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 September 30, 2001. number 001-13337 STONERIDGE, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Ohio 34-1598949 ------------------------------- ------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9400 East Market Street, Warren, Ohio 44484 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (330) 856-2443 -------------------------------------------------- Registrant's Telephone Number, Including Area Code 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 14, 2001 was 22,397,311.
STONERIDGE, INC. INDEX <TABLE> <CAPTION> Page No. Part I Financial Information Item 1. Financial Statements <S> <C> Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 2 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2001 and 2000 3 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 4 Notes to Condensed Consolidated Financial Statements 5-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 Item 3. Quantitative and Qualitative Disclosure About Market Risk 14 Part II Other Information 15-17 Signatures 18 Exhibit Index 19 </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, 2001 2000 ------------- ------------- (Unaudited) (Audited) <S> <C> <C> ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 4,234 $ 5,594 Accounts receivable, net 98,324 91,680 Inventories, net 58,320 70,159 Prepaid expenses and other 19,609 17,104 Deferred income taxes, net 12,939 10,217 ------------- ------------- Total current assets 193,426 194,754 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT, net 119,955 113,855 OTHER ASSETS: Goodwill and other intangibles, net 350,127 357,526 Investments and other 28,580 30,860 ------------- ------------- TOTAL ASSETS $692,088 $696,995 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ 39,594 $ 34,562 Accounts payable 44,296 45,199 Accrued expenses and other 39,191 34,924 ------------- ------------- Total current liabilities 123,081 114,685 ------------- ------------- LONG-TERM DEBT, net of current portion 275,989 296,079 DEFERRED INCOME TAXES, net 25,682 22,352 OTHER LIABILITIES 7,897 1,693 ------------- ------------- Total long-term liabilities 309,568 320,124 ------------- ------------- 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, 2001 and December 31, 2000, stated at -- -- Additional paid-in capital 141,506 141,506 Retained earnings 125,995 123,211 Accumulated other comprehensive loss (8,062) (2,531) ------------- ------------- Total shareholders' equity 259,439 262,186 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $692,088 $696,995 ============= ============= </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 OPERATIONS (Unaudited) (in thousands except for per share data) <TABLE> <CAPTION> For the three months ended For the nine months ended September 30, September 30, ---------------------------- -------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> NET SALES $ 136,361 $ 153,764 $ 444,461 $ 520,743 COST AND EXPENSES: Cost of goods sold 106,122 115,754 339,410 380,393 Selling, general and administrative expenses 25,766 22,568 77,906 73,105 ---------- --------- ---------- ---------- Operating income 4,473 15,442 27,145 67,245 Interest expense, net 7,205 7,178 22,573 22,756 Other (income) expense, net 285 (1,223) 463 (1,764) ---------- --------- ---------- ---------- (LOSS) INCOME BEFORE INCOME TAXES (3,017) 9,487 4,109 46,253 (Benefit) provision for income taxes (1,204) 1,949 1,325 14,609 ---------- --------- ---------- ---------- NET (LOSS) INCOME $ (1,813) $ 7,538 $ 2,784 $ 31,644 ========== ========= ========== ========== BASIC AND DILUTED NET (LOSS) INCOME PER SHARE $ (0.08) $ 0.34 $ 0.12 $ 1.41 ========== ========= ========== ========== </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, --------------------------- 2001 2000 ------- -------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 2,784 $ 31,644 Adjustments to reconcile net income to net cash from operating activities- Depreciation and amortization 21,423 20,726 Deferred income taxes 1,652 6,064 Loss (gain) on sale of property 6 (995) Changes in operating assets and liabilities- Accounts receivable, net (8,373) (6,453) Inventories 10,607 (1,614) Prepaid expenses and other (3,285) (7,462) Other assets, net 1,847 1,660 Accounts payable 95 7,395 Accrued expenses and other 5,896 430 ------- -------- Net cash from operating activities 32,652 51,395 ------- -------- INVESTING ACTIVITIES: Capital expenditures (20,896) (16,951) Proceeds from sale of property -- 2,176 Other, net 199 (631) ------- -------- Net cash from investing activities (20,697) (15,406) ------- -------- FINANCING ACTIVITIES: Proceeds from long-term debt 7,188 1,685 Repayments of long-term debt (4,706) (570) Net repayments under credit agreement (14,486) (33,866) Debt issuance costs (1,223) -- ------- -------- Net cash from financing activities (13,227) (32,751) ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (88) (512) NET CHANGE IN CASH AND CASH EQUIVALENTS (1,360) 2,726 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,594 3,924 ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,234 $ 6,650 ------- -------- </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) 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 accounting principles generally accepted in the United States 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 2000 Annual Report to Shareholders. The results of operations for the three and nine months ended September 30, 2001 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 75% and 77% of the Company's inventories at September 30, 2001 and December 31, 2000, 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: September 30, December 31, 2001 2000 ------------- ------------ Raw materials $38,300 $45,552 Work in progress 9,041 9,369 Finished goods 11,016 15,261 LIFO reserve (37) (23) ------------- ------------ Total $58,320 $70,159 ============= ============ 3. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS 138). SFAS 133 establishes new accounting and reporting standards for derivatives and hedging activities, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes. The adoption of SFAS 133 did not result in a cumulative effect adjustment being recorded to net income for the change in accounting. However, the Company recorded a cumulative effect transition adjustment charge of approximately $0.3 million (net of tax) in accumulated other comprehensive loss in the first quarter of 2001. The Company uses derivative financial instruments to reduce exposure to market risk resulting from fluctuations in interest rates. The Company does not enter into financial instruments for trading purposes. Management believes that its use of these instruments to reduce risk is in the Company's best interest. 5
STONERAGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) (in thousands) The Company's credit agreement requires that interest rate risk associated with our debt portfolio be managed by entering into interest rate swap agreements to manage exposure to changes in interest rates. These agreements require the Company to pay a fixed interest rate to counter- parties while receiving a floating interest rate based on LIBOR. The counter-parties to each of the interest rate swap agreements are major commercial banks. These agreements mature on or before December 31, 2003 and qualify as cash flow hedges. The total notional amount of the interest rate swap agreements is $179.3 million. Gains and losses on derivatives qualifying as cash flow hedges are recorded in other comprehensive loss to the extent that hedges are effective until the underlying transactions are recognized in earnings. Net losses included in other comprehensive loss as of September 30, 2001, including the transition adjustment, were $4.6 million after tax ($7.3 million pre-tax). 4. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations". SFAS 141 eliminates the pooling-of-interests method and requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. The Company believes that the adoption of SFAS 141 will not materially impact the Company's financial statements upon adoption. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets". Under SFAS 142, the amortization period for certain intangibles changes and goodwill is no longer subject to amortization. Goodwill will be subject to at least an annual assessment for impairment by applying a fair value based test. This standard is effective for the Company on January 1, 2002. The Company is currently in the process of evaluating the overall potential impact of this Statement on the Company's financial statements. Goodwill amortization, which approximates $9.5 million annually, will no longer be subject to amortization effective January 1, 2002. In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144, which will be effective for the Company in fiscal year 2002, supercedes SFAS 121 and establishes guidelines for accounting for the impairment and disposal of long-lived assets. The Company has not yet evaluated the impact of this Statement on its financial statements. 5. Other comprehensive (loss) income includes foreign currency translation adjustments and derivative transactions, net of related tax. Comprehensive (loss) income consists of the following: <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net (loss) income $ (1,813) $ 7,538 $ 2,784 $ 31,644 Other comprehensive loss (1,870) (884) (5,530) (2,524) ---------- ---------- ---------- ---------- Comprehensive (loss) income $ (3,683) $ 6,654 $ (2,746) $ 29,120 ========== ========== ========== ========== </TABLE> 6
STONERAGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) (in thousands) 6. The Company has a $425.0 million credit agreement with a bank group. The credit agreement, as amended on September 28, 2001, has three components: a $100.0 million revolving credit facility, including a $5.0 million swing line facility, 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 0.50% on the unused balance. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 2.50% or (ii) LIBOR plus a margin of 4.00%. These margins increase periodically through September 30, 2002. These facilities require additional interest of 1.00% on the aggregate unpaid principal balance payable on the expiration date. The $5.0 million swing line facility expires on December 31, 2003. Interest is payable monthly at the overnight money market borrowing rate. The $175.0 million term facility expires on December 31, 2005. Interest is payable quarterly at either (i) the prime rate plus a margin of 3.50% or (ii) LIBOR plus a margin of 5.00%. These margins increase periodically through September 30, 2002. This facility also requires additional interest of 1.00% on the aggregate unpaid principal balance payable on the expiration date. The Company was in compliance with respect to its covenants as of September 30, 2001. Long-term debt consists of the following: September 30, December 31, 2001 2000 ---------------- ---------------- Borrowings under credit agreement $ 309,173 $ 323,670 Borrowings payable to foreign banks 5,523 4,826 Other 887 2,145 ---------------- ---------------- 315,583 330,641 Less: Current portion 39,594 34,562 ---------------- ---------------- $ 275,989 $ 296,079 ================ ================ 7. The Company presents basic and diluted earnings per share in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share amounts were computed using weighted average shares outstanding for each respective period. Diluted earnings per share also reflect the weighted average impact from the date of issuance of all potentially dilutive securities during the periods presented, except for the three months ended September 30, 2001 and three and nine months ended September 30, 2000 where such inclusion would have had an anti-dilutive effect. Actual weighted average shares outstanding used in calculating basic and diluted earnings per share were as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Basic weighted average shares outstanding 22,397 22,397 22,397 22,397 Effect of dilutive securities -- -- 78 -- ----------- ----------- ----------- ----------- Diluted weighted average shares outstanding 22,397 22,397 22,475 22,397 =========== =========== =========== =========== </TABLE> 7
STONERAGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) (in thousands) 8. Based on the criteria set forth in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company operates in one business segment. The following table presents net sales and non- current assets for each of the geographic areas in which the Company operates: Three months Nine months ended September 30, ended September 30, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net Sales: North America $ 117,126 $ 134,751 $ 381,323 $ 454,735 Europe and other 19,235 19,013 63,138 66,008 ----------- ----------- ----------- ----------- Total $ 136,361 $ 153,764 $ 444,461 $ 520,743 =========== =========== =========== =========== September 30, December 31, 2001 2000 ----------- ----------- Non-Current Assets: North America $ 442,804 $ 446,744 Europe and other 55,858 55,497 ----------- ----------- Total $ 498,662 $ 502,241 =========== =========== 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Nine Months Ended September 30, 2001 Compared To Nine Months Ended September 30, - -------------------------------------------------------------------------------- 2000 - ---- Net Sales. Net sales for the nine months ended September 30, 2001 decreased by $76.2 million, or 14.6%, to $444.5 million from $520.7 million for the same period in 2000. Sales revenues for the first nine months were unfavorably impacted by the prolonged weakness in production in the automotive and commercial vehicle markets, combined with new product launch delays and slower production ramp-ups. Sales for the nine months ended September 30, 2001 for North America decreased by $73.4 million to $381.3 million from $454.7 million for the same period in 2000. North American sales accounted for 85.8% of total sales for the first nine months of 2001 compared with 87.3% for the same period in 2000. Sales for the nine months ended September 30, 2001 outside North America decreased by $2.9 million to $63.1 million from $66.0 million for the same period in 2000. International sales were unfavorably impacted by the weakening of foreign currencies in relation to the U.S. dollar. Sales outside North America accounted for 14.2% of total sales for the nine months ended September 30, 2001 compared with 12.7% for the same period in 2000. Cost of Goods Sold. Cost of goods sold for the first nine months of 2001 decreased by $41.0 million, or 10.8%, to $339.4 million from $380.4 million in the first nine months of 2000. As a percentage of sales, cost of goods sold increased to 76.4% from 73.0% for the first nine months of 2001 and 2000, respectively. The corresponding reduction in margin was primarily attributable to the continued weakness of the automotive and commercial vehicle markets, price pressures from our customers, costs related to pre-production ramp-ups and new program launches, and the unfavorable impact of foreign currencies in relation to the U.S. dollar at our foreign operations. Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses, including research and development, increased by $4.8 million to $77.9 million in the first nine months of 2001 from $73.1 million for the same period in 2000. As a percentage of sales, SG&A expenses increased to 17.5% for the first nine months of 2001 from 14.0% for the same period in 2000. Design and development resources were required principally to support efforts associated with awarded programs. The third quarter of 2001 includes $0.6 million related to costs associated with the Company's attempted offering of senior subordinated notes. Interest Expense. Interest expense for the first nine months of 2001 was $22.6 million compared with $22.8 million for the same period in 2000. Average outstanding indebtedness was $323.4 million and $335.4 million for the first nine months of 2001 and 2000, respectively. Other Income. Other income of $1.8 million for the first nine months of 2000 includes a $1.0 million gain on the sale of idle property. The Company received cash proceeds of $2.2 million from the sale which were used to pay down the credit facility. Income Before Income Taxes. As a result of the foregoing, income before taxes decreased by $42.2 million for the first nine months of 2001 to $4.1 million from $46.3 million in 2000. Provision for Income Taxes. The Company recognized provisions for income taxes of $1.3 million and $14.6 million for federal, state and foreign income taxes for the first nine months of 2001 and 2000, respectively. 9
Net Income. As a result of the foregoing, net income decreased by $28.9 million, or 91.2%, to $2.8 million for the first nine months of 2001 from $31.6 million in 2000. Three Months Ended September 30, 2001 Compared To Three Months Ended September - ------------------------------------------------------------------------------ 30, 2000 - --------- Net Sales. Net sales for the quarter ended September 30, 2001 decreased by $17.4 million, or 11.3%, to $136.4 million from $153.8 million for the same period in 2000. Sales revenues for the third quarter of 2001 were unfavorably impacted by the prolonged weakness in the automotive and commercial vehicle markets, combined with new product launch delays and slower production ramp-ups. Sales for the quarter ended September 30, 2001 for North America decreased $17.7 million to $117.1 million from $134.8 million for the same period in 2000. North American sales accounted for 85.9% of total sales for the third quarter of 2001 compared with 87.6% for the same period in 2000. Sales for the third quarter of 2001 outside North America decreased by $0.2 million to $19.2 million from $19.0 million for the same period in 2000. International sales were unfavorably impacted by the weakening of foreign currencies in relation to the U.S. dollar. Sales outside North America accounted for 14.1% of total sales for the third quarter of 2001 compared with 12.4% for the same period in 2000. Cost of Goods Sold. Cost of goods sold for the third quarter of 2001 decreased by $9.7 million, or 8.3%, to $106.1 million from $115.8 million for the same period in 2000. As a percentage of sales, cost of goods sold increased to 77.8% in 2001 from 75.3% in 2000. The corresponding reduction in margin was primarily attributable to the continued weakness of the automotive and commercial vehicle markets, price pressures from our customers, costs related to pre-production ramp-ups and new program launches, and the unfavorable impact of foreign currencies in relation to the U.S. dollar at our foreign operations. Selling, General and Administrative Expenses. SG&A expenses, including research and development, increased by $3.2 million to $25.8 million in the third quarter of 2001 from $22.6 million for the same period in 2000. As a percentage of sales, SG&A expenses increased to 18.9% for the third quarter of 2001 from 14.7% for the same period in 2000. Design and development resources were required principally to support efforts associated with awarded programs. The third quarter of 2001 includes $0.6 million related to costs associated with the Company's attempted offering of senior subordinated notes. Interest Expense. Interest expense for the third quarter of 2001 and 2000 was $7.2 million. Average outstanding indebtedness was $314.8 million and $321.9 million for the third quarter of 2001 and 2000, respectively. Other Income. Other income of $1.2 million for the third quarter of 2000 includes a $1.0 million gain on the sale of idle property. The Company received cash proceeds of $2.2 million from the sale which were used to pay down the credit facility. (Loss) Income Before Income Taxes. As a result of the foregoing, income before taxes decreased by $12.5 million for the third quarter of 2001 to loss before taxes of $3.0 million from income before taxes of $9.5 million in 2000. 10
Provision for Income Taxes. The Company recognized a benefit for income taxes of $1.2 million and an expense for income taxes of $1.9 million for federal, state and foreign income taxes for the third quarter of 2001 and 2000, respectively. Net(Loss) Income. As a result of the foregoing, net income decreased by $9.4 million, or 124.1%, to a net loss of $1.8 million for the third quarter of 2001 from net income of $7.5 million in 2000. Liquidity and Capital Resources Net cash provided by operating activities was $32.7 million and $51.4 million for the nine months ended September 30, 2001 and 2000, respectively. The decrease in net cash from operating activities of $18.7 million was primarily attributable to a decrease in net income offset by reduced working capital requirements. Net cash used for investing activities was $20.7 million and $15.4 million for the nine months ended September 30, 2001 and 2000, respectively, and primarily related to capital expenditures. Net cash used for financing activities was $13.2 million and $32.8 million for the nine months ended September 30, 2001 and 2000, respectively. Higher levels of generated operating cash flows in 2000 were used primarily to repay outstanding debt under the credit agreement. The Company has a $425.0 million credit agreement (of which $309.2 million and $323.7 million was outstanding at September 30, 2001 and December 31, 2000, respectively) with a bank group. The credit agreement, as amended September 28, 2001, has the following components: a $100.0 million revolving facility (of which $38.5 million is currently available) including a $5.0 million swing line facility, 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 0.50% on the unused balance. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 2.50% or (ii) LIBOR plus a margin of 4.00%. These margins increase periodically through September 30, 2002. These facilities require additional interest of 1.00% on the aggregate unpaid principal balance payable on the expiration date. The $5.0 million swing line facility expires on December 31, 2003. Interest is payable monthly at an overnight money market borrowing rate. The $175.0 million term facility expires on December 31, 2005. Interest is payable quarterly at either (i) the prime rate plus a margin of 3.50% or (ii) LIBOR plus a margin of 5.00%. These margins increase periodically through September 30, 2002. This facility also requires additional interest of 1.00% on the aggregate unpaid principal balance payable on the expiration date. These amended interest rates are higher than the interest rates in effect prior to the amendment by 1.00%. This will result in higher interest rates in prospective periods. The Company was in compliance with respect to its covenants as of September 30, 2001. The Company has entered into three interest-rate swap agreements with a total notional amount of $179.3 million. Two of these interest-rate swap agreements will expire on December 31, 2002, and one swap agreement will expire on December 31, 2003. These 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. 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. 11
Inflation and International Presence Management believes that the Company's operations have not been adversely affected by inflation. By operating internationally, the Company is affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, management believes they are not significantly exposed to adverse economic conditions. Recently Issued Accounting Standards Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS 138). SFAS 133 establishes new accounting and reporting standards for derivatives and hedging activities, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes. The cumulative effect of adopting SFAS 133 was to increase other comprehensive loss by $0.3 million, after-tax. The effect on net income was not significant, primarily because the hedges in place as of January 1, 2001 qualified for hedge accounting treatment and were highly effective. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations". SFAS 141 eliminates the pooling-of-interests method and requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. The Company believes that the adoption of SFAS 141 will not materially impact the Company's financial statements upon adoption. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets". Under SFAS 142, the amortization period for certain intangibles changes and goodwill is no longer subject to amortization. Goodwill will be subject to at least an annual assessment for impairment by applying a fair value based test. This standard is effective for the Company on January 1, 2002. The Company is currently in the process of evaluating the overall potential impact of this Statement on the Company's financial statements. Goodwill amortization, which approximates $9.5 million annually, will no longer be subject to amortization effective January 1, 2002. In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144, which will be effective for the Company in fiscal year 2002, supercedes SFAS 121 and establishes guidelines for accounting for the impairment and disposal of long-lived assets. The Company has not yet evaluated the impact of this Statement on its financial statements. Forward-Looking Statements Portions of this report may contain "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, the Company's (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development and (iv) growth opportunities related to awarded business. The forward-looking 12
statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Factors which may cause actual results to differ materially from those in the forward-looking statements include, among other factors, the loss of a major customer; a further decline in automotive, medium and heavy-duty truck or agricultural vehicle production; the failure to achieve successful integration of any acquired company or business; or a decline in general economic conditions in any of the various countries in which the Company operates. Further information concerning issues that could materially affect financial performance is contained in the Company's periodic filings with the Securities and Exchange Commission. 13
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. These agreements have a notional amount of $179.3 million and expire between December 31, 2002 and December 31, 2003. 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; however, after consideration of the Company's swap agreements, a 1.00% increase in interest rates would increase annual interest expense by approximately $1.4 million. 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 significant. The Company does not expect the effects of these risks to be significant based on current operating and economic conditions in the countries and markets in which it operates. 14
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 - ------------------------------------------------------------ The following information revises and amends the information previously filed on Form 10-Q for the quarter ended June 30, 2001: (a) The Annual Meeting of Shareholders of Stoneridge, Inc. was held on May 7, 2001. (b) The following matters were submitted to a vote at the meeting: (1) The election of the following nominees as directors of the Company. The vote with respect to each nominee was as follows: Nominee For Withheld ------- --- -------- D.M. Draime 16,712,392 2,594,514 Cloyd J. Abruzzo 16,712,092 2,594,814 Avery S. Cohen 17,541,568 1,765,338 Richard E. Cheney 17,552,765 1,754,141 Sheldon J. Epstein 16,086,189 3,220,717 C.J. Hire 17,548,355 1,758,551 Richard G. LeFauve 17,553,365 1,753,541 Earl L. Linehan 17,548,155 1,758,751 (2) The increase in the number of Common Shares reserved for issuance under the Company's Long-Term Incentive Plan by 1,500,000, from 1,000,000 to 2,500,000. The vote with respect to increasing the number of reserved shares was as follows: In Favor 12,408,678 Against 4,679,014 Abstained 3,595 No other matters were voted on during the second or third quarter of 2001. 15
ITEM 5. OTHER INFORMATION - -------------------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits 10.1 Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc., as Borrower, the Lending Institutions Named Therein, as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, National City Bank as Administrative Agent and Collateral Agent, PNC Bank, NA as Documentation Agent (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.2 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 (incorporated by reference to Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.3 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 (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.4 Amendment No. 3 dated as of May 25, 2000 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 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.5 Amendment No. 4 dated as of January 26, 2001 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 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.6 Amendment No. 5 dated as of September 28, 2001 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 16
City Bank as a Lender, a Letter of Credit Issuer, the Administrative Agent and the Collateral Agent, PNC Bank NA as Documentation Agent, filed herewith. (b) Reports on Forms 8-K 1. On July 18, 2001, the Company filed a Current Report on Form 8-K reporting the anticipated sale of Senior Subordinated Notes. 2. On August 7, 2001, the Company filed a Current Report on Form 8-K reporting the withdrawal of the Senior Subordinated Notes off the market. 17
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 14, 2001 /s/ Cloyd J. Abruzzo ----------------------------------------- Cloyd J. Abruzzo President and Chief Executive Officer (Principal Executive Officer) Date: November 14, 2001 /s/ Kevin P. Bagby ----------------------------------------- Kevin P. Bagby Treasurer and Chief Financial Officer (Principal Financial and Chief Accounting Officer) 18
STONERIDGE, INC. EXHIBIT INDEX Exhibit Number Exhibit - ------ ------- 10.1 Credit Agreement dated as of December 30, 1998 among Stoneridge, Inc., as Borrower, the Lending Institutions Named Therein, as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, National City Bank as Administrative Agent and Collateral Agent, PNC Bank, NA as Documentation Agent (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.2 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 (incorporated by reference to Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.3 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 (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.4 Amendment No. 3 dated as of May 25, 2000 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 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.5 Amendment No. 4 dated as of January 26, 2001 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 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.6 Amendment No. 5 dated as of September 28, 2001 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, filed herewith. 19