-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SfcyNK9Zj5NLppj2lckG03FXRwKSm3H4HncOuMgvJuhqpuEnUPvr5Mp48DSQIMAo C2nk6lEsGnRmdlLnG8OBcQ== /in/edgar/work/20000626/0000944209-00-001071/0000944209-00-001071.txt : 20000920 0000944209-00-001071.hdr.sgml : 20000920 ACCESSION NUMBER: 0000944209-00-001071 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000626 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE AUTOMOTIVE INDUSTRIES INC CENTRAL INDEX KEY: 0001012393 STANDARD INDUSTRIAL CLASSIFICATION: [5013 ] IRS NUMBER: 952920557 STATE OF INCORPORATION: CA FISCAL YEAR END: 0326 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28568 FILM NUMBER: 660943 BUSINESS ADDRESS: STREET 1: 700 E BONITA AVE CITY: POMONA STATE: CA ZIP: 91767 BUSINESS PHONE: 9096248041 MAIL ADDRESS: STREET 1: 700 EAST BONITA AVE CITY: POMONA STATE: CA ZIP: 91767 10-K 1 0001.txt FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2000 OR [_]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: 0-28568 ---------------- KEYSTONE AUTOMOTIVE INDUSTRIES, INC. (Exact name of registrant as specified in its charter) California 95-2920557 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 700 East Bonita Avenue, Pomona, California 91767 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (909) 624-8041 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of Class) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this form 10-K. [_] The aggregate market value of the voting stock held by nonaffiliates of the registrant based upon the closing sales price of its Common Stock on June 16, 2000 on the Nasdaq National Market was approximately $81,284,850. For purposes of the foregoing calculation, shares of Common Stock held by each officer and director and by each person who may be deemed to be an affiliate have been excluded. The number of shares of Common Stock outstanding as of June 16, 2000: 14,489,345 DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III is incorporated by reference to portions of the Registrant's definitive proxy statement for the 2000 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2000 fiscal year. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties, such as statements of the Company's strategies, plans, objectives, expectations and intentions. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Cautionary Statements" in Item 1 below and elsewhere in this Annual Report. The cautionary statements made in this Annual Report should be read as being applicable to all related forward- looking statements wherever they appear in this Annual Report. PART I ITEM 1. BUSINESS General Keystone Automotive Industries, Inc. ("Keystone" or the "Company") is the nation's leading distributor of aftermarket collision replacement parts produced by independent manufacturers for automobiles and light trucks. Keystone distributes products primarily to collision repair shops throughout most of the United States. In addition, the Company recycles and produces chrome plated and plastic bumpers and remanufactures alloy wheels. The Company's product lines consist of automotive body parts, bumpers, autoglass and remanufactured alloy wheels, as well as paint and other materials used in repairing a damaged vehicle. Keystone currently offers more than 19,000 stock keeping units to over 25,000 collision repair shop customers, out of an estimated 54,000 shops nationwide. Founded in Southern California in 1947, the Company operates a "hub and spoke" distribution system consisting of 118 service centers, 23 of which serve as regional hubs and 20 depots, located in 35 states throughout the United States, as well as in Vancouver, Canada and Tijuana, Mexico. From these service centers, Keystone has over 1,200 service and salespersons who call on or have contact with collision repair shops. In addition, the Company operates nine wheel remanufacturing facilities and 36 plastic and steel bumper recycling facilities. During fiscal 2000, the Company completed the following acquisitions. In May 1999, the Company acquired all of the assets of (i) Quality Bumpers, L.L.C., a distributor of plastic and steel bumpers for automobiles and trucks, located in Alabama and (ii) Nordan Products Division, Inc. and Nordan Distributors, Inc., distributors of aftermarket collision replacement parts, with operations in the state of Washington and Vancouver, Canada. In October 1999, the Company acquired certain of the assets of Supreme Bumpers Inc., a distributor of recycled and remanufactured bumpers, with operations in Michigan and Ohio and in November 1999, it acquired certain of the assets of Auto Body Supply, Inc., a distributor of aftermarket collision replacement parts, with operations in Pennsylvania. In addition, during fiscal 2000, the Company opened new service centers in Elkhart, Indiana; Little Rock, Arkansas; Lubbock, Texas and Esconaba, Michigan. See "Cautionary Statements" below concerning the impact on the Company as a result of the decision in the State Farm Mutual Automobile Insurance Company ("State Farm") class action lawsuit and subsequent actions by other insurers and state legislatures and administrators. Industry Overview History. The Company estimates that the wholesale market for aftermarket collision parts is currently $1.8 billion in annual expenditures, or approximately 15% of the collision parts market. These estimates do not take into account a possible shrinkage in the market as a result of the State Farm decision and subsequent actions. See "Cautionary Statements" below. In addition, the Company estimates that annual wholesale sales of paint 2 and related supplies and equipment for collision repair currently account for approximately $2.4 billion. Substantially all of the remainder of the collision parts market consists of parts produced by original equipment manufacturers ("OEMs"), and a substantial number of collision parts are available exclusively from OEMs and are likely to remain so. The growth in sales of aftermarket collision parts has been due primarily to the increased availability of quality parts and to cost containment efforts by the insurance industry. Before 1980, automotive collision parts were manufactured almost exclusively by OEMs. During the 1960s and 1970s, due to prohibitive tariffs in Taiwan on imported automobiles and restrictions on foreign ownership of manufacturing facilities in Taiwan, certain Taiwanese automobile manufacturers commenced producing automobiles for sale in Taiwan, which created the need for additional parts manufacturers to supply the assembly lines. Since the early 1980s, these Taiwanese manufacturers have sought to reduce the effect on their business of the cyclical demand for new automobiles by producing aftermarket collision parts. An industry trade publication estimates that approximately 87% of all automobile collision repair work is paid for in part by insurance. Accordingly, major insurance companies exert significant influence over the selection of collision parts used by collision repair shops. The availability of aftermarket collision parts has been a major factor in the insurance industry's efforts to contain the escalating cost of collision repairs. Aftermarket collision parts generally sell for between 20% and 40% less than comparable OEM parts, resulting in substantial savings for insurance companies by providing consumers with less expensive aftermarket parts and creating competition, often resulting in lower prices for comparable OEM parts. The Company believes that it may be somewhat insulated from downturns in the general economy as a result of the fact that it is estimated that approximately 87% of all automobile collision repair work is paid for in part by insurance. As a part of their ongoing efforts to improve customer service, most major insurance companies have adopted programs designating selected collision repair shops in particular geographic areas as Direct Repair Providers ("DRPs"). DRPs are generally directed additional collision repair business by the insurers in return for adhering to certain criteria, which may include the use of aftermarket collision parts when available. To encourage consumers to use DRPs, the insurers authorize the repair of collision damage without obtaining the prior approval of the insurer's adjuster (thereby generally providing for a quicker return of the vehicle to its owner) and offer additional warranties concerning the repair services and parts used. Companies offering collision support services, including Automated Data Processing ("ADP"), Mitchell International and CCC Information Services, Inc., have developed proprietary software and databases to provide insurance claims adjusters and collision repair shops with computerized access to the inventories and prices of selected distributors of both aftermarket and OEM collision parts nationwide. The Company's inventory and prices are included in these databases. Access to the providers' databases enables distributors with computerized inventory control systems, such as the Company, to update prices rapidly and notify collision repair shops of the availability of new products. Quality Assurance. In 1987, the Certified Automotive Parts Association ("CAPA") was founded to provide insurance companies, distributors, collision repair shops and consumers with an objective method of evaluating the functional equivalence of aftermarket collision parts and OEM collision parts. CAPA, a non-profit association of insurance companies, manufacturers, importers, distributors, collision repair shops and consumer groups, establishes the specifications for, tests and certifies the quality of aftermarket automotive collision parts. Through independent testing laboratories, CAPA develops engineering specifications for aftermarket collision parts based upon an examination of OEM parts; certifies the factories, manufacturing processes and quality control procedures used by independent manufacturers; and certifies the materials, fit and finish of specific aftermarket collision parts. While, according to CAPA, the number of collision part applications entitled to bear the CAPA certification had increased from approximately 700 in August 1989 to approximately 2,500 by May 2000, the number of CAPA-certified parts approximates only 5% of the total number of aftermarket collision parts. CAPA randomly reviews both the factories and individual parts previously certified by it and solicits comments concerning the quality of certified parts from collision repair shops and consumers on a regular basis. 3 Most major insurance companies have adopted policies recommending or requiring the use of parts certified by CAPA, when available. The Company distributes parts certified by CAPA when available and actively participates with CAPA, insurance companies and consumer groups in encouraging independent manufacturers of collision parts to seek CAPA certification. Management believes that the Company is the largest distributor of CAPA-certified parts in the United States. See "Cautionary Statements" below for information with respect to a class action lawsuit challenging the quality of aftermarket collision replacement parts produced by independent manufacturers and the validity of CAPA certifications. Consolidation. The collision repair shop industry is in the process of consolidation due to, among other things, (i) an increase in the technical complexity of collision repairs generally, (ii) an increase in governmental regulations, including environmental regulations, applicable to collision repair shops, (iii) the designation of certain collision repair shops as DRPs and (iv) a reduction in the number of collision repairs generally. The increasing number of aftermarket collision parts and makes and models of automobiles has resulted in distributors being required to maintain larger inventories. In addition, the trend towards fewer, larger and more efficient collision repair shops has increased the pressure on distributors to provide price concessions, just-in-time delivery and certain value-added services, such as training, that collision repair shops require in their increasingly complex and competitive industry. The above factors, in turn, have contributed to a consolidation of distributors of aftermarket collision parts, providing the Company with an opportunity to expand its operations into new markets and to penetrate further existing markets. See "Cautionary Statements" below. Strategy Historically, the Company's growth strategy has been a combination of acquisitions, product expansion and increases in same store sales. As a result of the State Farm decision and its aftermath, see "Cautionary Statements" below, the Company has refocused its growth strategy to concentrate on product differentiation, expansion of product sales not impacted by the State Farm decision and strategic arrangements with customers not dependent on insurance company specifications. To emphasize the high quality of aftermarket parts distributed by Keystone, it has announced its "Keystone Platinum Plus" program. This program will only cover the highest quality parts and parts will be warranted for the lifetime of the owner of the vehicle being repaired, as long as that owner remains the owner of the vehicle. Keystone is emphasizing sales of paint and related products, remanufactured wheels, radiators and condensers. In addition, the Company plans to market radiators and condensers to mechanical repair shops utilizing its extensive distribution network. In February 2000, the Company entered into a strategic arrangement with one of the largest automotive salvage yard groups in the country, pursuant to which Keystone became the exclusive supplier of remanufactured OEM alloy wheels to the salvage company and Keystone became the exclusive buyer of their alloy wheel cores. In April 2000, the Company entered into a strategic marketing arrangement with the leading auctioneer of salvage automobiles in the country. The auctioneer intends to market Keystone parts to its rebuilder customers and has agreed, under certain conditions, not to sell aftermarket automobile parts competitive with Keystone products. Keystone has agreed, under certain circumstances, not to market or resell Keystone products to persons engaged in the business of operating salvage automobile auctions. In November 1999, the Company made an investment in GoMedia, Inc. ("GoMedia"), a company which has developed an online business community, goClaims.com, addressing the automotive collision repair and claims processing market. As a result of its investment, among other benefits, the Company will be the default screen on goClaims.com's parts ordering screen and will have "preferred" placement and pricing with respect to all advertising and sponsorship. 4 Products The Company distributes more than 19,000 stock keeping units of aftermarket collision parts and repair materials for most popular models of domestic and foreign automobiles and light trucks, generally for the eight most recent model years. The Company's principal product lines consist of automotive body parts, bumpers, paint and other materials, remanufactured alloy wheels, autoglass and light truck accessories. In addition, the Company recycles, produces and distributes new and remanufactured plastic and chrome bumpers to wholesale bumper distributors and to manufacturers of truck accessories. Automotive Body Parts. The Company distributes automotive and light truck parts manufactured by multiple foreign and domestic manufacturers, including fenders, hoods, radiators and condensers and head and tail light assemblies. These products accounted for approximately $162.8 million, or 43.7% of the Company's net sales in the fiscal year ended March 31, 2000. Bumpers. The Company distributes new and remanufactured plastic bumper covers and steel bumpers manufactured by multiple domestic and foreign manufacturers. For the fiscal year ended March 31, 2000, sales of plastic and steel bumpers accounted for approximately $117.7 million, or 31.6% of the Company's net sales. The Company believes that it is one of the nation's largest non-OEM providers of new and recycled chrome plated bumpers for the collision repair and restoration markets. Beginning in the late 1970s and the early 1980s, manufacturers of new automobiles began changing from an almost exclusive use of chrome plated steel bumpers to painted plastic bumpers. By the 1996 model year, manufacturers were using painted plastic bumpers almost exclusively for their automobiles. Chrome plated steel bumpers are still used extensively on light trucks and sport utility vehicles. On an annual basis, the Company electroplates approximately 220,000 steel plated bumpers for automobiles and light trucks. Bumpers used in the operations include new steel stampings, collision-damaged bumpers that require straightening and replating and older model or antique bumpers that require restoration and replating. The bumper repair and replating process generally includes some or all of the following steps: straightening or reforming to original dimensions; welding breaks or cracks; surface grinding to remove rust and corrosion; chemical stripping to remove the original electroplated finishes; metal polishing and buffing; electroplating layers of copper, nickel and chromium; and inspecting and packaging. Paint and Other Materials. Beginning in fiscal 1993, the Company significantly increased its emphasis on the sale of paint and other materials used in repairing a damaged vehicle, including sandpaper, abrasives, masking products and plastic filler. The paint and other materials distributed by the Company are purchased from numerous domestic suppliers. For the fiscal year ended March 31, 2000, sales of paint and other materials accounted for approximately $57.7 million, or 15.5% of the Company's net sales. Certain of these products are distributed under the name "Keystone." Remanufactured Alloy Wheels. In October 1995, the Company acquired a remanufacturer of collision damaged alloy wheels located in Denver, Colorado, and since that time, has opened or acquired eight additional remanufacturing operations. According to industry sources, the percentage of new automobiles equipped with alloy wheels, as opposed to steel wheels and hubcaps, has increased from approximately 11% in 1985 to 50% for the 1999 model year. The average wholesale cost of a new replacement alloy wheel is approximately $225, compared to an average wholesale cost of approximately $125 for a remanufactured alloy wheel. The alloy wheel remanufacturing process generally includes some or all of the following steps: straightening, welding minor dents or chips, machining, painting and applying clear powder coat. For the fiscal year ended March 31, 2000, sales of remanufactured alloy wheels accounted for approximately $23.0 million, or 6.2% of the Company's net sales. The remanufacturing of alloy wheels is generally conducted by many small independent operators. The Company believes that there is a large and growing demand for remanufactured alloy wheels and that, using its existing distribution system and customer base, the Company is well-positioned to service that demand. 5 Autoglass. The Company distributes autoglass, including windshields, side windows and rear windows, which are purchased from two domestic manufacturers. For the fiscal year ended March 31, 2000, sales of autoglass, which was introduced by Keystone in fiscal 1993, accounted for approximately $4.9 million, or 1.3% of the Company's net sales. Distribution, Marketing and Sales The Company's distribution system is designed to provide responsive customer service and to foster long-term customer relations. Distribution System. The Company has developed a national "hub and spoke" distribution system consisting of 118 service centers, 23 of which serve as regional hubs and 20 depots. Each regional hub receives container shipments directly from foreign and domestic manufacturers. Using the Company's fleet of over 1,000 delivery trucks, each regional hub makes regular shipments to the service centers in its region, which in turn make regular deliveries to its repair shop customers. By maintaining a fleet of delivery trucks, the Company ensures rapid delivery within its distribution system and to its customers. In addition, each service center can order products directly from any hub or service center. The Company manages its inventory and the ordering, shipment, storage and delivery of products through centralized information systems that allow the regional hubs and service centers to obtain timely information regarding the location and availability of products. The continuing increase in the number of makes and models of automobiles and light trucks and the number of aftermarket collision parts has increased the pressure on distributors to maintain larger inventories. The Company believes that its "hub and spoke" distribution system allows it to offer its customers one of the broadest available selections of aftermarket collision parts and to fill most orders within 24 hours, while minimizing inventory costs. Sales and Marketing Staff. The Company has a marketing staff, which operates from its corporate headquarters, and has over 1,200 sales representatives and route salespersons who operate from its service centers. The marketing staff develops all marketing and promotional materials, assists the service centers in recruiting and training sales representatives, route salespersons and customer service representatives, supervises the Company's in-house management training program and supports general managers of its service centers, sales representatives and route salespersons with computerized analyses of sales by product, route and customer. In addition, the marketing staff conducts educational programs for regional insurance executives and claims adjusters to explain the role of aftermarket collision parts in containing the escalating costs of claims and in order to facilitate the implementation of insurance companies' policies favoring aftermarket collision parts. The general managers of the Company's service centers are actively involved in customer calls. The Company believes that this local control and expertise have contributed significantly to its growth. Through periodic training programs and performance reviews, the Company seeks to enhance the professionalism and technical expertise of its route salespersons. As a result, the Company believes that its route salespersons are highly attendant to the needs of the Company's customers. Marketing Programs. The Company offers various marketing programs to foster closer customer relations, including a warranty program in which the Company generally warrants its products against defects in material and workmanship for as long as the repair shop's customer owns the vehicle. Customers The Company's current customers consist of more than 25,000 collision repair shops located in 35 states and Vancouver, Canada and Tijuana, Mexico, none of which accounted for more than 1% of the Company's net sales during the fiscal year ended March 31, 2000. The Company also distributes its bumpers to wholesale distributors and to manufacturers of truck accessories. The size of its customer base reduces the Company's dependence on any single customer and its national scope mitigates the effects of regional economic changes and regional weather patterns. Collision Repair Industry Insight, an industry trade publication, estimates that there are over 54,000 collision repair shops nationwide. The number of collision repair shops to whom the 6 Company sold products increased from approximately 13,400 in fiscal 1993 to approximately 25,000 in fiscal 2000. The Company's regional hubs also sell collision parts to local distributors who may compete with the Company. These sales accounted for less than 10% of the Company's net sales during the fiscal year ended March 31, 2000 and no distributor accounted for more than 1% of the Company's net sales for such fiscal year. Suppliers The products distributed by the Company are manufactured by over 60 manufacturers, and no single supplier provided as much as 10% of the products purchased by the Company during fiscal 2000. The Company believes that it is one of the largest customers of each of its ten largest suppliers. In fiscal 2000, approximately 80% of the products distributed by the Company were manufactured in the United States or Canada, and approximately 20% were imported directly from manufacturers in Taiwan. The Company's orders from domestic suppliers generally are received within 10 days and orders from foreign manufacturers generally are received in between 60 and 90 days. Although the Company has no manufacturing agreements with any of its suppliers and competes with other distributors for production capacity, the Company believes that its sources of supply and its relationships with its suppliers are satisfactory. Although alternative suppliers exist for substantially all products distributed by the Company, the loss of any one supplier could have a material adverse effect on the Company until alternative suppliers are located and have commenced providing products. Competition Based upon industry estimates, the Company believes that approximately 79% of collision parts are supplied by OEMs, compared with approximately 15% by distributors of aftermarket collision parts and 6% by distributors of salvage parts. See "Cautionary Statements" below for a discussion of a recent court decision which is impacting the market share of aftermarket collision parts. The Company encounters intense competition from OEMs, all of which have substantially greater financial, distribution, marketing and other resources, including greater brand recognition and a broader selection of collision parts, than the Company. Accordingly, OEMs are in a position to exert pricing and other competitive pressure on the Company. The distribution industry for aftermarket collision parts is highly fragmented. The Company's competitors generally are independently owned distributors having from one to three distribution centers. The Company expects to encounter significant competition in the future, including competition from OEMs, automobile dealerships, distributors of salvage parts, buying groups and other large distributors. The Company competes with OEMs on the basis of price and perceived product quality, and it competes with distributors of aftermarket collision parts primarily on the basis of the competitive advantages provided by its position as a market leader, experienced executive management and service center managers, entrepreneurial corporate culture, superior customer service, its relationship with certain insurance companies, and, to a lesser extent, on the basis of price. The Company's chrome bumper plating operations compete in the wholesale bumper distribution segment of the market with four companies, whom the Company believes have greater regional sales than the Company. It also competes with small chrome bumper platers or distributors in virtually every geographical market in which it operates. The Company competes with small chrome bumper platers and distributors primarily on the basis of quality and service. Over the last 10 years, there has been a significant decrease in the number of small bumper platers as a result of the decreasing use of chrome plated bumpers on new automobiles and the increasing environmental requirements for electroplaters. The Company believes that this trend will continue, creating more sales opportunities for larger regional chrome bumper platers, who are capable of meeting the increased financial and environmental requirements of the future. The Company also encounters competition from the OEM's who supply new replacement bumpers to the collision repair market and it competes with these OEM's on the basis of price and perceived product quality. 7 Government Regulation and Environmental Hazards The Company is subject to increasing restrictions imposed by various federal, state and local laws and regulations. Various state and federal regulatory agencies, such as the Occupational Safety and Health Administration and the EPA, have jurisdiction over the Company's operations with respect to matters including worker safety, community and employee "right-to-know" laws, and laws regarding clean air and water. In addition, primarily as a result of the State Farm decision and the attendant publicity, certain state legislatures and regulators are considering imposing, or have imposed, restrictions on the use of aftermarket collision parts. See "Cautionary Statements." Prior Ford Litigation In 1987, Ford Motor Company ("Ford") filed suit against the Company on the grounds that between 1982 and 1987, the Company had misrepresented the quality of the aftermarket collision parts sold by it for Ford automobiles. In May 1992, Ford and the Company settled this lawsuit. As part of the settlement, the Company and its insurance companies paid Ford $1.8 million, of which the Company contributed $450,000, as damages and agreed to finance a one-year corrective advertising campaign conducted by Ford using the Company's name. As a result of this settlement and the corrective advertising campaign, certain insurance companies ceased listing the Company as an approved supplier of aftermarket collision parts. Currently, most major insurance companies list the Company as an approved supplier of aftermarket collision parts, and all major insurance companies reimburse the cost of collision repairs using the Company's products. The Company's business is highly dependent on the continued acceptance of aftermarket collision parts in general, and the Company's products in particular, by insurers, collision repair shops, consumers and governmental agencies. See "Cautionary Statements" below. Employees At May 31, 2000, the Company had approximately 2,679 full-time employees, of whom 393 were engaged in corporate management and administration, 1,211 in sales and customer service, 562 in warehousing and shipping and 523 in manufacturing. Nine persons in the Newark, New Jersey chrome bumper recycling facility are covered by collective bargaining agreements. The Company considers its relations with its employees to be satisfactory. Cautionary Statements State Farm Decision and Pending Actions. In July 1997, certain individuals initiated a class action lawsuit against State Farm in the Illinois Circuit Court in Williamson County (Marion, Illinois), asserting claims for breach of contract, consumer fraud and equitable relief relating to State Farm's then practice of sometimes specifying the use of parts manufactured by sources other than the original equipment manufacturer ("non-OEM crash parts") when adjusting claims for the damage to insured vehicles. The Williamson County Court certified a near-nationwide class. It was alleged that this practice breached State Farm's insurance agreements with its policyholders and was a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act because non-OEM crash parts are inherently inferior to OEM crash parts and, consequently, vehicles are not restored to their "pre-loss condition" as specified in their policy. In October 1999, after a lengthy trial, the jury awarded the class damages in the amount of approximately $460 million and the judge assessed punitive damages against State Farm of over $700 million. State Farm has appealed the verdict. Shortly after the verdict in the Williamson County case, State Farm suspended specifying most non-OEM crash parts used in connection with repairing cars covered by their insurance. Effective November 8, 1999, Nationwide Insurance and Farmers Insurance also temporarily suspended specifying many non-OEM crash parts. The action of these insurance companies has had a material adverse impact on the Company's sales and net income and if other insurance companies follow suit and the State Farm decision is not overruled, the magnitude of the negative impact on the Company would likely increase. See "Management Discussion and Analysis of Financial Condition and Result of Operations-General" below. 8 At the present time, lawsuits are pending in a number of states against several insurance companies alleging violation of contractual provisions and various laws and statutes relating to the specification of non-OEM crash parts in connection with the repair of damaged vehicles. These cases have been brought as class actions and generally involve two different legal theories. One line of cases is similar to State Farm contending that non-OEM crash parts do not restore a vehicle to their "pre-loss condition" as provided for in the insurance policy. The other theory is that of "diminished value," with the contention being that in addition to repairing the vehicle, the owner should be compensated for the difference between the pre-loss value and the value after the vehicle is repaired. In at least one pending action, the Company believes that CAPA has been joined as a defendant in connection with their certification of non-OEM crash parts. While the Company was, or is, not a party to the State Farm lawsuit or the other pending lawsuits, a substantial portion of the Company's business consists of the distribution of non-OEM crash parts to collision repair shops for the use in repairing automobiles, the vast majority of which are covered by insurance policies. In the event that the State Farm verdict is repeated in other similar cases or there is a substantial verdict upholding the diminished value theory, and such cases are not overturned on appeal, with the result that non-OEM crash parts are no longer specified by insurance companies to repair insured vehicles, the aggregate cost to consumers will be substantial and the impact on Keystone would be material and adverse. Once again, OEM's would likely have monopoly pricing power with respect to many of the products required to repair damaged vehicles. The Company believes that substantially all of the non-OEM crash parts which it distributes are of similar quality to OEM crash parts and when installed in a competent manner by collision repair shops, vehicles are restored to their "pre-loss condition." In addition, the Company provides a warranty with respect to the parts it distributes for as long as the owner at the time repairs are made continues to own the vehicle. Federal and State Action. During the past two years, legislation was introduced or considered in over 25 states seeking to prohibit or limit the use of aftermarket parts in collision repair work and/or require special disclosure before using aftermarket parts. To date legislation has been passed in only three states and it has not had a material impact on the Company's business. The Company anticipates the introduction of similar legislation in many states during 2000 and beyond and if a number of states were to adopt legislation prohibiting or restricting the use of non-OEM crash parts, it could have a material adverse impact on the Company. In addition, recently, persons with a business interest in restricting the use of non-OEM parts have also sought help from insurance regulators in at least three states to attempt to do administratively what to date has not be accomplished legislatively. In Florida, the Commissioner of the Department of Agriculture & Consumer Services, has taken action designed to eliminate the use of non-OEM crash parts in connection with insured repairs. The Commissioner has also brought a legal action against an insurance company for specifying the use of non-OEM parts. This action is currently having a material adverse impact on the Company's sales in Florida. Action in the other two states is in an early stage and the Company cannot predict the outcome. In addition, a U.S. Congressman has requested that the General Accounting Office ("GAO") review the role of the National Highway and Transportation Safety Administration in regulating the safety and quality of replacement automotive parts. A GAO report is anticipated during 2000. Management Information Systems. In October 1998, the Company entered into an agreement with a vendor for the purchase of a software package to be installed on an enterprise-wide basis. To date, the Company has expended an aggregate of approximately $6.5 million on software implementation relating to the installation of the new enterprise software package and estimates that it will spend an additional $2.5 million over the next 12 to 18 months. As the Company is still in the initial phases of the implementation and such an implementation involves uncertainty, there can be no assurance that the actual costs will not exceed the estimate. To date, the costs have been paid using funds generated from operating cash flow or the sale of assets and it is anticipated that future costs will be paid from existing working capital, cash flow from operations or borrowings under the Company's line of credit. 9 At the present time, the Company estimates that the new enterprise software system, which will consolidate the Company's various systems and address a number of management concerns, will be installed and operating company-wide in 18 to 24 months. The estimated costs as of the projects described above are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these time or cost estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, and the inherent difficulty in integrating new computer systems into the Company's existing operations. Continued Acceptance of Aftermarket Collision Replacement Parts. Based upon industry sources, the Company estimates that approximately 87% of automobile collision repair work is paid for in part by insurance; accordingly, the Company's business is highly dependent upon the continued acceptance of aftermarket collision replacement parts by the insurance industry and the governmental agencies that regulate insurance companies and the ability of insurers to recommend the use of such parts for collision repair jobs, as opposed to OEM parts. As described above, the use of many of the products distributed by the Company is being disputed in various forums. Acquisition Strategy. A principal component of the Company's growth strategy has been to acquire other independent distributors of aftermarket collision replacement parts operating in new geographic markets, as well as to increase its penetration in existing markets. Since March 1996, the Company has completed 23 acquisitions of a total of 92 service centers, located primarily in the Northeast, Midwest, Mid-Atlantic and South, of which 15 have been consolidated with existing locations or closed. Primarily as a result of the State Farm decision, the Company does not anticipate completing any acquisitions during fiscal 2001, although it continues to look at potential transactions. Acquisition Risks. Although the Company investigates the operations and assets that it acquires, there may be liabilities that the Company fails to, or is unable to, discover, and for which the Company as a successor owner or operator may be responsible. The Company seeks to mitigate the risk of these potential liabilities by obtaining indemnities and warranties from the seller. However, these indemnities and warranties may not fully cover the liabilities due to their limited scope, amounts or duration, the limited financial resources of the indemnitor or warrantor or other reasons. To date, the Company has not recorded any material liabilities not discovered prior to completing its acquisitions. In addition, acquisitions accounted for under the purchase method of accounting generally involve the recording of goodwill and deferred charges on the Company's balance sheet, which are amortized over varying periods of time of up to 30 years. This amortization has the effect of reducing the Company's reported earnings. At March 31, 2000, the Company had recorded approximately $36.2 million in goodwill, net of accumulated amortization. In addition, at March 31, 2000, the Company had recorded approximately $1.9 million in deferred charges, net of accumulated amortization, primarily related to noncompetition agreements, which are amortized over the terms of those agreements, three to five years. Dependence on Key and Foreign Suppliers. The Company is dependent on a relatively small number of suppliers. Although alternative suppliers exist for substantially all products distributed by the Company, the loss of any one supplier could have a material adverse effect on the Company until alternative suppliers are located and have commenced providing products. In fiscal 2000, approximately 80% of the products distributed by the Company were manufactured in the United States or Canada and approximately 20% were imported directly from manufacturers in Taiwan. As a result, the Company's operations are subject to the customary risks of doing business abroad, including, among other things, transportation delays, political instability, expropriation, currency fluctuations and the imposition of tariffs, import and export controls and other non-tariff barriers (including changes in the allocation of quotas), as well as the uncertainty regarding future relations between China and Taiwan. The percentage of imported products may decline in the future if sales of autoglass, paint and related supplies and equipment and remanufactured alloy wheels, which are manufactured in the 10 United States, continue to grow. Any significant disruption in the Company's Taiwanese sources of supply or in its relationship with its suppliers located in Taiwan could have a material adverse effect on the Company. Competition. The Company competes directly with, and encounters intense competition from OEMs, all of which have substantially greater financial, distribution, marketing and other resources, including greater brand recognition and a broader selection of collision replacement parts. Accordingly, OEMs are in a position to exert pricing and other competitive pressures on the Company and other independent distributors, which could have a material adverse effect on the results of operations of the Company. The aftermarket collision replacement parts distribution industry is highly fragmented. Typically, the Company's other competitors are independently owned distributors having from one to three distribution centers. the Company anticipates that it will encounter significant competition in the future, including competition from automobile dealerships, distributors of salvage parts, buying groups and other large distributors. Compliance with Government Regulations; Environmental Hazards. The Company is subject to increasing restrictions imposed by various federal, state and local laws and regulations. Various state and federal regulatory agencies, such as the Occupational Safety and Health Administration and the United States Environmental Protection Agency (the "EPA"), have jurisdiction over the Company's operations with respect to matters including worker safety, community and employee "right-to-know" laws, and laws regarding clean air and water. Under various federal, state and local laws and regulations, an owner or lessee of real estate or the operator of a business may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, property owned or used in the business, as well as related costs of investigation and property damage. Such laws often impose such liability without regard to whether the owner, lessee or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Other than as described below with respect to its bumper plating operations, the Company does not currently generate substantial hazardous waste in the ordinary course of its business. The Company believes that it currently is in substantial compliance with all applicable laws and regulations, and is not aware of any material environmental problem at any of its current or former facilities. No assurance can be given, however, that the Company's prior activities or the activities of a prior owner or operator of an acquired service center or other facility did not create a material environmental problem for which the Company could be responsible or that future uses or conditions (including, without limitation, changes in applicable laws and regulations) will not result in material environmental liability to the Company. Furthermore, compliance with legislative or regulatory changes may cause future increases in the Company's operating costs or otherwise adversely affect operations. Certain of the Company's products, such as paints and solvents, are highly flammable. Accordingly, the storage and transportation of these materials expose the Company to the inherent risk of fire. The Company acquired North Star Plating Company's bumper plating operations in March 1997 and Midwest Bumper Company's plating operations in March 1999. In addition to those operations, the Company currently conducts limited bumper plating operations at one other facility and previously conducted similar operations at 11 additional sites which were closed between 1983 and 1993. The Company's bumper plating operations, which use a number of hazardous materials, are subject to a variety of federal and state laws and regulations relating to environmental matters, including the release of hazardous materials into the air, water and soil. The Company endeavors to ensure that its bumper plating operations comply with applicable environmental laws and regulations. Compliance with such laws and regulations has not had a material effect on the Company's capital expenditures, earnings or competitive position, and no material capital expenditures with respect to the Company's bumper plating operations are anticipated during the next 12 months. Although the Company believes it is in substantial compliance with all applicable environmental laws and regulations relating to its bumper plating operations, there can be no assurance that the Company's current or former operations have not, or will not in the future, violate such laws and regulations or that compliance with such laws and regulations will not have a material adverse effect on the Company's operations. Any inadvertent mishandling of hazardous materials or similar incident could result in costly remediation efforts and administrative and legal proceedings, which could materially and adversely affect the Company's business and results of operations. In addition, future environmental regulations could add to overall costs of the Company's bumper plating business or otherwise materially and adversely affect these operations. 11 Volatility of Stock Price. The trading price of the Company's Common Stock may be subject to significant fluctuations as a result of variations in the Company's actual or anticipated operating results, changes in general market conditions and other factors. In recent years, the stock market generally has experienced significant price and volume fluctuations which often have been unrelated or disproportionate to the operating performance of a specific company or industry. There can be no assurance that the market price of the Company's Common Stock will not decline below the current market price. It is possible that in some future quarter, the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company Common Stock may be materially and adversely affected. ITEM 2. PROPERTIES The Company's principal executive offices are located in Pomona, California, on premises which contain approximately 20,000 square feet. The Pomona, California offices are owned by the Company. In addition, the Company owns facilities used as service centers in Chicago, Illinois; Bethlehem, Pennsylvania; Denver, Colorado; New Albany, Indiana and Palmyra, New Jersey, of which two of the facilities also serve as regional hubs and three serve as wheel remanufacturing facilities. The Company leases its remaining facilities. The Company's regional hub facilities range from approximately 25,000 square feet to 163,000 square feet. Its service center facilities range from approximately 2,500 square feet to 30,000 square feet. All of its leased properties are leased for terms expiring on dates ranging from on or about the date hereof to the year 2015, many with options to extend the lease term. The Company believes that no single lease is material to its operations, its facilities are adequate for the foreseeable future and alternative sites presently are available at market rates. Of the Company's service centers, six are leased from parties in whom current officers or directors of the Company have an interest. See "Item 13" below. The Company believes that the terms and conditions of leases with affiliated parties are no less favorable to the Company than could have been obtained from unaffiliated parties in arm's-length transactions at the time of the execution of such leases. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in litigation incidental to the conduct of its business. The Company currently is not a party to any material pending litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock began trading publicly on The Nasdaq Stock Market under the symbol "KEYS" on June 20, 1996. The following table sets forth, for the periods indicated, the range of high and low sale prices for Keystone's Common Stock as reported by The Nasdaq Stock Market.
High Low ------ ------ Fiscal 1999 First Quarter............................................... $28.13 $23.68 Second Quarter.............................................. 23.75 14.00 Third Quarter............................................... 20.19 15.63 Fourth Quarter.............................................. 21.50 14.38 Fiscal 2000 First Quarter............................................... 19.25 14.13 Second Quarter.............................................. 19.00 10.88 Third Quarter............................................... 10.13 5.38 Fourth Quarter.............................................. 7.00 4.88 Fiscal 2001 First Quarter (through June 16, 2000)....................... 7.38 5.06
On June 16, 2000, the last reported sale price for the Common Stock of the Company, as reported on The Nasdaq Stock Market, was $6.25 per share. As of June 16, 2000, there were approximately 466 shareholders of record of the Common Stock. The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain any future earnings to provide funds to operate and expand its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Company's Board of Directors, and will depend upon, among other things, the Company's earnings, financial condition and capital requirements, general business conditions and any restrictions in credit agreements. In February 2000, the Company issued a warrant to purchase 100,000 shares of its Common Stock to LKQ Corporation at an exercise price of $6.50 per share, in connection with a supply agreement entered into with LKQ Corporation. The issuance of the warrant was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act. 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" also included elsewhere herein.
Fiscal Year Ended ----------------------------------------------------- March 29, March 28, March 27, March 26, March 31, 1996 1997 1998 1999 2000(1) --------- --------- --------- --------- --------- (In thousands, except per share amounts) Consolidated Statement of Income Data: Net sales............... $178,076 $223,806 $263,802 $332,047 $372,466 Cost of sales........... 106,169 130,590 149,855 186,150 211,840 -------- -------- -------- -------- -------- Gross profit............ 71,907 93,216 113,947 145,897 160,626 Selling and distribution expenses............... 50,156 61,063 73,551 93,169 110,976 General and administrative expenses............... 12,388 15,699 18,101 24,873 30,800 Non-recurring expenses.. -- 905 1,147 1,814 3,881 -------- -------- -------- -------- -------- Operating income........ 9,363 15,549 21,148 26,041 14,969 Other income............ 174 373 1,086 3,617 2,613 Interest expense........ (1,721) (1,477) (504) (50) (954) -------- -------- -------- -------- -------- Income before income taxes.................. 7,816 14,445 21,730 29,608 16,628 Income taxes............ 2,836 4,435 7,497 11,843 6,819 -------- -------- -------- -------- -------- Net income.............. $ 4,980 $ 10,010 $ 14,233 $ 17,765 $ 9,809 ======== ======== ======== ======== ======== Net income per share: Basic................. $ 0.49 $ 0.88 $ 1.02 $ 1.06 $ 0.62 ======== ======== ======== ======== ======== Diluted............... $ 0.49 $ 0.87 $ 1.01 $ 1.05 $ 0.62 ======== ======== ======== ======== ======== Weighted average common shares outstanding: Basic................. 10,250 11,408 13,915 16,784 15,899 ======== ======== ======== ======== ======== Diluted............... 10,250 11,474 14,105 16,913 15,917 ======== ======== ======== ======== ======== Pro forma information (unaudited)(2): Net income, as previously reported.. $ 4,980 $ 10,010 $ 14,233 $ 17,765 $ 9,809 Pro forma tax adjustment........... (258) (1,288) (1,345) -- -- -------- -------- -------- -------- -------- Pro forma net income.. $ 4,722 $ 8,722 $ 12,888 $ 17,765 $ 9,809 ======== ======== ======== ======== ======== Pro forma net income per share: Basic................. $ 0.46 $ 0.76 $ 0.93 $ 1.06 $ 0.62 ======== ======== ======== ======== ======== Diluted............... $ 0.46 $ 0.76 $ 0.91 $ 1.05 $ 0.62 ======== ======== ======== ======== ======== Consolidated Balance Sheet Data: Working capital......... $ 18,134 $ 30,154 $ 72,454 $105,330 $ 86,152 Total assets............ 71,780 87,183 119,696 194,094 183,817 Total current liability.............. 38,335 38,240 21,539 26,551 31,869 Long-term debt.......... 7,021 2,087 503 100 68 Shareholders' equity.... 26,119 46,453 97,228 163,205 150,195
- -------- (1) Fiscal 2000 contained 53 weeks, all other periods contained 52 weeks. (2) Pro forma information gives effect to an income tax adjustment to reflect taxation of the income of two corporations acquired in January 1998 (accounted for as poolings of interests), as "C" corporations, rather than "S" corporations, at an estimated statutory rate of approximately 39%. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is qualified in its entirety by, and should be read in conjunction with, the "Selected Consolidated Financial Data" as set forth in Item 6 above and the financial statements and notes thereto included in Item 8 below. Except for the historical information contained herein, the matters addressed herein constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements, such as statements of the Company's strategies, plans, objectives, expectations and intentions, are subject to a variety of risks and uncertainties that could cause the Company's actual results to differ materially from those anticipated in these forward-looking statements. The Cautionary Statements set forth in Item 1 above should be read as being applicable to all related forward-looking statements wherever they appear herein. General Fiscal 2000 contained 53 weeks as compared to 52 weeks for the other fiscal years set forth in Item 6 above. Consequently, comparisons of results may not be meaningful. The results of operations for fiscal 2000 include the results with respect to four acquisitions completed subsequent to March 26, 1999, accounted for as "purchases," whereas fiscal 1999 does not include any results of operations for those acquired entities. See "Recent Acquisitions" below. In addition, the results of operations for fiscal 1999 include the results for Republic Automotive Parts, Inc. ("Republic") only for the period subsequent to the acquisition (June 27, 1998) and for the Midwest Bumper Company affiliated group only for the period subsequent to the acquisition (January 4, 1999), whereas the results of operations for fiscal 2000 include the results for those operations for the entire period. As a result of the verdict in the State Farm class action in October 1999 and the fact that numerous other class actions are pending, State Farm, Nationwide Insurance and Farmers Insurance have temporarily suspended specifying the use of many aftermarket collision replacement parts in connection with the repair of vehicles which they insure. See "Cautionary Statements" above. These suspensions had a material, adverse effect on the Company's revenues and earnings for fiscal 2000. Recent Acquisitions In June 1998, the Company completed the acquisition of Republic and issued 2,907,000 shares of its Common Stock to the former Republic shareholders. The total purchase price amounted to $63.1 million and the acquisition of Republic was accounted for under the purchase method of accounting. Following the Republic acquisition, the Company sold the net operating assets of Republic's hard parts operations in a series of transactions for cash. Also during fiscal 1999, the Company acquired the assets of the following businesses: Unico Corporation and Greenville Unico II Corporation, a distributor of aftermarket collision replacement parts with operations in North and South Carolina, in August 1998; Clark Supply Corporation, a distributor of paint and related supplies doing business in Iowa, in November 1998; California Chrome, a distributor of aftermarket collision replacement parts with operations in central California, in January 1999; Inventory Recovery Systems, Inc., a distributor of aftermarket collision replacement parts with operations in Michigan, in January 1999; 1-800 Used Rim, Inc.. a distributor of wheels for automobiles and light trucks with operations in southern California, in March 1999; and Midwest Bumper Company, International Warehouse Distributing Co., Midwest Bumper Company of Lansing, Collision Parts Distributors Co. and Carhart Products, Inc., affiliated distributors of aftermarket collision replacement parts with operations in Michigan, in March 1999. All of these acquisitions were accounted for under the purchase method of accounting and the consolidated financial statements include the results of operations for each business for all periods subsequent to the applicable purchase date. 15 During fiscal 2000, the Company acquired certain assets of the following businesses: Quality Bumpers, LLC, a distributor of plastic and steel bumpers with operations in Alabama, in May 1999; Nordan Products Division, Inc. and Nordan Distributors, Inc., distributors of aftermarket collision replacement parts with operations in Washington and Vancouver, British Columbia, in May 1999; Supreme Bumpers Inc., a distributor of recycled or remanufactured bumpers in Ohio and Michigan, in October 1999 and Auto Body Supply Co., Inc., a distributor of aftermarket collision replacement parts in Pennsylvania, in November 1999. All of these acquisitions were accounted for under the purchase method of accounting and the consolidated financial statements include the results of operations for each business for all periods subsequent to the applicable purchase date. Results of Operations The following table sets forth, for the periods indicated, certain selected income statement items as a percentage of net sales.
Fiscal Year Ended ----------------------------- March 27, March 26, March 31, 1998 1999 2000 --------- --------- --------- Net sales...................................... 100.0% 100.0% 100.0% Cost of sales.................................. 56.8 56.1 56.9 ----- ----- ----- Gross profit................................... 43.2 43.9 43.1 Selling and distribution expenses.............. 27.9 28.1 29.8 General and administrative expenses............ 6.9 7.5 8.3 Non-recurring expenses......................... 0.5 0.5 1.0 ----- ----- ----- Operating income............................... 8.0 7.8 4.0 Other income................................... 0.4 1.1 0.7 Interest expense............................... 0.2 0.0 0.3 ----- ----- ----- Income before income taxes..................... 8.2 8.9 4.4 Income taxes................................... 2.8 3.5 1.8 ----- ----- ----- Net income..................................... 5.4% 5.4% 2.6% ===== ===== ===== Pro forma net income(1)........................ 4.9% 5.4% 2.6% ===== ===== =====
- -------- (1) Pro Forma net income gives effect to an income tax adjustment to reflect taxation of the income of Inteuro and Car Body, acquired in January 1998, as "C" corporations, rather than "S" corporations, at an estimated statutory rate of approximately 39%. Fiscal 2000 Compared to Fiscal 1999 Net sales were $372.5 million in fiscal 2000 compared to $332.0 million in fiscal 1999, an increase of $40.5 million, or 12.2%. This increase was due primarily to an increase of $14.3 million in sales of automotive body parts, an increase of $7.3 million in sales of paint and related materials and an increase of $15.2 million in sales of new and recycled bumpers, which represent increases of approximately 9.6%, 14.6% and 14.8%, respectively, over fiscal 1999. In addition, the Company sold $23.0 million of remanufactured alloy wheels in fiscal 2000 compared to $17.4 million in the prior fiscal year, an increase of 32.5%. The increased net sales were attributable primarily to an increase in the number of service centers in operation primarily as a result of acquisitions. Price increases were not a material factor in increased net sales. On a same store sales basis, sales were down approximately 1.0% for the year and approximately 7.0% for the last six months of fiscal 2000, as a result of the State Farm decision and subsequent actions by certain insurance companies. See "General" above. Management anticipates recent sales trends may continue for the foreseeable future, subject to the continuing impact of the State Farm decision. 16 Gross profit increased to $160.6 million (43.2% of net sales) in fiscal 2000 from $145.9 million (43.9% of net sales) in fiscal 1999, an increase of 10.1%, primarily as a result of the increase in net sales. The Company's gross profit margin decreased, primarily as a result of higher freight costs with respect to product shipped from overseas, a shift in product mix as fewer higher margin collision parts are being written on repair estimates and a write-off of certain inventories. The Company's gross profit margin has fluctuated, and is expected to continue to fluctuate, depending on a number of factors, including changes in product mix, competition and the strength of the United States dollar relative to the Taiwanese dollar. Selling and distribution expenses increased to $111.0 million (29.8% of net sales) in fiscal 2000 from $93.2 million (28.1% of net sales) in fiscal 1999, an increase of 19.1%. The increase in these expenses in fiscal 2000 as a percentage of net sales was generally the result of reduced revenue across the entire organization as a result of State Farm, Farmers Insurance and Nationwide restricting usage of aftermarket collision replacement parts. The Company was staffed in anticipation of a normal winter selling season which did not materialize. Higher fuel costs during the current fiscal year may result in increases in selling and distribution expenses as a percentage of net sales. General and administrative expenses increased to $30.8 million (8.3% of net sales) in fiscal 2000 from $24.9 million (7.5% of net sales) in fiscal 1999, an increase of 23.7%. The increase in these expenses in fiscal 2000 as a percentage of net sales resulted from a number of factors, including an increase in amortization of goodwill and other intangibles. Amortization of goodwill and other intangibles, as a result of acquisitions, increased to $2.6 million in fiscal 2000 compared to approximately $2.1 million in fiscal 1999, due to the application of purchase accounting. During fiscal 2000, the Company incurred approximately $3.9 million of nonrecurring expenses as compared to $1.8 million in fiscal 1999. In fiscal 1999, these expenses were the result of a write-off of an abandoned computer project of $700,000, $650,000 related to consolidating duplicate warehouse facilities and $450,000 of severance payments. In fiscal 2000, these expenses were the result of write-downs of goodwill and covenants not to compete aggregating $3.3 million relating to certain acquisitions and a write-off of approximately $600,000 relating to tooling acquired in an acquisition. During fiscal 2000, other income decreased from $3.6 million to $2.6 million. This decrease is primarily attributable to a decrease in interest income earned on invested cash. As a result of the above factors, net income decreased to $9.8 million (2.6% of net sales) in fiscal 2000 from $17.8 million (5.4% of net sales) in fiscal 1999. Fiscal 1999 Compared to Fiscal 1998 Net sales were $332.0 million in fiscal 1999 compared to $263.8 million in fiscal 1998, an increase of $68.2 million, or 25.9%. This increase was due primarily to an increase of $35.5 million in sales of automotive body parts, an increase of $9.3 million in sales of paint and related materials and an increase of $13.0 million in sales of new and recycled bumpers, which represent increases of approximately 32.0%, 22.6% and 14.2%, respectively, over fiscal 1998. In addition, the Company sold $17.4 million of remanufactured alloy wheels in fiscal 1999 compared to $8.4 million in the prior fiscal year, an increase of 108.7%. The increased net sales were attributable primarily to an increase in the number of service centers in operation as a result of acquisitions and an increase in unit volume. Price increases were not a material factor in increased net sales. Gross profit increased to $145.9 million (43.9% of net sales) in fiscal 1999 from $113.9 million (43.2% of net sales) in fiscal 1998, an increase of 28.0%, primarily as a result of the increase in net sales. The Company's gross profit margin has improved, in part, due to increased purchasing leverage, a direct result of acquisitions and internal growth. In addition, the United States dollar has strengthened relative to the Taiwanese dollar, 17 resulting in lower costs for imported product. The Company imports approximately 25% of its product from Taiwan, generally, fenders, hoods, door panels and grilles. The Company's gross profit margin has fluctuated, and is expected to continue to fluctuate, depending on a number of factors, including changes in product mix, acquisitions and competition. Selling and distribution expenses increased to $93.2 million (28.1% of net sales) in fiscal 1999 from $73.6 million (27.9% of net sales) in fiscal 1998, an increase of 26.7%. The increase in these expenses as a percentage of net sales was generally the result of costs associated with consolidating service centers and assimilating acquisitions. General and administrative expenses increased to $24.9 million (7.5% of net sales) in fiscal 1999 from $18.1 million (6.9% of net sales) in fiscal 1998, an increase of 37.4%. The increase in these expenses in fiscal 1999 as a percentage of net sales resulted from a number of factors, including an increase in amortization of goodwill and other intangibles. Amortization of goodwill and other intangibles, as a result of acquisitions, increased to $2.1 million in fiscal 1999 compared to approximately $1.0 million in fiscal 1998, due to the application of purchase accounting. During fiscal 1999, the Company incurred approximately $1.8 million of nonrecurring expenses. These expenses relate to an approximately $700,000 write-off of an abandoned computer project, approximately $650,000 related to costs incurred to consolidate duplicate warehouse facilities and approximately $450,000 related to severance payments. During fiscal 1998, the Company expensed $442,000 of costs related to the Inteuro and Car Body mergers, consisting primarily of legal, accounting and regulatory fees, the Company incurred approximately $705,000 of costs related to severance payments to its former Chairman and Chief Executive Officer. During fiscal 1999, other income increased to $3.6 million compared to $1.1 million in fiscal 1998. This increase is primarily attributable to interest income earned on invested cash and to discounts earned for early payments on purchases. As a result of the above factors, net income increased to $17.8 million (5.4% of net sales) in fiscal 1999 from $14.2 million (5.4% of net sales) in fiscal 1998. Variability of Quarterly Results and Seasonality The Company has experienced, and expects to continue to experience, variations in its sales and profitability from quarter to quarter due, in part, to the timing and integration of acquisitions and the seasonal nature of Keystone's business. The number of collision repairs is directly impacted by the weather. Accordingly, the Company's sales generally are highest during the five-month period from December to April. The impact of seasonality may be reduced somewhat in the future as Keystone becomes more geographically diversified. Other factors which influence quarterly variations include the reduced number of business days during the holiday seasons, the timing of the introduction of new products, the level of consumer acceptance of new products, general economic conditions that affect consumer spending, the timing of supplier price changes and the timing of expenditures in anticipation of increased sales and customer delivery requirements. Liquidity and Capital Resources The Company's primary need for funds has been to finance the growth of inventory and accounts receivable and to complete acquisitions. At March 31, 2000, working capital was $86.2 million compared to $105.3 million at March 26, 1999. The decrease in working capital is primarily the result of a decrease in cash coupled with an increase in inventory. Historically, the Company has financed its working capital requirements from its cash flow from operations, proceeds from public offerings of its Common Stock and advances drawn under lines of credit. 18 The Company has in place a revolving line of credit with its commercial lender that provides for a $30 million unsecured credit facility that expires on September 15, 2000. Advances under the revolving line of credit bear interest at LIBOR plus 0.75%-0.875%. At June 16, 2000, $18.3 million had been drawn down under the line of credit. The line of credit is subject to certain restrictive covenants set forth in the loan agreement, which requires that the Company maintain certain financial ratios. The Company was in compliance with all covenants as of March 31, 2000 and as of the date of filing of this Annual Report. In fiscal 1999, the Company initiated a stock repurchase program. Through June 16, 2000, an aggregate of 3.5 million shares had been repurchased for $45.6 million, an average of $13.11 per share. During fiscal 2000, the Company's cash and cash equivalents decreased by $14.9 million. This decrease is the result of (i) an increase in cash provided by operating activities of $17.4 million from a variety of sources, primarily net income; (ii) a decrease in cash used in investing activities of $18.1 million, primarily as a result of cash used to complete acquisitions and implement the Company's enterprise software package; and (iii) a decrease in cash provided by financing activities of $14.2 million, primarily as a result of the elimination of Republic's outstanding bank indebtedness and the repurchase of shares of the Company's Common Stock, offset in part by paydowns with respect to the Company's borrowings. The Company believes that its existing working capital, estimated cash flow from operations and funds available under its line of credit will enable it to finance its operations and stock repurchases for at least the next 12 months. Inflation The Company does not believe that the relatively moderate rates of inflation over the past three years have had a significant effect on its net sales or its profitability. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133--"Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives in the statement of financial position and measure those instruments at fair value. In 1999, the FASB issued SFAS No. 137--"Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133," for one year. The Company must implement SFAS No. 133 by the first quarter of 2001 and has not yet made a final determination of its impact on the financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements. The effective date of SAB 101 is the first fiscal quarter of the fiscal year beginning after December 15, 1999. The Company plans on applying SAB 101 effective April 1, 2000, however, it does not expect that the application of SAB 101 will have a significant impact on its results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's results of operations are exposed to changes in interest rates primarily with respect to borrowings under its credit facility, where interest rates are tied to the prime rate or LIBOR. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. Based on the current levels of debt, the exposure to interest rate fluctuations is not considered to be material. The Company is also exposed to currency fluctuations, primarily with respect to its product purchases in Taiwan. While all transactions with Taiwan are conducted in U.S. Dollars, changes in the relationship between the U.S. dollar and New Taiwan dollars might impact the price of products purchased in Taiwan. The Company might not be able to pass on any price increases to customers. Under its present policies, the Company does not attempt to hedge its currency exchange rate exposure. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS KEYSTONE AUTOMOTIVE INDUSTRIES, INC. Report of Independent Auditors............................................ 21 Consolidated Balance Sheets at March 31, 2000 and March 26, 1999.......... 22 Consolidated Statements of Income for the years ended March 31, 2000, March 26, 1999 and March 27, 1998........................................ 23 Consolidated Statements of Shareholders' Equity for the years ended March 31, 2000, March 26, 1999 and March 27, 1998.............................. 24 Consolidated Statements of Cash Flows for the years ended March 31, 2000, March 26, 1999 and March 27, 1998........................................ 25 Notes to Consolidated Financial Statements................................ 26
20 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Keystone Automotive Industries, Inc. We have audited the accompanying consolidated balance sheets of Keystone Automotive Industries, Inc. and subsidiaries as of March 31, 2000 and March 26, 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2000. Our audits also included the financial statement schedule listed in the index at 14(a). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keystone Automotive Industries, Inc. at March 31, 2000 and March 26, 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. /s/ Ernst & Young LLP Los Angeles, California May 24, 2000 21 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
March 31, March 26, 2000 1999 --------- --------- ASSETS ------ Current assets: Cash and cash equivalents................................. $ 2,884 $ 17,784 Accounts receivable, less allowance for doubtful accounts of $1,145 in 2000 and $962 in 1999....................... 27,644 30,256 Inventories, primarily finished goods..................... 80,176 72,284 Prepaid expenses and other current assets................. 3,650 7,956 Deferred taxes............................................ 3,667 3,601 -------- -------- Total current assets.................................. 118,021 131,881 Property, plant and equipment, at cost: Land...................................................... 519 519 Buildings and leasehold improvements...................... 10,086 9,465 Machinery and equipment................................... 23,759 17,288 Furniture and fixtures.................................... 11,616 10,568 -------- -------- 45,980 37,840 Accumulated depreciation and amortization................. (22,391) (18,473) -------- -------- 23,589 19,367 Goodwill, net of accumulated amortization of $3,274 in 2000 and $1,583 in 1999........................................ 35,204 36,262 Other intangibles, net of accumulated amortization of $3,123 in 2000 and $2,167 in 1999......................... 1,647 1,874 Other assets............................................... 2,242 2,664 Deferred taxes............................................. 3,114 2,046 -------- -------- Total assets.......................................... $183,817 $194,094 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Credit facility........................................... $ 12,500 $ -- Bankers acceptances....................................... -- 2,961 Accounts payable.......................................... 12,693 14,859 Accrued salaries, wages and related benefits.............. 5,098 3,621 Other accrued liabilities................................. 1,461 4,141 Long-term debt, due within one year....................... 117 200 Deferred taxes............................................ -- 769 -------- -------- Total current liabilities............................. 31,869 26,551 Long-term debt, less current maturities.................... 68 100 Other long-term liabilities................................ 1,685 2,679 Deferred taxes............................................. -- 1,559 Commitments and contingencies Shareholders' equity: Preferred stock, no par value: Authorized shares--3,000,000 None issued and outstanding Common stock, no par value: Authorized shares--50,000,000 Issued and outstanding shares--14,892,000 in 2000 and 16,858,000 in 1999, at stated value.................... 81,817 105,436 Warrant................................................... 236 -- Additional paid-in capital................................ 1,260 1,223 Retained earnings......................................... 66,882 57,073 Accumulated other comprehensive loss...................... -- (527) -------- -------- Total shareholders' equity............................ 150,195 163,205 -------- -------- Total liabilities and shareholders' equity............ $183,817 $194,094 ======== ========
See accompanying notes. 22 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share and share amounts)
Year ended ------------------------------------- March 31, March 26, March 27, 2000 1999 1998 ----------- ----------- ----------- Net sales.............................. $ 372,466 $ 332,047 $ 263,802 Cost of sales.......................... 211,840 186,150 149,855 ----------- ----------- ----------- Gross profit........................... 160,626 145,897 113,947 Operating expenses: Selling and distribution............. 110,976 93,169 73,551 General and administrative........... 30,800 24,873 18,101 Non-recurring........................ 3,881 1,814 1,147 ----------- ----------- ----------- 145,657 119,856 92,799 ----------- ----------- ----------- Operating income....................... 14,969 26,041 21,148 Other income........................... 2,613 3,617 1,086 Interest expense....................... (954) (50) (504) ----------- ----------- ----------- Income before income taxes............. 16,628 29,608 21,730 Income taxes........................... 6,819 11,843 7,497 ----------- ----------- ----------- Net income............................. $ 9,809 $ 17,765 $ 14,233 =========== =========== =========== Net income per share--basic............ $ 0.62 $ 1.06 $ 1.02 =========== =========== =========== Weighted average common shares outstanding--basic.................... 15,899,000 16,784,000 13,915,000 ----------- ----------- ----------- Net income per share--diluted.......... $ 0.62 $ 1.05 $ 1.01 =========== =========== =========== Weighted average common shares outstanding--diluted.................. 15,917,000 16,913,000 14,105,000 =========== =========== =========== (unaudited pro forma information) (Note 2) Net income, as previously reported..... $ 9,809 $ 17,765 $ 14,233 Pro forma tax adjustment............... -- -- (1,345) ----------- ----------- ----------- Pro forma net income................... 9,809 $ 17,765 $ 12,888 =========== =========== =========== Pro forma net income per share--basic.. $ 0.62 $ 1.06 $ 0.93 =========== =========== =========== Pro forma net income per share-- diluted............................... $ 0.62 $ 1.05 $ 0.91 =========== =========== ===========
See accompanying notes. 23 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except per share and share amounts)
Accumulated Common Stock Additional Other ------------------- Paid-in Retained Comprehensive Shares Amount Warrant Capital Earnings Loss Total ---------- ------- ------- ---------- -------- ------------- -------- Balance at March 28, 1997................... 11,750,000 $15,923 $ -- $ 582 $29,948 $ -- $ 46,453 Net adjustment for pooled companies for the quarter ended March 31, 1997............... -- -- -- -- (2,072) -- (2,072) Issuance of stock, net of offering costs of $2,679................. 2,610,000 37,776 -- -- -- -- 37,776 Issuance of stock in connection with acquisition of All Makes at $12.75 per share.................. 235,000 2,991 -- -- -- -- 2,991 Stock options exercised.............. 47,000 506 -- -- -- -- 506 Tax benefit of stock options exercised...... -- -- -- 142 -- -- 142 S-Corp. distributions by pooled companies....... -- -- -- -- (2,801) -- (2,801) Net income.............. -- -- -- -- 14,233 -- 14,233 ---------- ------- ----- ------ ------- ----- -------- Balance at March 27, 1998................... 14,642,000 57,196 -- 724 39,308 -- 97,228 Net income.............. -- -- -- -- 17,765 -- 17,765 Defined benefit plan funding adjustments net of taxes of $363....... -- -- -- -- -- (527) (527) -------- Comprehensive income.... 17,238 Issuance of stock in connection with acquisition of Collision Parts Distributor Co. at $12.19 per share....... 150,000 1,828 -- -- -- -- 1,828 Issuance of stock in connection with acquisition of Republic Automotive at $21.69 per share.............. 2,907,000 63,063 -- -- -- -- 63,063 Stock options exercised.............. 168,000 2,188 -- -- -- -- 2,188 Tax benefit of stock options exercised...... -- -- -- 499 -- -- 499 Repurchase of common stock.................. (1,009,000) (18,839) -- -- -- -- (18,839) ---------- ------- ----- ------ ------- ----- -------- Balance at March 26, 1999................... 16,858,000 105,436 -- 1,223 57,073 (527) 163,205 Net income.............. -- -- -- -- 9,809 -- 9,809 Defined benefit plan funding adjustments net of taxes of $363....... -- -- -- -- -- 527 527 -------- Comprehensive income.... 10,336 Issuance of warrant..... -- -- 236 -- -- -- 236 Stock options exercised.............. 11,000 103 -- -- -- -- 103 Tax benefit of stock options exercised...... -- -- -- 37 -- -- 37 Repurchases of common stock.................. (1,977,000) (23,722) -- -- -- -- (23,722) ---------- ------- ----- ------ ------- ----- -------- Balance at March 31, 2000................... 14,892,000 $81,817 $ 236 $1,260 $66,882 $ -- $150,195 ========== ======= ===== ====== ======= ===== ========
See accompanying notes. 24 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended ----------------------------- March 31, March 26, March 27, 2000 1999 1998 --------- --------- --------- Operating activities Net income...................................... $ 9,809 $17,765 $14,233 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................. 4,607 4,318 3,188 Amortization of goodwill and other intangibles.................................. 2,649 2,050 967 Deferred taxes................................ (3,462) 679 (618) Loss on impairment............................ 3,881 -- -- Provision for losses on uncollectible accounts..................................... 127 601 372 Provision for losses on inventory............. 19 251 495 Loss on sales of assets....................... 5 27 76 Changes in operating assets and liabilities: Accounts receivable......................... 3,701 (2,305) (2,886) Inventories................................. (5,429) (1,151) (8,031) Prepaid expenses and other current assets... 433 (1,949) (692) Accounts payable............................ (2,236) 521 (7,613) Accrued salaries, wages and related benefits................................... 3,314 (2,286) (332) Other accrued liabilities................... (3,110) (532) 1,910 Other, net.................................. 3,115 624 (620) ------- ------- ------- Net cash provided by operating activities.. 17,423 18,613 449 Investing activities Proceeds from sales of assets................... 232 42,629 213 Acquisitions of certain service centers, net of cash received.................................. (9,615) (12,517) (7,048) Purchases of property, plant and equipment...... (8,745) (5,126) (3,790) ------- ------- ------- Net cash (used in) provided by investing activities................................ (18,128) 24,986 (10,625) Financing activities Borrowings under bank credit facility........... 12,500 -- -- Payments under bank credit facility............. -- (20,000) (12,629) Bankers acceptances............................. (2,961) 1,109 (1,686) Payments on notes payable to officers, shareholders and other related parties......... -- -- (42) Principal payments on long-term debt............ (115) (1,133) (1,892) S-Corp. distributions related to pooled companies...................................... -- -- (2,801) Proceeds from initial public and secondary offering....................................... -- -- 37,776 Purchase of common stock........................ (23,722) (18,839) -- Proceeds from stock option exercises............ 103 2,189 506 ------- ------- ------- Net cash (used in) provided by financing activities................................ (14,195) (36,674) 19,232 ------- ------- ------- Net (decrease) increase in cash and cash equivalents..................................... (14,900) 6,925 9,056 Cash and cash equivalents at beginning of year... 17,784 10,859 2,284 Net change in cash and cash equivalents during the quarter ended March 31, 1997 for pooled companies....................................... -- -- (481) ------- ------- ------- Adjusted cash and cash equivalents at beginning of year......................................... 17,784 10,859 1,803 ------- ------- ------- Cash and cash equivalents at end of year......... $ 2,884 $17,784 $10,859 ======= ======= ======= Supplemental disclosures: Interest paid during the year................... $ 847 $ 242 $ 585 Income taxes paid during the year............... 6,607 11,655 6,346 Acquisition of businesses using debt............ -- 150 -- Acquisition of businesses using stock........... -- 64,891 2,991 The following item is not included in the Consolidated Statement of Cash Flows: Minimum pension liability adjustment............ $ (527) $ 527 $ -- Issuance of warrant............................. 236 -- --
See accompanying notes. 25 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Keystone Automotive Industries, Inc. and its wholly owned subsidiaries (the "Company"). Significant subsidiaries included in the consolidated financial statements include North Star Plating Company ("North Star"), Inteuro Parts Distributors, Inc. ("Inteuro") and Republic Automotive Parts, Inc. ("Republic"). All significant intercompany transactions have been eliminated in consolidation. Business Information The principal business of the Company is the distribution of replacement parts for automobiles and light trucks to collision repair shops through a network of service centers located within the United States, one in Mexico, and one in Canada. Fiscal Year The Company uses a 52/53 week fiscal year. The Company's fiscal year ends on the last Friday of March. The fiscal year ended March 31, 2000 included 53 weeks. The fiscal years ended March 26, 1999 and March 27, 1998 each included 52 week periods. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Concentrations of Risk Accounts receivable subject the Company to a potential concentration of credit risk. Substantially all of the Company's customers are in the auto body repair business, none representing more than 1% of sales. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 days. Credit losses have consistently been within management's expectations. During 2000 and 1999, the Company imported 20% and 25% of its products from the Far East, respectively. Fair Values of Financial Instruments Fair values of cash and cash equivalents, accounts receivable, accounts payable, bankers acceptances and other short-term obligations approximate cost due to the short period of time to maturity. Fair values of long-term debt, which have been determined based on borrowing rates currently available to the Company for loans with similar terms or maturity, approximate the carrying amounts in the consolidated financial statements. Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are held by major financial institutions. 26 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Inventories The Company's inventories consist primarily of automotive after market collision replacement parts, paint and related items and bumpers. Inventories are stated at the lower of cost (first-in, first-out method) or market. Long-Lived Assets The Company reviews the reasonability of its long-lived assets, including goodwill, as required by Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of," whenever significant events or changes occur which might impair the recovery of the recorded costs. The Company records impairment losses on long-lived assets held and used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If impairment exists, the amount of such impairment is calculated based upon discounted cash flows or the market values compared to the recorded costs. In addition, the Company accounts for its long-lived assets to be disposed of at the lower of their carrying amounts or fair value less selling and disposal costs. During fiscal 2000, the Company recorded an impairment reserve related to goodwill and covenants not to compete aggregating $3.3 million relating to certain acquisitions and an impairment reserve of approximately $600,000 relating to tooling acquired in an acquisition. Depreciation and Amortization The Company uses the straight-line method for calculating depreciation and amortization of property, plant, and equipment over the following estimated useful lives: Buildings............... 20 years Machinery and equipment.............. 5-12 years Furniture and fixtures.. 5-7 years Auto and truck.......... 3-5 years Leasehold improvements.. Term of lease or life of the asset, whichever is shorter
Goodwill and Other Intangibles Goodwill, representing the excess of the purchase price over the fair values of the net assets of acquired entities, is amortized over 15 to 30 years using the straight-line method. Other intangibles are comprised of covenants not to compete. Covenants not to compete are amortized using the straight-line method over the terms of the agreements, generally 3-5 years. Investment In November 1999, the Company made an investment in GoMedia, Inc., a company which has developed an online business community, goClaims.com, addressing the automotive collision repair and claims processing market. The Company is accounting for its investment ($795,000) using the cost method of accounting. Revenue Recognition The Company recognizes revenue from product sales at the time of delivery or shipment. The Company provides its customers the right to return products that are damaged or defective. The effect of these programs is estimated and current period sales and costs of sales are reduced accordingly. 27 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation The Company elected to continue to account for stock-based compensation plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under the provisions of APB No. 25, compensation expense is measured at the grant date for the difference between the fair value of the stock and the exercise price. The Company has not granted stock options at less than the fair value of the stock at the date of grant. New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives in the statement of financial position and measure those instruments at fair value. In 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133," which defers the effective date of SFAS No. 133 for one year. The Company must implement SFAS No. 133 by the first quarter of 2001 and has not yet made a final determination of its impact on the financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The effective date of SAB 101 is the first fiscal quarter of the fiscal year beginning after December 15, 1999. The Company plans to apply SAB 101 effective April 1, 2000; however, the Company does not expect the application of SAB 101 to have a significant impact on its results of operations. 2. ACQUISITIONS In June 1998, the Company completed its acquisition of Republic. The Company issued approximately 2,907,000 shares of its common stock in exchange for the outstanding common stock of Republic (total purchase price of approximately $63.1 million using an average share price of $21.69). The fair value of the assets acquired approximated $41.9 million, net of approximately $28.8 million of liabilities assumed. The excess of the purchase price over assets acquired (goodwill) approximated $21.2 million and is being amortized over 30 years. The acquisition of Republic is being accounted for under the purchase method of accounting. At the time of the acquisition, Republic was engaged in the distribution of automotive mechanical hard parts and aftermarket collision replacement parts. The net assets acquired as part of the Republic transaction, which related to the Republic mechanical hard parts operations, were recorded as assets held for sale in the allocation of the opening balance sheet at June 27, 1998. The assets held for sale were recorded at fair value based upon the final sales price. The results of operations from June 27, 1998 through the date of sale of the mechanical hard parts operations were accounted for as an adjustment to the carrying amount of the assets. The assets held for sale were sold in a series of transactions during fiscal 1999, which resulted in a gain. The gain on sales has been accounted for as an adjustment of the original purchase price. The operating results of the Company from June 27, 1998, excluded any effects from the mechanical hard parts business. 28 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The unaudited pro forma results of operations for the year ended March 26, 1999 and March 27, 1998, as though Republic had been combined with the Company at the beginning of fiscal 1998, is as follows (in thousands, except share and per share amounts):
March 26, March 27, 1999 1998 ----------- ----------- Net sales............................................ $ 347,346 319,927 Net income........................................... $ 17,325 15,080 Net income per share................................. $ .98 .89 Weighted average shares outstanding diluted.......... 17,649,000 17,012,000
In addition to the Republic acquisition, Keystone acquired six other companies for approximately $17.8 million cash, $1.8 million in stock and a note payable of $150,000. These acquisitions were accounted for as purchases, and accordingly the assets and liabilities of the acquired entities have been recorded at their estimated fair values at the dates of acquisition. The excess of purchase price over the estimated fair values of the assets acquired was approximately $9.9 million and has been recorded as goodwill and is being amortized over 15 to 20 years. The unaudited proforma results for fiscal 1998 and 1999, assuming these other acquisitions had been made at the beginning of fiscal 1998, would not be materially different from the pro forma results presented above. Effective January 1, 1998, Inteuro merged with and into the Company. An aggregate of 2,000,000 shares of the Company's common stock were issued in exchange for all of the issued and outstanding common stock of Inteuro. This transaction was accounted for as a pooling of interests and therefore, all prior period financial statements presented include Inteuro's historical activities. Inteuro used a December 31 year end. The Company's financial statements for fiscal 1998 combine the Company's consolidated financial statements for the year ended March 27, 1998, with Inteuro's financial statements for year ended December 31, 1997. For the quarter ended March 28, 1997, net income for Inteuro was $385,000, offset by S-Corp. distributions of $2,457,000, resulting in a net adjustment to retained earnings of $2,072,000. Revenue and expenses of $9,164,000 and $8,779,000, respectively, were recorded for the quarter ended March 28, 1997 for Inteuro which have not been reflected in the statement of operations. Prior to the merger, the net income of Inteuro had been taxed under subchapter "S" of the Internal Revenue Code, and therefore, did not reflect the corporate tax liability that was passed through to its shareholders. The proforma net income and earnings per share included herein reflect income tax expense of the combined companies at an estimated statutory rate of 39%. In connection with the merger with Inteuro, $442,000 of merger costs and expenses were incurred and have been charged to operations for the year ended and March 27, 1998. The merger costs and expenses consisted primarily of legal, accounting, and investment banking fees. 3. GOODWILL AND OTHER INTANGIBLES Goodwill increased approximately $1,088,000, net of impairment losses recorded during fiscal 2000. Amortization expense for goodwill and other intangibles for the years ended March 31, 2000, March 26, 1999 and March 27, 1998 was $2,649,000, $2,050,000 and $967,000, respectively, and is included with depreciation and amortization expense. 29 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. FINANCING ARRANGEMENTS The Company maintains a revolving line of credit with a commercial lender that provides a $30,000,000 unsecured credit facility that expires, as amended, in September 2000. Initial advances under the revolving line of credit are made with interest at the lender's prime rate; however, at the Company's option, all advances may be converted to LIBOR plus 0.75%--0.875%. The agreement also contains an unused line charge of 0.125%. At March 31, 2000, $12,500,000 was outstanding under the line of credit. The loan agreement is subject to certain restrictive covenants and requires that the Company maintain certain financial ratios. The Company was in compliance with all covenants as of March 31, 2000. 5. SHAREHOLDERS' EQUITY In June 1996, the Company completed its initial public offering of 1,500,000 shares at an offering price of $9.00 per share, which generated net proceeds of $11,622,000. In June 1997, the Company's Registration Statement on Form S-1 was declared effective by the Securities and Exchange Commission, permitting the Company to sell additional shares of its common stock to the public. The Company and selling shareholders sold 2,610,000 shares each, at an offering price of $15.50 per share, which generated net proceeds to the Company of $37,776,000 (net of underwriter commissions and offering costs). The Company's proceeds from both offerings were used to pay down bank debt, to fund acquisitions and for working capital. Additionally, in August 1997, the Company amended its Articles of Incorporation to increase its authorized shares of common stock to 50,000,000. In June 1998, as part of the Company's acquisition of Republic, the Company issued approximately 2,907,000 shares using an average share price of $21.69. In September 1998, the Board of Directors authorized the Company to purchase up to 1,000,000 shares of its common stock at such times and at such prices as the President and Chief Financial Officer deemed appropriate. Repurchased shares were redeemed and treated as authorized but unissued shares. At March 26, 1999, the Company had repurchased approximately 1,009,000 shares of its common stock at an average cost of $18.67 per share. In March 1999, the Company issued 150,000 shares of unregistered stock using an average share price of $12.19 to acquire Collision Parts Distributors Co. In February 2000, the Company issued a warrant to purchase 100,000 shares of the Company's stock, at an exercise price of $6.50 per share to a vendor. The warrant is exercisable starting in February 2001 through 2005, or through the date of dissolution of the agreement. Using the intrinsic value method, the Company recorded the warrant in Shareholders' equity at $236,000 and will amortize the expense over the period services are received from the vendor. 30 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. EARNINGS PER SHARE In 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the SFAS No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
Year ended ----------------------------- March 31, March 26, March 27, 2000 1999 1998 --------- --------- --------- (in thousands, except share and per share amounts) Numerator: Net income................................. $ 9,809 $17,765 $14,233 ------- ------- ------- Denominator: Denominator for basic earnings per share-- weighted average shares.................................... 15,899 16,784 13,915 ------- ------- ------- Effect of dilutive securities: Employee stock options..................... 18 129 190 Denominator for dilutive earnings per share--adjusted weighted average shares and assumed conversions................... 15,917 16,913 14,105 ------- ------- ------- Basic earnings per share..................... $ 0.62 $ 1.06 $ 1.02 ======= ======= ======= Diluted earnings per share................... $ 0.62 $ 1.05 $ 1.01 ======= ======= =======
The warrant to purchase 100,000 shares had an exercise price greater than the average market price of common stock at March 31, 2000, and therefore was excluded from the computation of diluted earnings per share because the effect would be an antidilutive. 7. RELATED PARTY TRANSACTIONS The Company has entered into various property lease agreements with related parties, including certain of the Company's directors and officers and agreements with a corporation which is owned by a family member of a Company officer and director. The leases contain terms up to 10 years. The Company believes that the terms and conditions of such leases with affiliated parties are no less favorable than could have been obtained from unaffiliated parties in arm's length transactions at the time such leases were entered into. Rent expense for related party lease agreements, included in the total rent expense, amounted to $1,373,000, $1,863,000 and $1,715,000 for 2000, 1999 and 1998, respectively, exclusive of the Company's obligation for property taxes and insurance. 31 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. INCOME TAXES The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Significant components of the Company's deferred tax liabilities and assets are as follows:
March 31, March 26, 2000 1999 --------- --------- (in thousands) Deferred tax assets: Uniform cost capitalization........................... $1,423 $ 1,331 Goodwill.............................................. 2,542 1,183 Inventory reserve..................................... 643 594 Accrued expenses not currently deductible for tax..... 2,021 2,234 Other, net............................................ 196 305 ------ ------- Total deferred tax assets........................... 6,825 5,647 Deferred tax liabilities: Prepaid expenses...................................... (44) (769) Tax depreciation over book............................ -- (488) Book/tax difference on pension accrual................ -- (1,071) ------ ------- Total deferred tax liabilities...................... (44) (2,328) ------ ------- Net deferred tax assets............................. $6,781 $ 3,319 ====== =======
Significant components of the provision for income taxes attributable to operations under the liability method are as follows:
Year ended ----------------------------- March 31, March 26, March 27, 2000 1999 1998 --------- --------- --------- (in thousands) Current: Federal...................................... $ 8,512 $ 7,136 $6,575 State........................................ 1,769 1,984 1,540 ------- ------- ------ 10,281 9,120 8,115 Deferred: Federal...................................... (3,090) 1,792 (514) State........................................ (372) 931 (104) ------- ------- ------ (3,462) 2,723 (618) ------- ------- ------ $6,819 $11,843 $7,497 ======= ======= ======
Prior to the purchase of Inteuro by the Company on January 1, 1998, Inteuro had elected to be treated as an S corporation under the provisions of the Internal Revenue Code. Accordingly, taxable income of Inteuro has been reported in the tax returns of the individual shareholders of Inteuro. Subsequent to the acquisition of Inteuro on January 1, 1998, the operating results of Inteuro are included in the consolidated federal and state tax returns of the Company. 32 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The reconciliation of income taxes at the U.S. federal statutory tax rate to reported income tax expense is as follows:
Year ended ----------------------------- March 31, March 26, March 27, 2000 1999 1998 --------- --------- --------- (in thousands) Income taxes at statutory tax rate........... $5,821 $10,363 $ 7,606 State income taxes, net of federal tax effect...................................... 710 1,229 915 S-Corp. earnings of Inteuro.................. -- -- (1,221) Non-deductible expenses...................... 288 251 197 ------ ------- ------- $6,819 $11,843 $ 7,497 ====== ======= =======
9. EMPLOYEE BENEFIT PLANS The Company terminated its employee stock ownership plan which covers substantially all of its employees. Final payout is expected to occur during fiscal 1999. Under the terms of the Internal Revenue Code, each year's tax deductible contribution is limited to a maximum of 15% of the Company's qualified payroll. A carryover of unused allowable contributions is allowed, subject to certain limits. Under the terms of the plan, the Company makes the contribution to the Trustee, who is required to follow the Administrative Committee's investment decisions. There were no Company contributions to the plan in fiscal 1997, 1998 nor 1999. In March 1979, the Company adopted a defined benefit pension plan (the "Plan") to provide pension benefits to all non-union employees. Plan benefits are based on an employee's years of service and the compensation during the five years of employment which would yield the highest average compensation. Effective in April 1997, the Company suspended the accrual of future benefits resulting in a curtailment gain of $427,000. The curtailment gain was used to offset unrecognized net losses of the Plan. The assets of the Plan consist primarily of investments in mutual funds, time certificates of deposit, and marketable debt securities. The Company's policy is to fund pension cost accrued. In June 1998, the Company acquired Republic, including its pension and postretirement life and health insurance plans ("Health and Life Plans"). Republic's defined benefit plan covers substantially all employees. Benefits under this plan generally are based upon the employee's years of service and compensation preceding retirement. The Company's general funding policy is to contribute amounts deductible for federal income taxes. Under the Health and Life Plans, the Company contributes toward the cost of health insurance benefits for certain retired employees. In order to be eligible for postretirement health insurance coverage, an employee must retire after attainment of age 55 and completion of 10 years of service, or attainment of age 50 and completion of 15 years of service. After attainment of age 65, the employee will not be eligible for coverage under the health insurance plan. In order to be eligible for life insurance benefits, an employee must retire after attaining age 55 and completing 10 years of service, or attaining age 50 and completing 15 years of service. Eligible retirees will receive a life insurance benefit of $2,500 for which the Company pays the full cost. The Health and Life Plans are unfunded and therefore, premiums are paid from the Company's current operations. 33 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The net periodic pension cost for all the Company's benefit plans was as follows:
Pension Benefits Other Benefits ----------------------------- ------------------- March 31, March 26, March 27, March 31, March 26, 2000 1999 1998 2000 1999 --------- --------- --------- --------- --------- (in thousands) Service cost................ $ 67 $ 281 $ 18 $ 5 $11 Interest cost............... 485 424 271 87 58 Amortization or unrecognized transition obligation or asset...................... -- -- 120 -- -- Recognized gains or (losses)................... (193) 29 489 -- -- Prior service cost recognized................. 130 -- (143) -- -- Expected return on assets... (284) (500) (224) -- -- Gain or loss due to settlement or curtailment.. -- -- (427) -- -- ----- ----- ----- --- --- $ 205 $ 234 $ 104 $92 $69 ===== ===== ===== === ===
34 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following is a summary of the status of the funding of the plans:
Pension Benefits Other Benefits ------------------- ------------------- March 31, March 26, March 31, March 26, 2000 1999 2000 1999 --------- --------- --------- --------- (in thousands) Change in benefit obligation: Benefit obligation at beginning of year............................... $ 8,140 $ 2,752 $ 1,107 $ -- Benefit obligation from acquired company............................ -- 4,311 -- 1,235 Service cost........................ 67 281 5 11 Interest cost....................... 485 424 87 58 Plan participants' contributions.... -- -- 12 13 Actuarial losses (gains)............ (87) 690 (49) (94) Settlement loss..................... 671 -- -- -- Benefits paid....................... (3,121) (1,048) (94) (116) Plan amendments..................... (324) -- -- -- Change in assumptions............... (1,769) 730 -- -- ------- ------- ------- ------- Benefit obligation at end of year............................. $ 4,062 $ 8,140 $ 1,068 $ 1,107 ======= ======= ======= ======= Change in plan assets: Fair value of plan assets at beginning of year.................. $ 6,464 $ 3,015 $ -- $ -- Actual return on plan assets........ 284 26 -- -- Acquisition......................... -- 4,266 -- -- Company contributions............... -- 205 -- -- Benefits paid....................... (3,121) (1,048) -- -- ------- ------- ------- ------- Fair value of plan assets at end of year.......................... $ 3,627 $ 6,464 $ -- $ -- ======= ======= ======= ======= Funded status: Funded status of the plan (underfunded)...................... $ (435) $(1,676) $(1,068) $(1,107) Unrecognized net actuarial (gain) losses............................. (39) 2,485 (143) (94) Adjustment required to recognize minimum liability.................. -- (890) -- -- ------- ------- ------- ------- Net amount recognized............. $ (474) $ (81) $(1,211) $(1,201) ======= ======= ======= ======= Amounts recognized in the statement of financial position: Prepaid pension cost................ $ -- $ 1,001 $ -- $ -- Accrued benefit liability........... (474) (1,548) (1,211) (1,201) Intangible asset.................... -- 466 -- -- ------- ------- ------- ------- Net amount recognized............. $ (474) $ (81) $(1,211) $(1,201) ======= ======= ======= =======
In accordance with the provisions of SFAS No. 87, "Employers Accounting for Pensions," at March 26, 1999 the Company recorded a minimum pension liability representing the excess of the accumulated benefit obligation over the fair value of the plan assets. The liability has been offset by intangible assets to the extent possible. The balance of the liability of $890,000 was reported in accumulated comprehensive income (loss), net of applicable deferred income taxes of $363,000. No minimum pension liability exists at March 31, 2000. In determining the actuarial present value of projected benefit obligations for the Company's Plan, at March 31, 2000 and March 26, 1999, a discount rate of 5% was used. The Company Plan was "frozen" effective March 26, 1999 and therefore, there were no future compensation increases for the Plan for the periods subsequent to March 26, 1999. Effective June 30, 1999, the accrual of future benefits under the Republic defined 35 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) benefit plan was suspended. The defined benefit plans of the Company and Republic were merged on December 31, 1999. In determining the actuarial present value of projected benefit obligations for the merged plan at March 31, 2000, a discount rate of 8% was issued. There are no future compensation increases due to the suspension of benefit accruals. The expected long-term annual rate of return on assets was 8% for the year ended March 31, 2000. The expected long-term annual rate of return on assets was 5% for the year ended March 26, 1999. The actuarial present value of projected benefit obligations at March 26, 1999 for the Republic pension plan, used a discount rate of 7%. The assumed future compensation increases for the Republic pension plan for the year ended March 26, 1999 was 5% and the expected long-term annual rate of return on assets was 9.5%. For the Health and Life Plans, the actuarial present value of benefit obligations at March 31, 2000 and March 26, 1999, assumed a discount rate of 8% and 7%, respectively. The assumed healthcare cost trend rate for 2000 and later was 8%. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
1-Percentage 1-Percentage Point Point Increase Decrease ------------ ------------ (in thousands) Effect on the total of service cost and interest cost components in fiscal 2000..................................... $ 8 $ (7) Effect on the postretirement benefit obligation as of March 31, 2000............................ $50 $(43)
The Company maintains a 401(k) plan, as amended, that covers substantially all of its employees. Employees who have completed more than one year of service are eligible and may contribute from 1% to 15% of their base pay. The Company matches 50% of the first 6% of employee contributions. Employee contributions vest immediately, while employer contributions vest based on years of service. Employer contributions to the plan were $1,074,000, $1,058,000 and $982,000 as of March 31, 2000, March 26, 1999 and March 27, 1998, respectively. 36 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. STOCK COMPENSATION PLANS In 1996, the Board of Directors of the Company adopted a Stock Incentive Plan (the "1996 Plan"). There were 1,100,000 shares of Common Stock reserved for issuance under the 1996 Plan. The 1996 Plan provides for granting of stock options that may be either "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code of 1986 (the "Code") or "non- qualified stock options," which do not satisfy the provisions of Section 422A of the Code. Options are required to be granted at an option price per share equal to the fair market value of Common Stock on the date of grant. Stock options may not be granted longer than 10 years from the date of the 1996 Plan. All options granted have ten-year terms and vest at the rate of 25% per year, commencing one year from the date of grant. No options were exercised during the year ended March 28, 1997.
Weighted Average Stock Option Plan Shares Exercise Price ----------------- -------- -------------- Outstanding at March 28, 1997.......................... 432,000 $11.90 Granted.............................................. 232,000 17.13 Exercised............................................ (47,250) 10.72 Expired.............................................. (28,500) 13.22 -------- ------ Outstanding at March 27, 1998.......................... 588,250 13.99 Granted.............................................. 390,000 19.30 Exercised............................................ (168,525) 14.76 Expired.............................................. (10,250) 9.16 -------- ------ Outstanding at March 26, 1999.......................... 799,475 16.36 Granted.............................................. 395,000 14.13 Exercised............................................ (11,400) 9.00 Expired/Cancelled.................................... 327,575 19.55 -------- ------ Outstanding at March 31, 2000 855,500 $15.75 ======== ======
37 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following tabulation summarizes certain information concerning outstanding and exercisable options at March 31, 2000, March 26, 1999 and March 27, 1998:
Price Range ---------------------------------- $12.00- $9.00 $20.00 $20.375 $24.13 -------- -------- ------- -------- Outstanding options as of March 27, 1998: Number outstanding........................ 187,750 333,500 67,000 -- Weighted average exercise price........... $ 9.00 $ 15.23 $20.375 $ -- Weighted average remaining contractual life in years............................ 8.2 8.3 9.4 -- Exercisable options: Number exercisable........................ 67,500 57,125 -- -- Weighted average exercise price........... $ 9.00 $ 14.71 $20.375 $ -- Outstanding options as of March 26, 1999: Number outstanding........................ 150,600 436,875 67,000 145,000 Weighted average exercise price........... $ 9.00 $ 15.75 $20.375 $ 24.13 Weighted average remaining contractual life in years............................ 7.2 7.6 8.4 9.1 Exercisable options: Number exercisable........................ 75,300 125,744 16,750 -- Weighted average exercise price........... $ 9.00 $ 15.61 $20.375 $ -- Outstanding options as of March 31, 2000: Number outstanding........................ 121,700 690,300 43,500 -- Weighted average exercise price........... $ 9.00 $ 15.06 $20.375 $ -- Weighted average remaining contractual life in years............................ 6.2 7.9 7.4 -- Exercisable options: Number exercisable........................ 96,275 321,675 21,750 -- Weighted average exercise price........... $ 9.00 $ 15.93 $20.375 $ --
If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," net income and earnings per share would have been reduced to the pro forma amounts shown below:
March 31, March 26, March 27, 2000 1999 1998 --------- --------- --------- (In thousands, except per share amounts) Pro forma: Net income................................... $8,444 $17,009 $13,855 Net income per share: Basic...................................... $ .53 $ 1.01 $ 1.00 Diluted.................................... $ .53 $ 1.01 $ .98
38 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The effects of applying SFAS No. 123 for purposes of determining pro forma net income and net income per share are not likely to be representative of the effects on reported net income for future years. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:
March 31, March 26, March 27, 2000 1999 1998 --------- --------- --------- Risk free interest rate........................ 5.24% 5.89% 5.58% Expected life in years......................... 4 4 4 Expected volatility............................ 49.6% 31.6% 25.5% Expected dividend yield........................ 0.00% 0.00% 0.00%
11. COMMITMENTS AND CONTINGENCIES The Company leases substantially all of its property and a portion of its plant and equipment. Certain of the leases contained renewal options from two to five years. Future minimum lease payments, under noncancelable operating leases with initial terms of one year or more, are approximately as follows at March 31, 2000:
Related Total Party Operating Leases Other Leases ------- ------- --------- (in thousands) 2000............................................... $1,475 $10,764 $12,239 2001............................................... 1,523 8,901 10,424 2002............................................... 1,540 6,548 8,088 2003............................................... 1,352 4,494 5,845 2004............................................... 837 2,526 3,363 Thereafter......................................... 366 7,225 7,591 ------ ------- ------- Total minimum rental payments...................... $7,093 $40,458 $47,550 ====== ======= =======
Total rent expense amounted to $12,985,000, $10,695,000 and $7,054,000 for fiscal 2000, 1999 and 1998, respectively, exclusive of the Company's obligation for property taxes and insurance. Certain leases contain provisions for rent escalation that is being amortized on a straight-line basis over the lives of the leases. The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position, results of operations or cash flow of the Company. 12. NON-RECURRING EXPENSES During fiscal 1999, the Company expensed approximately $1.8 million of non- recurring expenses. These expenses relate to an approximately $700,000 write- off of an abandoned computer project, approximately $650,000 related to costs incurred to consolidate duplicate warehouse facilities and approximately $450,000 related to severance payments. During fiscal 1998, the Company expensed $442,000 of costs related to the Inteuro and Car Body mergers, consisting primarily of legal, accounting and regulatory fees. Additionally, the Company incurred approximately $705,000 of costs related to severage payments to its former Chairman and Chief Executive Officer. 39 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended March 31, 2000 and March 26, 1999.
Quarter Ended (1) --------------------------------------- July 2 October 1 December 31 March 31 -------- --------- ----------- -------- (In thousands, except per share amounts) 2000: Net Sales............................ $101,381 $92,501 $86,197 $92,387 Gross Profit......................... 44,906 39,283 37,227 39,209 Non-recurring expenses............... -- -- -- 3,881(2) Net Income........................... 5,495 3,191 1,337 (214) Net Income Per Share--Basic.......... 0.33 0.20 0.09 (0.01) Net Income Per Share--Diluted........ 0.33 0.20 0.09 (0.01)
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year shown elsewhere.
Quarter Ended (1) ----------------------------------------- June 26 September 25 December 25 March 26 ------- ------------ ----------- -------- (In thousands, except per share amounts) 1999: Net Sales............................ $69,872 $81,438 $84,017 $96,720 Gross Profit......................... 30,338 35,034 36,958 43,567 Non-recurring expenses............... -- 402 103 1,309 Net Income........................... 3,860 4,082 4,952 4,871 Net Income Per Share--Basic.......... 0.26 0.23 0.28 0.28 Net Income Per Share--Diluted........ 0.26 0.23 0.28 0.28
- -------- (1) Fiscal 2000 contained 53 weeks and fiscal 1999 contained 52 weeks. The extra week in fiscal 2000 was in the quarter ended July 2, 2000. (2) Consists of impairment expense related to goodwill, covenant not to compete and capitalized tooling (written off). 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding the directors and executive officers of the Company.
Years Employed Name Age Position by Company ---- --- -------- ---------- Ronald G. Brown............. 63 Chairman of the Board 32(1) Charles J. Hogarty.......... 59 President, Chief Executive 39 Officer and Director Kim D. Wood................. 44 Vice President and President 18(1) and Chief Operating Officer of North Star John M. Palumbo............. 44 Vice President, Treasurer, and 4 Chief Financial Officer Christopher Northup......... 40 Vice President--Sales and 17 Marketing James C. Lockwood........... 62 Vice President--General Counsel 3 and Secretary Timothy C. McQuay(2)(3)..... 48 Director -- Al A. Ronco(2).............. 64 Director -- George E. Seebart(2)(3)..... 71 Director -- Keith M. Thompson(3) 60 Director --
- -------- (1) Includes years of service at North Star. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. RONALD G. BROWN was elected a director of the Company upon completion of the North Star Plating Company ("North Star") merger pursuant to the terms of the Merger Agreement and was elected as Chairman of the Board of Directors in May 1997. Mr. Brown served as President of North Star from its founding in 1968 until the North Star merger and he is currently the Vice-President-- Manufacturing of North Star. Mr. Brown has served as a member of the Board of Directors and Vice President of the Bumper Recycling Association of North America. CHARLES J. HOGARTY has served as the President, Chief Operating Officer and a director of the Company since 1987 and was appointed the Chief Executive Officer of the Company in May 1997. From his joining the Company in 1960 until 1987, Mr. Hogarty held various positions, including salesman, sales manager, general manager and regional manager. Mr. Hogarty served as a director of the Aftermarket Body Parts Association from 1984 to 1993, President in 1989 and Chairman in 1990. KIM D. WOOD was elected President and Chief Operating Officer of North Star upon completion of the North Star merger in March 1997 and was elected a Vice President of the Company in May 1997. Mr. Wood served as Vice President of North Star from 1982 until the completion of the North Star merger. Mr. Wood is a director of the Certified Automotive Parts Association. From 1989 until 1999, a member of the Board of Directors of the Aftermarket Body Parts Association, serving as its Chairman from 1993 through 1995. JOHN M. PALUMBO joined the Company as Vice President and Treasurer in March 1996 and was appointed Chief Financial Officer in May 1997. From 1988 until he joined the Company in 1996, Mr. Palumbo served as Chief Financial Officer, Treasurer and Corporate Secretary of American United Global, Inc., a public company engaged in the manufacture of certain automotive parts. CHRISTOPHER NORTHUP has served as Vice President--Sales and Marketing since October 1996. From 1987 until October 1996, Mr. Northup served as the National Marketing Director. From his joining the Company in 1983 until 1987, Mr. Northup held the position of Publications Manager. 41 JAMES C. LOCKWOOD joined the Company in April 1997 and was appointed Vice President--General Counsel and Secretary in May 1997. From July 1985 until he joined the Company in April 1997, Mr. Lockwood was a member of the law firm of Troy & Gould Professional Corporation. TIMOTHY C. MCQUAY was appointed a director of the Company upon the completion of its initial public offering in June 1996. Mr. McQuay joined A.G. Edwards & Sons, Inc. as a Senior member of its Investment Banking Department in July 1997, where he is currently a Managing Director. From October 1994 to July 1997, he was Managing Director--Corporate Finance of Crowell, Weedon & Co. From May 1993 to October 1994, Mr. McQuay was Vice President, Corporate Development with Kerr Group, Inc., a NYSE-listed plastics manufacturing company. From May 1990 to May 1993, Mr. McQuay was Managing Director--Merchant Banking with Union Bank. Mr. McQuay is a director of Meade Instruments Corp., a publicly-held company. AL A. RONCO served as the Executive Vice President of the Company from 1987 until he retired in August 1998. He also served as Secretary of the Company from 1987 until he resigned that position in May 1997. From his joining the Company in 1959 until 1987, Mr. Ronco held various positions, including salesman, production manager, general manager and regional manager. Mr. Ronco has been a director of the Company since 1987. GEORGE E. SEEBART was appointed a director of the Company upon the completion of its initial public offering in June 1996. From 1964 until his retirement in 1993, Mr. Seebart was employed in various executive positions with Farmers Group, Inc., including as Senior Vice President, Field Operations and Vice President, Sales and Marketing. Additionally, from 1987 to 1993, Mr. Seebart was President of Mid-Century Insurance Company, a subsidiary of Farmers Group, Inc. KEITH M. THOMPSON was the President and Chief Executive Officer of Republic Automotive Parts, Inc. ("Republic") from 1986 until he resigned on November 30, 1998. Republic was acquired by the Company in June 1998. Mr. Thompson was elected a director of the Company in March 1999. Pursuant to the North Star merger, certain shareholders of the Company, including Charles J. Hogarty, Al A. Ronco and John M. Palumbo, agreed to vote all shares held by them to maintain Ronald G. Brown as a director of the Company. All directors are elected annually and serve until the next annual meeting of shareholders or until their successors have been elected and qualified. All officers are appointed by and serve at the discretion of the Board of Directors, subject to employment agreements, where applicable. There are no family relationships between any directors or officers of the Company. The Board of Directors has established an Audit Committee, whose members are currently Messrs. McQuay, Ronco and Seebart and a Compensation Committee whose members are Messrs. McQuay, Seebart and Thompson. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be contained in the Company's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders under the captions "Election of Directors" and "Executive Compensation," and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be contained in the Company's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders under the caption "Security Ownership," and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be contained in the Company's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders under the caption "Certain Transactions," and is incorporated herein by reference. 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a)(1) Financial Statements: See the Index to Item 8 above. (a)(2) Financial Statement Schedule: See (d) below. (a)(3) Exhibits: The following exhibits are filed herewith or incorporated by reference herein:
Exhibit No. Description ----------- ----------- 3.1(2) Amended and Restated Bylaws of the Registrant. [3.4]* 3.1.1(4) Amendment to Amended and Restated Bylaws of the Registrant. [3.1.1]* 3.1.2(10) Amendment to Amended and Restated Bylaws of the Registrant. [3.1.2]* 3.2(2) Restated Articles of Incorporation of the Registrant. [3.5]* 3.2.1(8) Amendment to Restated Articles of Incorporation of Registrant. [3.2.1]* 3.2.2(10) Amendment to Restated Articles of Incorporation of Registrant. [3.2.2]* 3.2.3(12) Certificate of Determination of Series A Junior Participating Preferred Stock. [4.2(A)]* 4.1(2) Form of stock certificate. [4.1]* 4.2(12) Rights Agreement dated as of February 10, 2000 [4.2]* 4.3 Warrant to Purchase 100,000 shares of Common Stock dated February 21, 2000. 10.1(1)(A) Employment Agreement dated June 20, 1996, between the Registrant and Charles J. Hogarty.[10.2]* 10.2(3)(A) Employment Agreement between North Star and Ronald G. Brown. [10.5]* 10.3(3)(A) Employment Agreement between North Star and Kim D. Wood. [10.6]* 10.4(A) Employment Agreement between the Registrant and John M. Palumbo dated December 1, 1999. 10.5(1)(A) Indemnification Agreement dated June 20, 1996 between the Registrant and Charles J. Hogarty. [10.6]* 10.6(1)(A) Indemnification Agreement dated June 20, 1996, between the Registrant and John M. Palumbo. [10.9]* 10.7(3)(A) Indemnification Agreement between the Registrant and Ronald G. Brown. [10.12]* 10.8(3)(A) Indemnification Agreement between the Registrant and Kim D. Wood. [10.13]* 10.9(1)(A) Keystone Automotive Industries, Inc. 1996 Stock Incentive Plan, together with forms of incentive stock option, non-qualified stock option and restricted stock agreements. [10.10]* 10.10(7)(A) Amendment to Registrant's 1996 Stock Incentive Plan 10.11(1) The Registrant's Employee Defined Benefit Pension Plan, as amended. [10.11]* 10.12(1) Lease Agreement, dated January 5, 1995, between V-JAC Properties, Ltd. and the Registrant. [10.14]* 10.13(1) Lease Agreement, dated January 5, 1995, between V-JAC Properties, Ltd. and the Registrant. [10.18]*
43
Exhibit No. Description ------- ----------- 10.14(3) Voting Agreement dated December 6, 1996, among the Registrant, North Star Plating Company, Virgil K. Benton, II, Charles J. Hogarty, Al A. Ronco, Robert L. Blanton and John M. Palumbo. [10.37]* 10.15(3) Credit Agreement dated March 25, 1997 between the Registrant and Mellon Bank, N.A. [10.38]* 10.16(7) Amendment No. 1 to Credit Agreement between the Registrant and Mellon Bank, N.A. 10.17(7) Amendment No. 2 to Credit Agreement between the Registrant and Mellon Bank, N.A. 10.18(10) Amendment No. 3 to Credit Agreement between the Registrant and Mellon Bank, N.A. [10.25]* 10.19(10) Amendment No. 4 to Credit Agreement between the Registrant and Mellon Bank, N.A. [10.26]* 10.20(11) Amendment No. 5 to Credit Agreement between the Registrant and Mellon Bank, N.A. [a]* 10.21(4) Lease Agreement, dated January 1, 1995, between North Star and the spouses of Ronald G. Brown and Kim D. Wood. [10.41]* 10.22(4) Lease Agreement, dated January 1, 1995, between North Star and the spouse of Ronald G. Brown and a third party. [10.42]* 10.23(4) Lease Agreement, dated January 1, 1995, between North Star and a partnership owned by Kim D. Wood and an employee of North Star. [10.43]* 10.24(4) Lease Agreement, dated May 20, 1996, between North Star and a partnership owned by the spouses of Ronald G. Brown and Kim Wood and the Brown Family Limited Partnership. [10.44]* 10.25(9) Stock Acquisition Agreement dated August 3, 1998 by and among the Registrant, Republic Automotive Parts, Inc., Republic Automotive Parts Distribution, Inc. and General Parts, Inc. [2.1]* 10.26(A) Key Employee Salary Continuation Agreement between Registrant and James C. Lockwood dated April 11, 2000. 21.1 Subsidiaries. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 27.1 Financial Data Schedule.
- -------- * Indicates the exhibit number of the document in the original filing. (1) Filed as an exhibit to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on April 18, 1996 (File No. 333- 3994). (2) Filed as an exhibit to Amendment No. 2 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on June 17, 1996. (3) Filed as an exhibit to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on December 23, 1996 (File No. 333- 18663). (4) Filed as an exhibit to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on June 6, 1997 (File No. 333- 28709). (7) Filed as an exhibit to Registrant's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on May 18, 1998 (File No. 333-52969) (8) Filed as an exhibit to Registrant's Form 10-K filed with the Securities and Exchange Commission on June 24, 1998. (9) Filed as an exhibit to Registrant's Form 8-K filed with the Securities and Exchange Commission on September 14, 1998. 44 (10) Filed as an exhibit to Registrant's Form 10-K filed with the Securities and Exchange Commission on June 24, 1999. (11) Filed as an exhibit to Registrant's Form 10-Q filed with the Securities and Exchange Commission on February 14, 2000. (12) Filed as an exhibit to Registrant's Form 8-K filed with the Securities and Exchange Commission on February 23, 2000. (A) A management contract or compensatory plan or arrangement as defined in Item 601 of Regulation S-K. (b) Reports on Form 8-K: On February 23, 2000, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission with respect to Item 5, Other Events. (c) Exhibits: See (a)(3) above. (d) Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the Registrant's financial statements or the related notes thereto. 45 KEYSTONE AUTOMOTIVE INDUSTRIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions --------------------- Balance at Charged to Charged to Beginning Costs and Other Balance at Description of Year Expenses Accounts Deductions End of Year ----------- ---------- ---------- ---------- ---------- ----------- Year ended March 27, 1998 Allowance for uncollectible accounts............ $732 $372 $ -- $511 $ 593 Year ended March 26, 1999 Allowance for uncollectible accounts............ $593 $601 $ 249 $481 $ 962 Year ended March 31, 2000 Allowance for uncollectible accounts............ $962 $923 $ -- $738 $1,145
- -------- (1) Uncollectible accounts written off, net of recoveries.
Additions --------------------- Balance at Charged to Charged to Beginning Costs and Other Balance at Description of Year Expenses Accounts Deductions End of Year ----------- ---------- ---------- ---------- ---------- ----------- Year ended March 27, 1998 Allowance for slow- moving inventory..... $ 510 $495 $ 629 $444 $1,190 Year ended March 26, 1999 Allowance for slow- moving inventory..... $1,190 $251 $ 156 $ 75 $1,522 Year ended March 31, 2000 Allowance for slow- moving inventory..... $1,522 $408 $ -- $290 $1,640
46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. KEYSTONE AUTOMOTIVE INDUSTRIES, INC. /s/ Charles J. Hogarty By: _________________________________ Charles J. Hogarty, President Dated: June 23, 2000 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Annual Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Charles J. Hogarty President, Chief Executive Officer June 23, 2000 ____________________________________ and Director Charles J. Hogarty /s/ John M. Palumbo Vice President and Treasurer June 23, 2000 ____________________________________ (Principal Financial and Accounting John M. Palumbo Officer) /s/ Ronald G. Brown Director June 23, 2000 ____________________________________ Ronald G. Brown /s/ Timothy C. McQuay Director June 23, 2000 ____________________________________ Timothy C. McQuay Director June , 2000 ____________________________________ Al A. Ronco /s/ George E. Seebart Director June 23, 2000 ____________________________________ George E. Seebart Director June , 2000 ____________________________________ Keith M. Thompson
47 EXHIBIT INDEX
Exhibit No. Description Page No. ----------- ----------- -------- 4.3 Warrant to Purchase 100,000 shares of Common Stock dated February 21, 2000. 10.4 Employment Agreement between the Registrant and John M. Palumbo dated December 1, 1999. 10.26 Key Salary Continuation Agreement between Registrant and James C. Lockwood dated April 11, 2000. 21.1 Subsidiaries. 23.1 Consent of Ernst & Young LLP, independent auditors. 27.1 Financial Data Schedule.
EX-4.3 2 0002.txt WARRANT TO PURCHASE COMMON STOCK DTD 2/21/2000 Exhibit 4.3 THE WARRANT AND UNDERLYING SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO THE TERMS OF SECTION 1.2 OF THIS WARRANT AGREEMENT AND AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. WARRANT TO PURCHASE 100,000 SHARES VOID AFTER 5:00 P.M., PACIFIC TIME ON FEBRUARY 21, 2005 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. WARRANT AGREEMENT AND CERTIFICATE This certifies that, for value received, LKQ Corporation, a Delaware corporation, the registered holder (the "Warrantholder"), 120 N. LaSalle Street, Suite 3300, Chicago, Illinois 60602 is entitled to purchase from Keystone Automotive Industries, Inc., a California corporation (the "Company") with its principal office located at 700 E. Bonita Avenue, Pomona, California 91767, at any time after February 21, 2001 and before 5:00 p.m., Pacific Time, on the date set forth above, which date is the date 60 months following the initial issuance date of this Warrant (the "Termination Date") at the purchase price of $6.50 per share (the "Exercise Price"), the number of Shares of the Company's Common Stock (the "Shares") set forth above. The Termination Date, the number of Shares purchasable upon exercise of this Warrant and the Exercise Price per Share are subject to adjustment from time to time as set forth in Section 3 below. Section 1. Transfer or Exchange of Warrant. ------------------------------- 1.1 The Company is entitled to treat the registered owner of this Warrant as the owner in fact for all purposes and will not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and will not be liable for any registration or transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary, unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration of transfer, or with such knowledge of such facts that its participation amounts to gross negligence or bad faith. 1.2 This Warrant may not be sold, transferred, assigned or hypothecated, other than by operation of law, prior to the earlier to occur of (i) the Termination Date or (ii) the date of termination of this Warrant Agreement pursuant to Section 3.1 hereof, and then only in accordance with all applicable federal and state securities laws. 1.3 This Warrant will be transferable on the books of the Company only upon delivery of this Warrant Certificate duly endorsed by the Warrantholder or by its duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration of transfer, the Company shall deliver a new Warrant Certificate to the person(s) or entity entitled to receive the Certificate. Section 2. Term of Warrant; Exercise of Warrant. ------------------------------------ 2.1 Subject to the terms of this Agreement and Certificate, the Warrantholder has the right, which may be exercised commencing on February 22, 2001 and ending at 5:00 p.m. Pacific Time on the Termination Date, to purchase from the Company the number of Shares which the Warrantholder may at that time be entitled to purchase on exercise of this Warrant. 2.2 This Warrant may be exercised by surrender to the Company, at its principal office, of this Certificate evidencing the Warrant to be exercised, together with the form of election to purchase attached to this Warrant duly filled in and signed, with payment to the Company of the Exercise Price for the number of Shares in respect of which the Warrant is then exercised. Payment of the aggregate Exercise Price must be made in cash or certified funds, or if approved by the Company's Board of Directors, other property. 2.3 Subject to Section 3 of this Warrant, upon surrender of this Warrant Certificate and payment of the Exercise Price, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Warrantholder exercising this Warrant, and in such name or names as such Warrantholder may designate, certificates for the number of Shares purchased upon the exercise of this Warrant. Such certificate or certificates will be deemed to have been issued, and any person so designated to be named in the certificate will be deemed to have become a holder of record of such Shares, as of the date of receipt by the Company of such Warrant Certificate and payment of the Exercise Price. The right of purchase represented by this Warrant is exercisable, at the election of the Warrantholder, either in full or from time to time in part and, in the event that this Warrant Certificate is exercised to purchase less than all of the Shares purchasable on such exercise at any time prior to the Termination Date, a new Warrant Certificate evidencing the remaining Warrant will be issued. 2.4 The Warrantholder will pay all documentary stamp taxes, if any, attributable to the initial issuance of the Shares upon the exercise of Warrants. Section 3. Adjustment of Termination Date, Exercise Price and Shares. --------------------------------------------------------- 3.1 If the Letter Agreement between the Warrantholder and the Company effective February 21, 2000 is terminated by the Company prior to February 21, 2004, the Termination Date shall be revised and the new Termination Date shall be that date one year following the date of the Company's termination of the Letter Agreement. If the Letter Agreement is terminated at anytime prior to the Termination Date by the Warrantholder, this Warrant Agreement, and all rights hereunder, will terminate concurrently with the Warrantholder's notice to the Company of the Termination of the Letter Agreement. 3.2 If there is any change in the number of shares of outstanding Common Stock through the declaration of stock dividends, or through a recapitalization resulting in stock splits or combinations or exchanges of such shares, the number of shares of Common Stock underlying the Warrants, and the exercise price per share of the outstanding Warrants, will be proportionately adjusted by the Board to reflect any increase or decrease in the number of issued shares of Common Stock; provided, however, that any fractional shares resulting from such adjustment will be eliminated. 3.3 In the event of the proposed dissolution or liquidation of the Company, or any corporate separation or division, including, but not limited to, split-up, split-off or spin-off, or a merger or consolidation of the Company with another corporation, the Board may provide that the Warrantholder will have the right to exercise such Warrant (at its then current Exercise Price) solely for the kind and amount of shares of stock and other securities, property, cash or any combination thereof receivable upon such dissolution, liquidation, corporate separation or division, or merger or consolidation by a holder of the number of shares of Common Stock for which such Warrant might have been exercised immediately prior to such dissolution, liquidation, corporate separation or division, or merger or consolidation; or, in the alternative the Board may provide that the Warrant will terminate as of a date fixed by the Board; provided, however, that not less than 30 days' written notice of the date so fixed must be given to the Warrantholder, who will have the right, during the period of 30 days preceding such termination, to exercise the Warrant as to all or any part of the shares of Common Stock covered by the Warrant. 3.4 The preceding paragraph will not apply to a merger or consolidation in which the Company is the surviving corporation and shares of Common Stock are not converted into or exchanged for stock, securities of any other corporation, cash or any other thing of value. Notwithstanding the preceding sentence, in case of any consolidation or merger of another corporation into the Company in which the Company is the surviving corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (excluding a change in par value, or from no par value to par value, or any change as a result of a subdivision or combination, but including any change in such shares into two or more classes or series of shares), the Board may provide that the holder of this Warrant will have the right to exercise the Warrant solely for the kind and amount of shares of stock and other securities (including those of any new direct or indirect Parent of the Company), property, cash or any combination thereof receivable upon such reclassification, change, consolidation or merger by the holder of the number of shares of Common Stock for which such Warrant might have been exercised. 3.5 In the event of a change in the Common Stock of the Company as presently constituted into the same number of shares with a par value, the share resulting from any such change will be deemed to be the Common Stock of the Company within the meaning of this agreement. 3.6 To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments will be made by the Board in an equitable and reasonable manner, and that determination will be final, binding and conclusive. 3.7 Except as expressly provided in this Warrant, the Warrantholder will have no rights by reason of any subdivision or consolidation of shares of stock of any class, or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class, or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation; and any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, will not affect, and no adjustment will be made with respect to, the number or price of shares of Common Stock subject to this Warrant. The grant of this Warrant will not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structures, or to merge or consolidate, or to dissolve, liquidate, or sell or transfer all or any part of its business or assets. Section 4. Mutilated or Missing Warrant Certificates. If this Warrant ----------------------------------------- Certificate is mutilated, lost, stolen or destroyed, the Company shall, at the request of the holder of such Certificate, issue and deliver, in exchange and substitution for and upon cancellation of the mutilated Certificate, or in lieu of and substitution for the Certificate, lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest; but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of the Warrant Certificate and indemnity by the Warrantholder, if requested by the Company, in a form that is satisfactory to the Company. An applicant for a substitute Warrant Certificate shall also comply with other reasonable regulations and pay other reasonable charges as the Company may prescribe. Section 5. Reservation of Shares of Common Stock. There has been reserved, and ------------------------------------- the Company shall at all times keep reserved so long as any of the Warrants remain outstanding, out of its authorized Common Stock, a number of shares of Common Stock sufficient to provide for the exercise of the rights of purchase represented by the outstanding Warrant and the underlying securities. Section 6. No Fractional Shares. The Company shall not be required to issue -------------------- fractional shares or scrip representing fractional shares upon the exercise of the Warrant. Section 7. Limitations on Resale of Securities. The Securities underlying this ----------------------------------- Warrant will be "restricted securities" and may in the future be sold only in compliance with limited exemptions from registration under the Act, the availability of which must be established to the satisfaction of the Company. The following legend will be placed on the certificates evidencing the Securities: The shares represented by this Certificate have not been registered under the Securities Act of 1933 (the "Act") and are "restricted securities" as that term is defined in Rule 144 under the Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company. Section 8. Transfer and Exercise to Comply With the Securities Act of 1933. --------------------------------------------------------------- The Warrants may not be exercised except in a transaction exempt from registration under the Act. Section 9. Notices. Any notice pursuant to this Agreement by the Company or by ------- the Warrantholders must be in writing and will be deemed to have been duly given if delivered or mailed certified mail, return receipt requested to the Company or the Warrantholder at the addresses set forth above. Each party may from time to time change the address to which notices to it are to be delivered or mailed under this Warrant by notice in accordance herewith to the other party. Section 10. Successors. All the covenants and provisions of this Agreement by ---------- or for the benefit of the Company or the Warrantholder will bind and inure to the benefit of any successors and assigns, as permitted under Section 1.2 above. Section 11. Applicable Law. This Warrant Agreement and Certificate and any -------------- replacement Certificate issued is and will be governed by the laws of the State of California. KEYSTONE AUTOMOTIVE INDUSTRIES, INC. By: /s/ Charles J. Hogarty ---------------------------------- Charles J. Hogarty, President PURCHASE FORM Dated _____________, _______ The undersigned irrevocably elects to exercise the Warrant represented by this Warrant Certificate to the extent of purchasing 100,000 Shares of Keystone Automotive Industries, Inc. and makes payment of $6.50 per share in payment of the exercise price. __________________________________ INSTRUCTIONS FOR REGISTRATION OF STOCK Name ______________________________________________________________________________ (please type or print in block letters) Address ______________________________________________________________________________ ____________________________________________ Signature Dated: ________________________ EX-10.4 3 0003.txt EMPLOYMENT AGREEMENT DATED DECEMBER 1, 1999 Exhibit 10.4 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and effective as of December 1, 1999, by and between KEYSTONE AUTOMOTIVE INDUSTRIES, INC., a California corporation (the "Company") and John M. Palumbo (the "Employee"), with respect to the following facts: A. The Company desires to be assured of the continued association and services of the Employee in order to take advantage of his experience, knowledge and abilities in the Company's business, and is willing to employ the Employee, and the Employee desires to be so employed, on the terms and conditions set forth in this Agreement. B. The Employee from time to time in the course of his employment may learn trade secrets and other confidential information concerning the Company, and the Company desires to safeguard such trade secrets and confidential information against unauthorized use and disclosure. ACCORDINGLY, on the basis of the representations, warranties and covenants contained herein, the parties hereto agree as follows: 1. EMPLOYMENT ---------- 1.1 Employment. The Company hereby employs the Employee as ---------- aVice President and the Chief Financial Officer and the Employee hereby accepts such employment, on the terms and conditions set forth below, to perform during the terms of this Agreement such services as are required hereunder. 1.2 Duties. The Employee shall render such services to the ------ Company, and shall perform such duties and acts, as reasonably may be required by the Board of Directors and/or the Chief Executive Officer of the Company in connection with any aspect of the Company's business. 1.3 Service to Others. The Employee shall devote his entire ----------------- productive time, ability and attention to, and shall diligently and conscientiously use his best efforts to further, the Company's business, and shall not, without the prior written consent of the Company's Board of Directors in each instance, perform services of any kind, whether or not for compensation, for any person other than the Company, which services, in the sole opinion of the Company's Board of Directors, might materially interfere with the performance of his duties hereunder. 1 2. COMPENSATION ------------ 2.1 Compensation. As the total consideration for the services ------------ which the Employee renders hereunder, the Employee shall be entitled to the following: (a) an annual salary of $175,000 subject to such periodic increases, if any, as the Company's Board of Directors may deem to be appropriate in its sole discretion, less income tax and other applicable withholdings, payable in weekly, bi-monthly or monthly installments as may be agreed between the Employee and the Company; (b) an annual bonus in such amount and upon the realization of such performance criteria as may be established from time to time by the Company's Board of Directors, less income tax and other applicable withholdings; (c) participation in all benefit plans or programs sponsored by the Company for executive officers in general, including, without limitation, participation in any group health plan, medical reimbursement plan, dental plan, disability insurance plan, life insurance plan and pension and profit sharing plan; (d) reimbursement of any and all reasonable and documented expenses incurred by the Employee from time to time in the performance of his duties hereunder; (e) two weeks paid vacation per year, at such time or times as the Company's Board of Directors may authorize, and all paid holidays observed by the Company; provided, however, that such vacation shall be taken -------- annually and shall not cumulate from year to year; and (f) the use of an automobile substantially similar to that currently provided by the Company to the Employee, together with reimbursement of all expenses for insurance, fuel and maintenance. 2.2 Illness. Subject to the limitations contained in Section ------- 3.2(c) and 3.3(i) of the Agreement, if the Employee shall be unable to render the services required hereunder on account of personal injuries or physical or mental illness, he shall continue to receive all payments provided in this Agreement; provided, however, that any such payments may, at the sole option of --------- the Company, be reduced by any amount that the Employee receives for the period covered by such payments as disability compensation under insurance policies, if any, maintained by the Company or under government programs. 2 3. TERM OF EMPLOYMENT AND TERMINATION ---------------------------------- 3.1 Term. Unless sooner terminated pursuant to Section 3.2 of ---- this Agreement, the term of employment under this Agreement shall be for a period commencing on December 1, 1999 and ending on the third anniversary date thereof; provided, however, that such term of employment automatically shall be -------- renewed for successive two (2) year terms unless written notice of termination is given by either the Company or the Employee not less than ninety (90) days prior to the end of the initial term or any subsequent two (2) year term. 3.2 Termination. Employment under this Agreement shall ----------- terminate prior to the expiration of its term upon the happening of any of the following events: (a) the mutual agreement of the Company and the Employee; (b) the death of the Employee; (c) at the Company's option if, in the reasonable judgment of the Company's Board of Directors, the Employee has become so physically or mentally disabled as to be incapable of substantially performing his duties hereunder for a period of six (6) consecutive months or an aggregate of 180 days in any twelve (12) month period; (d) at the Company's option, in the event of (i) a material breach of this Agreement by reason of the Employee's continued and willful failure or refusal to substantially perform his duties in accordance with this Agreement or (ii) the conviction of the Employee of a felony or of a misdemeanor involving financial impropriety or (iii) a material breach of the Employee's fiduciary duty to the Company; provided, however, that no termination shall -------- occur under clause (i) unless the Employee first shall have received written notice specifying the acts or omissions alleged to constitute such breach and, if such breach can be corrected, it continues after the Employee shall have had reasonable opportunity to correct it; (e) at the Employee's option, in the event of (i) a material breach of this Agreement by the Company or (ii) the assignment to the Employee of duties inconsistent with his status as a Vice President and the Chief Financial Officer of the Company or (iii) a substantial alteration in the Employee's reporting responsibility, title or office or (iv) a move of the Company's principal executive offices outside the County of Los Angeles; provided, however, that no termination shall occur under clause (i) unless the - -------- Company first shall have received written notice specifying the acts or omissions alleged to constitute such breach and, if such breach can be corrected, it continues after the Company shall have had a reasonable opportunity to correct it; or (f) at the Company's option by resolution of the Board of Directors for any reason whatsoever without cause. 3 3.3 Duties Upon Termination. In the event that employment under ----------------------- this Agreement is terminated, whether at the expiration of the initial term or any subsequent two (2) year term or prior thereto pursuant to Section 3.2 of this Agreement, neither the Company nor the Employee shall have any remaining duties or obligations hereunder, except that (i) the Company shall pay to the Employee, or his estate, such compensation as is due pursuant to Section 2.1, prorated through the date of termination, (ii) the Employee shall continue to be bound by Section 4 of this Agreement and (iii) in the event that such termination shall occur pursuant to Section 3.2(a), (b), (c), (e) or (f) of this Agreement or in the event that the Company terminates this Agreement under Section 3.1 hereof effective at the end of the initial term or any renewal term, except for any such termination for any reason described in Section 3.2(d) hereof, the Company shall pay to the Employee, or his estate, such compensation as would otherwise be due pursuant to Sections 2.1(a) and (c) during such initial term or renewal term. 4. TRADE SECRETS -------------- 4.1 Trade Secrets. The Employee shall not, without the prior ------------- written consent of the Company's Board of Directors in each instance, disclose or use in any way, during the term of his employment by the Company and for one (1) year thereafter, except as required in the course of such employment, any confidential business or technical information or trade secret of the Company acquired in the course of such employment, whether or not patentable, copyrightable or otherwise protected by law, and whether or not conceived of or prepared by him (collectively, the "Trade Secrets") including, without limitation, any information concerning designs, patterns, customer lists, products, procedures, operations, information concerning designs, patterns, customer lists, products, procedures, operations, investments, financing, costs, employees, purchasing, accounting, marketing, merchandising, sales, salaries, pricing, profits and plans for future development, the identity, requirements, preferences, practices and methods of doing business of specific parties with whom the Company transacts business, and all other information which is related to any product, service or business of the Company, other than information which is generally known in the industry in which the Company transacts business or is acquired from public sources; all of which Trade Secrets are the exclusive and valuable property of the Company. 4.2 Tangible Items. All files, accounts, records, documents, -------------- books, forms, notes, reports, memoranda, studies, compilations of information, correspondence and all copies, abstracts and summaries of the foregoing, and all other physical items related to the Company, other than a merely personal item, whether of a public nature or not, and whether prepared by the Employee or not, are and shall remain the exclusive property of the Company and shall not be removed from the premises of the Company, except as required in the course of employment by the Company, without the prior written consent of the Company's Board of Directors in each instance, and the same shall be promptly returned to the Company by the Employee on the expiration or termination of his employment by the Company or at any time prior thereto upon the request of the Company. 4 4.3 Solicitation of Employees. During the term of his ------------------------- employment by the Company and for one (1) year thereafter (such period not to include any period of violation hereof by the Employee or period which is required for litigation to enforce this paragraph and during which the Employee is in violation hereof), the Employee shall not, directly or indirectly, either for his own benefit or purposes or the benefit or purposes of any other person, employ or offer to employ, call on, solicit, interfere with or attempt to divert or entice away any employee of the Company in any capacity if that person possesses or has knowledge of any Trade Secrets of the Company. 4.4 Injunctive Relief. The Employee hereby acknowledges and ----------------- agrees that it would be difficult to fully compensate the Company for damages resulting from the breach or threatened breach of this Section 4 and, accordingly, that the Company shall be entitled to seek temporary and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, to enforce such provisions without the necessity of proving actual damages and without the necessity of posting any bond or other undertaking in connection therewith. This provision with respect to injunctive relief shall not, however, diminish the Company's right to claim and recover damages. 4.5 "Company". For the purposes of this Section 4 of this --------- Agreement only, the term "Company" shall mean collectively Keystone Automotive Industries, Inc., a California corporation, and its successors, assigns and nominees, and all individuals, corporations and other entities that directly, or indirectly through one or more intermediaries, control or are controlled by or are under common control with any of the foregoing. 5. MISCELLANEOUS ------------- 5.1 Severable Provisions. The provisions of this Agreement are -------------------- severable, and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provisions to the extent enforceable, shall nevertheless be binding and enforceable. 5.2 Successors and Assigns. All of the terms, provisions and ---------------------- obligations of this Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, representatives, successors and assigns. Notwithstanding the foregoing, neither this Agreement nor any rights hereunder shall be assigned, pledged, hypothecated or otherwise transferred by the Employee without the prior written consent of the Company in each instance. 5.3 Governing Law. The validity, construction and ------------- interpretation of this Agreement shall be governed in all respects by the laws of the State of California applicable to contracts made and to be performed within that State. 5 5.4 Arbitration. At the demand of either party any dispute ----------- arising out of this Agreement shall be resolved through binding arbitration. Unless the parties agree on a different arbitration procedure, arbitration shall take place under the Expedited Labor Arbitration Rules of the American Arbitration Association of Los Angeles County, California. The decision of the Arbitrator shall be final and binding on both parties. 5.5 Headings. Section and subsection headings are not to be -------- considered part of this Agreement and are included solely for convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any provisions hereof. 5.6 Entire Agreement. This Agreement constitutes the entire ---------------- agreement between the parties hereto pertaining to the subject matter hereof, and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, relating to the subject matter of this Agreement. No supplement, modification, waiver or termination of this Agreement shall be valid unless executed by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expresssly provided. 5.7 Notice. Any notice or other communication required or ------ permitted hereunder shall be in writing and shall be deemed to have been given (i) if personally delivered, when so delivered, (ii) if mailed, one (1) week after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the party to whom it is directed at the address set forth below or (iii) if given by telex or telecopier, when such notice or other communication is transmitted to the telex or telecopier number specified below and the appropriate answerback or telephonic confirmation is received. Either party may change the address to which such notices are to be addressed by giving the other party notice in the manner herein set forth. 5.8 Attorneys' Fees. In the event any party takes legal action --------------- to enforce any of the terms of this Agreement, the unsuccessful party to such action shall pay the successful party's expenses, including attorneys' fees, incurred in such action. 5.9 Third Parties. Nothing in this Agreement, expressed or ------------- implied, is intended to confer upon any person other than the Company or the Employee any rights or remedies under or by reason of this Agreement. 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date and year first set forth above. KEYSTONE AUTOMOTIVE INDUSTRIES, INC. By /s/Charles J. Hogarty ------------------------------------ Charles J. Hogarty, President 700 East Bonita Avenue Pomona, California 91767 Facsimile: (909) 624-9136 /s/John M. Palumbo ------------------------------------ JOHN M. PALUMBO 14049 Mar Vista Whittier, California 90602 7 EX-10.26 4 0004.txt KEY EMPLOYEE SALARY CONTINUATION AGREEMENT Exhibit 10.26 KEY EMPLOYEE SALARY CONTINUATION AGREEMENT AGREEMENT, dated as of the 11/th/ day of April, 2000 between KEYSTONE AUTOMOTIVE INDUSTRIES, INC., a California corporation (the "Company"), and James C. Lockwood (the "Executive"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event an effort is made to obtain control of the Company through a tender offer or otherwise; WHEREAS, in this connection, the Company recognized that the possibility for a change in control and the uncertainty and questions which it may raise among management may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Executive is a key employee of the Company; WHEREAS, the Company believes the Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should the Company receive any proposals from a third person concerning a possible business combination with, or acquisition of equity securities of, the Company, the Company believes it imperative that the Company and the Board of Directors (the "Board") be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice, if so requested, as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such a proposal; and WHEREAS, should the Company receive any such proposals, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of such proposals, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to assure the Company that it will have the continued undivided attention and services of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive agree as follows: 1. Services During Certain Events. ------------------------------- In the event a third person begins a tender or exchange offer, circulates a proxy to stockholders, or takes other steps seeking to effect a Change in Control (as hereafter defined), the Executive agrees that he will not voluntarily leave the employ of the Company, and will render the services contemplated in the recitals to this Agreement, until the third person has abandoned or terminated his or its efforts to effect a Change in Control or until after such a Change in Control has been effected. In the event that the Executive breaks his obligations under this paragraph, he shall forfeit his rights to the benefits conferred hereby (which forfeiture shall constitute the sole remedy of the Company for such breach). The Company shall promptly notify the Executive if and when it receives knowledge that steps are being taken to effect a Change in Control. 2. Change in Control. ------------------ For the purposes of this Agreement, "Change in Control" shall have the following meaning: (i) a merger of equivalent combination involving the Company after which forty-nine percent (49%) or more of the voting stock of the surviving corporation is held by persons other than former shareholders of the Company; (ii) the acquisition of thirty percent (30%) or more of the outstanding shares of Common Stock by any person (as defined by Section 3(a)(9) of the 1934 Act) other than directly from the Company; (iii) the occurrence of circumstance having the effect that thirty percent (30%) or more of the directors elected by shareholders to the Board are persons who were not nominated by management in the then most recent proxy statement of the Company; or (iv) a change in the Chief Executive Officer of the Company. 3. Circumstances Triggering Receipt of Benefits. --------------------------------------------- The Company shall provide the Executive with the benefits set forth in Section 5 immediately upon any "Involuntary Termination" of the Executive's employment by the Company within one year following a Change in Control. "Involuntary Termination" shall mean the termination of the Executive's employment with the Company during such period (a) by the Company unless the termination is: (i) by reason of the Executive's death or (ii) by reason of the Executive's inability by reason of illness or other physical and mental disability to perform his duties for any consecutive 180 day period; (b) by such Executive after any reduction in his base salary, any material reduction in his fringe benefits, a requirement to be physically present at the Company's executive offices more than two days per week, his relocation to a location outside a 60 mile radius of his current residence without his consent, or a material decrease in his responsibilities or authority or any other material adverse change in the condition of his employment. 4. Notice of Termination. ---------------------- Any termination of the Executive's employment with the Company by the Company or by the Executive, in each case as contemplated by Section 3, shall be communicated by written "Notice of Termination" to the other party hereto. 5. Benefits. --------- Subject to the conditions set forth in Section 3, the following benefits (subject to any applicable payroll or other taxes required to be withheld) shall be paid to the Executive: (a) the Company shall continue paying such Executive's then current annual base salary for a period of one year following such termination, such amount to be in addition to any other coverage, fringe benefits, payments and distributions to which such Executive is entitled; and (b) all Stock Options granted to such Executive which the Executive shall not then have been entitled to exercise shall be accelerated immediately prior to or concurrently with the occurrence with the change in control and the optionee shall have the right to exercise all such options. 6. Continuing Obligations. ----------------------- In order to induce the Company to enter into this Agreement, the Executive hereby agrees that all documents, records, techniques, business secrets and other information which have come into his possession from time to time during his employment hereunder, shall be deemed to be confidential and proprietary to the Company and the Executive further agrees to retain in confidence any confidential information known to him concerning the Company and its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 7. Successors. ----------- (a) The Company will require any successor controlled by the Company's Board of Directors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to the benefits provided by Section 5 from the Company in the same amount and on the same terms as the Executive would be entitled hereunder upon Involuntary Termination within one year following a Change in Control as provided in Section 3, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of the Involuntary Termination. As used in the Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts are payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there be no such designee, to his estate. 8. Notices. -------- For purposes of this Agreement, notices and all other communications provided herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: James C. Lockwood 1817 Westridge Road Los Angeles, CA 90049 If to the Company: Keystone Automotive Industries, Inc. 700 E. Bonita Avenue Pomona, CA 91767 Attention: Chief Executive Officer or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9. Governing Law. -------------- The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. 10. Miscellaneous. -------------- Except as provided in Section 13, no provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or any prior subsequent time. This agreement supersedes all prior agreements with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 11. Separability. ------------- The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12. Non-assignability. ------------------ This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this agreement or any rights or obligations hereunder, except as provided in Section 7. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of security interest or otherwise, other than a transfer by his will or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this paragraph the Company shall have no liability to pay any amount so attempted to be assigned or transferred. 13. Termination; Modification. -------------------------- The Company may terminate or modify this agreement at any time by three (3) months written notice of such termination or modification given to the Executive; except that no such termination or modification shall be made, and if ------ ---- made shall have no effect, (a) within one year after the Change in Control in question, (b) following a termination of employment as contemplated by Section 3, or (c) during any period of time when the Company has knowledge that any third person has taken steps reasonably calculated to effect a Change in Control until, in the opinion of the Board, the third person has abandoned or terminated his efforts to effect a Change in Control. Any decision by the Board made in good faith as to the nature of any steps taken by such third person or as to whether the third person has abandoned or terminated his efforts to effect a Change in Control shall be conclusive and binding on the Executive. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above set forth. KEYSTONE AUTOMOTIVE INDUSTRIES, INC. By /s/ Charles J. Hogarty ------------------------------------ President & Chief Executive Officer EXECUTIVE By /s/ James C. Lockwood ----------------------------------- James C. Lockwood EX-21.1 5 0005.txt SUBSIDIARIES EXHIBIT 21.1 ------------ Registrant had the following significant subsidiaries as of June 16, 2000: Name State of Incorporation Percentage Ownership ---- ---------------------- -------------------- North Star Plating Company Minnesota 100% Inteuro Parts Distributors, Inc. Florida 100% Republic Automotive Parts, Inc. Delaware 100% Fenders & More, Inc. Tennessee (1) (1) a wholly-owned subsidiary of Republic Automotive Parts, Inc. EX-23.1 6 0006.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-24047 and Form S-8 No. 333-57799) pertaining to the Keystone Automotive Industries, Inc. 1996 Employee Stock Incentive Plan, as amended, of our report dated May 24, 2000, with respect to the consolidated financial statements and schedule of Keystone Automotive Industries, Inc. included in the Annual Report (Form 10-K) for the year ended March 31, 2000. /s/ Ernst & Young LLP Los Angeles, California June 23, 2000 EX-27.1 7 0007.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-31-2000 MAR-27-1999 MAR-31-2000 2,884 0 28,789 1,145 80,176 118,021 45,980 22,391 183,817 31,869 0 0 0 81,817 68,378 183,817 372,466 372,466 211,840 211,840 143,044 0 954 16,628 6,819 9,809 0 0 0 9,809 0.62 0.62
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