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STONERIDGE INC - Quarter Report: 2006 September (Form 10-Q)

Stoneridge, Inc. 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
Commission file number: 001-13337
STONERIDGE, INC.
 
(Exact name of registrant as specified in its charter)
     
Ohio   34-1598949
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
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 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. þ Yes o No
     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):
     Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o 
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
     The number of Common Shares, without par value, outstanding as of October 23, 2006 was 23,768,433.
 
 

 


Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES
INDEX
             
        Page No.  
PART I—FINANCIAL INFORMATION        
 
           
  Financial Statements        
 
      2  
 
      3  
 
      4  
 
      5  
  Management's Discussion and Analysis of Financial Condition and Results of Operations     24  
  Quantitative and Qualitative Disclosures About Market Risk     31  
  Controls and Procedures     32  
 
           
PART II—OTHER INFORMATION        
 
           
  Legal Proceedings     33  
  Risk Factors     33  
  Unregistered Sales of Equity Securities and Use of Proceeds     33  
  Defaults Upon Senior Securities     33  
  Submission of Matters to a Vote of Security Holders     33  
  Other Information     33  
  Exhibits     33  
 
           
        34  
Index to Exhibits     35  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
                 
    September 30,     December 31,  
    2006     2005  
    (Unaudited)     (Audited)  
 
               
ASSETS
               
 
               
Current Assets:
               
Cash and cash equivalents
  $ 46,730     $ 40,784  
Accounts receivable, less allowances for doubtful accounts of $4,841 and $4,562, respectively
    121,938       100,362  
Inventories, net
    58,237       53,791  
Prepaid expenses and other
    14,701       14,490  
Deferred income taxes
    9,575       9,253  
 
           
Total current assets
    251,181       218,680  
 
           
Long-Term Assets:
               
Property, Plant and Equipment, net
    114,458       113,478  
Other Assets:
               
Goodwill
    65,176       65,176  
Investments and other, net
    31,500       26,491  
Deferred income taxes
    36,899       39,213  
 
           
Total long-term assets
    248,033       244,358  
 
           
Total Assets
  $ 499,214     $ 463,038  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current Liabilities:
               
Current portion of long-term debt
  $     $ 44  
Accounts payable
    69,020       55,344  
Accrued expenses and other
    51,919       46,603  
 
           
Total current liabilities
    120,939       101,991  
 
           
Long-Term Liabilities:
               
Long-term debt, net of current portion
    200,000       200,000  
Deferred income taxes
    1,411       923  
Other liabilities
    5,074       6,133  
 
           
Total long-term liabilities
    206,485       207,056  
 
           
 
               
Shareholders’ Equity:
               
Preferred Shares, without par value, 5,000 authorized, none issued
           
Common Shares, without par value, authorized 60,000 shares, issued 23,940 and 23,232 shares and outstanding 23,758 and 23,178 shares, respectively, with no stated value
           
Additional paid-in capital
    148,876       147,440  
Common Shares held in treasury, 182 and 54 shares, respectively, at cost
    (150 )     (65 )
Retained earnings
    20,271       7,188  
Accumulated other comprehensive income (loss)
    2,793       (572 )
 
           
Total shareholders’ equity
    171,790       153,991  
 
           
Total Liabilities and Shareholders’ Equity
  $ 499,214     $ 463,038  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    September 30,     October 1,     September 30,     October 1,  
    2006     2005     2006     2005  
 
                               
Net Sales
  $ 172,351     $ 158,715     $ 537,484     $ 519,849  
 
                               
Costs and Expenses:
                               
Cost of goods sold
    134,173       127,154       414,619       401,238  
Selling, general and administrative
    28,956       28,357       91,346       88,943  
Provision for doubtful accounts
    38       2,671       544       3,604  
Loss (gain) on sale of property, plant and equipment
    15       (5 )     (1,454 )     (344 )
Restructuring charges, net
    80       823       154       4,963  
 
                       
 
                               
Operating Income (Loss)
    9,089       (285 )     32,275       21,445  
 
                               
Interest expense, net
    5,710       5,936       17,462       17,973  
Equity in earnings of investees
    (1,838 )     (1,397 )     (4,804 )     (3,203 )
Other (income) expense, net
    (55 )     (108 )     1,697       (900 )
 
                       
 
                               
Income (Loss) Before Income Taxes
    5,272       (4,716 )     17,920       7,575  
 
                               
Provision (benefit) for income taxes
    866       (1,424 )     4,857       3,683  
 
                       
 
                               
Net Income (Loss)
  $ 4,406     $ (3,292 )   $ 13,063     $ 3,892  
 
                       
 
                               
Basic net income (loss) per share
  $ 0.19     $ (0.14 )   $ 0.57     $ 0.17  
 
                       
Basic weighted average shares outstanding
    22,880       22,726       22,833       22,701  
 
                       
 
                               
Diluted net income (loss) per share
  $ 0.19     $ (0.14 )   $ 0.56     $ 0.17  
 
                       
Diluted weighted average shares outstanding
    23,396       22,726       23,250       22,940  
 
                       
The accompanying notes are an integral part of these condensed consolidated financial statements.

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STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
                 
    Thirty-Nine Weeks Ended  
    September 30,     October 1,  
    2006     2005  
OPERATING ACTIVITIES:
               
Net income
  $ 13,063     $ 3,892  
Adjustments to reconcile net income to net cash provided by operating activities —
               
Depreciation
    19,124       19,749  
Amortization
    1,238       1,141  
Deferred income taxes
    2,726       551  
Earnings of equity method investees, less dividends received
    (4,841 )     (3,256 )
Gain on sale of property, plant and equipment
    (1,454 )     (344 )
Share-based compensation expense
    1,380       1,320  
Postretirement benefit settlement gain
    (1,242 )      
Changes in operating assets and liabilities —
               
Accounts receivable, net
    (19,499 )     (13,985 )
Inventories, net
    (3,094 )     1,003  
Prepaid expenses and other
    189       (4,659 )
Other assets
    1,149       456  
Accounts payable
    12,020       4,845  
Accrued expenses and other
    1,851       4,808  
 
           
Net cash provided by operating activities
    22,610       15,521  
 
           
 
               
INVESTING ACTIVITIES:
               
Capital expenditures
    (19,794 )     (20,934 )
Proceeds from sale of property, plant and equipment
    2,266       1,664  
Business acquisitions and other
    (668 )     (282 )
 
           
Net cash used by investing activities
    (18,196 )     (19,552 )
 
           
 
               
FINANCING ACTIVITIES:
               
Repayments of long-term debt
    (44 )     (96 )
Share-based compensation activity, net
    47       3  
Other financing costs
    (150 )     (75 )
 
           
Net cash used by financing activities
    (147 )     (168 )
 
           
 
               
Effect of exchange rate changes on cash and cash equivalents
    1,679       (2,207 )
 
           
 
               
Net change in cash and cash equivalents
    5,946       (6,406 )
 
               
Cash and cash equivalents at beginning of period
    40,784       52,332  
 
           
 
               
Cash and cash equivalents at end of period
  $ 46,730     $ 45,926  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
(1) Basis of Presentation
     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 U.S. generally accepted accounting principles have been condensed or omitted pursuant to the Commission’s rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2005.
     The results of operations for the 13 and 39 weeks ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year.
     Beginning in 2005, the Company changed from a calendar year end to a 52-53 week fiscal year end. The Company’s fiscal quarters are now comprised of 13-week periods and once every 7 years, starting in 2008, the fourth quarter will be 14 weeks in length. The third 13-week period of 2006 and 2005 ended on September 30 and October 1, respectively.
     The Company has reclassified the presentation of certain prior-period information to conform to the current presentation.
(2) Inventories
     Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for approximately 68% and 72% of the Company’s inventories at September 30, 2006 and December 31, 2005, 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,  
    2006     2005  
 
               
Raw materials
  $ 34,976     $ 34,026  
Work in progress
    10,110       8,644  
Finished goods
    14,657       12,400  
 
           
Total inventories
    59,743       55,070  
Less: LIFO reserve
    (1,506 )     (1,279 )
 
           
Inventories, net
  $ 58,237     $ 53,791  
 
           
(3) Fair Value of Financial Instruments
     Financial Instruments
     A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The estimated fair value of the Company’s senior notes (fixed rate debt) at September 30, 2006 and October 1, 2005, per quoted market sources, was $192.0 million and $211.3 million, respectively. On both dates, the carrying value was $200.0 million.
     Derivative Instruments and Hedging Activities
     The Company uses derivative financial instruments, including foreign currency forward and option contracts, to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on intercompany transactions denominated in a foreign currency and other known foreign currency exposures. The principal currencies hedged by

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
the Company include the Swedish krona, British pound and Mexican peso. The foreign currency forward contracts are marked to market, with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other income. The option contracts are marked to market, with gains and losses recognized in the Company’s consolidated statement of operations as a component of operating income. The Company’s foreign currency forward and option contracts substantially offset gains and losses on the underlying foreign denominated transactions. The Company does not enter into financial instruments for speculative or profit motivated purposes. Management believes that the use of these instruments to reduce risk is in the Company’s best interest.
     The Company’s foreign currency forward contracts had a notional value of approximately $15,044 and $19,826 at September 30, 2006 and October 1, 2005, respectively. The purpose of these investments is to reduce exposure related to the Company’s Swedish krona and British pound denominated receivables. The estimated fair value of these contracts at September 30, 2006 and October 1, 2005, per quoted market sources, was approximately $(311) and $134, respectively. The Company’s foreign currency option contracts had a notional value of $56 and $133 at September 30, 2006 and October 1, 2005, respectively. The purpose of these investments is to reduce the risk associated with the Company’s other known foreign currency exposures related to the Mexican peso. The estimated fair value of these contracts at September 30, 2006 and October 1, 2005, per quoted market sources, was approximately $12 and $216, respectively.
(4) Share-Based Compensation
     At September 30, 2006, the Company had three types of share-based compensation plans; (1) Long-Term Incentive Plan (the “Incentive Plan”), (2) Directors’ Share Option Plan (the “Director Option Plan”) and (3) the Directors’ Restricted Shares Plan. One plan is for employees and two plans are for non-employee directors. The Incentive Plan is made up of the Long-Term Incentive Plan that was approved by the Company’s shareholders on September 30, 1997 (the “1997 Plan”) and expires on June 30, 2007 and the Amended and Restated Long-Term Incentive Plan (the “2006 Plan”) that was approved by the Company’s shareholders on April 24, 2006 and expires on April 24, 2016. Prior to the second quarter of 2005, the Company accounted for its plans under the fair value recognition provisions of Statement of Financial Accounting Standard (“SFAS”) 123, “Accounting for Stock-Based Compensation,” adopted prospectively for all employee and director awards granted, modified or settled after January 1, 2003, under the provisions of SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS 123.”
     Effective at the beginning of the second quarter of 2005, the Company 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 all unvested awards at the time of adoption were being recognized under a fair value approach, the adoption of SFAS 123(R) did not have a significant impact on the Company’s 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 the 13 and 39 weeks ended September 30, 2006.
     Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $454 and $578 for the 13 weeks ended September 30, 2006 and October 1, 2005, respectively. For the 39-week period ended September 30, 2006 and October 1, 2005, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $1,380 and $1,320, respectively. The total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $159 and $202 for the 13 weeks ended September 30, 2006 and October 1, 2005, respectively. There was no share-based compensation cost capitalized as inventory or fixed assets for either period.

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     A summary of the option activity under the plans noted on the previous page as of September 30, 2006, and changes during the 39 week-period then ended is presented below:
                         
                    Weighted-Average  
            Weighted-Average     Remaining  
    Share Options     Exercise Price     Contractual Term  
 
                       
Outstanding at December 31, 2005
    757,850     $ 11.30          
Exercised
    (14,000 )     5.53          
Expired
    (57,500 )     11.49          
 
                     
Outstanding and Exercisable at September 30, 2006
    686,350     $ 11.41       4.55  
 
                     
     There were no options granted during the 13 or 39-week periods ended September 30, 2006 and October 1, 2005. As of September 30, 2006, the aggregate intrinsic value of both outstanding and exercisable options was $151.
     The fair value of the non-vested time-based restricted Common Share awards was calculated using the market value of the shares on the date of issuance. The weighted-average grant-date fair value of shares granted was $8.41 and $10.09 for the 13-week periods ended September 30, 2006 and October 1, 2005, respectively. The weighted-average grant-date fair value of shares granted was $7.79 and $10.23 for the 39-week periods was ended September 30, 2006 and October 1, 2005, respectively.
     The fair value of the non-vested performance-based restricted Common Share awards, requiring the Company to obtain certain net income per share targets, was calculated using the market value of the shares on the date of issuance. The fair value of the non-vested performance-based restricted Common Share awards with a market condition, which measures the Company’s performance against a peer group’s performance in terms of total return to shareholders, was calculated using valuation techniques incorporating the Company’s historical total return to shareholders in comparison to its peers to determine the expected outcomes related to these awards.
     A summary of the status of the Company’s non-vested restricted Common Shares as of September 30, 2006, and the changes during the 39 weeks ended, is presented below:
                                 
    Time-Based Awards     Performance-Based Awards  
            Weighted-Average             Weighted-Average  
            Grant-Date Fair             Grant-Date Fair  
Non-vested Restricted Common Shares   Shares     Value     Shares     Value  
 
                               
Non-vested at December 31, 2005
    207,251     $ 11.47       237,000     $ 8.24  
Granted
    431,650       7.79       262,725       8.39  
Vested
    (155,679 )     10.37              
Forfeited
    (12,793 )     11.06       (100,800 )     8.24  
 
                           
Non-vested at September 30, 2006
    470,429     $ 8.47       398,925     $ 8.34  
 
                           
     As of September 30, 2006, total unrecognized compensation cost related to non-vested time-based restricted Common Share awards granted was $2,665. That cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of shares vested based on service conditions during the 13 and 39 weeks ended September 30, 2006 was $111 and $1,062, respectively. For the 13 and 39 weeks ended October 1, 2005, the total fair value of time-based restricted Common Share awards vested was $326 and $442, respectively.

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     As of September 30, 2006, total unrecognized compensation cost related to non-vested performance-based restricted Common Share awards granted was $1,106. That cost is expected to be recognized over a weighted-average period of 1.6 years. No performance-based restricted Common Share awards have vested as of September 30, 2006.
     Net cash received from option exercises under all share-based arrangements for the 39 weeks ended September 30, 2006 and October 1, 2005 was $47 and $3, respectively.
(5) Comprehensive Income (Loss)
     SFAS 130, “Reporting Comprehensive Income,” establishes standards for the reporting and disclosure of comprehensive income. Other comprehensive income includes foreign currency translation, the effective portion of gains and losses on certain hedging activities, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale marketable securities.
     The components of comprehensive income (loss), net of tax were as follows:
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    September 30,     October 1,     September 30,     October 1,  
    2006     2005     2006     2005  
 
                               
Net income (loss)
  $ 4,406     $ (3,292 )   $ 13,063     $ 3,892  
 
                       
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
    249       516       3,608       (3,213 )
Minimum pension liability adjustments
    (41 )     42       (275 )     267  
Unrealized gain on marketable securities
    10       16       32       32  
 
                       
Total other comprehensive income (loss)
    218       574       3,365       (2,914 )
 
                       
Comprehensive income (loss)
  $ 4,624     $ (2,718 )   $ 16,428     $ 978  
 
                       
     Accumulated other comprehensive income (loss) is comprised of the following:
                 
    September 30,     December 31,  
    2006     2005  
 
               
Foreign currency translation adjustments
  $ 6,163     $ 2,555  
Minimum pension liability adjustments
    (3,367 )     (3,092 )
Unrealized loss on marketable securities
    (3 )     (35 )
 
           
Accumulated other comprehensive income (loss)
  $ 2,793     $ (572 )
 
           
(6) Long-Term Debt
     Senior Notes
     On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes. The $200.0 million senior notes bear interest at an annual rate of 11.50% and mature on May 1, 2012. The senior notes are redeemable in May 2007 at 105.75. Interest is payable on May 1 and November 1 of each year. On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.
     Credit Agreement
     On March 7, 2006, the Company amended the existing credit agreement, which provided the Company with substantially all of its borrowing capacity on the $100.0 million credit facility. The credit agreement contains various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated earnings before interest,

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
taxes, depreciation and amortization (“EBITDA”) and interest coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. The amendment utilizes a borrowing base composed of accounts receivable and inventory. The borrowing base limitation expires June 30, 2007. In addition, the Company is prohibited from repurchasing, repaying or redeeming subordinated notes until certain covenant levels are met. As of September 30, 2006, $96.7 million of the $100.0 million credit facility was available to the Company. The revolving facility expires on April 30, 2008 and requires a commitment fee of 0.375% to 0.500% 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 0.25% to 1.25% or (ii) LIBOR plus a margin of 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA, as defined. Interest on the swing line facility is payable monthly at the quoted overnight borrowing rate plus a margin of 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA, as defined.
(7) Net Income (Loss) Per Share
     Basic net income (loss) per share was computed by dividing net income (loss) by the weighted-average number of Common Shares outstanding for each respective period. Diluted net income (loss) per share was calculated by dividing net income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented.
     Actual weighted-average shares outstanding used in calculating basic and diluted net income per share were as follows:
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    September 30,     October 1,     September 30,     October 1,  
    2006     2005     2006     2005  
 
                               
Basic weighted average shares outstanding
    22,880,325       22,725,702       22,833,392       22,701,156  
Effect of dilutive securities
    515,368             416,626       238,875  
 
                       
Diluted weighted-average shares outstanding
    23,395,693       22,725,702       23,250,018       22,940,031  
 
                       
     Options not included in the computation of diluted net income (loss) per share to purchase 470,250 and 483,250 Common Shares at an average price of $13.46 and $13.94 per share were outstanding during the 13-week periods ended September 30, 2006 and October 1, 2005, respectively. Options not included in the computation of diluted net income (loss) per share to purchase 610,850 and 483,250 Common Shares at an average price of $12.18 and $13.94 per share were outstanding during the 39-week periods ended September 30, 2006 and October 1, 2005, respectively. These outstanding options were not included in the computation of diluted net income (loss) per share because their respective exercise prices were greater than the average market price of Common Shares and, therefore, their effect would have been anti-dilutive.
(8) Restructuring
     In January 2005, the Company announced restructuring initiatives related to the rationalization of certain manufacturing facilities in Europe and North America. This rationalization is part of the Company’s cost reduction initiatives. In connection with these initiatives, the Company recorded restructuring charges of $80 and $154 for the 13 and 39 weeks ended September 30, 2006. Restructuring charges included in the condensed consolidated statements of operations for the 13 and 39 weeks ended October 1, 2005 were $823 and $4,963, respectively. Accrued severance costs of $370 related to the Vehicle Management and Power Distribution segment were reversed during the 13 weeks ended July 1, 2006, resulting from continued production at a plant that was previously scheduled to close. The reversal of the accrual to income represents a non-cash inflow. Also included in the condensed consolidated statements of operations was a gain on the sale of property, plant and equipment related to our restructuring initiatives of $336 for 39 weeks ended October 1, 2005. This gain is netted within the activity listed in the table on the next page.

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     The restructuring charges related to the Vehicle Management & Power Distribution reportable segment included the following:
                         
            Asset-Related        
    Severance Costs     Charges     Total  
 
                       
Total expected restructuring charges
  $ 763     $ 127     $ 890  
 
                 
 
                       
Balance at December 31, 2004
  $     $     $  
 
                       
First quarter charge to expense
    88       127       215  
Second quarter charge to expense
    9             9  
Third quarter charge to expense
    356             356  
Fourth quarter charge to expense
    70             70  
Cash payments
    (111 )           (111 )
Non-cash utilization
          (127 )     (127 )
 
                 
 
                       
Balance at December 31, 2005
  $ 412     $     $ 412  
 
                       
First quarter charge to expense
    176             176  
Second quarter charge to expense
    (370 )           (370 )
Third quarter charge to expense
    127             127  
Cash payments
    (217 )           (217 )
Non-cash utilization
                 
 
                 
 
                       
Balance at September 30, 2006
  $ 128     $     $ 128  
 
                 
 
                       
Remaining expected restructuring charge
  $ 307     $     $ 307  
 
                 

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     The restructuring charges related to the Control Devices reportable segment included the following:
                                         
            Asset-Related     Facility Closure                
    Severance Costs     Charges     Costs     Other Exit Costs     Total  
 
                                       
Total expected restructuring charges
  $ 3,713     $ 983     $ 1,219     $ 653     $ 6,568  
 
                             
 
                                       
Balance at March 31, 2004
  $     $     $     $     $  
 
                                       
Second quarter charge to expense
          205                   205  
Third quarter charge to expense
          202             118       320  
Fourth quarter charge to expense
    1,068       207             287       1,562  
Cash payments
    (590 )                 (405 )     (995 )
Non-cash utilization
          (614 )                 (614 )
 
                             
 
                                       
Balance at December 31, 2004
  $ 478     $     $     $     $ 478  
 
                                       
First quarter charge to expense
    1,698       206             7       1,911  
Second quarter charge to expense
    586       163       746       174       1,669  
Third quarter charge to expense
    214             218       35       467  
Fourth quarter charge to expense
    (57 )           140       (18 )     65  
Cash payments
    (2,722 )           (140 )     (198 )     (3,060 )
Non-cash utilization
          (369 )                 (369 )
 
                             
 
                                       
Balance at December 31, 2005
  $ 197     $     $ 964     $     $ 1,161  
 
                                       
First quarter charge to expense
                      48       48  
Second quarter charge to expense
    204             14       2       220  
Third quarter charge to expense
    (48 )           1             (47 )
Cash payments
    (353 )           (717 )     (50 )     (1,120 )
Non-cash utilization
                             
 
                             
 
                       
Balance at September 30, 2006
  $     $     $ 262     $     $ 262  
 
                             
 
                       
Remaining expected restructuring charge
  $ 48     $     $ 100     $     $ 148  
 
                             
     All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges primarily relate 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 exit costs include miscellaneous expenditures associated with exiting business activities. The Company expects that these restructuring efforts will be substantially completed during the second quarter of 2007.
(9) Commitments and Contingencies
     In the ordinary course of business, the Company is involved in various legal proceedings and 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, cash flows or the financial position of the Company.
     Customer Bankruptcy
     On March 3, 2006, the Company was notified that one of its customers had filed for Chapter 11 bankruptcy protection. As a result, the Company established a reserve for estimated losses of approximately $343 that are expected to result from the

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
bankruptcy. The charges were recorded in the Company’s condensed consolidated statement of operations as a component of provision for doubtful accounts expense. The charge was recorded during the 13-week period ended April 1, 2006.
     Product Warranty and Recall
     Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers.
     The following provides a reconciliation of changes in product warranty and recall liability for the 39 weeks ended September 30, 2006 and October 1, 2005:
                 
    2006     2005  
 
               
Product warranty and recall at beginning of period
  $ 6,220     $ 6,644  
Accruals for products shipped during period
    3,185       2,034  
Changes in estimates of existing liabilities
    525       207  
Settlements made during the period (in cash or in kind)
    (3,167 )     (2,864 )
 
           
Product warranty and recall at end of period
  $ 6,763     $ 6,021  
 
           
(10) Employee Benefit Plans
     The Company has a single defined benefit pension plan that covers certain employees in the United Kingdom and a postretirement benefit plan that covers certain employees in the U.S. The components of net periodic benefit cost under the defined benefit pension plan are as follows:
                                 
    Pension Benefit Plan  
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    September 30,     October 1,     September 30,     October 1,  
    2006     2005     2006     2005  
 
                               
Service cost
  $ 34     $ 18     $ 98     $ 55  
Interest cost
    308       240       893       746  
Expected return on plan assets
    (331 )     (248 )     (959 )     (773 )
Amortization of actuarial loss
    79       71       228       221  
 
                       
Net periodic benefit cost
  $ 90     $ 81     $ 260     $ 249  
 
                       

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     In September 2006, the Board of Directors approved a plan to discontinue life insurance benefits of all active and retired employees under the Company’s postretirement benefit plan effective September 30, 2006. The discontinuance of these benefits was accounted for as a plan settlement, resulting in a one-time gain of approximately $1,242. The components of net periodic benefit cost under the postretirement benefit plan are as follows:
                                 
    Postretirement Benefit Plan  
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    September 30,     October 1,     September 30,     October 1,  
    2006     2005     2006     2005  
 
                               
Service cost
  $ 12     $ 25     $ 40     $ 71  
Interest cost
    17       26       58       70  
Settlement gain
    (1,242 )           (1,242 )      
 
                       
Net periodic postretirement (benefit) cost
  $ (1,213 )   $ 51     $ (1,144 )   $ 141  
 
                       
     As a result of the plan settlement, the Company remeasured the remaining obligation for its postretirement benefit plan, which consists of medical benefits for a small group of retirees. For the remainder of the fiscal year, net periodic benefit cost related to this plan will reflect the revised assumptions. The revised actuarial assumptions included a change in the discount rate for the postretirement benefit obligation from 5.50% to 5.90%. The Company’s policy is to model its discount rate using certain market indicators.
     The Company previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to contribute $273 to its pension plan in 2006. Of this amount, as of September 30, 2006, contributions of $174 have been made to the pension plan.
(11) Income Taxes
     The Company recognized a provision (benefit) for income taxes of $866, or 16.4% of pre-tax income, and $(1,424), or (30.2%) of pre-tax income, for federal, state and foreign income taxes for the 13 weeks ended September 30, 2006 and October 1, 2005, respectively. The Company recognized a provision for income taxes of $4,857, or 27.1% of pre-tax income, and $3,683, or 48.6% of pre-tax income, for federal, state and foreign income taxes for the 39 weeks ended September 30, 2006 and October 1, 2005, respectively. The increase in the effective tax rate for the 13 weeks ended September 30, 2006 compared to the 13 weeks ended October 1, 2005 was attributable to the improved profitability of the Company. The decrease in the effective tax rate for the 39 week period ended September 30, 2006 compared to the 39 week period ended October 1, 2005 was primarily attributable to the improved performance of the United Kingdom operations thus reducing the impact on the effective tax rate of the current year valuation allowance provided. Additionally, the effective tax rate was favorably impacted by a reduction in accrued income taxes due to the expiration of certain statutes of limitation.
(12) Accounting Pronouncements
     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is assessing FIN 48 and has not yet determined the impact that the adoption of FIN 48 will have on its result of operations or financial position.
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. We

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
have not yet determined the impact, if any, that the implementation of SFAS 157 will have on our results of operations or financial condition.
     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS 158 requires an employer to recognize a plan’s funded status in its statement of financial position, measure a plan’s assets and obligations as of the end of the employer’s fiscal year and recognize the changes in a defined benefit postretirement plan’s funded status in comprehensive income in the year in which the changes occur. SFAS 158’s requirement to recognize the funded status of a benefit plan and new disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006 (the current fiscal year-end for the Corporation). The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company is currently assessing the impact SFAS 158 will have on its consolidated financial statements.
(13) Segment Reporting
     SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance.
     The Company has two reportable segments: Vehicle Management & Power Distribution and Control Devices. These reportable segments were determined based on the differences in the nature of the products offered. The Vehicle Management & Power Distribution reportable segment produces 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 produces electronic and electromechanical switches and control actuation devices and sensors.
     The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s December 31, 2005 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and income before income taxes. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     A summary of financial information by reportable segment is as follows:
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    September 30,     October 1,     September 30,     October 1,  
    2006     2005     2006     2005  
Net Sales
                               
Vehicle Management & Power Distribution
  $ 103,105     $ 82,462     $ 309,012     $ 281,169  
Inter-segment sales
    4,132       3,523       13,135       12,049  
 
                       
Vehicle Management & Power Distribution net sales
    107,237       85,985       322,147       293,218  
 
                       
 
                               
Control Devices
    69,246       76,253       228,472       238,680  
Inter-segment sales
    909       796       3,020       2,312  
 
                       
Control Devices net sales
    70,155       77,049       231,492       240,992  
 
                       
 
                               
Eliminations
    (5,041 )     (4,319 )     (16,155 )     (14,361 )
 
                       
Total consolidated net sales
  $ 172,351     $ 158,715     $ 537,484     $ 519,849  
 
                       
 
                               
Income Before Income Taxes
                               
Vehicle Management & Power Distribution
  $ 8,204     $ (1,239 )   $ 23,248     $ 15,274  
Control Devices
    38       (324 )     8,944       2,570  
Other corporate activities
    2,716       2,518       2,913       7,126  
Corporate interest expense
    (5,686 )     (5,671 )     (17,185 )     (17,395 )
 
                       
Total consolidated income before income taxes
  $ 5,272     $ (4,716 )   $ 17,920     $ 7,575  
 
                       
 
                               
Depreciation and Amortization
                               
Vehicle Management & Power Distribution
  $ 1,952     $ 1,844     $ 5,719     $ 6,024  
Control Devices
    4,475       4,369       13,264       13,639  
Corporate activities
    157       98       345       292  
 
                       
Total consolidated depreciation and amortization(A)
  $ 6,584     $ 6,311     $ 19,328     $ 19,955  
 
                       
 
                               
Interest Expense (Income)
                               
Vehicle Management & Power Distribution
  $ (18 )   $ 49     $ (255 )   $ 117  
Control Devices
    42       215       532       461  
Corporate activities
    5,686       5,672       17,185       17,395  
 
                       
Total consolidated interest expense, net
  $ 5,710     $ 5,936     $ 17,462     $ 17,973  
 
                       
 
                               
Capital Expenditures
                               
Vehicle Management & Power Distribution
  $ 3,431     $ 2,084     $ 8,465     $ 7,609  
Control Devices
    2,903       6,466       10,970       13,207  
Corporate activities
    310       19       359       118  
 
                       
Total consolidated capital expenditures
  $ 6,644     $ 8,569     $ 19,794     $ 20,934  
 
                       
                 
    September 30,     December 31,  
    2006     2005  
Total Assets
               
Vehicle Management & Power Distribution
  $ 188,014     $ 158,203  
Control Devices
    224,303       222,747  
Corporate(B)
    251,601       248,739  
Eliminations
    (164,704 )     (166,651 )
 
           
Total consolidated assets
  $ 499,214     $ 463,038  
 
           
(A)   These amounts represent depreciation and amortization on fixed and certain intangible assets.
 
(B)   Assets located at Corporate consist primarily of cash, deferred taxes and equity investments.

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     The following table presents net sales and non-current assets for each of the geographic areas in which the Company operates:
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    September 30,     October 1,     September 30,     October 1,  
    2006     2005     2006     2005  
Net Sales
                               
North America
  $ 130,941     $ 128,577     $ 415,356     $ 411,168  
Europe and other
    41,410       30,138       122,128       108,681  
 
                       
Total consolidated net sales
  $ 172,351     $ 158,715     $ 537,484     $ 519,849  
 
                       
                 
    September 30,     December 31,  
    2006     2005  
Non-Current Assets
               
North America
  $ 218,057     $ 216,563  
Europe and other
    29,976       27,795  
 
           
Total non-current assets
  $ 248,033     $ 244,358  
 
           
(14) Investments
     PST Indústria Eletrônica da Amazônia Ltda.
     The Company has a 50% interest in PST Indústria Eletrônica da Amazônia Ltda. (“PST”), a Brazilian electronic components business that specializes in electronic vehicle security devices. The investment is accounted for under the equity method of accounting. The Company’s investment in PST was $11,673 and $17,818 at September 30, 2006 and December 31, 2005, respectively. The Company has a receivable from PST of $1,148 as of September 30, 2006 and December 31, 2005, respectively. PST operates on a calendar year.
     Condensed financial information for PST is as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2006   2005   2006   2005
 
Revenues
  $ 24,598     $ 19,016     $ 66,612     $ 50,132  
Cost of sales
  $ 12,095     $ 10,083     $ 33,433     $ 27,384  
 
                               
Total pretax income
  $ 4,381     $ 3,327     $ 12,206     $ 7,558  
The Company’s share of pretax income
  $ 2,191     $ 1,664     $ 6,103     $ 3,779  
     Equity in earnings of PST included in the condensed consolidated statements of operations was $1,750 and $1,373 for the 13 weeks ended September 30, 2006 and October 1, 2005, respectively. For the 39 weeks ended September 30, 2006 and October 1, 2005, equity in earnings of PST included in the condensed consolidated statements of operations was $4,576 and $3,138, respectively.
     Minda Instruments Ltd.
     The Company has a 30% interest in Minda Instruments Ltd. (“Minda”), a company based in India that manufactures electronic instrumentation equipment for the transportation market. In February 2006, the Company increased its investment in Minda from 20% to 30% by purchasing an additional 10% of Minda’s equity for $980. The investment is accounted for under the equity method of accounting. The Company’s investment in Minda was $1,973 and $828 at September 30, 2006 and December 31, 2005, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was $88 and $24, for the 13 weeks ended September 30, 2006 and October 1, 2005, respectively. For the 39 weeks ended September 30, 2006 and October 1, 2005, equity in earnings of Minda included in the condensed consolidated statements of operations was $228 and

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
$65, respectively. As outlined in Note 16 to our financial statements, in October 2006, the Company increased its investment in Minda from 30% to 49% by purchasing an additional 19% of Minda’s equity for approximately $1,625.
(15) Guarantor Financial Information
     The senior notes and the credit facility are fully and unconditionally guaranteed, jointly and severally, by each of the Company’s existing and future domestic wholly owned subsidiaries (Guarantor Subsidiaries). The Company’s non-U.S. subsidiaries do not guarantee the senior notes and the credit facility (Non-Guarantor Subsidiaries).
     Presented below are summarized consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a condensed consolidated basis, as of September 30, 2006 and December 31, 2005 and for each of the 13 and 39 weeks ended September 30, 2006 and October 1, 2005.
     These summarized condensed consolidating financial statements are prepared under the equity method. Separate financial statements for the Guarantor Subsidiaries are not presented based on management’s determination that they do not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentations on the subsequent pages.

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Table of Contents

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
                                         
    September 30, 2006  
            Guarantor     Non-Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
ASSETS
                                       
 
                                       
Current Assets:
                                       
Cash and cash equivalents
  $ 15,835     $ 46     $ 30,849     $     $ 46,730  
Accounts receivable, net
    56,126       35,728       30,091       (7 )     121,938  
Inventories, net
    26,047       13,256       18,934             58,237  
Prepaid expenses and other
    (268,948 )     269,318       14,331             14,701  
Deferred income taxes
    4,842       4,036       697             9,575  
 
                             
Total current assets
    (166,098 )     322,384       94,902       (7 )     251,181  
 
                             
 
                                       
Long-Term Assets:
                                       
Property, Plant and Equipment, net
    61,333       32,673       20,452             114,458  
Other Assets:
                                       
Goodwill
    44,585       20,591                   65,176  
Investments and other, net
    31,908       425       167       (1,000 )     31,500  
Deferred income taxes
    40,000       (3,125 )     24             36,899  
Investment in subsidiaries
    407,087                   (407,087 )      
 
                             
Total long-term assets
    584,913       50,564       20,643       (408,087 )     248,033  
 
                             
Total Assets
  $ 418,815     $ 372,948     $ 115,545     $ (408,094 )   $ 499,214  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
 
                                       
Current Liabilities:
                                       
Accounts payable
  $ 24,374     $ 22,273     $ 22,373     $     $ 69,020  
Accrued expenses and other
    22,630       9,276       20,020       (7 )     51,919  
 
                             
Total current liabilities
    47,004       31,549       42,393       (7 )     120,939  
 
                             
 
                                       
Long-Term Liabilities:
                                       
Long-term debt
    200,000             1,000       (1,000 )     200,000  
Deferred income taxes
                1,411             1,411  
Other liabilities
    21       513       4,540             5,074  
 
                             
Total long-term liabilities
    200,021       513       6,951       (1,000 )     206,485  
 
                             
 
                                       
Shareholders’ Equity
    171,790       340,886       66,201       (407,087 )     171,790  
 
                             
 
                                       
Total Liabilities and Shareholders’ Equity
  $ 418,815     $ 372,948     $ 115,545     $ (408,094 )   $ 499,214  
 
                             

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     Supplemental condensed consolidating financial statements (continued):
                                         
    December 31, 2005  
            Guarantor     Non-Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
ASSETS
                                       
 
                                       
Current Assets:
                                       
Cash and cash equivalents
  $ 7,754     $ 47     $ 32,983     $     $ 40,784  
Accounts receivable, net
    46,505       30,883       23,043       (69 )     100,362  
Inventories, net
    25,662       12,804       15,325             53,791  
Prepaid expenses and other
    (274,706 )     258,203       30,993             14,490  
Deferred income taxes
    4,713       4,116       424             9,253  
 
                             
Total current assets
    (190,072 )     306,053       102,768       (69 )     218,680  
 
                             
 
                                       
Long-Term Assets:
                                       
Property, Plant and Equipment, net
    61,620       33,683       18,175             113,478  
Other Assets:
                                       
Goodwill
    44,585       20,591                   65,176  
Investments and other, net
    38,004       460       46       (12,019 )     26,491  
Deferred income taxes
    41,547       (3,781 )     1,447             39,213  
Investment in subsidiaries
    399,536                   (399,536 )      
 
                             
Total long-term assets
    585,292       50,953       19,668       (411,555 )     244,358  
 
                             
Total Assets
  $ 395,220     $ 357,006     $ 122,436     $ (411,624 )   $ 463,038  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
 
                                       
Current Liabilities:
                                       
Current portion of long-term debt
  $     $     $ 44     $     $ 44  
Accounts payable
    20,350       17,358       17,636             55,344  
Accrued expenses and other
    20,879       10,351       15,442       (69 )     46,603  
 
                             
Total current liabilities
    41,229       27,709       33,122       (69 )     101,991  
 
                             
 
                                       
Long-Term Liabilities:
                                       
Long-term debt, net of current portion
    200,000             12,019       (12,019 )     200,000  
Deferred income taxes
                923             923  
Other liabilities
          2,043       4,090             6,133  
 
                             
Total long-term liabilities
    200,000       2,043       17,032       (12,019 )     207,056  
 
                             
 
                                       
Shareholders’ Equity
    153,991       327,254       72,282       (399,536 )     153,991  
 
                             
 
                                       
Total Liabilities and Shareholders’ Equity
  $ 395,220     $ 357,006     $ 122,436     $ (411,624 )   $ 463,038  
 
                             

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     Supplemental condensed consolidating financial statements (continued):
                                         
    Thirteen Weeks Ended September 30, 2006  
            Guarantor     Non-Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net Sales
  $ 86,662     $ 52,953     $ 54,496     $ (21,760 )   $ 172,351  
 
                                       
Costs and Expenses:
                                       
Cost of goods sold
    75,571       39,867       39,798       (21,063 )     134,173  
Selling, general and administrative
    13,227       6,904       9,560       (697 )     28,994  
Loss on sale of property, plant and equipment
    15                         15  
Restructuring charges, net
    127       (46 )     (1 )           80  
 
                             
 
                                       
Operating (Loss) Income
    (2,278 )     6,228       5,139             9,089  
 
                                       
Interest expense (income), net
    5,896             (186 )           5,710  
Other (income) expense, net
    (1,948 )           55             (1,893 )
Equity income from subsidiaries
    (10,243 )                 10,243        
 
                             
 
                                       
Income (Loss) Before Income Taxes
    4,017       6,228       5,270       (10,243 )     5,272  
 
                                       
(Benefit) provision for income taxes
    (389 )           1,255             866  
 
                             
 
                                       
Net Income (Loss)
  $ 4,406     $ 6,228     $ 4,015     $ (10,243 )   $ 4,406  
 
                             
                                         
    Thirteen Weeks Ended October 1, 2005  
            Guarantor     Non-Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net Sales
  $ 78,079     $ 56,604     $ 41,145     $ (17,113 )   $ 158,715  
 
                                       
Costs and Expenses:
                                       
Cost of goods sold
    68,403       42,988       32,309       (16,546 )     127,154  
Selling, general and administrative
    13,919       9,167       8,509       (567 )     31,028  
(Loss) gain on sale of property, plant and equipment
    12             (17 )           (5 )
Restructuring charges
    176       172       475             823  
 
                             
 
                                       
Operating (Loss) Income
    (4,431 )     4,277       (131 )           (285 )
 
                                       
Interest expense, net
    5,878             58             5,936  
Other (income) expense, net
    (1,551 )           46             (1,505 )
Equity income from subsidiaries
    (4,194 )                 4,194        
 
                             
 
                                       
(Loss) Income Before Income Taxes
    (4,564 )     4,277       (235 )     (4,194 )     (4,716 )
 
                                       
(Benefit) provision for income taxes
    (1,272 )     699       (851 )           (1,424 )
 
                             
 
                                       
Net (Loss) Income
  $ (3,292 )   $ 3,578     $ 616     $ (4,194 )   $ (3,292 )
 
                             

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     Supplemental condensed consolidating financial statements (continued):
                                         
    Thirty-Nine Weeks Ended September 30, 2006  
            Guarantor     Non-Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net Sales
  $ 267,904     $ 172,622     $ 162,051     $ (65,093 )   $ 537,484  
 
                                       
Costs and Expenses:
                                       
Cost of goods sold
    230,745       128,076       118,785       (62,987 )     414,619  
Selling, general and administrative
    39,739       25,471       28,786       (2,106 )     91,890  
(Loss) gain on sale of property, plant and equipment
    (1,457 )           3             (1,454 )
Restructuring charges, net
    (68 )     206       16             154  
 
                             
 
                                       
Operating Income
    (1,055 )     18,869       14,461             32,275  
 
                                       
Interest expense (income), net
    17,665             (203 )           17,462  
Other (income) expense, net
    (3,645 )           538             (3,107 )
Equity income from subsidiaries
    (28,852 )                 28,852        
 
                             
 
                                       
Income (Loss) Before Income Taxes
    13,777       18,869       14,126       (28,852 )     17,920  
 
                                       
Provision for income taxes
    714       19       4,124             4,857  
 
                             
 
                                       
Net Income (Loss)
  $ 13,063     $ 18,850     $ 10,002     $ (28,852 )   $ 13,063  
 
                             
                                         
    Thirty-Nine Weeks Ended October 1, 2005  
            Guarantor     Non-Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net Sales
  $ 257,753     $ 175,839     $ 141,115     $ (54,858 )   $ 519,849  
 
                                       
Costs and Expenses:
                                       
Cost of goods sold
    217,937       128,351       108,287       (53,337 )     401,238  
Selling, general and administrative
    40,467       24,806       28,795       (1,521 )     92,547  
(Loss) gain on sale of property, plant and equipment
    5             (349 )           (344 )
Restructuring charges
    176       728       4,059             4,963  
 
                             
 
                                       
Operating Income
    (832 )     21,954       323             21,445  
 
                                       
Interest expense, net
    17,950             23             17,973  
Other (income) expense, net
    (4,271 )           168             (4,103 )
Equity income from subsidiaries
    (20,323 )                 20,323        
 
                             
 
                                       
Income (Loss) Before Income Taxes
    5,812       21,954       132       (20,323 )     7,575  
 
                                       
Provision for income taxes
    1,920       12       1,751             3,683  
 
                             
 
                                       
Net Income (Loss)
  $ 3,892     $ 21,942     $ (1,619 )   $ (20,323 )   $ 3,892  
 
                             

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
     Supplemental condensed consolidating financial statements (continued):
                                         
    Thirty-Nine Weeks Ended September 30, 2006  
            Guarantor     Non-Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash (used) provided by operating activities
  $ (4,799 )   $ 5,075     $ 33,353     $ (11,019 )   $ 22,610  
 
                             
 
                                       
INVESTING ACTIVITIES:
                                       
Capital expenditures
    (9,273 )     (4,840 )     (5,681 )           (19,794 )
Proceeds from sale of fixed assets
    2,266                         2,266  
Business acquisitions and other
    (110 )     (50 )     388       (896 )     (668 )
 
                             
Net cash used by investing activities
    (7,117 )     (4,890 )     (5,293 )     (896 )     (18,196 )
 
                             
 
                                       
FINANCING ACTIVITIES:
                                       
Borrowings (repayments) of long-term debt
    1,556             (12,619 )     11,019       (44 )
Share-based compensation activity, net
    47                         47  
Shareholder distributions
    10,850             (10,850 )            
Other financing costs
    7,544       (186 )     (8,404 )     896       (150 )
 
                             
Net cash provided (used) by financing activities
    19,997       (186 )     (31,873 )     11,915       (147 )
 
                             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                1,679             1,679  
 
                             
Net change in cash and cash equivalents
    8,081       (1 )     (2,134 )           5,946  
Cash and cash equivalents at beginning of period
    7,754       47       32,983             40,784  
 
                             
Cash and cash equivalents at end of period.
  $ 15,835     $ 46     $ 30,849     $     $ 46,730  
 
                             
                                         
    Thirty-Nine Weeks Ended October 1, 2005  
            Guarantor     Non-Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash (used) provided by operating activities
  $ 7,355     $ 6,298     $ (2,838 )   $ 4,706     $ 15,521  
 
                             
 
                                       
INVESTING ACTIVITIES:
                                       
Capital expenditures
    (10,880 )     (6,257 )     (3,797 )           (20,934 )
Proceeds from sale of fixed assets
                1,664             1,664  
Business acquisitions and other
    (294 )     (49 )           61       (282 )
 
                             
Net cash used by investing activities
    (11,174 )     (6,306 )     (2,133 )     61       (19,552 )
 
                             
 
                                       
FINANCING ACTIVITIES:
                                       
Borrowings (repayments) of long-term debt
                4,610       (4,706 )     (96 )
Share-based compensation activity, net
    3       61             (61 )     3  
Other financing costs
    (75 )                       (75 )
 
                             
Net cash provided (used) by financing activities
    (72 )     61       4,610       (4,767 )     (168 )
 
                             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                (2,207 )           (2,207 )
 
                             
Net change in cash and cash equivalents
    (3,891 )     53       (2,568 )           (6,406 )
Cash and cash equivalents at beginning of period
    20,363       17       31,952             52,332  
 
                             
Cash and cash equivalents at end of period.
  $ 16,472     $ 70     $ 29,384     $     $ 45,926  
 
                             

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STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
(16) Subsequent Event
     In October 2006, the Company increased its investment in Minda from 30% to 49% by purchasing an additional 19% of Minda’s equity for approximately $1,625.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     Overview
     The following Management Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.
     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.
     We recognized net income for the 13-week period ended September 30, 2006 of $4.4 million, or $0.19 per diluted share, compared with net loss of $3.3 million, or $(0.14) per diluted share, for the 13-week period ended October 1, 2005.
     We recognized net income for the 39-week period ended September 30, 2006 of $13.1 million, or $0.56 per diluted share, compared with net income of $3.9 million, or $0.17 per diluted share, for the 39-week period ended October 1, 2005.
     Our third quarter 2006 operating results were unfavorably affected by a number of challenging industry-wide issues, including intense competition, product price reductions, and higher commodity costs. We continuously work to address these challenges by implementing a broad range of initiatives aimed to improve operating performance. During the second quarter of 2006, we employed teams to implement best practices in our underperforming operations and focused our purchasing initiatives to reduce material procurement costs. These challenges were favorably offset by a number of items in the third quarter, including a $2.6 million pretax reduction in our provision for doubtful accounts and a $1.2 million one-time gain related to the settlement of the life insurance benefits portion of a postretirement benefit plan. Our PST joint venture in Brazil continued to perform well during the quarter, resulting in equity earnings of $1.8 million compared with $1.4 million in the previous year.
     On July 29, 2006 we announced that we would begin work on our second major instrument panel assembly contract for the North American commercial vehicle market. Production is expected to begin in the first quarter of 2007 and the contract is expected to contribute net sales of approximately $40.0 million annually at full production. It is currently anticipated that the program will reach full-production levels by 2009.
     In 2007, management expects a significant decline in industry production for medium and heavy trucks as the U.S. adopts more stringent diesel emissions standards. We expect our overall sales decline will be less than the industry production decline as our second instrument panel award and stable demand outside of the United States partially offsets reduced medium- and heavy-duty truck production. Our expected performance will be based on our continued drive toward operational excellence across the organization, ongoing cost reduction initiatives and successful launches of several key products in 2007.
     Significant factors inherent to our markets that could affect our results for 2006 include the financial stability of our customers and suppliers as well as our ability to successfully execute our planned productivity and cost reduction initiatives. We are undertaking these initiatives to mitigate commodity price increases and customer–demanded price reductions. 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 that 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 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 13-week period of 2006 and 2005 ended on September 30 and October 1, respectively.

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     13 Weeks Ended September 30, 2006 Compared to 13 Weeks Ended October 1, 2005
     Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the 13 weeks ended September 30, 2006 and October 1, 2005 are summarized in the following table:
                                 
    Thirteen Weeks Ended              
    September 30,     October 1,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
 
                               
Vehicle Management & Power Distribution
  $ 103,105     $ 82,462     $ 20,643       25.0 %
Control Devices
    69,246       76,253       (7,007 )     (9.2 )%
 
                         
Total net sales
  $ 172,351     $ 158,715     $ 13,636       8.6 %
 
                         
     The increase in net sales for our Vehicle Management & Power Distribution segment was primarily due to increased sales to our commercial vehicle customers as North American demand remained strong in the quarter. In addition, new programs in our European operations and a favorable $1.7 million impact from favorable foreign currency exchange rates resulted in increased revenue in the quarter. These favorable factors were partially offset by ongoing product price reductions.
     The decrease in net sales for our Control Devices segment was primarily attributable to unfavorable North American light vehicle production results at our major customers and product price reductions. In addition, the impact from foreign currency exchange rate translation increased our sales by $0.4 million during the quarter.
     Net sales by geographic location for the 13 weeks ended September 30, 2006 and October 1, 2005 are summarized in the following table:
                                 
    Thirteen Weeks Ended              
    September 30,     October 1,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
 
                               
North America
  $ 130,941     $ 128,577     $ 2,364       1.8 %
Europe and other
    41,410       30,138       11,272       37.4 %
 
                         
Total net sales
  $ 172,351     $ 158,715     $ 13,636       8.6 %
 
                         
     North American sales accounted for 76.0% of total net sales in the third 13 weeks of 2006 compared with 81.0% for the same period in 2005. The $2.4 million increase in North American sales was primarily attributable to increased sales to our commercial vehicle customers as a result of strong North American demand in the quarter. The increase was partially offset by an unfavorable North American light vehicle production mix and product price reductions. Net sales outside North America accounted for 24.0% of total net sales for the 13 weeks ended September 30, 2006 compared to 19.0% for the same period in 2005. Our increase in sales outside of North America for the quarter was primarily due to new product revenues. In addition, the favorable effect of foreign currency exchange rates impacted net sales outside North America by $2.1 million in the quarter.
     Cost of Goods Sold. Cost of goods sold for the 13 weeks ended September 30, 2006 increased by $7.0 million, or 5.5%, to $134.2 million from $127.2 million for the same period in 2005. As a percentage of sales, cost of goods sold decreased to 77.9% from 80.1%. This decrease as a percentage of sales was predominately due to favorable volume and operational improvement. These favorable items were mitigated by ongoing material cost increases and product price reductions. Going forward, we expect that pricing and raw material price increases will continue to affect our gross margin through 2006 and into 2007. Our management team is working to offset these increases through our focused operational improvement efforts and purchasing programs.
     Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for the 13 weeks ended September 30, 2006 increased by $0.6 million, or 2.1%, to $29.0 million from $28.4 million for the third 13 weeks of 2005. Product development expenses included within SG&A were $9.4 million for the 13 weeks ended September 30, 2006 and $9.5 million for the 13 weeks ended October 1, 2005, respectively. Included in third quarter SG&A was a $1.2 million one-time gain related to the settlement of the life insurance benefits portion of a postretirement benefit plan. Excluding this gain, SG&A

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expenses increased due to increased marketing and infrastructure costs associated with a new product launch and increased costs associated with a system implementation. As a percentage of sales, SG&A expenses decreased to 16.8% for the third 13 weeks ended September 30, 2006 from 17.9% for the comparable period in 2005.
     Provision for Doubtful Accounts. The provision for doubtful accounts decreased $2.6 million compared to the same time period in 2005. The decrease was due to the bad debt charge associated with the customer bankruptcy filings in the third quarter of 2005 with no such charges during the comparable period in 2006.
     Restructuring Charges, Net. 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 America. This rationalization is a result of our cost reduction initiatives. Restructuring charges for the 13 weeks ended September 30, 2006 and October 1, 2005 was $80 and $823, respectively.
     Equity in Earnings of Investees. Equity in earnings of investees was $1.8 million and $1.4 million for the 13 weeks ended September 30, 2006 and October 1, 2005, respectively. The increase of $0.4 million was predominately attributable to the increase in equity earnings recognized from our PST joint venture in Brazil. The increase primarily reflects higher volume for PST’s security product lines.
     Income (Loss) Before Income Taxes. Income (loss) before income taxes is summarized in the following table by reportable segment.
                                 
    Thirteen Weeks Ended              
    September 30,     October 1,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
 
                               
Vehicle Management & Power Distribution
  $ 8,204     $ (1,239 )   $ 9,443       762.1 %
Control Devices
    38       (324 )     362       111.7 %
Other corporate activities
    2,716       2,518       198       7.9 %
Corporate interest expense
    (5,686 )     (5,671 )     (15 )     (0.3 )%
 
                         
Income before income taxes
  $ 5,272     $ (4,716 )   $ 9,988       211.8 %
 
                         
     The increase in income before income taxes at the Vehicle Management & Power Distribution reportable segment was primarily the result of increased volume, reduced bad debt provision expenses and operational improvements during the quarter. The improvement was partially offset by unfavorable raw material variances and product price reductions.
     The increase in income before income taxes at the Control Devices reportable segment was primarily the result of improved operating efficiencies at our United Kingdom operation, lower bad debt provision expenses and a reduction in restructuring expenses in the quarter. These factors were partially offset by ongoing product price reductions and increased raw material costs.
     Income (loss) before income taxes for the 13 weeks ended September 30, 2006 for North America increased by $4.8 million to $1.0 million from $(3.8) million for the same period in 2005. The increase in our profitability in North America was primarily attributable to lower bad debt provision expenses, operational improvement and increased commercial vehicle volume. Mitigating factors were unfavorable raw material variances and product price reductions. Income (loss) before income taxes for 2005 outside North America increased by $5.2 million to $4.3 million from $(0.9) million in 2005. The increase in our profitability outside North America was primarily due to the increased sales volume and operational improvement at our United Kingdom operations, which experienced significant operational inefficiencies in the 2005 period.
     Provision (Benefit) for Income Taxes. We recognized a provision (benefit) for income taxes of $0.9 million, or 16.4% of pre-tax income, and $(1.4) million, or (30.2%) of the pre-tax income, for federal, state and foreign income taxes for the 13 weeks ended September 30, 2006 and October 1, 2005, respectively. The increase in the effective tax rate for the 13 weeks ended September 30, 2006 compared to the 13 weeks ended October 1, 2005 was attributable to the improved profitability of the Company.

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     39 Weeks Ended September 30, 2006 Compared to 39 Weeks Ended October 1, 2005
     Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the 39 weeks ended September 30, 2006 and October 1, 2005 are summarized in the following table:
                                 
    Thirty-Nine Weeks Ended              
    September 30,     October 1,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
 
                               
Vehicle Management & Power Distribution
  $ 309,012     $ 281,169     $ 27,843       9.9 %
Control Devices
    228,472       238,680       (10,208 )     (4.3 )%
 
                         
Total net sales
  $ 537,484     $ 519,849     $ 17,635       3.4 %
 
                         
     The increase in net sales for our Vehicle Management & Power Distribution reportable segment was primarily due to increased sales to our commercial vehicle customers as a result of strong demand in North America and new program launches in Europe. This increase was offset by an unfavorable $2.0 million impact from foreign currency exchange rates and ongoing product price reductions.
     The decrease in net sales for our Control Devices reportable segment was primarily attributable to a decline in our customers’ North American light vehicle production schedules and product price reductions. In addition, unfavorable foreign currency exchange rate translation reduced our sales by $0.4 million during the 39 weeks ended September 30, 2006.
     Net sales by geographic location for the 39 weeks ended September 30, 2006 and October 1, 2005 are summarized in the following table:
                                 
    Thirty-Nine Weeks Ended              
    September 30,     October 1,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
 
                               
North America
  $ 415,356     $ 411,168     $ 4,188       1.0 %
Europe and other
    122,128       108,681       13,447       12.4 %
 
                         
Total net sales
  $ 537,484     $ 519,849     $ 17,635       3.4 %
 
                         
     North American sales accounted for 77.3% of total net sales in the 39 weeks ended September 30, 2006 compared with 79.1% for the same period in 2005. The $4.2 million increase in North American sales was primarily attributable to increased sales to our commercial vehicle customers as a result of strong North American demand. The increase was partially offset by an unfavorable North American light vehicle production and product price reductions. Net sales outside North America accounted for 22.7% of total net sales for the 39 weeks ended September 30, 2006 compared to 20.9% for the same period in 2005. The increase in sales outside North America was primarily due to new product revenues, offset partially by unfavorable foreign currency exchange rates. In addition, the unfavorable effect of foreign currency exchange rates impacted net sales outside North America by $2.4 million for the 39 weeks ended September 30, 2006.
     Cost of Goods Sold. Cost of goods sold for the 39 weeks ended September 30, 2006 increased by $13.4 million, or 3.3%, to $414.6 million from $401.2 million for the same period in 2005. As a percentage of sales, cost of goods sold decreased slightly to 77.1% from 77.2%. This decrease as a percentage of sales was predominately due to operational improvement and increased sales volume. Offsetting these factors were unfavorable material price variances resulting from raw material price increases and product price reductions. Going forward, we expect that pricing and raw material price challenges will continue to affect our gross margin through 2006 and into 2007. Our management team is working to offset these pressures through our focused operational improvement efforts and purchasing programs.
     Selling, General and Administrative Expenses. SG&A expenses for the 39 weeks ended September 30, 2006 increased by $2.4 million, or 2.7%, to $91.3 million from $88.9 million for the same period in 2005. Product development expenses included in SG&A were $29.9 million for the 39 weeks ended September 30, 2006 and $30.5 million for the 39 weeks ended October 1, 2005, respectively. Included in product development expenses in the 39 weeks ended September 30, 2005, were expenditures

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incurred to obtain certification for a key product in Europe, which was certified in 2005. The increase in non-product development SG&A expenses in 2006 compared with 2005 is primarily attributable to the non-recurrence of favorable legal and commercial settlements in 2005. As a percentage of sales, SG&A expenses decreased to 17.0% for the 39 weeks ended September 30, 2006 from 17.1% for the same period in 2005.
     Provision for Doubtful Accounts. The provision for doubtful accounts decreased $3.1 million compared to the same time period in 2005. The decrease was due to the bad debt charge associated with customer bankruptcies in the second and third quarter of 2005 exceeding the bad debt charge associated with a customer bankruptcy in the first quarter of 2006.
     Restructuring Charges, Net. 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 America. This rationalization is a result of our cost reduction initiatives. Restructuring charges for the 39 weeks ended September 30, 2006 and October 1, 2005 was $154 and $4,627, respectively.
     Gain on Sale of Property, Plant and Equipment. Gain on sale of property, plant and equipment was $1.5 million for the 39 weeks ended September 30, 2006 and is the result of the sale of land and a building adjacent to our Sarasota, Florida, location. Gain on sale of property, plant and equipment was $0.3 million for the 39 weeks ended October 1, 2005 and is the result of the sale of a facility in the United Kingdom.
     Equity in Earnings of Investees. Equity in earnings of investees was $4.8 million and $3.2 million for the 39 weeks ended September 30, 2006 and October 1, 2005, respectively. The increase of $1.6 million was predominately attributable to the increase in equity earnings recognized from our PST joint venture in Brazil. The increase primarily reflects higher volume for PST’s security product lines.
     Income Before Income Taxes. Income before income taxes is summarized in the following table by reportable segment.
                                 
    Thirty-Nine Weeks Ended              
    September 30,     October 1,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
 
                               
Vehicle Management & Power Distribution
  $ 23,248     $ 15,274     $ 7,974       52.2 %
Control Devices
    8,944       2,570       6,374       248.0 %
Other corporate activities
    2,913       7,126       (4,213 )     (59.1 )%
Corporate interest expense
    (17,185 )     (17,395 )     210       1.2 %
 
                         
Income before income taxes
  $ 17,920     $ 7,575     $ 10,345       136.6 %
 
                         
     The increase in income before income taxes at the Vehicle Management & Power Distribution reportable segment was primarily the result of increased sales volume, a reduction in bad debt provision, and operational improvement. Offsetting these gains were unfavorable raw material variances and product price reductions.
     The increase in income before income taxes at the Control Devices reportable segment was primarily the result of improved operating efficiencies at our United Kingdom operation and a reduction in restructuring and bad debt expenses. These factors were partially offset by ongoing product price reductions and increased raw material costs.
     Income before income taxes for the 39 weeks ended September 30, 2006 for North America decreased by $2.8 million to $6.9 million from $9.7 million for the same period in 2005. The decrease in our profitability in North America was primarily attributable to unfavorable raw material variances, ongoing operating inefficiencies at our Mexican operations and product price reductions. Income before income taxes for 2006 outside North America increased by $13.1 million to $11.0 million from $(2.1) million in 2005. The increase in our profitability outside North America was primarily due to the operational improvement at our United Kingdom operations, which experienced significant operational inefficiencies in the 2005 period, and increased sales volume.
     Provision for Income Taxes. We recognized a provision for income taxes of $4.9 million, or 27.1% of pre-tax income, and $3.7 million, or 48.6% of the pre-tax income, for federal, state and foreign income taxes for the 39 weeks ended September 30, 2006 and October 1, 2005, respectively. The decrease in the effective tax rate for the 39 weeks ended September 30, 2006

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compared to the 39 weeks ended October 1, 2005 was primarily attributable to the improved performance of the United Kingdom operations thus reducing the impact on the effective tax rate of the current year valuation allowance provided. Additionally, the effective tax rate was favorably impacted by a reduction in accrued income taxes due to the expiration of certain statutes of limitation.
     Liquidity and Capital Resources
     Net cash provided by operating activities was $22.6 million and $15.5 million for the 39 weeks ended September 30, 2006 and October 1, 2005, respectively. The increase in net cash provided by operating activities of $7.1 million was primarily due to improvements in net income. Higher accounts receivable and inventory cash requirements were largely offset by favorable changes in accounts payable and prepaid expenses.
     Net cash used by investing activities was $18.2 million and $19.6 million for the 39 weeks ended September 30, 2006 and October 1, 2005, respectively. The decrease in net cash used by investing activities of $1.4 million was attributable to a decrease in capital expenditures during the 39 week period. During the 2006 period, major capital spending initiatives included the launch of new products in the areas of customer-actuated switches, power distribution systems and sensor products. In addition, in February 2006, we invested approximately $1.0 million for an additional 10% stake in our Minda Instruments Limited joint venture. Capital spending and investment spending was offset by $2.3 million in proceeds from a property sale in the first quarter of 2006.
     Net cash used by financing activities for the 39 weeks ended September 30, 2006 was $0.1 million, and primarily related to fees for the completion of our credit agreement amendment during the first quarter.
     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 September 30, 2006. On March 7, 2006, we amended our credit agreement dated May 1, 2002. The amendment modifies certain financial covenant requirements, changes certain reporting requirements, sets borrowing levels based on certain asset levels and prohibits us from repurchasing, repaying or redeeming any of our outstanding subordinated notes unless certain covenant levels are met.
     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 6 to our financial statements, the Company is a party to a $100.0 million revolving 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. As of September 30, 2006, $96.7 of the $100.0 million was available.
     Inflation and International Presence
     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.

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     Forward-Looking 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 statements may be identified by the words “will,” “may,” “designed to,” “believes,” “plans,” “expects,” “continue,” and similar words and expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:
    the loss or bankruptcy of a major customer or supplier;
 
    the costs and timing of facility closures, business realignment, or similar actions;
 
    a significant change in automotive, medium- and heavy-duty, agricultural or off-highway vehicle production;
 
    our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;
 
    a significant change in general economic conditions in any of the various countries in which we operate;
 
    labor disruptions at our facilities or at any of our significant customers or suppliers;
 
    the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis;
 
    the amount of debt and the restrictive covenants contained in our credit facility;
 
    customer acceptance of new products;
 
    capital availability or costs, including changes in interest rates or market perceptions;
 
    the successful integration of any acquired businesses;
 
    the occurrence or non-occurrence of circumstances beyond our control; and those items described in Part I, Item IA (“Risk Factors”) of the Company’s 2005 Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
     Interest Rate Risk
     From time to time, we are exposed to certain market risks, primarily resulting from the effects of changes in interest rates. At September 30, 2006, however, all of our debt was fixed rate debt. At this time, we do not intend to use financial instruments to manage this risk.
     Commodity Price 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, zinc, resins and certain other commodities. 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. 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.
     Foreign Currency Exchange Risk
     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 3 to our condensed consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $15,044 to reduce exposure related to our Swedish krona- and British pound-denominated intercompany loans. The estimated fair value of these contracts at September 30, 2006, per quoted market sources, was approximately $(311). Our foreign currency option contracts have a notional value of $56 and reduce the risk associated with our other known foreign currency exposures related to the Mexican peso. The estimated fair value of these contracts at September 30, 2006, per quoted market sources, was approximately $12. 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.

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Item 4. Controls and Procedures.
     Evaluation of Disclosure Controls and Procedures
     As of September 30, 2006, an evaluation was performed under the supervision and with the participation of the Company’s management, including the chief executive officer (CEO) and chief financial officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2006.
     Changes in Internal Control Over Financial Reporting
     There were no changes in the Company’s internal control over financial reporting during the 13 weeks ended September 30, 2006 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
     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 government-imposed or other instituted recalls involving such products. The Company maintains insurance against such liability claims.
Item 1A. Risk Factors.
     There were no material changes from risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
     None.
Item 3. Defaults Upon Senior Securities.
     None.
Item 4. Submission of Matters to a Vote of Security Holders.
     None.
Item 5. Other Information.
     None.
Item 6. Exhibits.
     Reference is made to the separate, “Index to Exhibits,” filed herewith.

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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 6, 2006  /s/ John C. Corey    
  John C. Corey   
  President, Chief Executive Officer and Director (Principal Executive Officer)   
 
     
Date: November 6, 2006  /s/ George E. Strickler    
  George E. Strickler   
  Executive Vice President and Chief Financial Officer (Principal Financial Officer)   

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INDEX TO EXHIBITS
     
Exhibit    
Number   Exhibit
 
   
10.1
  Outside Directors’ Deferred Compensation Plan (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 26, 2006).
 
   
10.2
  Employees’ Deferred Compensation Plan (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on July 26, 2006).
 
   
10.3
  Form of 2006 Restricted Shares Grant Agreement (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on July 26, 2006).
 
   
10.4
  Form of 2006 Directors’ Restricted Shares Grant Agreement (incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on July 26, 2006).
 
   
31.1
  Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
   
31.2
  Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
   
32.1
  Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
   
32.2
  Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

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