SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number 001-13337
September 30, 1998.
STONERIDGE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1598949
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9400 East Market Street, Warren, Ohio 44484
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(Address of Principal Executive Offices) (Zip Code)
(330) 856-2443
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Registrant's Telephone Number, Including Area Code
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 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 [_].
The number of Common Shares, without par value, outstanding as of November 11,
1998: 22,397,311
STONERIDGE, INC.
INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 2
Condensed Consolidated Statements of Income for the three
months and nine months ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 12
Part II Other Information 13
Signatures 14
Exhibit Index 15
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1998 1997
------------- ------------
(unaudited) (audited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,304 $ 1,338
Accounts receivable, net 81,702 57,873
Inventories 41,061 38,594
Deferred income taxes 5,860 5,829
Prepaid expenses and other 8,313 6,842
-------- --------
Total current assets 138,240 110,476
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net 54,960 58,696
OTHER ASSETS:
Goodwill and other intangible assets, net 45,977 46,892
Investments and other 23,830 19,009
-------- --------
TOTAL ASSETS $263,007 $235,073
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 37 $ 456
Accounts payable 36,882 31,459
Accrued expenses and other 32,849 31,105
Accrued shareholder distributions -- 2,600
-------- --------
Total current liabilities 69,768 65,620
-------- --------
LONG-TERM DEBT, net of current portion 5,949 9,139
DEFERRED INCOME TAXES 2,839 3,104
OTHER LIABILITIES 1,603 --
-------- --------
Total long term liabilities 10,391 12,243
-------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, 5,000
authorized, none issued -- --
Common shares, without par value, 60,000
authorized, 22,397 outstanding at September 30,
1998 and December 31, 1997, stated at -- --
Additional paid-in capital 141,506 141,506
Retained earnings 41,317 15,930
Cumulative currency translation adjustment 25 (226)
-------- --------
Total shareholders' equity 182,848 157,210
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $263,007 $235,073
======== ========
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated balance sheets.
2
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except for per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
NET SALES $118,194 $103,919 $371,173 $322,706
COST AND EXPENSES
Cost of goods sold 89,036 77,883 280,692 243,493
Selling, general and administrative expenses 16,994 13,777 47,598 38,989
-------- -------- -------- --------
Operating income 12,164 12,259 42,883 40,224
Gain on sale of equipment -- -- -- (1,733)
Interest expense, net 20 875 560 2,738
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 12,144 11,384 42,323 39,219
Provision for income taxes 4,932 239 16,936 564
-------- -------- -------- --------
NET INCOME $ 7,212 $ 11,145 $ 25,387 $ 38,655
======== ======== ======== ========
BASIC AND DILUTED NET INCOME PER SHARE $ 0.32 $ 0.78 $ 1.13 $ 2.75
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 22,397 14,257 22,397 14,062
======== ======== ======== ========
1997 PRO FORMA INCOME DATA:
Income before income taxes $ 12,144 $ 11,384 $ 42,323 $ 39,219
Pro forma adjustment - provision for
income taxes 4,932 4,667 16,936 15,369
-------- -------- -------- --------
Pro forma net income $ 7,212 $ 6,717 $ 25,387 $ 23,850
======== ======== ======== ========
Pro forma net income per share $ 0.32 $ 0.31 $ 1.13 $ 1.10
======== ======== ======== ========
Pro forma weighted average shares
Outstanding 22,397 21,640 22,397 21,640
======== ======== ======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
3
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the nine months ended
September 30,
-------------------------
1998 1997
-------- ---------
OPERATING ACTIVITIES:
Net income $ 25,387 $ 38,655
Adjustments to reconcile net income to net cash
from operating activities-
Depreciation and amortization 10,769 9,016
Deferred income taxes (658) --
Gain on sale of equipment -- (1,733)
Other -- 575
Changes in operating assets and liabilities-
Accounts receivable, net (23,831) (9,755)
Inventories (2,466) (2,624)
Prepaid expenses and other (1,497) (1,390)
Other assets, net 15 (2,163)
Accounts payable 5,412 6,915
Accrued expenses and other 3,367 6,552
-------- --------
Net cash from operating activities 16,498 44,048
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (7,339) (8,058)
Proceeds from sale of equipment 2,091 2,514
Equity investment -- (1,000)
Increase in notes to affiliates (5,857) --
-------- --------
Net cash from investing activities (11,105) (6,544)
-------- --------
FINANCING ACTIVITIES:
Cash distributions paid (2,600) (22,655)
Proceeds from long-term debt 230 789
Repayments of long-term debt (7,716) (2,498)
Net borrowings (repayments) under credit facility 4,659 (15,729)
Share options exercised, net -- 2,314
-------- --------
Net cash from financing activities (5,427) (37,779)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (34) (275)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,338 357
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,304 $ 82
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
4
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data)
1. The accompanying condensed consolidated financial statements have been
prepared by Stoneridge, Inc. (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"Commission"). The information furnished in the condensed consolidated
financial statements includes normal recurring adjustments and reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of such financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Commission's rules and regulations.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and the notes thereto included in the Company's 1997
Annual Report to Shareholders.
The results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the results to be expected for the
full year.
2. On October 10, 1997, the Company completed an initial public offering of
6,727,500 Common Shares at $17.50 per share (the "Offering"). The Company
received net cash proceeds of $108,693 from the Offering. Net proceeds of
the Offering were used to fund a payment to the pre-offering shareholders
of approximately $83,000 as an S Corporation Distribution ("S Corporation
Distribution") and the remaining proceeds were used to repay net borrowings
under the Company's credit facility. Concurrent with the Offering, certain
officers and directors of the Company purchased 510,181 Common Shares
("Management Reinvestment") resulting in net proceeds of $8,326.
Immediately prior to the completion of the Offering, the Company amended
its Articles of Incorporation to change the authorized capital shares of
the Company from 37,724 shares of Class A Common Shares (voting), without
par value, and 87,276 shares of Class B Common Shares (non-voting), without
par value, to 60,000,000 Common Shares, and 5,000,000 Preferred Shares,
without par value. In addition, 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 in the accompanying unaudited condensed consolidated financial
statements have been adjusted accordingly.
Concurrent with the Offering, the Company acquired, through a share
exchange, the remaining 55% of Berifors AB ("Berifors") it did not own, in
exchange for 757,063 Common Shares, of which 52,500 Common Shares were held
in escrow pending final closing in February 1998. The acquisition was
accounted for as a purchase and the excess of the cost over the fair value
of assets acquired, totaling $10,439, was reflected as goodwill which will
be amortized over 40 years on a straight-line basis. As of October 10,
1997, the accounts of Berifors AB were consolidated in the financial
statements of the Company.
5
3. Pro forma net income assumes that the Company was subject to income taxes
as a C Corporation for all income statement periods presented.
Pro forma net income per share has been calculated by dividing pro forma
net income per share by the number of Common Shares outstanding as of
September 30, 1997 (14,367,796), the number of Common Shares issued in
connection with the exercise of share options on October 10, 1997 (34,771),
the number of Common Shares issued in connection with the Offering
(6,727,500), and the number of Common Shares issued in connection with the
Management Reinvestment (510,181).
4. 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 and consists of the following:
September 30, December 31,
1998 1997
------------- ------------
Raw materials $25,041 $24,725
Work in progress 9,710 9,397
Finished goods 8,905 6,723
Less-LIFO reserve (2,595) (2,251)
------- -------
Total $41,061 $38,594
======= =======
5. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of SFAS 130 requires
that certain items including currency translation adjustments be included
in other comprehensive income, which prior to adoption were reported
separately in shareholders' equity.
The component of comprehensive income, net of related tax, was as follows:
Three months Nine months
ended ended
September 30, September 30,
1998 1998
------------- -------------
Net income $7,212 $25,387
Currency translation adjustment, net of
income taxes 254 251
------ -------
Comprehensive income $7,466 $25,638
====== =======
Accumulated other comprehensive income (deficit), net of related tax, at
September 30, 1998 was comprised of currency translation adjustments and
totaled $25. The accumulated comprehensive income adjustments and
accumulated balance were zero for the three months ended and the nine
months ended September 30, 1997, consequently prior year financial
statements do not require reclassification to conform to SFAS 130.
6
6. On August 4, 1998, the Company entered into a new credit agreement. The new
credit facility has a $125,000 borrowing limit and expires on July 31,
2003. The $125,000 borrowing limit includes sublimits of $20,000 for
borrowings denominated in certain foreign currencies and $10,000 for swing
line credit facility borrowings. Swing line credit facility borrowings are
defined as borrowings for working capital requirements with maturities of
less than 30 days. Interest on general credit facility borrowings are
payable quarterly at the Company's option at either (i) the prime rate or
(ii) LIBOR plus a margin of 0.4% to 1.0%, and interest on foreign
denominated borrowings are payable quarterly at the eurocurrency rate, as
defined in the credit facility, plus a margin of 0.4% to 1.0%. The interest
rate margins of 0.4% to 1.0% are determined based on the Company's total
debt to earnings before interest, income taxes, depreciation and
amortization expenses (EBITDA), as defined in the credit facility. Interest
on swing line borrowings are payable quarterly at the quoted money market
rate, as of the dates funds are borrowed, as defined in the credit
facility.
The Company has entered into a $25,000 interest rate swap agreement with a
member of its bank group whereby its contractual interest rate was swapped
through February 1999 for a fixed rate of 5.795% plus a margin of 0.4% to
1.0%, depending upon the Company's total debt to EBITDA ratio, as defined
in the credit facility. 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 its
bank group whereby its contractual interest rate was swapped through August
1999 for a fixed rate of 6.28% plus a margin of 0.4% to 1.0%, depending
upon the Company's total debt to EBITDA ratio, as defined in the credit
facility, 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 September 30, 1998, the Company would have paid approximately $260 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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Nine Months Ended September 30, 1998 Compared To Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1997
- ----
Net Sales. Net sales for the nine months ended September 30, 1998 increased by
$48.5 million, or 15.0%, to $371.2 million from $322.7 million for the same
period in 1997. Sales of core electrical and electronic components, modules,
and systems increased by $59.2 million, or 23.3%, to $313.3 million during the
first nine months of 1998 compared with $254.1 million for the same period in
1997. Sales related to Berifors AB the acquisition, which was completed
concurrently with the Company's initial public offering in October 1997,
accounted for $30.0 million of the $59.2 million increase in the first nine
months of 1998. Excluding the impact of the Berifors AB acquisition, sales
revenue of core products increased by $29.2 million, or 11.5%, compared with the
same period in 1997.
Sales for the nine months ended September 30, 1998 for North America increased
$16.0 million to $337.7 million from $321.7 million for the same period in 1997.
North American sales accounted for 91.0% of total sales for the nine months
ended September 30, 1998 compared with 99.7% for the same period in 1997. Sales
outside North America increased $32.5 million to $33.5 million from $1.0 million
for the same period in 1997. This increase was due primarily to the Berifors
acquisition. Sales outside North America accounted for 9.0% of total sales for
the nine months ended September 30, 1998 compared with 0.3% for the same period
in 1997.
Sales of contract manufacturing wire harnesses of $57.9 million were $10.7
million, or 15.6%, lower than 1997 reflecting declining customer production
levels. As expected, contract manufacturing sales declined to 15.6% of the
Company's total sales revenue for the first nine months of 1998 compared with
21.2% of total sales for the same period in 1997.
Cost of Goods Sold. Cost of goods sold for the first nine months of 1998
increased by $37.2 million, or 15.3%, to $280.7 million from $243.5 million in
the first nine months of 1997. As a percentage of sales, cost of goods sold
increased to 75.6% in 1998 from 75.5% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses for the first nine months of 1998 increased by
$8.6 million, or 22.1%, to $47.6 million from $39.0 million in the same period
in 1997. As a percentage of sales, SG&A expenses increased to 12.8% for 1998
from 12.1% in 1997. The increase reflected the consolidation of Berifors AB,
which accounted for $4.3 million of the increase. In addition, the Company
increased its investment in product development by $4.5 million, of which $2.4
million related to Berifors AB. Other marketing, support and administrative
overhead costs increased an additional $2.2 million due to higher sales levels
and expenditures related to business development activities.
Interest Expense. Interest expense for the first nine months of 1998 decreased
by $2.1 million, or 77.8%, to $0.6 million from $2.7 million in the first nine
months of 1997. The decrease was due to a lower average outstanding
indebtedness.
Other Income. Other income for the first nine months of 1997 was $1.7 million
which represented a gain on the sale of equipment.
8
Income Before Income Taxes. As a result of the foregoing, income before taxes
increased by $3.1 million for the first nine months of 1998 to $42.3 million
from $39.2 million in 1997. Excluding the one-time gain on sale of equipment,
the increase in income before taxes would have been $4.8 million or 12.9%.
Provision for Income Taxes. The Company recognized provisions for income taxes
of $16.9 million and $0.6 million for federal, state and foreign income taxes
for the first nine months of 1998 and 1997, respectively. This increase in the
tax provision was due to the change in tax status from an S corporation to a C
corporation. Accordingly, had the Company been subject to federal and state
income taxes at the corporate level for all of 1997, the Company would have
recorded a provision for income taxes of approximately $15.4 million for the
nine months ended September 30, 1997.
Net Income. Net income decreased by $13.3 million to $25.4 million in the first
nine months of 1998 from $38.7 million in the first nine months of 1997 due to
the change in tax status from an S corporation to a C corporation. 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 $23.9 million for the nine
months ended September 30, 1997.
Three Months Ended September 30, 1998 Compared To Three Months Ended September
- ------------------------------------------------------------------------------
30, 1997
- --------
Net Sales. Net sales for the quarter ended September 30, 1998 increased by $14.3
million, or 13.8%, to $118.2 million from $103.9 million for the same period in
1997. Sales of core electrical and electronic components, modules, and systems
increased by $16.3 million, or 19.4%, to $100.4 million during the third quarter
of 1998 compared with $84.1 million for the same period in 1997. Sales related
to Berifors AB accounted for $9.2 million of the $16.3 million increase in the
third quarter of 1998. Excluding the impact of the Berifors AB acquisition,
sales revenue of core products increased by $7.1 million, or 8.4%, compared with
the same period in 1997.
Sales of contract manufacturing wire harnesses of $17.8 million were $1.9
million, or 9.6%, lower than 1997 reflecting declining customer production
levels. As expected, contract manufacturing sales declined to 15.1% of the
Company's total sales revenue for the third quarter of 1998 compared with 19.0%
of total sales for the same period in 1997.
Sales for the quarter ended September 30, 1998 for North America increased $3.5
million to $107.0 million from $103.5 million for the same period in 1997.
North American sales accounted for 90.5% of total sales for the quarter ended
September 30, 1998 compared with 99.6% for the same period in 1997. Sales
outside North America increased $10.8 million to $11.2 million from $0.4 million
for the same period in 1997. The increase was due primarily to the Berifors
acquisition. Sales outside North America accounted for 9.5% of total sales for
the quarter ended September 30, 1998 compared with 0.4% for the same period in
1997.
Cost of Goods Sold. Cost of goods sold for the third quarter of 1998 increased
by $11.1 million, or 14.3%, to $89.0 million from $77.9 million in the third
quarter of 1997. As a percentage of sales, cost of goods sold increased to 75.3%
in 1998 from 75.0% in 1997.
9
Selling, General and Administrative Expenses. SG&A expenses for the third
quarter of 1998 increased by $3.2 million, or 23.2%, to $17.0 million from $13.8
million in the same period in 1997. As a percentage of sales, SG&A expenses
increased to 14.4% for 1998 from 13.3% in 1997. The increase reflected the
consolidation of Berifors AB, which accounted for $1.4 million of the increase.
In addition, the Company increased its investment in product development by $1.9
million, of which $1.0 million related to Berifors AB. Other marketing, support
and administrative overhead costs increased an additional $0.9 million due to
higher sales levels and expenditures related to business development activities.
Interest Expense. Interest expense for the third quarter of 1998 decreased by
$0.9 million to $0.0 million from $0.9 million in the third quarter of 1997. The
decrease was due to a lower average outstanding indebtedness.
Income Before Income Taxes. As a result of the foregoing, income before taxes
increased by $0.7 million for the third quarter of 1998 to $12.1 million from
$11.4 million in 1997.
Provision for Income Taxes. The Company recognized provisions for income taxes
of $4.9 million and $0.2 million for federal, state and foreign income taxes for
the third quarters of 1998 and 1997, respectively. This increase in the tax
provision was due to the change in tax status from an S corporation to a C
corporation. Accordingly, had the Company been subject to federal and state
income taxes at the corporate level for all of 1997, the Company would have
recorded provisions for income taxes of approximately $4.7 million for the
quarter ended September 30, 1997.
Net Income. Net income decreased by $3.9 million to $7.2 million in the third
quarter of 1998 from $11.1 million in the third quarter of 1997 due to the
change in tax status from an S corporation to a C corporation. 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 $6.7 for the quarter ended
September 30, 1997.
General Motors Work Stoppage
- ----------------------------
The General Motors work stoppage adversely impacted basic and diluted earnings
per share for the third quarter of 1998 by approximately $0.02 per share.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operating activities was $16.5 million and $44.0 million
for the nine months ended September 30, 1998 and 1997, respectively. The
decrease in net cash from operating activities of $27.5 million was due to the
decrease in net income of $13.3 million and an increase in working capital
requirements and other operating assets of $14.2 million.
Net cash used for investing activities was $11.1 million and $6.5 million for
the nine months ended September 30, 1998 and 1997, respectively. The increase
in cash used for investing activities of $4.6 million was the result of lower
net capital expenditures of $0.3 million, a nonrecurring investment in PST
Industria Eletronica da Amazonia Ltda. of $1.0 million in July 1997 and the
issuance of notes receivable to affiliates of $5.9 million in 1998.
10
Net cash used for financing activities was $5.4 million and $37.8 million for
the nine months ended September 30, 1998 and 1997, respectively. A final cash
distribution to pre-Offering shareholders of $2.6 million occurred during the
nine months ended September 30, 1998, while cash distributions were $22.7
million for the nine months ended September 30, 1997. Proceeds from the
exercise of share options were $2.3 million for the nine months ended September
30, 1997. Long-term debt decreased $7.5 million and $1.7 million for the nine
months ended September 30, 1998 and 1997, respectively.
As a result of the forgoing, net borrowings under the credit facility increased
$4.7 million and decreased $15.7 million for the nine months ended September 30,
1998 and 1997, respectively.
The Company had a $125.0 million unsecured credit facility (of which $0.0
million was outstanding as of September 30, 1998), which expires on July 31,
2003. Interest on the credit facility was payable at the Company's option at
either prime rate or LIBOR plus 0.40% to 1.0%. Currently the Company borrows at
LIBOR plus 0.40%. The Company has entered into two interest rate swap agreements
with notional amounts of $25.0 and $20.0 million. The interest rate swap
agreements exchange the variable interest rate on the credit facility for fixed
rates. The Company is exposed to credit loss under the swap agreements in the
event of nonperformance by the bank. As of September 30, 1998, the Company
would have paid approximately $0.3 million 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 amounts of the swap
agreements.
Year 2000
- ---------
The Company has conducted an evaluation of the actions necessary in order to
gain assurance that its information and non-information technology systems will
be able to function without disruption with respect to the application of dating
systems in the Year 2000. As a result of this evaluation, the Company is engaged
in the process of upgrading, replacing and testing computer systems, computer
applications and other systems so as to be able to operate without disruption
due to Year 2000 issues. The Company's remedial actions are scheduled to be
completed by the end of the third quarter of 1999.
There can be no assurance that the remedial actions being implemented by the
Company will be able to be completed by the time necessary to avoid Year 2000
dating systems problems or that the cost of doing so will not be material. If
the Company is unable to complete its remedial actions in the planned timeframe,
contingency plans will be developed to address systems that may not be Year 2000
compliant. These contingency plans could include accelerating the implementation
of third party Year 2000 compliant software.
The Company estimates total historical Year 2000 expenditures to be
approximately $1.0 million. Year 2000 expenditures relate to modifying software,
purchasing new software and hardware and replacing non-compliant software and
hardware. Year 2000 expenditures to be incurred through the December 31, 1999
are estimated to be an additional $3.8 million. These costs include both
internal and external personnel costs related to the assessment process, as well
as the cost of purchasing certain hardware and software. There can be no
guarantee that these estimates will be achieved and actual results may differ
from those planned. The cost of remedial actions to rectify non-information
technology systems is not anticipated to be material to the Company's financial
position or results of operations. The Company intends to use cash provided from
operations to fund expenditures related to Year 2000 issues.
11
The Company currently believes the most likely worst case scenario with respect
to the Year 2000 issue is a disruption in the supply of products and services
from the Company's vendors, including utility providers. Such a supply
disruption could result in the Company not being able to produce certain
products for a period of time, which could have a material adverse effect on the
financial condition and results of operations of the Company.
The Company intends to develop contingency plans to address potential third
party system failures resulting from a Year 2000 problem. The Company has an
ongoing assessment process to gain assurances and certifications of customers'
and suppliers' Year 2000 readiness programs. Based on the results of the
assessment process, the Company will develop contingency plans for those
suppliers who are unable or unwilling to develop remediation plans to become
Year 2000 compliant. Although these plans are not yet complete, the Company
expects that these plans will include a combination of the resourcing of
materials to Year 2000 compliant vendors and the stockpiling of components. The
Company expects the implementation of these plans to occur by the end of third
quarter of 1999.
Portions of this Year 2000 section contain statements that constitute forward-
looking statements. The forward-looking statements include statements regarding
the Company's intent, belief and expectations with respect to, among other
things, the timing of the Company's Year 2000 remedial actions and the
development of the Company's contingency plans, and the future expenses related
to the Company's Year 2000 compliance programs. Investors are cautioned that
any such forward-looking statement is not a guarantee and involves risks and
uncertainties, and that actual events may differ materially from those in the
forward-looking statement as a result of various factors, including, among
others, the discovery of a currently unknown material Year 2000 issue, the
failure to implement the Company's Year 2000 as scheduled, and a material
increase in the costs of external consultants.
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
27.1 Financial Data Schedule for the nine months ended September 30, 1998
(b) Reports on Forms 8-K
None.
13
SIGNATURES
Pursuant to the requirements 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: November 12, 1998 /s/ Cloyd J. Abruzzo
-------------------------------------
Cloyd J. Abruzzo
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1998 /s/ Kevin P. Bagby
-------------------------------------
Kevin P. Bagby
Treasurer and Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
14
STONERIDGE, INC.
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
27.1 Financial Data Schedule for the nine months ended September 30,
1998, filed herewith.
15