SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended Commission file number 001-13337 September 30, 1999. 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ----- The number of Common Shares, without par value, outstanding as of November 8, 1999 : 22,397,311
STONERIDGE, INC. INDEX <TABLE> <CAPTION> Page No. Part I Financial Information <S> <C> Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 2 Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 4 Notes to Condensed Consolidated Financial Statements 5-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 Item 3. Quantitative and Qualitative Disclosure About Market Risk 12 Part II Other Information 13 Signatures 14 Exhibit Index 15 </TABLE> 1
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STONERIDGE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> September 30, December 31, 1999 1998 ------------ ------------ (unaudited) (audited) ASSETS - ------ <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 4,644 $ 1,876 Accounts receivable, net 100,785 84,655 Inventories 63,615 53,273 Prepaid expenses and other 9,914 5,983 Deferred income taxes 11,793 11,679 ----------- ---------- Total current assets 190,751 157,466 ----------- ---------- PROPERTY, PLANT AND EQUIPMENT, net 101,628 94,770 OTHER ASSETS: Goodwill, net 365,333 351,501 Other intangible assets, net 3,435 3,928 Investments and other 29,979 30,451 ----------- ---------- TOTAL ASSETS $ 691,126 $ 638,116 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ 23,689 $ 21,213 Accounts payable 45,914 45,835 Accrued expenses and other 55,442 48,234 ----------- ---------- Total current liabilities 125,045 115,282 ----------- ---------- LONG-TERM DEBT, net of current portion 328,574 322,724 DEFERRED INCOME TAXES 11,693 8,088 OTHER LIABILITIES 4,117 1,480 ----------- ---------- Total long term liabilities 344,384 332,292 ----------- ---------- SHAREHOLDERS' EQUITY: Preferred shares, without par value, 5,000 authorized, none issued -- -- Common shares, without par value, 60,000 authorized, 22,397 issued and -- outstanding at September 30, 1999 and December 31, 1998, stated at -- Additional paid-in capital 141,506 141,506 Retained earnings 80,001 49,330 Accumulated other comprehensive income 190 (294) ----------- ---------- Total shareholders' equity 221,697 190,542 ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 691,126 $ 638,116 =========== ========== </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated balance sheets. 2
STONERIDGE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share data) <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, -------------------------------- ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> NET SALES $ 156,985 $ 118,194 $ 512,688 $ 371,173 COST AND EXPENSES: Cost of goods sold 112,952 89,036 369,404 280,692 Selling, general and administrative expenses 22,566 16,994 69,900 47,598 ------------ ------------ ------------ ------------ Operating income 21,467 12,164 73,384 42,883 Interest expense, net 7,494 20 23,070 560 Other income 168 -- 395 -- ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 14,141 12,144 50,709 42,323 Provision for income taxes 5,451 4,932 20,038 16,936 ------------ ------------ ------------ ------------ NET INCOME $ 8,690 $ 7,212 $ 30,671 $ 25,387 ============ ============ ============ ============ BASIC AND DILUTED NET INCOME PER SHARE $ 0.39 $ 0.32 $ 1.37 $ 1.13 ============ ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 22,397 22,397 22,397 22,397 ============ ============ ============ ============ </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements. 3
STONERIDGE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) <TABLE> <CAPTION> For the nine months ended September 30, ------------------------------ 1999 1998 --------- --------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 30,671 $ 25,387 Adjustments to reconcile net income to net cash from operating activities- Depreciation and amortization 21,624 10,769 Deferred income taxes 3,588 (658) Changes in operating assets and liabilities- Accounts receivable, net (7,616) (23,831) Inventories (2,538) (2,466) Prepaid expenses and other (3,421) (1,497) Other assets, net 1,408 15 Accounts payable (5,410) 5,412 Accrued expenses and other (1,703) 3,367 --------- --------- Net cash from operating activities 36,603 16,498 --------- --------- INVESTING ACTIVITIES: Capital expenditures (9,664) (7,339) Proceeds from sale of fixed assets -- 2,091 Increase in notes to affiliates -- (5,857) Business acquisitions, net of cash acquired (31,099) -- --------- --------- Net cash from investing activities (40,763) (11,105) --------- --------- FINANCING ACTIVITIES: Shareholder distributions paid -- (2,600) Proceeds from long-term debt 1,797 230 Repayments of long-term debt (125) (7,716) Net borrowings under credit agreement 5,130 4,659 --------- --------- Net cash from financing activities 6,802 (5,427) --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 126 -- NET CHANGE IN CASH AND CASH EQUIVALENTS 2,768 (34) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,876 1,338 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,644 $ 1,304 ========= ========= </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements. 4
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except for share and per share data) 1. The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the Commission). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Commission's rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's 1998 Annual Report to Shareholders. The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. 2. Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 68% and 76% of the Company's inventories at September 30, 1999 and December 31, 1998, 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: <TABLE> <CAPTION> September 30, 1999 December 31, 1998 ------------------ ----------------- <S> <C> <C> Raw materials $ 42,978 $ 32,453 Work in progress 9,047 10,673 Finished goods 13,964 12,379 Less-LIFO reserve (2,374) (2,232) ----------- ------------ Total $63,615 $53,273 =========== ============ </TABLE> 3. On August 27, 1999, the Company purchased all the outstanding shares of TVI Europe Limited (TVI), a United Kingdom manufacturer of vehicle information and management systems for the European commercial vehicle market. The transaction was accounted for as a purchase. The preliminary purchase price approximates $20,000. On March 6, 1999, the Company purchased certain assets and assumed certain liabilities of Delta Schoeller, Ltd. (Delta), a United Kingdom manufacturer of switches for the automotive industry. The transaction was accounted for as a purchase. The preliminary purchase price approximates $12,000. On December 31, 1998, the Company purchased all the outstanding common shares of Hi-Stat Manufacturing Company, 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 September 30, 1999 and December 31, 1998. The purchase price was funded with the Company's cash on hand and with proceeds from the Company's senior secured credit agreement. The components of intangible assets included in the allocation of purchase price at December 31, 1998 and the related straight- line amortization periods is summarized as follows: 5
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) (in thousands, except for share and per share data) <TABLE> <CAPTION> Amortization Amount Period (years) ------------ -------------- <S> <C> <C> Non-compete covenants $ 590 2 Patents 2,580 6-13 Goodwill 309,613 40 -------- Total $312,783 ======== </TABLE> The results of operations of Hi-Stat have been included in the accompanying financial statements from the date of acquisition. As such, Hi-Stat has no effect on fiscal year 1998 net income. The unaudited pro forma consolidated results of operations as though Hi-Stat had been acquired as of the beginning of fiscal 1998 is as follows: <TABLE> <CAPTION> Three months ended Nine months ended September 30, 1998 September 30, 1998 ------------------ ------------------ <S> <C> <C> Net sales $151,204 $482,519 Operating income $ 15,724 $ 59,158 Net income $ 4,424 $ 20,398 Basic and diluted earnings per share $ 0.20 $ 0.91 </TABLE> The pro forma data does 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 assumed purchase accounting adjustments for the periods presented: . Elimination of historical management costs and interest expense of Hi-Stat . 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 4. Other comprehensive income includes foreign currency translation adjustments. Comprehensive income consists of the following: <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, ----------------------- ------------------------ 1999 1998 1999 1998 ----------- ---------- ----------- ----------- <S> <C> <C> <C> <C> Net Income $8,690 $7,212 $30,671 $25,387 Other comprehensive income 855 254 484 251 ------ ------ ------- ------- Comprehensive income $9,545 $7,466 $31,155 $25,638 ====== ====== ======= ======= </TABLE> 6
STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) (in thousands, except for share and per share data) 5. 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 0.00% to 1.00% or (ii) LIBOR plus a margin of 1.25% to 2.50%, 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%. Long-term debt consists of the following: <TABLE> <CAPTION> September 30, 1999 December 31, 1998 ------------------ ----------------- <S> <C> <C> Borrowings under credit agreement $347,042 $342,150 Other 5,221 1,787 ------------- -------------- 352,263 343,937 Less: Current maturities 23,689 21,213 ------------- -------------- $328,574 $322,724 ============= ============== </TABLE> 6. The Company presents basic and diluted earnings per share in accordance with Statement of Financial Accounting Standard No. 128, "Earnings Per Share". Potentially dilutive securities are not significant and do not create differences between reported basic and diluted earnings per share for all periods presented. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Nine Months Ended September 30, 1999 Compared To Nine Months Ended September 30, - -------------------------------------------------------------------------------- 1998 - ---- Net Sales. Net sales for the nine months ended September 30, 1999 increased by $141.5 million, or 38.1%, to $512.7 million from $371.2 million for the same period in 1998. Sales of core products increased by $177.5 million, or 56.7%, to $490.8 million during the first nine months of 1999 compared to $313.3 million for the same period of 1998. Sales of core products from the recent acquisitions of Hi-Stat, Delta and TVI accounted for $150.8 million of the change, while sales of existing core products prior to the acquisitions increased by $26.7 million, or 7.2%, compared to same period in 1998. Sales revenues for the nine months ended September 30, 1999 were favorably impacted by strong OEM production volumes in both the automotive and the commercial vehicle markets which was offset in part by lower production volumes in the agricultural vehicle market. Sales for the nine months ended September 30, 1999 for North America increased by $129.2 million to $466.9 million from $337.7 million for the same period in 1998. North American sales accounted for 91.1% of total sales for the nine months ended September 30, 1999 compared with 91.0% for the same period in 1998. Sales for the first nine months of 1999 outside North America increased by $12.3 million to $45.8 million from $33.5 million for the same period in 1998. Sales outside North America accounted for 8.9% of total sales for the nine months ended September 30, 1999 compared with 9.0% for the same period in 1998. During the second quarter of 1999, the Company completed the planned phase out of its contract manufacturing business. As expected, contract manufacturing sales for the first nine months of 1999 declined by $36.0 million to $21.9 million, or 4.3% of the Company's total sales revenue compared with $57.9 million, or 15.6% of total sales revenue for the same period in 1998. Cost of Goods Sold. Cost of goods sold for the first nine months of 1999 increased by $88.7 million, or 31.6%, to $369.4 million from $280.7 million in the first nine months of 1998. As a percentage of sales, cost of goods sold decreased to 72.1% for the first nine months of 1999 from 75.6% for the same period in 1998. The decrease as a percent of sales was due primarily to increased operating leverage, a shift in product mix to higher value added electrical and electronic core products and lower contract manufacturing sales. Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased by $22.3 million to $69.9 million in the first nine months of 1999 from $47.6 million for the same period in 1998. As a percentage of sales, SG&A expenses increased to 13.6% for the first nine months of 1999 from 12.8% for the same period in 1998. The majority of the increase was attributable to additional SG&A expenses of the newly acquired businesses. Interest Expense. Interest expense for the first nine months of 1999 was $23.1 million compared with $0.6 million for the same period in 1998. Average outstanding indebtedness was $342.6 million and $9.9 million for the first nine months of 1999 and 1998, respectively. The increase in average outstanding indebtedness was primarily due to borrowings to finance recent acquisitions. Income Before Income Taxes. As a result of the foregoing, income before taxes increased by $8.4 million for the first nine months of 1999 to $50.7 million from $42.3 million for the same period in 1998. Provision for Income Taxes. The Company recognized provisions for income taxes of $20.0 million and $16.9 million for federal, state and foreign income taxes for the first nine months of 1999 and 1998, respectively. Net Income. As a result of the foregoing, net income increased by $5.3 million, or 20.9%, to $30.7 million for the first nine months of 1999 from $25.4 million for the same period in 1998. 8
Three Months Ended September 30, 1999 Compared To Three Months Ended September - ------------------------------------------------------------------------------ 30, 1998 - -------- Net Sales. Net sales for the quarter ended September 30, 1999 increased by $38.8 million, or 32.8%, to $157.0 million from $118.2 million for the same period in 1998. Sales of core products increased by $56.6 million, or 56.4%, to $157.0 million during the third quarter of 1999 compared to $100.4 million for the same period of 1998. Sales of core products from the recent acquisitions of Hi-Stat, Delta and TVI accounted for $50.9 million of the change, while sales of existing core products prior to the acquisitions increased by $5.7 million, or 5.7%, compared to same period in 1998. Sales revenues for the third quarter of 1999 were favorably impacted by strong OEM production volumes in both the automotive and the commercial vehicle markets which was offset in part by lower production volumes in the agricultural vehicle market. Sales for the quarter ended September 30, 1999 for North America increased by $35.1 million to $142.1 million from $107.0 million for the same period in 1998. North American sales accounted for 90.5% of total sales for the third quarters of 1999 and 1998. Sales for the third quarter of 1999 outside North America increased by $3.7 million to $14.9 million from $11.2 million for the same period in 1998. Sales outside North America accounted for 9.5% of total sales for the third quarters of 1999 and 1998. As previously mentioned, the Company completed its planned phase out of the contract manufacturing business. As expected, the Company had no contract manufacturing sales in the third quarter of 1999, compared with $17.8 million, or 15.1% of total sales revenue for the same period in 1998. Cost of Goods Sold. Cost of goods sold for the third quarter of 1999 increased by $23.9 million, or 26.9%, to $112.9 million from $89.0 million in the third quarter of 1998. As a percentage of sales, cost of goods sold decreased to 71.9% in 1999 from 75.3% in 1998. The decrease as a percent of sales was due primarily to increased operating leverage, a shift in product mix to higher value added electrical and electronic core products and lower contract manufacturing sales. Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased by $5.6 million to $22.6 million in the third quarter of 1999 from $17.0 million for the same period in 1998. As a percentage of sales, SG&A expenses were 14.4% for the third quarters of 1999 and 1998. Interest Expense. Interest expense for the third quarter of 1999 was $7.5 million compared with $0.0 million for the same period in 1998. Average outstanding indebtedness was $337.1 million and $5.4 million for the third quarters of 1999 and 1998, respectively. The increase in average outstanding indebtedness was primarily due to borrowings to finance recent acquisitions. Income Before Income Taxes. As a result of the foregoing, income before taxes increased by $2.0 million for the third quarter of 1999 to $14.1 million from $12.1 million in 1998. Provision for Income Taxes. The Company recognized provisions for income taxes of $5.4 million and $4.9 million for federal, state and foreign income taxes for the third quarters of 1999 and 1998, respectively. Net Income. As a result of the foregoing, net income increased by $1.5 million, or 20.5%, to $8.7 million for the third quarter of 1999 from $7.2 million for the same period in 1998. 9
Liquidity and Capital Resources Net cash provided by operating activities was $36.6 million and $16.5 million for the nine months ended September 30, 1999 and 1998, respectively. The increase in net cash from operating activities of $20.1 million was due to increases in net income of $5.3 million and depreciation and amortization of $10.8 million and decreases in working capital and other operating assets of $4.0 million. Net cash used for investing activities was $40.8 million and $11.1 million for the nine months ended September 30, 1999 and 1998, respectively. The increase in cash used for investing activities of $29.7 million was primarily the result of the acquisitions of Delta and TVI. The acquisitions of Delta and TVI were financed with funds from the Company's $425.0 million credit agreement. Net cash provided by financing activities was $6.8 million for the nine months ended September 30, 1999 as compared to net cash used for financing activities of $5.4 million for the nine months ended September 30, 1998. The Company has a $425.0 million credit agreement (of which $347.0 million was outstanding at September 30, 1999) with a bank group. The credit agreement has three components: a $100.0 million revolving facility (of which $59.6 million is currently available), a $150.0 million term facility, and a $175.0 million term facility. The $100.0 million revolving facility and the $150.0 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 either (i) the prime rate plus a margin of 0.00% to 1.00% or (ii) LIBOR plus a margin of 1.25% to 2.50%, 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 Company has entered into five interest rate swap agreements with a total notional amount of $314.8 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. Inflation and International Presence Management believes that the Company's operations have not been adversely affected by inflation. By operating internationally, the Company is affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, management believes the Company is not significantly exposed to adverse economic conditions. 10
Recently Issued Accounting Standards Effective January 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." 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), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes new accounting and reporting standards for derivatives and hedging activities. In May 1999, the Financial Accounting Standards Board announced a deferral in the implementation date of SFAS 133 to January 1, 2001. The Company has not yet evaluated the financial accounting and reporting impact of SFAS 133. Year 2000 Initiative 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 for systems critical to daily operations and manufacturing capability are substantially complete. Certain systems not critical to daily operations and manufacturing capability require additional remedial actions. These remedial actions are scheduled to be complete by December 31, 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 all remedial actions in the planned timeframe, contingency plans to address systems that may not be Year 2000 compliant will be developed. These contingency plans could include developing non-system procedures and controls or accelerating the implementation of third party Year 2000 compliant software. The Company estimates total historical Year 2000 expenditures to be approximately $3.6 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 $0.3 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. The Company intends to continue to refine contingency plans developed to address potential third party system failures resulting from a Year 2000 problem. The Company continues to monitor its 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 refine contingency plans for those suppliers who are unable or unwilling to complete remediation plans to become Year 2000 compliant. 11
Although these plans continue to be refined, the Company's current plan includes a combination of the resourcing of materials to Year 2000 compliant vendors and the stockpiling of components. The Company will continue to monitor these plans up to December 31, 1999. The Company intends to assess the status of customers' and suppliers' Year 2000 compliance in early January 2000. Based on the results of this assessment, the Company will implement certain elements of the contingency plans discussed above to attempt to minimize operational disruptions. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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. 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. Management believes that its use of these financial instruments to reduce risk is in the Company's best interest. The Company does not enter into financial instruments for trading purposes. 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. 12
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ----------------------------- In the ordinary course of business, the Company is involved in various legal proceedings, workers' compensation and product liability disputes. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - ----------------------------------------------------- None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ------------------------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------- None. ITEM 5. OTHER INFORMATION - ----------------------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - -------------------------------------------- (a) Exhibits 10.15 Amendment No. 1 dated as of January 28, 1999 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank, as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent. 10.16 Amendment No. 2 dated as of September 7, 1999 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank, as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent. 27.1 Financial Data Schedule for the nine months ended September 30, 1999 (b) Reports on Forms 8-K None. 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STONERIDGE, INC. Date: November 15, 1999 /s/ Cloyd J. Abruzzo -------------------- Cloyd J. Abruzzo President and Chief Executive Officer (Principal Executive Officer) Date: November 15, 1999 /s/ Kevin P. Bagby -------------------- Kevin P. Bagby Treasurer and Chief Financial Officer (Principal Financial and Chief Accounting Officer) 14
STONERIDGE, INC. EXHIBIT INDEX Exhibit Number Exhibit - ------- ------- 10.15 Amendment No. 1 dated as of January 28, 1999 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank, as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent. 10.16 Amendment No. 2 dated as of September 7, 1999 to Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc. as Borrower, the Lenders named therein as Lenders, DLJ Capital Funding, Inc. as Syndication Agent, National City Bank, as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent. 27.1 Financial Data Schedule for the nine months ended September 30, 1999, filed herewith. 15