STONERIDGE INC - Annual Report: 2005 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 OR 15(d)

of the Securities Exchange Act of 1934

STONERIDGE, INC.

(Exact name of registrant as specified in its charter)

(330) 856-2443

Registrant’s telephone number, Including Area Code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o         No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o         No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes o         No þ

     As of July 2, 2005, the aggregate market value of the registrant’s Common Shares, without par value, held by non-affiliates of the registrant was approximately $95.7 million. The closing price of the Common Shares on July 2, 2005 as reported on the New York Stock Exchange was $7.13 per share. As of July 2, 2005, the number of Common Shares outstanding was 23,212,366.

     The number of Common Shares, without par value, outstanding as of February 10, 2006 was 23,327,478.

DOCUMENTS INCORPORATED BY REFERENCE

     Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2006, into Part III, Items 10, 11, 12, 13 and 14.

INDEX

STONERIDGE, INC. AND SUBSIDIARIES

PART I

Overview

      Founded in 1965, Stoneridge, Inc. (the “Company”) is an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets. Our custom-engineered products are predominantly sold on a sole-source basis and consist of application-specific control devices, sensors, vehicle management electronics and power and signal distribution systems. These products comprise the elements of every vehicle’s electrical system, and individually interface with a vehicle’s mechanical and electrical systems to (i) activate equipment and accessories, (ii) display and monitor vehicle performance and (iii) control and distribute electrical power and signals. Our products improve the performance, safety, convenience and environmental monitoring capabilities of our customers’ vehicles. As such, the growth in many of the product areas in which we compete is driven by the increasing consumer desire for safety, security and convenience coupled with the need for original equipment manufacturers (“OEM”) to meet safety requirements in addition to the general trend of increased electrical and electronic content per vehicle. Our technology and our partnership-oriented approach to product design and development enables us to develop next-generation products and to excel in the transition from mechanical-based components and systems to electrical and electronic components, modules and systems.

Products

      We conduct our business in two reportable segments: Vehicle Management & Power Distribution and Control Devices. Under the provisions of Statement of Accounting Standard (“SFAS”) 131, “Disclosures about Segments of an Enterprise and Related Information,” two of the Company’s four operating segments are aggregated into the Vehicle Management & Power Distribution reportable segment and two are aggregated into the Control Devices reportable segment. The core products of the Vehicle Management & Power Distribution reportable segment include vehicle electrical power and distribution systems and electronic instrumentation and information display products. The core products of the Control Devices reportable segment include electronic and electrical switch products, actuator products and sensor products. We design and manufacture the following vehicle parts:

      Vehicle Management & Power Distribution. The Vehicle Management & Power Distribution reportable segment produces electronic instrument clusters, electronic control units, and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. 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. In addition, power distribution systems regulate, coordinate and direct the operation of the entire electrical system within a vehicle compartment. These products use state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.

      Control Devices. The Control Devices reportable segment produces products that monitor, measure or activate a specific function within the vehicle. Product lines included within the Control Devices segment are sensors, switches, actuators, driver information systems as well as other electronic products. Sensor products are employed in most major vehicle systems, including the emissions, safety, powertrain, braking, climate control, steering and suspension systems. Switches transmit a signal that activates specific functions. Hidden switches are not typically seen by vehicle passengers, but are used to activate or deactivate selected functions. Customer activated switches are used by a vehicle’s operator or passengers to manually activate headlights, rear defrosters and other accessories. In addition, the Control Devices segment 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. We sell these products principally to the automotive market.

      For further information related to our reportable segments and financial information about geographic areas, see Note 13, “Segment Reporting,” to the consolidated financial statements included in this report.

Production Materials

      The principal production materials used in the manufacturing process for both reportable segments include: copper wire, cable, resins, plastics, printed circuit boards, metal stamping and certain electrical components such as microprocessors, memories, resistors, capacitors, fuses, relays and connectors. We purchase such materials pursuant to both annual contract and spot purchasing methods. Such materials are readily available from multiple sources, but we generally establish collaborative relationships with a qualified supplier for each of our key production materials in order to lower costs and enhance service and quality.

Patents and Intellectual Property

      Both of our reportable segments maintain and have pending various U.S. and foreign patents and other rights to intellectual property relating to our business, which we believe are appropriate to protect the Company’s interests in existing products, new inventions, manufacturing processes and product developments. We do not believe any single patent is material to our business, nor would the expiration or invalidity of any patent have a material adverse effect on our business or ability to compete. We are not currently engaged in any material infringement litigation, nor are there any material infringement claims pending by or against the Company.

Industry Cyclicality and Seasonality

      The markets for products in both of our reportable segments have historically been cyclical. Because these products are used principally in the production of vehicles for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets, sales, and therefore 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, agricultural and off-highway vehicle production of our principal customers could adversely impact the Company. Approximately 43%, 46% and 53% of our net sales in 2005, 2004 and 2003, respectively, were made to the automotive market. Approximately 57%, 54% and 47% of our net sales in 2005, 2004 and 2003, respectively, were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.

      We typically experience decreased 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 similarly impacted by plant shutdowns for the holidays.

      We are dependent on a small number of principal customers for a significant percentage of our sales. The loss of any significant portion of our sales to these customers or the loss of a significant customer would have a material adverse impact on the financial condition and results of operations of the Company. We supply numerous different parts to each of our principal customers. Contracts with several of our customers provide for supplying their 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 our major customers could have a material adverse impact on the Company. We may also enter into contracts to supply parts, the introduction of which may then be delayed or not used at all. We also compete to supply products for successor models and are therefore 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 Company’s major customers, as a percentage of net sales:

Backlog

      The majority of our products are not on a backlog status. They are produced from readily available materials and have a relatively short manufacturing cycle. Each of our production facilities maintains its own inventories and production schedules. Production capacity is adequate to handle current requirements and will be expanded to handle increased growth when needed.

Competition

      Markets for our products in both reportable segments are highly competitive. Our principle methods of competition are quality, service, price, timely delivery and technological innovation. We compete 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 will usually continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns.

      Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location. We compete based on strong customer relations and a fast and flexible organization that develops technically effective solutions at or below target price. We compete against the following primary competitors:

      Vehicle Management & Power Distribution. Our primary competitors include Alcoa Fujikura, Ametek, Delphi, Sumitomo Electric, Siemens VDO, Visteon and Yazaki.

Product Development

      Our research and development efforts are largely product development oriented and consist primarily of applying known technologies to customer generated problems and situations. We work closely with our customers to creatively solve problems using innovative approaches. The vast majority of our development expenses are related to customer-sponsored programs where we are involved in designing custom-engineered solutions for specific applications or for next generation technology. To further our vehicles platform penetration, we have also developed collaborative relationships with the design and engineering departments of key customers. These collaborative efforts have resulted in the development of new and complimentary products and the enhancement of existing products.

      Development work at the Company is largely performed on a decentralized basis. We have engineering and product development departments located at a majority of our manufacturing facilities. To ensure knowledge sharing among decentralized development efforts, we have instituted a number of mechanisms and practices whereby innovation and best practices are shared. The decentralized product development operations are complimented by larger technology groups in Canton, Massachusetts and Stockholm, Sweden.

      We use efficient and quality oriented work processes to address our customers’ high standards. Our product development technical resources include a full complement of computer-aided design and engineering (“CAD/ CAE”) software systems, including (i) virtual three-dimensional modeling, (ii) functional simulation and analysis capabilities and (iii) data links for rapid prototyping. These CAD/ CAE systems enable the Company to expedite product design and the manufacturing process to shorten the development time and ultimately time to market.

      We are further strengthening our electrical engineering competencies through investment in equipment such as (i) automotive electro-magnetic compliance test chambers, (ii) programmable automotive and commercial vehicle transient generators, (iii) circuit simulators and (iv) other environmental test equipment. Additional investment in product machining equipment has allowed us to fabricate new product samples in a fraction of the time required historically. Our product development and validation efforts are supported by full service, on-site test labs at most manufacturing facilities, thus enabling cross-functional engineering teams to optimize the product, process and system performance before tooling initiation.

      We have invested, and will continue to invest in technology to develop new products for our customers. Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses, as incurred. Such costs amounted to approximately $39.2 million, $36.1 million and $28.7 million for 2005, 2004 and 2003, respectively, or 5.8%, 5.3% and 4.7% of net sales for these periods. It generally takes the Company several years to bring new products from development to the marketplace.

Environmental and Other Regulations

      Our 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. We believe that our 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, 2005, we had approximately 6,000 employees, approximately 1,400 of whom were salaried and the balance of whom were paid on an hourly basis. Except for certain employees located in

Joint Ventures

      We form joint ventures in order to achieve several strategic objectives including gaining access to new markets, exchanging technology and intellectual capital, broadening our customer base and expanding our product offerings. Specifically we have formed joint ventures in Brazil, PST Indústria Eletrônica da Amazônia Ltda. (“PST”), and India, Minda Instruments Ltd. (“Minda”), and continue to explore similar business opportunities in other global markets. We have a 50% interest in PST and a 20% interest in Minda. We entered into our PST joint venture in October 1997 and our Minda joint venture in August 2004. Each of these investments is accounted for using the equity method of accounting. As of December 31, 2005, our investments in these non-consolidated joint ventures totaled $18.6 million. Equity earnings from these joint ventures were $4.1 million and $1.7 million for the fiscal years ended December 31, 2005 and 2004, respectively.

Available Information

      We make available, free of charge through our website (www.stoneridge.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC. Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers, Whistleblower Policy and Procedures and the charters of the Board’s Audit, Compensation and Nominating and Corporate Governance Committees are posted on our website as well. Copies of these documents will be available to any shareholder upon request. Requests should be directed in writing to Investor Relations at 9400 East Market Street, Warren, Ohio 44484.

      The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DE 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.

ITEM 1A.     RISK FACTORS.

      We are dependent on a small number of principal customers for a significant percentage of our net sales. In 2005, International, DaimlerChrysler, Ford, Volvo, Deere and General Motors accounted for 22%, 12%, 7%, 6%, 6% and 5%, respectively, of our net sales. The loss of any significant portion of our sales to these customers or any other significant customers would have a material adverse impact on our results of operations and financial condition. The contracts we have entered into with many of our 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 our major customers could have a material adverse impact on our results of operations and financial condition by reducing cash flows and our ability to spread costs over a larger revenue base. We also compete to supply products for successor models and are subject to the risk that the customer will not select us to produce products on any such model, which could have a material adverse impact on our results of operations and financial condition. In addition, we have significant receivable balances related to these customers and other major customers that would be at risk in the event of their bankruptcy.

      The demand for our products is largely dependent on the domestic and foreign production of automobiles, medium-and heavy-duty trucks, agricultural and off-road vehicles. The markets for our products have historically been cyclical, because new vehicle demand is dependent on, among other things, consumer spending and is tied closely to the overall strength of the economy. Because our products are used principally in the production of vehicles for the automotive, medium- and heavy-duty truck, agricultural and off-road vehicle markets, our sales, and therefore our 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, agricultural and off-highway vehicle production could adversely impact our results of operations and financial condition. In 2005, approximately 43% of our net sales were made to the automotive market and approximately 57% were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets. Seasonality experienced by the automotive industry also impacts our operations. We typically experience decreased sales during the third 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.

      Since the early 1980’s the OEM supply industry has undergone a significant consolidation as OEMs have sought to lower costs, improve quality and increasingly purchase complete systems and modules rather than separate components. As a result of the cost focus of these major customers, we have been, and expect to continue to be, required to reduce prices. Because of these competitive pressures, we cannot assure you that we will be able to increase or maintain gross margins on product sales to OEMs. The trend toward consolidation among automotive parts suppliers is resulting in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. If we cannot achieve cost savings and operational improvements sufficient to allow us to compete favorably in the future with these larger, consolidated companies, our results of operations and financial condition could be adversely affected.

      Our offices and facilities, including those used for design and development, material procurement, manufacturing, logistics and sales are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of any number of unexpected events. If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace these facilities or offices.

      In addition, network and information system shutdowns caused by unforeseen events such as power outages, disasters, hardware or software defects, computer viruses and computer hacking pose increasing risks. Such an event could also result in the disruption of our operations, delay production, shipments and revenue, and result in large expenditures necessary to repair or replace such network and information systems.

      Markets for our products are highly competitive and the company can offer no assurance that we can maintain our product pricing levels with our customers. We compete based on quality, service, price, timely delivery and technological innovation. Many of our competitors are more diversified and have greater financial and other resources than we do. We cannot assure you that our business will not be adversely

      Our products are subject to changing technology, which could place us at a competitive disadvantage relative to alternative products introduced by competitors. Our success will depend on our ability to continue to meet customers’ changing specifications with respect to quality, service, price, timely delivery and technological innovation by implementing and sustaining competitive technological advances. Our business may, therefore, require, significant ongoing and recurring additional capital expenditures and investment in research and development and manufacturing and management information systems. We cannot assure you that we will be able to achieve the technological advances or introduce new products that may be necessary to remain competitive. Our inability to continuously improve existing products and to develop new products and to achieve technological advances could have a material adverse affect on our results of operations and financial condition.

      As of December 31, 2005, we had approximately 6,000 employees, approximately 1,400 of whom were salaried and the balance of whom were paid on an hourly basis. Certain employees located in Chihuahua, Mexico, Orebro and Stockholm, Sweden and Dundee, Scotland, are represented by unions. We cannot assure you that more of our employees will not be covered by collective bargaining agreements in the future or that any of our facilities will not experience a work stoppage or other labor disruption. Any prolonged labor disruption involving our employees, employees of our customers, a large percentage of which are covered by collective bargaining agreements, or employees of our suppliers could have a material adverse impact on our results of operations and financial condition by disrupting our ability to manufacture our products or the demand for our products.

      Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things:

      We believe that our 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. The operation of our manufacturing facilities entails risks and we cannot assure you that we will not incur material costs or liabilities in connection with these operations. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.

      We are subject to the risk of exposure to product liability claims in the event that the failure of any of our products results in personal injury or death and we cannot assure you that we will not experience material product liability losses in the future. In addition, if any of our products prove to be defective, we

      Approximately 21% of our net sales in 2005 were derived from sales of our European and other international operations, and European and other international non-current assets accounted for approximately 11% of our non-current assets as of December 31, 2005. International sales and operations are subject to significant risks, including, among others:

      Additionally, to the extent any portion of our net sales and expenses are denominated in currencies other than U.S. dollars, changes in exchange rates could have a material adverse affect on our results of operations and financial condition.

      Our supply agreements with some of our customers require us to provide our products at predetermined prices. In some cases, these prices decline over the course of the contract and may require us to meet certain productivity, cost reduction targets. The costs that we incur in fulfilling these contracts may vary substantially from our initial estimates. Unanticipated cost increases or the inability to meet certain cost reduction targets may occur as a result of several factors, including increases in the costs of labor, components or materials. In some cases, we are permitted to pass on to our customers the cost increases associated with specific materials. Cost overruns that we cannot pass on to our customers could adversely affect our business, results of operations and financial condition.

      We require substantial amounts of raw materials and substantially all raw materials we require are purchased from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels. Any change in the supply of, or price for, these raw materials could materially affect our results of operations and financial condition.

ITEM 1B.     UNRESOLVED STAFF COMMENTS.

      None.

      The Company and our joint ventures currently own or lease 23 manufacturing facilities, which together contain approximately 1.8 million square feet of manufacturing space. Of these manufacturing facilities, ten are used by our Vehicle Management & Power Distribution reportable segment, ten are used by our Control Devices reportable segment and three are owned by our joint venture companies. The following table provides information regarding our facilities:

      The Company is involved in certain legal actions and claims arising in the ordinary course of business. The Company, however, does not believe that any of the litigation in which it is currently engaged, either individually or in the aggregate, will have a material adverse effect on its business, consolidated financial position or results of operations. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products causes personal injury or death to users of the Company’s products and there can be no assurance that the Company will not experience any material product liability losses in the future. In addition, if any of the Company’s products prove to be defective, the Company may be required to participate in the government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such liability claims.

      No matters were submitted to a vote of security holders during the fourth quarter of 2005.

Executive Officers of the Company

      Each executive officer of the Company is appointed by the Board of Directors, serves at its pleasure and holds office until a successor is appointed, or until the earlier of death, resignation or removal. The Board of Directors generally appoints executive officers annually. The executive officers of the Company are as follows:

      D.M. Draime, Chairman of the Board of Directors and Assistant Secretary. Mr. Draime, founder of the Company, has served as Chairman of the Board of Directors of the Company and its predecessors since 1965. Mr. Draime served as Interim President and Chief Executive Officer from January 2004 to May 2004.

      John C. Corey, President, Chief Executive Officer and Director. Mr. Corey has served as President and Chief Executive Officer since being appointed by the Board of Directors in January 2006. Mr. Corey has served as a Director on the Board of Directors since January 2004. Prior to his employment with the Company, Mr. Corey served from October 2000, as President and Chief Executive Officer and Director of the Safety Components International, a leading low-cost supplier of airbags and components, with worldwide operations.

      Edward F. Mosel, Executive Vice President and Chief Operating Officer. Mr. Mosel has served as Executive Vice President and Chief Operating Officer of the Company since June of 2004. Prior to this time, Mr. Mosel had served as Vice President of Pollak Sales and Marketing from 1987 to 1993, Vice President and General Manager of Pollak Central Services from 1993 to 1995, and Vice President and General Manager of the Switch Products Division from 1996 to 2000, at which time he became Vice President and General Manager of the Switch and Sensor Products Group.

      Thomas A. Beaver, Vice President of Global Sales and Systems Engineering. Mr. Beaver has served as Vice President of Global Sales and Systems Engineering of the Company since January of 2005. Prior to this time, Mr. Beaver served as Vice President of Stoneridge Sales and Marketing from January 2000 to January 2005 and Vice President of Sales and Systems Engineering of the Stoneridge Engineered Products Group from February 1995 to December 1999.

      Karl E. Mentzel, Vice President and General Manager of Alphabet Group. Mr. Mentzel has served as Vice President and General Manager of the Alphabet Division since July of 2005. Prior to joining the Company, Mr. Mentzel served as Vice President of Operations for Skyworks Solutions Inc. from 2003 to 2005 and Vice President of Manufacturing from 2001 to 2003. In addition, Mr. Mentzel held various senior management positions at Conexant Systems Inc. and Texas Instruments for over 20 years.

      Andrew Mark Oakes, Vice President and General Manager of Actuator and Sensor Products Group. Mr. Oakes served as General Manager of the Actuator Products Division from 1996 to 1997, and Vice President and General Manager of the Actuator Products Division from 1998 to 2001 when he became Vice President and General Manager of the Actuator and Sensor Products Group. In 2005, Mr. Oakes assumed additional duties and serves as Chairman and General Manager of Stoneridge Asia Pacific Electronics (Sozhou) Co., Ltd., a Stoneridge wholly owned subsidiary, now undergoing operation start-up in China.

      Mark J. Tervalon, Vice President and General Manager of Stoneridge Electronics Group. Mr. Tervalon served as Vice President and General Manager of the Electronic Products Division from May 2002 to December 2003 when he became Vice President and General Manager of the Stoneridge Electronics Group. Prior to that, Mr. Tervalon served as a Vice President and General Manager at Power – One, Inc. from August 1998 to November 2001.

      Vincent F. Suttmeier, Vice President and General Manager of Switch and Sensor Products Group. Mr. Suttmeier served as Vice President of the Switch Products Division from January to June of 2000 and Vice President and General Manager of the Switch Products Division from June 2000 to June 2004 when he became Vice President and General Manager of the Switch and Sensor Products Group.

      Avery S. Cohen, Secretary and Director. Mr. Cohen has served as Secretary and a Director of the Company since 1988. Mr. Cohen is a partner in Baker & Hostetler LLP, a law firm, which has served as general outside counsel for the Company since 1993 and is expected to continue to do so in the future.

PART II

      Our shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “SRI.” As of February 10, 2006, we had 23,327,478 Common Shares without par value, issued and outstanding, which were

      We have not historically paid or declared dividends, which are restricted under both the senior notes and the credit agreement, on our Common Shares. We may only pay cash dividends in the future if immediately prior to and immediately after the payment is made no event of default has occurred, we remain in compliance with certain leverage ratio requirements, and the amount paid does not exceed 5% of our excess cash flow for the preceding fiscal year. We currently intend to retain earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction in outstanding indebtedness. Accordingly, we do not expect to pay cash dividends in the foreseeable future.

      High and low sales prices (as reported on the NYSE composite tape) for our Common Shares for each quarter during 2005 and 2004 are as follows:

      The Company did not repurchase any Common Shares in 2005 or 2004.

      For information on “Related Stockholder Matters” required by Item 201(d) of Regulation S-K, refer to Item 12 of this report.

      The following table sets forth selected historical financial data and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein. The selected historical data was derived from our consolidated financial statements.

Executive Overview

      We are an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.

      Our net income for the year ended December 31, 2005 was $0.9 million, or $0.04 per diluted share, compared with a net loss of $92.5 million, or $4.09 per diluted share, for 2004.

      Our 2005 results were affected by operating losses at certain of our operations involved in our manufacturing restructuring initiatives, as well as a number of challenging industry-wide issues, including intense competition, product price reductions, higher commodity costs, customer bankruptcies, and lower North American light vehicle production levels. We continuously work to address these challenges by implementing a broad range of initiatives aimed to improve operating performance. One of the main focuses during 2005 was our restructuring program, which is aimed at reducing our overall manufacturing square footage and improving our cost structure accordingly. In addition to our restructuring initiatives, we have implemented lean manufacturing principles, consolidated our purchasing activities, and we are continually evaluating the opportunity to manufacture products in low cost locations.

      Operating inefficiencies related to our restructuring efforts, primarily due to retention issues, also negatively affected our 2005 results. These restructuring initiatives include the rationalization of certain manufacturing facilities in the high cost regions of Europe and North America. As a result of the rationalization, many employees opted not to move with the business causing significant turnover and increased hiring, training and expedited freight charges. We recently began a transition of additional production from the United States to Mexico by announcing the closing of a wire harness plant in the United States. The production lines are planned to transition to Mexico over the next year. In connection with our overall restructuring plan, we recorded charges of $4.8 million for the fiscal year 2005. We expect the total cost of our restructuring efforts for 2005 and 2006 to approximate $7.2 million. See Note 12 to our consolidated financial statements for more information.

      These challenges were offset by the favorable operating results of our PST joint venture in Brazil, which added $4.0 million to our equity in earnings of investees in 2005.

      Significant factors inherent to our markets that could affect our results for 2006 include our ability to successfully execute our planned restructuring program, mitigate commodity price increases and customer demanded price reductions, and implement planned productivity and cost reduction initiatives. Our results for 2006 also depend on conditions in the automotive and commercial vehicle industries, which are generally dependent on domestic and global economies.

Results of Operations

      We are primarily organized by markets served and products produced. Under this organization structure, our operations have been aggregated into two reportable segments: Vehicle Management & Power Distribution and Control Devices. The Vehicle Management & Power Distribution reportable segment includes results of operations from our operations that primarily design and manufacture electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. The Control Devices reportable segment includes results of operations from our operations that primarily design and manufacture electronic and electromechanical switches, control actuation devices and sensors.

      Beginning in 2005, we changed from a calendar year-end to a 52-53 week fiscal year-end. Our fiscal quarters are now comprised of 13-week periods and once every seven years, starting in 2008, the fourth quarter will be 14 weeks in length. The third quarter of 2005 and 2004 ended on October 1 and September 30, respectively.

      Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the fiscal years ended December 31, 2005 and 2004 are summarized in the following table:

      The increase in net sales for our Vehicle Management & Power Distribution reportable segment was primarily due to increased North American commercial vehicle production, mitigated by product price reductions and a European product phase-out. The decrease in net sales for our Control Devices reportable segment during the fiscal year 2005 was primarily attributable to product price reductions and reduced North American light vehicle production for our customers.

      Net sales by geographic location for the fiscal years ended December 31, 2005 and 2004 are summarized in the following table.

      North American sales accounted for 79.3% of total net sales in 2005 compared with 79.1% in 2004. Net sales outside North America accounted for 20.7% of total net sales in 2005 compared to 20.9% in 2004. The decrease in sales outside North America was primarily attributed to lower light vehicle volume and a product phase-out. The decrease was partially offset by increased commercial vehicle production. The decline in North American sales is attributable to reduced light vehicle volumes and price reductions.

      Cost of Goods Sold. Cost of goods sold for the fiscal year ended December 31, 2005 increased by $16.2 million, or 3.2%, to $523.0 million from $506.8 million in 2004. As a percentage of sales, cost of goods sold increased to 77.9% from 74.3% for 2004. This increase as a percentage of sales was predominately due to operational inefficiencies resulting from the execution of our restructuring efforts, price reductions and reduced North American light vehicle volume. Going forward, we believe our management efforts will offset operational inefficiencies; however, we expect that pricing and volume challenges will continue to affect our gross margin through 2006.

      Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for the fiscal year ended December 31, 2005 increased by $2.2 million to $116.9 million from $114.7 in 2004. Included in SG&A expenses for the fiscal year ended December 31, 2005 and 2004 were product development expenses of $39.2 million and $36.1 million, respectively. The increase in SG&A expenses primarily reflects increased investment in our product development activities, which are focused on driver information products, emissions system products, chassis and occupant safety. The increase also reflects increased sales and marketing activity partially offset by decreased Sarbanes-Oxley compliance expenses. As a percentage of sales, SG&A expenses increased to 17.4% in 2005 from 16.8% in 2004.

      Restructuring Charges. In January 2005, we announced that we would undertake restructuring efforts related to the rationalization of certain manufacturing facilities in the high cost regions of Europe and North

      All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges relate primarily to accelerated depreciation and the write-down of property, plant and equipment, resulting from the closure or streamlining of certain facilities. Severance costs relate to a reduction in workforce. Facility closure costs primarily relate to asset relocation and lease termination costs. Other costs include miscellaneous expenditures associated with exiting business activities.

      Equity in Earnings of Investees. Equity in earnings of investees was $4.1 million and $1.7 million for the fiscal years ended December 31, 2005 and 2004, respectively. The increase of $2.4 million was predominately attributable to the increase in equity earnings recognized from our PST joint venture in Brazil. The increase primarily reflects higher volume and pricing for the company’s security product lines.

      Other Income, net. Other income increased by $1.8 million to $1.0 million from a loss of $0.8 million in 2004. The increase was primarily the result of favorable foreign currency forward and option contracts.

      Income (Loss) Before Income Taxes. Income (loss) before income taxes, which is the primary profitability measure used by our chief executive officer, is summarized in the following table by reportable segment for the fiscal years ended December 31, 2005 and 2004.

      The decrease in income (loss) before income taxes at the Vehicle Management & Power Distribution reportable segment was primarily the result of operational inefficiencies, bad debt expenses related to customer bankruptcies, increased product development expenses, restructuring charges and product price

      The increase in income (loss) before income taxes at the Control Devices reportable segment was primarily the result of the $183.5 million goodwill impairment charge recorded in 2004 that did not recur in 2005. Excluding this charge, income declined year-over-year due to operational inefficiencies, product price reductions, decreased North American light vehicle volume, and a $2.6 million charge related to customer bankruptcies.

      Income (loss) before income taxes for the fiscal year ended December 31, 2005 for North America increased by $159.4 million to $1.5 million from $(157.9) million in 2004. Income (loss) before income taxes for 2005 outside North America decreased by $5.8 million to $2.9 million from $8.7 million in 2004. The decrease in our overall profitability, excluding the goodwill impairment charge recorded in 2004, was primarily due to operating inefficiencies, restructuring charges, customer bankruptcies, product price reductions, and increased product development activities.

      Provision (Benefit) for Income Taxes. We recognized a provision (benefit) for income taxes of $3.5 million, or 79% of pre-tax income, and $(56.7) million, or (38%) of the pre-tax loss, for federal, state and foreign income taxes for the fiscal years ended December 31, 2005 and 2004, respectively. The increase in the effective rate for the fiscal year ended December 31, 2005 compared to 2004 was attributable to net operating loss carryforwards and certain other deferred tax assets in the United Kingdom that required a full valuation allowance in 2005.

      Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the fiscal years ended December 31, 2004 and 2003 are summarized in the following table:

      The increase in net sales for both of our reportable segments during 2004 was primarily attributable to an increase in commercial vehicle production partially offset by lower North American light vehicle production and price reductions. Net sales were also favorably impacted by foreign exchange rate fluctuations relative to the U.S. dollar, which increased sales by $13.5 million.

      Net sales by geographic location for the fiscal years ended December 31, 2004 and 2003 are summarized in the following table.

      North American sales accounted for 79.1% of total sales in 2004 compared with 79.3% in 2003. The increase in North American sales was primarily attributable to increased sales to the commercial vehicle market, partially offset by a decrease in sales to the light vehicle market, and price reductions. Sales outside North America accounted for 20.9% of total sales in 2004 compared with 20.7% in 2003. The increase in net sales outside North America was primarily attributable to increased commercial vehicle production and also

      Cost of Goods Sold. Cost of goods sold for the fiscal year ended December 31, 2004 increased by $56.2 million, or 12.5%, to $506.8 million from $450.6 million in 2003. As a percentage of sales, cost of goods sold remained flat at 74.3% in 2004 compared to 74.3% in 2003. Cost of goods sold includes primarily material, labor and manufacturing overhead costs. We were able to maintain our gross margin percentage despite the difficult operating environment due to management’s continued focus on our lean production system utilizing Six Sigma principles.

      Selling, General and Administrative Expenses. SG&A expenses increased by $17.2 million to $114.7 million for the fiscal year ended December 31, 2004 from $97.5 million in 2003. Included in SG&A expenses for the fiscal year ended December 31, 2004 and 2003 were product development expenses of $36.1 million and $28.7 million, respectively. The increase in SG&A expenses reflects increased investment in our product development activities, which are focused on occupant safety, chassis, driveline and instrument cluster products, and increased sales and marketing efforts. Sarbanes-Oxley implementation, especially compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which relates to internal controls and legal-related costs, also negatively affected SG&A during 2004. As a percentage of sales, SG&A expenses increased to 16.8% in 2004 from 16.1% in 2003.

      Restructuring Charges. We initiated restructuring efforts in 2004 related to the rationalization of certain manufacturing facilities in the high cost European region. This rationalization was a result of our cost reduction initiatives. Restructuring charges recorded by reportable segment during the fiscal year ended December 31, 2004, were as follows:

      All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges relate primarily to accelerated depreciation resulting from the closure or streamlining of certain facilities. Severance costs relate to a reduction in workforce. Other costs include miscellaneous expenditures associated with exiting business activities.

      Income (Loss) Before Income Taxes. Income (loss) before income taxes, which is the primary profitability measure used by our chief executive officer, is summarized in the following table by reportable segment for the years ended December 31, 2004 and 2003.

      Income before income taxes for the year ended December 31, 2004 increased by $15.9 million at the Vehicle Management & Power Distribution reportable segment, primarily as the result of increased commercial vehicle production, offset by higher commodity costs and price reductions. This increase also includes a benefit due to favorable currency exchange rates.

      The loss before income taxes recognized at our Control Devices reportable segment was due to the goodwill impairment loss of $183.5 million recorded in the fourth quarter of 2004 after we performed its

      Income before income taxes for the year ended December 31, 2004 for North America decreased by $178.6 million to $(157.9) million from $20.7 million for the corresponding period in 2003. Income before income taxes for the year ended December 31, 2004 outside North America decreased by $1.6 million to $8.7 million from $10.3 million for the corresponding period of 2003. The decrease in our worldwide profitability was primarily due to the non-cash, goodwill impairment charge recognized in 2004. The loss before income taxes that we reported was also due to the decrease in passenger car and light truck production as well as price reductions, higher commodity costs, and increased product development activities, offset by increased commercial vehicle production and favorable currency exchange rates.

      Provision (Benefit) for Income Taxes. We recognized a provision (benefit) for income taxes of $(56.7) million, or 38.0% of the pre-tax loss, and $9.6 million, or 31.1% of pre-tax income, for federal, state and foreign income taxes for the years ended December 31, 2004 and 2003, respectively. The effective tax rate for 2004 decreased primarily due to the tax benefit recognized on the loss. The rate decrease was marginally impacted by a reduction in state taxes, which was offset by a reduction in credits and the impact of the goodwill impairment charge.

      Net cash provided by operating activities was $19.1 million and $48.3 million for the fiscal years ended December 31, 2005 and 2004, respectively. The decrease in net cash provided by operating activities of $29.2 million was primarily due to a decrease in our profitability, largely attributable to operating inefficiencies related to our restructuring efforts, the decrease in passenger car and light truck production, product price reductions, customer bankruptcies and increased product development activities. This decrease was partially offset by decreases in working capital requirements.

      Net cash used by investing activities was $27.6 million and $19.9 million for the fiscal years ended December 31, 2005 and 2004, respectively. The increase in net cash used by investing activities of $7.7 million was attributable to an increase in capital spending for our restructuring initiatives, high temperature sensors, speed sensors and customer actuated switches, offset by proceeds received from a sale of fixed assets in the United Kingdom in 2005.

      Net cash used by financing activities was $0.4 million and $1.0 million for the fiscal years ended December 31, 2005 and 2004, respectively. Cash used by financing activities for the year ended December 31, 2005 was primarily related to capital lease payments and deferred debt issuance costs related to the company’s credit facility amendments.

      As discussed in Note 9 to our consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $23.0 million to reduce exposure related to our krona- and pound-denominated receivables. The estimated fair value of these contracts at December 31, 2005, per quoted market sources, was approximately $0.2 million. The Company’s foreign currency option contracts have expired as of December 31, 2005.

      Our credit facilities contain various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated EBITDA, interest coverage and fixed charge coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. We were in compliance with all covenants at December 31, 2005. On March 7, 2006, the Company amended its credit agreement dated May 1, 2002. The amendment modifies certain financial covenant requirements, changes

      The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 2005. The Company’s $200.0 million senior notes are redeemable in May 2007 at 105.75.

      Future capital expenditures are expected to be consistent with recent levels and future organic growth is expected to be funded through cash flows from operations. Management will continue to focus on reducing its weighted average cost of capital and believes that cash flows from operations and the availability of funds from our credit facilities will provide sufficient liquidity to meet our future growth and operating needs. As outlined in Note 4 to our financial statements, the Company is a party to a $100.0 million revolving credit facility. Due to certain financial covenants, as of December 31, 2005, the Company was restricted to access no more than $35.0 million of the $100.0 million credit facility. On March 7, 2006, the Company amended the credit agreement, which, among other things, gave the Company substantially all of its borrowing capacity on the $100.0 million credit facility. We also have $40.8 million in available cash, and believe that we will have access to the debt and equity markets should the need arise.

      Given the current economic climate and recent increases in certain commodity prices, we believe that a continuation of such price increases would significantly affect our profitability. Furthermore, by operating internationally, we are affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, we believe we are not significantly exposed to adverse economic conditions.

      The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

      On an ongoing basis, we evaluate estimates and assumptions used in our financial statements. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

      We believe the following are “critical accounting policies;” those most important to the financial presentation and those that require the most difficult, subjective or complex judgments.

      Revenue Recognition and Sales Commitments. We recognize revenues from the sale of products, net of actual and estimated returns of products sold based on authorized returns and historical trends in sales returns, at the point of passage of title, which is generally at the time of shipment. We often enter into agreements with our customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is our obligation to fulfill the customers’ purchasing requirements for the

      Warranties. Our warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. This estimate is based on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims. In order to estimate the warranty reserve, we are required to forecast the resolution of existing claims as well as expected future claims on products previously sold. While we believe that our warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. Our customers are increasingly seeking to hold suppliers responsible for product warranties, which could negatively impact our exposure to these costs.

      Allowance for Doubtful Accounts. We evaluate the collectibility of accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet our financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. Additionally, we review historical trends for collectibility in determining an estimate for our allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. We do not have collateral requirements with our customers.

      Contingencies. We have accrued for estimated losses in accordance with SFAS 5, “Accounting for Contingencies,” when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimated that amount of probable loss. The reserves may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.

      Inventory. Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for U.S. inventories and by the first-in, first-out (“FIFO”) method for non-U.S. inventories. Where appropriate, standard cost systems are utilized for purposes of determining cost and the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of the lower of cost or market value of inventory are determined based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.

      Goodwill. In connection with the adoption of SFAS 142, “Goodwill and Other Intangible Assets,” we discontinued the amortization of goodwill on January 1, 2002. In lieu of amortization, this standard requires that goodwill be tested for impairment as of the date of adoption, at least annually thereafter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. See Note 2 to our consolidated financial statements for more information on our application of this accounting standard, including the valuation techniques used to determine the fair value of goodwill.

      Share-Based Compensation. Effective April 3, 2005, we adopted SFAS 123(R), “Share-Based Payment,” using the modified-prospective-transition method. Because the Company had previously adopted the fair value recognition provisions required by SFAS 123, and due to the fact that all unvested awards at the time of adoption were being recognized under a fair value approach, the adoption of SFAS 123(R) did not affect our operating income, income before income taxes, net income, cash flow from operating activities, cash flow from financing activities, or basic and diluted net income per share for fiscal year ended December 31, 2005. See Note 2 to our consolidated financial statements for assumptions used to determine fair value.

      Deferred Income Taxes. Deferred income taxes are provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations, as well as net operating loss, tax credit and other carryforwards. The Company does not provide deferred income taxes on unremitted earnings of certain

      In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 151, “Inventory Costs,” as an amendment to Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS 151 to have a material impact on the Company’s consolidated financial statements.

      In December 2004, the FASB issued two FASB Staff Positions (“FSP”) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (“the Act”) that was signed into law in October 2004. The Act could affect how companies report their deferred income tax balances. The first FSP is FSP SFAS 109-1 (“SFAS 109-1”); the second is FSP SFAS 109-2 (“SFAS 109-2”). In SFAS 109-1, the FASB concluded that the tax relief (special tax deduction for domestic manufacturing companies) from the Act should be accounted for as a “special deduction” instead of a tax rate reduction. The Company has reviewed SFAS 109-1. The Company has not issued financial statements that treat the “domestic manufacturing deduction” as a rate reduction. Therefore, SFAS 109-1 did not affect the Company’s financial statements for 2004. The Company now treats the domestic manufacturing deduction as a special deduction in its financial statements issued for 2005 forward. SFAS 109-2 gives companies additional time to evaluate the effects of the Act on any plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109, “Accounting for Income Taxes.” However, companies must provide certain disclosures if they choose to utilize the additional time granted by the FASB. The Company did not repatriate foreign earnings during 2004 or 2005. It is management’s intent not to repatriate foreign earnings during 2006 and beyond. Therefore, no disclosure is required. These FSPs, which were effective immediately, did not have a material impact on the Company’s consolidated financial statements.

      In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” in order to change the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The Statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impractical to determine either the period-specific effects or the cumulative effect of the change. This Statement becomes effective for accounting changes and corrections of errors during fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material impact on the Company’s consolidated financial statements.

      Portions of this report 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, our directors or officers with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking

      From time to time, we are exposed to certain market risks, primarily resulting from the effects of changes in interest rates. At December 31, 2005, however, all of our debt was fixed rate debt. In order to manage the interest rate risk associated with the Company’s previous debt portfolio, we entered into interest rate swap agreements, which were terminated on May 1, 2002. At this time, we do not intend to use financial instruments to manage this risk.

      Given the current economic climate and the recent increases in certain commodity costs, we currently are experiencing an increased risk particularly with respect to the purchase of copper, steel, and resins. We manage this risk through a combination of fixed price agreements, staggered short-term contract maturities and commercial negotiations with our suppliers. We may also consider pursuing alternative commodities or alternative suppliers to mitigate this risk over a period of time. At this time, we do not intend to use financial instruments to mitigate this risk. The recent increases in certain commodity costs have negatively affected our operating results, and a continuation of such price increases could significantly affect our profitability. Going forward, we believe that our mitigation efforts will offset a substantial portion of the financial impact of these increased costs. However, no assurances can be given that the magnitude or duration of these increased costs will not have a material impact on our future operating results.

      Our risks related to foreign currency exchange rates have historically not been material; however, given the current economic climate, we are monitoring this risk. We use derivative financial instruments, including foreign currency forward and option contracts, to mitigate our exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other known foreign currency exposures. As discussed in Note 9 to our consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $23.0 million to reduce exposure related to our krona- and pound-denominated intercompany loans. The estimated fair value of these contracts at December 31, 2005, per quoted market sources, was approximately $0.2 million. The Company’s foreign currency option contracts have expired as of December 31, 2005. We do not expect the effects of this risk to be material in the future based on the current operating and economic conditions in the countries in which we operate. Furthermore, a hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in quoted exchange rates would not significantly affect our results of operations, financial position or cash flows.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE

      Other than Schedule II, all Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

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, 2005 and 2004 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stoneridge, Inc. and Subsidiaries at December 31, 2005 and 2004 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

      As explained in Note 2 to the consolidated financial statements, effective at the beginning of the second quarter of 2005, the Company adopted Financial Accounting Standards (Statement) No. 123 (revised 2004), “Share-Based Payment,” using the modified-prospective-transition method. Also explained in Note 2 to the consolidated financial statements, effective January 1, 2003, the Company adopted Statement No. 123, “Accounting for Stock-Based Compensation,” under the prospective transition method in Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure; an Amendment to Statement No. 123.”

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Stoneridge, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2006 expressed an unqualified opinion thereon.

Cleveland, Ohio

March 9, 2006

CONSOLIDATED BALANCE SHEETS

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)