ITEM 1. BUSINESS
THE COMPANY
The Company was founded in 1965 as a manufacturer of wire harnesses for the agricultural vehicle market. In 1987, the Company began to transition away from contract manufacturing into a value-added designer and manufacturer of highly engineered products by developing internal engineering capabilities and pursuing an acquisition program to expand product offerings. The Company completed its initial public offering on October 10, 1997 (the Offering).
The Company is a leading independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium and heavy duty truck and agricultural vehicle markets. The Company's products interface with a vehicle's mechanical and electrical systems to activate equipment and accessories, display and monitor vehicle performance, and control and distribute electrical power and signals. The Company has a leading market position in the design and manufacture of electrical and electronic modules and systems for the medium and heavy duty truck and agricultural vehicle markets. In the automotive market, the Company designs and manufactures specially designed and engineered electrical and electronic components and modules, typically on a sole-source basis.
RECENT ACQUISITIONS AND JOINT VENTURES
In November 1995, the Company acquired the business, machinery and equipment, intellectual property rights and purchase contracts of the actuator business of an original equipment manufacturer (OEM) supplier.
In April 1996, seeking to leverage its capabilities and diversify its OEM customer base, the Company acquired approximately 45% of Berifors AB (Berfiors), a Sweden-based manufacturer of electronic display panels and instrumentation for the European truck and commercial vehicle markets. In October 1997, the Company acquired the remaining 55% of Berifors, in exchange for 757,063 Common Shares, of which 52,500 Common Shares were held in escrow pending final closing in February 1998. As a result of this acquisition, the Company will be a worldwide supplier of instrumentation displays for heavy duty trucks to Mercedes Benz, Volvo and Scania.
In October 1997, the Company purchased 50% of the outstanding common stock of PST Industria Eletronica da Amazonia Ltda. (Positron), a Brazilian electronic components business which specializes in electronic vehicle security devices. Total cash consideration paid by the Company with respect to this investment was $17.7 million including fees and expenses.
In August 1997, the Company entered into two joint venture agreements with Connecto AB, a Swedish manufacturer of power distribution systems. Pursuant to the terms of the agreements the Company expects to pay approximately $2.4 million for a 60% interest in a Brazilian joint venture and $1.1 million for a 40% interest in a European joint venture. The joint ventures are establishing production facilities in Brazil and Europe for the purpose of manufacturing and selling power distribution systems in South America and Europe, respectively. In addition, the joint ventures will pursue sales and marketing efforts for other products and services of the joint venture partners.
DISCONTINUANCE OF CERTAIN CONTRACT MANUFACTURING BUSINESS
A division of General Motors has notified the Company that it is discontinuing all outsourcing of its wire harness requirements under contract manufacturing arrangements. The Company believes that by 1999 the General Motors division will produce in-house substantially all of its wire harnesses requirements previously supplied by the Company, although no assurance can be given that such sales by the Company will not end at an earlier date. The Company's net sales under this arrangement totaled approximately $95.1 million, $105.6 million and $65.4 million for 1997, 1996 and for 1995, respectively, or approximately 21.2%, 29.0% and 23.5% of total net sales for such periods.
PRODUCTS
The Company's products include vehicle electrical power and distribution systems, electronic and electrical switch products, electronic instrumentation and information display products, including the European instrumentation and information display products manufactured by Berifors, and actuator products.
The Company's four principal product categories are:
. Power Distribution Products. The Company designs and manufactures electrical power and signal distribution components, modules and systems, including fully integrated automotive and truck wiring systems and highly engineered products, such as power distribution panels, for the automotive, medium and heavy duty truck and agricultural vehicle markets. Power distribution systems regulate, coordinate and direct the operation of the entire electrical system within a vehicle or compartment. A significant portion of the Company's current power distribution business consists of contract manufacturing of wire harnesses for a division of General Motors.
. Switch Products. The Company designs and manufactures integrated electronic and electromechanical switch products which include hidden switches and customer-activated switches. These switches transmit a signal to a control device which activates specific functions. Hidden switches are those switches which are not typically seen by vehicle passengers but are utilized to activate or deactivate selected functions such as brake lights, cruise control functions and electronic safety features related to air bag and anti-lock braking systems. Customer- activated switches are used by a vehicle's operator or passengers to manually activate headlights, rear defrosters, heated seats and other accessories. The Company sells these products principally to the automotive market.
. Instrumentation and Information Display Products. The Company designs and manufactures electronic instrument clusters, driver message centers, power conversion products, tachographs, multiplexed modules and electrical systems and electronic switch modules. These products collect, store and display vehicle information such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled, and driver messages related to vehicle performance. These products utilize state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium and heavy duty truck and agricultural vehicle markets.
. Actuator Products. The Company designs and manufactures electromechanical actuator products that enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions. These products include power door lock and four-wheel-drive actuators and are sold principally to the automotive market.
The following table sets forth the approximate composition by product group represented by a percentage of the Company's net sales for the three fiscal years ended December 31, 1997, 1996, and 1995.
PRODUCTION MATERIALS
The principal production materials used in the Company's manufacturing processes include wire, cable, plastic housings, and certain electrical components such as fuses, relays, and connectors. The Company generally purchases such materials subject to annual contracts. Such materials are readily available from multiple sources, but the Company generally establishes collaborative relationships with a qualified supplier for each of its key production materials in order to lower costs and enhance service and quality.
PATENTS AND INTELLECTUAL PROPERTY
The Company maintains and has pending various U.S. and foreign patents and other rights to intellectual property relating to its business, which it believes are appropriate to protect the Company's interests in existing products, new inventions, manufacturing processes and product developments. The Company does not believe any single patent is material to its business, nor would the expiration or invalidity of any patent have a material adverse effect on its business or its ability to compete. The Company is not currently engaged in any infringement litigation, nor are there any claims pending by or against the Company.
INDUSTRY CYCLICALITY AND SEASONALITY
The markets for the Company's products have historically been cyclical. Because the Company's products are used principally in the production of vehicles for the automotive, medium and heavy duty truck and agricultural vehicle markets, its sales and therefore its results of operations are significantly dependent on the general state of the economy and other factors which affect these markets. A decline in automotive, medium and heavy duty truck and agricultural vehicle production could adversely impact the Company. Approximately 65%, 72% and 70 % of the Company's net sales in 1997, 1996 and 1995 respectively, were made to the automotive market and approximately 33%, 27% and 29% of the net sales in 1997, 1996 and 1995 respectively, were derived from the medium and heavy duty and agricultural vehicle markets.
Demand for the Company's products has been seasonal. The Company typically experiences decreased net sales during the third calendar quarter of each year due to the impact of scheduled OEM plant shutdowns in July for vacations and new model changeovers. The fourth quarter is also impacted by plant shutdowns for the holidays.
RELIANCE ON MAJOR CUSTOMERS
The Company is dependent on a small number of principal customers for a significant percentage of its net sales. The loss of any significant portion of its sales to these customers or any other significant customers would have a material adverse impact on the financial condition and results of operations of the Company. The contracts the Company has entered into with many of its customers provide for supplying the customers' requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of the Company's major customers could have a material adverse impact on the Company. The Company also competes to supply products for successor models and is subject to the risk that the customer will not select the Company to produce products on any such model, which could have a material adverse impact on the financial condition and results of operations of the Company.
The following table presents the major customers, as a percentage of net sales, of the Company for the years ended December 31, 1997, 1996 and 1995:
The following table presents an overview of the major vehicle models for which the Company is producing components, modules or systems in 1997:
AUTOMOTIVE
MEDIUM AND HEAVY DUTY TRUCK & AGRICULTURAL
BACKLOG
The majority of the Company's products are not on a backlog status. They are produced from readily available materials such as wire, cable, housings and electronic components and have a relatively short manufacturing cycle. Each operating unit of the Company maintains its own inventories and production schedules. Production capacity is adequate to handle current requirements and will be expanded to handle increased growth where needed.
COMPETITION
Markets for the Company's products are highly competitive. Quality, service, price, timely delivery, and technological innovation are the primary elements of competition. The Company competes for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM usually will continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns.
PRODUCT DEVELOPMENT
In order to increase its vehicle platform penetration, the Company has invested, and intends to continue to invest, significant amounts in its technology and design capabilities. The Company's product development expenditures were $14.1 million, $9.3 million and $6.7 million for 1997, 1996 and 1995, respectively, or 4.0%, 3.6% and 3.1% of core electrical and electronic components, modules and systems sales for such periods. These development efforts have strengthened the Company's ability to provide higher value-added products and systems, and have resulted in the introduction of new products such as the four-wheel-drive actuator (shift on demand) and the auto- stick (which enables a driver to manually shift an automatic transmission using a unique electronic switch). The Company's technical centers in Massachusetts, Michigan, Ohio, Brazil, Mexico and Sweden develop and test both new and existing products and concepts. In addition, through its advanced technologies group comprised of dedicated engineers, the Company concentrates on the development of its next generation of products. To further increase vehicle platform penetration, the Company has developed collaborative relationships with the design and engineering departments of its key OEM customers. These collaborative efforts have resulted both in the development of new and complementary products and the enhancement of existing products.
ENVIRONMENTAL AND OTHER REGULATIONS
The Company's operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The Company believes that its business, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.
EMPLOYEES
As of December 31, 1997, the Company, including Berifors, had approximately 4,400 employees, approximately 1,300 of whom were salaried and the balance of whom were paid on an hourly basis. Except for certain employees located in Chihuahua, Mexico, and Orebro and Stockholm, Sweden, the Company's employees are not represented by a union. The Company believes that its relations with its employees are excellent. The Company believes strongly in employee education and sponsors a number of educational opportunities and programs for its employees.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
D.M. Draime, founder of the Company, has served as Chairman of the Board of Directors of the Company and its predecessors since 1965 and as a director of the Company since 1988.
Cloyd J. Abruzzo has served as President and Chief Executive Officer of the Company or its predecessors since June 1993 and as a director of the Company since 1990. From 1984 to June 1993, Mr. Abruzzo was the Vice President and Chief Financial Officer of the Company or its predecessor. Mr. Abruzzo serves as a director of Second National Bank of Warren.
Kevin P. Bagby has served as Vice President of the Company, Chief Financial Officer and Treasurer since joining the Company in July 1995. Mr. Bagby was employed by Kelsey-Hayes as Director of Business Analysis from June 1994 to July 1995 and as Director of Finance for the Foundation Brakes Business Unit from January 1991 to June 1994.
Sten Forseke, a co-founder of Berifors, has served as Vice President of the Company since the acquisition of Berifors in 1997 and Managing Director of Berifors since 1988.
Gerald V. Pisani has served as Vice President of the Company since 1989 and President of the Pollak Engineered Products Group since 1985.
David L. Thomas has served as Vice President of the Company and President of the Company's Alphabet Group since 1989.
Avery S. Cohen has served as Secretary and a director of the Company since 1988. He has been a partner in the law firm of Baker & Hostetler LLP since 1993. From 1989 to 1993, Mr. Cohen was a partner with the law firm of Benesch, Friedlander, Coplan & Aronoff.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently owns or leases nine manufacturing facilities, which together contain approximately one million square feet of manufacturing space. The following table provides information regarding the Company's facilities:
- -------- (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.
ITEM 3. LEGAL PROCEEDINGS
The Company has no pending litigation which it believes will have a material adverse impact upon the Company. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its Company will not experience any material product liability losses in the future. In addition, if any of the Company's products causes personal injury or death to users of the Company's products, and there can be no assurance that the products prove to be defective, the Company may be required to participate in a government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such liability claims.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1997.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) On March 20, 1998, the Company had 22,397,311 shares of its Common Shares with no par value outstanding, which were owned by 3,475 shareholders of record.
The Company has neither paid nor declared dividends on its Common Share since its Offering, except for the payment or declaration of S-corporation distributions of $85,600,000 to pre-Offering shareholders. The Company currently intends to retain earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction in outstanding indebtedness. Accordingly, the Company does not expect to pay cash dividends in the foreseeable future.
High and low sales prices (as reported on the New York Stock Exchange "NYSE" composite tape) for the Common Shares for each quarter during 1996 and 1997.
- -------- 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical and pro forma financial data for the Company and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein. The selected historical data for the years ended December 31, 1997, 1996, 1995 and 1994 are derived from the Company's consolidated financial statements, which were audited by Arthur Andersen LLP, the Company's independent accountants. The selected historical data for the year ended December 31, 1993 is derived from the unaudited combined financial statements of the Company. These combined financial statements of the Company have been prepared on a basis consistent with the Company's audited financial statements.
- -------- (1) Results reflect the combined results of operations and financial position of Stoneridge Inc., Alphabet Inc. and Alphastac, Inc. (Pollak). (2) Results reflect the acquisition of an automotive product line in November 1995.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared To Year Ended December 31, 1996
Net Sales. Net sales for 1997 increased by $85.8 million, or 23.6%, to $449.5 million from $363.7 million in 1996. Sales of core electrical and electronic components, modules and systems increased by $96.2 million, or 37.3%, to $354.4 million during 1997 compared with $258.2 million in 1996. Net sales of contract manufacturing wire harnesses of $95.1 million were 9.9% lower than 1996, reflecting declining customer production levels. As expected, contract manufacturing sales declined to 21.2 % of total sales revenue for the year compared with 29.0% in 1996. Concurrent with its initial public offering, the Company acquired Berifors AB, a Swedish manufacturer of electronic instrumentation and information display systems. The acquisition, which occurred in October 1997, increased sales revenue by $10.1 million in 1997. Excluding the impact of the Berifors AB acquisition, sales revenue of core products increased by $86.1 million, or 33.3%, compared with 1996.
Sales for 1997 of actuator products increased by $41.8 million to $72.3 million from $30.5 million in 1996. Full production of actuator products (acquired in late 1995) was not reached until approximately November 1996. The 1997 launch of a new four-wheel-drive actuator product significantly increased shipments of actuator products. Sales for 1997 of power distribution products, exclusive of contract manufacturing, increased by $25.7 million, or 30.8%, to $109.2 million due to increased market penetration in the medium and heavy duty truck market and higher net sales to the agricultural vehicle market of $15.5 million and $7.1 million, respectively. Passenger car/light truck market product introductions increased power distribution sales by $3.1 million. Sales for 1997 of electrical instrumentation and information displays increased by $8.6 million, or 22.9%, due principally to the introduction of new information clusters for the medium and heavy duty truck market. Sales for 1997 of switch products increased by $5.4 million, or 5.0%, reflecting higher production levels in served markets and new product launches.
Cost of Goods Sold. Cost of goods sold for 1997 increased by $53.2 million, or 18.5%, to $341.3 million from $288.1 million in 1996. As a percentage of sales, cost of goods sold decreased to 75.9% in 1997 from 79.2% in 1996 while the corresponding gross profit margin increased to 24.1% in 1997 from 20.8% in 1996. The improvement in gross profit margin primarily resulted from improved operating leverage associated with increased actuator product sales. The consolidation of two power distribution/contract manufacturing facilities eliminated certain fixed costs and also contributed to the increase in gross margin. In addition, gross margin was favorably impacted by increased efficiencies resulting from higher production of power distribution, switch and electronic instrumentation and information display systems.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses for 1997 increased by $9.1 million, or 19.5%, to $55.8 million from $46.7 million in 1996. As a percentage of sales, SG&A expenses decreased to 12.4% for 1997 from 12.8% in 1996. The acquisition of Berifors AB increased SG&A by $2.2 million, which included $1.6 million in product development costs, compared with the same period in 1996. Product development expenses increased $4.9 million in 1997 or 52.4% to $14.1 million from $9.2 million in 1996. This increase included the $1.6 million for Berifors AB, medium and heavy-duty truck instrumentation and information display products were responsible for $1.8 million and the remaining $1.5 million was primarily spent on the actuator product line. An additional $2.0 million of marketing and administrative expense was also due to the launch of the actuator product line. Other marketing support and administrative overhead costs increased an additional $5.9 million due to increased infrastructure requirements to support higher sales levels. These increases were offset by a $4.3 million decrease in expenses due to the expiration of the actuator products transition services agreement in October 1996.
Interest Expense. Interest expense for 1997 decreased by $1.1 million, or 25.8%, to $3.2 million from $4.3 million in 1996. The decrease was due to a lower average outstanding indebtedness.
Other Income. Other income of $1.7 million for 1997 represents a gain on the sale of certain transportation equipment. The Company received cash proceeds of $2.3 million from the sale, which were used to retire a note payable collateralized by the transportation equipment.
Income Before Income Taxes. As a result of the foregoing, income before taxes increased by $26.3 million for 1997 to $50.9 million from $24.6 million in 1996.
Provision for Income Taxes. Prior to October 1997, the Company was an S corporation for federal and, where qualified, state income tax purposes. Accordingly, the Company recognized provisions for income taxes of $5.1 million and $0.5 million for federal, state and foreign income taxes for 1997 and 1996, respectively. Had the Company been subject to federal and state income taxes at the corporate level for all of 1997 and 1996, the Company would have recorded provisions for income taxes of $21.2 million and $10.3 million for 1997 and 1996, respectively.
Income Tax Benefit from the Reinstatement of Deferred Taxes. In connection with the Company's initial public offering in October 1997, the Company terminated its S corporation status. Accordingly, the Company became subject to federal and state income taxes as a C corporation. As a result, a net current deferred income tax asset and a net non-current deferred income tax liability of $4.1 million and $ 2.9 million, respectively, were recorded with an offsetting benefit to income of $1.2 million.
Net Income. As a result of the foregoing, net income increased by $22.9 million, or 95.1%, to $47.0 million in 1997 from $24.1 million in 1996. Had the Company been subject to federal and state income taxes at the corporate level, the Company's pro forma net income would have been $29.7 million and $14.3 million for 1997 and 1996, respectively.
Year Ended December 31, 1996 Compared To Year Ended December 31, 1995
Net Sales. Net sales for 1996 increased by $85.7 million, or 30.8%, to $363.7 million from $278.0 million in 1995. Of this increase, $53.4 million was due to materials purchased for contract manufacturing (previously supplied by the customer) with a division of General Motors. Such increase was partially offset by a 20.3% decline in unit volume, or $13.3 million of net sales. The acquisition of the actuator business in 1995 increased 1996 net sales by approximately $29.5 million. In addition, increased market penetration related to switch products and power distribution products resulted in increased sales of $12.4 million and $8.7 million, respectively. Partially offsetting these increases, net sales of power distribution, instrumentation and information displays product lines decreased by $15.9 million as a result of lower OEM production volumes of medium and heavy duty trucks and a decline in the market share of an automotive OEM customer. Net sales of power distribution products to the agricultural vehicle market increased by $5.6 million.
Cost of Goods Sold. Cost of goods sold for 1996 increased by $76.4 million, or 36.1%, to $288.1 million from $211.7 million in 1995. As a percentage of net sales, cost of goods sold increased to 79.2% in 1996 from 76.1% in 1995, while the corresponding gross profit margin decreased to 20.8% in 1996 from 23.9% in 1995. The change in the contract manufacturing arrangement with the division of General Motors caused a reduction in gross profit margin of 1.7%. Gross profit was adversely impacted by start-up inefficiencies and $1.0 million of expenses associated with the relocation of switch production to the Company's new Canton, Massachusetts, facility. The remaining decrease was related to the decline in volume of instrumentation and information displays and power distribution product lines.
Selling, General and Administrative Expenses. SG&A expenses for 1996 increased by $9.2 million, or 24.5%, to $46.7 million from $37.5 million in 1995. As a percentage of net sales, SG&A expenses decreased to 12.8% in 1996 from 13.5% in 1995 because the change in the contract manufacturing arrangement with a division of General Motors had minimal effect on SG&A expenses. The transitional services agreement expense related to the commercial and process engineering support for the relocation of the actuator business increased SG&A expenses by $4.3 million in 1996 compared with $0.9 million in 1995. These costs were incurred from
November 1995 to October 1996. Product development and engineering costs increased by $2.6 million, or 39.0%, as a result of costs associated with the launch of power distribution systems and instrument displays for a medium duty vehicle, the launch of the four-wheel-drive and new door lock actuator products and development costs associated with products to be launched in 1998. Costs associated with marketing and technical resource enhancements to provide improved customer support accounted for $1.4 million of the increase in SG&A expenses.
Interest Expense. Interest expense for 1996 increased by $2.3 million to $4.3 million from $2.0 million in 1995. The increase was due to additional borrowings to finance the acquisition of the actuator products business in November 1995 and the initial investment in Berifors AB in April 1996. In addition, the average borrowing rate increased to 7.4% in 1996 from 7.0% in 1995.
Income Before Income Taxes. As a result of the foregoing, income before income taxes decreased by $2.2 million, or 8.2%, to $24.6 million in 1996 from $26.8 million in 1995.
Provision for Income Taxes. Prior to the Offering, the Company was an S corporation for federal and, where qualified, state income tax purposes. Accordingly, the Company recognized provisions for income taxes of $0.5 million and $0.7 million for foreign income and state franchise taxes in 1996 and 1995, respectively. Had the Company been subject to federal and state income taxes at the corporate level, the Company would have recognized provisions for income taxes of approximately $10.3 million in 1996.
Net Income. As a result of the foregoing, net income decreased by $2.1 million, or 8.0%, to $24.1 million in 1996 from $26.2 million in 1995. Had the Company been subject to federal and state income taxes at the corporate level, the Company's net income for 1996 would have been $14.3 million.
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided by operating activities for 1997 and 1996 was $63.8 million and $25.3 million, respectively. The increase in cash provided by operating activities for 1997 as compared with 1996 was $38.5 million. The increase in cash provided by operating activities was the result of higher net income of $22.9 million and a decrease in working capital requirements and other operating assets of $15.6 million.
The net cash used for investing activities in 1997 and 1996 was $27.7 million and $18.1 million, respectively. The increase in cash used from investing activities of $9.6 million for 1997 as compared with 1996 was a result of lower net capital expenditures of $1.8 million, a decrease in proceeds from the sale of fixed assets of $2.5 million and nonrecurring investments in Berifors AB of $8.8 million in April 1996 and in PST Industria Eletronica da Amazonia Ltda. (Positron) of $17.7 million in 1997.
Net cash used for financing activities for 1997 and 1996 was $35.2 million and $7.1 million, respectively. Cash distributions for 1997 and 1996 were $105.0 million and $13.2 million, respectively. Proceeds from the exercise of share options were $2.5 million for the year ended December 31, 1997. In October 1997, the Company completed its initial public offering of 6,727,500 common shares, resulting in net proceeds of $108.7 million. Concurrent with the initial public offering, certain officers and management of the company purchased 510,181 common shares, resulting in net proceeds of $8.3 million. Net proceeds from these offerings were used to pay an S corporation distribution and to repay borrowings under the credit facility.
As a result of the foregoing, net borrowings under the credit facility decreased $47.4 million in 1997 while net borrowings under the credit facility increased $2.7 million in 1996.
The Company has a $125.0 million unsecured credit facility (of which $0.5 million was outstanding as of December 31, 1997), which expires on June 30, 2002. Interest on the credit facility is payable at the Company's option at either prime rate or LIBOR plus 0.75% to 2.0%. Currently the Company is borrowing at LIBOR plus 0.75%. The Company has entered into two interest rate swap agreements with notional amounts of $25.0 million
and $20.0 million. The interest rate swap agreements exchange the variable interest rate on the credit facility for fixed rates. The Company does not use derivatives for speculative or profit-motivated purposes.
INFLATION
Management believes that the Company's operations have not been adversely affected by inflation.
YEAR 2000 INITIATIVE
The Company has performed an assessment of its computer systems to determine their compliance with the Year 2000. Based on this assessment, some of the Company's internal information systems are in the process of being upgraded or replaced with Year 2000-compliant systems. The Company will use internal and external resources to replace, reprogram and test software and hardware, where necessary, to ensure Year 2000 compliance. The Company is also communicating with its customers, suppliers, financial institutions and others to coordinate the Year 2000 conversion. The majority of the systems are planned to be completed by December 1998 and the entire Year 2000 project by July 1999. The total cost of the project is not expected to have a material effect on the Company's financial condition or results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Stoneridge, Inc.:
We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. (an Ohio corporation) and Subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stoneridge, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio, February 9, 1998
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets.
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
1. ORGANIZATION AND NATURE OF BUSINESS
Effective January 1, 1994, Alphabet, Inc. (Alphabet) and Alphastac, Inc. (Alphastac) were merged into Stoneridge, Inc. (Stoneridge). Stoneridge was the surviving entity of the above merger transaction. Since Alphabet, Alphastac and Stoneridge shared common ownership, the merger of these entities was accounted for in a manner similar to a pooling of interest.
Stoneridge is an independent designer and manufacturer of engineered electrical and electronic components, modules and systems for the automotive, medium and heavy duty truck, and agricultural vehicle markets and operates in one business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Stoneridge and its majority-owned subsidiaries (collectively, the Company). All significant intercompany balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.
Accounts Receivable
Revenues are principally generated from the automotive, medium and heavy duty truck, and agricultural vehicle markets. Due to the nature of these industries, a significant portion of sales and related accounts receivable are concentrated in a relatively low number of customers. In 1997, three customers accounted for approximately 32%, 21% and 10% of net sales, while the top five customers accounted for 76% of net sales. The same three customers accounted for approximately 39%, 18% and 10% of the Company's 1996 net sales, and its top five customers accounted for approximately 76% of its 1996 net sales. Accounts receivable from the Company's five largest customers aggregated approximately $45,210 and $38,383 at December 31, 1997, and 1996, respectively.
A division of General Motors has notified the Company that it is discontinuing all outsourcing of its wire harness requirements under contract manufacturing arrangements. The Company believes that by 1999, the General Motors division will produce in-house substantially all of its wire harness requirements previously supplied by the Company, although no assurance can be given that such sales by the Company will not end at an earlier date. In 1997, the Company's net sales under this arrangement totaled approximately $95.1 million and contributed approximately $6.7 million in operating income. There can be no assurance that the Company will be able to offset reductions in its sales and operating profits resulting from the reduction in sales to the General Motors division.
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Inventories
Inventories are valued at the lower of cost or market, determined by using the last-in, first-out (LIFO) method of inventory accounting. Inventory cost includes material, labor and overhead. Inventories consist of the following at December 31:
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consists of the following at December 31:
Depreciation is provided by both the straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $11,273, $8,686 and $7,284, respectively. Depreciable lives within each property classification are as follows:
Maintenance and repair expenditures which are not considered betterments and do not extend the useful life of property are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is credited or charged to income.
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Goodwill and Other Intangibles
The primary component of goodwill and other intangible assets, net of accumulated amortization, in the accompanying consolidated balance sheets represents the excess of the purchase price paid over the fair market value of acquired assets and assumed liabilities. Goodwill is being amortized over 40 years on a straight-line basis. Amortization expense totaled approximately $1,495, $1,180 and $695 in 1997, 1996 and 1995, respectively. Accumulated amortization as of December 31, 1997, and 1996 was $6,969 and $5,474, respectively. The Company regularly evaluates its accounting for goodwill. Impairment of goodwill would be recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Measurement of the amount of impairment will be based on appraisal, market value of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at December 31:
Income Taxes
Prior to the initial public offering (Offering) discussed in Note 3, the Company was an S corporation. As an S corporation, the Company's profits were taxed directly to its shareholders for federal income tax and certain state income tax purposes. Certain state taxes were paid directly by the Company. Concurrent with the Offering, the Company terminated its S corporation status. The Company is subject to federal, state and foreign income taxes.
The Company accounts for income taxes, using the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not.
Foreign Currency Translation Adjustment
The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from translation of financial statements are reflected as a separate component of shareholders' equity.
The financial statements of foreign subsidiaries where the U.S. dollar is the functional currency and which have certain transactions denominated in a local currency are remeasured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates translation adjustments which are included in net income. All translation and transaction activity was insignificant in 1997, 1996 and 1995.
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Revenue Recognition
The Company recognizes revenues from the sale of products at the point of passage of title, which is generally at the time of shipment.
Product Development Expenses
Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. The costs amounted to $14,114, $9,263 and $6,664 in 1997, 1996, and 1995, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, since the exercise price of employee share options equals the market price of the shares on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation."
Financial Instruments and Derivative Financial Instruments
Financial instruments held by the Company include cash and cash equivalents, accounts receivable, accounts payable, credit facility, long-term debt and interest rate swap agreements. The book value of cash and cash equivalents, accounts receivable and payables are considered to be representative of fair value because of the short maturity of these instruments. The fair values of borrowings under the credit facility and long-term debt are based on rates available to the Company for debt with comparable terms and maturities.
The interest rate swap agreements convert floating rate debt under the Company's credit facility to fixed-rate debt. As the outstanding balance on the Company's credit facility was significantly less than the notional amount of the interest rate swap agreements, the carrying value of the interest rate swap agreements was marked to market and recognized in interest expense in 1997.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including certain self-insured risks and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
Accounting Standards
The Company adopted Statement of Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1996. SFAS 121 requires long-lived assets and certain identifiable intangible assets to be reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of this Standard did not have an effect on the Company's financial statements. Management periodically reviews the realizability of long-lived assets of the Company in accordance with SFAS 121.
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
The Company adopted Statement of Financial Accounting Standard No. 128 (SFAS 128), "Earnings per Share," in 1997. SFAS 128 requires the presentation of basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by all weighted average dilutive potential common shares that were outstanding during the period.
3. OFFERING OF COMMON SHARES
On October 10, 1997, the Company completed its Offering of 6,727,500 Common Shares, resulting in net proceeds (after deducting issuance costs) of $108,693. Net proceeds from the Offering was used to pay an $83,000 S corporation distribution, and the remaining proceeds were used to repay net borrowings under the credit facility discussed in Note 6. Concurrent with the initial public offering, certain officers and management of the Company purchased 510,181 Common Shares (Management Reinvestment), resulting in net proceeds of $8,326. Subsequent to December 31, 1997, a final S corporation distribution of $2,600 was paid.
In connection with the Offering, the Company amended its Articles of Incorporation to change the authorized share capital of the Company from 37,724 shares of Class A Common, voting, without par value, and 87,276 shares of Class B Common, non-voting, without par value, to 60,000,000 Common Shares, without par value and 5,000,000 shares of voting preferred shares, without par value. The amended Articles of Incorporation provided that each Class A Common Share and Class B Common Share automatically became 139.0856 Common Shares. All applicable share and per share data has been adjusted accordingly in these financial statements.
4. ACQUISITIONS
On November 1, 1995, the Company acquired an automotive product line and the related machinery and equipment, intellectual property rights and purchase contracts. The Company also entered into a certain transition services agreement with the seller in conjunction with this acquisition. In connection with the transition services agreement, the seller provided certain services during the period November 1995 through October 1996 for cash consideration of $5,200. The Company recorded $4,254 and $946 of expense in 1996 and 1995, respectively, relative to the transition services agreement. The acquisition was accounted for as a purchase, and the excess of the cost over the fair value of the assets acquired, totaling approximately $14,000, was reflected as goodwill in the accompanying consolidated balance sheets. Total consideration paid by the Company with respect to this acquisition including payments under the transition services agreement was approximately $24,000.
In April 1996, the Company purchased 45% of the outstanding common stock of Berifors AB (Berifors), a Sweden-based manufacturer of electronic instrumentation and information displays for the European truck and commercial vehicle markets, for approximately $8,834. The investment was accounted for under the equity method of accounting. The excess of the amount paid over the book value of the assets acquired, totaling $7,200, is being amortized over 40 years on a straight-line basis. On October 10, 1997, the Company acquired the remaining 55% of Berifors, in exchange for 757,063 Common Shares, of which 52,500 Common Shares are held in escrow pending final closing in February 1998. The transaction was accounted for as a purchase. The excess of the purchase price over the book value of assets acquired, totaling $10,439, is being amortized over 40 years on a straight-line basis. The results of operations of Berifors are included in the accompanying financial statements from the date of acquisition.
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
5. INVESTMENTS
In October 1997, the Company purchased 50% of the outstanding common stock of PST Industria Eletronica da Amazonia Ltda. (Positron), a Brazilian electronic components business which specializes in electronic vehicle security devices. The investment is accounted for under the equity method of accounting. Total cash consideration paid by the Company with respect to this investment was $17,722 including fees and expenses. The allocation of purchase price resulted in intangibles, primarily non-compete covenants and goodwill of $2,000 and $12,622, respectively, which are being amortized over periods of two to 40 years. Amortization expense was $469 in 1997. The acquisition was financed through borrowings under the credit facility discussed in Note 6. In 1998, the Company issued a $5,000 note to Positron. The proceeds of the note were used for the repayment of existing debt. The note is secured by certain assets of Positron.
In August 1997, the Company entered into two joint venture agreements with Connecto AB, a Swedish manufacturer of power distribution systems. Pursuant to the terms of the agreements, the Company expects to pay approximately $2,400 for a 60% interest in a Brazilian joint venture and $1,100 for a 40% interest in a European joint venture. As of December 31, 1997, the Company incurred costs of approximately $250 related to these joint ventures. The joint ventures are establishing production facilities in Brazil and Europe for the purpose of manufacturing and selling power distribution systems in South America and Europe, respectively. In addition, the joint ventures will pursue sales and marketing efforts for other products and services of joint venture partners to the extent practicable. The Company will finance its investments in the joint ventures through borrowings under the credit facility discussed in Note 6.
6. LONG-TERM DEBT
The Company has a $125,000 unsecured credit facility with a bank group. The credit facility expires on June 30, 2002, and requires a commitment fee of 1/10% to 1/4% on the unused balance. Interest is payable quarterly at the Company's option at either (i) the prime rate or (ii) LIBOR plus a margin of 0.75% to 2.0%, depending upon the Company's fixed charge coverage ratio, as defined. Credit facility borrowings were supported by individual notes with maturities of three months or less.
The Company has entered into a $25,000 interest rate swap agreement with a member of the bank group whereby its contractual interest rate was swapped through February 1999 for a fixed rate of 5.795% plus a margin of 0.75% to 2.0%, depending upon the Company's fixed charge coverage ratio, as defined. The notional amount under the swap agreement remains at $25,000 through maturity. Additionally, the Company has entered into a separate $20,000 interest rate swap agreement with a member of the bank group whereby its contractual interest rate was swapped through August 1999 for a fixed rate of 6.28% plus a margin of 0.75% to 2.0%, depending upon the Company's fixed charge coverage ratio, as defined, provided the LIBOR rate is less than 7.50%. This swap agreement is ineffective when the LIBOR rate is equal to or greater than 7.50%. The notional amount under the swap agreement remains at $20,000 through maturity. The Company is exposed to credit loss under the swap agreements in the event of nonperformance by the bank. As of December 31, 1997, the Company would have paid approximately $157 to the bank had it elected to terminate these interest rate swap agreements. The Company has accrued these termination costs in these financial statements, as the outstanding credit facility borrowings were less than the combined notional amount of the swap agreements.
The weighted average interest rate in effect for the years ended December 31, 1997, 1996 and 1995 was approximately 7.1%, 7.4% and 7.0%, respectively, including the effects of the interest rate swap agreements.
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Long-term debt consists of the following at December 31:
The credit facility contains various covenants which require, among other things, the maintenance of several financial ratios and minimum net worth levels while restricting capital expenditures and dividends. The Company was in compliance with these covenants at December 31, 1997.
Future maturities of long-term debt as of December 31, 1997, are as follows:
7. INCOME TAXES
The provision for income tax included in the accompanying financial statements represents federal, state, and foreign income taxes for the period October 9, 1997, to December 31, 1997, and state income taxes for certain states for 1995, 1996 and the period January 1, 1997, to October 8, 1997. The provision for income taxes consists of the following for the years ended December 31:
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
A reconciliation of the Company's effective income tax rate to the statutory federal tax rate has been omitted, as presentation of such information is not meaningful.
As a result of the Company's conversion to C corporation status on October 9, 1997, current deferred income tax assets and noncurrent deferred income tax liabilities of approximately $4,073 and $2,906, respectively, were recorded offsetting a cumulative effect benefit of $1,167.
Deferred tax assets and liabilities consist of the following at December 31:
8. OPERATING LEASE COMMITMENTS
The Company leases equipment, vehicles and a building from third parties under operating lease agreements.
The Company also leases some of its facilities from certain related parties. The leases are accounted for as operating leases and are for various terms ranging from three to 20 years with additional renewal options. The Company is generally responsible for repairs and maintenance, taxes and insurance.
For the years ended December 31, 1997, 1996 and 1995, lease expense totaled $2,313, $2,255 and $1,683, respectively, under these agreements.
Future minimum operating lease commitments at December 31, 1997, are as follows:
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
9. SHARE OPTION PLANS
In March 1995, the Company granted 90,545 options to key executives to purchase Common Shares at $4.82 per share. The options were vested upon grant, and all options were exercised in June 1996.
In June 1996, the Company granted an additional 438,119 options to directors and key executives to purchase Common Shares at $5.74 per share. The options were exercised prior to the Offering. The Company recorded compensation expense of $450 in 1997 and 1996, in the accompanying consolidated financial statements relative to these options.
In October 1997, the Company adopted a Long-Term Incentive Plan (Incentive Plan). The Company has reserved 1,000,000 Common Shares for issuance under the Incentive Plan. Under the Incentive Plan, the Company granted options to purchase 498,000 Common Shares to management with exercise prices equal to the fair market value of the Company's Common Shares at the date of grant. The options will vest two years after the date of grant.
Information relating to the Company's outstanding options is as follows at December 31, 1997:
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:
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:
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan covering substantially all of the employees. Company contributions are discretionary; however, a portion of these contributions are based upon a percentage of employee compensation, as defined in the plan. The Company's policy is to fund all profit sharing costs accrued. There are no unfunded prior service costs. For the years ended December 31, 1997, 1996 and 1995, contributions amounted to $1,828, $1,356 and $1,538, respectively.
Additionally, the Company has a defined contribution profit sharing retirement plan, which covers certain other employees. The plan includes the provisions of a Section 401(k) plan and allows employees to contribute up to 14% of their eligible compensation. Company contributions are determined by the Board of Directors; however the Company must match 50% of the participating employees' contributions up to a maximum of 3% of their eligible compensation. For the years ended December 31, 1997, 1996 and 1995, the Company's contributions amounted to $1,446, $1,125 and $950, respectively.
The Company does not provide any other material retirement, postretirement or postemployment benefits to its employees.
11. RELATED PARTY TRANSACTIONS
In 1996, the Company sold a building to an affiliated entity for $2,200. The excess of the sales price over the carrying value of the building was $562 and was recorded as a capital contribution. During 1996, prior to the sale of this building, the Company received approximately $235 in lease payments and recognized related depreciation and interest expense totaling approximately $108. In 1995, the Company recognized lease revenue of $278 and depreciation and interest expense of $207 and $194, respectively.
The Company provided management services to a related company in the amount of $300 annually and also paid the salary of a certain key employee of the related company, amounting to $76, $180 and $182 in 1997, 1996 and 1995, respectively. Beginning on September 1, 1997, the salary payments were paid by the related company.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and payables are considered to be representative of fair value because of the short maturity of these instruments. In management's opinion, the estimated fair value of the Company's long-term debt approximates book value, as under the terms of the borrowing arrangements, a significant portion of the obligations are subject to fluctuating market rates of interest.
Derivative financial instruments as of December 31, 1997, and 1996, held for purposes other than trading, include two swap agreements which mature during 1999. The notional amounts and fair values of the swap agreements are as follows at December 31:
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
13. UNAUDITED PRO FORMA INFORMATION
The unaudited pro forma net income for the years ended December 31, 1997, 1996 and 1995, assumes that the Company was subject to income taxes as a C corporation.
Unaudited pro forma net income per share has been calculated by dividing pro forma net income by the weighted average number of Common Shares outstanding, the number of Common Shares issued in connection with the Offering discussed in Note 3 (6,727,500), the number of Common Shares issued in connection with the exercise of share options (438,119), and the number of Common Shares to be issued in connection with the Management Reinvestment discussed in Note 3 (510,181).
14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is involved in various legal proceedings, workers' compensation and product liability disputes. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company.
15. UNAUDITED QUARTERLY FINANCIAL DATA
The following is a condensed summary of actual quarterly results of operations for 1997 and 1996:
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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Stoneridge, Inc.:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Stoneridge, Inc. and Subsidiaries included in this Form 10-K, and have issued our report thereon dated February 9, 1998. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule on page 35 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Cleveland, Ohio, February 9, 1998
STONERIDGE, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
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.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to the information under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 4, 1998, and the information under the heading "Executive Officers" in Part I of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the information under the heading "Executive Compensation" contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 4, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to the information under the heading "Security Ownership of Certain Beneficial Owners and Management" contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 4, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the information under the heading "Transactions with Management" contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 4, 1998.
PART IV.
ITEM 14.
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.
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(b) The following reports on Form 8-K were filed during the quarter ended December 31, 1997.
None.
(c) The exhibits listed on the Index to Exhibits on page 39 are filed with this Form 10-K or incorporated by reference as set forth below.
(d) Additional Financial Statement Schedules.
None.
INDEX TO EXHIBITS
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Stoneridge, Inc.
Date: March 27, 1998 /s/ Kevin P. Bagby _____________________________________ KEVIN P. BAGBY Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)
PURSUANT TO THE REQUIREMENTS OF SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
Date: March 27, 1998 /s/ D.M. Draime _____________________________________ D.M. DRAIME Chairman of the Board of Directors
Date: March 27, 1998 /s/ Cloyd J. Abruzzo _____________________________________ CLOYD J. ABRUZZO President and Chief Executive Officer (Principal Executive Officer)
Date: March 27, 1998 /s/ Avery S. Cohen _____________________________________ AVERY S. COHEN Secretary and Director
Date: March 27, 1998 /s/ Richard E. Cheney _____________________________________ RICHARD E. CHENEY Director
Date: March 27, 1998 /s/ Sheldon J. Epstein _____________________________________ SHELDON J. EPSTEIN Director
Date: March 27, 1998 /s/ Earl L. Linehan _____________________________________ EARL L. LINEHAN Director