT SERVICES. In 2001, there were approximately 21,800 new
automobile dealers in the United States. In addition to new car sales, the
majority of these automobile dealers sell 'name brand' aftermarket parts and
accessories and also service vehicles. The products available through the
dealers are purchased through the original equipment service network, or OES
network, operated by OEMs. As part of the OES network, Standard Motor Products
and its competitors sell their products directly to the vehicle manufacturers'
parts and service segments. These segments then sell the products, usually under
a vehicle manufacturer brand name, directly to the dealer who then sells them to
the installers, jobbers and do-it-yourselfers.
FACTORS INFLUENCING THE AUTOMOTIVE AFTERMARKET
We believe that the automotive aftermarket industry is influenced by a
variety of factors, including:
growth in the number of vehicles on the road;
increases in the number of drivers and number of vehicles per household;
vehicles are on the road longer and driven more miles per year;
automotive parts retailers are attempting to displace traditional jobbers;
environmental laws are becoming more stringent;
broader range in prices for replacement parts;
vehicles are comprised of more complex systems, requiring a greater
specialization of parts;
new cars are being made better and have longer warranties; and
greater need for increased repair expertise and technology.
We believe that the net impact of the foregoing factors will result in a
minimal rate of growth over the next several years for the North American
automotive aftermarket industry.
GROWTH IN THE NUMBER OF VEHICLES ON THE ROAD. From 1991 to 2001, the number
of registered vehicles in the United States increased at an annual rate of
approximately 2.1% to approximately 216.5 million vehicles, as represented by
the graph below. Growth in light trucks in particular has been strong,
increasing 3.8% in 2001 compared to 2000, continuing a decade of steady growth.
Canada contributes 17 million registered light vehicles on the road and Mexico
47
<Page>
contributes another 10 million of such vehicles, bringing the 2001 North
American market to approximately 236 million registered light vehicles.
VEHICLES IN USE -- UNITED STATES
[PERFORMANCE GRAPH]
(in millions)
<Table>
<Caption>
CAGR (1991-2001): 2.1% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
175.00 181.00 185.00 190.00 191.00 195.00 200.00 197.00 208.00 212.00 216.00
</Table>
Source: U.S. Department of Transportation and R.L. Polk & Co.
INCREASES IN THE NUMBER OF DRIVERS AND NUMBER OF VEHICLES PER HOUSEHOLD. The
number of drivers and the number of vehicles per household (vehicle penetration)
impact the size of the aftermarket. In 2000, the number of licensed drivers
reached roughly 190 million drivers, continuing an annual growth rate of 1.3%
since 1991. On a per household basis, the number of vehicles increased to 1.91
per household in 2001, reflecting an annual growth rate of 1.83% since 1991.
VEHICLES ARE ON THE ROAD LONGER AND MORE MILES ARE BEING DRIVEN PER YEAR.
Approximately 40% of the 2001 vehicle population was ten years of age or older.
More importantly, approximately 60% of the vehicles on the road are over six
years of age, a segment which represents the primary customer base of the
independent automotive aftermarket. Dealerships typically service vehicles newer
than five years old, which do not contribute significant sales to aftermarket
distributors or retailers. In 2001, the average car was 9.3 years old, compared
to 8.1 years old in 1992. Trucks have also extended their average life to 8.5
years (see the following graph). The increase in average life per vehicle is
attributable, among other things, to an increase in the structural integrity of
vehicles as well as significant technological innovations in protecting
automobiles from structural and exterior corrosion and improved quality in the
major parts systems such as engines and transmissions.
In addition, the number of miles driven each year has been steadily rising
for the past decade. An increase in the number of miles driven results in
greater wear on a vehicle and a greater need for replacement parts sold in the
aftermarket. In 2000, the average miles driven per vehicle was approximately
11,988, a 16% increase from 1991.
POPULATION OF VEHICLES BY AGE
[PERFORMANCE CHART]
Thousands of Vehicles
<Table>
<Caption>
Less
than 1 1 2 3 4 5
1995 2000 1995 2000 1995 2000 1995 2000 1995 2000 1995 2000
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
10100 13000 14500 15500 13500 14500 12500 14500 12700 13000 12700 14700
<Caption>
6 7 8 9 10 11
1995 2000 1995 2000 1995 2000 1995 2000 1995 2000 1995 2000
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
13500 13000 13500 12200 13200 10500 13200 10500 11500 10100 10000 11400
<Caption>
12 13 14 15 or more
1995 2000 1995 2000 1995 2000 1995 2000
- ---- ---- ---- ---- ---- ---- ---- ----
6500 10100 5000 9000 4500 8500 29500 33500
</Table>
Vehicle Age in Years
Source: R.L. Polk & Co.
AUTOMOTIVE PARTS RETAILERS ARE ATTEMPTING TO DISPLACE TRADITIONAL JOBBERS.
We believe that more aftermarket parts are now being sold through the retail
channel as these stores begin to serve professional mechanics as well as their
traditional retail clients. Given that retailers have conveniently located
stores already in place, they have been able to sell fast-moving product lines
to the jobber client base by simply adding more inventory coverage, a same day
delivery service,
48
<Page>
and an overnight emergency order system. The increase in the number of retail
outlets, serving a broader market volume (partially offset by a decrease in the
number of jobbers), results in a net increase in the number of locations
carrying a broader range of replacement parts.
ENVIRONMENTAL LAWS ARE BECOMING MORE STRINGENT. Environmental pressures have
imposed new standards on automobiles manufactured by the OEMs, as well as on
existing automobiles. Recently, several states have begun to impose tighter
emission controls at the inspection station, requiring otherwise 'clean'
vehicles to undergo repair of their emissions systems in order to pass. These
tighter emissions controls translate into a higher utilization of jobbers and
service bays as these vehicles are forced to conform to tighter regulatory
standards. The end result is a greater demand for aftermarket emission parts. In
addition, the growth in anti-fluorocarbon legislation has made similar demands
on the interior temperature control systems of the average vehicle. United
States production of R-12 based refrigerants such as Freon was no longer
permitted as of December 31, 1995, which has forced OEMs to replace the system
with a recyclable coolant variant. As anti-ozone legislation increases, the
average driver will be forced to replace his or her system as well with a
variant that is not only more costly, but also requires a lengthy service bay
visit.
BROADER RANGE IN PRICES FOR REPLACEMENT PARTS. Many price conscious
consumers have demanded lower prices for quality original equipment replacement
parts for their aging cars with a limited remaining life. Aftermarket suppliers
responded by supplying multiple versions of the same product at differing
price/quality points. Supplying multiple versions of the same product has
resulted in lower margins for aftermarket suppliers, and particularly suppliers
who do not have the efficient distribution channels and production capabilities
needed to handle lower margin sales. This factor is contributing heavily to the
consolidation of automotive suppliers. Lower margin products have also made many
of the aftermarket supplier products more attractive compared to original
equipment supplier products in the replacement market, which may work to
increase aftermarket suppliers' share of the automotive replacement parts
business. We believe that in order to continue to offer high quality, low cost
products it is important to be a large, cost-efficient supplier to the
automotive aftermarket.
VEHICLES ARE COMPRISED OF MORE COMPLEX SYSTEMS, REQUIRING A GREATER
SPECIALIZATION OF PARTS. Vehicles are becoming increasingly complex in terms of
their electronics, on a content per vehicle basis. While on average these parts
have a greater longevity than the electromechanical parts they are replacing, we
believe that the sheer volume of parts required and higher average prices per
part outweigh any of the negative effects that longevity may have on aftermarket
sales. In short, we believe that the more complicated the system, the greater
the chance that a replacement part will be needed in some capacity.
NEW CARS ARE BEING MADE BETTER AND HAVE LONGER WARRANTIES. As new technology
makes its way into the interior of cars, it is also entering vehicles in terms
of structural materials. New, corrosive-resistant steel and other materials make
the average vehicle on the road today less likely to fail structurally, raising
the life of the vehicle considerably. Many functional parts are now being
designed to last for 100,000 miles of usage. The extension of the average new
car warranty evidences the change in durability and quality in the structural
and functional components of the vehicles. These longer warranties are likely to
keep car owners returning to their dealer for servicing for a longer period of
time, thus hurting aftermarket sales.
GREATER NEED FOR INCREASED REPAIR EXPERTISE AND TECHNOLOGY. Late model
domestic cars or imported vehicles require more expertise and technology to
repair. As these have become a greater percentage of the vehicles on the road,
non-dealer mechanics have had to invest in greater amounts of equipment and
training to service them or risk losing business. While import vehicle owners
may return more often to their dealer for servicing, we do not believe that this
will substantially hurt aftermarket part sales. Non-dealer repair shops have
been rapidly investing in technology and expertise to compete effectively with
dealers in servicing import cars. The major replacement parts manufacturers have
also responded by providing enhanced ongoing training of professional mechanics
and telephonic services that assist mechanics in diagnosing repairs and
installing parts. In addition, independent manufacturers are designing parts for
ease of installation and providing specialty tools to speed the installation
process.
49
<Page>
BUSINESS
OVERVIEW
We are a leading independent manufacturer and distributor of replacement
parts for motor vehicles in the automotive aftermarket industry. We are
organized into two principal operating divisions, each of which focuses on a
specific segment of replacement parts. Our Engine Management Division
manufactures ignition and emission parts, on-board computers, ignition wires,
battery cables and fuel system parts. Our Temperature Control Division
manufactures and remanufactures air conditioning compressors, and other air
conditioning and heating parts.
We sell our products primarily to warehouse distributors and large retail
chains in the United States and Canada. We also sell our products through
distributors in Latin America and Europe. Our customers consist of many of the
leading warehouse distributors, such as Carquest and NAPA Auto Parts, as well as
many of the leading auto parts retail chains, such as Advance Auto Parts,
AutoZone and O'Reilly Automotive. We distribute parts under our own brand names,
such as Standard, Blue Streak and Four Seasons, and through private labels, such
as Carquest and NAPA Auto Parts.
In 2001, our consolidated net sales were $591.7 million, and our operating
income was $15.1 million. The following charts set forth our consolidated net
sales by operating division, geographic region and customer group as a
percentage of consolidated net sales in 2001:
[PERFORMANCE GRAPH]
2001 CONSOLIDATED NET SALES BY OPERATING DIVISION
Other 7%
Temperature Control 45%
Engine Management 48%
2001 CONSOLIDATED NET SALES BY GEOGRAPHIC REGION
Canada 5%
Rest of the World 8%
United States 87%
2001 CONSOLIDATED NET SALES BY CONSUMER GROUP
Retail 27%
Warehouse Distributors 65%
Other 8%
OUR STRATEGY
Our goal is to grow revenues and earnings and deliver returns in excess of
our cost of capital by providing high quality, low cost replacement parts in the
engine management and temperature control automotive aftermarkets. The key
elements of our strategy are as follows:
CAPITALIZE ON THE ACQUISITION OF DANA'S EMG BUSINESS. The acquisition will
allow us to combine Dana's EMG Business with our Engine Management
Division, thereby creating opportunities to realize cost savings and grow
earnings. We intend to integrate Dana's EMG Business into our Engine
Management Division within 18 months from the closing of the acquisition,
and intend to capitalize on the acquisition in the following ways:
increase sales in our Engine Management business, through our access to
Dana's EMG Business customer base and by strengthening our relationships
with our existing customers;
develop new and improved products to better satisfy the increasing
requirements of our customers;
rationalize manufacturing and distribution facilities to achieve more
efficient operations and lower costs for ourselves and our customers;
consolidate and centralize corporate functions such as sales and
marketing, accounting, tax, information systems, human resources, cash
management and risk management to eliminate redundant costs;
improve cost structure by realizing increased economies of scale in the
purchasing, processing, production and distribution of our products,
including being able to bring new products to market faster and more
efficiently by manufacturing more products ourselves,
50
<Page>
rather than purchasing such products from third parties and then reselling
such products to our customers; and
increase the proportion of our total sales and profits from our Engine
Management business which is more stable and predictable than our seasonal
Temperature Control business.
MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT AND
TEMPERATURE CONTROL BUSINESSES. We are one of the leading independent
manufacturers serving North America and other geographic areas in our core
businesses of Engine Management and Temperature Control. We believe that
our success is attributable to our emphasis on product quality, the breadth
and depth of our product lines for both domestic and imported automobiles,
and our reputation for outstanding customer service, as measured by rapid
order turn-around times and high-order fill rates. We believe that the
acquisition of Dana's EMG Business will enhance our success in these areas.
To maintain our strong competitive position in our markets, we remain
committed to the following:
providing our customers with broad lines of high quality engine management
and temperature control products, supported by the highest level of
customer service and reliability;
continuing to maximize our production and distribution efficiencies;
continuing to improve our cost position; and
focusing further our engineering development efforts.
We believe our Engine Management Division will be strengthened by the
acquisition of Dana's EMG Business, allowing us to offer improved and cost
effective existing complimentary products and expand our customer base.
PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND TECHNICAL
SUPPORT. Our goal is to increase sales to existing and new customers by
leveraging our skills in rapidly filling orders, maintaining high levels of
product availability and providing technical support in a cost-effective
manner. In addition, our technically-skilled sales force of approximately
200 sales professionals provides product selection and application support
to our customers.
EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our sales by
continuing to develop and expand the range of Engine Management and
Temperature Control products that we offer to our customers. We are
committed to investing the resources necessary to maintain and expand our
technical capability to manufacture multiple product lines that incorporate
the latest technologies developed by OEMs in North America and Europe.
BROADEN OUR CUSTOMER BASE. Our goal is to increase our business by
marketing our products more broadly to the distribution businesses of OEMs
who sell products to new car dealer service areas.
IMPROVE OPERATING EFFICIENCY AND COST POSITION. Our management places
significant emphasis on improving our financial performance, by achieving
operating efficiencies and improving asset utilization, while maintaining
product quality and high customer order fill rates. We have a proven track
record of managing costs and improving operating efficiency through
consolidating redundant functions and realizing cost savings in our
business. In 2001, we reduced our inventory level by $57 million while
retaining customer fill rates of approximately 93%. We intend to continue
to improve our operating efficiency and cost position by:
increasing cost-effective vertical integration in key product lines
through internal development;
focusing on efficient inventory management, including warranty and
overstock return management;
51
<Page>
maintaining and improving our cost effectiveness and competitive
responsiveness to better serve the automotive aftermarket customer base;
adopting company-wide programs geared toward manufacturing and
distribution efficiency; and
initiating company-wide overhead and operating expense cost reduction
programs, such as closing excess facilities.
Following an effective integration of Dana's EMG Business into our company,
we anticipate realizing additional operating efficiencies, cost savings and
improved productivity.
REDUCE OUR DEBT. Following an initial period during which our cash flows
will be used to integrate Dana's EMG Business into our Engine Management
Division, we intend to apply any excess cash flow from operations and the
management of working capital to reduce our outstanding indebtedness.
Further, we believe leveraging our capital expenditures with Dana's EMG
Business will enhance our ability to generate increased cash flow for debt
reduction.
ACQUISITION HISTORY
Over recent years, we have pursued an acquisition strategy focused on
specific areas in engine management and temperature control, namely:
the broadening of new product lines;
the addition of low cost lines within the main areas of our business;
vertical integration; and
international expansion.
Since January 1996, we have acquired 15 businesses. The integration of these
businesses has led to improvements in production, distribution and other
operating areas and in the quality and depth of our aftermarket product
offerings. We believe that our customers have benefited from these acquisitions
and our resulting ability to offer a broader portfolio of high quality, cost
effective aftermarket products. We intend to draw on our experience integrating
these past acquisitions to facilitate the integration of Dana's EMG Business.
The following table summarizes acquisitions and divestitures we have made
since January 1, 1996:
<Table>
<Caption>
ACQUISITION ACQUISITION DATE LOCATION BUSINESS OF ACQUIRED COMPANY
- ----------- ---------------- -------- ----------------------------
Sagem, Inc. May 2002 Greenville, South Manufacture and distribution of fuel
(a subsidiary of Johnson Controls) Carolina injectors and other ignition products
Carol Cable Ltd. April 2002 Wellingborough, Manufacture and distribution of
United Kingdom ignition leads
Chillair of Texas, Ltd. and Hartle January 2002 Dallas, Texas and Distribution of temperature control
Industries Grand Prairie, products
Texas
Automotive Heater Exchange July 2000 Massa, Italy Distribution of temperature control
products
Vehicle Air Conditioning Parts January 2000 United Kingdom Distribution of temperature control
products
Lemark Auto Accessories Limited April 1999 United Kingdom Manufacture and distribution primarily
of ignition wire and other engine
management products
Eaglemotive Corporation February 1999 Forth Worth, Texas Manufacture and distribution of fan
clutches and oil coolers
Webcon UK Limited and Injection January 1999 Two locations in Manufacture and distribution of
Correction UK Limited the United Kingdom full-line of engine management
products
Temperature control division of March 1998 Multiple locations Manufacture and distribution of
Cooper Industries in the United full-line temperature control products
States
</Table>
(table continued on next page)
52
<Page>
(table continued from previous page)
<Table>
<Caption>
ACQUISITION ACQUISITION DATE LOCATION BUSINESS OF ACQUIRED COMPANY
- ----------- ---------------- -------- ----------------------------
Oxygen sensor manufacturing September 1997 Wilson, North Manufacture oxygen sensors
business of AlliedSignal Carolina
Filko Automotive Division of F&B January 1997 Multiple locations Manufacture and distribution of
Manufacturing in the United ignition wire and other engine
States management products
Hayden Division of the Equion December 1996 Corona, California Assembly and distribution of heavy
Corporation duty cooling products
Fibro Friction, Inc. (since divested) July 1996 Montreal, Canada Manufacture and distribution of brake
parts
Intermotor Holdings Limited July 1996 Nottingham, Manufacture and distribution of engine
England management products, primarily to the
European market
Federal Parts Corporation February 1996 Dallas, Texas Manufacture and distribution of
ignition wire products
<Caption>
DISPOSITION DISPOSITION DATE LOCATION BUSINESS OF DISPOSED COMPANY
- ----------- ---------------- -------- ----------------------------
Pik-A-Nut October 1998 Huntington, General service line
Indiana
Fuel Pump business October 1998 Long Island City, Manufacture and distribution of fuel
New York pumps
Champ/ASL September 1998 Edwardsville, General service line
Kansas
EIS Brake parts March 1998 Berlin, Manufacture of brake parts
Connecticut
EIS Brake Manufacturing (EBM) March 1998 Ontario, Canada Manufacture of brake parts
Fibro Friction, Inc. March 1998 Montreal, Canada Manufacture and distribution of brake
parts
</Table>
FINANCIAL INFORMATION ABOUT OUR OPERATING DIVISIONS
The table below shows our consolidated net sales by operating division and
by major product group within each division for the three years ended
December 31, 2001 and for the nine months ended September 30, 2002. Our two
reportable operating divisions are Engine Management and Temperature Control.
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------------- ---------------------
1999 2000 2001 2002
--------------------- --------------------- --------------------- ---------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
ENGINE MANAGEMENT:
Ignition and Emission
Parts.................... $217,853 33.3% $219,337 36.5% $218,694 37.0% $184,609 37.8%
Wires and Cables.......... 61,170 9.4% 59,517 9.9% 58,720 9.9% 44,122 9.0%
Fuel System Parts......... 12,263 1.9% 9,386 1.6% 8,084 1.4% 5,182 1.1%
-------- ------ -------- ------ -------- ------ -------- ------
TOTAL ENGINE MANAGEMENT...... 291,286 44.6% 288,240 48.0% 285,498 48.3% 233,913 47.9%
-------- ------ -------- ------ -------- ------ -------- ------
TEMPERATURE CONTROL:
Compressors............... 139,921 21.4% 118,399 19.7% 117,965 19.9% 97,328 19.9%
Other Air Conditioning
Parts.................... 164,328 25.1% 139,051 23.1% 138,542 23.4% 114,498 23.5%
Heating Parts............. 15,834 2.5% 13,398 2.2% 13,349 2.3% 11,138 2.3%
-------- ------ -------- ------ -------- ------ -------- ------
TOTAL TEMPERATURE CONTROL.... 320,083 49.0% 270,848 45.0% 269,856 45.6% 222,964 45.7%
-------- ------ -------- ------ -------- ------ -------- ------
All Other.................... 42,082 6.4% 42,304 7.0% 36,298 6.1% 31,157 6.4%
-------- ------ -------- ------ -------- ------ -------- ------
TOTAL.................. $653,451 100.0% $601,392 100.0% $591,652 100.0% $488,034 100.0%
-------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------
</Table>
53
<Page>
The table below shows our operating profit and identifiable assets by
operating division for the three years ended December 31, 2001 and for the nine
months ended September 30, 2002.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------------------
1999 2000 2001
------------------------ ------------------------ ------------------------
OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE
PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS
------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Engine Management........... $ 26,134 $253,346 $ 37,974 $265,336 $ 26,433 $233,564
Temperature Control......... 17,477 212,026 11,513 224,410 3,624 182,083
All Other................... (13,388) 90,649 (18,776) 59,650 (14,934) 93,782
-------- -------- -------- -------- -------- --------
TOTAL................. $ 30,223 $556,021 $ 30,711 $549,396 $ 15,123 $509,429
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2002
------------------------
OPERATING IDENTIFIABLE
PROFIT ASSETS
------ ------
(DOLLARS IN THOUSANDS)
Engine Management........... $ 31,988 $253,621
Temperature Control......... 12,682 206,668
All Other................... (15,090) 105,157
-------- --------
TOTAL................. $ 29,580 $565,446
-------- --------
-------- --------
</Table>
'All Other' consists of items pertaining to the corporate headquarters
function, as well as the Canadian and European business units that do not meet
the criteria of a reportable operating division.
ENGINE MANAGEMENT DIVISION
BREADTH OF PRODUCTS. In our Engine Management Division, replacement parts
for automotive ignition and emission control systems accounted for approximately
38% of our consolidated net sales for the nine months ended September 30, 2002
and approximately 37% of our 2001 consolidated net sales. These parts include
distributor caps and rotors, electronic ignition control modules, voltage
regulators, coils, switches, sensors and EGR valves. We are a basic manufacturer
of many of the ignition parts we market and continue to develop ways of
increasing the number of parts we manufacture, rather than purchasing such parts
from third parties and then reselling such parts to our customers. We believe
our customers benefit from lower prices and improved quality from our
manufacturing such parts. These products cover a wide range of applications,
from 30-year old vehicles to current models, both domestic and imports, and
include passenger cars, light trucks and certain off-road and marine
applications.
We offer products at three different price points under a 'good-better-best'
concept. We began offering ignition parts under the 'Standard' brand name that
are equal in quality to original equipment parts installed on new vehicles. Soon
afterward, we pioneered the concept of offering higher quality parts, sold at
premium prices under the 'Blue Streak' brand name, that are significantly better
than original equipment. We also offer lower-priced lines under the 'COBRA'
brand to compete with lower priced private labels.
COMPUTER CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped
with computer-controlled engine management systems to control ignition, emission
control and fuel injection. These computer-controlled engine management systems,
as opposed to the traditional breaker-point ignition systems installed in prior
generations of new vehicles, reflect the automobile industry's response to
decades of pressure from the government and environmental groups to reduce
national fuel consumption and the level of pollutants from auto exhaust. The
on-board computers monitor inputs from many types of sensors located throughout
the vehicle, and control a myriad of valves, switches and motors to manage
engine and vehicle performance. Electronic ignition systems enable the engine to
improve fuel efficiency and reduce the level of hazardous fumes in exhaust
gases. We are a leading manufacturer and distributor of replacements for these
engine management component parts, including remanufactured automotive
computers. Electronic control modules and electronic voltage regulators
comprised approximately 12% of our total ignition and emission consolidated net
sales for the nine months ended September 30, 2002 and approximately 13% of our
total ignition and emission consolidated net sales in 2001.
In 1992, we entered into a 50/50 joint venture in Canada with Blue Streak
Electronics, Inc. to rebuild automotive engine management computers and mass air
flow sensors. The volume of products produced by the joint venture are sold
primarily to us and has positioned us as a key supplier in the growing
remanufactured electronics markets. In 1994, we vastly increased our offering of
remanufactured computers and instituted a program to offer slower-moving items
by
54
<Page>
overnight shipment from our factory, which has enabled our customers to expand
their coverage without increasing inventory investment. The Blue Streak joint
venture has further expanded its product range to include computers used in
temperature control, anti-lock brake systems and air bags. In 1997, the joint
venture launched an operation in Europe to serve that market and an operation in
Florida to better serve the United States market in slow-moving items. In
January 1999, Blue Streak Europe acquired Injection Correction UK LTD, and in
September 2001, it also acquired TRW Inc.'s electronic control unit
remanufacturing division, also located in the United Kingdom.
We divide our electronic operations between product design and highly
automated manufacturing operations in Orlando, Florida and assembly operations,
which are performed in assembly plants in Orlando and Hong Kong.
Our sales of sensors, valves, solenoids and related parts have increased
steadily as automobile manufacturers equip their cars with more complex engine
management systems. Government emission laws have been implemented throughout
the majority of the United States. The Clean Air Act, as amended in 1990,
imposes strict emission control test standards on existing and new vehicles, and
remains the preeminent legislation in the area of vehicle emissions. As many
states have implemented required inspection/maintenance tests, the Environmental
Protection Agency, through its rulemaking ability, has also encouraged both
manufacturers and drivers to reduce vehicle emissions. As the Clean Air Act was
'phased in' beginning in 1994, automobiles must now comply with emission
standards from the time they are manufactured, and in most states, until the
last day they are in use. This law has, and in the future we expect this law and
other new government emission laws to have, a positive impact on sales of our
ignition and emission controls parts. Vehicles failing these new, more stringent
tests have required repairs utilizing parts sold by us.
WIRE AND CABLE PRODUCTS. Wire and cable parts accounted for approximately 9%
of our consolidated net sales for the nine months ended September 30, 2002 and
approximately 10% of our 2001 consolidated net sales. These products include
ignition (spark plug) wires, battery cables and a wide range of electrical wire,
terminals, connectors and tools for servicing an automobile's electrical system.
The largest component of this product line is the sale of ignition wire
sets. We have historically offered a premium brand of ignition wires and battery
cables, which capitalize on the market's awareness of the importance of quality.
With the growing customer interest in lower-priced products, we introduced a
second line of wire and cable products in 1989. This line has steadily expanded
to include import coverage, and in 1995 was reintroduced under the Tru-Tech
brand name.
In 1999, we relocated two of our wire and cable operations, one in Dallas,
Texas and the other in Bradenton, Florida, to a new facility in Reynosa, Mexico.
The Mexican operation focuses on assembly and packaging of the economy wire
sets, while our premium line is manufactured at our facility in Edwardsville,
Kansas.
TEMPERATURE CONTROL DIVISION
We manufacture, remanufacture and market a broad line of replacement parts
for automotive temperature control systems (air conditioning and heating),
primarily under the brand names of Four Seasons, Everco, Factory Air, Trumark,
NAPA Auto Parts and Carquest. The major product groups sold by our Temperature
Control Division are compressors, other air conditioning parts including small
motors, fan clutches, dryers, evaporators, accumulators and hoses, and heating
parts, including heater cores and valves. Total sales for our Temperature
Control Division accounted for approximately 46% of our consolidated net sales
for the nine months ended September 30, 2002 and approximately 46% of our 2001
consolidated net sales.
A major factor in the Temperature Control Division's business is the federal
regulation of chlorofluorocarbon refrigerants. United States legislation phased
out the production of domestic R-12 refrigerant (e.g., DuPont's Freon)
completely by the end of 1995. As the new law became
55
<Page>
effective, vehicle air conditioners needing repair or recharge were retrofitted
to use the new R-134a refrigerant. New vehicles began to use the new
refrigerants in 1993. Installers continue to seek training and certification in
the new technology and our Temperature Control Division has taken the lead in
providing this training and certification. Additionally, as technological
changes necessitate many new automotive parts, as well as new service equipment,
in anticipation of the phase-out of chlorofluorocarbon refrigerants, in 1994 we
reengineered our compressor line to be able to operate efficiently utilizing
either R-12 or R-134a refrigerants, and remain a leader in providing retrofit
kits for conversion of R-12 systems.
In 1998, we exchanged our brake business for the Moog automotive temperature
control business of Cooper Industries, which expanded our position in
temperature control. The Moog acquisition also expanded our position in the
small motor and heater parts markets. In 1999, we acquired Eaglemotive
Corporation, a manufacturer of fan clutches and oil coolers. In consolidating
these two businesses with our existing operations, we closed three manufacturing
facilities and consolidated three distribution sites into one.
In 1997, we launched a Temperature Control program in Europe. We entered
into a joint venture with Valeo to remanufacture compressors in Creteil, France
and established a distribution center in, Strasbourg, France. Subsequent to this
launch, we have made additional investments with Temperature Control
distribution points in the UK, Italy and Spain.
FINANCIAL INFORMATION ABOUT OUR FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
We sell our line of products primarily in the United States, with additional
sales in Canada, Latin America and Europe. Our sales are substantially
denominated in U.S. dollars.
The table below shows our consolidated net sales by geographic area for the
three years ended December 31, 2001 and for the nine months ended September 30,
2002:
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------
1999 2000 2001 2002
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
United States............................. $572,534 $520,741 $515,322 $421,911
Canada.................................... 32,515 27,942 28,811 25,105
Other Foreign............................. 48,402 52,709 47,519 41,018
-------- -------- -------- --------
Total................................. $653,451 $601,392 $591,652 $488,034
-------- -------- -------- --------
-------- -------- -------- --------
</Table>
The table below shows our long-lived assets by geographical area for the
three years ended December 31, 2001 and for the nine months ended September 30,
2002:
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------
1999 2000 2001 2002
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
United States............................. $125,766 $122,825 $118,455 $112,649
Canada.................................... 3,897 3,511 2,829 2,510
Other Foreign............................. 18,534 18,885 18,402 11,712
-------- -------- -------- --------
Total................................. $148,197 $145,221 $139,686 $126,871
-------- -------- -------- --------
-------- -------- -------- --------
</Table>
SALES AND DISTRIBUTION
We sell our products under proprietary brand names throughout the United
States and Canada, and through distributors in Latin America and Europe.
Products are distributed to warehouse distributors, including 15,000 jobber
outlets located throughout the United States and Canada. The jobbers sell our
products primarily to professional mechanics and to consumers who perform their
own automobile repairs. In addition, we sell directly to large auto parts retail
chains, such as Advance Auto Parts, AutoZone and O'Reilly Automotive.
56
<Page>
As of December 31, 2002, we sold and serviced our products through a direct
sales force of approximately 200 employees and, in some instances, through
independent sales representatives.
We believe that our sales force is the premier direct sales force for our
two product lines. We believe the primary reason for this reputation is our high
concentration of highly-qualified, well-trained salespeople dedicated to
geographic territories, which allows us to provide a level of customer service
that we believe is unmatched. The United States sales force is divided into
three regions, each with five to six zones and approximately eight salespeople
per zone.
From the outset, we thoroughly train our salespeople both in the function
and application of every product line we sell, as well as in proven sales
techniques. Customers therefore depend on these salespeople as a reliable source
for technical information. We give newly hired salespeople extensive instruction
at our training facility in Irving, Texas and have a policy of continuing
education that allows our sales force to stay current on troubleshooting and
repair techniques, as well as the latest automotive parts and systems
technology. We employ a comprehensive CD-ROM training program that further
broadens our capability to provide real-time updated training to our
salespeople.
We generate demand for our products by directing a significant portion of
our sales effort to the end-customers' customers (i.e., jobbers and professional
mechanics), creating demand through our traditional distribution system. We also
conduct instructional clinics, which teach mechanics how to diagnose and repair
complex systems related to our products. To help our salespeople to be teachers
and trainers, we focus our recruitment efforts on candidates who already have
strong technical backgrounds as well as sales experience. We also create demand
for our products through the Standard Plus Club. Our Standard Plus Club, a
professional service dealer network comprised of approximately 7,900 members,
offers technical and business development support and has a technical service
telephone hotline which provides diagnostics and installation support. This club
is available to any jobber or installer and provides training, special discount
programs, on-line diagnostics assistance and logo merchandise.
In connection with our sales activities, we offer several types of discounts
and allowances. We believe these discounts and allowances are a common practice
throughout the automotive aftermarket industry. First, we offer cash discounts
for paying invoices in accordance with the discounted terms of the invoice.
Second, we offer pricing discounts based on volume and different product lines
purchased from us. Supplementally, rebates and discounts are provided to
customers as advertising and sales force allowances. In addition to the
aforementioned discounts and rebates, allowances for warranty and overstock
returns are also provided.
CUSTOMERS
Our customer base is comprised largely of warehouse distributors, jobber
outlets, other manufacturers and export customers. In addition to serving our
traditional customer base, we have expanded into the retail market by selling to
large retail chains such as Advance Auto Parts, AutoZone and O'Reilly
Automotive. Our retail channel of distribution has grown significantly from
approximately $41 million in consolidated net sales to retailers in 1993
(representing 7% of consolidated net sales), to approximately $107 million in
1997 (representing 20% of consolidated net sales), and to approximately $159 in
2001 (representing 27% of consolidated net sales).
Our five largest individual customers accounted for 46% of our consolidated
net sales for the nine months ended September 30, 2002 and 44% of our
consolidated net sales in 2001. Members of one marketing group represent our
largest group of customers and accounted for approximately 16% of our
consolidated net sales for the nine months ended September 30, 2002 and 15% of
our consolidated net sales in 2001. One individual member of this marketing
group accounted for 11% of our consolidated net sales for the nine months ended
September 30, 2002 and 10% of our consolidated net sales in 2001.
We have in the past and may in the future lose customers or lose a
particular product line of a customer. See 'Risk Factors -- We depend on a
limited number of key customers, and the loss of any such customer or a material
reduction in business from any such customer could have a
57
<Page>
material adverse effect on our business, financial condition and results of
operations' for a more detailed discussion of our risk of losing customers.
COMPETITION
We are a leading independent manufacturer of replacement parts for the
product lines comprising our two divisions: Engine Management and Temperature
Control. We compete primarily on the basis of price, product quality, customer
service, product coverage, product availability, order turn-around time and
order fill rate. We believe we differentiate ourselves from our competitors
primarily through:
a value-added, knowledgeable sales force;
extensive product coverage;
a sophisticated parts cataloguing systems; and
inventory levels sufficient to meet the rapid delivery requirements of
customers.
In the engine management business, we are one of the leading independent
manufacturers in the United States. Our significant competitors include Delco
Electronics Corporation, Delphi Corporation, Federal-Mogul Corporation, KEM
Manufacturing Products, Inc., Robert Bosch Corporation and Wells Manufacturing
Corporation (a UIS, Inc. subsidiary).
Our temperature control business is one of the leading independent producers
and distributors of a full line of temperature control products in North America
and other geographic areas. Delphi Corporation, Visteon Corporation, Transpro,
Inc. and Stant (a subsidiary of Tomkins plc) are some of our key competitors in
this market.
Although we are a leading independent manufacturer of automotive replacement
parts with strong brand name recognition, we face substantial competition in all
markets that we serve. The automotive aftermarket is highly competitive and our
success in the marketplace continues to depend on our ability to offer
competitive prices, improved products and expanded offerings in competition with
many other suppliers to the aftermarket. Some major manufacturers of replacement
parts are divisions of companies having greater financial, marketing and other
resources than we do. In addition, automobile manufacturers supply virtually
every replacement part sold by us, although these manufacturers generally supply
parts only for cars they produce. See 'Risk Factors -- Our industry is highly
competitive, and our success depends on our ability to compete with suppliers of
aftermarket automotive products, some of which have substantially greater
financial, marketing and other resources than we do' for a more detailed
discussion of the risks we face in connection with competition in the automotive
aftermarket industry.
SEASONALITY
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year, with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather.
For example, a cool summer may lessen the demand for our Temperature Control
products, while a hot summer may increase such demand. As a result of this
seasonality and variability in demand of our Temperature Control products, our
working capital requirements peak near the end of the second quarter, as the
inventory build-up of air conditioning products is converted to sales and
payments on the receivables associated with such sales have yet to be received.
During this period, our working capital requirements are typically funded by
borrowings from our revolving credit facility.
The seasonality of our business offers significant operational challenges in
our manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we traditionally offer a
pre-season selling program, known as our 'Spring promotion', in which customers
are offered a choice of a price discount or longer payment terms.
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<Page>
See 'Risk Factors -- Our business is seasonal and is subject to substantial
quarterly fluctuations, which impact our quarterly performance and working
capital requirements' for a more detailed discussion of the risks related to the
seasonality of our business.
WORKING CAPITAL MANAGEMENT
Automotive aftermarket companies have been under increasing pressure to
provide broad SKU (stock keeping unit) coverage in response to parts and brand
proliferation. Since 1996, we have made significant changes to the inventory
management system to reduce inventory requirements. We launched a new
forecasting system in our Engine Management Division that permitted a
significant reduction in safety stocks. Our Engine Management Division also
introduced a new distribution system in the second half of 1999, which permits
pack-to-order systems to be implemented. Such systems permit us to retain slow
moving items in a bulk storage state until an order for a specific brand part is
received. This system reduces the volume of a given part in inventory and
reduces the labor requirements to package and repackage inventory.
Our profitability and working capital requirements have become more seasonal
with the increased sales mix of temperature control products. Our working
capital requirements peak near the end of the second quarter, as the inventory
build-up of air conditioning products is converted to sales and payments on the
receivables associated with such sales have yet to be received. These increased
working capital requirements are funded by borrowings from our revolving credit
facility.
SUPPLIERS
The principal raw materials purchased by us consist of brass, electronic
components, fabricated copper (primarily in the form of magnet and insulated
cable), ignition wire, stainless steel coils and rods, aluminum coils and rods,
lead, rubber molding compound, thermo-set and thermo plastic molding powders.
Additionally, we use components and cores (used parts) in our remanufacturing
processes for computerized electronics and air conditioning compressors.
We purchase many materials in the U.S. open market, but do have a limited
number of supply agreements on key components. A number of prime suppliers make
these materials available. In the case of cores, we obtain them either from
exchanges with customers who return cores when purchasing remanufactured parts,
or through direct purchases from a network of core brokers.
We believe there is an adequate supply of primary raw materials and cores.
In order to ensure a consistent, high quality, low cost supply of key components
for each product line, we continue to develop our own sources through internal
manufacturing capacity.
PRODUCTION AND ENGINEERING
We engineer, tool and manufacture many of the components for our products,
except for some commonly available small component parts from outside suppliers.
We also perform our own plastic and rubber molding operations, stamping and
machining operations, automated electronics assembly and a wide variety of other
processes. In the case of remanufactured components, we conduct our own
teardown, diagnostics and rebuilding for computer modules and air conditioning
compressors. We have found this level of vertical integration to provide
advantages in terms of cost, quality and availability. We intend to selectively
continue efforts toward further vertical integration to ensure a consistent
quality and supply of low cost components.
We use the 'just-in-time' cellular manufacturing concept as a major program
to lower costs and improve efficiency. The main thrust of 'just-in-time'
cellular manufacturing is reducing work-in-process and finished goods inventory,
and its implementation reduces the inefficient operations that burden many
manufacturing processes. In 2000, we launched a program for the installation of
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<Page>
a fully integrated enterprise resource planning (ERP) system. The implementation
is expected to be fully completed in 2003 in our Temperature Control Division.
At that time, the system will encompass all aspects of the supply chain,
including procurement, manufacturing, sales, distribution and finance at all of
our Temperature Control facilities. The existing Engine Management information
system continues to meet the need of our Engine Management Division and will be
the foundation for consolidating Dana's EMG Business.
EMPLOYEES
As of December 31, 2002, we employed approximately 2,200 people in the
United States, and 1,100 people in Mexico, Canada, Puerto Rico, Europe and Hong
Kong. Of these, approximately 2,200 are production employees. We operate
primarily in non-union facilities and have binding labor agreements with the
workers at our two unionized facilities. We have approximately 130 production
employees in Edwardsville, Kansas who are covered by a contract with The
International Union, United Automobile, Aerospace and Agricultural Implement
Workers of America ('UAW') that expires April 1, 2003. We expect to renew this
agreement prior to its expiration. As of December 31, 2002, approximately 120 of
our production employees in Long Island City, New York are under a UAW contract
that expires October 2, 2004. We also have a union relationship in Mexico with
an agreement negotiated each year. The current union agreement in Mexico, which
covers approximately 260 employees, expired on January 29, 2003. We are
currently in negotiations to renew the labor agreement in Mexico. We believe
that our facilities are in favorable labor markets with ready access to adequate
numbers of skilled and unskilled workers, and we believe our relations with our
union and non-union employees are good.
PROPERTIES
We maintain our executive offices and a manufacturing plant in Long Island
City, New York.
The table below describes our principal physical properties.
<Table>
<Caption>
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
- -------- ------- --------------------------- ---- --------
Engine Management
-----------------
Orlando FL Manufacturing (Ignition) 50,640 2007
Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned
Wilson NC Manufacturing (Ignition) 31,500 2008
Reno NV Distribution (Ignition) 67,000 Owned
Long Island City NY Administration and Manufacturing (Ignition) 318,000 Owned
Greenville SC Manufacturing (Ignition) 181,525 Owned
Disputanta VA Distribution (Ignition) 411,000 Owned
Fajardo Puerto Rico Manufacturing (Ignition) 114,000 2007
Hong Kong HK Manufacturing (Ignition) 21,350 2003
Reynosa Mexico Manufacturing (Wire) 62,500 2004
Nottingham England Administration and Distribution (Ignition and Wire) 29,000 Owned
Nottingham England Manufacturing (Ignition and Wire) 46,777 Owned
Nottingham England Manufacturing (Ignition) 10,000 2012
Temperature Control
-------------------
Corona CA Manufacturing and Distribution 78,200 2008
Lewisville TX Administration and Distribution 415,000 2009
Fort Worth TX Manufacturing and Distribution 204,000 Owned
Fort Worth TX Manufacturing and Distribution 103,000 2004
Grapevine TX Manufacturing 180,000 Owned
St. Thomas Canada Manufacturing 40,000 Owned
Strasbourg France Administration and Distribution 16,146 2003
Massa Italy Administration and Distribution 13,100 2004
</Table>
(table continued on next page)
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<Page>
(table continued from previous page)
<Table>
<Caption>
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
- -------- ------- --------------------------- ---- --------
Temperature Control/Engine Management
-------------------------------------
Mississauga Canada Administration and Distribution (Ignition, Wire, 128,400 2006
Temperature Control)
Sunbury at Thames England Distribution (Ignition and Temperature Control) 28,095 2007
Other
-----
Ontario CA Vacated-subleased 250,200 2003
Cumming GA Vacated 77,000 2007
Grapevine TX Storage 83,125 2004
Irving TX Training Center 13,400 2004
</Table>
LEGAL PROCEEDINGS
On January 28, 2000, a former significant customer of ours which is
currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court filed
claims against a number of its former suppliers, including us. The claim against
us alleged $0.5 million of preferential payments in the 90 days prior to the
related Chapter 11 bankruptcy petition. The claim pertaining to the preferential
payments was settled for an immaterial amount during the second quarter of 2002.
In addition, this former customer seeks $9.4 million from us for a variety of
claims including antitrust, breach of contract, breach of warranty and
conversion. These latter claims arise out of allegations that this customer was
entitled to various discounts, rebates and credits after it filed for
bankruptcy. We have purchased insurance with respect to the actions. On August
22, 2002, the court dismissed the antitrust claims. We believe that these
remaining matters will not have a material adverse effect on our consolidated
financial statements taken as a whole.
In 1986, we acquired a brake business, which we subsequently sold in March
1998 and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure will depend upon the number of claims filed against us on or
after September 1, 2001 and the amounts paid for indemnity and defense thereof.
At December 31, 2001, approximately 100 cases were outstanding for which we were
responsible for any related liabilities. At December 31, 2002, the number of
cases outstanding for which we were responsible for related liabilities
increased to approximately 2,500, which include approximately 1,600 cases filed
in December 2002 in Mississippi. We believe that these Mississippi cases filed
against us in December 2002 were due in large part to potential plaintiffs
accelerating the filing of their claims prior to the effective date of
Mississippi's tort reform statute in January 2003, which statute eliminated the
ability of plaintiffs to file consolidated cases. To date, the amounts paid for
settled claims have been immaterial. We do not have insurance coverage for the
defense and indemnity costs associated with these claims. We recorded a
liability associated with future settlements through 2052 and recorded an after
tax charge of $16.9 million as a loss from a discontinued operation during the
third quarter of 2002 to reflect such liability.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations. See 'Risk Factors -- We may be materially
adversely affected by asbestos claims arising from products sold by our former
brake business, as well as by other product liability claims' for a more
detailed discussion of the risks we face in connection with our exposure to
asbestos-related claims.
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INSURANCE
We maintain basic liability coverage of $2 million for automobile liability
and $1 million for general and product liability, umbrella liability coverage of
$50 million and a $10 million environmental policy to cover our existing
facilities, except for one of our facilities which is currently undergoing minor
environmental remediation. The environmental remediation costs at such facility
are covered by an insurance policy of $3 million, which is subject to a $1.5
million deductible. Historically, we have not experienced casualty losses in any
year in excess of our coverage. We have no reason to expect this experience to
change, but can offer no assurances that liability losses in the future will not
exceed our coverage.
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MANAGEMENT
Our executive officers and directors, and their ages and positions as of
December 31, 2002, are:
<Table>
<Caption>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
-------------------------------- --- --------
Lawrence I. Sills............................ 63 Chairman of the Board, Chief Executive Officer
and Director
John P. Gethin............................... 54 President and Chief Operating Officer
James J. Burke............................... 47 Vice President Finance, Chief Financial Officer
Joseph G. Forlenza........................... 59 Vice President and General Manager of Engine
Management Division
Donald E. Herring............................ 60 Vice President of Aftermarket Sales
Sanford Kay.................................. 60 Vice President of Human Resources and Secretary
Nitin Parikh................................. 63 Vice President of Information Systems
Robert H. Martin............................. 56 Treasurer and Assistant Secretary
Arthur D. Davis.............................. 55 Vice Chairman of the Board and Director
Marilyn Fife Cragin.......................... 50 Director
Susan F. Davis............................... 53 Director
Robert M. Gerrity(1)(2)...................... 64 Director
John L. Kelsey(1)(2)......................... 77 Director
Kenneth A. Lehman(1)(2)...................... 59 Director
Arthur S. Sills.............................. 59 Director
Peter J. Sills............................... 56 Director
Frederick D. Sturdivant(1)(2)................ 65 Director
William H. Turner(1)(2)...................... 62 Director
</Table>
- ---------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Lawrence I. Sills has been our Chief Executive Officer and Chairman of the
Board since December 2000 and has been one of our directors since 1986. From
1986 to December 2000, Mr. Sills served as our President and Chief Operating
Officer. From 1983 to 1986, Mr. Sills served as our Vice President of
Operations. Mr. Sills is the brother of Arthur S. Sills and Peter J. Sills, who
are also our directors.
John P. Gethin has served as our President and Chief Operating Officer since
December 2000. From December 1997 to November 2000, Mr. Gethin served as our
Senior Vice President of Operations. Since October 1998, he has served as
General Manager of our Four Seasons Division (part of our Temperature Control
Division). From October 1995 to December 1997, Mr. Gethin was Vice President and
General Manager of EIS Brake Parts Division (a former business unit of ours).
James J. Burke has served as our Vice President Finance, Chief Financial
Officer since October 1999. From January 1998 to September 1999, Mr. Burke
served as our Director of Finance, Chief Accounting Officer. From March 1993 to
December 1997, Mr. Burke served as our Corporate Controller.
Joseph G. Forlenza has served as Vice President and General Manager of our
Engine Management Division since July 1993. From May 1988 to June 1993, Mr.
Forlenza served as Vice President and General Manager of our Champ Service Line
division (a former business unit of ours).
Donald E. Herring has served as our Vice President of Aftermarket Sales
since January 1993. From January 1990 to December 1992, Mr. Herring served as
our National Sales Manager.
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Sanford Kay has served as our Vice President of Human Resources since June
1988 and as our Secretary since May 1993. From January 1987 to June 1988, Mr.
Kay served as our Director of Labor Relations.
Nitin Parikh has served as our Vice President of Information Systems since
June 1985. From June 1978 to June 1985, Mr. Parikh served as our Manager of
Information Systems.
Robert H. Martin has served as our Treasurer and Assistant Secretary since
October 1999. From April 1993 to October 1999, Mr. Martin served as Controller
of our Engine Management Division. From February 1989 to April 1993, Mr. Martin
was the Division Controller of Stanric, Inc., our subsidiary.
Arthur D. Davis has served as our Vice Chairman of the Board since December
2000 and as a director since May 1986. Mr. Davis served as our Vice President of
Materials Management from May 1986 to January 1989. Mr. Davis is currently
retired. Mr. Davis is the husband of Susan F. Davis, one of our directors.
Marilyn Fife Cragin has served as a director since October 1995. Ms. Fife
Cragin has been an independent consultant to the Center for Research on Women at
Wellesley College since July 2001 and has periodically served as an independent
consultant to Planned Parenthood of Greater Massachusetts since January 2002.
From November 1998 to August 2000, she served as Program Director for Arts In
Progress, a private, not-for-profit education program for inner city girls. From
February 1995 to October 1998, Ms. Fife Cragin was the co-owner of an art
gallery. Prior to co-owning the art gallery, she was a practicing
psychotherapist for more than twenty years. Ms. Fife Cragin is the sister of
Susan F. Davis.
Susan F. Davis has served as a director since May 1998. Ms. Davis is the
wife of Arthur D. Davis and sister of Marilyn Fife Cragin.
Robert M. Gerrity has served as a director since July 1996. From 1996 to
2000, Mr. Gerrity served as Chairman and Chief Executive Officer of the Antrim
Group, Inc., a venture capital company. Prior to 1996, Mr. Gerrity served as
Vice Chairman of New Holland, n.v., an agricultural and construction equipment
company. Mr. Gerrity is also a director of Birmingham Steel Inc. and Rimrock
Corporation.
John L. Kelsey has served as a director since 1964. Mr. Kelsey is currently
retired. From 1989 to 1994, Mr. Kelsey served as Advisory Director at
PaineWebber Inc. Prior to that time, Mr. Kelsey served as Managing Director of
PaineWebber Inc. (and its predecessor firms) for more than 30 years.
Kenneth A. Lehman has served as a director since April 2000. Mr. Lehman has
been Managing Director of the KKP Group LLC since April 1999. From 1990 to
December 1998, he was the Co-Chairman and Chief Executive Officer of Fel-Pro
Incorporated. He is also a director of Gold Eagle Co.
Arthur S. Sills has served as a director since October 1995. Mr. Sills was
an educator and administrator in Massachusetts school districts for thirty years
prior to his retirement in 2000.
Peter J. Sills has served as a director since December 2000. Mr. Sills has
been a writer for the past ten years and is also an attorney.
Fredrick D. Sturdivant has served as a director since December 2001. Mr.
Sturdivant has been Chairman of the Tyler Group Inc. since April 2002. Mr.
Sturdivant was Chairman of Reinventures LLC from October 2000 to March 2002.
From June 1998 to September 2000, he was Executive Managing Director of
Strategic Decisions Group/Navigant Consulting. From January 1996 to June 1998,
he was President of Index Research and Advisory Services, a subsidiary of
Computer Sciences Corporation, and its general management consulting arm,
CSC Index.
William H. Turner has served as a director since May 1990. Mr. Turner has
been the Chairman of the Advisory Council of PNC Bank, New Jersey since June
2000. From September 1999 to June 2000, he was the Chairman of PNC Bank, N.A.,
New Jersey and Northeast Region and President of PNC from August 1997 to
September 1999. He was President and Co-Chief Executive Officer of Franklin
Electronic Publishers, Inc. from October 1996 to July 1997. He was
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the Vice Chairman, Chase Manhattan Bank, and its predecessor, Chemical Banking
Corporation, prior to his employment with Franklin Electronics Publishers, Inc.,
where he serves as a director. Mr. Turner is also a director of Volt Information
Sciences, Inc. and New Jersey Resources Corporation.
We intend to comply with all applicable rules promulgated under the
Sarbanes-Oxley Act of 2002 and the applicable New York Stock Exchange rules
relating to corporate governance matters, including those rules relating to
audit committees.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information as of December 31, 2002 with
respect to the beneficial ownership of shares of our common stock, by:
each person known by us to be the beneficial owner of more than 5% of the
outstanding shares of our common stock,
our directors, our chief executive officer during 2002 and each of our
other four most highly compensated executive officers during 2002, and
all of our executive officers and directors as a group.
<Table>
<Caption>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME AND ADDRESS OWNERSHIP(1) OF CLASS
- ---------------- ------------ --------
Gabelli Asset Management Inc................................ 2,368,691(2) 18.65
One Corporate Center
Rye, NY
Marilyn Fife Cragin(11) .................................... 1,593,048(3) 12.63
37-18 Northern Boulevard
Long Island City, NY
Lawrence I. Sills(10) ...................................... 1,586,775(4) 12.53
37-18 Northern Boulevard
Long Island, NY
Arthur D. Davis(12) ........................................ 1,451,552(5) 11.49
37-18 Northern Boulevard
Long Island City, NY
Peter J. Sills(10) ......................................... 1,131,020(6) 9.01
37-18 Northern Boulevard
Long Island City, New York
Arthur S. Sills(10) ........................................ 1,118,779(7) 8.91
37-18 Northern Boulevard
Long Island, NY
Susan F. Davis(11)(12) ..................................... 1,087,233(8) 8.60
37-18 Northern Boulevard
Long Island City, NY
Dimensional Fund Advisors Inc. ............................ 809,350(9) 6.45
1299 Ocean Avenue
Santa Monica, CA
John P. Gethin ............................................. 80,942(13) *
37-18 Northern Boulevard
Long Island City, NY
Joseph G. Forlenza ......................................... 77,782(14) *
37-18 Northern Boulevard
Long Island City, NY
Donald E. Herring .......................................... 62,047(15) *
37-18 Northern Boulevard
Long Island City, NY
James J. Burke ............................................. 56,179(16) *
37-18 Northern Boulevard
Long Island City, NY
John L. Kelsey ............................................. 14,770(17) *
460 Coconut Palm Road
Vero Beach, FL
William H. Turner .......................................... 13,742(18) *
2 Tower Center Blvd.
East Brunswick, NJ
Robert M. Gerrity .......................................... 12,742(19) *
114 Division Street
Bellaire, MI
</Table>
(table continued on next page)
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(table continued from previous page)
<Table>
<Caption>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME AND ADDRESS OWNERSHIP(1) OF CLASS
- ---------------- ------------ --------
Kenneth A. Lehman .......................................... 8,726(20) *
2715 Sheridan Road
Evanston, IL
Frederick D. Sturdivant .................................... 2,054 *
8 San Clemente Drive
Carmel Valley, CA 93924
Directors and Officers as a group (eighteen persons)........ 6,225,720(21) 47.11
</Table>
- ---------
* Represents beneficial ownership of less than 1% of the outstanding shares
of common stock.
(1) Applicable percentage of ownership is based on 12,557,009 shares of common
stock outstanding as of December 31, 2002. Beneficial ownership is
determined in accordance with the rules of the SEC. In computing the number
of shares beneficially owned by a person and the percentage ownership of
that person, shares of common stock subject to options, warrants and our
convertible debentures held by that person that are currently exercisable
or exercisable within 60 days of December 31, 2002 are deemed outstanding.
Regarding our convertible debentures, under Rule 13d-3 of the Exchange Act,
these persons must disclose the share amounts they would hold upon
conversion of our convertible debentures, even though such conversion has
not actually occurred. At December 31, 2002, our convertible debentures
were convertible into 31.068 shares of common stock for each $1,000
convertible debentures converted and the conversion price for our
convertible debentures was equivalent to approximately $32.19 per share.
Shares subject to options or our convertible debentures, however, are not
deemed outstanding for the purpose of computing the percentage ownership of
any other person. Except as indicated in the footnotes to this table, the
shareholder named in the table has sole voting power and sole investment
power with respect to the shares set forth opposite such shareholder's
name.
In footnotes 3, 4, 5, 6, 7 and 8, where more than one director of our
company is a co-trustee of a trust, co-director of a foundation, or joint
purchaser of our convertible debentures, and shares voting power and
investment power with another director or directors with respect to a
certain number of shares, such shares are counted as being beneficially
owned by each director who shares such voting power and investment power.
However, in computing the aggregate number of shares owned by directors and
officers in footnote 21, these same shares are only counted once.
(2) The information for Gabelli Asset Management Inc. and certain of its
affiliated entities ('Gabelli') is based solely on an amendment to its
Schedule 13D, filed with the SEC on December 24, 2002, wherein Gabelli
stated that it beneficially owned an aggregate of 2,368,691 shares of our
common stock. Gabelli states that it has sole voting power for 2,368,691
shares and has sole investment power for 2,337,691 shares.
(3) Includes 889,289 shares of common stock, of which: (a) 447,187 shares are
held as co-trustee with, among others, Arthur D. Davis and Susan F. Davis
for which Ms. Fife Cragin has shared voting and shared investment power;
(b) 109,063 shares are held by the Fife Family Foundation, Inc., of which
Ms. Fife Cragin is a director and officer and shares voting power and
investment power with, among others, Susan F. Davis; (c) 137,270 shares are
held by Ms. Fife Cragin as custodian for minor children for which she has
sole voting and sole investment power; (d) 52,400 shares are held as
co-trustee with Arthur D. Davis for which Ms. Fife Cragin has shared voting
and shared investment power; (e) 53,527 shares are deemed beneficially
owned by Ms. Fife Cragin in connection with her purchase of our convertible
debentures; (f) 18,560 shares are held as co-trustee for which she has
shared voting and investment power; (g) 9,307 shares are owned by Ms. Fife
Cragin's husband; and (h) 61,975 shares are held by Ms. Fife Cragin's
husband as trustee for their children. In her
(footnotes continued on next page)
67
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(footnotes continued from previous page)
capacity as a trustee, director of the foundation and for shares held as
custodian for minor children and owned by her spouse, Ms. Fife Cragin
disclaims beneficial ownership of such shares so deemed 'beneficially
owned' by her within the meaning of Rule 13d-3 of the Exchange Act.
(4) Includes 974,180 shares of common stock, of which: (a) 430,312 shares are
held as co-trustee with Arthur S. Sills and Peter J. Sills for which
Lawrence I. Sills has shared voting and shared investment power;
(b) 430,770 shares are held by the estate of Nathaniel I. Sills, of which
Lawrence I. Sills is executor and has sole voting and sole investment
power; (c) 4,619 shares of common stock allocated to Lawrence I. Sills
under Standard Motor Products, Inc.'s Employee Stock Ownership Plan (the
'Standard Motor Products ESOP'); (d) 2,812 shares are owned by Mr. Sills's
wife; and (e) 105,667 shares of common stock subject to options exercisable
within 60 days of December 31, 2002. In his capacity as a trustee and
executor and for shares of common stock held by his wife, Mr. Sills
disclaims beneficial ownership of the shares which are deemed 'beneficially
owned' by him within the meaning of Rule 13d-3 of the Exchange Act.
(5) Includes 1,364,183 shares of common stock, of which: (a) 420,982 shares are
held by Arthur D. Davis as trustee for which he has sole voting and sole
investment power; (b) 52,400 shares are held as co-trustee with Marilyn
Fife Cragin for which Mr. Davis has shared voting and shared investment
power; (c) 129,835 shares are held as co-trustee with Susan F. Davis for
which Mr. Davis has shared voting and shared investment power; (d) 447,187
shares are held as co-trustee with, among others, Marilyn Fife Cragin and
Susan F. Davis for which Mr. Davis has shared voting and shared investment
power; (e) approximately 1,287 shares are deemed beneficially owned by
Arthur D. Davis and Susan F. Davis in connection with their purchase of our
convertible debentures; (f) approximately 53,527 shares are deemed
beneficially owned by Arthur D. Davis and Susan F. Davis in connection with
their purchase of our convertible debentures; (g) 29 shares are allocated
to Mr. Davis under the Standard Motor Products ESOP; (h) 238,936 shares are
owned by Susan F. Davis; and (i) 20,000 shares are held by Mr. Davis that
were subject to options exercisable within 60 days of December 31, 2002. In
his capacity as a trustee and with regard to the 53,527 shares deemed
beneficially owned by Mr. Davis in connection with the conversion of our
convertible debentures and the 238,936 shares owned by Susan F. Davis,
Mr. Davis disclaims beneficial ownership of the shares which are deemed
'beneficially owned' by him within the meaning of Rule 13d-3 of the
Exchange Act.
(6) Includes 573,374 shares of common stock, of which: (a) 430,312 shares are
held as co-trustee with Lawrence I. Sills and Arthur S. Sills for which
Peter J. Sills has shared voting and shared investment power; and
(c) 143,062 shares are held by the Sills Family Foundation, Inc., of which
Peter J. Sills is a director and officer and shares voting and investment
power with, among others, Arthur S. Sills. In his capacity as a trustee and
director of the foundation, Mr. Sills disclaims beneficial ownership of the
shares which are deemed 'beneficially owned' by him within the meaning of
Rule 13d-3 of the Exchange Act.
(7) Includes 573,374 shares of common stock, of which: (a) 430,312 shares are
held as co-trustee with Lawrence I. Sills and Peter J. Sills for which
Arthur S. Sills has shared voting and shared investment power; and
(b) 143,062 shares are held by the Sills Family Foundation, Inc., of which
Arthur S. Sills is a director and officer and shares voting and investment
power with, among others, Peter J. Sills. In his capacity as a trustee and
director of the foundation, Mr. Sills disclaims beneficial ownership of the
shares which are deemed 'beneficially owned' by him within the meaning of
Rule 13d-3 of the Exchange Act.
(8) Includes 848,297 shares of common stock, of which: (a) 447,187 shares are
held as co-trustee with, among others, Marilyn Fife Cragin and Arthur D.
Davis for which Ms. Davis has shared voting and shared investment power;
(b) 109,063 shares are held by the Fife Family Foundation, Inc., of which
Ms. Davis is a director and officer and shares voting power and investment
power with, among others, Marilyn Fife Cragin; (c) 129,835 shares are held
as co-trustee with Arthur D. Davis for which Ms. Davis has shared voting
and shared
(footnotes continued on next page)
68
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(footnotes continued from previous page)
investment power; (d) approximately 1,287 shares are deemed beneficially
owned by Susan F. Davis and Arthur D. Davis in connection with their
purchase of our convertible debentures; (e) approximately 53,527 shares are
deemed beneficially owned by Susan F. Davis and Arthur D. Davis in
connection with their purchase of our convertible debentures; (f) 20,000
shares held by Mr. Davis that were subject to options exercisable within 60
days of December 31, 2002; and (g) 87,398 shares are owned by Arthur D.
Davis. In her capacity as trustee and director of the foundation and with
regard to the 1,287 shares deemed beneficially owned by Ms. Davis in
connection with the conversion of our convertible debentures and the 87,398
shares owned by Arthur D. Davis, Ms. Davis disclaims beneficial ownership
of the shares so deemed 'beneficially owned' by her within the meaning of
Rule 13d-3 of the Exchange Act.
(9) The information for Dimensional Fund Advisors Inc. ('Dimensional Fund') is
based solely on an amendment to its Schedule 13G, filed with the SEC on
February 12, 2002 ('13G/A'), which states that Dimensional Fund furnishes
investment advice to four investment companies and serves as investment
manager to certain other commingled group trusts and separate accounts
(such companies, trusts and accounts are referred to as 'Funds'). In
connection with its role as an investment advisor or manager to the Funds,
Dimensional Fund claims in its 13G/A to have sole voting and investment
power over 809,350 shares of our common stock, but disclaims beneficial
ownership of such shares.
(10) Lawrence I. Sills, Arthur S. Sills and Peter J. Sills are brothers.
(11) Marilyn Fife Cragin and Susan F. Davis are sisters.
(12) Arthur D. Davis and Susan F. Davis are married.
(13) Includes (a) 942 shares of common stock allocated to the account of John P.
Gethin under the Standard Motor Products ESOP and (b) 74,500 shares of
common stock held by Mr. Gethin which were subject to options exercisable
within 60 days of December 31, 2002.
(14) Includes (a) 3,482 shares of common stock allocated to the account of
Joseph G. Forlenza under the Standard Motor Products ESOP; (b) 61,800
shares of common stock held by Mr. Forlenza which were subject to options
exercisable within 60 days of December 31, 2002; and (c) 2,500 shares of
common stock owned by Mr. Forlenza's wife, of which Mr. Forlenza disclaims
'beneficial ownership' of such shares within the meaning of Rule 13d-3 of
the Exchange Act.
(15) Includes (a) 2,646 shares of common stock allocated to the account of
Donald E. Herring under the Standard Motor Products ESOP and (b) 55,000
shares of common stock held by Mr. Herring which were subject to options
exercisable within 60 days of December 31, 2002.
(16) Includes (a) 2,929 shares of common stock allocated to the account of James
J. Burke under the Standard Motor Products ESOP and (b) 48,250 shares of
common stock held by Mr. Burke which were subject to options exercisable
within 60 days of December 31, 2002.
(17) Includes 9,000 shares of common stock held by John L. Kelsey which were
subject to options exercisable within 60 days of December 31, 2002.
(18) Includes 9,000 shares of common stock held by William H. Turner which were
subject to options exercisable within 60 days of December 31, 2002.
(19) Includes 9,000 shares of common stock held by Robert M. Gerrity which were
subject to options exercisable within 60 days of December 31, 2002.
(20) Includes 4,000 shares of common stock held by Kenneth A. Lehman which were
subject to options exercisable within 60 days of December 31, 2002.
(21) All of our officers and directors as a group have 528,217 shares, which
were subject to options that are exercisable within 60 days of
December 31, 2002, 21,365 shares allocated to all officers under the
Standard Motor Products ESOP and approximately 102,207 shares of common
stock in connection with the purchase of our convertible debentures.
69
<Page>
DESCRIPTION OF CAPITAL STOCK
We are currently authorized by our Restated Certificate of Incorporation, as
amended, to issue up to:
30,000,000 shares of common stock, par value $2.00 per share, and
500,000 shares of preferred stock, par value $20.00 per share, of which
30,000 shares of preferred stock have been designated as Series A
participating preferred stock, par value $20.00 per share, and reserved for
future issuance upon exercise of rights under our Rights Agreement (as
described below).
As of December 31, 2002, there were 12,557,009 shares of common stock
outstanding and no shares of preferred stock outstanding. At February 12, 2003,
we had 503 holders of record.
The statements under this caption are brief summaries of material provisions
of (1) our Restated Certificate of Incorporation, as amended, (2) our Restated
By-laws, (3) the Indenture, dated as of July 26, 1999, between us and HSBC Bank
USA, as trustee, and (4) the Rights Agreement, dated as of February 15, 1996,
between us and Registrar & Transfer Co., as rights agent. Such summaries do not
purport to be complete, and are subject to, and are qualified in their entirety
by reference to, such documents.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters on which holders of common stock are entitled to vote. The holders of
shares of our common stock do not have cumulative voting rights. Therefore, the
holders of more than 50% of the shares of common stock voting for the election
of directors can elect all of the directors, and the remaining holders will not
be able to elect any directors. Subject to the rights of the holders of any
shares of preferred stock, holders of our common stock are entitled to receive
ratably such dividends as may from time to time be declared by our board of
directors out of funds legally available therefor. Our current policy is to pay
dividends on a quarterly basis. Our credit agreement with General Electric
Capital Corporation, as agent, in connection with our revolving credit facility
will permit dividends and distributions by us, provided specific conditions are
met. Such conditions include:
no default or event of default exists under the credit agreement or would
result from such dividend distribution;
we will not have paid dividends in an amount greater than $9 million in any
12 month period; and
we will have excess borrowing availability as determined under the credit
agreement of not less than $15.25 million or 5% of the total credit
facility (whichever is greater) for our prior fiscal quarter.
Holders of our common stock have no pre-emptive, conversion, redemption,
subscription or similar rights. In the event of our liquidation, dissolution or
winding up, whether voluntary or involuntary, holders of shares of our common
stock are entitled to share ratably in our assets that are legally available for
distribution, if any, remaining after the payment or provision for the payment
of all of our debts and other liabilities and the payment of any preferential
amount due to the holders of shares of any series of preferred stock. All of the
outstanding shares of our common stock are fully paid and non-assessable.
The transfer agent for our common stock is Registrar and Transfer Co.
PREFERRED STOCK
Our Restated Certificate of Incorporation authorizes our board of directors
to issue from time to time up to 500,000 shares of preferred stock in one or
more series and to establish and fix the number of shares of such series and the
relative rights, preferences and limitations of each series. Preferred stock, if
issued, will rank senior to our common stock as to dividends and
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liquidation preference and could decrease the amount of earnings and assets
available for distribution to holders of our common stock. The issuance of the
preferred stock may have the effect of delaying, deterring or preventing a
change in control of us and may adversely affect the rights of holders of our
common stock. Preferred stock, upon issuance, against full payment of the
purchase price therefor, will be fully paid and non-assessable. As of
December 31, 2002, no shares of preferred stock are outstanding. However, 30,000
shares of preferred stock have been reserved for issuance as Series A
participating preferred stock upon exercise of certain rights under our Rights
Agreement.
CONVERTIBLE DEBENTURES
On July 26, 1999, we issued convertible debentures in the aggregate
principal amount of $90 million under an Indenture between us and HSBC Bank USA,
as trustee. The convertible debentures bear interest at the rate per annum of
6.75% and will mature on July 15, 2009. The convertible debentures are general
unsecured subordinated obligations. We pay the interest due on the convertible
debentures every six months, on January 15 and July 15. The convertible
debentures are convertible at the option of the holder at anytime into shares of
our common stock. If so converted, the holder will receive 31.0680 shares of our
common stock for each $1,000 of convertible debentures that are converted
(equivalent to a conversion price of approximately $32.19 per share). The number
of shares of our common stock to be issued upon conversion of the convertible
debentures is subject to adjustments, including, among others:
dividends and other distributions payable in common stock on shares of our
capital stock;
the issuance of certain rights, options or warrants to all holders of our
common stock that entitles them, as of a specified record date, to
subscribe for or purchase our common stock at less than the then current
market price of our common stock; and
subdivisions, combinations and reclassifications of our common stock.
We may redeem the convertible debentures at our option, at any time on or after
July 15, 2004, in whole or in part, at a redemption price of 103.375% in 2004,
102.700% in 2005, 102.025% in 2006, 101.350% in 2007, 100.675% 2008 and 100% of
the principal amount on July 15, 2009, in each case together with accrued
interest to the redemption date. We also may repurchase the convertible
debentures at the option of the holders upon a change of control at a purchase
price equal to 101% of the aggregate principal amount of the convertible
debentures on their date of purchase, plus accrued interest, if any.
RIGHTS AGREEMENT
On January 17, 1996, our board of directors declared a dividend of one
preferred share purchase right, which we refer to as a 'right,' for each
outstanding share of our common stock. The dividend was payable on March 1, 1996
to the shareholders of record as of February 15, 1996. All shares of our common
stock issued subsequently also include these rights. Under certain conditions,
each right may be exercised to purchase from us one one-thousandth of a share of
Series A participating preferred stock at a price of $80.00 per one
one-thousandth of a share of Series A participating preferred stock, subject to
adjustment.
Our Restated Certificate of Incorporation provides that holders of Series A
participating preferred stock will be entitled to 1,000 votes per share of
Series A participating preferred stock, to a minimum preferential quarterly
dividend payment of $10.00 per share and to an aggregate dividend per share of
1,000 times the aggregate dividend declared per share of common stock. Dividends
on the Series A participating preferred stock are cumulative. Further, holders
of Series A participating preferred stock will be entitled to a minimum
preferential liquidation payment of $1,000 per share but will be entitled to an
aggregate payment of 1,000 times the payment made per share of common stock. In
addition, holders of Series A participating preferred stock will be entitled to
vote together as a class to elect two directors to our board of directors
whenever dividends payable on Series A participating preferred stock are in
default.
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The rights are exercisable only if, without the prior written consent of our
board of directors, a person or group acquires, or announces a tender offer to
acquire, 20% or more of the outstanding shares of our common stock. In addition,
if we are acquired in a merger or other business combination, or if 50% or more
of our consolidated assets or earning power is sold after a person or group of
affiliated or associated persons has acquired beneficial ownership of 20% or
more of the outstanding shares of our common stock, each right (other than
rights beneficially owned by the acquiring person (which will thereafter be
void)) will entitle its holder to purchase, at the right's then current exercise
price, a number of shares of equity securities of the acquiring company having a
market value of two times the exercise price of the right. The rights are
redeemable at our option at any time prior to a person or group acquiring 20% or
more of the outstanding shares of our common stock at a purchase price of
one-tenth of one percent per right. The rights may be exchanged by us, in whole
or in part, at any time after a person or group acquires 20% or more of the
outstanding shares of our common stock, but before such person or group acquires
50% or more of the outstanding shares of our common stock, at an exchange ratio
of one share of common stock, or one one-thousandth of a share of preferred
stock, per right, subject to adjustment. Until a right is exercised, the holder
of such right has none of the rights of our shareholders, including the right to
vote or to receive dividends. The rights expire on February 28, 2006, unless
extended by us or unless the rights have been earlier redeemed or exchanged.
The rights are designed to protect and maximize the value of the outstanding
shares of our common stock in the event of an unsolicited attempt by a person or
entity to acquire us in a manner or on terms not approved by our board of
directors. The rights may have the effect of rendering more difficult or
discouraging an acquisition of us that is deemed undesirable by our board of
directors. The rights may cause substantial dilution to a person or group that
attempts to acquire us on terms or in a manner not approved by our board of
directors, except an offer conditioned upon the negation, purchase or redemption
of the rights.
NEW YORK BUSINESS CORPORATION LAW
We are subject to Section 912 of the Business Corporation Law of New York,
which prohibits certain 'business combinations' (as defined in Section 912
generally to include mergers, sales and leases of assets, issuances of
securities and similar transactions) by us or one of our subsidiaries with an
'interested shareholder' (as defined in Section 912 and as applied to us this
generally means any person or entity, other than us or any of our subsidiaries,
that (1) beneficially owns, directly or indirectly, 20% or more of our
outstanding voting stock or (2) is an affiliate or associate of us and was, at
any time within five years prior to the date of the proposed business
combination, the beneficial owner, directly or indirectly, of 20% or more of our
outstanding voting stock) for five years after the person or entity becomes an
interested shareholder, unless (a) our board of directors shall have approved
the transaction before the person became an interested shareholder, or (b) the
business combination is approved by the holders of our outstanding voting stock,
excluding shares held by the interested shareholder, five years after such
interested shareholder's acquisition.
In addition, Article 16 of the Business Corporation Law of New York requires
that any offeror making a takeover bid for a New York corporation file with the
New York Attorney General, as soon as practicable on the date of commencement of
the takeover bid, a registration statement containing specified details
regarding the proposed takeover. The Business Corporation Law of New York also
contains provisions permitting directors taking action (including action
relating to a change in control) to consider employees, retirees, customers,
creditors and the community, and preventing New York corporations from paying
'greenmail' without a shareholder vote. These statutory provisions may have the
effect of delaying, deterring or preventing a future takeover or change in
control of us, unless such takeover or change in control is approved by our
board of directors.
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RESTATED CERTIFICATE OF INCORPORATION AND RESTATED BY-LAWS
In addition to the rights discussed above, our Restated Certificate of
Incorporation, as amended, and Restated By-laws include other provisions that
are intended to enhance the likelihood of continuity and stability in our
ownership and that may have the effect of delaying, deterring or preventing a
future takeover or change in control of us without approval from our board of
directors. Pursuant to our Restated Certificate of Incorporation, as amended,
prior to:
any merger or consolidation of us or any of our subsidiaries with or into
any other corporation;
any sale, lease, exchange or other disposition by us or any of our
subsidiaries of all or substantially all of our or such subsidiaries'
assets to any other corporation, person or entity; or
any purchase, lease or other acquisition by us, or any of our subsidiaries,
of any assets and/or securities from any other corporation, person or
entity, whereby, in connection with such purchase, lease or other
acquisition, we were to issue our voting securities or the voting
securities of any of our subsidiaries, including any securities convertible
into our voting securities or options, warrants or rights to purchase our
voting securities;
and, if as of the record date for determination of shareholders entitled to
notice and to vote on any of the transactions described in the bullets above:
such corporation, person or entity is the other party to any of the
transactions listed above and is the beneficial owner, directly or
indirectly, of 5% or more of the outstanding shares of any class of our
shares entitled to vote on such transaction;
then, in order to consummate such transaction, we would be required to get the
affirmative vote of the holders of our shares, determined as of a specified
record date, of:
at least 75% of the remaining outstanding shares of each class of our
capital stock entitled to vote in an election of directors; and
at least a majority of the outstanding shares of each class of our capital
stock entitled to vote in elections of directors, excluding those which
are, as determined by the board of directors, directly or indirectly
beneficially owned by the other corporation, person or entity to the
transaction.
To repeal or amend the provisions of our Restated Certificate of Incorporation,
as amended, outlined above requires a vote of at least 75% of the outstanding
shares of each class of our capital stock.
Our Restated Certificate of Incorporation, as amended, and Restated By-laws
also provide that any director may be removed at any time, without cause, by the
affirmative vote at any shareholders' meeting of the holders of at least 75% of
the outstanding shares of each class of our capital stock entitled to vote at
such meeting.
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UNDERWRITING
The Company and the underwriters for this offering named below have entered
into an underwriting agreement with respect to the shares being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co. and
Morgan Stanley & Co. Incorporated are the representatives of the underwriters.
<Table>
<Caption>
Number of
Underwriters Shares
------------ ------
Goldman, Sachs & Co.....................................
Morgan Stanley & Co. Incorporated.......................
---------
Total..........................................
---------
---------
</Table>
The underwriters are committed to take and pay for all of the shares being
offered, if any are taken, other than the shares covered by the option described
below unless and until this option is exercised.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from the Company to cover these sales. They may exercise this option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by the Company. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<Table>
<Caption>
Paid By the Company No Exercise Full Exercise
------------------- ----------- -------------
Per Share................................................... $ $
Total....................................................... $ $
</Table>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial price
to public. If all the shares are not sold at the initial price to public, the
representatives may change the offering price and the other selling terms.
The Company and its officers and directors have agreed with the underwriters
not to offer, sell, contract to sell, pledge, grant any option to purchase, make
any short sale or otherwise dispose of any shares of its common stock, or any
options or warrants to purchase any shares of its common stock, or any
securities convertible into, exchangeable for or that represent the right to
receive shares of its common stock, whether now owned or hereinafter acquired,
owned directly by the undersigned (including holding as a custodian) or with
respect to which it or such officer or director, as the case may be, has
beneficial ownership within the rules and regulations of the SEC, during the
period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, except with the prior written consent of
Goldman, Sachs & Co. This agreement does not apply to any existing employee
benefit plans.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. 'Covered'
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the Company in this offering. The
underwriters may close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short
74
<Page>
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the overallotment option. 'Naked' short
sales are any sales in excess of such option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchases of
common stock made by the underwriters in the open market prior to the completion
of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
common stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock. As
a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
New York Stock Exchange, in the over-the-counter market or otherwise.
The Company estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ .
The Company has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, commercial or investment
banking services to the Company, for which they have in the past received, and
may in the future receive, customary fees. Goldman, Sachs & Co. has provided us
with financial advisory services in connection with the acquisition of Dana's
EMG Business, for which they will receive customary fees and commissions.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement under the Securities Act
of 1933 with respect to the shares of common stock to be sold in this offering.
As permitted by the rules and regulations of the SEC, this prospectus omits some
information contained in the registration statement. For further information
with respect to us and the shares of common stock to be sold in this offering,
you should refer to the registration statement and to its exhibits and
schedules. Statements contained in this prospectus regarding the contents of any
agreement or other document are not necessarily complete. You should refer in
each instance to the copy of the agreement or other document filed or
incorporated by reference as an exhibit to the registration statement, each such
statement being qualified in all respects by the document to which it refers. We
are also required to file annual, quarterly and special reports, proxy
statements and other information with the SEC.
You can read the registration statement and the exhibits and schedules filed
with the registration statement or our annual, quarterly and special reports,
proxy statements or other information we have filed with the SEC, at the public
reference facility maintained by the SEC at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549. Copies of such material can also be
obtained at prescribed rates by mail from the Public Reference Branch of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference services. In
addition, the SEC maintains a website (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. You may also
75
<Page>
inspect our SEC reports and other information at the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This prospectus is part of the registration statement that we filed with the
SEC. The SEC permits us to incorporate by reference the information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we subsequently
file with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below filed by us with the SEC:
our Annual Report on Form 10-K for the year ended December 31, 2001, filed
on April 1, 2002, excluding our consolidated annual financial statements
and the related independent auditors' report dated February 22, 2002, which
have been superseded by the consolidated annual financial statements
included herein, which financial statements give retroactive effect to the
adoption of FASB Statement No. 142, 'Business Combinations', and EITF 01-
9, 'Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor's Products)';
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002,
filed on May 14, 2002;
our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002,
filed on August 14, 2002;
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002,
filed on November 13, 2002;
our Current Report on Form 8-K, filed on February 10, 2003;
our Proxy Statement on Schedule 14A, filed April 22, 2002, for our annual
meeting of stockholders held on May 23, 2002;
the description of our common stock contained in our registration statement
on Form 8-A (File No. 001-04743), filed on April 11, 1996; and
the description of our preferred stock purchase rights contained in our
registration statement on Form 8-A (File No. 001-04743), filed on March 1,
1996, and amended on April 11, 1996.
In addition, all reports and other documents we subsequently file pursuant
to Section 12, 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the
initial filing of the registration statement and until the time that we sell all
the securities described in this prospectus shall be deemed to be incorporated
in this prospectus and to be a part of this prospectus from the date of filing
of such reports and documents. Any statement contained in a previously filed
document incorporated by reference in this prospectus is modified or superseded
to the extent that a statement contained in this prospectus modifies or
supersedes such statement. Any statement contained in this prospectus or in a
document incorporated by reference in this prospectus is modified or superseded
to the extent that a statement contained in any subsequently filed document
which is or is deemed to be incorporated by reference in this prospectus
modifies or supersedes such statement. Only the modified or superseded statement
shall constitute a part of this prospectus.
You may request a copy of these filings, other than their exhibits, at no
cost, by oral or written request to: Standard Motor Products, Inc., 37-18
Northern Boulevard, Long Island City, New York 11101, Attention: James J. Burke,
Vice President Finance, Chief Financial Officer, (718) 392-0200.
76
<Page>
VALIDITY OF COMMON STOCK
The validity of our common stock offered in this offering will be passed
upon for us by Kelley Drye & Warren LLP, New York, New York, and for the
underwriters by Sullivan & Cromwell LLP, New York, New York.
EXPERTS
Our audited consolidated financial statements at December 31, 2000, and
2001, and for each of the years in the three-year period ended December 31,
2001, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere and incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The audited combined financial statements of Dana's EMG Business as of
December 31, 2001, and September 30, 2002 and for the years ended December 31,
2000 and 2001 and for the nine-month period ended September 30, 2002 included
in this registration statement have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
77
<Page>
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE NO.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES --------
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS (Audited)
Independent Auditors' Report................................ F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000 and 2001.......................... F-3
Consolidated Balance Sheets as of December 31, 2000 and
2001...................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001.......................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 2000 and 2001...... F-6
Notes to Consolidated Annual Financial Statements........... F-7
CONDENSED CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2001 and 2002... F-27
Condensed Consolidated Balance Sheets as of September 30,
2001 and 2002............................................. F-28
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2002............. F-29
Notes to Condensed Consolidated Quarterly Financial
Statements................................................ F-30
<Caption>
PAGE NO.
DANA CORPORATION'S ENGINE MANAGEMENT GROUP --------
COMBINED FINANCIAL STATEMENTS (Audited)
Report of Independent Accountants........................... F-38
Combined Statements of Operations for the nine months ended
September 30, 2002 and the years ended December 31, 2000
and 2001.................................................. F-39
Combined Balance Sheets as of December 31, 2001 and
September 30, 2002........................................ F-40
Combined Statements of Cash Flows for the years ended
December 31, 2000 and 2001 and for the nine months ended
September 30, 2002........................................ F-41
Combined Statements of Changes in Combined Equity for the
years ended December 31, 2000 and 2001 and the nine months
ended September 30, 2002.................................. F-42
Notes to Combined Financial Statements...................... F-43
</Table>
F-1
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Standard Motor Products, Inc.:
We have audited the consolidated balance sheets of Standard Motor Products, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Standard Motor
Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 2, these consolidated financial statements have been
revised to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
which was adopted by the Company as of January 1, 2002. As discussed in Note 3,
these consolidated financial statements have been revised to account for certain
sales incentives in accordance with Emerging Issues Task Force Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products), which was adopted by the Company as of
January 1, 2002.
/s/ KPMG LLP
New York, New York
February 22, 2002
F-2
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net sales (Note 6)................................. $ 653,451 $ 601,392 $ 591,652
Cost of sales...................................... 482,642 438,691 452,597
----------- ----------- -----------
Gross profit................................... 170,809 162,701 139,055
Selling, general and administrative expenses....... 140,586 131,990 123,932
----------- ----------- -----------
Operating income............................... 30,223 30,711 15,123
Other income (expense), net (Notes 3 and 13)....... (2,243) 450 2,763
Interest expense................................... 15,951 18,045 17,430
----------- ----------- -----------
Earnings before taxes and extraordinary item... 12,029 13,116 456
----------- ----------- -----------
Provision for income taxes (Note 14)............... 3,344 2,886 144
----------- ----------- -----------
Earnings before extraordinary item............. 8,685 10,230 312
----------- ----------- -----------
Extraordinary loss on early extinguishment of debt,
net of taxes of $707, $364 and $975 in 1999, 2000
and 2001, respectively. (Note 7)................. 1,060 501 2,797
----------- ----------- -----------
Net earnings (loss)............................ $ 7,625 $ 9,729 $ (2,485)
----------- ----------- -----------
----------- ----------- -----------
Net earnings (loss) Per Common Share -- Basic:
Earnings before extraordinary item............. $ 0.66 $ 0.86 $ 0.03
Extraordinary (loss) from early extinguishment
of debt...................................... (0.08) (0.04) (0.24)
----------- ----------- -----------
Net earnings (loss) Per Common Share -- Basic...... $ 0.58 $ 0.82 $ (0.21)
----------- ----------- -----------
----------- ----------- -----------
Net earnings (loss) Per Common Share -- Diluted:
Earnings before extraordinary item............. $ 0.66 $ 0.85 $ 0.03
Extraordinary (loss) from early extinguishment
of debt...................................... (0.08) (0.04) (0.24)
----------- ----------- -----------
Net earnings (loss) Per Common Share -- Diluted.... $ 0.58 $ 0.81 $ (0.21)
----------- ----------- -----------
----------- ----------- -----------
Average number of common shares.................... 13,073,272 11,933,774 11,774,591
----------- ----------- -----------
----------- ----------- -----------
Average number of common shares and dilutive common
shares........................................... 13,145,743 11,974,341 11,830,737
----------- ----------- -----------
----------- ----------- -----------
</Table>
See accompanying notes to consolidated financial statements.
F-3
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 2001
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 7,699 $ 7,496
Accounts receivable, less allowances for discounts and
doubtful accounts of $4,577 and $4,362 in 2000 and
2001, respectively (Notes 3 and 7).................... 106,261 117,965
Inventories (Notes 4 and 7)............................. 234,257 177,291
Deferred income taxes (Note 14)......................... 12,482 12,316
Prepaid expenses and other current assets............... 12,060 13,881
-------- --------
Total current assets............................ 372,759 328,949
-------- --------
Property, plant and equipment, net (Notes 5 and 7).......... 104,536 101,646
-------- --------
Goodwill, net............................................... 40,685 38,040
-------- --------
Other assets (Notes 6 and 11)............................... 31,416 40,794
-------- --------
Total assets.................................... $549,396 $509,429
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 7).................................. $ 38,930 $ 4,075
Current portion of long-term debt (Note 7).............. 13,643 1,784
Accounts payable........................................ 56,612 26,110
Sundry payables and accrued expenses.................... 49,671 41,968
Accrued customer returns................................ 17,693 18,167
Payroll and commissions................................. 8,119 8,489
-------- --------
Total current liabilities....................... 184,668 100,593
-------- --------
Long-term debt (Notes 7 and 8).............................. 150,018 200,066
-------- --------
Postretirement benefits other than pensions and other
accrued liabilities (Notes 11 and 12)..................... 20,405 23,083
Commitments and contingencies (Notes 7, 9, 10, 11, 12 and 17)
Stockholders' equity (Notes 7, 8, 9,10 and 11):
Common Stock -- par value $2.00 per share:
Authorized 30,000,000 shares, issued and outstanding
11,695,179 and 11,823,650 in 2000 and 2001,
respectively...................................... 26,649 26,649
Capital in excess of par value.......................... 2,541 1,877
Retained earnings....................................... 190,253 183,532
Accumulated other comprehensive loss.................... (591) (3,722)
-------- --------
218,852 208,336
Less: Treasury stock -- at cost (1,629,297 and 1,500,826
shares in 2000 and 2001, respectively).................... 24,547 22,649
-------- --------
Total stockholders' equity...................... 194,305 185,687
-------- --------
Total liabilities and stockholders' equity...... $549,396 $509,429
-------- --------
-------- --------
</Table>
See accompanying notes to consolidated financial statements.
F-4
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)..................................... $ 7,625 $ 9,729 $ (2,485)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 17,230 18,922 18,909
Gain on disposal of property, plant & equipment..... (2,564) (99) (265)
Equity (income) loss from joint ventures............ 4,118 (702) (844)
Employee stock ownership plan allocation............ 1,739 1,032 713
Tax benefit related to employee stock options....... 290 -- 48
Increase in deferred income taxes................... (4,552) (897) (3,628)
Extraordinary loss on repayment of debt............. 1,767 865 3,772
Change in assets and liabilities, net of effects from
acquisitions:
Decrease in accounts receivable, net................ 10,782 14,793 13,296
(Increase) decrease in inventories.................. (5,944) (44,666) 56,966
(Increase) decrease in prepaid expenses and other
current assets.................................... (947) 388 (1,821)
(Increase) decrease in other assets................. (1,514) 3,811 (7,745)
Increase (decrease) in accounts payable............. (10,349) 14,413 (30,502)
Increase (decrease) in sundry payables and accrued
expenses.......................................... 1,129 (16,724) (9,749)
Increase (decrease) in other liabilities............ 2,174 (1,818) 3,524
-------- -------- --------
Net cash provided by (used in) operating
activities.................................... 20,984 (953) 40,189
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and
equipment............................................. 8,420 657 652
Capital expenditures, net of effects from
acquisitions.......................................... (14,423) (16,652) (13,740)
Payments for acquisitions, net of cash acquired......... (17,381) (2,718) (1,069)
-------- -------- --------
Net cash used in investing activities........... (23,384) (18,713) (14,157)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line-of-credit
agreements............................................ (819) 36,285 71,935
Net proceeds from issuance of long-term debt............ 86,568 -- --
Principal payments and retirement of other long-term
debt.................................................. (54,664) (29,119) (93,601)
Proceeds from exercise of employee stock options........ 1,830 -- 473
Purchase of treasury stock.............................. (9,765) (14,345) --
Dividends paid.......................................... (4,456) (4,324) (4,236)
-------- -------- --------
Net cash (used in) provided by financing
activities.................................... 18,694 (11,503) (25,429)
-------- -------- --------
Effect of exchange rate changes on cash..................... 629 (1,512) (806)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ 16,923 (32,681) (203)
CASH AND CASH EQUIVALENTS at beginning of year.............. 23,457 40,380 7,699
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year.................... $ 40,380 $ 7,699 $ 7,496
-------- -------- --------
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................ $ 14,733 $ 18,943 $ 17,403
-------- -------- --------
-------- -------- --------
Income taxes........................................ $ 6,205 $ 2,776 $ 2,792
-------- -------- --------
-------- -------- --------
</Table>
See accompanying notes to consolidated financial statements.
F-5
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY
STOCK PAR VALUE EARNINGS INCOME (LOSS) STOCK TOTAL
----- --------- -------- ------------- ----- -----
(DOLLARS IN THOUSANDS)
BALANCE AT DECEMBER 31, 1998........... $26,649 $2,951 $181,679 $ (516) $ (5,738) $205,025
Comprehensive Income:
Net earnings....................... 7,625 7,625
Foreign currency translation
adjustment....................... 1,230 1,230
--------
Total comprehensive
income....................... 8,855
Cash dividends paid.................... (4,456) (4,456)
Exercise of employee stock options..... (381) 2,211 1,830
Tax benefits applicable to the exercise
of employee stock options............ 290 290
Employee Stock Ownership Plan.......... 97 1,642 1,739
Purchase of treasury stock............. (9,765) (9,765)
------- ------ -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1999........... 26,649 2,957 184,848 714 (11,650) 203,518
Comprehensive Income:
Net earnings....................... 9,729 9,729
Foreign currency translation
adjustment....................... (1,305) (1,305)
--------
Total comprehensive
income....................... 8,424
Cash dividends paid.................... (4,324) (4,324)
Employee Stock Ownership Plan.......... (416) 1,448 1,032
Purchase of treasury stock............. (14,345) (14,345)
------- ------ -------- ------- -------- --------
BALANCE AT DECEMBER 31, 2000........... 26,649 2,541 190,253 (591) (24,547) 194,305
Comprehensive Loss:
Net loss........................... (2,485) (2,485)
Foreign currency translation
adjustment....................... (1,086) (1,086)
Unrealized loss on interest rate
swap agreements.................. (2,045) (2,045)
--------
Total comprehensive loss....... (5,616)
Cash dividends paid.................... (4,236) (4,236)
Exercise of employee stock options..... (295) 768 473
Tax benefits applicable to the exercise
of employee stock options............ 48 48
Employee Stock Ownership Plan.......... (417) 1,130 713
------- ------ -------- ------- -------- --------
BALANCE AT DECEMBER 31, 2001........... $26,649 $1,877 $183,532 $(3,722) $(22,649) $185,687
------- ------ -------- ------- -------- --------
------- ------ -------- ------- -------- --------
</Table>
See accompanying notes to consolidated financial statements.
F-6
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (the 'Company') is engaged in the manufacture
and sale of automotive replacement parts. The consolidated financial statements
include the accounts of the Company and all subsidiaries in which the Company
has more than a 50% equity ownership. The Company's investments in
unconsolidated affiliates are accounted for on the equity method. All
significant intercompany items have been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, management of
the Company has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements. Some of the more significant estimates include allowances for
doubtful accounts, inventory valuation reserves, depreciation and amortization
of long-lived assets, product liability and litigation matters, deferred tax
asset valuation allowance and sales return allowances. Actual results could
differ from those estimates.
RECLASSIFICATIONS
Where appropriate, certain amounts in 1999 and 2000 have been reclassified
to conform with the 2001 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
At December 31, 2000 and 2001, held-to-maturity securities amounted to $7.2
million. Held-to-maturity securities consist primarily of U.S. Treasury Bills
and corporate debt securities which are reported at amortized cost which
approximates fair value. As of December 31, 2001, the held-to-maturity
securities mature within two years.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the
first-in, first-out method) or market.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998 and June 2000, the FASB issued SFAS No. 133, 'Accounting for
Derivative Instruments and Hedging Activities' and SFAS No. 138, 'Accounting for
Certain Derivative Instruments and Certain Hedging Activities.' These statements
establish accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. For derivatives that have been formally designated
as a cash flow hedge (interest rate swap agreements), the effective portion of
changes in the fair value of the derivatives are recorded in 'other
comprehensive income (loss).' Payment or receipts on interest rate swap
agreements are recorded in the 'interest expense' caption in the statement of
operations. The Company had no outstanding derivatives as of January 1, 2001.
F-7
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
These assets are recorded at cost and are depreciated using the
straight-line method of depreciation over the estimated useful lives as follows:
<Table>
<Caption>
ESTIMATED LIFE
-------------------------
Buildings and improvements................................. 10 to 33 1/2 years
Machinery and equipment.................................... 7 to 12 years
Tools, dies and auxiliary equipment........................ 3 to 8 years
Furniture and fixtures..................................... 3 to 12 years
Computer software.......................................... 3 to 10 years
Leasehold improvements..................................... 10 years or life of lease
</Table>
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, has been amortized on a straight-line basis over the
estimated period of expected benefit, generally 15 years. The Company assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
Accumulated amortization at December 31, 2001 and 2000 was $16.4 million and
$12.8 million. Goodwill will no longer be amortized upon adoption of Statement
of Financial Accounting Standards (SFAS) No. 142, 'Goodwill and Other Intangible
Assets' (See discussion in 'Recently Issued Accounting Standards').
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at year end exchange
rates and revenues and expenses are translated at average exchange rates during
the year. The resulting translation adjustments are recorded as a separate
component of accumulated other comprehensive income (loss) and remains there
until the underlying foreign operation is liquidated or substantially disposed
of.
REVENUE RECOGNITION
The Company recognizes revenues from product sales upon shipment to
customers. The Company estimates and records provisions for cash discounts,
quantity rebates, sales returns and warranties, in the period the sale is
recorded, based upon its prior experience.
F-8
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net postretirement benefit liability and related expense under
the Company's benefit plans are determined on an actuarial basis. Benefits are
determined primarily based upon employees' length of service.
INCOME TAXES
Income taxes are calculated using the liability method in accordance with
the provisions of Statement of Financial Accounting Standards ('SFAS') No. 109,
'Accounting for Income Taxes.' Deferred tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences
between the financial statement and tax bases of assets and liabilities, as
measured by the current enacted tax rates. Deferred tax expense (benefit) is the
result of changes in the deferred tax asset and liability.
NET EARNINGS PER COMMON SHARE
The Company presents two calculations of earnings per common share. 'Basic'
earnings per common share equals net income divided by weighted average common
shares outstanding during the period. 'Diluted' earnings per common share equals
net income divided by the sum of weighted average common shares outstanding
during the period plus potentially dilutive common shares. Potentially dilutive
common shares that are anti-dilutive are excluded from net earnings per common
share.
The following is a reconciliation of the shares used in calculating basic
and dilutive net earnings per common share.
<Table>
<Caption>
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
Weighted average common shares........................... 13,073 11,934 11,775
Effect of stock options.................................. 73 40 56
------ ------ ------
Weighted average common shares outstanding assuming
dilution............................................... 13,146 11,974 11,831
------ ------ ------
------ ------ ------
</Table>
The average shares listed below were not included in the computation of
diluted earnings per share because to do so would have been anti-dilutive for
the periods presented.
<Table>
<Caption>
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
Stock options............................................... 552 861 625
----- ----- -----
----- ----- -----
Convertible debentures...................................... 1,165 2,796 2,796
----- ----- -----
----- ----- -----
</Table>
STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance with the
provisions of SFAS No. 123 'Accounting for Stock Based Compensation.' As
permitted by this statement, the Company has chosen to continue to apply the
intrinsic value-based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees' and
related interpretations including SFAS interpretation No. 44, 'Accounting for
certain transactions involving stock compensation and interpretation of
APB No. 25,' issued in March 2001. Accordingly, no compensation expense has been
recognized for options granted because the exercise price is equal to the fair
value of the stock at the date of grant. As required, the Company provides pro
forma net income and pro forma earnings per share
F-9
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosures for stock option grants, as if the fair value based method defined
in SFAS No. 123 had been applied.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with high quality
financial institutions and limits the amount of credit exposure to any one
institution. With respect to accounts receivable, such receivables are primarily
from warehouse distributors and major retailers in the automotive aftermarket
industry located in the United States. The Company performs ongoing credit
evaluations of its customers' financial conditions. Members of one marketing
group represent the Company's largest group of customers and accounted for
approximately 14%, 15% and 14% of consolidated net sales for the years ended
December 31, 1999, 2000 and 2001, respectively. One individual member of this
marketing group accounted for 9%, 9%, and 10% of net sales for the years ended
December 31, 1999, 2000 and 2001, respectively. The Company's five largest
individual customers, including members of this marketing group, accounted for
35%, 33% and 42% of net sales in 1999, 2000 and 2001, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2002, the Company adopted the guidelines of the Emerging
Issues Task Force Issue No. 01-9, Accounting Consideration Given by a Vendor to
a Customer (Including Reseller of the Vendor's Products) ('EITF 01-9'). These
guidelines address when sales incentives and discounts should be recognized and
the accounting for certain costs incurred by a vendor on behalf of a customer,
as well as where the related revenues and expenses should be classified in the
financial statements. Historically, the Company has provided certain
consideration, including rebates, product and discounts to customers and treated
such costs as advertising, marketing and sales force expenses. Such costs are
now treated as a reduction of revenues or as cost of sales. As a result, certain
costs of approximately $18.0 million, $25.4 million and $30.4 million,
respectively, have been reclassified from selling, general and administrative
expenses for the three fiscal years ended December 31, 1999, 2000 and 2001.
These reclassifications had no effect on net earnings.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
(SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No. 141
also specifies criteria to determine whether intangible assets acquired in a
business combination should be recognized and reported separately from goodwill.
SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. Impairment is
measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. SFAS No. 142 requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121 and subsequently, SFAS No. 142 after its adoption. The Company
adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142
effective January 1, 2002. As of the date of adoption of SFAS No. 142, the
Company has unamortized goodwill in the amount of $38 million. Upon adoption of
SFAS No. 142, our earnings before extraordinary item and net earnings for basic
and diluted earnings per share adjusted to exclude goodwill amortization expense
(net of taxes) were as follows:
F-10
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------------------
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Reported earnings before extraordinary item................. $ 8,685 $10,230 $ 312
Add back: goodwill amortization expense, net of tax......... 2,439 2,733 2,498
------- ------- -------
Adjusted earnings before extraordinary item................. $11,124 $12,963 $ 2,810
------- ------- -------
------- ------- -------
Basic earnings per share:
Reported basic earnings per share before extraordinary
item.................................................. $ 0.66 $ 0.86 $ 0.03
Add back: goodwill amortization expense, net of tax..... 0.19 0.23 0.21
------- ------- -------
Adjusted basic earnings per share before extraordinary
item...................................................... $ 0.85 $ 1.09 $ 0.24
------- ------- -------
------- ------- -------
Diluted earnings per share:
Reported diluted earnings per share before extraordinary
item.................................................. $ 0.66 $ 0.85 $ 0.03
Add back: goodwill amortization expense, net of tax..... 0.19 0.23 0.21
------- ------- -------
Adjusted diluted earnings per share before extraordinary
item...................................................... $ 0.85 $ 1.08 $ 0.24
------- ------- -------
------- ------- -------
Reported net earnings (loss)................................ $ 7,625 $ 9,729 $(2,485)
Add back: goodwill amortization expense, net of tax......... 2,439 2,733 2,498
------- ------- -------
Adjusted net earnings....................................... $10,064 $12,462 $ 13
------- ------- -------
------- ------- -------
Basic net earnings (loss) per share:
Reported basic net earnings (loss) per share............ $ 0.58 $ 0.82 $ (0.21)
Add back: goodwill amortization expense, net of tax..... 0.19 0.23 0.21
------- ------- -------
Adjusted basic net earnings per share....................... $ 0.77 $ 1.05 $ --
------- ------- -------
------- ------- -------
Diluted net earnings (loss) per share:
Reported diluted net earnings (loss) per share.......... $ 0.58 $ 0.81 $ (0.21)
Add back: goodwill amortization expense, net of tax..... 0.19 0.23 0.21
------- ------- -------
Adjusted diluted net earnings per share..................... $ 0.77 $ 1.04 $ --
------- ------- -------
------- ------- -------
</Table>
Management is currently analyzing the impact of adoption of this Standard,
but believes this Standard is likely to result in the impairment of a portion of
the Company's goodwill. The Company has substantially completed the first step
of the initial impairment test required by the Standard and identified
approximately $16 million of goodwill that may be impaired based on the new
requirements. The Company will complete the impairment testing required to
determine the actual amount of goodwill impairment in the first fiscal quarter
of 2002. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.
2. ACQUISITIONS
In January 2000, the Company completed the purchase of Vehicle Air
Conditioning Parts, located in England, which has subsequently been named 'Four
Seasons UK, LTD.' In July 2000, the Company completed the purchase of Automotive
Heater Exchange SRL in Massa, Italy. In addition, during 2000 and 2001, the
Company increased its ownership percentage in Standard Motor Products Holdings
Limited, formerly Intermotor Holdings Limited, from 74.25% to 86%. In aggregate,
approximately $3.8 million was incurred in connection with these acquisitions.
Such acquisitions had an immaterial effect on net earnings.
F-11
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, the Company acquired and accounted for as a purchase, the
following business: In January 1999, the Company acquired 85% of the stock of
Webcon UK Limited, and, through its UK joint venture Blue Streak Europe Limited,
Webcon's affiliate Injection Correction UK Limited located in Sunbury-on-Thames
England, for approximately $3.5 million. The remaining 15% was acquired in
January 2000. The acquisition increased consolidated net sales by approximately
$12 million in 1999 and had an immaterial effect on net earnings for the year
ended December 31, 1999.
In February 1999, the Company acquired 100% of the stock of Eaglemotive
Corporation for approximately $12.4 million. The acquisition increased
consolidated net sales by approximately $22 million in 1999 and had an
immaterial effect on net earnings for the year ended December 31, 1999.
In April 1999, the Company acquired Lemark Auto Accessories Limited, located
in Redditch, England, for approximately $1.9 million. The acquisition increased
consolidated net sales by approximately $3 million and had an immaterial effect
on net earnings for the year ended December 31, 1999.
The Company's acquisitions were funded from cash and short term borrowings.
Assets acquired in all of the acquisitions consisted primarily of inventory and
property, plant and equipment. The purchase prices have been allocated to the
assets acquired and liabilities assumed based on the fair value at the dates of
acquisition. In aggregate, the excess of the purchase price over the fair value
of the net assets acquired during 2001, 2000 and 1999 was approximately $1.1
million, $2.6 million and $5.7 million, respectively. The operating results of
these acquired businesses have been included in the consolidated financial
statements from the date of each respective acquisition.
In December 2001, the Company signed a letter of intent to acquire Carol
Cable Limited, a manufacturer and distributor of wire sets, based in England,
for approximately $1.7 million. Assets consist primarily of property plant and
equipment, and inventory. The purchase is expected to be completed in April 2002
with funds provided under the Company's line of credit.
3. SALE OF ACCOUNTS RECEIVABLE
The Company sold certain accounts receivable through its wholly-owned
subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May
1999 SMP Credit Corp. and an independent financial institution entered into a
three year agreement whereby SMP Credit Corp. could sell up to a $25 million
undivided ownership interest in a designated pool of certain of these eligible
receivables. This agreement was terminated in 2001 as part of the new credit
facility described in Note 7. At December 31, 2000, net accounts receivables
amounting to $25 million had been sold under this agreement. These sales were
reflected as reductions of trade accounts receivable and the related fees and
discounting expense were recorded as other expense.
4. INVENTORIES
<Table>
<Caption>
DECEMBER 31,
-----------------------
2000 2001
---- ----
(DOLLARS IN THOUSANDS)
Finished goods.............................................. $165,381 $141,799
Work in process............................................. 3,552 3,155
Raw materials............................................... 65,324 32,337
-------- --------
Total inventories....................................... $234,257 $177,291
-------- --------
-------- --------
</Table>
F-12
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
DECEMBER 31,
-----------------------
2000 2001
---- ----
(DOLLARS IN THOUSANDS)
Land, buildings and improvements............................ $ 60,435 $ 60,665
Machinery and equipment..................................... 101,884 109,617
Tools, dies and auxiliary equipment......................... 12,035 17,815
Furniture and fixtures...................................... 28,340 27,643
Computer software........................................... 4,824 10,231
Leasehold improvements...................................... 7,475 7,450
Construction in progress.................................... 12,328 6,440
-------- --------
227,321 239,861
Less accumulated depreciation and amortization.............. 122,785 138,215
-------- --------
Total property, plant and equipment, net................ $104,536 $101,646
-------- --------
-------- --------
</Table>
Depreciation expense was $13.8 million, $15.4 million and $15.3 million for
1999, 2000 and 2001, respectively.
6. OTHER ASSETS
<Table>
<Caption>
DECEMBER 31,
------------------------
2000 2001
---- ----
(DOLLARS IN THOUSANDS)
Marketable securities....................................... $ 7,200 $ 7,200
Unamortized customer supply agreements...................... 2,365 1,892
Equity in joint ventures.................................... 1,956 2,149
Deferred income taxes....................................... 8,859 12,653
Deferred loan costs......................................... 3,864 5,389
Other....................................................... 7,172 11,511
------- -------
Total other assets...................................... $31,416 $40,794
------- -------
------- -------
</Table>
Included in Other is a preferred stock investment in a customer of the
Company. Net sales to such customer amounted to $58 million, $57.4 million and
$57.9 million in 1999, 2000 and 2001, respectively.
7. CREDIT FACILITIES AND LONG-TERM DEBT
The Company, effective April 27, 2001 entered into an agreement with GE
Capital Corp. and a syndicate of lenders for a new secured revolving credit
facility. The former unsecured revolving credit facility was set to expire on
November 30, 2001. The term of the new credit agreement is for a period of five
years and provides for a line of credit up to $225 million. The initial proceeds
have been used to refinance approximately $97 million of the outstanding
indebtedness under the Company's former bank line of credit, a 7.56% senior note
of $52 million, a $25 million accounts receivable sales arrangement and a
Canadian Credit Facility of $5 million. The Company recorded an extraordinary
loss of approximately $2.8 million, net of taxes, in the second quarter of 2001,
for a prepayment penalty and write-off of unamortized fees for the retirement of
the above related debt. Availability under the new credit facility is based on a
formula of eligible accounts receivable, eligible inventory and eligible fixed
assets. Direct borrowings bear interest at the Prime Rate plus the applicable
margin (as defined) or the LIBOR Rate plus the applicable margin (as defined),
at the option of the Company. At December 31, 2000 and 2001, the interest rate
on the Company's revolving credit facilities was 9.75% and 4.30%, respectively.
Borrowings are collateralized by accounts receivable, inventory and fixed assets
of the Company and its subsidiaries. The terms of the new revolving credit
facility contain, among other provisions, requirements of maintaining defined
levels of tangible net worth and specific limits or restrictions on additional
indebtedness,
F-13
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital expenditures, liens and acquisitions. The Company was in compliance with
the covenants at December 31, 2001.
In addition, a foreign subsidiary of the Company has a revolving credit
facility. The amount of short-term bank borrowings outstanding under that
facility was $3.9 million and $4.1 million at December 31, 2000 and 2001,
respectively. At December 31, 2001, the foreign subsidiary was not in compliance
with certain covenants, for which it received waivers and amendments. The
weighted average interest rates on these borrowings at December 31, 2001 and
2000 were 6.4% and 6.9%, respectively.
On July 26, 1999, the Company completed a public offering of convertible
subordinated debentures amounting to $90 million. The Convertible Debentures
carry an interest rate of 6.75%, payable semi-annually, and will mature on July
15, 2009. The Debentures are convertible into approximately 2,796,000 shares of
the Company's common stock. The Company may, at its option, redeem some or all
of the Debentures at any time on or after July 15, 2004, for a redemption price
equal to the issuance price plus accrued interest. In addition, if a change in
control, as defined, occurs at the Company, the Company will be required to make
an offer to purchase the convertible debentures at a purchase price equal to
101% of their aggregate principal amount, plus accrued interest. The Company
incurred fees in relation to the offering of approximately $3.4 million. Net
proceeds from the offering were used to pre-pay a senior note payable, including
prepayment penalties, repurchase a portion of the Company's common stock and pay
down short term bank borrowings.
Under the terms of the 7.56% senior note agreement, the Company was required
to repay the loan in seven equal annual installments beginning in 2000. This
senior note was paid off as part of the new revolving credit facility.
Under the terms of a Canadian (CDN) credit agreement, the Company was
required to repay the loan as follows: $2 million CDN in 2001 and a final
payment of $6 million CDN in 2002. This credit agreement was paid off as part of
the new revolving credit facility.
<Table>
<Caption>
DECEMBER 31,
-----------------------
2000 2001
---- ----
(DOLLARS IN THOUSANDS)
6.75% convertible subordinated debentures................... $ 90,000 $ 90,000
Revolving credit facility................................... -- 106,790
7.56% senior note........................................... 62,571 --
Canadian Credit Facility.................................... 5,335 --
Other....................................................... 5,755 5,060
-------- --------
163,661 201,850
Less current portion........................................ 13,643 1,784
-------- --------
Total non-current portion of long-term debt............. $150,018 $200,066
-------- --------
-------- --------
</Table>
Maturities of long-term debt during the five years ending December 31, 2002
through 2006 are $1.8 million, $1.3 million, $1.1 million, $0.6 million and
$106.9 million, respectively.
8. INTEREST RATE SWAP AGREEMENTS
The Company does not enter into financial instruments for trading or
speculative purposes. The principal financial instruments used for cash flow
hedging purposes are interest rate swaps.
In July 2001, the Company entered into interest rate swap agreements to
manage its exposure to interest rate changes. The swaps effectively convert a
portion of the Company's variable rate debt under the revolving credit facility
to a fixed rate, without exchanging the notional principal amounts. At December
31, 2001, the Company had two outstanding interest rate swap
F-14
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreements maturing in January 2003 and 2004, with aggregate notional principal
amounts of $75 million. Under these agreements the Company receives a floating
rate based on the LIBOR interest rate, and pays a fixed rate of 4.92% on a
notional amount of $45 million and 4.37% on a notional amount of $30 million.
If, at any time, the swaps are determined to be ineffective, in all or in part,
due to changes in the interest rate swap agreements, the fair value of the
portion of the interest rate swap determined to be ineffective will be
recognized as gain or loss in the statement of operations in the period. It is
not expected that any gain or loss will be reported in the statement of
operations during the year ending December 31, 2002.
9. STOCKHOLDERS' EQUITY
The Company has authority to issue 500,000 shares of preferred stock, $20
par value, and the Board of Directors is vested with the authority to establish
and designate series of preferred, to fix the number of shares therein and the
variations in relative rights as between series. On December 18, 1995, the Board
of Directors established a new series of preferred shares designated as Series A
Participating Preferred Stock. The number of shares constituting the Series A
Preferred Stock is 30,000. The Series A Preferred Stock is designed to
participate in dividends, ranks senior to the Company's common stock as to
dividends and liquidation rights and has voting rights. Each share of the Series
A Preferred Stock shall entitle the holder to one thousand votes on all matters
submitted to a vote of the stockholders of the Company. No such shares were
outstanding at December 31, 2001.
On January 17, 1996, the Board of Directors adopted a Shareholder Rights
Plan (Plan). Under the Plan, the Board declared a dividend of one Preferred
Share Purchase Right (Right) for each outstanding common share of the Company.
The dividend was payable on March 1, 1996, to the shareholders of record as of
February 15, 1996. The Rights are attached to and automatically trade with the
outstanding shares of the Company's common stock.
The Rights will become exercisable only in the event that any person or
group of affiliated persons becomes a holder of 20% or more of the Company's
outstanding common shares, or commences a tender or exchange offer which, if
consummated, would result in that person or group of affiliated persons owning
at least 20% of the Company's outstanding common shares. Once the rights become
exercisable they entitle all other shareholders to purchase, by payment of an
$80.00 exercise price, one one-thousandth of a share of Series A Participating
Preferred Stock, subject to adjustment, with a value of twice the exercise
price. In addition, at any time after a 20% position is acquired and prior to
the acquisition of a 50% position, the Board of Directors may require, in whole
or in part, each outstanding Right (other than Rights held by the acquiring
person or group of affiliated persons) to be exchanged for one share of common
stock or one one-thousandth of a share of Series A Preferred Stock. The Rights
may be redeemed at a price of $0.001 per Right at any time prior to their
expiration on February 28, 2006.
During the years 1998 through 2000, the Board of Directors authorized
multiple repurchase programs under which the Company could repurchase shares of
its common stock. During such years, $26.7 million (in aggregate) of common
stock has been repurchased to meet present and future requirements of the
Company's stock option programs and to fund the Company's ESOP. As of December
31, 2001, the Company has Board authorization to repurchase additional shares at
a maximum cost of $1.7 million.
10. STOCK OPTIONS
The Company has principally two fixed stock-based compensation plans. Under
the 1994 Omnibus Stock Option Plan, as amended, the Company is authorized to
issue 1,500,000 stock options. The options become exercisable over a three to
five year period and expire at the end of five years following the date they
become exercisable. Under the 1996 Independent Directors'
F-15
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plan, the Company is authorized to issue 50,000 stock options. The
options become exercisable one year after the date of grant and expire at the
end of ten years following the date of grant. At December 31, 2001, in aggregate
1,320,280 shares of authorized but unissued common stock were reserved for
issuance under the Company's stock option plans.
As permitted under SFAS No. 123, the Company continues to apply the
provisions of APB Opinion No. 25 for stock-based awards granted to employees.
Accordingly, no compensation cost has been recognized for the fixed stock option
plans. Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value method of SFAS No. 123, the Company's
net earnings (loss) per share would have changed to the pro forma amounts as
follows:
<Table>
<Caption>
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE DATA)
Net earnings (loss)......................... As reported $7,625 $9,729 $(2,485)
Pro forma $6,648 $8,708 $(2,697)
Basic earnings (loss)....................... As reported $ 0.58 $ 0.82 $ (0.21)
per share................................... Pro forma $ 0.51 $ 0.73 $ (0.23)
Diluted earnings............................ As reported $ 0.58 $ 0.81 $ (0.21)
(loss) per share............................ Pro forma $ 0.51 $ 0.72 $ (0.23)
</Table>
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<Table>
<Caption>
1999 2000 2001
---- ---- ----
Expected option life........................... 4.3 years 4.3 years 4.0 years
Expected stock volatility...................... 39.5% 39.1% 38.6%
Expected dividend yield........................ 1.8% 3.8% 2.8%
Risk-free interest rate........................ 6.6% 4.6% 4.2%
Fair value of option........................... $7.97 $2.53 $3.71
</Table>
A summary of the status of the Company's stock option plans follow:
<Table>
<Caption>
1999 2000 2001
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
(SHARES IN THOUSANDS)
Outstanding at beginning
of year.......................
793 $19.58 808 $20.40 1,189 $16.60
Granted......................... 136 23.73 498 10.73 10 13.05
Exercised....................... (100) 17.83 -- -- (55) 9.29
Forfeited....................... (21) 23.13 (117) 17.78 (133) 18.18
---- ------ ----- ------ ----- ------
Outstanding at end of year...... 808 $20.40 1,189 $16.60 1,011 $16.76
---- ------ ----- ------ ----- ------
---- ------ ----- ------ ----- ------
Options exercisable at end of
year.......................... 431 526 671
---- ----- -----
</Table>
F-16
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS OUTSTANDING
<Table>
<Caption>
SHARES WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING CONTRACTUAL WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/01 LIFE (YEARS) EXERCISE PRICE
--------------- ----------- ------------ --------------
$6.56-$11.29 386 6.1 $ 9.92
$13.05-$16.94 139 1.6 $16.05
$20.50-$24.84 486 3.5 $22.40
</Table>
STOCK OPTIONS EXERCISABLE
<Table>
<Caption>
RANGE OF SHARES EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/01 EXERCISE PRICE
--------------- ----------- --------------
$6.56-$23.84 671 $19.17
</Table>
11. RETIREMENT BENEFIT PLANS
The Company has a defined benefit pension plan covering certain former
employees of the Company's former Brake business.
The following table represents a reconciliation of the beginning and ending
benefit obligation, the fair value of plan assets and the funded status of the
plan:
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 2001
---- ----
(DOLLARS IN THOUSANDS)
Benefit obligation at beginning of year..................... $ 9,271 $ 8,957
Interest cost............................................... 658 629
Actuarial loss (gain)....................................... (102) 93
Benefits paid............................................... (870) (866)
------- -------
Benefit Obligation at End of Year........................... $ 8,957 $ 8,813
------- -------
------- -------
Fair value of plan assets at beginning of year.............. $12,755 $12,063
Actual return on plan assets................................ 178 (135)
Benefits paid............................................... (870) (866)
------- -------
Fair value of plan assets at end of year.................... $12,063 $11,062
------- -------
Funded status............................................... $ 3,106 $ 2,249
Unrecognized net actuarial gain............................. (2,654) (1,386)
------- -------
Prepaid benefit cost........................................ $ 452 $ 863
------- -------
------- -------
</Table>
Weighted average assumptions are as follows:
<Table>
<Caption>
DECEMBER 31,
---------------------------
1999 2000 2001
---- ---- ----
Discount rates........................................... 7.50% 7.50% 7.25%
Expected long-term rate of return on assets.............. 8.00% 8.00% 8.00%
</Table>
Components of net periodic (benefit) cost follow:
F-17
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31,
---------------------------
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
Service cost.............................................. $ -- $ -- $ --
Interest cost............................................. 651 658 629
Return on assets.......................................... (900) (988) (928)
Amortization of prior service cost........................ -- -- --
Recognized actuarial (gain) loss.......................... (60) (127) (112)
----- ----- -----
Net periodic (benefit) cost............................... $(309) $(457) $(411)
----- ----- -----
----- ----- -----
</Table>
In addition, the Company participates in several multi employer plans which
provide defined benefits to substantially all unionized workers. The
Multi-employer Pension Plan Amendments Act of 1980 imposes certain liabilities
upon employers associated with multi employer plans. The Company has not
received information from the plans' administrators to determine its share, if
any, of unfunded vested benefits.
The Company and certain of its subsidiaries also maintain various defined
contribution plans, which include profit sharing and provide retirement benefits
for other eligible employees.
The provisions for retirement expense in connection with the plans are as
follows:
<Table>
<Caption>
MULTI- DEFINED CONTRIBUTION
EMPLOYER PLANS AND OTHER PLANS
-------------- ---------------
Years ended December 31,
1999 $348,000 $2,332,000
2000 344,000 2,319,000
2001 $299,000 $2,449,000
</Table>
The Company has an Employee Stock Ownership Plan and Trust for employees who
are not covered by a collective bargaining agreement. 75,000 shares each were
granted to employees during 1999, 2000 and 2001, under the terms of the ESOP.
These shares were funded directly from treasury stock.
In fiscal 2000, the Company created an employee benefits trust to which it
contributed 750,000 shares of treasury stock. The Company is authorized to
instruct the trustees to distribute such shares toward the satisfaction of the
Company's future obligations under employee benefit plans. The shares held in
trust are not considered outstanding for purposes of calculating earnings per
share until they are committed to be released. The trustees will vote the shares
in accordance with its fiduciary duties.
The provision for expense in connection with the ESOP was approximately $1.7
million in 1999, $1.0 million in 2000 and $0.7 million in 2001.
In August 1994 the Company established an unfunded Supplemental Executive
Retirement Plan (SERP) for key employees of the Company. Under the plan, these
employees may elect to defer a portion of their compensation and, in addition,
the Company may at its discretion make contributions to the plan on behalf of
the employees. Such contributions were $98,000, $24,000 and $37,000 in 1999,
2000, and 2001, respectively.
On October 1, 2001, the Company adopted a second unfunded SERP. The SERP is
a defined benefit plan pursuant to which the Company will pay supplemental
pension benefits to certain key employees upon retirement based upon the
employees' years of service and compensation. For the year ended December 31,
2001, approximately $0.9 million of benefits were accrued and $0.1 million was
charged to expense. The projected benefit obligation and accumulated benefit
obligation were $1.3 million and $0.9 million, respectively, at December 31,
2001. The costs and benefit obligations were determined using a discount rate
and an expected rate of return on assets of 7.25% at December 31, 2001.
F-18
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. POSTRETIREMENT MEDICAL BENEFITS
The Company provides certain medical and dental care benefits to eligible
retired employees. The Company's current policy is to fund the cost of the
health care plans on a pay-as-you-go basis.
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of the plan.
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 2001
---- ----
(DOLLARS IN THOUSANDS)
Benefit obligation at beginning of year..................... $ 18,369 $ 17,447
Service cost................................................ 1,377 1,500
Interest cost............................................... 1,152 1,314
Actuarial (gain) loss....................................... (2,586) 1,180
Benefits paid............................................... (865) (957)
-------- --------
Benefit obligation at end of year........................... $ 17,447 $ 20,484
-------- --------
-------- --------
Funded status............................................... $(17,447) $(20,484)
Unrecognized prior service cost............................. 1,038 914
Unrecognized net actuarial gain............................. (3,996) (2,582)
-------- --------
Accrued benefit cost........................................ $(20,405) $(22,152)
-------- --------
-------- --------
</Table>
Components of net periodic benefit cost follow:
<Table>
<Caption>
DECEMBER 31,
------------------------------
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
Service cost............................................ $1,284 $1,377 $1,500
Interest cost........................................... 1,221 1,152 1,314
Amortization of prior service cost...................... 124 124 124
Recognized actuarial gain............................... (8) (275) (232)
------ ------ ------
Net periodic benefit cost............................... $2,621 $2,378 $2,706
------ ------ ------
------ ------ ------
</Table>
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
<Table>
<Caption>
1999 2000 2001
---- ---- ----
Discount rate............................................... 7.50% 7.50% 7.25%
Current medical cost trend rate............................. 7% 10% 9%
Current dental cost trend rate.............................. 6% 5.5% 5%
Ultimate medical cost trend rate............................ 6% 5% 5%
Year trend rate declines to ultimate........................ 2002 2005 2005
</Table>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects for 2001:
<Table>
<Caption>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
(DOLLARS IN THOUSANDS)
Effect on total of service and interest cost
components........................................... $ 269 $ (221)
Effect on post retirement benefit obligation........... $1,539 $(1,300)
</Table>
F-19
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER INCOME (EXPENSE), NET
<Table>
<Caption>
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
Interest and dividend income.......................... $ 1,637 $ 1,038 $1,336
Loss on sale of accounts receivable (Note 3).......... (1,281) (1,567) (484)
Income (loss) from joint ventures..................... (4,118) 702 844
Gain on disposal of property, plant and equipment..... 2,564 99 265
Other -- net.......................................... (366) 225 382
------- ------- ------
Total other income (expense), net................. $(1,564) $ 497 $2,343
------- ------- ------
------- ------- ------
</Table>
In connection with the Company's Heat Battery joint venture in Canada, in
the fourth quarter of 1999, it was mutually agreed between the joint venture
participants, that due to lack of significant commercial success and recurring
losses, the joint venture would close. In connection with this decision, the
Company recorded an approximate $4.0 million charge relating to writing down the
Company's investment to net realizable value.
14. INCOME TAXES
The income tax provision (benefit) consists of the following:
<Table>
<Caption>
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
Current:
Domestic.......................................... $ 4,376 $ 1,260 $ 2,099
Foreign........................................... 3,520 2,523 1,673
------- ------- -------
Total Current......................................... 7,896 3,783 3,772
------- ------- -------
Deferred:
Domestic.......................................... (5,167) (1,103) (3,408)
Foreign........................................... 615 206 (220)
------- ------- -------
Total Deferred........................................ (4,552) (897) (3,628)
------- ------- -------
Total income tax provision............................ $ 3,344 $ 2,886 $ 144
------- ------- -------
------- ------- -------
</Table>
The Company has not provided for federal income taxes on the undistributed
income of its foreign subsidiaries because of the availability of foreign tax
credits and/or the Company's intention to permanently reinvest such
undistributed income. Cumulative undistributed earnings of foreign subsidiaries
on which no United States income tax has been provided were $25.5 million at the
end of 1999, $27.5 million at the end of 2000, and $28.2 million at the end of
2001.
Earnings before income taxes for foreign operations (including Puerto Rico)
amounted to approximately $13 million, $14 million, and $7 million in 1999,
2000, and 2001, respectively. Earnings of the Puerto Rico subsidiary are not
subject to United States income taxes and are partially exempt from Puerto Rican
income taxes under a tax exemption grant expiring on December 31, 2002. The
Company intends on renewing the grant prior to the expiration date. The tax
benefits of the exemption, reduced by a minimum tollgate tax instituted in 1993,
amounted to $0.12 per share in 2001 (1999 -- $0.14; 2000 -- $0.23).
Reconciliations between the U.S. federal income tax rate and the Company's
effective income tax rate as a percentage of earnings from continuing operations
before income taxes are as follows:
F-20
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
1999 2000 2001
---- ---- ----
U.S. federal income tax rate................................ 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal income tax
benefit................................................... 2.9 1.2 21.4
Non-deductible items, net................................... 0.8 0.1 60.5
Benefits of income subject to taxes at lower than the U.S.
federal rate.............................................. (11.0) (14.3) (85.3)
Other....................................................... 0.1 -- --
----- ----- -----
Effective tax rate.......................................... 27.8% 22.0% 31.6%
----- ----- -----
----- ----- -----
</Table>
The following is a summary of the components of the net deferred tax assets
and liabilities recognized in the accompanying consolidated balance sheets:
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 2001
---- ----
(DOLLARS IN THOUSANDS)
Deferred Tax Assets:
Inventories............................................. $ 7,639 $ 6,044
Allowance for customer returns.......................... 7,332 7,069
Postretirement benefits................................. 8,060 8,751
Allowance for doubtful accounts......................... 1,604 1,587
Accrued salaries and benefits........................... 3,342 2,938
Net operating loss and tax credit carryforwards......... 8,270 14,990
Other................................................... 7,188 6,551
-------- --------
43,435 47,930
-------- --------
Valuation allowance..................................... (14,171) (14,171)
-------- --------
Total............................................... $ 29,264 $ 33,759
-------- --------
-------- --------
Deferred Tax Liabilities:
Depreciation............................................ $ 4,717 $ 6,702
Promotional costs....................................... 915 1,036
Other................................................... 2,291 1,052
-------- --------
Total............................................... 7,923 8,790
-------- --------
Net deferred tax assets............................. $ 21,341 $ 24,969
-------- --------
-------- --------
</Table>
The Company believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the net
deferred tax assets. However, if the Company is unable to generate sufficient
taxable income in the future through its operations, increases in the valuation
allowance may be required.
15. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of SFAS No. 131, the Company has two reportable
operating segments which are the major product areas of the automotive
aftermarket in which the Company competes. The Engine Management Division
consists primarily of ignition and emission parts, wires and cables, and fuel
system parts. The Temperature Control Division consists primarily of
compressors, other air conditioning parts and heater parts. The accounting
policies of each
F-21
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
segment are the same as those described in the summary of significant accounting
policies (see Note 1). The following tables contain financial information for
each reportable segment:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------
ENGINE TEMPERATURE OTHER
MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED
---------- ------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales.......................... $291,286 $320,083 $ 42,082 $653,451
-------- -------- -------- --------
Depreciation and amortization...... 8,535 5,949 2,746 17,230
-------- -------- -------- --------
Operating income................... 26,134 17,477 (13,388) 30,223
-------- -------- -------- --------
Investment in equity affiliates.... 105 272 1,062 1,439
-------- -------- -------- --------
Capital expenditures............... 7,118 7,026 279 14,423
-------- -------- -------- --------
Total assets....................... $253,346 $212,026 $ 90,649 $556,021
-------- -------- -------- --------
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------
ENGINE TEMPERATURE OTHER
MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED
---------- ------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales.......................... $288,240 $270,848 $ 42,304 $601,392
-------- -------- -------- --------
Depreciation and amortization...... 10,293 6,116 2,513 18,922
-------- -------- -------- --------
Operating income................... 37,974 11,513 (18,776) 30,711
-------- -------- -------- --------
Investment in equity affiliates.... 105 -- 1,851 1,956
-------- -------- -------- --------
Capital expenditures............... 8,914 6,454 1,284 16,652
-------- -------- -------- --------
Total assets....................... $265,336 $224,410 $ 59,650 $549,396
-------- -------- -------- --------
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2001
-----------------------------------------------------
ENGINE TEMPERATURE OTHER
MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED
---------- ------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales.......................... $285,498 $269,856 $ 36,298 $591,652
-------- -------- -------- --------
Depreciation and amortization...... 9,649 6,462 2,798 18,909
-------- -------- -------- --------
Operating income................... 26,433 3,624 (14,934) 15,123
-------- -------- -------- --------
Investment in equity affiliates.... 105 -- 2,044 2,149
-------- -------- -------- --------
Capital expenditures............... 4,724 6,781 2,235 13,740
-------- -------- -------- --------
Total assets....................... $233,564 $182,083 $ 93,782 $509,429
-------- -------- -------- --------
</Table>
Other Adjustments consist of items pertaining to the corporate headquarters
function, as well as Canadian and European business units that do not meet the
criteria of a reportable operating segment under SFAS No. 131.
<Table>
<Caption>
REVENUE
------------------------------------
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
United States.................................... $572,534 $520,741 $515,322
Canada........................................... 32,515 27,942 28,811
Other Foreign.................................... 48,402 52,709 47,519
-------- -------- --------
Total........................................ $653,451 $601,392 $591,652
-------- -------- --------
-------- -------- --------
</Table>
F-22
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
LONG LIVED ASSETS
------------------------------------
1999 2000 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
United States.................................... $125,766 $122,825 $118,455
Canada........................................... 3,897 3,511 2,829
Other Foreign.................................... 18,534 18,885 18,402
-------- -------- --------
Total........................................ $148,197 $145,221 $139,686
-------- -------- --------
-------- -------- --------
</Table>
Revenues are attributed to countries based upon the location of the
customer.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of
those instruments.
MARKETABLE SECURITIES
The fair values of investments are estimated based on quoted market prices
for these or similar instruments.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on quoted
market prices or current rates offered to the Company for debt of the same
remaining maturities.
INTEREST RATE SWAPS
The fair value of the Company's financial instruments are based on market
quotes and represents the net amount required to terminate the position, taking
into consideration market rates and counterparty credit risk.
The estimated fair values of the Company's financial instruments are as
follows:
<Table>
<Caption>
CARRYING
AMOUNT FAIR VALUE
------ ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2000
Cash and cash equivalents................................... $ 7,699 $ 7,699
Marketable securities....................................... 7,200 7,200
Long-term debt.............................................. $(163,661) $(107,174)
DECEMBER 31, 2001
Cash and cash equivalents................................... $ 7,496 $ 7,496
Marketable securities....................................... 7,200 7,400
Long-term debt.............................................. (201,850) (177,520)
Interest rate swaps......................................... $ (2,045) $ (2,045)
</Table>
F-23
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three-years ended December 31, 2001 was as
follows:
<Table>
<Caption>
REAL
TOTAL ESTATE OTHER
----- ------ -----
(DOLLARS IN THOUSANDS)
1999...................................................... $8,176 $5,124 $3,052
2000...................................................... $9,797 $7,217 $2,580
2001...................................................... $8,673 $6,508 $2,165
</Table>
At December 31, 2001, the Company is obligated to make minimum rental
payments (exclusive of real estate taxes and certain other charges) through
2011, under operating leases for real estate, as follows:
<Table>
<Caption>
(DOLLARS IN
THOUSANDS)
2002.......................................... $ 6,196
2003.......................................... 5,392
2004.......................................... 4,137
2005.......................................... 3,695
2006.......................................... 3,532
Thereafter.................................... 5,417
-------
Total..................................... $28,369
-------
-------
</Table>
The Company also has lease and sub-lease agreements in place for various
properties under its control. The Company expects to receive operating lease
payments from lessees during the five years ending December 31, 2002 through
2006 of $1.7 million, $1.0 million, $0.6 million, $0.6 million, and $0.6
million, respectively.
At December 31, 2001, the Company had outstanding letters of credit
aggregating approximately $0.5 million. The contract amount of the letters of
credit is a reasonable estimate of their value as the value for each is fixed
over the life of the commitment.
The Company has entered into Change in Control arrangements with two key
officers of the Company. In the event of a Change of Control (as defined), each
executive will receive severance payments, (as defined), and certain other
benefits.
On January 28, 2000, a former significant customer of the Company currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including the Company. The claim
against the Company alleges $0.5 million (formerly $19.8 million) of
preferential payments in the 90 days prior to the related bankruptcy petition.
In addition, this former customer seeks $10.5 million from the Company for a
variety of claims including antitrust, breach of contract, breach of warranty
and conversion. These latter claims arise out of allegations that this customer
was entitled to various discounts, rebates and credits after it filed for
bankruptcy. The Company has purchased insurance with respect to the two actions.
The Company believes that these matters will not have a material effect on the
Company's consolidated financial statements taken as a whole.
The Company is involved in various other litigation and product liability
matters arising in the ordinary course of business. One of the product liability
matters involves a former Brake business of the Company. In 1986, the Company
acquired the business resulting in the assumption by the Company of certain
liabilities relating to any alleged exposure to asbestos-containing products
manufactured by the seller. In accordance with the related purchase agreement,
the Company agreed to assume the liabilities for all new claims filed after
fifteen years from the date of the purchase. The ultimate exposure to the
Company will depend upon the extent to which future claims are filed and the
amounts paid for indemnity and defense. At December 31, 2001,
F-24
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately 100 cases were outstanding whereby the Company is now responsible
for any related liabilities. Although the final outcome of this specific matter
or any other litigation or product liability matter cannot be determined, based
on the Company's understanding and evaluation of the relevant facts and
circumstances, it is management's opinion that the final outcome of these
matters will not have a material adverse effect on the Company's financial
statements taken as a whole.
18. SUBSEQUENT EVENTS (UNAUDITED)
On January 17, 2002 the Company purchased the Temperature Control business
of Hartle Industries for approximately $4.8 million. Assets acquired consist
primarily of property, plant and equipment, and inventory. The purchase was
financed with funds provided under the Company's line of credit.
On March 20, 2002, the Company reached a definitive agreement to purchase
the aftermarket business of Sagem Inc., a subsidiary of Johnson Controls for
approximately $11.5 million. Sagem Inc. is a basic manufacturer of fuel
injectors, a product line which prior to the acquisition, the Company has been
purchasing. Assets to be acquired consist primarily of property, plant and
equipment, and inventory. The purchase which is expected to close within sixty
days will be partially financed by the seller (approximately $7 million to be
paid over a two year period), with the remaining funds being provided under the
Company's line of credit.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
QUARTER ENDED 2001 2001 2001 2001
- ------------- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................ $153,960 $181,914 $156,707 $ 99,071
-------- -------- -------- --------
Gross profit............................. 36,928 40,578 40,268 21,281
-------- -------- -------- --------
Earnings (loss) before extraordinary
item................................... 619 2,275 3,748 (6,330)
-------- -------- -------- --------
Extraordinary item -- loss on early
extinguishment of debt, net of taxes... -- (2,797) -- --
-------- -------- -------- --------
Net earnings (loss)...................... $ 619 $ (522) $ 3,748 $ (6,330)
-------- -------- -------- --------
Net earnings (loss) before extraordinary
item per common share:
Basic................................ $ 0.05 $ 0.19 $ 0.32 $ (0.54)
Diluted.............................. $ 0.05 $ 0.19 $ 0.32 $ (0.54)
-------- -------- -------- --------
Net earnings (loss) per common share:
Basic................................ $ 0.05 $ (0.05) $ 0.32 $ (0.54)
Diluted.............................. $ 0.05 $ (0.05) $ 0.32 $ (0.54)
-------- -------- -------- --------
</Table>
F-25
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
QUARTER ENDED 2000 2000 2000 2000
- ------------- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................ $147,137 $175,738 $163,622 $114,895
-------- -------- -------- --------
Gross profit............................. 40,182 49,491 45,259 27,769
-------- -------- -------- --------
Earnings (loss) before extraordinary
item................................... 385 7,036 4,858 (2,049)
-------- -------- -------- --------
Extraordinary item -- loss on early
extinguishment of debt, net of taxes... 501 -- -- --
-------- -------- -------- --------
Net earnings (loss)...................... $ (116) $ 7,036 $ 4,858 $ (2,049)
-------- -------- -------- --------
Net earnings (loss) before extraordinary
item per common share:
Basic................................ $ 0.03 $ 0.59 $ 0.41 $ (0.18)
Diluted.............................. $ 0.03 $ 0.54 $ 0.40 $ (0.18)
-------- -------- -------- --------
Net earnings (loss) per common share:
Basic................................ $ (0.01) $ 0.59 $ 0.41 $ (0.18)
Diluted.............................. $ (0.01) $ 0.54 $ 0.40 $ (0.18)
-------- -------- -------- --------
</Table>
As of January 1, 2002, the Company adopted EITF 01-9. Accordingly, the
quarterly financial data above has been reclassified to conform with the
requirements of EITF 01-9.
F-26
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2002 2001 2002
---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
Net sales (Note 2)....................... $ 156,707 $ 182,625 $ 492,581 $ 488,034
Cost of sales (Note 2)................... 116,439 133,023 374,807 362,164
----------- ----------- ----------- -----------
Gross profit......................... 40,268 49,602 117,774 125,870
Selling, general and administrative
expenses (Note 2)...................... 31,066 32,510 95,628 96,290
----------- ----------- ----------- -----------
Operating income..................... 9,202 17,092 22,146 29,580
Other income (expense) -- net............ 1,081 969 1,540 1,725
Interest expense......................... 4,795 3,606 13,962 10,877
----------- ----------- ----------- -----------
Earnings from continuing operations
before taxes....................... 5,488 14,455 9,724 20,428
Income taxes............................. 1,740 4,623 3,082 6,333
----------- ----------- ----------- -----------
Earnings from continuing
operations......................... 3,748 9,832 6,642 14,095
Loss from discontinued operation, net of
tax (Note 15).......................... -- (16,918) -- (18,043)
----------- ----------- ----------- -----------
Earnings (loss) before extraordinary
item and cumulative effect of
accounting change.................. 3,748 (7,086) 6,642 (3,948)
Extraordinary item, net of tax........... -- -- (2,797) --
Cumulative effect of accounting change,
net of tax (Note 3).................... -- -- -- (15,985)
----------- ----------- ----------- -----------
Net earnings (loss).................. 3,748 (7,086) 3,845 (19,933)
Retained earnings at beginning of
period................................. 188,239 168,547 190,253 183,532
----------- ----------- ----------- -----------
191,987 161,461 194,098 163,599
Less: cash dividends for period.......... 1,064 1,076 3,175 3,214
----------- ----------- ----------- -----------
Retained earnings at end of period....... $ 190,923 $ 160,385 $ 190,923 $ 160,385
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE DATA:
Net earnings (loss) per common
share -- basic:
Basic earnings per share from
continuing operations.......... $ 0.32 $ 0.82 $ 0.56 $ 1.18
Discontinued operation........... -- (1.41) -- (1.52)
Extraordinary Item............... -- -- (0.23) --
Cumulative effect of accounting
change......................... -- -- -- (1.34)
----------- ----------- ----------- -----------
Net earnings (loss) per common
share -- basic................. $ 0.32 $ (0.59) $ 0.33 $ (1.68)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings (loss) per common
share -- diluted:
Diluted earnings per share from
continuing operations.......... $ 0.32 $ 0.72 $ 0.56 $ 1.14
Discontinued operation........... -- (1.14) -- (1.22)
Extraordinary Item............... -- -- (0.23) --
Cumulative effect of accounting
change......................... -- -- -- (1.08)
----------- ----------- ----------- -----------
Net earnings(loss) per common
share -- diluted............... $ 0.32 $ (0.42) $ 0.33 $ (1.16)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average number of common shares
outstanding........................ 11,797,961 11,954,928 11,764,870 11,900,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average number of common shares and
dilutive common shares............. 11,893,848 14,859,401 11,816,646 14,805,121
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
F-27
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 7,496 $ 9,672
Marketable securities................................... -- 7,200
Accounts and notes receivable, net of allowance for
doubtful accounts and discounts of $4,362 and $5,523
(Note 7).............................................. 117,965 191,703
Inventories (Notes 5 and 7)............................. 177,291 161,709
Other current assets.................................... 26,197 30,978
-------- --------
TOTAL CURRENT ASSETS............................ 328,949 401,262
-------- --------
Property, plant and equipment, net of accumulated
depreciation (Notes 6 and 7).............................. 101,646 106,854
Goodwill, net (Note 3)...................................... 38,040 20,017
Other assets................................................ 40,794 37,313
-------- --------
TOTAL ASSETS.................................... $509,429 $565,446
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................................... $ 4,075 $ 3,229
Current portion of long-term debt (Note 7).............. 1,784 4,242
Accounts payable........................................ 26,110 47,130
Sundry payables and accrued expenses.................... 41,968 51,059
Accrued customer returns................................ 18,167 26,177
Payroll and commissions................................. 8,489 14,913
-------- --------
TOTAL CURRENT LIABILITIES....................... 100,593 146,750
-------- --------
Long-term debt (Note 7)..................................... 200,066 200,879
Other liabilities (Note 15)................................. 23,083 52,064
-------- --------
TOTAL LIABILITIES............................... 323,742 399,693
-------- --------
Commitments and contingencies (Notes 7, 8, 11, 13 and 15)
STOCKHOLDERS' EQUITY (NOTES 7, 8, 10, 11 AND 13):
Common stock -- par value $2.00 per share:
Authorized -- 30,000,000 shares, issued and
outstanding -- 11,823,650 and 11,957,009 shares
in 2001 and 2002, respectively)................... 26,649 26,649
Capital in excess of par value.......................... 1,877 1,684
Retained earnings....................................... 183,532 160,385
Accumulated other comprehensive loss.................... (3,722) (2,328)
-------- --------
208,336 186,390
Less: Treasury stock -- at cost (1,500,826 and 1,367,467
shares in 2001 and 2002, respectively)................ 22,649 20,637
-------- --------
TOTAL STOCKHOLDERS' EQUITY...................... 185,687 165,753
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $509,429 $565,446
-------- --------
-------- --------
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
F-28
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2002
---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)..................................... $ 3,845 $(19,933)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 14,072 11,715
Gain on sale of property, plant & equipment......... -- (136)
Equity income from joint ventures................... (569) (607)
Employee stock ownership plan allocation............ 534 907
Cumulative effect of accounting change.............. -- 15,985
Loss from discontinued operation.................... -- 18,043
Extraordinary loss on repayment of debt............. 2,797 --
Change in assets and liabilities, net of effects from
acquisitions:
Increase in accounts receivable, net................ (49,479) (72,757)
Decrease in inventories............................. 57,070 21,072
Increase in prepaid expenses and other current
assets............................................ (4,203) (4,026)
Increase in other assets............................ (8,741) (674)
Increase (Decrease) in accounts payable............. (20,177) 20,538
Increase (Decrease) in sundry payables and accrued
expenses.......................................... (3,502) 12,288
Increase (Decrease) in other liabilities............ 12,645 24,021
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 4,292 26,436
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant & equipment... -- 514
Capital expenditures.................................... (11,125) (5,804)
Payments for acquisitions, net of cash acquired......... (1,069) (19,455)
------- --------
NET CASH USED IN INVESTING ACTIVITIES........... (12,194) (24,745)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements.......... 110,647 (441)
Net borrowings (payments) of long-term debt............. (94,442) 2,866
Proceeds from exercise of employee stock options........ 206 524
Dividends paid.......................................... (3,175) (3,214)
------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.................................... 13,236 (265)
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (1,219) 750
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,115 2,176
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD........ 7,699 7,496
------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.............. $11,814 $ 9,672
------- --------
------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest................................................ $15,243 $ 12,506
------- --------
------- --------
Income taxes............................................ $ 2,025 $ 347
------- --------
------- --------
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
F-29
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
Standard Motor Products, Inc. (the 'Company') is engaged in the
manufacturing and distribution of replacement parts for motor vehicles in the
automotive aftermarket industry.
The accompanying unaudited financial information should be read in
conjunction with the consolidated financial statements, including the notes
thereto, for the year ended December 31, 2001.
The unaudited consolidated financial statements include the accounts of the
Company and all domestic and international companies in which the Company has
more than a 50% equity ownership. The Company's investments in unconsolidated
affiliates are accounted for on the equity method. All significant inter-company
items have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the interim
periods are not necessarily indicative of the results of operations for the
entire year.
Where appropriate, certain reclassifications have been made to the 2001
unaudited consolidated financial statements to conform with the 2002
presentation.
NOTE 2
On January 1, 2002, the Company adopted the guidelines of the Emerging
Issues Task Force (EITF) entitled 'Accounting for Certain Sales Incentives' and
'Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendors Products.' These guidelines address when sales incentives and
discounts should be recognized and the accounting for certain costs incurred by
a vendor on behalf of a customer, as well as where the related revenues and
expenses should be classified in the financial statements. Historically, the
Company has provided certain consideration, including rebates, product and
discounts to customers and treated such costs as advertising, marketing and
sales force expenses. Beginning with the first quarter of 2002, such costs are
now treated as a reduction of revenue or as cost of sales. As a result, certain
costs of approximately $9.7 million and $25.9 million, respectively, have been
reclassified from selling, general and administrative expenses for the three
month and nine month periods ended September 30, 2001. These reclassifications
had no effect on net earnings.
NOTE 3
Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 142, 'Goodwill and Other Intangible
Assets' (SFAS No. 142). In accordance with SFAS No. 142, goodwill will no longer
be amortized, but instead, will be subject to an annual review for potential
impairment. Using the discounted cash flows method, based on the Company's
weighted average cost of capital and market multiples, the Company reviewed the
fair values of each of its reporting units. The recent decline in economic and
market conditions, higher integration costs than anticipated relating to the
Company's acquisitions and the general softness in the automotive aftermarket
has caused a decrease in the fair values of certain of the Company's reporting
units. As a result, the Company recorded an impairment loss on goodwill as a
cumulative effect of accounting change of $16 million, net of tax, or $1.35 per
diluted share, during the first quarter of 2002. The impairment loss relates to
goodwill pertaining to certain of the Company's reporting units within its
European Operations (classified as 'All Other' for
F-30
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
segment reporting) and within its Temperature Control Segment and recorded
charges of $8.6 million and $7.4 million, respectively.
Upon adoption of SFAS No. 142, the Company's earnings before extraordinary
item and net earnings for basic and diluted earnings per share adjusted to
exclude goodwill amortization expense (net of taxes) are as follows:
<Table>
<Caption>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -----------------
2001 2002 2001 2002
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported earnings (loss) before extraordinary item.... $3,748 $(7,086) $6,642 $ (3,948)
Add back: goodwill amortization expense, net of tax... 648 -- 1,868 --
------ ------- ------ --------
Adjusted earnings (loss) before extraordinary item.... $4,396 $(7,086) $8,510 $ (3,948)
------ ------- ------ --------
------ ------- ------ --------
Basic earnings (loss) per share:
Reported basic earnings (loss) per share before
extraordinary item.............................. $ 0.32 $ (0.59) $ 0.56 $ (0.34)
Add back: goodwill amortization expense, net of tax... 0.05 -- 0.15 --
------ ------- ------ --------
Adjusted basic earnings (loss) per share before
extraordinary item.................................. $ 0.37 $ (0.59) $ 0.71 $ (0.34)
------ ------- ------ --------
------ ------- ------ --------
Diluted earnings (loss) per share:
Reported diluted earnings (loss) per share before
extraordinary item.............................. $ 0.32 $ (0.42) $ 0.56 $ (0.08)
Add back: goodwill amortization expense, net of tax... 0.05 -- 0.15 --
------ ------- ------ --------
Adjusted diluted earnings (loss) per before
extraordinary item.................................. $ 0.37 $ (0.42) $ 0.71 $ (0.08)
------ ------- ------ --------
------ ------- ------ --------
Reported net earnings (loss).......................... $3,748 $(7,086) $3,845 $(19,933)
Add back: goodwill amortization expense, net of tax... 648 -- 1,868 --
------ ------- ------ --------
Adjusted net earnings (loss).......................... $4,396 $(7,086) $5,713 $(19,933)
------ ------- ------ --------
------ ------- ------ --------
Basic net earnings (loss) per share:
Reported basic earnings (loss) per share.......... $ 0.32 $ (0.59) $ 0.33 $ (1.68)
Add back: goodwill amortization expense, net of tax... 0.05 -- 0.15 --
------ ------- ------ --------
Adjusted basic earnings (loss) per share.............. $ 0.37 $ (0.59) $ 0.48 $ (1.68)
------ ------- ------ --------
------ ------- ------ --------
Diluted net earnings (loss) per share:
Reported diluted earnings (loss) per share........ $ 0.32 $ (0.42) $ 0.33 $ (1.16)
Add back: goodwill amortization expense, net of tax... 0.05 -- 0.15 --
------ ------- ------ --------
Adjusted diluted earnings (loss) per share............ $ 0.37 $ (0.42) $ 0.48 $ (1.16)
------ ------- ------ --------
------ ------- ------ --------
</Table>
NOTE 4
In January 2002, the Company acquired the assets of a Temperature Control
business from Hartle Industries for $4.8 million. The assets acquired consist
primarily of property, plant and equipment, and inventory.
In April 2002, the Company acquired Carol Cable Limited, a manufacturer and
distributor of wire sets, based in England, for $1.7 million. The assets
acquired consist primarily of property, plant and equipment, and inventory.
F-31
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
In May 2002, the Company purchased the aftermarket fuel injector business of
Sagem Inc., a subsidiary of Johnson Controls, for $10.5 million. Sagem Inc. is a
basic manufacturer of fuel injectors, and was the primary supplier to the
Company prior to its acquisition. The assets acquired consist primarily of
property, plant and equipment, and inventory. The purchase was partially
financed by the seller ($5.4 million to be paid over a two-year period), with
the remaining funds being provided under the Company's revolving credit
facility.
The above acquisitions had an immaterial effect on earnings from continuing
operations.
NOTE 5
INVENTORIES
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Finished goods.............................................. $141,799 $124,112
Work in process............................................. 3,155 2,777
Raw materials............................................... 32,337 34,820
-------- --------
Total inventories....................................... $177,291 $161,709
-------- --------
-------- --------
</Table>
NOTE 6
PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Land, buildings and improvements............................ $ 60,665 $ 66,070
Machinery and equipment..................................... 109,617 118,623
Tools, dies and auxiliary equipment......................... 17,815 19,526
Furniture and fixtures...................................... 26,211 26,817
Computer software........................................... 11,663 12,351
Leasehold improvements...................................... 7,450 7,398
Construction in progress.................................... 6,440 6,899
-------- --------
239,861 257,684
Less: accumulated depreciation and amortization............. 138,215 150,830
-------- --------
Total property, plant and equipment -- net.............. $101,646 $106,854
-------- --------
-------- --------
</Table>
F-32
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 7
LONG-TERM DEBT
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Long-term debt consists of:
6.75% convertible subordinated debentures................... $ 90,000 $ 90,000
Revolving credit facility................................... 106,790 107,195
Other....................................................... 5,060 7,926
-------- --------
201,850 205,121
Less: current portion....................................... 1,784 4,242
-------- --------
Total non-current portion of long-term debt............. $200,066 $200,879
-------- --------
-------- --------
</Table>
Effective April 27, 2001, the Company entered into an agreement with GE
Capital Corp. and a syndicate of lenders for a new secured revolving credit
facility. The term of the new credit agreement is for a period of five years and
it provides for a line of credit up to $225 million. The initial proceeds were
used to refinance the approximately $97 million of outstanding indebtedness
under the Company's former bank line of credit, a senior note of $52 million, a
$25 million accounts receivable sale arrangement and a Canadian Credit Facility
of $5 million. The Company recorded an extraordinary loss of approximately $2.8
million, net of taxes, in the second quarter of 2001, for a prepayment penalty
and write-off of unamortized fees for the retirement of the above related debt.
Availability under the new credit facility is based on a formula of eligible
accounts receivable, inventory and fixed assets. Direct borrowings bear interest
at the Prime Rate plus the applicable margin (as defined) or the LIBOR Rate plus
the applicable margin (as defined), at the option of the Company. Borrowings are
collateralized by accounts receivable, inventory and fixed assets of the Company
and its subsidiaries. The terms of the new revolving credit facility contain,
among other provisions, requirements of maintaining defined levels of tangible
net worth and specific limits or restrictions on additional indebtedness,
capital expenditures, liens and acquisitions.
On July 26, 1999, the Company completed a public offering of convertible
subordinated debentures amounting to $90 million. The Convertible Debentures
carry an interest rate of 6.75%, payable semi-annually, and will mature on July
15, 2009. The Convertible Debentures are convertible into 2,796,120 shares of
the Company's common stock, subject to adjustment.
NOTE 8
The Company does not enter into financial instruments for trading or
speculative purposes. The principal financial instruments used for cash flow
hedging purposes are interest rate swaps.
In July 2001, the Company entered into interest rate swap agreements to
manage its exposure to interest rate changes. The swaps effectively convert a
portion of the Company's variable rate debt under the revolving credit facility
to a fixed rate, without exchanging the notional principal amounts. At September
30, 2002, the Company had two outstanding interest rate swap agreements maturing
in January 2003 and 2004, respectively, with an aggregate notional principal
amount of $75 million. Under these agreements, the Company receives a floating
rate based on the LIBOR interest rate, and pays a fixed rate of 4.92% on a
notional amount of $45 million and 4.37% on a notional amount of $30 million.
If, at any time, the swaps are determined to be ineffective, in whole or in
part, due to changes in the interest rate swap agreements, the fair
F-33
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
value of the portion of the interest rate swap determined to be ineffective will
be recognized as gain or loss in the statement of operations for the applicable
period.
NOTE 9
The Company sold certain accounts receivable to an independent financial
institution, through its wholly owned subsidiary, SMP Credit Corp., a qualifying
special-purpose corporation. In May 1999, SMP Credit Corp. entered into a three
year agreement whereby it could sell up to a $25 million undivided ownership
interest in a designated pool of certain of these eligible receivables. This
agreement was terminated in the second quarter of 2001 as part of the new credit
facility described in Note 7. These sales were reflected as reductions of trade
accounts receivable and the related fees and discounting expense were recorded
as other expense.
NOTE 10
Total comprehensive income (loss) was $466,000 and $(7,895,000) for the
three-month periods ended September 30, 2001 and 2002, respectively, and
$359,000 and $(18,539,000) for the nine-month periods ended September 30, 2001
and 2002, respectively.
NOTE 11
During the nine-month period ended September 30, 2002, options to purchase
53,839 shares of common stock were exercised. At September 30, 2002, an
aggregate of 1,266,441 shares of authorized but unissued common stock were
reserved for issuance under the Company's stock option plans, of which 912,196
shares were subject to outstanding options. At September 30, 2002, options to
purchase 740,040 shares of common stock were vested.
NOTE 12
The following are reconciliations of the earnings available to common
stockholders and the shares used in calculating basic and diluted net earnings
(loss) per common share:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2002 2001 2002
---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Earnings from continuing operations....... $ 3,748 $ 9,832 $ 6,642 $ 14,095
Loss from discontinued operation...... -- (16,918) -- (18,043)
Extraordinary item.................... -- -- (2,797) --
Cumulative effect of accounting
change.............................. -- -- -- (15,985)
---------- ---------- ---------- ----------
Earnings (loss) available to common
stockholders............................ 3,748 (7,086) 3,845 (19,933)
Effect of convertible debentures.......... -- 911 -- 2,734
---------- ---------- ---------- ----------
Net earnings (loss) available to
common stockholders assuming
dilution............................ $ 3,748 $ (6,175) $ 3,845 $ (17,199)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding............................. 11,797,961 11,954,928 11,764,870 11,900,800
Effect of convertible debentures.......... -- 2,796,120 -- 2,796,120
Effect of stock options................... 95,887 108,353 51,776 108,201
---------- ---------- ---------- ----------
Weighted average common shares
outstanding assuming dilution....... 11,893,848 14,859,401 11,816,646 14,805,121
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</Table>
F-34
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
The average shares listed below were not included in the computation of
diluted earnings per share because to do so would have been anti-dilutive for
the periods presented.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2002 2001 2002
---- ---- ---- ----
Stock options............................. 640,074 566,574 768,229 566,574
Convertible debentures.................... 2,796,120 -- 2,796,120 --
--------- ------- --------- -------
--------- ------- --------- -------
</Table>
NOTE 13
In fiscal 2000, the Company created an employee benefits trust to which it
contributed 750,000 shares of treasury stock. The Company is authorized to
instruct the trustees to distribute such shares toward the satisfaction of the
Company's future obligations under Employee Benefit Plans. The shares held in
trust are not considered outstanding for purposes of calculating earnings per
share until they are committed to be released. The trustees will vote the shares
in accordance with its fiduciary duties. As of September 30, 2002, 150,000
shares have been released from the trust leaving 600,000 shares remaining in the
trust.
NOTE 14
The Company's two reportable operating segments are Engine Management and
Temperature Control.
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
2001 2002
--------------------- ---------------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- ------ --------- ------
(DOLLARS IN THOUSANDS)
Engine Management................................. $ 73,892 $ 8,671 $ 82,959 $11,716
Temperature Control............................... 73,360 4,051 89,081 10,899
All Other......................................... 9,455 (3,520) 10,585 (5,523)
-------- ------- -------- -------
Consolidated...................................... $156,707 $ 9,202 $182,625 $17,092
-------- ------- -------- -------
-------- ------- -------- -------
</Table>
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
2001 2002
--------------------- ---------------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- ------ --------- ------
(DOLLARS IN THOUSANDS)
Engine Management................................. $221,003 $21,027 $233,913 $31,988
Temperature Control............................... 242,264 10,190 222,964 12,682
All Other......................................... 29,314 (9,071) 31,157 (15,090)
-------- ------- -------- -------
Consolidated...................................... $492,581 $22,146 $488,034 $29,580
-------- ------- -------- -------
-------- ------- -------- -------
</Table>
All Other consists of items pertaining to European and Canadian operations
and the Corporate headquarters function, which do not meet the criteria of a
reportable operating segment.
The carrying values of goodwill for the Company's segments as of September
30, 2002 are as follows:
F-35
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
(IN THOUSANDS)
Engine Management........................................... $10,490
Temperature Control......................................... 4,822
All Other................................................... 4,705
-------
Goodwill, net........................................... $20,017
-------
-------
</Table>
NOTE 15
On January 28, 2000, a former significant customer of the Company which is
currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court filed
claims against a number of its former suppliers, including the Company. The
claim against the Company alleges $0.5 million (formerly $19.8 million) of
preferential payments in the 90 days prior to the related Chapter 11 bankruptcy
petition. The claim pertaining to the preferential payments was settled for an
immaterial amount during the second quarter of 2002. In addition, this former
customer seeks $9.4 million from the Company for a variety of claims including
antitrust, breach of contract, breach of warranty and conversion. These latter
claims arise out of allegations that this customer was entitled to various
discounts, rebates and credits after it filed for bankruptcy. The Company has
purchased insurance with respect to the actions. On August 22, 2002, the court
dismissed the antitrust claims. The Company believes that these remaining
matters will not have a material adverse effect on the Company's consolidated
financial statements taken as a whole.
In 1986, the Company acquired a brake business, which it subsequently sold
in March 1998 and which is accounted for as a discontinued operation in the
accompanying consolidated financial statements. When the Company originally
acquired this brake business, the Company assumed future liabilities relating to
any alleged exposure to asbestos-containing products manufactured by the seller
of the acquired brake business. In accordance with the related purchase
agreement, the Company agreed to assume the liabilities for all new claims filed
on or after September 1, 2001. The ultimate exposure to the Company will depend
upon the number of claims filed against the Company on or after September 1,
2001 and the amounts paid for indemnity and defense thereof. At December 31,
2001, approximately 100 cases were outstanding for which the Company was
responsible for any related liabilities. At September 30, 2002, the number of
cases outstanding for which the Company was responsible for related liabilities
had increased to approximately 600. To date, the amounts paid for settled claims
have been immaterial. The Company does not have insurance coverage for the
defense and indemnity costs associated with these claims.
In evaluating its potential asbestos-related liability, the Company has
considered various factors including, among other things, an actuarial study
performed by a leading actuarial firm with expertise in assessing
asbestos-related liabilities, settlement amounts of the Company, the incidence
of claims, the mix of the injuries of the plaintiffs, the number of cases
pending against the Company and whether there are any co-defendants, the
jurisdiction in which lawsuits are filed, and the status and results of
settlement discussions. Actuarial consultants with experience in assessing
asbestos-related liabilities completed a study in September 2002 to estimate the
Company's potential claim liability. The methodology used to project
asbestos-related liabilities and costs in the study considered: (1) historical
data available from publicly available studies; (2) an analysis of the Company's
recent claims history to estimate likely filing rates for the remainder of 2002
through 2052; (3) an analysis of the Company's currently pending claims; and (4)
an analysis of the Company's settlements to date in order to develop average
settlement values. Based upon all the information considered by the actuarial
firm, the actuarial study estimated an undiscounted liability for settlement
payments ranging from $27.3 million to $58 million for the period through 2052.
F-36
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
Accordingly, based on the information contained in the actuarial study and
all other available information considered by the Company, the Company recorded
an after tax charge of $16.9 million as a loss from discontinued operation
during the third quarter of 2002 to reflect such liability. The Company
concluded that no amount within the range of settlement payments was more likely
than any other and, therefore, recorded the low end of the range as the
liability associated with future settlement payments through 2052 in the
Company's condensed consolidated financial statements, in accordance with
generally accepted accounting principles. Given the uncertainties associated
with projecting such matters into the future, the short period of time that the
Company has been responsible for defending these claims, and other factors
outside the control of the Company, the Company can give no assurance that
additional provisions will not be required. Management will continue to monitor
the circumstances surrounding these potential liabilities in determining whether
additional provisions may be necessary. At the present time, however, the
Company does not believe that any additional provisions would be reasonably
likely to have a material adverse effect on the Company's liquidity or
consolidated financial position.
The Company is involved in various other litigation and product liability
matters arising in the ordinary course of business. Although the final outcome
of these matters cannot be determined, it is management's opinion that the final
resolution of these matters will not have a material effect on the Company's
financial statements taken as a whole.
F-37
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Dana Corporation
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of equity and of cash flows present fairly,
in all material respects, the financial position of Engine Management (a
business of Dana Corporation) at December 31, 2001 and September 30, 2002, and
the results of its operations and its cash flows for the years ended
December 31, 2000 and 2001 and for the nine-month period ended September 30,
2002 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Toledo, Ohio
November 8, 2002
F-38
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
NINE-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -------------
2000 2001 2002
---- ---- ----
NET SALES............................................ $357,475 $297,796 $229,137
-------- -------- --------
COSTS AND EXPENSES
Cost of sales.................................... 359,201 287,070 217,942
Selling, general and administrative expenses..... 85,522 66,616 47,271
Restructuring charges............................ -- 44,276 9,660
Interest expense................................. 91 609 144
Other expense.................................... 458 756 713
-------- -------- --------
445,272 399,327 275,730
-------- -------- --------
LOSS BEFORE INCOME TAXES............................. (87,797) (101,531) (46,593)
ESTIMATED INCOME TAX BENEFIT......................... (35,676) (39,064) (18,096)
-------- -------- --------
NET LOSS............................................. $(52,121) $(62,467) $(28,497)
-------- -------- --------
-------- -------- --------
</Table>
The accompanying notes are an integral part of the combined financial
statements.
F-39
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
COMBINED BALANCE SHEET
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 292 $ 734
Accounts receivable, less allowance for doubtful
accounts of $2,196 and $2,573......................... 41,922 54,135
Inventories............................................. 98,178 87,259
Deferred tax assets..................................... 36,478 31,958
Other current assets.................................... 881 1,216
-------- --------
Total current assets................................ 177,751 175,302
Property, plant and equipment, net.......................... 83,034 68,323
Deferred tax assets......................................... 2,102 2,496
Other assets................................................ 1,297 914
-------- --------
Total assets........................................ $264,184 $247,035
-------- --------
-------- --------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term borrowings................................... $ 13,949 $ 5,337
Accounts payable........................................ 22,807 31,491
Accrued payroll and employee benefits................... 8,119 8,476
Other accrued liabilities............................... 43,484 36,651
-------- --------
Total current liabilities........................... 88,359 81,955
-------- --------
Deferred tax liability...................................... 4,733 6,928
Other noncurrent liabilities................................ 750 1,288
Commitments and contingencies (Note 11)
Combined equity............................................. 170,342 156,864
-------- --------
Total liabilities and combined equity............... $264,184 $247,035
-------- --------
-------- --------
</Table>
The accompanying notes are an integral part of the combined financial
statements.
F-40
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
NINE-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
2000 2001 2002
---- ---- ----
NET CASH FLOWS -- OPERATING ACTIVITIES............... $ (7,476) $ 54,276 $ (5,117)
Cash flows from (used in) investing activities:
Purchases of property, plant and equipment... (21,557) (1,378) (1,560)
Proceeds from sales of certain assets........ 74 22,621 545
Other........................................ (80) (707) (170)
-------- -------- --------
Net cash flows -- investing activities....... (21,563) 20,536 (1,185)
-------- -------- --------
Cash flows from (used in) financing activities:
Net transactions with Dana....................... 29,039 (74,520) 6,744
-------- -------- --------
NET CASH FLOWS -- FINANCING ACTIVITIES............... 29,039 (74,520) 6,744
-------- -------- --------
Net increase in cash and cash equivalents.... -- 292 442
Cash and cash equivalents -- beginning of
year....................................... -- -- 292
-------- -------- --------
CASH AND CASH EQUIVALENTS -- end of year............. $ -- $ 292 $ 734
-------- -------- --------
-------- -------- --------
Reconciliation of net loss to net cash flows from
operating activities:
Net loss..................................... $(52,121) $(62,467) $(28,497)
Depreciation and amortization................ 18,802 19,216 12,810
Loss (gain) on disposal of property, plant
and equipment.............................. 754 (940) 598
Asset impairment............................. -- 25,331 2,318
Deferred income taxes........................ 13,866 (1,301) 6,537
Change in accounts receivable................ 9,858 29,652 (12,213)
Change in inventories........................ 24,325 34,378 10,919
Change in other operating assets............. 3,651 471 (335)
Change in operating liabilities.............. (26,611) 9,936 2,746
-------- -------- --------
Net cash flows -- operating activities....... $ (7,476) $ 54,276 $ (5,117)
-------- -------- --------
-------- -------- --------
</Table>
The accompanying notes are an integral part of the combined financial
statements.
F-41
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
STATEMENT OF CHANGES IN COMBINED EQUITY
(IN THOUSANDS)
<Table>
<Caption>
NET
COMBINED
EQUITY
------
BALANCE, DECEMBER 31, 1999.................................. $341,022
Net loss for the year ended December 31, 2000............... (52,121)
Transactions with Dana Corporation, net..................... 29,039
--------
BALANCE, DECEMBER 31, 2000.................................. 317,940
--------
Net loss for the year ended December 31, 2001............... (62,467)
Transactions with Dana Corporation, net..................... (41,169)
Dividend from Ponce to Dana................................. (43,600)
Change in accumulated other comprehensive loss.............. (362)
--------
BALANCE, DECEMBER 31, 2001.................................. 170,342
--------
Net loss for the nine-month period ended September 30,
2002...................................................... (28,497)
Transactions with Dana Corporation, net..................... 15,356
Change in accumulated other comprehensive loss.............. (337)
--------
BALANCE, SEPTEMBER 30, 2002................................. $156,864
--------
--------
</Table>
The accompanying notes are an integral part of the combined financial
statements.
F-42
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
These financial statements are being presented due to the potential sale of
substantially all of the US operations of the Dana Corporation (Dana) Engine
Management Business (EM). EM is a component of Dana's Automotive Aftermarket
Group Strategic Business Unit. EM manufactures and distributes a wide range of
engine management products principally for the automotive aftermarket.
These financial statements present the historical results of EM, adjusted to
exclude the operations of the Beck Arnley distribution business, the CUMSA
business in Mexico and Texas, and the Dana Canada distribution business, which
are distinct business units within EM but are not intended to be included in the
potential divestiture. Transactions between these business units and EM are
further described below. The adjusted EM amounts are intended to reflect the
financial position and results of operations of the business being sold,
hereinafter referred to as 'Engine Management', as though managed by Dana as a
separate entity. As such, the Engine Management financial statements include
allocations for certain expenses, as well as assets and liabilities historically
maintained by Dana and not recorded in the accounts of Engine Management.
Significant allocations are discussed in the notes that follow. Engine
Management and Dana management believe such allocations have been made on a
reasonable basis. However, these financial statements may not necessarily be
indicative of the results that would have been obtained if Engine Management had
operated as a separate entity during the periods presented.
The combined equity section of the Engine Management financial statements
comprises the excess of Engine Management's assets over its liabilities.
Combined equity is affected by the Engine Management operating results, expense
allocations from Dana, and cash transfers between Engine Management and Dana,
including settlement of intracompany transactions, as Dana manages all treasury
activities. Dana has not historically allocated any interest expense to Engine
Management with respect to Dana's net investment in the business. Accordingly,
no allocations of corporate debt or corporate interest cost are reflected in
these financial statements.
During the periods presented, Engine Management underwent significant
restructuring of its business. This involved the closing of numerous warehouses
and consolidation of inventory at national distribution centers as well as
closure of certain manufacturing locations. In anticipation of the warehouse
consolidation, Engine Management built significant inventory. Problems with the
warehouse consolidation and declines in business led to significant unfavorable
cost absorption and inventory loss provisions in 2001 and 2002. Additionally, as
a result of these consolidation efforts, Engine Management incurred
restructuring charges related to impairment of certain fixed assets, relocation
of assets, severance and similar costs and was unfavorably impacted by related
operational inefficiencies. Until the warehouse and distribution center
consolidation was completed in May 2002, Engine Management had not realized a
significant reduction in its distribution costs. The restructuring program also
included the reduction of headcount in the manufacturing and selling and
administrative areas of the business. As with the warehouse consolidation
initiative, the savings from these restructuring activities have yet to be fully
realized. The complexity of these restructuring and reorganization actions,
accompanied with general market softness, has resulted in significant operating
losses for Engine Management and the continued reliance upon Dana to fund EM
operations during 2000, 2001 and 2002. Dana has confirmed its intention to
continue to fund Engine Management's operations while it remains under Dana's
ownership. The restructuring is discussed further in Note 12.
F-43
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of these financial statements required management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying disclosures. Some of the more significant estimates
include depreciation and amortization of long-lived assets; inventory
valuations; sales returns and allowances; restructuring accruals; postemployment
and postretirement benefits; corporate allocations; and allowances for doubtful
accounts. Actual results could differ from those estimates.
ALLOCATION OF CORPORATE COSTS
Certain expenses incurred by Dana Corporation on behalf of Engine Management
have been included in these financial statements. These expenses include
accounting, audit, legal, tax, treasury and certain other administrative
services. These expenses have been allocated to Engine Management generally
based upon its sales relative to the consolidated sales of Dana as this
methodology yields, in the opinion of management, a reasonable allocation.
CONCENTRATION OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company limits its
credit risk by performing ongoing credit evaluations and, when deemed necessary,
requiring letters of credit, guarantees, or collateral. The majority of the
Company's accounts receivable are with automotive parts wholesalers and
retailers.
For the nine-month period ended September 30, 2002, the Company's sales to
its three largest customers were 32.1% and 8.2% and 7.6% of total sales,
respectively. Accounts receivable at September 30, 2002 relating to these three
customers were 35.4%, 9.9% and 11.8% of the total accounts receivable,
respectively.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is generally
determined on the first-in, first-out (FIFO) or average cost basis.
PROPERTIES AND DEPRECIATION
Property, plant and equipment are valued at historical costs. Depreciation
is recognized over the estimated useful lives of these assets using primarily
the straight-line method for financial reporting purposes and accelerated
depreciation methods for federal income tax purposes. For financial reporting
purposes, the estimated useful lives range from 25 to 45 years for buildings and
building fixtures, from 3 to 12 years for machinery and equipment and generally
5 years for ERP-related software. Land improvements are depreciated over 20
years and leasehold improvements are amortized over the shorter of the life of
the lease or the useful life of the asset. Long-lived assets are reviewed for
impairment and, if necessary, are adjusted to fair value.
As part of the restructuring discussed in Note 12, asset writedowns were
recorded in 2001 and 2002 principally related to closed facilities.
During 2001, EM sold its Nashville distribution center to a third party
commercial finance company for $22,550. Concurrent with the sale of the
facility, EM leased the facility from the third
F-44
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
party for a period of twenty years. Other than the leaseback, EM has no
continuing involvement and, therefore, the immaterial gain on sale is being
recognized in earnings over the lease term.
REVENUE RECOGNITION
Sales are recognized when products are shipped and title has transferred to
the customer. Accruals for warranty costs, sales returns and other allowances
are provided at the time of shipment based upon experience; adjustments are made
as new information becomes available. Shipping and handling fees billed to
customers are included in sales and the costs of shipping and handling are
included in cost of sales. Intragroup sales have been eliminated; sales to other
Dana businesses, including those EM businesses not included in these financial
statements, are included in net sales.
INCOME TAXES
Dana and its U.S. subsidiaries file a consolidated income tax return, which
includes Engine Management. The income tax provision included in these financial
statements was calculated on a method generally consistent with a separate
return basis, as if Engine Management was a separate taxpayer, and the resulting
current tax benefit (liability) is settled with Dana through the intercompany
accounts. Deferred tax balances reflect the impact of temporary differences
between the carrying amounts of Engine Management assets and liabilities in the
financial statements and their related tax bases.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2001 and September 30, 2002, Engine Management's financial
instruments included cash, cash equivalents, receivables, accounts payable, and
short-term borrowings. At December 31, 2001 and September 30, 2002, because of
their short term nature, the fair value of such instruments approximated their
carrying values.
PENSION PLANS
Pension benefits are provided for certain employees of Engine Management
under plans administered by Dana. Annual cost for defined benefit plans is
determined on an actuarial basis and funded through deposits with trustees.
Generally, Engine Management employees participate in Dana plans and the assets
and liabilities are commingled with those related to other Dana businesses.
Accordingly, except for one stand-alone plan, no amounts are reflected on the
Engine Management balance sheet and pension expense for Engine Management has
been determined on a multi-employer plan basis.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Upon retirement, certain of the Engine Management employees will be eligible
to receive other postretirement benefits, including medical, dental and life
insurance, pursuant to two EM plans that are sponsored by Dana. Benefit
obligations of the postretirement benefit plans are not funded. Annual net
postretirement benefits liability and expense under the defined benefit plans
are determined on an actuarial basis for each plan. Benefits are determined
primarily based upon employees' length of service and include employee cost
sharing where applicable.
F-45
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
COMPREHENSIVE LOSS
The only component of other comprehensive income was the minimum pension
liability adjustment. Comprehensive loss totaled $52,121, $62,829, and $28,834
for the years ended December 31, 2000 and 2001 and the nine months ended
September 30, 2002, respectively.
CASH AND MARKETABLE SECURITIES
Engine Management maintains its cash in depository accounts with high credit
quality financial institutions. As discussed in Note 1, treasury activities at
Dana are generally centralized such that Engine Management cash relates
principally to petty cash accounts and cash accounts of the operations located
in Puerto Rico.
NON-CASH INVESTING AND FINANCING ACTIVITIES
During 2001 and 2002, EM settled certain investing and financing activities
through intercompany transactions with Dana without exchanging cash. Those
transactions include: the Ponce dividend to Dana in 2001 of $43,600; short-term
borrowings of $13,949 in 2001; and repayments of short-term borrowings of $8,612
in 2002.
STOCK-BASED COMPENSATION
Certain Engine Management employees participate in Dana's stock based
compensation plans. Stock-based compensation under Dana's stock based plans is
accounted for using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees,' and
related interpretations. No compensation expense is recorded for stock options
when granted as the option price is set at the market value of the underlying
Dana stock.
ACCRUED WORKERS' COMPENSATION
Under Dana's self insured arrangements for workers' compensation benefits,
Engine Management estimates liabilities for incurred but unreported claims based
on actuarial calculations using its loss history. As of December 31, 2001 and
September 30, 2002, Engine Management had estimated liabilities of approximately
$2,189 and $2,025, respectively.
PER SHARE DATA
Per share data is not relevant as Engine Management is not a separate legal
entity and has no stand alone equity structure.
NOTE 3. INVENTORIES
The components of inventory are as follows:
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
Raw materials............................................ $16,845 $19,874
Work in process and finished goods....................... 81,333 67,385
------- -------
$98,178 $87,259
------- -------
------- -------
</Table>
NOTE 4. SHORT-TERM BORROWINGS
Beginning in March 2001, Engine Management has participated in Dana's
accounts receivable securitization program. Under the program, Engine Management
contributed accounts receivable to Dana Asset Funding LLC (DAF), a special
purpose entity. DAF funds its accounts receivable purchases in part by pledging
a portion of the receivables as collateral for short-term loans from
participating banks and uses the amounts borrowed under the program to fund the
purchase of
F-46
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
accounts receivable. The securitized accounts receivable are owned in their
entirety by DAF and are not available under this arrangement to satisfy claims
of Dana's or Engine Management's creditors. DAF's Engine Management related
receivables are included in the Engine Management financial statements solely
because DAF does not meet certain technical accounting requirements for
treatment as a 'qualifying special purpose entity' under generally accepted
accounting principles. Accordingly, the sales and contributions of the Engine
Management accounts receivable to DAF were eliminated and DAF's related loans
were reflected as short-term borrowings in Engine Management's financial
statements.
NOTE 5. LONG-TERM DEBT
During 2001, Dana repaid, on Engine Management's behalf, the outstanding
principal balance of $3,700 of long-term industrial bonds originally issued for
the construction of a former Engine Management facility. During 2000 and 2001,
Engine Management incurred interest expense on these bonds of $87 and $65,
respectively.
NOTE 6. STOCK OPTION PLANS
The Compensation Committee of Dana's Board of Directors grants stock options
to Dana employees, including selected Engine Management employees, under Dana's
Stock Option Plan. The option price is equal to the market price of the Dana
stock at the date of grant. One-fourth of the options granted become exercisable
at each of the first four anniversary dates of the grant; options generally
expire ten years from the date of grant. Stock appreciation rights may be
granted separately or in conjunction with the options.
The following table is a summary of transactions involving Engine Management
employees under the Dana stock option plan during the years ended December 31,
2000 and 2001, and the nine-month period ended September 30, 2002:
<Table>
<Caption>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------ -----
Outstanding at December 31, 1999............................ 436,539 $39.56
Transactions during the year ended December 31, 2000:
Granted................................................. 155,450 23.06
Exercised............................................... (2,546) 14.25
Cancelled............................................... (26,476) 39.64
-------- ------
Outstanding at December 31, 2000............................ 562,967 $35.11
-------- ------
-------- ------
Transactions during the year ended December 31, 2001:
Granted................................................. 88,100 $25.05
Exercised............................................... (8,086) 13.79
Cancelled............................................... (107,179) 35.70
-------- ------
Outstanding at December 31, 2001............................ 535,802 $33.67
-------- ------
-------- ------
Transactions during the nine-month period ended September
30, 2002:
Granted................................................. 68,300 $15.33
Cancelled............................................... (25,454) 28.93
-------- ------
Outstanding at September 30, 2002........................... 578,648 $31.72
-------- ------
-------- ------
</Table>
F-47
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes information about stock options under this
plan at September 30, 2002:
<Table>
<Caption>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------ --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES OPTIONS LIFE IN YEARS PRICE OPTIONS PRICE
------ ------- ------------- ----- ------- -----
$15.33-23.06................... 186,950 8.7 $20.30 60,075 $23.06
25.05-37.52................... 194,561 6.3 31.45 132,161 34.48
40.08-52.56................... 197,137 6.3 42.81 174,781 42.46
------- --- ------ ------- ------
578,648 7.1 $31.72 367,017 $36.41
------- --- ------ ------- ------
------- --- ------ ------- ------
</Table>
In accordance with its accounting policy for stock-based compensation,
Engine Management has not recognized any expense relating to these stock
options. If the fair value method of accounting for stock option grants, the
alternative policy set out in SFAS No. 123, 'Accounting for Stock-Based
Compensation,' had been used, the after-tax expense relating to the stock
options would have been approximately $617 and $403 for the years ended
December 31, 2000 and 2001, respectively, and approximately $320 for the
nine-month period ended September 30, 2002. If this proforma expense had been
charged to operations, EM's net loss for the years ended December 31, 2000 and
2001 and the nine-month period ended September 30, 2002, would have been
approximately $52,738, $62,870, and $28,817, respectively.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes model with the following assumptions:
<Table>
<Caption>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
2000 2001 2002
---- ---- ----
Risk-free interest rate......................... 6.16% 4.63% 3.53%
Dividend yield.................................. 5.38% 4.95% 0.30%
Expected life................................... 5.4 years 5.4 years 5.4 years
Stock price volatility.......................... 40.72% 44.67% 53.24%
</Table>
Based on the above assumptions, the weighted average fair value per share of
options granted under the plans was $6.51 and $7.49 for the years ended
December 31, 2000 and 2001, respectively, and $7.67 for the nine-month period
ended September 30, 2002.
NOTE 7. EMPLOYEES' STOCK PURCHASE PLAN
The majority of Engine Management's full-time employees are eligible to
participate in Dana's stock purchase plan. Plan participants can elect to have
up to 15% of their earnings withheld and deposited with an independent
custodian. The custodian uses the funds to purchase Dana's common stock at
current market prices. The purchased shares are allocated to the participants,
and are distributed to the participants on request.
Participants' contributions are matched in cash up to 50% over a five-year
period beginning with the year the amounts are withheld. If a participant
withdraws any shares before the end of five years, the amount of the match will
depend on how long the shares were in the account. On behalf of the Engine
Management participants, the custodian purchased 29,222 shares in 2000, 34,581
shares in 2001 and 23,558 shares in the nine-month period ended September 30,
2002. The charges to expense for the matching contributions were $37 in 2000,
$68 in 2001 and $74 in the nine-month period ended September 30, 2002.
F-48
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NOTE 8. PENSION AND OTHER POSTRETIREMENT BENEFITS
The employees of Engine Management are participants in various defined
benefit pension plans sponsored by Dana. Expenses incurred by Engine Management
with respect to multi-division, defined benefit pension plans during the years
ended December 31, 2000 and 2001, and the nine-month period ended September 30,
2002, were approximately $440, $552 and $589, respectively.
The former employees of Engine Management's closed facility in Ottawa,
Illinois were covered by a separate, defined benefit pension plan (the Ottawa
Plan). As the facility was closed in 1999, no additional benefits were
accumulated after that time.
The following tables provide a reconciliation of the changes in the Ottawa
Plan's benefit obligations and fair value of assets for the year ended
December 31, 2001 and the nine-month period ended September 30, 2002, as well as
statements of the funded status and schedules of the net amounts recognized in
the balance sheet at December 31, 2001 and September 30, 2002.
<Table>
<Caption>
PENSION BENEFITS
----------------------------
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
Reconciliation of benefit obligation:
Obligation at January 1................................. $1,903 $2,010
Service cost............................................ -- --
Interest cost........................................... 144 113
Actuarial loss.......................................... 73 355
Benefit payments........................................ (110) (84)
------ ------
Obligation at period end.................................... $2,010 $2,394
------ ------
------ ------
Reconciliation of fair value of plan assets:
Fair value at January 1................................. $2,242 $1,950
Actual return on plan assets............................ (182) (33)
Benefit payments........................................ (110) (84)
------ ------
Fair value at December 31................................... $1,950 $1,833
------ ------
------ ------
Funded status:
Balance at period end................................... $ (60) $ (561)
Unrecognized transition obligation...................... (3) (1)
Unrecognized prior service cost......................... 157 142
Unrecognized loss....................................... 596 1,147
------ ------
Prepaid cost................................................ $ 690 $ 727
------ ------
------ ------
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost.................................... $ 690 $ 727
Accrued benefit liability............................... (750) (1,288)
Intangible assets....................................... 157 142
Accumulated other comprehensive income.................. 593 1,146
------ ------
Net asset recognized........................................ $ 690 $ 727
------ ------
------ ------
</Table>
Components of the net periodic benefit cost of the Ottawa Plan for the years
ended December 31, 2000 and 2001, and the nine-month period ended September 30,
2002, are as follows:
F-49
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
PENSION BENEFITS COST
<Table>
<Caption>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
2000 2001 2002
---- ---- ----
Interest cost........................................ $ 139 $ 144 $ 113
Expected return on plan assets....................... (206) (220) (165)
Amortization of transition obligation................ (10) (10) (2)
Amortization of prior service cost................... 20 20 15
----- ----- -----
Net periodic benefit cost (credit)................... $ (57) $ (66) $ (39)
----- ----- -----
----- ----- -----
</Table>
The assumptions used in the measurement of pension benefit obligations are
as follows:
<Table>
<Caption>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
2000 2001 2002
---- ---- ----
Discount rate......................................... 7.75% 7.50% 6.50%
Expected return on plan assets........................ 9.25% 9.50% 9.50%
</Table>
The employees of Engine Management are also eligible to participate in
defined contribution benefit plans sponsored by Dana. Under the terms of the
defined contribution benefit plans, participant and sponsor contributions may be
directed into a number of investment options. During the years ended
December 31, 2000 and 2001, and the nine-month period ended September 30, 2002,
respectively, Engine Management incurred expenses of approximately $628, $526
and $347 for matching contributions to the defined contribution benefit plans.
Upon retirement, certain of the Engine Management employees will be eligible
to receive other postretirement benefits, including medical, dental and life
insurance, pursuant to plans sponsored by Dana. Benefit obligations of the
postretirement benefit plans are not funded.
The following tables provide a reconciliation of the changes in the
postretirement benefit plans' benefit obligations for the year ended
December 31, 2001 and the nine-month period ended September 30, 2002, as well as
the funded status and the net amounts recognized in the balance sheet at
December 31, 2001 and September 30, 2002.
F-50
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
POSTRETIREMENT BENEFITS
<Table>
<Caption>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
Reconciliation of benefit obligation:
Obligation at January 1.............................. $ 7,392 $ 8,591
Service cost......................................... 139 140
Interest cost........................................ 554 607
Actuarial loss....................................... 983 3,951
Benefit payments..................................... (477) (503)
------- --------
Obligation at period end................................. $ 8,591 $ 12,786
------- --------
------- --------
Funded status:
Balance at period end................................ $(8,591) $(12,786)
Unrecognized prior service cost...................... 3,649 3,395
Unrecognized loss.................................... 3,738 7,476
------- --------
Accrued liability recorded............................... $(1,204) $ (1,915)
------- --------
------- --------
</Table>
Components of the net periodic postretirement benefit costs for the years
ended December 31, 2000 and 2001, and the nine-month period ended September 30,
2002, are as follows:
POSTRETIREMENT BENEFITS COST
<Table>
<Caption>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
2000 2001 2002
---- ---- ----
Interest cost......................................... $390 $ 554 $ 607
Service cost.......................................... 164 139 140
Amortization of prior service cost.................... -- 339 255
Recognized net actuarial gain (loss).................. 225 108 214
---- ------ ------
Net periodic benefit cost............................. $779 $1,140 $1,216
---- ------ ------
---- ------ ------
</Table>
The assumptions used in the measurement of postretirement benefit
obligations are as follows:
<Table>
<Caption>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
2000 2001 2002
---- ---- ----
Discount rate......................................... 7.75% 7.50% 6.50%
Initial weighted health care costs trend rate......... 6.80% 8.10% 12.30%
Ultimate health care costs trend rate................. 5.00% 5.00% 5.00%
Years to ultimate..................................... 9 9 6
</Table>
Assumed health care costs trend rates have a significant effect on the
health care plan. A one-percentage-point change in assumed health care costs
trends rates would have the following effects for the nine-month period ended
September 30, 2002:
F-51
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
1% POINT 1% POINT
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost components..... 111 (111)
Effect on postretirement benefit obligations................ 1,845 (1,844)
</Table>
NOTE 9. ESTIMATED INCOME TAXES
Engine Management is included in Dana's consolidated U.S. tax return. The
income tax benefit has been calculated for each period on a method generally
consistent with a separate return basis as if Engine Management were a separate
taxpayer. The annual settlement of the current payable to (receivable from) Dana
is recorded through equity. A valuation allowance has not been established for
the recorded deferred tax assets because Dana has traditionally been a U.S.
taxpayer and Engine Management expects to be able to realize these assets
through Dana. The income tax benefit consists of the following components:
<Table>
<Caption>
NINE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
2000 2001 2002
---- ---- -------------
U.S. federal
Current.................................... $(45,572) $(31,979) $(22,088)
Deferred................................... 13,866 (1,301) 6,537
U.S. state and local........................... (4,966) (5,737) (2,677)
Other U.S. .................................... 996 (47) 132
-------- -------- --------
$(35,676) $(39,064) $(18,096)
-------- -------- --------
-------- -------- --------
</Table>
Other U.S. taxes pertain to Ponce, Engine Management's operation in Puerto
Rico, which is part of a distinct legal entity that files a separate tax return.
During 2001, Ponce declared and paid a dividend to Dana of $43,600.
Deferred tax assets (liabilities) consist of the following:
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
Expense accruals......................................... $17,810 $12,433
Inventory reserves....................................... 18,667 19,525
Employee benefits and other.............................. 2,103 2,496
------- -------
Deferred tax assets...................................... 38,580 34,454
------- -------
Depreciation............................................. (3,935) (5,970)
Other.................................................... (798) (958)
------- -------
Deferred tax liabilities................................. (4,733) (6,928)
------- -------
Net deferred tax assets.................................. $33,847 $27,526
------- -------
------- -------
</Table>
The effective income tax rate differs from the U.S. federal income tax rate
for the following reasons:
F-52
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
NINE-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
2000 2001 2002
---- ---- ----
U.S. federal income tax rate................. 35.0% 35.0% 35.0%
Increases (reductions) resulting from:
State and local income taxes, net of
federal income tax benefit............. 3.7 3.7 3.7
Other-U.S. income........................ 2.0 (0.1) 0.5
Miscellaneous items...................... (0.1) (0.1) (0.4)
---- ---- ----
Effective income tax benefit rate............ 40.6% 38.5% 38.8%
---- ---- ----
</Table>
NOTE 10. COMPOSITION OF CERTAIN BALANCE SHEET AMOUNTS
The following items comprise the net amounts indicated in the respective
balance sheet captions:
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
Property, plant and equipment, net
Land and improvements to land............................ $ 2,007 $ 2,546
Buildings and building fixtures.......................... 34,312 35,210
Machinery and equipment.................................. 175,306 160,326
Construction in progress................................. 3,152 950
-------- --------
214,777 199,032
Less: Accumulated depreciation........................... 131,743 130,709
-------- --------
$ 83,034 $ 68,323
-------- --------
-------- --------
Other accrued liabilities
Warranty................................................. $ 11,682 $ 15,073
Restructuring............................................ 15,063 7,323
Other.................................................... 16,739 14,255
-------- --------
$ 43,484 $ 36,651
-------- --------
-------- --------
</Table>
Depreciation expense for the years ended December 31, 2000 and 2001 was $18,777
and $19,191, respectively, and $12,810 for the nine-month period ended September
30, 2002.
NOTE 11. COMMITMENTS AND CONTINGENCIES
At September 30, 2002, Engine Management had purchase commitments for
property, plant and equipment of approximately $772.
Future minimum rental commitments under operating leases were $103,876 at
September 30, 2002, with rental payments during the fourth quarter of 2002 and
next five years of: 2002, $3,231; 2003, $11,171; 2004, $9,320; 2005, $8,257 and
2006, $6,405. Net rental expense was $17,026 and $17,006, respectively, during
the years ended December 31, 2000 and 2001, and $9,467 during the nine-month
period ended September 30, 2002.
Engine Management is a party to various pending judicial and administrative
proceedings arising in the ordinary course of business. These include, among
others, proceedings based on product liability claims. Management does not
believe that any liabilities that may result from these
F-53
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
proceedings are reasonably likely to have a material adverse effect on the
liquidity, financial condition and results of operations of Engine Management.
NOTE 12. RESTRUCTURING OF OPERATIONS
As discussed in Note 1, Engine Management underwent a significant
restructuring of its business during the periods presented. The restructuring
program began in 1999 when Dana announced its plans to consolidate numerous
warehouses within Engine Management which took place through 2000. Further
consolidation activities and headcount reductions were announced in 2001 which
extended into 2002. These actions were taken to rationalize Engine Management's
cost structure in response to market and related factors.
The following summarizes the restructuring charges and activity recorded
during the periods presented:
<Table>
<Caption>
EMPLOYEE LONG-LIVED
TERMINATION ASSET
BENEFITS IMPAIRMENT EXIT COSTS TOTAL
-------- ---------- ---------- -----
Balance at December 31, 1999............ $ 5,374 $ -- $1,377 $ 6,751
Activity during the year
Cash payments....................... (4,461) (1,328) (5,789)
------- ------- ------ --------
Balance at December 31, 2000............ 913 -- 49 962
------- ------- ------ --------
Activity during the year
Charges to expense.................. 10,675 24,509 9,092 44,276
Cash payments....................... (5,247) -- (419) (5,666)
Write-off of assets................. -- (24,509) -- (24,509)
------- ------- ------ --------
Balance at December 31, 2001............ 6,341 -- 8,722 15,063
------- ------- ------ --------
Activity during the year
Charges to expense.................. 1,037 2,318 6,305 9,660
Cash payments....................... (5,882) -- (9,200) (15,082)
Write-off of assets................. -- (2,318) -- (2,318)
------- ------- ------ --------
Balance at September 30, 2002........... $ 1,496 $ -- $5,827 $ 7,323
------- ------- ------ --------
------- ------- ------ --------
</Table>
Employee terminations relating to the plans were as follows:
<Table>
<Caption>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
2001 2002
---- ----
Total estimated............................................. 952 149
Less terminated:
Year ended December 31, 2001............................ (322) --
Nine-month period ended September 30, 2002.............. (602) (143)
---- ----
Balance at September 30, 2002............................... 28 6
---- ----
---- ----
</Table>
At September 30, 2002, $7,323 of restructuring charges remained in accrued
liabilities. This balance was comprised of $1,496 for the reduction of
approximately 34 employees to be completed in 2003 and $5,827 for lease
terminations and other exit costs. The estimated annual cash expenditures will
be approximately $3,415 in 2003 and $2,177 in 2004 and $1,731 thereafter.
F-54
<Page>
ENGINE MANAGEMENT
(A BUSINESS OF DANA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NOTE 13. RELATED PARTY TRANSACTIONS
For purposes of these financial statements, sales between Engine Management
and other Dana units have not been eliminated. These transactions between Engine
Management and other Dana locations are currently on a cost-plus basis with the
mark up on most transactions being 15%. Engine Management's sales to other Dana
operations were $27,620 and $13,707, respectively, for the years ended December
31, 2000 and 2001, and $6,955 for the nine-month period ended September 30,
2002.
Direct expenses incurred by Dana on behalf of Engine Management have been
charged to Engine Management based on estimated or actual cost. Such services
include insurance risk management, employee benefits and payroll administration.
Corporate allocations from Dana for administrative services aggregated
$2,691, $1,784 and $1,493 during 2000, 2001, and the nine months ended September
30, 2002, respectively, and are included in selling, general and administrative
expenses.
No allocation of Dana Corporate interest expense has been included in these
financial statements.
Engine Management provides sales and distribution support to Beck Arnley.
Charges for these services in 2002 aggregate $7,893 and were principally
determined on a percentage of sales basis which management believes to be
reasonable.
Engine Management leases certain office and warehouse space, vehicles and
equipment under operating leases entered into with Dana Credit Corporation
(DCC). Lease payments to DCC were $7,561 and $9,729, respectively, for the years
ended December 31, 2000 and 2001, and $5,360 for the nine-month period ended
September 30, 2002. The majority of these lease payments relate to a land and
building lease between DCC and Engine Management for the Salt Lake City
distribution center and other equipment leases.
NOTE 14. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT
ACCOUNTANT'S REPORT
On February 7, 2003, Dana entered into an agreement to sell a substantial
portion of Engine Management to Standard Motor Products. The completion of the
transaction is subject to, among other things, regulatory approvals and the
buyer's completion of financing related to the transaction.
F-55
<Page>
==================================== ===================================
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
<Table>
<Caption>
Page
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 8
Special Notes Regarding Forward-Looking Statements.......... 17
The Acquisition and Related Transactions.................... 18
Use of Proceeds............................................. 20
Price Range of Common Stock and Dividend Policy............. 21
Capitalization.............................................. 22
Pro Forma Financial Information............................. 24
Selected Consolidated Financial Data........................ 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
The Automotive Aftermarket.................................. 45
Business.................................................... 50
Management.................................................. 63
Principal Shareholders...................................... 66
Description of Capital Stock................................ 70
Underwriting................................................ 74
Where You Can Find More Information......................... 75
Incorporation of Certain Documents by Reference............. 76
Validity of Common Stock.................................... 77
Experts..................................................... 77
Index to Financial Statements............................... F-1
</Table>
Shares
STANDARD MOTOR PRODUCTS, INC.
Common Stock
-------------------
[Logo]
-------------------
GOLDMAN, SACHS & CO.
MORGAN STANLEY
==================================== ===================================
<Page>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All the amounts shown are estimated,
except the SEC registration fee and the NASD filing fee.
<Table>
SEC registration fee........................................ $ 6,242
NASD fee.................................................... 7,285
NYSE fee.................................................... *
Printing expenses........................................... 125,000
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees and expenses.............. *
Blue Sky fees and expenses.................................. *
Miscellaneous............................................... *
--------
Total................................................... $
--------
--------
</Table>
- ---------
* To be filed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In 1986, various Sections of Article 7 of the Business Corporation Law of
New York (the 'BCL') were amended to broaden the indemnification rights of
directors, officers and employees. In 1987, BCL Section 402(b) was further
amended to permit a provision to be included in a certificate of incorporation
shielding directors from personal liability for breach of their duties as
directors. In order to protect our directors, officers and employees, as
applicable, to the fullest extent permitted by these statutory amendments, we
amended and restated our By-laws (the 'By-laws') and restated our Certificate of
Incorporation, as amended (the 'Certificate of Incorporation').
In general, the By-laws and Certificate of Incorporation provide that we
shall, to the fullest extent permitted by Article 7 of the BCL, indemnify each
person made or threatened to be made a party to, or called as a witness in, or
asked to submit information in, any action or proceeding by reason of the fact
that such person is or was a director or officer of us, or serves or served, at
our request, any other corporation in any capacity, against judgments, fines,
penalties, amounts paid in settlement and reasonable expenses, including
attorneys' fees, incurred in connection with such action or proceeding, or any
appeal therein. This indemnification requirement covers any pending or
threatened action, proceeding, hearing or investigation, whether civil or
criminal, whether judicial, administrative or legislative in nature, and whether
or not in the nature of a direct or shareholders' derivative action brought by
us or on our behalf or any other corporation or enterprise which the director or
officer of us serves or has served at our request. The By-laws prohibit
indemnification if a judgment or other final adjudication adverse to such person
establishes that his or her acts were committed in bad faith or were the result
of active or deliberate dishonesty and were material to the cause of action so
adjudicated, or that he or she personally gained in fact a financial profit or
other advantage to which he or she was not legally entitled. The By-laws further
provide that no indemnification shall be required with respect to any settlement
or other non-adjudicated disposition of any threatened or pending action or
proceeding unless we have given our prior consent to such settlement or other
disposition. The By-laws require us to advance or promptly reimburse upon
request any person entitled to indemnification for all expenses, including
attorneys' fees, reasonably incurred in defending any action or proceeding in
advance of the final disposition thereof upon receipt of an undertaking by such
person to repay such amount if such person is ultimately not to be entitled to
indemnification; provided, however, that such person cooperates with any request
by us that counsel be utilized by the parties to an action or proceeding
similarly situated unless to do so would be inappropriate due to actual or
potential conflicts of interest.
II-1
<Page>
The Certificate of Incorporation provides that the personal liability of our
directors be eliminated to the fullest extent permitted by the provisions of BCL
Section 402(b). It also provides that we shall, to the fullest extent permitted
by Article 7 of the BCL, indemnify under that statute from and against any and
all of the expenses, liabilities or other matters covered by the statute. The
By-laws, summarized above, contain the detailed terms and conditions under which
this indemnification requirement of the Certificate of Incorporation is to be
effected.
We maintain an officers' and directors' liability insurance policy insuring
our officers and directors against certain liabilities and expenses incurred by
them in their capacities as such. The policy does not reimburse us for
indemnification obligations to our officers and directors.
Additionally, the underwriting agreement provides that the underwriter(s)
shall indemnify each of our directors and each of our officers who signed the
registration statement and each person who controls us for certain liabilities,
including certain liabilities under the Securities Act of 1933.
ITEM 16. EXHIBITS
(a) Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1. -- Form of Underwriting Agreement between Standard Motor
Products, Inc., and Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated as representatives of the
underwriters.
2.1 -- Asset Purchase Agreement, dated as of February 7, 2003,
by and among Dana Corporation, Automotive Controls Corp.,
BWD Automotive Corporation, Pacer Industries, Inc.,
Ristance Corporation, Engine Controls Distribution
Services, Inc., as Sellers, and Standard Motor Products,
Inc., as Buyer (incorporated by reference to Standard
Motor Products, Inc.'s Current Report on Form 8-K (File
No. 001-04743), filed on February 10, 2003).
4.1 -- Restated Certificate of Incorporation, dated July 31,
1990 (incorporated by reference to Exhibit 4.2 of Standard
Motor Products, Inc.'s Registration Statement on Form S-8
(Registration No. 333-51565), dated May 1, 1998).
4.2 -- Certificate of Amendment to the Restated Certificate of
Incorporation, dated July 31, 1990 (incorporated by
reference to Exhibit 4.3 of Standard Motor Products,
Inc.'s Registration Statement on Form S-8 (Registration
No. 333-51565), filed on May 1, 1998).
4.3 -- Restated By-Laws, dated May 23, 1996 (incorporated by
reference to Exhibit 3.4 of Standard Motor Products,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996).
4.4 -- Form of Subordinated Debenture Indenture (including form
of convertible debenture) (incorporated by reference to
Exhibit 4.1 to Standard Motor Products, Inc.'s Amendment
No. 2 to its Registration Statement on Form S-3
(Registration No. 333-79177), filed on July 20, 1999).
4.5 -- Rights Agreement, dated as of February 15, 1996, between
Standard Motor Products, Inc. and Registrar & Transfer
Co., as rights agent (incorporated by reference to
Standard Motor Products, Inc.'s Registration Statement on
Form 8-A (File No. 001-04743), filed on April 11, 1996).
4.6 -- Form of Share Ownership Agreement by and between Standard
Motor Products, Inc. and Dana Corporation (incorporated by
reference to Standard Motor Products, Inc.'s Current
Report on Form 8-K (File No. 001-04743), filed on February
10, 2003).
5.1* -- Opinion of Kelley Drye & Warren LLP.
23.1 -- Consent of independent auditors KPMG LLP.
23.2 -- Consent of independent accountants PricewaterhouseCoopers LLP.
23.3* -- Consent of Kelley Drye & Warren LLP (included in its
opinion filed as Exhibit 5.1).
24.1 -- Powers of Attorney (included on signature page).
</Table>
- ---------
* To be filed by amendment.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
II-2
<Page>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Long Island City, New York, on the 13th day of February, 2003.
STANDARD MOTOR PRODUCTS, INC.
By: /s/ LAWRENCE I. SILLS
....................................
Lawrence I. Sills
Chairman of the Board,
Chief Executive Officer and Director
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Lawrence I. Sills and James J. Burke, and each of
them individually, his or her true and lawful agent, proxy and attorney-in-fact,
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to (i) act on, sign and
file with the Securities and Exchange Commission any and all amendments to this
registration statement (which includes any additional registration statement
under Rule 462(b)) together with all schedules and exhibits thereto, (ii) act
on, sign and file with the Securities and Exchange Commission any and all
exhibits to this registration statement and any and all exhibits and schedules
thereto, (iii) act on, sign and file any and all applications, registration
statements, notices, reports and other documents necessary or appropriate in
connection with the registration or qualification under foreign and state
securities laws of the securities described in this registration statement or
any amendment thereto, or obtain an exemption therefrom, in connection with the
offering described therein, and (iv) take any and all such actions which may be
necessary or appropriate in connection therewith, granting unto such agents,
proxies and attorneys-in-fact, and each of them individually, full power and
authority to do and perform each and every act and thing necessary or
appropriate to be done, as approving, ratifying and confirming all that such
agents, proxies and attorneys-in-fact, any of them or any of his or her or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on the 13th day of February,
2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ LAWRENCE I. SILLS Chairman of the Board, Chief Executive Officer and
......................................... Director (Principal Executive Officer)
Lawrence I. Sills
/s/ JAMES J. BURKE Vice President Finance, Chief Financial Officer
......................................... (Principal Financial and Accounting Officer)
James J. Burke
/s/ ARTHUR D. DAVIS Vice Chairman of the Board and Director
.........................................
Arthur D. Davis
/s/ MARILYN FIFE CRAGIN Director
.........................................
Marilyn Fife Cragin
</Table>
II-4
<Page>
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ SUSAN F. DAVIS Director
.........................................
Susan F. Davis
/s/ ROBERT M. GERRITY Director
.........................................
Robert M. Gerrity
/s/ JOHN L. KELSEY Director
.........................................
John L. Kelsey
/s/ KENNETH A. LEHMAN Director
.........................................
Kenneth A. Lehman
/s/ ARTHUR S. SILLS Director
.........................................
Arthur S. Sills
/s/ PETER J. SILLS Director
.........................................
Peter J. Sills
/s/ FREDERICK D. STURDIVANT Director
.........................................
Frederick D. Sturdivant
/s/ WILLIAM H. TURNER Director
.........................................
William H. Turner
</Table>
II-5
<Page>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ------- -------- -------- ---------- -----------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful
accounts..................... $ 2,664 $ 2,387 $611 $ 3,043 $ 2,619
Allowance for discounts........ 1,861 -- 131 -- 1,992
------- -------- ---- -------- -------
$ 4,525 $ 2,387 $742 $ 3,043 $ 4,611
------- -------- ---- -------- -------
------- -------- ---- -------- -------
Allowance for sales returns.... $16,296 $115,749 $ -- $109,347 $22,698
------- -------- ---- -------- -------
------- -------- ---- -------- -------
Allowance for inventory
valuation.................... $18,221 $ 1,911 $599 $ 6,965 $13,766
------- -------- ---- -------- -------
------- -------- ---- -------- -------
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful
accounts..................... $ 2,619 $ 699 $ -- $ 339 $ 2,979
Allowance for discounts........ 1,992 -- -- 394 1,598
------- -------- ---- -------- -------
$ 4,611 $ 699 $ -- $ 733 $ 4,577
------- -------- ---- -------- -------
------- -------- ---- -------- -------
Allowance for sales returns.... $22,698 $100,403 $ -- $105,408 $17,693
------- -------- ---- -------- -------
------- -------- ---- -------- -------
Allowance for inventory
valuation.................... $13,766 $ 3,165 $ -- $ 4,001 $12,930
------- -------- ---- -------- -------
------- -------- ---- -------- -------
YEAR ENDED DECEMBER 31, 2001:
Allowance for doubtful
accounts..................... $ 2,979 $ 598 $ -- $ 660 $ 2,917
Allowance for discounts........ 1,598 -- -- 153 1,445
------- -------- ---- -------- -------
$ 4,577 $ 598 $ -- $ 813 $ 4,362
------- -------- ---- -------- -------
------- -------- ---- -------- -------
Allowance for sales returns.... $17,693 $ 94,122 $ -- $ 93,648 $18,167
------- -------- ---- -------- -------
------- -------- ---- -------- -------
Allowance for inventory
valuation.................... $12,930 $ 4,387 $ -- $ 3,422 $13,895
------- -------- ---- -------- -------
------- -------- ---- -------- -------
</Table>
<Page>
INDEX OF EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.1 -- Form of Underwriting Agreement between Standard Motor
Products, Inc., and Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated as representatives of the
underwriters.
2.1 -- Asset Purchase Agreement, dated as of February 7, 2003,
by and among Dana Corporation, Automotive Controls Corp.,
BWD Automotive Corporation, Pacer Industries, Inc.,
Ristance Corporation, Engine Controls Distribution
Services, Inc., as Sellers, and Standard Motor Products,
Inc., as Buyer (incorporated by reference to Standard
Motor Products, Inc.'s Current Report on Form 8-K (File
No. 001-04743), filed on February 10, 2003).
4.1 -- Restated Certificate of Incorporation, dated July 31,
1990 (incorporated by reference to Exhibit 4.2 of Standard
Motor Products, Inc.'s Registration Statement on Form S-8
(Registration No. 333-51565), dated May 1, 1998).
4.2 -- Certificate of Amendment to the Restated Certificate of
Incorporation, dated July 31, 1990 (incorporated by
reference to Exhibit 4.3 of Standard Motor Products,
Inc.'s Registration Statement on Form S-8 (Registration
No. 333-51565), filed on May 1, 1998).
4.3 -- Restated By-Laws, dated May 23, 1996 (incorporated by
reference to Exhibit 3.4 of Standard Motor Products,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996).
4.4 -- Form of Subordinated Debenture Indenture (including form
of convertible debenture) (incorporated by reference to
Exhibit 4.1 to Standard Motor Products, Inc.'s Amendment
No. 2 to its Registration Statement on Form S-3
(Registration No. 333-79177), filed on July 20, 1999).
4.5 -- Rights Agreement, dated as of February 15, 1996, between
Standard Motor Products, Inc. and Registrar & Transfer
Co., as rights agent (incorporated by reference to
Standard Motor Products, Inc.'s Registration Statement on
Form 8-A (File No. 001-04743), filed on April 11, 1996).
4.6 -- Form of Share Ownership Agreement by and between Standard
Motor Products, Inc. and Dana Corporation (incorporated by
reference to Standard Motor Products, Inc.'s Current
Report on Form 8-K (File No. 001-04743), filed on
February 10, 2003).
5.1*-- Opinion of Kelley Drye & Warren LLP.
23.1 -- Consent of independent auditors KPMG LLP.
23.2 -- Consent of independent accountants PricewaterhouseCoopers LLP.
23.3*-- Consent of Kelley Drye & Warren LLP (included in its
opinion filed as Exhibit 5.1).
24.1 -- Powers of Attorney (included on signature page).
</Table>
- ---------
* To be filed by amendment.