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, 1998 Commission file number 001-13337
STONERIDGE, INC.
---------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1598949
------------------------------- -------------------
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.)
9400 East Market Street, Warren, Ohio 44484
------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
(330) 856-2443
------------------------------------------------------
Registrant's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Exchange on Which Registered
------------------- ----------------------------
Common Shares, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing price of March 22, 1999, the aggregate market
value of common stock held by nonaffiliates of the registrant was $172.4
million.
The number of Common Shares, without par value, issued and outstanding
as of March 22, 1999 was 22,397,311.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on May 3, 1999, into Part III, Items 10, 11, 12 and 13.
INDEX
-----
STONERIDGE, INC. -- FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
Page No.
--------
Part I.
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results 11
of Operations
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial 38
Disclosure
Part III.
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 40
Signatures 42
2
Forward-Looking Statements
Portions of this report may contain "forward-looking statements" under
the Private Securities Litigation Reform Act of 1995. These statements appear in
a number of places in this report and include statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things, the Company's (i) future product and
facility expansion, (ii) acquisition strategy, 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, including Hi-Stat Manufacturing Co., Inc., and Delta Schoeller, Ltd.,
or a decline in general economic conditions in any of the various countries in
which the Company operates. 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 components, 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 December 1998, the Company purchased all of the outstanding common
shares of Hi-Stat Manufacturing Co., Inc., a manufacturer of engineered sensors,
switches and solenoids for measuring speed, pressure, temperature and fluid
levels in vehicles. Hi-Stat primarily serves the automotive industry. Cash
consideration paid by the Company with respect to this purchase was
approximately $362.0 million.
In October 1997, the Company purchased 50% of the outstanding common
stock of PST Industria Eletronica da Amazonia Ltda. (PST), 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.
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.
3
In April 1996, seeking to leverage its capabilities and diversify its
OEM customer base, the Company acquired approximately 45% of Berifors AB
(Berifors), 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 the Company. As a result of this acquisition,
the Company is a worldwide supplier of instrumentation displays for heavy-duty
trucks to Mercedes Benz, Volvo and Scania.
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.
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 mid-1999 the General
Motors division will produce in-house substantially all of its wire harness
requirements previously supplied by the Company. The Company's net sales under
this arrangement totaled approximately $84.1 million, $95.1 million and $105.6
million for 1998, 1997 and 1996, respectively, or approximately 16.7%, 21.2%
and 29.0% 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, actuator products
and sensor products.
The Company's principal product categories are:
Power and Distribution Systems. 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.
Electronic and Electrical 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.
Electronic 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
Sensor Products. The Company designs and manufactures sensor products
that measure temperature, pressure, speed and fluid levels. These
products monitor and measure the physical variables affecting the
performance vehicle systems. Sensor products are employed in most major
vehicle systems, including the powertrain, fuel, braking, climate
control and steering systems. The Company sells these products
principally to the automotive market.
Production Materials
The principal production materials used in the Company's manufacturing
processes include wire, cable, 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 56%, 65% and 72% of the Company's net sales in 1998, 1997 and
1996
respectively, were made to the automotive market and approximately 44%, 33% and
27% of the net sales in 1998, 1997 and 1996 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.
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.
5
The following table presents the major customers, as a percentage of
net sales, of the Company for the years ended December 31, 1998, 1997 and 1996:
Year Ended December 31,
-----------------------
Customer 1998 1997 1996
---- ---- ----
General Motors 25% 32% 39%
Ford 18 21 18
Navistar 10 5 5
Deere 9 10 10
Other 38 32 28
-- -- --
Total 100% 100% 100%
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 $17.4 million, $14.1 million and $9.3 million for 1998, 1997
and 1996, respectively, or 4.1%, 4.0% and 3.6% 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.
6
Employees
As of December 31, 1998, the Company, including Berifors, had
approximately 6,600 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.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
D.M. Draime 65 Chairman of the Board of Directors, Assistant Secretary and
Director
Cloyd J. Abruzzo 48 President, Chief Executive Officer, Assistant Treasurer and
Director
Kevin P. Bagby 47 Vice President of the Company, Chief Financial Officer and
Treasurer
Sten Forseke 39 Vice President of the Company and Managing Director of
Berifors AB
Gerald V. Pisani 58 Vice President of the Company and President of Stoneridge
Engineered Products Group
David L. Thomas 49 Vice President of the Company and President of Alphabet Group
Avery S. Cohen 62 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 Stoneridge Engineered Products Group since 1985.
David L. Thomas has served as Vice President of the Company and
President of the 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.
7
ITEM 2. PROPERTIES
The Company currently owns or leases thirteen manufacturing facilities,
which together contain approximately 1.25 million square feet of manufacturing
space. The following table provides information regarding the Company's
facilities:
Owned/ Square
Location Use Leased Status Footage
-------- --- ------------- -------
Arlington Heights, Illinois Sales/Engineering Office Leased 1,000
Bloomfield, Michigan Sales 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
Farmington Hills, Michigan Sales/Engineering Office Leased 5,400
Greenwood, South Carolina(1) Manufacturing Leased 56,000
Kent, Ohio Manufacturing Owned 70,000
Lexington, Ohio Manufacturing Owned 155,000
Mansfield, Ohio Manufacturing Owned 4,000
Mebane, North Carolina Manufacturing Leased 51,000
Orwell, Ohio Manufacturing Owned 72,000
Portland, Indiana Manufacturing Owned 196,000
Sarasota. Florida Division Office & Manufacturing Owned 125,000
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
Indaiatuba, Brazil Manufacturing Leased 10,200
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
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 1998.
8
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On March 22, 1999, the Company had 22,397,311 Common
Shares without par value, issued and outstanding, which were owned by 110
shareholders of record, including Common Shares held in "streetname" by nominees
who are recordholders and approximately 2,110 beneficial owners.
The Company has neither paid nor declared dividends on its Common
Shares since its Offering, except for the payment or declaration of
S-corporation distributions of $85,600,000 to pre-Offering shareholders. The
Company currently intends to retain earnings for acquisitions, working capital,
capital expenditures, general corporate purposes and reduction in outstanding
indebtedness. Accordingly, the Company does not expect to pay cash dividends in
the foreseeable future.
High and low sales prices (as reported on the New York Stock Exchange
"NYSE" composite tape) for the Common Shares for each
quarter during 1997 and 1998.
Quarter Ended High Low
------------- ---- ---
1997 March 31 N/A N/A
June 30 N/A N/A
September 30 N/A N/A
December 31 20 7/8 13 7/8
1998 March 31 20 14 7/8
June 30 23 1/16 18 1/4
September 30 21 7/8 14 5/8
December 31 22 7/8 13 7/8
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.
9
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical and pro forma
financial data for the Company and should be read in conjunction with the
consolidated financial statements and notes related thereto and other financial
information included elsewhere herein. The selected historical data was derived
from the Company's consolidated financial statements, which were audited by
Arthur Andersen LLP, the Company's independent accountants.
Year Ended
December 31,
------------------------------------------------
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Income Data:
Net sales $503,821 $449,506 $363,748 $278,043 $225,531
Gross profit 124,239 108,192 75,606 66,331 60,557
Operating income 56,722 52,366 28,912 28,822 28,015
Income before income taxes 56,036 50,895 24,595 26,808 25,671
Net income $ 33,400 $ 46,964 $ 24,071 $ 26,154 $ 26,666
================================================
Basic and diluted net income per share $ 1.49 $ 2.92 $ 1.73 $ 1.88 $ 1.92
================================================
Pro Forma Data (Unaudited):
Income before income taxes $ 56,036 $ 50,895 $ 24,595 $ 26,808 $ 25,671
Provision for income taxes 22,636 21,181 10,295 10,991 10,525
------------------------------------------------
Pro forma net income $ 33,400 $ 29,714 $ 14,300 $ 15,817 $ 15,146
================================================
Pro forma basic and diluted net income
per share $ 1.49 $ 1.36 $ 0.66 $ 0.73 $ 0.70
================================================
Other Data:
Product development expenses $ 17,418 $ 14,114 $ 9,263 $ 6,664 $ 5,997
Capital expenditures 10,919 12,256 14,083 14,767 9,046
Depreciation and amortization 14,422 13,237 9,966 7,979 6,870
Balance Sheet Data:
Working capital $ 42,184 $ 44,856 $ 39,957 $ 34,851 $ 30,654
Total assets 638,116 235,073 178,487 172,298 119,915
Long-term debt, net of current portion 322,724 9,139 51,156 47,999 28,845
Shareholders' equity 190,542 157,210 84,633 73,720 63,112
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Net Sales. Net sales for the year ended December 31, 1998 increased by
$54.3 million, or 12.1%, to $503.8 million from $449.5 million for the same
period in 1997. Sales of core electrical and electronic components, modules and
systems increased by $65.3 million, or 18.4%, to $419.7 million for 1998
compared with $354.4 million for the same period in 1997. Sales related to the
Berifors AB acquisition that was completed concurrently with the Company's
initial public offering in October 1997, accounted for $32.6 million of the
$65.3 million increase in 1998. Excluding the impact of the Berifors AB
acquisition, sales revenue of core products increased by $32.7 million, or 9.2%,
compared with the same period in 1997.
Sales for the year ended December 31, 1998 for North America increased
$19.2 million to $456.8 million from $437.6 million for the same period in 1997.
North American sales accounted for 90.7% of total sales for the year ended
December 31, 1998 compared with 97.4% for the same period in 1997. Sales outside
North America increased $35.1 million to $47.0 million from $11.9 million for
the same period in 1997. This increase was due primarily to the Berifors
acquisition. Sales outside North America accounted for 9.3% of total sales for
the year ended December 31, 1998 compared with 2.6% for the same period in 1997.
Sales of contract manufacturing wire harnesses of $84.1 million were
$11.0 million, or 11.6%, lower than 1997, reflecting declining customer
production levels. As expected, contract manufacturing sales declined to 16.7%
of the Company's total sales revenue for the year 1998 compared with 21.2% of
total sales for the same period in 1997.
Cost of Goods Sold. Cost of goods sold for the year 1998 increased by
$38.3 million, or 11.2%, to $379.6 million from $341.3 million in the year 1997.
As a percentage of sales, cost of goods sold decreased to 75.3% in 1998 from
75.9% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses for the year of 1998 increased by $11.7 million,
or 20.9%, to $67.5 million from $55.8 million in the same period in 1997. As a
percentage of sales, SG&A expenses increased to 13.4% for 1998 from 12.4% in
1997. The increase reflected the consolidation of Berifors AB, which accounted
for $2.3 million of the increase. In addition, the Company increased its
investment in product development by $3.3 million.
Other Income. Other income for 1997 was $1.7 million, which represented
a gain on the sale of equipment.
Interest Expense. Interest expense for the year 1998 decreased by $2.5
million, or 78.6%, to $0.7 million from $3.2 million in the year 1997. The
decrease was primarily due to a lower average outstanding indebtedness.
Income Before Income Taxes. As a result of the foregoing, income before
taxes increased by $5.1 million for the year 1998 to $56.0 million from $50.9
million in 1997. Excluding the one-time gain on sale of equipment, the increase
in income before taxes would have been $6.8 million or 13.8%.
Provision for Income Taxes. The Company recognized provisions for
income taxes of $22.6 million and $5.1 million for federal, state and foreign
income taxes for the years 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 $21.2 million for the
year ended December 31, 1997.
Net Income. Net income decreased by $13.6 million to $33.4 million in
the year 1998 from $47.0 million in the year 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 $29.7 million for the year ended December 31, 1997.
11
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 product sales. The
consolidation of two power distribution/contract manufacturing facilities
eliminated certain fixed costs and also contributed to the increase in gross
margin.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses for 1997 increased by $9.1 million, or 19.6%, 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. Other marketing support and administrative overhead
costs increased an additional $7.9 million due to increased infrastructure
requirements to support higher sales levels and the launch of the actuator
product line. 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.
Other Income. Other income of $1.7 million for 1997 represents a gain
on the sale of equipment.
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.
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.
12
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 95.0%, 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.
Liquidity and Capital Resources
Net cash provided from operating activities was $46.0 million and $63.8
million for the years ended December 31, 1998 and 1997, respectively. The
decrease in net cash from operating activities of $17.8 million was due
primarily to the decrease in net income of $13.6 million, reflecting the change
in the Company's tax status from an S corporation to a C corporation.
Net cash used for investing activities was $368.7 million and $27.7
million for the years ended December 31, 1998 and 1997, respectively. The
increase in cash used for investing activities of $341.0 million was primarily
the result of the acquisition of Hi-Stat Manufacturing Co., Inc. (Hi-Stat). The
Company purchased Hi-Stat on December 31, 1998 for approximately $362.0 million
in cash. Approximately $307.0 million of goodwill was recorded in conjunction
with the Hi-Stat acquisition. Management believes that anticipated favorable
business prospects and purchase structure justify the purchase price. The
transaction was financed by a combination of existing cash from Stoneridge
together with funds from a new $425.0 million senior secured credit facility.
Offsetting the acquisition of Hi-Stat was a decrease in net capital expenditures
of $2.8 million and the 1997 investment in PST of $17.7 million.
Net cash provided by and used for financing activities was $323.3
million and $35.2 million for the years ended December 31, 1998 and 1997,
respectively. Primarily, as a result of the Hi-Stat acquisition, long-term debt
increased $334.5 million for the year ended December 31, 1998.
On December 30, 1998 and in conjunction with the purchase transaction
described above, the Company entered into a new senior secured credit facility
with its senior lender National City Bank and Donaldson, Lufkin, & Jenrette as
the lead arrangers. The credit facility consists of a $100 million Senior
Secured Revolving Facility, a $150 million Senior Secured Term Loan A, and a
$175 million Senior Secured Term Loan B. The $100 million revolving facility and
the $150 million term facility expire on December 31, 2003 and require a
commitment fee of 0.37% to 0.50% on the unused balance. Interest is payable
quarterly at the Company's option of either (i) the prime rate plus a margin of
.25% to 1.50% or (ii) LIBOR plus a margin of 1.75% to 3.00%, depending upon the
Company's ratio of consolidated total debt to consolidated earnings before
interest, taxes, depreciation and amortization, as defined. The $175 million
term facility expires on December 31, 2005. Interest is payable quarterly at the
Company's option of either (i) the prime rate plus a margin of 2.00% or (ii)
LIBOR plus a margin of 3.50%.
The Company has entered into six interest rate swap agreements with a
total notional amount of $370.0 million. The interest rate swap agreements
exchange variable interest rates on the senior secured credit facility for fixed
interest rates. The Company does not use derivatives for speculative or profit-
motivated purposes. To the extent that the notional amount of the swap
agreements exceed the carrying value of the underlying debt, a mark to market
adjustment is reflected in the financial statements.
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.
13
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 they are not
significantly exposed to adverse economic conditions.
Recently Issued Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), oReporting Comprehensive Income.o 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.
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), oDisclosures about Segments of an
Enterprise and Related Information.o SFAS 131 requires the financial statement
disclosures for operating segments, products and services, and geographic areas.
The Company operates in one business segment based on the criteria set forth in
SFAS 131. Therefore, SFAS 131 will not affect the Company's financial position,
results of operations or financial statement disclosures.
The Company is required to adopt Statement of Financial Accounting
Standards No. 133 (SFAS 133), oAccounting for Derivative Instruments and Hedging
Activitieso for its fiscal year ending 2000. SFAS 133 establishes new accounting
and reporting standards for derivatives and hedging activities. The Company has
not yet evaluated the financial accounting and reporting impact of SFAS 133.
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
information systems, computer applications and other systems 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 in excess
of the amounts discussed below. 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 $1.5 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 December 31, 1999 are
estimated to be an additional $2.7 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.
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.
14
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 the
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 of third parties to address Year 2000 issues, the failure to implement
the Company's Year 2000 plan as scheduled, and a material increase in the costs
of external consultants.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks, primarily resulting
from the effects of changes in interest rates. To reduce exposures to market
risks resulting from fluctuations in interest rates, the Company uses derivative
financial instruments. Specifically, the Company uses interest rate swap
agreements to mitigate the effects of interest rate fluctuations on net income
by changing the floating interest rates on certain portions of the Company's
debt to fixed interest rates. For more information on these interest rate
exposures, see Note 2 and Note 12 of the Company's Notes to Consolidated
Financial Statements included elsewhere herein. The effect of changes in
interest rates on the Company's net income generally has been small relative to
other factors that also affect net income, such as sales and operating margins.
The Company does not enter into financial instruments for trading
purposes. Management believes that its use of these instruments to reduce risk
is in the Company's best interest.
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 based on current operating and
economic conditions in the countries and markets in which it operates.
15
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 17
Consolidated Balance Sheets as of December 31, 1998 18
and 1997
Consolidated Statements of Income for the Years Ended 19
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years 20
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended 21
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 22
Financial Statement Schedule:
-----------------------------
Report of Independent Public Accountants 36
Schedule II--Valuation and Qualifying Accounts 37
16
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, 1998
and 1997 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio,
January 28, 1999.
17
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
-----------
1998 1997
---- ----
(in thousands,
except share data)
Assets
Current Assets:
Cash and cash equivalents................................................... $ 1,876 $ 1,338
Accounts receivable, less allowance for doubtful accounts
of $1,006 and $231........................................................ 84,655 57,873
Inventories................................................................. 53,273 38,594
Prepaid expenses and other.................................................. 5,983 6,842
Deferred income taxes....................................................... 11,679 5,829
-------- -------
Total current assets...................................................... 157,466 110,476
-------- -------
Property, Plant and Equipment, net........................................... 94,770 58,696
Other Assets:
Goodwill, net............................................................... 351,501 45,985
Other intangible assets, net................................................ 3,928 907
Investments and other....................................................... 30,451 19,009
-------- -------
Total Assets.............................................................. $638,116 $235,073
======== =======
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt........................................... $ 21,213 $ 456
Accounts payable............................................................ 45,835 31,459
Accrued expenses and other.................................................. 48,234 31,105
Accrued shareholder distributions........................................... -- 2,600
-------- -------
Total current liabilities................................................. 115,282 65,620
-------- -------
Long-Term Debt, net of current portion....................................... 322,724 9,139
Deferred Income Taxes........................................................ 8,088 3,104
Other........................................................................ 1,480 --
-------- -------
Total long term liabilities............................................... 332,292 12,243
-------- -------
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 issued and outstanding at December 31, 1998 and 1997, stated at.. -- --
Additional paid-in capital.................................................. 141,506 141,506
Retained earnings........................................................... 49,330 15,930
Accumulated other comprehensive income...................................... (294) (226)
---- ----
190,542 157,210
-------- -------
Total Liabilities and Shareholders' Equity............................ $638,116 $235,073
======== ========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
18
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
Net Sales............................................ $503,821 $449,506 $363,748
Costs and Expenses:
Cost of goods sold............................... 379,582 341,314 288,142
Selling, general and administrative expenses 67,517 55,826 46,694
-------- -------- --------
Operating income.............................. 56,722 52,366 28,912
Gain on sale of fixed assets..................... -- (1,733) --
Interest expense, net............................ 686 3,204 4,317
-------- -------- --------
Income Before Income Taxes........................... 56,036 50,895 24,595
-------- -------- --------
Provision for income taxes....................... 22,636 5,098 524
Income tax benefit from the reinstatement of
deferred income taxes......................... -- (1,167) --
-------- -------- --------
Net Income........................................... $ 33,400 $ 46,964 $ 24,071
======== ======== ========
Basic and Diluted Net Income per Share............... $ 1.49 $ 2.92 $ 1.73
======== ======== ========
Weighted Average Shares Outstanding.................. 22,397 16,073 13,941
======== ======== ========
Pro Forma Income Data (Unaudited):
Income before income taxes........................... $ 56,036 $ 50,895 $ 24,595
Pro forma adjustment--provision for income taxes 22,636 21,181 10,295
------ ------ ------
Pro forma net income................................. $ 33,400 $ 29,714 $ 14,300
======== ======== ========
Pro forma basic and diluted net income per share $ 1.49 $ 1.36 $ 0.66
======== ======== ========
Pro forma weighted average shares outstanding........ 22,397 21,830 21,655
======== ======== ========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
19
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Number Additional Retained Comprehensive Comprehensive
of Shares Paid-In Capital Earnings Income Income
--------- --------------- -------- ------ ------
(in thousands)
Balance, December 31, 1995..................................... 13,909 $ 7,958 $ 65,762 $ --
Net income and comprehensive income............................ -- -- 24,071 -- $24,071
Exercise of share options, net................................. 55 225 -- -- =======
Compensation expense
from share option plans...................................... -- 450 -- --
Capital contribution........................................... -- 562 -- --
Distributions declared......................................... -- -- (14,395) --
------ ----- ------- ------
Balance, December 31, 1996..................................... 13,964 9,195 75,438 --
Net income..................................................... -- -- 46,964 -- $46,964
Other comprehensive income:
Currency translation adjustments, net of tax................. -- -- -- (226) (226)
-------
Comprehensive income......................................... $46,738
Exercise of share options...................................... 438 2,513 -- -- =======
Compensation expense
from share option plans...................................... -- 450 -- --
Issuance of shares in public offering, net..................... 6,728 108,693 -- --
Issuance of shares to Company management....................... 510 8,326 -- --
Acquisition of Berifors AB..................................... 757 12,329 -- --
Distributions declared......................................... -- -- (106,472) --
------ ----- ------- ------
Balance, December 31, 1997..................................... 22,397 141,506 15,930 (226)
Net income..................................................... -- -- 33,400 -- $33,400
Other comprehensive income:
Currency translation adjustments, net of tax.................. -- -- -- (68) (68)
------ ----- ------- ------ -------
Comprehensive income....................................... $33,332
=======
Balance, December 31, 1998..................................... 22,397 $141,506 $49,330 $ (294)
====== ======== ======= =======
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
20
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
Operating Activities:
Net income............................................................................... $ 33,400 $ 46,964 $ 24,071
Adjustments to reconcile net income to net cash
from operating activities--
Depreciation and amortization........................................................... 14,422 13,237 9,966
Deferred income taxes................................................................... (1,702) (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............................................................. (7,162) (5,521) 2,694
Inventories.......................................................................... (1,918) (4,036) (3,730)
Prepaid expenses and other........................................................... 1,761 (1,564) 4,599
Other assets, net.................................................................... (3,854) (466) (1,014)
Accounts payable..................................................................... 4,004 6,526 (12,854)
Accrued expenses and other........................................................... 7,037 12,228 1,089
--------- --------- --------
Net cash from operating activities................................................ 45,988 63,831 25,271
--------- --------- --------
Investing Activities:
Capital expenditures..................................................................... (10,919) (12,256) (14,083)
Proceeds from sale of fixed assets....................................................... 3,758 2,300 4,850
Equity investments....................................................................... -- (17,722) (8,834)
Business acquisitions.................................................................... (361,520) -- --
--------- --------- --------
Net cash from investing activities................................................ (368,681) (27,678) (18,067)
--------- --------- --------
Financing Activities:
Shareholder distributions paid........................................................... (2,600) (104,972) (13,201)
Proceeds from long-term debt............................................................. 1,286 789 3,512
Repayments of long-term debt............................................................. (8,469) (3,072) (410)
Net borrowings (repayments) under credit agreement....................................... 341,729 (47,449) 2,745
Debt issuance costs...................................................................... (8,615) -- --
Share options exercised, net............................................................. -- 2,513 225
Proceeds from issuance of common shares, net............................................. -- 117,019 --
--------- --------- --------
Net cash from financing activities................................................ 323,331 (35,172) (7,129)
--------- --------- --------
Effect of exchange rates changes on cash and cash equivalents............................ (100) -- --
Net change in cash and cash equivalents.................................................. 538 981 75
Cash and cash equivalents at beginning of period......................................... 1,338 357 282
---------- --------- --------
Cash and cash equivalents at end of period............................................... $ 1,876 $ 1,338 $ 357
========== ========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................................... $ 952 $ 3,281 $ 3,844
========== ========= ========
Cash paid for income taxes............................................................... $ 22,979 $ 591 $ 383
========== ========= ========
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.
21
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
1. Nature of Business
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. Stoneridge
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 wholly-owned and majority-owned subsidiaries
(collectively, the Company). All significant intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates fair value.
Accounts Receivable
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 1998, three customers
accounted for approximately 25%, 18% and 10% of net sales, while the top five
customers accounted for 72% of net sales. The same three customers accounted for
approximately 32%, 21% and 10% of the Company's 1997 net sales, and its top five
customers accounted for approximately 76% of its 1997 net sales. Accounts
receivable from the Company's five largest customers aggregated approximately
$51,927 and $45,210 at December 31, 1998, and 1997, 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 mid 1999, the General
Motors division will produce in-house substantially all of its wire harness
requirements previously supplied by the Company. In 1998, the Company's net
sales under this arrangement totaled approximately $84.1 million and contributed
approximately $4.9 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.
22
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
Inventories
Cost is determined by the last-in, first-out (LIFO) method for
approximately 76% and 100% of the Company's inventories at December 31, 1998 and
1997, respectively, and by the first-in, first-out (FIFO) method for all other
inventories. Inventory cost includes material, labor and overhead. Inventories
consist of the following at December 31:
1998 1997
---- ----
Raw materials $ 32,453 $ 24,725
Work in progress 10,673 9,397
Finished goods 12,379 6,723
Less-LIFO reserve (2,232) (2,251)
---------------------
Total $ 53,273 $ 38,594
=====================
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consist of the
following at December 31:
1998 1997
---- ----
Land and land improvements $ 5,355 $ 3,756
Buildings and improvements 42,345 32,795
Machinery and equipment 63,012 37,154
Office furniture and fixtures 16,444 8,242
Tooling 22,663 16,729
Vehicles 477 3,977
Leasehold improvements 818 1,018
--------------------
151,114 103,671
Less-Accumulated depreciation
and amortization 56,344 44,975
--------------------
$ 94,770 $ 58,696
====================
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, 1998, 1997 and 1996 was $11,779, $11,273 and
$8,686, respectively. Depreciable lives within each property classification are
as follows:
Buildings and improvements 10--40 years
Machinery and equipment 5--10 years
Office furniture and fixtures 3--10 years
Tooling 2--5 years
Vehicles 3--5 years
Leasehold improvements 3--8 years
23
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
Maintenance and repair expenditures that are not considered betterments
and do not extend the useful life of property are charged to expense as
incurred. Expenditures for improvements and major renewals are capitalized. When
assets are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss on the
disposition is credited or charged to income.
Goodwill and Other Intangibles
Goodwill 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. Other intangible assets are
being amortized over two to thirteen years on a straight-line basis. Goodwill
and other intangible asset amortization expense totaled approximately $1,453,
$1,495 and $1,180 in 1998, 1997 and 1996, respectively. Accumulated amortization
as of December 31, 1998, and 1997 was $8,422 and $6,969, respectively. The
Company regularly evaluates its accounting for goodwill and other intangible
assets. Impairment would be recognized when events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Measurement of the amount of impairment 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:
1998 1997
---- ----
Compensation-related obligations $14,717 $11,699
Insurance-related obligations 7,241 3,491
Income Taxes 2,012 5,812
Other 24,264 10,103
------------------------
$48,234 $31,105
========================
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), oAccounting for
Income Taxes.o 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.
24
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
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
accumulated other comprehensive income.
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 activities were insignificant in 1998, 1997 and 1996.
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
$17,418, $14,114 and $9,263 in 1998, 1997, and 1996, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, oAccounting for Stock Issued to Employeeso (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), oAccounting for Stock-Based
Compensation.o
Financial Instruments and Derivative Financial Instruments
Financial instruments held by the Company include cash and cash
equivalents, accounts receivable, accounts payable, long-term debt and interest
rate swap agreements. The carrying value of cash and cash equivalents, accounts
receivable and payables is considered to be representative of fair value because
of the short maturity of these instruments. The fair values of borrowings under
the long-term debt facilities are based on rates available to the Company for
debt with comparable terms and maturities.
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 facilities was less than the notional amount of the interest
rate swap agreements, the market value attributable to the difference was
recognized in interest expense in 1998 and 1997.
25
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
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), oAccounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,o 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.
The Company adopted Statement of Financial Accounting Standard No. 128
(SFAS 128), oEarnings per Share,o 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. Potentially dilutive securities are not
significant and do not create differences between reported basic and diluted
earnings per share for all periods presented.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), oReporting Comprehensive Incomeo. 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. Prior year financial statements have been reclassified to conform to the
requirements of this statement.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), oDisclosures about Segments of an
Enterprise and Related Information.o SFAS 131 requires the financial statement
disclosures for operating segments, products and services, and geographic areas.
The Company operates in one business segment based on the criteria set forth in
SFAS 131. Therefore, SFAS 131 will not affect the Company's financial position,
results of operations or financial statement disclosures.
The Company will be required to adopt Statement of Financial Accounting
Standards No. 133 (SFAS 133), oAccounting for Derivative Instruments and Hedging
Activitieso for its fiscal year ending 2000. SFAS 133 establishes accounting and
reporting standards for derivatives and hedging activities. The Company has not
yet evaluated the financial accounting and reporting impact of SFAS 133.
26
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
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 were 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. In 1998, 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 have been adjusted accordingly in these
financial statements.
4. Acquisitions
On December 31, 1998, the Company purchased all of the outstanding
common shares of Hi-Stat Manufacturing Co., Inc. (Hi-Stat) for approximately
$362,000. Hi-Stat manufactures engineered sensors, switches and solenoids for
the automotive industry. The transaction was accounted for as a purchase.
Accordingly, the assets acquired and liabilities assumed of Hi-Stat are included
in the consolidated balance sheet as of December 31, 1998. The purchase price
was funded with the Company's cash on hand and with proceeds from the credit
facilities discussed in Note 6. All assets acquired and liabilities assumed were
stated at fair value. The purchase price paid in excess of identifiable net
assets was allocated to goodwill. The purchase price has been allocated based
on preliminary appraisals and evaluations and is subject to further review and
refinement. The components of intangible assets included in the allocation of
purchase price, along with the related straight-line amortization periods, are:
Amortization
Amount Period (years)
-------- --------------
Non-compete covenants $ 590 2
Patents 2,580 6-13
Goodwill 306,613 40
--------
Total $309,783
========
The results of operations of Hi-Stat are included in the accompanying
financial statements from the date of acquisition.
The unaudited pro forma consolidated results of operations as though
Hi-Stat had been acquired at the beginning of fiscal 1998 and 1997 are as
follows:
1998 1997
---- ----
Net sales $659,151 $584,965
Operating income $ 73,269 $ 73,286
Net income $ 24,736 $ 22,772
Basic and diluted net income per share $ 1.10 $ 1.04
27
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
The pro forma data do not purport to be indicative of the results that
would have been obtained had these events actually occurred at the beginning of
the periods presented and is not intended to be a projection of future results.
The pro forma amounts reflect the results of operations for the Company, Hi-Stat
and the following purchase accounting and other adjustments for the periods
presented:
. Elimination of certain costs and interest expense of Hi-Stat
which are expected to be nonrecurring.
. Interest expense on borrowings used to fund the acquisition
. Amortization of intangible assets based on the purchase price
allocation
. Estimated income tax effect on the results of operations and
the pro forma adjustments assuming both companies were subject
to tax as C corporations
. 1997 pro forma earnings per share assumes outstanding shares as
discussed in Note 13
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. 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 consolidated in the accompanying financial statements from October 1997.
5. Investments
In October 1997, the Company purchased 50% of the outstanding common
stock of PST Industria Eletronica da Amazonia Ltda. (PST), a Brazilian
electronic components business that specializes in electronic vehicle security
devices. The investment is accounted for under the equity method of accounting.
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 $1,190 and $469 in 1998 and 1997, respectively.
The acquisition was financed with borrowings under the credit facility discussed
in Note 6. In 1998, the Company issued a $5,000 note to PST. The proceeds of the
note were used for the repayment of existing debt. The note is secured by
certain assets of PST.
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. The Brazilian joint venture will be consolidated with
the results of the Company and the European joint venture will be accounted for
under the equity method of accounting. As of December 31, 1998, the Company
incurred costs of approximately $260 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 finances its investments in the joint
ventures through borrowings under the credit facility discussed in Note 6.
28
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
6. Long-Term Debt
The Company has a $425,000 credit agreement with a bank group. The
credit agreement has three components: a $100,000 revolving credit facility, a
$150,000 term facility and a $175,000 term facility. The $100,000 revolving
facility and the $150,000 term facility expire on December 31, 2003, and require
a commitment fee of 0.37% to 0.50% on the unused balance. Interest is payable
quarterly at either (i) the prime rate plus a margin of .25% to 1.50% or (ii)
LIBOR plus a margin of 1.75% to 3.00%, depending upon the Company's ratio of
consolidated total debt to consolidated earnings before interest, taxes,
depreciation and amortization, as defined. The $175,000 term facility expires on
December 31, 2005. Interest is payable quarterly at either (i) the prime rate
plus a margin of 2.00% or (ii) LIBOR plus a margin of 3.50%.
The weighted average interest rate in effect for the years ended
December 31, 1998, 1997 and 1996 was approximately 7.1%, 7.1% and 7.4%,
respectively, including the effects of the interest rate swap agreements.
Long-term debt consists of the following at December 31:
1998 1997
---- ----
Borrowings under credit facility $342,150 $ 497
Borrowings repaid in 1998 -- 8,345
Other 1,787 753
-----------------
343,937 9,595
Current maturities 21,213 456
=================
$322,724 $9,139
=================
The credit agreement contains various covenants that require, among
other things, the maintenance of certain minimum amounts of consolidated net
worth and consolidated EBITDA and certain specified ratios of consolidated total
debt, to consolidated EBITDA, interest coverage and fixed charge coverage.
Restrictions may also include limits on capital expenditures and dividends. The
Company was in compliance with these covenants at December 31, 1998.
Future maturities of long-term debt as of December 31, 1998 are as
follows:
1999 $21,213
2000 24,728
2001 32,122
2002 39,408
2003 60,216
Thereafter 166,250
29
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
7. Income Taxes
The provision for income tax included in the accompanying financial
statements represents federal, state and foreign income taxes for fiscal 1998
and the period October 9, 1997, to December 31, 1997, and state income taxes for
certain states for the period January 1, 1997, to October 8, 1997 and fiscal
1996. The provision for income taxes consists of the following for the years
ended December 31:
1998 1997 1996
---- --- ----
Current:
Federal $20,414 $ 4,441 $ --
State and foreign 3,924 1,744 524
-------------------------
24,338 6,185 524
Deferred:
Federal (1,489) (983) --
State and foreign (213) (104) --
--------------------------
(1,702) (1,087) --
--------------------------
Total $22,636 $ 5,098 $ 524
==========================
A reconciliation of the Company's effective income tax rate to the
statutory federal tax rate for 1998 is as follows:
1998
----
Statutory federal income tax rate 35.0%
State income taxes, net of federal tax benefit 4.7
Goodwill amortization 0.8
Other items (0.1)
-----
Effective income tax rate 40.4%
======
A reconciliation of the Company's effective income tax rate to the
statutory federal tax rate has been omitted for 1997 and 1996, as presentation
of such information is not meaningful.
Unremitted earnings of foreign subsidiaries are $878 as of December 31,
1998. Because these earnings have been indefinitely reinvested in foreign
operations, no provision has been made for U.S. income taxes. It is
impracticable to determine the amount of unrecognized deferred taxes with
respect to these earnings; however, foreign tax credits would be available to
reduce U.S. income taxes in the event of a distribution.
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.
In conjunction with the acquisition of Hi-Stat on December 31, 1998,
the Company recorded deferred income tax assets and noncurrent deferred income
tax liabilities of approximately $4,172 and $5,072, respectively.
30
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
Deferred tax assets and liabilities consist of the following at
December 31:
1998 1997
---- ----
Deferred tax assets:
Inventories $ 1,632 $1,103
Employee Benefits 1,806 2,371
Insurance 2,834 1,504
Other nondeductible reserves 7,710 2,396
---------------
Gross deferred tax assets 13,982 7,374
Deferred tax liabilities
Depreciation and amortization 7,953 2,899
Other 2,438 1,750
---------------
Gross deferred tax liabilities 10,391 4,649
---------------
Net deferred tax asset $ 3,591 $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 with additional renewal options. The Company is generally responsible for
repairs and maintenance, taxes and insurance.
For the years ended December 31, 1998, 1997 and 1996, lease expense
totaled $3,015, $2,313 and $2,255, respectively, under these agreements.
Future minimum operating lease commitments at December 31, 1998, are as
follows:
Third Related
Party Party
----- -----
1999 $3,194 $576
2000 2,553 576
2001 1,779 466
2002 1,347 252
2003 1,233 252
Thereafter -- 212
31
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:
Shares Average Exercise
Option Prices Price
------ ------ -----
Outstanding,
December 31, 1996 -- $ -- $ --
Granted in 1997 498,000 16.44-17.50 17.48
-------
Outstanding,
December 31, 1997 498,000 16.44-17.50 17.48
Forfeited in 1998 (6,000) 17.50 17.50
-----
Outstanding,
December 31, 1998 492,000 16.44-17.50 17.48
=======
Of the outstanding options issued and outstanding under the Incentive
Plan, none are currently exercisable as of December 31, 1998.
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%
32
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
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:
1998 1997
---- ----
Net income - as reported $33,400 $46,964
Net income - pro forma $31,236 $46,485
Basic and diluted earnings per share - as reported $ 1.49 $ 2.92
Basic and diluted earnings per share - pro forma $ 1.39 $ 2.89
10. Employee Benefit Plans
The Company has certain defined contribution profit sharing and 401(k)
plans covering substantially all of the employees. Company contributions are
generally discretionary; however, a portion of these contributions are based
upon a percentage of employee compensation, as defined in the plans. The
Company's policy is to fund all benefit costs accrued. There are no unfunded
prior service costs. For the years ended December 31, 1998, 1997 and 1996,
contributions amounted to $3,149, $3,274 and $2,481, 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.
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 and $180 in 1997 and 1996, respectively.
Beginning on September 1, 1997, the salary payments were paid by the related
company.
33
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
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.
The Company uses derivative financial instruments to reduce exposures
to market risks resulting from fluctuations in interest rates. The Company does
not enter into financial instruments for trading purposes. Management believes
that its use of these instruments to reduce risk is in the Company's best
interest.
Derivative financial instruments as of December 31, 1998, and 1997,
include the following interest rate swap agreements:
Notional Amount Expected
1998 1997 Fixed Rate Paid Maturity Date
---- ---- --------------- -------------
20,000 20,000 6.545-7.795 Feb. 01, 1999
25,000 25,000 7.03-9.28 Aug 01, 1999
75,000 -- 7.00-8.25 Dec. 29, 2000
75,000 -- 7.00-8.25 Dec. 29, 2000
87,500 -- 8.81 Dec. 31, 2001
87,500 -- 8.81 Dec. 31, 2001
The fair market value of these interest rate swap agreements, which was
estimated based on quoted market sources and approximated a net payable of $220
and $157, at December 31, 1998 and 1997, respectively.
The interest rate swap agreements require the Company to pay a fixed
interest rate to counterparties while receiving a floating interest rate based
on LIBOR. The fixed rate paid to the counterparties is dependent on the
Company's ratio of consolidated total debt to consolidated EBITDA as defined by
the Company's $425,000 credit agreement discussed in Note 6. The counterparties
to each of the interest rate swap agreements are major commercial banks.
Management believes that losses related to credit risk are remote.
13. Unaudited Pro Forma Information
The unaudited pro forma net income in the consolidated statements of
income for the years ended December 31, 1997 and 1996, assumes that the Company
was subject to income taxes as a C corporation.
Unaudited pro forma net income per share for the years ended December
31, 1997 and 1996, 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 as discussed in Note 9 (438,119), and the number of Common Shares issued
in connection with the Management Reinvestment discussed in Note 3 (510,181).
34
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except for share and per share data)
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 1998 and 1997:
Quarter Ended,
----------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31
------- ------- ------- -------
(in millions, except per share data)
1998
Net sales $132.6 $118.2 $121.8 $131.2
Gross profit 33.7 29.2 29.6 31.7
Operating income 13.8 12.2 14.7 16.0
Net income $ 8.0 $ 7.2 $ 8.8 $ 9.4
=================================
Basic and diluted net income per share $ 0.36 $ 0.32 $ 0.39 $ 0.42
=================================
1997
Net sales $126.8 $103.9 $110.8 $108.0
Gross profit 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 net income per share $ 0.52 $ 0.69 $ 0.82 $ 0.89
=================================
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.
35
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 January 28, 1999. Our audits were made for the purpose of forming an
opinion on those financial statements taken as a whole. The schedule on page 37
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Cleveland, Ohio,
January 28, 1999.
36
STONERIDGE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Liabilities
Balance at Charged to Assumed in Balance at
Beginning Costs and Purchase End of
of Period Expenses Accounting Write-offs Period
---------- ---------- ------------ ---------- ------
(in thousands)
Allowance for doubtful accounts:
Year ended December 31, 1996 453 43 -- 231 265
Year ended December 31, 1997 265 20 -- 54 231
Year ended December 31, 1998 231 254 545 24 1,006
37
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.
38
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 3, 1999, 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 3, 1999.
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 3, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference
to the information under the heading "Certain Relationships and Related
Transactions" contained in the Company's Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on May 3, 1999.
39
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 Public Accountants 17
Consolidated Balance Sheet as of December 31, 1998 and 1997 18
Consolidated Statements of Income for the years ended 19
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years 20
ended December 31, 1998, 1997, and 1996
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 21
Note to Consolidated Financial Statements 22
2. Financial Statement Schedules:
Report of Independent Public Accountants 36
Schedule II - Valuation and Qualifying Accounts 37
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, 1998.
None.
(c) The exhibits listed on the Index to Exhibits on page 41 are filed
with this Form 10-K or incorporated by reference as set forth
below.
(d) Additional Financial Statement Schedules.
None.
40
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 (incorporated by reference to Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.1 Long-Term Incentive Plan (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 (No. 333-
33285)).
10.2 Lease 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 dated as of December 30, 1998 among Stoneridge,
Inc., as Borrower, the Lending Institutions Named Therein, as
Lenders, DLJ Capital Funding, Inc., as Syndication Agent, National
City Bank, as Administrative Agent and Collateral Agent, PNC Bank,
NA as Documentation Agent, filed herewith.
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).
10.13 Stock Purchase Agreement by and among Stoneridge, Inc. and the
Shareholders of Hi-Stat Manufacturing Co., Inc., dated as of
December 7, 1998 (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K as of December 31, 1998).
10.14 Form of Change in Control Agreement, filed herewith.
21.1 Subsidiaries of the Company, filed herewith.
27.1 Financial Data Schedule for the year ended December 31, 1998,
filed herewith.
41
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 31, 1999 /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 31, 1999 /s/ D.M. DRAIME
-----------------------------------------
D.M. Draime
Chairman of the Board of Directors
Date: March 31, 1999 /s/ CLOYD J. ABRUZZO
-----------------------------------------
Cloyd J. Abruzzo
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 1999 /s/ AVERY S. COHEN
-----------------------------------------
Avery S. Cohen
Secretary and Director
Date: March 31, 1999 /s/ RICHARD E. CHENEY
-----------------------------------------
Richard E. Cheney
Director
Date: March 31, 1999 /s/ SHELDON J. EPSTEIN
-----------------------------------------
Sheldon J. Epstein
Director
Date: March 31, 1999 /s/ C.J. HIRE
-----------------------------------------
C.J. Hire
Director
Date: March 31, 1999 /s/ RICHARD G. LEFAUVE
-----------------------------------------
Richard G. LeFauve
Director
Date: March 31, 1999 /s/ EARL L. LINEHAN
-----------------------------------------
Earl L. Linehan
Director
42