UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER: 1-4743
STANDARD MOTOR PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
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(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 392-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- -------------------------------------
Common Stock, par value $2.00 per share New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Smaller reporting company |_|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting common stock based on the closing price on the New York Stock Exchange on June 29, 2007 (the last business day of registrant's most recently completed second fiscal quarter) of $15.03 per share held by non-affiliates of the registrant was $235,742,018. For purposes of the foregoing calculation only, all directors and officers have been deemed to be affiliates, but the registrant disclaims that any of such are affiliates.
As of February 29, 2008, there were 18,507,007 outstanding shares of the registrant's common stock, par value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is incorporated herein by reference from the registrant's definitive proxy statement relating to its annual meeting of stockholders to be held on May 15, 2008.
STANDARD MOTOR PRODUCTS, INC.
INDEX
PART I. PAGE NO.
Item 1 Business ...................................................... 3
Item 1A Risk Factors....................................................14
Item 1B Unresolved Staff Comments........................................19
Item 2. Properties.......................................................20
Item 3. Legal Proceedings................................................21
Item 4. Submission of Matters to a Vote of Security Holders..............21
PART II.
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities................................................22
Item 6. Selected Financial Data..........................................24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......39
Item 8. Financial Statements and Supplementary Data......................40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...........................88
Item 9A. Controls and Procedures..........................................88
Item 9B. Other Information................................................89
PART III.
Item 10. Directors, Executive Officers and Corporate Governance...........90
Item 11. Executive Compensation...........................................90
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.......................90
Item 13. Certain Relationships and Related Transactions,
and Director Independence .......................................90
Item 14. Principal Accounting Fees and Services...........................90
PART IV.
Item 15. Exhibits, Financial Statement Schedules..........................91
Signatures.......................................................92
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PART I
IN THIS ANNUAL REPORT ON FORM 10-K, "STANDARD MOTOR PRODUCTS," "WE," "US," "OUR" AND THE "COMPANY" REFER TO STANDARD MOTOR PRODUCTS, INC. AND ITS SUBSIDIARIES, UNLESS THE CONTEXT REQUIRES OTHERWISE. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE INDICATED BY WORDS SUCH AS "ANTICIPATES," "EXPECTS," "BELIEVES," "INTENDS," "PLANS," "ESTIMATES," "PROJECTS" AND SIMILAR EXPRESSIONS. THESE STATEMENTS REPRESENT OUR EXPECTATIONS BASED ON CURRENT INFORMATION AND ASSUMPTIONS AND ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE WHICH ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, ECONOMIC AND MARKET CONDITIONS; THE PERFORMANCE OF THE AFTERMARKET SECTOR; CHANGES IN BUSINESS RELATIONSHIPS WITH OUR MAJOR CUSTOMERS AND IN THE TIMING, SIZE AND CONTINUATION OF OUR CUSTOMERS' PROGRAMS; CHANGES IN THE PRODUCT MIX AND DISTRIBUTION CHANNEL MIX; THE ABILITY OF OUR CUSTOMERS TO ACHIEVE THEIR PROJECTED SALES; COMPETITIVE PRODUCT AND PRICING PRESSURES; INCREASES IN PRODUCTION OR MATERIAL COSTS THAT CANNOT BE RECOUPED IN PRODUCT PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED BUSINESSES; PRODUCT LIABILITY AND ENVIRONMENTAL MATTERS (INCLUDING, WITHOUT LIMITATION, THOSE RELATED TO ASBESTOS-RELATED CONTINGENT LIABILITIES); AS WELL AS OTHER RISKS AND UNCERTAINTIES, SUCH AS THOSE DESCRIBED UNDER RISK FACTORS, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND THOSE DETAILED HEREIN AND FROM TIME TO TIME IN THE FILINGS OF THE COMPANY WITH THE SEC. FORWARD-LOOKING STATEMENTS ARE MADE ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THE FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. IN ADDITION, HISTORICAL INFORMATION SHOULD NOT BE CONSIDERED AS AN INDICATOR OF FUTURE PERFORMANCE.
ITEM 1. BUSINESS
OVERVIEW
We are a leading independent manufacturer, distributor and marketer of replacement parts for motor vehicles in the automotive aftermarket industry, with an increasing focus on the original equipment and original equipment service markets. We are organized into two major operating segments, each of which focuses on a specific line of replacement parts. Our Engine Management Segment manufactures ignition and emission parts, ignition wires, battery cables and fuel system parts. Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories, and windshield washer system parts. We also sell our products in Europe through our European Segment.
We sell our products primarily to warehouse distributors, large retail chains, original equipment manufacturers and original equipment service part operations in the United States, Canada and Latin America. 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, CSK Auto, O'Reilly Automotive and Pep Boys. Our customers also include national program distribution groups, specialty market distributors and original equipment service parts organizations. We distribute parts under our own brand names, such as Standard, Blue Streak, BWD, Niehoff, Hayden and Four Seasons, and through private labels, such as CARQUEST and NAPA Auto Parts.
BUSINESS STRATEGY
Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by providing high quality original equipment and replacement products to the engine management and temperature control markets. The key elements of our strategy are as follows:
o 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.
To maintain our strong competitive position in our markets, we remain committed to the following:
o 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;
o continuing to maximize our production and distribution efficiencies;
o continuing to improve our cost position through increased global
sourcing and increased manufacturing in low cost countries; and
o focusing further on our engineering development efforts.
o 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 professionals provide product selection and application support to our customers.
o EXPAND OUR PRODUCT LINES. We intend to increase our sales by continuing to develop internally, or through potential acquisitions, 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.
o BROADEN OUR CUSTOMER BASE. Our goal is to increase our customer base by (a)
continuing to leverage our manufacturing capabilities to secure additional
original equipment business with automotive, industrial and heavy duty
vehicle and equipment manufacturers and their service part operations and
(b) supporting the service part operations of vehicle and equipment
manufacturers with value added services and product support for the life of
the part.
o 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 intend to continue to improve our operating efficiency and cost position by:
o increasing cost-effective vertical integration in key product lines
through internal development;
o focusing on integrated supply chain management;
o maintaining and improving our cost effectiveness and competitive
responsiveness to better serve our customer base, including sourcing
certain products from low cost countries such as those in Asia.
o adopting company-wide programs geared toward manufacturing and
distribution efficiency; and
o focusing on company-wide overhead and operating expense cost reduction
programs, such as closing excess facilities and consolidating
redundant functions.
o CASH UTILIZATION. We intend to apply any excess cash flow from operations and the management of working capital to reduce our outstanding indebtedness, pay dividends and repurchase our stock.
THE AUTOMOTIVE AFTERMARKET
The automotive aftermarket industry is comprised of a large number of diverse 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. 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 Original Equipment Manufacturers ("OEMs").
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 benefit 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 OEMs and their suppliers, because these sales increase the total number of cars available for repair. Until recently, aggressive financing programs by automakers have increased demand for new cars and trucks, which should benefit the automotive aftermarket manufacturers in the long term as vehicles age and the number of vehicles in operation increases.
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:
o growth in number of vehicles on the road;
o increase in average vehicle age;
o increase in total miles driven per year;
o new and modified environmental regulations;
o increase in pricing of new cars; and
o new car quality and related warranties.
Traditionally, the parts manufacturers of OEMs and the independent manufacturers who supply the original equipment (OE) part applications have supplied a majority of the business to new car dealer networks. However, certain parts manufacturers have become more independent and are no longer affiliated with OEMs, which has provided, and may continue to provide, opportunities for us to supply replacement parts to the dealer service networks of the OEMs, both for warranty and out-of-warranty repairs.
FINANCIAL INFORMATION ABOUT OUR OPERATING SEGMENTS
The table below shows our consolidated net sales by operating segment and by major product group within each segment for the three years ended December 31, 2007. Our three reportable operating segments are Engine Management, Temperature Control and Europe.
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------
2007 2006 2005
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% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
ENGINE MANAGEMENT:
Ignition and Emission
Parts ............... $425,758 53.9% $436,238 53.7% $455,125 54.8%
Wires and Cables ........ 101,483 12.8% 106,983 13.2% 91,883 11.1%
-------- ----- -------- ----- -------- -----
TOTAL ENGINE MANAGEMENT ..... 527,241 66.7% 543,221 66.9% 547,008 65.9%
-------- ----- -------- ----- -------- -----
TEMPERATURE CONTROL:
Compressors ............. 94,416 12.0% 96,171 11.8% 101,876 12.3%
Other Climate Control
Parts ................. 113,188 14.3% 114,931 14.2% 127,350 15.3%
-------- ----- -------- ----- -------- -----
TOTAL TEMPERATURE CONTROL ... 207,604 26.3% 211,102 26.0% 229,226 27.6%
-------- ----- -------- ----- -------- -----
EUROPE:
Engine Management Parts . 39,329 5.0% 30,297 3.7% 26,802 3.2%
Temperature Control Parts 2,881 0.3% 16,747 2.1% 16,621 2.0%
-------- ----- -------- ----- -------- -----
TOTAL EUROPE ................ 42,210 5.3% 47,044 5.8% 43,423 5.2%
-------- ----- -------- ----- -------- -----
ALL OTHER ................... 13,130 1.7% 10,657 1.3% 10,756 1.3%
-------- ----- -------- ----- -------- -----
TOTAL ................. $790,185 100.0% $812,024 100.0% $830,413 100.0%
-------- ----- -------- ----- -------- -----
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The following table shows our operating profit and identifiable assets by operating segment for the three years ended December 31, 2007.
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------------
2007 2006 2005
---------------------- --------------------- ----------------------
OPERATING OPERATING OPERATING
PROFIT IDENTIFIABLE PROFIT IDENTIFIABLE PROFIT IDENTIFIABLE
(LOSS) ASSETS (LOSS) ASSETS (LOSS) ASSETS
(IN THOUSANDS)
Engine Management .. $ 28,109 $443,465 $ 41,249 $430,158 $ 19,338 $438,116
Temperature Control 10,215 113,440 11,954 109,734 11,936 114,441
Europe ............. 968 36,538 46 26,708 (572) 28,217
All Other .......... (16,900) 84,649 (17,934) 73,492 (16,620) 72,270
-------- -------- -------- -------- -------- --------
Total ........... $ 22,392 $678,092 $ 35,315 $640,092 $ 14,082 $653,044
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"All Other" consists of items pertaining to our corporate headquarters function and our Canadian business unit, each of which does not meet the criteria of a reportable operating segment.
ENGINE MANAGEMENT SEGMENT
BREADTH OF PRODUCTS. We manufacture a full line of engine management replacement parts including distributor caps and rotors, electronic ignition control modules, voltage regulators, coils, switches, emission sensors, EGR valves and many other engine management components under our brand names Standard, BWD, Niehoff and GP Sorenson and through private labels such as CARQUEST and NAPA. We are a basic manufacturer of many of the engine management parts we market. In addition, our strategy includes sourcing certain products from low cost countries such as those in Asia. In our Engine Management Segment, replacement parts for ignition and emission control systems accounted for approximately 54%, 54% and 55% of our consolidated net sales in 2007, 2006 and 2005, respectively.
COMPUTER-CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped with computer-controlled engine management systems to control ignition, emission and fuel injection systems. The on-board computers monitor inputs from many types of sensors located throughout the vehicle, and control a myriad of valves, injectors, switches and motors to manage engine and vehicle performance. Electronic ignition systems enable the engine to operate with improved fuel efficiency and reduced level of hazardous fumes in exhaust gases.
In 1992, we entered into a joint venture in Canada with Blue Streak Electronics, Inc. to rebuild automotive engine management computers and mass air flow sensors. This joint venture has further expanded its product range to include computers used in temperature control, anti-lock brake systems and air bags, and development of diagnostic repair tools.
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.
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 were manufactured, and in most states, until the last day they are in use. This law and other government emissions laws have had, and we expect it to continue to have, a positive impact on sales of our ignition and emission controls parts since vehicles failing these laws may require repairs utilizing parts sold by us.
Our sales of sensors, valves, solenoids and related parts have increased steadily as automobile manufacturers equip their cars with more complex engine management systems.
WIRE AND CABLE PRODUCTS. Wire and cable parts accounted for approximately 13%, 13% and 11% of our consolidated net sales in 2007, 2006 and 2005, respectively. 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 capitalizes on the market's awareness of the importance of quality. We extrude high voltage wire in our Mishawaka, Indiana facility which is used in our ignition wire sets. This vertical integration of this critical component offers us the ability to achieve lower costs and a controlled source of supply and quality.
TEMPERATURE CONTROL SEGMENT
We manufacture, remanufacture and market a full line of replacement parts for automotive temperature control (air conditioning and heating) systems, engine cooling systems, power window accessories and windshield washer systems, primarily under our brand names of Four Seasons, Factory Air, Murray, Hayden, Imperial and ACi and through private labels such as CARQUEST and NAPA. The major product groups sold by our Temperature Control Segment are new and remanufactured compressors, clutch assemblies, blower and radiator fan motors, filter dryers, evaporators, accumulators, hose assemblies, expansion valves, heater valves, AC service tools and chemicals, fan assemblies, fan clutches, engine oil coolers, transmission coolers, window lift motors and windshield washer pumps. Our temperature control products accounted for approximately 26%, 26% and 28% of our consolidated net sales in 2007, 2006 and 2005, respectively.
Due to increasing offshore competitive price pressure, our Temperature Control business made several changes within its manufacturing portfolio. We have outsourced the manufacturing of several major AC product groups to low cost areas and have implemented plans to consolidate manufacturing facilities. In addition, we continue to increase production of remanufactured compressors in Reynosa, Mexico and have entered into several supply agreements for certain products with vendors in low cost countries such as those in Asia.
Today's vehicles are being produced with smaller, more complex and efficient AC system designs. These newer systems are less prone to leak resulting in fewer AC system repairs. Our Temperature Control Segment continues to be a leader in providing superior training to service dealers who seek the knowledge in which to perform proper repairs for today's vehicles. We believe that our training module (HVAC Tips & Techniques) remains one of the most sought-after training clinics in the industry and among professional service dealers.
EUROPE SEGMENT
In July 1996, we acquired an equity interest in Standard Motor Products (SMP) Holdings Limited (formerly Intermotor Holdings Limited) located in Nottingham, England. During 2002, we acquired the remaining equity interest bringing the Company's ownership percentage to 100%. SMP Holdings Limited manufactures and distributes a broad line of engine management products primarily to customers in Europe. Also in 1996, we expanded our presence in Europe by opening a European distribution center in Strasbourg, France for temperature control products, which we later divested in the fourth quarter of 2006. A joint venture (Blue Streak Europe) between SMP Holdings Limited and Blue Streak Electronics was also initiated in 1996, which joint venture supplies rebuilt engine computers for the European market.
Since 1996, we have made a series of smaller acquisitions supplementing both the Engine Management and Temperature Control portions of our business. With respect to the engine management business, in January 1999 we acquired Webcon UK Limited, an assembler and distributor of fuel system components, which we subsequently divested in June 2003. In January 1999, Blue Streak Europe acquired Injection Correction UK LTD, a subsidiary of Webcon, and in September 2001, acquired TRW Inc.'s electronic control unit remanufacturing division. In April 1999, we acquired Lemark Auto Accessories, a supplier of wire sets. In April 2002, the wire business was further expanded by acquiring Carol Cable Limited, a manufacturer and distributor of wire. In April 2006, we acquired substantially all of the assets of Biazet EI's ignition and coil business in Poland. Subsequently, we relocated certain of our UK manufacturing operations to our facility in Poland. In December 2007, we acquired Kerr Nelson Ltd., a manufacturer and distributor of wire sets.
With respect to the temperature control portion of our business, following the opening of the distribution center in France, in 1997 a joint venture was entered into with Valeo SA to remanufacture air conditioner compressors for the European market. In addition, in January 2000 we acquired Four Seasons UK Ltd. (formerly Vehicle Air Conditioning Parts Ltd.), a distributor of components for the repair of air conditioning systems. In July 2000, the Temperature Control business purchased Four Seasons Italy SRL (formerly Automotive Heater Exchange SRL) in Italy. In 2001 we entered into a joint venture with Pedro Sanz in Madrid, Spain to distribute our products in the Iberian Peninsula. In the fourth quarter of 2006, we sold a majority portion of our European Temperature Control business, consisting of our equity interests of our operations in Spain and our business in France (other than our joint venture with Valeo) and Italy. The proceeds from the divestiture were $3.1 million, and we incurred a loss on divestiture of $3.2 million in the fourth quarter of 2006.
Our European Segment accounted for approximately 5%, 6% and 5% of our consolidated net sales in 2007, 2006 and 2005, respectively. Aftermarket margins are under pressure, while volumes are in a general decline in the ignition line. We have responded to the adverse market conditions by reducing manufacturing costs through consolidating certain facilities and outsourcing products.
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, Europe and Latin America. 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, 2007.
2007 2006 2005
-------- -------- --------
(IN THOUSANDS)
United States .................. $663,534 $688,030 $716,358
Canada ......................... 53,901 48,537 46,353
Europe ......................... 42,210 47,044 43,423
Other International ............ 30,540 28,413 24,279
-------- -------- --------
Total ...................... $790,185 $812,024 $830,413
======== ======== ========
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The table below shows our long-lived assets by geographical area for the three years ended December 31, 2007.
2007 2006 2005
-------- -------- --------
(IN THOUSANDS)
United States .................. $136,029 $144,208 $161,451
Europe ......................... 8,883 4,821 4,682
Canada ......................... 3,954 4,014 3,900
Other International ............ 680 778 754
-------- -------- --------
Total ...................... $149,546 $153,821 $170,787
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SALES AND DISTRIBUTION
In the traditional distribution channel, we sell our products to warehouse distributors, who supply auto parts jobbers, who in turn sell to professional technicians and to consumers who perform automotive repairs themselves. In recent years, warehouse distributors have consolidated with other distributors, and an increasing number of distributors own their jobbers. In the retail distribution channel, customers buy directly from us and sell directly to technicians and "do it yourselfers." Retailers are also consolidating with other retailers and have expanded into the jobber market, adding additional competition in the "do it for me" business segment targeting the professional technician.
As automotive parts grow more complex, consumers are less likely to service their own vehicles and may become more reliant on dealers and technicians. In addition to new car sales, automotive dealerships sell OE brand parts and service vehicles. The products available through the dealers are purchased through the original equipment service (OES) network. Traditionally, the parts manufacturers of OEMs have supplied a majority of the OES network. However, certain parts manufacturers have become independent and are no longer affiliated with OEMs. In addition, many Tier 1 OEM suppliers are disinterested in providing service parts after serial production is complete. As a result of these factors, there are additional opportunities for independent automotive aftermarket manufacturers like us to supply the OES network.
We believe that our sales force is the premier direct sales force for our product lines due to our concentration of highly-qualified, well-trained sales people dedicated to geographic territories. Our sales force allows us to provide customer service that we believe is unmatched by our competitors. We thoroughly train our sales people both in the function and application of our product lines, as well as in proven sales techniques. Customers, therefore, depend on these sales people as a reliable source for technical information. We give newly hired sales people extensive instruction at our training facility in Irving, Texas and have a continuing education program that allows our sales force to stay current on troubleshooting and repair techniques, as well as the latest automotive parts and systems technology.
We generate demand for our products by directing a significant portion of our sales effort to our customers' customers (i.e., jobbers and professional technicians). We also conduct instructional clinics, which teach technicians how to diagnose and repair complex systems related to our products. To help our sales people to be teachers and trainers, we focus our recruitment efforts on candidates who already have strong technical backgrounds as well as sales experience.
In connection with our sales activities, we offer a variety of customer discounts, allowances and incentives. For example, we offer cash discounts for paying invoices in accordance with the specified discounted terms of the invoice, and we offer pricing discounts based on volume and different product lines purchased from us. We also offer rebates and discounts to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided. We believe these discounts, allowances and incentives are a common practice throughout the automotive aftermarket industry, and we intend to continue to offer them in response to competitive pressures.
CUSTOMERS
Our customer base is comprised largely of warehouse distributors, large retailers, OE/OES customers, other manufacturers and export customers. Our warehouse distributor customers include CARQUEST and NAPA Auto Parts, and several large independent distributors affiliated with industry marketing group associations. These associations include The Aftermarket Auto Parts Alliance, The Automotive Distribution Network, and National Pronto Association. Our retail customers include Advance Auto Parts, AutoZone, CSK Auto, O'Reilly Automotive and Pep Boys. In 2007, our consolidated net sales to our major market channels consisted of $386 million to our traditional customers, $247 million to our retail customers, $81 million to our OE/OES customers, and $76 million to other customers.
Our five largest individual customers, including members of a marketing group, accounted for 50% of our 2007 consolidated net sales. Two individual customers accounted for 17% and 15%, respectively, of our 2007 consolidated net sales.
COMPETITION
We are a leading independent manufacturer of replacement parts for product lines in Engine Management and Temperature Control. We compete primarily on the basis of product quality, product availability, customer service, product coverage, order turn-around time, order fill rate and price. We believe we differentiate ourselves from our competitors primarily through:
o a value-added, knowledgeable sales force;
o extensive product coverage;
o sophisticated parts cataloguing systems;
o inventory levels sufficient to meet the rapid delivery requirements of
customers; and
o breadth of manufacturing capabilities.
In the Engine Management business, we are one of the leading independent manufacturers in the United States. Our competitors include AC Delco, Cardone Industries, Inc., Delphi Corporation, Denso Corporation, Federal-Mogul Corporation, Robert Bosch Corporation, Visteon Corporation and Wells Manufacturing Corporation, as well as OE dealers.
Our Temperature Control business is one of the leading independent manufacturers and distributors of a full line of temperature control products in North America and other geographic areas. AC Delco, Delphi Corporation, Denso Corporation, Sanden International Inc., Proliance International, Inc., Continental/Siemens VDO Automotive and Visteon Corporation are some of our key competitors in this market.
The automotive aftermarket is highly competitive, and we face substantial competition in all markets that we serve. 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 of our competitors may have greater financial, marketing and other resources than we do. In addition, we face competition from automobile manufacturers who supply many of the replacement parts sold by us, although these manufacturers generally supply parts only for cars they produce through OE dealerships.
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 and customer 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 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 longer payment terms.
WORKING CAPITAL MANAGEMENT
Automotive aftermarket companies have been under increasing pressure to provide broad SKU (stock keeping unit) coverage due to parts and brand proliferation. In response to this, we have made, and continue to make, changes to our inventory management system designed to reduce inventory requirements. We upgraded our forecasting system in our Engine Management and Temperature Control Segments that will help us better manage our inventory levels and improve inventory turns. In 2007, inventory levels increased significantly as we built bridge inventory levels to meet customer demand during our facility relocation moves. In addition, during 2007 our accounts receivable balances increased reflecting an expansion in days outstanding from 119 to 127. We have a pack-to-order distribution system, which permits 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. We also recently expanded our management system to improve inventory deployment, enhance our collaboration with customers on forecasts, and further integrate our supply chain both to customers and suppliers.
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 (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories. In addition, the seasonality of our Temperature Control Segment 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 order to better control warranty returns, we tightened the rules to reduce returns arising from installer error or misdiagnosis. For example, with respect to our air conditioning compressors, our most significant customer product warranty returns, we established procedures whereby a warranty will be voided if a customer does not provide acceptable proof that complete AC system repair was performed. In the fourth quarter of 2007, we experienced significant overstock returns as customers reduced their working capital levels in response to a difficult economic climate.
Our profitability and working capital requirements are seasonal due to our 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), steel magnets, laminations, tubes and shafts, stamped steel parts, copper wire, ignition wire, stainless steel coils and rods, aluminum coils, fittings, tubes and rods, cast aluminum parts, lead, steel roller bearings, rubber molding compound, thermo-set and thermo plastic molding powders. Additionally, we use components and cores (used parts) in our remanufacturing processes for air conditioning compressors.
We purchase many materials in the U.S. and foreign open markets and have a limited number of supply agreements on key components. A number of prime suppliers make these materials available. In the case of cores for air conditioning compressors, we obtain them either from exchanges with customers who return cores subsequent to purchasing remanufactured parts or through direct purchases from a network of core brokers. In addition, we acquire certain materials by purchasing products that are resold into the market, particularly by OEM sources and other domestic and foreign suppliers.
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. Recently, prices of steel, aluminum, copper and other commodities have risen. These increases did not have a material impact on us, as we are not dependent on any single commodity, however, there can be no assurance over the long term that increases in commodity prices will not materially affect our business or results of operations.
PRODUCTION AND ENGINEERING
We engineer, tool and manufacture many of the components used in the assembly of our products. 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 air conditioning compressors. We have found this level of vertical integration to provide advantages in terms of cost, quality and availability. We intend to continue selective efforts toward further vertical integration to ensure a consistent quality and supply of low cost components. In addition, our strategy includes sourcing an increasing number of finished goods and component parts from low cost countries such as those in Asia.
In 2000, we launched a program for the installation of a fully integrated enterprise resource planning (ERP) system. The implementation of such system was completed in 2003 at all of our Temperature Control Segment locations. In 2005, we launched our program to implement such a system in our Engine Management Segment and we anticipate full implementation in 2009.
EMPLOYEES
As of December 31, 2007, we employed approximately 3,000 people in the United States, and 800 people in Mexico, Canada, Puerto Rico, Europe and Hong Kong. Of these, approximately 1,900 are production employees. We operate primarily in non-union facilities and have binding labor agreements with the workers at other unionized facilities. We have approximately 180 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 in April 2009. As of December 31, 2007, approximately 110 of our production employees in Long Island City, New York are under a UAW contract. We also have union relationships in Mexico with agreements negotiated at various intervals. The current union agreements in Mexico cover approximately 400 employees and expire in January 2009 and December 2009.
In December 2007, we entered into an agreement with the UAW regarding the shutdown of our manufacturing operations at Long Island City, New York, which operations we expect to transfer to our other facilities in the second quarter of 2008.
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.
INSURANCE
We maintain basic liability coverage up to $2 million for automobile liability, general and product liability and $50 million for umbrella liability coverage. We also maintain environmental insurance of $10 million, covering our existing U.S. and Canadian facilities. One of our facilities is currently undergoing testing for potential environmental remediation. The environmental testing and any remediation costs at such facility are covered by an insurance policy of $3 million, which is subject to a $1.5 million deductible; we have purchased additional environmental insurance coverage in the amount of $2 million with a $0.1 million deductible relating to such facility. Historically, we have not experienced casualty losses in any year in excess of our coverage. However, there can be no assurances that liability losses in the future will not exceed our coverage.
AVAILABLE INFORMATION
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. Our Internet address is WWW.SMPCORP.COM. We provide a link to reports that we have filed with the SEC. However, for those persons that make a request in writing or by e-mail (financial@smpcorp.com), we will provide free of charge our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports and other information are also available, free of charge, at WWW.SEC.GOV.
ITEM 1A. RISK FACTORS
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND OUR SUCCESS DEPENDS ON OUR ABILITY TO COMPETE WITH SUPPLIERS OF AUTOMOTIVE AFTERMARKET PRODUCTS, SOME OF WHICH MAY HAVE SUBSTANTIALLY GREATER FINANCIAL, MARKETING AND OTHER RESOURCES THAN WE DO.
While we believe that our business is well positioned to compete in our two primary market segments, Engine Management and Temperature Control, the automotive aftermarket industry is highly competitive, and our success depends on our ability to compete with suppliers of automotive aftermarket products. In the Engine Management business, our competitors include AC Delco, Cardone Industries, Inc., Delphi Corporation, Denso Corporation, Federal-Mogul Corporation, Robert Bosch Corporation, Visteon Corporation and Wells Manufacturing Corporation. In the Temperature Control business, we compete with AC Delco, Delphi Corporation, Denso Corporation, Sanden International Inc., Proliance International, Inc., Continental/Siemens VDO Automotive and Visteon Corporation. In addition, automobile manufacturers supply many of the replacement parts we sell.
Some of our competitors may have larger customer bases and significantly greater financial, technical and marketing resources than we do. These factors may allow our competitors to:
o 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;
o engage in more extensive research and development;
o sell products at a lower price than we do;
o undertake more extensive marketing campaigns; and
o 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. This is the result of a number of industry trends, including the impact of offshore suppliers in the marketplace, the consolidated purchasing power of large customers and actions taken by some of our competitors in an effort to "win over" new business. Recently, we have reduced prices to remain competitive and may have to do so in the future. Price reductions have impacted our sales and profit margins and are expected to do so in the future. In addition, we have commenced facility integration efforts to further reduce costs. Our future profitability will depend in part upon the success of our integration plans, and our ability to respond to changes in the product and distribution channel mix, to continue to improve our manufacturing efficiencies, to generate cost reductions, including reductions in the cost of components purchased from outside suppliers, and to 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.
WE DEPEND ON A LIMITED NUMBER OF KEY CUSTOMERS, AND THE LOSS OF ANY SUCH CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our five largest individual customers, including members of a marketing group, accounted for 50%, 51% and 52% of our consolidated net sales for 2007, 2006 and 2005, respectively. Two individual customers accounted for 17% and 15%, respectively, of our 2007 consolidated net sales, 18% and 14%, respectively, of our 2006 consolidated net sales, and 18% and 15%, respectively, of our 2005 consolidated net sales. The loss of one or more of these customers or, if any of them significantly reduces their purchases of our products, 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, including pricing pressures. 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.
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 customer 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 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 have in the past incurred, and may in the future 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. 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 a specified percentage of their annual purchases from us. 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. In the fourth quarter of 2007, we experienced significant overstock returns as customers reduced their working capital levels in response to a difficult economic climate. To the extent that overstocked returns are materially in 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 (and related warranties) 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 of such claims.
Actuarial consultants with experience in assessing asbestos-related liabilities conducted a study to estimate our potential claim liability as of August 31, 2007. The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs, ranging from $23.8 million to $55.2 million for the period through 2050. The change from the prior year study was a $1.7 million increase for the low end of the range and a $1.3 million increase for the high end of the range. Based on the information contained in the actuarial study and all other available information considered by us, 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 2050 in our consolidated financial statements. Accordingly, an incremental $2.8 million provision in our discontinued operation was added to the asbestos accrual increasing the reserve to approximately $23.8 million. According to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operation in the accompanying consolidated statements of operations, are estimated to range from $18.7 million to $32.6 million during the same period.
At December 31, 2007, approximately 3,430 cases were outstanding for which we were responsible for any related liabilities. Since inception in September 2001 through December 31, 2007, the amounts paid for settled claims are approximately $6.1 million. A substantial increase in the number of new claims or increased settlement payments or awards of damages could have a material adverse effect on our business, financial condition and results of operations.
Given the uncertainties associated with projecting asbestos-related matters into the future 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. We plan on performing a similar annual actuarial analysis during the third quarter of each year for the foreseeable future.
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 a significant amount of indebtedness. As of December 31, 2007, our total outstanding indebtedness was $255.3 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 $275 million with General Electric Capital Corporation, as agent, and a syndicate of lenders, which we refer to throughout this Report as our revolving credit facility. As of December 31, 2007, we had $148.7 million of outstanding indebtedness and approximately $80.3 million of availability under this revolving credit facility. Our substantial indebtedness could:
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our ability to fund future working capital, capital
expenditures, research and development costs and other general
corporate requirements;
o limit our ability to pay future dividends;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
o 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
o 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 and other assets. We have also pledged shares of stock in our subsidiaries to those lenders. If we default on any of our indebtedness, or if we are unable to obtain necessary liquidity, our business could be adversely affected.
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, 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:
o reducing capital expenditures;
o reducing research and development efforts;
o selling assets;
o restructuring or refinancing our indebtedness; and
o seeking additional funding.
We cannot assure you that our business will generate sufficient cash flow from operations, 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. and foreign open markets. 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 on 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 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 testing for potential environmental remediation. Based upon the findings related to the testing, we increased our environmental reserve by $1.8 million in 2007. The testing and any environmental remediation costs at such facility are covered by an insurance policy of $3 million, which is subject to a $1.5 million deductible; we have purchased additional environmental insurance coverage in the amount of $2 million with a $0.1 million deductible relating to such facility. We also maintain insurance of $10 million to cover our existing U.S. and Canadian facilities. We can give no assurance that the future cost of compliance with existing environmental laws and the liability for known environmental claims pursuant to such environmental laws will give rise to additional significant expenditures or liabilities that would be material to us. In addition, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of federal, state or local regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES
We maintain our executive offices in Long Island City, New York. The table below describes our principal facilities as of December 31, 2007.
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
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ENGINE MANAGEMENT
Orlando FL Manufacturing (Ignition) 50,640 2017
Mishawaka IN Manufacturing 153,070 Owned
Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned
Independence KS Manufacturing 273,390 Owned
Wilson NC Manufacturing (Ignition) 31,500 Owned
Reno NV Distribution (Ignition) 67,000 Owned
Long Island City NY Administration and Manufacturing (Ignition) 202,000 Owned*
Greenville SC Manufacturing (Ignition) 181,525 Owned
Disputanta VA Distribution (Ignition) 411,000 Owned
Hong Kong HK Manufacturing (Ignition) 21,350 2008
Fajardo Puerto Rico Manufacturing (Ignition) 113,900 2008
Reynosa Mexico Manufacturing (Wire) 62,500 2009
Reynosa Mexico Manufacturing (Wire) 100,000 2014
Reynosa Mexico Manufacturing (Ignition) 110,000 2009
TEMPERATURE CONTROL
Corona CA Manufacturing and Distribution 78,200 2011
Lewisville TX Administration and Distribution 415,000 2016
Grapevine TX Manufacturing 180,000 Owned
St. Thomas Canada Manufacturing 40,000 Owned
Reynosa Mexico Remanufacturing (Compressors) 80,140 2009
EUROPE
Nottingham England Administration and Distribution (Ignition and Wire) 35,520 2022
Nottingham England Administration and Distribution (Ignition and Wire) 29,000 Owned
Nottingham England Manufacturing (Ignition) 46,780 Owned
Wellingborough England Manufacturing (Wire) 19,380 2016
Bialystok Poland Manufacturing (Ignition) 42,050 2011
OTHER
Mississauga Canada Administration and Distribution (Ignition, Wire,
Temperature Control) 128,400 2016
Irving TX Training Center 13,400 2009
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* In December 2007, we entered into an agreement to sell this facility. On March 12, 2008, we closed on the sale of the facility, and we leased back a portion of the facility.
The real property that we own in Indiana, Kansas, Nevada, North Carolina, South Carolina, Virginia and Texas and in St. Thomas, Canada is encumbered by a mortgage or deed of trust, as applicable, in favor of General Electric Capital Corporation or its affiliated company, as agent for our revolving credit facility. In addition, the real property we own in England is encumbered by a lien in favor of the Royal Bank of Scotland.
ITEM 3. LEGAL PROCEEDINGS
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, 2007, approximately 3,430 cases were outstanding for which we were responsible for any related liabilities. We expect the outstanding cases to increase gradually due to recent legislation in certain states mandating minimum medical criteria before a case can be heard. Since inception in September 2001 through December 31, 2007, the amounts paid for settled claims are approximately $6.1 million. In September 2007, we entered into an agreement with an insurance carrier to provide us with limited insurance coverage for the defense and indemnity costs associated with certain asbestos-related claims. We have submitted various asbestos-related claims to the insurance carrier for coverage under this agreement. See Note 20 of the notes to consolidated financial statements for further discussion.
In November 2004, the Company was served with a summons and complaint in the U.S. District Court for the Southern District of New York by The Coalition For A Level Playing Field, which is an organization comprised of a large number of auto parts retailers. The complaint alleges antitrust violations by the Company and a number of other auto parts manufacturers and retailers and seeks injunctive relief and unspecified monetary damages. In August 2005, we filed a motion to dismiss the complaint, following which the plaintiff filed an amended complaint dropping, among other things, all claims under the Sherman Act. The remaining claims allege violations of the Robinson-Patman Act. Motions to dismiss those claims were filed by us in February 2006. Plaintiff filed opposition to our motions, and we subsequently filed replies in June 2006. Oral arguments were originally scheduled for September 2006, however the court adjourned these proceedings until a later date to be determined. Subsequently, the judge initially assigned to the case recused himself, and a new judge has been assigned. Although we cannot predict the ultimate outcome of this case or estimate the range of any potential loss that may be incurred in the litigation, we believe that the lawsuit is without merit, deny all of the plaintiff's allegations of wrongdoing and believe we have meritorious defenses to the plaintiff's claims. We intend to defend vigorously this lawsuit.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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 our common stock as reported by the New York Stock Exchange and the dividends declared per share for the periods indicated:
HIGH LOW DIVIDEND
---- --- --------
FISCAL YEAR ENDED DECEMBER 31, 2007
First Quarter............................ $18.43 $14.48 $0.09
Second Quarter........................... 19.45 13.89 0.09
Third Quarter............................ 16.70 7.37 0.09
Fourth Quarter........................... 10.25 7.35 0.09
FISCAL YEAR ENDED DECEMBER 31, 2006
First Quarter............................ $11.10 $8.55 $0.09
Second Quarter........................... 9.11 6.75 0.09
Third Quarter............................ 12.64 7.10 0.09
Fourth Quarter........................... 15.70 9.55 0.09
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The last reported sale price of our common stock on the NYSE on February 29, 2008 was $7.41 per share. As of February 29, 2008, there were 598 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 revolving credit facility permits dividends and distributions by us provided specific conditions are met. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a further discussion of our revolving credit facility.
There have been no unregistered offerings of our common stock during the fourth quarter of 2007 nor any repurchases of our common stock during the fourth quarter of 2007. For a discussion of our stock repurchases in 2007, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and see Note 12 of the notes to our consolidated financial statements.
The following graph compares the five year cumulative total return on the Company's Common Stock to the total returns on the Standard & Poor's 500 Stock Index and the S&P 1500 Auto Parts & Equipment Index, which is a combination of automotive parts and equipment companies within the S&P 400, the S&P 500 and the S&P 600. The graph shows the change in value of a $100 investment in the Company's Common Stock and each of the above indices on December 31, 2002 and the reinvestment of all dividends. The comparisons in this table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Company's Common Stock or the referenced indices.
[GRAPHIC OMITTED]
S&P 1500
Auto Parts
& Equipment
SMP S&P 500 Index
--- ------- -----
2002............................ $100 $100 $100
2003............................ 96 129 147
2004............................ 129 143 148
2005............................ 78 150 119
2006............................ 131 173 124
2007............................ 74 183 151
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* SOURCE: STANDARD & POOR'S
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the five years ended December 31, 2007. This selected consolidated financial data should be read 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 Form 10-K.
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $ 790,185 $ 812,024 $ 830,413 $ 824,283 $ 678,783
Gross profit .............................. 202,275 205,221 185,980 194,993 174,772
Goodwill impairment charge (1) .. ......... -- -- -- (6,429) --
Operating income (loss) ................... 22,392 35,315 14,082 (1,737) 15,815
Earnings (loss) from continuing
operations .............................. 5,431 9,163 (1,770) (8,907) 224
Earnings (loss) from
discontinued operation,
net of tax .............................. (3,156) 248 (1,775) (3,909) (1,742)
Cumulative effect of accounting
change, net of tax (2) .................. -- -- -- (1,564) --
Net earnings (loss) (3) ................... 2,275 9,411 (3,545) (14,380) (1,518)
PER SHARE DATA:
Earnings (loss) from continuing operations:
Basic ................................. $ 0.29 $ 0.50 $ (0.09) $ (0.46) $ 0.01
Diluted ............................... 0.29 0.50 (0.09) (0.46) 0.01
Earnings (loss) per common share:
Basic ................................. 0.12 0.51 (0.18) (0.74) (0.10)
Diluted ............................... 0.12 0.51 (0.18) (0.74) (0.10)
Cash dividends per common
share ..................................... 0.36 0.36 0.36 0.36 0.36
OTHER DATA:
Depreciation and amortization ............. $ 15,181 $ 15,486 $ 17,356 $ 19,013 $ 17,092
Capital expenditures ...................... 13,995 10,080 9,957 9,774 8,926
Dividends ................................. 6,683 6,579 7,024 6,955 5,615
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ................. $ 13,261 $ 22,348 $ 14,046 $ 14,934 $ 19,647
Working capital ........................... 183,074 183,313 169,768 194,760 191,333
Total assets .............................. 678,092 640,092 653,044 656,569 694,525
Total debt ................................ 255,311 238,320 248,327 224,186 217,810
Long-term debt (excluding
current portion) ........................ 90,534 97,979 98,549 114,236 114,757
Stockholders' equity ...................... 188,364 190,699 185,707 207,312 226,041
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(1) In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill is tested for impairment at the reporting unit level at least annually, and whenever events or changes in circumstances indicate that goodwill might be impaired. Our annual impairment test of goodwill as of December 31, 2004, indicated that the carrying amounts of two of our reporting units exceeded the corresponding fair values. As a result, we recorded an impairment loss on goodwill of $6.4 million during the fourth quarter of 2004. The impairment loss related to our European Segment and Temperature Control Segment for which we recorded a charge of $1.6 million and $4.8 million, respectively.
(2) New customer acquisition costs refer to arrangements pursuant to which we incur change-over-costs to induce a new or existing customer to switch from a competitor's brand. In addition, change-over-costs include the costs related to removing the new customer's inventory and replacing it with Standard Motor Products inventory commonly referred to as a stocklift. New customer acquisition costs were initially recorded as a prepaid asset and the related expense was recognized ratably over a 12-month period beginning in the month following the stocklift as an offset to sales. In the fourth quarter of 2004, we determined that it was a preferable accounting method to reflect the customer acquisition costs as a reduction to revenue when incurred. We recorded a cumulative effect of a change in accounting for new customer acquisition costs totaling $1.6 million, net of tax effects, and recorded the accounting change as if it had taken effect on October 1, 2004.
(3) We recorded an after tax gain (loss) of $(3.2) million, $0.2 million and $(1.8) million as earnings (loss) from discontinued operation to account for legal expenses and potential costs associated with our asbestos-related liability for the years ended December 31, 2007, 2006 and 2005, respectively. Such costs were also separately disclosed in the Operating Activity section of the Consolidated Statements of Cash Flows for those same years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated 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, 2007.
OVERVIEW
We are a leading independent manufacturer, distributor and marketer of replacement parts for motor vehicles in the automotive aftermarket industry. We are organized into two major operating segments, each of which focuses on a specific segment of replacement parts. Our Engine Management Segment manufactures ignition and emission parts, ignition wires, battery cables and fuel system parts. Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, and other air conditioning and heating parts. We sell our products primarily in the United States, Canada and Latin America. We also sell our products in Europe through our European Segment.
As part of our efforts to grow our business, as well as to achieve increased production and distribution efficiencies, in June 2003 we acquired substantially all of the assets and assumed substantially all of the operating liabilities of Dana Corporation's Engine Management Group ("DEM") for $130.5 million.
We place 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 intend to continue to improve our operating efficiency and cost position by focusing on company-wide overhead and operating expense cost reduction programs, such as closing excess facilities and consolidating redundant functions. In that regard, during 2007 and 2006, we announced initiatives to close our Puerto Rico manufacturing facility, integrate operations in Mexico, close our Fort Worth, Texas production facility and shutdown our manufacturing operations in Long Island City, New York.
For additional information about our business, strategy and competitive environment, see Item 1, "Business."
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 and customer 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 typically 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 longer payment terms.
INVENTORY MANAGEMENT. 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 (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories. We accrue for overstock returns as a percentage of sales, after giving consideration to recent returns history.
In order to better control warranty and overstock return levels, 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. Despite the additional controls, in the fourth quarter of 2007, we experienced significant overstock returns as customers reduced their working capital levels in response to a difficult economic climate. In addition, with respect to our air conditioning compressors, which are our most significant customer product warranty returns, we established procedures whereby a warranty will be voided if a customer does not provide acceptable proof that complete air conditioning system repair was performed.
DISCOUNTS, ALLOWANCES AND INCENTIVES. In connection with our sales activities, we offer a variety of usual customer discounts, allowances and incentives. First, we offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice. Second, we offer pricing discounts based on volume and different product lines purchased from us. These discounts are principally in the form of "off-invoice" discounts and are immediately deducted from sales at the time of sale. For those customers that choose to receive a payment on a quarterly basis instead of "off-invoice," we accrue for such payments as the related sales are made and reduce sales accordingly. Finally, rebates and discounts are provided to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided. 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. We account for these discounts and allowances as a reduction to revenues, and record them when sales are recorded.
COMPARISON OF FISCAL YEARS 2007 AND 2006
SALES. Consolidated net sales for 2007 were $790.2 million, a decrease of $21.8 million or 2.7%, compared to $812 million in 2006, driven by decreases in our Engine Management, Temperature Control and European Segments of $16 million, $3.5 million and $4.8 million, respectively. The decrease in Engine Management sales was mainly due to higher sales deductions consisting primarily of customer warranty and overstock returns and other rebates and allowances. The net sales decrease in our Temperature Control Segment was due primarily to lower pricing and volume erosion caused by low cost foreign imports, partially offset by lower customer warranty returns. Europe net sales in 2006 included $13.4 million related to the European Temperature Control business that was divested in December 2006. Excluding this divested business, Europe sales increased $8.6 million.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales, increased by 0.3 percentage points to 25.6% in 2007 from 25.3% in 2006 mainly due to margin improvements in our Engine Management and European Segments of 1 percentage point and 0.5 percentage points, respectively, partially offset by a 2 percentage point decrease in our Temperature Control margin. The margins in Engine Management and Europe benefited mainly from continued improvements in procurement and lower manufacturing costs. Partially offsetting these savings in Engine Management were the impact of $15.9 million of higher sales deductions for the year that negatively impacted gross margin as a percentage of sales. The European Segment also benefited from the divestiture of its Temperature Control business which carried lower margins. The decrease in Temperature Control margin was primarily affected by selective price decreases to match offshore price competition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative (SG&A) expenses increased by $0.9 million to $169 million or 21.4% of consolidated net sales in 2007, as compared to $168.1 million or 20.7% of consolidated net sales in 2006. The increase was due to a higher bad debt provision on certain accounts receivable and slightly higher general and administrative expenses, partially offset by a reduction in distribution expenses.
RESTRUCTURING AND INTEGRATION EXPENSES. Restructuring expenses, which include restructuring and integration expenses, increased to $10.9 million in 2007, compared to $1.9 million in 2006. The 2007 expense related to charges made for the closure of our Puerto Rico production operations, the integration of operations in Mexico, the closure of our Fort Worth, Texas production facility and severance and related costs in connection with the shutdown of our Long Island City manufacturing operations. In December 2007, we reached an agreement with the union representing the hourly employees at our Long Island City manufacturing facility relating to the shutdown of our manufacturing operations. As part of the agreement, we agreed to the payment of certain severance payments upon termination of employment and to the withdrawal from the union's multi-employer pension plan. The estimated withdrawal liability related to the multi-employer plan is calculated at $5.6 million paid quarterly over 20 years. The present value of the liability is estimated at $3.3 million and was recorded as part of restructuring and integration expenses in 2007. In addition, a $1.8 million increase in our environmental reserve was recorded in 2007 for remediation related to the planned sale of our Long Island City building.
Restructuring and integration expense in 2006 related mostly to severance costs related to the move of our European and Puerto Rican production operations and the divestiture of a production unit of our Temperature Control Segment.
OPERATING INCOME. Operating income was $22.4 million in 2007, compared to $35.3 million in 2006. The decrease of $12.9 million was primarily due to lower consolidated net sales, as well as higher restructuring and integration expenses.
OTHER INCOME (EXPENSE), NET. Other income, net was $3.9 million in 2007, which was $4.3 million higher than other expense, net of $0.4 million in 2006. Other income, net in 2007 includes a $0.8 million gain on the sale of our Fort Worth, Texas manufacturing facility, a $1.4 million gain in foreign exchange, and $0.7 million in dividend and interest income. Other income (expense), net in 2006 included a $3.2 million loss incurred on the sale of a majority portion of our European Temperature Control business. Offsetting the 2006 loss incurred on the sale of a majority portion of our European Temperature Control business are a $0.7 million gain in foreign exchange, $0.9 million in joint venture equity income and $0.5 million in dividend and interest income.
INTEREST EXPENSE. Interest expense of $18 million in 2007 was $1.3 million lower than interest expense of $19.3 million in 2006. The lower interest expense in 2007 was due primarily to lower borrowing costs and lower average borrowings during the year.
INCOME TAX PROVISION. The income tax provision was $2.8 million for 2007 compared to $6.5 million in 2006. The $3.7 million decrease was primarily due to a lower effective rate in 2007, which was 34% compared to 41.5% in 2006. The 2007 rate was lower due to the release of the valuation allowance related to U.S. capital losses in consideration of the expected capital gain in connection with our sale of our Long Island City, New York facility. The 2006 rate was higher due to the adverse impact of discrete items attributable to changes in state tax rates, while the 2007 estimated tax rate benefited from pre-tax income in Europe where previously unrecognized losses carried forward offset taxes otherwise payable. Net deferred tax assets as of December 31, 2007 were $42.8 million and are net of a valuation allowance of $26.8 million and deferred tax liabilities of $14.9 million. We have concluded that our current level of valuation allowance of $26.8 million continues to be appropriate, as discussed in Note 17 of the notes to our consolidated financial statements.
EARNINGS (LOSS) FROM DISCONTINUED OPERATION. Earnings (loss) from discontinued operation, net of tax, reflects legal expenses associated with our asbestos related liability and adjustments thereto based on the information contained in the August 2007 actuarial study and all other available information considered by us. We recorded $3.2 million as a loss and $0.2 million as income, both net of tax, from discontinued operation for 2007 and 2006, respectively. The loss for 2007 reflects a $2.8 million pre-tax adjustment to increase our indemnity liability in line with the August 2007 actuarial study, as well as legal fees incurred in litigation, whereas the income for 2006 reflects a $3.4 million pre-tax adjustment to reduce our indemnity liability in line with the August 2006 actuarial study, partially offset by legal fees incurred in litigation in 2006. As discussed more fully in Note 20 of the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
COMPARISON OF FISCAL YEARS 2006 AND 2005
SALES. Consolidated net sales for 2006 were $812 million, a decrease of $18.4 million or 2%, compared to $830.4 million in 2005. The net sales decrease was primarily due to our Temperature Control net sales decreasing by $18.1 million or 8% due to reduced demand resulting from a cooler summer than the prior year and competition from low cost foreign imports. Engine Management net sales also decreased by $3.8 million or 0.7% mainly due to higher than average customer returns. Partially offsetting the decrease, net sales in Europe increased $3.6 million.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales, increased by 2.9 percentage points to 25.3% in 2006 from 22.4% in 2005 mainly driven by Engine Management margin improvements of 4.5 percentage points. The margin increase in our Engine Management Segment reflected a combination of price increases and improved procurement and manufacturing costs. Temperature Control and Europe margin percentages remained stable due to improved production and procurement costs offsetting the effect of inflation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased $1.5 million to $168.1 million or 20.7%
of consolidated net sales in 2006, compared to $166.6 million or 20.1% of
consolidated net sales in 2005. The increase in SG&A expenses was driven mainly
by increases in marketing and general and administrative expenses, partially
offset by a reduction of $3.4 million in draft expenses as we terminated our
accounts receivable draft program in the fourth quarter of 2005 and a reduction
in distribution costs as a result of lower sales. The increase in marketing
expenses is due to an increase in promotion spending and temporary overlapping
costs as we transitioned from an outsourced to an internal returns processing
center. The increase in general administrative expenses was mainly due to our
ongoing efforts to fully integrate our operations into a common enterprise
resource planning system.
RESTRUCTURING AND INTEGRATION EXPENSES. Restructuring expenses, which include restructuring and integration expenses, decreased to $1.9 million for 2006, compared to $5.3 million in 2005. The 2006 expenses related mostly to severance costs related to the move of our European and Puerto Rican production operations and the divestiture of a production unit of our Temperature Control Segment. Expenses in 2005 were primarily for a non-cash asset impairment charge of $3.3 million in our Temperature Control business related to a strategic decision to outsource products previously manufactured, while the remainder was mostly related to the DEM restructuring, which has since been substantially completed.
OPERATING INCOME (EXPENSE), NET. Operating income increased by $21.2 million to $35.3 million in 2006, compared to $14.1 million in 2005. The increase was primarily due to higher gross profit from Engine Management's 4.5 point improvement in gross profit percentage, lower integration expenses and the elimination of the accounts receivable draft program fees, partially offset by higher SG&A expenses.
OTHER INCOME, NET. Other income, net decreased $3 million in 2006 compared to 2005, due to a $3.2 million loss incurred on the sale of a majority portion of our European Temperature Control business, partially offset by higher foreign exchange gains. A benefit in 2005 was from a discount of $1.3 million on a debt reduction not repeated in 2006.
INTEREST EXPENSE. Interest expense increased by $2.2 million for 2006 compared to 2005 due to higher average borrowings and higher borrowing costs. The increase in average borrowings is due to the termination of our accounts receivable draft program in the fourth quarter of 2005, as well as the funding of the repurchase of our common stock held by Dana for $11.9 million at that time.
INCOME TAX PROVISION. The income tax provision was $6.5 million for 2006 compared to $1.4 million for 2005. The increase was primarily due to higher pre-tax earnings and a higher effective rate for 2006 which was 41.5%. We had an increase in our on-going tax rate primarily due to the January 1, 2006 expiration of Section 936 of the Internal Revenue Code with regard to our Puerto Rico operations which are taxed at the U.S. statutory rate starting in 2006. This increase was offset in 2006 by the one-time impact of our Puerto Rico deferred tax assets becoming recoverable at the higher US tax rate. Our taxes were also higher as a result of recording a valuation allowance for the capital loss on disposition of our European Temperature Control business which is not expected to be recoverable in the future. Net deferred tax assets as of December 31, 2006 were $38.4 million and are net of a valuation allowance of $28 million and deferred tax liabilities of $15.7 million. The tax expense of $1.4 million in 2005 on losses of $0.3 million was mostly due to the recording of discrete items, namely with regards to a reduced statutory rate applicable to opening deferred tax assets and a larger increase to the tax valuation allowance.
EARNINGS (LOSS) FROM DISCONTINUED OPERATION. Earnings (loss) from discontinued operation, net of tax, reflects legal expenses associated with our asbestos related liability and adjustments thereto based on the information contained in the actuarial study and all other available information considered by us. We recorded $0.2 million as income and $1.8 million as a loss, both net of tax, from discontinued operation for 2006 and 2005, respectively. The income for 2006 includes a $3.4 million pre-tax adjustment to reduce our indemnity liability in line with our most recent actuarial valuation report, partially offset by legal fees incurred in litigation, whereas the loss for 2005 reflects only legal expenses. As discussed more fully in Note 20 of the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During 2007, cash used by operations amounted to $7.8 million, compared to cash provided by operations of $33.7 million in 2006. The $41.5 million decrease in operating cash flow is primarily due to an increase in inventories in order to bridge our requirements while we proceed with our facility integration efforts, an increase in accounts receivable reflecting an expansion in days sales outstanding from 119 to 127, and lower net earnings.
During 2006, cash provided by operations amounted to $33.7 million, compared to cash used by operations of $2.2 million in 2005. The year over year improvement of $35.9 million is primarily attributable to a lower increase in accounts receivable of $13.8 million and increased net earnings. The greater increase in accounts receivable in 2005 was due to the end of the accounts receivable draft program in 2005 compared to 2004 when our major accounts were under the draft program. The lower increase in accounts receivable in 2006 reflects a stabilized situation with no draft program in place. Partially offsetting these improvements was a slight increase in inventory compared to a decrease of $10 million in 2005, driven by our need to provide a bridge of inventory as we undergo a rationalization of our production facilities.
INVESTING ACTIVITIES. Cash used in investing activities was $13.4 million in 2007, compared to $6 million in 2006. The increase of $7.4 million was primarily due to an increase in capital expenditures of $3.9 million in 2007 and the acquisition in December 2007 of a European wire and cable business for $3.8 million, offset in part by proceeds of $4.2 million from the sale of our Fort Worth, Texas manufacturing facility. During 2006, we received $3.1 million in proceeds from the sale of a majority portion of our European Temperature Control business.
Cash used in investing activities was $6 million in 2006, compared to $7.8 million in 2005. The decrease of $1.8 million was primarily due to proceeds from the sale of a majority portion of our European Temperature Control business in 2006.
FINANCING ACTIVITIES. Cash provided by financing activities was $9.3 million in 2007, compared to cash used in financing activities of $20.2 million in 2006. The increase is primarily due to higher borrowings, an increase in cash overdrafts, and proceeds received from the exercise of employee stock options, partially offset by a $5 million purchase of treasury stock, essentially completing our share buyback program.
Cash used in financing activities was $20.2 million in 2006, compared to cash provided by financing activities of $9.7 million in 2005. The change is primarily due to repayments made on our line of credit in 2006 due to an improvement in cash provided by operating activities and a decrease in our bank overdraft balances. The 2005 increase to our line of credit was driven by the settlement of the note held by Dana and the repurchase of the common stock held by Dana, which note and common stock were originally issued to Dana in connection with our acquisition of Dana's engine management business.
In March 2007, we entered into a Second Amended and Restated Credit Agreement with General Electric Capital Corporation, as agent, and a syndicate of lenders for a secured revolving credit facility. This restated credit agreement replaces our prior credit facility with General Electric Capital Corporation, which prior credit facility provided for a $305 million credit facility and which was to expire in 2008. The restated credit agreement provides for a line of credit of up to $275 million (inclusive of the Canadian term loan described below) and expires in 2012. The restated credit agreement also provides a $50 million accordion feature, which would allow us to expand the facility. Direct borrowings under the restated credit agreement bear interest at the LIBOR rate plus the applicable margin (as defined), or floating at the index rate plus the applicable margin, at our option. The interest rate may vary depending upon our borrowing availability. The restated credit agreement is guaranteed by our same subsidiaries and secured by our same assets as the prior $305 million credit facility.
Borrowings under the restated credit agreement are collateralized by substantially all of our assets, including accounts receivable, inventory and fixed assets, and those of certain of our subsidiaries. After taking into account outstanding borrowings under the restated credit agreement, there was an additional $80.3 million available for us to borrow pursuant to the formula at December 31, 2007. At December 31, 2007, the interest rate on our restated credit agreement was 6.4%, and at December 31, 2006, the interest rate on our prior credit agreement was 7.8%. Outstanding borrowings under the restated credit agreement (inclusive of the Canadian term loan described below), which are classified as current liabilities, were $148.7 million and $133.3 million at December 31, 2007 and December 31, 2006, respectively.
At any time our borrowing availability in the aggregate is less than $30 million and until such time that we have maintained an average borrowing availability in the aggregate of $30 million or greater for a continuous period of 90 days, the terms of our restated credit agreement provide for, among other provisions, financial covenants requiring us, on a consolidated basis, (1) to maintain specified levels of fixed charge coverage at the end of each fiscal quarter (rolling twelve months), and (2) to limit capital expenditure levels. As of December 31, 2007, we were not subject to these covenants. Availability under our restated credit agreement is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. In addition, the restated credit agreement provides that, beginning on January 15, 2008 and on a quarterly basis thereafter, $15 million of our borrowing availability shall be reserved for the repayment, repurchase or redemption, as the case may be, of the aggregate outstanding amount of our convertible debentures. Our restated credit agreement also permits dividends and distributions by us provided specific conditions are met.
Our profitability and working capital requirements are seasonal due to the sales mix of 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 begin to be received. These increased working capital requirements are funded by borrowings from our lines of credit. We anticipate that our present sources of funds will continue to be adequate to meet our near term needs.
In March 2007, we amended our credit agreement with GE Canada Finance Holding Company, for itself and as agent for the lenders. This credit agreement amends our existing $7 million credit agreement which was to expire in 2008. The amended credit agreement provides for a line of credit of up to $12 million, of which $7 million is currently outstanding and which amount is part of the $275 million available for borrowing under our restated credit agreement with General Electric Capital Corporation (described above). The amended credit agreement is guaranteed and secured by us and certain of our wholly-owned subsidiaries and expires in 2012. Direct borrowings under the amended credit agreement bear interest at the same rate as our restated credit agreement with General Electric Capital Corporation (described above).
Our European subsidiary has revolving credit facilities which, at December 31, 2007, provide for a line of credit up to $8.8 million. The amount of short-term bank borrowings outstanding under these facilities was $8 million on December 31, 2007 and $6.5 million on December 31, 2006. The weighted average interest rate on these borrowings on December 31, 2007 and December 31, 2006 was 6.7% and 6.3 %, respectively.
In June 2003, we borrowed $10 million under a mortgage loan agreement. The loan was payable in equal monthly installments. The loan had interest at a fixed rate of 5.50% maturing in July 2018. The mortgage loan was secured by our Long Island City property. On March 12, 2008, in connection with the closing of the sale of our Long Island City property the mortgage loan was defeased. For further information on the sale of the building and the defeasance of the mortgage loan, see Notes 4, 10 and 22 of the notes to our consolidated financial statements.
In October 2003, we entered into an interest rate swap agreement with a notional amount of $25 million that matured in October 2006. Under this agreement, we received a floating rate based on the LIBOR interest rate, and paid a fixed rate of 2.45% on the notional amount of $25 million. We have not entered into a new swap agreement to replace this agreement.
In July 1999, we issued convertible debentures, payable semi-annually, in the aggregate principal amount of $90 million. The debentures carry an interest rate of 6.75%, payable semi-annually. The debentures are convertible into 2,796,120 shares of our common stock, and mature on July 15, 2009.
In August 2007, our Board of Directors authorized a $3.3 million increase in our stock repurchase program. The program is in addition to our existing program authorizing $1.7 million of stock repurchases. During 2007, we repurchased 541,750 shares of our common stock, essentially completing the entire $5 million repurchase program. No shares of our common stock were repurchased in the comparable 2006 period.
The following is a summary of our contractual commitments as of December 31, 2007:
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(IN THOUSANDS) 2008 2009 2010 2011 2012 2013-2022 TOTAL
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Principal payments of
long term debt .......... $ 8,021 $ 90,149 $ 126 $ 119 $ 119 $ 21 $ 98,555
Operating leases ............ 8,464 7,772 5,507 4,511 3,921 14,861 45,036
Post retirement benefits .... 5,764 1,021 1,059 1,076 1,110 11,253 21,283
Severance payments related
to restructuring and
integration ................ 2,219 739 311 311 280 1,975 5,835
-------- -------- -------- -------- -------- -------- --------
Total commitments.. $ 24,468 $ 99,681 $ 7,003 $ 6,017 $ 5,430 $ 28,110 $170,709
======== ======== ======== ======== ======== ======== ========
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CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the notes to our consolidated financial statements. You should be aware that 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 consolidated 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 Segments. We recognize revenues when products are shipped and title has been transferred to a customer, the sales price is fixed and determinable, and collection is reasonably assured. For some of our sales of remanufactured products, we also charge our customers a deposit for the return of a used core component which we can use in our future remanufacturing activities. Such deposit is not recognized as revenue but rather carried as a core liability. The liability is extinguished when a core is actually returned to us. We estimate and record provisions for cash discounts, quantity rebates, sales returns and warranties in the period the sale is recorded, based upon our prior experience and current trends. As described below, significant management judgments and estimates must be made and used in estimating sales returns and allowances relating to revenue recognized in any accounting period.
INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out basis. Where appropriate, standard cost systems are utilized for purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of lower of cost or market value of inventory are determined at the reporting unit level and are based upon the inventory at that location taken as a whole. These estimates are based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.
We also evaluate inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of current and future projected market demand. For inventory deemed to be obsolete, we provide a reserve on the full value of the inventory. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates our estimate of future demand.
We utilize cores (used parts) in our remanufacturing processes for air conditioning compressors. The production of air conditioning compressors involves the rebuilding of used cores, which we acquire generally either in outright purchases or from returns pursuant to an exchange program with customers. Under such exchange programs, we reduce our inventory, through a charge to cost of sales, when we sell a finished good compressor, and put back to inventory at standard cost through a credit to cost of sales the used core exchanged at the time it is eventually received from the customer.
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. 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. At December 31, 2007, the allowance for sales returns was $23.1 million. Similarly, 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. At December 31, 2007, the allowance for doubtful accounts and for discounts was $9 million.
NEW CUSTOMER ACQUISITION COSTS. New customer acquisition costs refer to arrangements pursuant to which we incur change-over costs to induce a new customer to switch from a competitor's brand. In addition, change-over costs include the costs related to removing the new customer's inventory and replacing it with Standard Motor Products inventory commonly referred to as a stocklift. New customer acquisition costs are recorded as a reduction to revenue when incurred.
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 estimating our actual current tax expense 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 it is more likely than not that the deferred tax assets will not be recovered, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we must include an expense or recovery, respectively, within the tax provision in the statement of operations.
Significant management judgment is required in determining the adequacy of our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At December 31, 2007, we had a valuation allowance of $26.8 million, due to uncertainties related to our ability to utilize some of our deferred tax assets. The assessment of the adequacy of our 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 for current trends or expected changes in our estimating assumptions, we may need to modify the level of valuation allowance which could materially impact our business, financial condition and results of operations.
In accordance with the provisions of SFAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.109" ("FIN 48"), we recognize in our financial statements only those tax positions that meet the more-likely-than-not-recognition threshold. We establish tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in our consolidated statement 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. With respect to goodwill, we test for impairment at least annually in the fourth quarter of each year as part of our annual budgeting process. Factors we consider important, which could trigger an impairment review, include the following: (a) significant underperformance relative to expected historical or projected future operating results; (b) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (c) significant negative industry or economic trends. We review the fair values of each of our reporting units using the discounted cash flows method and market multiples.
In the event our planning assumptions were modified resulting in impairment to our assets, we would be required to include an expense in our statement of operations, which could materially impact our business, financial condition and results of operations.
RETIREMENT AND POST-RETIREMENT MEDICAL BENEFITS. Each year, we calculate the costs of providing retiree benefits under the provisions of SFAS 87, "Employers' Accounting for Pensions" and SFAS 106, "Employers' Accounting for Post-Retirement Benefits Other than Pensions". The key assumptions used in making these calculations are the eligibility criteria of participants, the discount rate used to value the future obligation, expected return on plan assets and health care cost trend rates. We select discount rates commensurate with current market interest rates on high-quality, fixed-rate debt securities. The expected return on assets is based on our current review of the long-term returns on assets held by the plans, which is influenced by historical averages. The medical cost trend rate is based on our actual medical claims and future projections of medical cost trends. Under SFAS Staff Position No.106-2 ("FSP 106-2"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," we have concluded that our post-retirement plan is actuarially equivalent to the Medicare Part D benefit and accordingly we recognize subsidies from the federal government in the measurement of the accumulated post-retirement benefit obligation pursuant to the requirements of SFAS 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions." In September 2005, in accordance with SFAS No. 106, "Employers' Accounting For Post-Retirement Benefits Other Than Pensions", we recognized a curtailment gain of $3.8 million for our post-retirement plan related to changes made to our plan, namely reducing the number of participants eligible for our plan by making all active participants hired after 1995 no longer eligible.
ENVIRONMENTAL RESERVES. We are subject to various U.S. federal and state and local environmental laws and regulations and are involved in certain environmental remediation efforts. We estimate and accrue our liabilities resulting from such matters based upon a variety of factors including the assessments of environmental engineers and consultants who provide estimates of potential liabilities and remediation costs. Such estimates may or may not include potential recoveries from insurers or other third parties and are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.
ASBESTOS RESERVE. We are responsible for certain future liabilities relating to alleged exposure to asbestos-containing products. In accordance with our accounting policy, our most recent actuarial study as of August 31, 2007 estimated an undiscounted liability for settlement payments, excluding legal costs, ranging from $23.8 million to $55.2 million for the period through 2050. As a result, in 2007 an incremental $2.8 million provision in our discontinued operation was added to the asbestos accrual increasing the reserve to approximately $23.8 million as of that date. Based on the information contained in the actuarial study and all other available information considered by us, 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 2050 in our consolidated financial statements. In addition, according to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operation, are estimated to range from $18.7 million to $32.6 million during the same period. We plan to perform an annual actuarial analysis during the third quarter of each year for the foreseeable future. Based on this analysis and all other available information, we will continue to reassess the recorded liability and, if deemed necessary, record an adjustment to the reserve, which will be reflected as a loss or gain from discontinued operation.
OTHER LOSS RESERVES. We have other loss exposures, such as environmental claims, product liability 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 PRONOUNCEMENTS
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued SFAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. FIN 48 also provides guidance on accounting for derecognition, interest and penalties, and classification and disclosure of matters related to uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006 and, as a result, was effective for us beginning January 1, 2007.
On January 1, 2007, we adopted the provisions of FIN 48. The cumulative effect of adoption was a $1.9 million reduction of retained earnings. At January 1, 2007, the total amount of unrecognized tax benefits was $2.3 million, all of which would impact the effective tax rate, if recognized.
We continue the practice of recognizing interest and penalties associated with income tax matters as components of the "provision for income taxes." Our accrual for interest and penalties was $0.4 million upon adoption of FIN 48 and at December 31, 2007.
We are subject to taxation in the US and various state, local and foreign jurisdictions. We remain subject to examination by US Federal, state, local and foreign tax authorities for tax year 2001 as well as 2003 through 2006. With a few exceptions, we are no longer subject to US Federal, state, local or foreign examinations by tax authorities for the tax year 2002 and for tax years prior to 2001. We do not presently anticipate that our unrecognized tax benefits will significantly increase or decrease prior to December 31, 2008; however, actual developments in this area could differ from those currently expected.
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. This statement applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for the fiscal year beginning after November 15, 2007, which for us is the year ending December 31, 2008. In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157's effective date for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008. Derivatives measured at fair value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing the impact, if any, which the adoption of SFAS 157 will have on our consolidated financial position, results of operations and cash flows.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS158"). SFAS 158 requires an employer to recognize the funded status of their defined benefit pension or postretirement plans on the consolidated balance sheet and to recognize changes in that funded status in the year in which the changes occur through accumulated other comprehensive income in stockholders' equity. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. We adopted the recognition and related disclosure provisions of SFAS No. 158, prospectively, on December 31, 2006. The adoption of SFAS 158 resulted in an increase to total assets of $1.2 million, an increase to total liabilities of $2.6 million, and a decrease to stockholders' equity of $1.4 million. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008, which for us is the year ending December 31, 2009. As all of our measurement dates are as of December 31, our fiscal year-end reporting date, there will be no impact on us as related to the measurement date provisions of SFAS 158.
The incremental effect of applying SFAS No. 158 on individual line items in the consolidated balance sheet at December 31, 2006 was as follows (in thousands):
BEFORE AFTER
APPLICATION OF APPLICATION OF
SFAS NO. 158 ADJUSTMENTS SFAS NO. 158
------------ ----------- ------------
Prepaid expenses and other current
assets (current) ........................... $ 7,861 $ (16) $ 7,845
Other assets (pension, deferred
income taxes - non-current) ................ 40,658 1,216 41,874
-------- --------
Total assets ................................. 638,892 1,200 640,092
--------
Sundry payables and accrued expenses
(pension, current) ......................... 26,313 (1,100) 25,213
Pension and post-retirement medical
benefits (non-current) ..................... 48,347 3,714 52,061
--------
Total liabilities ............................ 446,779 2,614 449,393
Accumulated other comprehensive income (loss) 4,955 (1,414) 3,541
--------
Total liabilities and stockholders' equity ... $638,892 $ 1,200 $640,092
========
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FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), including an amendment of FASB Statement No. 115. SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value. The Statement's objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The new Statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity's election on its earnings, but does not eliminate disclosure requirements of other accounting standards. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, and is effective for us as of January 1, 2008. We do not anticipate any financial statement impact upon adoption of SFAS 159.
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for the fiscal year beginning after December 15, 2008, which for us is the fiscal year beginning January 1, 2009. We are assessing the impact, if any, which the adoption of SFAS 141R will have on our consolidated financial position, results of operations and cash flows.
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, which for us is the fiscal year beginning January 1, 2009. We are assessing the impact, if any, which the adoption of SFAS 160 will have on our consolidated financial position, results of operations and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, the British pound, the Euro, and the Hong Kong dollar. As of December 31, 2007, our monetary assets and liabilities 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 the exchange rates affecting the foreign currencies in which monetary assets and liabilities 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 in the past entered into interest rate swap agreements.
In October 2003, we entered into an interest rate swap agreement with a notional amount of $25 million that matured in October 2006. If, at any time, the swap was determined to be ineffective, in whole or in part, due to changes in the interest rate swap agreement, the fair value of the portion of the interest rate swap determined to be ineffective would have been recognized as gain or loss in the statement of operations for the applicable period. The hedge was effective throughout the time of the swap.
At December 31, 2007, we had approximately $255.3 million in loans and financing outstanding, of which approximately $97.9 million bear interest at fixed interest rates and approximately $157.4 million bear interest at variable rates of interest. We invest our excess cash in highly liquid short-term investments. Our percentage of variable rate debt to total debt was 61.7% and 58.7% at December 31, 2007 and 2006, respectively. Depending upon the level of borrowings under our revolving credit facility and our excess cash, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have approximately $1.7 million negative impact on our earnings or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
Management's Report on Internal Control over Financial Reporting..............41
Report of Independent Registered Public Accounting Firm--Internal
Control Over Financial Reporting.........................................42
Report of Independent Registered Public Accounting Firm--
Consolidated Financial Statements........................................43
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005.........................................44
Consolidated Balance Sheets as of December 31, 2007 and 2006..................45
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005 ........................................46
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2007, 2006 and 2005.....................47
Notes to Consolidated Financial Statements....................................48
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MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Stockholders
Standard Motor Products, Inc.:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment using those criteria, we concluded that, as of December 31, 2007, our internal control over financial reporting is effective.
Our independent registered public accounting firm, Grant Thornton LLP, has audited our consolidated financial statements for 2007 and has issued an attestation report concurring with management's assessment of our internal control over financial reporting. Grant Thornton's report appears on the following pages of this "Item 8. Financial Statements and Supplementary Data."
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
INTERNAL CONTROL OVER REPORTING
Board of Directors and Stockholders
Standard Motor Products, Inc.
We have audited Standard Motor Products, Inc. and Subsidiaries' (a New York corporation) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Standard Motor Products, Inc. and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Standard Motor Products, Inc. and Subsidiaries' internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Standard Motor Products, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control--Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Standard Motor Products, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in comprehensive income and stockholders' equity and cash flows for each of the three years in the period ended December 31, 2007, and our report dated March 13, 2008 expressed an unqualified opinion on those consolidated financial statements and includes explanatory paragraphs relating to the application of FASB Interpretation No. 48 effective January 1, 2007, and the application of Statement of Financial Accounting Standards No. 123 (R) as of January 1, 2006 and No. 158 as of December 31, 2006.
/s/ GRANT THORNTON LLP New York, New York March 13, 2008 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Stockholders
Standard Motor Products, Inc.
We have audited the accompanying consolidated balance sheets of Standard Motor Products, Inc. and Subsidiaries (a New York corporation) as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 13 to the consolidated financial statements, the Company changed its method of accounting for share-based compensation effective January 1, 2006 in connection with the adoption of Statement of Financial Statement Standards No. 123 (revised 2004), "Share-Based Payment."
As discussed in Notes 14 and 15 to the consolidated financial statements, the Company changed its method of accounting for defined benefit pension and other postretirement plans, effective as of December 31, 2006, in connection with the adoption of Statement of Financial Statement Standards No. 158, "Employers' Accounting for Defined Pension and Other Post Retirement Plans."
As discussed in Note 17 to the consolidated financial statements, the Company adopted the provisions of FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109" effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Standard Motor Products, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 13, 2008 expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP New York, New York March 13, 2008 |
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
2007 2006 2005
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
Net sales ........................................ $ 790,185 $ 812,024 $ 830,413
Cost of sales .................................... 587,910 606,803 644,433
------------ ------------ ------------
Gross profit .................................. 202,275 205,221 185,980
Selling, general and administrative expenses ..... 168,950 168,050 166,556
Restructuring and integration expenses ........... 10,933 1,856 5,342
------------ ------------ ------------
Operating income .............................. 22,392 35,315 14,082
Other income (expense), net ...................... 3,881 (383) 2,648
Interest expense ................................. 18,044 19,275 17,077
------------ ------------ ------------
Earnings (loss) from continuing operations
before taxes ............................... 8,229 15,657 (347)
Provision for income taxes ....................... 2,798 6,494 1,423
------------ ------------ ------------
Earnings (loss) from continuing operations ....... 5,431 9,163 (1,770)
Earnings (loss) from discontinued operation,
net of income tax of $2,101, $809 and $1,118 (3,156) 248 (1,775)
------------ ------------ ------------
Net earnings (loss) ........................... $ 2,275 $ 9,411 $ (3,545)
============ ============ ============
Net earnings (loss) per common share - Basic:
Earnings (loss) from continuing operations .. $ 0.29 $ 0.50 $ (0.09)
Discontinued operation ...................... (0.17) 0.01 (0.09)
------------ ------------ ------------
Net earnings (loss) per common share - Basic ..... $ 0.12 $ 0.51 $ (0.18)
============ ============ ============
Net earnings (loss) per common share - Diluted:
Earnings (loss) from continuing operations .. $ 0.29 $ 0.50 $ (0.09)
Discontinued operation ...................... (0.17) 0.01 (0.09)
------------ ------------ ------------
Net earnings (loss) per common share - Diluted ... $ 0.12 $ 0.51 $ (0.18)
============ ============ ============
Average number of common shares .................. 18,530,548 18,283,707 19,507,818
============ ============ ============
Average number of common shares and
dilutive common shares ......................... 18,586,532 18,325,175 19,507,818
============ ============ ============
See accompanying notes to consolidated financial statements.
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2007 2006
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 13,261 $ 22,348
Accounts receivable, less allowances for
discounts and doubtful accounts
of $8,964 and $9,465 in 2007 and 2006,
respectively .......................................... 204,445 183,664
Inventories ............................................. 252,277 233,970
Deferred income taxes ................................... 17,003 14,011
Assets held for sale .................................... 5,373 --
Prepaid expenses and other current assets ............... 10,748 7,845
--------- ---------
Total current assets ........................... 503,107 461,838
Property, plant and equipment, net ........................... 71,775 80,091
Goodwill, net ................................................ 41,566 38,488
Other intangibles, net ....................................... 16,325 17,801
Other assets ................................................. 45,319 41,874
--------- ---------
Total assets ................................... $ 678,092 $ 640,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ........................................... $ 156,756 $ 139,799
Current portion of long-term debt ....................... 8,021 542
Accounts payable ........................................ 64,384 53,783
Sundry payables and accrued expenses .................... 29,242 25,213
Accrued customer returns ................................ 23,149 21,705
Accrued rebates ......................................... 21,494 20,769
Payroll and commissions ................................. 16,987 16,714
--------- ---------
Total current liabilities .................. 320,033 278,525
Long-term debt ............................................... 90,534 97,979
Post-retirement medical benefits and other
accrued liabilities ...................................... 56,510 52,061
Accrued asbestos liabilities ................................. 22,651 20,828
--------- ---------
Total liabilities .......................... 489,728 449,393
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common Stock - par value $2.00 per share:
Authorized 30,000,000 shares,
issued 20,486,036 shares ............................ 40,972 40,972
Capital in excess of par value .......................... 59,220 57,429
Retained earnings ....................................... 106,147 112,481
Accumulated other comprehensive income .................. 5,546 3,541
Treasury stock - at cost (2,189,079 and 2,109,816
shares in 2007 and 2006, respectively) .............. (23,521) (23,724)
--------- ---------
Total stockholders' equity ................. 188,364 190,699
--------- ---------
Total liabilities and stockholders' equity . $ 678,092 $ 640,092
========= =========
See accompanying notes to consolidated financial statements.
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) .................................................. $ 2,275 $ 9,411 $ (3,545)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization ................................... 15,181 15,486 17,356
Increase to allowance for doubtful accounts ..................... 709 405 655
Increase to inventory reserves .................................. 6,623 6,128 5,286
(Gain) loss on disposal of property, plant and equipment ........ (794) 71 2,940
Loss on impairment of assets .................................... 317 -- --
Loss on divestiture of European Temperature Control division .... -- 3,209 --
Gain on retirement of debt ...................................... -- -- (1,258)
Equity income from joint ventures ............................... (116) (915) (955)
Employee stock ownership plan allocation ........................ 1,867 1,190 1,341
Stock-based compensation ........................................ 485 848 --
Decrease (increase) in deferred income taxes .................... (3,200) 328 (4,760)
Increase (decrease) in tax valuation allowance .................. (1,167) 1,875 3,074
Loss (earnings) on discontinued operations, net of tax .......... 3,156 (248) 1,775
Change in assets and liabilities:
(Increase) in accounts receivable ............................... (19,866) (11,758) (25,597)
(Increase) in inventories ....................................... (24,150) (701) 10,058
(Increase) in prepaid expenses and other current assets ......... (2,887) (43) (491)
(Increase) decrease in other assets ............................. (1,952) 313 1,237
Increase in accounts payable .................................... 9,861 7,693 2,760
Increase (decrease) in sundry payables and accrued expenses ..... 5,908 2,173 (6,697)
(Decrease) in restructuring accrual ............................. (228) (1,095) (5,516)
Increase (decrease) in other liabilities ........................ 182 (681) 99
-------- -------- --------
Net cash (used in) provided by operating activities ......... (7,796) 33,689 (2,238)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment .............. 4,321 995 2,164
Capital expenditures ................................................. (13,995) (10,080) (9,957)
Proceeds from the divestiture of European Temperature Control division -- 3,119 --
Acquisition of European wire and cable business ...................... (3,759) -- --
-------- -------- --------
Net cash used in investing activities ....................... (13,433) (5,966) (7,793)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line-of-credit agreements .......... 16,544 (9,082) 39,820
Principal payments and retirement of long-term debt .................. (629) (570) (14,655)
Increase (decrease) increase in overdraft balances ................... 449 (4,716) 3,288
Repurchase of shares held by Dana Corporation ........................ -- -- (11,899)
Proceeds from exercise of employee stock options ..................... 4,185 738 169
Excess tax benefits related to the exercise of employee stock options 454 -- --
Purchase of treasury stock ........................................... (4,997) -- --
Dividends paid ....................................................... (6,683) (6,579) (7,024)
-------- -------- --------
Net cash provided by (used in) financing activities ......... 9,323 (20,209) 9,699
-------- -------- --------
Effect of exchange rate changes on cash .............................. 2,819 788 (556)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................. (9,087) 8,302 (888)
CASH AND CASH EQUIVALENTS at beginning of year ....................... 22,348 14,046 14,934
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year ............................. $ 13,261 $ 22,348 $ 14,046
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .................................................... $ 18,228 $ 19,224 $ 17,227
======== ======== ========
Income taxes ................................................ $ 4,236 $ 2,976 $ 3,456
======== ======== ========
Non-cash investing and financing activities:
Reduction of restructuring accrual applied against goodwill ..... $ -- $ 10,606 $ 1,243
======== ======== ========
See accompanying notes to consolidated financial statements.
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2007, 2006 AND 2005
CAPITAL ACCUMULATED OTHER
IN EXCESS COMPREHENSIVE
COMMON OF PAR RETAINED INCOME TREASURY
STOCK VALUE EARNINGS (LOSS) STOCK TOTAL
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 2004 ................ $ 40,972 $ 57,424 $ 120,218 $ 4,805 $ (16,107) $ 207,312
Comprehensive Loss:
Net loss .............................. (3,545) (3,545)
Foreign currency translation adjustment (940) (940)
Unrealized gain on interest rate swap
agreements, net of tax of $108 ...... 26 26
Minimum pension liability adjustment .. 267 267
---------
Total comprehensive loss .............. (4,192)
Cash dividends paid ......................... (7,024) (7,024)
Exercise of employee stock options .......... (71) 240 169
Employee Stock Ownership Plan ............... (387) 1,728 1,341
Repurchase of shares
held by Dana Corporation .............. (11,899) (11,899)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2005 ................ 40,972 56,966 109,649 4,158 (26,038) 185,707
Comprehensive Loss:
Net loss .............................. 9,411 9,411
Foreign currency translation adjustment 1,300 1,300
Unrealized gain on interest rate swap
agreements, net of tax of $ (198).
(298) (298)
Adoption of FASB Statement No.158, net
of income taxes of $1,906 ............. (1,414) (1,414)
Additional minimum pension
liability adjustment................... (205) (205)
---------
Total comprehensive loss .............. 8,794
Cash dividends paid ......................... (6,579) (6,579)
Exercise of employee stock options .......... (49) 787 738
Stock based compensation .................... 653 195 848
Employee Stock Ownership Plan ............... (141) 1,332 1,191
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2006 ................ 40,972 57,429 112,481 3,541 (23,724) 190,699
Comprehensive Income:
Net income ............................ 2,275 2,275
Foreign currency translation adjustment 3,196 3,196
Minimum pension liability adjustment .. (1,191) (1,191)
---------
Total comprehensive income ............ 4,280
Impact of adopting provisions of FIN 48 ..... (1,926) (1,926)
Cash dividends paid ......................... (6,683) (6,683)
Purchase of treasury stock .................. (4,997) (4,997)
Exercise of employee stock options .......... 494 3,691 4,185
Stock based compensation .................... 314 171 485
Excess tax benefits related to exercise
of employee stock options ............. 454 454
Employee Stock Ownership Plan ............... 529 1,338 1,867
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2007 ................ $ 40,972 $ 59,220 $ 106,147 $ 5,546 $ (23,521) $ 188,364
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to consolidated financial statements as "we," "us," "our" or the "Company") is engaged in the manufacture and distribution of replacement parts for motor vehicles in the automotive aftermarket industry. The consolidated financial statements include our accounts and all subsidiaries in which we have more than a 50% equity ownership. Our investments in unconsolidated affiliates are accounted for on the equity method. All significant inter-company items have been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, we have 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, realizability of inventory, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability, pensions and other post-retirement benefits, asbestos and litigation matters, deferred tax asset valuation allowance and sales return allowances. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS
We do not generally require collateral for our trade accounts receivable. Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. These allowances are established based on a combination of write-off history, aging analysis, and specific account evaluations. When a receivable balance is known to be uncollectible, it is written off against the allowance for doubtful accounts. Cash discounts are provided based on an overall average experience rate applied to qualifying accounts receivable balances.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the first-in, first-out method) or market. Inventories are reduced by an allowance for excess and obsolete inventories, based on our review of on-hand inventories. We provided for an inventory reserve of $36.7 million and $35.4 million as of December 31, 2007 and 2006, respectively.
We use cores (used parts) in our remanufacturing processes for air conditioning compressors. The production of air conditioning compressors involves the rebuilding of used cores, which we acquire either in outright purchases from used parts brokers, or from returns pursuant to an exchange program with customers. Under such exchange programs, we reduce our inventory, through a charge to cost of sales, when we sell a finished good compressor, and put back to inventory at standard cost through a credit to cost of sales the used core exchanged when it is actually received from the customer.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We recognize derivatives 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 "accumulated other comprehensive income
(loss)." Amounts in "accumulated other comprehensive income (loss)" are
reclassified into earnings in the "interest expense" caption when interest
expense on the underlying borrowings is recognized.
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:
Buildings and improvements..................... 25 to 33-1/2 years
Building refurbishments........................ 10 years
Machinery and equipment........................ 7 to 12 years
Tools, dies and auxiliary equipment............ 3 to 8 years
Furniture and fixtures......................... 3 to 12 years
Leasehold improvements......................... Shorter of life of asset
or lease term
|
Major renewals and improvements of property, plant and equipment are capitalized, and repairs and maintenance costs are expensed as incurred.
GOODWILL, OTHER INTANGIBLE AND LONG-LIVED ASSETS
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill and certain other intangible assets having indefinite lives are not amortized to earnings, but instead are subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives.
Goodwill of a reporting unit is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, we are required to perform a second step, as this is an indication that the reporting unit goodwill may be impaired. In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB Statement No. 141, "Business Combinations" ("SFAS 141"). The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
Intangible and other long-lived assets are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing for impairment, we compare the carrying value of such assets with finite lives to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets fair value and their carrying value.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which we incur change-over costs to induce a new customer to switch from a competitor's brand. In addition, change-over costs include the costs related to removing the new customer's inventory and replacing it with our inventory commonly referred to as a stocklift. New customer acquisition costs are recorded as a reduction to revenue when incurred.
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. Where the U.S. dollar is the functional currency, transaction gains or losses arising from the remeasurement of financial statements are recorded in the statement of operations under the caption "other income (expense)."
REVENUE RECOGNITION
We recognize revenues when products are shipped and title has been transferred to a customer, the sales price is fixed and determinable, and collection is reasonably assured. For some of our sales of remanufactured products, we also charge our customers a deposit for the return of a used core component which we can use in our future remanufacturing activities. Such deposit is not recognized as revenue but rather carried as a core liability. The liability is extinguished when a core is actually returned to us. We estimate and record provisions for cash discounts, quantity rebates, sales returns and warranties in the period the sale is recorded, based upon our prior experience and current trends.
SELLING, GENERAL AND ADMINISTRATION EXPENSES
Selling, general and administration expenses includes shipping costs and advertising, which is expensed as incurred. Shipping and handling charges, as well as freight to customers, are included in distribution expenses as part of selling, general and administration expenses.
DEFERRED FINANCING COSTS
We have incurred costs in obtaining financing. These costs of $10.7 million as of December 31, 2007 and $9.9 million as of December 31, 2006 were capitalized in other assets and are being amortized over the life of the related financing arrangements through 2018. As of December 31, 2007 and 2006, total accumulated amortization was $8 million and $7 million, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net post-retirement benefit liability and related expense under our benefit plans are determined on an actuarial basis. Benefits are determined primarily based upon employees' length of service.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income taxes are calculated using the asset and liability method in accordance with the provisions of FASB Statement 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 carrying amounts and the tax bases of assets and liabilities, as measured by the current enacted tax rates. We establish valuation allowances against deferred tax assets when it is more likely than not that some portion or all of those deferred assets will not be realized. The valuation allowance is intended in part to provide for the uncertainty regarding the ultimate utilization of our U.S. foreign tax credit carryovers, and foreign net operating loss carry forwards. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability.
In accordance with the provisions of SFAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.109" ("FIN 48"), we recognize in our financial statements only those tax positions that meet the more-likely-than-not-recognition threshold. We establish tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in our consolidated statement of operations.
REPORTING OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes (a) net income, (b) the cumulative effect of translating balance sheets of foreign subsidiaries to U.S. dollars, (c) the effect of adjusting interest rate swaps to market, and (d) the recognition of the unfunded status of pension and post-retirement benefit plans as well as minimum pension liabilities. The last three are not included in the income statement and are reflected as adjustments to stockholders' equity.
NET EARNINGS PER COMMON SHARE
We present 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.
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
Weighted average common shares ................... 18,531 18,284 19,508
Effect of potentially dilutive common shares ..... 56 41 --
------ ------- ------
Weighted average common equivalent shares
outstanding assuming dilution ................. 18,587 18,325 19,508
====== ====== ======
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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.
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
Stock options and restricted shares ........... 687 991 1,249
===== ===== =====
Convertible debentures ........................ 2,796 2,796 2,796
===== ===== =====
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENVIRONMENTAL RESERVES
We are subject to various U.S. federal and state and local environmental laws and regulations and are involved in certain environmental remediation efforts. We estimate and accrue our liabilities resulting from such matters based upon a variety of factors including the assessments of environmental engineers and consultants who provide estimates of potential liabilities and remediation costs. Such estimates may or may not include potential recoveries from insurers or other third parties and are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.
ASBESTOS LITIGATION
In evaluating our potential asbestos-related liability, it is our accounting policy to use an actuarial study that is prepared by a leading actuarial firm with expertise in assessing asbestos-related liabilities. We evaluate the estimate of the range of undiscounted liability to determine which amount to accrue. If there is no amount within the range of settlement payments that is more likely than any other, we record the low end of the range as the liability associated with future settlement payments. Legal costs are expensed as incurred.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments and accounts receivable. We place our cash investments with high quality financial institutions and limit the amount of credit exposure to any one institution. Although we are directly affected by developments in the vehicle parts industry, management does not believe significant credit risk exists. 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. We perform ongoing credit evaluations of our customers' financial conditions. Our five largest individual customers, including members of a marketing group, accounted for 50%, 51% and 52% of consolidated net sales in 2007, 2006 and 2005, respectively. Two individual customers accounted for 17% and 15%, respectively, of consolidated net sales in 2007, 18% and 14%, respectively, of consolidated net sales in 2006, and 18% and 15%, respectively, of consolidated net sales in 2005. Substantially all of the cash and cash equivalents, including foreign cash balances, at December 31, 2007 and 2006 were uninsured. Foreign cash balances at December 31, 2007 and 2006 were $5.3 million and $11.7 million, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued SFAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. FIN 48 also provides guidance on accounting for derecognition, interest and penalties, and classification and disclosure of matters related to uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006 and, as a result, was effective for us beginning January 1, 2007.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 1, 2007, we adopted the provisions of FIN 48. The cumulative effect of adoption was a $1.9 million reduction of retained earnings. At January 1, 2007, the total amount of unrecognized tax benefits was $2.3 million, all of which would impact the effective tax rate, if recognized.
We continue the practice of recognizing interest and penalties associated with income tax matters as components of the "provision for income taxes." Our accrual for interest and penalties was $0.4 million upon adoption of FIN 48 and at December 31, 2007.
We are subject to taxation in the US and various state, local and foreign jurisdictions. We remain subject to examination by US Federal, state, local and foreign tax authorities for tax year 2001 as well as 2003 through 2006. With a few exceptions, we are no longer subject to US Federal, state, local or foreign examinations by tax authorities for the tax year 2002 and for tax years prior to 2001. We do not presently anticipate that our unrecognized tax benefits will significantly increase or decrease prior to September 30, 2008; however, actual developments in this area could differ from those currently expected.
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. This statement applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for the fiscal year beginning after November 15, 2007, which for us is the year ending December 31, 2008. In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157's effective date for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008. Derivatives measured at fair value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing the impact, if any, which the adoption of SFAS 157 will have on our consolidated financial position, results of operations and cash flows.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS158"). SFAS 158 requires an employer to recognize the funded status of their defined benefit pension or postretirement plans on the consolidated balance sheet and to recognize changes in that funded status in the year in which the changes occur through accumulated other comprehensive income in stockholders' equity. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. We adopted the recognition and related disclosure provisions of SFAS No. 158, prospectively, on December 31, 2006. The adoption of SFAS 158 resulted in an increase to total assets of $1.2 million, an increase to total liabilities of $2.6 million, and a decrease to stockholders' equity of $1.4 million. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008, which for us is the year ending December 31, 2009. As all of our measurement dates are as of December 31, our fiscal year-end reporting date, there will be no impact on us as related to the measurement date provisions of SFAS 158.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The incremental effect of applying SFAS No. 158 on individual line items in the consolidated balance sheet at December 31, 2006 was as follows (in thousands):
BEFORE AFTER
APPLICATION OF APPLICATION OF
SFAS NO. 158 ADJUSTMENTS SFAS NO. 158
------------ ----------- ------------
Prepaid expenses and other current
assets (current) ......................... $ 7,861 $ (16) $ 7,845
Other assets (pension, deferred income
taxes - non-current) ..................... 40,658 1,216 41,874
--------
Total assets ................................. 638,892 1,200 640,092
--------
Sundry payables and accrued expenses
(pension, current) ....................... 26,313 (1,100) 25,213
Pension and post-retirement medical benefits
(non-current) ............................ 48,347 3,714 52,061
--------
Total liabilities ............................ 446,779 2,614 449,393
Accumulated other comprehensive
income (loss) ............................ 4,955 (1,414) 3,541
--------
Total liabilities and stockholders'
equity ................................... $638,892 $ 1,200 $640,092
=========
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FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB SFAS No. 115" ("SFAS 159"). SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value. The statement's objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The new statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity's election on its earnings, but does not eliminate disclosure requirements of other accounting standards. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, and is effective for us as of January 1, 2008. We do not anticipate any financial statement impact upon adoption of SFAS 159.
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for the fiscal year beginning after December 15, 2008, which for us is the fiscal year beginning January 1, 2009. We are assessing the impact, if any, which the adoption of SFAS 141R will have on our consolidated financial position, results of operations and cash flows.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, which for us is the fiscal year beginning January 1, 2009. We are assessing the impact, if any, which the adoption of SFAS 160 will have on our consolidated financial position, results of operations and cash flows.
2. RESTRUCTURING AND INTEGRATION COSTS
RESTRUCTURING COSTS
In connection with our acquisition of substantially all of the assets and the assumption of substantially all of the operating liabilities of Dana Corporation's Engine Management Group ("DEM") in June 2003, we have a restructuring accrual of $0.9 million remaining as of December 31, 2007, and most of this amount we expect to pay in 2008. The restructuring accrual relates to work force reductions, employee termination benefits and contract termination costs. During each of 2007 and 2006, termination benefits of $0.2 million have been charged to the restructuring accrual as related workforce reduction. As of December 31, 2007 and 2006, the reserve balance for workforce reductions was at $0.2 million and $0.5 million, respectively. The restructuring accrual also includes costs associated with exiting certain activities, primarily related to lease and contract termination costs, which will not have future benefits. As of December 31, 2007 and 2006, we have an exit reserve balance for other exit costs of $0.6 million.
Selected information relating to the restructuring costs included in the allocation of the cost to acquire DEM for the years ended December 31, 2007 and 2006 is as follows (in thousands):
Workforce Other Exit
Reduction Costs Total
--------- ----- -----
Restructuring liability at December 31, 2005 .. $ 809 $ 11,825 $ 12,634
Cash payments during 2006 ..................... (184) (758) (942)
Adjustments during 2006 ....................... (153) (10,453) (10,606)
-------- -------- --------
Restructuring liability as of December 31, 2006 $ 472 $ 614 $ 1,086
Cash payments during 2007 ..................... (228) -- (228)
-------- -------- --------
Restructuring liability as of December 31, 2007 $ 244 $ 614 $ 858
-------- -------- --------
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INTEGRATION EXPENSES
During 2007 and 2006, we incurred integration expenses of $10.9 million and $1.9 million, respectively. Integration expenses incurred for 2007 were $5.8 million for one-time termination benefits and $5.1 million for other exit costs. The 2007 amount relates primarily to the cost of moving and closing our Puerto Rico production operations, the integration of operations in Mexico, the closure of our Fort Worth, Texas production facility, the closure of our Long Island City, New York production facility and the cost of moving our European production operations. The 2006 amount relates primarily to the cost of moving our European production operations and the costs incurred relating to the divestiture of a production unit of our Temperature Control Segment.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 2006, we announced plans to close our Puerto Rico manufacturing facility related to the Engine Management Segment. These operations will be moved to other manufacturing sites. In connection with this closing, we will incur one-time termination benefits to be paid to certain employees at the end of a specified requisite service period. We estimate these termination benefits will amount to approximately $2 million which will be recognized as expense ratably over the requisite service period. We also expect to incur approximately $2.4 million of various expenses to move the production assets, close the Puerto Rico facility, and relocate some employees. These expenses will be recognized as incurred over the next year.
In July 2007, we sold our Fort Worth, Texas manufacturing facility. As a result of the sale, we incurred one-time termination benefits paid to certain employees. These termination benefits amounted to approximately $0.4 million and were recognized over the requisite service period. In addition, we incurred approximately $0.8 million in various expenses to move the production assets and close the facility. These expenses were recognized as incurred.
In December 2007, we entered into an agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and its Local 365 ("UAW") regarding the shut down of our manufacturing operations at Long Island City, New York, which operations will be transferred to other facilities. The relocation and closure of such manufacturing operations is expected to be completed by the second quarter of 2008. In connection with the shutdown of the manufacturing operations at Long Island City, we expect to incur approximately $6.1 million to $ 6.6 million in total costs associated with the exit or disposal activity, consisting of severance, equipment removal, capital expenditures, environmental clean-up costs and other cash costs. During 2007, we recorded a charge of $2.3 million for costs associated with the shutdown activities, which included severance costs of $0.5 million and environmental clean-up costs of $1.8 million. In addition, we will incur a withdrawal liability from a multi-employer pension plan. The pension plan withdrawal liability is related to trust asset under-performance in a multi-employer plan that covers our UAW employees at the Long Island City facility and is payable in a lump sum or over a period which is not to exceed 20 years. During 2007, we recorded a charge of $3.3 million, which is our best estimate of the withdrawal liability based upon information received from a third party actuary.
Selected information relating to the closure of our Puerto Rico manufacturing facility, integration of operations in Mexico, the closure of our Fort Worth, Texas production facility, the closure of our Long Island City, New York production facility and the cost of moving our European production operations is as follows (in thousands):
Workforce Other Exit
Reduction Costs Total
--------- ----- -----
Exit activity liability at December 31, 2005 $ 408 $ 467 $ 875
Amounts provided for during 2006 ........... 1,359 497 1,856
Cash payments during 2006 .................. (1,020) (710) (1,730)
-------- -------- --------
Exit activity liability at December 31, 2006 747 254 1,001
Amounts provided for during 2007 ........... 5,822 5,111 10,933
Cash payments during 2007 .................. (978) (2,858) (3,836)
-------- -------- --------
Exit activity liability at December 31, 2007 $ 5,591 $ 2,507 $ 8,098
-------- -------- --------
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In December 2006, we divested a majority portion of our European Temperature Control business. The transaction involved the sale of all of our voting stock of our subsidiaries in Italy and France. The proceeds from the divestiture were approximately $3.1 million, and we incurred a loss on divestiture of $3.2 million. The major classes of assets and liabilities at the time of sale were as follows: accounts receivable of $4 million, inventory of $3.9 million, accounts payable of $1.7 million, and accrued liabilities of $0.8 million. The European Temperature Control business was previously included in our European Segment.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SALE OF FORT WORTH, TEXAS FACILITY
In July 2007, we sold our Fort Worth, Texas manufacturing facility for $4.2 million, with a pre-tax gain of $0.8 million. The pre-tax gain is included in Other Income, Net in the consolidated statements of operations. The proceeds from the sale were used to pay down debt under our revolving credit facility.
4. SALE OF LONG ISLAND CITY, NEW YORK PROPERTY
In December 2007, we entered into a Purchase and Sale Agreement to sell our property located at 37-18 Northern Blvd., Long Island City, New York. The purchase price for the property is $40.6 million. We intend to use the proceeds from the sale to reduce debt. We expect the closing to occur in the first quarter of 2008. In connection with the sale of the Long Island City property, we intend to enter into a Lease Agreement with the purchaser whereby we would lease space at the property. The initial term of the lease is ten years and contains four 5-year renewal options. During approximately the first twelve months of the lease term, we will make initial annual rent payments of approximately $2.6 million. Thereafter, we expect to reduce our leased space to 1.5 floors, and the annual rent payments will decrease to approximately $1.1 million. See Note 22 for further information on the closing of the sale and leaseback of the Long Island City property.
As of December 31, 2007, in accordance with the requirements of FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), we have reported the net book value of the property of $5.4 million as assets held for sale on our consolidated balance sheet. Revenue recognition related to the sale has not occurred as of December 31, 2007 as the Purchase and Sale Agreement entered into in December 2007 contains several pre-closing conditions. The earnings process will not be complete until all consideration has exchanged hands, the permanent financing has been secured and all conditions precedent to closing in the agreement have been performed, all of which are expected to occur at closing. Upon the closing of the transaction, the sale will be recorded as a sale and leaseback transaction. As our retention rights to the property will be more than minor but less than substantially all, a portion of the gain will be deferred upon closing of the sale. Upon closing, we currently anticipate that the total gain from the sale of the property will be in the range of $28 - $32 million. The portion of the gain to be recognized upon closing will be in the range of $18 - $22 million, with the balance of the gain deferred and recognized over the initial term of the lease of ten years.
In addition, in connection with the closing, we will defease our existing mortgage loan on the property. As of December 31, 2007, the mortgage loan was $7.9 million. We expect to incur fees and expenses in the defeasance of approximately $1 million, and deferred finance costs currently capitalized of $0.4 million will be expensed upon the defeasance. See Notes 10 and 22 for further information on the closing of the defeasance of the mortgage.
5. SALES OF RECEIVABLES
Prior to November 18, 2005, we entered into agreements to sell undivided interests in certain of our receivables to factoring companies, which in turn have the right to sell an undivided interest to a financial institution or other third parties. We entered these agreements at our discretion when we determined that the cost of factoring was less than the cost of servicing our receivables with existing debt. Pursuant to these agreements, we sold $240.7 million of receivables during 2005, and none in 2006 and 2007. We retained no rights or interest, and had no obligations, with respect to the sold receivables. We do not service the receivables after the sale.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The sale of receivables was accounted for as a sale in accordance with FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The sold receivables were removed from the balance sheet at the time of sale. The costs incurred in relation to the sale of receivables were $3.4 million in 2005 and are recorded in selling, general and administrative expense.
6. INVENTORIES
2007 2006
---- ----
(IN THOUSANDS)
Finished goods, net .......................... $182,914 $169,183
Work in process, net ......................... 5,850 4,654
Raw materials, net ........................... 63,513 60,133
-------- --------
Total inventories, net ................... $252,277 $233,970
======== ========
7. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
2007 2006
---- ----
(IN THOUSANDS)
Land, buildings and improvements ................. $ 43,313 $ 71,147
Machinery and equipment .......................... 136,107 133,022
Tools, dies and auxiliary equipment .............. 25,944 24,270
Furniture and fixtures ........................... 29,857 29,255
Leasehold improvements ........................... 8,554 7,595
Construction in progress ......................... 9,397 5,732
-------- ---------
253,172 271,021
Less accumulated depreciation .................... 181,397 190,930
-------- ---------
Total property, plant and equipment, net ......... $ 71,775 $ 80,091
======== ========
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Depreciation expense was $12.9 million, $13.4 million and $15.5 million for 2007, 2006 and 2005, respectively.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
We test for impairment of our remaining goodwill at least annually. Under FASB Statement No. 142, "Goodwill and Other Intangible Assets," we completed our annual impairment test of goodwill as of December 31, 2007 and 2006, respectively, and determined that our goodwill was not impaired.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The changes in the carrying value of goodwill for our segments during the two years ended December 31, 2007 are as follows (in thousands):
ENGINE
MANAGEMENT EUROPE TOTAL
---------- ------ -----
Balance as of December 31, 2005 ............. $ 49,094 $ -- $ 49,094
Purchase accounting adjustments ............. (10,606) -- (10,606)
-------- -------- --------
Balance as of December 31, 2006 ............. 38,488 -- 38,488
Acquisition of UK wire and cable business ... -- 3,078 3,078
-------- -------- --------
Balance as of December 31, 2007 ............. $ 38,488 $ 3,078 $ 41,566
======== ======== ========
|
During 2007, our European affiliate acquired the wire and cable business of a third party in the United Kingdom for a purchase price of $3.7 million. Net assets acquired were $0.6 million, and the excess purchase price over net assets of $3.1 million has been reported as goodwill in our consolidated balance sheet. We have retained a third party valuation firm to value the net assets acquired and any revision in the purchase price allocation is expected to be completed during 2008.
During 2006, goodwill was reduced $10.6 million. The reduction in goodwill in 2006 relates to an adjustment of purchase price related to the acquisition of DEM resulting from a reduction in the restructuring cost estimate that had been established in the original purchase accounting upon acquisition.
OTHER INTANGIBLE ASSETS
Other intangibles assets include computer software. Computer software, net of amortization, was $4.1 million and $4.5 million as of December 31, 2007 and 2006, respectively. Computer software is amortized over its estimated useful life of 3 to 10 years. Amortization expense for computer software was $1.2 million, $1 million and $0.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.
ACQUIRED INTANGIBLE ASSETS
Acquired identifiable intangible assets associated with the acquisition of DEM, as of December 31, 2007 and 2006 consist of (in thousands):
2007 2006
---- ----
Gross customer relationships ................... $10,000 $10,000
Trademarks and trade names ..................... 6,100 6,100
------- -------
16,100 16,100
Less accumulated amortization(1) ............... 3,889 2,778
------- -------
Net ........................................ $12,211 $13,322
======= =======
|
(1) Applies to the gross customer relationships.
Of the total purchase price, $16.1 million was allocated to intangible assets consisting of customer relationships and trademarks and trade names; $10 million was assigned to customer relationships and will be amortized on a straight-line basis over the estimated useful life of 10 years; and the remaining $6.1 million of acquired intangible assets was assigned to trademarks and trade names which is not subject to amortization as they were determined to have indefinite useful lives. Amortization expense for acquired intangible assets was $1.1 million per year for each of the years ended December 31, 2007, 2006 and 2005.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization expense for the next five years is estimated to be $1.1 million per year during 2008 through 2012.
2007 2006
---- ----
(IN THOUSANDS)
Equity in joint ventures ......................... $ 2,310 $ 2,483
Deferred income taxes, net (Note 17) ............. 25,809 24,434
Deferred financing costs, net .................... 2,373 2,897
Other ............................................ 14,827 12,060
------- -------
Total other assets, net ..................... $45,319 $41,874
======= =======
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Included in the above caption "Other" is a preferred stock investment of $1.5 million in a customer, which is carried at cost. Net sales to this customer amounted to $35.4 million, $37.4 million and $47.8 million in 2007, 2006 and 2005, respectively. Also included in "Other" are $4 million of long term accounts receivables from customers and $8.2 million of assets held in a nonqualified defined contribution pension plan.
As of December 31, 2007, we have equity ownership investments in several joint ventures located in Europe, Canada, and Israel. Our ownership interests in these joint ventures are accounted for on the equity method. The two largest of our joint ventures are Blue Streak Electronics, Ltd. ("BSE") located in Canada and Testar Ltd. ("Testar") located in Israel. The investments and equity income in our other joint ventures are not material. The following is a brief description of each of the two largest of our joint ventures:
BLUE STREAK ELECTRONICS, LTD.
Since established in 1992, we have maintained a 50% ownership interest in this joint venture. The joint venture remanufactures on-board computers for the automobile aftermarket. The headquarters and manufacturing facility of BSE are located in Canada. BSE has a fiscal year end of December 31.
TESTAR, LTD.
Since established in 1995, we have maintained a 50% ownership interest in this joint venture. The headquarters and manufacturing facility of Testar are located in Israel. The joint venture produces software products for use in on-board computers for the automobile aftermarket. Testar has a fiscal year end of December 31.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is summarized selected financial information from our joint ventures (in thousands):
AS OF DECEMBER 31,
AGGREGATED FINANCIAL INFORMATION 2007 2006 2005
----------------------------------------------------------------------------------------
Current assets ................................... $ 11,399 $ 10,445 $ 10,720
Non-current assets ............................... 3,270 2,928 2,928
Current liabilities .............................. 8,358 6,197 6,583
Non-current liabilities .......................... 44 1,635 2,067
FOR THE YEAR ENDED DECEMBER 31,
2007 2006 2005
-----------------------------------
Net sales ........................................ $ 11,574 $ 14,256 $ 14,846
Costs and expenses ............................... 11,263 12,256 13,016
--------- --------- ---------
Net earnings ..................................... $ 311 $ 2,000 $ 1,830
========= ========= =========
AS OF DECEMBER 31,
BLUE STREAK ELECTRONICS, LTD. 2007 2006 2005
----------------------------------------------------------------------------------------
Current assets ................................... $ 6,151 $ 5,223 $ 5,687
Non-current assets ............................... 2,834 2,661 2,645
Current liabilities .............................. 4,523 3,855 4,372
Non-current liabilities .......................... -- -- --
FOR THE YEAR ENDED DECEMBER 31,
2007 2006 2005
-----------------------------------
Net sales ........................................ $ 7,076 $ 7,563 $ 8,541
Costs and expenses ............................... 7,371 6,875 7,573
--------- --------- ---------
Net earnings (loss) .............................. $ (295) $ 688 $ 968
========= ========= =========
AS OF DECEMBER 31,
TESTAR, LTD. 2007 2006 2005
----------------------------------------------------------------------------------------
Current assets ................................... $ 50 $ 213 $ 1,078
Non-current assets ............................... 3 7 11
Current liabilities .............................. 144 69 113
Non-current liabilities .......................... -- 42 22
FOR THE YEAR ENDED DECEMBER 31,
2007 2006 2005
-----------------------------------
Net sales ........................................ $ 170 $ 520 $ 1,389
Costs and expenses ............................... 177 454 496
--------- --------- ---------
Net earnings (loss) .............................. $ (7) $ 66 $ 893
========= ========= =========
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31,
ALL OTHER 2007 2006 2005
----------------------------------------------------------------------------------------
Current assets ................................... $ 5,198 $ 5,009 $ 3,955
Non-current assets ............................... 433 260 272
Current liabilities .............................. 3,691 2,273 2,098
Non-current liabilities .......................... 44 1,593 2,045
FOR THE YEAR ENDED DECEMBER 31,
2007 2006 2005
-----------------------------------
Net sales ........................................ $ 4,328 $ 6,173 $ 4,916
Costs and expenses ............................... 3,715 4,927 4,947
--------- --------- ---------
Net earnings (loss) .............................. $ 613 $ 1,246 $ (31)
========= ========= =========
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10. CREDIT FACILITIES AND LONG-TERM DEBT
2007 2006
--------- ---------
Current
Revolving credit facilities (1) .................. $ 156,756 $ 139,799
Current portion of mortgage loan (2) ............. 7,891 542
Other ............................................ 130 --
--------- ---------
164,777 140,341
--------- ---------
Long-term Debt
6.75% convertible subordinated debentures ........ 90,000 90,000
Mortgage loan (2) ................................ 7,891 8,416
Other ............................................ 664 105
Less current portion of long-term debt ........... (8,021) (542)
--------- ---------
90,534 97,979
--------- ---------
Total debt ................................... $ 255,311 $ 238,320
========= ==========
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(1) Consists of the revolving credit facility, the Canadian term loan and the European revolving credit facilities.
(2) The mortgage loan was secured by the Long Island City, New York property. On March 12, 2008, in connection with the sale of the property, we defeased the mortgage loan. See Note 4 and Note 22.
Maturities of long-term debt during the five years ending December 31, 2008 through 2012 are $8 million, $90.1 million, $0.1 million, $0.1 million and $0.1 million, respectively.
We had deferred financing cost of $2.7 million and $2.9 million as of December 31, 2007 and 2006, respectively. These costs related to our revolving credit facility, the convertible subordinated debentures and a mortgage loan agreement, and these costs are being amortized in the amount of $1.1 million in 2008, $0.6 million in 2009, $0.4 million in 2010 and $0.5 million for the period 2011-2018.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVOLVING CREDIT FACILITY
In March 2007, we entered into a Second Amended and Restated Credit Agreement with General Electric Capital Corporation, as agent, and a syndicate of lenders for a secured revolving credit facility. This restated credit agreement replaces our prior credit facility with General Electric Capital Corporation, which prior credit facility provided for a $305 million credit facility and which was to expire in 2008. The restated credit agreement provides for a line of credit of up to $275 million (inclusive of the Canadian term loan described below) and expires in 2012. The restated credit agreement also provides a $50 million accordion feature, which would allow us to expand the facility. Direct borrowings under the restated credit agreement bear interest at the LIBOR rate plus the applicable margin (as defined), or floating at the index rate plus the applicable margin, at our option. The interest rate may vary depending upon our borrowing availability. The restated credit agreement is guaranteed by our same subsidiaries and secured by our same assets as the prior $305 million credit facility.
Borrowings under the restated credit agreement are collateralized by substantially all of our assets, including accounts receivable, inventory and fixed assets, and those of certain of our subsidiaries. After taking into account outstanding borrowings under the restated credit agreement, there was an additional $80.3 million available for us to borrow pursuant to the formula at December 31, 2007. At December 31, 2007, the interest rate on our restated credit agreement was 6.4%, and at December 31, 2006, the interest rate on our prior credit agreement was 7.8%. Outstanding borrowings under the restated credit agreement (inclusive of the Canadian term loan described below), which are classified as current liabilities, were $148.7 million and $133.3 million at December 31, 2007 and December 31, 2006, respectively.
At any time our borrowing availability in the aggregate is less than $30 million and until such time that we have maintained an average borrowing availability in the aggregate of $30 million or greater for a continuous period of 90 days, the terms of our restated credit agreement provide for, among other provisions, financial covenants requiring us, on a consolidated basis, (1) to maintain specified levels of fixed charge coverage at the end of each fiscal quarter (rolling twelve months), and (2) to limit capital expenditure levels. As of December 31, 2007, we were not subject to these covenants. Availability under our restated credit agreement is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. In addition, the restated credit agreement provides that, beginning on January 15, 2008 and on a quarterly basis thereafter, $15 million of the Company's borrowing availability shall be reserved for the repayment, repurchase or redemption, as the case may be, of the aggregate outstanding amount of our convertible debentures. Our restated credit agreement also permits dividends and distributions by us provided specific conditions are met.
CANADIAN TERM LOAN
In March 2007, we amended our credit agreement with GE Canada Finance Holding Company, for itself and as agent for the lenders. This credit agreement amends our existing $7 million credit agreement which was to expire in 2008. The amended credit agreement provides for a line of credit of up to $12 million, of which $7 million is currently outstanding and which amount is part of the $275 million available for borrowing under our restated credit agreement with General Electric Capital Corporation (described above). The amended credit agreement is guaranteed and secured by us and certain of our wholly-owned subsidiaries and expires in 2012. Direct borrowings under the amended credit agreement bear interest at the same rate as our restated credit agreement with General Electric Capital Corporation (described above).
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVOLVING CREDIT FACILITIES--EUROPE
Our European subsidiary has revolving credit facilities which, at December 31, 2007, provide for a line of credit up to $8.8 million. The amount of short-term bank borrowings outstanding under these facilities was $8 million on December 31, 2007 and $6.5 million on December 31, 2006. The weighted average interest rate on these borrowings on December 31, 2007 and December 31, 2006 was 6.7% and 6.3%, respectively.
SUBORDINATED DEBENTURES
In July 1999, we 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 our common stock at the option of the holder. We may, at our option, redeem some or all of the convertible 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 in the agreement, occurs at the Company, we 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 convertible debentures are subordinated in right of payment to all of the Company's existing and future senior indebtedness.
MORTGAGE LOAN AGREEMENT
In June 2003, we borrowed $10 million under a mortgage loan agreement. The loan was payable in monthly installments. The loan had interest at a fixed rate of 5.5% maturing in July 2018. The mortgage loan was secured by the Long Island City, New York property. As previously mentioned, in connection with the sale of the property, we defeased the mortgage loan. We incurred fees and expenses in the defeasance of approximately $1 million, and deferred finance costs currently capitalized of $0.4 million will be expensed upon the defeasance. See Note 4 and Note 22.
11. INTEREST RATE SWAP AGREEMENTS
We do not enter into financial instruments for trading or speculative purposes. The principal financial instruments we have used in the past for cash flow hedging purposes are interest rate swaps. We have 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.
In October 2003, we entered into an interest rate swap agreement with a notional amount of $25 million that matured in October 2006. Under this agreement, we received a floating rate based on the LIBOR interest rate, and paid a fixed rate of 2.45% on the notional amount of $25 million. The net offset was recorded in accumulated other comprehensive income. Following the maturity of the swap agreement, none of these amounts remain outstanding as of December 31, 2006.
If, at any time, the swaps were determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the interest rate swap determined to be ineffective would have been recognized as gain or loss in the statement of operations in the "interest expense" caption for the applicable period. There has not been any gain or loss reported in the statement of operations during the years ending December 31, 2006 and 2005.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY
We have authority to issue 500,000 shares of preferred stock, $20 par value, and our Board of Directors is vested with the authority to establish and designate any series of preferred, to fix the number of shares therein and the variations in relative rights as between each series. In December 1995, our 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 our 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, 2007 and 2006.
As of December 31, 2006, we had Board authorization to repurchase additional shares of our common stock up to a maximum cost of $1.7 million. In August 2007, our Board of Directors authorized a $3.3 million increase in our stock repurchase program. In 2007, we repurchased approximately $5 million of our common stock pursuant to these authorizations. During 2006, we did not repurchase any shares of our common stock.
Accumulated other comprehensive income is comprised of the following (in thousands):
2007 2006
---- ----
Foreign currency translation adjustments ........... $ 11,579 $ 8,383
Minimum pension liability .......................... (6,033) (4,842)
-------- --------
Total accumulated other comprehensive income ....... $ 5,546 $ 3,541
======== ========
|
In January 1996, our Board of Directors adopted a Shareholder Rights Plan. Under the Rights Plan, the Board declared a dividend of one Preferred Share Purchase Right for each of our outstanding common shares. The dividend was payable on March 1, 1996 to the stockholders of record as of February 15, 1996. The Rights were attached to and automatically traded with the outstanding shares of our common stock. The Rights were exercisable only upon the occurrence of certain events. In February 2006, the Rights Plan expired according to its stated terms.
13. STOCK-BASED COMPENSATION PLANS
We have five stock-based compensation plans. Under the 1994 Omnibus Stock Option Plan, as amended, which terminated in May 2004, we were authorized to issue options to purchase 1,500,000 shares of common stock. 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. At December 31, 2007, there were options to purchase an aggregate of 240,363 shares of common stock.
Under the 1996 Independent Directors' Stock Option Plan, which terminated in May 2006, we were authorized to issue options to purchase 50,000 shares of common stock. The options became exercisable one year after the date of grant and expired at the end of ten years following the date of grant. At December 31, 2007, there were options to purchase an aggregate of 24,200 shares of common stock.
Under the 2004 Omnibus Stock Option Plan, which terminates in May 2014, we were authorized to issue options to purchase 500,000 shares of common stock. The options become exercisable over a three to five year period and expire at the end of ten years following the date of grant. At December 31, 2007, there were options to purchase an aggregate of 327,057 shares of common stock.
Under the 2004 Independent Directors' Stock Option Plan, we were authorized to issue options to purchase 50,000 shares of common stock. 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, 2007, there were options to purchase an aggregate of 16,000 shares of common stock.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the 2006 Omnibus Incentive Plan, which terminates in May 2016, we are authorized to issue, among other things, shares of restricted and performance based stock to eligible employees and directors of up to 700,000 shares of common stock. Stock options forfeited under the previous stock option plans and equity awards under the incentive plan are eligible to be granted again under the 2006 Omnibus Incentive Plan with respect to stock options and equity awards so forfeited.
At December 31, 2007, under all of our option plans there were options to purchase an aggregate of 607,620 shares of common stock, with no shares of common stock available for future grants. At December 31, 2007, under our 2006 Omnibus Incentive Plan, there were an aggregate of (a) 193,200 shares of restricted and performance-based stock granted, net of forfeitures, and (b) 501,100 shares of common stock available for future grants.
Effective January 1, 2006, we adopted FASB Statement No. 123R, "Share-Based Payment" ("SFAS 123R"), which prescribes the accounting for equity instruments exchanged for employee and director services. Under SFAS 123R, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the grant, and is recognized as an expense over the service period applicable to the grantee. The service period is the period of time that the grantee must provide services to us before the stock-based compensation is fully vested.
Prior to January 1, 2006, we accounted for stock-based compensation to employees and directors in accordance with the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under the intrinsic value method, no compensation expense was recognized in our financial statements for the stock-based compensation, because the stock-based compensation that we granted was incentive stock options and all of the stock options granted had exercise prices equivalent to the fair market value of our common stock on the grant date. We also followed the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation," as amended, "Accounting for Stock-Based Compensation--Transition and Disclosure."
We adopted SFAS 123R using the modified prospective transition method. Under this transition method, the financial statement amounts for the periods before 2006 have not been restated to reflect the fair value method of expensing the stock-based compensation. The compensation expense recognized on or after January 1, 2006 includes the compensation cost based on the grant-date fair value estimated in accordance with: (a) SFAS 123 for all stock-based compensation that was granted prior to, but vested on or after, January 1, 2006; and (b) SFAS 123R for all stock-based compensation that was granted on or after January 1, 2006. Stock-based compensation expense was $342,500 ($224,800, net of tax) or $0.01 per basic and diluted share and $848,000 ($516,100, net of tax) or $0.03 per basic and diluted share for the years ended December 31, 2007 and 2006, respectively.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had we determined compensation cost based on the fair value at the grant date
for our pre-2006 stock option grants, our pro forma net loss and pro forma net
loss per common share would have been as follows (in thousands, except per share
data):
Year Ended
December 31 2005
----------------
Net loss as reported ........................................... $ (3,545)
Less: Stock-based employee compensation expense
determined under fair value method for all awards, net
of related tax effects ......................................... 678
---------
Pro forma net loss .......................................... $ (4,223)
=========
Loss per share:
Basic - as reported ........................................ $ (0.18)
---------
Basic - pro forma .......................................... $ (0.22)
---------
Diluted - as reported ...................................... $ (0.18)
---------
Diluted - pro forma ........................................ $ (0.22)
=========
|
STOCK OPTION GRANTS
There were no stock options granted in the years ended December 31, 2007 and 2006 and options to purchase 280,500 shares of common stock were granted in the year ended December 31, 2005. Accordingly, we have recognized compensation expense for prior years' grants which vest after January 1, 2006 based on the grant-date fair value, estimated in accordance with SFAS 123 which was used in our prior pro forma disclosure. Further, the current year's expense reflects our estimate of expected forfeitures which we determine to be immaterial, based on history and remaining time until vesting of the remaining options.
The stock options granted prior to 2006 have been vesting gradually at annual intervals. In our prior period SFAS 123 pro forma disclosures, our policy was to calculate the compensation expense related to the stock-based compensation granted to employees and directors on a straight-line basis over the full vesting period of the grants.
Prior to 2006, we provided pro forma net income and pro forma net income per common share disclosures for stock option grants based on the fair value of the options at the grant date. For purposes of presenting pro forma information, the fair value of options granted was computed using the Black Scholes option pricing model with the following assumptions applicable to each remaining unvested annual grant:
Year of Grant: 2005 ------------- ---- Expected option life.................... 3.9 years Expected stock volatility............... 39.1% Expected dividend yield................. 3.4% Risk-free rate.......................... 4.0% Fair value of option.................... $2.72 |
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate was based on the US Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility was based on historical volatility of our common stock.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the changes in outstanding stock options for the
year ended December 31, 2007:
Weighted Weighted Average
Average Remaining
Exercise Contractual
Shares Price Term (Years)
----------- ----------- ----------------
Outstanding at December 31, 2004................ 1,191,745 $ 16.20 4.3
Granted......................................... 280,500 $ 11.06 9.4
Expired......................................... (171,161) $ 21.33 0
Exercised....................................... (5,000) $ 10.79 0
Forfeited, Other................................ (46,858) $ 14.70 5.4
-------------------------------------------------- ----------- ----------- ----------------
Outstanding at December 31, 2005................ 1,249,226 $ 14.42 6.2
Expired......................................... (180,665) $ 20.43 0
Exercised....................................... (70,038) $ 10.55 0
Forfeited, Other................................ (7,625) $ 12.76 5.8
-------------------------------------------------- ----------- ----------- ----------------
Outstanding at December 31, 2006................ 990,898 $ 13.61 5.1
Expired......................................... (39,999) $ 24.84 0
Exercised....................................... (328,211) $ 12.75 0
Forfeited, Other................................ (15,068) $ 13.53 5.5
-------------------------------------------------- ----------- ----------- ----------------
Outstanding at December 31, 2007................ 607,620 $ 13.34 4.8
-------------------------------------------------- ----------- ----------- ----------------
Options exercisable at December 31, 2007........ 607,620 $ 13.34 4.8
-------------------------------------------------- ----------- ----------- ----------------
|
There was no aggregate intrinsic value of all outstanding stock options as of December 31, 2007. All outstanding stock options as of December 31, 2007 are exercisable. The total intrinsic value of options exercised was $1.3 million and $0.3 million during the years ended December 31, 2007 and 2006, respectively. There was no intrinsic value for options exercised in 2005.
The following is a summary of the changes in non-vested stock options for the year ended December 31, 2007:
Weighted
Average Grant
Shares Date Fair Value
------ ---------------
Non-vested shares at January 1, 2007 ............... 129,750 $ 2.72
Forfeitures ........................................ (1,125) $ 2.72
Vested ............................................. (128,625) $ 2.72
--------
Non-vested shares at December 31, 2007 ............. --
========
|
Stock option-based compensation expense in 2007 was $85,200 ($55,800, net of tax), all for unvested options. Stock option-based compensation expense in 2006 was $547,400 ($333,100, net of tax), including $264,700 for unvested options. As of December 31, 2007, we have no remaining unrecognized compensation cost and as of December 31, 2006, we had $88,200 of unrecognized compensation cost related to non-vested stock options granted, which was recognized over a weighted-average period of four months in 2007.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESTRICTED STOCK AND PERFORMANCE SHARE GRANTS
Under our 2006 Omnibus Incentive Plan, we are authorized to issue shares of restricted and performance-based stock to eligible employees and issue shares of restricted stock to independent directors. Prior to the time a restricted share becomes fully vested or a performance share is issued, the awardees cannot transfer, pledge, hypothecate or encumber such shares. Prior to the time a restricted share is fully vested, the awardees have all other rights of a stockholder, including the right to vote (but not receive dividends during the vesting period). Prior to the time a performance share is issued, the awardees shall have no rights as a stockholder. Restricted shares become fully vested upon the third and first anniversary of the date of grant for employees and directors, respectively. Performance-based shares are subject to a three year measuring period and the achievement of performance targets and, depending upon the achievement of such performance targets, they may become vested on the third anniversary of the date of grant.
All shares and rights are subject to forfeiture if certain employment conditions are not met. Under the plan, 700,000 shares are authorized to be issued. For the year ended December 31, 2007, 111,850 restricted and performance-based shares were granted (81,600 restricted shares and 30,250 performance-based shares), and for the year ended December 31, 2006, 95,225 restricted and performance-based shares were granted (67,725 restricted shares and 27,500 performance-based shares). In determining the grant date fair value, the stock price on the date of grant, as quoted on the New York Stock Exchange, was reduced by the present value of dividends expected to be paid on the shares issued and outstanding during the requisite service period, discounted at a risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the restriction or vesting period at the grant date. The fair value of the shares at the date of grant is amortized to expense ratably over the restriction period. For the years ended December 31, 2007 and 2006, forfeitures are estimated at 2% for employees and 0% for executives and directors, respectively, based on evaluation of historical and expected future turnover.
As related to restricted and performance stock shares, we recorded compensation expense related to restricted shares and performance-based shares of $257,300 ($169,000, net of tax) and $164,200 ($99,900, net of tax) for the year ended December 31, 2007 and 2006, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $821,900 and $506,200 at December 31, 2007 and 2006, respectively and is expected to be recognized over a weighted average period of 1.8 and 0.8 years for employees and directors, respectively, as of December 31, 2007 and over a weighted average period of 2.3 and 0.3 years for employees and directors, respectively, as of December 31, 2006.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's restricted and performance-based share activity was as follows for
the year ended December 31, 2007:
Weighted
Average Grant
Date Fair Value
Shares Per Share
------ ---------
Balance at January 1, 2006 ..................... -- --
Granted ..................................... 95,225 $ 7.21
Vested ...................................... (200) $ 7.84
Forfeited ................................... (1,250) $ 6.90
------- --------
Balance at January 1, 2007...................... 93,775 $ 7.21
Granted ..................................... 111,850 $ 7.28
Vested ...................................... (5,500) $ 7.49
Forfeited ................................... (6,925) $ 7.01
------- --------
Balance at December 31, 2007 ................... 193,200 $ 7.25
|
The weighted-average grant date fair value of restricted and performance-based shares outstanding as of December 31, 2007 and 2006 was $1.4 million (or $7.25 per share) and $0.7 million (or $7.21 per share), respectively. No restricted or performance-based shares were authorized, granted, outstanding or vested during the year ended December 31, 2005.
14. RETIREMENT BENEFIT PLANS
We adopted the provisions of SFAS No. 158 on December 31, 2006. The adoption related to the defined benefit unfunded Supplemental Executive Retirement Plan and UK pension plan resulted in a decrease to total assets of $0.1 million, a decrease to total liabilities $0.5 million, and an increase to stockholders' equity of $0.4 million. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008, which for us is the year ending December 31, 2009. As all of our measurement dates are as of December 31, our fiscal year-end reporting date, there will be no impact on us as related to the measurement date provisions of SFAS 158.
We participate 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. Contributions to the plans are determined in accordance with the provisions of a negotiated labor contract. Except as described below, we have not received information from the plans' administrators to determine our share, if any, of unfunded vested benefits.
In December 2007, we entered into an agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and its Local 365 regarding the shut down of our manufacturing operations at Long Island City, New York, which operations will be transferred to other facilities. As part of the agreement, effective January 5, 2008, we agreed to withdrawn from the multi-employer pension plan covering our UAW employees at the Long Island City facility. As a result, we will incur a withdrawal liability. The pension plan withdrawal liability is related to trust asset under-performance and is payable in a lump sum or over a period which is not to exceed 20 years. During 2007, we recorded a charge of $3.3 million, which is our best estimate of the withdrawal liability based upon information received from a third party actuary.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, we and certain of our subsidiaries 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 (in thousands):
DEFINED
MULTI- CONTRIBUTION AND
EMPLOYER PLANS OTHER PLANS
-------------- -----------
Year ended December 31,
2007.................................. $ 438 $ 3,927
2006.................................. 445 3,804
2005.................................. 434 3,759
|
We also have an Employee Stock Ownership Plan and Trust (ESOP) for employees who are not covered by a collective bargaining agreement. Employees were granted an aggregate of 119,023 shares, 118,500 shares, and 114,500 shares during 2007, 2006 and 2005, respectively, under the terms of the ESOP. These shares were issued directly from treasury stock.
In 2000, we created an employee benefits trust to which we contributed 750,000 shares of treasury stock. We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our 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. During 2007, we committed 119,023 shares to be released leaving 62,977 shares remaining in the trust. The provision for expense in connection with the ESOP was approximately $1.9 million in 2007, $1.2 million in 2006, and $1.3 million in 2005.
In August 1994, we established an unfunded Supplemental Executive Retirement Plan (SERP) for key employees. Under the plan, these employees may elect to defer a portion of their compensation and, in addition, we may at our discretion make contributions to the plan on behalf of the employees. Such contributions were $113,000 in 2007, $83,000 in 2006, and $69,000 in 2005.
In October 2001, we adopted a second unfunded SERP. The SERP is a defined benefit plan pursuant to which we will pay supplemental pension benefits to certain key employees upon retirement based upon the employees' years of service and compensation. We use a January 1 measurement date for this plan.
The following table represents a reconciliation of the beginning and ending benefit obligation and the funded status of the SERP defined benefit plan (in thousands):
2007 2006
------- -------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .............. $ 5,642 $ 5,495
Service cost ......................................... 426 393
Interest cost ........................................ 353 284
Actuarial loss (gain) ................................ 491 (530)
------- -------
Benefit obligation at end of year .................... $ 6,912 $ 5,642
======= =======
FUNDED STATUS ........................................ (6,912) (5,642)
Unrecognized prior service cost ...................... 580 690
Additional minimum pension liability ................. (871) (1,029)
Unrecognized net actuarial loss ...................... 1,246 912
------- -------
Net amount recognized (accrued benefit cost) ......... $(5,957) $(5,069)
======= =======
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Components of net periodic benefit cost follow (in thousands):
2007 2006 2005
------ ------ ------
Service cost ............................... $ 426 $ 393 $ 394
Interest cost .............................. 353 284 255
Amortization of prior service cost ......... 110 111 110
Amortization of unrecognized loss .......... 158 117 118
------ ------ ------
Net periodic benefit cost .................. $1,047 $ 905 $ 877
====== ====== ======
|
Actuarial assumptions used to determine costs and benefit obligations are as follows:
2007 2006 2005
---- ---- -------
Discount rates .................... 5.75% 5.75% 5.50%
Salary increase ................... 4% 4% 4%
|
The following SERP benefit payments are expected to be paid (in thousands):
2008............................................ $ 4,761 2009............................................ -- 2010............................................ -- 2011............................................ -- 2012............................................ -- Years 2013 - 2017............................... 4,736 |
The estimated net loss and prior service cost for the plan that is expected to be amortized from accumulated other comprehensive income into pension costs during 2008 are $0.1 million and $0.1 million, respectively.
We maintain a UK pension plan which is comprised of a defined benefit plan and a defined contribution plan. Effective April 1, 2001, the defined benefit plan was closed to new entrants and existing active members ceased accruing any further benefits.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents a reconciliation of the beginning and ending benefit obligation and the funded status of our UK defined benefit plan:
2007 2006
---- ----
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .............. $ 3,310 $ 2,886
Service cost ......................................... -- --
Interest cost ........................................ 173 168
Actuarial (gain) loss ................................ (227) --
Benefits paid ........................................ (105) (125)
Translation adjustment ............................... 49 381
------- -------
Benefit obligation at end of year .................... $ 3,200 $ 3,310
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year........ 3,288 2,678
Employer contributions ............................... 95 94
Actual return on plan assets ......................... 135 288
Benefits paid ........................................ (105) (125)
Translation adjustment ............................... 49 353
------- -------
Fair value of plan assets at end of year ............. $ 3,462 $ 3,288
------- -------
FUNDED (UNFUNDED) STATUS ............................. 262 (22)
Unrecognized prior service cost ...................... -- 22
Unrecognized net actuarial loss ...................... 1,797 1,974
------- -------
Net amount recognized ................................ $ 2,059 $ 1,974
======= =======
|
Amounts recognized in the consolidated balance sheet consist of (in thousands):
2007 2006
---- ----
Current liabilities ............................... $ -- $ --
Non-current assets (liabilities) .................. 262 (22)
Accumulated other comprehensive loss .............. 1,797 1,996
------- -------
Net amount recognized ............................. $ 2,059 $ 1,974
======= =======
|
Amounts recognized in accumulated other comprehensive loss consist of (in thousands):
2007 2006
------ ------
Net actuarial (gain) loss ...................... $1,797 $1,974
Prior service cost (credit) .................... -- 22
------ ------
Net amount recognized .......................... $1,797 $1,996
====== ======
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information for the UK pension plan with accumulated benefit obligation in excess of plan assets (in thousands):
2007 2006
------ ------
Projected benefit obligation ..................... $3,200 $3,310
Accumulated benefit obligation ................... $3,200 $3,310
Fair value of plan assets ........................ $3,462 $3,288
|
Components of net periodic benefit cost follow (in thousands):
2007 2006 2005
----- ----- -----
Service cost ............................... $ -- $ -- $ --
Interest cost .............................. 173 168 157
Amortization of net actuarial loss ......... 113 -- --
Expected return on plan assets ............. (225) (196) (145)
----- ----- -----
Net periodic benefit cost .................. $ 61 $ (28) $ 12
===== ===== =====
|
Actuarial assumptions used to determine costs and benefit obligations are as follows:
2007 2006 2005
------- ------- -------
Discount rates .............. 5.90% 5.23% 5.23%
Inflation ................... 3.30% 3.00% 3.00%
|
The UK pension plan's weighted-average asset allocation by asset category is as follows:
2007 2006
---- ----
Equity securities ............................ 72% 70%
Bonds ........................................ 13% 14%
Property ..................................... 15% 16%
Cash ......................................... 0% 0%
---- ----
100% 100%
==== ====
|
The return on plan assets for 2007 was approximately 4.3%. The return on plan assets for 2006 was approximately 9.8%.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
2008.......................................................... $ 109 2009.......................................................... 129 2010.......................................................... 149 2011.......................................................... 169 2012.......................................................... 189 Years 2013 - 2017............................................. $1,143 |
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for retirement expense in connection with the UK defined contribution plan is as follows (in thousands):
Year ended December 31, 2007................................................... $ 377 2006................................................... 289 2005................................................... 305 |
15. POST-RETIREMENT MEDICAL BENEFITS
We provide certain medical and dental care benefits to eligible retired employees. Our current policy is to fund the cost of the health care plans on a pay-as-you-go basis.
Effective September 1, 2005, we restricted the eligibility requirements of employees who can participate in this program, whereby all active participants hired after 1995 are no longer eligible. In addition, in accordance with FASB Statement No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions" ("SFAS 106"), we recognized a curtailment gain of $3.8 million for our post-retirement plan related to changes made to our plan which included the above eligibility restriction. The curtailment accounting required us to recognize pro-rata portion of the unrecognized prior service cost as a result of the changes.
In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the "Medicare Reform Act") was signed into law. The Medicare Reform Act expanded Medicare to include, for the first time, coverage for prescription drugs. In connection with the Medicare Reform Act, the FASB issued FASB Staff Position No.106-2 ("FSP 106-2"), which provides guidance on accounting for the effects of the new Medicare prescription drug legislation for employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D and are therefore entitled to receive subsidies from the federal government beginning in 2006. In January 2005, the Centers for Medicare and Medicaid Services released final regulations implementing major provisions of the Medicare Reform Act. The regulations address key concepts, such as defining a plan, as well as the actuarial equivalence test for purposes of obtaining a government subsidy. Pursuant to the guidance in FSP 106-2, we concluded that our post-retirement benefit plan qualifies for the direct subsidies and, consequently, our accumulated post-retirement benefit obligation has been reduced by $6.5 million.
As a result of the reduced eligibility and Medicare subsidy explained above, we benefited in 2006 from a reduction to our post-retirement benefit costs through negative amortization of prior service costs.
We adopted the provisions of SFAS No. 158 on December 31, 2006. The adoption related to post-retirement medical benefit plans resulted in an increase to total assets of $1.3 million, an increase to total liabilities $3.1 million, and a decrease to stockholders' equity of $1.9 million. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years beginning after December 15, 2008, which for us is the year ending December 31, 2009. As all of our measurement dates are as of December 31, our fiscal year-end reporting date, there will be no impact on us as related to the measurement date provisions of SFAS 158.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents a reconciliation of the beginning and ending benefit obligation and the funded status of the plan (in thousands):
2007 2006
-------- --------
Benefit obligation at beginning of year .......... $ 38,192 $ 35,302
Service cost ..................................... 818 807
Interest cost .................................... 2,231 2,050
Amendments ....................................... -- --
Actuarial loss ................................... 763 953
Benefits paid .................................... (895) (920)
-------- --------
Benefit obligation at end of year ................ $ 41,109 $ 38,192
-------- --------
Funded status .................................... $(41,109) $(38,192)
Unrecognized transition obligation ............... -- --
Unrecognized prior service costs ................. -- --
Unrecognized net actuarial loss .................. -- --
-------- --------
Accrued benefit cost ............................. $(41,109) $(38,192)
======== ========
|
Components of net periodic benefit cost following (in thousands):
2007 2006 2005
------- ------- -------
Service cost ............................... $ 818 $ 807 $ 2,924
Interest cost .............................. 2,231 2,050 2,330
Amortization of transition obligation ...... 5 4 30
Amortization of prior service cost ......... (2,871) (2,868) (1,190)
Amortization of net actuarial loss ......... -- -- 6
Recognized actuarial loss .................. 1,310 1,481 1,056
------- ------- -------
Net periodic benefit cost .................. $ 1,493 $ 1,474 $ 5,156
SFAS 106 curtailment gain .................. -- -- (3,842)
------- ------- -------
Total benefit cost .................... $ 1,493 $ 1,474 $ 1,314
======= ======= =======
|
Actuarial assumptions used to determine costs and benefit obligations are as follows:
2007 2006 2005
---- ---- ----
Discount rate .................................... 5.75% 5.75% 5.50%
Current medical cost trend rate .................. 9% - 10% 9% 9%
Current dental cost trend ........................ 5% 5% 5%
Ultimate medical cost trend rate ................. 5% 5% 5%
Year trend rate declines to ultimate ............. 2012 2011 2010
Our measurement date for this plan is December 31.
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following benefit payments which reflect expected future service, as appropriate, are expected to be paid (in thousands):
2008........................ $ 894 2009........................ 892 2010........................ 910 2011........................ 907 2012........................ 921 Years 2013 - 2017........... $ 5,374 |
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 2007 (in thousands):
1-PERCENTAGE-
1-PERCENTAGE- POINT
POINT INCREASE DECREASE
-------------- --------
Effect on total of service and
interest cost components ...................... $ 589 $ (475)
Effect on post retirement benefit
obligation .................................... $ 7,245 $(5,875)
|
The estimated net loss and prior service cost (credit) for the plan that is expected to be amortized from accumulated other comprehensive income into post-retirement medical benefits cost during 2008 are $1.2 million and ($2.9) million, respectively.
16. OTHER INCOME (EXPENSE), NET
YEAR ENDED DECEMBER 31,
------------------------------
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
Interest and dividend income ................................. $ 687 $ 498 $ 311
Gain on early retirement of debt ............................. -- -- 1,258
Income from joint ventures ................................... 116 915 956
Loss on divestiture of European Temperature Control operations -- (3,209) --
Gain (loss) on disposal of property, plant and equipment ..... 794 (71) 160
Gain (loss) on foreign exchange .............................. 1,421 646 (768)
Other income - net ........................................... 863 838 731
------- ------- -------
Total other income (expense), net ........................ $ 3,881 $ (383) $ 2,648
======= ======= =======
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES
The income tax provision (benefit) consists of the following (in thousands):
2007 2006 2005
---- ---- ----
Current:
Domestic ........................... $ 1,473 $ 968 $ 233
Foreign ........................... 3,720 2,135 2,137
------- ------- -------
Total Current ........................ 5,193 3,103 2,370
Deferred:
Domestic .......................... (2,500) 3,416 (1,074)
Foreign ........................... 105 (25) 127
------- ------- -------
Total Deferred ....................... (2,395) 3,391 (947)
------- ------- -------
Total income tax provision ........... $ 2,798 $ 6,494 $ 1,423
======= ======= =======
|
We have not provided for U.S. income taxes on the undistributed earnings of our foreign subsidiaries that are deferred from U.S. income taxation and that we intend to be permanently reinvested. The Company has provided for U.S. income tax regarding those undistributed earnings of our foreign subsidiaries subject to current taxation under Subpart F of the Internal Revenue Code. Cumulative undistributed earnings of foreign subsidiaries on which no U.S. income tax has been provided were $44.1 million at the end of 2007, $35.9 million at the end of 2006 and $36.1 million at the end of 2005.
Earnings before income taxes for foreign operations (excluding Puerto Rico) amounted to approximately $9.3 million, $6.6 million and $6.8 million in 2007, 2006 and 2005, respectively. Prior to 2006, U.S. income taxes on the earnings of the Puerto Rican subsidiary were largely eligible for tax credits against such U.S. income taxes. During 2006, such earnings became fully subject to U.S. income taxes. Such earnings are partially exempt from Puerto Rican income taxes under a tax exemption grant expiring in 2016.
Reconciliations between taxes at the United States federal income tax rate and taxes at our effective income tax rate on earnings from continuing operations before income taxes are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2007 2006 2005
---- ---- ----
U.S. federal income tax rate of 35% .............................. $ 2,880 $ 5,480 $ (121)
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal income tax benefit (93) 33 (121)
State tax credits ............................................. 3 8 (535)
Non-deductible items, net ..................................... 809 246 241
Impact on deferred tax assets, Puerto Rico .................... -- (1,146) --
Income (benefit) taxes attributable to foreign income ......... 366 (2) (1,115)
Change in valuation allowance ................................. (1,167) 1,875 3,074
------- ------- -------
Provision (benefit) for income
taxes ....................................................... $ 2,798 $ 6,494 $ 1,423
======= ======= =======
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the components of the net deferred tax assets and liabilities recognized in the accompanying consolidated balance sheets (in thousands):
DECEMBER 31,
--------------------
2007 2006
-------- --------
Deferred tax assets:
Inventories .................................................. $ 11,071 $ 9,922
Allowance for customer returns ............................... 8,675 7,285
Post-retirement benefits ..................................... 15,016 13,261
Allowance for doubtful accounts .............................. 3,808 3,495
Accrued salaries and benefits ................................ 13,392 9,672
Net operating loss, capital loss and tax credit carry forwards 14,351 21,136
Goodwill ..................................................... 543 1,512
Accrued asbestos liabilities ................................. 9,501 8,691
Other ........................................................ 8,174 7,194
-------- --------
84,531 82,168
-------- --------
Valuation allowance .......................................... (26,840) (28,006)
-------- --------
Total ........................................................ $ 57,691 $ 54,162
======== ========
Deferred tax liabilities:
Depreciation ................................................. $ 3,594 $ 4,743
Promotional costs ............................................ 560 482
Goodwill ..................................................... 672 514
Restructuring costs .......................................... 8,851 8,620
Other ........................................................ 1,202 1,358
-------- --------
Total ........................................................ 14,879 15,717
-------- --------
Net deferred tax assets ......................................... $ 42,812 $ 38,445
======== ========
|
The current net deferred tax assets are $17 million and $14 million for 2007 and 2006, respectively. The non-current net deferred tax assets are $25.8 million and $24.4 million for 2007 and 2006, respectively. The tax valuation allowance was allocated to the current deferred tax assets in the amounts of $10.7 million and $10.3 million in 2007 and 2006, respectively. The long term tax deferred assets had a valuation allowance of $16.2 million and $17.7 million in 2007 and 2006, respectively.
We performed an assessment regarding the realization of the net deferred tax assets, which includes projecting future taxable income, and have decreased the valuation allowance by $1.2 million. The decrease in the valuation allowance specifically applied to the projected realization of the capital loss carryforward in the U.S. resulting from the sale of the Long Island City building expected to occur during 2008. The valuation allowance is intended to provide, in part, for the uncertainty regarding the ultimate utilization of our state tax credit carryovers, U.S. foreign tax credit carryovers, foreign net operating loss carry forwards, and certain long lived deferred tax assets stemming mainly from accrued asbestos liabilities and post-retirement benefit obligations. At December 31, 2007, approximately $150 million of U.S. taxable income will need to be generated to realize the entire deferred tax asset, with the exception of certain credit carryforwards. We believe it is more likely than not that we will only generate approximately $99 million of U.S. taxable income within the next 5 years. Therefore, we have a reserve of $22.4 million against the U.S. deferred tax assets at December 31, 2007. In addition, if we are unable to generate sufficient taxable income in the future through our operations, increases in the valuation allowance may be required.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2007, we have approximately $17.5 million of domestic and foreign net operating loss carry forwards, of which $5.9 million will expire in 2025, with the remainder (foreign) having an indefinite carryforward period. We also have foreign tax credit carryforwards of approximately $1.1 million that will expire between 2010 and 2012, a capital loss carryforward of approximately $0.6 million that will expire in 2011 and an alternative minimum tax credit carryforward of approximately $6.5 million, which has no expiration date.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2007......................................... $ 400
Increase based on tax positions taken in the current year.......... 2,100
Decrease based on tax positions taken in the current year.......... (200)
-------
Balance at December 31, 2007....................................... $ 2,300
=======
|
The amount of unrecognized tax benefits at December 31, 2007, includes $2 million of unrecognized tax benefits which, if ultimately recognized, will reduce our annual effective tax rate.
We are subject to taxation in the U.S. and various state, local and foreign jurisdictions. We remain subject to examination by U.S. Federal, state, local and foreign tax authorities for tax year 2001 as well as 2003 through 2006. With a few exceptions, we are no longer subject to U.S. Federal, state, local or foreign examinations by tax authorities for the tax year 2002 and for tax years prior to 2001. We do not presently anticipate that our unrecognized tax benefits will significantly increase or decrease prior to December 31, 2008; however, actual developments in this area could differ from those currently expected.
We recognize interest and penalties associated with income tax matters as components of the "provision for income taxes." Our accrual for interest and penalties was $0.4 million upon adoption of FIN 48 and at December 31, 2007.
18. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), we have three reportable operating segments, which are the major product areas of the automotive aftermarket in which we compete. Engine Management consists primarily of ignition and emission parts, wire and cable, and fuel system parts. Temperature Control consists primarily of compressors, other air conditioning parts and heater parts. The third reportable operating segment is Europe, which consists of both Engine Management and Temperature Control reporting units.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1). The following tables contain financial information for each reportable segment (in thousands):
2007 2006 2005
--------- --------- ---------
Net sales:
Engine Management .................. $ 527,241 $ 543,221 $ 547,008
Temperature Control ................ 207,604 211,102 229,226
Europe ............................. 42,210 47,044 43,423
Other .............................. 13,130 10,657 10,756
--------- --------- ---------
Total ............................ $ 790,185 $ 812,024 $ 830,413
========= ========= =========
Depreciation and amortization:
Engine Management .................. $ 9,474 $ 9,893 $ 9,992
Temperature Control ................ 2,936 3,457 4,717
Europe ............................. 1,019 816 1,415
Other .............................. 1,752 1,320 1,232
--------- --------- ---------
Total ............................ $ 15,181 $ 15,486 $ 17,356
========= ========= =========
Operating profit (loss):
Engine Management .................. $ 28,109 $ 41,249 $ 19,338
Temperature Control ................ 10,215 11,954 11,936
Europe ............................. 968 46 (572)
Other .............................. (16,900) (17,934) (16,620)
--------- --------- ---------
Total ............................ $ 22,392 $ 35,315 $ 14,082
========= ========= =========
Investment in equity affiliates:
Engine Management .................. $ -- $ -- $ --
Temperature Control ................ -- -- --
Europe ............................. 145 201 (202)
Other .............................. 2,165 2,282 2,216
--------- --------- ---------
Total ............................ $ 2,310 $ 2,483 $ 2,014
========= ========= =========
Capital expenditures:
Engine Management .................. $ 10,622 $ 7,481 $ 7,511
Temperature Control ................ 1,542 1,339 1,813
Europe ............................. 1,792 1,215 623
Other .............................. 39 45 10
--------- --------- ---------
Total .............................. $ 13,995 $ 10,080 $ 9,957
========= ========= =========
Total assets:
Engine Management .................. $ 443,465 $ 430,158 $ 438,116
Temperature Control ................ 113,440 109,734 114,441
Europe ............................. 36,538 26,708 28,217
Other .............................. 84,649 73,492 72,270
--------- --------- ---------
Total ............................ $ 678,092 $ 640,092 $ 653,044
========= ========= =========
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of segment operating profit (loss) to net earnings (loss):
2007 2006 2005
-------- -------- --------
Operating profit .......................... $ 22,392 $ 35,315 $ 14,082
Other income (expense) .................... 3,881 (383) 2,648
Interest expense .......................... 18,044 19,275 17,077
-------- -------- --------
Earnings (loss) from continuing operations
before taxes ........................... 8,229 15,657 (347)
Income tax expense ........................ 2,798 6,494 1,423
-------- -------- --------
Earnings (loss) from continuing operations . 5,431 9,163 (1,770)
Discontinued operation, net of tax ....... (3,156) 248 (1,775)
-------- -------- --------
Net earnings (loss) ........................ $ 2,275 $ 9,411 $ (3,545)
======== ======== ========
|
Our five largest individual customers, including members of a marketing group, accounted for 50%, 51% and 52% of consolidated net sales in 2007, 2006 and 2005, respectively. These net sales were generated from our Engine Management and Temperature Control Segments.
Other Adjustments consist of items pertaining to our corporate headquarters function, as well as our Canadian business unit that does not meet the criteria of a reportable operating segment under SFAS 131.
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
United States ............... $663,534 $688,030 $716,358
Canada ...................... 53,901 48,537 46,353
Europe ...................... 42,210 47,044 43,423
Other Foreign ............... 30,540 28,413 24,279
-------- -------- --------
Total .................... $790,185 $812,024 $830,413
======== ======== ========
LONG LIVED ASSETS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
United States ............... $136,029 $144,208 $161,451
Europe ...................... 8,883 4,821 4,682
Canada ...................... 3,954 4,014 3,900
Other Foreign ............... 680 778 754
-------- -------- --------
Total ..................... $149,546 $153,821 $170,787
======== ======== ========
|
Revenues are attributed to countries based upon the location of the customer. Long lived assets are attributed to countries based upon the location of the assets.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. 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.
TRADE ACCOUNTS RECEIVABLE
The carrying amount of trade receivables approximates fair value because of their short outstanding terms.
TRADE ACCOUNTS PAYABLE
The carrying amount of trade payables approximates fair value because of their short outstanding terms.
SHORT TERM BORROWINGS
The carrying value of these borrowings equals fair market value because their interest rate reflects current market rates.
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on quoted market prices or current rates offered to us for debt of the same remaining maturities.
The estimated fair values of our financial instruments are as follows (in thousands):
CARRYING AMOUNT FAIR VALUE
--------------- ----------
DECEMBER 31, 2007
Cash and cash equivalents.................. $ 13,261 $ 13,261
Trade accounts receivable.................. 204,445 204,445
Trade accounts payable..................... 64,384 64,384
Short term borrowings...................... 156,756 156,756
Long-term debt............................. 98,555 94,730
DECEMBER 31, 2006
Cash and cash equivalents.................. $ 22,348 $22,348
Trade accounts receivable.................. 183,664 183,664
Trade accounts payable..................... 53,783 53,783
Short term borrowings...................... 139,799 139,799
Long-term debt............................. 98,521 94,584
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20.......COMMITMENTS AND CONTINGENCIES
Total rent expense for the three years ended December 31, 2007 was as follows (in thousands):
TOTAL REAL ESTATE OTHER
----- ----------- -----
2007........................................ $8,948 $ 5,996 $2,952
2006........................................ 8,438 5,983 2,455
2005........................................ 9,928 6,970 2,958
|
At December 31, 2007, we are obligated to make minimum rental payments through 2022, under operating leases, which are as follows (in thousands):
2008................................................... $ 8,464
2009................................................... 7,772
2010................................................... 5,507
2011................................................... 4,511
2012................................................... 3,921
Thereafter............................................. 14,861
-------
Total.............................................. $45,036
=======
|
At December 31, 2007, we also had lease agreements in place for the Long Island City, New York property. At such time, we expected to receive operating lease payments from lessees during the five years ending December 31, 2008 through 2012 of $0.6 million, $0.4 million, $0.2 million, $0 and $0, respectively. In connection with the sale of the Long Island City, New York property, the related rental income from these lessees was assigned to the purchaser at the closing on March 12, 2008. For information regarding the sale and leaseback of the Long Island City, New York property, see Note 22.
We generally warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time of the product depending on the nature of the product. As of December 31, 2007 and 2006, we have accrued $11.3 million and $11.7 million, respectively, for estimated product warranty claims included in accrued customer returns. The accrued product warranty costs are based primarily on historical experience of actual warranty claims. Warranty expense for each of the years 2007, 2006 and 2005 were $47.2 million, $49.3 million and $50.3 million, respectively.
The following table provides the changes in our product warranties (in thousands):
2007 2006
-------- --------
Balance, beginning of period ....................... $ 11,704 $ 12,701
Liabilities accrued for current year sales ......... 47,191 49,259
Settlements of warranty claims ..................... (47,578) (50,256)
-------- --------
Balance, end of period ............................. $ 11,317 $ 11,704
======== ========
|
LETTERS OF CREDIT. At December 31, 2007, we had outstanding letters of credit with certain vendors aggregating approximately $0.8 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.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CHANGE OF CONTROL ARRANGEMENTS. We entered into change in control arrangements with two key officers. In the event of a change of control (as defined in the agreement), each executive will receive severance payments and certain other benefits as provided in their respective agreement.
ASBESTOS. In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation. 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, 2007, approximately 3,430 cases were outstanding for which we were responsible for any related liabilities. We expect the outstanding cases to increase gradually due to recent legislation in certain states mandating minimum medical criteria before a case can be heard. Since inception in September 2001 through December 31, 2007, the amounts paid for settled claims are approximately $6.1 million. In September of 2007, we entered into an agreement with an insurance carrier to provide us with limited insurance coverage for the defense and indemnity costs associated with certain asbestos-related claims. We have submitted various asbestos-related claims to the insurance carrier for coverage under this agreement.
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 and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of settlement discussions. As is our accounting policy, we engage actuarial consultants with experience in assessing asbestos-related liabilities to estimate our 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 our recent claims history to estimate likely filing rates into the future; (3) an analysis of our currently pending claims; and (4) an analysis of our settlements to date in order to develop average settlement values.
The most recent actuarial study was performed as of August 31, 2007. The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs, ranging from $23.8 million to $55.2 million for the period through 2050. The change from the prior year study was a $1.7 million increase for the low end of the range and a $1.3 million increase for the high end of the range. Based on the information contained in the actuarial study and all other available information considered by us, 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 2050 in our consolidated financial statements. Accordingly, an incremental $2.8 million provision in our discontinued operation was added to the asbestos accrual increasing the reserve to approximately $23.8 million. According to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operation in the accompanying statement of operations, are estimated to range from $18.7 million to $32.6 million during the same period.
We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future. Given the uncertainties associated with projecting such matters into the future 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.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ANTITRUST LITIGATION. In November 2004, we were served with a summons and complaint in the U.S. District Court for the Southern District of New York by The Coalition For A Level Playing Field, which is an organization comprised of a large number of auto parts retailers. The complaint alleges antitrust violations by us and a number of other auto parts manufacturers and retailers and seeks injunctive relief and unspecified monetary damages. In August 2005, we filed a motion to dismiss the complaint, following which the plaintiff filed an amended complaint dropping, among other things, all claims under the Sherman Act. The remaining claims allege violations of the Robinson-Patman Act. Motions to dismiss those claims were filed by us in February 2006. Plaintiff filed opposition to our motions, and we subsequently filed replies in June 2006. Oral arguments were originally scheduled for September 2006, however the court adjourned these proceedings until a later date to be determined. Subsequently, the judge initially assigned to the case recused himself, and a new judge has been assigned before whom further preliminary proceedings have been held. Although we cannot predict the ultimate outcome of this case or estimate the range of any potential loss that may be incurred in the litigation, we believe that the lawsuit is without merit, deny all of the plaintiff's allegations of wrongdoing and believe we have meritorious defenses to the plaintiff's claims. We intend to defend vigorously this lawsuit.
OTHER LITIGATION. 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.
21. QUARTERLY FINANCIAL DATA UNIT (UNAUDITED)
2007:
QUARTER ENDED DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2007 2007 2007 2007
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ...................................................... $ 167,251 $ 206,169 $ 216,950 $ 199,815
--------- --------- --------- ---------
Gross profit ................................................... 39,069 54,642 56,689 51,875
--------- --------- --------- ---------
Earnings (loss) from continuing operations ..................... (7,943) 4,782 5,656 2,936
--------- --------- --------- ---------
Earnings (loss) from discontinued operation,
net of taxes ............................................... (380) (2,148) (279) (349)
--------- --------- --------- ---------
Net earnings (loss) ............................................ $ (8,323) $ 2,634 $ 5,377 $ 2,587
--------- --------- --------- ---------
Net earnings (loss) from continuing operations per common share:
Basic ..................................................... $ (0.43) $ 0.26 $ 0.30 $ 0.16
Diluted ................................................... $ (0.43) $ 0.26 $ 0.30 $ 0.16
--------- --------- --------- ---------
Net earnings (loss) per common share:
Basic ..................................................... $ (0.45) $ 0.14 $ 0.29 $ 0.14
Diluted ................................................... $ (0.45) $ 0.14 $ 0.28 $ 0.14
--------- --------- --------- ---------
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2006:
QUARTER ENDED DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2006 2006 2006 2006
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ....................................................... $ 169,019 $ 203,755 $ 229,174 $ 210,076
--------- --------- --------- ---------
Gross profit .................................................... 45,952 49,332 56,706 53,231
--------- --------- --------- ---------
Earnings (loss) from continuing operations ...................... (1,473) 2,583 5,455 2,598
--------- --------- --------- ---------
Earnings (loss) from discontinued operation,
net of taxes ............................................... (355) 1,656 (289) (764)
--------- --------- --------- ---------
Net earnings (loss) ............................................. $ (1,828) $ 4,239 $ 5,166 $ 1,834
--------- --------- --------- ---------
Net earnings (loss) from continuing operations per common share:
Basic ...................................................... $ (0.08) $ 0.14 $ 0.30 $ 0.14
Diluted .................................................... $ (0.08) $ 0.14 $ 0.30 $ 0.14
--------- --------- --------- ---------
Net earnings (loss) per common share:
Basic ...................................................... $ (0.10) $ 0.23 $ 0.28 $ 0.10
Diluted .................................................... $ (0.10) $ 0.23 $ 0.28 $ 0.10
--------- --------- --------- ---------
|
22. SUBSEQUENT EVENT
On March 12, 2008, we completed the sale of our Long Island City, New York property pursuant to the terms of the Purchase and Sale Agreement entered into in December 2007. The purchase price for the property was $40.6 million, and we used the proceeds to reduce debt under our revolving credit facility.
In connection with the closing, on March 12, 2008, we entered into a lease agreement to lease space at the property. The initial term of the lease is ten years and the lease contains four 5-year renewal options. During the first twelve months of the lease we will make initial annual rental payments of approximately $2.6 million. Thereafter, as we reduce our leased space to approximately 1.5 floors, our annual rent payments will decrease to approximately $1.1 million. The lease agreement provides that our rent payments will increase 3% per year for the first twenty years of the lease; provided that in years 11 and 16, the rent payment increase will be 10% and 5%, respectively.
In connection with the above transactions, we will record a gain from the sale of the property of between $18-$22 million. The remainder of the gain will be deferred and amortized to reduce rental expense during each of the ten years of the initial lease term by approximately $1 million per year.
In addition, in connection with the sale, on March 12, 2008, we defeased the mortgage loan relating to the property. The amount defeased was approximately $7.9 million. We expect to incur one-time charges of approximately $1.4 million related to defeasing the mortgage loan and the write-off of associated deferred financing costs.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Report. This evaluation also included consideration of our internal controls and procedures for the preparation of our financial statements as required under Section 404 of the Sarbanes-Oxley Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.
(b) Management's Report on Internal Control Over Financial Reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act, as part of this Report we have furnished a report regarding our internal control over financial report as of December 31, 2007. The report is under the caption "Management's Report on Internal Control Over Financial Reporting" in "Item 8. Financial Statements and Supplementary Data," which report is incorporated herein by reference.
(c) Attestation Report of Independent Registered Public Accounting Firm.
Grant Thornton, our independent registered public accounting firm, has issued an opinion as to the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. The opinion is under the caption "Report of Independent Registered Public Accounting Firm-Internal Control Over Financial Reporting" in "Item 8. Financial Statements and Supplementary Data" for this attestation report, which is incorporated herein by reference.
(d) Changes in Internal Control Over Financial Reporting.
During the quarter ended December 31, 2007 and subsequent to that date, we have not made changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We continue to review, document and test our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts will lead to various changes in our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Sale/Leaseback of Long Island City, New York Property
On March 12, 2008, we consummated the sale of our Long Island City, New York property. We sold the property to 37-18 Northern Boulevard LLC, the successor to EX II Northern Boulevard Acquisition LLC, pursuant to the terms of that certain Purchase and Sale Agreement, dated as of December 21, 2007. The purchase price for the property was $40.6 million, and we used the net proceeds to reduce debt under our revolving credit facility.
In connection with the closing of the sale of our Long Island City, New York
property, on March 12, 2008 we entered into a Lease Agreement with 37-18
Northern Boulevard LLC, as lessor. The initial term of the lease is ten years
and contains four 5-year renewal options. During approximately the first twelve
months of the lease term, we will make initial annual rent payments of
approximately $2.6 million. Thereafter, as we reduce our leased space to
approximately 1.5 floors, our annual rent payments will decrease to
approximately $1.1 million. The lease agreement provides that our rent payments
will increase 3% per year for the first twenty years of the lease; provided that
in years 11 and 16, the rent payment increase will be 10% and 5%, respectively.
The lease also provides for a build-out allowance of approximately $2.1 million,
which we will use to make improvements to our leased space.
In connection with the above transactions, we will record a gain from the sale
of the property of between $18-$22 million during the first quarter of 2008.
The remainder of the gain will be deferred and amortized to reduce rental
expense during each of the ten years of the initial lease term by approximately
$1 million per year.
The description set forth above is qualified by the Purchase and Sale Agreement and the Lease Agreement filed herewith as exhibits 10.22 and 10.23.
Defeasance of Mortgage on Long Island City, New York Property
In connection with the closing of the sale of our Long Island City, New York property, on March 12, 2008 we defeased the mortgage loan relating to the Long Island City, New York property. At closing, the outstanding amount defeased was approximately $7.9 million. We expect to incur one-time charges of approximately $1.4 million in the first quarter of 2008 related to defeasing the mortgage loan and writing off associated deferred financing costs.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the
information in our Definitive Proxy Statement to be filed with the SEC in
connection with our 2008 Annual Meeting of Stockholders (the "2008 Proxy
Statement") set forth under the captions "Election of Directors," "Management
Information," "Corporate Governance" and "Section 16(a) Beneficial Ownership
Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information in our 2008 Proxy Statement set forth under captions "Corporate Governance," "Executive Compensation and Related Information" and "Compensation and Management Development Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the information in our 2008 Proxy Statement set forth under the captions "Executive Compensation and Related Information" and "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information in our 2008 Proxy Statement set forth under the captions "Corporate
Governance" and "Executive Compensation and Related Information."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the information in our 2008 Proxy Statement set forth under the captions "Audit and Non-Audit Fees."
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The Index to Consolidated Financial Statements of the Registrant under Item 8 of this Report is incorporated herein by reference as the list of Financial Statements required as part of this Report.
(2) The following financial schedule and related report for the years 2007, 2006 and 2005 is submitted herewith:
Report of Independent Registered Public Accounting Firm on Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not applicable or the information is included in the financial statements or notes thereto.
(3) Exhibits.
The exhibit list in the Exhibit Index is incorporated by reference as the list of exhibits required as part of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
(REGISTRANT)
/s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chairman, Chief Executive Officer
and Director
/s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and
Chief Financial Officer
New York, New York
March 14, 2008
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lawrence I. Sills and James J. Burke, jointly and severally, as his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
March 14, 2008 /s/ Lawrence I. Sills
----------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
March 14, 2008 /s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
|
March 14, 2008 /s/ Robert M. Gerrity
----------------------
Robert M. Gerrity, Director
March 14, 2008 /s/ Pamela Forbes Lieberman
----------------------------
Pamela Forbes Lieberman, Director
March 14, 2008 /s/ Arthur S. Sills
--------------------
Arthur S. Sills, Director
March 14, 2008 /s/ Peter J. Sills
-------------------
Peter J. Sills, Director
March 14, 2008 /s/ Frederick D. Sturdivant
----------------------------
Frederick D. Sturdivant, Director
March 14, 2008 /s/ William H. Turner
----------------------
William H. Turner, Director
March 14, 2008 /s/ Richard S. Ward
----------------------------
Richard S. Ward, Director
March 14, 2008 /s/ Roger M. Widmann
-----------------------------
Roger M. Widmann, Director
|
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
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 the Company's
Current Report on Form 8-K, filed on February 10, 2003).
3.1 Restated By-Laws, dated May 23, 1996, filed as an Exhibit of the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as
an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990.
3.3 Certificate of Amendment of the Certificate of Incorporation, dated
February 15, 1996, filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
4.1 Form of Subordinated Debenture Indenture (including form of
convertible debenture) (incorporated by reference to Exhibit 4.1 to
the Company's Amendment No. 2 to its Registration Statement on Form
S-3 (Registration No. 333-79177), filed on July 20, 1999).
10.1 Employee Stock Ownership Plan and Trust, dated January 1, 1989
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1989).
10.2 Supplemental Executive Retirement Plan, dated August 15, 1994
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.3 1996 Independent Outside Directors Stock Option Plan of Standard
Motors Products, Inc. (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.4 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended (incorporated by reference to the Company's Registration
Statement on Form S-8 (Registration No. 33-51565), filed on May 1,
1998).
10.5 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended and restated, (incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 333-59524), filed
on April 25, 2001).
10.6 Supplemental Compensation Plan effective October 1, 2001 (incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001).
10.7 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and John Gethin (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
|
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
10.8 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and James Burke (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
10.9 Amended and Restated Credit Agreement, dated as of February 7, 2003,
among Standard Motor Products, Inc., as Borrower and General Electric
Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Current Report on Form 8-K filed on
February 10, 2003).
10.10 Amendment No. 1 to Amended and Restated Credit Agreement, dated June
27, 2003, among Standard Motor Products, Inc., as Borrower and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2003).
10.11 Amendment No. 2 to Amended and Restated Credit Agreement, dated March
11, 2004, among Standard Motor Products, Inc., as Borrower, and
General Electric Capital Corp. and Bank of America, as Lenders
(incorporated by reference to the Company's Quarterly Report in Form
10-Q for the quarter ended March 31, 2004).
10.12 Amendment No. 3 to Amended and Restated Credit Agreement, dated August
11, 2004, among Standard Motor Products, Inc., as Borrower, and
General Electric Capital Corp. and Bank of America, as Lenders
(incorporated by reference to the Company's Quarterly Report in Form
10-Q for the quarter ended September 30, 2004).
10.13 Waiver and Amendment No. 4 to Amended and Restated Credit Agreement,
dated as of March 31, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Annual Report in
Form 10-K for the year ended December 31, 2004).
10.14 Waiver and Amendment No. 5 to Amended and Restated Credit Agreement,
dated as of May 9, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Quarterly Report
in Form 10-Q for the quarter ended March 31, 2005).
10.15 Waiver and Amendment No. 6 to Amended and Restated Credit Agreement,
dated as of November 4, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Quarterly Report
in Form 10-Q for the quarter ended September 30, 2005).
10.16 Consent and Amendment No. 7 to Amended and Restated Credit Agreement,
dated as of December 29, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Current Report on
Form 8-K filed on January 3, 2006).
|
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
10.17 Credit Agreement, dated as of December 29, 2005, among SMP Motor
Products, Ltd., as Borrower, (incorporated by reference to the
Company's Current Report on Form 8-K filed on January 3, 2006).
10.18 Repurchase and Prepayment Agreement, dated as of December 29, 2005,
between Standard Motor Products, Inc., and Dana Corporation
(incorporated by reference to the Company's Current Report on Form 8-K
filed on January 3, 2006).
10.19 Amendment to the Standard Motor Products, Inc. Supplemental
Compensation Plan, effective December 1, 2006 (incorporated by
reference to the Company's Annual Report on Form 10 K for the year
ended December 31, 2006).
10.20 Retention Bonus and Insurance Agreement, dated December 26, 2006,
between Standard Motor Products, Inc. and John Gethin (incorporated by
reference to the Company's Annual Report on Form 10 K for the year
ended December 31, 2006).
10.21 Retention Bonus and Insurance Agreement dated December 26, 2006,
between Standard Motor Products, Inc. and James Burke (incorporated by
reference to the Company's Annual Report on Form 10 K for the year
ended December 31, 2006).
10.22 Purchase and Sale Agreement, dated December 21, 2007, between Standard
Motors Products, Inc. and EXII Northern Boulevard Acquisition LLC.
10.23 Lease Agreement, dated March 12, 2008, between Standard Motors
Products, Inc. and 37-18 Northern Boulevard LLC.
10.24 Standard Motor Products, Inc. Special Incentive Plan (incorporated by
reference to our Current Report on Form 8-K filed January 28, 2008).
21 List of Subsidiaries of Standard Motor Products, Inc.
23 Consent of Independent Registered Public Accounting Firm.
24 Power of Attorney (see signature page to Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Stockholders and Board of Directors
Standard Motor Products, Inc.
We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Standard Motor Products, Inc and Subsidiaries referred to in our report dated March 13, 2008, which is included in the annual report to security holders on Form 10-K. Our report on the consolidated financial statements includes explanatory paragraphs relating to the application of FASB Interpretation No. 48 effective January 1, 2007, and the application of Statement of Financial Accounting Standards No. 123 (R) as of January 1, 2006 and No. 158 as of December 31, 2006. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2), which is the responsibility of the Company's management. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP New York, New York March 13, 2008 |
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2007, 2006 and 2005
Additions
Balance at Charged to
beginning costs and Balance at
Description of year expenses Other Deductions end of year
----------- ------- -------- ------ ---------- -----------
Year ended December 31, 2007:
Allowance for doubtful accounts $ 7,311,000 $ 709,000 $ (1,030,000) (1) $ 370,000 $ 6,620,000
Allowance for discounts 2,154,000 11,463,000 -- 11,273,000 2,344,000
--------------- ---------------- --------------- -------------- ---------------
$ 9,465,000 $ 12,172,000 $ (1,030,000) (1) $ 11,643,000 $ 8,964,000
=============== ================ =============== =============== ===============
Allowance for sales returns $ 21,705,000 $ 88,889,000 $ -- $ 87,445,000 $ 23,149,000
=============== ================ =============== =============== ===============
Allowance for inventory valuation $ 35,438,000 $ 6,623,000 $ -- $ 5,314,000 $ 36,747,000
=============== ================ =============== =============== ===============
Year ended December 31, 2006:
Allowance for doubtful accounts $ 7,527,000 $ 405,000 $ (382,000) (2) $ 239,000 $ 7,311,000
Allowance for discounts 2,047,000 11,491,000 -- 11,384,000 2,154,000
--------------- ---------------- --------------- -------------- ---------------
$ 9,574,000 $ 11,896,000 $ (382,000) (2) $ 11,623,000 $ 9,465,000
=============== ================ =============== =============== ===============
Allowance for sales returns $ 22,346,000 $ 82,259,000 $ (95,000) (2) $ 82,805,000 $ 21,705,000
=============== ================ =============== =============== ===============
Allowance for inventory valuation $ 39,061,000 $ 6,128,000 $ (846,000) (2) $ 8,905,000 $ 35,438,000
=============== ================ =============== =============== ===============
Year ended December 31, 2005:
Allowance for doubtful accounts $ 7,422,000 $ 655,000 $ -- $ 550,000 $ 7,527,000
Allowance for discounts 1,932,000 11,708,000 -- 11,593,000 2,047,000
--------------- ---------------- --------------- --------------- ---------------
$ 9,354,000 $ 12,363,000 $ -- $ 12,143,000 $ 9,574,000
=============== ================ =============== =============== ===============
Allowance for sales returns $ 23,127,000 $ 83,872,000 $ -- $ 84,653,000 $ 22,346,000
=============== ================ =============== =============== ===============
Allowance for inventory valuation $ 39,638,000 $ 5,286,000 $ -- $ 5,863,000 $ 39,061,000
=============== ================ =============== =============== ===============
|
(1) Reclass to non-current for receivables with extended terms.
(2) Allowances for divested companies.
PURCHASE AND SALE AGREEMENT
BETWEEN
SMP REAL ESTATE LLC, AS SELLER
AND
EX II NORTHERN BOULEVARD ACQUISITION LLC, AS PURCHASER
AS OF DECEMBER 21, 2007
TABLE OF CONTENTS
PAGE
ARTICLE 1 DEFINITIONS................................................................................1
ARTICLE 2 PURCHASE AND SALE..........................................................................6
2.1 Agreement to Sell and Purchase the Property....................................................6
2.2 Permitted Exceptions...........................................................................7
2.3 Earnest Money..................................................................................7
2.4 Purchase Price.................................................................................7
2.5 Closing........................................................................................7
ARTICLE 3 PURCHASER'S INSPECTION AND REVIEW RIGHTS...................................................8
3.1 Due Diligence Inspections......................................................................8
3.2 Condition of the Property......................................................................9
3.3 Title and Survey..............................................................................14
3.4 Service Contracts.............................................................................15
3.5 Confidentiality...............................................................................15
ARTICLE 4 REPRESENTATIONS, WARRANTIES AND OTHER AGREEMENTS..........................................16
4.1 Representations and Warranties of Seller......................................................16
4.2 Knowledge Defined.............................................................................20
4.3 Covenants and Agreements of Seller............................................................20
4.4 Tenant Estoppel Certificate...................................................................22
4.5 Representations and Warranties of Purchaser...................................................23
4.6 Covenant of Purchaser to Comply with Environmental Remediation Easement.......................24
ARTICLE 5 CLOSING DELIVERIES, CLOSING COSTS AND PRORATIONS..........................................24
5.1 Seller's Closing Deliveries...................................................................24
5.2 Purchaser's Closing Deliveries................................................................26
5.3 Closing Costs.................................................................................27
5.4 Prorations and Credits........................................................................27
ARTICLE 6 CONDITIONS TO CLOSING.....................................................................29
6.1 Conditions Precedent to Purchaser's Obligations...............................................29
6.2 Conditions Precedent to Seller's Obligations..................................................30
ARTICLE 7 CASUALTY AND CONDEMNATION.................................................................30
7.1 Casualty......................................................................................30
7.2 Condemnation..................................................................................31
7.3 Survival......................................................................................32
i
TABLE OF CONTENTS
(continued)
PAGE
ARTICLE 8 DEFAULT AND REMEDIES......................................................................32
8.1 Purchaser's Default...........................................................................32
8.2 Seller's Default..............................................................................32
8.3 Survival......................................................................................33
ARTICLE 9 ASSIGNMENT................................................................................33
9.1 Assignment....................................................................................33
ARTICLE 10 BROKERAGE COMMISSIONS.....................................................................33
10.1 Broker........................................................................................33
ARTICLE 11 MISCELLANEOUS.............................................................................34
11.1 Notices.......................................................................................34
11.2 Possession....................................................................................35
11.3 Time Periods..................................................................................35
11.4 Publicity.....................................................................................35
11.5 Discharge of Obligations......................................................................36
11.6 Severability..................................................................................36
11.7 Construction..................................................................................36
11.8 Sale Notification Letters.....................................................................36
11.9 General Provisions............................................................................36
11.10 Attorney's Fees...............................................................................37
11.11 Counterparts..................................................................................37
11.12 Effective Agreement...........................................................................37
11.13 Certiorari....................................................................................37
11.14 Defeasance....................................................................................37
ii
|
SCHEDULE OF EXHIBITS
Exhibit "A" Description of Land Exhibit "B" List of Personal Property Exhibit "C" List of Existing Commission Agreements Exhibit "D" Form of Escrow Agreement Exhibit "E" List of Existing Environmental Reports Exhibit "F" Description of Existing Survey Exhibit "G" List of Lease Documents Exhibit "H" Municipal Searches Exhibit "I" Litigation Schedule Exhibit "J" List of Service Contracts Exhibit "K" Form of Tenant/Seller Estoppel Certificate Exhibit "K-1" Environmental Remediation Easement Exhibit "K-2" Environmental Insurance Policies Exhibit "L" List of Property Tax Appeals |
SCHEDULE OF CLOSING DOCUMENTS
Schedule 1 Form of Assignment and Assumption of Leases Schedule 2 Form of Assignment and Assumption of Service Contracts Schedule 3 Form of Bill of Sale to Personal and Intangible Property Schedule 4 Form of Seller's FIRPTA Affidavit Schedule 5 Form of Lease |
PURCHASE AND SALE AGREEMENT
37-18 NORTHERN BOULEVARD
LONG ISLAND CITY, NEW YORK
THIS PURCHASE AND SALE AGREEMENT (the "Agreement"), made and entered into as of the 21st day of December, 2007, by and between SMP Real Estate LLC, a Delaware limited liability company ("Seller"), and Ex II Northern Boulevard Acquisition LLC, a Delaware limited liability company ("Purchaser").
WHEREAS, Seller desires to sell that certain improved real property located at street address 37-18 Northern Boulevard, Long Island City, New York, together with certain related personal and intangible property of Seller, and Purchaser desires to purchase such real, personal and intangible property; and
WHEREAS, the parties hereto desire to provide for said sale and purchase on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt, adequacy, and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto hereby covenant and agree as follows:
ARTICLE 1 DEFINITIONS
For purposes of this Agreement, each of the following capitalized terms shall have the meaning ascribed to such terms as set forth below:
"ACO" shall have the meaning ascribed thereto in Section 4.3(e) hereof.
"ACO Environmental Work" shall have the meaning ascribed thereto in Section 4.3(e) hereof.
"Arbitrator" shall have the meaning ascribed thereto in
Section 3.2(f) hereof.
"Assignment and Assumption of Leases" shall mean the form of assignment and assumption of Leases to be executed and delivered by Purchaser and Seller, at the Closing in the form attached hereto as SCHEDULE 1.
"Assignment and Assumption of Service Contracts" shall mean the form of assignment and assumption of the Service Contracts to be executed and delivered by Purchaser and Seller, at the Closing in the form attached hereto as SCHEDULE 2.
"Bill of Sale" shall mean the form of bill of sale to the Personal Property to be executed and delivered to Purchaser by Seller as to the Personal Property, at the Closing in the form attached hereto as SCHEDULE 3.
"Broker" shall have the meaning ascribed thereto in SECTION 10.1 hereof.
"Business Day" shall mean any day other than a Saturday, Sunday or other day on which banking institutions in the State of New York are authorized by law or executive action to close.
"Closing" shall mean the consummation of the purchase and sale of the Property pursuant to the terms of this Agreement.
"Closing Date" shall have the meaning ascribed thereto in
SECTION 2.5 hereof.
"Closing Documents" shall mean any certificate, instrument or other document delivered pursuant to this Agreement.
"Commission Agreement" shall have the meaning ascribed thereto in SECTION 4.1(F) hereof, and such agreement is more particularly described on EXHIBIT "C" attached hereto and made a part hereof.
"Deed" shall have the meaning ascribed thereto in SECTION 5.1(A).
"Deliverables" shall have the meaning ascribed thereto in
Section 4.3(e) hereof.
"Due Diligence Material" shall have the meaning ascribed thereto in SECTION 3.5 hereof.
"Earnest Money" shall mean the sum of FOUR MILLION SIXTY THOUSAND DOLLARS ($4,060,000.00) to be paid by Purchaser to Escrow Agent hereunder as provided in SECTION 2.3 hereof and in the Escrow Agreement, plus any interest earned thereon.
"Effective Date" shall mean the date upon which Seller and Purchaser shall have delivered a fully executed counterpart of this Agreement to the other, which date shall be inserted in the space provided on page 1 hereof. For the purposes of determining the Effective Date, a facsimile signature shall be deemed an original signature.
"Environmental Insurance" shall have the meaning ascribed thereto in SECTION 3.2(C) hereof.
"Environmental Law" shall mean any law, ordinance, rule, regulation, order, judgment, injunction or decree now or hereafter relating to pollution or substances or materials which are considered to be hazardous or toxic, including, without limitation, the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Comprehensive Environmental Response, Compensation and Liability Act (codified in various sections of 26 U.S.C., 33 U.S.C., 42 U.S.C. and 42 U.S.C. ss. 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. ss. 1801 et seq.), the Clean Water Act (33 U.S.C.
ss. 1251 et seq.), the Safe Drinking Water Act (21 U.S.C. ss. 349, 42 U.S.C. ss. 201 et seq. and ss. 300 et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2061 et seq.), the Emergency Planning and Community Right to Know Act (42 U.S.C. ss. 1100 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.), and any state and local environmental laws, all amendments and supplements to any of the foregoing and all regulations and publications promulgated or issued pursuant thereto.
"Environmental Liabilities" shall have the meaning ascribed thereto in SECTION 3.2(B) hereof.
"Environmental Work" shall have the meaning ascribed thereto in SECTION 4.3(E) hereof.
"Escrow Agent" shall mean Kelley Drye & Warren LLP, with an address at 101 Park Avenue, New York, New York 10178.
"Escrow Agreement" shall mean that certain Escrow Agreement in the form attached hereto as EXHIBIT "D" entered into among Seller, Purchaser and Escrow Agent with respect to the Earnest Money.
"Existing Environmental Reports" shall mean those certain reports, correspondence and related materials, if any, more particularly described on EXHIBIT "E" attached hereto and made a part hereof.
"Existing Survey" shall mean that certain survey with respect to the Land, as more particularly described on EXHIBIT "F" attached hereto and made a part hereof.
"FIRPTA Affidavit" shall mean the form of FIRPTA Affidavit to be executed and delivered to Purchaser at Closing by Seller in the form attached hereto as SCHEDULE 4.
"Governmental Authority" shall have the meaning ascribed thereto in SECTION 3.2(B) hereof.
"Hazardous Materials" shall mean any and all substances, mold or organism which is toxic, explosive corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous or any other substances that might pose a hazard to health or safety, the removal of which is required under any Environmental Law or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is regulated, restricted, prohibited or penalized under any Environmental Law (including, without limitation, lead paint, asbestos, urea formaldehyde foam insulation, petroleum and polychlorinated biphenyls).
"Improvements" shall mean all buildings, structures and improvements now or on the Closing Date situated on the Land, including without limitation, all parking areas and facilities, improvements and fixtures located on the Land.
"Indemnitees" shall have the meaning ascribed thereto in
SECTION 3.2(B) hereof.
"Intangible Property" shall mean all intangible property, if any, owned by Seller and related to the Land, the Improvements and the Personal Property, including without limitation, the rights and interests, if any, of Seller in and to the following (to the extent assignable): (i) all assignable plans and specifications and other architectural and engineering drawings for the Land and Improvements; (ii) all assignable warranties or guaranties given or made in respect of the Improvements or Personal Property; (iii) all transferable consents, authorizations, variances or waivers, licenses, permits and approvals from any governmental or quasi-governmental agency, department, board, commission, bureau or other entity or instrumentality solely in respect of the Land or Improvements; and (iv) all of the right, title and interest of Seller in and to all Service Contracts that Purchaser agrees to assume (or is deemed to have agreed to assume).
"Land" shall mean that certain tract or parcel of real property located in Long Island City, New York, which is more particularly described on EXHIBIT "A" attached hereto, together with all rights, privileges and easements appurtenant to said real property, and all right, title and interest, if any, of Seller in and to any land lying in the bed of any street, road, alley or right-of-way, open or closed, adjacent to or abutting the Land.
"Leases" shall mean the leases identified on EXHIBIT "G" attached hereto.
"Monetary Objection" or "Monetary Objections" shall mean (a) any mortgage, deed to secure debt, deed of trust or similar security instrument encumbering all or any part of the Property, (b) any mechanic's, materialman's or similar lien (unless resulting from any act or omission of Purchaser or any of its agents, contractors, representatives or employees or any tenant of the Property), (c) the lien of ad valorem real or personal property taxes, assessments and governmental charges affecting all or any portion of the Property which are due and payable, and (d) any judgment of record against Seller in the county or other applicable jurisdiction in which the Property is located.
"Mortgage" shall have the meaning ascribed thereto in Section 11.15 hereof.
"Non-ACO Environmental Work" shall have the meaning ascribed thereto in SECTION 4.3(E) hereof.
"Other Notices of Sale" shall have the meaning ascribed thereto in SECTION 5.1(Q) hereof.
"Permitted Exceptions" shall mean, collectively, (a) liens for taxes, assessments and governmental charges not yet due and payable with respect to the Land and Improvements, (b) the Leases affecting the Land and Improvements, (c) such state of facts set forth on the Existing Survey, (d) such state of facts, if any, in addition to the state of facts set forth on the Existing Survey, as would be disclosed by a current survey of the Land, provided such additional state of facts, if any, would not render title to the Property unmarketable, (e) Reservation of Easement set forth in deed dated May 11, 1911, recorded May 31, 1911 in Liber 1751 Cp. 354, (f) Sidewalk Violation No. 2447/92 filed June 8, 1992, and (g) such other easements, restrictions and encumbrances with respect to the Land and Improvements that do not constitute Monetary Objections, and that are approved (or are deemed approved) by Purchaser in accordance with the provisions of SECTION 3.3 hereof.
"Personal Property" shall mean all carpeting, draperies, appliances, personal property (excluding any computer software which is either licensed to Seller or which Seller deems proprietary), machinery, apparatus and equipment owned by Seller and currently used exclusively in the operation, repair and maintenance of the Land and Improvements and situated thereon, including, without limitation, as generally described on EXHIBIT "B" attached hereto and made a part hereof. The Personal Property does not include any property owned by tenants, contractors or licensees, and shall be conveyed by Seller to Purchaser subject to depletions, replacements and additions in the ordinary course of Seller's business.
"Property" shall have the meaning ascribed thereto in SECTION 2.1 hereof.
"Purchase Price" shall be the amount specified in SECTION 2.4 hereof.
"Purchaser Waived Breach" shall have the meaning ascribed thereto in SECTION 4.1 hereof.
"Purchaser Consultation Matters" shall have the meaning ascribed thereto in SECTION 3.2(E) hereof.
"Purchaser's Counsel" shall mean Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York, Attention: Brian Diamond, Esq.
"Purchaser's Environmental Insurance" shall have the meaning ascribed thereto in SECTION 3.2(B) hereof.
"Purchaser's Investigation" shall have the meaning ascribed thereto in SECTION 3.2(C) hereof.
"Purchaser's Investigation Workplan" shall have the meaning ascribed thereto in SECTION 3.2(C) hereof.
"Release" shall mean any discharge, disposal, leaching, emission, or spill of Hazardous Materials in violation of Environmental Law or in such manner that would be reasonably likely to result in liability or an obligation under Environmental Law to investigate and/or remediate such Hazardous Material.
"ROD" shall have the meaning ascribed thereto in Section 3.2(e) hereof.
"Seller Estoppel Certificate" shall mean the certificate to be provided by Seller in substantially the form attached hereto as EXHIBIT "K" if and to the extent Seller fails to provide a Tenant Estoppel Certificate for each subject tenant under a Lease.
"Seller Lease" shall mean the form of lease covering a portion of the Property to be executed and delivered by Purchaser, as landlord, and Standard Motor Products, Inc., as tenant, at the Closing in the form attached hereto as Schedule 5.
"Seller's Affidavit" shall mean the form of owner's affidavit to be given by Seller at Closing to the Title Company in a form reasonably acceptable to Seller and the Title Company.
"Seller's Counsel" shall mean Kelley Drye & Warren LLP, 101 Park Avenue, New York, New York 10178, Attention: Bud Holman, Esq.
"Service Contracts" shall mean all those certain contracts and agreements more particularly described as Service Contracts on EXHIBIT "J" attached hereto and made a part hereof relating to the repair, maintenance or operation of the Land, Improvements or Personal Property which will extend beyond the Closing Date, including, without limitation, all equipment leases.
"Survey" shall have the meaning ascribed thereto in SECTION 3.3 hereof.
"Taxes" shall have the meaning ascribed thereto in SECTION 5.4(A) hereof.
"Tenant Estoppel Certificate" shall mean the certificate to be sought from the tenants under the Leases in substantially the form attached hereto as EXHIBIT "K"; PROVIDED, HOWEVER, that in no event shall Seller be obligated to deliver to Purchaser a Tenant Estoppel Certificate containing any terms or items that are not expressly the obligation of tenant to certify pursuant to the terms of its Lease.
"Tenant Inducement Costs" shall mean any out-of-pocket payments required under a Lease to be paid by the landlord thereunder to or for the benefit of the tenant thereunder which is in the nature of a tenant inducement, including specifically, but without limitation, tenant improvement costs, lease buyout payments, and moving, design, refurbishment and costs.
"Tenant Notice of Sale" shall have the meaning ascribed thereto in SECTION 5.1(P) hereof.
"Title Company" shall mean Fidelity National Title Insurance Company; provided, however, that Purchaser may obtain co-insurance (pursuant to a "me-too" endorsement), as to not more than twenty-five percent (25%) of the owner's policy, from Regal Title Agency.
"Title Commitment" shall have the meaning ascribed thereto in
SECTION 3.3 hereof.
"Title Notice" shall have the meaning ascribed thereto in
SECTION 3.3 hereof.
ARTICLE 2 PURCHASE AND SALE
2.1 AGREEMENT TO SELL AND PURCHASE THE PROPERTY. Subject to and in accordance with the terms and provisions of this Agreement, Seller agrees to sell and Purchaser agrees to purchase, the following property (collectively, the "Property"):
(a) the Land;
(b) the Improvements;
(c) all right, title and interest of Seller as "landlord" or "lessor" in and to the Leases;
(d) the Personal Property; and
(e) the Intangible Property.
2.2 PERMITTED EXCEPTIONS. The Property shall be conveyed subject to the matters which are, or are deemed pursuant to the terms of this Agreement to be, Permitted Exceptions.
2.3 EARNEST MONEY.
(a) On December 24, 2007, Purchaser shall deliver the Earnest Money to Escrow Agent by federal wire transfer, which Earnest Money shall be held and released by Escrow Agent in accordance with the terms of the Escrow Agreement.
(b) The Earnest Money shall be applied to the Purchase Price at the Closing and shall otherwise be held, refunded, or disbursed in accordance with the terms of the Escrow Agreement and this Agreement. Interest and other income from time to time earned on the Earnest Money shall be earned for the account of the party to which the Earnest money is refunded or disbursed, as applicable, by Escrow Agent.
2.4 PURCHASE PRICE. Subject to adjustment and credits as otherwise specified in this Section 2.4 and elsewhere in this Agreement, the purchase price (the "Purchase Price") to be paid by Purchaser to Seller for the Property shall be the sum of FORTY MILLION SIXTY HUNDRED THOUSAND DOLLARS ($40,600,000.00).
The Purchase Price shall be paid by Purchaser to Seller at the Closing as follows:
(a) The Earnest Money shall be paid by Escrow Agent to Seller at Closing; and
(b) At Closing, the balance of the Purchase Price, after applying, as partial payment of the Purchase Price, the Earnest Money, and subject to prorations and other adjustments specified in this Agreement, shall be paid by Purchaser in immediately available funds to an account or accounts designated by Seller.
2.5 CLOSING. The consummation of the sale by Seller and purchase by Purchaser of the Property (the "Closing") shall be held on or about sixty (60) days subsequent to the date of this Agreement. The date of the Closing is sometimes referred to as the "Closing Date". The transaction shall be closed with the concurrent delivery of the documents of title and the payment of the Purchase Price.
ARTICLE 3 PURCHASER'S INSPECTION AND REVIEW RIGHTS
3.1 DUE DILIGENCE INSPECTIONS.
(a) From and after the Effective Date until the Closing Date, Seller shall permit Purchaser and its authorized representatives to inspect the Property, to perform due diligence and environmental investigations, at such times during normal business hours as Seller shall reasonably designate. All such inspections shall be nondestructive in nature, and specifically shall not include any physically intrusive testing, PROVIDED, HOWEVER, that Purchaser shall be entitled to obtain groundwater samples from any existing groundwater monitoring wells at the Property. All such inspections shall be performed in such a manner to minimize any interference with the business of the tenants under the Leases, and, in each case, in compliance with the rights and obligations of Seller as landlord under the Leases. Purchaser agrees that Purchaser shall make no contact with and shall not interview the tenants without at least two (2) Business Days' advance written notice to Seller. All inspection fees, appraisal fees, engineering fees and all other costs and expenses of any kind incurred by Purchaser relating to the inspection of the Property shall be solely Purchaser's expense. Seller reserves the right to have a representative present at the time of making any such inspection and at the time of any such interview with the tenant. Purchaser shall notify Seller not less than two (2) Business Days in advance of making any such inspection.
(b) If the Closing is not consummated hereunder for any reason other than Seller's default, Purchaser shall promptly deliver to Seller (if contractually permitted to do so) copies of all reports, surveys and other information furnished to Purchaser by third parties in connection with such inspections. This Section 3.1(b) shall survive the termination of this Agreement.
(c) To the extent that Purchaser or any of its representatives, agents or contractors damages or disturbs the Property or any portion thereof, Purchaser shall return the same to substantially the same condition which existed immediately prior to such damage or disturbance. Purchaser hereby agrees to and shall indemnify, defend and hold harmless Seller from and against any and all expense, loss or damage which Seller may incur (including, without limitation, reasonable attorney's fees actually incurred) as a result of any act or omission of Purchaser or its representatives, agents or contractors (collectively, "Purchaser's representatives") in connection with inspections of the Property. Except for Purchaser's negligence, the foregoing indemnity shall not include (x) any claims, demands, causes of action, losses, damages, liabilities, costs or expenses (including without limitation attorneys' fees and disbursements) that result from the discovery by Purchaser or Purchaser's representatives of existing conditions on the Property, or (y) consequential, indirect or special damages. Said indemnification agreement shall survive the Closing, or earlier termination of this Agreement. Purchaser shall maintain and shall ensure that Purchaser's consultants and contractors maintain commercial general liability insurance in an amount not less than $2,000,000, combined single limit, and in form and substance adequate to insure against all liability of Purchaser and its consultants and contractors, respectively, and each of their respective agents, employees and contractors, arising out of inspections and testing of the Property or any part thereof made on Purchaser's behalf. Purchaser agrees to provide to Seller a certificate of insurance with regard to each applicable liability insurance policy prior to any entry upon the Property by Purchaser or its consultants or contractors, as the case may be, pursuant to this SECTION 3.1.
3.2 CONDITION OF THE PROPERTY.
(a) Purchaser and Seller mutually acknowledge and agree that the Property is being sold in an "AS IS, WHERE IS" condition and "WITH ALL FAULTS," known or unknown, contingent or existing, except as set forth in the representations and warranties provided in this Agreement and the documents executed and delivered in connection with the Closing (collectively, the "Closing Documents"). Subject to the foregoing sentence, Purchaser has the sole responsibility to fully inspect the Property, to investigate all matters relevant thereto, including, without limitation, the condition of the Property, and to reach its own, independent evaluation of any risks (environmental or otherwise) or rewards associated with the ownership, leasing, management and operation of the Property. Effective as of the Closing and except as expressly set forth in this Agreement and/or the Closing Documents, Purchaser hereby waives and releases Seller and its officers, directors, shareholders, partners, agents, affiliates, employees and successors and assigns from and against any and all claims, obligations and liabilities which Purchaser may have arising out of or in connection with the Property. The foregoing release shall not be applicable to Purchaser's right to implead or otherwise seek joinder of Seller solely with respect to any claims brought against Purchaser by a third party unaffiliated with Purchaser relating to personal injury or death that occurred solely during Seller's period of ownership of the Property. Furthermore, this release shall not applicable to any claims arising out of the express covenants, representations, or warranties set forth in this Agreement that shall expressly survive the Closing so long as the survival period is still in effect.
(b) Except as otherwise expressly provided in this Subsection 3.2(b), to the fullest extent permitted by law, Purchaser does hereby unconditionally waive and release Seller and its officers, directors, shareholders, partners, agents, affiliates and employees from any present or future claims and liabilities of any nature arising from or relating to the presence or alleged presence of Hazardous Materials in, on, at, from, under or about the Property or any adjacent property, including, without limitation, any claims under or on account of any Environmental Law, regardless of whether such Hazardous Materials are located in, on, at, from, under or about the Property or any adjacent property prior to or after the date hereof (collectively, "Environmental Liabilities"); PROVIDED, HOWEVER, that the foregoing release as it applies to Seller, its officers, directors, shareholders, partners, agents, affiliates and employees, shall not release Seller from any Environmental Liabilities of Seller relating to any Hazardous Materials which may be placed, located or released on the Property by Seller after the date of Closing. Notwithstanding the foregoing release, Seller shall indemnify, defend and hold Purchaser and Purchaser's representatives, successors and assigns, and any of Purchaser's mortgagees or holder of deed of trust affecting the Property (collectively, "Indemnitees"), harmless for and against: (i) any present or future claims and liabilities of any nature asserted by any third parties other than Governmental Authorities arising from the presence of any Hazardous Materials on, in, under, about or emanating from the Property to the extent that the third-party claim seeks to recover for losses, damages or injuries due to the release of Hazardous Materials that are, or which are later alleged by such third party to be, the particular Hazardous Materials which Seller is legally obligated to remediate pursuant to the ACO (PROVIDED, HOWEVER, that in the case of Hazardous Materials that are later alleged by a third party to be the
particular Hazardous Materials which Seller is legally obligated to remediate
pursuant to the ACO, Seller shall reimburse Purchaser for all reasonable
expenses incurred by Purchaser in the defense of such claim; and PROVIDED
FURTHER that under no circumstances shall Seller have any obligation to
indemnify, defend, or hold Purchaser harmless hereunder with respect to any
claims or liabilities to the extent that they involve Hazardous Materials that
Seller did not cause to be released), and (ii) any present or future claims and
liabilities of any nature asserted by any Governmental Authority arising from
Seller's breach of Seller's representations, warranties and/or covenants in
subsections 4.1(m), 4.3(c) and/or 4.3(e) hereof, PROVIDED, HOWEVER, that Seller
shall have no such obligation to indemnify, defend and/or hold any of the
Indemnitees harmless for any such claim or liabilities unless the following
conditions are true as of the time that Purchaser and/or any of Purchaser's
representatives assert any claim against Seller seeking to enforce such
obligation: (i) Purchaser and, as the case may be, Purchaser's representatives,
have at all times fully cooperated with Seller in all respects in Seller's
performance of the Environmental Work, including without limitation, complying
with all of Purchaser's obligations pursuant to Subsection 4.6 and the
Environmental Remediation Easement, attached hereto as Exhibit K-1; and (ii)
neither Purchaser, any of Purchaser's representatives, the other Indemnitees,
nor any third party acting at Purchaser's direction or request or with
information provided to such third party by Purchaser, has interfered with
Seller's exclusive and absolute right to control all negotiations with the State
of New York and its relevant agencies, or any other federal, state or local
governmental authority having jurisdiction pursuant to any Environmental Law
concerning any and all aspects of the Environmental Work ("Governmental
Authority"), either before or after Closing. For purposes of the foregoing
sentence, the terms "interfered with" shall mean any communication of any type
whatsoever with any Governmental Authority whose effect is to increase the cost
or scope of the Environmental Work, PROVIDED, HOWEVER, that it shall not include
any oral or written communication that: (i) Purchaser is required by law or
judicial process to provide to any Governmental Authority if Purchaser has first
given prior written notice to Seller of Purchaser's intention to communicate
such information describing in reasonable detail the information to be provided;
(ii) is otherwise necessary to provide on an emergent basis without such prior
notice in order to prevent an imminent and substantial endangerment to human
health, provided that in the case of the foregoing clause (ii), Purchaser has
notified Seller of such communication as soon as possible; (iii) Purchaser
engages in with any Governmental Authority after Seller has failed to provide
any response by the date required for such response for any required submission
by the NYSDEC and has further failed to cure any such non-response within thirty
(30) days of Seller's receipt of written notice by Purchaser of such failure
with reference to this Section 3.2(b), unless Seller has contested in good faith
its legal obligation to provide such submission or any action relating thereto;
or (iv) pertains to any Hazardous Materials present at, in, on or under the
Property that have not been excluded from coverage under the environmental
insurance to be obtained by Purchaser (which insurance shall be paid equally by
Seller and Purchaser and shall include each party as a named insured)
("Purchaser's Environmental Insurance"), containing substantially the same terms
and conditions as referenced in the quote attached hereto as Exhibit K-2.
Seller's duty to indemnify, defend and/or hold any of Indemnitees harmless in
this Section 3.2(b) shall expire as of: (A) in the case of any Environmental
Liabilities for which Seller becomes responsible under the ACO, the issuance by
the New York Department of Environmental Conservation ("NYSDEC") of either: (x)
a "Certificate of Completion", or equivalent documentation from the NYSDEC,
demonstrating that all required remediation activities have been completed to
the satisfaction of the NYSDEC (not including any required long-term monitoring
which is provided for below in Section 3.2(b)); or (y) a "Certificate of Construction Completion," if Seller has provided, in conjunction with such certificate, a third-party liability transfer contract reasonably satisfactory to Purchaser; or (B) in the case of any Environmental Liabilities for which Seller otherwise becomes responsible, five (5) years from the date of Closing, except that such indemnification shall continue for any Environmental Liabilities discovered within 5 years of the date of closing until a Certificate of Completion, Certificate of Construction Completion or a Notice of No Further Action is issued by a Governmental Authority. Notwithstanding any expiration of the indemnity as set forth above in the foregoing sentence, upon the issuance of a Certificate of Completion or a Certificate of Construction Completion to Seller whether under subsection (A) or (B), Seller's indemnity obligation under this Section 3.2(b) shall continue with respect to any claims and liabilities of any nature, including those asserted by any third parties, arising from Seller's obligations under the ACO or other such requirement, if any, to perform ongoing operations and maintenance activities and/or monitoring with respect to soil, soil gas and/or groundwater at, on, in, under, or emanating from the Property.
(c) Notwithstanding anything in the foregoing subsection 3.2(b) to the contrary, Seller shall have no duty to indemnify, defend and/or hold any of Indemnitees harmless under Section 3.2(b) for any Environmental Liabilities against Seller hereunder if insurance coverage for such Environmental Liabilities is, or is reasonably expected to be, provided for under any of the insurance policies held by Seller or Purchaser, more particularly referred to as Kemper Indemnity Insurance Company Policy No. 4YY-002213-00 and American International Specialty Lines Insurance Company Policy No. PLS 2026574, and the insurance policy that Seller is required to obtain hereunder containing substantially the same coverage as described in the quote attached hereto as Exhibit K-2 (collectively, the "Environmental Insurance"), if and for so long as Purchaser and/or Seller are either "named insured," "first loss payee" and/or "additional insured" under said Environmental Insurance until Purchaser and/or Seller, whichever is first insured, as the case may be, have reasonably exhausted efforts to recover under said insurance for such Environmental Liabilities, PROVIDED, HOWEVER, that Seller shall in any event indemnify, defend and/or hold any of Indemnitees harmless as provided under Section 3.2(b) above if and when the limits of coverage provided under the Environmental Insurance have been exhausted. The terms "reasonably exhausted efforts to recover under said insurance" in the immediately foregoing sentence shall mean that Seller and/or Purchaser as applicable have diligently provided notice of a claim for coverage of said Environmental Liabilities to the carrier under the Environmental Insurance within thirty (30) days of such claim arising, and has pursued coverage for a period of one hundred eighty (180) days from the date the environmental claim arose. At the close of the 180-day period from the date the environmental claim arose as referenced in the foregoing sentence, if no carrier has agreed to provide coverage for any claimed Environmental Liabilities, whether or not subject to a reservation of rights, the indemnification obligations of the Seller as set forth in Section 3.2(b) herein shall be in full force and effect. Seller agrees that the statute of limitations applicable to any claim of Purchaser shall be tolled during any period in which Purchaser and/or Seller are seeking coverage under the Environmental Insurance. Further, notwithstanding anything in the foregoing subsection 3.2(b) to the contrary, but except as otherwise provided in the immediately following sentence for any Purchaser Investigation (as defined below), Seller shall have no duty to indemnify, defend and/or hold any of the Indemnitees harmless under Section 3.2(b) for any claims or liabilities arising in whole or in part from, but Purchaser shall instead indemnify, defend and hold harmless Seller for: (i) any
Environmental Liabilities arising from any negligence or exacerbation of any existing environmental condition involving Hazardous Materials by Purchaser or any Purchaser's tenants, contractors, agents, or invitees; and/or (ii) any invasive investigation undertaken by Purchaser or any of its tenants, contractors, agents or invitees at or near the Property. For purposes of this Agreement, "invasive investigation" shall mean the installation of monitoring wells for soil and/or groundwater sampling and shall not include any activity associated with routine maintenance of or visual inspection at the building or buildings. Notwithstanding anything in the immediately foregoing sentence to the contrary, Purchaser may perform an invasive investigation ("Purchaser's Investigation") at or near the Property and shall be entitled to indemnification from Seller pursuant to subsection 3.2(b) above for any Environmental Liabilities relating to the discovery of any Hazardous Materials resulting from such investigation and whose presence at or near the Property existed prior to the date of Closing or whose release was otherwise caused by Seller if all of the following conditions are true at the time that Purchaser seeks such indemnification from Seller: (A) Purchaser has provided reasonable written advance notice to Seller of its intention to perform such investigation and Seller has not elected to perform the investigation itself at Seller's cost; (B) Purchaser has demonstrated to Seller's reasonable satisfaction that the investigation is necessary in order to permit Purchaser to perform property maintenance (including landscaping), a building renovation or extension of the building, which maintenance, renovation or extension Purchaser has demonstrated to Seller's reasonable satisfaction is likely to be performed; (C) a written workplan (the "Purchaser's Investigation Workplan") outlining the scope of such investigation has been approved by Seller, which approval shall not be unreasonably withheld or delayed; (D) the scope of the investigation as set forth in the Purchaser's Investigation Workplan is strictly limited to the scope of the property maintenance, building renovation or extension; and (E) the investigation was performed in strict compliance with the Purchaser's Investigation Workplan.
(d) Purchaser shall have the right, but not the obligation, to
assume control of the ACO Environmental Work, at Seller's expense if the
following conditions have been satisfied: (i) Seller has failed to provide any
response by the date required for such response for any submission required by
the NYSDEC and has further failed to cure any such non-response within the later
of (A) sixty (60) days of Seller's receipt of written notice by Purchaser of
such failure with reference to this Section 3.2(d), or (B) such longer period as
may be reasonably necessary in order to cure; (ii) Seller's failure to so
respond and cure concerns a matter of a material nature and reasonably would be
likely to result in an administrative or judicial proceeding initiated by the
NYSDEC against Seller seeking to enforce Seller's obligations under the ACO; and
(iii) Seller has not at any time during or prior to the preceding 60-day period
contested in good faith its legal obligation to provide such submission or any
action relating thereto. Notwithstanding anything in the foregoing sentence to
the contrary, in the event that Seller has contested in good faith its legal
obligation to provide the foregoing submission or any action relating thereto,
Purchaser shall be entitled to assume control of the ACO Work at Seller's
expense at such time that Seller's contest of its obligation to do so has been
finally and conclusively determined by a court of competent jurisdiction (or by
an administrative law judge if Seller has no right of judicial redress) against
Seller and Seller has exhausted all rights of appeal therefrom, provided that
all of the other foregoing conditions remain satisfied. Notwithstanding the
foregoing, under no circumstances shall Seller have any responsibility under
this Section 3.2(d) for: (i) any measures in excess of those strictly necessary
to comply with Environmental Laws; (ii) repair, replacement or upgrade of
equipment, or building, material, product or equipment decommissioning,
decontamination or disposal; or (iii) internal costs and overhead of the
Purchaser, including wages, salaries, or any other form of employee
compensation.
(e) Notwithstanding anything in this Section 3.2 to the contrary, if
after the eighteen month anniversary date of the Closing Seller has not obtained
a Record of Decision ("ROD") signed by the NYSDEC for the ACO Environmental
Work: (i) Seller agrees that Purchaser and Seller shall jointly work together to
obtain the ROD; (ii) Seller and Purchaser shall consult with one another, and
shall cause each other's consultants to participate in such consultation,
regarding the nature or scope of the ACO Environmental Work (the "Purchaser
Consultation Matters"); (iii) with respect to any scheduled telephonic
conference call with Seller (or its consultants) and the NYSDEC involving the
Purchaser Consultation Matters, Seller shall include Purchaser on such
conference call, provided that Seller at all times shall have the exclusive
right to convey the mutually agreed upon positions of Seller and Purchaser to
the NYSDEC regarding any matters pertaining to the ACO Environmental Work; (iv)
with respect to any unscheduled telephonic call with Seller (or its consultants)
and the NYSDEC involving the Purchaser Consultation Matters, Seller agrees to
promptly inform Purchaser of all such communications by follow-up telephonic
discussion or e-mail correspondence; (v) Purchaser and Seller shall jointly have
the right to comment on any Deliverable prior to its submission to the NYSDEC;
and (vi) Seller shall not unreasonably refuse to make modifications to any
Deliverable in order to address Purchaser's comments. For purposes of this
Section 3.2(e), Purchaser and Seller agree that under no circumstances shall
Seller be required to perform any action beyond that which is required by law.
(f) In the event that Seller and Purchaser are unable to agree on:
(i) whether the conditions set forth in subsection 3.2(d) above for triggering
Purchaser's right to assume control of the ACO Environmental Work have been
satisfied; or (ii) whether, or to what extent, any Deliverable should be
modified in accordance with subsection 3.2(e) above, then in either such case,
Seller and Purchaser agree to submit the matter for arbitration with an
independent third party with expertise in the applicable matters in dispute (the
"Arbitrator"), which Arbitrator shall be mutually agreeable to both Seller and
Purchaser, and further agree that the decision of such Arbitrator shall be
conclusive in all respects as to such matter. Seller and Purchaser also agree
that in the event of an arbitration pursuant to the foregoing sentence, they
will each pay one-half of the arbitrator's fee, but shall otherwise be
responsible for their own counsel and/or expert witness fees.
(g) At Closing, Seller shall place the sum of $500,000 into an escrow account, pursuant to an escrow agreement that Seller and Purchaser shall jointly agree on, with Escrow Agent. Seller and Purchaser further agree that such escrow agreement shall include, at a minimum: (i) a full release and indemnity of Escrow Agent from and against any claims of any nature whatsoever stemming from its role as Escrow Agent; (ii) a right of Seller to draw down money from the escrow in order to pay for any costs incurred in connection with the investigation or remediation of the ACO Environmental Work or the Non-ACO Environmental Work and/or any interactions with any Governmental Authority in connection with the same, except for attorneys fees; (iii) a termination provision allowing Seller to receive all remaining amounts in the escrow upon deliver to Purchaser of: (A) an executed contract with an environmental engineering firm for the performance of the ACO Environmental Work as provided
under an NYSDEC-signed ROD; or (B) a prepaid guaranteed remediation contract or third-party risk transfer agreement with an environmental engineering firm providing for the completion of the ACO Environmental Work. As of the date of the termination of the escrow agreement, Seller shall provide Purchaser with a letter indicating that Seller has not filed for bankruptcy.
3.3 TITLE AND SURVEY. Within two (2) Business Days after the Effective
Date, Purchaser shall order from the Title Company an update of preliminary
title commitment No. 07-7406-17848-Q with respect to the Property issued in
favor of Purchaser (the "Title Commitment"). Purchaser shall promptly deliver
copies of the Title Commitment to Seller. At any time following the Effective
Date, Purchaser may arrange, at its expense, for the preparation of one or more
updates of the Existing Survey (each and together, the "Survey"). Purchaser
shall promptly deliver copies of any such Survey to Seller. Purchaser shall have
until twenty (20) business days from the date of Purchaser's receipt of the
Title Commitment, to give written notice (the "Title Notice") to Seller of such
objections as Purchaser may have to any exceptions to title disclosed in the
Title Commitment. Seller shall have the right, but not the obligation (except as
to Monetary Objections), to attempt to remove, satisfy or otherwise cure any
exceptions to title to which the Purchaser so objects. Within ten (10) Business
Days after receipt of Purchaser's Title Notice, Seller shall give written notice
to Purchaser informing the Purchaser of Seller's election with respect to such
objections. If Seller fails to give written notice of election within such ten
(10) Business Day period, Seller shall be deemed to have elected not to attempt
to cure the objections (other than Monetary Objections). If Seller elects to
attempt to cure any objections, Seller shall be entitled to one or more
reasonable adjournments of the Closing (not to exceed sixty (60) days in the
aggregate) to attempt such cure, but, except for Monetary Objections, Seller
shall not be obligated to expend any sums, commence any suits or take any other
action to effect such cure. Except as to Monetary Objections, if Seller elects,
or is deemed to have elected, not to cure any exceptions to title to which
Purchaser has objected or if, after electing to attempt to cure, Seller
determines that it is unwilling or unable to remove, satisfy or otherwise cure
any such exceptions, Purchaser's sole remedy hereunder in such event shall be
either (i) to accept title to the Property subject to such exceptions as if
Purchaser had not objected thereto and without reduction of the Purchase Price,
or (ii) to terminate this Agreement within three (3) Business Days after receipt
of written notice from Seller either of Seller's election not to attempt to cure
any objection or of Seller's determination, having previously elected to attempt
to cure, that Seller is unable or unwilling to do so, whereupon Escrow Agent
shall return the Earnest Money to Purchaser and the parties shall have no
further obligations pursuant to this Agreement except those that expressly
survive a termination of this Agreement. Notwithstanding anything to the
contrary contained elsewhere in this Agreement, Seller shall be obligated to
cure or satisfy all Monetary Objections at or prior to Closing, and Seller may
use the proceeds of the Purchase Price at Closing for such purpose. From and
after the date hereof, Seller shall not cause the creation of any Lien (a "New
Lien") to encumber title to the Property, without Purchaser's written consent
thereto, which consent may be withheld in Purchaser's sole discretion.
Notwithstanding any other provision of this Agreement to the contrary, Seller
shall be obligated to remove or discharge of record, prior to Closing, any New
Lien caused by Seller which has not been consented to in writing by Purchaser.
In addition, notwithstanding anything to the contrary contained in this
Agreement, if any New Liens (whether caused by Seller or a third party) appear
on any update to the Title Commitment, Purchaser shall have the right to object
to same within twenty (20) Business Days of receipt of such update, and such
objections shall be considered objections to title for all purposes of this
Agreement and the provisions of this SECTION 3.3 shall apply to such objections.
3.4 SERVICE CONTRACTS. Within ten (10) Business Days of Purchaser's
receipt of complete copies of the Service Contracts (but no earlier than ten
(10) Business Days after the Effective Date, Purchaser will designate in a
written notice to Seller which Service Contracts Purchaser will assume and which
Service Contracts will be terminated by Seller at Closing; PROVIDED, HOWEVER,
that Seller shall not be obligated to terminate, and Purchaser shall assume
Seller's obligations arising from and after Closing under, all Service Contracts
which cannot be terminated by Seller upon thirty (30) days (or less) prior
notice or which can be terminated by Seller only upon payment of a fee, premium,
penalty or other form of early termination compensation. Purchaser will assume
the obligations arising from and after the Closing Date under those Service
Contracts which Purchaser has designated will not be terminated. Seller, without
cost to Purchaser, shall terminate at Closing all Service Contracts that are not
so assumed, to the extent any relates to the Property. If Purchaser fails to
timely notify Seller in writing of any Service Contracts that Purchaser does not
desire to assume at Closing, Purchaser shall be deemed to have elected to assume
all such Service Contracts and to have waived its right to require Seller to
terminate such Service Contracts.
3.5 CONFIDENTIALITY. All information acquired by Purchaser or any of its designated representatives (including by way of example, but not in limitation, the officers, directors, shareholders and employees of Purchaser, and Purchaser's engineers, consultants, counsel and potential lenders, and the officers, directors, shareholders and employees of each of them) with respect to the Property, whether delivered or otherwise made available by Seller or any representatives of Seller or obtained by Purchaser as a result of its inspection and investigation of the Property, examination of the books, records and files of Seller in respect of the Property, or otherwise (collectively, the "Due Diligence Material") shall be used solely for the purpose of determining whether the Property is suitable for Purchaser's acquisition and ownership thereof and for no other purpose whatsoever. Prior to Closing, the terms and conditions which are contained in this Agreement and all Due Diligence Material which is not (i) published as public knowledge, (ii) generally available in the public domain or (iii) was known to Purchaser through a source other than the Due Diligence Material shall be kept in strict confidence by Purchaser and shall not be disclosed to any individual or entity other than to those representatives of Purchaser and Purchaser's prospective and actual counsel, accountants, professionals, consultants and lenders, who need to know the information for the purpose of assisting Purchaser in evaluating the Property for Purchaser's potential acquisition thereof; PROVIDED, HOWEVER, that Purchaser shall have the right to disclose any such information if required by applicable law or as may be necessary in connection with any court action or proceeding with respect to this Agreement. Purchaser shall and hereby agrees to indemnify and hold Seller harmless from and against any and all loss, liability, cost, damage or expense that Seller may suffer or incur (including, without limitation, reasonable attorneys' fees actually incurred) as a result of the unpermitted disclosure by Purchaser or any of its prospective and actual counsel, accountants, professionals, consultants and lenders of any of the Due Diligence Material to any individual or entity other than a representative of Purchaser and Purchaser's prospective and actual counsel, accountants, professionals, consultants and lenders and/or the use of any Due Diligence Material for any purpose other than as herein contemplated and permitted. The foregoing indemnity shall not extend to disclosure of any Due Diligence Material (i) as may be
required by applicable law, (ii) as may be necessary or advisable in connection
with any court action or proceeding with respect to this Agreement, (iii) that
is or becomes (x) published as public knowledge, or (y) generally available in
the public domain other than by virtue of a breach of Purchaser's covenant under
this SECTION 3.5 or (iv) that was known to Purchaser through a source other than
the Due Diligence Material. If Purchaser or Seller elect to terminate this
Agreement pursuant to any provision hereof permitting such termination, or if
the Closing contemplated hereunder fails to occur for any reason, Purchaser
will, at Seller's option, promptly either destroy or return to Seller all Due
Diligence Material in the possession of Purchaser and any of its
representatives, and destroy all copies, notes or abstracts or extracts thereof,
as well as all copies of any analyses, compilations, studies or other documents
prepared by Purchaser or for its use (whether in written or electronic form)
containing or reflecting any Due Diligence Material. In the event of a breach or
threatened breach by Purchaser or any of its representatives of this SECTION
3.5, Seller shall be entitled, in addition to other available remedies, to an
injunction restraining Purchaser or its representatives from disclosing, in
whole or in part, any of the Due Diligence Material and any of the terms and
conditions of this Agreement. Nothing contained herein shall be construed as
prohibiting or limiting Seller from pursuing any other available remedy, in law
or in equity, for such breach or threatened breach. The provisions of this
Section shall survive any termination of this Agreement.
ARTICLE 4 REPRESENTATIONS, WARRANTIES AND OTHER AGREEMENTS
4.1 REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby makes the following representations and warranties to Purchaser:
(a) Organization, Authorization and Consents.
(i) Seller has the right, power and authority to enter into this Agreement and to sell the Property in accordance with the terms and provisions of this Agreement, to engage in the transaction contemplated in this Agreement and to perform and observe all of the terms and provisions hereof.
(ii) Seller is a duly organized and validly existing limited liability company under the laws of the State of Delaware.
(b) Action of Seller, Etc. Seller has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and upon the execution and delivery of any document to be delivered by Seller on or prior to the Closing, this Agreement and such document shall constitute the valid and binding obligation and agreement of Seller, enforceable against Seller in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors.
(c) No Violations of Agreements. Neither the execution, delivery or performance of this Agreement by Seller, nor compliance with the terms and provisions hereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon the Property or any portion thereof pursuant to the terms of any indenture, deed to secure debt, mortgage, deed of trust, note, evidence of indebtedness or any other agreement or instrument by which Seller or the Property is bound.
(d) Litigation. Except as disclosed on Exhibit "I" attached hereto, Seller has not received written notice of any pending or threatened suit, action or proceeding, which (i) if determined adversely to Seller, materially and adversely affects the use or value of the Property, or (ii) questions the validity of this Agreement or any action taken or to be taken pursuant hereto, or (iii) involves condemnation or eminent domain proceedings involving the Property or any portion thereof.
(e) Existing Leases. Seller represents that all rent due from tenants of the Building is not in arrears on the date hereof. Other than the Leases listed on Exhibit "G" attached hereto, Seller has not entered into any contract or agreement with respect to the occupancy of the Property or any portion or portions thereof which will be binding on Purchaser or the Property after the Closing. The copy of the Leases heretofore delivered or made available by Seller to Purchaser are a true, correct and complete copies thereof, and the Leases have not been amended except as evidenced by amendments similarly delivered and listed on Exhibit "G" attached hereto and constitute the entire agreement between Seller and the tenant thereunder. To Seller's knowledge, except as set forth in Exhibit "I" attached hereto, Seller has not given or received any written notice of any party's default or failure to comply with the terms and provisions of the Leases which remains uncured. Seller is the landlord under each of the leases and has not assigned, mortgaged, pledged, sublet, hypothecated or otherwise encumbered any of its rights or interests under any of the leases in a manner which will survive the Closing. The security deposits delivered by each tenant under Leases are as set forth in Exhibit "G". No tenant has paid any rents more than one (1) month in advance. Except as set forth in Exhibit "G", no tenant is entitled to any free rent, abatement of rent or similar concession. Anything to the contrary contained in this sub-section (e) notwithstanding, with regard to the License Agreement and Permit to Enter Upon Premises, each dated June 26, 2003, between Seller and The Long Island Rail Road Company listed on Exhibit G attached hereto, Seller is not landlord but rather licensee, and Seller shall continue to be licensee thereunder, and said instruments shall not be assigned to Purchaser.
(f) Leasing Commissions. There are no lease brokerage agreements, leasing commission agreements or other agreements providing for payments of any amounts for leasing activities or procuring tenants with respect to the Property or any portion or portions thereof other than as disclosed in Exhibit "C" attached hereto (the "Commission Agreements"), and all leasing commissions and brokerage fees accrued or due and payable under the Commission Agreements with respect to the Property as of the date hereof and at the Closing have been or shall be paid in full. Except with respect to the Commission Agreements, there are no leasing commissions or brokerage fees that will be payable after the Closing in connection with Leases in effect as of the date hereof. Notwithstanding anything to the contrary contained herein, Purchaser shall be responsible for the payment of all leasing commissions payable for (a) any new leases entered into after the Effective Date that have been approved (or deemed approved) by Purchaser, and (b) the renewal, expansion or extension of the Leases existing as of the Effective Date and exercised or effected after the Effective Date. The terms of the immediately preceding sentence shall survive Closing.
(g) Management Agreement. There is no agreement currently in effect relating to the management of the Property by any third party management company.
(h) Taxes and Assessments. Except as may be set forth on EXHIBIT "L" attached hereto and made a part hereof, Seller has not filed, and has not retained anyone to file, notices of protests against, or to commence action to review, real property tax assessments against the Property. Seller shall retain sole and absolute interest in proceedings against the City New York an its agencies, including, but not limited to, the New York City Department of Finance, New York City Tax Commission and New York City Law Department, which relate to the protest or appeal of the assessment of real property for the years set forth on EXHIBIT "L." As such, Seller shall have sole interest in and sole authority to settle, pursue or initiate any proceedings for tax years listed on EXHIBIT "L." Seller's authority stated above in this clause (h) shall survive Closing. Notwithstanding the foregoing, any refund or savings in respect to such proceeding shall belong to Seller only after deduction of all sums payable to tenants under the Leases in respect thereof; provided that if any refund or savings is in the form of a future tax credit, Purchaser shall deliver the aggregate amount of such credit to Seller in cash, and Seller shall deliver any applicable sums payable to tenants under the Leases in respect thereof.
(i) Compliance with Laws. EXHIBIT "H" attached hereto sets forth true and complete copies of the most recent departmental searches obtained by Seller. Purchaser shall accept title to the Property subject to all violations of laws, orders, rules and regulations affecting the Property as of the Closing Date. Anything to the contrary contained in the immediately preceding sentence notwithstanding, for any violation issued against the Property before or after the date of this Agreement, Seller shall be responsible to cure the subject condition; provided that Seller shall not be responsible to cure any violations which were caused by Purchaser or its tenants after the closing date of this Agreement. To the extent Seller is responsible to cure violations as more particularly provided for in the immediately preceding sentence, Seller shall act promptly, it being understood that such curing of violations may not be accomplished prior to Closing and to the extent such violations are not cured prior to Closing Seller's obligation to act promptly to cure such violations shall survive Closing. Purchaser agrees to cooperate with Seller at no out-of-pocket cost to Purchaser in connection with Seller's obligations, if any, set forth in this clause (i) which agreement to cooperate shall survive Closing.
(j) Other Agreements. To Seller's knowledge, except for the Leases, the Service Contracts, the Commission Agreements and the Permitted Exceptions, there are no leases, management agreements, brokerage agreements, leasing agreements or other agreements or instruments in force or effect that grant to any person or any entity (other than Seller) any right, title, interest or benefit in and to all or any part of the Property or any rights relating to the use, operation, management, maintenance or repair of all or any part of the Property which will survive the Closing or be binding upon Purchaser other than those which Purchaser has agreed in writing to assume (or is deemed to have agreed to assume) or which are terminable upon thirty (30) days notice without payment of premium or penalty. Seller has delivered true, correct and complete copies of the Service Contracts and each Service Contract is in full force and effect. To the best of Seller's knowledge, neither Seller nor any other party to any Service Contract is in default in any material respect under any of the Service Contracts.
(k) Seller Not a Foreign Person. Seller is not a "foreign person" which would subject Purchaser to the withholding tax provisions of Section 1445 of the Internal Revenue Code of 1986, as amended.
(l) Intentionally Omitted.
(m) Environmental. To Seller's knowledge, or except as may be set forth in the Existing Environmental Reports or other written Due Diligence Material, (i) the Property complies in all material respects with Environmental Laws; (ii) neither the Seller nor any other person has caused any material Release of any Hazardous Material at the Property; (iii) Seller has not received any written notification from any governmental authority alleging a material violation of any Environmental Law by Seller with respect to the Property.
(n) No Bankruptcy. Seller has not made a general assignment for the benefit of creditors, filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by Seller's creditors, suffered the appointment of a receiver to take possession of any of Seller's assets, suffered the attachment or other judicial seizure of any of Seller's assets, admitted in writing its inability to pay its debts as they come due or made an offer of settlement, extension or composition to its creditors generally.
(o) Options. No person or entity (other than Purchaser) has any option or other right to purchase or ground lease all or any portion of the Property.
(p) Personalty. Seller is the owner of the Personal Property and the Intangible Property and the same shall be transferred to Purchaser free and clear of all liens and encumbrances.
(q) OFAC. (i) Neither Seller, nor any of Seller's owners, or any officers, directors or employees, is named as a "Specially Designated National and Blocked Person" as designated by the United States Department of the Treasury's Office of foreign Assets Control or as a person, group, entity or nation designated in Presidential Executive Order 13224 as a person who commits, threatens to commit, or supports terrorism; (ii) Seller is not owned or controlled, directly or indirectly, by the government of any country that is subject to a United States Embargo; (iii) Seller is not acting, directly or indirectly, for or on behalf of any person, group, entity or nation named by the United States treasury Department as a "Specially Designated National and Blocked Person", or for or on behalf of any person, group, entity or nation designated in Presidential Executive Order 13224 as a person who commits, threatens to commit, or supports terrorism; and (iv) Seller is not a person who commits, threatens to commit, or supports terrorism; and (iv) Seller is not engaged in the transaction contemplated hereby directly or indirectly on behalf of, any such person, group, entity or nation.
Each of the representations and warranties is true and accurate as of the date of execution of this Agreement by Seller, and will be true and accurate as of the Closing Date, and will survive the Closing for a period of one hundred eighty (180) days, PROVIDED, HOWEVER, that nothing in the foregoing clause shall be construed so as to in any way limit the term of Seller's indemnification obligation under Section 3.2 above. Except as otherwise expressly provided in this Agreement or in any documents to be executed and delivered by Seller to Purchaser at the Closing, Seller has not made, and
Purchaser has not relied on, any information, promise, representation or
warranty, express or implied, regarding the Property, whether made by Seller, on
behalf of Seller, or otherwise, including, without limitation, the physical
condition of the Property, the financial condition of the tenants under the
Leases, title to or the boundaries of the Property, pest control matters, soil
conditions, the presence, existence or absence of hazardous wastes, toxic
substances or other environmental matters, compliance with building, health,
safety, land use and zoning laws, regulations and orders, structural and other
engineering characteristics, traffic patterns, market data, economic conditions
or projections, past or future economic performance of the tenants or the
Property, and any other information pertaining to the Property or the market and
physical environments in which the Property is located. Purchaser acknowledges
(i) that Purchaser has entered into this Agreement with the intention of making
and relying upon its own investigation or that of Purchaser's own consultants
and representatives with respect to the physical, environmental, economic and
legal condition of the Property and (ii) that Purchaser is not relying upon any
statements, representations or warranties of any kind, other than those
specifically set forth in this Agreement or in any document to be executed and
delivered by Seller to Purchaser at the Closing, made (or purported to be made)
by Seller or anyone acting or claiming to act on behalf of Seller. Purchaser
will inspect the Property and become fully familiar with the physical condition
thereof and, subject to the terms and conditions of this Agreement and the
Closing Documents, shall purchase the Property in its "as is, where is"
condition, "with all faults," on the Closing Date. The provisions of this
paragraph shall survive the Closing.
If prior to the Closing, Purchaser obtains knowledge in writing of any inaccuracy or breach of any representation, warranty or covenant of Seller contained in this Agreement (a "Purchaser Waived Breach") and nonetheless proceeds with and consummates the Closing, then Purchaser and any Purchaser-Related Entities shall be deemed to have waived and forever renounced any right to assert a claim for indemnification under this ARTICLE 4 for, or any other claim or cause of action under this Agreement, at law or in equity on account of any such Purchaser Waived Breach.
4.2 KNOWLEDGE DEFINED. All references in this Agreement to the "knowledge of Seller" or "to Seller's knowledge" shall refer only to the actual knowledge of Robert H. Martin, Carmine J. Broccole and Iain Campbell, who have been actively involved in the management of Seller's business in respect of the Property. The term "knowledge of Seller" or "to Seller's knowledge" shall not be construed, by imputation or otherwise, to refer to the knowledge of Seller, or any affiliate of Seller, or to any other partner, beneficial owner, officer, director, agent, manager, representative or employee of Seller, or any of their respective affiliates, or to impose on either of the individuals named above any duty to investigate the matter to which such actual knowledge, or the absence thereof, pertains. There shall be no personal liability on the part of the individuals named above arising out of any representations or warranties made herein or otherwise.
4.3 COVENANTS AND AGREEMENTS OF SELLER.
(a) Leasing Arrangements. During the pendency of this Agreement, Seller will not enter into any lease affecting the Property, or modify or amend in any respect, or terminate, the existing Leases without Purchaser's prior written consent in each instance, which consent may be withheld in Purchaser's
sole discretion. Each request shall be accompanied by a copy of any proposed modification or amendment of an existing Lease or of any new lease that Seller wishes to execute between the Effective Date and the Closing Date, including, without limitation, a description of any Tenant Inducement Costs and leasing commissions associated with any proposed renewal or expansion of the existing Leases or with any such new lease, as well as any additional information regarding such proposed transaction as Purchaser may reasonably request. At Closing, Purchaser shall reimburse Seller for any Tenant Inducement Costs or leasing commissions actually incurred by Seller pursuant to a renewal or expansion of the existing Leases after the Effective Date or new lease approved by Purchaser hereunder, and Purchaser shall assume any such new lease and shall assume the obligations of Seller thereunder, including the obligation to pay any Tenant Inducement Costs and leasing commissions.
(b) New Contracts. During the pendency of this Agreement, Seller will not enter into any contract, or modify, amend, renew or extend any existing contract, that will be an obligation affecting the Property or any part thereof subsequent to the Closing without Purchaser's prior written consent in each instance, which consent shall be in Purchaser's sole discretion.
(c) Operation of Property. During the pendency of this Agreement, Seller shall, at Seller's expense, continue to operate the Property in a good and businesslike fashion consistent with Seller's past practices.
(d) Insurance. During the pendency of this Agreement, Seller shall, at Seller's expense, continue to maintain the current insurance policies covering the Improvements.
(e) Environmental. Except as to any such requirements which Seller has contested in good faith, Seller shall diligently comply with all legal requirements pursuant to the Administrative Consent Order between Seller and the NYSDEC dated March 30, 1998 (the "ACO") and shall obtain and deliver to Purchaser such documentation as may be provided by the State of New York and any of its relevant agencies demonstrating that the requirements of the ACO have been satisfied (the "ACO Environmental Work"). For purposes of the foregoing sentence, the terms "diligently comply with all legal requirements" shall be deemed to include compliance with any deadlines that the NYSDEC shall impose for the delivery of any remedial plan or investigation report to the NYSDEC, except to the extent that Seller's failure to so comply was caused by Purchaser, any of Purchaser's Representatives, or any force majeure event. Seller shall further perform such remedial actions with regard to any Hazardous Materials that are present in soils or groundwater at, on, in, under or emanating from the Property as of the date of Closing, to the extent that Seller becomes legally required to do so as a result of any claim by any Governmental Authority or third party against Seller, subject to Seller's right to contest that it is required to do so pursuant to Environmental Laws (the "Non-ACO Environmental Work"), PROVIDED, HOWEVER, that Seller shall have no obligation hereunder to perform such remedial actions with respect to: (i) any Hazardous Materials discovered as a result of any investigation (other than Purchaser's Investigation to the extent that such investigation complies with all of the requirements, conditions and limitations set forth in Section 3.2(c) for Seller's duty to indemnify, defend and hold harmless Indemnitees for Environmental Liabilities arising from Purchaser's Investigation) performed by Purchaser or any of Purchaser's tenants, contractors, agents, or invitees; and/or (ii) any Environmental Liability
arising from Purchaser's or any of Purchaser's tenants', contractors', agents', or invitees' negligence or exacerbation of any Hazardous Materials present at, on, under or near the Property prior to Closing. (The ACO Environmental Work and the Non-ACO Environmental Work shall hereinafter be referred to as the "Environmental Work.") In performing the Environmental Work, Seller shall: (i) keep Purchaser reasonably apprised of its remedial work activities and shall provide Purchaser or Purchaser's designated representative with draft copies of any workplans, reports or schedules ("Deliverables") required by any Governmental Authority for its review and comment prior to their submission to any Governmental Authority and any responses to said documents from any Governmental Authority, PROVIDED, HOWEVER, that in the case of any such documents required to be submitted to any Governmental Authority, Seller shall have no obligation to accept any of Purchaser's comments, except as otherwise provided in Section 3.2(e) hereof, and (ii) take such measures as are necessary to avoid disruption to the business operations of Purchaser's tenants at the Property, PROVIDED, HOWEVER, that Seller shall have no obligation to do so to the extent that the cost of any measures necessary to avoid such disruptions exceed the then fair market rent for the tenant's space plus any other reasonable business losses incurred by the tenant for which Purchaser is held responsible under the terms of the applicable lease; PROVIDED, FURTHER HOWEVER, that if Seller's performance of Environmental Work is directly responsible for Purchaser's incurring liability to tenants of the Property for any substantial disruption of said tenants' businesses, Seller shall reimburse Purchaser for the actual costs incurred by Purchaser, provided that Seller shall have the right to defend Purchaser against any related claims by tenants and Purchaser agrees to cooperate fully with Seller in connection with any such defense. Seller further agrees that it shall be solely responsible for the payment of, and hereby covenants to pay as necessary to invoke coverage for any claim covered thereunder, all deductible amounts pursuant to that insurance policy currently held by Seller, known more particularly as Kemper Indemnity Insurance Company Policy No. 4YY-002213-00 and American International Specialty Lines Insurance Company Policy No. PLS 2026574, and shall further cause the carrier on the latter policy to name Purchaser as an additional insured on such policy. There foregoing covenants shall survive the Closing until such time as Seller's indemnification obligations expire in accordance with Section 3.2(b). Further, it shall be a precondition that prior to seeking any judicial remedy with respect to Seller's actual or alleged breach of any of the foregoing covenants in this Section 4.3(e), Purchaser shall first provide Seller with written notice of such breach and provide Seller with thirty (30) days in which to cure such breach. Seller shall further compensate Purchaser for the fair market rental value of any otherwise leaseable space that is rendered unleaseable due to the Seller's performance of the Environmental Work, during the period that such space is so rendered unleaseable.
4.4 TENANT ESTOPPEL CERTIFICATE. Seller shall endeavor in good faith (but without obligation to incur any cost or expense) to obtain and deliver to Purchaser, at least two (2) Business Days prior to Closing, written Tenant Estoppel Certificates in substantially the form attached hereto as EXHIBIT "K" signed by the tenants under the Leases; and in no event shall the inability or failure of Seller to obtain and deliver said Tenant Estoppel Certificates (Seller having used its good faith efforts as set forth above as to the tenants under Leases) be a default of Seller hereunder. Seller authorizes Purchaser to contact tenants in order to obtain Tenant Estoppel Certificates. With respect to each Tenant from which Seller fails to obtain a Tenant Estoppel Certificate, Seller shall deliver at least two (2) Business Days prior to Closing, a written seller estoppel executed by Seller certifying to matters set forth in the form of Seller Estoppel Certificate attached hereto as EXHIBIT "K." After Seller delivers any such seller estoppel to Purchaser, Seller shall have the right
prior to Closing to substitute the subject Tenant Estoppel Certificate executed by the subject tenant. Any seller estoppel shall provide that such seller estoppel shall expire on the first anniversary of said seller estoppel.
4.5 REPRESENTATIONS AND WARRANTIES OF PURCHASER.
(a) Organization, Authorization and Consents. Purchaser is a duly organized and validly existing limited liability company under the laws of the State of Delaware. Purchaser has the right, power and authority to enter into this Agreement and to purchase the Property in accordance with the terms and conditions of this Agreement, to engage in the transactions contemplated in this Agreement and to perform and observe the terms and provisions hereof.
(b) Action of Purchaser, Etc. Purchaser has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and upon the execution and delivery of any document to be delivered by Purchaser on or prior to the Closing, this Agreement and such document shall constitute the valid and binding obligation and agreement of Purchaser, enforceable against Purchaser in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors.
(c) No Violations of Agreements. Neither the execution, delivery or performance of this Agreement by Purchaser, nor compliance with the terms and provisions hereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under the terms of any indenture, deed to secure debt, mortgage, deed of trust, note, evidence of indebtedness or any other agreement or instrument by which Purchaser is bound.
(d) Litigation. To Purchaser's knowledge, Purchaser has received no written notice that any action or proceeding is pending or threatened, which questions the validity of this Agreement or any action taken or to be taken pursuant hereto.
(e) No Bankruptcy. Purchaser has not made a general assignment for the benefit of creditors, filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by Purchaser's creditors, suffered the appointment of a receiver to take possession of any of Purchaser's assets, suffered the attachment or other judicial seizure of any of Purchaser's assets, admitted in writing its inability to pay its debts as they come due or made an offer of settlement, extension or composition to its creditors generally.
(f) OFAC. (i) Neither Purchaser, nor any of Purchaser's owners, or any officers, directors or employees, is named as a "Specially Designated National and Blocked Person" as designated by the United States Department of the Treasury's Office of Foreign Assets Control or as a person, group, entity or nation designated in Presidential Executive Order 13224 as a person who commits, threatens to commit, or supports terrorism; (ii) Purchaser is not owned or controlled, directly or indirectly, by the government of any country that is subject to a United States Embargo; (iii) Purchaser is not acting, directly or indirectly, for or on behalf of any person, group, entity or nation named by the United States Treasury Department as a "Specially Designated National and Blocked Person", or for or on behalf of any person, group, entity or nation
designated in Presidential Executive Order 13224 as a person who commits, threatens to commit, or supports terrorism; and (iv) Purchaser is not engaged in the transaction contemplated hereby directly or indirectly on behalf of, or facilitating the transaction contemplated hereby directly or indirectly on behalf of, any such person, group, entity or nation.
4.6 COVENANT OF PURCHASER TO COMPLY WITH ENVIRONMENTAL REMEDIATION EASEMENT.
Purchaser acknowledges the presence of Hazardous Materials on, under or in the Property, as disclosed in the documents provided to Purchaser in the Existing Environmental Reports and Due Diligence Materials, and that Seller is presently performing the ACO Environmental Work under the supervision of the New York Department of Environmental Conservation and the New York Department of Health. Purchaser agrees to cooperate with Seller in all respects concerning its ongoing performance of the Environmental Work and grants to Seller an easement for purposes of completing the Environmental Work, as more particularly set forth in the Environmental Remediation Easement attached hereto as Exhibit K-1, provided that nothing in this Section 4.6 shall obligate Purchaser to incur any cost in connection with Seller's performance of the Environmental Work. Purchaser's covenant in this SECTION 4.6 shall survive Closing.
ARTICLE 5 CLOSING DELIVERIES, CLOSING COSTS AND PRORATIONS
5.1 SELLER'S CLOSING DELIVERIES. For and in consideration of, and as a condition precedent to Purchaser's delivery to Seller of the Purchase Price, Seller shall obtain or execute and deliver to Purchaser at Closing the following documents, all of which shall be duly executed, acknowledged and notarized where required:
(a) Deed. A Bargain and Sale Deed Without Covenants Against Grantor's Acts from Seller with respect to the Land and Improvements (the "Deed"), subject only to the Permitted Exceptions, and executed and acknowledged by Seller. The legal description of the Land set forth in the Deed shall be based upon and conform to the legal description attached hereto as Exhibit "A". If and to the extent that any of the Permitted Exceptions requires the recitation or incorporation in any deed of any provisions of such Permitted Exception, the Deed shall conform to such requirements;
(b) Seller Lease. Two (2) counterparts of a lease agreement (the "Seller Lease") between Purchaser, as landlord, and Standard Motor Products, Inc., as tenant, in substantially the form attached hereto as Schedule 5, executed by Seller;
(c) Assignment and Assumption of Leases. Two (2) counterparts of an assignment and assumption of the Leases and, to the extent required elsewhere in this Agreement, the obligations of Seller under the Commission Agreements in the form attached hereto as Schedule 1 (the "Assignment and Assumption of Lease"), executed by Seller;
(d) Assignment and Assumption of Service Contracts. Two (2) counterparts of an assignment and assumption of Service Contracts in the form attached hereto as SCHEDULE 2 (the "Assignment and Assumption of Service Contracts"), executed by Seller;
(e) Bill of Sale. A bill of sale from Seller for the Personal and Intangible Property of Seller in the form attached hereto as SCHEDULE 3 (the "Bill of Sale"), without warranty as to the title or condition of the Personal and Intangible Property, executed by Seller;
(f) Seller's Affidavit. An owner's affidavit from Seller in a form reasonably requested by the Title Company and acceptable to Seller;
(g) RPT Return. The Real Property Transfer Tax Return pursuant to Chapter 46, Title II of the New York City Administrative Code (the "RPT Return"), together with bank or cashiers' checks from Seller, made payable to the appropriate governmental authority in the required amount(s) (unless Seller authorizes the Title Company and the Title Company agrees to deduct and pay such expenses out of monies payable to Seller);
(h) NYS Tax Affidavit. The New York State Department of Taxation and Finance Combined Real Estate Transfer Tax Return, Credit Line Mortgage Certificate and Certification of Exemption from the Payment of Estimated Personal Income Tax (TP-584) (7/03) and Real Property Transfer Tax Report (RP-5217NYC) (collectively, the "NYS Tax Affidavit"), or any successor form thereto required to be filed with respect to the New York State Real Estate Transfer Tax, together with bank or cashiers' checks from Seller, made payable to the appropriate governmental authority in the required amount(s) (unless Seller authorizes the Title Company and the Title Company agrees to deduct and pay such expenses out of monies payable to Seller);
(i) FIRPTA Certificate. A FIRPTA Certificate from Seller in the form attached hereto as SCHEDULE 4, or in such other form as applicable laws may require;
(j) Evidence of Authority. Such documentation as may reasonably be required by the Title Company to establish that this Agreement, the transactions contemplated herein, and the execution and delivery of the documents required hereunder, are duly authorized, executed and delivered on behalf of Seller;
(k) Settlement Statement. A settlement statement setting forth the amounts paid by or on behalf of and/or credited to each of Purchaser and Seller pursuant to this Agreement;
(l) Surveys and Plans. Such surveys, site plans, plans and specifications, and other matters relating to the Property as are in the possession or control of Seller to the extent not theretofore delivered to Purchaser;
(m) Certificates of Occupancy. To the extent the same are in the possession or control of Seller, original or photocopies of certificates of occupancy for all space within the Improvements located on the Property;
(n) Leases and Contracts. To the extent the same is in the possession or control of Seller, original executed counterparts of the Leases and the Service Contracts;
(o) Tenant Estoppel Certificate. Tenant Estoppel Certificates or seller estoppel certificates, as applicable, as required by Section 4.4;
(p) Notice of Sale to Tenant. Seller will join with Purchaser in executing a notice, in form and content reasonably satisfactory to Seller and Purchaser (the "Tenant Notice of Sale"), which Purchaser shall send to the tenants under the Leases informing the tenants of the sale of the Property and of the assignment to and assumption by Purchaser of Seller's interest in the Leases and directing that all rent and other sums payable for periods after the Closing under the Leases shall be paid as set forth in said notice;
(q) Notices of Sale to Service Contractors and Leasing Agents. Seller will join with Purchaser in executing notices, in form and content reasonably satisfactory to Seller and Purchaser (the "Other Notices of Sale"), which Purchaser shall send to each service provider and leasing agent under the Service Contracts assumed by Purchaser at Closing informing such service provider of the sale of the Property and of the assignment to and assumption by Purchaser of Seller's obligations under the Service Contracts arising after the Closing Date and directing that all future statements or invoices for services under such Service Contracts for periods after the Closing be directed to Seller or Purchaser as set forth in said notices;
(r) Keys and Records. All of the keys to any door or lock on the Property and the original tenant files, plans and specifications of the Property excluding keys for space continuing to be occupied by Seller, and other non-confidential books and records relating to the Property in the possession of Seller;
(s) Seller Certificate. A certificate of Seller confirming the
continued accuracy of the representations and warranties made by Seller in this
Agreement or updating and correcting any changes to such representations and
warranties, it being agreed that any update to or change of the representations
and warranties will not be a Seller default if any such representations and
warranties (which were true when made) have become untrue due to any reason
other than an act or omission to act of Seller which violates the terms of this
Agreement which certificate shall survive the Closing for one hundred eighty
(180) days; and
(t) Other Documents. Such other documents as shall be reasonably requested by the Title Company to effectuate the purposes and intent of this Agreement, including as may be required by the Title Company in connection with the issuance to Purchaser of an owner's policy, provided that such affidavits do not impose on Seller any material liabilities not assumed by it under this Agreement (it being agreed that an affidavit in customary form which is required to limit the standard pre-printed exception for tenants in possession to their rights as tenants only under written leases and to eliminate the standard exception for inchoate mechanics' liens for work performed by Seller at Seller's expense will not be deemed to impose material liabilities on Seller).
(u) Environmental Insurance. A fully executed insurance policy containing substantially the same terms and conditions as described in the quote provided in Exhibit K-2 attached hereto.
5.2 PURCHASER'S CLOSING DELIVERIES. Purchaser shall obtain or execute and deliver to Seller at Closing the following documents, all of which shall be duly executed, acknowledged and notarized where required:
(a) Assignment and Assumption of Lease. Two (2) counterparts of the Assignment and Assumption of Lease, executed by Purchaser;
(b) Assignment and Assumption of Service Contracts. Two (2) counterparts of the Assignment and Assumption of Service Contracts, executed by Purchaser;
(c) Notice of Sale to Tenant. The Tenant Notice of Sale, executed by Purchaser, as contemplated in SECTION 5.1(P) hereof;
(d) Notices of Sale to Service Contractors and Leasing Agents. The Other Notices of Sale to service providers as contemplated in SECTION 5.1(Q) hereof;
(e) Settlement Statement A settlement statement setting forth the amounts paid by or on behalf of and/or credited to each of Purchaser and Seller pursuant to this Agreement;
(f) Evidence of Authority. A copy of resolutions of the members of Purchaser, certified by the managing member of Purchaser to be in force and unmodified as of the date and time of Closing and authorizing the purchase contemplated herein and the execution and delivery of the documents required hereunder and designating the signatures of the persons who are to execute and deliver all such documents;
(g) Seller Lease. Two (2) counterparts of the Seller Lease, executed by Purchaser;
(h) Transfer Documents. The RPT Return and NYS Tax Affidavit.
(i) Environmental Insurance. A fully executed insurance policy containing substantially the same terms and conditions as described in the quote provided in Exhibit K-2 attached hereto.
(j) Other Documents. Such other documents as shall be reasonably requested by Seller's counsel to effectuate the purposes and intent of this Agreement.
5.3 CLOSING COSTS. Seller shall pay the attorneys' fees of Seller, the brokerage commission due Broker pursuant to Section 10.1 of this Agreement, the cost of the documentary stamps or transfer taxes imposed upon the conveyance of the Property, all fees and recording charges for releasing liens (other than the Permitted Exceptions) which Seller has an obligation or elects to remove, including prepayment premiums or penalties, if any, and all other costs and expenses incurred by Seller in closing and consummating the purchase and sale of the Property pursuant hereto. Purchaser shall pay the costs of obtaining the Survey, the cost of recording the Deed, the cost of all title examination fees and expenses and title insurance premiums payable with respect to the owner's title insurance policy issued by the Title Company to Purchaser, the cost of all endorsements to Purchaser's owner's title insurance policy, the costs of issuing and title insurance premiums for any mortgagee title insurance policy obtained by Purchaser, the costs of the Survey, all other recording fees on all instruments to be recorded in connection with these transactions, the attorneys' fees of Purchaser, and all other costs and expenses incurred by Purchaser in the performance of Purchaser's due diligence inspection of the Property (including without limitation appraisal costs, environmental audit and assessment costs, and engineering review costs) and in closing and consummating the purchase and sale of the Property pursuant hereto.
5.4 PRORATIONS AND CREDITS. The following items in this SECTION 5.4 shall be adjusted and prorated between Seller and Purchaser as of 11:59 P.M. on the day preceding the Closing, based upon the actual number of days in the applicable month or year:
(a) Taxes. All general real estate taxes imposed by any governmental authority ("Taxes") for the tax year in which the Closing occurs shall be prorated between Purchaser and Seller with respect to the Property as of the Closing. If the Closing occurs prior to the receipt by Seller of the tax bill for the Property for applicable tax period in which the Closing occurs, Taxes with respect to the Property shall be prorated for such calendar year or other applicable tax period based upon the prior year's tax bill.
(b) Reproration of Taxes. Within thirty (30) days of receipt of
final bills for Taxes, the party receiving said final tax bills shall furnish
copies of the same to the other party and shall prepare and present to such
other party a calculation of the reproration of such Taxes based upon the actual
amount of such Taxes for the year. The parties shall make the appropriate
adjusting payment between them within thirty (30) days after presentment to
Seller of Purchaser's calculation and appropriate back-up information. The
provisions of this SECTION 5.4(B) shall survive the Closing for a period of one
(1) year after the Closing Date.
(c) Rents, Income and Other Expenses. Rents and any other amounts paid to Seller by the tenants under the Leases (and any new lease entered into in accordance with the terms of this Agreement) shall be prorated as of the Closing Date and be adjusted against the Purchase Price on the basis of an updated Rent Roll certified by Seller and dated as of the Closing, a draft of which shall be prepared by Seller and delivered to Purchaser for Purchaser's review and approval prior to Closing. Seller and Purchaser shall prorate all rents, additional rent, common area maintenance charges, operating expense contributions, tenant reimbursements and escalations, and all other payments under the Leases (and any such new lease) received as of the Closing Date so that at Closing Seller will receive monthly basic rent payments through the day prior to the Closing Date and so that Seller will receive reimbursement for all expenses paid by Seller through the day prior to the Closing Date for which Seller is entitled to reimbursement under the Leases (and any such new lease) (including, without limitation, Taxes) (such expenses shall be reasonably estimated if not ascertainable as the Closing Date and then shall be re-adjusted as provided in (f) below when actual amounts are determined), and so that the excess, if any, is credited to Purchaser. Purchaser agrees to pay to Seller, upon receipt, any rents or other payments by the tenants under the Leases that apply to periods prior to Closing but which are received by Purchaser after Closing; PROVIDED, HOWEVER, that any rents or other payments by any such tenant received by Purchaser after Closing shall be applied first to the calendar month during which the Closing Date occurs, then to any current amounts then owed to Purchaser by such tenant and then to Seller for the calendar month immediately preceding the calendar month during which the Closing Date occurs, with the balance, if any, paid over to Seller to the extent of delinquencies existing on the date of Closing to which Seller is entitled. It is understood and agreed that except as provided for in the immediately preceding sentence Purchaser
shall not be legally responsible to Seller for the collection of any rents or other charges payable with respect to the Leases or any portion thereof which are delinquent or past due as of the Closing Date; but Purchaser agrees that Purchaser shall send monthly notices for a period of three (3) consecutive months in an effort to collect any rents and charges not collected as of the Closing Date. Seller hereby retains its right to pursue the tenants under the Leases for sums due Seller for periods attributable to Seller's ownership of the Property. The provisions of this Section 5.4(c) shall survive the Closing.
(d) Tenant Inducement Costs. Subject to the penultimate sentence of
this subsection (d), Seller shall pay all such Tenant Inducement Costs and
leasing commissions payable under the Lease with respect to all periods prior to
the Closing Date. If said amounts have not been paid in full on or before
Closing, Purchaser shall receive a credit against the Purchase Price in the
aggregate amount of all such Tenant Inducement Costs and leasing commissions
remaining unpaid at Closing, and Purchaser shall assume the obligation to pay
amounts payable after Closing up to the amount of such credit received at
Closing. Except as may be specifically provided to the contrary elsewhere in
this Agreement, Purchaser shall be responsible for the payment of all Tenant
Inducement Costs and leasing commissions (i) as a result of any renewals or
extensions or expansions of the existing Leases entered into after the Effective
Date hereof with the approval of Purchaser as set forth in this Agreement, and
(ii) under any new leases approved or deemed approved by Purchaser in accordance
with SECTION 4.3(A). The provisions of this SECTION 5.4(D) shall survive the
Closing.
(e) Security Deposits. Purchaser shall receive at Closing a credit for all security deposits transferred and assigned to Purchaser at Closing in connection with the Leases and any new lease approved or deemed approved by Purchaser in accordance with SECTION 4.3(A) hereof, together with an inventory of such security deposits certified by Seller at Closing.
(f) Operating Expenses; Year End Reconciliation. Personal property
taxes, installment payments of special assessment liens, vault charges, sewer
charges, utility charges, and normally prorated operating expenses actually paid
or payable by Seller as of the Closing Date shall be prorated as of the Closing
Date and adjusted against the Purchase Price, provided that within ninety (90)
days after the Closing, Purchaser and Seller will make a further adjustment for
such expenses which may have accrued or been incurred prior to the Closing Date,
but which were not paid as of the Closing Date. In addition, within ninety (90)
days after the close of the fiscal year used in calculating pass-throughs to the
tenants of operating expenses and/or common area maintenance costs under the
Leases (where such fiscal year includes the Closing Date), Seller and Purchaser
shall re-prorate on a fair and equitable basis all rents and income prorated
pursuant to this SECTION 5.4 as well as all expenses prorated pursuant to this
SECTION 5.4. All prorations of rent and other income shall be made based on the
cumulative amounts collected from the tenants under the Leases in such fiscal
year and applied first to actual expense amounts paid by Seller prior to the
Closing Date and then to Purchaser for actual expense amounts paid by Purchaser
from and after the Closing Date. The provisions of this SECTION 5.4(F) shall
survive the Closing.
(g) Other Costs and Expenses; Survival. All other costs and expenses customarily prorated for in similar transactions (including without limitation the cost of oil in the tank(s) on the Property) shall be apportioned in accordance with the Customs in Respect to Title Closings of the Real Estate Board of New York, Inc. The provisions of this Section 5.4 shall survive the Closing for twelve (12) months.
ARTICLE 6 CONDITIONS TO CLOSING
6.1 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS. The obligations of Purchaser hereunder to consummate the transaction contemplated hereunder shall in all respects be conditioned upon the satisfaction of each of the following conditions prior to or simultaneously with the Closing (or at such earlier time as may be provided below), any of which may be waived by Purchaser in its sole discretion at or prior to the Closing Date:
(a) Seller shall have performed, in all material respects, all covenants, agreements and undertakings of Seller contained in this Agreement;
(b) All representations and warranties of Seller as set forth in this Agreement shall be true and correct in all material respects as of the date of the Closing; and
(c) In the event any condition in clauses (a) and (b) of this
SECTION 6.1 has not been satisfied (or otherwise waived by Purchaser) prior to
or on the Closing Date (as the same may be extended or postponed as provided in
this Agreement), Purchaser shall have the right, in its sole discretion, to
terminate this Agreement by written notice to Seller given prior to the Closing,
whereupon (i) Escrow Agent shall return the Earnest Money to Purchaser; and (ii)
except for those provisions of this Agreement which by their express terms
survive the termination of this Agreement, no party hereto shall have any other
or further rights or obligations under this Agreement.
6.2 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. The obligations of Seller hereunder to consummate the transactions contemplated hereunder shall in all respects be conditioned upon the satisfaction of each of the following conditions prior to or simultaneously with the Closing (or at such earlier time as may be provided below), any of which may be waived by Seller in Seller's sole discretion by written notice to Purchaser at or prior to the Closing Date:
(a) Purchaser shall have paid and Seller shall have received the Purchase Price, as adjusted pursuant to the terms and conditions of this Agreement, which Purchase Price shall be payable in the amount and in the manner provided for in this Agreement;
(b) Purchaser shall have performed, in all material respects, all covenants, agreements and undertakings of Purchaser contained in this Agreement; and
(c) All representations and warranties of Purchaser as set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement.
ARTICLE 7 CASUALTY AND CONDEMNATION
7.1 CASUALTY. Risk of loss up to and including the Closing Date shall be borne by Seller. In the event of any immaterial damage or destruction to the Property or any portion thereof, Seller and Purchaser shall proceed to close under this Agreement, and Purchaser will receive (and Seller will assign to
Purchaser at the Closing Seller's rights under insurance policies to receive)
any insurance proceeds (including any rent loss insurance applicable to any
period on and after the Closing Date) due Seller as a result of such damage or
destruction (less any amounts reasonably expended for restoration or collection
of proceeds) and assume responsibility for such repair, and Purchaser shall
receive a credit at Closing for any deductible amount under said insurance
policies. For purposes of this Agreement, the term "immaterial damage or
destruction" shall mean such instances of damage or destruction of the Property:
(i) which can be repaired or restored at a cost of $500,000.00 or less; and (ii)
which can be restored and repaired within one hundred eighty (180) days from the
date of such damage or destruction.
In the event of any material damage or destruction to the Property or any portion thereof, Purchaser may, at its option, by notice to Seller given within the earlier of twenty (20) days after Purchaser is notified by Seller of such damage or destruction, or the Closing Date, but in no event less than twenty (20) days after Purchaser is notified by Seller of such damage or destruction (and if necessary the Closing Date shall be extended to give Purchaser the full 20-day period to make such election): (i) terminate this Agreement, whereupon Escrow Agent shall immediately return the Earnest Money to Purchaser, or (ii) proceed to close under this Agreement, receive (and Seller will assign to Purchaser at the Closing the rights of Seller under insurance policies to receive) any insurance proceeds (including any rent loss insurance applicable to the period on or after the Closing Date) due Seller as a result of such damage or destruction (less any amounts reasonably expended for restoration), and assume responsibility for such repair, and Purchaser shall receive a credit at Closing for any deductible amount under said insurance policies. If Purchaser fails to deliver to Seller notice of its election within the period set forth above, Purchaser will conclusively be deemed to have elected to proceed with the Closing as provided in clause (ii) of the preceding sentence. If Purchaser elects or is deemed to have elected clause (ii) above, Seller will cooperate with Purchaser after the Closing to assist Purchaser in obtaining the insurance proceeds from the insurers of Seller. For purposes of this Agreement "material damage or destruction" shall mean all instances of damage or destruction that are not immaterial, as defined herein.
7.2 CONDEMNATION. If, prior to the Closing, all or any part of the Property is subjected to a bona fide threat of condemnation by a body having the power of eminent domain or is taken by eminent domain or condemnation (or sale in lieu thereof), or if Seller has received written notice that any condemnation action or proceeding with respect to the Property is contemplated by a body having the power of eminent domain (collectively, a "Taking"), Seller shall give Purchaser immediate written notice of such Taking. In the event of any immaterial Taking with respect to the Property or any portion thereof, Seller and Purchaser shall proceed to close under this Agreement. For purposes of this Agreement, the term "immaterial Taking" shall mean such instances of Taking of the Property: (i) which do not result in a taking of any portion of the building structure of the building occupied by tenants on the Property; (ii) which do not result in a decrease in the number of parking spaces at the Property (taking into account the number of additional parking spaces that can be provided within 180 days of such Taking); and (iii) which are not so extensive as to allow the tenants under the Leases to terminate the Leases or abate or reduce rent payable thereunder.
In the event of any material Taking of the Property or any portion thereof, Purchaser may, at its option, by written notice to Seller given within thirty (30) days after receipt of such notice from Seller, elect to terminate this Agreement, or Purchaser may choose to proceed to close. If Purchaser chooses to terminate this Agreement in accordance with this SECTION 7.2, then the Earnest Money shall be returned immediately to Purchaser by Escrow Agent and the rights, duties, obligations, and liabilities of the parties hereunder shall immediately terminate and be of no further force and effect, except for those provisions of this Agreement which by their express terms survive the termination of this Agreement. For purposes of this Agreement "material Taking " shall mean all instances of a Taking that are not immaterial, as defined herein.
If Purchaser does not elect to, or has no right to, terminate
this Agreement in accordance herewith on account of a Taking, this Agreement
shall remain in full force and effect and the sale of the Property contemplated
by this Agreement, less any interest taken by eminent domain or condemnation, or
sale in lieu thereof, shall be effected with no further adjustment and without
reduction of the Purchase Price, and at the Closing, Seller shall assign,
transfer, and set over to Purchaser all of the right, title, and interest of
Seller in and to any awards applicable to the Property that have been or that
may thereafter be made for such taking. At such time as all or a part of the
Property is subjected to a bona fide threat of condemnation and Purchaser shall
not have elected to terminate this Agreement as provided in this SECTION 7.2,
(i) Purchaser shall thereafter be permitted to participate in the proceedings as
if Purchaser were a party to the action, and (ii) Seller shall not settle or
agree to any award or payment pursuant to condemnation, eminent domain, or sale
in lieu thereof without obtaining Purchaser's prior written consent thereto in
each case.
7.3 SURVIVAL. The provisions of this Article 7 shall survive Closing.
ARTICLE 8 DEFAULT AND REMEDIES
8.1 PURCHASER'S DEFAULT. If Purchaser fails to consummate this transaction for any reason other than the default of Seller, failure of a condition to Purchaser's obligation to close, or the exercise by Purchaser of an express right of termination granted herein, Seller shall be entitled, as its sole remedy hereunder, to terminate this Agreement and to receive and retain the Earnest Money as full liquidated damages for such default of Purchaser, the parties hereto acknowledging that it is impossible to estimate more precisely the damages which might be suffered by Seller upon Purchaser's default, and that said Earnest Money is a reasonable estimate of the probable loss of Seller in the event of default by Purchaser. The retention by Seller of said Earnest Money is intended not as a penalty, but as full liquidated damages. The right to retain the Earnest Money as full liquidated damages is the sole and exclusive remedy of Seller in the event of default hereunder by Purchaser, and Seller hereby waives and releases any right to (and hereby covenant that it shall not) sue the Purchaser: (a) for specific performance of this Agreement, or (b) to recover actual damages in excess of the Earnest Money. The foregoing liquidated damages provision shall not apply to or limit Purchaser's liability for Purchaser's obligations under SECTIONS 3.1(B), 3.1(C), 3.5 and 10.1 of this Agreement. Purchaser hereby waives and releases any right to (and hereby covenants that it shall not) sue Seller or seek or claim a refund of said Earnest Money (or any part thereof) on the grounds it is unreasonable in amount and exceeds the actual damages of Seller or that its retention by Seller constitutes a penalty and not agreed upon and reasonable liquidated damages.
8.2 SELLER'S DEFAULT. If Seller fails to perform any of its material obligations under this Agreement for any reason other than Purchaser's default or the permitted termination of this Agreement by Seller or Purchaser as expressly provided herein Purchaser shall be entitled, as its sole remedy, either (a) to receive the return of the Earnest Money from Escrow Agent and payment by Seller of Purchaser's Reimbursable Due Diligence Expenses (as defined below), which return and payment shall operate to terminate this Agreement and release Seller from any and all liability hereunder except provisions that expressly survive a termination of this Agreement, or (b) to enforce specific performance of the obligation of Seller to execute and deliver the documents required to convey the Property to Purchaser in accordance with this Agreement; it being specifically understood and agreed that the remedy of specific performance shall not be available to enforce any other obligation of Seller hereunder; provided that Purchaser shall not be entitled to such remedies if Purchaser waives any default of Seller and the Closing occurs. Purchaser expressly waives its rights to seek damages in the event of the default of Seller hereunder. Purchaser shall be deemed to have elected to terminate this Agreement and to receive a return of the Earnest Money from Escrow Agent if Purchaser fails to file suit for specific performance against Seller in a court having jurisdiction, on or before ninety (90) days following the date upon which the Closing was to have occurred. "Reimbursable Due Diligence Expenses" shall mean all costs and expenses (including reasonable attorneys' fees) in an amount not to exceed TWO HUNDRED THOUSAND DOLLARS ($200,000) incurred by Purchaser in connection with the negotiation and preparation of this Agreement, Purchaser's due diligence investigations of the Property and its operations and the enforcement of this Agreement. If Seller fails to deliver all Tenant Estoppel Certificates (but delivers Seller Estoppel Certificates in lieu thereof), Purchaser shall not be entitled to receive the Reimbursable Due Diligence Expenses in connection with such failure to deliver on the part of the Seller.
8.3 SURVIVAL. The provisions of this Article 8 shall survive the termination of this Agreement.
ARTICLE 9 ASSIGNMENT
9.1 ASSIGNMENT. Subject to the next following sentence, this Agreement and all rights and obligations hereunder shall not be assignable by any party without the written consent of the other. Notwithstanding the foregoing to the contrary, this Agreement and all of Purchaser's rights hereunder may be transferred and assigned to any entity controlled by Purchaser. Any assignee or transferee under any such assignment or transfer by Purchaser as to which the written consent of Seller has been given or as to which the consent of Seller is not required hereunder shall expressly assume all of Purchaser's duties, liabilities and obligations under this Agreement (whether arising or accruing prior to or after the assignment or transfer) by written instrument delivered to Seller as a condition to the effectiveness of such assignment or transfer. No assignment or transfer shall relieve the original Purchaser of any duties or obligations hereunder, and the written assignment and assumption agreement shall expressly so provide. For purposes of this SECTION 9.1, the term "control" shall mean the ownership of at least fifty percent (50%) of the applicable entity. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. This Agreement is not intended and shall not be construed to create any rights in or to be enforceable in any part by any other persons.
ARTICLE 10 BROKERAGE COMMISSIONS
10.1 BROKER. Upon the Closing, and only in the event the Closing occurs, Seller shall pay a brokerage commission to Greiner-Maltz Company of New York, Inc. ("Broker"), pursuant to a separate agreement between Seller and Broker. Broker is representing Seller in this transaction. Seller shall and does hereby indemnify and hold Purchaser harmless from and against any and all liability, loss, cost, damage, and expense, including reasonable attorneys' fees actually incurred and costs of litigation, Purchaser shall ever suffer or incur because of any claim by any agent, salesman, or broker, whether or not meritorious, for any fee, commission or other compensation with regard to this Agreement or the sale and purchase of the Property contemplated hereby, and arising out of any acts or agreements of Seller, including any claim asserted by Broker. Likewise, Purchaser shall and does hereby indemnify and hold Seller free and harmless from and against any and all liability, loss, cost, damage, and expense, including reasonable attorneys' fees actually incurred and costs of litigation, Seller shall ever suffer or incur because of any claim by any agent, salesman, or broker, whether or not meritorious, for any fee, commission or other compensation with respect to this Agreement or the sale and purchase of the Property contemplated hereby and arising out of the acts or agreements of Purchaser. This Section 10.1 shall survive the Closing until the expiration of any applicable statute of limitations and shall survive any earlier termination of this Agreement.
ARTICLE 11 MISCELLANEOUS
11.1 NOTICES. Wherever any notice or other communication is required or permitted hereunder, such notice or other communication shall be in writing and shall be delivered by overnight courier, hand, facsimile, or sent by U.S. registered or certified mail, return receipt requested, postage prepaid, to the addresses or facsimile numbers set out below or at such other addresses as are specified by written notice delivered in accordance herewith:
PURCHASER: c/o J.P. Morgan Investment Management Inc.
245 Park Avenue, 26th Floor
New York, New York 10167
Attention: Michael Duignan
Facsimile: 212-648-2262
with a copy to: c/o RD Investments, LLC
55 Fifth Avenue, 15th Floor
New York, NY 10003
Attention: Jeffrey Rosenblum
Facsimile: (212) 627-9279
and c/o J.P. Morgan Investment Management Inc.
P.O. Box 5005
New York, New York 10163-5005
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and Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Attention: Brian Diamond, Esq.
Facsimile: (212) 806-6006
SELLER Standard Motor Products, Inc.
37-18 Northern Boulevard
Long Island City, New York 11101
Attention: Robert H. Martin, Treasurer
Facsimile: (718) 784-3284
with a copy to: Standard Motor Products, Inc.
37-18 Northern Boulevard
Long Island City, New York 11101
Attention: Carmine J. Broccole,
VP General Counsel and Secretary
Facsimile: (718) 784-3284
with a copy to: Kelley Drye & Warren LLP
101 Park Avenue
New York, New York 10178
Attention: Bud Holman, Esq.
Facsimile: (212) 808-7897
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Any notice or other communication (i) mailed as hereinabove provided shall be deemed effectively given or received on the third (3rd) Business Day following the postmark date of such notice or other communication, (ii) sent by overnight courier or by hand shall be deemed effectively given or received upon receipt, and (iii) sent by facsimile shall be deemed effectively given or received on the day of such electronic transmission of such notice and confirmation of such transmission if transmitted and confirmed prior to 5:00 p.m. local New York, New York time on a Business Day and otherwise shall be deemed effectively given or received on the first Business Day after the day of transmission of such notice and confirmation of such transmission. Refusal to accept delivery shall be deemed delivered.
11.2 POSSESSION. Full and exclusive possession of the Property, subject to the Permitted Exceptions and the rights of the tenants under the Leases, shall be delivered by Seller to Purchaser on the Closing Date.
11.3 TIME PERIODS. If the time period by which any right, option, or election provided under this Agreement must be exercised, or by which any act required hereunder must be performed, or by which the Closing must be held, expires on a Saturday, Sunday, or holiday, then such time period shall be automatically extended through the close of business on the next regularly scheduled Business Day.
11.4 PUBLICITY. The parties agree that, prior to Closing, and except for disclosures required by law or governmental regulations applicable to such party, no party shall, with respect to this Agreement and the transactions contemplated hereby, contact or conduct negotiations with public officials, make any public announcements or issue press releases regarding this Agreement or the transactions contemplated hereby to any third party without the prior written consent of the other party hereto. No party shall record this Agreement or any notice hereof.
11.5 DISCHARGE OF OBLIGATIONS. The acceptance by Purchaser of the Deed hereunder shall be deemed to constitute the full performance and discharge of each and every warranty and representation made by Seller and Purchaser herein and every agreement and obligation on the part of Seller and Purchaser to be performed pursuant to the terms of this Agreement, except those warranties, representations, covenants and agreements which are specifically provided in this Agreement to survive Closing.
11.6 SEVERABILITY. This Agreement is intended to be performed in accordance with, and only to the extent permitted by, all applicable laws, ordinances, rules and regulations. If any provision of this Agreement, or the application thereof to any person or circumstance, shall, for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby but rather shall be enforced to the greatest extent permitted by law.
11.7 CONSTRUCTION. This Agreement shall not be construed more strictly against one party than against the other merely by virtue of the fact that this Agreement may have been prepared by counsel for one of the parties, it being mutually acknowledged and agreed that Seller and Purchaser and their respective counsel have contributed substantially and materially to the preparation and negotiation of this Agreement. Accordingly, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any exhibits or amendments hereto.
11.8 SALE NOTIFICATION LETTERS. Promptly following the Closing, Purchaser shall deliver the Tenant Notice of Sale to the tenants under the Leases, and the Other Notices of Sale to each service provider, the obligations under whose respective Service Contracts Purchaser has assumed at Closing.
11.9 GENERAL PROVISIONS. No failure of either party to exercise any power given hereunder or to insist upon strict compliance with any obligation specified herein, and no custom or practice at variance with the terms hereof, shall constitute a waiver of either party's right to demand exact compliance with the terms hereof. This Agreement contains the entire agreement of the parties hereto, and no representations, inducements, promises, or agreements, oral or otherwise, between the parties not embodied herein shall be of any force or effect. Any amendment to this Agreement shall not be binding upon Seller or Purchaser unless such amendment is in writing and executed by Seller and Purchaser. The provisions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns. On the date of Closing, Seller shall assign its rights and obligations hereunder to its affiliate, Standard Motor Products, Inc., and Standard Motor Products, Inc. hereby agrees to assume all rights, interests and obligations of this Agreement. The headings inserted at the beginning of each paragraph are for convenience only, and do not add to or subtract from the meaning of the contents of each paragraph. This
Agreement shall be construed, interpreted and enforced under the laws of the State of New York. Except as otherwise provided herein, all rights, powers, and privileges conferred hereunder upon the parties shall be cumulative but not restrictive to those given by law. All personal pronouns used in this Agreement, whether used in the masculine, feminine, or neuter gender shall include all genders, and all references herein to the singular shall include the plural and vice versa.
11.10 ATTORNEY'S FEES. If Purchaser or Seller brings an action at law or equity against the other in order to enforce the provisions of this Agreement or as a result of an alleged default under this Agreement, the prevailing party in such action shall be entitled to recover court costs and reasonable attorney's fees actually incurred from the other.
11.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which when taken together shall constitute one and the same original. To facilitate the execution and delivery of this Agreement, the parties may execute and exchange counterparts of the signature pages by facsimile, and the signature page of either party to any counterpart may be appended to any other counterpart.
11.12 EFFECTIVE AGREEMENT. The submission of this Agreement for examination is not intended to nor shall constitute an offer to sell, or a reservation of, or option or proposal of any kind for the purchase of the Property. In no event shall any draft of this Agreement create any obligation or liability, it being understood that this Agreement shall be effective and binding only when a counterpart of this Agreement has been executed and delivered by each party hereto.
11.13 CERTIORARI. Seller shall retain sole and absolute interest in proceedings against The City New York and its agencies, including, but not limited to, the New York City Department of Finance, New York City Tax Commission and New York City Law Department, which relate to the protest or appeal of the assessment of real property for tax years prior to the tax year in which the Closing occurs. As such, seller shall have sole interest in and sole authority to settle, pursue or initiate any proceedings for tax years commencing prior to the sale of the property. Said authority shall survive the sale of the property.
11.14 DEFEASANCE. Seller and Purchaser acknowledge that the mortgage
(the "Mortgage") presently encumbering the Property shall be defeased in
connection with the closing of the Sale. Seller and Purchaser agree to cooperate
with each other in order to attempt to effect a "New York style" defeasance of
the Mortgage and assignment of the Mortgage to Purchaser's lender. Purchaser's
obligation to cooperate with Seller's defeasance of the Mortgage shall remain in
effect notwithstanding any failure to effect the assignment of the Mortgage to
Purchaser's lender. Such cooperation on the part of Purchaser shall include,
without limitation, Purchaser's causing its lender to fund Purchaser's loan one
(1) business day prior to the actual closing of the Sale and for Purchaser to
deposit the amount Purchase Price with an escrow agent (presumably the Title
Company). The escrow agent shall be directed to invest the money in a manner
reasonably acceptable to both Seller and Purchaser and Purchaser shall be
entitled to the earnings thereon. Purchaser acknowledges that Purchaser shall
incur costs due to and in connection with such early funding of Purchaser's
loan.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written.
SELLER:
SMP REAL ESTATE LLC,
a Delaware limited liability company
By: /s/ Robert H. Martin
---------------------
Name: Robert H. Martin
Title: Treasurer
|
PURCHASER:
EX II NORTHERN BOULEVARD ACQUISITION LLC,
a Delaware limited liability company
By: Excelsior, LLC, a Delaware limited
liability company, its sole member
By: J. P. Morgan Investment Management Inc.,
its manager
By: /s/ Michael J. Duignan
------------------------
Name: Michael J. Duignan
Title: Vice President
|
STANDARD MOTOR PRODUCTS, INC.,
a New York corporation
(with respect to Section 11.9)
By: /s/ Robert H. Martin
---------------------
Name: Robert H. Martin
Title: Treasurer
|
STANDARD FORM OF OFFICE LEASE 7/04
THE REAL ESTATE BOARD OF NEW YORK, INC.
Agreement of Lease, made as of this 12th day of March in the year 2008, between 37-18 NORTHERN BOULEVARD LLC party of the first part, hereinafter referred to as OWNER, and STANDARD MOTOR PRODUCTS INC. party of the second part, hereinafter referred to as TENANT,
Witnesseth: Owner hereby leases to Tenant and Tenant hereby hires from Owner certain premises as described in Article 37 of this Lease in the building known as 37-18 Northern Boulevard, Long Island City, New York, for the term of approximately ten (10) years commencing on the Commencement Date and expiring on the Expiration Date as described in Article 38 of this Lease both dates inclusive, at the base annual rental rate as described in Article 39 of this Lease which Tenant agrees to pay in lawful money of the United States, which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, at the office of Owner or such other place as Owner may designate, without any setoff or deduction whatsoever, except that Tenant shall pay the first monthly installment(s) on the execution hereof (unless this lease be a renewal).
In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Owner pursuant to the terms of another lease with Owner or with Owner's predecessor in interest, Owner may at Owner's option and without notice to Tenant add the amount of such arrears to any monthly installment of rent payable hereunder and the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows:
1. RENT. Tenant shall pay the rent as above and as hereinafter provided.
2. OCCUPANCY. Tenant shall use and occupy the demised premises for office and warehouse and for no other purpose.
3. TENANT ALTERATIONS. Tenant shall make no changes in or to the demised premises of any nature without Owner's prior written consent which consent shall not (subject to the provisions of Article 45 below), be unreasonably withheld, conditioned or delayed. Subject to the prior written consent of Owner, and to the provisions of this article, Tenant, at Tenant's expense, may make alterations, installations, additions or improvements which are non-structural and which do not affect utility services or plumbing and electrical lines, in or to the interior of the demised premises, by using contractors or mechanics first approved in each instance by Owner which approval shall not be unreasonably withheld, conditioned or delayed. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof, and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner, and Tenant agrees to carry, and will cause Tenant's contractors and sub-contractors to carry, such worker's compensation, commercial general
liability, personal and property damage insurance as Owner may require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days thereafter, at Tenant's expense, by payment or filing a bond as permitted by law. All fixtures and all paneling, partitions, railings and like installations, installed in the demised premises at any time, either by Tenant or by Owner on Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises. Nothing in this article shall be construed to give Owner title to, or to prevent Tenant's removal of, trade fixtures, moveable office furniture and equipment, but upon removal of same from the demised premises or upon removal, of other installations as may be required by Owner, Tenant shall immediately, and at its expense, repair and restore the demised premises to the condition existing prior to any such installations, and repair any damage to the demised premises or the building due to such removal. All property permitted or required to be removed by Tenant at the end of the term remaining in the demised premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or may be removed from the demised premises by Owner, at Tenant's expense.
4. MAINTENANCE AND REPAIRS. Tenant shall, throughout the term of this lease, take good care of the demised premises and the fixtures and appurtenances therein. Tenant shall be responsible for all damage or injury to the demised premises or any other part of the building and the systems and equipment thereof, whether requiring structural or nonstructural repairs caused by, or resulting from, carelessness, omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents, employees, invitees or licensees, or which arise out of any work, labor, service or equipment done for, or supplied to, Tenant or any subtenant, or arising out of the installation, use or operation of the property or equipment of Tenant or any subtenant. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture and equipment. Tenant shall promptly make, at Tenant's expense, all repairs in and to the demised premises for which Tenant is responsible. Any other repairs in or to the building or the facilities and systems thereof, for which Tenant is responsible, shall be performed by Owner at the Tenant's expense. Owner shall maintain in good working order and repair the exterior and the structural portions of the building, including the structural portions of the demised premises, and the public portions of the building interior and the building plumbing, electrical, heating and ventilating systems (to the extent such systems presently exist) serving the demised premises (without limitation, the term "structural" shall be deemed to include the roof of the building). Tenant agrees to give prompt notice of any defective condition in the demised premises for which Owner may be responsible hereunder. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or others making repairs, alterations, additions or improvements in or to any portion of the building or the demised premises, or in and to the fixtures, appurtenances or equipment thereof. It is specifically agreed that Tenant shall not be entitled to any setoff or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this lease. Tenant agrees that Tenant's sole remedy at law in such instance will be by way of an action for damages for breach of contract. The provisions of this Article 4 shall not apply in the case of fire or other casualty, which are dealt with in Article 9 hereof.
5. WINDOW CLEANING. Tenant will not clean nor require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable law, or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction.
6. REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS. Prior to the commencement of the lease term, if Tenant is then in possession, and at all times thereafter, Tenant, at Tenant's sole cost and expense, shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant's use or manner of use thereof, (including Tenant's permitted use) or, with respect to the building if arising out of Tenant's use or manner of use of the demised premises or the building (including the use permitted under the lease), provided, however, Tenant shall not be responsible to cure any conditions existing prior to the commencement of the term of this Lease or effect the dismissal of any violations given in connection with any condition existing prior to the commencement of the term of this Lease. Nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has, by its manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after securing Owner to Owner's satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorney's fees, by cash deposit or by surety bond in an amount and in a company satisfactory to Owner, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Owner to prosecution for a criminal offense, or constitute a default under any lease or mortgage under which Owner may be obligated, or cause the demised premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner with respect to the demised premises or the building of which the demised premises form a part, or which shall or might subject Owner to any liability or responsibility to any person, or for property damage. Tenant shall not keep anything in the demised premises, except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the demised premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or damages, which may be imposed upon Owner by reason of Tenant's failure to comply with the provisions of this article, and if by reason of such failure the fire insurance rate shall, at the beginning of this lease, or at any time thereafter, be higher than it otherwise would be, then, Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make-up" of rate for the building or the demised premises issued by the New York Fire Insurance Exchange, or other body making fire insurance rates
applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to reasonably prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Owner's reasonable judgment, to absorb and prevent vibration, noise and annoyance.
7. SUBORDINATION. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which the demised premises are a part, and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall from time to time execute promptly any certificate that Owner may request.
8. PROPERTY LOSS, DAMAGE REIMBURSEMENT INDEMNITY. Owner or its agents shall not be liable for any damage to property of Tenant, or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by, or due to, the negligence of Owner, its agents, servants or employees. Owner or its agents will not be liable for any such damage caused by other tenants or persons in, upon or about said building, or caused by operations in construction of any private, public or quasi public work. If at any time any windows of the demised premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever including, but not limited to, Owner's own acts, Owner shall not be liable for any damage Tenant may sustain thereby, and Tenant shall not be entitled to any compensation therefore, nor abatement or diminution of rent, nor shall the same release Tenant from its obligations hereunder, nor constitute an eviction. Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations, damages, penalties, claims, costs and expenses for which Owner shall not be reimbursed by insurance, including reasonable attorneys' fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any subtenant, and any agent, contractor, employee, invitee or licensee of any subtenant. In case any action or proceeding is brought against Owner by reason of any such claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Owner in writing, such approval not to be unreasonably withheld.
9. DESTRUCTION, FIRE AND OTHER CASUALTY. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner, and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by, and at the expense of, Owner, and the rent and other items of additional rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty, according
to the part of the demised premises which is usable for the reasonable conduct
of Tenant's business. (c) If the demised premises are totally damaged or
rendered wholly unusable by fire or other casualty, then the rent and other
items of additional rent, as hereinafter expressly provided, shall be
proportionately paid up to the time of the casualty, and thenceforth shall cease
until the date when the demised premises shall have been repaired and restored
by Owner (or if sooner reoccupied in part by the Tenant then rent shall be
apportioned as provided in subsection (b) above), subject to Owner's right to
elect not to restore the same as hereinafter provided. (d) If the demised
premises are rendered wholly unusable or (whether or not the demised premises
are damaged in whole or in part) if the building shall be so damaged that Owner
shall decide to demolish it or to rebuild it, then, in any of such events, Owner
may elect to terminate this lease by written notice to Tenant, or if the demised
premises are rendered wholly unusable whether or not Owner elects to restore the
damage, Tenant may elect to terminate this Lease by written notice to Owner, if
the restoration period (as reasonably determined by Owner's contractor or
architect) exceeds 365 days. If the damage was caused by the Tenant , Tenant
shall not have the right to terminate the Lease, given within ninety (90) days
after such fire or casualty, or thirty (30) days after adjustment of the
insurance claim for such fire or casualty, whichever is sooner, specifying a
date for the expiration of the lease, which date shall not be more than sixty
(60) days after the giving of such notice, and upon the date specified in such
notice the term of this lease shall expire as fully and completely as if such
date were the date set forth above for the termination of this lease, and Tenant
shall forthwith quit, surrender and vacate the demised premises without
prejudice however, to Landlord's rights and remedies against Tenant under the
lease provisions in effect prior to such termination, and any rent owing shall
be paid up to such date, and any payments of rent made by Tenant which were on
account of any period subsequent to such date shall be returned to Tenant.
Unless Owner or Tenant shall serve a termination notice as provided for herein,
Owner shall make the repairs and restorations under the conditions of (b) and
(c) hereof, with all reasonable expedition, subject to delays due to adjustment
of insurance claims, labor troubles and causes beyond Owner's control. After any
such casualty, Tenant shall cooperate with Owner's restoration by removing from
the demised premises as promptly as reasonably possible, all of Tenant's
salvageable inventory and movable equipment, furniture, and other property.
Tenant's liability for rent shall resume five (5) days after written notice from
Owner that the demised premises are substantially ready for Tenant's occupancy.
(e) Nothing contained hereinabove shall relieve Tenant from liability that may
exist as a result of damage from fire or other casualty. Notwithstanding
anything contained to the contrary in subdivisions (a) through (e) hereof,
including Owner's obligation to restore under subparagraph (b) above, each party
shall look first to any insurance in its favor before making any claim against
the other party for recovery for loss or damage resulting from fire or other
casualty, and to the extent that such insurance is in force and collectible, and
to the extent permitted by law, Owner and Tenant each hereby releases and waives
all right of recovery with respect to subparagraphs (b), (d) and (e) above,
against the other, or any one claiming through or under each of them by way of
subrogation or otherwise. The release and waiver herein referred to shall be
deemed to include any loss or damage to the demised premises and/or to any
personal property, equipment, trade fixtures, goods and merchandise located
therein. The foregoing release and waiver shall be in force only if both
releasors' insurance policies contain a clause providing that such a release or
waiver shall not invalidate the insurance. If, and to the extent, that such
waiver can be obtained only by the payment of additional premiums, then the
party benefiting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant, and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof.
10. EMINENT DOMAIN. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then, and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding, and Tenant shall have no claim for the value of any unexpired term of said lease, and assigns to Owner, Tenant's entire interest in any such award. Tenant shall have the right to make an independent claim to the condemning authority for the value of Tenant's moving expenses and personal property, trade fixtures and equipment, provided Tenant is entitled pursuant to the terms of the lease to remove such property, trade fixtures and equipment at the end of the term, and provided further such claim does not reduce Owner's award.
11. ASSIGNMENT, MORTGAGE, ETC. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. Transfer of the majority of the stock of a corporate Tenant or the majority interest in any partnership or other legal entity which is Tenant shall be deemed an assignment. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-Tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, undertenant or occupant as Tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any way be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting.
12. ELECTRIC CURRENT. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation, and Tenant may not use any electrical equipment which, in Owner's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other Tenants of the building. The change at any time of the character of electric service shall in no way make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain.
13. ACCESS TO PREMISES. Owner or Owner's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times after reasonable prior notice shall have been given to Tenant, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Owner may elect to perform. Tenant shall permit Owner to use and maintain and replace pipes, ducts, and conduits in and through the demised premises and to erect new pipes, ducts, and conduits therein, provided they are concealed within the walls, floor, or ceiling. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction provided Owner shall place such materials and equipment in an area reasonably designated by Tenant and shall not "store" same in the demised premises except to the extent reasonably necessary, nor shall the Tenant be entitled to any abatement of rent while such work is in progress, nor to any damages by reason of loss or interruption of business or otherwise. Owner shall use commercially reasonable efforts to perform such work in a manner which minimizes any adverse affect upon Tenant's use, enjoyment and conduct of Tenant's business in the demised premises. Owner shall leave the demised premises broom clean at the end of each day of the performance of such work. Throughout the term hereof, Owner shall have the right to enter the demised premises at reasonable hours for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term, for the purpose of showing the same to prospective Tenants. If Tenant is not present to open and permit an entry into the demised premises, Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly, and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefore, nor in any event shall the obligations of Tenant hereunder be affected.
14. VAULT, VAULT SPACE, AREA. No vaults, vault space or area, whether or not enclosed or covered, not within the property line of the building, is leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability, nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant.
15. OCCUPANCY. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the demised premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's work, if any. In any event, Owner makes no representation as to the condition of the demised premises, and Tenant agrees to accept the same subject to violations, whether or not of record, provided Tenant shall have no obligation to cure the subject condition and/or effect the dismissal of the subject violation, unless the same was caused by the Tenant or anybody acting by, through, or under Tenant.
16. BANKRUPTCY.
16.1 Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by the sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant (or a guarantor of any of Tenant's obligations under this lease) as the debtor; or (2) the making by Tenant (or a guarantor of any of Tenant's obligations under this lease) of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the demised premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease.
16.2 It is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages, an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination, and the fair and reasonable rental value of the demised premises for the period for which such installment was payable, shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such demised premises or any part thereof be re-let by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such re-letting shall be deemed to be the fair and reasonable rental value for the part or the whole of the demised premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages, by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than, the amount of the difference referred to above.
17. DEFAULT.
17.1 If Tenant defaults in fulfilling any of the covenants of this lease; or if the demised premises become vacant or deserted; or if any execution or attachment shall be issued against Tenant or any of Tenant's property, whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if this lease be rejected under ss.365 of Title 11 of the U.S. Code (Bankruptcy Code); or if Tenant shall have failed, after five (5) days written notice, to redeposit with Owner any portion of the security deposit hereunder which Owner has applied to the payment of any rent and additional rent due and payable hereunder; or if Tenant shall be in default with respect to any other lease between Owner and Tenant; or if Tenant shall fail to move into or take possession of the demised premises within thirty (30) days after the commencement of the term of this lease, then, in any one or more of such events, upon Owner serving a written fifteen (15) days notice upon Tenant specifying the nature of said default, and upon the expiration of said fifteen (15) days, if
Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said fifteen (15) day period, and if Tenant shall not have diligently commenced curing such default within such fifteen (15) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof, and Tenant shall then quit and surrender the demised premises to Owner, but Tenant shall remain liable as hereinafter provided.
17.2 If the notice provided for in 17.1 hereof shall have been given, and the term shall expire as aforesaid, Owner may without notice, re-enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of the demised premises, and remove their effects and hold the demised premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder, and fail to cure same within the notice and cure period provided for in Section 17.1 above, prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice.
18. REMEDIES OF OWNER AND WAIVER OF REDEMPTION. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the demised premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease, and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant or the legal representatives of Tenant shall also pay to Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the demised premises, or any part or parts thereof, shall not release or affect Tenant's liability for damages. In computing such liquidated damages there shall be added to the said deficiency such expenses as Owner may incur in connection with re-letting, such as legal expenses, reasonable attorney's fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease, and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceeding. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner's sole judgment, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall
in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Owner obtaining possession of the demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise.
19. FEES AND EXPENSES. If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under, or by virtue of, any of the terms or provisions in any article of this lease, after notice, if required, and upon expiration of any applicable grace period, if any, (except in an emergency), then, unless otherwise provided elsewhere in this lease, Owner may immediately, or at any time thereafter and without notice, perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing, or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to reasonable attorneys' fees, in instituting, prosecuting or defending any action or proceeding, and prevails in any such action or proceeding, then Tenant will reimburse Owner for such sums so paid, or obligations incurred, with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder, and shall be paid by Tenant to Owner within ten (10) days of rendition of any bill or statement to Tenant therefore. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner, as damages.
20. BUILDING ALTERATIONS AND MANAGEMENT. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefore, to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the building, and to change the name, number or designation by which the building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenants making any repairs in the building or any such alterations, additions and improvements. Furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of such controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants.
21. NO REPRESENTATIONS OWNER. Neither Owner nor Owner's agents have made any representations or promises with respect to the physical condition of the building, the land upon which it is erected or the demised premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the demised premises, except as herein expressly set forth, and no rights, easements or licenses are acquired by Tenant by implication or
otherwise, except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition and agrees to take the same "as-is", and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant, and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought.
22. END OF TERM. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, "broom-clean", in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday, unless it be a legal holiday, in which case it shall expire at noon on the preceding business day.
23. QUIET ENJOYMENT. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 31 hereof, and to the ground leases, underlying leases and mortgages hereinbefore mentioned.
24. FAILURE TO GIVE POSSESSION. If Owner is unable to give possession of the demised premises on the date of the commencement of the term hereof because of the holding-over or retention of possession of any Tenant, undertenant or occupants, or if the demised premises are located in a building being constructed, because such building has not been sufficiently completed to make the demised premises ready for occupancy, or because of the fact that a certificate of occupancy has not been procured, or for any other reason, Owner shall not be subject to any liability for failure to give possession on said date and the validity of the lease shall not be impaired under such circumstances, nor shall the same be construed in any way to extend the term of this lease, but the rent payable hereunder shall be abated (provided Tenant is not responsible for Owner's inability to obtain possession or complete construction) until after Owner shall have given Tenant written notice that the Owner is able to deliver possession in condition required by this lease. If permission is given to Tenant to enter into possession of the demises premises, or to occupy premises other than the demised premises, prior to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such possession and/or occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease, except the obligation to pay the fixed annual rent set forth in the preamble to this lease. The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law.
25. NO WAIVER. The failure of Owner to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent and/or additional rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach, and no provision of this lease shall be deemed to have been waived by Owner unless such waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of the demised premises, and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease, and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the demised premises.
26. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall, and they hereby do, waive trial by jury in any action proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of, or in any way connected with, this lease, the relationship of Owner and Tenant, Tenant's use of, or occupancy of, the demised premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any proceeding or action for possession, including a summary proceeding for possession of the demised premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding, including a counterclaim under Article 4, except for statutory mandatory counterclaims.
27. INABILITY TO PERFORM. This lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no way be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease, or to supply, or is delayed in supplying, any service expressly or impliedly to be supplied, or is unable to make, or is delayed in making, any repair, additions, alterations, or decorations, or is unable to supply, or is delayed in supplying, any equipment, fixtures, or other materials, if Owner is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever including, but not limited to, government preemption or restrictions, or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency, or by reason of the conditions which have been or are affected, either directly or indirectly, by war or other emergency.
28. BILLS AND NOTICES. Except as otherwise in this lease provided, any notice, statement, demand or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this lease or pursuant to any applicable law or requirement of public authority, shall be in writing (whether or not so stated elsewhere in this lease) and shall be deemed to have been properly given, rendered or made, if sent by registered or
certified mail (express mail, if available), return receipt requested, or by courier guaranteeing overnight delivery and furnishing a receipt in evidence thereof, addressed to the other party at the address hereinabove set forth (except that after the date specified as the commencement of the term of this lease, Tenant's address, unless Tenant shall give notice to the contrary, shall be the building), and shall be deemed to have been given, rendered or made (a) on the date delivered, if delivered to Tenant personally, (b) on the date delivered, if delivered by overnight courier or (c) on the date which is two (2) days after being mailed. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demand or other communications intended for it. Notices given by Owner's managing agent shall be deemed a valid notice if addressed and set in accordance with the provisions of this Article. At Owner's option, notices and bills to Tenant may be sent by hand delivery.
29. SERVICES PROVIDED BY OWNER. As long as Tenant is not in default
under any of the covenants of this lease beyond the applicable grace period
provided in this lease for the curing of such defaults, Owner shall provide: (a)
necessary elevator facilities on business days from 8 a.m. to 6 p.m. and have
one elevator subject to call at all other times; (b) heat to the demised
premises when and as required by law, on business days from 8 a.m. to 6 p.m.;
(c) water for ordinary lavatory purposes, but if Tenant uses or consumes water
for any other purposes or in unusual quantities (of which fact Owner shall be
the sole judge), Owner may install a water meter at Tenant's expense, which
Tenant shall thereafter maintain at Tenant's expense in good working order and
repair, to register such water consumption, and Tenant shall pay for water
consumed as shown on said meter as additional rent as and when bills are
rendered; (d) said premises are to be kept clean by Tenant, it shall be done at
Tenant's sole expense, in a manner reasonably satisfactory to Owner, and no one
other than persons approved by Owner shall be permitted to enter said premises
or the building of which they are a part for such purpose. Tenant shall pay
Owner the cost of removal of any of Tenant's refuse and rubbish from the
building; (e) if the demised premises are serviced by Owner's air
conditioning/cooling and ventilating system, air conditioning/cooling will be
furnished to Tenant from May 15th through September 30th on business days
(Mondays through Fridays, holidays excepted) from 8:00 a.m. to 6:00 p.m., and
ventilation will be furnished on business days during the aforesaid hours except
when air conditioning/cooling is being furnished as aforesaid. If Tenant
requires air conditioning/cooling or ventilation for more extended hours on
Saturdays, Sundays or on holidays, as defined under Owner's contract with the
applicable Operating Engineers contract, Owner will furnish the same at Tenant's
expense. RIDER to be added in respect to rates and conditions for such
additional service; (f) Owner reserves the right to stop services of the
heating, elevators, plumbing, air-conditioning, electric, power systems or
cleaning or other services, if any, when necessary by reason of accident, or for
repairs, alterations, replacements or improvements necessary or desirable in the
judgment of Owner, for as long as may be reasonably required by reason thereof.
If the building of which the demised premises are a part supplies manually
operated elevator service, Owner at any time may substitute automatic control
elevator service and proceed diligently with alterations necessary therefor
without in any way affecting this lease or the obligations of Tenant hereunder.
30. CAPTIONS. The Captions are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof.
31. DEFINITIONS. The term "office", or "offices", wherever used in this lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes, or for manufacturing. The term "Owner" means a landlord or lessor, and as used in this lease means only the owner, or the mortgagee in possession for the time being, of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales or conveyance, assignment or transfer of said land and building, or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be, and hereby is, entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser, grantee, assignee or transferee or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "business days" as used in this lease shall exclude Saturdays, Sundays and all days as observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract, or by the applicable Operating Engineers contract with respect to HVAC service. Wherever it is expressly provided in this lease that consent shall not be unreasonably withheld, such consent shall not be unreasonably delayed.
32. ADJACENT EXCAVATION-SHORING. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, a license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building, of which demised premises form a part, from injury or damage, and to support the same by proper foundations, without any claim for damages or indemnity against Owner, or diminution or abatement of rent.
33. RULES AND REGULATIONS. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Owner and Owner's agents may from time to time adopt. Notice of any additional Rules or Regulations shall be given in such manner as Owner may elect. In case Tenant disputes the reasonableness of any additional Rules or Regulations hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rules or Regulations for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rules or Regulations upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing, upon Owner, within fifteen (15) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant, and Owner shall not be liable to Tenant for violation of the same by any other Tenant, its servants, employees, agents, visitors or licensees.
34. SECURITY. Tenant has deposited with Owner (a) cash or a Letter of Credit in the amount of $360,000.00 for the Temporary Space (the "Temporary Space Security Deposit") and (b) Letter of Credit in the amount of $198,500.00 for the Long Term Space (the "Long Term Space Security Deposit") as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this lease; it is agreed that in the event Tenant defaults in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent, or any other sum as to which Tenant is in default, or for any sum which Owner may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this lease, including but not limited to, any damages or deficiency in the re-letting of the demised premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the case of every such use, application or retention, Tenant shall, within five (5) days after demand, pay to Owner the sum so used, applied or retained which shall be added to the security deposit so that the same shall be replenished to its former amount. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant after the date fixed as the end of the lease and after delivery of entire possession of the demised premises to Owner. In the event of a sale of the land and building, or leasing of the building, of which the demised premises form a part, Owner shall have the right to transfer the security to the vendee or lessee, and Owner shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Owner solely for the return of said security, and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Owner. Tenant further covenants that it will not assign or encumber, or attempt to assign or encumber, the monies deposited herein as security, and that neither Owner nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance.
35. ESTOPPEL CERTIFICATE. Tenant, at any time, and from time to time, upon at least ten (10) days prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by Owner under this lease, and, if so, specifying each such default and such other information as shall be required of Tenant.
36. SUCCESSORS AND ASSIGNS. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. Tenant shall look only to Owner's estate and interest in the land and building, for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) against Owner in the event of any default by Owner hereunder, and no other property or assets of such Owner (or any partner, member, officer or director thereof, disclosed or undisclosed), shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under, or with respect to, this lease, the relationship of Owner and Tenant hereunder, or Tenant's use and occupancy of the demised premises.
37. THE DEMISED PREMISES.
37.1 At the commencement of the term of this Lease (the
"Commencement Date") the demised premises shall consist of 202,000 rentable
square feet (said square footage being mutually agreed upon by Owner and
Tenant). The locations within the Building that comprise the demised premises,
and the agreed upon square footages thereof, are identified on Schedule I
("Schedule I") attached hereto and made a part hereof. In addition to the space
provided for on Schedule I, provided Tenant occupies same as of the Commencement
Date, Tenant shall lease the West Space on the Third Floor of the Building
consisting of 20,000 rentable square feet (said square footage being mutually
agreed upon by Owner and Tenant), at the monthly Base Rent of $15,000 per month
plus additional rent as provided for in this Lease, subject to each of Owner and
Tenant having the right to terminate such lease of the West Space on the Third
Floor on not less than thirty (30) days prior written notice given to the other
party to this Lease, such right to terminate to take effect no earlier than six
(6) months from the Commencement Date.
37.2 No later than twenty-four (24) months, and no sooner than
six (6) months unless otherwise mutually agreed in writing between the parties,
from the first day of the calendar month immediately subsequent to the calendar
month during which the Commencement Date occurs, upon not less than ninety (90)
days prior written notice given by Tenant to Owner, the Long Term Space
(hereinafter defined) may be reduced (the "Reduction") at Tenant's option to a
premises identified by Tenant (as more particularly provided for in the
immediately succeeding sentence) which is a portion of or all of the second
(2nd) floor, fifth (5th) floor and sixth (6th) floor portions of the demised
premises labeled Long Term Space on Schedule I ("Long Term Space"), provided the
Long Term Space as reduced by the Reduction shall encompass not less than one
and one-half (1 1/2) floors of the Long Term Space and not more than two and
one-half (2 1/2) floors of Long Term Space. Each East Space and each West Space
of the Long Term Space as identified on Schedule I shall be deemed to be
one-half (1/2) of a floor. Tenant shall have a period of one hundred eighty
(180) days from the Commencement Date (the "Reduction Identification Period") to
identify by written notice given to Owner the specific portions of the second
(2nd), fifth (5th) and sixth (6th) floors of the demised premises which shall
comprise the demised premises as it shall be reduced (if it is to be reduced).
To the extent additional space not specified on Schedule I is vacant or
otherwise available for leasing on the second (2nd), fourth (4th) and fifth
(5th) floors of the Building between the Commencement Date and the Reduction
Identification Date, such additional space may be added to Long Term Space at
Tenant's option at rental rates then applicable to Long Term Space and shall be
subject to the Reduction. The space on Schedule I labeled Temporary Space
("Temporary Space") shall be relinquished by the Tenant no later than 24 months
after the Commencement Date; Tenant shall have the right to relinquish the
Temporary Space in parts during said 24 months provided no less than one-half
(1/2) floor is relinquished at any given time. In order to determine the
rentable square footage of the demised premises, the demised premises shall be
measured in accordance with Real Estate Board of New York, Inc. standards for
measurement of office space, provided the loss factor shall not exceed twelve
percent (12%) of the net usable measurement (the "Measurement Standard").
Tenant's right to reduce space is subject to space being configured in a manner
so that, in Owner's reasonable judgment, they are self-contained rentable units,
which have independent access to common areas, including core restrooms and
elevators.
37.3 The fifth (5th) floor west portion of the Building ("Five
West") is presently under lease (the "5 West Lease") to a third party tenant for
a term scheduled to expire on October 31, 2011 (the "5 West Expiration Date").
Owner agrees not to extend the term of the 5 West Lease. Tenant shall have the
period through and including April 30, 2011 to elect (the "5 West Election") to
exchange, or incorporated into the Long Term Space pursuant to the size
restriction set forth in Section 37.2 (collectively, the
"Exchange/Incorporation,") any portion of the Building located on the second
(2nd) floor which is a portion of the demised premises on the 5 West Expiration
Date for any portion of 5 West, or the fourth (4th) floor if available, subject
to the size restrictions set forth in Section 37.2, the Exchange/Incorporation
to occur on November 1, 2011. Anything to the contrary contained in the
immediately preceding sentence notwithstanding, if the 5 West Lease expires or
terminates for any reason prior to October 31, 2011, Owner will notify Tenant of
any such expiration or termination, and Tenant shall have thirty (30) days after
receiving such notice from Owner to elect to occupy such premises, or space on
the fourth (4th) floor if available, at the rental rate then being paid by the
Tenant. In addition, at such time as Tenant has the right to exchange space for,
or incorporate, 5 West space, Tenant shall also have the right to add basement
level space of 2,500 rentable feet to the demised premises, which space shall be
mutually agreed upon by the parties, having direct access to the freight
elevator, measured by the Measurement Standard, at a rental rate equal to fair
market value for basement level warehousing space without office space or
parking as determined by mutual agreement of the parties but failing such
agreement to be promptly determined by an arbitrator appointed by the Real
Estate Board of New York, Inc.
37.4 Tenant shall be responsible for turning over the
Temporary Space and any portion of the Long Term Space, as per the Reduction, in
broom clean condition, free and clear of all tenancies, and shall be responsible
for the removal of all machinery, equipment, fixtures, and debris in such space.
If Tenant shall not relinquish the Temporary Space as per this Section 37.4
within eighteen (18) months of the Commencement Date, the Base Rent for the
Temporary Space shall be increased to $17.00 per square foot, with all
additional rent provisions of this Lease remaining applicable. If Tenant shall
not relinquish the Temporary Space as per this Section 37.4 within twenty-four
(24) months of the Commencement Date, Tenant shall be deemed a holdover tenant
and Base Rent for the Temporary Space shall be calculated as more particularly
provided for in Article 64 of this Lease, with all other additional rent
provisions and remedies of the Owner through this Lease remaining applicable.
38. TERM OF THE LEASE. Lease Year 1 shall include any partial calendar month from the Commencement Date through the end of such calendar month and the succeeding twelve (12) calendar months. Lease Year 2 and all subsequent Lease Years shall be the succeeding twelve (12) calendar month periods. The initial term of this Lease shall commence (the "Commencement Date") on the date that SMP Real Estate LLC transfers fee title to the Building to Owner. The term of this Lease shall run through the end of Lease Year 10 (the "Expiration Date").
39. BASIC ANNUAL RENT.
39.1 The base annual rent (the "Base Rent") payable for the demised premises commencing on the Commencement Date shall be the sum of Two Million Five Hundred Sixty-Two Thousand Dollars ($2,562,000.00), the calculation
of which is set forth on Schedule I, payable in monthly installments of Two Hundred Thirteen Thousand Five Hundred Dollars ($213,500.00). In addition, pursuant to the terms of Section 37.1 Tenant shall pay Owner the monthly Base Rent relating to West Space on the Third Floor of the Building.
39.2 Anything to the contrary contained in Section 39.1 of this Lease notwithstanding, upon the date which the square footage of the demised premises is reduced in accordance with Section 37.2 of this Lease, Base Rent per annum shall be the product of the number of square feet of the demised premises measured by the Measurement Standard multiplied by Seventeen Dollars ($17.00) plus any annual increases in rent as described in Section 39.3.1 payable in equal monthly installments. Anything to the contrary contained in this Section 39.2 notwithstanding, the rent for basement level space shall be determined in accordance with Section 37.3 of this Lease.
39.3
39.3.1 Anything to the contrary contained in Sections 39.1 and 39.2 of this Lease notwithstanding, for each Lease Year after Lease Year 1 an additional three percent (3%) of the Base Rent for the previous Lease Year shall be added to Base Rent. If Tenant exercises the first renewal option provided for in Article 61 of this Lease the addition to Lease Year 10 Base Rent shall be ten percent (10%) instead of three percent (3%) for the first Lease Year of the renewal term and thereafter shall be three percent (3%) for each subsequent Lease Year of the first renewal term. If Tenant exercises the second renewal option provided for in Article 61 of this Lease the addition to the Base Rent of the final Lease Year of the first renewal term shall be five percent (5%) instead of three percent (3%) for the first year of the second renewal term and thereafter shall be three percent (3%) for each subsequent Lease Year of the second renewal term. The increases to Base Rent provided for in this Section 39.3 shall be cumulative.
39.3.2 Anything to the contrary contained above in this Article 39 notwithstanding, if Tenant exercises the third or fourth renewal options provided for in Article 61 of this Lease, the Base Rent for the subject renewal terms shall be "Market Value Rent." The term "Market Value Rent" shall mean the annual fair market rental value of the demised premises as of the Determination Date (as hereinafter defined), but in no event less than the Base Rent payable pursuant to Article 39 of this Lease by Tenant in the twelve-month period immediately prior to the expiration date of the preceding term of this Lease. In addition, commencing on the first day of the subject renewal term, Tenant shall pay, as additional rent, in addition to the escalation payments provided for under this Lease, such other types of escalation payments which Owner shall be then charging tenants under other leases, or shall be then requiring in other offers for leases, in the Building. Anything to the contrary contained in this Article 61 notwithstanding, the base year for determination of "such other escalation payments" referred to in the immediately preceding sentence shall be the first year of the subject renewal term. For purposes hereof, the "Determination Date" shall mean the date which shall occur nine (9) months prior to the subject expiration date.
The initial determination of Market Value Rent shall be made by Owner. Owner shall give notice (the "MVR Notice") to Tenant of Owner's initial determination of the Market Value Rent within thirty (30) days following the
Determination Date. Such initial determination of Market Value Rent shall be
final and binding in fixing the Market Value Rent, unless, within thirty (30)
days after Owner shall have given MVR Notice to Tenant, Owner shall receive a
notice from Tenant (the "MVR Objection Notice"): (i) advising Owner that Tenant
disagrees with the initial determination of Market Value Rent set forth in the
MVR Notice, and (ii) proposing a specific alternative Market Value Rent, which
shall have been determined in good faith by Tenant. If Owner and Tenant shall
fail to agree upon the Market Value Rent within thirty (30) days after Owner
shall have received the MVR Objection Notice, then Owner and Tenant each shall
give notice to the other setting forth the name and address of an arbitrator
designated by the party giving such notice. If either party shall fail to give
notice of such designation within ten (10) days, then the first arbitrator
chosen shall make the determination alone. If two arbitrators shall have been
designated, such two arbitrators shall, within twenty (20) days following the
designation of the second arbitrator, make their determinations of Market Value
Rent in writing and give notice thereof to each other and to Owner and Tenant.
Such two arbitrators shall have twenty (20) days after the receipt of notice of
each other's determinations to confer with each other and to attempt to reach
agreement as to the determination of Market Value Rent. The arbitrators shall
take into account in any such determination the base years set forth in this
Lease, which shall continue throughout the remainder of the renewal terms of
this Lease. If such two arbitrators shall concur as to the determination of the
Market Value Rent, such concurrence shall be final and binding upon Owner and
Tenant. If such two arbitrators shall fail to concur by the end of said twenty
(20) day period, then such two arbitrators shall forthwith designate a third
arbitrator. If the two arbitrators shall fail to agree upon the designation of
such third arbitrator within ten (10) days, then either party may apply to the
American Arbitration Association or the Real Estate Board of New York, Inc. or
any successor thereto having jurisdiction for the designation of such
arbitrator. All arbitrators shall be real estate appraisers who shall have had
at least ten (10) years continuous experience in the business of appraising real
estate for purposes of determining Market Value Rent in the Borough of
Manhattan, City of New York and/or Long Island City, New York. The third
arbitrator shall conduct such hearings and investigations as he may deem
appropriate and shall, within thirty (30) days after his designation, choose one
of the determinations of the two arbitrators originally selected by the parties,
and that choice by the third arbitrator shall be binding upon Owner and Tenant.
Each party shall pay its own counsel fees and expenses, if any, in connection
with any arbitration under this Article 61, including the expenses and fees of
any arbitrator selected by it in accordance with the provisions of this Article,
and the parties shall share equally all other expenses and fees of any such
arbitration. The determination rendered in accordance with the provisions of
this Section 39.3.2 shall be final and binding in fixing the Market Value Rent.
The arbitrators shall not have the power to add to, modify or change any of the
provisions of this Lease.
If for any reason the Market Value Rent shall not have been determined prior to the commencement of the subject renewal term, then, until the Base Rent shall have been finally determined, the Base Rent and all recurring additional rent payable for and during the subject renewal term shall be equal to the Base Rent and recurring additional rent paid in the immediately preceding term of this Lease. Upon final determination of the Market Value Rent, an appropriate adjustment to the Base Rent shall be made reflecting such final determination, and Owner or Tenant, as the case may be, shall refund or pay to the other any overpayment or deficiency, as the case may be, in the payment of Base Rent and recurring additional rent from the commencement of the subject renewal term to the date of such final determination.
39.4 Additional rent shall consist of all other sums of money other than Base Rent due and payable by Tenant to Owner pursuant to the terms of this Lease. Base Rent and additional rent may hereinafter be referred to as "Rent" or "rent."
39.5 Owner shall have the same remedies in the event of Tenant's default in the payment of additional rent as a default in the payment of Base Rent.
40. REAL ESTATE TAX ESCALATION.
40.1 Definitions: For the purposes of this Article 40:
40.1.1 "Taxes" shall mean the aggregate of the following items
assessed, levied, confirmed or imposed at any time by any taxing or other
authority, on, against, or in respect of, or which may be or become a lien upon,
the Building and/or the land upon which the Building is located: (a) real estate
taxes; (b) assessments (including, without limitation, assessments for public
improvements or benefits, whether or not commenced or completed during the term
of this Lease); (c) water charges; (d) sewer rents; (e) vault taxes; (f) any
other tax, levy, impost, charge or assessment, however designated; and (g) any
tax, levy, impost, charge or assessment, however designated, general, special,
ordinary or extraordinary, foreseen or unforeseen, levied, assessed or imposed
by any taxing or other authority, against or with respect to such land and/or
Building, the occupancy thereof, or the rents or profits therefrom or the
collection thereof, to the extent that the same shall be in substitution of or
in lieu of all or any portion of any item set forth herein, or in lieu of any
addition or increase in any item or any portion thereof set forth herein.
Notwithstanding the foregoing, Real Estate Taxes shall not include (a) any
inheritance, estate, succession, transfer, gift, franchise or capital stock tax;
(b) any income taxes arising out of or related to ownership and operation of
income-producing real estate; (c) any excise taxes imposed upon Owner based upon
gross or net rentals or other income received by it; or (d) assessments for
improvements completed prior to the Commencement Date.
40.1.2 "Base Tax Year" shall mean the target assessment as of the date of this Lease for the fiscal year commencing July 1, 2007 and ending June 30, 2008.
40.1.3 "Base Tax" shall mean the amount of Taxes, as finally determined, payable by Owner for the Base Tax Year.
40.1.4 "Tax Year" shall mean each twelve (12) month period falling wholly or partly within the term of this Lease and commencing on the first day next succeeding the Base Tax Year or any anniversary of said date.
40.1.5 "Tenant's Proportionate Share" shall mean, the number of gross square feet included in the demised premises at any given time divided by the number of gross square feet included in the entire Building, each such footage as measured by the Measurement Standard.
40.1.6 Owner shall take advantage of all programs which reduce or freeze real estate tax assessments in connection with capital improvements made to the Building.
40.2 If the Taxes for any Tax Year shall be greater than the Base Tax (the amount of such excess being hereinafter referred to as the "Tax Excess"), Tenant shall pay Owner as additional rent for such Tax Year, in addition to any other additional rent required under this Lease, an amount equal to Tenant's Proportionate Share of such Tax Excess (such amount of additional rent being hereinafter referred to as the "Tax Payment"). The Tax Payment shall be prorated, if necessary, for the first and final Tax Years. Tenant shall pay the Tax Payment based on the Taxes (which, to the extent necessary, may be estimated by Owner in its sole discretion) as initially assessed, levied or imposed, subject to an adjustment, if any.
40.3 Before or after the beginning of each Tax Year, Owner
shall submit to Tenant a written statement (hereinafter referred to as the "Tax
Statement") with respect to such Tax Year, which Tax Statement shall set forth
the following: (a) the Tax Year covered by the Tax Statement; (b) the Base Tax;
(c) the Taxes (which, to the extent necessary, may be estimated by Owner in its
sole discretion) for the Tax Year covered by the Tax Statement; (d) the Tax
Excess; and (e) a computation of Tenant's Proportionate Share of the Tax Excess
(the Tax Payment) for the Tax Year covered by the Tax Statement and the amount
of the equal monthly installments thereof.
40.4 After Owner has submitted to Tenant the Tax Statement with respect to any Tax Year, Tenant shall pay Owner, as additional rent for such Tax Year, the Tax Payment shown on such Tax Statement as due Owner for such Tax Year, in equal monthly installments, in advance, on the first day of each and every month, together with the monthly installments of fixed rent, commencing with the installment of fixed rent next due after the date of submission of such Tax Statement following the Base Tax Year. Each installment of such Tax Payment due shall be in an amount equal to one-twelfth (1/12th) of such Tax Payment.
40.5 If a Tax Statement showing a Tax Payment due Owner for any Tax Year is submitted by Owner (who will use best efforts to have Tax Statements available to Tenant at the commencement of the Tax Year in respect of which such Tax Statement is rendered), and after the time when one or more installments thereof would have otherwise been due and payable had such Tax Statement been submitted to Tenant at or prior to the commencement of such Tax Year, Tenant shall pay Owner, as additional rent, within twenty (20) days after the submission of such Tax Statement, an amount equal to the total of all the monthly installments that are unpaid and due for the period elapsed prior to the first day of the month next succeeding the month during which such Tax Statement is submitted. Such amount due shall be equal to the product obtained by multiplying the Tax Payment due for such Tax Year by a fraction, the denominator of which shall be twelve (12), and the numerator of which shall be the number of months of such Tax Year elapsed prior to the first day of the month next succeeding the month during which such Tax Statement is submitted. Appropriate credit, if any, against such amount due shall be given in accordance with the provisions of Paragraph 40.6 hereof.
40.6 Until submission by Owner to Tenant of the Tax Statement for the second and each subsequent Tax Year, Tenant shall continue to pay Owner, as additional rent, on the first day of each and every month of the then current
Tax Year until the first day of the month next succeeding the month during which such Tax Statement is submitted, the monthly installment of the Tax Payment for the Tax Year immediately preceding such current Tax Year. The total amount of such monthly payments paid during such current Tax Year shall be credited towards the Tax Payment due Owner for such current Tax Year or towards the amount due Owner pursuant to the provisions of Paragraph 40.5 hereof, and appropriate adjustment, as of the end of the month during which such Tax Statement is submitted, shall be made between Owner and Tenant.
40.7 If during the term of this Lease, the Taxes (or any portion thereof) for any Tax Year shall be payable, in full or in quarterly or other installments, on any date or dates other than as required on the date hereof, the Tax Payment due Owner hereunder for such Tax Year shall be due and payable in full within twenty (20) days after the submission by Owner to Tenant of a statement therefor.
40.8 If the Base Tax is reduced as a result of a final determination of any appropriate proceeding, settlement or otherwise, then the Base Tax, as finally determined, shall be regarded as the Base Tax, and the Tax Payment theretofore paid or payable by Tenant hereunder with respect to any Tax Year shall be adjusted on the basis of such reduction. In such event, Tenant shall pay Owner, as additional rent, within ten (10) days after receipt of a written statement from Owner setting forth the amount and basis of such adjustment, any deficiency between the amount of such Tax Payment as theretofore computed and the amount thereof due as a result of such adjustment. If Owner shall receive a refund of Taxes for any Tax Year during which Tenant has paid a Tax Payment, as a result of a final determination of any proceeding, settlement or otherwise, then the proceeds of such refund, less reasonable attorneys' fees and all other fees, costs and expenses incurred in securing the same, shall be applied and allocated to the period for which such refund was obtained, and Owner shall either pay Tenant Tenant's Proportionate Share of such net amount allocated to said period or, at Owner's sole option, credit the amount thereof against any amount then or thereafter becoming due to Owner under the provisions of this Lease or otherwise. Tenant's Proportionate Share of such net amount shall be limited to the amount of additional rent paid by Tenant to Owner for such period pursuant to this Article 39 on the basis of the initial assessment prior to such reduction.
40.9 Owner shall be under no obligation to contest the Taxes for any Tax Year or to refrain from contesting the same, and may settle any such contest on such terms as Owner in its sole discretion shall consider proper.
40.10 If the first day of the term of this Lease is not the first day of a Tax Year, or if the final day of the term of this Lease is not the final day of a Tax Year, then the Tax Payment due as additional rent hereunder for such first or final Tax Year shall be equal to the product obtained by multiplying the Tax Payment for such Tax Year, calculated in accordance with the provisions of this section, by a fraction, the denominator of which shall be twelve (12), and the numerator of which shall be the number of months commencing in such first or final Tax Year. If a Tax Statement is submitted to Tenant at or after the expiration or termination of this Lease, Tenant shall pay Owner the Tax Payment due within twenty (20) days after such
submission.
40.11 Anything to the contrary contained in this Article 40 notwithstanding, the additional rent for each Tax Year under this Article 40 shall be limited to one and one-half percent (1 1/2%) of the Base Rent for the immediately preceding Lease Year, provided such increases shall be cumulative.
41. FUEL COST ESCALATION.
41.1 Definitions: For the purposes of this Article 41:
41.1.1 "Fuel" shall mean # 4 Oil.
41.1.2 "Base Fuel Year" shall mean calendar year 2008.
41.1.3 "Base Fuel Cost" shall mean the cost of Fuel utilized to operate the central heating system of the Building.
41.1.4 "Fuel Year" shall mean each twelve (12) month period falling wholly or partly within the term of this Lease and commencing on the first day next succeeding the Base Fuel Year or any anniversary of said date.
41.1.5 "Fuel Cost" shall mean the cost of Fuel utilized to operate the central heating system of the Building.
41.1.6 "Tenant's Proportionate Share" shall mean the number of square feet included in the demised premises (weighted average over the calendar year as applicable) at any given time divided by the number of square feet included in the Building, each such square footage determined by the Measurement Standard.
41.2 If the Fuel Cost for any Fuel Year shall be greater than the Base Fuel Cost (the amount of such excess being hereinafter referred to as the "Fuel Excess"), Tenant shall pay Owner as additional rent for such Fuel Year, in addition to any other additional rent required under this Lease, an amount equal to Tenant's Proportionate Share of such Fuel Excess (such amount of additional rent being hereinafter referred to as the "Fuel Payment"). The Fuel Payment shall be prorated, if necessary, for the first and final Fuel Years.
41.3 Before or after the beginning of each Fuel Year, Owner shall submit to Tenant a written statement (hereinafter referred to as the "Fuel Statement") with respect to such Fuel Year, which Fuel Statement shall set forth the following: (a) the Fuel Year covered by the Fuel Statement; (b) the Base Fuel Cost; (c) the Fuel Cost (which, to the extent necessary, may be estimated by Owner in its sole discretion) for the Fuel Year covered by the Fuel Statement; (d) the Fuel Excess; and (e) a computation of Tenant's Proportionate Share of the Fuel Excess (the Fuel Payment) for the Fuel Year covered by the Fuel Statement and the amount of the equal monthly installments thereof.
41.4 After Owner has submitted to Tenant the Fuel Statement with respect to any Fuel Year, Tenant shall pay Owner, as additional rent for such Fuel Year, the Fuel Payment shown on such Fuel Statement as due Owner for such Fuel Year, in equal monthly installments, in advance, on the first day of each
and every month, together with the monthly installments of fixed rent, commencing with the installment of fixed rent next due after the date of submission of such Fuel Statement following the Base Fuel Year. Each installment of such Fuel Payment due shall be in an amount equal to one-twelfth (1/12th) of such Fuel Payment.
41.5 If a Fuel Statement showing a Fuel Payment due Owner for any Fuel Year is submitted by Owner (who will use best efforts to have Fuel Statements available to Tenant at the commencement of the Fuel Year in respect of which such Fuel Statement is rendered), and after the time when one or more installments thereof would have otherwise been due and payable had such Fuel Statement been submitted to Tenant at or prior to the commencement of such Fuel Year, Tenant shall pay Owner, as additional rent, within twenty (20) days after the submission of such Fuel Statement, an amount equal to the total of all the monthly installments that are unpaid and due for the period elapsed prior to the first day of the month next succeeding the month during which such Fuel Statement is submitted. Such amount due shall be equal to the product obtained by multiplying the Fuel Payment due for such Fuel Year by a fraction, the denominator of which shall be twelve (12), and the numerator of which shall be the number of months of such Fuel Year elapsed prior to the first day of the month next succeeding the month during which such Fuel Statement is submitted. Appropriate credit, if any, against such amount due shall be given in accordance with the provisions of Paragraph 41.6 hereof.
41.6 Until submission by Owner to Tenant of the Fuel Statement for the second and each subsequent Fuel Year, Tenant shall continue to pay Owner, as additional rent, on the first day of each and every month of the then current Fuel Year until the first day of the month next succeeding the month during which such Fuel Statement is submitted, the monthly installment of the Fuel Payment for the Fuel Year immediately preceding such current Fuel Year. The total amount of such monthly payments paid during such current Fuel Year shall be credited towards the Fuel Payment due Owner for such current Fuel Year or towards the amount due Owner pursuant to the provisions of Paragraph 41.5 hereof, and appropriate adjustment, as of the end of the month during which such Fuel Statement is submitted, shall be made between Owner and Tenant.
41.7 If the first day of the term of this Lease is not the first day of a Fuel Year, or if the final day of the term of this Lease is not the final day of a Fuel Year, then the Fuel Payment due as additional rent hereunder for such first or final Fuel Year shall be equal to the product obtained by multiplying the Fuel Payment for such Fuel Year, calculated in accordance with the provisions of this section, by a fraction, the denominator of which shall be twelve (12), and the numerator of which shall be the number of months commencing in such first or final Fuel Year. If a Fuel Statement is submitted to Tenant at or after the expiration or termination of this Lease, Tenant shall pay Owner the Fuel Payment due within twenty (20) days after such submission.
42. TENANT'S WORK.
42.1 Tenant, at Tenant's sole cost and expense, and in a good and workmanlike manner, shall make and complete work (the "Tenant's Work") in and to the demised premises as has or shall be reduced in accordance with Article 37 of this Lease. With respect to Tenant's Work, Tenant shall, subject to Owner's reasonable approval, such approval not to be unreasonably withheld or
delayed, have the right to designate a general contractor or construction manager, which general contractor or construction manager may be Tenant or an affiliate of Tenant.
42.2 Tenant, at Tenant's sole cost and expense, shall cause to be prepared a preliminary plan or set of plans (which said plan or set of plans, as the case may be, are hereinafter called the "plan") which shall contain information relating to the construction of the demised premises and the engineering in connection therewith and any effect on building systems. The plan shall be submitted by Tenant to Owner for Owner's approval, which approval shall not be unreasonably withheld or delayed and shall be based solely upon (i) the effect of Tenant's Work upon the Building engineering specifications and systems, and (ii) the effect of Tenant's Work on the structure of the Building (i.e., Tenant's Work must not be structural in nature except that installation of chaseways/vertical risers having a diameter of not more than twelve inches between contiguous floors of the demised premises shall be deemed not to be structural in nature). If Owner shall disapprove the plan, Owner shall set forth its reasons for such disapproval and itemize those portions of the plan so disapproved. In the event Owner disapproves the plan, Tenant shall make such changes to the plan as Owner shall reasonably require and shall thereupon resubmit the revised plan for Owner's approval in accordance with this Section. Owner shall not be deemed unreasonable in withholding its consent to the extent that the plan prepared by Tenant pursuant hereto involves the performance of work or the installation of materials or equipment which do not equal or exceed the standard of quality adopted by Owner for the Building. In connection with the review of Tenant's plan, Owner shall not be entitled to any fee or overhead payment, but Tenant shall reimburse Owner for its actual, out-of-pocket expense within thirty (30) days after being invoiced therefor. In accordance with the plan and such other plans and specifications as may be approved by Owner, Tenant, at Tenant's expense, will make and complete Tenant's Work. Tenant shall have the right to revise the plan, provided Tenant has received Owner's prior written consent, such consent not to be unreasonably withheld or delayed, to such revision. Final plans will be delivered to Owner as they become available, for Owner's approval, such approval not to be unreasonably withheld or delayed, pursuant to this Section. Anything to the contrary contained in this Section 42.2 notwithstanding, Tenant shall be permitted to, and shall only be required to, complete Tenant's build-out to the extent of plans filed with and approved by the New York City Buildings Department.
42.3 The following conditions shall also apply to Tenant's Work:
(a) Tenant, at Tenant's expense, shall file all required architectural, mechanical and electrical drawings and obtain all necessary permits, and shall furnish and perform all engineering and engineering drawings in connection with Tenant's Work.
(b) Prior to Tenant's occupancy of any portion of the demised premises to which Tenant's Work has been performed for the conduct of Tenant's business, Tenant, at its expense, shall procure a temporary certificate of completion for such portion or shall receive written advice from such local authority permitting lawful occupancy pending issuance of a certificate of completion. Owner agrees to cooperate with Tenant in obtaining all permits and certificates pursuant to this Section, and, if requested, Owner agrees to join in applications therefor.
(c) Tenant shall cause all work to be performed by a licensed and insured contractor subject to all terms and conditions set forth in this Lease.
42.4 Owner agrees to make a contribution of Two Million One
Hundred Fifty Thousand Dollars ($2,150,000.00) ("Owner's Contribution") to be
paid by Owner to Tenant as progress payments on a monthly basis upon Tenant
providing invoices for the subject work from the subject contractors. Any
request by Tenant for payment of Owner's Contribution shall be accompanied by
(i) copies of invoices from contractors performing the portion of Tenant's Work;
(ii) a certificate executed by Tenant and Tenant's architect that such portion
of Tenant's Work (other than soft costs) has been completed in a manner
satisfactory to such parties; and (iii) a certificate and partial lien waiver
from the contractor performing such work (other than soft costs) that such
contractor has been paid in full for all prior invoices of such contractors that
have been submitted to Owner for payment. The final payment ten percent (10%)
retainage shall be conditioned upon Owner's receiving (a) final waivers of lien
from all contractors and subcontractors, and (b) an architect's certification
that all Tenant Work has been completed in compliance in all material respects
with all applicable laws. Any portion of Owner's Contribution which is not
applied to the cost of Tenant's Work (including soft costs such as, but without
limitation, legal, architectural, engineering and expeditor fees and
disbursements and the costs of permits and filing fees) shall be a rent credit
to be applied to Base Rent next coming due under this Lease. Anything to the
contrary contained in this Section 42.4 notwithstanding and regardless of the
state of completion of Tenant's installation, it is a material provision of this
Lease that Tenant shall have received the Owner's Contribution by direct payment
or by rent credits no later than the third (3rd) anniversary of the Commencement
Date, and to the extent the entire Owner's Contribution except for ten percent
(10%) retainage if applicable has not been paid prior to the third (3rd)
anniversary of the Commencement Date, Owner shall pay Tenant the portion of
Owner's Contribution not yet paid on the third (3rd) anniversary of the
Commencement Date, time being deemed of the essence.
42.5 Tenant may submit the plan to Owner in stages and perform Tenant's Work in stages, as determined in Tenant's sole discretion.
43. "AS-IS" CONDITION. Tenant has examined and inspected the demised premises, and agrees to accept said demised premises in their condition existing on the date hereof. Owner shall not be obligated to perform any work within the demised premises unless otherwise expressly provided herein. Owner shall use commercially reasonable standards to maintain the exterior of the Building and sidewalks to industry standard.
44. INDEMNITY, LIABILITY INSURANCE.
44.1 The provisions of this Article 44 shall be in addition to and not in limitation of the provisions of Article 8 hereof.
44.2 Tenant shall indemnify and hold Owner and Owner's managing agent harmless from and against any and all claims by or on behalf of any person, firm or corporation, arising from any work or thing whatsoever done by or on behalf of Tenant in or about the demised premises, and shall indemnify
and hold Owner and Owner's managing agent harmless from and against any and all claims arising from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed or observed pursuant to the terms of this Lease, or arising from any act or negligence of Tenant, or any of its agents, contractors, servants, employees or licensees, and from and against all costs, losses, injuries, expenses and liabilities, including, without limitation, reasonably attorneys' fees, resulting from any such claim or action or proceeding brought thereon; and in the event that any action or proceeding is brought against Owner or Owner's managing agent by reason of any such claim, Tenant, upon notice from Owner, shall resist or defend, at Tenant's sole cost and expense, such action or proceeding by counsel satisfactory to Owner. Owner will not unreasonably withhold its approval of said counsel.
44.3 Tenant shall, at its sole cost and expense, provide on or before the date of this Lease and keep in force at all times during the term of this Lease, for the benefit of Owner, Owner's managing agent and Tenant, a policy of commercial general liability insurance naming Owner and Owner's managing agent and such other parties as Owner may reasonably, from time to time, designate, as additional insureds against any liability whatsoever occasioned by accident on or about the demised premises or any appurtenances thereto, and an endorsement to such policy whereby the insurer shall insure Tenant's indemnity obligation pursuant to Articles 8 and 44 hereof. Such policy shall be written by good and solvent United States insurance companies doing and licensed to do business in the State of New York and reasonably satisfactory to Owner, and the limits of liability thereunder shall not be less than the amount of Three Million Dollars ($3,000,000) in respect of any one person, in the amount of Two Million Dollars ($2,000,000) in respect of any one accident, and in the amount of Two Million Dollars ($2,000,000) in respect of property damage. Prior to the commencement of the term of this Lease, Tenant shall deliver to Owner a certificate evidencing such policy and endorsement. Such policy or certificate shall require the insurer to give at least thirty (30) days written notice to Owner prior to the cancellation, expiration or modification thereof. Such insurance may be carried under a blanket policy covering the demised premises and other locations, if any, of Tenant, provided such blanket policy conforms in amounts and all other respects to the provisions of this Lease. Each insurance policy maintained by Tenant pursuant to this Paragraph 44.2 shall expressly provide that no act or omission of Tenant shall affect the validity of such policy, its enforceability by Owner or Owner's managing agent, or the continued responsibility thereunder, as regards Owner and Owner's managing agent, of the insurer. Tenant shall also insure all of Tenant's alterations, equipment, and fixtures in a commercially reasonable amount.
44.4. Owner shall maintain All Risk insurance in respect of the Building and other improvements on the Land normally covered by such insurance for the benefit of Owner and any other parties Owner may at any time and from time to time designate, and shall maintain rent insurance. The All Risk insurance will be in an amount not less than the amount sufficient to avoid the effect of the co-insurance provisions of the applicable policy or policies.
45. TENANT'S ALTERATIONS.
45.1 In accordance with the provisions of Article 3 hereof, Tenant shall not make, or permit the making of, any alterations, additions, installations or improvements in or to the Building or any part thereof except with the prior written consent of Owner. Owner acknowledges that Tenant may desire to make certain interior alterations, additions, installations and improvements in and to the demised premises including Tenant's Work and Owner
agrees not to unreasonably withhold or delay its consent provided that such
changes do not affect the structural integrity of or utility systems in the
Building and do not materially or adversely affect the value of the demised
premises. Anything to the contrary contained in the two (2) immediately
preceding sentences, Tenant shall not require the consent of Owner to make
interior alterations, additions and improvements in and to the demised premises
except to the extent such consent is required under the terms of Article 42 of
this Lease. Tenant shall have the right to erect exterior signs subject to
Owner's approval as to size, location and content which approval shall not be
unreasonably withheld or delayed. All alterations, additions, installations and
improvements made pursuant to Article 3 hereof and this Article 45 shall be made
(a) at Tenant's sole cost and expense, (b) in accordance with the plans approved
by Owner which approval shall not be unreasonably withheld or delayed; (c) by
persons or firms reasonably acceptable to Owner, and (d) must comply in all
material respects with all laws and ordinances with the Owner retaining the
right to correct or remove such alterations, additions, installations, and
improvements at the Tenant's expense if they not meet such criteria and (e) at
such times and in such manner as Owner may reasonably designate, and shall
otherwise be made in accordance with the terms and conditions set forth in
Article 3 hereof and this Article 45. All materials and equipment incorporated
in the demised premises pursuant to Article 3 hereof and this Article 45 shall
be of first quality and shall not be subject to any lien, encumbrance, chattel
mortgage, security agreement or title retention whatsoever. To the extent
exterior signage is permitted for tenants of the Building, Tenant's right to
exterior signage shall provide for surface coverage not less than Tenant's pro
rata share based upon Tenant's leased space.
45.2 Anything to the contrary contained in Articles 3, 42 and 45 of this Lease notwithstanding, Owner's consent or approval, as otherwise provided for in said Articles of this Lease, shall not be required for any alterations by Tenant costing a cumulative amount of $100,000.00 or less.
46. ELECTRICITY.
46.1 Owner shall supply electricity to the demised premises in accordance with the provisions of this Article 46. For the purposes of this Article 46, Owner and Tenant agree that the term "Cost per Kilowatt hour" shall mean the total cost for electricity incurred by Owner to service the demised premises, as measured by the meter servicing that portion of the Building in which the demised premises are located, during a particular time period (including all applicable surcharges, demand charges, energy charges, fuel adjustment charges, time of day charges, Fuel Cost and other sums payable in respect thereof) divided by the total kilowatt hours purchased by Owner during such period.
46.2 Electricity shall be supplied by Owner to service the demised premises and Tenant shall pay to Owner, as additional rent, an amount determined by applying the Cost per Kilowatt hour to Tenant's consumption of and demand for electricity within the demised premises as recorded on the submeter or submeters servicing the demised premises. Owner shall supply a minimum of five (5) watts per rentable square foot of electrical power connected load (exclusive of base Building systems) to the demised premises. Where more than one meter measures the electric service to Tenant, the electric service rendered through each meter shall be computed and billed separately in accordance with the provisions hereinafter set forth. Bills for the electricity additional rent
shall be rendered to Tenant at such time as Owner may elect. The costs incurred by Owner for meter readings for those meters and sub-meters that measure the electric service supplied to Tenant, and the costs incurred by Owner in the maintenance of such meters and sub-meters, shall be solely Tenant's responsibility. Owner shall have the right, but not the obligation to directly meter the demised premises. If Owner directly meters the demised premises, Tenant shall pay its utility costs directly to the utility provider.
46.3 Tenant shall furnish and install, at Tenant's sole cost and expense, all original and replacement lighting tubes, lamps, bulbs, fixtures and ballasts as Tenant may require in the demised premises.
47. BUILDING RENOVATIONS.
47.1 Promptly after the Commencement Date, Owner shall undertake a renovation of the Property at its sole cost and expense, except where noted herein, which will last approximately 18 to 24 months. Owner shall provide Tenant with (i) a monthly report regarding the progress of the renovations (including interim drawings, if applicable) commencing on the Commencement Date and (ii) its final drawings within 90 days of the Commencement Date. The renovation shall be conducted to minimize at all times the inconvenience of the Tenant. As part of this renovation, Owner shall provide the following:
(i) Replace all existing windows, with openable, insulated glass "office style" windows, with full window areas restored; unless "Blank Windows or ventilation louvers" are required as per Building Department Code in elevator shafts, etc.;
(ii) Expand and improve current lobby; lobby shall be no less than 2 times current size, which is approximately 550 sq. ft.;
(iii) Replace and/or renovate existing passenger elevator, which shall be to a standard for new elevators; Owner will use its best efforts to add a second passenger elevator to the Building, which shall be to a standard for new elevators and shall construct a second entrance and lobby for such elevator if the second passenger elevator is not in the general vicinity of the existing passenger elevator; Tenant shall have non- exclusive use of all of the Building's elevators during its tenancy; If Owner is unable to add a second passenger elevator to the Building due to the cost of such construction being in excess of $350,000, then Owner shall (a) convert the freight elevator on the Western portion of the Building to a dual purpose passenger/freight elevator (the primary purpose would be passenger) with the interior being substantially similar to the replaced or renovated passenger elevator, (b) construct a second entrance and lobby to the Building in close proximity to the Western dual purpose elevator; and (c) reduce Tenant's square footage on the sixth floor (and the fifth floor if Tenant leases the western portion of such floor) by the amount of square footage necessary to create a reception/lobby area for the Tenant on the western portion of the sixth (and fifth, if applicable) floors in comparable size to the Tenant's current reception area on the 6th floor;
(iv) Automate the freight elevators, with the intent that at least one of them can be dual (passenger/freight) purpose;
(v) Provide 24 hours per day, 7 days per week access to the Building protected by accessible video surveillance of the front door with remote access controls situated in Tenant's premises, and individual card/code access to the front door;
(vi) Provide a general reception area with personnel, building access control; services to be provided from 8 a.m. to 5 p.m., 5 days a week; receptionist services shall be chargeable to the Tenant as per Tenant's Proportionate Share; and
(vii) Improve the exterior of Building, to be reasonably comparable to rendering attached hereto as Exhibit C; As Tenant will have Building naming rights pursuant to Section 68 hereof, Tenant will have exclusive signage rights on the canopy and on either the roof or top floor facade of the Building; Tenant agrees that other tenants who lease at least one full floor of the Building shall have the right to place their signage on the ground level facade or on the side facade of the Building, provided that the signage of any other tenants is not more prominent than Tenant's signage; any signage shall be at a location and size to be mutually agreed between the parties; Tenant shall solely determine the specific design of its signage. Owner shall ensure that all other tenant signage will adhere to content and design standards commensurate with a first class commercial building.
47.2 (i) The parties agree that Tenant shall be allowed to operate the existing cafeteria on the Third Floor of the Building (the "Existing Cafeteria") at Tenant's expense. Tenant will make the Existing Cafeteria available for on-site consumption purposes only to other tenants (and their invitees) of the Building, and Owner shall ensure that its lease agreements with other tenants of the Building shall contain a provision to indicate that the Existing Cafeteria shall be for on-site consumption purposes only. So long as Tenant is paying Owner the monthly Base Rent relating to the East Space on the Third Floor of the Building (which such space includes the Existing Cafeteria) pursuant to the terms of Section 37.1 and in the amount set forth on Schedule I, Tenant shall be obligated to pay the operator of the Existing Cafeteria any financial support required by such operator, but Tenant shall not be required to pay Owner any additional amounts in connection with the operation of the Existing Cafeteria. Notwithstanding the foregoing, upon such time, if any, that Tenant is no longer paying Owner the monthly Base Rent relating to the East Space on the Third Floor of the Building, Tenant shall be required to pay Owner rent at $12.50 per square foot (for the approximately 3,000 square feet of the Existing Cafeteria) in connection with the operation of the Existing Cafeteria (but shall not be required to pay Tenant's Proportionate Share of any common area costs for the Existing Cafeteria) and shall be obligated to pay the operator of the Existing Cafeteria any financial support required by such operator. To the extent that Tenant decides, at its option, to discontinue Tenant's financial support of the Existing Cafeteria, Tenant shall provide Owner with thirty (30) days prior written notice of such event, and Owner shall not be required to replace the Existing Cafeteria with another eatery as provided below.
(ii) Notwithstanding anything to the contrary herein, Owner shall have the right, at its discretion and at any time, to replace the Existing Cafeteria with an eatery (the "New Cafeteria") offering comparable or superior food services anywhere within the Building, subject to the following provisions:
o the size of the New Cafeteria shall not be below 2,500 square feet;
o the New Cafeteria shall only serve Building tenants and their
guests and not the general public;
o all construction and related costs of the New Cafeteria shall be
at Owner's expense; and
o Tenant shall pay Tenant's Proportionate Share of the cost of
operating the New Cafeteria (including any reasonable amounts
paid to the cafeteria operator to subsidize operations).
47.3 At the Commencement Date, a specific monetary set aside in the amount of no less than $5,000,000 in the form of a construction loan or cash account designated for renovation shall be exhibited to Tenant as evidence and intent of the financial ability of Owner to complete the building renovations outlined in Section 47.1, which Tenant shall rely on as Owner's guarantee to complete all renovations outlined herein. In the event the Owner fails to perform the renovations, in whole or part, as outlined in Section 47.1, then Owner and Tenant agree, for each and every such failure, to have all claims adjudicated solely through binding arbitration under the rules and auspices of the American Arbitration Society, with both parties to share in all arbitration fees equally.
48. RESTRICTION ON USES. So long as Tenant is a tenant of the Building, Owner shall not enter into any lease, or permit occupancy of the Building, providing for any of the uses set forth on Schedule II attached to and made a part of this Lease.
49. LIMITATION OF LIABILITY. Whether Owner or any successor in interest be an individual, joint venture, tenancy in common, co-partnership, unincorporated association or other unincorporated aggregate of individuals or a corporation (all of which are referred to herein, individually and collectively, as the "Owner"), then, anything elsewhere to the contrary notwithstanding, if at any time Owner shall be or shall become liable to Tenant under the terms of this Lease or otherwise, such liability of Owner shall be limited to Owner's interest in the demised premises and no other property or assets of Owner shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's claims.
50. SAVING PROVISION. If any provision of this Lease, or its application to any situation, shall be invalid or unenforceable to any extent, the remainder of this Lease, or the application thereof to situations other than those as to which it is invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.
51. LEASE NOT BINDING UNLESS EXECUTED. Submission by Owner of this Lease for execution by Tenant shall confer no rights nor impose any obligations on either party unless and until both Owner and Tenant shall have executed this Lease and duplicate originals thereof shall have been delivered by each party to the other.
52. INTEREST ON LATE PAYMENTS. If Owner shall not have received any payment due Owner from Tenant under the provisions of this Lease, including, without limitation, any payment of fixed rent, additional rent or any portion, installment or adjustment thereof, within ten (10) days of the due date, then interest shall become due and owing to Owner on such payment from the date when it was first due, and the amount thereof shall constitute additional rent under
the terms of this Lease and shall be collectible as such. The interest shall be computed at the rate of five percent (5%) per annum over the prime rate of The Chase Manhattan Bank, N.A., or its successor in interest, then in effect, but in no event shall such interest be computed at a rate in excess of the maximum legal rate of interest then chargeable to Tenant in the State of New York. The payment of interest as provided in this Article 52 shall be without prejudice, and in addition, to any of Owner's rights and remedies under this Lease or at law for the default by Tenant in fulfilling the covenant to pay fixed or additional rent beyond the applicable notice and cure period. Tenant shall pay an administrative fee of 2% of the payment due for any payment not received by Owner within ten (10) days after the due date.
53. SUBORDINATION, NON-DISTURBANCE, AND ATTORNMENT AGREEMENT. Anything to the contrary contained in this Lease notwithstanding, this Lease shall be subordinate to any now or hereafter existing ground or underlying lease or mortgage encumbering the building of which the demised premises forms a part, and any renewals, modifications, and consolidations thereof, but only if, and upon the express condition that, the lessor under any such ground or underlying lease, or the holder of any such mortgage, as the case may be, enters into a Subordination, Non-Disturbance and Attornment Agreement ("SNDA") with Tenant which is reasonably satisfactory to the holder of such Mortgage, and Tenant shall execute such document within fifteen (15) business days of receipt, provided that such SNDA shall provide the Tenant protection from dispossession in the event of the foreclosure of any mortgage or termination of any ground or underlying lease, provided that Tenant is not in default of this Lease beyond any applicable cure periods.
54. CONSENTS AND APPROVALS. Wherever in this Lease Owner's consent or approval is required, if Owner shall delay or refuse such consent or approval, Tenant in no event shall be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Owner unreasonably withheld or unreasonably delayed its consent or approval. Tenant covenants and agrees that Tenant's sole remedy shall be an action or proceeding for a declaratory judgment.
55. INTENTIONALLY OMITTED.
56. ASSIGNMENT AND SUBLETTING.
Tenant may sublet all or a portion of the demised premises or assign this Lease with Owner's prior written consent which shall not be unreasonably withheld or delayed provided that:
(a) Tenant shall furnish Owner with the name and business address of the proposed subtenant or assignee, a counterpart of the proposed subleasing or assignment agreement, and reasonably satisfactory information with respect to the nature and character of the business of the proposed subtenant or assignee together with current financial information and references reasonably satisfactory to Owner.
(b) In the reasonable judgment of the Owner the proposed subtenant or assignee is financially responsible with respect to its
proposed obligations under the proposed agreement and is of a character and engaged in a business which is in keeping with the standards of the Building.
(c) An executed duplicate original in a form
reasonably satisfactory to Owner for review by Owner's counsel of such
subleasing or assignment agreement shall be delivered to Owner at least thirty
(30) days prior to the effective date thereof. In the event of any assignment,
Tenant will deliver to Owner at least thirty (30) days prior to the effective
date thereof an assumption agreement wherein the assignee agrees to assume all
of the terms, covenants and conditions of this Lease to be performed by Tenant
hereunder and which provides that Tenant named herein and such assignee shall,
after the effective date of such assignment, be jointly and severally liable for
the performance of all of the terms, covenants and conditions of this Lease.
(d) Without limiting the terms upon which Tenant may assign or sublet, Tenant further agrees that it shall not at any time publicly advertise at a rental rate less than the fixed rent plus any additional rent then payable hereunder, for assignment or sublease of all or part of the demised premises (but listing of the demised premises with a broker shall not violate this section).
(e) Tenant shall have no right to assign this Lease or sublet the same to any existing Tenant or occupant of the building or to any party who is dealing with or has dealt with Owner or Owner's agent with respect to space then still available for rent in the Building within the six (6) months immediately preceding Owner's receipt of Tenant's notice pursuant to Section (h) of this Article 56.
(f) Tenant shall not be in monetary default beyond the applicable notice and cure period with respect to its obligations under this Lease and shall have complied and shall comply with each of the provisions in this Article 56.
(g) The consent by Owner to any assignment, subletting or occupancy shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or subletting.
(h) If Tenant shall desire to assign this Lease or sublet the demised premises, Tenant shall send Owner written notice thereof at least thirty (30) days prior to the intended date thereof, which notice shall contain the terms and conditions of any such proposed assignment or subletting. Owner shall have the right within thirty (30) days after receipt of Tenant's notice to cancel this Lease with respect to the portion of the demised premises to be assigned or sublet. Owner shall notify Tenant in writing of such cancellation, in which event, and such date as proposed by Tenant shall then be deemed to be the expiration of the term of this Lease with respect to the portion of the demised premises to be assigned or sublet subject to all the provisions hereof relating thereto and Tenant shall be responsible for all obligations and payments to be made by it accruing prior to such expiration date. In the event Owner does not recapture under this provision 56(h), Tenant shall be permitted to make the sublease or assignment, as applicable, subject only to the terms of provision 56(b). Owner shall not have the right of cancellation under this provision (h) if the proposed sublease is for a term of two (2) years or less.
(i) Intentionally Omitted.
(j) Tenant hereby waives any claim against Owner for money damages which it may have based upon any assertion that Owner has unreasonably withheld or unreasonably delayed any consent to an assignment or subletting pursuant to this Article 56. Tenant agrees that its sole remedy shall be an action or proceeding to enforce such provision or for specific performance.
(k) Tenant shall reimburse Owner within twenty (20) days after demand for any reasonable costs, fees and expenses that may be incurred by Owner in connection with such sublease or assignment, including but not limited to the cost of making investigations as to the acceptability of the proposed subtenant or assignee and reasonable legal costs incurred in connection with the granting of any requested consent.
(l) No sublease or assignment shall be valid and no sublessee or assignee shall take possession of the demised premises or any part thereof, until an executed counterpart of such sublease or assignment has been delivered to Owner.
(m) Each sublease and assignment shall provide that
it is subject and subordinate to this Lease and to matters to which this Lease
is or shall be subordinate, and shall further provide that in the event of
termination, re-entry or dispossession by Owner under this Lease, Owner may, at
its option take over all of the right, title and interest of Tenant, as
sublessor or assignor under such sublease or assignment, and such subtenant or
assignee shall, at Owner's option, attorn to Owner pursuant to the then
executory provisions of such sublease or assignment except that Owner shall not
(i) be liable for any previous act or omission of Tenant under such sublease or
assignment (ii) be subject to any offset not expressly provided in such sublease
or assignment which therefore accrued to such subtenant or assignee against
Tenant or (iii) be bound by any previous modification of such sublease or
assignment (unless previously consented to by Owner) or by any previous
prepayment of more than one month's rent or equivalent assignment consideration.
(n) In the case of all subleases and assignments under this Article 56, Tenant shall and will remain fully liable for the payment of the fixed rent and any additional rent due or to become due hereunder and for the performance of al the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of the Tenant to be performed and all acts and omissions of any subtenant or assignee or anyone claiming through or under any subtenant or assignee, which shall be in violation of any of the obligations of this Lease, shall be deemed to be a violation of Tenant. The provision of this paragraph shall be waived in the case of an assignment where the assignee has a net worth which is at least equivalent to Tenant's net worth as of the date hereof and the Assignee's use of the demised premises is similar to Tenant's.
57. INTENTIONALLY OMITTED.
58. BROKERS. Owner and Tenant represent and warrant that it has dealt with no broker, finder, agent or any other person in connection with the negotiation or execution of this Lease or the showing or leasing of the demised premises except for Greiner-Maltz Company of New York, Inc. ("Broker") and Owner and Tenant shall indemnify and hold the other harmless from and against any and
all liability, cost or expense (including, without limitation, reasonable attorneys' fees) resulting from any claims of whatsoever nature of any broker, finder, agent or any other person claiming to have been involved in any manner whatsoever with the indemnifying party in the leasing of the demised premises, in the execution of this Lease or in the negotiation thereof. Any and all commissions due to the Broker, if any, shall be paid by the Tenant.
59. ENVIRONMENTAL COMPLIANCE.
(a) During the Lease term Tenant shall, and shall cause any and all of its subtenants and/or assignees to, comply with the terms of this Section 59 and in all material respects with all environmental laws, ordinances, rules, regulations, requirements, orders and directives, whether now existing or hereinafter enacted, of all federal, state and local governmental authorities ("Governmental Authorities") having jurisdiction over the Property ("collectively Environmental Laws"), as they pertain to Tenant's or its subtenants' and/or assignees' particular use of the demised premises during the term of the Lease.
(b) If a lien is filed by any Governmental Authority against the building or land it is located upon the Property due to the Tenant's or its subtenants' and/or assignees' particular use or operation of the Demised Premise during the term of this Lease in violation of any Environmental Laws, the Tenant will bond or discharge same within fifteen (15) days after the filing of such lien.
(c) Tenant shall, or shall cause any and all of its subtenants and/or assignees to, supply Owner with all notices, reports, correspondence and submissions made by Tenant to any Governmental Authority which requires submission of any information concerning environmental matters, or toxic and/or hazardous wastes or substances ("Hazardous Substances") pursuant to any Environmental Laws due to Tenant's or its subtenants' and/or assignees' particular use of the demised premises during the term of this Lease. Tenant shall, and shall cause any and all of its subtenants and/or assignees to, also supply Owner with all notices, reports, directives, correspondence and other documentation from any Governmental Authorities to Tenant concerning environmental matters, or Hazardous Substances, as they pertain to Tenant's or its subtenants' and/or assignees' particular use of the demised premises during the term of the Lease.
(d) Prior to the Commencement Date of the Lease, Tenant shall supply to Owner an affidavit of an officer or principal of Tenant in accordance with the form attached hereto as Exhibit "D" ("Officer's Affidavit"), setting forth Tenant's Standard Industrial Classification Number ("SIC Number") and a description of the operations and processes Tenant will undertake at the Property organized in the form of a narrative report, including a list of Hazardous Substances to be generated, manufactured, refined, transported, treated, stored, handled or disposed of by Tenant at the demised premises in quantities that exceed a reportable quantity threshold under Environmental Laws. Tenant shall not substantially change its use, operations, quantification, storage and/or processing of Hazardous Substances without Owner's express prior written approval. For the purposes herein a substantial change in the Tenant's use, operations and/or processing of Hazardous Substances is defined as:
(i) an annual increase of more than 2% in the use or storage of Hazardous Substances already specified in the attached Officer's Affidavit of Environmental Compliance or such annual update of such affidavit as approved by the Owner;
(ii) the use or storage of any material quantity of Hazardous Substance not already specified in the attached Officer's Affidavit of Environmental Compliance or such annual update of such affidavit as approved by Owner; or
(iii) a change in the method of Tenant's use, storage or processing of any such Hazardous Substances which would require any material alteration, modification, addition or change in the Tenant's obligations to comply with Environmental Laws.
Notwithstanding the above provisions, the Tenant shall not be required to obtain Owner's consent for any alteration, modification, addition or change in Tenant's or any subtenants' and/or assignees' use, operations, quantification, storage or processing of Hazardous Substances, which simply reduces the use or amount of one or more Hazardous Substances generated, manufactured, refined, transported, treated, stored, handled or disposed of at the Property. Following commencement of the Lease term, Tenant shall notify Owner as to any proposed changes in Tenant's SIC Number or use and/or generation of Hazardous Substances, by way of a supplemental Officer's Affidavit, which proposed changes shall be subject to Owner's prior written approval. Tenant shall also supplement and update the Officer's Affidavit on an annual basis at the beginning of each calendar year during the term of this Lease starting with 2007 and at any other time upon demand by Owner. Tenant warrants and represents that the SIC Number of Tenant is 3694 and 3714 ("Tenant SIC Number"). Tenant's and any of its subtenants' and/or assignees' use of the Property for the entire term of the Lease is restricted to the Tenant SIC Number unless Tenant obtains the prior written consent from the Owner to any such proposed change.
(e) Tenant shall permit Owner and Owner's agents, including but not limited to, legal counsel and environmental consultants and engineers, access to the demised premises upon reasonable prior notice, for the purposes of environmental inspections (to be performed at Owner's sole cost and expense) during regular business hours, or during other hours, in the event of any environmental emergency. Tenant shall not restrict Owner and Owner's agents from access to any part of the demised premises and Tenant shall not impose any conditions to access. If Owner performs any testing or sampling at the Property in accordance with the foregoing, Owner shall use all reasonable efforts to avoid interfering with Tenant's use of the demised premises. Owner agrees that Tenant and Tenant's agents may at all times accompany Owner and Owner's agents on any environmental inspection. If any environmental inspection includes sampling and testing, Owner and Owner's agents will supply Tenant with a copy of the results of such samples and tests. If such environmental inspection uncovers a violation of the environmental provisions of this Lease, Tenant shall cure such default as soon as reasonably practical in the event of an emergency, or within thirty (30) days following written notice by Owner of such default, subject to extensions as may be grant by Owner, which extensions shall not be unreasonably withheld.
(f) Tenant shall not commence or alter any operation at the demised premises prior to: (i) obtaining all operating and discharge permits or written approvals required by any Environmental Laws therefore, including but not limited to all pollution control permits and pollution discharge permits from all Governmental Authorities having jurisdiction over Tenant's operation and (ii) providing copies of such permits or written approvals to Owner.
(g) Tenant shall not install any additional storage tanks or gas lines on the demised premises without the prior written consent of the Owner.
(h) Tenant hereby agrees at its sole cost and expense to indemnify, defend and save Owner, it successors and assigns, and Owner's mortgagee or holder of deed of trust affecting the Property, harmless from all fines, suits, liens, claims and actions of any kind arising out of any spills or discharges of toxic or Hazardous Substances at the Property, or any violation of any Environmental Laws, resulting from the Tenant's or its subtenants' and/or assignees' particular use and operation of the demised premises during the term of this Lease, except to the extent caused by Owner's negligence or intentional misconduct, and from all fines, suits, procedures, claims and actions of any kind arising out of Tenant's or its subtenants' and/or assignees' failure to provide all information, make all submissions and take all actions required by any Governmental Authorities concerning environmental compliance matters for which Tenant is responsible hereunder. The provisions of this Paragraph shall survive the expiration or sooner termination of this Lease.
60. OWNER'S INTERESTS. Owner represents and warrants to Tenant that as of the date hereof, Owner is authorized to execute this Lease and owns and holds fee title in and to the Building, the demised premises and the land on which the same are located.
61. RENEWAL OPTIONS. Provided that Tenant is not in monetary default beyond any applicable notice and cure period with respect to its obligations under this Lease, Tenant shall have four (4) successive options to extend the term of this Lease for an additional period of five (5) years each. Each extended term shall begin upon the expiration of the then current term of this Lease upon the same terms and conditions as herein set forth, except as otherwise set forth immediately below in Sections 39.3.1 and 39.3.2. In the event that Tenant shall elect to exercise such renewal options, it shall do so by giving written notice of such intention, to Owner not less than nine (9) months prior to the expiration of the then current term of this Lease. All the terms and conditions of this Lease shall apply to the periods by which the term of this Lease is extended by the exercise of the renewal options. The first renewal option shall cover Lease Year 11 through Lease Year 15. The second renewal option shall cover Lease Year 16 through Lease Year 20. The third renewal option shall cover Lease Year 21 through Lease Year 25. The fourth renewal option shall cover Lease Year 26 through Lease Year 30. Succeeding renewal option may not be exercised unless the immediately preceding renewal option is exercised. Anything to the contrary contained in this Section 61 notwithstanding, for any portion of the demised premises which is 5,000 or more contiguous square feet which is sublet by Tenant at the time the subject renewal term commences shall be deleted from the space which shall be renewed, and the remainder of the demised premises shall be renewed at a rental rate proportionately reduced due to the deletion of the sublet space from the demised premises.
62. CONFLICT OF TERMS. In the event of any conflict between any provision of this Rider and the printed provisions of this Lease, the provisions of this Rider shall prevail.
63. CHOICE OF LAW. This Lease shall be governed by the laws of the State of New York.
64. END OF TERM.
(a) Upon the Expiration Date or sooner termination space under this Lease or of this lease, Tenant shall quit and surrender the demised premises to Owner, broom clean, in good order and condition, free of all leases, subleases, tenancies and occupancies, reasonable wear and tear and damage by casualty and eminent domain excepted.
(b) Tenant agrees that if possession of the demised premises is not surrendered to Owner within twenty-four (24) hours after the Expiration Date or sooner termination of the Lease, in addition to any other rights or remedies Owner may have hereunder or at law, Tenant shall pay to Owner for each month and for each portion of any month during which Tenant holds over in the demised premises after the Expiration Date or sooner termination of this Lease, a sum equal to one and one-half (1 1/2) times the aggregate of that portion of the Base Rent and Additional Rent which was payable under this Lease during the last month of the term of this Lease.
(c) If, after default on payment of Base Rent, and/or Additional Rent or violation of any other provisions of this Lease, or upon the expiration of this Lease, the Tenant moves out or is dispossessed and fails to remove any removable trade fixtures, machinery, equipment or any other property of Tenant prior to said default, removal or expiration of Lease, or prior to the final order for execution of a warrant for possession, then and in that event, the said fixtures, machinery, equipment and property shall at the election of the Owner be deemed abandoned by the Tenant and shall become the property of the Owner. Any damage caused by such removal shall be repaired at the sole expense of Tenant. If Owner shall not so elect, Owner may remove such fixtures, machinery, equipment and property from the demised premises and store them at Tenant's risk and expense. The provisions of this Paragraph shall survive the expiration or sooner termination of this Lease.
65. INTENTIONALLY OMITTED.
66. NOTICES. Wherever any notice or other communication is required or permitted hereunder, such notice or other communication shall be in writing and shall be delivered by overnight courier, hand delivery, facsimile, or sent by U.S. registered or certified mail, return receipt requested, postage prepaid, to the addresses set out below or at such other addresses as are specified by written notice delivered in accordance herewith.
OWNER: RD Investments LLC
55 Fifth Avenue, 15th Floor
New York, New York 10003
Attention Jeffrey Rosenblum
Facsimile: 212-627-9279
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TENANT: Standard Motor Products, Inc.
37-18 Northern Boulevard
Long Island City, New York 11101
Attention: Robert Martin
Facsimile: 718-784-3284
67. SECURITY DEPOSIT.
67.1 The Temporary Space Security Deposit shall be held solely
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to secure the return to Owner of the Temporary Space in vacant, broom clean condition and shall be returned to Tenant on or before the second (2nd) anniversary of the term of this Lease in accordance with Article 34. The form of security for the Temporary Space Security Deposit may be either in the form of cash or Letter of Credit at Tenant's option. Owner shall deposit any cash security in an interest-bearing account and all interest earned thereon shall be added to and form a part of the Temporary Space Security Deposit. The form of security for the Long Term Space Security Deposit shall be in the form of a Letter of Credit.
67.2 The Letter of Credit that Tenant shall deliver to Owner (the "Letter of Credit") shall be a clean, irrevocable, transferable and unconditional letter of credit (the "Letter of Credit") issued by and drawn upon a commercial bank or General Electric Capital Corporation (hereinafter referred to as the "Issuing Bank") which shall be a member bank of the New York Clearinghouse Association (or, in the alternative, which shall have offices for banking purposes in the Borough of Manhattan or Long Island City and shall have a net worth of not less than $100,000,000, with appropriate evidence thereof to be submitted by Tenant), which Letter of Credit shall: (i) have a term of not less than one year, (ii) be for the benefit of Owner, (iii) be in the amounts as more particularly provided for in Articles 34 and 67 of this Lease (i.e., the Security Deposit Amount), (iv) except as otherwise provided in this Section 67.2, conform and be subject to the most recent revision of the Uniform Customs and Practice for Documentary Credits, ICC Publication No. 590 (or any revision thereof or successor thereto), (v) be fully transferable by Owner without any fees or charges therefor (or, if the Letter of Credit shall provide for the payment of any transfer fees or charges, the same shall be paid by Tenant as and when such payment shall be requested by the Issuing Bank), (vi) provide that Owner shall be entitled to draw upon the Letter of Credit upon presentation to the Issuing Bank of a sight draft accompanied by Owner's statement that Owner is then entitled to draw upon the Letter of Credit pursuant to the terms of this Lease, and (vii) provide that the Letter of Credit shall be deemed automatically renewed, without amendment, for consecutive periods of one year each year thereafter during the entire Term of this Lease and for a period of thirty (30) days thereafter, unless the Issuing Bank shall send notice (the "Non-Renewal Notice") to Owner by registered mail, return receipt requested, not less than sixty (60) days next preceding the then expiration date of the Letter of Credit that the Issuing Bank elects not to renew such Letter of Credit, in which case Tenant shall furnish Owner with a replacement Letter of Credit (which shall comply with all of the conditions set forth in the immediately preceding sentence), in the Security Deposit Amount so that Owner shall have the entire Security Deposit Amount on hand at all times during the term of this Lease and for a period of thirty (30) days thereafter. Tenant acknowledges and agrees that the Letter of Credit shall be delivered to Owner as security for the faithful performance and observance by Tenant of all of the covenants, agreements, terms, provisions and conditions of this Lease, and that Owner shall have the right to
draw upon the entire Letter of Credit (or a portion thereof) as hereinbefore described in Article 34 of this Lease. Other than Long Term Space, Tenant may substitute a Letter of Credit for cash security at Tenant's option throughout the term of this Lease provided Landlord shall have the entire Security Deposit Amount on hand at all times during the term of this Lease and for a period of thirty (30) days thereafter.
68. BUILDING NAME & SIGNAGE. Owner agrees to name the Building the Standard Motors Products Building. Tenant will have exclusive signage rights on the canopy of the main entrance of the Building at a location and size to be mutually agreed between the parties; Tenant shall solely determine the specific design of its signage. Tenant shall also have signage rights to the roof or facade of the Building at a location and size to be mutually agreed between the parties; as long as Owner's other tenants are leasing at least one full floor of the Building, such other tenants shall have signage rights to the roof or facade of the building at a location and size to be mutually agreed between the parties. Owner will not be obligated to provide Tenant with building naming or signage rights if Tenant s files for bankruptcy or reduces its square footage to below one full floor of the Building.
69. BUILDING CONTAMINANTS. To prevent the contamination, growth, or deposit of any mold, mildew, bacillus, virus, pollen, or other micro-organism (collectively, "Biologicals") and the deposit, release or circulation of any indoor contaminants including emissions from paint, carpet and drapery treatments, cleaning, maintenance and construction materials and supplies, pesticides, pressed wood products, insulation, and other materials and products (collectively with Biologicals, "Contaminants") that could adversely affect the health, safety or welfare of any tenant, employee, or other occupant of the Building or their invitees (each, an "Occupant"), Tenant shall, at Tenant's sole cost and expense, at all times during the term hereof (1) operate the demised premises in such a manner to reasonably prevent or minimize the accumulation of stagnant water and moisture in planters, kitchen appliances and vessels, carpeting, insulation, water coolers, and any other locations where stagnant water or moisture could accumulate, and (2) otherwise operate the demised premises to prevent the generation, growth, deposit, release or circulation of any Contaminants.
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IN WITNESS WHEREOF, Owner and Tenant have respectively executed this Lease as of the day and year first above written.
OWNER:
37-18 NORTHERN BOULEVARD LLC,
a Delaware limited liability company
By: Northern Boulevard Holding JV LLC,
a Delaware limited liability company,
its member
By: RD Northern Equities LLC,
a New York limited liability company,
its managing member
By: /s/ ASHISH DUA
---------------
Name: Ashish Dua
Title: Managing Member
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TENANT:
STANDARD MOTOR PRODUCTS, INC,
as Tenant
By: /s/ ROBERT H. MARTIN
--------------------
Name: Robert H. Martin
Title: Treasurer
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Schedule I
LONG TERM
SQUARE RENT PER SPACE/
FLOOR SPACE FOOTAGE SQUARE FOOT BASE RENT TEMPORARY SPACE*
------------------------------------------------------------------------------------
Basement Total 43,000 $9.00 $387,000.00 Temporary Space
First East 23,000 $9.00 $207,000.00 Temporary Space
First West 20,000 $9.00 $180,000.00 Temporary Space
Second East 27,000 $17.00 $459,000.00 Long Term
Third East 23,000 $9.00 $207,000.00 Temporary Space
Fifth East 23,000 $17.00 $391,000.00 Long Term
Sixth East 23,000 $17.00 $391,000.00 Long Term
Sixth West 20,000 $17.00 $340,000.00 Long Term
202,000 $2,562,000.00 *(as of the date of
this Lease)
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SCHEDULE II
USES WHICH REQUIRE THE PRIOR CONSENT OF TENANT
1. houses of worship
2. prisons
3. taxi licensing / taxi insurance offices
4. funeral establishments
5. mini-storage
6. social service agencies that allow public access to assist in providing persons with welfare benefits (either educational or financial), assist with licensing or expediting services, provide family planning or clinic, or provide counseling of any nature
7. day spas - massage facilities (except shall be permitted if part of a gym/health club and occupy not more than 20% of the floor area)
8. billiard parlors - pool halls
9. seafood stores
10. cabarets
11. manufacturing which falls within Use Group 18
12. topless bar
13. adult video/adult book store
14. consignment store
15. video tape sales and rentals
16. military recruitment
17. religious arts and goods
18. pornography
19. operations which can reasonably be expected to create high traffic conditions which would significantly impede access to and within the Building
IMPORTANT - PLEASE READ
RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN
ACCORDANCE WITH ARTICLE 33.
1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by Tenant or used for any purpose other than for ingress or egress from the demised premises, and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the building, either by any tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and safeguards. If said premises are situated on the ground floor of the building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk and curb in front of said premises clean and free from ice, snow, dirt and rubbish.
2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other substances shall be deposited therein; and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant, whether or not caused by the Tenant, or its clerks, agents, employees or visitors.
3. No carpet, rug or other article shall be hung or shaken out of any window of the building and Tenant shall not sweep or throw, or permit to be swept or thrown, from the demised premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the building, and Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Owner or other occupants of the building by reason of noise, odors, and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any bicycles, vehicles, animals, fish, or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited.
4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of Owner.
5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by Tenant on any part of the outside of the demised premises or the building, or on the inside of the demised premise if the same is visible from the outside of the demised premises, without the prior written consent of Owner, except that the name of Tenant may appear on the entrance door of the demised premises. In the event of the violation of the foregoing by Tenant, Owner may remove same without any liability, and may charge the expense incurred by such removal to Tenant. Interior signs on door and directory tablet shall be inscribed, painted or affixed for Tenant by Owner at the expense of Tenant, and shall be of a size, color and style acceptable to Owner.
6. Tenant shall not mark, paint, drill into, or in any way deface, any part of the demised premises or the building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Owner, and as Owner may direct. Tenant shall not lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and, if linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by Tenant, nor shall any changes be made in existing locks or mechanism thereof. Tenant must, upon the termination of his tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, Tenant, and in the event of the loss of any keys so furnished, Tenant shall pay to Owner the cost thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the demised premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by Owner. Owner reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations of the lease, or which these Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the building is prohibited and Tenant shall cooperate to prevent the same.
10. Owner reserves the right to exclude from the building all persons who do not present a pass to the building signed by Owner. Owner will furnish passes to persons for whom Tenant requests same in writing. Tenant shall be responsible for all persons for whom he requests such pass, and shall be liable to Owner for all acts of such persons. Tenant shall not have a claim against Owner by reason of Owner excluding from the building any person who does not present such pass.
11. Owner shall have the right to prohibit any advertising by Tenant which in Owner's opinion, tends to impair the reputation of the building or its desirability as a building for offices, and upon written notice from Owner, Tenant shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible, explosive, or hazardous fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors, to permeate in, or emanate from, the demised premises.
13. If the building contains central air conditioning and ventilation, Tenant agrees to keep all windows closed at all times and to abide by all rules and regulations issued by Owner with respect to such services. If Tenant requires air conditioning or ventilation after the usual hours, Tenant shall give notice in writing to the building superintendent prior to 3:00 p.m. in the case of services required on weekdays, and prior to 3:00 p.m. on the day
prior in case of after hours service required on weekends or on holidays. Tenant shall cooperate with Owner in obtaining maximum effectiveness of the cooling system by lowering and closing venetian blinds and/or drapes and curtains when the sun's rays fall directly on the windows of the demised premises.
14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the building without Owner's prior written consent. If such safe, machinery, equipment, bulky matter or fixtures requires special handling, all work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto, and shall be done during such hours as Owner may designate.
15. Refuse and Trash. (1) Compliance by Tenant. Tenant covenants and agrees, at its sole cost and expense, to comply with all present and future laws, orders, and regulations, of all state, federal, municipal and local governments, departments, commissions and boards regarding the collection, sorting, separation and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse and trash into such categories as provided by law. Each separately sorted category of waste products, garbage, refuse and trash shall be placed in separate receptacles reasonably approved by Owner. Such separate receptacles may, at Owner's option, be removed from the demised premises in accordance with a collection schedule prescribed by law. Tenant shall remove, or cause to be removed by a contractor acceptable to Owner, at Owner's sole discretion, such items as Owner may expressly designate. (2) Owner's Rights in Event of Noncompliance. Owner has the option to refuse to collect or accept from Tenant waste products, garbage, refuse or trash (a) that is not separated and sorted as required by law or (b) which consists of such items as Owner may expressly designate for Tenant's removal, and to require Tenant to arrange for such collection at Tenant's sole cost and expense, utilizing a contractor satisfactory to Owner. Tenant shall pay all costs, expenses, fines, penalties, or damages that may be imposed on Owner or Tenant by reason of Tenant's failure to comply with the provisions of this Building Rule 15, and, at Tenant's sole cost and expense, shall indemnity, defend and hold Owner harmless (including reasonable legal fees and expenses) from and against any actions, claims and suits arising from such noncompliance, utilizing counsel reasonably satisfactory to Owner.
EXHIBIT 21
SUBSIDIARIES OF STANDARD MOTOR PRODUCTS, INC.
Percent
State or of Voting
Country of Securities
Name Incorporation Owned
-------------------------------------------- ------------- ---------
SMP Motor Products Limited Canada 100
Motortronics, Inc. New York 100
Stanric, Inc. (1) Delaware 100
Mardevco Credit Corp. (2) New York 100
Standard Motor Products (Hong Kong) Limited Hong Kong 100
Industrial & Automotive Associates, Inc. California 100
Standard Motor Products Holdings Limited England and Wales 100
Standard Motor Products de Mexico,
S. De R.L. De C. V. (3) Mexico 100
SMP Real Estate LLC Delaware 100
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All of the subsidiaries are included in the consolidated financial statements of Standard Motor Products, Inc.
(1) Mardevco Credit Corp. owns 12.7% of Stanric, Inc.
(2) Stanric Inc. owns 14.9% of Mardevco Credit Corp.
(3) Standard Motor Products, Inc. owns 49,999 shares and Motortronics, Inc.
owns 1 share of Standard Motor Products de Mexico, S. De R.L. De C.V.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
STANDARD MOTOR PRODUCTS, INC.
We have issued our reports dated March 13, 2008, accompanying the consolidated financial statements and schedule and management's assessment of the effectiveness of internal control over financial reporting (which reports express an unqualified opinion and includes an explanatory paragraph relating to the application of FASB Interpretation No. 48 effective January 1, 2007, and the application of Statement of Financial Accounting Standards No. 123 (R) as of January 1, 2006 and No. 158 as of December 31, 2006) included in the Annual Report of Standard Motor Products, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 2007. We hereby consent to the incorporation by reference of said report in the Registration Statements of Standard Motor Products, Inc. and Subsidiaries on Forms S-8 (File No. 333-134239, effective May 18, 2006 and File No. 333-125600, effective June 7, 2005)
/s/ GRANT THORNTON LLP New York, New York March 13, 2008 |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lawrence I. Sills, certify that:
1. I have reviewed this annual report on Form 10-K of Standard Motor Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 14, 2008
/s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James J. Burke, certify that:
1. I have reviewed this annual report on Form 10-K of Standard Motor Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: March 14, 2008
/s/ James J. Burke
------------------
James J. Burke
Chief Financial Officer
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Standard Motor Products, Inc. (the "Company") on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence I. Sills, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Lawrence I. Sills --------------------- Lawrence I. Sills Chief Executive Officer March 14, 2008 |
*A signed original of this written statement required by Section 906 has been provided to Standard Motor Products, Inc. and will be retained by Standard Motor Products, Inc. and furnished to the Securities and Exchange Commission on its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Standard Motor Products, Inc. (the "Company") on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James J. Burke, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ James J. Burke ------------------ James J. Burke Chief Financial Officer March 14, 2008 |
*A signed original of this written statement required by Section 906 has been provided to Standard Motor Products, Inc. and will be retained by Standard Motor Products, Inc. and furnished to the Securities and Exchange Commission on its staff upon request.