UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 2001 Commission file number 001-13337 STONERIDGE, INC. ---------------- (Exact Name of Registrant as Specified in Its Charter) Ohio 34-1598949 ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9400 East Market Street, Warren, Ohio 44484 ------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (330) 856-2443 ------------------------------------------------- Registrant's Telephone Number, Including Area Code Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Exchange on Which Registered ------------------- ---------------------------- Common Shares, without par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Based on the closing price of March 12, 2002, the aggregate market value of Common Shares held by non-affiliates of the registrant was $146.1 million. The number of Common Shares, without par value, outstanding as of March 12, 2002 was 22,397,311. DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 2002, into Part III, Items 10, 11, 12 and 13. 1
INDEX ----- STONERIDGE, INC. - FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 <TABLE> <CAPTION> Page No. <S> <C> Part I. Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Part II. Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results 11 of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk 14 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes in and Disagreements With Accountants on Accounting and 34 Financial Disclosure Part III. Item 10. Directors and Executive Officers of the Registrant 35 Item 11. Executive Compensation 35 Item 12. Security Ownership of Certain Beneficial Owners and Management 35 Item 13. Certain Relationships and Related Transactions 35 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 36 Signatures 39 </TABLE> 2
Forward-Looking Statements Portions of this report may contain "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, the Company's (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words "will," "may," "designed to," "believes," "plans," "expects," "continue," and similar expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward- looking statements include, among other factors: . the loss of a major customer; . a further decline in automotive, medium- and heavy-duty truck or agricultural vehicle production; . the failure to achieve successful integration of any acquired company or business; . a decline in general economic conditions in any of the various countries in which the Company operates; . labor disruptions at our facilities or at any of our significant customers or suppliers; . the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis; . our significant amount of debt and the restrictive covenants contained in our credit facility; . customer acceptance of new products; . capital availability or costs, including changes in interest rates or market perceptions of the Company; . changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies; . the impact of laws and regulations, including environmental laws and regulations; and . the occurrence or non-occurrence of circumstances beyond our control. PART I. ITEM 1. BUSINESS The Company The Company was founded in 1965 as a manufacturer of wire harnesses for the agricultural vehicle market. The Company expanded as a contract manufacturer primarily in the automotive market. In 1987, the Company began to transition away from contract manufacturing into a value-added designer and manufacturer of highly engineered products by developing internal engineering capabilities and pursuing an acquisition program to expand product offerings. The Company completed its initial public offering on October 10, 1997 (the Offering). The Company is a leading, technology driven, independent designer, developer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-road vehicle markets. Our custom-engineered products are predominantly sold on a sole-source basis and consist of application- specific control devices, sensors, vehicle management electronics and power and signal distribution systems. These products comprise the elements of every vehicle's electrical system, and individually interface with a vehicle's mechanical and electrical systems to (i) activate equipment and accessories, (ii) display and monitor vehicle performance and (iii) control and distribute electrical power and signals. Our products improve the performance, safety, convenience and environmental monitoring capabilities of our customers' vehicles. As such, the growth in many of the product areas in which we compete is driven by the increasing consumer desire for safety, security and convenience and the need for OEM's to meet safety requirements in addition to the general trend of increased electrical and electronic content per vehicle. Our technology and our partnership-oriented approach to product design and development enables us to develop next-generation products and be a leader in the transition from electrical to electronic components, modules and systems. 3
Acquisitions In August 1999, the Company purchased all of the outstanding shares of TVI Europe, Limited, a United Kingdom manufacturer of vehicle information and management systems for the European commercial vehicle market. Cash consideration paid by the Company with respect to this purchase was approximately $20.7 million. In March 1999, the Company purchased certain assets and assumed certain liabilities of Delta Schoeller, Limited, a United Kingdom manufacturer of switches for the automotive industry. Cash consideration paid by the Company with respect to this purchase was approximately $12.2 million. In December 1998, the Company purchased all of the outstanding common shares of Hi-Stat Manufacturing Company, Inc. (Hi-Stat), a manufacturer of engineered sensors, switches and solenoids for measuring speed, pressure, temperature and fluid levels in vehicles. Hi-Stat primarily serves the automotive industry. Cash consideration paid by the Company with respect to this purchase was approximately $361.5 million. Products The Company's core products include vehicle electrical power and distribution systems, electronic and electrical switch products, electronic instrumentation and information display products, actuator products and sensor products. We design and manufacture the following vehicle parts: Power and Signal Distribution Systems. Electrical power and signal distribution components, modules and systems, including fully integrated automotive and truck wiring systems and highly-engineered products, such as power distribution panels, for the automotive, medium- and heavy-duty truck, and agricultural vehicle markets. Power distribution systems regulate, coordinate and direct the operation of the entire electrical system within a vehicle or compartment. Control Devices. These switches transmit a signal to a control device that activates specific functions. Hidden switches are not typically seen by vehicle passengers, but are used to activate or deactivate selected functions. Customer activated switches are used by a vehicle's operator or passenger to manually activate headlights, rear defrosters and other accessories. In addition, the Company designs and manufactures electromechanical actuator products that enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions. The Company sells these products principally to the automotive market. Vehicle Management Electronics. These products collect, store and display vehicle information such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled and driver messages related to vehicle performance. These products use state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium- and heavy- duty truck and agricultural vehicle markets. Sensor Products. These products monitor and measure the physical variables affecting the performance vehicle systems. Sensor products are employed in most major vehicle systems, including the emissions, safety, powertrain, braking, climate control, steering and suspension systems. The Company sells these products principally to the automotive market. Production Materials The principal production materials used in the Company's manufacturing processes include wire, cable, plastics printed circuit boards, metal stamping and certain electrical components such as microprocessors, memories, resistors, capacitors, fuses, relays and connectors. The Company generally purchases such materials subject to annual contracts. Such materials are readily available from multiple sources, but the Company generally establishes collaborative relationships with a qualified supplier for each of its key production materials in order to lower costs and enhance service and quality. Patents and Intellectual Property The Company maintains and has pending various U.S. and foreign patents and other rights to intellectual property relating to its business, which it believes are appropriate to protect the Company's interests in existing products, new inventions, manufacturing processes and product developments. 4
The Company does not believe any single patent is material to its business, nor would the expiration or invalidity of any patent have a material adverse effect on its business or its ability to compete. The Company is not currently engaged in any material infringement litigation, nor are there any material claims pending by or against the Company. Industry Cyclicality and Seasonality The markets for the Company's products have historically been cyclical. Because the Company's products are used principally in the production of vehicles for the automotive, medium- and heavy-duty truck and agricultural vehicle markets, its sales, and therefore its results of operations, are significantly dependent on the general state of the economy and other factors which affect these markets. A further decline in automotive, medium- and heavy- duty truck and agricultural vehicle production could adversely impact the Company. Approximately 58%, 62% and 64% of the Company's net sales in 2001, 2000 and 1999, respectively, were made to the automotive market and approximately 42%, 38% and 36% of the net sales in 2001, 2000 and 1999, respectively, were derived from the medium- and heavy-duty truck and agricultural vehicle markets. Demand for the Company's products has been seasonal. The Company typically experiences decreased sales during the third calendar quarter of each year due to the impact of scheduled OEM plant shutdowns in July for vacations and new model changeovers. The fourth quarter is similarly impacted by plant shutdowns for the holidays. Reliance on Major Customers The Company is dependent on a small number of principal customers for a significant percentage of its sales. The loss of any significant portion of its sales to these customers or the loss of a significant customer would have a material adverse impact on the financial condition and results of operations of the Company. The Company supplies numerous different parts to each of its principal customers. The contracts the Company has entered into with many of its customers provide for supplying the customers' requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of the Company's major customers could have a material adverse impact on the Company. The Company also competes to supply products for successor models and is subject to the risk that the customer will not select the Company to produce products on any such model, which could have a material adverse impact on the financial condition and results of operations of the Company. The following table presents the major customers, as a percentage of net sales, of the Company for the years ended December 31, 2001, 2000 and 1999: <TABLE> <CAPTION> Year Ended December 31, --------------------------------- 2001 2000 1999 ------ ------ ------ <S> <C> <C> <C> Customer Ford 18% 17% 18% General Motors 17 18 21 Daimler-Chrysler 15 17 17 Navistar 12 8 9 Deere 6 7 5 Volvo 5 6 10 Other 27 27 20 ----- ------ ------ Total 100% 100% 100% ===== ====== ====== </TABLE> Backlog The majority of the Company's products are not on a backlog status. They are produced from readily available materials such as wire, cable, housings and electronic components and have a relatively short manufacturing cycle. Each operating unit of the Company maintains its own inventories and production schedules. Production capacity is adequate to handle current requirements and will be expanded to handle increased growth where needed. 5
Competition Markets for the Company's products are highly competitive. The Company competes on the basis of quality, service, price, timely delivery and technological innovation. The Company competes for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM usually will continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns. Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location. Product Development In order to increase its vehicle platform penetration, the Company has invested, and intends to continue to invest, significant amounts in its technology and design capabilities. The Company's product development expenditures were $27.0 million, $26.8 million and $22.0 million for 2001, 2000 and 1999, respectively, or 4.6%, 4.0% and 3.4% of core product sales for these periods. These development efforts have strengthened the Company's ability to provide higher value-added products and systems, and have resulted in the introduction of new products such as the four-wheel-drive actuator (shift on demand), seat positioning switches and sensors (which interface with passive restraint systems to indicate occupant position prior to air bag deployment), fuel shut off valve (explosion suppression) and the auto-stick (which enables a driver to manually shift an automatic transmission using a unique electronic switch). The Company's technical centers in Massachusetts, Michigan, Ohio, Brazil, England, Mexico, Scotland and Sweden develop and test both new and existing products and concepts. In addition, through its advanced technologies group comprised of dedicated engineers, the Company concentrates on the development of its next generation of products. To further increase vehicle platform penetration, the Company has developed collaborative relationships with the design and engineering departments of its key OEM customers. These collaborative efforts have resulted both in the development of new and complementary products and the enhancement of existing products. Environmental and Other Regulations The Company's operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The Company believes that its business, operations and facilities have been and are being operated in compliance, in all material respects, with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. Employees As of December 31, 2001, the Company had approximately 5,600 employees, approximately 1,600 of whom were salaried and the balance of whom were paid on an hourly basis. Except for certain employees located in Chihuahua, Mexico, Orebro and Stockholm, Sweden, and Dundee, Scotland, the Company's employees are not represented by a union. The Company believes that its relations with its employees are excellent. The Company strongly believes in employee education and sponsors a number of educational opportunities and programs for its employees. Executive Officers of the Registrant The executive officers of the Company are as follows: <TABLE> <CAPTION> Name Age Position ---- --- -------- <S> <C> <C> D.M. Draime 68 Chairman of the Board of Directors and Assistant Secretary Cloyd J. Abruzzo 51 President, Chief Executive Officer, Assistant Treasurer and Director Kevin P. Bagby 50 Vice President, Chief Financial Officer and Treasurer Sten Forseke 42 Vice President of the Company and Managing Director of Stoneridge Electronics (formerly Berifors AB) Gerald V. Pisani 61 Vice President of the Company and President of Stoneridge Engineered Products Group </TABLE> 6
<TABLE> <S> <C> <C> Thomas A. Beaver 48 Vice President of Sales and Marketing Michael J. Bagby 59 Vice President and General Manager of Alphabet Group Avery S. Cohen 65 Secretary and Director </TABLE> D.M. Draime, founder of the Company, has served as Chairman of the Board of Directors of the Company and its predecessors since 1965. Cloyd J. Abruzzo has served as President and Chief Executive Officer of the Company or its predecessor since June 1993 and as a Director of the Company since 1990. From 1984 to June 1993, Mr. Abruzzo was the Vice President and Chief Financial Officer of the Company or its predecessor. Mr. Abruzzo serves as a Director of Second National Bank of Warren. Kevin P. Bagby has served as Vice President of the Company, Chief Financial Officer and Treasurer since joining the Company in July 1995. Sten Forseke, a co-founder of Berifors AB, has served as Vice President of the Company since the acquisition of Berifors AB in 1997 and Managing Director of Berifors AB since 1988. Gerald V. Pisani has served as Vice President of the Company since 1989 and President of the Stoneridge Engineered Products Group since 1985. Thomas A. Beaver has served as Vice President of Sales and Systems Engineering of the Stoneridge Engineered Products Group from February 1995 to December 1999 and Vice President of Sales and Marketing since January 2000. Michael J. Bagby has served as Vice President of the Alphabet Group since March 1990 and Vice President and General Manager of the Alphabet Group since January 2000. Avery S. Cohen has served as Secretary and a Director of the Company since 1988. Mr. Cohen has been a partner in the law firm of Baker & Hostetler, LLP since 1993. 7
ITEM 2. PROPERTIES The Company currently owns or leases 16 manufacturing facilities, which together contain approximately 1.6 million square feet of manufacturing space. The following table provides information regarding the Company's facilities: <TABLE> <CAPTION> Owned/ Square Location Use Leased Status Footage -------- --- ------------- ------- <S> <C> <C> <C> Boston, Massachusetts Division Office & Manufacturing Owned 166,100 Canton, Massachusetts Division Office & Manufacturing Owned 126,500 Chicago, Illinois Sales/Engineering Office Leased 1,000 El Paso, Texas Office/Warehouse Leased 22,400 El Paso, Texas Manufacturing Leased 80,000 Novi, Michigan Sales/Engineering Office Leased 9,400 Lexington, Ohio Manufacturing Owned 155,000 Mansfield, Ohio Tool & Die Owned 4,000 Mebane, North Carolina Manufacturing Leased 51,000 Orwell, Ohio Manufacturing Owned 72,000 Portland, Indiana Manufacturing Owned 196,000 Sarasota, Florida Manufacturing/Division Office Owned 125,000 Warren, Ohio Corporate Office Owned 7,500 Warren, Ohio Division Office Leased 15,300 Cheltenham, England Manufacturing Leased 39,983 Dundee, Scotland Manufacturing Owned 148,500 Frankfurt, Germany Sales/Engineering Office Leased 100 Madrid, Spain Office/Warehouse Leased 14,370 Munich, Germany Sales/Engineering Office Leased 1,000 Northampton, England Manufacturing Owned 40,667 Orebro, Sweden Manufacturing Leased 56,000 Paris, France Sales Office Leased 2,799 Stockholm, Sweden Division Office & Engineering Leased 16,100 Stuttgart, Germany Sales/Engineering Office Leased 1,000 Tallinn, Estonia Manufacturing Leased 5,380 Chihuahua, Mexico Manufacturing Owned 133,000 Indaiatuba, Brazil Manufacturing Leased 27,000 Juarez, Mexico Manufacturing Owned 178,000 Sao Paulo, Brazil Sales/Engineering Office Leased 200 </TABLE> ITEM 3. LEGAL PROCEEDINGS There is no pending litigation which management believes will have a material adverse impact upon the Company. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products causes personal injury or death to users of the Company's products and there can be no assurance that the Company will not experience any material product liability losses in the future. In addition, if any of the Company's products proves to be defective, the Company may be required to participate in a government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such liability claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2001. 8
PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS On March 12, 2002, the Company had 22,397,311 Common Shares without par value, issued and outstanding, which were owned by 147 shareholders of record, including Common Shares held in "streetname" by nominees who are record holders and approximately 1,700 beneficial owners. The Company has neither paid nor declared dividends on its Common Shares since its Offering, except for the payment or declaration of S-Corporation distributions of $85,600,000 to pre-Offering shareholders. The Company currently intends to retain earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction in outstanding indebtedness. Accordingly, the Company does not expect to pay cash dividends in the foreseeable future. High and low sales prices (as reported on the New York Stock Exchange "NYSE" composite tape) for the Common Shares for each quarter during 2000 and 2001 are as follows: <TABLE> <CAPTION> Quarter Ended High Low ------------- ---- --- <S> <C> <C> <C> 2000 March 31 16 7/16 9 1/4 June 30 14 1/8 8 11/16 September 30 11 7/16 7 1/2 December 31 10 3/16 6 2001 March 31 9 3/20 4 3/4 June 30 12 6 3/4 September 30 11 3/5 7 December 31 9 1/10 5 2/5 </TABLE> The Company's Common Shares are traded on the NYSE under the symbol SRI. The Company did not issue or sell any registered or unregistered securities in 2001. 9
ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical and pro forma financial data for the Company and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein. The selected historical data was derived from the Company's consolidated financial statements, which were audited by Arthur Andersen LLP, the Company's independent public accountants. <TABLE> <CAPTION> Years ended December 31, ------------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (in thousands, except per share data) <S> <C> <C> <C> <C> <C> Statement of Income Data: Net sales $584,468 $667,192 $675,221 $503,821 $449,506 Gross profit (A) 135,082 171,112 187,872 124,239 108,192 Operating income 35,495 75,166 97,305 56,722 52,366 Income before income taxes 3,896 46,794 67,022 56,036 50,895 Net income $ 2,946 $ 32,709 $ 41,172 $ 33,400 $ 46,964 ============================================================ Basic and diluted net income per share $ 0.13 $ 1.46 $ 1.84 $ 1.49 $ 2.92 ============================================================ Pro Forma Data (Unaudited): (B) Income before income taxes $ 3,896 $ 46,794 $ 67,022 $ 56,036 $ 50,895 Provision for income taxes 950 14,085 25,850 22,636 21,181 ------------------------------------------------------------ Pro forma net income $ 2,946 $ 32,709 $ 41,172 $ 33,400 $ 29,714 ============================================================ Pro forma basic and diluted net income per share $ 0.13 $ 1.46 $ 1.84 $ 1.49 $ 1.36 ============================================================ Other Data: Product development expenses $ 26,996 $ 26,750 $ 21,976 $ 17,418 $ 14,114 Capital expenditures 23,968 28,720 17,589 10,919 12,256 Depreciation and amortization 29,568 28,680 27,850 14,422 13,237 Balance Sheet Data: Working capital $ 46,399 $ 80,069 $ 77,112 $ 42,184 $ 44,856 Total assets 666,843 696,995 698,309 638,116 235,073 Long-term debt, less current portion 249,720 296,079 331,898 322,724 9,139 Shareholders' equity 259,607 262,186 231,628 190,542 157,210 </TABLE> (A) Gross profit represents net sales less cost of goods sold. (B) Prior to the Offering in October 1997, the Company was taxed as an S- Corporation. Concurrent with the Offering, the Company terminated its S- Corporation status, making it subject to federal, state and foreign income taxes. The pro forma data reflect the results as if the S-Corporation termination had been effective as of December 31, 1996. 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 - --------------------------------------------------------------------- Net Sales. Net sales for the year ended December 31, 2001 decreased $82.7 million, or 12.4%, to $584.5 million from $667.2 million in 2000. Sales revenues in 2001 were unfavorably impacted by the prolonged weakness in production in the automotive and commercial vehicle markets, combined with new product launch delays and slower production ramp-ups in the next-generation vehicle, seat track position switch and fuel cutoff switch. Sales for the year ended December 31, 2001 for North America decreased by $81.9 million to $498.0 million from $579.9 million in 2000. North American sales accounted for 85.2% of total sales in 2001 compared with 86.9% in 2000. Sales in 2001 outside North America decreased by $0.8 million to $86.5 million from $87.3 million in 2000. Sales outside North America accounted for 14.8% of total sales in 2001 compared with 13.1% in 2000. Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2001 decreased by $46.7 million, or 9.4%, to $449.4 million from $496.1 million in 2000. As a percentage of sales, cost of goods sold increased to 76.9% in 2001 from 74.4% in 2000. The corresponding reduction in margin was primarily attributable to the continued weakness of the automotive and commercial vehicle markets, price pressures from our customers, and costs related to pre-production ramp-ups and new program launches. Partially offsetting the aforementioned were cost reduction initiatives including Six Sigma and lean manufacturing. Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses, including research and development, increased by $3.6 million to $99.6 million for the year ended December 31, 2001 from $95.9 million in 2000. As a percentage of sales, SG&A expenses increased to 17.0% in 2001 from 14.4% in 2000. This increase is primarily attributable to higher design and development costs, which were required predominately to support efforts associated with awarded programs. This increase also includes $0.6 million related to costs associated with the Company's attempted offering of senior subordinated notes in the third quarter of 2001. Interest Expense, net. Interest expense for the year ended December 31, 2001 was $31.3 million compared with $29.5 million in 2000. Average outstanding indebtedness was $317.9 million and $331.0 million for the years ended December 31, 2001 and 2000, respectively. The cost of borrowing increased in 2001 as a result of an amended credit agreement. Other Expense / Income, net. Other expense was $0.3 million for the year ended December 31, 2001, and primarily consisted of equity losses of unconsolidated subsidiaries. Other income was $1.1 million for the year ended December 31, 2000, and primarily consisted of equity losses of unconsolidated subsidiaries and a gain on sale of idle fixed assets. Income Before Income Taxes. As a result of the foregoing, income before income taxes decreased by $42.9 million for the year ended December 31, 2001 to $3.9 million from $46.8 million in 2000. Provision for Income Taxes. The Company recognized provisions for income taxes of $1.0 million and $14.1 million for federal, state and foreign income taxes for the years ended December 31, 2001 and 2000, respectively. The decline in the effective tax rate to 24.4% in 2001 from 30.1% in 2000 was primarily a result of the implementation of certain tax planning strategies and non- recurring tax refunds. The effective tax rate is expected to increase in future years. Net Income. As a result of the foregoing, net income decreased by $29.8 million, or 91.0%, to $2.9 million for the year ended December 31, 2001 from $32.7 million in 2000. 11
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 - --------------------------------------------------------------------- Net Sales. Net sales for the year ended December 31, 2000 decreased by $8.0 million, or 1.2%, to $667.2 million from $675.2 million in 1999. Sales of core products increased by $13.9 million, or 2.1%, to $667.2 million during 2000 compared to $653.3 million in 1999. This increase is primarily attributable to the increase in core product sales from the 1999 acquisition of TVI Europe Ltd. (TVI) of $15.9 million, which was offset by a decrease in existing core product sales of $2.0 million, or 0.3%, compared to 1999. Contract manufacturing sales totaling $21.9 million, which were phased out during the second quarter of 1999, accounted for 3.2% of total sales for the year ended December 31, 1999. The remaining decline in sales revenues in 2000 was primarily attributable to the continuing slowdown in the North American commercial vehicle markets, as well as the downturn in the North American automotive and light-truck market that occurred during the fourth quarter. Sales for the year ended December 31, 2000 for North America decreased by $19.4 million to $579.9 million from $599.3 million in 1999. North American sales accounted for 86.9% of total sales in 2000 compared with 88.8% in 1999. Sales in 2000 outside North America increased by $11.4 million to $87.3 million from $75.9 million in 1999. Sales outside North America accounted for 13.1% of total sales in 2000 compared with 11.2% in 1999. The increase is primarily a result of the Company's 1999 acquisitions partially offset by the impact of unfavorable foreign currency exchange rate fluctuations. Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2000 increased by $8.8 million, or 1.8%, to $496.1 million from $487.3 million in 1999. As a percentage of sales, cost of goods sold increased to 74.4% in 2000 from 72.2% in 1999. The increase as a percent of sales was primarily attributable to material shortages and their related impact on production costs, an unfavorable shift in product mix, and costs related to pre-production ramp- ups and new program launches. In addition, unfavorable foreign currency exchange rate fluctuations contributed to this increase. Selling, General and Administrative Expenses. SG&A expenses increased by $5.3 million to $95.9 million for the year ended December 31, 2000 from $90.6 million in 1999. As a percentage of sales, SG&A expenses increased to 14.4% in 2000 from 13.4% in 1999. The increase is due primarily to higher development costs to support new program launches for safety-related products, including the seat track position sensor, fuel cutoff switch, and a new modular assembly program titled the next-generation vehicle. The commercial costs related to the newly acquired companies and geographical expansion also contributed to this increase. Interest Expense, net. Interest expense for the year ended December 31, 2000 was $29.5 million compared with $30.7 million in 1999. Average outstanding indebtedness was $331.0 million and $343.8 million for the years ended December 31, 2000 and 1999, respectively. Other Income, net. Other income, which primarily represented equity losses of unconsolidated subsidiaries and gain on sale of idle fixed assets, was $1.1 million for the year ended December 31, 2000 compared with $0.5 million in 1999. Income Before Income Taxes. As a result of the foregoing, income before income taxes decreased by $20.2 million for the year ended December 31, 2000 to $46.8 million from $67.0 million in 1999. Provision for Income Taxes. The Company recognized provisions for income taxes of $14.1 million and $25.9 million for federal, state and foreign income taxes for the years ended December 31, 2000 and 1999, respectively. The decline in the effective tax rate to 30.1% in 2000 from 38.6% in 1999 was primarily a result of the implementation of certain tax planning strategies and non- recurring tax refunds. The effective tax rate is expected to increase in future years. Net Income. As a result of the foregoing, net income decreased by $8.5 million, or 20.6%, to $32.7 million for the year ended December 31, 2000 from $41.2 million in 1999. Liquidity and Capital Resources Net cash provided by operating activities was $62.7 million and $52.4 million for the years ended December 31, 2001 and 2000, respectively. The increase in net cash from operating activities of $10.2 million was primarily attributable to a decrease in net income offset by significantly reduced working capital requirements. 12
Net cash used for investing activities was $23.9 million and $25.8 million for the years ended December 31, 2001 and 2000, respectively, and primarily related to capital expenditures. Net cash used for financing activities was $39.8 million and $24.4 million for the years ended December 31, 2001 and 2000, respectively. Improved cash flows from operations for the year ended December 31, 2001 were used primarily to pay down debt. The Company has a $425.0 million credit agreement (of which $286.6 million and $323.7 million was outstanding at December 31, 2001 and 2000, respectively) with a bank group. The credit agreement, as amended on September 28, 2001, has the following components: a $100.0 million revolving facility (of which $30.0 million is currently available) including a $5.0 million swing line facility, a $150.0 million term facility, and a $175.0 million term facility. The $100.0 million revolving facility and the $150.0 million term facility expire on December 31, 2003 and require a commitment fee of 0.50% on the unused balance of the revolver. The revolving facility permits the Company to borrow up to half its borrowing in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 2.50% or (ii) LIBOR plus a margin of 4.00%. These margins increase periodically through September 30, 2002. These facilities require additional interest of 1.00% on the aggregate unpaid principal balance payable on the expiration date. The $5.0 million swing line facility expires on December 31, 2003. Interest is payable monthly at an overnight money market borrowing rate. The $175.0 million term facility expires on December 31, 2005. Interest is payable quarterly at either (i) the prime rate plus a margin of 3.50% or (ii) LIBOR plus a margin of 5.00%. These margins increase periodically through September 30, 2002. This facility also requires additional interest of 1.00% on the aggregate unpaid principal balance payable on the expiration date. The Company was in compliance with respect to its covenants as of December 31, 2001. The Company has entered into three interest rate swap agreements with a total notional amount of $175.3 million. Two of these interest rate swap agreements will expire on December 31, 2002 and one interest rate swap agreement will expire on December 31, 2003. The interest rate swap agreements exchange variable interest rates on the Company's credit agreement for fixed interest rates. The Company has also entered into a Swedish krona forward contract with a notional amount of $13.3 million to satisfy krona denominated debt obligations and other insignificant forward contracts. The Company does not use derivatives for speculative or profit-motivated purposes. Management believes that cash flows from operations and the availability of funds from the Company's credit facilities will provide sufficient liquidity to meet the Company's growth and operating needs. Inflation and International Presence Management believes that the Company's operations have not been adversely affected by inflation. By operating internationally, the Company is affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, management believes the Company is not significantly exposed to adverse economic conditions. Recently Issued Accounting Standards Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS 138). SFAS 133 establishes new accounting and reporting standards for derivatives and hedging activities, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes. The cumulative effect of adopting SFAS 133 was to increase other comprehensive loss by $0.3 million, after-tax. The effect on net income was not significant, primarily because the hedges in place as of January 1, 2001 qualified for hedge accounting treatment and were highly effective. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations." SFAS 141 eliminates the pooling-of-interests method and requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. The adoption of SFAS 141 did not have a material impact on the Company's financial statements. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS 142, the amortization period for certain intangibles will change and goodwill will no longer be subject to amortization. Goodwill will be subject to at least an annual assessment for impairment by applying a fair value-based test. This Statement is effective for the Company on January 1, 2002. The Company is currently in the process of evaluating the overall potential impact of this Statement on the Company's financial statements. Goodwill amortization, which approximates $9.5 million annually, will no longer be subject to amortization effective January 1, 2002. An impairment analysis will be performed during 2002 as required by the new Statement. 13
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144, which will be effective for the Company in fiscal year 2002, supersedes SFAS 121 and establishes guidelines for accounting for the impairment and disposal of long-lived assets. The Company believes that the adoption of SFAS 144 will not materially impact the Company's financial statements upon adoption. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks, primarily resulting from the effects of changes in interest rates. To reduce exposures to market risks resulting from fluctuations in interest rates, the Company uses derivative financial instruments. Specifically, the Company uses interest rate swap agreements to mitigate the effects of interest rate fluctuations on net income by swapping the floating interest rates on certain portions of the Company's debt to fixed interest rates. These agreements had a notional amount of $175.3 million and $140.1 million for the years ended December 31, 2001 and 2000, respectively, and they expire between December 31, 2002 and December 31, 2003. Holding other factors constant (such as foreign exchange rates and debt levels), a 1.00% increase in interest rates would have changed the fair market value of these agreements at December 31, 2001 by approximately $1.8 million. The effect of changes in interest rates on the Company's net income historically has been small relative to other factors that also affect net income, such as sales and operating margins. However, a 1.00% increase in interest rates would increase annual interest expense by approximately $3.1 million before considering the impact of interest rate swaps. Management believes that its use of these financial instruments to reduce risk is in the Company's best interest. The Company does not enter into financial instruments for trading purposes. The Company's risks related to commodity price and foreign currency exchange risks have historically not been material. The Company does not expect the effects of these risks to be material in the future based on current operating and economic conditions in the countries and markets in which it operates. Therefore, a 10.00% change in the value of the U.S. dollar would not significantly affect the Company's financial position. 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE <TABLE> <CAPTION> Page ---- Consolidated Financial Statements: - ---------------------------------- <S> <C> Report of Independent Public Accountants 16 Consolidated Balance Sheets as of December 31, 2001 and 2000 17 Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999 18 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 19 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999 20 Notes to Consolidated Financial Statements 21 Financial Statement Schedule: - ----------------------------- Report of Independent Public Accountants 32 Schedule II--Valuation and Qualifying Accounts 33 </TABLE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Stoneridge, Inc.: We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. (an Ohio corporation) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the 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 financial statements referred to above present fairly, in all material respects, the financial position of Stoneridge, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments. Arthur Andersen LLP Cleveland, Ohio, January 22, 2002. 16
STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> December 31, ------------ 2001 2000 -------- -------- <S> <C> <C> Assets Current Assets: Cash and cash equivalents................................... $ 4,369 $ 5,594 Accounts receivable, less allowance for doubtful accounts of $1,742 and $2,142............................ 91,018 91,680 Inventories................................................. 54,504 70,159 Prepaid expenses and other.................................. 15,538 17,104 Deferred income taxes, net.................................. 7,316 10,217 --------- --------- Total current assets..................................... 172,745 194,754 --------- --------- Property, Plant and Equipment, net............................... 118,061 113,855 Other Assets: Goodwill and other intangibles, net...................... 347,724 357,526 Investments and other.................................... 28,313 30,860 --------- --------- Total Assets..................................................... $ 666,843 $ 696,995 ========= ========= Liabilities and Shareholders' Equity Current Liabilities: Current portion of long-term debt........................... $ 41,621 $ 34,562 Accounts payable............................................ 50,792 45,199 Accrued expenses and other.................................. 33,933 34,924 --------- --------- Total current liabilities................................ 126,346 114,685 --------- --------- Long-Term Debt, net of current portion........................... 249,720 296,079 Deferred Income Taxes, net....................................... 24,352 22,352 Other............................................................ 6,818 1,693 --------- --------- Total long-term liabilities.............................. 280,890 320,124 --------- --------- Shareholders' Equity: Preferred shares, without par value, 5,000 authorized, none issued.................................. -- -- Common shares, without par value, 60,000 authorized, 22,397 issued and outstanding at December 31, 2001 and 2000, stated at................. -- -- Additional paid-in capital.................................. 141,506 141,506 Retained earnings........................................... 126,157 123,211 Accumulated other comprehensive loss........................ (8,056) (2,531) --------- --------- Total shareholders' equity............................... 259,607 262,186 --------- --------- Total Liabilities and Shareholders' Equity....................... $ 666,843 $ 696,995 ========= ========= </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 17
STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) <TABLE> <CAPTION> For the years ended December 31, -------------------------------- 2001 2000 1999 ------------ ------------ ------------ <S> <C> <C> <C> Net Sales....................................... $ 584,468 $ 667,192 $ 675,221 Costs and Expenses Cost of goods sold........................... 449,386 496,080 487,349 Selling, general and administrative.......... 99,587 95,946 90,567 ----------- ----------- ----------- Operating Income................................ 35,495 75,166 97,305 Interest expense, net........................ 31,308 29,492 30,741 Other expense / (income), net................ 291 (1,120) (458) ----------- ----------- ----------- Income Before Income Taxes...................... 3,896 46,794 67,022 Provision for income taxes................... 950 14,085 25,850 ----------- ----------- ----------- Net Income...................................... $ 2,946 $ 32,709 $ 41,172 =========== =========== =========== Basic Net Income per Share...................... $ 0.13 $ 1.46 $ 1.84 Weighted Average Shares Outstanding............. 22,397 22,397 22,397 =========== =========== =========== Diluted Net Income per Share.................... $ 0.13 $ 1.46 $ 1.84 Weighted Average Shares Outstanding............. 22,467 22,397 22,397 =========== =========== =========== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 18
STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> For the years ended December 31, -------------------------------- 2001 2000 1999 ----------- ----------- ------------ <S> <C> <C> <C> Operating Activities: Net income......................................................... $ 2,946 $ 32,709 $ 41,172 Adjustments to reconcile net income to net cash from operating activities -- Depreciation and amortization................................... 29,568 28,680 27,850 Deferred income taxes........................................... 7,052 7,166 8,900 Loss / (gain) on sale of fixed assets........................... 84 (995) -- Changes in operating assets and liabilities -- Accounts receivable, net...................................... (960) 5,577 (5,213) Inventories................................................... 14,462 (5,905) (3,615) Prepaid expenses and other.................................... 283 (4,242) (6,937) Other assets, net............................................. 3,293 (2,142) (1,015) Accounts payable.............................................. 6,548 4,292 (8,793) Accrued expenses and other.................................... (625) (12,738) (8,181) ---------- ---------- ------------ Net cash provided by operating activities................... 62,651 52,402 44,168 ---------- ---------- ------------ Investing Activities: Capital expenditures............................................... (23,968) (28,720) (17,589) Proceeds from sale of fixed assets................................. -- 2,176 -- Business acquisitions and other.................................... 44 786 (34,209) ---------- ---------- ------------ Net cash used for investing activities...................... (23,924) (25,758) (51,798) ---------- ---------- ------------ Financing Activities: Proceeds from long-term debt....................................... 1,309 -- 5,114 Repayments of long-term debt....................................... (1,038) (1,308) (168) Net borrowings (repayments) under credit agreement................. (37,060) (23,191) 4,712 Debt issuance costs................................................ (3,053) -- -- ---------- ---------- ------------ Net cash (used for) provided by financing activities........ (39,842) (24,499) 9,658 ---------- ---------- ------------ Effect of exchange rate changes on cash and cash equivalents....... (110) (475) 20 ---------- ---------- ------------ Net change in cash and cash equivalents............................ (1,225) 1,670 2,048 Cash and cash equivalents at beginning of period................... 5,594 3,924 1,876 ---------- ---------- ------------ Cash and cash equivalents at end of period......................... $ 4,369 $ 5,594 $ 3,924 ========== ========== ============ Supplemental disclosure of cash flow information: Cash paid for interest............................................. $ 29,534 $ 27,698 $ 29,967 ========== ========== ============ Cash (received) paid for income taxes.............................. $ (9,229) $ 14,761 $ 16,180 ========== ========== ============ </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 19
STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) <TABLE> <CAPTION> Accumulated Additional Other Number of Paid-in Retained Comprehensive Comprehensive shares Capital Earnings Loss Income / (Loss) --------- ---------- -------- ------------- --------------- <S> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 1998..................... 22,397 $ 141,506 $ 49,330 $ (294) Net income..................................... -- -- 41,172 -- $ 41,172 Other comprehensive income: Currency translation adjustments............ -- -- -- (86) (86) --------- ---------- -------- ------------ ------------- Comprehensive income.......... $ 41,086 ============= BALANCE, DECEMBER 31, 1999..................... 22,397 141,506 90,502 (380) Net income..................................... -- -- 32,709 -- $ 32,709 Other comprehensive income: Currency translation adjustments............ -- -- -- (2,151) (2,151) --------- ---------- -------- ------------ ------------- Comprehensive income.......... $ 30,558 ============= BALANCE, DECEMBER 31, 2000..................... 22,397 141,506 123,211 (2,531) Net income..................................... -- -- 2,946 -- $ 2,946 Other comprehensive loss: Cumulative effect of change in accounting for derivatives.......................... -- -- -- (268) (268) Change in fair value of derivatives......... -- -- -- (4,042) (4,042) Currency translation adjustments............ -- -- -- (1,215) (1,215) --------- ---------- -------- ------------ ------------- Comprehensive loss............ $ (2,579) ============= BALANCE, DECEMBER 31, 2001..................... 22,397 $ 141,506 $126,157 $ (8,056) ========= ========== ======== ============ </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 20
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) 1. Organization and Nature of Business Stoneridge, Inc. (Stoneridge) and its subsidiaries are independent designers and manufacturers of engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural, and off-road vehicle markets. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of Stoneridge and its wholly-owned and majority-owned subsidiaries (collectively, the Company). All significant intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value. Accounts Receivable Concentrations Revenues are principally generated from the automotive, medium- and heavy-duty truck, and agricultural vehicle markets. Due to the nature of these industries, a significant portion of sales and related accounts receivable are concentrated in a relatively small number of customers. In 2001, the top three customers accounted for approximately 18%, 17% and 15% of net sales, while the top five customers accounted for 68% of net sales. The top three customers accounted for approximately 18%, 17% and 17% of the Company's 2000 net sales, and its top five customers accounted for approximately 66% of its 2000 net sales. Accounts receivable from the Company's five largest customers aggregated approximately $48,529 and $47,876 at December 31, 2001 and 2000, respectively. Inventories Cost is determined using the last-in, first-out (LIFO) method for approximately 74% and 77% of the Company's inventories at December 31, 2001 and 2000, respectively, and by the first-in, first-out (FIFO) method for all other inventories. Inventory cost includes material, labor and overhead. Inventories consist of the following at December 31: <TABLE> <CAPTION> 2001 2000 ------- ------- <S> <C> <C> Raw materials $35,488 $45,552 Work in progress 8,192 9,369 Finished goods 11,142 15,261 Less: LIFO reserve (318) (23) ------- ------- Total $54,504 $70,159 ======= ======= </TABLE> 21
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) Property, Plant and Equipment Property, plant and equipment are recorded at cost and consist of the following at December 31: <TABLE> <CAPTION> 2001 2000 --------- --------- <S> <C> <C> Land and land improvements $ 5,552 $ 5,560 Buildings and improvements 44,730 43,855 Machinery and equipment 93,041 87,245 Office furniture and fixtures 23,925 22,925 Tooling 48,313 38,350 Vehicles 862 1,115 Leasehold improvements 1,106 1,110 -------- -------- 217,529 200,160 Less: Accumulated depreciation and amortization 99,468 86,305 -------- -------- $118,061 $113,855 ======== ======== </TABLE> Depreciation is provided by both the straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was $18,664, $18,218 and $17,057, respectively. Depreciable lives within each property classification are as follows: Buildings and improvements 10-40 years Machinery and equipment 5-10 years Office furniture and fixtures 3-10 years Tooling 2-5 years Vehicles 3-5 years Leasehold improvements 3-8 years Maintenance and repair expenditures that are not considered betterments and do not extend the useful life of property are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is credited or charged to income. Goodwill and Other Intangibles Goodwill and other intangibles, net, which result principally from acquisitions, consist of the following at December 31: <TABLE> <CAPTION> Estimated Useful Life 2001 2000 ----------- -------- -------- <S> <C> <C> <C> Goodwill 40 years $345,392 $354,912 Patents 6-13 years 2,332 2,614 -------- -------- $347,724 $357,526 ======== ======== </TABLE> 22
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) Goodwill and other intangibles are presented net of accumulated amortization of $37,143 and $27,262 as of December 31, 2001 and 2000, respectively. Goodwill and other intangible asset amortization expense totaled approximately $9,881, $10,121 and $9,769 in 2001, 2000 and 1999, respectively. The Company regularly evaluates its accounting for goodwill and other intangible assets. No impairment charges were recorded in 2001, 2000 and 1999. Impairment would be recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Measurement of the amount of impairment would be based on appraisal, market value of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at December 31: 2001 2000 ------- ------- Compensation-related obligations $14,186 $14,028 Insurance-related obligations 7,586 8,036 Other 12,161 12,860 ------- ------- $33,933 $34,924 ======= ======= Income Taxes The Company accounts for income taxes using the provisions of SFAS 109, "Accounting for Income Taxes." Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. Currency Translation Adjustment The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from translation of financial statements are reflected as accumulated other comprehensive loss. The financial statements of foreign subsidiaries, where the U.S. dollar is the functional currency and which have certain transactions denominated in a local currency, are re-measured as if the functional currency were the U.S. dollar. The re-measurement of local currencies into U.S. dollars creates translation adjustments which are included in net income. All translation and transaction activities were insignificant in 2001, 2000 and 1999. Revenue Recognition The Company recognizes revenues from the sale of products, net of costs of returns and allowances, at the point of passage of title, which is generally at the time of shipment. Revenue is recognized in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." Product Development Expenses Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. The costs amounted to $26,996, $26,750 and $21,976 in 2001, 2000 and 1999, respectively. 23
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) Stock-Based Compensation The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." The Company continues to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee share options. Since the exercise price of the Company's employee share options equals the market price of the shares on the date of grant, no compensation expense is recorded. Financial Instruments and Derivative Financial Instruments Financial instruments held by the Company include cash and cash equivalents, accounts receivable, accounts payable, long-term debt, interest rate swap agreements and forward currency contracts. The carrying value of cash and cash equivalents, accounts receivable and accounts payable is considered to be representative of fair value because of the short maturity of these instruments. The fair values of borrowings under the long-term debt facilities are based on rates available to the Company for debt with comparable terms and maturities. Refer to Note 10 for fair value disclosures of the interest rate swaps and currency forward contracts. Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including certain self-insured risks and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. Net Income Per Share Net income per share amounts for all periods are presented in accordance with SFAS 128, "Earnings per Share," which requires the presentation of basic net income per share and diluted net income per share. Basic net income per share was computed by dividing net income by the weighted average number of common shares outstanding for each respective period. Diluted net income per share was calculated by dividing net income by the weighted average of all potentially dilutive common shares that were outstanding during the periods presented, except for the years ended December 31, 2000 and 1999, where such inclusion would have had an anti-dilutive effect. Actual weighted average shares outstanding used in calculating basic and diluted net income per share were as follows: <TABLE> <CAPTION> For the years ended December 31, ---------------------------------------------------- 2001 2000 1999 -------------- -------------- -------------- <S> <C> <C> <C> Basic weighted average shares outstanding 22,397 22,397 22,397 Effect of dilutive securities 70 -- -- -------------- -------------- -------------- Diluted weighted average shares outstanding 22,467 22,397 22,397 ============== ============== ============== </TABLE> 24
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) Impairment of Assets The Company reviews its long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment charges were recorded in 2001, 2000 and 1999. Impairment would be recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. Measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset. Accounting Standards Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS 138). SFAS 133 establishes new accounting and reporting standards for derivatives and hedging activities, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes. The cumulative effect of adopting SFAS 133 was to increase other comprehensive loss by $0.3 million, after-tax. The effect on net income was not significant, primarily because the hedges in place as of January 1, 2001 qualified for hedge accounting treatment and were highly effective. In July 2001, the FASB issued SFAS 141, "Business Combinations." SFAS 141 eliminates the pooling-of-interests method and requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. The adoption of SFAS 141 did not have a material impact on the Company's financial statements. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS 142, the amortization period for certain intangibles will change and goodwill will no longer be subject to amortization. Goodwill will be subject to at least an annual assessment for impairment by applying a fair value-based test. This Statement is effective for the Company on January 1, 2002. The Company is currently in the process of evaluating the overall potential impact of this Statement on the Company's financial statements. Goodwill amortization, which approximates $9.5 million annually, will cease effective January 1, 2002. An impairment analysis will be performed during 2002 as required by the new Statement. In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144, which will be effective for the Company in fiscal year 2002, supersedes SFAS 121 and establishes guidelines for accounting for the impairment and disposal of long-lived assets. The Company believes that the adoption of SFAS 144 will not materially impact the Company's financial statements upon adoption. Reclassifications Certain prior year amounts have been reclassified to conform to their 2001 presentation in the consolidated financial statements. 3. Acquisitions On August 27, 1999, the Company purchased all the outstanding shares of TVI Europe, Limited (TVI) for approximately $20,700. TVI is a United Kingdom manufacturer of vehicle information and management systems for the European commercial vehicle market. The transaction was accounted for as a purchase. The excess of purchase price over the fair value of assets acquired was approximately $17,400. The results of operations of TVI are included in the accompanying financial statements from the date of acquisition. 25
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) On March 6, 1999, the Company purchased certain assets and assumed certain liabilities of Delta Schoeller, Limited (Delta) for approximately $12,200. Delta is a United Kingdom manufacturer of switches for the automotive industry. The transaction was accounted for as a purchase. The results of operations of Delta are included in the accompanying financial statements from the date of acquisition. 4. Investments The Company has a 50% interest in PST Industria Eletronica da Amazonia Ltda. (PST), a Brazilian electronic components business that specializes in electronic vehicle security devices. The investment is accounted for under the equity method of accounting. The Company's investment in PST was $1,758 and $1,492 at December 31, 2001 and 2000, respectively. The Company has loaned PST $6,498, which includes accrued interest. The initial loan was used for the repayment of existing debt and is secured by certain assets of PST. The Company has also entered into two joint venture agreements with Connecto AB, a Swedish manufacturer of power distribution systems. Pursuant to the terms of the agreements, the Company has a 92% interest in a Brazilian joint venture and a 14% interest in a European joint venture. The Brazilian joint venture is consolidated with the results of the Company and the European joint venture is accounted for under the equity method of accounting, because the Company maintains significant influence over this entity. As of December 31, 2001, the Company incurred costs of approximately $5,187 related to these joint ventures. The joint ventures are establishing production facilities in Brazil and Europe for the purpose of manufacturing and selling power distribution systems in South America and Europe, respectively. 5. Long-Term Debt The Company has a $425.0 million credit agreement with a bank group. The credit agreement, as amended on September 28, 2001, has the following components: a $100.0 million revolving facility including a $5.0 million swing line facility, a $150.0 million term facility, and a $175.0 million term facility. The $100.0 million revolving facility and the $150.0 million term facility expire on December 31, 2003 and require a commitment fee of 0.50% on the unused balance of the revolver. The revolving facility permits the Company to borrow up to half its borrowing in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 2.50% or (ii) LIBOR plus a margin of 4.00%. These margins increase periodically through September 30, 2002. These facilities require additional interest of 1.00% on the aggregate unpaid principal balance payable on the expiration date. The $5.0 million swing line facility expires on December 31, 2003. Interest is payable monthly at an overnight money market borrowing rate. The $175.0 million term facility expires on December 31, 2005. Interest is payable quarterly at either (i) the prime rate plus a margin of 3.50% or (ii) LIBOR plus a margin of 5.00%. These margins increase periodically through September 30, 2002. This facility also requires additional interest of 1.00% on the aggregate unpaid principal balance payable on the expiration date. The weighted average interest rate in effect for the years ended December 31, 2001, 2000 and 1999 was approximately 9.39%, 7.75% and 8.40%, respectively, including the effects of the interest rate swap agreements. Long-term debt consists of the following at December 31: <TABLE> <CAPTION> 2001 2000 ----------- ---------- <S> <C> <C> Borrowings under credit agreement $ 286,610 $ 323,670 Borrowings payable to foreign banks 3,891 4,826 Other 840 2,145 ----------- ---------- 291,341 330,641 Less: Current portion 41,621 34,562 ----------- ---------- $ 249,720 $ 296,079 =========== ========== </TABLE> 26
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) The credit agreement contains various covenants that require, among other things, the maintenance of certain minimum amounts of consolidated net worth and consolidated EBITDA and certain specified ratios of consolidated total debt to consolidated EBITDA, interest coverage and fixed charge coverage. Restrictions also include limits on capital expenditures and dividends. The Company was in compliance with these covenants at December 31, 2001. Future maturities of long-term debt as of December 31, 2001 are as follows: 2002 $ 41,621 2003 88,479 2004 45,237 2005 116,004 2006 -- The credit agreement requires certain debt prepayments based upon the achievement of defined levels of EBITDA. 6. Income Taxes The provisions for income taxes included in the accompanying financial statements represent federal, state and foreign income taxes. The provision for income taxes consists of the following for the years ended December 31: <TABLE> <CAPTION> 2001 2000 1999 --------- --------- -------- <S> <C> <C> <C> Current: Federal $ (9,347) $ 3,003 $ 12,281 State and foreign 712 2,763 3,966 --------- --------- -------- (8,635) 5,766 16,247 --------- --------- -------- Deferred: Federal 8,387 7,602 8,618 State and foreign 1,198 717 985 --------- --------- -------- 9,585 8,319 9,603 --------- --------- -------- Total $ 950 $ 14,085 $ 25,850 ========= ========= ======== </TABLE> A reconciliation of the Company's effective income tax rate to the statutory federal tax rate for 2001, 2000 and 1999 is as follows: <TABLE> <CAPTION> 2001 2000 1999 ------- ------- ------ <S> <C> <C> <C> Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 14.6 1.5 3.0 Tax credits (23.1) (1.0) -- Goodwill amortization 7.6 0.5 0.7 Foreign sales corporation (56.0) (3.8) (1.4) Foreign rate differential 28.6 (2.4) -- Other items 17.7 0.3 1.3 ------- ------- ------ Effective income tax rate 24.4% 30.1% 38.6% ======= ======= ====== </TABLE> Unremitted earnings of foreign subsidiaries are $10,978 as of December 31, 2001. Because these earnings have been indefinitely reinvested in foreign operations, no provision has been made for U.S. income taxes. It is impracticable to determine the amount of unrecognized deferred taxes with respect to these earnings; however, foreign tax credits should be available to reduce U.S. income taxes in the event of a distribution. 27
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) Deferred tax assets and liabilities consist of the following at December 31: <TABLE> <CAPTION> 2001 2000 -------- -------- <S> <C> <C> Deferred tax assets: Inventories $ 1,618 $ 2,275 Employee benefits 2,028 2,863 Insurance 2,559 2,922 Other nondeductible reserves 10,879 7,615 -------- -------- Gross deferred tax assets 17,084 15,675 -------- -------- Deferred tax liabilities: Depreciation and amortization (31,025) (24,515) Other (3,095) (3,295) -------- -------- Gross deferred tax liabilities (34,120) (27,810) -------- -------- Net deferred tax liability $(17,036) $(12,135) ======== ======== </TABLE> 7. Operating Lease Commitments The Company leases equipment, vehicles and buildings from third parties under operating lease agreements. The Company also leases some of its facilities from certain related parties. The leases are accounted for as operating leases and are for various terms with additional renewal options. The Company is generally responsible for repairs and maintenance, taxes and insurance. For the years ended December 31, 2001, 2000 and 1999, lease expense totaled $5,713, $4,098 and $3,620 under these agreements, including related party lease expense of $538, $575 and $465, respectively. Future minimum operating lease commitments at December 31, 2001 are as follows: Third Related Party Party ------- ------- 2002 $ 4,565 $ 471 2003 2,776 461 2004 1,085 383 2005 133 357 2006 23 357 Thereafter -- 1,072 8. Share Option Plans In October 1997, the Company adopted a Long-Term Incentive Plan (Incentive Plan). The Company has reserved 1,000,000 Common Shares for issuance under the Incentive Plan. In May 2001, the number of Common Shares reserved under the Incentive Plan was increased to 2,500,000. Under the Incentive Plan, the Company has granted cumulative options to purchase 1,025,500 Common Shares to management with exercise prices equal to the fair market value of the Company's Common Shares at the date of grant. The options vest from one to five years after the date of grant. 28
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) Information relating to the Company's outstanding options is as follows: <TABLE> <CAPTION> Weighted Share Exercise Average Options Prices Exercise Price ------------ -------------- ------------------ <S> <C> <C> <C> Outstanding at December 31, 1998 492,000 16.44-17.50 17.48 Granted in 1999 103,000 14.72 14.72 Forfeited in 1999 (14,000) 14.72-17.50 16.31 ------------ Outstanding at December 31, 1999 581,000 14.72-17.50 17.02 Granted in 2000 60,000 7.82 7.82 Forfeited in 2000 (65,000) 14.72-17.50 17.07 ------------ Outstanding at December 31, 2000 576,000 7.82-17.50 16.05 Granted in 2001 364,500 5.13-8.40 5.66 Forfeited in 2001 (4,000) 5.13-14.72 12.32 ------------ Outstanding at December 31, 2001 936,500 5.13-17.50 12.03 ============ </TABLE> Of the options issued and outstanding under the Incentive Plan, 488,000, 434,000, and 484,000 were exercisable as of December 31, 2001, 2000 and 1999, respectively. The weighted average exercise price of options exercisable at the end of year was $17.14, $17.44 and $17.48 per share at December 31, 2001, 2000 and 1999, respectively. The following pro forma information regarding net income and net income per share is required by SFAS 123, and has been determined as if the Company had accounted for its share options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: <TABLE> <CAPTION> 2001 2000 1999 --------------------- -------------------- ------------------- <S> <C> <C> <C> Risk-free interest rate 5.19 - 5.26% 6.09 - 6.14% 5.29-5.32% Expected dividend yield 0.00% 0.00% 0.00% Expected lives 7.5 years 7.5 - 8.5 years 7.5 - 8.5 years Expected volatility 40.4 - 41.0% 38.54 - 39.00% 33.90% </TABLE> The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected share price volatility. Because the Company's share options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its share options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings per share is as follows: <TABLE> <CAPTION> 2001 2000 1999 --------- ---------- ---------- <S> <C> <C> <C> Net income - as reported $ 2,946 $ 32,709 $ 41,172 Net income - pro forma $ 2,134 $ 32,381 $ 39,302 Basic and diluted net income per share - as reported $ 0.13 $ 1.46 $ 1.84 Basic and diluted net income per share - pro forma $ 0.10 $ 1.45 $ 1.75 </TABLE> 29
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) 9. Employee Benefit Plans The Company has certain defined contribution profit sharing and 401(k) plans covering substantially all employees. Company contributions are generally discretionary; however, a portion of these contributions is based upon a percentage of employee compensation, as defined in the plans. The Company's policy is to fund all benefit costs accrued. There are no unfunded prior service costs. For the years ended December 31, 2001, 2000 and 1999, contributions amounted to $3,555, $3,479 and $6,310, respectively. The Company does not provide any other material retirement, post-retirement or post-employment benefits to its employees. 10. Fair Value of Financial Instruments A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. In management's opinion, the estimated fair value of the Company's long-term debt approximates book value, as under the terms of the borrowing arrangements, a significant portion of the obligations are subject to fluctuating market rates of interest. The Company uses derivative financial instruments to reduce exposures to market risks resulting from fluctuations in interest rates and currency rates. The Company does not enter into financial instruments for trading purposes. Management believes that its use of these instruments to reduce risk is in the Company's best interest. Derivative financial instruments as of December 31, 2001 and 2000 include the following interest rate swap agreements: Notional Amount Fixed Rate Maturity 2001 2000 Paid Date ---- ---- ---- ---- $ 39,375 $ 54,375 6.76 Dec. 31, 2002 84,875 85,750 6.77 Dec. 31, 2002 51,056 -- 4.93 Dec. 31, 2003 The fair market value of these interest rate swap agreements, which was estimated based on quoted market sources, approximated a net payable of $6,700 and $2,500, at December 31, 2001 and 2000, respectively. As a result of the adoption of SFAS 133 in 2001, the Company has reflected the net of tax offset to this liability as a separate component of shareholders' equity, due to these swaps being deemed effective hedges. The interest rate swap agreements require the Company to pay a fixed interest rate to counterparties while receiving a floating interest rate based on LIBOR. The counterparties to each of the interest rate swap agreements are major commercial banks. Management believes that losses related to credit risk are remote. The Company also entered into a foreign currency forward contract to purchase $13.3 million of Swedish krona to satisfy krona denominated debt obligations. The estimated fair value of the forward at December 31, 2001, per quoted market sources, was not materially different from the carrying value. 11. Commitments and Contingencies In the ordinary course of business, the Company is involved in various legal proceedings, workers' compensation and product liability disputes. Management is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company. 30
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share data, unless otherwise indicated) 12. Geographic Areas The Company has adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 requires the financial statement disclosures for operating segments, products and services, and geographic areas. The Company operates in one business segment based on the aggregation criteria set forth in SFAS 131. The following table presents net sales and non-current assets for each of the geographic areas in which the Company operates: 2001 2000 1999 --------- --------- --------- Net sales: North America $ 498,011 $ 579,877 $ 599,309 Europe and other 86,457 87,315 75,912 --------- --------- --------- Total $ 584,468 $ 667,192 $ 675,221 ========= ========= ========= Non-current assets: North America $ 440,915 $ 446,744 $ 452,774 Europe and other 53,183 55,497 53,219 --------- --------- --------- Total $ 494,098 $ 502,241 $ 505,993 ========= ========= ========= 13. Unaudited Quarterly Financial Data The following is a condensed summary of actual quarterly results of operations for 2001 and 2000: <TABLE> <CAPTION> Quarter Ended -------------------------------------- Dec. 31 Sep. 30 June 30 Mar. 31 -------- ------- ------- ------- (in millions, except per share data) <S> <C> <C> <C> <C> 2001 Net sales $ 140.0 $ 136.4 $ 151.9 $ 156.2 Gross profit (A) 30.0 30.2 36.7 38.1 Operating income 8.4 4.5 9.8 12.9 Net income (loss) $ 0.2 $ (1.8) $ 1.5 $ 3.1 ======= ======= ======= ======= Basic and diluted net income (loss) per share $ .01 $ (.08) $ 0.07 $ 0.14 ======= ======= ======= ======= 2000 Net sales $ 146.4 $ 153.8 $ 182.8 $ 184.2 Gross profit (A) 30.7 38.0 50.7 51.7 Operating income 7.9 15.4 25.2 26.6 Net income $ 1.1 $ 7.5 $ 11.6 $ 12.5 ======= ======= ======= ======= Basic and diluted net income per share $ 0.05 $ 0.34 $ 0.52 $ 0.56 ======= ======= ======= ======= </TABLE> (A) Gross profit represents net sales less cost of goods sold. 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Stoneridge, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Stoneridge, Inc. and Subsidiaries included in this Form 10-K, and have issued our report thereon dated January 22, 2002. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule on page 34 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, January 22, 2002. 32
STONERIDGE, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands) <TABLE> <CAPTION> Liabilities Balance at Charged to Assumed in Beginning of Costs and Purchase Balance at Period Expenses Accounting Write-offs End of Period ------------ ---------- ----------- ---------- ------------- <S> <C> <C> <C> <C> <C> Allowance for doubtful accounts: Year ended December 31, 1999 $ 1,006 $ 728 $ 125 $ 310 $ 1,549 Year ended December 31, 2000 1,549 840 -- 247 2,142 Year ended December 31, 2001 2,142 564 -- 964 1,742 </TABLE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no disagreement between the management of the Company and the Company's accountants on any matter of accounting principles or practices of financial statement disclosures. 34
PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is incorporated by reference to the information under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 13, 2002, and the information under the heading "Executive Officers" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated by reference to the information under the heading "Executive Compensation" contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 13, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated by reference to the information under the heading "Security Ownership of Certain Beneficial Owners and Management" contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 13, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is incorporated by reference to the information under the heading "Certain Relationships and Related Transactions" contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 13, 2002. 35
PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K. <TABLE> <CAPTION> Page in Form 10-K --------- <S> <C> 1. Consolidated Financial Statements: Report of Independent Public Accountants 16 Consolidated Balance Sheets as of December 31, 2001 and 2000 17 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 18 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 19 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 20 Notes to Consolidated Financial Statements 21 2. Financial Statement Schedules: Report of Independent Public Accountants 32 Schedule II - Valuation and Qualifying Accounts 33 </TABLE> All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (b) The following reports on Form 8-K were filed during the quarter ended December 31, 2001. None. (c) The exhibits listed on the Index to Exhibits on page 38 are filed with this Form 10-K or incorporated by reference as set forth below. (d) Additional Financial Statement Schedules. None. 36
INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit Number Exhibit ------- ------- <S> <C> 3.1 Proposed Form of Second Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (No. 333-33285)). 3.2 Proposed Form of Amended and Restated Code of Regulations of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (No. 333-33285)). 4.1 Common Share Certificate (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.1 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 333-33285)). 10.2 Lease Agreement between Industrial Development Associates and the Alphabet Division, with respect to the Company's Mebane, North Carolina facility (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.3 Lease Agreement between Stoneridge, Inc. and Alphabet, Inc., with respect to the Company's division headquarters for the Alphabet Division (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.4 Share Exchange Agreement relating to the Berifors Acquisition (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (No. 333-33285)). 10.5 Joint Venture and Shareholders' Agreements and Cooperation Agreement with Connecto AB (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (No. 333-33285)). 10.6 Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc., as Borrower, the Lending Institutions Named Therein, as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, National City Bank as Administrative Agent and Collateral Agent, PNC Bank, NA as Documentation Agent (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.7 Amendment No. 1 dated as of January 28, 1999 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent (incorporated by reference to Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.8 Amendment No. 2 dated as of September 7, 1999 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.9 Amendment No. 3 dated as of May 25, 2000 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). </TABLE> 37
<TABLE> <S> <C> 10.10 Amendment No. 4 dated as of January 26, 2001 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent (incorporated be reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.11 Amendment No. 5 dated as of September 28, 2001 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 10.12 Proposed Form of Tax Indemnification Agreement (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (No. 333-33285)). 10.13 Agreement for the Purchase and Sale of Quotas of P.S.T. Industria Eletronica da Amazonia Ltda dated October 29, 1997(incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.14 Quotaholders' Agreement among Marcos Ferretti, Sergio De Cerqueira Leite, Stoneridge, Inc. and P.S.T. Industria Eletronica da Amazonia Ltda dated October 29, 1997 (incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.15 Stock Purchase Agreement by and among Stoneridge, Inc. and the Shareholders of Hi-Stat Manufacturing Co., Inc., dated as of December 7, 1998 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K as of December 31, 1998). 10.16 Form of Change in Control Agreement (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 21.1 Subsidiaries and Affiliates of the Company, filed herewith. 23.1 Consent of Independent Public Accountants, filed herewith. </TABLE> 38
SIGNATURES Pursuant to the requirements of the 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. STONERIDGE, INC. Date: March 12, 2002 /s/ KEVIN P. BAGBY -------------------------------------------- Kevin P. Bagby Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of 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 date indicated. Date: March 12, 2002 /s/ D.M. DRAIME -------------------------------------------- D.M. Draime Chairman of the Board of Directors Date: March 12, 2002 /s/ CLOYD J. ABRUZZO -------------------------------------------- Cloyd J. Abruzzo President and Chief Executive Officer (Principal Executive Officer) Date: March 12, 2002 /s/ AVERY S. COHEN -------------------------------------------- Avery S. Cohen Secretary and Director Date: March 12, 2002 /s/ RICHARD E. CHENEY -------------------------------------------- Richard E. Cheney Director Date: March 12, 2002 /s/ SHELDON J. EPSTEIN -------------------------------------------- Sheldon J. Epstein Director Date: March 12, 2002 /s/ CHARLES J. HIRE -------------------------------------------- Charles J. Hire Director Date: March 12, 2002 /s/ RICHARD G. LEFAUVE -------------------------------------------- Richard G. LeFauve Director Date: March 12, 2002 /s/ EARL L. LINEHAN -------------------------------------------- Earl L. Linehan Director 39