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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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   o

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). x

The aggregate market value of the Common Shares held by non-affiliates of the registrant based on the closing price as of June 28, 2002 was $249.8 million.

The number of Common Shares, without par value, outstanding as of March 21, 2003 was 22,401,311.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 2003, into Part III, Items 10, 11, 12 and 13.

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INDEX

STONERIDGE, INC. – FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002

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Forward-Looking Statements

     Portions of this report may contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, the Company’s (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business.  Forward-looking statements may be identified by the words “will,” “may,” “designed to,” “believes,” “plans,” “expects,” “continue,” and similar expressions.  The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:

PART I.

ITEM 1.     BUSINESS

The Company

          Founded in 1965, the Company is a leading, technology driven, independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.  Our custom-engineered products are predominantly sold on a sole-source basis and consist of application-specific control devices, sensors, vehicle management electronics and power and signal distribution systems.  These products comprise the elements of every vehicle’s electrical system, and individually interface with a vehicle’s mechanical and electrical systems to (i) activate equipment and accessories, (ii) display and monitor vehicle performance and (iii) control and distribute electrical power and signals.  Our products improve the performance, safety, convenience and environmental monitoring capabilities of our customers’ vehicles.  As such, the growth in many of the product areas in which we compete is driven by the increasing consumer desire for safety, security and convenience coupled with the need for original equipment manufacturers (“OEM”) to meet safety requirements in addition to the general trend of increased electrical and electronic content per vehicle.  Our technology and our partnership-oriented approach to product design and development enables us to develop next-generation products and be a leader in the transition from mechanical-based components and systems to electrical and electronic components, modules and systems.

Products

          The Company conducts its business in two operating segments: Vehicle Management & Power Distribution and Control Devices. The core products of the Vehicle Management & Power Distribution operating segment include vehicle electrical power and distribution systems and electronic instrumentation and information display products. The core products of the Control Devices operating segment include electronic and electrical switch products, actuator products and sensor products.   The Company designs and manufactures the following vehicle parts:

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Vehicle Management & Power Distribution. The Vehicle Management & Power Distribution operating segment produces electronic instrument clusters, electronic control units, driver information systems, and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution.  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.  In addition, power distribution systems regulate, coordinate and direct the operation of the entire electrical system within a vehicle compartment.  These products use state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.

Control Devices. The Control Devices operating segment produces products that monitor, measure or activate a specific function within the vehicle.  Product lines included within the Control Devices segment are sensors, switches, actuators as well as other electronic products.  Sensor products are employed in most major vehicle systems, including the emissions, safety, powertrain, braking, climate control, steering and suspension systems.  Switches transmit a signal that activates specific functions.  Hidden switches are not typically seen by vehicle passengers, but are used to activate or deactivate selected functions.  Customer activated switches are used by a vehicle’s operator or passengers to manually activate headlights, rear defrosters and other accessories.  In addition, the Company designs and manufactures electromechanical actuator products that enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions.  The Company sells these products principally to the automotive market.

See Note 11 to the Company’s consolidated financial statements for more information on the Company’s operating segments.

Production Materials

          The principal production materials used in both operating segments of the Company’s manufacturing processes include: wire, cable, plastics, printed circuit boards, metal stamping and certain electrical components such as microprocessors, memories, resistors, capacitors, fuses, relays and connectors.  The Company typically purchases such materials pursuant 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

          Both of the Company’s operating segments maintain and have pending various U.S. and foreign patents and other rights to intellectual property relating to its business, which the Company 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 material infringement litigation, nor are there any material infringement claims pending by or against the Company.

Industry Cyclicality and Seasonality

          The markets for both operating segments of 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, agricultural and off-highway 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, agricultural and off-highway vehicle production of the Company’s principal customers could adversely impact the Company. Approximately 57%, 58% and 62% of the Company’s net sales in 2002, 2001 and 2000, respectively, were made to the automotive market. Approximately 43%, 42% and 38% of the Company’s net sales in 2002, 2001 and 2000, respectively, were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.

          The Company typically experiences decreased sales during the third calendar quarter of each year due to the impact of scheduled OEM plant shutdowns in July for vacations and new model changeovers. The fourth quarter is similarly impacted by plant shutdowns for the holidays.

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Reliance on Major Customers

          The Company is dependent on a small number of principal customers for a significant percentage of its sales. The loss of any significant portion of its sales to these customers or the loss of a significant customer would have a material adverse impact on the financial condition and results of operations of the Company.   The Company supplies numerous different parts to each of its principal customers.  The contracts the Company has entered into with many of its customers provide for supplying the customers’ requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of the Company’s major customers could have a material adverse impact on the Company. The Company may also enter into contracts to supply parts, the introduction of which may then be delayed or not used at all.  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 Company’s major customers, as a percentage of net sales, for the years ended December 31, 2002, 2001 and 2000:

Backlog

          The majority of the Company’s products are not on a backlog status. They are produced from readily available materials and have a relatively short manufacturing cycle. Each production facility 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 in both operating segments are highly competitive. The Company competes on the basis of quality, service, price, timely delivery and technological innovation. The Company competes for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM usually will continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns. 

          Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location.  The Company competes successfully based on its strong customer relations and a fast and flexible organization that develops technically effective solutions at or below target price.

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Product Development

          Research and development within the Company is largely product development oriented and consists primarily of applying known technologies to customer generated problems and situations.  The Company works closely with its customers to creatively solve problems using innovative technologies.  The vast majority of the Company’s development expenses are related to customer sponsored programs where the Company is involved in designing custom-engineered solutions for specific applications or for next generation technology.  To further the Company’s vehicle platform penetration, it has also developed collaborative relationships with the design and engineering departments of its key customers.  These collaborative efforts have resulted in the development of new and complimentary products and the enhancement of existing products.

          Development work at the Company is largely performed on a decentralized basis.  The Company has engineering and product development departments located at a majority of its manufacturing facilities.  To ensure knowledge sharing among decentralized development efforts, the Company has instituted a number of mechanisms and practices whereby innovation and best practices can be shared.  The decentralized product development operations are complimented by larger technology groups in Stockholm, Sweden and Canton, Massachusetts.

          The Company uses efficient and quality oriented work processes to address its customers’ high standards.  The Company’s product development technical resources include a full compliment of computer-aided design and engineering (“CAD/CAE”) software systems, including (i) virtual three-dimensional modeling, (ii) functional simulation and analyses capabilities and (iii) data links for rapid prototyping.  These CAD/CAE systems enable the Company to expedite product design and the manufacturing process to shorten the development time and ultimately time to market.

          The Company is further strengthening its electrical engineering competencies through investment in equipment such as (i) automotive Electro-Magnetic Compliance test chambers, (ii) programmable automotive and commercial vehicle transient generators, (iii) circuit simulators and (iv) other environmental test equipment.  Additional investment in product machining equipment has allowed the Company to fabricate new product samples in a fraction of the time required historically.  The Company’s product development and validation efforts are supported by full service, on-site test labs at most manufacturing facilities, thus enabling its cross-functional engineering teams to optimize the product, process and system performance before tooling initiation.

          The Company has invested, and will continue to invest in technology to develop new products for its customers.  Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses, as incurred.  Such costs amounted to approximately $25.3 million, $27.0 million and $26.8 million for 2002, 2001 and 2000, respectively, or 4.0%, 4.6% and 4.0% of net sales for these periods.

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, 2002, the Company had approximately 5,500 employees, approximately 1,600 of whom were salaried and the balance of whom were paid on an hourly basis. Except for certain employees located in Chihuahua, Mexico, Orebro and Stockholm, Sweden, and Dundee, Scotland, the Company’s employees are not represented by a union. The Company believes that its relations with its employees are good.

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Executive Officers of the Registrant

          The executive officers of the Company are as follows:

          D.M. Draime, Chairman of the Board of Directors and Assistant Secretary.  Mr. Draime, founder of the Company, has served as Chairman of the Board of Directors of the Company and its predecessors since 1965.

          Cloyd J. Abruzzo, President, Chief Executive Officer, Assistant Treasurer and Director.  Mr. Abruzzo has served as President and Chief Executive Officer of the Company or its predecessor since June 1993 and as a Director of the Company since 1990.  From 1984 to June 1993, Mr. Abruzzo was the Vice President and Chief Financial Officer of the Company or its predecessor.  Mr. Abruzzo serves as a Director of Second National Bank of Warren.

          Kevin P. Bagby, Vice President, Chief Financial Officer and Treasurer.  Mr. Bagby has served as Vice President of the Company, Chief Financial Officer and Treasurer since joining the Company in July 1995. 

          Sten Forseke, Vice President of the Company and President of Stoneridge Electronics (formerly Berifors AB).   Mr. Forseke, a co-founder of Berifors AB, has served as Vice President of the Company since the acquisition of Berifors AB in 1997, Managing Director of Berifors AB from 1988 to 2002 and is currently serving as President of Stoneridge Electronics (formerly Berifors AB).

          Gerald V. Pisani, Vice President of the Company and President of Stoneridge Engineered Products Group.  Mr. Pisani has served as Vice President of the Company since 1989 and President of the Stoneridge Engineered Products Group since 1985.

          Thomas A. Beaver, Vice President of Sales and Marketing.  Mr. Beaver has served as Vice President of Sales and Systems Engineering of the Stoneridge Engineered Products Group from February 1995 to December 1999 and Vice President of Sales and Marketing since January 2000.

          Michael J. Bagby, Vice President and General Manager of Alphabet Group.  Mr. Bagby has served as Vice President of the Alphabet Group since March 1990 and Vice President and General Manager of the Alphabet Group since January 2000.

          Avery S. Cohen, Secretary and Director.  Mr. Cohen has served as Secretary and a Director of the Company since 1988.  Mr. Cohen is a partner in Baker & Hostetler LLP, a law firm which has served as general outside counsel for the Company since 1993 and is expected to continue to do so in the future.

Available Information

          The Company makes available, free of charge through its web site (www.stoneridge.com), its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC.

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ITEM 2.     PROPERTIES

          The Company currently owns or leases 16 manufacturing facilities, which together contain approximately 1.6 million square feet of manufacturing space. The following table provides information regarding the Company’s facilities:

ITEM 3.     LEGAL PROCEEDINGS

          There is no pending litigation which management believes will have a material adverse impact upon the Company. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products causes personal injury or death to users of the Company’s products and there can be no assurance that the Company will not experience any material product liability losses in the future.  In addition, if any of the Company’s products proves to be defective, the Company may be required to participate in a government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such liability claims.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          No matters were submitted to a vote of security holders during the fourth quarter of 2002.

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PART II.

ITEM 5.      MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

          On March 21, 2003, the Company had 22,401,311 Common Shares without par value, issued and outstanding, which were owned by 130 shareholders of record, including Common Shares held in “streetname” by nominees who are record holders and approximately 1,200 beneficial owners.

          The Company has not historically paid or declared dividends, which are restricted under both the senior notes and the credit agreement, on its Common Shares.  The Company may only pay cash dividends in the future if immediately prior to and immediately after the payment is made no event of default has occurred, the Company remains in compliance with certain leverage ratio requirements, and the amount paid does not exceed 5% of the Company’s excess cash flow for the preceding fiscal year.  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 Company’s Common Shares for each quarter during 2002 and 2001 are as follows:

          The Company’s Common Shares are traded on the NYSE under the symbol SRI.

          In October 1997, the Company adopted a Long-Term Incentive Plan for its employees and in May 2002, the Company adopted a Director Share Option Plan for its directors.  Both plans were approved by the Company’s shareholders.  Equity compensation plan information, as of December 31, 2002, is as follows:

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ITEM 6.     SELECTED FINANCIAL DATA

          The following table sets forth selected historical financial data for the Company and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein.  The selected historical data was derived from the Company’s consolidated financial statements.  

(A)   Gross profit represents net sales less cost of goods sold.

(B)   In accordance with the transition provisions of SFAS 142, the Company determined through a two-step impairment assessment that the carrying value of the Company’s goodwill exceeded its fair value. Therefore, the Company recorded, effective January 1, 2002, an after-tax impairment charge of $69,834 as a cumulative effect of accounting change.  See Note 2 to the Company’s consolidated financial statements for more information.

During the second quarter of 2002, the Company recognized a net of tax extraordinary loss of $3,607, as the result of an early extinguishment of debt.  See Note 4 to the Company’s consolidated financial statements for more information.

(C)   These amounts represent depreciation and amortization on fixed and intangible assets.

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ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. 

          On an ongoing basis, the Company evaluates estimates and assumptions used in its financial statements. The Company bases its estimates used on historical experience and on various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from these estimates.

          The Company believes the following are its “critical accounting policies” – those most important to the financial presentation and those that require the most difficult, subjective or complex judgments.

          Revenue Recognition and Sales Commitments – The Company recognizes revenues from the sale of products, net of actual and estimated returns of products sold based on authorized returns and historical trends in sales returns, at the point of passage of title, which is generally at the time of shipment.  The Company often enters into agreements with its customers at the beginning of a given vehicle’s life.  Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle.  These agreements generally may be terminated by our customers at any time, but usually are not.

          Bad Debts – The Company evaluates the collectibility of accounts receivable based on a combination of factors.  In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected.  Additionally, the Company reviews historical trends for collectibility in determining an estimate for its allowance for doubtful accounts.  If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount.

          Inventory – Inventories are valued at the lower of cost or market.  Cost is determined by the last-in, first-out (LIFO) method for U.S. inventories and by the first-in, first-out (FIFO) method for non-U.S. inventories.  Where appropriate, standard cost systems are utilized for purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual costs.  Estimates of the lower of cost or market value of inventory are determined based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.

          Goodwill – In connection with the adoption of SFAS 142, “Goodwill and Other Intangible Assets,” the Company discontinued its amortization of goodwill on January 1, 2002.  In lieu of amortization, the new standard requires that goodwill be tested for impairment as of the date of adoption, at least annually thereafter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  See Note 2 to the Company’s consolidated financial statements for more information on the Company’s application of this new accounting standard.

Results of Operations

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

          Net Sales.  Net sales for the year ended December 31, 2002 increased $52.0 million, or 8.9%, to $636.5 million from $584.5 million in 2001.  Sales revenues in 2002 were favorably impacted by increased North American light and commercial vehicle builds as well as new product launches.

          Sales for the year ended December 31, 2002 for North America increased by $36.8 million to $534.8 million from $498.0 million in 2001.North American sales accounted for 84.0% of total sales in 2002 compared with 85.2% in 2001.

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Sales in 2002 outside North America increased by $15.2 million to $101.7 million from $86.5 million in 2001.  Sales outside North America accounted for 16.0% of total sales in 2002 compared with 14.8% in 2001.

          Net sales for the Vehicle Management & Power Distribution operating segment were $273.8 million for the year ended December 31, 2002 as compared to $245.9 million for the corresponding period in 2001.  Increased production volumes on existing programs and increased content per vehicle accounted for the change in sales.  Net sales for the Control Devices operating segment were $376.9 million for the year ended December 31, 2002 as compared to $349.5 million for the corresponding period in 2001, reflecting higher production volumes in the Company’s end markets and an incremental increase in revenue due to new product launches.

          Cost of Goods Sold.  Cost of goods sold for the year ended December 31, 2002 increased by $21.8 million, or 4.9%, to $471.2 million from $449.4 million in 2001.  As a percentage of sales, cost of goods sold decreased to 74.0% in 2002 from 76.9% in 2001. The improvement as a percent of sales was primarily attributable to increased production volumes and improved operating leverage as a result of cost reduction initiatives, including Six Sigma, lean manufacturing and improved productivity, partially offset by pricing pressures.

          Selling, General and Administrative Expenses.  Selling, general and administrative (SG&A) expenses, including product development, decreased by $7.5 million to $92.1 million for the year ended December 31, 2002 from $99.6 million in 2001.  As a percentage of sales, SG&A expenses decreased to 14.5% in 2002 from 17.0% in 2001. The decrease was primarily attributable to the Company’s adoption of the non-amortization of goodwill provisions of SFAS 142 on January 1, 2002.  Goodwill amortization expense for the year ended December 31, 2001 was $9.8 million.  Excluding the impact of goodwill amortization expense, SG&A increased $2.3 million, or 2.5%, in 2002 compared to the corresponding period in 2001.  As a percentage of sales, SG&A expenses declined to 14.5% from 15.4%, excluding the impact of goodwill amortization expense.

          Interest Expense, net. Net interest expense for the year ended December 31, 2002 increased by $3.3 million to $34.6 million from $31.3 million for the same period in 2001.  The increase was primarily attributable to the termination of existing interest rate swap agreements as a result of the Company’s debt refinancing, offset by lower interest rates.  These swaps, which are being amortized to interest expense, will be fully amortized by the end of 2003.  Average outstanding indebtedness was $286.1 million and $317.9 million for the years ended December 31, 2002 and 2001, respectively. 

          Other Expense / Income, net.  Other expense, which primarily consisted of equity losses of unconsolidated subsidiaries, was $0.5 million and $0.3 million for the years ended December 31, 2002 and 2001, respectively. 

          Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of Accounting Change. As a result of the foregoing, income before income taxes, extraordinary loss and cumulative effect of accounting change increased by $34.2 million for the year ended December 31, 2002 to $38.1 million from $3.9 million in 2001.

          Provision for Income Taxes.  The Company recognized provisions for income taxes of $13.4 million and $1.0 million for federal, state and foreign income taxes for the years ended December 31, 2002 and 2001, respectively.  The increase in the effective tax rate to 35.2% in 2002 from 24.4% in 2001 was a result of non-recurring tax refunds in 2001, coupled with the fact that tax initiatives resulted in less of a relative benefit on higher 2002 operating income, compared to lower operating income in 2001.  The effective tax rate is expected to increase in future years pending certain proposed tax legislation.

          Income Before Extraordinary Loss and Cumulative Effect of Accounting Change. As a result of the foregoing, income before extraordinary loss and cumulative effect of accounting change increased by $21.7 million to $24.7 million for the year ended December 31, 2002 from $2.9 million in 2001. 

          Extraordinary Loss, net of tax.  The Company recognized a net of tax loss of $3.6 million during 2002 in connection with the early extinguishment of debt related to the Company’s debt refinancing.  See Note 4 to the Company’s consolidated financial statements for more information on the Company’s debt refinancing.

          Cumulative Effect of Accounting Change, net of tax.  In accordance with the transition provisions of SFAS 142, the Company completed the two-step transitional goodwill impairment analysis in 2002.  As a result, the Company recorded as a cumulative effect of accounting change, a non-cash, after-tax charge of $69.8 million, to write off a portion of the carrying value of goodwill.  The Company performed an annual impairment test on goodwill and no additional impairment was

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recognized.  See Note 2 to the Company’s consolidated financial statements for more information on the Company’s application of this new accounting standard.

          Net (Loss) Income. As a result of the foregoing, the Company recognized a net loss of $48.8 million for the year ended December 31, 2002, and net income of $2.9 million for the corresponding period in 2001.

          Net loss for the Vehicle Management & Power Distribution operating segment was $29.5 million for the year ended December 31, 2002 as compared to $11.9 million for the corresponding period in 2001.  Net loss for the Control Devices operating segment was $19.3 million for the year ended December 31, 2002 as compared to net income of $14.8 million for the corresponding period in 2001.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

          Net Sales.  Net sales for the year ended December 31, 2001 decreased $82.7 million, or 12.4%, to $584.5 million from $667.2 million in 2000.  Sales revenues in 2001 were unfavorably impacted by the prolonged weakness in production in the automotive and commercial vehicle markets, combined with new product launch delays and slower production ramp-ups in the next-generation vehicle, seat track position switch and fuel cutoff switch.

          Sales for the year ended December 31, 2001 for North America decreased by $81.9 million to $498.0 million from $579.9 million in 2000.  North American sales accounted for 85.2% of total sales in 2001 compared with 86.9% in 2000.  Sales in 2001 outside North America decreased by $0.8 million to $86.5 million from $87.3 million in 2000.  Sales outside North America accounted for 14.8% of total sales in 2001 compared with 13.1% in 2000. 

          Net sales for the Vehicle Management & Power Distribution operating segment were $245.9 million for the year ended December 31, 2001 as compared to $263.0 million for the corresponding period in 2000. The prolonged weakness in production in the automotive and commercial vehicle markets, combined with new product launch delays and slower production ramp-ups in the next-generation vehicle accounted for the decrease.  Net sales for the Control Devices operating segment were $349.5 million for the year ended December 31, 2001 as compared to $413.8 million for the corresponding period in 2000. The prolonged weakness in production in the automotive and commercial vehicle markets, combined with new product launch delays and slower production ramp-ups in the seat track position switch and fuel cutoff switch accounted for the decrease.

          Cost of Goods Sold.  Cost of goods sold for the year ended December 31, 2001 decreased by $46.7 million, or 9.4%, to $449.4 million from $496.1 million in 2000.  As a percentage of sales, cost of goods sold increased to 76.9% in 2001 from 74.4% in 2000.  The corresponding reduction in margin was primarily attributable to the continued weakness of the automotive and commercial vehicle markets, price pressures from our customers, and costs related to pre-production ramp-ups and new program launches.  Partially offsetting the aforementioned were cost reduction initiatives including Six Sigma and lean manufacturing.

          Selling, General and Administrative Expenses.  SG&A expenses, including product development, increased by $3.6 million to $99.6 million for the year ended December 31, 2001 from $95.9 million in 2000.  As a percentage of sales, SG&A expenses increased to 17.0% in 2001 from 14.4% in 2000.  This increase is primarily attributable to higher design and development costs, which were required predominately to support efforts associated with awarded programs.  This increase also includes $0.6 million related to costs associated with the Company’s attempted offering of senior subordinated notes in the third quarter of 2001.

          Interest Expense, net.  Net interest expense for the year ended December 31, 2001 was $31.3 million compared with $29.5 million in 2000.  Average outstanding indebtedness was $317.9 million and $331.0 million for the years ended December 31, 2001 and 2000, respectively.  The cost of borrowing increased in 2001 as a result of an amended credit agreement.

          Other Expense / Income, net.  Other expense was $0.3 million for the year ended December 31, 2001, and primarily consisted of equity losses of unconsolidated subsidiaries.  Other income was $1.1 million for the year ended December 31, 2000, and primarily consisted of equity losses of unconsolidated subsidiaries and a gain on sale of idle fixed assets.

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          Income Before Income Taxes.  As a result of the foregoing, income before income taxes decreased by $42.9 million for the year ended December 31, 2001 to $3.9 million from $46.8 million in 2000.

          Provision for Income Taxes.  The Company recognized provisions for income taxes of $1.0 million and $14.1 million for federal, state and foreign income taxes for the years ended December 31, 2001 and 2000, respectively.  The decline in the effective tax rate to 24.4% in 2001 from 30.1% in 2000 was primarily a result of the implementation of certain tax planning strategies and non-recurring tax refunds. 

          Net Income.  As a result of the foregoing, net income decreased by $29.8 million, or 91.0%, to $2.9 million for the year ended December 31, 2001 from $32.7 million in 2000.

          The Vehicle Management & Power Distribution operating segment recognized a net loss of $11.9 million for the year ended December 31, 2001 compared to $5.9 million for the corresponding period in 2000. Net income for the Control Devices operating segment was $14.8 million for the year ended December 31, 2001 as compared to $38.6 million for the corresponding period in 2000. 

Liquidity and Capital Resources

          Net cash provided by operating activities was $95.6 million and $62.1 million for the years ended December 31, 2002 and 2001, respectively.  The increase in net cash from operating activities of $33.5 million was primarily attributable to an increase in income before extraordinary loss and cumulative effect of accounting change as well as a reduction in working capital.

          Net cash used by investing activities was $14.3 million and $23.4 million for the years ended December 31, 2002 and 2001, respectively, and primarily related to capital expenditures.

          Net cash used by financing activities was $59.2 million and $39.8 million for the years ended December 31, 2002 and 2001, respectively, as improved cash flows from operations were used to repay debt.

          On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes, the proceeds of which were used to repay existing debt.  The $200.0 million notes bear interest at an annual rate of 11.50% and mature on May 1, 2012.  Interest is payable on May 1 and November 1 of each year.  On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.

          In conjunction with the issuance of the senior notes, the Company also entered into a new $200.0 million credit agreement (of which $49.3 million was outstanding at December 31, 2002) with a bank group.  The credit agreement has the following components: a $100.0 million revolving facility (of which $96.5 million is currently available) including a $10.0 million swing line facility, and a $100.0 million term facility. The revolving facility expires on April 30, 2007 and requires a commitment fee of 0.375% to 0.500% on the unused balance as well as a utilization fee of 0.125% to 0.250% when the unutilized balance equals or exceeds 50.0% of the total revolving commitment.  The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies.  Interest is payable quarterly at either (i) the prime rate plus a margin of 0.50% to 1.50% or (ii) LIBOR plus a margin of 2.00% to 3.00%, depending upon the Company’s ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined.  Interest on the swing line facility is payable monthly at the same rate as the revolving facility.  The term facility expires on April 30, 2008.  Interest is payable quarterly at either (i) the prime rate plus 1.75% or (ii) LIBOR plus 3.25%. The Company has the right to prepay any of the above mentioned loans, in whole or in part, without premium or penalty.  During 2002, the Company prepaid $50.0 million of the term facility.  The Company was in compliance with its covenants as of December 31, 2002.

          In order to manage the interest rate risk associated with our previous debt portfolio, the Company entered into interest rate swap agreements.  These agreements required the Company to pay a fixed interest rate to counterparties while receiving a floating interest rate based on LIBOR.  The counterparties to each of the interest rate swap agreements were major commercial banks.  These agreements were due to mature on or before December 31, 2003 and qualified as cash flow hedges; however, as a result of the recent debt refinancing and in accordance with SFAS 133, these agreements were terminated at a cost of $5.3 million on May 1, 2002.

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          Changes in the fair market value of derivatives qualifying as cash flow hedges are recorded in other comprehensive (loss) income to the extent that the hedges are effective until the underlying transactions are recognized in earnings.  Net losses included in accumulated other comprehensive loss as of May 1, 2002 were $3.3 million after-tax ($5.3 million pre-tax).  This amount is currently being amortized to interest expense over the remaining contractual terms of the agreements.   The remaining unamortized balance as of December 31, 2002 was $0.6 million after-tax ($1.0 million pre-tax).

          The Company has entered into foreign currency forward contracts to purchase $13.1 million of Swedish krona and British pounds to satisfy krona and pound denominated debt obligations.  The estimated fair value of these forward contracts at December 31, 2002, per quoted market sources, was $13.8 million. The contracts are marked to market through earnings and are not accounted for using hedge accounting. The Company does not use derivatives for speculative or profit-motivated purposes.

          The following table summarizes the Company’s future cash outflows resulting from financial contracts and commitments, as of December 31, 2002:

          Management believes that cash flows from operations and the availability of funds from the Company’s credit facilities will provide sufficient liquidity to meet the Company’s growth and operating needs.

Recently Issued Accounting Standards

          See Note 2 to the Company’s consolidated financial statements.

Inflation and International Presence

          Management believes that the Company’s operations have not been adversely affected by inflation. By operating internationally, the Company is affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, management believes the Company is not significantly exposed to adverse economic conditions.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          The Company is exposed to certain market risks, primarily resulting from the effects of changes in interest rates. To reduce exposures to market risks resulting from fluctuations in interest rates, the Company uses a combination of variable and fixed rate debt.  At December 31, 2002, approximately 20% of the Company’s debt was variable rate debt.  The Company believes that a 1.0% increase or decrease in the interest rate on variable rate debt could affect annual interest expense by approximately $0.5 million.

          The Company’s risks related to commodity price and foreign currency exchange risks have historically not been material.  The Company does not expect the effects of these risks to be material in the future based on current operating and economic conditions in the countries and markets in which it operates.  Therefore, a 10.0% change in the value of the U.S. dollar would not significantly affect the Company’s financial position.

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ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
Stoneridge, Inc.

          We have audited the accompanying consolidated balance sheet of Stoneridge, Inc. (an Ohio Corporation) and Subsidiaries as of December 31, 2002 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended.  Our audit also included the financial statement schedule listed in the Index at Item 8.  These financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audit.  The consolidated financial statements and schedule of Stoneridge, Inc. and Subsidiaries as of December 31, 2001 and for each of the years in the two year period then ended were audited by other auditors who have ceased operations and whose report dated January 22, 2002, expressed an unqualified opinion on those statements and schedules before the restatement adjustments and disclosures described below and in Notes 2, 8 and 11.

          We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

          In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stoneridge, Inc. and Subsidiaries at December 31, 2002 and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

          As explained in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (Statement) No. 142, “Goodwill and Other Intangible Assets.”

          As discussed above, the consolidated financial statements of Stoneridge, Inc. and Subsidiaries as of December 31, 2001 and for the each of the years in the two year period ended December 31, 2001 were audited by other auditors who have ceased operations. However, the Company made certain adjustments to and disclosures in the prior years’ financial statements to conform to the current year’s presentation or to comply with adoption requirements of new accounting pronouncements, as follows:

          (i)     As described in Note 2, the 2001 and 2000 consolidated financial statements have been revised to include the transitional disclosures required by Statement No. 142, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the 2001 and 2000 disclosures in Note 2 included (a) agreeing the previously reported net income (in total and the related net income per share amounts) to the previously issued consolidated financial statements and the adjustments to reported amounts representing amortization expense (including any related tax effects) recognized in those periods related to goodwill as a result of initially applying Statement No. 142 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related net income per share amounts.

          (ii)    In Note 8, the Company added 2001 and 2000 disclosures relating to its defined benefit pension plan to conform to the 2002 presentation. We audited the information added for the 2001 and 2000 disclosures. Our procedures included (a) agreeing the 2001 and 2000 defined benefit pension plan amounts and information contained in Note 8 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliations of 2001 and 2000 defined benefit pension plan amounts to the consolidated financial statements.

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          (iii)   As presented in Note 11, the Company changed the composition of its reportable segments in 2002 from one reportable segment to two reportable segments, and the amounts in the 2001 and 2000 consolidated financial statements relating to reportable segments have been restated to conform to the 2002 composition of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2001 and 2000 consolidated financial statements. Our procedures included (a) agreeing the adjusted amounts of 2001 and 2000 reportable segment information contained in Note 11 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliations of 2001 and 2000 reportable segment amounts to the consolidated financial statements.

          In our opinion, the adjustments and disclosures described in (i), (ii) and (iii) above are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of the Company other than with respect to such disclosures and adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole.

ERNST & YOUNG LLP

Cleveland, Ohio
January 31, 2003

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

THIS REPORT IS A COPY AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

THIS REPORT REFERENCES THE COMPANY’S BALANCE SHEET AS OF DECEMBER 31, 2000 AND ITS RELATED CONSOLIDATED STATEMENTS OF INCOME, SHAREHOLDER’S EQUITY AND CASH FLOWS FOR THE PERIOD ENDED DECEMBER 31, 1999, WHICH ARE NOT PRESENTED HEREIN.

To the Board of Directors and Shareholders of
Stoneridge, Inc.:

          We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. (an Ohio corporation) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

          We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stoneridge, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

          As explained in Note 2 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments.

Cleveland, Ohio,
January 22, 2002.

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STONERIDGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands)

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.

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STONERIDGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.

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STONERIDGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)