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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, 1997 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 (ZIP CODE)
OFFICES)
(330) 856-2443
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------- -----------------------
Common Shares, no 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. [_]
Based on the closing price of March 20, 1998, the aggregate market value of
common stock held by nonaffiliates of the registrant was $223.4 million.
The number of Common Shares, without par value, outstanding as of March 20,
1998 was 22,397,311.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held
on May 4, 1998, into Part III, Items 10, 11, 12 and 13.
INDEX
STONERIDGE, INC.--FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
PAGE
NO.
----
PART I.
Item 1. Business................................................... 3
Item 2. Properties................................................. 10
Item 3. Legal Proceedings.......................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........ 10
PART II.
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 11
Item 6. Selected Financial Data.................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 8. Financial Statements and Supplementary Data................ 17
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 36
PART III.
Item 10. Directors and Executive Officers of the Registrant......... 37
Item 11. Executive Compensation..................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 37
Item 13. Certain Relationships and Related Transactions............. 37
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 38
SIGNATURES.............................................................. 40
2
FORWARD-LOOKING STATEMENTS
Portions of the Report contain "forward-looking statements" under the
Private Securities Litigation Act of 1995. These statements appear in a number
of places in the 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, and (iii) investments and new product
development. 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. Factors which
may cause actual results to differ materially from those in the forward-
looking statements include, among other factors, the loss of a major customer,
a decline in automotive, medium and heavy duty truck or agricultural vehicle
production, the failure to achieve successful integration of any acquired
company or business, or a decline in general economic conditions. Further
information concerning issues that could, materially affect financial
performance is contained in the Company's periodic filings with the Securities
and Exchange Commission.
PART I.
ITEM 1. BUSINESS
THE COMPANY
The Company was founded in 1965 as a manufacturer of wire harnesses for the
agricultural vehicle 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 independent designer and manufacturer of highly
engineered electrical and electronic components, modules and systems for the
automotive, medium and heavy duty truck and agricultural vehicle markets. The
Company's products interface with a vehicle's mechanical and electrical
systems to activate equipment and accessories, display and monitor vehicle
performance, and control and distribute electrical power and signals. The
Company has a leading market position in the design and manufacture of
electrical and electronic modules and systems for the medium and heavy duty
truck and agricultural vehicle markets. In the automotive market, the Company
designs and manufactures specially designed and engineered electrical and
electronic components and modules, typically on a sole-source basis.
RECENT ACQUISITIONS AND JOINT VENTURES
In November 1995, the Company acquired the business, machinery and
equipment, intellectual property rights and purchase contracts of the actuator
business of an original equipment manufacturer (OEM) supplier.
In April 1996, seeking to leverage its capabilities and diversify its OEM
customer base, the Company acquired approximately 45% of Berifors AB
(Berfiors), a Sweden-based manufacturer of electronic display panels and
instrumentation for the European truck and commercial vehicle markets. In
October 1997, the Company acquired the remaining 55% of Berifors, in exchange
for 757,063 Common Shares, of which 52,500 Common Shares were held in escrow
pending final closing in February 1998. As a result of this acquisition, the
Company will be a worldwide supplier of instrumentation displays for heavy
duty trucks to Mercedes Benz, Volvo and Scania.
In October 1997, the Company purchased 50% of the outstanding common stock
of PST Industria Eletronica da Amazonia Ltda. (Positron), a Brazilian
electronic components business which specializes in electronic vehicle
security devices. Total cash consideration paid by the Company with respect to
this investment was $17.7 million including fees and expenses.
3
In August 1997, the Company 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 expects to pay approximately $2.4
million for a 60% interest in a Brazilian joint venture and $1.1 million for a
40% interest in a European joint venture. 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. In addition, the joint ventures will pursue sales and marketing
efforts for other products and services of the joint venture partners.
DISCONTINUANCE OF CERTAIN CONTRACT MANUFACTURING BUSINESS
A division of General Motors has notified the Company that it is
discontinuing all outsourcing of its wire harness requirements under contract
manufacturing arrangements. The Company believes that by 1999 the General
Motors division will produce in-house substantially all of its wire harnesses
requirements previously supplied by the Company, although no assurance can be
given that such sales by the Company will not end at an earlier date. The
Company's net sales under this arrangement totaled approximately $95.1
million, $105.6 million and $65.4 million for 1997, 1996 and for 1995,
respectively, or approximately 21.2%, 29.0% and 23.5% of total net sales for
such periods.
PRODUCTS
The Company's products include vehicle electrical power and distribution
systems, electronic and electrical switch products, electronic instrumentation
and information display products, including the European instrumentation and
information display products manufactured by Berifors, and actuator products.
The Company's four principal product categories are:
. Power Distribution Products. The Company designs and manufactures
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. A
significant portion of the Company's current power distribution business
consists of contract manufacturing of wire harnesses for a division of
General Motors.
. Switch Products. The Company designs and manufactures integrated
electronic and electromechanical switch products which include hidden
switches and customer-activated switches. These switches transmit a
signal to a control device which activates specific functions. Hidden
switches are those switches which are not typically seen by vehicle
passengers but are utilized to activate or deactivate selected functions
such as brake lights, cruise control functions and electronic safety
features related to air bag and anti-lock braking systems. Customer-
activated switches are used by a vehicle's operator or passengers to
manually activate headlights, rear defrosters, heated seats and other
accessories. The Company sells these products principally to the
automotive market.
. Instrumentation and Information Display Products. The Company designs and
manufactures electronic instrument clusters, driver message centers,
power conversion products, tachographs, multiplexed modules and
electrical systems and electronic switch modules. 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 utilize state-of-the-art hardware, software and
multiplexing technology and are sold principally to the medium and heavy
duty truck and agricultural vehicle markets.
. Actuator Products. 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.
These products include power door lock and four-wheel-drive actuators and
are sold principally to the automotive market.
4
The following table sets forth the approximate composition by product group
represented by a percentage of the Company's net sales for the three fiscal
years ended December 31, 1997, 1996, and 1995.
YEAR ENDED
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
PRODUCT CATEGORY
Power Distribution Systems:
Contract Manufacturing (GM).............................. 21% 29% 23%
Other Power Distribution Systems......................... 25 23 28
Switch Products............................................ 25 29 33
Instrumentation and Information
Display Products:
North America and other................................ 10 11 16
Europe................................................. 2 -- --
Actuator Products........................................ 17 8 --
--- --- ---
Total...................................................... 100% 100% 100%
PRODUCTION MATERIALS
The principal production materials used in the Company's manufacturing
processes include wire, cable, plastic housings, and certain electrical
components such as 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.
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 infringement litigation, nor are there any 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 decline in automotive, medium and heavy duty truck
and agricultural vehicle production could adversely impact the Company.
Approximately 65%, 72% and 70 % of the Company's net sales in 1997, 1996 and
1995 respectively, were made to the automotive market and approximately 33%, 27%
and 29% of the net sales in 1997, 1996 and 1995 respectively, were derived from
the medium and heavy duty and agricultural vehicle markets.
Demand for the Company's products has been seasonal. The Company typically
experiences decreased net 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 also impacted by plant shutdowns
for the holidays.
5
RELIANCE ON MAJOR CUSTOMERS
The Company is dependent on a small number of principal customers for a
significant percentage of its net sales. The loss of any significant portion
of its sales to these customers or any other significant customers would have
a material adverse impact on the financial condition and results of operations
of the Company. 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, 1997, 1996 and 1995:
YEAR ENDED
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
CUSTOMER
General Motors............................................... 32% 39% 36%
Ford......................................................... 21 18 13
Deere........................................................ 10 10 11
Other........................................................ 37 33 40
--- --- ---
Total........................................................ 100% 100% 100%
6
The following table presents an overview of the major vehicle models for
which the Company is producing components, modules or systems in 1997:
AUTOMOTIVE
CHRYSLER FORD GM MAZDA
- -------- ---- -- -----
Breeze Bronco Astro B2000
Caravan Continental Aurora Quest
Cherokee Cougar Blazer
Cirrus Crown Victoria Bravada
Concorde Econoline Bonneville
Dakota Escort C/K Pickup
Dodge N-Truck Expedition Camaro
Durango Explorer Cavalier
Intrepid F-Series Pickup Delta 88
LHS Grand Marquis Deville
Neon Mark VIII Firebird
Ram Mountaineer Grand Am
Sebring Mustang Grand Prix
Stratus Navigator Jimmy
Town & Country Ranger LeSabre
T-300 Utility Sable Park Avenue
Viper Taurus S-10
Vision Thunderbird Safari
Voyager Town Car Savanna
Wrangler Tracer Seville STS/SLS
Villager Skylark
Windstar Sonoma
Sportvan
Suburban
Sunfire
Tahoe
Yukon
MEDIUM AND HEAVY DUTY TRUCK & AGRICULTURAL
DEERE FREIGHTLINER MACK TRUCK
- ----- ------------ ----------
Combine (Models 93-96) Class 5, 6, 7 (medium duty) Class 8 (heavy duty)
Four-Wheel Drive (Series
9000) Class 8 (heavy duty)
MR Tractor (Series 7000)
Scimitar (Series 8000)
MERCEDES BENZ MERCEDES BENZ
BRAZIL & MEXICO EUROPE NAVISTAR
- --------------- ------------- --------
Class 5,6 (medium duty) Class 8 (heavy duty) Class 5, 6, 7 (bus/medium duty)
Class 8 (heavy duty)
PACCAR SCANIA VOLVO TRUCK CORPORATION
- ------ ------ -----------------------
Class 8 (heavy duty) Class 8 (heavy duty) Class 7, 8 (heavy duty)
7
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.
COMPETITION
Markets for the Company's products are highly competitive. Quality, service,
price, timely delivery, and technological innovation are the primary elements
of competition. 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.
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 $14.1 million, $9.3 million and $6.7 million for 1997, 1996
and 1995, respectively, or 4.0%, 3.6% and 3.1% of core electrical and
electronic components, modules and systems sales for such 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) 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, Mexico 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, 1997, the Company, including Berifors, had approximately
4,400 employees, approximately 1,300 of whom were salaried and the balance of
whom were paid on an hourly basis. Except for certain employees located in
Chihuahua, Mexico, and Orebro and Stockholm, Sweden, the Company's employees
are not represented by a union. The Company believes that its relations with
its employees are excellent. The Company believes strongly in employee
education and sponsors a number of educational opportunities and programs for
its employees.
8
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
D.M. Draime............. 64 Chairman of the Board of Directors, Assistant Secretary and Director
Cloyd J. Abruzzo........ 47 President, Chief Executive Officer, Assistant Treasurer and Director
Kevin P. Bagby.......... 46 Vice President of the Company, Chief Financial Officer and Treasurer
Sten Forseke............ 38 Vice President of the Company and Managing Director of Berifors
Gerald V. Pisani........ 57 Vice President of the Company and President of Pollak Engineered Products Group
David L. Thomas......... 48 Vice President of the Company and President of Alphabet Group
Avery S. Cohen.......... 61 Secretary and Director
D.M. Draime, founder of the Company, has served as Chairman of the Board of
Directors of the Company and its predecessors since 1965 and as a director of
the Company since 1988.
Cloyd J. Abruzzo has served as President and Chief Executive Officer of the
Company or its predecessors 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. Mr. Bagby was
employed by Kelsey-Hayes as Director of Business Analysis from June 1994 to
July 1995 and as Director of Finance for the Foundation Brakes Business Unit
from January 1991 to June 1994.
Sten Forseke, a co-founder of Berifors, has served as Vice President of the
Company since the acquisition of Berifors in 1997 and Managing Director of
Berifors since 1988.
Gerald V. Pisani has served as Vice President of the Company since 1989 and
President of the Pollak Engineered Products Group since 1985.
David L. Thomas has served as Vice President of the Company and President of
the Company's Alphabet Group since 1989.
Avery S. Cohen has served as Secretary and a director of the Company since
1988. He has been a partner in the law firm of Baker & Hostetler LLP since
1993. From 1989 to 1993, Mr. Cohen was a partner with the law firm of Benesch,
Friedlander, Coplan & Aronoff.
9
ITEM 2. PROPERTIES
The Company currently owns or leases nine manufacturing facilities, which
together contain approximately one million square feet of manufacturing space.
The following table provides information regarding the Company's facilities:
OWNED/
LEASED SQUARE
LOCATION USE STATUS FOOTAGE
-------- --- ------ -------
Arlington Heights,
Illinois Sales/Engineering Office Leased 1,000
Boston, Massachusetts Division Office & Manufacturing Owned 166,100
Canton, Massachusetts Division Office & Manufacturing Owned 126,500
Cortland, Ohio Engineering Office Leased 11,400
El Paso, Texas Office/Warehouse Leased 22,400
Greenwood, South
Carolina(1) Manufacturing Leased 56,000
Kent, Ohio Manufacturing Owned 70,000
Mebane, North Carolina Manufacturing Leased 51,000
Orwell, Ohio Manufacturing Owned 72,000
Portland, Indiana Manufacturing Owned 196,000
Southfield, Michigan Sales/Engineering Office Leased 4,200
Warren, Ohio Corporate Office Owned 7,500
Warren, Ohio Division Office Leased 15,300
Bromma, Sweden Division Office & Engineering Leased 16,100
Chihuahua, Mexico Manufacturing Owned 133,000
Eschborn, Germany Sales/Engineering Office Leased 100
Juarez, Mexico Manufacturing Owned 178,000
Munich, Germany Sales/Engineering Office Leased 1,000
Orebro, Sweden Manufacturing Leased 56,000
Sao Paulo, Brazil Sales/Engineering Office Leased 200
Stuttgart, Germany Sales/Engineering Office Leased 1,000
- --------
(1) Plant idled in first quarter of 1997.
Positron, a 50% equity investment of the Company, leases a production
facility in Manaus, Brazil, and owns a sales office in Campinas, Brazil.
ITEM 3. LEGAL PROCEEDINGS
The Company has no pending litigation which it 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 Company will not experience any material product liability losses in the
future. In addition, if any of the Company's products causes personal injury
or death to users of the Company's products, and there can be no assurance
that the products prove 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 1997.
10
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) On March 20, 1998, the Company had 22,397,311 shares of its Common
Shares with no par value outstanding, which were owned by 3,475 shareholders
of record.
The Company has neither paid nor declared dividends on its Common Share
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 1996 and 1997.
QUARTER ENDED HIGH LOW
------------- ---- ---
1996 March 31.................................................. N/A N/A
June 30................................................... N/A N/A
September 30.............................................. N/A N/A
December 31............................................... N/A N/A
1997 March 31.................................................. N/A N/A
June 30................................................... N/A N/A
September 30.............................................. N/A N/A
December 31............................................... 20 13/16 14
- --------
N/A--The Company began trading on the NYSE on October 10, 1997.
The Company's Common Shares are traded on the NYSE under the symbol SRI.
11
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 for the years ended
December 31, 1997, 1996, 1995 and 1994 are derived from the Company's
consolidated financial statements, which were audited by Arthur Andersen LLP,
the Company's independent accountants. The selected historical data for the
year ended December 31, 1993 is derived from the unaudited combined financial
statements of the Company. These combined financial statements of the Company
have been prepared on a basis consistent with the Company's audited financial
statements.
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997(2) 1996(2) 1995(2) 1994 1993(1)
-------- -------- -------- -------- ---------
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales....................... $449,506 $363,748 $278,043 $225,531 $187,413
Gross profit.................... 108,192 75,606 66,331 60,557 47,480
Operating income................ 52,366 28,912 28,822 28,015 15,610
Income before income taxes...... 50,895 24,595 26,808 25,671 13,389
Net income...................... $ 46,964 $ 24,071 $ 26,154 $ 26,666 $ 8,995
======== ======== ======== ======== ========
Basic and diluted earnings per
share.......................... $ 2.92 $ 1.73 $ 1.88 $ 1.92 $ 0.65
======== ======== ======== ======== ========
PRO FORMA DATA:
Income before income taxes...... $ 50,895 $ 24,595 $ 26,808 $ 25,671 $ 13,389
Provision for income taxes...... 21,181 10,295 10,991 10,525 5,489
-------- -------- -------- -------- --------
Pro forma net income............ $ 29,714 $ 14,300 $ 15,817 $ 15,146 $ 7,900
======== ======== ======== ======== ========
Pro forma basic and diluted net
income per share............... $ 1.36 $ 0.66 $ 0.73 $ 0.70 $ 0.37
======== ======== ======== ======== ========
OTHER DATA:
Research and development
expense........................ $ 14,114 $ 9,263 $ 6,664 $ 5,997 $ 5,096
Capital expenditures............ 12,256 14,083 14,767 9,046 5,669
Depreciation and amortization... 13,237 9,966 7,979 6,870 6,696
BALANCE SHEET DATA:
Working capital................. $ 44,856 $ 39,957 $ 34,851 $ 30,654 $ 21,246
Total assets.................... 235,073 178,487 172,298 119,915 130,162
Long-term debt, less current
portion........................ 9,139 51,156 47,999 28,845 29,784
Shareholders' equity............ 157,210 84,633 73,720 63,112 49,946
- --------
(1) Results reflect the combined results of operations and financial position
of Stoneridge Inc., Alphabet Inc. and Alphastac, Inc. (Pollak).
(2) Results reflect the acquisition of an automotive product line in November
1995.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared To Year Ended December 31, 1996
Net Sales. Net sales for 1997 increased by $85.8 million, or 23.6%, to
$449.5 million from $363.7 million in 1996. Sales of core electrical and
electronic components, modules and systems increased by $96.2 million, or
37.3%, to $354.4 million during 1997 compared with $258.2 million in 1996. Net
sales of contract manufacturing wire harnesses of $95.1 million were 9.9%
lower than 1996, reflecting declining customer production levels. As expected,
contract manufacturing sales declined to 21.2 % of total sales revenue for the
year compared with 29.0% in 1996. Concurrent with its initial public offering,
the Company acquired Berifors AB, a Swedish manufacturer of electronic
instrumentation and information display systems. The acquisition, which
occurred in October 1997, increased sales revenue by $10.1 million in 1997.
Excluding the impact of the Berifors AB acquisition, sales revenue of core
products increased by $86.1 million, or 33.3%, compared with 1996.
Sales for 1997 of actuator products increased by $41.8 million to $72.3
million from $30.5 million in 1996. Full production of actuator products
(acquired in late 1995) was not reached until approximately November 1996. The
1997 launch of a new four-wheel-drive actuator product significantly increased
shipments of actuator products. Sales for 1997 of power distribution products,
exclusive of contract manufacturing, increased by $25.7 million, or 30.8%, to
$109.2 million due to increased market penetration in the medium and heavy
duty truck market and higher net sales to the agricultural vehicle market of
$15.5 million and $7.1 million, respectively. Passenger car/light truck market
product introductions increased power distribution sales by $3.1 million.
Sales for 1997 of electrical instrumentation and information displays
increased by $8.6 million, or 22.9%, due principally to the introduction of
new information clusters for the medium and heavy duty truck market. Sales for
1997 of switch products increased by $5.4 million, or 5.0%, reflecting higher
production levels in served markets and new product launches.
Cost of Goods Sold. Cost of goods sold for 1997 increased by $53.2 million,
or 18.5%, to $341.3 million from $288.1 million in 1996. As a percentage of
sales, cost of goods sold decreased to 75.9% in 1997 from 79.2% in 1996 while
the corresponding gross profit margin increased to 24.1% in 1997 from 20.8% in
1996. The improvement in gross profit margin primarily resulted from improved
operating leverage associated with increased actuator product sales. The
consolidation of two power distribution/contract manufacturing facilities
eliminated certain fixed costs and also contributed to the increase in gross
margin. In addition, gross margin was favorably impacted by increased
efficiencies resulting from higher production of power distribution, switch
and electronic instrumentation and information display systems.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses for 1997 increased by $9.1 million, or 19.5%,
to $55.8 million from $46.7 million in 1996. As a percentage of sales, SG&A
expenses decreased to 12.4% for 1997 from 12.8% in 1996. The acquisition of
Berifors AB increased SG&A by $2.2 million, which included $1.6 million in
product development costs, compared with the same period in 1996. Product
development expenses increased $4.9 million in 1997 or 52.4% to $14.1 million
from $9.2 million in 1996. This increase included the $1.6 million for
Berifors AB, medium and heavy-duty truck instrumentation and information
display products were responsible for $1.8 million and the remaining $1.5
million was primarily spent on the actuator product line. An additional $2.0
million of marketing and administrative expense was also due to the launch of
the actuator product line. Other marketing support and administrative overhead
costs increased an additional $5.9 million due to increased infrastructure
requirements to support higher sales levels. These increases were offset by a
$4.3 million decrease in expenses due to the expiration of the actuator
products transition services agreement in October 1996.
Interest Expense. Interest expense for 1997 decreased by $1.1 million, or
25.8%, to $3.2 million from $4.3 million in 1996. The decrease was due to a
lower average outstanding indebtedness.
13
Other Income. Other income of $1.7 million for 1997 represents a gain on the
sale of certain transportation equipment. The Company received cash proceeds
of $2.3 million from the sale, which were used to retire a note payable
collateralized by the transportation equipment.
Income Before Income Taxes. As a result of the foregoing, income before
taxes increased by $26.3 million for 1997 to $50.9 million from $24.6 million
in 1996.
Provision for Income Taxes. Prior to October 1997, the Company was an S
corporation for federal and, where qualified, state income tax purposes.
Accordingly, the Company recognized provisions for income taxes of $5.1
million and $0.5 million for federal, state and foreign income taxes for 1997
and 1996, respectively. Had the Company been subject to federal and state
income taxes at the corporate level for all of 1997 and 1996, the Company
would have recorded provisions for income taxes of $21.2 million and $10.3
million for 1997 and 1996, respectively.
Income Tax Benefit from the Reinstatement of Deferred Taxes. In connection
with the Company's initial public offering in October 1997, the Company
terminated its S corporation status. Accordingly, the Company became subject
to federal and state income taxes as a C corporation. As a result, a net
current deferred income tax asset and a net non-current deferred income tax
liability of $4.1 million and $ 2.9 million, respectively, were recorded with
an offsetting benefit to income of $1.2 million.
Net Income. As a result of the foregoing, net income increased by $22.9
million, or 95.1%, to $47.0 million in 1997 from $24.1 million in 1996. Had
the Company been subject to federal and state income taxes at the corporate
level, the Company's pro forma net income would have been $29.7 million and
$14.3 million for 1997 and 1996, respectively.
Year Ended December 31, 1996 Compared To Year Ended December 31, 1995
Net Sales. Net sales for 1996 increased by $85.7 million, or 30.8%, to
$363.7 million from $278.0 million in 1995. Of this increase, $53.4 million
was due to materials purchased for contract manufacturing (previously supplied
by the customer) with a division of General Motors. Such increase was
partially offset by a 20.3% decline in unit volume, or $13.3 million of net
sales. The acquisition of the actuator business in 1995 increased 1996 net
sales by approximately $29.5 million. In addition, increased market
penetration related to switch products and power distribution products
resulted in increased sales of $12.4 million and $8.7 million, respectively.
Partially offsetting these increases, net sales of power distribution,
instrumentation and information displays product lines decreased by $15.9
million as a result of lower OEM production volumes of medium and heavy duty
trucks and a decline in the market share of an automotive OEM customer. Net
sales of power distribution products to the agricultural vehicle market
increased by $5.6 million.
Cost of Goods Sold. Cost of goods sold for 1996 increased by $76.4 million,
or 36.1%, to $288.1 million from $211.7 million in 1995. As a percentage of
net sales, cost of goods sold increased to 79.2% in 1996 from 76.1% in 1995,
while the corresponding gross profit margin decreased to 20.8% in 1996 from
23.9% in 1995. The change in the contract manufacturing arrangement with the
division of General Motors caused a reduction in gross profit margin of 1.7%.
Gross profit was adversely impacted by start-up inefficiencies and $1.0
million of expenses associated with the relocation of switch production to the
Company's new Canton, Massachusetts, facility. The remaining decrease was
related to the decline in volume of instrumentation and information displays
and power distribution product lines.
Selling, General and Administrative Expenses. SG&A expenses for 1996
increased by $9.2 million, or 24.5%, to $46.7 million from $37.5 million in
1995. As a percentage of net sales, SG&A expenses decreased to 12.8% in 1996
from 13.5% in 1995 because the change in the contract manufacturing
arrangement with a division of General Motors had minimal effect on SG&A
expenses. The transitional services agreement expense related to the
commercial and process engineering support for the relocation of the actuator
business increased SG&A expenses by $4.3 million in 1996 compared with $0.9
million in 1995. These costs were incurred from
14
November 1995 to October 1996. Product development and engineering costs
increased by $2.6 million, or 39.0%, as a result of costs associated with the
launch of power distribution systems and instrument displays for a medium duty
vehicle, the launch of the four-wheel-drive and new door lock actuator
products and development costs associated with products to be launched in
1998. Costs associated with marketing and technical resource enhancements to
provide improved customer support accounted for $1.4 million of the increase
in SG&A expenses.
Interest Expense. Interest expense for 1996 increased by $2.3 million to
$4.3 million from $2.0 million in 1995. The increase was due to additional
borrowings to finance the acquisition of the actuator products business in
November 1995 and the initial investment in Berifors AB in April 1996. In
addition, the average borrowing rate increased to 7.4% in 1996 from 7.0% in
1995.
Income Before Income Taxes. As a result of the foregoing, income before
income taxes decreased by $2.2 million, or 8.2%, to $24.6 million in 1996 from
$26.8 million in 1995.
Provision for Income Taxes. Prior to the Offering, the Company was an S
corporation for federal and, where qualified, state income tax purposes.
Accordingly, the Company recognized provisions for income taxes of $0.5
million and $0.7 million for foreign income and state franchise taxes in 1996
and 1995, respectively. Had the Company been subject to federal and state
income taxes at the corporate level, the Company would have recognized
provisions for income taxes of approximately $10.3 million in 1996.
Net Income. As a result of the foregoing, net income decreased by $2.1
million, or 8.0%, to $24.1 million in 1996 from $26.2 million in 1995. Had the
Company been subject to federal and state income taxes at the corporate level,
the Company's net income for 1996 would have been $14.3 million.
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided by operating activities for 1997 and 1996 was $63.8
million and $25.3 million, respectively. The increase in cash provided by
operating activities for 1997 as compared with 1996 was $38.5 million. The
increase in cash provided by operating activities was the result of higher net
income of $22.9 million and a decrease in working capital requirements and
other operating assets of $15.6 million.
The net cash used for investing activities in 1997 and 1996 was $27.7
million and $18.1 million, respectively. The increase in cash used from
investing activities of $9.6 million for 1997 as compared with 1996 was a
result of lower net capital expenditures of $1.8 million, a decrease in
proceeds from the sale of fixed assets of $2.5 million and nonrecurring
investments in Berifors AB of $8.8 million in April 1996 and in PST Industria
Eletronica da Amazonia Ltda. (Positron) of $17.7 million in 1997.
Net cash used for financing activities for 1997 and 1996 was $35.2 million
and $7.1 million, respectively. Cash distributions for 1997 and 1996 were
$105.0 million and $13.2 million, respectively. Proceeds from the exercise of
share options were $2.5 million for the year ended December 31, 1997. In
October 1997, the Company completed its initial public offering of 6,727,500
common shares, resulting in net proceeds of $108.7 million. Concurrent with
the initial public offering, certain officers and management of the company
purchased 510,181 common shares, resulting in net proceeds of $8.3 million.
Net proceeds from these offerings were used to pay an S corporation
distribution and to repay borrowings under the credit facility.
As a result of the foregoing, net borrowings under the credit facility
decreased $47.4 million in 1997 while net borrowings under the credit facility
increased $2.7 million in 1996.
The Company has a $125.0 million unsecured credit facility (of which $0.5
million was outstanding as of December 31, 1997), which expires on June 30,
2002. Interest on the credit facility is payable at the Company's option at
either prime rate or LIBOR plus 0.75% to 2.0%. Currently the Company is
borrowing at LIBOR plus 0.75%. The Company has entered into two interest rate
swap agreements with notional amounts of $25.0 million
15
and $20.0 million. The interest rate swap agreements exchange the variable
interest rate on the credit facility for fixed rates. The Company does not use
derivatives for speculative or profit-motivated purposes.
INFLATION
Management believes that the Company's operations have not been adversely
affected by inflation.
YEAR 2000 INITIATIVE
The Company has performed an assessment of its computer systems to determine
their compliance with the Year 2000. Based on this assessment, some of the
Company's internal information systems are in the process of being upgraded or
replaced with Year 2000-compliant systems. The Company will use internal and
external resources to replace, reprogram and test software and hardware, where
necessary, to ensure Year 2000 compliance. The Company is also communicating
with its customers, suppliers, financial institutions and others to coordinate
the Year 2000 conversion. The majority of the systems are planned to be
completed by December 1998 and the entire Year 2000 project by July 1999. The
total cost of the project is not expected to have a material effect on the
Company's financial condition or results of operations.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................. 18
Consolidated Balance Sheets as of December 31, 1997 and 1996............. 19
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995........................................................... 20
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995........................................ 21
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995..................................................... 22
Notes to Consolidated Financial Statements............................... 23
Unaudited Quarterly Financial Data....................................... 33
FINANCIAL STATEMENT SCHEDULE:
Report of Independent Public Accountants................................. 34
Schedule II--Valuation and Qualifying Accounts........................... 35
17
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, 1997 and 1996
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Stoneridge, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Cleveland, Ohio,
February 9, 1998
18
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,338 $ 357
Accounts receivable, less allowance for doubtful accounts
of $231 and $265......................................... 57,873 46,783
Inventories............................................... 38,594 30,158
Deferred income taxes..................................... 5,829 --
Prepaid expenses and other................................ 6,842 5,357
-------- --------
Total current assets.................................... 110,476 82,655
-------- --------
Property, Plant and Equipment, net.......................... 58,696 55,200
Other Assets:
Goodwill and other intangible assets, net................. 46,892 30,769
Investments and other..................................... 19,009 9,863
-------- --------
Total Assets............................................ $235,073 $178,487
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ 456 $ 3,001
Accounts payable.......................................... 31,459 21,365
Accrued expenses and other................................ 31,105 17,232
Accrued shareholder distributions......................... 2,600 1,100
-------- --------
Total current liabilities............................... 65,620 42,698
-------- --------
Long-Term Debt, net of current portion...................... 9,139 51,156
Deferred Income Taxes....................................... 3,104 --
-------- --------
Total long term liabilities............................. 12,243 51,156
-------- --------
Shareholders' Equity:
Preferred shares, without par value, 5,000,000 authorized,
none issued.............................................. -- --
Common shares, without par value, 60,000,000 authorized,
22,397,311 outstanding at December 31, 1997 and
13,964,448 outstanding at December 31, 1996, stated at... -- --
Additional paid-in capital................................ 141,506 9,195
Retained earnings......................................... 15,930 75,438
Cumulative currency translation adjustment................ (226) --
-------- --------
157,210 84,633
-------- --------
Total Liabilities and Shareholders' Equity.............. $235,073 $178,487
======== ========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
19
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR
PER SHARE DATA)
Net Sales.......................................... $449,506 $363,748 $278,043
Costs and Expenses:
Cost of goods sold............................... 341,314 288,142 211,712
Selling, general and administrative expenses..... 55,826 46,694 37,509
-------- -------- --------
Operating income............................... 52,366 28,912 28,822
Gain on sale of fixed assets..................... (1,733) -- --
Interest expense, net............................ 3,204 4,317 2,014
-------- -------- --------
Income Before Income Taxes......................... 50,895 24,595 26,808
-------- -------- --------
Provision for income taxes....................... 5,098 524 654
Income tax benefit from the reinstatement of
deferred income taxes........................... (1,167) -- --
-------- -------- --------
Net Income......................................... $ 46,964 $ 24,071 $ 26,154
======== ======== ========
Basic and Diluted Net Income per Share............. $ 2.92 $ 1.73 $ 1.88
======== ======== ========
Weighted Average Shares Outstanding................ 16,073 13,941 13,909
======== ======== ========
PRO FORMA INCOME DATA (UNAUDITED):
Income before income taxes......................... $ 50,895 $ 24,595 $ 26,808
Pro forma adjustment--provision for income taxes... 21,181 10,295 10,991
-------- -------- --------
Pro forma net income............................... $ 29,714 $ 14,300 $ 15,817
======== ======== ========
Pro forma basic and diluted net income per share... $ 1.36 $ 0.66 $ 0.73
======== ======== ========
Pro forma weighted average shares outstanding...... 21,830 21,655 21,584
======== ======== ========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
20
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CUMULATIVE
ADDITIONAL CURRENCY
NUMBER OF PAID-IN TRANSLATION RETAINED
SHARES CAPITAL AND OTHER EARNINGS TOTAL
--------- ---------- ----------- --------- ---------
(IN THOUSANDS)
BALANCE, DECEMBER 31,
1994................... 13,909 $ 7,958 $ -- $ 55,154 $ 63,112
Net income.............. -- -- -- 26,154 26,154
Distributions declared.. -- -- -- (15,546) (15,546)
------ -------- ----- --------- ---------
BALANCE, DECEMBER 31,
1995................... 13,909 7,958 -- 65,762 73,720
Net income.............. -- -- -- 24,071 24,071
Exercise of stock
options, net........... 55 225 -- -- 225
Compensation expense
from stock option
plans.................. -- 450 -- -- 450
Capital contribution.... -- 562 -- -- 562
Distributions declared.. -- -- -- (14,395) (14,395)
------ -------- ----- --------- ---------
BALANCE, DECEMBER 31,
1996................... 13,964 9,195 -- 75,438 84,633
Net income.............. -- -- -- 46,964 46,964
Compensation expense
from stock option
plans.................. -- 450 -- -- 450
Exercise of stock
options................ 438 2,513 -- -- 2,513
Issuance of shares in
public offering, net... 6,728 108,693 -- -- 108,693
Issuance of shares to
Company management..... 510 8,326 -- -- 8,326
Acquisition of Berifors
AB..................... 757 12,329 -- -- 12,329
Distributions declared.. -- -- -- (106,472) (106,472)
Currency translation
adjustments............ -- -- (226) -- (226)
------ -------- ----- --------- ---------
BALANCE, DECEMBER 31,
1997................... 22,397 $141,506 $(226) $ 15,930 $ 157,210
====== ======== ===== ========= =========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
21
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income..................................... $ 46,964 $ 24,071 $ 26,154
Adjustments to reconcile net income to net cash
from operating activities--
Depreciation and amortization................ 13,237 9,966 7,979
Deferred income taxes........................ (1,087) -- --
Gain on sale of fixed assets................. (1,733) -- --
Compensation expense for stock options....... 450 450 --
Income tax benefit from the reinstatement of
deferred income taxes....................... (1,167) -- --
Changes in operating assets and liabilities--
Accounts receivable, net................... (5,521) 2,694 (18,504)
Inventories................................ (4,036) (3,730) (4,495)
Prepaid expenses and other................. (1,564) 4,599 (4,609)
Other assets, net.......................... (466) (1,014) 23
Accounts payable........................... 6,526 (12,854) 19,560
Accrued expenses and other................. 12,228 1,089 3,262
--------- -------- --------
Net cash from operating activities....... 63,831 25,271 29,370
--------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures........................... (12,256) (14,083) (14,767)
Proceeds from sale of fixed assets............. 2,300 4,850 --
Equity investments............................. (17,722) (8,834) --
Acquisitions, net of stock issued and cash
acquired...................................... -- -- (18,800)
--------- -------- --------
Net cash from investing activities....... (27,678) (18,067) (33,567)
--------- -------- --------
FINANCING ACTIVITIES:
Cash distributions paid........................ (104,972) (13,201) (15,546)
Proceeds from long-term debt................... 789 3,512 --
Repayments of long-term debt................... (3,072) (410) (247)
Net borrowings (repayments) under credit
facility...................................... (47,449) 2,745 19,200
Stock options exercised, net................... 2,513 225 --
Proceeds from issuance of common shares, net... 117,019 -- --
--------- -------- --------
Net cash from financing activities....... (35,172) (7,129) 3,407
--------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS........ 981 75 (790)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD........................................ 357 282 1,072
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..... $ 1,338 $ 357 $ 282
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest......................... $ 3,281 $ 3,844 $ 1,892
========= ======== ========
Cash paid for income taxes..................... $ 591 $ 383 $ 922
========= ======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common shares issued for acquisition of
Berifors AB................................... $ 12,329 $ -- $ --
========= ======== ========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
22
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
1. ORGANIZATION AND NATURE OF BUSINESS
Effective January 1, 1994, Alphabet, Inc. (Alphabet) and Alphastac, Inc.
(Alphastac) were merged into Stoneridge, Inc. (Stoneridge). Stoneridge was the
surviving entity of the above merger transaction. Since Alphabet, Alphastac
and Stoneridge shared common ownership, the merger of these entities was
accounted for in a manner similar to a pooling of interest.
Stoneridge is an independent designer and manufacturer of engineered
electrical and electronic components, modules and systems for the automotive,
medium and heavy duty truck, and agricultural vehicle markets and operates in
one business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Stoneridge and its majority-owned subsidiaries (collectively, the Company).
All significant intercompany 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
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 low number of customers. In 1997, three customers
accounted for approximately 32%, 21% and 10% of net sales, while the top five
customers accounted for 76% of net sales. The same three customers accounted
for approximately 39%, 18% and 10% of the Company's 1996 net sales, and its
top five customers accounted for approximately 76% of its 1996 net sales.
Accounts receivable from the Company's five largest customers aggregated
approximately $45,210 and $38,383 at December 31, 1997, and 1996,
respectively.
A division of General Motors has notified the Company that it is
discontinuing all outsourcing of its wire harness requirements under contract
manufacturing arrangements. The Company believes that by 1999, the General
Motors division will produce in-house substantially all of its wire harness
requirements previously supplied by the Company, although no assurance can be
given that such sales by the Company will not end at an earlier date. In 1997,
the Company's net sales under this arrangement totaled approximately $95.1
million and contributed approximately $6.7 million in operating income. There
can be no assurance that the Company will be able to offset reductions in its
sales and operating profits resulting from the reduction in sales to the
General Motors division.
23
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Inventories
Inventories are valued at the lower of cost or market, determined by using
the last-in, first-out (LIFO) method of inventory accounting. Inventory cost
includes material, labor and overhead. Inventories consist of the following at
December 31:
1997 1996
------- -------
Raw materials.............................................. $24,725 $17,983
Work in progress........................................... 9,397 6,063
Finished goods............................................. 6,723 8,224
Less-LIFO reserve.......................................... (2,251) (2,112)
------- -------
Total.................................................... $38,594 $30,158
======= =======
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consists of the
following at December 31:
1997 1996
-------- -------
Land and land improvements................................. $ 3,756 $ 3,724
Buildings and improvements................................. 32,795 27,718
Machinery and equipment.................................... 37,154 32,947
Office furniture and fixtures.............................. 8,242 8,270
Tooling.................................................... 16,729 13,630
Vehicles................................................... 3,977 3,911
Leasehold improvements..................................... 1,018 1,416
-------- -------
103,671 91,616
Less Accumulated depreciation and amortization............. 44,975 36,416
-------- -------
$ 58,696 $55,200
======== =======
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, 1997, 1996 and 1995 was $11,273, $8,686 and $7,284,
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........................................... 8 years
Maintenance and repair expenditures which 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.
24
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Goodwill and Other Intangibles
The primary component of goodwill and other intangible assets, net of
accumulated amortization, in the accompanying consolidated balance sheets
represents the excess of the purchase price paid over the fair market value of
acquired assets and assumed liabilities. Goodwill is being amortized over 40
years on a straight-line basis. Amortization expense totaled approximately
$1,495, $1,180 and $695 in 1997, 1996 and 1995, respectively. Accumulated
amortization as of December 31, 1997, and 1996 was $6,969 and $5,474,
respectively. The Company regularly evaluates its accounting for goodwill.
Impairment of goodwill 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 will 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:
1997 1996
------- -------
Compensation-related obligations............................ $11,699 $ 9,402
Insurance-related obligations............................... 3,491 2,329
Income Taxes................................................ 5,812 --
Other....................................................... 10,103 5,501
------- -------
$31,105 $17,232
======= =======
Income Taxes
Prior to the initial public offering (Offering) discussed in Note 3, the
Company was an S corporation. As an S corporation, the Company's profits were
taxed directly to its shareholders for federal income tax and certain state
income tax purposes. Certain state taxes were paid directly by the Company.
Concurrent with the Offering, the Company terminated its S corporation status.
The Company is subject to federal, state and foreign income taxes.
The Company accounts for income taxes, using the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases 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.
Foreign 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 a separate component of shareholders' equity.
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 remeasured as if the functional currency were the U.S.
dollar. The remeasurement of local currencies into U.S. dollars creates
translation adjustments which are included in net income. All translation and
transaction activity was insignificant in 1997, 1996 and 1995.
25
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Revenue Recognition
The Company recognizes revenues from the sale of products at the point of
passage of title, which is generally at the time of shipment.
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
$14,114, $9,263 and $6,664 in 1997, 1996, and 1995, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options. Under APB 25,
since the exercise price of employee share options equals the market price of
the shares on the date of grant, no compensation expense is recorded. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."
Financial Instruments and Derivative Financial Instruments
Financial instruments held by the Company include cash and cash equivalents,
accounts receivable, accounts payable, credit facility, long-term debt and
interest rate swap agreements. The book value of cash and cash equivalents,
accounts receivable and payables are considered to be representative of fair
value because of the short maturity of these instruments. The fair values of
borrowings under the credit facility and long-term debt are based on rates
available to the Company for debt with comparable terms and maturities.
The interest rate swap agreements convert floating rate debt under the
Company's credit facility to fixed-rate debt. As the outstanding balance on
the Company's credit facility was significantly less than the notional amount
of the interest rate swap agreements, the carrying value of the interest rate
swap agreements was marked to market and recognized in interest expense in
1997.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Accounting Standards
The Company adopted Statement of Financial Accounting Standard No. 121 (SFAS
121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," in 1996. SFAS 121 requires long-lived assets and
certain identifiable intangible assets to be reviewed for impairment whenever
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of this Standard did not have an effect on the
Company's financial statements. Management periodically reviews the
realizability of long-lived assets of the Company in accordance with SFAS 121.
26
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
The Company adopted Statement of Financial Accounting Standard No. 128 (SFAS
128), "Earnings per Share," in 1997. SFAS 128 requires the presentation of
basic earnings per share and diluted earnings per share. Basic earnings per
share is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share is calculated by
dividing net income by all weighted average dilutive potential common shares
that were outstanding during the period.
3. OFFERING OF COMMON SHARES
On October 10, 1997, the Company completed its Offering of 6,727,500 Common
Shares, resulting in net proceeds (after deducting issuance costs) of
$108,693. Net proceeds from the Offering was used to pay an $83,000 S
corporation distribution, and the remaining proceeds were used to repay net
borrowings under the credit facility discussed in Note 6. Concurrent with the
initial public offering, certain officers and management of the Company
purchased 510,181 Common Shares (Management Reinvestment), resulting in net
proceeds of $8,326. Subsequent to December 31, 1997, a final S corporation
distribution of $2,600 was paid.
In connection with the Offering, the Company amended its Articles of
Incorporation to change the authorized share capital of the Company from
37,724 shares of Class A Common, voting, without par value, and 87,276 shares
of Class B Common, non-voting, without par value, to 60,000,000 Common Shares,
without par value and 5,000,000 shares of voting preferred shares, without par
value. The amended Articles of Incorporation provided that each Class A Common
Share and Class B Common Share automatically became 139.0856 Common Shares.
All applicable share and per share data has been adjusted accordingly in these
financial statements.
4. ACQUISITIONS
On November 1, 1995, the Company acquired an automotive product line and the
related machinery and equipment, intellectual property rights and purchase
contracts. The Company also entered into a certain transition services
agreement with the seller in conjunction with this acquisition. In connection
with the transition services agreement, the seller provided certain services
during the period November 1995 through October 1996 for cash consideration of
$5,200. The Company recorded $4,254 and $946 of expense in 1996 and 1995,
respectively, relative to the transition services agreement. The acquisition
was accounted for as a purchase, and the excess of the cost over the fair
value of the assets acquired, totaling approximately $14,000, was reflected as
goodwill in the accompanying consolidated balance sheets. Total consideration
paid by the Company with respect to this acquisition including payments under
the transition services agreement was approximately $24,000.
In April 1996, the Company purchased 45% of the outstanding common stock of
Berifors AB (Berifors), a Sweden-based manufacturer of electronic
instrumentation and information displays for the European truck and commercial
vehicle markets, for approximately $8,834. The investment was accounted for
under the equity method of accounting. The excess of the amount paid over the
book value of the assets acquired, totaling $7,200, is being amortized over 40
years on a straight-line basis. On October 10, 1997, the Company acquired the
remaining 55% of Berifors, in exchange for 757,063 Common Shares, of which
52,500 Common Shares are held in escrow pending final closing in February
1998. The transaction was accounted for as a purchase. The excess of the
purchase price over the book value of assets acquired, totaling $10,439, is
being amortized over 40 years on a straight-line basis. The results of
operations of Berifors are included in the accompanying financial statements
from the date of acquisition.
27
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
5. INVESTMENTS
In October 1997, the Company purchased 50% of the outstanding common stock
of PST Industria Eletronica da Amazonia Ltda. (Positron), a Brazilian
electronic components business which specializes in electronic vehicle
security devices. The investment is accounted for under the equity method of
accounting. Total cash consideration paid by the Company with respect to this
investment was $17,722 including fees and expenses. The allocation of purchase
price resulted in intangibles, primarily non-compete covenants and goodwill of
$2,000 and $12,622, respectively, which are being amortized over periods of
two to 40 years. Amortization expense was $469 in 1997. The acquisition was
financed through borrowings under the credit facility discussed in Note 6. In
1998, the Company issued a $5,000 note to Positron. The proceeds of the note
were used for the repayment of existing debt. The note is secured by certain
assets of Positron.
In August 1997, the Company 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 expects to pay approximately $2,400
for a 60% interest in a Brazilian joint venture and $1,100 for a 40% interest
in a European joint venture. As of December 31, 1997, the Company incurred
costs of approximately $250 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. In addition, the joint ventures will pursue
sales and marketing efforts for other products and services of joint venture
partners to the extent practicable. The Company will finance its investments
in the joint ventures through borrowings under the credit facility discussed
in Note 6.
6. LONG-TERM DEBT
The Company has a $125,000 unsecured credit facility with a bank group. The
credit facility expires on June 30, 2002, and requires a commitment fee of
1/10% to 1/4% on the unused balance. Interest is payable quarterly at the
Company's option at either (i) the prime rate or (ii) LIBOR plus a margin of
0.75% to 2.0%, depending upon the Company's fixed charge coverage ratio, as
defined. Credit facility borrowings were supported by individual notes with
maturities of three months or less.
The Company has entered into a $25,000 interest rate swap agreement with a
member of the bank group whereby its contractual interest rate was swapped
through February 1999 for a fixed rate of 5.795% plus a margin of 0.75% to
2.0%, depending upon the Company's fixed charge coverage ratio, as defined.
The notional amount under the swap agreement remains at $25,000 through
maturity. Additionally, the Company has entered into a separate $20,000
interest rate swap agreement with a member of the bank group whereby its
contractual interest rate was swapped through August 1999 for a fixed rate of
6.28% plus a margin of 0.75% to 2.0%, depending upon the Company's fixed
charge coverage ratio, as defined, provided the LIBOR rate is less than 7.50%.
This swap agreement is ineffective when the LIBOR rate is equal to or greater
than 7.50%. The notional amount under the swap agreement remains at $20,000
through maturity. The Company is exposed to credit loss under the swap
agreements in the event of nonperformance by the bank. As of December 31,
1997, the Company would have paid approximately $157 to the bank had it
elected to terminate these interest rate swap agreements. The Company has
accrued these termination costs in these financial statements, as the
outstanding credit facility borrowings were less than the combined notional
amount of the swap agreements.
The weighted average interest rate in effect for the years ended December
31, 1997, 1996 and 1995 was approximately 7.1%, 7.4% and 7.0%, respectively,
including the effects of the interest rate swap agreements.
28
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Long-term debt consists of the following at December 31:
1997 1996
------ -------
Borrowings under credit facility............................ $ 497 $47,945
Borrowings denominated in foreign currencies paid in 1998
with proceeds from credit facility......................... 5,118 --
Note payable to financing company, repaid in full in
February 1997 -- 2,580
Note payable to financing company, collateralized by
specific property, plant and equipment, due in monthly
installments of $37, including variable rate interest based
annually on the yield of two-year Treasury securities,
constant maturity of United States Government plus 2.15%
with a balloon payment of $1,087, maturing in April 2006... 3,227 3,415
Other....................................................... 753 217
------ -------
9,595 54,157
Less: Current maturities.................................... 456 3,001
------ -------
$9,139 $51,156
====== =======
The credit facility contains various covenants which require, among other
things, the maintenance of several financial ratios and minimum net worth
levels while restricting capital expenditures and dividends. The Company was
in compliance with these covenants at December 31, 1997.
Future maturities of long-term debt as of December 31, 1997, are as follows:
1998.................................................................. $ 456
1999.................................................................. 390
2000.................................................................. 407
2001.................................................................. 355
2002.................................................................. 5,943
Thereafter............................................................ 2,044
7. INCOME TAXES
The provision for income tax included in the accompanying financial
statements represents federal, state, and foreign income taxes for the period
October 9, 1997, to December 31, 1997, and state income taxes for certain
states for 1995, 1996 and the period January 1, 1997, to October 8, 1997. The
provision for income taxes consists of the following for the years ended
December 31:
1997 1996 1995
------- ---- ----
Current:
Federal................................................. $ 4,441 $-- $--
State and foreign....................................... 1,744 524 654
------- ---- ----
6,185 524 654
Deferred:
Federal................................................. (983) -- --
State and foreign....................................... (104) -- --
------- ---- ----
(1,087) -- --
------- ---- ----
Total................................................. $ 5,098 $524 $654
======= ==== ====
29
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
A reconciliation of the Company's effective income tax rate to the statutory
federal tax rate has been omitted, as presentation of such information is not
meaningful.
As a result of the Company's conversion to C corporation status on October
9, 1997, current deferred income tax assets and noncurrent deferred income tax
liabilities of approximately $4,073 and $2,906, respectively, were recorded
offsetting a cumulative effect benefit of $1,167.
Deferred tax assets and liabilities consist of the following at December 31:
1997
------
Deferred tax assets:
Inventories........................................................ $1,103
Employee Benefits.................................................. 2,371
Insurance.......................................................... 1,504
Other.............................................................. 2,396
------
Gross deferred tax assets............................................ 7,374
Deferred tax liabilities
Depreciation and amortization...................................... 2,899
Accounts receivable................................................ 412
Other.............................................................. 1,338
------
Gross deferred tax liabilities....................................... 4,649
------
Net deferred tax asset............................................... $2,725
======
8. OPERATING LEASE COMMITMENTS
The Company leases equipment, vehicles and a building 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
ranging from three to 20 years with additional renewal options. The Company is
generally responsible for repairs and maintenance, taxes and insurance.
For the years ended December 31, 1997, 1996 and 1995, lease expense totaled
$2,313, $2,255 and $1,683, respectively, under these agreements.
Future minimum operating lease commitments at December 31, 1997, are as
follows:
THIRD RELATED
PARTY PARTY
------ -------
1998.......................................................... $1,910 $577
1999.......................................................... 1,263 584
2000.......................................................... 942 590
2001.......................................................... 354 486
2002.......................................................... 2 382
Thereafter.................................................... -- 501
30
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
9. SHARE OPTION PLANS
In March 1995, the Company granted 90,545 options to key executives to
purchase Common Shares at $4.82 per share. The options were vested upon grant,
and all options were exercised in June 1996.
In June 1996, the Company granted an additional 438,119 options to directors
and key executives to purchase Common Shares at $5.74 per share. The options
were exercised prior to the Offering. The Company recorded compensation
expense of $450 in 1997 and 1996, in the accompanying consolidated financial
statements relative to these options.
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. Under the Incentive Plan, the Company granted options to
purchase 498,000 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 will vest two years after the date of grant.
Information relating to the Company's outstanding options is as follows at
December 31, 1997:
WEIGHTED
AVERAGE
TOTAL OPTION
OPTIONS PRICE
------- --------
Options granted............................................. 498,000 $17.48
Options exercisable......................................... -- --
The following pro forma information regarding net income and earnings 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:
Risk-free interest rate........................................... 5.97-6.16%
Expected dividend yield........................................... 0.0%
Expected lives.................................................... 7.5 years
Expected volatility............................................... 33.19%
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which 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 were as follows:
1997
-------
Net income--as reported............................................. $46,964
Net income--pro forma............................................... $46,485
Basic and diluted earnings per share--as reported................... $ 2.92
Basic and diluted earnings per share--pro forma..................... $ 2.89
31
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan covering
substantially all of the employees. Company contributions are discretionary;
however, a portion of these contributions are based upon a percentage of
employee compensation, as defined in the plan. The Company's policy is to fund
all profit sharing costs accrued. There are no unfunded prior service costs.
For the years ended December 31, 1997, 1996 and 1995, contributions amounted
to $1,828, $1,356 and $1,538, respectively.
Additionally, the Company has a defined contribution profit sharing
retirement plan, which covers certain other employees. The plan includes the
provisions of a Section 401(k) plan and allows employees to contribute up to
14% of their eligible compensation. Company contributions are determined by
the Board of Directors; however the Company must match 50% of the
participating employees' contributions up to a maximum of 3% of their eligible
compensation. For the years ended December 31, 1997, 1996 and 1995, the
Company's contributions amounted to $1,446, $1,125 and $950, respectively.
The Company does not provide any other material retirement, postretirement
or postemployment benefits to its employees.
11. RELATED PARTY TRANSACTIONS
In 1996, the Company sold a building to an affiliated entity for $2,200. The
excess of the sales price over the carrying value of the building was $562 and
was recorded as a capital contribution. During 1996, prior to the sale of this
building, the Company received approximately $235 in lease payments and
recognized related depreciation and interest expense totaling approximately
$108. In 1995, the Company recognized lease revenue of $278 and depreciation
and interest expense of $207 and $194, respectively.
The Company provided management services to a related company in the amount
of $300 annually and also paid the salary of a certain key employee of the
related company, amounting to $76, $180 and $182 in 1997, 1996 and 1995,
respectively. Beginning on September 1, 1997, the salary payments were paid by
the related company.
12. 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
payables 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.
Derivative financial instruments as of December 31, 1997, and 1996, held for
purposes other than trading, include two swap agreements which mature during
1999. The notional amounts and fair values of the swap agreements are as
follows at December 31:
1997 1996
------- -------
Notional Amount............................................ $45,000 $45,000
Fair Value................................................. (157) (257)
32
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
13. UNAUDITED PRO FORMA INFORMATION
The unaudited pro forma net income for the years ended December 31, 1997,
1996 and 1995, assumes that the Company was subject to income taxes as a C
corporation.
Unaudited pro forma net income per share has been calculated by dividing pro
forma net income by the weighted average number of Common Shares outstanding,
the number of Common Shares issued in connection with the Offering discussed
in Note 3 (6,727,500), the number of Common Shares issued in connection with
the exercise of share options (438,119), and the number of Common Shares to be
issued in connection with the Management Reinvestment discussed in Note 3
(510,181).
14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is involved in various legal
proceedings, workers' compensation and product liability disputes. The Company
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.
15. UNAUDITED QUARTERLY FINANCIAL DATA
The following is a condensed summary of actual quarterly results of
operations for 1997 and 1996:
QUARTER ENDED
---------------------------
DEC. SEP. JUNE MAR.
31 30 30 31
------ ------ ------ ------
(IN MILLIONS, EXCEPT PER
SHARE DATA)
1997
Net sales....................................... $126.8 $103.9 $110.8 $108.0
Gross profit.................................... 29.0 26.0 27.3 25.9
Operating income................................ 12.1 12.3 14.3 13.7
Net income...................................... $ 8.4 $ 11.1 $ 13.1 $ 14.4
====== ====== ====== ======
Basic and diluted earnings per share............ $ 0.52 $ 0.69 $ 0.82 $ 0.89
====== ====== ====== ======
1996
Net sales....................................... $ 96.1 $ 89.8 $ 94.4 $ 83.5
Gross profit profit............................. 20.2 18.1 18.8 18.6
Operating income................................ 9.3 6.3 6.7 6.6
Net income...................................... $ 7.8 $ 5.1 $ 5.8 $ 5.4
====== ====== ====== ======
Basic and diluted earnings per share............ $ 0.55 $ 0.37 $ 0.42 $ 0.39
====== ====== ====== ======
See Note 3 regarding the Company's Offering of Common Shares in October
1997.
Results reflect the partial acquisition of Berifors AB in April 1996 and
full consolidation of Berifors AB in October 1997.
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Stoneridge, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Stoneridge, Inc. and Subsidiaries
included in this Form 10-K, and have issued our report thereon dated February
9, 1998. Our audits were made for the purpose of forming an opinion on those
financial statements taken as a whole. The schedule on page 35 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,
February 9, 1998
34
STONERIDGE, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING TO COSTS AND TO OTHER AT END OF
OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
---------- ------------ -------- ---------- ---------
(IN THOUSANDS)
Allowance for doubtful
accounts:
Year ended December
31, 1995............. 173 325 -- 45 453
Year ended December
31, 1996............. 453 43 -- 231 265
Year ended December
31, 1997............. 265 20 -- 54 231
35
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.
36
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 4, 1998, 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 4, 1998.
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 4, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the
information under the heading "Transactions with Management" contained in the
Company's Proxy Statement in connection with its Annual Meeting of
Shareholders to be held on May 4, 1998.
37
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.
PAGE IN
FORM 10-K
---------
1. Consolidated Financial Statements:
Report of Independent Accountants............................. 18
Consolidated Balance Sheet as of December 31, 1997 and 1996... 19
Consolidated Statements of Income for the years ended December
31, 1997, 1996 and 1995...................................... 20
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996, and 1995...................... 21
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................. 22
Note to Consolidated Financial Statements..................... 23
Unaudited Quarterly Financial information..................... 33
2. Financial Statement Schedules:
Report of Independent Accountants............................. 34
Schedule II--Valuation and Qualifying Accounts................ 35
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(b) The following reports on Form 8-K were filed during the quarter ended
December 31, 1997.
None.
(c) The exhibits listed on the Index to Exhibits on page 39 are filed with
this Form 10-K or incorporated by reference as set forth below.
(d) Additional Financial Statement Schedules.
None.
38
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
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, filed herewith.
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 dated October 1, 1993 between D.M. Draime and Alphabet, Inc.
(the Company's predecessor) with respect to the Company's Greenwood,
South Carolina facility (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (No. 333-33285)).
10.3 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 Registration Statement on Form S-1 (No. 333-33285)).
10.4 Lease Agreement between Hunters Square, 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
Registration Statement on Form S-1 (No. 333-33285)).
10.5 Contract Manufacturing Agreement dated January 3, 1993 with a division
of General Motors (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (No. 333-33285)).
10.6 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)).
10.7 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)).
10.8 Credit Agreement, among Stoneridge, Inc. and PNC Bank, National
Association, Star Bank, National Association and National City Bank,
and National City Bank, Agent, dated September 15, 1997 (incorporated
by reference to Exhibit 10.8 to the Company's Registration Statement
on Form S-1 (No. 333-33285)).
10.9 Agreement with DAV (Labinal) dated June 9, 1994 (incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (No. 333-33285)).
10.10 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)).
10.11 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).
10.12 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).
27.1 Financial Data Schedule for the year ended December 31, 1997, filed
herewith.
39
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 27, 1998 /s/ Kevin P. Bagby
_____________________________________
KEVIN P. BAGBY
Treasurer 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 27, 1998 /s/ D.M. Draime
_____________________________________
D.M. DRAIME
Chairman of the Board of Directors
Date: March 27, 1998 /s/ Cloyd J. Abruzzo
_____________________________________
CLOYD J. ABRUZZO
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 27, 1998 /s/ Avery S. Cohen
_____________________________________
AVERY S. COHEN
Secretary and Director
Date: March 27, 1998 /s/ Richard E. Cheney
_____________________________________
RICHARD E. CHENEY
Director
Date: March 27, 1998 /s/ Sheldon J. Epstein
_____________________________________
SHELDON J. EPSTEIN
Director
Date: March 27, 1998 /s/ Earl L. Linehan
_____________________________________
EARL L. LINEHAN
Director
40