-----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, OSzvw5zC/7d7264yAGtkaWGDN3nMWeP/xZ5JfFQZD6wF0s2aPr0faJL3FtGwH1ej PhXyf3pw9nnECUMdqWr07g== 0000944209-97-000752.txt : 19970610 0000944209-97-000752.hdr.sgml : 19970610 ACCESSION NUMBER: 0000944209-97-000752 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970606 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE AUTOMOTIVE INDUSTRIES INC CENTRAL INDEX KEY: 0001012393 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLE SUPPLIES & NEW PARTS [5013] IRS NUMBER: 952920557 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-28709 FILM NUMBER: 97620480 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 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1997 FILE NO.: 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- KEYSTONE AUTOMOTIVE INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 5013 95-2920557 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
700 EAST BONITA AVENUE POMONA, CALIFORNIA 91767 (909) 624-8041 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) CHARLES J. HOGARTY PRESIDENT 700 EAST BONITA AVENUE POMONA, CALIFORNIA 91767 (909) 624-8041 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: PAUL H. IRVING, ESQ. DALE E. SHORT, ESQ. MANATT, PHELPS & PHILLIPS, LLP TROY & GOULD PROFESSIONAL CORPORATION 11355 WEST OLYMPIC BOULEVARD 1801 CENTURY PARK EAST LOS ANGELES, CALIFORNIA 90064 LOS ANGELES, CALIFORNIA 90067 (310) 312-4196 (310) 553-4441 FAX: (310) 312-4224 FAX: (312) 201-4746
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement has become effective. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE - --------------------------------------------------------------------------------- Common Stock(2)........ 4,370,000 shares $15.25 $66,642,500 $20,826
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the registration fee. (2) Includes 570,000 shares which the Underwriters have the option to purchase solely to cover over-allotments, if any. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JUNE 6, 1997 PROSPECTUS 3,800,000 SHARES [LOGO OF KEYSTONE AUTOMOTIVE INDUSTRIES, INC.] COMMON STOCK ----------- Of the 3,800,000 shares of Common Stock being offered hereby, 1,500,000 shares are being offered by Keystone Automotive Industries, Inc. ("Keystone" or the "Company") and 2,300,000 shares are being offered by certain shareholders (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "KEYS." On June 5, 1997, the last reported sale price of the Common Stock on that market was $15.25 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) TO COMPANY(2) SHAREHOLDERS - -------------------------------------------------------------------------------- Per Share................ $ $ $ $ - -------------------------------------------------------------------------------- Total(3)................. $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, estimated to be $400,000, payable by the Company. (3) The Company and certain shareholders have granted the Underwriters a 30-day option from the date of this Prospectus to purchase up to 570,000 additional shares of Common Stock (of which the first 310,0000 shares will be sold by certain shareholders and the remaining shares will be sold by the Company) on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, and subject to the Underwriters' right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock offered hereby will be made on or about , 1997. ----------- MORGAN KEEGAN & COMPANY, INC. A.G. EDWARDS & SONS, INC. CROWELL, WEEDON & CO. THE DATE OF THIS PROSPECTUS IS , 1997 PHOTO CAPTIONS OF: [KEYSTONE SERVICE CENTER] [AUTOMOTIVE BODY PARTS] [REMANUFACTURED ALUMINUM WHEELS] [AUTOMOTIVE PAINT & BODY SUPPLIES] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 [MAP OF SERVICE CENTERS ON TWO-PAGE GATEFOLD] PROSPECTUS SUMMARY This Prospectus 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 "Risk Factors" and elsewhere in this Prospectus. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. Except as otherwise specifically set forth, all information, financial and otherwise, with respect to Keystone Automotive Industries, Inc. ("Keystone" or the "Company") (i) includes its wholly-owned subsidiary, North Star Plating Company ("North Star"), which was combined with the Company on March 28, 1997 in a transaction accounted for as a pooling of interests, and (ii) assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY Keystone 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 22,000 collision repair shop customers, out of an estimated 48,000 shops nationwide. Founded in Southern California in 1947, the Company operates a "hub and spoke" distribution system consisting of 11 regional hubs and 71 service centers located in 33 states in the West, Midwest, Northeast, Mid-Atlantic and South, as well as in Tijuana, Mexico. From these service centers, Keystone has approximately 360 professional and highly-trained salespersons who call on an average of over 5,000 collision repair shops per day. On March 28, 1997, a wholly-owned subsidiary of the Company merged into North Star in a transaction (the "North Star Merger") accounted for as a pooling of interests. At the time of the North Star Merger, North Star operated four regional hubs and 23 service centers located in the Midwest and Mid-Atlantic, and the Company believes that North Star was the second largest distributor of aftermarket collision replacement parts in the United States. North Star's operations are very similar to the Company's and strategically expand the Company's geographic market coverage, as only two of the North Star service centers operate in markets already served by Keystone. In addition, the North Star Merger adds depth and experience to the Company's management capabilities. For the fiscal year ended March 28, 1997, the Company generated record revenues, net income and net income per share of $194.3 million, $6.8 million and $0.72, respectively. These results represented increases of approximately 23.8%, 56.6% and 35.8%, respectively, over revenues of $157.0 million, net income of $4.3 million and net income per share of $0.53 in fiscal 1996. For fiscal 1995, 1996 and 1997, the Company generated increases in comparable service center sales of approximately 16%, 13% and 13%, respectively. Keystone's growth has been due primarily to a combination of (i) strategic acquisitions of independent distributors, both in new and existing geographic markets, (ii) expansion of existing product lines and introduction of new product lines and (iii) increased demand for aftermarket collision parts. 3 The Aftermarket Body Parts Association ("ABPA"), the principal industry trade group, estimates that the wholesale market for aftermarket collision parts in the United States and Canada has grown since its inception in the early 1980s to between $800 million and $1.2 billion in annual expenditures in 1995, or approximately 10% of the collision parts market. Substantially all of the remainder of the collision parts market consists of parts produced by original equipment manufacturers ("OEMs"), which prior to 1980 were the sole source of all collision parts. Aftermarket collision parts generally sell for between 20% and 40% less than comparable OEM parts. According to Body Shop Business' 1996 Industry Survey, the percentage of collision repair facilities using aftermarket collision replacement parts increased from approximately 54% in 1993 to 69% in 1995. The aftermarket collision parts market has grown primarily due to the increasing availability of quality parts and cost containment efforts by the insurance industry. Industry sources estimate that approximately 87% of all automobile collision repair work in the United States is paid for in part by insurance. The aftermarket collision parts distribution industry is highly fragmented and is in the process of consolidation. Typically, the Company's competitors are independently owned distributors operating from one to three locations. As a result of the increasing number of aftermarket collision parts and makes and models of automobiles and light trucks, there is increasing pressure on distributors to maintain larger inventories. In addition, the trend towards larger, 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. As a result of its competitive strengths, the Company believes that it is well-positioned to take advantage of the consolidation in its industry and to meet the increasing demands of its customers. Keystone believes that its growth in sales and earnings has been and will continue to be driven by its competitive strengths, which include the following: . Leading Market Position. As the nation's leading distributor of aftermarket collision parts, Keystone offers its customers one of the broadest available selections of aftermarket collision parts, just-in- time delivery, lower prices due to volume purchasing, worldwide product sourcing, priority access to new products and superior technical expertise. . Relationship with Insurance Companies. Since the founding of its business in 1947, Keystone has fostered its relationship with insurance companies, whose increasing efforts to contain the escalating cost of collision repairs have been a principal factor in the growth of the market for aftermarket collision parts. . Experienced Management. Keystone's executive officers have been employed by the Company for an average of 20 years, and the Company's service center managers have been employed for an average of over nine years. The experience and tenure of the Company's personnel and their long- standing relationships with collision repair shop operators have been instrumental in the growth of the Company. . Entrepreneurial Corporate Culture. The manager of each Keystone service center is responsible for its day-to-day operations and is eligible to earn a bonus of more than 100% of base salary based on the performance of the service center. . Superior Customer Service. The Company strives to provide responsive customer service and to foster close customer relations. In particular, the Company maintains large inventories of parts to meet diverse customer requirements, provides prompt delivery of customer orders, usually within 24 hours, by professional and highly-trained route salespersons and has a policy of complete customer satisfaction backed by a limited warranty of parts for as long as the repair shop's customer owns the repaired vehicle. 4 . Management Information and Other Systems. The Company has developed its own computerized order taking, inventory control and management information systems in an effort to achieve additional operating efficiencies and a higher level of customer service. The Company intends to continue its growth through an integrated strategy of selectively acquiring other independent distributors, expanding its existing product lines and introducing new product lines. Since its initial public offering in June 1996, Keystone has acquired 30 service centers by means of the North Star Merger and six other acquisitions and has opened alloy wheel remanufacturing operations at four centers. In addition, the Company has entered into agreements which, if successfully completed, will result in an expansion into the Southwest through the acquisition of six service centers located in Arizona, Colorado, New Mexico, Nevada and Texas. The Company seeks to acquire well-established independent distributors with strong management and significant market share in order to expand into new geographic markets and to increase its penetration in existing markets. Keystone also continually expands its existing product lines as additional aftermarket collision parts become available. Since April 1991, the Company has introduced such additional products as paint and related supplies and equipment, radiators and condensers, head and tail light assemblies and autoglass. In addition, in fiscal 1996 the Company began remanufacturing alloy wheels. The Company's principal executive offices are located at 700 East Bonita Avenue, Pomona, California 91767, and its telephone number is (909) 624-8041. THE OFFERING Common Stock offered by the Company............... 1,500,000 shares Common Stock offered by the Selling Shareholders.. 2,300,000 shares(1) Common Stock to be outstanding after the Offering. 11,250,000 shares(2) Use of proceeds................................... The net proceeds will be used primarily to pay down the Company's bank line of credit. The balance of the proceeds and future borrowings under the line of credit will be used for working capital and general corporate purposes and acquisitions. The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. See "Use of Proceeds." Nasdaq National Market symbol..................... KEYS
- -------- (1) See "Principal and Selling Shareholders." (2) Excludes shares reserved for issuance under the Company's 1996 Employee Stock Incentive Plan (the "Stock Incentive Plan"), of which 587,000 shares were subject to outstanding options as of May 31, 1997, at a weighted average exercise price of $12.86 per share. See "Management--Stock Incentive Plan." 5 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (In thousands, except share and per share amounts and operating data)
FISCAL YEAR ENDED ------------------------------------------------------- MARCH 26, MARCH 25, MARCH 31, MARCH 29, MARCH 28, 1993 1994 1995(1) 1996 1997 ----------- ----------- --------- --------- --------- (UNAUDITED) (UNAUDITED) Consolidated Statement of Income Data Net sales............... $ 99,165 $ 110,918 $ 132,655 $ 157,021 $ 194,321 Gross profit............ 39,766 45,205 53,336 61,890 79,269 Operating income........ 2,424 3,592 5,178 8,662 12,521 Net income.............. 821 1,526 2,435 4,336 6,789 ========= ========= ========= ========= ========= Net income per common share.................. $ 0.10 $ 0.18 $ 0.29 $ 0.53 $ 0.72 ========= ========= ========= ========= ========= Weighted average common shares outstanding(2).. 8,313,000 8,313,000 8,255,000 8,250,000 9,408,000 ========= ========= ========= ========= ========= Operating Data (Unaudited) Number of service centers(3) Starting sites......... 38 49 49 53 64 Sites acquired........ 14 2 6 10 10 Sites opened.......... 2 -- -- 3 -- Sites consolidated.... 3 2 1 2 3 Sites closed.......... 2 -- 1 -- 1 Ending sites........... 49 49 53 64 70 Comparable service center sales increase(4) Keystone...................................... 19% 10% 13% North Star.................................... 7% 22% 13% Combined.................................... 16% 13% 13%
MARCH 28, 1997 ------------------- AS ACTUAL ADJUSTED(5) ------- ----------- Consolidated Balance Sheet Data Working capital............................................. $26,847 $48,007 Total assets................................................ 78,800 87,331 Total current liabilities................................... 35,438 22,809 Long-term debt.............................................. 1,105 1,105 Shareholders' equity........................................ 41,854 63,014
- -------- (1) Fiscal 1995 contained 53 weeks. (2) Includes Common Stock equivalents attributable to stock options outstanding, which are not material. (3) Information with respect to service centers includes combined operating data of both Keystone and North Star. As a result of the North Star Merger, the Company acquired 23 service centers. Since March 28, 1997, the Company has acquired one additional service center. (4) Comparable service center sales have been computed using sales of service centers that were open throughout both fiscal years being compared. (5) Adjusted to reflect the sale of the shares of Common Stock offered by the Company hereunder and the application of the net proceeds at an assumed public offering price of $15.25 per share. See "Use of Proceeds." 6 RISK FACTORS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact included in this Prospectus, including, without limitation, the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding the Company's strategies, plans, objectives and expectations; the Company's ability to acquire other distributors and integrate those distributors into the Company's operations; pricing or other competitive pressures; the continued acceptance of the Company's aftermarket collision repair parts; the Company's ability to expand its existing product lines and introduce new product lines; the anticipated growth of its markets; the effect of government regulations; its future operating results; and other matters are forward-looking statements. Although the Company believes that the expectations reflected in such forward- looking statements are reasonable at this time, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are set forth in these "Risk Factors," as well as elsewhere in this Prospectus. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Prospective investors should consider carefully the following factors, together with the other information contained in this Prospectus, in evaluating an investment in the Common Stock offered hereby. ACQUISITION STRATEGY A principal component of the Company's growth strategy is to acquire other independent distributors operating in new geographic markets, as well as to increase its penetration in existing markets. Since April 1992, the Company has completed 18 acquisitions of a total of 42 service centers (including four acquisitions of 11 service centers by North Star prior to the North Star Merger), in the Northeast, Midwest, Mid-Atlantic, South and Mexico, of which 11 have been consolidated with existing locations and four have been closed. During this same period, North Star opened five additional service centers. The Company's ability to maintain or exceed its historical growth rate will depend in large part on its ability to successfully execute its acquisition strategy. The successful execution of this strategy will depend on the Company's ability to identify and to compete for appropriate acquisition candidates, to consummate such acquisitions on favorable terms (including obtaining acquisition financing, if necessary), to maintain and expand the sales and profitability of the acquired centers, and to anticipate the changes that continued growth would impose on its financial reporting and control systems, data processing systems and management. There can be no assurance that the Company will be successful in executing its strategy. Although the Company regularly evaluates new geographic markets and potential acquisition candidates, and believes that numerous acquisition opportunities exist due to the preponderance of small local and regional competitors, as of the date of this Prospectus, other than as described herein, the Company has no existing commitments or agreements with respect to any acquisition, and no assurance can be given that significant additional acquisitions can be consummated on terms favorable to the Company. See "Business -- Growth Strategy -- Acquisitions." ACQUISITION RISKS Although the Company investigates the operations and assets that it acquires, there may be liabilities that the Company fails 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 and, in some cases, deferring payments of a portion of the purchase price. However, these indemnities, warranties and holdbacks, if obtained, 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. In addition, the Company's acquisitions accounted for under the purchase method of accounting generally involve the recording of goodwill and deferred charges on its balance sheet, which are amortized over varying periods of 7 time of up to 15 years. This amortization has the effect of reducing the Company's reported earnings. At March 28, 1997, the Company had recorded $1.3 million in goodwill, net of accumulated amortization. The Company had also recorded $2.4 million in deferred charges net of accumulated amortization, primarily related to noncompetition agreements, which are amortized over the terms of those agreements. The efficient and effective integration of acquired companies' operations is necessary for the Company's acquisition strategy to be successful. This generally requires, among other things, an integration of purchasing, distribution, marketing and sales efforts, pricing, employee benefits policies, liquidity and capital expenditure requirements, management teams and management information and other systems. The challenges of integration may be increased by the need to coordinate geographically separated organizations. In addition, the integration generally requires a commitment of management resources which may temporarily divert attention from day-to-day operations of the Company. The North Star Merger was only recently consummated. Although the Company expects that the North Star Merger will result in benefits to the combined companies, there can be no assurance that the integration issues described above with respect to the combination of the two companies can be dealt with in an efficient and effective manner. The inability of management to successfully integrate the two companies could have a material adverse effect on the business and the future results of operations of the Company. COMPETITION Based upon industry estimates, the Company believes that 85% of collision parts for automobiles and light trucks are supplied by OEMs, compared with approximately 10% by independent distributors of aftermarket collision parts and an additional 5% by distributors of salvaged parts. 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 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 parts distribution industry is highly fragmented. Typically, the Company's 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 OEMs, automobile dealerships, distributors of salvage parts, buying groups and other large distributors. See "Business -- Competition." DEPENDENCE ON KEY AND FOREIGN SUPPLIERS The Company is dependent on a small number of suppliers. For the fiscal year ended March 28, 1997, the ten largest suppliers accounted for approximately 43% of the products purchased by the Company. 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 1997, approximately 75% of the products distributed by the Company were manufactured in the United States or Canada and approximately 25% 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 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. See "Business -- Suppliers." 8 CONTINUED ACCEPTANCE OF AFTERMARKET COLLISION 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 such parts by the insurance industry. The Company's business is also dependent upon the continued acceptance of such parts by collision repair shops, consumers and governmental agencies. See "Business -- Industry Overview" and "Business -- Prior Ford Litigation." CONSOLIDATION IN THE COLLISION REPAIR INDUSTRY The collision repair shop industry is in the process of consolidation. The trend towards larger, more efficient repair shops will increase the competition among distributors for the remaining accounts and the pressure on distributors to provide price concessions, just-in-time delivery, larger inventories, training and other value-added services, which may have a material adverse effect on the Company's sales and profitability. See "Business -- Industry Overview." DECLINE IN THE NUMBER OF COLLISION REPAIRS The number of collision repairs has declined significantly in recent years, and may continue to do so, due to, among other things, automotive safety improvements, more rigorous enforcement of stricter drunk driving laws resulting in fewer accidents and the increase in unit body construction and higher collision repair costs resulting in a larger number of automobiles being declared a total loss in lieu of being repaired. The continuation of such decline may have a material adverse effect on the Company. See "Business -- Industry Overview -- Consolidation." 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 to the seasonal nature of the Company's business. The number of collision repair jobs is directly impacted by the weather. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Variability of Quarterly Results and Seasonality." RELIANCE ON KEY PERSONNEL The operations of the Company depend to a great extent on the efforts of its executive officers, including Charles J. Hogarty, Al A. Ronco, Kim D. Wood (who joined the Company in March 1997 in connection with the North Star Merger) and John M. Palumbo. The loss of the services of any such person, or the failure of the Company to attract and retain other qualified personnel, could have a material adverse effect on its operations. Although the Company has employment agreements with Messrs. Hogarty, Ronco and Wood, such agreements may be ineffective in enabling the Company to retain the services of such officers or restricting them from competing with the Company in the event of a termination of employment. In addition, although the Company has generally been successful in retaining the services of its senior management to date, there can be no assurance that it will be able to do so in the future. See "Business -- Competitive Strengths" and "Management." In addition, see "Certain Transactions" with respect to the resignation in May 1997 of Virgil K. Benton II, the former Chairman of the Board and Chief Executive Officer of the Company. 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 9 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's bumper plating operations in connection with the North Star Merger. In addition, the Company currently conducts limited bumper plating operations at one site and previously conducted similar operations at 11 additional sites which were closed between 1983 and 1993. See "Business -- Products-- Bumpers." 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 chrome plating operation complies 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 for the remainder of this fiscal year. 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. See "Business -- Government Regulation and Environmental Hazards." ANTI-TAKEOVER PROVISIONS The ownership positions of the existing officers and directors of Keystone, together with the anti-takeover effect of certain provisions in the California General Corporation Law and in Keystone's Articles of Incorporation and Bylaws, may delay, defer or prevent a change in control of Keystone, may discourage bids for Keystone's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of the Common Stock. See "Description of Capital Stock." VOLATILITY OF STOCK PRICE The trading price of the Company's Common Stock has been, and is likely to continue to be, subject to significant fluctuations in response to quarterly 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 10 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's Common Stock may be materially and adversely affected. See "Price Range of Common Stock." SHARES ELIGIBLE FOR FUTURE SALE At May 31, 1997, there were 9,750,000 shares of Common Stock outstanding. Of these shares, the 3,105,000 shares sold in the Company's initial public offering and the 2,450,000 shares issued in the North Star Merger are freely tradeable without restriction or further registration under the Securities Act, except for any such shares held by an "affiliate" of the Company. The remaining 4,195,000 shares are "restricted securities" as that term is defined in Rule 144 under the Securities Act, and, accordingly, may not be sold without registration under the Securities Act or pursuant to an applicable exemption therefrom. Of these shares, 1,700,000 shares are being included in this Offering by certain of the Selling Shareholders. See "Principal and Selling Shareholders." The market price of the Company's Common Stock could be adversely affected by the availability for sale of such shares or of shares which may be issued under the Company's Stock Incentive Plan. The Company and certain of its officers, directors and shareholders have agreed, in connection with this Offering, not to offer, sell, contract to sell, transfer or otherwise dispose of, directly or indirectly, shares of Common Stock held by them in the public market, without the prior written consent of the representatives of the Underwriters. This lock-up period will expire 180 days from the date of this Prospectus, at which time such shares will become eligible for sale in the public market under Rule 144. Upon expiration of the lock-up period, the market price for the Company's Common Stock could be materially and adversely affected by the sale or availability for sale of such shares. See "Management -- Stock Incentive Plan" and "Description of Capital Stock -- Shares Eligible for Future Sale." 11 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 1,500,000 shares of Common Stock offered by it in this Offering, after deducting underwriting discounts and commissions and offering expenses, are estimated to be $21.2 million, assuming a public offering price of $15.25 per share. The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. The net proceeds of the Offering will be used primarily to pay down the Company's indebtedness under its $25.0 million unsecured revolving line of credit, which indebtedness was incurred for general corporate purposes and acquisitions. At May 31, 1997, the outstanding balance under the Company's primary revolving bank line of credit was $19.3 million, which bears interest at LIBOR plus 0.75% (6.46% at May 31, 1997). The line of credit expires in March 1998. The amounts repaid under the line of credit will be reborrowed from time to time and may be used, together with the remaining net proceeds of this Offering, for working capital and general corporate purposes and acquisitions. See "Business -- Growth Strategy." For further information with respect to the Company's line of credit, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 5 of Notes to Consolidated Financial Statements. DIVIDEND POLICY 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. PRICE RANGE OF COMMON STOCK The Company's Common Stock began trading publicly on the Nasdaq National 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 National Market. These prices do not include retail mark-ups, markdowns or commissions.
HIGH LOW ------- ------- Fiscal 1997 First Quarter (beginning June 20, 1996)....................... $ 10.50 $ 9.25 Second Quarter................................................ 13.75 10.13 Third Quarter................................................. 17.25 12.00 Fourth Quarter................................................ 18.13 15.50 Fiscal 1998 First Quarter (through June 5, 1997).......................... $ 16.75 $ 15.25
On June 5, 1997, the last reported sale price for the Common Stock of the Company as reported on the Nasdaq National Market was $15.25 per share. As of June 5, 1997, there were approximately 1,089 shareholders of record of the Common Stock. 12 CAPITALIZATION The following table sets forth the short-term debt and the capitalization of the Company at March 28, 1997 and as adjusted as of that date to give effect to the sale of the 1,500,000 shares of Common Stock offered by the Company at an assumed public offering price of $15.25 per share and the anticipated use of the estimated net proceeds therefrom. See "Use of Proceeds." The information set forth below should be read in conjunction with the Company's consolidated financial statements and notes thereto.
MARCH 28, 1997 ---------------- AS ACTUAL ADJUSTED ------- -------- (IN THOUSANDS) Short-term debt: Line of credit.............................................. $12,629 $ -- Bankers acceptances and short-term debt..................... 3,538 3,538 Long-term debt, due within one year......................... 741 741 ------- ------- Total short-term debt..................................... $16,908 $ 4,279 ======= ======= Long-term debt................................................ $ 1,105 $ 1,105 Shareholders' equity: Preferred Stock, no par value; 3,000,000 shares authorized; none issued and outstanding................................ -- -- Common Stock, no par value; 20,000,000 shares authorized; 9,750,000 shares issued and outstanding; 11,250,000 shares as adjusted(1)............................................. 15,921 37,081 Additional paid-in capital.................................... 553 553 Retained earnings............................................. 25,380 25,380 ------- ------- Total shareholders' equity................................ 41,854 63,014 ------- ------- Total capitalization...................................... $42,959 $64,119 ======= =======
- -------- (1) Does not include shares of Common Stock reserved for issuance under the Stock Incentive Plan, of which 587,000 shares were subject to outstanding options as of May 31, 1997, at a weighted average exercise price of $12.86 per share. See "Management -- Stock Incentive Plan." 13 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for, and as of the end of, each of the fiscal years in the two-year period ended March 28, 1997 have been derived from financial statements of the Company, which have been audited by Ernst & Young LLP, independent auditors, appearing elsewhere in this Prospectus. The selected financial data presented below for, and as of the end of the fiscal year ended March 31, 1995, have been derived from the financial statements audited by Ernst & Young LLP, of which the balance sheet is not included in this Prospectus. The selected financial data presented below for, and as of the end of, each of the fiscal years in the two-year period ended March 25, 1994 have been derived from unaudited financial statements of the Company not included herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the years ended March 26, 1993 and March 25, 1994. The operating data presented below were derived from unaudited information maintained by the Company.
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS AND OPERATING DATA) FISCAL YEAR ENDED ----------------------------------------------------- MARCH 26, MARCH 25, MARCH 31, MARCH 29, MARCH 28, 1993 1994 1995(1) 1996 1997 ----------- ----------- --------- --------- --------- (UNAUDITED) (UNAUDITED) CONSOLIDATED STATEMENT OF INCOME DATA Net sales................ $ 99,165 $ 110,918 $ 132,655 $ 157,021 $ 194,321 Cost of sales............ 59,399 65,713 79,319 95,131 115,052 --------- --------- --------- --------- --------- Gross profit............. 39,766 45,205 53,336 61,890 79,269 Selling and distribution expenses................ 30,632 33,773 38,601 43,800 53,503 General and administra- tive expenses........... 6,710 7,840 9,557 9,428 12,340 Merger costs............. -- -- -- -- 905 --------- --------- --------- --------- --------- Operating income......... 2,424 3,592 5,178 8,662 12,521 Interest expense......... 1,037 824 1,200 1,490 1,297 --------- --------- --------- --------- --------- Income before income tax- es...................... 1,387 2,768 3,978 7,172 11,224 Income taxes............. 566 1,108 1,543 2,836 4,435 Cumulative effect of accounting change for income taxes............ -- 134 -- -- -- --------- --------- --------- --------- --------- Net income............... $ 821 $ 1,526 $ 2,435 $ 4,336 $ 6,789 ========= ========= ========= ========= ========= Net income per share..... $0.10 $0.18 $0.29 $0.53 $0.72 ========= ========= ========= ========= ========= Weighted average common shares outstanding(2)... 8,313,000 8,313,000 8,255,000 8,250,000 9,408,000 OPERATING DATA (UNAU- DITED) Number of service centers (3) Starting sites......... 38 49 49 53 64 Sites acquired........ 14 2 6 10 10 Sites opened.......... 2 -- -- 3 -- Sites consolidated.... 3 2 1 2 3 Sites closed.......... 2 -- 1 -- 1 --------- --------- --------- --------- --------- Ending sites........... 49 49 53 64 70 ========= ========= ========= ========= =========
Comparable service center sales increase Keystone.......................................................... 19% 10% 13% North Star........................................................ 7% 22% 13% Combined........................................................ 16% 13% 13%
14
MARCH 26, MARCH 25, MARCH 31, MARCH 29, MARCH 28, 1993 1994 1995(1) 1996 1997 ----------- ----------- --------- --------- ------------------- AS (UNAUDITED) (UNAUDITED) ACTUAL ADJUSTED(5) ----------- ----------- ------- ----------- CONSOLIDATED BALANCE SHEET DATA Working capital......... $10,402 $11,518 $13,583 $16,954 $26,847 $48,007 Total assets............ 39,859 45,613 49,811 64,715 78,800 87,331 Total current liabilities............ 22,321 26,971 27,429 35,063 35,438 22,809 Long-term debt.......... 2,346 1,666 2,505 5,904 1,105 1,105 Shareholders' equity.... 14,370 16,278 19,107 23,443 41,854 63,014
- -------- (1) Fiscal 1995 contained 53 weeks. (2) Includes Common Stock equivalents attributable to stock options outstanding, which are not material. (3) Information with respect to service centers includes combined operating data of both Keystone and North Star. As a result of the North Star Merger, the Company acquired 23 service centers. Since March 28, 1997, the Company has acquired one additional service center. (4) Comparable service center sales have been computed using sales of service centers that were open throughout both fiscal years being compared. (5) As adjusted to reflect the sale of shares of Common Stock offered by the Company hereunder and the application of the net proceeds at an assumed public offering price of $15.25 Per share. See "Use of Proceeds." 15 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" and the financial statements and notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the matters addressed in this Prospectus constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements are subject to a variety of risks and uncertainties, such as statements of the Company's strategies, plans, objectives, expectations and intentions, that could cause the Company's actual results to differ materially from those anticipated in these forward- looking statements. The Cautionary Statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. RECENT ACQUISITIONS On March 28, 1997, the Company completed the North Star Merger which was accounted for as a pooling of interests, in which the Company issued 2,450,000 shares of its Common Stock. The pooling of interests method of accounting requires that financial information be presented on an historical combined basis for all periods presented. Therefore, unless otherwise indicated, the following discussion of results of operations and liquidity and capital resources reflects the combined companies. See "Index to Financial Statements." In August 1996, the Company acquired five service centers located in Mobile, Montgomery, Birmingham, Dothan and Huntsville, Alabama from After Market Parts & Supply, Inc. In September 1996, the Company acquired the assets of Southern Wrecker Sales, Inc. ("Augusta") located in Augusta, Georgia. Augusta will be operated as a depot of the Company's Atlanta service center. Also in September 1996, the Company acquired the assets related to the aftermarket collision replacement parts business of Glenn Automotive Paint & Body Supply, Inc. ("Glenn"). Glenn operated two locations, Atlanta, Georgia and Chattanooga, Tennessee, which have been consolidated into the Company's existing service centers in those cities. In October 1996, the Company acquired the assets related to the bumper distribution business of Stockton Plating, Inc. located in Stockton, California. These acquisitions were accounted for under the purchase method of accounting. 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 31, MARCH 29, MARCH 28, 1995 1996 1997 --------- --------- --------- Net sales...................................... 100.0% 100.0% 100.0% Cost of sales.................................. 59.8 60.6 59.2 ----- ----- ----- Gross profit................................... 40.2 39.4 40.8 Selling and distribution expenses.............. 29.1 27.9 27.5 General and administrative expenses............ 7.2 6.0 6.4 North Star Merger costs........................ -- -- 0.5 ----- ----- ----- Operating income............................... 3.9 5.5 6.4 Interest expense............................... 0.9 0.9 0.7 ----- ----- ----- Income before income taxes..................... 3.0 4.6 5.8 Income taxes................................... 1.2 1.8 2.3 ----- ----- ----- Net income..................................... 1.8% 2.8% 3.5% ===== ===== =====
16 Fiscal 1997 Compared to Fiscal 1996 Net sales were $194.3 million in fiscal 1997 compared to $157.0 million in fiscal 1996, an increase of $37.3 million, or 23.8%. This increase was due primarily to an increase of $14.2 million in sales of automotive body parts, an increase of $10.1 million in sales of paint and related materials and an increase of $9.5 million in sales of new and recycled bumpers, which represent increases of approximately 23.5%, 40.7% and 14.7%, respectively, over fiscal 1996. In addition, the Company sold $2.9 million of remanufactured alloy wheels in fiscal 1997 compared to $250,000 in the prior fiscal year, an increase of 1,060%. The increased net sales were attributable primarily to an increase in the number of service centers in operation and an increase in unit volume. Price increases were not a material factor in increased net sales. Gross profit increased to $79.3 million (40.8% of net sales) in fiscal 1997 from $61.9 million (39.4% of net sales) in fiscal 1996, an increase of 28.1%, primarily as a result of the increase in net sales. 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 $53.5 million (27.5% of net sales) in fiscal 1997 from $43.8 million (27.9% of net sales) in fiscal 1996, an increase of 22.2%. The decrease in these expenses as a percentage of net sales was generally the result of certain fixed costs being absorbed over a larger revenue base, which were partially offset by costs associated with consolidating and assimilating acquisitions. General and administrative expenses increased to $12.3 million (6.4% of net sales) in fiscal 1997 from $9.4 million (6.0% of net sales) in fiscal 1996, an increase of 30.9%. The increase in these expenses as a percentage of net sales in fiscal 1997 was primarily the result of costs incurred in assimilating acquired operations. In addition, during fiscal 1997, the Company incurred $905,000 of costs related to the North Star Merger, consisting primarily of legal, accounting and regulatory fees which were required to be expensed as incurred. All costs associated with the North Star Merger were expensed in fiscal 1997. As a result of the above factors, net income increased to $6.8 million (3.5% of net sales) in fiscal 1997 from $4.3 million (2.8% of net sales) in fiscal 1996. The increase in net income as a percentage of net sales was primarily the result of an increase in gross profit as a percentage of sales. Gross profit margin in fiscal 1997 increased primarily as a result of changes in product mix, including an increase in the sale of remanufactured alloy wheels. However, there can be no assurance that the Company can maintain its gross profit margin at the level experienced in fiscal 1997, which was above historical levels. Fiscal 1996 Compared to Fiscal 1995 Net sales were $157.0 million in fiscal 1996 compared to $132.7 million in fiscal 1995, an increase of $24.3 million, or 18.4%. This increase was due primarily to an increase of $11.0 million in sales of automotive body parts, an increase of $8.0 million in sales of new and recycled bumpers and an increase of $5.3 million in the sale of paint and related materials, which represent increases of approximately 22.3%, 14.1% and 28.2%, respectively, over fiscal 1995. Increased net sales were attributable primarily to an increase in the number of service centers in operation, including centers acquired in fiscal 1995 for which fiscal 1996 was the first full year that results of operations were included with the Company's, and an increase in unit volume. Price increases were not a material factor in increased net sales. Gross profit increased to $61.9 million in fiscal 1996 from $53.3 million in fiscal 1995, an increase of 16.0%, primarily as a result of the increase in sales. Gross profit decreased as a percentage of sales from 40.2% in fiscal 1995 to 39.4% in fiscal 1996, primarily as a result of changes in product mix. 17 Selling and distribution expenses increased to $43.8 million (27.9% of net sales) in fiscal 1996 from $38.6 million (29.1% of net sales) in fiscal 1995, an increase of 13.5%. The decrease in these expenses as a percentage of net sales is generally the result of certain fixed costs being absorbed over a larger revenue base, which were partially offset by costs associated with consolidating and assimilating acquisitions. General and administrative expenses decreased to $9.4 million (6.0% of net sales) in fiscal 1996 from $9.6 million (7.2% of net sales) in fiscal 1995, a reduction of 1.3%. These expenses decreased in amount and as a percentage of net sales in fiscal 1996 as a result of a net reduction in certain charges incurred in fiscal 1996 of $1.4 million as compared to fiscal 1995, of which $1.2 million represented compensation paid in fiscal 1995 pursuant to the Company's restricted stock option plan. As a result of the above factors, net income increased to $4.3 million (2.8% of net sales) in fiscal 1996 from $2.4 million (1.8% of net sales) in fiscal 1995. The increase in net income as a percentage of net sales was primarily the result of a decrease in operating expenses as a percentage of net sales from 36.3% in fiscal 1995 to 33.9% in fiscal 1996, which was partially offset in part by a decrease in gross profit margin from 40.2% in fiscal 1995 to 39.4% in fiscal 1996. The decrease in operating expenses in fiscal 1996 related primarily to certain charges incurred in 1995 which are not expected in future years and, consequently, the Company does not expect to realize significant decreases in operating expenses as a percentage of sales in the future. 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 between December and April. Such 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. The following unaudited table sets forth the Company's net sales, operating income and net income for the eight quarters ended March 28, 1997. The operating results for any quarter are not necessarily indicative of the results of any future period.
FISCAL 1996 FISCAL 1997 ------------------------------- ------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- ------- Net sales............... $34,667 $35,420 $38,763 $48,171 $45,561 $43,894 $49,905 $54,961 Operating income........ 1,596 1,717 2,346 3,003 3,017 2,846 3,555 3,103 Net income.............. 760 824 1,199 1,553 1,519 1,636 1,857 1,777
18 LIQUIDITY AND CAPITAL RESOURCES In June 1996, Keystone completed an initial public offering of 1,500,000 shares of its Common Stock, yielding net proceeds to the Company, after discounts, commissions and expenses, of $11.6 million. Approximately $10.9 million of the proceeds were used to pay down the Company's revolving credit facility with a commercial bank and approximately $700,000 of the proceeds were used to retire two outstanding mortgages on the Company's facilities located in Bethlehem, Pennsylvania and Louisville, Kentucky. Subsequently, $5.4 million under the Company's line of credit was used to fund acquisitions. On March 25, 1997, the Company entered into a revolving loan agreement with a commercial lender that provides for a $25.0 million unsecured credit facility that expires on March 24, 1998. Advances under the revolving line of credit bear interest at LIBOR plus 0.75% (6.46% at May 31, 1997). At May 31, 1997, the outstanding balance of the line of credit was $19.3 million. The revolving 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 28, 1997. The Company's primary need for funds has been to finance the growth of inventory and accounts receivable and acquisitions. At March 28, 1997, working capital was $26.8 million compared to $17.0 million at March 29, 1996. Historically, the Company has financed its working capital requirements from its cash flow from operations, advances drawn under lines of credit and, to a limited extent, indebtedness to certain of the sellers of acquired service centers. The Company believes that its cash flow from operations and the credit available under its line of credit will enable it to finance its anticipated growth in sales (excluding growth from acquisitions) for at least the next 12 months. The Company believes that consolidation among independent distributors of aftermarket collision parts is creating opportunities for the Company to acquire service centers in new and existing markets. The Company intends to explore acquisition opportunities that may arise from time to time. To date, the Company's acquisitions have been financed by cash flow from operations, advances drawn under its credit facilities and indebtedness to certain of the sellers of acquired service centers. The Company is offering the shares set forth in this Prospectus primarily to allow it to implement its acquisition strategy. As of the date of this Prospectus, other than as described herein, there are no existing commitments or agreements with respect to any acquisition and no assurance can be given that significant additional acquisitions can be consummated on terms favorable to the Company. See "Business -- Growth Strategy -- Acquisitions." Once the proceeds of this Offering are utilized, the Company may incur indebtedness or issue equity or debt securities to third parties or the sellers of the acquired businesses to complete additional acquisitions. There can be no assurance that additional capital, if and when required, will be available on terms acceptable to the Company, or at all. In addition, current and future issuance of equity securities, if any, will result in dilution to the shareholders of the Company, including investors in this Offering. 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 March 1995, the FASB issued Statement No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company has adopted Statement 121 in fiscal 1997 and the effect of adoption was not material. In October 1995, the FASB issued Statement No. 123, Accounting for Stock-based Compensation, which establishes financial accounting and reporting standards for stock-based compensation plans. The Company has adopted Statement No. 123 in fiscal 1997. 19 BUSINESS GENERAL Keystone 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 22,000 collision repair shop customers, out of an estimated 48,000 shops nationwide. Founded in Southern California in 1947, the Company operates a "hub and spoke" distribution system consisting of 11 regional hubs and 71 service centers located in 33 states in the West, Midwest, Northeast, Mid-Atlantic and South, as well as in Tijuana, Mexico. From these service centers, Keystone has approximately 360 professional and highly-trained salespersons who call on an average of over 5,000 collision repair shops per day. On March 28, 1997, a wholly-owned subsidiary of the Company merged into North Star in a transaction (the "North Star Merger") accounted for as a pooling of interests. At the time of the North Star Merger, North Star operated four regional hubs and 23 service centers located in the Midwest and Mid-Atlantic, and the Company believes that North Star was the second largest distributor of aftermarket collision replacement parts in the United States. North Star's operations are very similar to the Company's and strategically expand the Company's geographic market coverage, as only two of the North Star service centers operate in markets already served by Keystone. In addition, the North Star Merger adds depth and experience to the Company's management capabilities. For the fiscal year ended March 28, 1997, the Company generated record revenues, net income and net income per share of $194.3 million, $6.8 million and $0.72, respectively. These results represented increases of approximately 23.8%, 56.6% and 35.8%, respectively, over revenues of $157.0 million, net income of $4.3 million and net income per share of $0.53 in fiscal 1996. For fiscal 1995, 1996 and 1997, the Company generated increases in comparable service center sales of approximately 16%, 13% and 13%, respectively. Keystone's growth has been due primarily to a combination of (i) strategic acquisitions of independent distributors, both in new and existing geographic markets, (ii) expansion of existing product lines and introduction of new product lines and (iii) increased demand for aftermarket collision parts. INDUSTRY OVERVIEW History. The Aftermarket Body Parts Association ("ABPA") estimates that the wholesale market for aftermarket collision parts in 1995 ranged between $800 million and $1.2 billion in annual expenditures, or approximately 10% of the collision parts market. In addition, industry sources estimate that wholesale sales of paint and related supplies and equipment for collision repair, which constitute a growing part of the Company's business, accounted for approximately $2.4 billion in 1995. Substantially all of the remainder of the collision parts market consists of parts produced by 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. 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. Collision Repair Industry Insight ("Insight"), an industry trade publication, estimates that approximately 87% of all automobile collision repair work is paid for in part by insurance. Accordingly, major insurance 20 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. According to Body Shop Business' 1996 Industry Survey, the percentage of collision repair facilities using aftermarket collision replacement parts increased from approximately 54% in 1993 to 69% in 1995. Aftermarket collision parts generally sell for between 20% and 40% less than comparable OEM parts. The ABPA estimates that the competition afforded by aftermarket collision parts has resulted in price reductions of between 25% and 50% for selected OEM collision parts, and that the availability of aftermarket collision parts saved insurance companies approximately $800 million in 1994 by providing consumers with less expensive aftermarket parts and creating competition resulting in lower prices for comparable OEM parts. The Company believes that it is somewhat insulated from downturns in the general economy as a result of the fact that 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 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. According to Insight, during 1996, DRPs accounted for approximately 9% to 11% of total collision repair costs and this market share is estimated to grow to 25% by 1998. 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 adjustors 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. According to CAPA, the number of collision part applications entitled to bear the CAPA certification had increased from approximately 600 in January 1994 to approximately 1,600 by October 1996. 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. 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. 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 21 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, are contributing to a consolidation of distributors of aftermarket collision parts, providing the Company with an opportunity through acquisitions to expand its operations into new markets and to penetrate further existing markets. COMPETITIVE STRENGTHS Keystone believes that the following characteristics enable it to compete effectively. Leading Market Position. As the nation's leading distributor of aftermarket collision parts, Keystone offers its customers one of the broadest available selections of aftermarket collision parts, just-in-time delivery, lower prices as a result of volume purchasing power, worldwide product sourcing and priority access to new products and superior technical expertise, and thereby allows its customers to simplify their business by relying on fewer vendors. As a result of the Company's volume purchases, it can assemble entire containers for shipment from foreign manufacturers more efficiently than its generally smaller competitors. In addition, as a result of its leading market position, the Company periodically is requested by independent producers to introduce new aftermarket collision parts. Relationship with Insurance Companies. Since the founding of its business in 1947, the Company has fostered its relationship with insurance companies whose increasing efforts to contain escalating costs of collision repairs have been a principal factor in the growth of the market for aftermarket collision parts. The Company's inventory and prices are included in the parts databases used by most major insurance companies. In addition, the Company's national marketing staff routinely conducts seminars for regional insurance executives and claims adjusters to explain the role of aftermarket collision parts in containing the cost of claims and to encourage the implementation of the insurance companies' policies favoring such parts. Charles J. Hogarty, the Company's President and Chief Executive Officer, and Kim D. Wood, the President of North Star, were active in the efforts of ABPA and CAPA to provide insurance companies an objective method of evaluating the quality of aftermarket collision parts. As a result of its distribution system, which covers 33 states and Tijuana, Mexico, and its position as the nation's largest distributor of aftermarket collision parts, the Company believes that it is well-positioned to deal with major insurance companies on a national basis. The Company's business is highly dependent upon the continued acceptance of aftermarket collision parts by the insurance industry. Experienced Executive Management and Service Center Managers. Keystone believes that its key employees, including its service center managers, are among the most experienced in its industry. The Company's executive officers have been employed by the Company for an average of 20 years, and the Company's service center managers have been employed for an average of over nine years. The experience and tenure of the Company's service center managers and their long-standing relationships with collision repair shop operators have enabled the Company to compete successfully in local markets. Entrepreneurial Corporate Culture. Keystone fosters an entrepreneurial corporate culture in which the manager of each service center is responsible for its day-to-day operations, including the management of a staff of six to 70 employees. Each service center manager participates in an incentive compensation program through which the manager is eligible to earn a bonus which may exceed 100% of base salary. The Company believes that its entrepreneurial corporate culture has contributed to its growth in sales and profitability and has enabled the Company to attract and retain employees and to be highly responsive to customer requirements and preferences, actions by competitors and changes in local market conditions. Superior Customer Service. Keystone believes that its high level of customer service is one of the most important factors which differentiates it from its competitors. The Company periodically introduces new 22 programs to provide responsive customer service and to foster close customer relations. For example, most orders are filled by the Company within 24 hours of receipt out of inventories maintained in its regional hubs and service centers utilizing a computerized inventory control system and its own fleet of over 600 delivery trucks. In addition, the Company offers its customers one of the broadest available selections of aftermarket collision parts and it makes placing orders convenient and accurate through computerized order taking systems which regularly update the prices and the availability of parts. Moreover, the Company generally warrants its products against defects in material and workmanship for as long as the repair shop's customer owns the vehicle. To date the Company's warranty costs have been immaterial. The Company has approximately 360 professional and highly-trained route salespersons, who call on an average of over 5,000 collision repair shops per day, and are a resource for customers concerning technical and regulatory developments in an increasingly complex and competitive industry. The Company believes that its superior customer service has resulted in long-term customer relationships which present the opportunity to cross-sell additional products. Management Information Systems. The Company believes that its computerized order taking, inventory control and management information systems are among the most advanced in its industry. The Company periodically upgrades these systems to achieve additional operating efficiencies and a higher level of customer service. The ordering, shipment, storage and delivery of the Company's products are managed through two centralized information systems that allow the Company's and North Star's corporate headquarters, regional hubs and service centers to obtain timely information regarding the location and availability of products, customers, sales and other financial and operating data. The Company's electronic parts catalog and price list allows rapid updating of prices and availability of products both within the Company's distribution system and within the electronic databases maintained by various collision support services for use by claims adjusters and collision repair shops. The Company's computerized order taking system reduces the time required for a customer to place an order, reduces errors in order taking and facilitates the cross-selling of related products. North Star has developed and maintains its own computerized order taking, inventory control and management information systems, which are similar to Keystone's systems. Summary financial information is transmitted weekly from North Star's corporate headquarters to the Company's executive offices. GROWTH STRATEGY The Company's growth strategy includes the following key elements: Acquisitions and Service Center Additions. From April 1992 through the end of fiscal 1997, the Company had completed 18 acquisitions of 42 service centers in the Northeast, Midwest, Mid-Atlantic, South and Mexico, of which 11 had been consolidated with existing locations and four had been closed. Of these, North Star had completed four acquisitions of 11 service centers. During the same period, North Star opened five additional service centers. Since the North Star Merger, the Company has acquired an alloy wheel remanufacturing operation with facilities located in Minnesota and Illinois and a distributor of new and recycled bumpers located in Florida. In addition, the Company has entered into agreements which, if successfully completed, will result in an expansion into the Southwest through the acquisition of six service centers located in Arizona, Colorado, New Mexico, Nevada and Texas. The Company intends to continue to take advantage of the consolidation of its industry by acquiring service centers in new and existing markets. In the ordinary course of its business, the Company regularly evaluates new geographic markets and potential acquisitions and believes that numerous acquisition opportunities exist due to the preponderance of small local or regional competitors. In evaluating potential acquisitions, the Company seeks well-established local distributors with strong management and significant market share, which operate in markets which the Company believes will provide additional growth and acquisition opportunities. Through a combination of broader product lines, volume purchase discounts, efficient inventory management, experienced management and a national distribution system, the Company believes that it generally has been able to increase revenues and to operate acquired service centers more profitably than the prior owners. Expansion of Products. Since April 1992, the Company has introduced several new product lines, including autoglass, remanufactured alloy wheels and paint and related supplies and equipment. In addition, the 23 Company has expanded its existing product lines as additional aftermarket collision parts have become available, to include such products as radiators, condensers and head and tail light assemblies for the growing number of makes and models of automobiles and light trucks on the road today. The number of automotive and light truck parts distributed by the Company has increased from approximately 3,000 at December 31, 1992 to more than 4,900 at March 28, 1997. The Company intends to continue to expand its existing product lines, as well as to continue to introduce new product lines compatible with its distribution system. Increase in Comparable Service Center Sales. Comparable service center sales for the Company increased approximately 16% in fiscal 1995, 13% in fiscal 1996 and 13% in fiscal 1997. The Company's strategy is to continue to increase its market share in existing markets by introducing new products and product lines, by capitalizing on the competitive advantages provided by its position as a market leader and by continuing to emphasize customer service. 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 seven most recent model years. The Company's principal product lines consist of automotive body parts, bumpers, paint and other materials, autoglass, light truck accessories and remanufactured alloy wheels. In addition, the Company, primarily through North Star, recycles, produces and distributes new and remanufactured plastic and chrome bumpers to wholesale bumper distributors and manufacturers of truck accessories. Automotive Body Parts. The Company distributes automotive and light truck parts manufactured by six foreign and nine domestic manufacturers, including fenders, hoods, radiators and condensers and head and tail light assemblies. These products accounted for $74.9 million, or 38.5% of the Company's net sales in the fiscal year ended March 28, 1997. Bumpers. The Company distributes new and remanufactured plastic bumper covers and steel bumpers manufactured by five foreign and six domestic manufacturers. For the fiscal year ended March 28, 1997, sales of plastic and steel bumpers accounted for $74.0 million, or 38.1% of the Company's net sales. In addition, the Company recycles, produces and distributes new and recycled chrome and plastic bumpers, primarily at North Star. Management believes that North Star is one of the nation's largest non-OEM producers of new and recycled chrome plated bumpers to the collision repair and restoration markets. On an annual basis, North Star electro-plates approximately 150,000 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 electro-plated finishes; metal polishing and buffing; electro-plating layers of copper, nickel and chromium; and inspecting and packaging. 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. The Company's sales of chrome bumpers accounted for $27.7 million, or 14.3% of the Company's net sales for the fiscal year ended March 28, 1997. 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 approximately 20 domestic suppliers. For the fiscal year ended March 28, 1997, sales of paint and other materials accounted for $34.8 million, or 18.0% of the Company's net sales. Certain of these products are distributed under the name "Keystone." 24 Light Truck Accessories. The Company distributes parts and accessories for light trucks, including grills, step bumpers and bedliners. For the fiscal year ended March 28, 1997, sales of parts and accessories for light trucks accounted for $9.3 million, or 4.8% of the Company's net sales. 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 28, 1997, sales of autoglass, which was introduced in fiscal 1993, accounted for $2.7 million, or 1.4% of the Company's net sales. Remanufactured Alloy Wheels. In October 1995, the Company acquired a remanufacturer of collision damaged alloy wheels located in Denver, Colorado, and during fiscal 1997 it opened remanufacturing operations in four of its facilities. The Company opened a remanufacturing operation in Atlanta, Georgia in May 1997 and acquired remanufacturing operations located in Roseville, Minnesota and Chicago, Illinois in June 1997. According to industry sources, the percentage of new automobiles equipped with alloy wheels, as opposed to steel wheels and hub caps, has increased from approximately 11% in 1985 to 45% for the 1996 model year. The average wholesale cost of a new replacement alloy wheel is $225, compared to an average wholesale cost of $140 for a remanufactured alloy wheel. The alloy wheel remanufacturing process generally includes some or all of the following steps: straightening, welding minor breaks or chips, machining, painting and applying clear coat. For the fiscal year ended March 28, 1997, sales of remanufactured alloy wheels accounted for $2.9 million, or 1.5% 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. 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 11 regional hubs and 71 service centers. Each regional hub receives container shipments directly from foreign and domestic manufacturers. Using the Company's fleet of over 600 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 Company's and North Star's corporate headquarters, 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 ten-person marketing staff, which operates from its corporate headquarters, and has 78 sales representatives and approximately 360 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. 25 The general managers of the Company's service centers have been employed by the Company for an average of over nine years and are actively involved in customer calls. The Company believes that this local control and expertise have contributed significantly to its growth. In addition, 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. In addition, the Company's management information systems allow it to provide individual collision repair shops with personalized product usage reports which enable its customers to better manage their inventory by controlling inventory shrinkage and ensuring timely reordering. CUSTOMERS The Company's current customers consist of more than 22,000 collision repair shops located in 33 states and Tijuana, Mexico, none of which accounted for more than 1% of the Company's net sales during the fiscal year ended March 28, 1997. The Company also distributes its bumpers to wholesale distributors and 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. Insight estimates that there are over 48,000 collision repair shops nationwide. The number of collision repair shops to whom Keystone sold products increased from approximately 13,400 in fiscal 1993 to approximately 22,000 following the North Star Merger in March 1997. The Company's regional hubs also sell collision parts to local distributors who may compete with the Company. Approximately 12% of the Company's net sales during the fiscal year ended March 28, 1997 were attributable to sales to other local distributors. 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, the ten largest of which provided approximately 43% of the products purchased by the Company during the fiscal year ended March 28, 1997, and no single supplier provided as much as ten percent. The Company believes that it is one of the largest customers of each of its ten largest suppliers. In fiscal 1997, approximately 75% of the products distributed by the Company were manufactured in the United States or Canada, and approximately 25% 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. North Star generally sells only automotive paint manufactured by PPG Industries, Inc. ("PPG") at certain of its service centers. Keystone derived approximately 5% of its revenues from North Star's sale of PPG paint in fiscal 1997. In the event PPG's paint became unavailable for any reason, the Company believes North Star could replace its use of PPG paint by using a different company's paint products. 26 COMPETITION Based upon industry estimates, the Company believes that approximately 85% of collision parts are supplied by OEMs, compared with approximately 10% by distributors of aftermarket collision parts and 5% by distributors of salvage 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 primarily on the basis of price, 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, relationship with insurance companies and management information systems and centralized administrative functions, 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 ten 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 electro-platers. Bumper Recyclers Association of North America ("BRANA"), the nation's only bumper trade association, membership decreased from approximately 100 companies in 1982 to approximately 32 companies in 1996. 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 in the future. The Company also encounters competition from the OEM's who supply new replacement bumpers to the collision repair market, and have significantly greater resources than the Company. The Company competes with the OEM's primarily on the basis of price. 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. 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 27 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's bumper plating operations in connection with the North Star Merger. In addition, the Company currently conducts limited bumper plating operations at one site and previously conducted similar operations at 11 additional sites which were closed between 1983 and 1993. See "Business -- Products-- Bumpers." 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 chrome plating operation complies 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 for the remainder of this fiscal year. 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. 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. EMPLOYEES At May 31, 1997, the Company had approximately 1,537 full-time employees, of whom 11 were engaged in corporate management, 131 in administration, 809 in sales and customer service, 235 in warehousing and shipping and 351 in manufacturing. Seven persons in the Newark, New Jersey chrome bumper recycling facility and six persons in its Kenilworth, New Jersey service center are covered by collective bargaining agreements. The Company considers its relations with its employees to be satisfactory. PROPERTIES Keystone's principal executive offices are located in Pomona, California and North Star's principal executive offices are located in Minneapolis, Minnesota. These premises contain approximately 20,000 square feet and 75,000 square feet, respectively. The Pomona, California offices are owned by the Company and the Minneapolis, Minnesota offices are leased. In addition, the Company owns facilities used as service centers in 28 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, consisting of 65 service centers, of which eight serve as regional hubs and four also serve as remanufacturing centers. The Company's regional hubs range from approximately 25,000 square feet to 163,000 square feet. Its service centers 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 the date hereof to February 2005, 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. Eight of the Company's service centers are leased from parties in whom current or former officers or directors of the Company have an interest. 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. See "Management -- Certain Transactions." The Company also leases small depots in ten larger cities to facilitate distribution. 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. 29 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS 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...... 59 Chairman of the Board 29(1) Charles J. Hogarty... 56 President, Chief Executive Officer 36 and Director Al A. Ronco.......... 60 Executive Vice President and Director 37 Kim D. Wood.......... 40 Vice President and President and 15(1) Chief Operating Officer of North Star John M. Palumbo...... 41 Vice President, Treasurer, and Chief 1 Financial Officer Robert L. Blanton.... 53 Vice President -- Finance 27 Christopher Northup.. 37 Vice President -- Sales and Marketing 13 James C. Lockwood.... 59 Vice President -- General Counsel and * Secretary Timothy C. McQuay(2). 45 Director -- George E. Seebart(2). 68 Director --
- -------- * Less than one year. (1) Includes years of service at North Star. (2) Member of the Audit Committee and the Compensation Committee. RONALD G. BROWN was elected a director of the Company upon completion of the 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. From 1982 to the present, he has been a member of the Board of Directors of First Bank N.A. of Brainerd, Minnesota, an affiliate of North Star's primary bank lender. 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. AL A. RONCO has served as the Executive Vice President and a director of the Company since 1987 and as Secretary 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. 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 member of the Aftermarket Body Parts Association and the Certified Automotive Parts Association. From 1993 through 1995, he was the Chairman of the Board of the Aftermarket Body Parts Association. 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. 30 ROBERT L. BLANTON has served as the Vice President -- Finance of the Company since 1976. From his joining the Company in 1969 until 1976, Mr. Blanton held various positions, including office manager of a wheel fabrication plant and staff accountant. 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. 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 the Corporate Finance Department of Crowell, Weedon & Co. as Managing Director -- Corporate Finance in October 1994. 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. 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 -- California Zone beginning in 1992 and President of Mid-Century Insurance Company from 1987 to 1992. Pursuant to the North Star Merger, certain shareholders of the Company, including Virgil K. Benton II, Charles J. Hogarty, Al A. Ronco, Robert L. Blanton and John M. Palumbo, agreed to vote all shares held by them to elect Ronald G. Brown as a director of Keystone. All directors are elected annually and serve until the next annual meeting of shareholders or until their successors have been elected and qualified. The Company's Articles of Incorporation provide that, upon the satisfaction of certain conditions, the Board of Directors will be divided into three classes of directors, each serving for staggered three-year terms. The Company believes that the conditions have been satisfied and that the Board of Directors will be divided into three classes of Directors at the Annual Meeting of Shareholders scheduled to be held in August 1997. See "Description of Capital Stock -- Certain Provisions in the Company's Articles and Bylaws." COMMITTEES OF THE BOARD The Board of Directors has established an Audit Committee and a Compensation Committee, whose members are currently Messrs. McQuay and Seebart. DIRECTOR COMPENSATION The Company pays an annual retainer of $7,500 to each director who is not also an employee, payable in equal quarterly installments, $1,000 for each board meeting and $500 for each committee meeting attended; and reimburses such person for all reasonable and documented expenses incurred as a director. In addition, each non-employee director, upon joining the Board of Directors, receives an option to purchase 10,000 shares of the Common Stock of the Company pursuant to the Stock Incentive Plan. Such options will have an exercise price equal to the market price of such shares on the date of grant, will be immediately exercisable and will have a term of 10 years. The Board of Directors may modify such compensation in the future. 31 EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company for services rendered in all capacities during the fiscal year ended March 28, 1997 to the Company's Chief Executive Officer and the Company's four other most highly compensated executive officers at the end of fiscal 1997 (the "Named Executives"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------- OTHER ANNUAL ALL OTHER COMPENSATION COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) ($)(2) --------------------------- ---- --------- -------- ------------ ------------ Virgil K. Benton II(3)....... 1997 295,000 142,345 20,718 3,979 1996 425,000 182,744 20,718 9,069 1995 402,870 -- 20,718 2,930 Charles J. Hogarty........... 1997 250,000 122,010 11,616 2,099 1996 145,000 214,395 11,616 310 1995 134,006 184,836 11,616 1,518 Al A. Ronco.................. 1997 185,000 101,675 11,640 3,725 1996 125,000 187,787 11,640 3,682 1995 117,258 117,258 11,640 10,000 Robert L. Blanton............ 1997 100,000 40,670 3,195 5,070 1996 102,000 25,000 3,195 5,391 1995 68,250 94,403 3,195 3,170 John M. Palumbo(4)........... 1997 97,500 -- 6,000 783 1996 3,958 -- -- --
- -------- (1) Consists of automobile lease and related expenses. (2) Consists of reimbursement of medical and dental expenses not covered by insurance plans provided to employees generally. (3) Mr. Benton resigned as Chairman of the Board and Chief Executive Officer of the Company in May 1997. See "Principal and Selling Shareholders" and "Certain Transactions." (4) Mr. Palumbo joined the Company in March 1996. The Company has entered into employment agreements with Messrs. Hogarty, Ronco and Blanton, terminable by either party at the end of three years by written notice, pursuant to which each such person is entitled to (i) receive an annual base salary of $250,000, $195,000 and $100,000, respectively, (ii) receive such performance-based bonus, if any, as may be determined by the Board of Directors, (iii) participate in all plans sponsored for executive officers in general and (iv) receive the use of an automobile leased and maintained by the Company. In the event the Company terminates employment before the end of the stated term without cause or the individual terminates his employment for specified causes, the Company is obligated to pay the base salary through the stated term of the agreement. In the event the Company terminates employment before the end of the stated term with cause, the Company is obligated to pay the base salary only through the date of termination. Upon consummation of the North Star Merger, North Star entered into employment agreements with Messrs. Brown and Wood. Under a five-year employment agreement, Mr. Brown is employed as the Vice President- Manufacturing of North Star and is entitled to (i) receive an annual base salary for the 12 months commencing March 1, 1997, 1998, 1999, 2000 and 2001 of $325,000, $300,000, $275,000, $225,000 and $150,000, respectively, and (ii) participate in any group health, medical reimbursement or dental plan sponsored by the Company or North Star for executive officers in general. In the event North Star terminates his employment before the end of the stated term with cause, or Mr. Brown terminates his employment for specified causes, North Star is obligated to pay the compensation described in clauses (i) and (ii) only through the date of 32 termination. In the event North Star terminates his employment before the end of the stated term other than with cause, North Star is obligated to pay such compensation through the stated term of the agreement. The agreement further provides that Mr. Brown will not engage in any "competitive activity" (as defined in the agreement) during the period commencing on the date of the employment agreement and ending on the later to occur of the seventh anniversary of such date or two years after the termination of his employment. Under an employment agreement terminable by either party at the end of three years by giving written notice, Mr. Wood is employed as the President and Chief Operating Officer of North Star and is entitled to (i) receive an annual base salary of $175,000, (ii) receive such performance-based bonus, if any, as may be determined by the Board of Directors, (iii) participate in all plans sponsored by North Star for employees in general and (iv) receive the use of an automobile leased and maintained by North Star. In the event North Star terminates his employment before the end of the stated term with cause, or Mr. Wood terminates his employment for specified causes, North Star is obligated to pay such compensation only through the date of termination. In the event North Star terminates employment before the end of the stated term other than with cause, North Star is obligated to pay such compensation through the stated term of the agreement, but in no event for less than 12 months. The agreement further provides that Mr. Wood will not engage in any "competitive activity" (as defined in the agreement) during the 12-month period commencing on the termination of his employment. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to the initial public offering of the Company's Common Stock, all decisions involving executive officer compensation were made by the Company's Board of Directors, which consisted of Virgil K. Benton, Sr., John G. Jordan, Virgil K. Benton II, Charles J. Hogarty, Al A. Ronco and Robert L. Blanton. Since completion of the initial public offering of the Company's Common Stock in June 1996, the Company's Compensation Committee, consisting of Messrs. McQuay and Seebart, has made recommendations to the Board of Directors regarding executive compensation. STOCK INCENTIVE PLAN General. The Board of Directors of the Company adopted the 1996 Employee Stock Incentive Plan (the "Stock Incentive Plan") pursuant to which officers, directors, employees and independent contractors are eligible to receive shares of the Common Stock of the Company or other securities or benefits with a value derived from the value of the Common Stock of the Company. The purpose of the Stock Incentive Plan is to enable the Company to attract, retain and motivate officers, directors, employees and independent contractors by providing for or increasing their proprietary interests in the Company and, in the case of non-employee directors, to attract such directors and further align their interests with those of the Company's shareholders by providing for or increasing their proprietary interests in the Company. The maximum number of shares of Common Stock that may be issued pursuant to awards granted under the Stock Incentive Plan currently is 730,000 (subject to adjustments to prevent dilution), of which options to purchase 587,000 shares were outstanding as of May 31, 1997. The Board of Directors has approved an increase in the number of shares issuable under the Stock Incentive Plan to 1,100,000, subject to completion of this Offering and obtaining shareholder approval. Administration. The Stock Incentive Plan is administered by a committee of two or more disinterested directors appointed by the Board of Directors (the "Committee"), except that grants to non-employee directors are made by the Board of Directors pursuant to a predetermined formula. The Committee has full and final authority to select the recipients of awards and to grant such awards. Subject to the provisions of the Stock Incentive Plan, the Committee has a wide degree of flexibility in determining the terms and conditions of awards and the number of shares to be issued pursuant thereto, including conditioning the receipt or vesting of awards upon the achievement by the Company of specified performance criteria. The expenses of administering the Stock Incentive Plan are borne by the Company. Terms of Awards. The Stock Incentive Plan authorizes the Committee to enter into any type of arrangement with an eligible recipient that, by its terms, involves or might involve the issuance of Common 33 Stock or any other security or benefit with a value derived from the value of Common Stock. Awards are not restricted to any specified form or structure and may include, without limitation, sales or bonuses of stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock, securities convertible into or redeemable for stock, stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares. An award may consist of one such security or benefit or two or more of them in tandem or in the alternative. An award granted under the Stock Incentive Plan may include a provision accelerating the receipt of benefits upon the occurrence of specified events, such as a change of control of the Company or a dissolution, liquidation, merger, reclassification, sale of substantially all of the property and assets of the Company or other significant corporate transactions. The Committee may grant options that either are intended to be "incentive stock options" as defined under Section 422 of the Internal Revenue Code of 1986, as amended, or are not intended to be incentive stock options ("non-qualified stock options"). Awards to non-employee directors may only be non-qualified stock options. An award may permit the recipient to pay all or part of the purchase price of the shares or other property issuable pursuant thereto, or to pay all or part of such recipient's tax withholding obligation with respect to such issuance, by (i) delivering previously owned shares of capital stock of the Company or other property, (ii) reducing the amount of shares or other property otherwise issuable pursuant to the award or (iii) delivering a promissory note, the terms and conditions of which will be determined by the Committee. If an option permits the recipient to pay for the shares issuable pursuant thereto with previously owned shares, the recipient would be able to exercise the option in successive transactions, starting with a relatively small number of shares and, by a series of book-entry exercises using shares acquired from each such transaction to pay the purchase price of the shares acquired in the following transaction, to exercise an option for a large number of shares with no more investment than the original share or shares delivered. The exercise price and any withholding taxes are payable in cash by non-employee directors, although the Board of Directors at its discretion may permit such payment by delivery of shares of Common Stock, or by delivery of broker instructions authorizing a loan secured by the shares acquired upon exercise or payment of proceeds from the sale of such shares. Subject to limitations imposed by law, the Board of Directors may amend or terminate the Stock Incentive Plan at any time and in any manner. However, no such amendment or termination may deprive the recipient of an award previously granted under the Stock Incentive Plan of any rights thereunder without his consent. Fiscal 1997 Awards. During the fiscal year ended March 28, 1997, options were granted to (i) Messrs. McQuay and Seebart, upon their appointment to the Board of Directors, to purchase 10,000 shares of Common Stock each, (ii) John M. Palumbo and Robert L. Blanton to purchase 5,000 and 10,000 shares of Common Stock, respectively, and (iii) 77 other employees to purchase 417,000 shares of Common Stock, at a weighted average exercise price equal to $12.92. The options granted to Messrs. McQuay and Seebart became exercisable immediately upon grant. The options granted to Mr. Palumbo and to the other employees are exercisable in four equal annual installments. Other than the grant to Mr. Palumbo, no options were granted to the Named Executives during fiscal 1997. All such options expire on the tenth anniversary of the date of grant. Fiscal 1998 Awards. During the current fiscal year, options were granted to (i) Messrs. Hogarty, Ronco and Wood to purchase 40,000 shares of Common Stock each, (ii) John M. Palumbo to purchase 15,000 shares of Common Stock and (iii) James C. Lockwood to purchase 20,000 shares of Common Stock, at an exercise price equal to $15.75 per share. No other options have been granted to the Named Executives during fiscal 1998. All such options expire on the tenth anniversary of the date of grant and are exercisable in four equal annual installments. 34 The following table sets forth certain information with respect to options granted under the Stock Incentive Plan during fiscal 1997 to the Named Executives. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE PERCENTAGE OF TOTAL VALUE AT ASSUMED OPTIONS GRANTED ANNUAL RATE OF STOCK SHARES OF COMMON STOCK TO EMPLOYEES IN EXERCISE EXPIRATION PRICE APPRECIATION NAME UNDERLYING OPTIONS FISCAL YEAR PRICE DATE FOR OPTION TERM ---- ---------------------- ------------------- -------- -------------- --------------------- 5% 10% ---------- ---------- John M. Palumbo......... 5,000(1) 2.7% $15.50 March 27, 2007 $ 21,390 $ 47,353 Robert L. Blanton....... 10,000(1) 5.5% $15.50 March 27, 2007 $ 42,780 $ 74,705
- -------- (1) The options vest in four equal annual installments, with the first installment vesting on March 28, 1998. OPTION EXERCISES AND YEAR-END VALUE TABLE AGGREGATED OPTION EXERCISES IN LAST FISCAR YEAR AND YEAR-END OPTION VALUES
NUMBER OF SHARES OF COMMON STOCK UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS IN-THE-MONEY OPTIONS AT ACQUIRED AT YEAR-END YEAR-END ON VALUE ------------------------- ------------------------- NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- -------- -------- ------------------------- ------------------------- John M. Palumbo......... -- -- 0/ 5,000 $0/0 Robert L. Blanton....... -- -- 0/10,000 0/0
The Company has registered under the Securities Act the shares of its Common Stock issuable pursuant to the Stock Incentive Plan. See "Description of Capital Stock -- Shares Eligible For Future Sale." EMPLOYEE DEFINED BENEFIT PENSION PLAN General. The Board of Directors adopted the Employee Defined Benefit Pension Plan (the "Pension Plan"), originally effective as of April 1, 1978, for the benefit of the eligible employees of the Company. Since the implementation of the Pension Plan, the Company has amended the Pension Plan from time to time. The primary purpose of the Pension Plan was to provide a retirement benefit for participating employees who continue in the employ of the Company until their retirement. Effective April 30, 1997, the Pension Plan was suspended with no further contributions or vesting to occur pending a determination of benefits due under the Pension Plan. It is anticipated that the Pension Plan will be terminated within the next two years and that the termination will not have a material adverse impact on the financial condition of the Company upon that event. The Pension Plan has been replaced with the 401(k) Savings Plan described below. 35 Estimated Monthly Benefits. The following table sets forth the estimated monthly benefit under the Pension Plan based on the current benefit structure. PENSION PLAN TABLE
YEARS OF SERVICE ---------------------------------- REMUNERATION 15 20 25 30 35 ------------ ------ ------ ------ ------ ------ $125,000.............................. $1,172 $1,563 $1,953 $2,344 $2,734 150,000.............................. 1,407 1,875 2,344 2,813 3,281 175,000.............................. 1,407 1,875 2,344 2,813 3,281 200,000.............................. 1,407 1,875 2,344 2,813 3,281 225,000.............................. 1,407 1,875 2,344 2,813 3,281 250,000.............................. 1,407 1,875 2,344 2,813 3,281 300,000.............................. 1,407 1,875 2,344 2,813 3,281 400,000.............................. 1,407 1,875 2,344 2,813 3,281 450,000.............................. 1,407 1,875 2,344 2,813 3,281 500,000.............................. 1,407 1,875 2,344 2,813 3,281
The compensation covered by the Pension Plan includes basic salary or wages, overtime payments, bonuses, commissions and all other direct current compensation, but does not include contributions by Keystone to Social Security, benefits from stock options (whether qualified or not), contributions to this or any other retirement plans or programs, or the value of any other fringe benefits provided at the expense of Keystone. For benefit calculation purposes, a "highest-five-year" average of compensation is used. Benefits are paid as straight-life annuities with no subsidies or offsets. The compensation covered by the Pension Plan for all of the Named Executive Officers was limited to $150,000 in accordance with Section 401(a)(17) of the Internal Revenue Code of 1986, as amended. The years of credited service for each Named Executive who participates in the Pension Plan are as follows:
NAME YEARS ---- ----- Virgil K. Benton II................ 22 Charles J. Hogarty................. 37 Al A. Ronco........................ 38 Robert L. Blanton.................. 28 John M. Palumbo.................... 1
401(K) SAVINGS PLAN Effective April 1, 1997, the Section 401(k) Savings Plan (the "Plan") in effect at North Star was amended to make the Plan available to Keystone employees. Pursuant to the amendment, the Company became the Plan sponsor and North Star became an adopting employer. All employees of the Company as of April 1, 1997, became participants in the Plan and the amendment had no affect upon those persons who were employed at North Star on April 1, 1997. Persons becoming employees of the Company subsequent to April 1, 1997 are not eligible to participate until they complete one year of service and are at least 21 years of age. Under the terms of the Plan, participants can contribute, by way of payroll deductions, from 1% to 15% of their pre-tax compensation annually, subject to certain legal limitations. The Plan also provides for a matching contribution by the Company equal to 50% of a participant's contribution, up to a maximum 6% of compensation. For purposes of determining the amount of contributions and matching contributions to be allocated to a participant's account, compensation is defined as the annual income amount reportable by the Company for federal income tax purposes, including overtime, commissions and bonuses. 36 A participant is always 100% vested in his own Plan contributions. A participant becomes 100% vested in the matching contributions allocated to his account upon his attainment of early retirement age (age 55 and four years of service), normal retirement age (age 65), disability while employed by the Company, his death while employed by the Company or the termination or complete discontinuance of contributions to the Plan. If a participant terminates employment with the Company for any other reason, a participant vests 25% in his benefits after one year of service, 25% each year thereafter, with 100% vesting after four or more years of service. EMPLOYEE STOCK OWNERSHIP PLAN General. The Board of Directors adopted the Employee Stock Ownership Plan (the "ESOP"), originally effective as of April 1, 1975, for the benefit of the eligible employees of the Company. Since the implementation of the ESOP, the Company has amended the ESOP from time to time. Most recently, the Company amended and restated the ESOP in order to comply with the requirements of the Tax Reform Act of 1986 and later legislation, generally effective as of April 1, 1989. The primary purpose of the ESOP is to permit participating employees to share in the growth and prosperity of the Company through the ownership of the Company's Common Stock under the ESOP. All employees of the Company are eligible to participate in the ESOP as of their date of hire. The Company does not intend to make contributions to the ESOP for the foreseeable future. Administration. The ESOP is administered by a committee (the "Committee") that is appointed by the Board of Directors. The Committee oversees the day- to-day administration of the ESOP and is responsible for making determinations on questions of administration, interpretation and application of ESOP terms, including questions of eligibility, service and distribution of plan benefits to participants. The Committee will carry out its responsibilities under the ESOP in a uniform and nondiscriminating manner. ESOP Contributions and Vesting. The ESOP provides for employer contributions only, the amount of which is determined by the Board of Directors on an annual basis. Tax law limits deductible contributions to the ESOP to 15% of the total compensation paid during the year to participating employees. For purposes of calculating the amount of a participant's employer contributions in any year, compensation means all wages and salaries paid to the participant during the year, including bonuses, overtime and commissions. A participant will become fully vested in his employer contributions upon the attainment of normal retirement age, death or termination of the ESOP. If the participant terminates employment prior to retirement age, the vested interest he has in his employer contributions will be based on his years of service, with 20% of vesting upon the completion of three years of service, and 20% for each additional year thereafter, with 100% vesting after seven or more years of service. ESOP Investments. Because the ESOP is an employee stock ownership plan, it is designed to comply with the legal requirement that all plan assets be invested primarily in the Company's Common Stock. Cash contributions made by the Company to the ESOP, therefore, are used by the trustee to purchase the Company's Common Stock at such time as the trustee deems it prudent to do so. In compliance with applicable legal requirements, the ESOP also permits eligible participants to diversify the investment of their plan assets under the ESOP. An eligible participant is a participant who has attained age 55 and who has at least ten years of participation in the ESOP. An eligible participant is entitled to diversify up to 25% of his account balance for a six-year period, and at the end of the six-year period, he will be entitled to diversify up to 50% of his account balance. For purposes of meeting diversification requirements, the Company will either make a distribution to the eligible participant of his diversified amount, or provide three investment funds under the ESOP to enable the eligible participant to diversify the investment of his plan assets. 37 ESOP Amendment or Termination. Under the terms of the ESOP, the Company reserves the right to amend or terminate the ESOP at any time and in any manner. No amendment or termination, however, may deprive a participant of any benefit he has accrued under the ESOP prior to the effective date of the amendment or termination. CERTAIN TRANSACTIONS The Company has entered into three lease agreements with two partnerships whose partners include certain of the Company's directors and officers and two lease agreements with a corporation which is owned by a family member of a former officer and director of the Company. In addition, as a result of the North Star Merger, the Company is a party to four leases with partnerships whose partners include persons, or their spouses, who are currently officers or directors of the Company. The Company believes that the terms and conditions of such 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 such leases were entered into. The Company entered into a lease dated January 5, 1995, with V-JAC Properties, Ltd. for an 8,000 square feet warehouse facility in Ontario, California, with a lease term of three years (with an option to renew the lease for an additional three years on the same terms and conditions), for a monthly rent of $3,494. V-JAC Properties, Ltd. is a partnership whose interests are held equally by Virgil K. Benton, Sr., and John G. Jordan, each of whom is a co-founder of the Company, and Al A. Ronco and Charles J. Hogarty, who are currently directors and executive officers of the Company. The Company has also entered into a lease dated January 5, 1995, with V- JAC Properties, Ltd. for a 10,000 square feet warehouse facility in Palmyra, New Jersey, with a lease term of three years (with an option to renew the lease for an additional three years on the same terms and conditions), for a monthly rent of $2,985. The Company entered into a lease dated January 5, 1995, with B-J Properties, Ltd. for a 25,000 square feet warehouse facility in St. Louis, Missouri, with a lease term of three years (with an option to renew the lease for an additional three years on the same terms and conditions), for a monthly rent of $5,067. B-J Properties, Ltd. is a partnership whose interests are held 61.75% by Virgil K. Benton, Sr. and 38.25% by John G. Jordan, the Company's co-founders, both of whom retired as directors effective March 31, 1996. The Company entered into a lease dated April 1, 1995, with Benton Real Properties, Inc. relating to approximately 24,082 square feet in Ontario, California, with a lease term of five years, for a monthly rent of $6,088 in the first year of the lease, increasing to $6,271, $6,549, $6,653 and $6,853, respectively, in each year thereafter. In January 1996, the Company exercised a five-year lease option expiring December 31, 2000, with respect to a lease dated January 1, 1991, with Benton Real Properties, Inc. relating to approximately 20,000 square feet in Ontario, California for a monthly rent of $5,634 in the first year of the lease, increasing to $5,803, $5,977, $6,157 and $6,341, respectively, in each year thereafter. Benton Real Properties, Inc. is wholly owned by Bertha Benton, the mother of Virgil Benton II. Mr. Benton resigned as the Company's Chief Executive Officer and a director in May 1997. On January 1, 1995, North Star entered into a ten-year lease agreement with a partnership owned by the spouses of Ronald G. Brown and Kim D. Wood to lease property occupied by North Star's East Peoria, Illinois service center. The initial base rent under the lease was $6,975 per month, which is subject to increase on each anniversary of the lease term by the percentage increase in the Consumer Price Index during the preceding year. In addition to the base rent, North Star pays real estate taxes, maintenance, utilities and insurance costs associated with the property. On January 1, 1995, North Star entered a ten-year lease agreement with a partnership owned by the spouse of Raymond Wood, a former shareholder, officer and director of North Star, and the spouse of Ronald G. Brown to lease the property occupied by North Star's Brainerd, Minnesota chrome bumper plating center. The initial base rent under the lease was $21,300 per month, which is subject to increase on each anniversary of the lease 38 term by the percentage increase in the Consumer Price Index during the preceding year. In addition to the base rent, North Star pays real estate taxes, maintenance, utilities and insurance costs associated with the property. Pursuant to the lease agreement, North Star is responsible for certain occurrences on the premises, including any environmental contamination. On January 1, 1995, North Star entered into a ten-year lease agreement with a partnership owned by Kim D. Wood and Richard Monson, the general manager of North Star's Brainerd, Minnesota chrome bumper manufacturing and recycling center to lease the property occupied by North Star's St. Cloud, Minnesota service center. The initial base rent under the lease was $5,000 per month, which is subject to increase on each anniversary of the lease term by the percentage increase in the Consumer Price Index during the preceding year. In addition to the base rent, North Star pays real estate taxes, maintenance, utilities and insurance costs associated with the property. On May 20, 1996, North Star entered into a ten-year lease agreement with a partnership owned by the spouses of Ronald G. Brown and Kim D. Wood and the Brown Family Limited Partnership to lease property occupied by North Star's headquarters and Minneapolis, Minnesota service center hub. The initial base rent under the lease was $12,000 per month, which is subject to increase on the anniversary of the lease term by the percentage increase in the Consumer Price Index during the preceding year. In addition to the base rent, North Star pays real estate taxes, maintenance utilities and insurance costs associated with the property. In an amendment to the lease dated September 23, 1996, the partnership agreed to construct a 37,260 square foot addition to the existing building. North Star began occupying the addition in January 1997 and, accordingly, the base rent increased to $25,627 per month. From time to time, the Company has borrowed funds from its directors, officers and principal shareholders for general working capital purposes. In March 1996, all such indebtedness was repaid. During the last three fiscal years, the maximum principal amount outstanding under each such loan was $123,668 and $240,596 to John G. Jordan, who retired as a director effective March 31, 1996, and Charles J. Hogarty, respectively. The Company believes the terms of such transactions were no less favorable to the Company than could have been obtained from an unaffiliated party. Crowell, Weedon & Co., one of the representatives of the underwriters of the Company's initial public offering, provided certain financial advisory services to the Company during fiscal 1996. In January 1996, the Company entered into an agreement with Crowell, Weedon & Co. to provide certain financial advisory services to the Company in connection with evaluating the North Star Merger. Upon the consummation of the North Star Merger, Crowell, Weedon & Co. received $125,000 in consideration of such services. Timothy C. McQuay, a director of the Company, is a Managing Director -- Corporate Finance of Crowell, Weedon & Co. In May 1997, Virgil K. Benton II resigned as the Chairman of the Board, Chief Executive Officer and director of the Company. In connection with his resignation, the Company and Mr. Benton entered into a Resignation Agreement and General Release, pursuant to which the Company (i) paid Mr. Benton cash and properties having a value of approximately $700,000, representing its obligations to Mr. Benton under the remaining two years of his employment agreement; (ii) agreed to register Mr. Benton's and certain related and affiliated persons' shares for sale in this Offering; and (iii) granted Mr. Benton a piggyback registration right in the event less than one million of the shares of Common Stock being offered by Mr. Benton and certain of his relatives and affiliates pursuant to this Prospectus are sold, unless the shares are withdrawn by those Selling Shareholders. The Company intends that it will not enter into any material transaction in which a director or officer of the Company has a direct or indirect financial interest, unless the transaction is determined by the Company's Board of Directors to be fair to the Company and is approved by a majority of the Company's disinterested directors or by the Company's shareholders, as provided for under California law. 39 LIMITATION ON LIABILITY AND INDEMNIFICATION The Articles of Incorporation of the Company limit the liability of the Company's directors for monetary damages arising from a breach of their fiduciary duties to the Company and its shareholders, except to the extent otherwise required by the California General Corporation Law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by applicable law, including circumstances in which indemnification is otherwise discretionary. The Company has entered into indemnification agreements with each of its directors and executive officers containing provisions which are in some respects broader than the specific indemnification provisions contained in the California General Corporation Law. Such agreements may require the Company, among other things, (i) to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers provided such persons acted in good faith and in a manner reasonably believed to be in the best interests of the Company and, with respect to any criminal action, had no cause to believe their conduct was unlawful, (ii) to advance the expenses actually and reasonably incurred by its officers and directors as a result of any proceeding against them as to which they could be indemnified and (iii) to obtain directors' and officers' insurance if available on reasonable terms. There is no action or proceeding pending or, to the knowledge of the Company, threatened which may result in a claim for indemnification by any director, officer, employee or agent of the Company. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described above or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the shares offered hereby, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 40 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the shares of Common Stock beneficially owned as of May 31, 1997, and as adjusted to reflect the sale of the shares offered hereby, by (i) each person known to the Company to be the beneficial owner of more than five percent of the outstanding Common Stock of the Company, (ii) those shareholders of the Company who are selling shares in this Offering (the "Selling Shareholders"), (iii) each director and the Named Executives and (iv) all directors and executive officers as a group.
SHARES SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED PRIOR TO AFTER OFFERING OFFERING(2) (2)(3) ------------------ ------------------ PERCENT NUMBER OF PERCENT NUMBER OF OF SHARES NUMBER OF OF NAME AND ADDRESS(1) SHARES CLASS(4) OFFERED SHARES CLASS(4) ------------------- --------- -------- --------- --------- -------- Ronald G. Brown (5)....... 1,547,877 15.9% 500,000 1,047,877 9.3% Employee Stock Ownership Plan..................... 1,398,285 14.3 -- 1,398,285 12.4 Virgil K. Benton II (6)... 1,162,019 11.9 1,162,019 -- -- Charles J. Hogarty (7).... 504,014 5.2 142,427 361,587 3.2 Al A. Ronco (8)........... 399,570 4.1 150,000 249,570 2.2 Kim D. Wood (9)........... 252,166 2.6 100,000 152,166 1.4 John M. Palumbo (10)...... 25,000 * 10,000 15,000 * Robert L. Blanton (11).... 93,559 * 6,376 87,183 * Timothy C. McQuay(12)..... 10,000 * -- 10,000 * George E. Seebart(12)..... 10,000 * -- 10,000 * Philip Wolfe, Trustee (13)..................... 100,000 1.0 100,000 -- -- Virgil K. Benton.......... 72,000 * 72,000 -- -- C. Tucker Cheadle, Trust- ee....................... 44,868 * 44,868 -- -- Tally Benton.............. 12,310 * 12,310 -- -- Rhonda Brown (14)......... 186,861 1.92 -- 186,861 1.66 Vanessa Brown (14)........ 186,861 1.92 -- 186,861 1.66 Vincent B. Brown (14)..... 186,861 1.92 -- 186,861 1.66 Ronald K. Brown (14)...... 29,347 * -- 29,347 * All directors and execu- tive officers as a group (10 persons) (15)........ 2,853,186 29.2 908,803 1,944,383 17.2
- ------- * Less than one percent. (1) The business address of each beneficial owner is 700 East Bonita Avenue, Pomona, California 91767. (2) Each person has sole voting and investment power over the shares of Common Stock shown as beneficially owned, subject to community property laws where applicable. (3) Assumes no exercise of the Underwriters' over-allotment option. (4) Shares of Common Stock which the person (or group) has the right to acquire within 60 days after May 31, 1997 are deemed to be outstanding in calculating the percentage ownership of the person (or group) but are not deemed to be outstanding as to any other person or group. (5) Mr. Brown has granted the Underwriters an option to purchase 100,000 shares of Common Stock solely to cover over-allotments, if any. To the extent such option is exercised, the number and percent of shares shown as beneficially owned by Mr. Brown after the Offering will be reduced accordingly. (6) Mr. Benton resigned as the Chairman of the Board, Chief Executive Officer and director of the Company in May 1997. Excludes 261,887 shares held by or in trust for members of the Benton family, as to which shares Mr. Benton disclaims beneficial ownership. (7) Includes 56,788 shares held for the benefit of Mr. Hogarty by the ESOP and excludes options to acquire 40,000 shares of Common Stock under the Stock Incentive Plan, which are not exercisable within 60 days of May 31, 1997. Mr. Hogarty has granted the Underwriters an option to purchase 60,000 shares of Common Stock solely to cover over-allotments, if any. To the extent such option is exercised, the number of shares shown as beneficially owned by Mr. Hogarty after the Offering will be reduced accordingly. (8) Includes (i) 347,677 shares held by the Ronco Family Trust and (ii) 51,893 shares held for the benefit of Mr. Ronco by the ESOP and excludes options to acquire 40,000 shares of Common Stock under the Stock Incentive Plan, which are not exercisable within 60 days of May 31, 1997. Mr. Ronco has granted the Underwriters an option to purchase 50,000 shares of Common Stock solely to cover over-allotments, if any. To the extent such option is exercised, the number and percent of shares shown as beneficially owned by Mr. Ronco after the Offering will be reduced accordingly. (9) Includes 81,700 shares of Common Stock held by Mr. Wood as Trustee for Kristine and Kathryn Wood pursuant to irrevocable trusts, of which 80,000 shares are being sold in this Offering. Excludes options to acquire 40,000 shares of Common Stock under the Stock Incentive Plan, which are not exercisable within 60 days of May 31, 1997. (10) Excludes options to acquire 20,000 shares of Common Stock under the Stock Incentive Plan, which are not exercisable within 60 days of May 31, 1997. (11) Includes 27,183 shares held for the benefit of Mr. Blanton by the ESOP. (12) Consists of shares issuable upon the exercise of stock options granted under the Company's Stock Incentive Plan to the named individual. (13) Represents shares held by Mr. Wolfe as Trustee for the Benton Charitable Trust. (14) Each of these shareholders has granted the Underwriters an option to purchase up to 25,000 shares of Common Stock solely to cover over- allotments, if any. To the extent such option is exercised, the number and percent of shares shown as beneficially owned by each of these shareholders after the Offering will be reduced accordingly. (15) Excludes 200,000 shares subject to options which are not exercisable within 60 days of May 31, 1997 and includes (i) 135,864 shares held for the benefit of directors and executive officers by the ESOP and (ii) 30,000 shares subject to options exercisable within 60 days of May 31, 1997. 41 DESCRIPTION OF CAPITAL STOCK The Company currently is authorized to issue up to (i) 20,000,000 shares of Common Stock, of which 9,750,000 shares were outstanding at May 31, 1997, and (ii) 3,000,000 shares of Preferred Stock, none of which are outstanding. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. While the Company's shareholders currently may cumulate their votes for the election of directors, cumulative voting will no longer be required or permitted under the Company's Articles of Incorporation (the "Articles") at such time as the Company's shares of Common Stock are listed on the Nasdaq National Market and the Company has at least 800 holders of its equity securities as of the record date of the Company's most recent annual meeting of shareholders. At the same time, the Company will divide its Board into three classes of directors. The Common Stock is listed on the Nasdaq National Market and the Company believes that it has, and will at the record date for its annual meeting of shareholders scheduled to be held in August 1997 have, at least 800 holders of its Common Stock. Subject to preferences which may be granted to the holders of Preferred Stock, each holder of Common Stock is entitled to share ratably in distributions to shareholders and to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor and, in the event of the liquidation, dissolution or winding up of the Company, is entitled to share ratably in all assets of the Company remaining after payment of liabilities. Holders of Common Stock have no conversion, preemptive or other rights to subscribe for additional shares, and there are no redemption rights or sinking fund provisions with respect to the Common Stock. The outstanding shares of Common Stock are, and the shares to be sold by the Company in this Offering will be, when issued and delivered against receipt of the consideration set forth in this Prospectus, validly issued, fully paid and nonassessable. Additional shares of Common Stock may be issued by the Company from time to time. PREFERRED STOCK The Board of Directors, without further action by the holders of Common Stock, may issue shares of Preferred Stock in one or more series and may fix or alter the relative, participating, optional or other rights, preferences, privileges and restrictions, including the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation preferences and conversion rights, and the description of and number of shares constituting any wholly unissued series of Preferred Stock. The Board of Directors, without further shareholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. No shares of Preferred Stock presently are outstanding, and the Company currently has no plans to issue shares of Preferred Stock. The issuance of Preferred Stock in certain circumstances may delay, defer or prevent a change in control of the Company without further action by the shareholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price, and the voting and other rights of the holders, of Common Stock. CERTAIN PROVISIONS IN THE COMPANY'S ARTICLES AND BYLAWS Shareholder Meetings. The Articles provide that any action required to be taken or that may be taken at any meeting of the Company's shareholders may only be taken at a meeting of shareholders or by the written consent of the holders of two-thirds of the outstanding voting shares. In addition, if a shareholder wishes to propose an item for consideration at a special meeting of shareholders, or at the annual meeting of shareholders to be held in August 1997, he must give written notice to the Company not less than 30 nor more than 60 days prior to the meeting or, if later, the tenth day following the first public announcement of such meeting, or such other date as is necessary to comply with applicable federal proxy solicitation rules or other regulations. The Bylaws of the Company (the "Bylaws") provide that, if a shareholder wishes to propose an item for 42 consideration at any annual meeting of shareholders (other than the first annual meeting after the date of this offering), he must give written notice to the Company not less than 90 days prior to the day and month on which, in the immediately preceding year, the annual meeting for such year had been held. Board of Directors. The Bylaws provide that the number of directors shall be not less than five nor more than nine until changed by an amendment duly adopted by the Company's shareholders. The Bylaws further provide that the exact number of directors shall be fixed from time to time, within such range, by the Board of Directors. The number of directors currently is fixed at five. The Articles provide that, upon the satisfaction of certain conditions, the Board of Directors will be divided into three classes of directors, each serving for staggered three-year terms. It is anticipated that this will occur at the next annual meeting of shareholders of the Company, which is scheduled to be held in August 1997. Amendment of Articles and Bylaws. The Bylaws may not be amended without the approval of the holders of at least two-thirds of the outstanding voting shares or the approval of at least two-thirds of the authorized directors; provided, however, that the provisions of the Bylaws relating to shareholder proposals and the number and nomination of directors require the approval of the holders of at least two-thirds of the outstanding voting shares. In addition, the provisions contained in the Articles and Bylaws with respect to the required vote for shareholder action without a meeting, the classification of the Board of Directors, the elimination of cumulative voting, indemnification of directors, officers and others and the Preferred Stock may not be amended without the affirmative vote of at least two-thirds of the outstanding voting shares. The foregoing provisions of the Articles and the Bylaws may delay, defer or prevent a change in control of the Company without further action by the shareholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of the Common Stock. TRANSFER AGENT AND REGISTRAR The Company has appointed U.S. Stock Transfer Corporation, Glendale, California as the transfer agent and registrar for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of the Common Stock of the Company in the public market could adversely affect prevailing market prices. At May 31, 1997, there were 9,750,000 shares of Common Stock outstanding. Of these shares, the 3,105,000 shares sold in the Company's initial public offering and the 2,450,000 shares issued in the North Star Merger are freely tradeable without restriction or further registration under the Securities Act, except for any such shares held by an "affiliate" of the Company. The remaining 4,195,000 shares are "restricted securities" as that term is defined in Rule 144 and, accordingly, may not be sold without registration under the Securities Act or pursuant to an applicable exemption therefrom. Of these shares, 1,700,000 shares are being included in this Offering by certain of the Selling Shareholders. In general, under Rule 144 promulgated under the Securities Act, as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner other than an "affiliate" of the Company), or who is an "affiliate" of the Company, is entitled to sell within any three- month period a number of such Restricted Shares or, in the case of an "affiliate," a number of such Restricted Shares and shares purchased in the public market, that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's Common Stock (approximately 97,500 shares, 112,500 shares if this Offering is completed) or (ii) the average weekly trading volume of the Company's Common Stock in the public market during the four calendar weeks immediately preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and availability 43 of current public information regarding the Company. A person who has not been an "affiliate" of the Company at any time during the three months preceding a sale, and who has beneficially owned Restricted Shares for at least two years, is entitled to sell such shares under Rule 144 without regard to the volume limitations, manner of sale provisions or notice requirements. On the date of this Prospectus substantially all of the Restricted Shares may be deemed to have been held for more than one year. The Company and certain of its officers, directors and shareholders have agreed, in connection with this Offering, not to, directly or indirectly, sell or otherwise dispose of shares of Common Stock held by them in the public market, without the prior written consent of the representatives of the Underwriters. The lock-up period will expire 180 days from the date of this Prospectus, at which time such shares will become eligible for sale in the public market under Rule 144. Upon expiration of the lock-up period, the market price for the Company's Common Stock could be materially and adversely affected by the sale or availability for sale of such shares. An aggregate of 730,000 shares, which the Company proposes to increase to 1,100,000 shares, are currently reserved for issuance under the Stock Incentive Plan. The Company has registered the sale of such shares under the Securities Act. Accordingly, as awards under the Company's stock incentive plan vest, shares issued pursuant thereto will be freely tradeable, except such shares as may be acquired by an "affiliate" of the Company. 44 UNDERWRITING The underwriters named below (the "Underwriters"), represented by Morgan Keegan & Company, Inc., A.G. Edwards & Sons, Inc. and Crowell, Weedon & Co. (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement (the "Underwriting Agreement"), to purchase from the Company and the Selling Shareholders the number of shares of Common Stock indicated below opposite their respective names at the public offering price less the underwriting discount set forth on the cover page of this Prospectus.
NUMBER OF NAME OF UNDERWRITER SHARES ------------------- --------- Morgan Keegan & Company, Inc....................................... A.G. Edwards & Sons, Inc........................................... Crowell, Weedon & Co............................................... --------- Total.......................................................... 3,800,000 =========
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any of such shares are purchased. The Company and the Selling Shareholders have been advised by the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share to other dealers. The public offering price and the concessions and discount to dealers may be changed by the Underwriters after the public offering. The Company and certain shareholders have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional 570,000 shares of Common Stock (of which the first 310,000 shares will be sold by certain shareholders and the remaining shares will be sold by the Company) at the public offering price, less underwriting discounts and commissions, as shown on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering over- allotments incurred in the sale of the shares of Common Stock offered hereby. The Company and the Selling Shareholders have agreed to indemnify the several Underwriters or to contribute to losses arising out of certain liabilities, including liabilities under the Securities Act. The Company and each of its executive officers and directors have agreed, for a period of 180 days from the date of this Prospectus, not to offer, sell, offer to sell, contract to sell, grant any option to purchase, or otherwise dispose of, directly or indirectly, any shares of Common Stock, or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock, in the public market, without the prior written consent of the Representatives. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Timothy C. McQuay, a partner with Crowell, Weedon & Co., serves as a director of the Company. See "Management" and "Certain Transactions." The Underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids for and purchases of Common Stock so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve the purchase of Common Stock in the open market in order to cover a 45 syndicate short position. Penalty bids permit the Underwriters to reclaim a selling concession from a syndicate member when the shares of Common Stock originally sold by such syndicate member are purchased in a stabilizing transaction or syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions, and penalty bids may cause the price of the Common Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq National Market, or otherwise, and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company and the Selling Shareholders by Manatt, Phelps & Phillips, LLP, Los Angeles, California. Certain legal matters will be passed upon for the Underwriters by Troy & Gould Professional Corporation, Los Angeles, California. EXPERTS The consolidated financial statements of the Company at March 29, 1996 and March 28, 1997 and for each of the three years in the period ended March 28, 1997, and the financial statements of North Star at September 30, 1995 and 1996 and for each of the three years in the period ended September 30, 1996, appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (including any amendments thereto) on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits and schedules thereto on file with the Commission pursuant to the Securities Act and the rules and regulations of the Commission thereunder. The Registration Statement, including exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith, files reports, proxy or information statements, and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following Regional Offices: 7 World Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, by mail at prescribed rates. In addition, the Commission has a Web site on the World Wide Web at http://www.sec.gov, containing registration statements, reports, proxy and information statements and other information that registrants, such as the Company, file electronically with the Commission. The Common Stock is traded on the Nasdaq National Market, and the Company's reports, proxy or information statements and other information may be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. 46 INDEX TO FINANCIAL STATEMENTS KEYSTONE AUTOMOTIVE INDUSTRIES, INC. Report of Independent Auditors............................................ F-2 Consolidated Balance Sheets at March 29, 1996 and March 28, 1997.......... F-3 Consolidated Statements of Income for the years ended March 31, 1995, March 29, 1996 and March 28, 1997........................................................... F-4 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1995, March 29, 1996 and March 28, 1997.............................. F-5 Consolidated Statements of Cash Flows for the years ended March 31, 1995, March 29, 1996 and March 28, 1997........................................ F-6 Notes to Consolidated Financial Statements................................ F-7 NORTH STAR PLATING COMPANY Report of Independent Auditors............................................ F-18 Balance Sheets at September 30, 1995 and September 30, 1996............... F-19 Statements of Income and Shareholders' Equity for the years ended September 30, 1994, September 30, 1995 and September 30, 1996............ F-20 Statements of Cash Flows for the years ended September 30, 1994, September 30, 1995 and September 30, 1996.......................................... F-21 Notes to Financial Statements............................................. F-22
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Keystone Automotive Industries, Inc. We have audited the accompanying balance sheets of Keystone Automotive Industries, Inc. and subsidiaries as of March 28, 1997 and March 29, 1996, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the periods ended March 28, 1997. These financial statements 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 generally accepted auditing standards. 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 financial position of Keystone Automotive Industries, Inc. at March 28, 1997 and March 29, 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 28, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Los Angeles, California May 23, 1997 F-2 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 29, MARCH 28, 1996 1997 --------- --------- ASSETS Current assets: Cash...................................................... $ 3,876 $ 1,352 Accounts receivable, less allowance for doubtful accounts of $355 in 1996 and $658 in 1997......................... 15,919 18,738 Inventories, primarily finished goods..................... 30,576 39,512 Prepaid expenses and other current assets................. 867 897 Deferred taxes............................................ 779 1,786 ------- ------- Total current assets.................................... 52,017 62,285 Property, plant and equipment, at cost: Land...................................................... 376 486 Buildings and leasehold improvements...................... 4,973 5,959 Machinery and equipment................................... 5,823 7,359 Furniture and fixtures.................................... 6,820 8,187 ------- ------- 17,992 21,991 Accumulated depreciation and amortization................. (9,470) (11,241) ------- ------- 8,522 10,750 Intangibles................................................ 2,584 3,719 Other assets............................................... 1,592 2,046 ------- ------- Total assets............................................ $64,715 $78,800 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit............................................ $13,250 $12,629 Bankers acceptances and other short term debt............. 3,520 3,538 Accounts payable.......................................... 13,086 15,994 Accrued salaries, wages and related benefits.............. 1,540 1,432 Other accrued liabilities................................. 1,140 718 Long-term debt, due within one year....................... 2,527 741 Deferred taxes............................................ -- 386 ------- ------- Total current liabilities............................... 35,063 35,438 Long-term debt, less current maturities................... 5,712 913 Notes payable to officers, shareholders and other related parties 192 192 Deferred taxes............................................ 269 403 Accrued pension cost...................................... 36 -- Shareholders' equity: Preferred stock, no par value: Authorized shares--3,000,000 None issued and outstanding............................... -- -- Common stock, no par value: Authorized shares--20,000,000 Issued and outstanding shares--8,250,000 in 1996 and 9,750,000 in 1997, at stated value....................... 4,299 15,921 Additional paid-in capital................................ 553 553 Retained earnings......................................... 18,591 25,380 ------- ------- Total shareholders' equity.............................. 23,443 41,854 ------- ------- Total liabilities and shareholders' equity.............. $64,715 $78,800 ======= =======
See accompanying notes. F-3 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
YEAR ENDED -------------------------------- MARCH 31, MARCH 29, MARCH 28, 1995 1996 1997 ---------- ---------- ---------- Net sales..................................... $ 132,655 $ 157,021 $ 194,321 Cost of sales................................. 79,319 95,131 115,052 ---------- ---------- ---------- Gross profit.................................. 53,336 61,890 79,269 Operating expenses: Selling and distribution expenses............ 38,601 43,800 53,503 General and administrative................... 9,557 9,428 12,340 Merger costs................................. -- -- 905 ---------- ---------- ---------- 48,158 53,228 66,748 ---------- ---------- ---------- Operating income.............................. 5,178 8,662 12,521 Interest expense.............................. 1,200 1,490 1,297 ---------- ---------- ---------- Income before income taxes.................... 3,978 7,172 11,224 Income taxes.................................. 1,543 2,836 4,435 ---------- ---------- ---------- Net income.................................... $ 2,435 $ 4,336 $ 6,789 ========== ========== ========== Net income per share.......................... $ .29 $ .53 $ .72 ========== ========== ========== Weighted averages shares outstanding.......... 8,255,000 8,250,000 9,408,000 ========== ========== ==========
See accompanying notes. F-4 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY MARCH 28, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK ADDITIONAL ------------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL --------- ------- ---------- -------- ------- Balance at March 25, 1994, as previously reported.......... 5,682,622 $ 3,905 $436 $ 6,228 $10,569 Pooling of interests with North Star Plating Company..................... 2,450,000 -- 117 5,592 5,709 --------- ------- ---- ------- ------- Balance at March 25, 1994, as adjusted..................... 8,132,622 3,905 553 11,820 16,278 Retirement of 62,755 shares of common stock ($3.32 per share)...................... (62,755) (209) -- -- (209) Issuance of 180,133 shares of common stock to officers ($3.35 per share).. 180,133 603 -- -- 603 Net income................... -- -- -- 2,435 2,435 --------- ------- ---- ------- ------- Balance at March 31, 1995..... 8,250,000 4,299 553 14,255 19,107 Net income................... -- -- -- 4,336 4,336 --------- ------- ---- ------- ------- Balance at March 29, 1996..... 8,250,000 4,299 553 18,591 23,443 Issuance of 1,500,000 shares in connection with initial public offering at $9.00 a share net of offering costs and commissions of $1,878... 1,500,000 11,622 -- -- 11,622 Net income................... -- -- -- 6,789 6,789 --------- ------- ---- ------- ------- Balance at March 28, 1997..... 9,750,000 $15,921 $553 $25,380 $41,854 ========= ======= ==== ======= =======
See accompanying notes. F-5 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED ----------------------------- MARCH 31, MARCH 29, MARCH 28, 1995 1996 1997 --------- --------- --------- OPERATING ACTIVITIES: Net income...................................... $2,435 $4,336 $ 6,789 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................. 1,401 1,607 2,617 Deferred taxes................................ (639) 239 (487) Provision of losses on uncollectible accounts. 270 317 673 Provision for losses on inventory............. 1,324 641 322 (Gain) loss on sales of assets................ 87 (11) (150) Stock issued for compensation................. 603 -- -- Changes in operating assets and liabilities: Accounts receivable.......................... (857) (4,672) (2,736) Inventories.................................. (267) (5,700) (6,834) Prepaid expenses and other receivables....... (454) 574 (30) Other assets................................. 176 445 (454) Accounts payable............................. (520) 3,947 2,908 Accrued salaries, wages and related benefits. (195) 539 (108) Other accrued liabilities and accrued pension costs....................................... (60) (524) (458) ------ ------ ------- Net cash provided by operating activities....... 3,304 1,738 2,052 INVESTING ACTIVITIES: Proceeds from sales of assets................... 66 75 270 Acquisitions of certain service centers......... (1,289) (3,051) (3,175) Intangible assets acquired...................... (175) (2,003) (1,751) Purchases of property, plant and equipment...... (2,504) (1,945) (3,854) ------ ------ ------- Net cash used in investing activities........... (3,902) (6,924) (8,510) FINANCING ACTIVITIES: Borrowings under bank credit facility........... 2,950 1,560 19,129 Payments under bank credit facility............. (1,210) (50) (19,750) Bankers acceptances and other short-term debt, net............................................ (1,024) 1,067 18 Borrowings on notes payable to officers, shareholders and other related parties......... 14 178 -- Payments on notes payable to officers, shareholders and other related parties......... (13) (364) -- Borrowings on long-term debt.................... 2,944 4,351 24 Principal payments on long-term debt............ (1,762) (2,131) (7,109) Proceeds from initial public offering........... -- -- 11,622 Principal payments on capital lease obligations. (141) Retirement of stock............................. (209) -- -- ------ ------ ------- Net cash provided by financing activities....... 1,549 4,611 3,934 ------ ------ ------- Net increase (decrease) in cash................. 951 (575) (2,524) Cash at beginning of year....................... 3,500 4,451 3,876 ------ ------ ------- Cash at end of year............................. $4,451 $3,876 $ 1,352 ====== ====== ======= Supplemental disclosures Interest paid during the year................. $1,145 $1,503 $ 1,338 Income taxes paid during the year............. $2,631 $2,412 $ 5,311 Acquisition of businesses using debt.......... $ -- $1,666 $ 500 ------ ------ -------
See accompanying notes. F-6 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 28, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS INFORMATION The principal business of Keystone Automotive Industries, Inc. (the "Company") is the distribution of replacement parts for automobiles and light trucks to collision repair shops through a network of seventy service centers located within the United States and one in Mexico. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Keystone Automotive Industries, Inc. and its wholly-owned subsidiary, North Star Plating Co. All significant intercompany transactions have been eliminated in consolidation. 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. 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 years ended March 31, 1995, March 29, 1996 and March 28, 1997, included 53, 52 and 52 weeks, respectively. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of cash and cash equivalents, short-term borrowings and the current portion of long-term debt 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. INVENTORIES The Company's inventories consist primarily of automotive collision replacement parts, paint and related materials and bumpers. Inventories are stated at the lower of cost (first-in, first-out) or market. DEPRECIATION The Company uses the straight-line method for depreciation of property, plant, and equipment over the following estimated useful lives: Buildings............................... 20 years Machinery and equipment................. 5-12 years Furniture and fixtures.................. 5-6 years Auto and truck.......................... 3-5 years Leasehold improvements.................. Term of lease or life of the asset, whichever is shorter, or 5-20 years.
Depreciation expenses amounted to approximately $1,369,000, $1,483,000, and $2,001,000 for the years ended March 31, 1995, March 29, 1996 and March 28, 1997, respectively. F-7 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 1997 Keystone imported 25% of its products from the Far East. 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. 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 No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related interpretations. Management has determined that the effect of applying Financial Accounting Standards Board Statement No. 123's fair value method to the Company's stock-based awards results in net income and earnings per share that are not materially different from amounts reported. Under the provisions of APB 25, compensation expense is measured at the grant date for the difference between the fair value of the stock and the exercise price. REVENUE RECOGNITION The Company recognizes revenue from product sales at the time of 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. INTANGIBLES Excess of cost over net assets acquired is amortized over a fifteen-year period using the straight-line method. Covenants not to compete are amortized using the straight-line method over the terms of the agreements. Amortization expense for the years ended March 31, 1995, March 29, 1996, and March 28, 1997 were $32,000, $124,000, and $616,000, respectively.
1996 1997 ------ ------ Covenants not to compete..................................... $1,135 $3,012 Excess of cost over net assets acquired...................... 1,605 1,479 ------ ------ 2,740 4,491 Less: Accumulated amortization............................... (156) (772) ------ ------ Total........................................................ $2,584 $3,719 ====== ======
F-8 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE The Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. The Company restated its Articles of Incorporation and Bylaws to increase the authorized shares of common stock to 20,000,000 and to authorize 3,000,000 shares of preferred stock. No preferred stock has been issued. Additionally, the Board of Directors and shareholders approved a common stock split of 3.8467 to 1 on April 16, 1996. All share and per share amounts in these financial statements have been adjusted for the common stock split. Earnings per share are computed using the weighted average number of shares of common stock and common stock equivalents (attributable to stock options which are not material) outstanding during each period. Common stock equivalents were calculated using the treasury stock method. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted for fiscal years ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement 128 on the calculation of basic earnings per share and fully diluted earnings per share for the years ended March 31, 1995, March 29, 1996, and March 28, 1997 will not be material. 2. MERGER AND ACQUISITIONS Effective March 28, 1997, the Company completed a merger with North Star Plating Company ("North Star"). An aggregate of 2,450,000 shares of Keystone common stock was exchanged for all of the outstanding common stock of North Star. The transaction was accounted for as a pooling of interests and therefore, all prior period financial statements presented include North Star's historical activities. North Star used a September 30 year end. The North Star balance sheets and statements of income and cash flow have been conformed to Keystone's fiscal years ended March 31, 1995, March 29, 1996 and March 28, 1997.
YEAR ENDED ----------------------------------------- MARCH 31, MARCH 29, MARCH 28, 1995 1996 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Net sales: Keystone..................................... $101,596 $115,326 $138,380 North Star................................... 32,479 43,317 58,227 Intercompany eliminations.................... (1,420) (1,622) (2,286) -------- -------- -------- Combined....................................... $132,655 $157,021 $194,321 ======== ======== ======== Net income: Keystone..................................... $ 1,406 $ 3,106 $ 4,836 North Star................................... 1,029 1,230 1,953 -------- -------- -------- Combined....................................... $ 2,435 $ 4,336 $ 6,789 ======== ======== ======== Other changes in shareholders' equity: Keystone..................................... $ 394 $ -- $ 11,622 North Star................................... -- -- -- -------- -------- -------- Combined....................................... $ 394 $ $ 11,622 ======== ======== ========
F-9 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 2. MERGER AND ACQUISITIONS (CONTINUED) Changes in shareholders' equity for the year ended March 31, 1995 are due to the issuance of 180,133 shares of common stock to officers for $3.35 a share and the retirement of 62,755 shares of common stock. Changes in shareholders' equity for the year ended March 28, 1997 are due to the proceeds from the Company's initial public offering less offering expenses, underwriters commissions and discounts. In connection with the merger, $905,000 of merger costs and expenses were incurred and have been charged to expense during the third and fourth quarter of the year ended March 28, 1997. The merger costs and expenses consisted primarily of legal, accounting, and investment banking fees. During the year ended March 29, 1996, the Company purchased substantially all of the assets, primarily inventory, furniture and fixtures, and equipment of M.A.P. International, C.D. Wheel and United Bumper. The Company paid approximately $1,192,000 in cash and a note for $150,000 due October 1998. In January of 1996 the Company's wholly-owned subsidiary (North Star) purchased substantially all of the assets of Carolina Bumper, Inc., Carolina Auto and Paint Supply, Inc., Carolina Truck Specialties/Automotive Colors, Inc. and Carolina Bumper/Automotive Colors, Inc., automotive and retail supply businesses. As consideration for the assets purchased, North Star paid cash of approximately $3,700,000, assumed certain liabilities and issued a one-year promissory note in the amount of $647,000. The note is due in monthly installments and bears interest at the rate of 8%. Promissory notes of $200,000 (due in 12 equal monthly installments) and $500,000 (due in 60 equal monthly installments), were issued in exchange for a five year covenant not to compete. Each note bears interest at a rate of 8%. The acquisitions for the year ended March 29, 1996 were accounted for using the purchase method. The acquired assets and liabilities were recorded at their estimated fair values. The results of operations have been included since the respective dates of acquisition. These results were not significant to the financial results of the Company. During fiscal 1997, the Company purchased substantially all of the assets primarily inventory, furniture and fixtures, and equipment of After Market Parts & Supply ("AMPS"), Augusta Bumper, Glenn Automotive Paint & Body Supply, Inc., and Stockton Plating Inc. The Company paid approximately $5,900,000 in total for these acquisitions. The acquired assets and liabilities were recorded at their estimated fair values. The acquisitions were accounted for using the purchase method. The results of operations have been included since the respective dates of acquisition. These results were not significant to the consolidated financial results of the Company. 3. SHAREHOLDERS' EQUITY In June 1996, the Company's Registration Statement of Form S-1 was declared effective by the Securities and Exchange Commission, permitting the Company to sell shares of its common stock to the public. The Company and selling shareholders sold 1,500,000 and 1,605,000 shares, respectively, at the initial offering price of $9.00 per share. The Company proceeds of $11,622,000 (net of underwriter commissions and offering costs) were used to pay down bank debt and for working capital. F-10 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 4. LONG-TERM DEBT Long-term debt consists of the following at March 29, 1996, and March 28, 1997 (in thousands):
1996 1997 ------ ------ Note payable to bank, due in monthly installments of $50,000, plus interest at the prime rate (8.25% at March 29, 1996), plus .5% due August 1, 1996..................... $ 250 $ -- Various covenants not-to-compete, payable with interest up to 8%, through 2001........................................ 804 884 Notes payable to Bumper Exchange, monthly principal of $6,790 and interest at 1% above the prime rate (8.25% at March 29, 1996), payable through October 1997. Secured by inventory, property and equipment.......................... 129 -- Note payable to PNC bank, monthly payments of $6,649 with a variable interest rate (9.25% at March 29, 1996), payable through April 30, 1999. Secured by property................ 674 -- Note payable to D. Fales, interest at 1% above the prime rate, (8.25% at March 28, 1997), payable through October 1998....................................................... 150 150 Note payable to bank, secured by all inventories, equipment, accounts receivable and fixed assets, payable in monthly installments of $62,877, including 8.23% interest until December 31, 2000.......................................... 3,883 -- Note payable, XRJ, Inc., secured by acquired assets, payable in monthly installments of $56,438 until December 15, 1996. 544 -- Capital lease obligation, payable in monthly installments of $5,678, including 6.73% interest through December 1, 1998.. 175 117 Other interest bearing notes, payable through 1999.......... 1,822 695 ------ ------ 8,431 1,846 Less amount due within one year............................. (2,527) (741) ------ ------ Amounts due after one year.................................. $5,904 $1,105 ====== ======
Long-term debt due after one year matures approximately as follows: 1998-- $741,000; 1999--$685,000; 2000--$225,000; 2001--$195,000; 2002 and thereafter--$0. 5. FINANCING ARRANGEMENTS On March 25, 1997 the Company entered into a revolving loan agreement with a commercial lender that provides a $25,000,000 unsecured credit facility that expires on March 24, 1998. Initial advances under the revolving line of credit are made with interest at the prime rate (8.5% at March 28, 1997), however at the Company's option, all advances may be converted to LIBOR plus 0.75%- 0.875%. The weighted average interest rate on the line of credit was 8.3% and 8.1% for the years ended March 29, 1996 and March 28, 1997, respectively. The agreement also contains an unused line charge of 0.125%. At March 28, 1997 the unused portion of the line of credit was $12,371,000. The revolving 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 28, 1997. F-11 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 6. 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 paid to related parties, included in the total rent expense, amounted to $724,000, $665,000 and $931,000 for 1995, 1996 and 1997, respectively, exclusive of the Company's obligation for property taxes and insurance. Notes payable to officers, shareholders, and other related parties are unsecured, due October 1, 1998, and bear interest at the prime rate (8.25% at March 28, 1997) plus 1%. Interest expense incurred in connection with these obligations was $32,000 at March 31, 1995, $43,000 at March 29, 1996 and $21,000 at March 28, 1997. 7. 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 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 as of year end as follows (in thousands):
1996 1997 ----- ------ Deferred tax assets: Book depreciation over tax.................................. $ 36 $ -- Uniform cost capitalization................................. 546 765 Inventory reserve........................................... 204 206 Accrued expenses not currently deductible for tax........... 413 696 Other, net.................................................. 108 313 ----- ------ Total deferred tax assets..................................... 1,307 1,980 Deferred tax liabilities: Prepaid expenses............................................ (381) (385) Tax depreciation over book.................................. -- (182) ----- ------ Total deferred tax liabilities................................ (381) (567) ----- ------ Net deferred tax assets....................................... $ 926 $1,413 ===== ======
No valuation allowance was necessary for deferred tax assets in 1996 or 1997. F-12 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 7. INCOME TAXES (CONTINUED) Significant components of the provision for income taxes attributable to operations under the liability method are as follows (in thousands):
1995 1996 1997 ------ ------ ------ Current: Federal............................................. $1,760 $2,064 $3,958 State............................................... 422 533 964 ------ ------ ------ 2,182 2,597 4,922 Deferred: Federal............................................. (436) 203 (390) State............................................... (203) 36 (97) ------ ------ ------ (639) 239 (487) ------ ------ ------ $1,543 $2,836 $4,435 ====== ====== ======
The reconciliation of income taxes at the U.S. federal statutory tax rate to reported income tax expense is as follows (in thousands):
1995 1996 1997 ------ ------ ------ Income taxes at statutory tax rate.................... $1,353 $2,438 $3,816 State income taxes, net of federal tax effect......... 210 381 565 Non-deductible expenses............................... 14 17 47 Other, net............................................ (34) -- 7 ------ ------ ------ $1,543 $2,836 $4,435 ====== ====== ======
8. EMPLOYEE BENEFIT PLANS The Company has an employee stock ownership plan which covers substantially all of its employees. 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. The Company's contributions to the plan were $190,000, in 1995, and none in 1996 and 1997, respectively. 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. 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. F-13 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 8. EMPLOYEE BENEFIT PLANS (CONTINUED) The net periodic pension cost for the Plan for the years ended March 31, 1995, March 29, 1996 and March 28, 1997, consisted of the following (in thousands).
1995 1996 1997 ----- ----- ----- Service costs-- benefits earned during the year......... $ 120 $ 132 $ 154 Interest cost on projected benefit obligation........... 188 213 232 Actual return on assets................................. (136) (153) (199) Net amortization and deferral........................... 40 45 40 ----- ----- ----- $ 212 $ 237 $ 227 ===== ===== =====
The following is a summary of the status of the funding of the Plan (in thousands):
1996 1997 ------- ------- Actuarial present value of benefit obligations: Vested benefit obligations.............................. $(2,414) $(2,783) Non-vested benefit obligations.......................... (65) (81) ------- ------- Accumulated benefit obligations........................... $(2,479) $(2,864) ======= ======= Projected benefit obligations............................. $(2,902) $(3,380) Assets of the plan at market.............................. 2,442 2,989 ------- ------- Projected benefit obligation greater than assets of the plan..................................................... (460) (391) Unrecognized net obligation not yet recognized in periodic pension cost............................................. 1,148 1,195 Unrecognized net transition obligation at March 28, 1987, being recognized over 25 years........................... 128 120 Adjustment required to recognize minimum liability: Accrued but not expensed................................ (1) -- Unfunded liability...................................... 36 -- ------- ------- Prepaid pension included in other assets and prepaid expenses.................................................. $ 851 $ 924 ======= =======
In determining the actuarial present value of projected benefit obligations at March 29, 1996 and March 28, 1997, a discount rate of 8% was used. Future compensation levels are assumed to increase at an annual rate of 5%. The expected long-term annual rate of return on assets was 8% for the years ended March 31, 1995, March 29, 1996, and March 28, 1997. In April 1997 the Board of Directors approved the freezing of the defined benefit pension plan. Management estimates, after consulting with the Company's actuary, that the curtailment of the plan is not material to the Company's results of operations. However, this estimate depends on the plan's asset values at the date of curtailment. North Star, a wholly-owned subsidiary, adopted a 401(k) plan in fiscal 1996 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 4% of employee contributions. Employee contributions vest immediately, while employer contributions vest based on years of service. Contributions to the plan were $43,000 and $173,000, as of March 29, 1996 and March 28, 1997, respectively. On April 1, 1997 the plan was amended to include substantially all of the Company's employees and to increase the matching contribution to 6% of employee contribution. F-14 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 9. STOCK COMPENSATION PLANS In 1996, the Board of Directors of the Company adopted a Stock Incentive Plan (the "Plan"). There were 730,000 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 that 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.
WEIGHTED AVERAGE EXERCISE STOCK OPTION PLAN SHARES PRICE ----------------- ------- -------- Outstanding at March 29, 1996 -- -- Granted................................................... 432,000 $11.90 Exercised................................................. -- -- Expired................................................... -- -- Outstanding at March 28, 1997............................... 432,000 $11.90
The following tabulation summarizes certain information concerning outstanding and exercisable options at March 28, 1997:
PRICE RANGE --------------- $12.25 TO $9.00 $15.00 ------- ------- Outstanding options: Number outstanding......................................... 220,000 212,000 Weighted average exercise price............................ $ 9.00 $ 14.90 Weighted average remaining contractual life in years....... 9.2 9.3 Exercisable options: Number exercisable......................................... 20,000 45,000 Weighted average exercise price............................ $ 9.00 $ 12.69
There were no exercisable options outstanding in fiscal years 1996 and 1995. 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 Statement of Financial Accounting Standards No. 123, net income and earnings per share would have been reduced to the pro forma amounts shown below:
1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------ Pro forma: Net income.......................................................... $6,667 Earnings per share: Primary............................................................ $ 0.71 Fully diluted...................................................... $ 0.71
F-15 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 9. STOCK COMPENSATION PLANS (CONTINUED) 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:
1997 ---- Risk free interest rate................................................ 6.52% Expected life in years................................................. 4 Expected volatility.................................................... 26.8% Expected dividend yield................................................ 0.00%
In fiscal 1995 the Company had 180,133 shares exercised at a weighted average price of $3.35. This resulted in compensation expense of $1,200,000. The plan under which these option were granted was terminated in 1995. 10. COMMITMENTS The Company leases substantially all of its property and a portion of its plant and equipment. Certain of the leases contain 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 28, 1997 (in thousands):
RELATED TOTAL PARTY OPERATING LEASES OTHER LEASES ------- ------- --------- 1998............................................... $1,002 $ 3,987 $ 4,989 1999............................................... 946 3,200 4,146 2000............................................... 1,078 2,699 3,777 2001............................................... 1,005 1,749 2,754 2002............................................... 977 774 1,751 Thereafter......................................... 2,881 234 3,115 ------ ------- ------- Total minimum rental payments...................... $7,889 $12,643 $20,532 ====== ======= =======
Total rent expense amounted to $2,707,000, $4,044,000 and $4,985,000 for 1995, 1996 and 1997, 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. 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended March 29, 1996 and March 28, 1997.
SEPT. JUNE 30 SEPT. 29 DEC. 29 MAR. 29 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------------------------- 1996: Net Sales.................................. $34,667 $35,420 $38,763 $48,171 Gross Profit............................... 13,810 13,773 15,479 18,828 Net Income................................. 760 824 1,199 1,553 Earnings Per Share......................... 0.09 0.10 0.15 0.19
F-16 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 28, 1997 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
JUNE 28 SEPT 27 DEC. 27 MAR. 28 ------- -------- ------ ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------------------------------------- 1997: Net Sales.................................. $45,561 $43,894 $49,905 $54,961 Gross Profit............................... 18,296 17,712 20,566 22,695 Net Income................................. 1,519 1,636 1,857 1,777 Earnings Per Share......................... 0.18 0.17 0.19 0.18
12. SUBSEQUENT EVENTS Effective on May 23, 1997, the Company's Chairman and Chief Executive Officer resigned his positions to pursue other interests. Under the terms of the employment agreement, the Company is obligated to pay the balance of his contract and to provide for certain employee benefits. The Company will record a pre tax charge of approximately $700,000 in the first quarter of fiscal year 1998 in connection with the settlement of all outstanding obligations. The Company is planning to file a Form S-1 Registration Statement with the SEC in connection with a secondary offering of its common stock. The filing is expected to be effective June 1997. Management has indicated the proceeds from the offering will be used to paydown the Company's indebtedness under its revolving lines of credit. The Company is currently negotiating acquisitions for substantially all the assets and specific liabilities of a bumper distributor located in the Southeast and a wheel remanufacturer located in the Midwest for approximately $4,100,000 in cash. The acquisitions are expected to be completed in June of 1997. F-17 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders North Star Plating Company We have audited the accompanying balance sheets of North Star Plating Company as of September 30, 1996 and 1995, and the related statements of income and shareholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These financial statements 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 generally accepted auditing standards. 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 financial position of North Star Plating Company at September 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP Minneapolis, Minnesota November 11, 1996 F-18 NORTH STAR PLATING COMPANY BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30, 1995 1996 ------------- ------------- ASSETS Current assets Cash and cash equivalents........................... $ 80,234 $ 360,844 Accounts receivable, less allowance for doubtful accounts and reserve for sales returns and discounts of $245,000 in 1996 and $75,000 in 1995.. 3,442,079 4,909,622 Other receivables................................... 16,599 114,514 Inventories, less obsolescence reserve of $340,000 in 1996 and $195,000 in 1995....................... 5,633,439 9,849,535 Prepaid expenses.................................... 429,215 317,089 Deferred income taxes............................... 394,000 640,613 ----------- ----------- Total current assets................................. 9,995,566 16,192,217 Property and equipment Leasehold improvements.............................. 413,604 601,355 Shop machinery and equipment........................ 1,187,113 1,722,650 Office furniture and equipment...................... 1,501,016 2,399,607 Vehicles............................................ 1,947,227 2,530,113 ----------- ----------- 5,048,960 7,253,725 Accumulated depreciation............................ (2,694,208) (3,352,143) ----------- ----------- 2,354,752 3,901,582 Other assets Intangible assets, net of accumulated amortization of $205,993 in 1996 and $54,417 in 1995............ 130,591 1,973,848 Other............................................... 74,642 36,108 ----------- ----------- 205,233 2,009,956 ----------- ----------- Total assets......................................... $12,555,551 $22,103,755 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable....................................... $ 1,000,000 $ 1,000,000 Accounts payable.................................... 1,972,050 5,159,894 Accrued liabilities................................. 464,222 537,455 Accrued wages....................................... 246,028 444,986 Current maturities of long-term debt................ 661,651 1,678,947 ----------- ----------- Total current liabilities............................ 4,343,951 8,821,282 Long-term debt, less current maturities.............. 1,112,008 4,323,405 Deferred income taxes................................ 269,080 335,227 Shareholders' equity Common Stock, $.01 par value: Authorized shares--100,000......................... Issued and outstanding--6,762...................... 68 68 Additional paid-in capital.......................... 117,250 117,250 Retained earnings................................... 6,713,194 8,506,523 ----------- ----------- Total shareholders' equity........................... 6,830,512 8,623,841 ----------- ----------- Total liabilities and shareholders' equity........... $12,555,551 $22,103,755 =========== ===========
See accompanying notes to financial statements. F-19 NORTH STAR PLATING COMPANY STATEMENT OF INCOME AND SHAREHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1994 1995 1996 ----------- ----------- ----------- Net Sales.................................. $29,611,965 $34,838,287 $52,152,195 Cost of sales.............................. 17,446,572 20,780,903 31,284,394 ----------- ----------- ----------- Gross margin............................... 12,165,393 14,057,384 20,867,801 =========== =========== =========== Other expenses General and administrative................ 1,206,881 1,700,668 2,240,722 Selling................................... 9,512,088 10,364,118 15,121,049 ----------- ----------- ----------- 10,718,969 12,064,786 17,361,771 ----------- ----------- ----------- Operating income........................... 1,446,424 1,992,598 3,506,030 Interest expense........................... 182,826 220,658 535,121 Other expense (income)..................... 3,225 (28,697) 27,466 ----------- ----------- ----------- Net income before taxes.................... 1,260,373 1,800,637 2,943,443 ----------- ----------- ----------- Income tax expense......................... 496,260 728,007 1,150,114 ----------- ----------- ----------- Net income................................. 764,113 1,072,630 1,793,329 =========== =========== =========== Beginning retained earnings................ 4,876,451 5,640,564 6,713,194 ----------- ----------- ----------- Ending retained earnings................... $ 5,640,564 $ 6,713,194 $ 8,506,523 =========== =========== =========== Net income per share....................... $ 113 $ 159 $ 265 =========== =========== =========== Weighted average shares outstanding........ 6,737 6,762 6,762 =========== =========== ===========
See accompanying notes to financial statements. F-20 NORTH STAR PLATING COMPANY STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, ------------------------------------- 1994 1995 1996 ----------- ----------- ----------- OPERATING ACTIVITIES Net income............................. $ 764,113 $ 1,072,630 $ 1,793,329 Adjustments to reconcile net income to net cash provided by (used in) operations: Depreciation and amortization........ 527,989 638,016 946,000 Loss on disposal of equipment........ 8,753 63,778 33,032 Deferred income taxes................ (63,510) (64,210) (180,466) Cash surrender value of officers' life insurance, net of loans........ (48,090) -- -- Changes in operating assets and liabilities: Accounts receivable.................. (306,351) (605,135) (1,104,985) Inventories.......................... (1,313,602) (743,915) (2,550,815) Prepaids and other assets............ (269,547) 254,014 150,660 Accounts payable, taxes and other liabilities......................... 465,367 292,161 3,379,129 ----------- ----------- ----------- Net cash (used in) provided by operating activities.................. (234,878) 907,339 2,465,884 INVESTING ACTIVITIES Purchase of plant and equipment........ (1,311,206) (580,002) (1,132,424) Purchase of business................... -- -- (132,914) Proceeds from sale of property, plant and equipment......................... 9,910 27,572 71,099 ----------- ----------- ----------- Net cash used in investing activities.. (1,301,296) (552,430) (1,194,239) FINANCING ACTIVITIES Proceeds from revolving line of credit and long-term borrowings.............. 1,678,086 635,222 720,189 Principal payments on revolving line of credit and long-term debt............. (938,525) (1,008,823) (1,711,224) Issuance of common stock............... 83,646 -- -- ----------- ----------- ----------- Net cash provided by (used in) financing activities.................. 823,207 (373,601) (991,035) ----------- ----------- ----------- Increase (decrease) in cash............ (712,967) (18,692) 280,610 Cash and cash equivalents at beginning of year............................... 811,893 98,926 80,234 ----------- ----------- ----------- Cash and cash equivalents at end of year.................................. $ 98,926 $ 80,234 $ 360,844 =========== =========== ===========
See accompanying notes to financial statements. F-21 NORTH STAR PLATING COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS North Star Plating Company, in existence since April 1, 1968, is a manufacturer and wholesale distributor of automotive aftermarket parts and a wholesale distributor of paint and body supplies. As stated in Note 2, in January 1996, the Company purchased substantially all of the assets of Carolina Bumper, Inc., Carolina Auto Body and Paint Supply, Inc., Carolina Truck Specialties/Automotive Colors, Inc. and Carolina Bumper/Automotive Colors, Inc., automotive wholesale and retail supply businesses. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 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 cost of sales are reduced accordingly. INVENTORIES The Company's inventories consist primarily of automotive crash parts, bumpers and automotive paint. Inventories are stated at the lower of cost (first-in, first-out method) or market. INTANGIBLES Goodwill is amortized over a fifteen-year period using the straight-line method. The non-compete agreements are amortized using the straight-line method over the terms of the agreements. RECLASSIFICATIONS Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation. INCOME TAXES Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax basis or assets and liabilities. NEW ACCOUNTING STANDARDS In October 1995, the FASB issued Statement No. 123, "Accounting for Stock- Based Compensation," which establishes financial accounting and report standards for stock-based compensation plans. The Company will comply with this standard in 1997. F-22 NORTH STAR PLATING COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The effect of the adoption by the Company in 1996 was not material. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from the estimates. DEPRECIATION The Company uses the straight-line method for depreciation of property, plant and equipment over the following estimated useful lives: Shop machinery and equipment...................................... 5-12 years Office furniture and equipment.................................... 5-10 years Vehicles.......................................................... 3-5 years Leasehold improvements and capital leases......................... 5-20 years
CONCENTRATION OF CREDIT 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, five 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 due within 30 days. Credit losses have consistently been within management's expectations. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees and Related Interpretations." FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The Company records its financial instruments at market value. F-23 NORTH STAR PLATING COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1996 2. ACQUISITION On January 1, 1996, the Company purchased substantially all of the assets of Carolina Bumper Inc., Carolina Auto Body and Paint Supply, Inc., Carolina Truck Specialties/Automotive Colors, Inc. and Carolina Bumper/Automotive Colors, Inc., automotive wholesale and retail supply businesses. As consideration for the assets purchased, the Company paid cash of approximately $3,700,000, assumed certain liabilities and issued a one-year promissory note in the original amount of $646,818. The note is due in monthly installments and bears interest at the rate of 8%. The Company also issued promissory notes of $200,000 and $500,000 in exchange for a five-year covenant not to compete on the part of the sole shareholder and an executive. The first promissory note is due in 12 equal monthly installments and bears interest at the rate of 8%. The second promissory note is due in 60 equal monthly installments and bears interest at the rate of 8%. The related intangible assets are being amortized over the life of the agreements. The acquisition was accounted for using the purchase method and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values. The results of operations have been included since the date of acquisition. The following unaudited supplemental pro forma information has been prepared assuming the acquisition had occurred at the beginning of the period presented. Pro forma results are not necessarily indicative of the results that would have occurred had the acquisition actually taken place at the beginning of the periods shown, or the expected results of future operations.
YEAR ENDED SEPTEMBER 30, ------------------------ 1995 1996 ------------ ----------- Net Sales............................................ $42,948,000 $54,067,000 Net Income........................................... 780,000 1,743,000 Net Income per share................................. 115 258
3. INVENTORIES The major classes of inventories are as follows as of September 30:
1995 1996 ---------- ---------- Raw materials........................................ $ 726,733 $ 915,984 Work-in-process...................................... 39,600 83,712 Finished goods....................................... 5,062,106 9,189,839 Less reserve for obsolescence........................ (195,000) (340,000) ---------- ---------- $5,633,439 $9,849,535 ========== ==========
4. NOTES PAYABLE Under terms of its outstanding credit agreements, the Company can borrow up to $1,000,000 based on certain percentages of eligible collateral, primarily inventory and receivables. Borrowings under the agreements are at the lender's sole discretion, are due on demand, bear interest at .5% over the base rate and are secured by substantially all of the Company's assets. The outstanding balance of the credit facility at September 30, 1996 and 1995 was $1,000,000. The Company is prohibited from selling or disposing of its property, consolidating or merging or declaring or paying dividends except for amounts required to pay shareholder taxes due on earnings. The Company must also maintain certain specified financial ratios. F-24 NORTH STAR PLATING COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1996 5. LONG-TERM DEBT Long-term debt at September 30 consists of the following:
1995 1996 ---------- ---------- Installment loans, each loan secured by a vehicle, maturing at various times through March 25, 1999, payable in monthly installments of $41,739, including interest from 7.00% to 9.75%............. $ 487,163 $ 568,114 Note payable to bank, secured by all inventories, equipment and accounts receivable, payable in monthly installments of $5,385, including interest at .50% over the bank's base rate through December 15, 1997.................................. 140,362 86,131 Note payable, C. Fagerhaugh, due in monthly installments of $3,965 and $1,322, including 10% interest, maturing November 1, 1995. Guaranteed by an officer and former shareholder of the Company... 5,242 -- Note payable, Trombley, Nozel & Howard, unsecured, due in monthly installments of $4,978, including 9.00% interest until July 15, 1998................. 149,082 100,808 Note payable to bank, secured by all inventories, equipment, accounts receivable and fixed assets, payable in monthly installments of $62,877 including 8.23% interest until December 31, 2000... -- 3,663,984 Note payable, XRJ, Inc., secured by acquired assets, payable in monthly installments of $56,438 until December 15, 1996.................................. -- 222,040 Demand loan payable, R. Wood, interest 8%, unsecured.......................................... 42,000 42,000 Loan payable, W. Farmer, unsecured, payable in monthly installments of $7,124, including variable interest of .50% over First Chicago's base rate, through January 15, 1998........................... 173,526 100,706 Note payable, Automotive Enterprises Company, payable in monthly installments of $15,638, including 7% interest, until April 15, 1999, secured by certain vehicles, equipment, inventory, accounts receivable and goodwill................... 593,194 442,285 Covenants-not-to-compete, payable in monthly installments of $5,385, no interest, through July 15, 1998........................................... 183,090 118,470 Covenants-not-to-compete, original issue of $200,000, payable in monthly installments of $17,451, including interest of 8%, until January 15, 1997........................................... -- 68,656 Covenant-not-to-compete with Melvin Smith, original issue of $500,000, payable in monthly installments of $10,138, including interest of 8%, until January 15, 2001........................................... -- 442,400 Capital lease obligation, payable in monthly installments of $5,678, including 6.73% interest, through December 1, 1998........................... -- 146,758 ---------- ---------- 1,773,659 6,002,352 Less current maturities............................. 661,651 1,678,947 ---------- ---------- $1,112,008 $4,323,405 ========== ==========
F-25 NORTH STAR PLATING COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1996 5. LONG-TERM DEBT (CONTINUED) Maturities of long-term debt at September 30, 1996 are as follows: 1997.............................................................. $1,678,947 1998.............................................................. 1,220,874 1999.............................................................. 826,210 2000.............................................................. 715,669 2001.............................................................. 1,560,652 ---------- $6,002,352 ==========
6. OPERATING LEASES The Company leases operating facilities and equipment. The terms of the leases vary. Future lease commitments at September 30, 1996 for noncancelable operating leases are approximately as follows: 1997.............................................................. $1,334,539 1998.............................................................. 1,243,008 1999.............................................................. 1,148,785 2000.............................................................. 1,156,225 2001.............................................................. 1,127,442 Thereafter........................................................ 2,957,006 ---------- $8,967,005 ==========
Total rent expense was $1,362,855, $1,030,903 and $943,794 for the years ended September 30, 1996, 1995 and 1994, respectively. Rent expense to related parties, included in the total rent expense, during those same years was $580,371, $527,815 and $495,415, respectively. Certain leases contain provisions for rent escalation which are being amortized on a straight-line basis over the lives of the leases. 7. INCOME TAXES Significant components of the provision for income taxes are as follows:
1994 1995 1996 -------- -------- ---------- Current Federal..................................... $456,084 $600,368 $1,084,671 State....................................... 103,686 191,848 245,909 -------- -------- ---------- Total current................................ 559,770 792,216 1,330,580 Deferred benefit............................. (63,510) (64,210) (180,466) -------- -------- ---------- $496,260 $728,006 $1,150,114 ======== ======== ==========
F-26 NORTH STAR PLATING COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1996 7. INCOME TAXES (CONTINUED) The effective tax rate for the years ended September 30, 1996, 1995 and 1994 differs from the federal statutory rate primarily as a result of the provision for state income taxes and permanent differences. The reconciliation of income taxes computed at the U.S. federal statutory tax rates to income tax expense is as follows:
1994 1995 1996 ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- ------- ---------- ------- ---------- ------- Pre-tax book income..... $1,260,373 100.0% $1,800,637 100.0% $2,943,443 100.0% ========== ===== ========== ===== ========== ===== Federal tax at 34%...... $ 428,527 34.0% $ 612,217 34.0% $1,000,771 34.0% State tax net of federal benefit................ 60,498 4.8 86,968 4.8 137,627 4.7 Other................... 7,235 0.6 28,822 1.6 11,716 0.4 ---------- ----- ---------- ----- ---------- ----- $ 496,260 39.4% $ 728,007 40.4% $1,150,114 39.1% ========== ===== ========== ===== ========== =====
Deferred income taxes are recorded to reflect temporary differences between financial and tax reporting. The significant components of the net deferred tax assets and deferred tax liabilities at September 30, 1996 and 1995 are as follows:
1995 1996 ------------------ ------------------ NON- NON- CURRENT CURRENT CURRENT CURRENT -------- --------- -------- --------- Deferred tax assets Accrued vacation.................... $ 34,000 $ -- $ 45,800 $ -- Bad debt reserve.................... 20,000 -- 30,000 -- Allowance for sales returns......... -- -- 40,250 -- Allowance for sales discounts....... -- -- 27,603 -- Inventory obsolescence.............. 78,000 -- 136,960 -- UNICAP.............................. 262,000 -- 360,000 -- Non-compete covenant................ -- 13,320 -- 47,413 -------- --------- -------- --------- 394,000 13,320 640,613 47,413 Deferred tax liabilities Depreciation........................ -- 282,400 -- 382,640 -------- --------- -------- --------- Net deferred asset (liability)....... $394,000 $(269,080) $640,613 $(335,227) ======== ========= ======== =========
8. EMPLOYEE BENEFITS PLAN The Company adopted a 401(k) plan in fiscal 1996 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 4% of employee contributions. Employee contributions vest immediately, while employer contributions vest based on years of service. The Company's contribution to the plan was $124,665 during 1996. 9. SUPPLEMENTAL CASH FLOW DISCLOSURES
YEAR ENDED SEPTEMBER 30, ---------------------------- 1994 1995 1996 -------- -------- ---------- Interest paid during the year.................. $185,326 $220,212 $ 530,267 Income taxes paid during the year.............. 696,365 778,830 1,238,375 Purchase of business........................... -- -- 5,219,547
F-27 PHOTO CAPTIONS OF: [RADIATORS & CONDENSERS] [STEEL & PLASTIC BUMPERS] [PRIVATE LABEL PRODUCT LINE] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION PRESENTED HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH SUCH INFORMATION IS GIVEN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES, OR ANY SUCH SHARES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. -------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary ....................................................... 3 Risk Factors ............................................................. 7 Use of Proceeds .......................................................... 12 Dividend Policy .......................................................... 12 Price Range of Common Stock .............................................. 12 Capitalization ........................................................... 13 Selected Consolidated Financial Data ..................................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 16 Business ................................................................. 20 Management ............................................................... 30 Principal and Selling Shareholders........................................ 41 Description of Capital Stock ............................................. 42 Underwriting ............................................................. 45 Legal Matters ............................................................ 46 Experts .................................................................. 46 Additional Information ................................................... 46 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,800,000 SHARES [LOGO OF KEYSTONE AUTOMOTIVE INDUSTRIES, INC.] KEYSTONE AUTOMOTIVE INDUSTRIES, INC. COMMON STOCK ---------------- PROSPECTUS ---------------- MORGAN KEEGAN & COMPANY, INC. A.G. EDWARDS & SONS, INC. CROWELL, WEEDON & CO. , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses in connection with the offering are as follows: SEC registration fee.............................................. $20,826 NASD filing fee................................................... 7,164 Nasdaq filing fee................................................. 17,500 Blue Sky filing fees and expenses................................. 5,000 Printing and engraving expenses................................... 75,000 Legal fees and expenses........................................... 100,000 Accounting fees and expenses...................................... 105,000 Registrar and transfer agent fees................................. 2,000 Miscellaneous..................................................... 67,510 -------- Total........................................................... $400,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The California General Corporations Law provides that California corporations may include provisions in their Articles of Incorporation relieving directors of monetary liability for breach of their fiduciary duty as directors, except for the liability of a director resulting from (i) any transaction from which the director derives an improper personal benefit, (ii) acts or omissions involving intentional misconduct or a knowing and culpable violation of law, (iii) acts or omissions that a director believes to be contrary to the best interest of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iv) acts or omissions constituting an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, (v) acts or omissions showing a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders, (vi) any improper transaction between a director and the corporation in which the director has a material financial interest, or (vii) the making of an illegal distribution to shareholders or any illegal loan or guaranty. The Registrant's Restated Articles of Incorporation contain such a provision. The Underwriting Agreement, a proposed form of which is filed as Exhibit 1.1 hereto, provides for the indemnification of directors, officers, employees, agents and controlling persons of the Registrant by the Underwriters under certain circumstances. The Bylaws of the Registrant require the Registrant to indemnify its directors and officers to the fullest extent permitted by applicable law. The Registrant has entered into indemnification agreements with its directors and executive officers that require the Registrant to indemnify the directors and executive officers to the fullest extent permitted by applicable law. ITEM 15. RECENT SALES Since June 1, 1994, the Company has issued and sold (without payment of any selling commission to any person) the following securities, which were not registered under the Securities Act of 1933, as amended (the "Securities Act"): (a) From April 1, 1994 to March 31, 1995, the Company sold an aggregate of 180,133 shares of Common Stock for an aggregate purchase price of $602,208 to various employees pursuant to the exercise of options granted under the Restricted Stock Option Plan in reliance on Section 4(2) of the Securities Act as not involving a public offering. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES A. EXHIBITS.
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 3.1+++ Amended and Restated Bylaws of the Registrant. [3.4]* 3.1.1 Amendment to Amended and Restated Bylaws of the Registrant. 3.2+++ Restated Articles of Incorporation of the Registrant. [3.5]* 4.1+++ Form of stock certificate. 5.1 Opinion of Manatt, Phelps & Phillips, LLP. 10.1+ Employment Agreement dated June 20, 1996, between the Registrant and Virgil K. Benton II. [10.1]* 10.2+ Employment Agreement dated June 20, 1996, between the Registrant and Charles J. Hogarty. [10.2]* 10.3+ Employment Agreement dated June 20, 1996, between the Registrant and Al A. Ronco. [10.3]* 10.4+ Employment Agreement dated June 20, 1996, between the Registrant and Robert L. Blanton. [10.4]* 10.5++++ Employment Agreement between North Star and Ronald G. Brown. [10.5]* 10.6++++ Employment Agreement between North Star and Kim D. Wood. [10.6]* 10.7+ Indemnification Agreement dated June 20, 1996 between the Registrant and Virgil K. Benton II. [10.5]* 10.8+ Indemnification Agreement dated June 20, 1996 between the Registrant and Charles J. Hogarty. [10.6]* 10.9+ Indemnification Agreement dated June 20, 1996 between the Registrant and Al A. Ronco. [10.7]* 10.10+ Indemnification Agreement dated June 20, 1996, between the Registrant and Robert L. Blanton. [10.8]* 10.11+ Indemnification Agreement dated June 20, 1996, between the Registrant and John M. Palumbo. [10.9]* 10.12++++ Indemnification Agreement between the Registrant and Ronald G. Brown. [10.12]* 10.13++++ Indemnification Agreement between the Registrant and Kim D. Wood. [10.13]* 10.14+ 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]* 10.15+ The Registrant's Employee Defined Benefit Pension Plan, as amended. [10.11]* 10.16+ The Registrant's Employee Stock Ownership Plan, as amended. [10.12]* 10.17+ The Registrant's 1989 Restricted Stock Option Plan. [10.13]* 10.18+ Lease Agreement, dated January 5, 1995, between V-JAC Properties, Ltd. and the Registrant. [10.14]* 10.19+ Lease Agreement, dated January 5, 1995, between B-J Properties, Ltd. and the Registrant. [10.15]* 10.20+ Lease and Option Agreement, dated April 1, 1995, between Benton Real Properties, Inc. and the Registrant. [10.16]* 10.21+ Lease and Option Agreement, dated January 1, 1991, between Benton Real Properties, Inc. and the Registrant. [10.17]*
II-2
EXHIBIT NO. DESCRIPTION ------- ----------- 10.22+ Lease Agreement, dated January 5, 1995, between V-JAC Properties, Ltd. and the Registrant. [10.18]* 10.23+ Loan and Security Agreement, dated December 17, 1990, between Union Bank and the Registrant, as amended. [10.19]* 10.24++ Letter dated May 24, 1996 from Union Bank to the Registrant. [10.19.1]* 10.25+ Term Loan Rider, dated December 17, 1990, between Union Bank and the Registrant. [10.20]* 10.26+ Inventory Rider Agreement, dated December 17, 1990, between Union Bank and the Registrant, as amended. [10.21]* 10.27+ Term Promissory Note, dated December 17, 1990, by the Registrant in favor of Union Bank. [10.22]* 10.28+ Letter of Credit/Bankers Acceptance Rider, dated December 17, 1990, between Union Bank and the Registrant, as amended. [10.23]* 10.29+ ERISA Rider, dated December 17, 1990, between Union Bank and the Registrant. [10.24]* 10.30+ Equipment Rider, dated December 17, 1990, between Union Bank and the Registrant, as amended. [10.25]* 10.31+ Waiver Letter, dated April 15, 1994, between Union Bank and the Registrant. [10.26]* 10.32+ Promissory Note, dated September 28, 1992, from the Registrant to the order of Bumper Exchange, Inc. [10.27]* 10.33++++ Underwriting Agreement dated June 20, 1996, among the Registrant, certain selling shareholders and Morgan Keegan & Company, Inc. and Crowell, Weedon & Co., as representatives of the several underwriters. [10.33]* 10.34++++ Letter Agreement dated January 15, 1996, between Registrant and Crowell, Weedon & Co. [10.34]* 10.35++++ Affiliate Agreement dated December 6, 1996, among the Registrant, North Star Plating Company, Ronald G. Brown and Kim D. Wood. [10.35]* 10.36++++ Form of Registration Rights Agreement among the Registrant, North Star Plating Company, Ronald G. Brown and Kim D. Wood [10.36]* 10.37++++ 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]* 10.38 Credit Agreement dated March 25, 1997 between the Registrant and Mellon Bank, N.A. 10.39++++ Agreement and Plan of Merger among the Registrant, North Star Merger, Inc., North Star Plating Company, Ronald G. Brown and Kim D. Wood dated December 6, 1996. [2.1]* 10.40 Resignation Agreement and General Release effective as of May 23, 1997 between the Registrant and Virgil K. Benton II. 10.41 Lease Agreement, dated January 1, 1995, between North Star and the spouses of Ronald G. Brown and Kim D. Wood. 10.42 Lease Agreement, dated January 1, 1995, between North Star and the spouse of Ronald G. Brown and a third party. 10.43 Lease Agreement, dated January 1, 1995, between North Star and a partnership owned by Kim D. Wood and an employee of North Star. 10.44 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. 11.1 Computation of per share earnings. 21.1 Subsidiaries.
II-3
EXHIBIT NO. DESCRIPTION ------- ----------- 23.1 Consent of Ernst & Young LLP, independent auditors of Registrant. 23.2 Consent of Ernst & Young LLP, independent auditors of North Star Plating Company. 23.3 Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1). 24.1 Power of Attorney (see signature page). 27.1** Financial Data Schedule.
- -------- * Indicates the exhibit number of the document in the original filing. ** Not applicable--no updated interim or annual financial statements. + 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). ++ Filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 30, 1996. +++ 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. ++++ 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). 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. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (a) That for the purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (b) That for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pomona, State of California, on June 6, 1997. KEYSTONE AUTOMOTIVE INDUSTRIES, INC. By: /s/ Charles J. Hogarty -------------------------- Charles J. Hogarty, President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles J. Hogarty and John M. Palumbo, and either of them, his attorneys-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this Registration Statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitutes, may do or cause to be done by virtue thereof. Pursuant to the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Charles J. Hogarty President, Chief Executive June 6, 1997 - ------------------------------------ Officer and Director Charles J. Hogarty /s/ Al A. Ronco Executive Vice President, June 6, 1997 - ------------------------------------ and Director Al A. Ronco /s/ John M. Palumbo Vice President and Treasurer June 6, 1997 - ------------------------------------ (Principal Financial and John M. Palumbo Accounting Officer) Director - ------------------------------------ Ronald G. Brown /s/ Timothy C. McQuay Director June 6, 1997 - ------------------------------------ Timothy C. McQuay Director - ------------------------------------ George E. Seebart
II-5 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Keystone Automotive Industries, Inc. We have audited the financial statements of Keystone Automotive Industries, Inc. as of March 28, 1997, March 29, 1996 and March 31, 1995 and for each of the three years in the period ended March 28, 1997, and have issued our report thereon dated May 23, 1997, (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule of Keystone Automotive Industries, Inc. listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Los Angeles, California May 23, 1997 S-1 KEYSTONE AUTOMOTIVE INDUSTRIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS ------------------- BALANCE AT CHARGED TO CHARGED BALANCE AT BEGINNING COSTS AND TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- -------- ---------- ---------- Year ended March 31, 1995 Allowance for uncollectible accounts. $418 $270 $-- $257(1) $431 Year ended March 31, 1996 Allowance for uncollectible accounts. 431 317 -- 393(1) 355 Year ended March 28, 1997 Allowance for uncollectible accounts. 355 673 -- 370 658
- -------- (1) Uncollectible accounts written off, net of recoveries.
ADDITIONS ------------------- BALANCE AT CHARGED TO CHARGED BALANCE AT BEGINNING COSTS AND TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- -------- ---------- ---------- Year ended March 31, 1995 Allowance for slow- moving inventory....... $ 80 $1,324 $-- $ 42 $1,362 Year ended March 31, 1996 Allowance for slow- moving inventory....... 1,362 641 -- 1,508 495 Year ended March 28, 1997 Allowance for slow- moving inventory....... 495 322 -- 307 510
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 3.1+++ Amended and Restated Bylaws of the Registrant. [3.4]* 3.1.1 Amendment to Amended and Restated Bylaws of the Registrant. 3.2+++ Restated Articles of Incorporation of the Registrant. [3.5]* 4.1+++ Form of stock certificate. 5.1 Opinion of Manatt, Phelps & Phillips, LLP. 10.1+ Employment Agreement dated June 20, 1996, between the Registrant and Virgil K. Benton II. [10.1]* 10.2+ Employment Agreement dated June 20, 1996, between the Registrant and Charles J. Hogarty. [10.2]* 10.3+ Employment Agreement dated June 20, 1996, between the Registrant and Al A. Ronco. [10.3]* 10.4+ Employment Agreement dated June 20, 1996, between the Registrant and Robert L. Blanton. [10.4]* 10.5++++ Employment Agreement between North Star and Ronald G. Brown. [10.5]* 10.6++++ Employment Agreement between North Star and Kim D. Wood. [10.6]* 10.7+ Indemnification Agreement dated June 20, 1996 between the Registrant and Virgil K. Benton II. [10.5]* 10.8+ Indemnification Agreement dated June 20, 1996 between the Registrant and Charles J. Hogarty. [10.6]* 10.9+ Indemnification Agreement dated June 20, 1996 between the Registrant and Al A. Ronco. [10.7]* 10.10+ Indemnification Agreement dated June 20, 1996, between the Registrant and Robert L. Blanton. [10.8]* 10.11+ Indemnification Agreement dated June 20, 1996, between the Registrant and John M. Palumbo. [10.9]* 10.12++++ Indemnification Agreement between the Registrant and Ronald G. Brown. [10.12]* 10.13++++ Indemnification Agreement between the Registrant and Kim D. Wood. [10.13]* 10.14+ 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]* 10.15+ The Registrant's Employee Defined Benefit Pension Plan, as amended. [10.11]* 10.16+ The Registrant's Employee Stock Ownership Plan, as amended. [10.12]* 10.17+ The Registrant's 1989 Restricted Stock Option Plan. [10.13]* 10.18+ Lease Agreement, dated January 5, 1995, between V-JAC Properties, Ltd. and the Registrant. [10.14]* 10.19+ Lease Agreement, dated January 5, 1995, between B-J Properties, Ltd. and the Registrant. [10.15]* 10.20+ Lease and Option Agreement, dated April 1, 1995, between Benton Real Properties, Inc. and the Registrant. [10.16]* 10.21+ Lease and Option Agreement, dated January 1, 1991, between Benton Real Properties, Inc. and the Registrant. [10.17]*
EXHIBIT NO. DESCRIPTION ------- ----------- 10.22+ Lease Agreement, dated January 5, 1995, between V-JAC Properties, Ltd. and the Registrant. [10.18]* 10.23+ Loan and Security Agreement, dated December 17, 1990, between Union Bank and the Registrant, as amended. [10.19]* 10.24++ Letter dated May 24, 1996 from Union Bank to the Registrant. [10.19.1]* 10.25+ Term Loan Rider, dated December 17, 1990, between Union Bank and the Registrant. [10.20]* 10.26+ Inventory Rider Agreement, dated December 17, 1990, between Union Bank and the Registrant, as amended. [10.21]* 10.27+ Term Promissory Note, dated December 17, 1990, by the Registrant in favor of Union Bank. [10.22]* 10.28+ Letter of Credit/Bankers Acceptance Rider, dated December 17, 1990, between Union Bank and the Registrant, as amended. [10.23]* 10.29+ ERISA Rider, dated December 17, 1990, between Union Bank and the Registrant. [10.24]* 10.30+ Equipment Rider, dated December 17, 1990, between Union Bank and the Registrant, as amended. [10.25]* 10.31+ Waiver Letter, dated April 15, 1994, between Union Bank and the Registrant. [10.26]* 10.32+ Promissory Note, dated September 28, 1992, from the Registrant to the order of Bumper Exchange, Inc. [10.27]* 10.33++++ Underwriting Agreement dated June 20, 1996, among the Registrant, certain selling shareholders and Morgan Keegan & Company, Inc. and Crowell, Weedon & Co., as representatives of the several underwriters. [10.33]* 10.34++++ Letter Agreement dated January 15, 1996, between Registrant and Crowell, Weedon & Co. [10.34]* 10.35++++ Affiliate Agreement dated December 6, 1996, among the Registrant, North Star Plating Company, Ronald G. Brown and Kim D. Wood. [10.35]* 10.36++++ Form of Registration Rights Agreement among the Registrant, North Star Plating Company, Ronald G. Brown and Kim D. Wood [10.36]* 10.37++++ 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]* 10.38 Credit Agreement dated March 25, 1997 between the Registrant and Mellon Bank, N.A. 10.39++++ Agreement and Plan of Merger among the Registrant, North Star Merger, Inc., North Star Plating Company, Ronald G. Brown and Kim D. Wood dated December 6, 1996. [2.1]* 10.40 Resignation Agreement and General Release effective dated May 1997 between the Registrant and Virgil K. Benton II. 10.41 Lease Agreement, dated January 1, 1995, between North Star and the spouses of Ronald G. Brown and Kim D. Wood. 10.42 Lease Agreement, dated January 1, 1995, between North Star and the spouse of Ronald G. Brown and a third party. 10.43 Lease Agreement, dated January 1, 1995, between North Star and a partnership owned by Kim D. Wood and an employee of North Star. 10.44 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. 11.1 Computation of per share earnings. 21.1 Subsidiaries.
EXHIBIT NO. DESCRIPTION ------- ----------- 23.1 Consent of Ernst & Young LLP, independent auditors of Registrant. 23.2 Consent of Ernst & Young LLP, independent auditors of North Star Plating Company. 23.3 Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1). 24.1 Power of Attorney (see signature page). 27.1** Financial Data Schedule.
- -------- * Indicates the exhibit number of the document in the original filing. ** Not applicable--no updated interim or annual financial statements. + 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). ++ Filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 30, 1996. +++ 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. ++++ 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). EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 KEYSTONE AUTOMOTIVE INDUSTRIES, INC. _____________ Shares of Common Stock* UNDERWRITING AGREEMENT ___________, 1997 MORGAN KEEGAN & COMPANY, INC. A.G. EDWARDS & SONS, INC. CROWELL, WEEDON & CO. As Representatives of the Several Underwriters named in Schedule II hereto c/o Morgan Keegan & Company, Inc. 50 Front Street Memphis, Tennessee 38103 Ladies and Gentlemen: Keystone Automotive Industries, Inc., a California corporation (the "Company"), and the several shareholders of the Company named in Schedule I hereto (collectively, the "Selling Shareholders") propose to sell to the several underwriters named in Schedule II hereto (collectively, the "Underwriters") __________ shares and __________ shares, respectively (collectively, the "Firm Shares") of the Company's common stock ("Common Stock"), as set forth in Schedule II hereto. The Firm Shares are to be sold to each Underwriter, acting severally and not jointly, in such amounts as are set forth in Schedule II opposite the name of such Underwriter. In addition, for the sole purpose of covering over-allotments in connection with the sale of the Firm Shares, the Company and Selling Shareholders propose to grant to the Underwriters an option to purchase an aggregate of up to ___________ additional shares (collectively, the "Option Shares") of Common Stock. The Firm Shares and any Option Shares purchased pursuant to this Agreement are herein referred to as the "Shares." You have advised the Company and the Selling Shareholders that you are authorized to enter into this Agreement on behalf of the Underwriters for whom you are acting as representatives (the "Representatives"), and that Morgan Keegan & Company, Inc. has authority to execute this Agreement, bind the Underwriters and the Representatives and take all actions on behalf of the Representatives referenced in this Agreement. - ---------------- /*/ Plus an option to purchase from the Company and the Selling Shareholders an aggregate of up to ______ additional shares to cover over-allotments. 1. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to, and agrees with, each Underwriter and each Selling Shareholder that: (a) The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in conformity with the requirements of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-1 (No. 333-______), including a preliminary prospectus, subject to completion, relating to the Shares. The registration statement, as amended at the time it becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the Closing Date (as hereinafter defined), as so amended, including financial statements and exhibits and the information (if any) contained in a prospectus that is deemed to be a part of the registration statement at the time of its effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "Registration Statement," and the prospectus in the form first used to confirm sales of the Shares is hereinafter referred to as the "Prospectus." (b) No order suspending the effectiveness of the Registration Statement or preventing or suspending the use of the Prospectus or any preliminary prospectus has been issued and no proceedings for that purpose are pending, threatened or, to the knowledge of the Company, contemplated by the Commission; no stop order suspending the sale of the Shares in any jurisdiction designated by you pursuant to Section 5(d) hereof has been issued and no proceedings for that purpose are pending, threatened or, to the knowledge of the Company, contemplated; and any request of the Commission and each securities authority or agency of each other jurisdiction for additional information (to be included in the Registration Statement or the Prospectus or otherwise) has been complied with. (c) Each preliminary prospectus in the form filed as part of the Registration Statement as originally filed or filed as part of any amendment thereto, or, if different, in the form used in connection with the offering of the Shares, complied fully in all material respects when so filed or used with the Act, and when the Registration Statement becomes effective and at all times subsequent thereto, the Registration Statement (including, if applicable, the information deemed to be part of the Registration Statement at the time it was declared effective pursuant to Rule 430A under the Act) and the Prospectus and any supplements or amendments thereto, shall comply in all material respects with the provisions of the Act and the Registration Statement and any such amendment thereto at the time such Registration Statement or such amendment becomes effective will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus and any supplements or amendments thereto, will not at any such time contain any untrue statement of 2. a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the foregoing shall not apply to statements in, or omissions from, any such document, in reliance upon, and in conformity with, written information furnished to the Company by you, specifically for use in the preparation thereof. The Company and the Selling Shareholders acknowledge for all purposes under this Agreement (including this paragraph and Section 9 hereof) that the statements appearing in any preliminary prospectus, the Prospectus or the Registration Statement in the _____, ______ and ______ paragraphs and the sentence of the ______ paragraph under the caption "Underwriting", the last paragraph on the cover page and the inside front cover concerning stabilization and overallotment by the Underwriters constitute the only written information furnished to the Company by you for use in the Registration Statement or the Prospectus or any preliminary prospectus (or any amendment or supplement thereto). There is no contract or document required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. (d) Ernst & Young LLP, whose report appears in the Prospectus, are, to the best knowledge of the Company, independent public accountants with respect to the Company as required by the Act. The consolidated financial statements (including the related notes) included in the Prospectus and the Registration Statement (and any amendments or supplements thereto) comply as to form with the requirements of the Act, present fairly the consolidated financial condition, the consolidated results of the operations and consolidated changes in cash flows and equity of the entities purported to be shown thereby at the dates and for the periods indicated and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated; and the other financial and statistical information and the supporting schedules included in the Prospectus and the Registration Statement (and any amendments or supplements thereto), present fairly, in all material respects, the information required to be stated therein. No other financial statements or schedules are required by Form S-1 or otherwise to be included in the Registration Statement or the Prospectus. (e) The only subsidiaries of the Company are Keystone Warehouse Distributors, Inc., a California corporation, which is not a "significant" subsidiary as defined under the Act, and has no assets, liabilities, employees or operations, and North Star Plating Company, a Minnesota corporation ("North Star"). The Company and North Star each has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own or lease and occupy its properties and conduct its business as it is currently being conducted and as described in the Prospectus and, in the Company's case, to authorize the offering of 3. the Shares and to execute, deliver and perform this Agreement and to issue, sell and deliver the Shares to be sold by it, and each of the Company and North Star is duly qualified to do business and is in good standing in each jurisdiction in which the character of the business conducted by it or the location of the properties owned or leased by it makes such qualification necessary except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect (as defined); and the Company and North Star each holds all licenses, certificates and permits from governmental authorities necessary for the conduct of its business as described in the Prospectus. The expiration of any such licenses, permits or other governmental authorizations would not materially affect the operations of the Company or North Star, as the case may be. Complete and correct copies of the respective articles of incorporation and bylaws of the Company and North Star and all amendments thereto have been delivered to you, and no changes therein will be made subsequent to the date hereof and prior to the date of the consummation of the sale of the Shares. (f) The capitalization of the Company is as set forth under the caption "Capitalization" in the Prospectus, and the Common Stock conforms to all statements relating thereto contained in the Registration Statement and the Prospectus; the outstanding shares of Common Stock (including any Shares to be purchased by the Underwriters from the Selling Shareholders) have been, and the Shares that are being sold by the Company, upon issuance and delivery and payment therefor in the manner herein described, will be, duly authorized, validly issued, fully paid and nonassessable. Except for the capital stock of North Star and Keystone Warehouse Distributors, Inc., neither the Company nor North Star owns, or at the date of the consummation of the sale of the Firm Shares will own, directly or indirectly through North Star or otherwise, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. The issued shares of capital stock of North Star have been duly authorized and validly issued, are fully paid and nonassessable and are owned of record and beneficially by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. There are no preemptive or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock or any shares of capital stock of North Star pursuant to the Company's or North Star's respective articles of incorporation, bylaws or other governing documents or any agreement or other instrument to which the Company or North Star is a party or by which the Company or North Star may be bound. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. 4. (g) There has not been any material adverse change in, or any adverse development which materially affects, the business, properties, financial condition, results of operations or prospects of the Company and North Star, taken as a whole, from the date as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, and neither the Company nor North Star has, directly or indirectly, incurred any liabilities or obligations, direct or contingent, or entered into any transactions, not in the ordinary course of business, which are material to the business of the Company and North Star, taken as a whole, and there has not been any change in the capital stock of, or any incurrence of long-term debt or material increase in short-term debt by, the Company or North Star, or any issuance or grant of options, warrants or rights to purchase the capital stock of the Company or North Star, or any declaration or payment of any dividend or other distribution on the capital stock of the Company from the date as of which information is given in the Registration Statement and the Prospectus. (h) Neither the Company nor North Star is, nor with the giving of notice or lapse of time or both would be, in violation of or in default under its articles of incorporation or bylaws, or any material agreement, indenture or other instrument, to which the Company or North Star is a party or by which either of them are bound, or to which either of their properties are subject. Neither the issuance, sale or delivery by the Company of the Shares, nor the execution, delivery and performance of this Agreement nor the consummation by the Company of the transactions contemplated hereby will result in a violation of, or constitute a default under, the restated articles of incorporation or amended and restated bylaws of the Company, or any agreement, indenture or other instrument to which the Company or North Star is a party or by which either of them is bound, or to which either of their properties are subject, nor will the performance by the Company of its obligations hereunder violate any law, ordinance, rule, administrative regulation or decree of any court or any governmental agency or body having jurisdiction over the Company or North Star or any of their respective properties or assets, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company or North Star. Except for permits and similar authorizations required under the Act and the securities or "blue sky" laws of certain jurisdictions and for such permits and authorizations which have been obtained, no consent, approval, authorization or order of any court, governmental agency or body or financial institution is required in connection with the consummation of the transactions contemplated by this Agreement. (i) This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy, and except as enforcement 5. may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally or by general equitable principles. (j) The Company and North Star each has good and marketable title to its properties, free and clear of all liens, encumbrances and defects except such as are described or referred to in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company or North Star, and any real property and buildings held under lease by the Company or North Star are held by it under valid, existing and enforceable leases with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or North Star and except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally or by general equitable principles. The properties of the Company and North Star necessary to the conduct of their respective businesses (as presently conducted and as described in the Prospectus) are in good repair (reasonable wear and tear excepted) and are insured in accordance with industry practice and suitable for their uses. (k) Neither the Company nor North Star, nor any other person or entity for whom the Company or North Star is or may be liable, is in violation of any federal, state, local, provincial or foreign laws or regulations relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products, asbestos or asbestos-containing materials, or polychlorinated biphenyls ("Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern (collectively, "Environmental Laws"), which violation could have a material adverse effect on the condition, financial or otherwise, or the results of operations, cash flow, business affairs or business prospects of the Company and North Star, taken as a whole (a "Material Adverse Effect"). "Violation" includes, but is not limited to, noncompliance with any permit or other governmental authorization required under applicable Environmental Laws and noncompliance with the terms and conditions of any such permit or authorization. (l) Neither the Company nor North Star has received any communication (written or oral), whether from a governmental authority, citizens' group, employee or otherwise, alleging that the Company or North Star, any other person or entity for whom the Company is or may be liable, is not in full compliance with any 6. Environmental Laws or permit or authorization required under applicable Environmental Laws, and there are no circumstances that may prevent or interfere with such full compliance in the future, except where failure to so comply would not have a Material Adverse Effect. (m) There is no claim, action, cause of action, investigation or notice (written or oral) by any person or entity alleging potential liability (including, without limitation, potential liability for investigatory costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from (i) the presence in or release into the environment of any Materials of Environmental Concern at any location owned, leased or operated, now or in the past, by the Company or North Star, or any other person or entity for whom the Company or North Star is or may be liable, or (ii) circumstances forming the basis of any violation or alleged violation of any Environmental Law (collectively, "Environmental Claims") pending or threatened against the Company or North Star or to the Company's knowledge, any other person or entity whose liability for any Environmental Claim the Company or North Star has retained or assumed either contractually or by operation of law. (n) Except as set forth in the Registration Statement and Prospectus, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Materials of Environmental Concern, that could form the basis of any Environmental Claim against the Company or North Star with respect to property owned, leased or operated by or for the Company or North Star, now or in the past, or against any person or entity whose liability for any Environmental Claim the Company or North Star has retained or assumed either contractually or by operation of law. (o) Except as would not, singly or in the aggregate, have a Material Adverse Effect, neither the Company nor North Star has (A) violated any applicable federal, state, provincial or foreign law relating to employment or employment practices or the terms and conditions of employment, including, without limitation, discrimination in the hiring, promotion or pay of employees, wages, hours of work, plant closings and layoffs, collective bargaining, and occupational safety and health, or any provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") or the rules and regulations promulgated thereunder or any other applicable law (whether foreign or domestic) relating to or governing the operation or maintenance of any plan or arrangement falling within the definition of an "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) or any other employee benefit plan or arrangement, nor (B) engaged in any unfair labor practice. There is (i) no unfair labor practice charge or complaint pending or threatened against the Company before the National Labor Relations Board or any corresponding state, local, 7. provincial or foreign agency, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending or threatened against the Company or North Star which would, singly or in the aggregate, have a Material Adverse Effect; and (ii) no union representation claim pending with respect to the employees of the Company or North Star and to the Company's knowledge, no union organizing activities taking place. No labor dispute involving the employees of the Company or North Star is pending or is threatened or to the Company's knowledge, is imminent which could singly or in the aggregate have a Material Adverse Effect; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any principal suppliers, manufacturers or contractors of the Company or North Star which could singly or in the aggregate have a Material Adverse Effect. (p) There is no legal or governmental proceeding to which the Company or North Star is a party or to which any of their respective properties are subject or which is pending or, to the Company's knowledge, threatened or contemplated against the Company or North Star which could result in any Material Adverse Effect or which is required to be disclosed in the Registration Statement or the Prospectus. (q) Neither the Company nor North Star is in violation of any law, ordinance, rule, administrative regulation or decree known to the Company of any court or governmental agency or body having jurisdiction over the Company or North Star or any of their respective properties or assets, which violation could have a Material Adverse Effect. (r) The Company has not taken, and shall not take, directly or indirectly, any action designed to cause or result in, or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (s) The Company and North Star have timely (giving effect to permitted extensions) and properly prepared and filed all necessary federal, state, local and foreign income, franchise and any other required tax returns and have paid all taxes shown as due thereon (other than those being contested in good faith), and neither the Company nor North Star has any knowledge of any tax deficiency which has been or might have a Material Adverse Effect. (t) (A) Neither the Company nor North Star or any current officers or directors of the Company or North Star has at any time and (B) no employee or agent acting on behalf of the Company or North Star has at any time within the last five (5) years, (i) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any contributions to any candidate for political office in accordance with any applicable statute, rule, regulation or ordinance 8. requiring such disclosure, (ii) made any payment to any local, state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by applicable law, (iii) made any payment outside the ordinary course of business to any purchasing or selling agent or person charged with similar duties of any entity to which the Company or North Star sells or from which the Company or North Star buys products for the purpose of influencing such agent or person to buy products from or sell products to the Company or North Star, or (iv) engaged in any transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company. (u) Except as contemplated by this Agreement, the Company is not aware of any claims for services in the nature of a finder's fee, brokerage fee or otherwise with respect to this offering for which the Company or North Star or any of the several Underwriters may be responsible. (v) The Company and North Star own or possess adequate rights to use all trademarks, service marks, trade names and copyrights necessary for the conduct of their respective businesses described in the Prospectus and has taken reasonable security measures to protect the secrecy, confidentiality and value of their respective trade secrets and know-how which are valid and protectible and are not part of the public knowledge or literature and which are necessary for, used in, or proposed to be used in the conduct of their respective businesses described in the Prospectus. Neither the Company nor North Star has received any notice of infringement of or conflict with, and neither the Company nor North Star, to the best of the Company's knowledge, is infringing or in conflict with asserted rights of others with respect to any trademarks, service marks, trade names, copyrights or trade secrets. (w) There are no outstanding loans or advances or guarantees of indebtedness by the Company or North Star to or for the benefit of any affiliate of the Company or North Star, any of the officers or directors of the Company or North Star, or any of the members of the families of any of the foregoing, which are required by the Act to be described in the Registration Statement or the Prospectus except such that are so described. (x) The Company and North Star maintain systems of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general 9. or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (y) The Company and North Star each had at all relevant times full corporate power and authority to execute and deliver the Agreement and Plan of Merger, dated December 6, 1996, among the Company, North Star, North Star Merger, Inc. and Ronald G. Brown and Kim D. Wood (the "North Star Merger Agreement") and to carry out the transactions contemplated thereby (collectively, the "North Star Merger"). The execution, delivery and performance by the Company and North Star of the North Star Merger Agreement and the consummation of the North Star Merger were duly authorized by all requisite corporate action of the Company and North Star, and the North Star Merger Agreement constitutes a valid and binding agreement of each of the Company and North Star, enforceable against the Company and North Star in accordance with its terms, except as rights to indemnity thereunder may be limited by federal or state securities laws and the public policy underlying such laws, and except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally or by general equitable principles. (z) Neither the execution and delivery by the Company or North Star of the North Star Merger Agreement nor the consummation by the Company and North Star of the North Star Merger (i) violated, conflicted with or resulted in a breach of any provision of the respective articles of incorporation or bylaws of the Company and North Star, (ii) violated, conflicted with or resulted in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties of the Company or North Star under, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement or other instrument to which the Company or North Star, or any of their respective properties, may be bound, (iii) violated any order, injunction, judgment, ruling, law or regulation of any court or governmental authority applicable to the Company or North Star or any of their respective properties, or (iv) except for applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder, and the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), required any consent, approval or authorization of, or notice to, or declaration, filing or registration with, any governmental or regulatory authority or other third party, which, in the case of clauses (ii), (iii) and (iv) above, would have a Material Adverse Effect. (aa) No broker, finder or investment banker is entitled to any fee or commission in connection with the transactions contemplated by the North Star Merger Agreement other than as have 10. been paid or accrued by the Company or North Star as reflected in the Company's consolidated financial statements included in the Prospectus and the Registration Statement. (bb) All applicable periods for asserting any dissenter's rights or appraisal rights in connection with the North Star Merger have expired, and no person has asserted or, to the best knowledge of the Company has threatened to asset, any dissenter's rights or appraisal rights under applicable law arising from or in connection with the North Star Merger. (cc) To the best of the Company's knowledge, no facts or circumstances exist giving rise to any claim of the Company for indemnification pursuant to the North Star Merger Agreement. Any certificate signed by any duly authorized officer of the Company or by or on behalf of the Selling Shareholders, respectively, and delivered to you or counsel for the Underwriters shall be deemed a representation and warranty by the Company or the Selling Shareholders, respectively, to each Underwriter as to the matters covered thereby. 2. Representations and Warranties of the Selling Shareholders. ----------------------------------------------------------- (a) Each Selling Shareholder, severally and not jointly, represents and warrants to, and agrees with, each Underwriter, the Company and the other Selling Shareholders that: (i) The execution, delivery and performance of this Agreement by such Selling Shareholder, the sale of the Shares to be sold by such Selling Shareholder, and the performance of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in a breach of any of the terms or provisions, or constitute a default or cause an acceleration of any obligation under any agreement, indenture or other instrument to which such Selling Shareholder is a party or by which such Selling Shareholder or the property of such Selling Shareholder is subject, nor will the performance by such Selling Shareholder of his obligations hereunder violate any law, ordinance, rule, administrative regulation or decree of any court or any governmental agency or body known to such Selling Shareholder having jurisdiction over such Selling Shareholder or any of his properties or assets, or result in the creation or imposition of any lien, charge, claim, or encumbrance upon any property or asset of such Selling Shareholder. (ii) Such Selling Shareholder is, and on the applicable Closing Date (as defined) will be, the lawful owner of the number of Shares to be sold by such Selling Shareholder and has, and on the applicable Closing Date will have, good and marketable title to the Shares to be sold by him to the Underwriters hereunder, free and clear of any security interest, 11. mortgage, pledge, lien, encumbrance, restriction on transfer, claim or equity (including, without limitation, claims made by reason of community property rights), other than those imposed by the Act, the securities or Blue Sky laws of certain jurisdictions and the Power of Attorney and Custody Agreement, as defined below); and upon delivery to the Underwriters of the Shares to be sold by such Selling Shareholder hereunder and payment of the purchase price therefor by the Underwriters as herein contemplated in good faith and without notice of an adverse claim within the meaning of Article VII of the Uniform Commercial Code, each of the Underwriters will receive good and marketable title to its ratable share of the Shares purchased by it from such Selling Shareholder, free and clear of any security interest, mortgage, pledge, lien, encumbrance, restriction on transfer, claim or equity (including, without limitation, claims made by reason of community property rights), other than those imposed by the Act and the securities or Blue Sky laws of certain jurisdictions. (iii) All authorizations, approvals and consents necessary for the execution, delivery and performance by such Selling Shareholder of this Agreement, the Irrevocable Custody Agreement and Power of Attorney in the form previously furnished to you (collectively, the "Custody Agreement") and the sale and delivery by such Selling Shareholder to the Underwriters of the Shares to be sold by such Selling Shareholder hereunder have been obtained and are in full force and effect, other than those imposed by the Act and the securities or Blue Sky laws of certain jurisdictions; and such Selling Shareholder has, and on each applicable Closing Date will have, all requisite right, power and authority to enter into and perform its obligations under this Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder to the Underwriters hereunder. (iv) Such Selling Shareholder has not taken, and shall not take, directly or indirectly, any action designed to cause or result in, or which might reasonably be expected to constitute, stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares to be sold by such Selling Shareholder, and other than as permitted by the Act, such Selling Shareholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (v) This Agreement and the Custody Agreement have each been duly and validly authorized, executed and delivered by or on behalf of such Selling Shareholder and each constitutes the valid and legally binding agreement of such Selling Shareholder, enforceable against such Selling Shareholder in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy, and except as enforcement may be limited by applicable bankruptcy, insolvency, 12. reorganization, moratorium or other similar laws relating to creditors' rights generally or by general equitable principles. (vi) The sale of the Shares to be sold by such Selling Shareholder pursuant to this Agreement is neither prompted by nor based upon any material adverse information concerning the Company known to such Selling Shareholder that is not set forth in the Prospectus. (vii) The information relating to such Selling Shareholder in each preliminary prospectus in the form filed as part of the Registration Statement as originally filed or filed as part of any amendment thereto, or, if different, in the form used in connection with the offering of the Shares, complied fully in all material respects when so filed or used with the Act, and when the Registration Statement becomes effective and at all times subsequent thereto, the information relating to the Selling Shareholder in the Registration Statement (including, if applicable, the information deemed to be part of the Registration Statement at the time it was declared effective pursuant to Rule 430A under the Act) and the Prospectus and any supplements or amendments thereto, shall comply in all material respects with the provisions of the Act, and the Registration Statement and any such information in any amendment thereto at the time such Registration Statement or such amendment becomes effective, will not contain any untrue statement of a material fact relating to such Selling Shareholder or omit to state with respect to such Selling Shareholder a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus and any supplements or amendments thereto, will not at any such time contain any untrue statement of a material fact relating to the Selling Shareholder or omit to state with respect to the Selling Shareholder any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Virgil K. Benton II, Ronald G. Brown, Charles J. Hogarty, Al A. Ronco, Robert L. Blanton, John M. Palumbo and Kim D. Wood (collectively, the "Insider Selling Shareholders"), severally and not jointly, further represent and warrant to, and agree with the Underwriters, the Company and the other Selling Shareholders that the Registration Statement and any amendments thereto, at the time such Registration Statement or such amendment becomes effective, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and the Prospectus and any amendments or supplements thereto will not at any such time contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 13. 3. Sale and Delivery of the Shares to the Underwriters. --------------------------------------------------- (a) Subject to the terms and conditions and upon the basis of the representations and warranties herein set forth, (i) the Company agrees to sell to the several Underwriters, at a price per share of $_____ (the "Purchase Price"), an aggregate of ________ Firm Shares, (ii) each Selling Shareholder agrees, severally and not jointly, to sell to the several Underwriters, at the Purchase Price, the number of Firm Shares set forth opposite the name of such Selling Shareholder on Schedule I hereto and (iii) each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Shareholders, at the Purchase Price, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto. (b) In addition, subject to the terms and conditions and upon the basis of the representations and warranties herein set forth, (i) the Company agrees to sell to the Underwriters, at the Purchase Price, up to __________ Option Shares, (ii) each Selling Shareholder agrees, severally and not jointly, to sell to the several Underwriters, at the Purchase Price, up to the number of Option Shares shown opposite such Selling Shareholder's name on Schedule II hereto, and (iii) the Underwriters shall have the right to purchase, severally and not jointly, from time to time for a period of 30 days from the date of the Prospectus, up to __________ Option Shares and an aggregate of up to ___________ Option Shares, respectively, from the Company and the Selling Shareholders at the Purchase Price. Option Shares may be purchased as provided in Section 4 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The underwriters shall not exercise the foregoing option granted by the Company unless and until they have first exercised in full the foregoing option granted by the Selling Shareholders. Subject to the foregoing sentence, if any Option Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from each Selling Shareholder in the proportion that the number of Option Shares set forth opposite such Selling Shareholder's name on Schedule II hereto bears to the total number of Option Shares to be purchased pursuant to the exercise, the aggregate number of Option Shares (subject to adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Option Shares to be purchased from the Selling Shareholders as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto bears to the total number of Firm Shares. If any Option Shares are to be purchased in excess of the aggregate Option Shares which the Selling Shareholders have agreed to sell, each underwriter, severally and not jointly, agrees to purchase from the Company the aggregate number of Option Shares (subject to adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Option Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II bears to the total number of Firm Shares. 4. Delivery of and Payment for Shares. Delivery of certificates for the ---------------------------------- Firm Shares to be purchased by the Underwriters 14. from the Company and the Selling Shareholders shall be made against payment therefor by certified or official bank check or checks in New York Clearing House next-day funds to the order of the Company, with respect to the Shares purchased from the Company, or to Mr. Charles J. Hogarty or Virgil K. Benton II, as the case may be, with respect to the Shares purchased from such Selling Shareholders as custodian for each of the Selling Shareholders (collectively, the "Custodians"), as the case may be. Such delivery and payment shall be made at 9:00 A.M., local time, at the offices of Morgan Keegan & Company, Inc., 50 Front Street, Memphis, Tennessee (or such other place as mutually may be agreed upon by you, the Company and the Custodians), on the third full business day following the date of the public offering as advised by you to the Company or at such other date not more than seven full business days thereafter as shall be determined by you, the Company and the Custodian (unless, in either case, postponed pursuant to Section 11) (the "First Closing Date"). The option to purchase Option Shares granted in Section 3 hereof may be exercised during the term thereof by written notice to the Company and the Custodians from you. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised and the time and date, not earlier than either the First Closing Date or the second business day after the date on which the option shall have been exercised nor later than the seventh business day after the date of such exercise, as determined by you, when the Option Shares are to be delivered (the "Option Closing Date"). Delivery and payment for such Option Shares is to be at the offices set forth above for delivery and payment of the Firm Shares. Delivery of certificates for the Option Shares to be purchased by the Underwriters from the Selling Shareholders shall be made against payment therefor by certified or official bank checks drawn upon or by a New York Clearing House bank and payable in next-day funds to the order of the Company and the respective Custodians as provided above in this Section 4 with respect to payment for the Firm Shares. (The First Closing Date and the Option Closing Date are herein individually referred to as the "Closing Date" and collectively referred to as the "Closing Dates.") Delivery of certificates for the Shares shall be made by or on behalf of the Company or the Selling Shareholders, as applicable, to you, or the respective accounts of the Underwriters, against payment by you, for the several accounts of the Underwriters, to the Company or the Selling Shareholders, as applicable. The certificates for the Shares shall be registered in such names and denominations as you shall have requested at least three full business days prior to the applicable Closing Date, and shall be made available for checking and packaging at a location as may be designated by you not later than 10:00 A.M. at least two full business days prior to such Closing Date. Time shall be of the essence and delivery at the time and place specified in this 15. Agreement is a further condition to the obligations of each Underwriter. 5. Offering. Upon your authorization of the release of the Firm Shares, -------- the Underwriters propose to offer the Shares for sale to the public at the public offering price and upon the other terms set forth in the Prospectus. 6. Covenants. The Company covenants and agrees with each Underwriter --------- that: (a) The Company shall use its reasonable best efforts to cause the Registration Statement to become effective at the earliest possible time or, if the procedure in Rule 430A of the Act is utilized, to comply with the provisions of, and make all requisite filings with the Commission pursuant to, Rule 430A of the Act and to notify you promptly (in writing, if requested) of all such filings. The Company shall notify you promptly and confirm such notification in writing, (i) when the Registration Statement has become effective (if such Registration Statement has not otherwise become effective prior to the execution of this Agreement), if and when any Prospectus is mailed (or otherwise sent for filing pursuant to Rule 424 under the Act), and when any post-effective amendment to the Registration Statement becomes effective, (ii) of the happening of any event during the period referred to in paragraph (c) below that makes any statement of a material fact made in the Registration Statement untrue or that requires the making of any additions to or changes in the Registration Statement (as amended or supplemented from time to time) in order to make the statement therein not misleading or that makes any statement of a material fact made in the Prospectus (as amended or supplemented from time to time) untrue or that requires the making of any additions to or changes in the Prospectus (as amended or supplemented from time to time) in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (iii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information relating thereto. The Company shall prepare and file with the Commission, promptly upon your request, any amendments of or supplements to the Registration Statement or the Prospectus which, in the opinion of counsel to the several Underwriters, may be necessary or advisable in connection with the distribution of the Shares and shall use every reasonable effort to cause the same to become effective as promptly as possible; and the Company shall not file any amendment of or supplement to the Registration Statement or the Prospectus, whether before or after the time when the Registration Statement becomes effective, which has not previously been submitted to you a reasonable time before the proposed filing thereof or to which you shall reasonably object in writing thereof. The Company shall advise you promptly after it shall receive notice thereof of the issuance by the Commission or any State or other regulatory body of any stop order or other order suspending the effectiveness of the 16. Registration Statement, suspending or preventing the use of any preliminary prospectus or the Prospectus or suspending the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threatening of any proceedings for any such purpose; and the Company shall use every reasonable effort to prevent the issuance of any stop order or other such order and, should a stop order or other such order be issued, to obtain as soon as possible the lifting thereof. (b) The Company shall furnish to the Underwriters, from time to time and without charge, a reasonable number of copies of the Registration Statement of which two for you and one for counsel to the Underwriters shall be signed and shall include exhibits and all amendments and supplements to such Registration Statement. (c) Within the time during which a Prospectus relating to the Shares is required to be delivered under the Act the Company shall furnish to each Underwriter, at the Company's expense, as many copies of the Prospectus (and of each amendment or supplement thereto) as such Underwriter may reasonably request, and the Company shall comply with all requirements imposed upon it by the Act, as now and hereafter amended, so far as is necessary to permit the continuance of sales of or dealings in the Shares as contemplated by the provisions hereof and the Prospectus. If during such period any event occurs as a result of which, in the opinion of counsel for the Underwriters or in the judgment of the Company, the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act, the Company shall promptly notify you and, subject to the provisions of Section 5(a), shall amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance, and will furnish to each Underwriter and to such dealers as you shall specify such number of copies as such Underwriter or dealers may reasonably request. (d) The Company shall use its reasonable best efforts to take or cause to be taken all necessary action and furnish to whomever you may direct such information as may be required in qualifying the Shares for sale under the laws of such jurisdictions which you shall designate and to continue such qualifications in effect for as long as may be required for the distribution of the Shares; except that in no event shall the Company be obligated in connection therewith to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not otherwise so subject. The Company shall file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. 17. (e) The Company shall make generally available to its security holders, in the manner contemplated by Rule 158 under the Act, as soon as practicable but in any event not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earnings statement satisfying the requirements of Section 11(a) of the Act covering a period of at least twelve consecutive months beginning after the effective date of the Registration Statement. (f) For a period of 180 days following the date of the Prospectus, the Company will not, without your prior written consent, (i) purchase any shares of Common Stock or equity securities of the Company or (ii) offer, issue, sell, contract to sell, transfer or otherwise dispose of, for value or otherwise, directly or indirectly, any shares of Common Stock or other equity securities of the Company or any securities convertible into or exchangeable for, or warrants to purchase or acquire, Common Stock, except (w) pursuant to this Agreement or (x) pursuant to the exercise of stock options outstanding as of the date of the Prospectus and disclosed therein or (y) pursuant to sales not in the public market, if the transferees of such non-public sales deliver to you their agreement to be bound by the terms of this provision or (z) pursuant to the issuance of options to employees or directors of the Company pursuant to the Company's 1996 Employee Stock Incentive Plan, provided that such options do not vest prior to 180 days following the date of the Prospectus. (g) The Company shall apply the net proceeds of the sale of the Shares sold by it in the manner specified under the caption "Use of Proceeds" in the Prospectus. (h) The Company shall timely complete all required filings and otherwise fully comply in a timely manner with all provisions of the Act in connection with the public offering of the Shares. (i) The Company shall pay or cause to be paid (A) all expenses (including stock transfer taxes) incurred in connection with the delivery to the several Underwriters of the Shares, (B) all fees and expenses (including, without limitation, fees and expenses of the Company's accountants and counsel) in connection with the preparation, printing, filing, delivery and shipping of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), each preliminary prospectus and the Prospectus, as amended or supplemented, and the printing, delivery and shipping of this Agreement and other underwriting documents, including Underwriters' Questionnaires, Underwriters' Powers of Attorney, Blue Sky Memoranda, Agreements Among Underwriters and Selected Dealer Agreements and any letters transmitting the offering material to Underwriters or selling group members (including costs of mailing and shipment), (C) all filing fees and reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the qualification of the 18. Shares under state securities laws as provided in Section 5(d) hereof up to a maximum of $12,500, (D) the filing fee of the National Association of Securities Dealers, Inc., (E) any applicable listing fees, including the fee for listing the Company's Common Stock on the Nasdaq National Market of the National Association of Securities Dealers Automated Quotation System ("The Nasdaq National Market"), (F) the cost of printing certificates representing the Shares, (G) the cost and charges of any transfer agent or registrar, (H) the costs and expenses of all pre-closing and post-closing advertisements relating to the offering of the Shares, (I) the costs related to travel and lodging incurred by the Company and its representatives relating to meetings with and presentations to prospective purchasers of the Shares and (J) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise provided for in this section. If this Agreement is terminated for any reason whatsoever (other than by reason of a default by any of the Underwriters), the Company shall pay the several Underwriters on demand for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) incurred by the Underwriters in reviewing the Registration Statement and the Prospectus and in connection with the investigation, preparing to market and marketing of the Shares or in contemplation of performing their obligations hereunder. The provisions of this Section are intended to relieve the Underwriters from payment of the expenses and the costs that the Company and the Selling Shareholders agree to pay, and shall not affect any agreements that the Company and the Selling Shareholders may make, or may have made, for the sharing of any such expenses and costs. (j) The Company, at its expense, shall furnish to its shareholders an annual report (including financial statements prepared in accordance with generally accepted accounting prin ciples audited by independent certified public accountants), and, as soon as practicable after the end of each of the first three quarters of each fiscal year, a statement of operations of the Company for such quarter (which may be in summary form), all in reasonable detail, and during the five-year period after the date hereof, at its expense, will furnish you (i) concurrently with providing such reports to its shareholders, a balance sheet of the Company and any subsidiaries as and at the end of such fiscal year, together with statements of income or operations, shareholders' equity and cash flows of the Company and any consolidated subsidiaries, and of any non-consolidated significant subsidiaries, for such fiscal year, all in reasonable detail and accompanied by a copy of the certificate or report thereon of independent certified public accountants; (ii) as soon as they are available, a copy of all reports (financial or other) mailed to security holders; (iii) as soon as they are available, a copy of all periodic reports and financial statements furnished to or filed with the Commission, any securities exchange or the NASD; and (iv) such other information of a public nature concerning the Company as you may from time to time reasonably request. In addition, during 19. such five-year period the Company shall furnish you, concurrently with its release, every material press release and every material news item or article in respect of the Company or its affairs that is released or prepared by the Company. (k) So long as the Company has an active subsidiary or subsidiaries, the financial statements provided for in Section 5(j) shall be on a consolidated basis to the extent the accounts of the Company and its subsidiary or subsidiaries are consolidated in reports furnished to its shareholders generally. Separate financial statements shall be furnished for any subsidiaries whose accounts are not consolidated but which at the time are significant subsidiaries as defined in the Act. (l) At or before the First Closing Date, you shall receive from each Selling Shareholder and from each officer and director of the Company and North Star a written agreement not to offer, sell, contract to sell, transfer or otherwise dispose of, directly or indirectly, for value or otherwise, any shares of Common Stock or other equity securities of the Company or any securities convertible into or exchangeable for, or warrants to purchase or acquire, Common Stock, now owned or hereafter acquired by such person, for a period of 180 days from the date of the Prospectus, except (i) pursuant to sales not in the public market or (ii) pursuant to bona fide gifts or (iii) with your prior written consent, provided that, in the case of (i) and (ii), the transferees of such non-public sales or bona fide gifts, as applicable, deliver to you their agreement to be bound by the terms of this provision. (m) The Company and North Star shall continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (n) The Company shall comply with all registration, filing and reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which may from time to time be applicable to the Company. (o) The Company shall make all filings required, including registration under the Exchange Act, to obtain and maintain the listing of the Common Stock on the Nasdaq National Market concurrently with the effective date of the Registration Statement. 20. (p) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (q) If at any time when a prospectus is required by law to be delivered any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company shall, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and if deemed appropriate by the Company and its counsel in consultation with you and your counsel disseminate, a press release or other public statement reasonably satisfactory to you responding to or commenting on such rumor, publication or event. (r) The Company's Board of Directors shall include at least two independent directors. (s) The Company is familiar with the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (collectively, the "1940 Act") and has in the past conducted its affairs, and will in the future conduct its affairs, in such a manner so as to ensure that the Company was not and will not be an "investment company" within the meaning of the 1940 Act. (t) The Company will supply the Underwriters with copies of all correspondence to and from and all documents issued to and by the Commission or the Commission's staff in connection with the registration of the Shares under the Act. 7. Conditions to the Underwriters' Obligations. The obligations of the ------------------------------------------- several Underwriters hereunder are subject to the accuracy, as of the date hereof and each Closing Date (as if made at such Closing Date), of the representations and warranties of the Company and the Selling Shareholders contained herein or in certificates of any officer of the Company or Selling Shareholder delivered pursuant to the provisions hereof, to the performance by the Company and the Selling Shareholders of their respective obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective not later than 5:30 P.M., eastern time, on the date following the date of this Agreement or, with your consent, at a later time and date as you may agree in writing; all filings required by Rule 424 and Rule 430A of the Act shall have been made; no stop order suspending the effectiveness of the Registration Statement or any amendment or supplement thereto shall have been issued; no proceedings for the issuance of such an order shall have been commenced or shall be 21. pending, or, to the knowledge of the Company, threatened or contemplated by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been disclosed to you and complied with to your satisfaction; and no stop order suspending the sale of the Shares in any jurisdiction shall have been issued, and no proceeding for that purpose shall have been instituted, or, to the knowledge of the Company, threatened or contemplated. (b) On each Closing Date (i) the Registration Statement and the Prospectus, as they may then be amended or supplemented, shall contain all statements that are required to be stated therein under the Act and shall conform in all material respects to the Act, the Company shall have complied in all material respects with Rule 430A (if it shall have elected to rely thereon) and neither the Registration Statement nor the Prospectus, as they may then be amended or supplemented, shall contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein (with respect to the Prospectus, in the light of the circumstances under which they were made) not misleading; (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the business prospects, properties, assets, results of operation or condition (financial or otherwise) of the Company and North Star, taken as a whole, whether or not arising in the ordinary course of business; (iii) no action, suit or proceeding at law or in equity shall be pending or, to the knowledge of the Company or any of the Selling Shareholders, threatened against the Company that would be required to be set forth in the Prospectus other than as set forth therein and no proceedings shall be pending or, to the knowledge of the Company or any of the Selling Shareholders, threatened against the Company before or by any federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding could materially adversely affect the business, prospects, properties, assets, results of operations or condition (financial or otherwise) of the Company and North Star, taken as a whole, other than as set forth in the Prospectus; (iv) the Company and the Selling Shareholders shall have complied with all agreements and satisfied all conditions on their respective parts to be performed or satisfied at or prior to the applicable Closing Date, and (v) the representations and warranties of the Company set forth in Section 1 and the representations and warranties of the Selling Shareholders set forth in Section 2 shall be accurate as though expressly made at and as of the applicable Closing Date. At each applicable Closing Date, you shall have received a certificate executed by the President and the Chief Executive Officer of the Company, dated as of the applicable Closing Date, to such effect and with respect to the following additional matters: (A) the Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement or preventing or suspending the use of the Prospectus has 22. been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of their knowledge, threatened under the Act; and (B) they have carefully reviewed the Registration Statement and the Prospectus and when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus and any amendments or supplements thereto contained all statements and information required to be included therein or necessary to make the statements therein (with respect to the Prospectus, in the light of the circumstances under which they were made) not misleading and neither the Registration Statement nor the Prospectus and any amendment or supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein (with respect to the Prospectus, in light of the circumstances under which they were made) not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus that has not been so set forth, and (C) all representations, warranties, covenants and statements made herein by the Company are true and correct in all material respects at such Closing Date, with the same effect as if made on and as of such Closing Date, and all agreements herein to be performed by the Company on or prior to such Closing Date have been duly performed. At each applicable Closing Date, you shall have received certificates executed by each Selling Shareholder, dated as of the applicable Closing Date, with respect to the following matters: all representations, warranties, covenants and statements made herein by such Selling Shareholder are true and correct in all material respects at such Closing Date, with the same effect as if made on and as of such Closing Date, and all agreements herein to be performed by the Company on or prior to such Closing Date have been duly performed. (c) On the business day immediately preceding the date of this Agreement you shall have received from Ernst & Young LLP, a letter, dated the date hereof in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other Underwriters, confirming that they are independent public accountants with respect to the Company within the meaning of the Act, stating in effect that: (i) in their opinion, the financial statements of the Company and of North Star included in the Registration Statement and covered by their reports therein comply as to form in all material respects with the applicable accounting requirements of the Act; (ii) on the basis of limited procedures (set forth in detail in such letter and made in accordance with such procedures as may be reasonably specified by you) not constituting an audit in accordance with generally accepted auditing standards, consisting of (but not limited to) a reading of the latest 23. available internal unaudited consolidated financial statements of the Company, a reading of minute books of the Company, inquiries of officials of the Company responsible for financial and accounting matters, and such other inquiries and procedures, as may be specified in such letter, nothing has come to their attention which caused them to believe that: (A) the unaudited financial statements and other unaudited financial data of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act or are not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement; (B) the amounts of net sales, income before income taxes, net income and net income per share for the three fiscal years ended March 28, 1997, included in the Prospectus under the caption "Prospectus Summary-Summary Consolidated Financial and Operating Data" do not agree with the corresponding amounts in the audited statements of income; (C) at a specified date not more than five business days prior to the date of delivery of such letter, there was any change in the capital stock or long-term debt or obligations under capital leases of the Company other than scheduled repayments or any decreases in total assets, stockholders' equity or other items of the Company specified by the Underwriters from that set forth in the consolidated balance sheet at March 28, 1997, included in the Prospectus, except as described in the Prospectus or such letter; or (D) for the period from March 28, 1997, to a specified date not more than five days prior to the date of delivery of such letter, there were any decreases in revenue, gross profit or income before income taxes of the Company, in each case as compared with the corresponding period of the preceding year, except in each case for decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (iii) in addition to the procedures referred to in clause (ii) above and the audit referred to in their report included in the Registration Statement, they have carried out certain specific procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by you which are derived from the general accounting records of the Company or North Star, which appear in the Registration Statement or the exhibits or schedules thereto and are specified by you, and have compared such amounts, percentages and financial information 24. with the accounting records of the Company or North Star and with material derived from such records and have found them to be in agreement. (d) At each Closing Date you shall have received from Ernst & Young LLP a letter, in form and substance satisfactory to you and dated as of such Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (c) above, except that the specified date referred to shall be a date not more than five business days prior to such Closing Date. (e) In the event that any of the letters to be delivered pursuant to subsections (c) and (d) above sets forth any such changes, decreases or increases, it shall be a further condition to your obligations that you shall have determined, after discussions with officers of the Company responsible for financial and accounting matters and with Ernst & Young LLP, that such changes, decreases or increases as are set forth in such letters do not reflect a material adverse change in the capital stock, long-term debt, obligations under capital leases, total assets, or stockholders' equity of the Company as compared with the amounts shown in the latest condensed consolidated balance sheet of the Company, or a material adverse change in revenues or the total or per share amounts of income before extraordinary items or net income, of the Company, in each case as compared with the corresponding period of the prior year. (f) On each Closing Date, you shall have received from Troy & Gould Professional Corporation, counsel for the Underwriters, such opinion or opinions with respect to the Registration Statement, the Prospectus and other related matters as you reasonably may require and such counsel shall have received such papers and information as they reasonably may request to enable them to pass upon such matters. (g) On each Closing Date, there shall have been furnished to you the respective opinions (addressed to the Underwriters) of Manatt, Phelps & Phillips, LLP, counsel for the Company and the Selling Shareholders, and Fredrikson & Byron, P.A., special counsel for North Star, each dated such Closing Date and in form and substance reasonably satisfactory to you and counsel for the Underwriters and stating that it may be relied upon by counsel for the Underwriters in giving their opinion, to the effect that: (i) The Company and North Star each has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own or lease and occupy its properties and conduct its business as described in the Prospectus, and is duly qualified to do business and is in good standing in each jurisdiction in which, to such counsel's knowledge, the character of the business conducted by it or the location of the 25. properties owned or leased by it makes such qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect. (ii) The authorized, issued and outstanding capital stock of the Company conforms as to legal matters in all material respects to the description thereof as set forth under the caption "Capitalization" in the Prospectus. The Common Stock of the Company conforms as to legal matters in all material respects to the description thereof contained under the caption "Description of Capital Stock" in the Registration Statement and the Prospectus. The outstanding shares of Common Stock (including any Shares to be purchased by the Underwriters from the Selling Shareholders) have been, and the Shares that are being sold by the Company, upon issuance and delivery and payment therefor in the manner herein described will be, duly authorized, validly issued, fully paid and nonassessable. There are no preemptive or to the knowledge of such counsel other rights to subscribe for or to purchase, or any restrictions upon the voting or transfer of, any shares of Common Stock or any capital stock of North Star pursuant to the Company's or North Star's respective articles of incorporation or bylaws, or any agreement or other instrument known to such counsel to which the Company or North Star is a party or by which the Company or North Star may be bound; and to such counsel's knowledge, neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. To such counsel's knowledge, neither the Company nor North Star has any subsidiaries other than North Star and Keystone Warehouse Distributors, Inc. All of the issued and outstanding shares of capital stock of North Star is owned of record and beneficially by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (iii) Neither the issuance, sale or delivery by the Company and the sale and delivery by the Selling Shareholders of the Shares, nor the execution, delivery and performance of this Agreement by the Company and the Selling Shareholders, nor the consummation by the Company or the Selling Shareholders of any of the other transactions contemplated hereby will result in a violation of, or constitute a default under, the articles of incorporation or bylaws of the Company, or result in a material violation of or constitute a default under any material agreement, indenture or other instrument known to such counsel, to which the Company or any Selling Shareholder is a party or by which any of them is bound, or to which any of their properties are subject, nor, to such counsel's knowledge, will the performance by the Company or any Selling Shareholder of its obligations hereunder violate any law, ordinance, rule, administrative regulation or decree of any court or any governmental agency or body having jurisdiction over the Company or any Selling 26. Shareholder or any of their respective properties or assets, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company; provided, however, that no opinion need be rendered regarding any state securities or Blue Sky laws. Except for permits and similar authorizations required under the Act, by the NASD or under the securities or "blue sky" laws of certain jurisdictions and for such permits and authorizations which have been obtained, no consent, approval, authorization or order of any court or governmental agency or body is required in connection with the consummation by the Company or the Selling Shareholders of the transactions contemplated by this Agreement. To such counsel's knowledge, the Company and North Star is conducting its business so as to comply in all material respects with all applicable statutes and regulations. (iv) The Company is not, nor with the giving of notice or lapse of time or both would be, in violation of or in default under its articles of incorporation or, to such counsel's knowledge, in material violation of or in material default under its bylaws, and neither the Company nor North Star is, nor with the giving of notice of lapse of time or both would be, in violation of or in default under any material agreement, indenture or other instrument known to such counsel, to which the Company or North Star is a party or by which the Company or North Star is bound or to which their respective properties are subject. (v) The Registration Statement and all post-effective amendments thereto have become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending before or contemplated by the Commission and all filings required by Rule 424 and Rule 430A of the Act have been made in a timely manner; and the Registration Statement and the Prospectus and any amendment or supplement thereto, as of their respective effective dates and as of each Closing Date, complied as to form in all material respects with the requirements of the Act (except that counsel need express no opinion on the financial or statistical statements or other financial or statistical data contained therein). (vi) The statements under the captions "Business -- Government Regulation and Environmental Hazards," "Description of Capital Stock," "Shares Eligible for Future Sale," "Dividend Policy," "Underwriting," and "Management" in the Prospectus and in Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, provide a fair summary of such legal matters, documents and proceedings; and such counsel does not know of any contracts or documents of a character required to be summarized or described in the 27. Registration Statement or the Prospectus or required to be filed as exhibits to the Registration Statement which are not so summarized, described or filed. There are no statutes or regulations applicable to the Company or North Star or certificates, permits or other authorizations from governmental regulatory officials or bodies required to be obtained or maintained by the Company or North Star of a character required to be disclosed in the Registration Statement or the Prospectus which have not been so disclosed and described therein. (vii) Except as described in the Prospectus, such counsel does not know of any past, pending or threatened action, suit, proceeding, inquiry or investigation before any court or before or by any public, regulatory or governmental body or board against or involving the properties or business of the Company or North Star or any of the Selling Shareholders of a character required to be disclosed in the Prospectus or, as to threatened litigation, of a character which would be required to be disclosed if filed, or in either case which, if successful, would have a Material Adverse Effect. (viii) Such contracts and documents as are summarized in the Prospectus are fairly summarized in all material respects; and, to such counsel's knowledge, each contract or document so described is in full force and effect in accordance with its terms. (ix) The Company has the corporate power and authority to enter into and perform this Agreement, and to issue, sell and deliver the Shares being issued, sold and delivered by the Company hereunder; this Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by you, constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to the rights of creditors generally and by general equitable principles, and except as rights to indemnification or contribution may be limited under federal and state securities laws and the public policy underlying such laws. (x) All corporate action required in connection with the authorization and issuance of the Shares and the sale of the Shares by the Company in accordance with the terms of this Agreement has been taken and all authorizations, consents, approvals, licenses or other orders of any regulatory body, administrative agency or other governmental body or, to such counsel's knowledge, any other person or entity required for the valid issuance, sale and delivery of the Shares hereunder have been obtained (except that no opinion need be expressed with respect to such authorizations, consents, approvals, licenses or other orders as may be required by the Blue Sky or state securities laws of any jurisdiction in connection with the sale of the Shares). 28. (xi) To such counsel's knowledge, no consents or waivers from the holders of the Company's capital stock are required to consummate the transactions contemplated hereby other than such consents and waivers as have been obtained. (xii) The Company and North Star each had at all relevant times the corporate power and authority to enter into and perform the North Star Merger Agreement and to consummate the North Star Merger as consummated, and the North Star Merger Agreement constitutes the valid and binding agreement of the Company and North Star, enforceable against the Company and North Star in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to the rights of creditors generally and by general equitable principles, and except as rights to indemnification may be limited under federal and state securities laws and the public policy underlying such laws. (xiii) All corporate action each of the Company and North Star required in connection with the authorization of the North Star Merger Agreement and the consummation of the North Star Merger has been taken and all authorizations, consents, approvals, licenses or other orders of any regulatory body, administrative agency or other governmental body or, to such counsel's knowledge, any other person or entity required for the consummation of the North Star Merger have been timely obtained. (xiv) No person has any dissenter's rights or appraisal rights arising from or in connection with the North Star Merger. (xv) Each Selling Shareholder has full legal right, power and authority, and all consents and approvals required pursuant to any agreement, indenture, or other instrument known to such counsel to which such Selling Shareholder is a party or by which he or any of his property or assets are bound, to enter into this Agreement and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be sold by him in the manner provided in this Agreement (except that no opinion need be expressed as to permits, consents and similar authorizations under the state securities or Blue Sky laws of any jurisdiction in connection with the sale of the Shares). (xvi) This Agreement and the Custody Agreement have been duly authorized, executed and delivered by each Selling Shareholder, and is a legal, valid and binding agreement of each Selling Shareholder, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to the rights of creditors generally and by general equitable principles, and except as rights to indemnification and 29. contribution may be limited under federal and state securities laws and the public policy underlying such laws. (xvii) Upon delivery of certificates for the Shares to be sold by each Selling Shareholder pursuant hereto and payment for such Shares as provided herein, valid and marketable title to such Shares will pass to the Underwriters, severally, free and clear of any security interest, mortgage, pledge, lien, encumbrance, restriction on transfer, claim or equity, provided that the Underwriters are without notice of any defect in the title of such Shares and take such Shares in good faith, without notice of any adverse claim. (xviii) To such counsel's knowledge, (1) the Company and North Star has obtained all material licenses, permits and other governmental authorizations necessary to the conduct of its business as described in the Prospectus; and (2) such licenses, permits and other governmental authorizations are in full force and effect and the Company and North Star is in all material respects complying therewith. (xix) The form of certificate representing the Common Stock and filed as an exhibit to the Registration Statement is in due and proper form under California law. (xx) The offer and sale of all securities of the Company made within the last three years as set forth in Item 15 of the Registration Statement were exempt from the registration requirements of the Act pursuant to the provisions set forth in such Item and from the registration or qualification requirements of all relevant state securities laws. (xxi) The Shares have been approved for quotation on The Nasdaq National Market, subject to official notice of issuance. (xxii) The Company is not an "investment company" within the meaning of the 1940 Act. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, counsel for the Underwriters, representatives of the independent public accountants for the Company, the Selling Shareholders, and you and your counsel, at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon, and does not assume responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (other than as set forth in clause (v) above), on the basis of the foregoing, no facts have come to such counsel's attention that lead them to believe either that the Registration Statement at the time such Registration Statement became effective contained an untrue statement of a material fact or omitted to 30. state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, or at the applicable Closing Date contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that such counsel need express no opinion with respect to the financial statements and other financial and statistical data included in the Registration Statement or the Prospectus. In rendering the foregoing opinion, such counsel may rely on the following: (A) as to matters involving the application of laws other than the laws of the United States and the State of California in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' counsel) of other counsel familiar with applicable laws; and (B) as to matters of fact, to the extent they deem proper, on certificates of officers of the Company and the Selling Shareholders and certificates or other written statements of officers or departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and certificates of the Company's transfer agent, provided that copies of all such opinions, statements or certificates shall be delivered to Underwriters' counsel, and, if written confirmation of the Commission is not available at the time such opinion is rendered, upon the current oral representations of members of the Commission's staff with respect to the Registration Statement or any amendment or supplement thereto having become effective and the lack of issuance of a stop order or institution of proceedings for that purpose. (h) At or prior to the First Closing Date, you shall have received the written agreements described in Section 6(l) hereof. (i) At the Closing Date, the Shares shall have been approved for listing on The Nasdaq National Market, subject to official notice of issuance. (j) The Company and the Selling Shareholders shall have furnished to you such additional documents and certificates as you may reasonably request. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you and to counsel for the Underwriters. The Company shall furnish you with such conformed copies of such opinions, certificates, letters and other 31. documents as you shall reasonably request for each of the Underwriters. If any of the conditions specified in this Section 6 shall not have been fulfilled when and as required by this Agreement, this Agreement and all obligations of the Underwriters hereunder may be cancelled at, or at any time prior to, each Closing Date, by you. Any such cancellation shall be without liability of the Underwriters to the Company. Notice of such cancellation shall be given to the Company in writing, or by telegraph or telephone and confirmed in writing. 8. Agreements of the Selling Shareholders. Each Selling Shareholder, -------------------------------------- severally and not jointly, agrees with the Underwriters and the Company: (a) To pay or cause to be paid his own underwriting discounts and commissions. (b) To take all reasonable actions in cooperation with the Company and the Underwriters to cause the Registration Statement to become effective at the earliest possible time, to do and perform all such things to be done and performed relating to such Selling Shareholder under this Agreement prior to each Closing Date, and to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement relating to such Selling Shareholder. (c) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the securities or Blue Sky Laws of such jurisdictions as you may reasonably request and to continue such qualification in effect so long as reasonably required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification, provided, however that no Selling -------- ------- Shareholder shall be required to take any action that would subject him to the general service of process in any jurisdiction where he is not now so subject. (d) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, to deliver to the Underwriters prior to or at the First Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 9. Indemnification. --------------- (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject 32. under the Act, specifically including but not limited to losses, claims, damages or liabilities related to negligence on the part of any Underwriter, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any breach of any warranty or covenant of the Company herein contained or any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto, or in any "blue sky" application or other document executed by the Company or based upon any information furnished in writing by the Company, filed in any jurisdiction in order to qualify any or all of the Shares under the securities laws thereof ("Blue Sky Application"), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements (with respect to the Prospectus, in the light of the circumstances under which they were made) therein not misleading; and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such preliminary prospectus or the Prospectus, or such amendment or supplement, or any Blue Sky Application in reliance upon and in conformity with written information furnished to the Company by you or by any Underwriter through you expressly for use therein; provided, further, that the Company will not be liable for any such losses, claims, damages, or liabilities arising from the sale of the Shares to any person if a copy of the Prospectus (as first filed pursuant to Rule 424(b)) or the Prospectus as amended or supplemented by all amendments or supplements thereto which has been furnished to the Underwriters shall not have been sent, mailed or given to such person, at or prior to the written confirmation of the sale of such Shares to such person, but only if and to the extent that such Prospectus, if so sent or delivered, would have cured the defect giving rise to such losses, claims, damages or liabilities. In addition to its other obligations under this Section 9(a), the Company agrees that, as an interim measure during the pendency of any such claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 9(a), it will reimburse the Underwriters on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expense and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement shall be in addition to any liabilities that the Company may otherwise have. 33. (b) Each Underwriter, severally but not jointly, will indemnify and hold harmless the Company and the Selling Shareholders against any losses, claims, damages or liabilities to which the Company or the Selling Shareholders may become subject, under the Act specifically including but not limited to losses, claims, damages or liabilities related to negligence on the part of the Company and the Selling Shareholders, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any breach of any warranty or covenant by you herein contained or any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto, or any Blue Sky Application or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, such preliminary prospectus or the Prospectus, or such amendment or supplement or any Blue Sky Application, in reliance upon and in conformity with information furnished to the Company by such Underwriter expressly for use therein; and will reimburse the Company and the Selling Shareholders for any legal or other expenses reasonably incurred by the Company or the Selling Shareholders in connection with investigating or defending any such loss, claim, damage, liability or action. In addition to their other obligations under this Section 9(b), the Underwriters agree that, as an interim measure during the pendency of any such claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 9(b), they will reimburse the Company and the Selling Shareholders on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding notwithstanding the absence of a judicial determination as to the propriety and enforceability of their obligation to reimburse the Company or the Selling Shareholders for such expense and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement shall be in addition to any liabilities which the Underwriters may otherwise have. The indemnity agreement in this Section 9(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer and director or partner of the Company or of a Selling Shareholder and each person, if any, who controls the Company or a Selling Shareholder within the meaning of the Act to the same extent as such agreement applies to the Company or the Selling Shareholder. (c) The Selling Shareholders, severally and not jointly, shall indemnify and hold harmless the Company and the Underwriters 34. against any losses, claims, damages or liabilities to which the Company or the Underwriters may become subject, under the Act specifically including but not limited to losses, claims, damages or liabilities related to negligence on the part of the Company or the Underwriters, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any breach of any warranty or covenant by the Selling Shareholders herein contained or any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto, or any Blue Sky Application or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, such preliminary prospectus or the Prospectus, or such amendment or supplement or any Blue Sky Application, in reliance upon and in conformity with information furnished to the Company by such Selling Shareholder expressly for use therein, it being understood that for all purposes of this Agreement that the statements appearing in any preliminary prospectus, the Prospectus or the Registration Statement under the caption "Principal and Selling Shareholders" constitute the only written information furnished to the Company by the Selling Shareholders (other than the Insider Selling Share holders), for use in the Registration Statement or the Prospectus or any preliminary prospectus (or any amendment or supplement thereto); and will reimburse the Company and the Underwriters for any legal or other expenses reasonably incurred by the Company or the Underwriters in connection with investigating or defending any such loss, claim, damage, liability or action. In addition to their other obligations under this Section 9(c), the Selling Shareholders agree that, as an interim measure during the pendency of any such claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 9(c), they will reimburse the Company and the Underwriters on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of their obligation to reimburse the Company or the Underwriters for such expense and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement shall be in addition to any liabilities which the Selling Shareholders may otherwise have. The indemnity agreement in this Section 9(c) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer and director of the Company and each person, if 35. any, who controls the Company within the meaning of the Act to the same extent as such agreement applies to the Company. (d) Within ten days after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; no indemnification provided in Section 9(a), 9(b) or 9(c) shall be available to any party who shall fail to give notice as provided in this Section 9(d) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability that it may have to any indemnified party otherwise than under this Section 9 or to the extent that it is not prejudiced as a proximate result of such failure. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it shall elect by written notice delivered to the indemnified party, jointly with any other indemnifying party, similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its own counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized by the indemnifying party, (ii) the indemnified party shall have been advised by such counsel that there may be a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense of such action (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying party shall not in fact have employed counsel to assume the defense of such action, in any of which events such fees and expenses shall be borne by the indemnifying party. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (e) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Section 9(a), 9(b) and 9(c) hereof, including the amounts of any 36. requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the indemnifying parties, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 9(a), 9(b) and 9(c) hereof and will not resolve the ultimate propriety or enforce ability of the obligation to indemnify for expenses that is created by the provisions of Sections 9(a), 9(b) and 9(c). (f) In order to provide for just and equitable contribution in circumstances under which the indemnity provided for in this Section 9 is for any reason judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company, the Selling Shareholders and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity incurred by the Company, the Selling Shareholders and one or more of the Underwriters, as incurred, in such proportions that (i) the Underwriters are responsible pro rata for that portion represented by the underwriting discount appearing on the cover page of the Prospectus bears to the public offering price (before deducting expenses) appearing thereon, and (ii) the Company and the Selling Shareholders are responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation; provided, however, that if the allocation provided above is not permitted by applicable law, the Company, the Selling Shareholders and the Underwriters shall contribute to the aggregate losses in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company, the Selling Shareholders and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, by the Selling Shareholders or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages or liabilities referred to 37. above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. For purposes of this Section 9(f), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company or a Selling Shareholder within the meaning of Section 15 of the Act shall have the same rights to contribution as the Company or such Selling Shareholder. (g) The parties to this Agreement acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions of this Agreement, including without limitation, the provisions of this Section 9, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 9 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act. The parties are advised that federal or state public policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain of the provisions of this Section 9, and the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under this Section 9 and further agree not to attempt to assert any such defense. In no event shall any of the Selling Shareholders, as such, be required pursuant to the indemnity agreement under this Section 9 or otherwise under this Agreement to pay a total amount in excess of the net amount received by such Selling Shareholder hereunder for the sale of Shares to the Underwriters. 10. Representations and Agreements to Survive Delivery. The -------------------------------------------------- representations, warranties, indemnities, agreements and other statements of the Underwriters, the Selling Shareholders, the Company or its officers set forth in or made pursuant to this Agreement will remain operative and in full force and effect regardless of any investigation made by or on behalf of the Company, the Selling Shareholders or any Underwriter or controlling person, with respect to an Underwriter or the Company and will survive delivery of and payment for the Shares or termination of this Agreement. 38. 11. Effective Date of Agreement and Termination. ------------------------------------------- (a) This Agreement shall become effective (i) if at the time of execution of this Agreement the Registration Statement has not become effective, at 10:00 A.M. eastern time on the first full business day following the effectiveness of the Registration Statement, or (ii) if at the time of execution of this Agreement, the Registration Statement has been declared effective, at 10:00 A.M. eastern time on the first full business day following the date of execution of this Agreement; but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine on and by notice to the Company or by release of any of the Shares for sale to the public. For the purposes of this Section 11, the Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Shares or upon the release by you of telegrams or facsimile messages (i) advising the Underwriters that the Shares are released for public offering, or (ii) offering the Shares for sale to securities dealers, whichever may occur first. By giving notice before the time this Agreement becomes effective, you, as the Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective, without liability of any party to any other party, except that the Company shall remain obligated to pay costs and expenses to the extent provided in Section 6(i) hereof. (b) You may terminate this Agreement by notice to the Company and the Selling Shareholders at any time at or prior to the Closing Date (i) in accordance with the last paragraph of Section 7 of this Agreement; or (ii) if there has been, since the respective dates as of which information is given in the Registration Statement, any material adverse change, or any development which might reasonably be viewed as resulting in a material adverse change in or affecting the assets, properties, results of operation, financial condition or business prospects of the Company, whether or not arising in the ordinary course of business, including without limitation, any failure of refusal for any reason of any Selling Shareholder to sell Shares in the Offering as contemplated in the Registration Statement and any preliminary prospectus disseminated in connection with the Offering; or (iii) if there has occurred or accelerated any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable to market the Shares or enforce contracts for the sale of the Shares; or (iv) if trading in any securities of the Company has been suspended by the Commission or by the NASD or the Nasdaq National Market, or if trading generally on the New York Stock Exchange or in the over-the-counter market has been suspended, or limitations on prices for trading (other than limitations on hours or numbers of days of trading) have been fixed, or maximum ranges for prices for securities have been required, by such exchange or the NASD or by order of the 39. Commission or any other governmental authority; or (v) if a banking moratorium has been declared by federal or New York, California or Tennessee authorities; or (vi) any federal or state statute, regulation, rule or order of any court or other governmental authority has been enacted, published, decreed or otherwise promulgated which in your reasonable opinion materially adversely affects or will materially adversely affect the business or operations of the Company, or (vii) any action has been taken by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States. (c) If this Agreement is terminated pursuant to this Section 11, such termination shall be without liability of any party to any other party, except to the extent provided in Section 6(i). Notwithstanding any such termination, the provisions of Section 9 shall remain in effect. 12. Default by One or More of the Underwriters. ------------------------------------------ (a) If any Underwriter shall default in its obligation to purchase the Firm Shares which it has agreed to purchase hereunder, you shall use your best efforts to arrange for you or another party or other parties to purchase such Firm Shares on the terms contained herein. If within 36 hours after such default by any Underwriter you do not arrange for the purchase of such Firm Shares, then the Company or the Selling Shareholders shall be entitled to a further period of 36 hours within which to procure another party or other parties satisfactory to you to purchase such Firm Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Shareholders that you have so arranged for the purchase of such Firm Shares, or the Company or the Selling Shareholders notifies you that it has so arranged for the purchase of such Firm Shares, you or the Company or the Selling Shareholders shall have the right to postpone the Closing Date for a period of not more than seven days in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any persons substituted under this Section 11 with like effect as if such person had originally been a party to this Agreement with respect to such Firm Shares. (b) If, after giving effect to any arrangements for the purchase of the Firm Shares of a defaulting Underwriter or Underwriters made by you or the Company or the Selling Shareholders as provided in subsection (a) above, the aggregate number of Firm Shares which remains unpurchased does not exceed _______ [10% of Firm Shares] then the Company shall have the right to require each 40. nondefaulting Underwriter to purchase the Firm Shares which such Underwriter agreed to purchase hereunder and, in addition, to require each nondefaulting Underwriter to purchase its pro rata share (based on the number of Firm Shares which such Underwriter agreed to purchase hereunder) of the Firm Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Firm Shares of a defaulting Underwriter or Underwriters made by you or the Company or the Selling Shareholders as provided in subsection (a) above, the number of Firm Shares which remains unpurchased exceeds _________ [10% of Firm Shares], or if the Company shall not exercise the right described in subsection (b) above to require nondefaulting Underwriters to purchase Firm Shares of a defaulting Underwriter or Underwriters, then the Company, the Selling Shareholders or you shall have the right, by written notice within the next twenty-four (24) hours, to terminate this Agreement, without liability on the part of any nondefaulting Underwriter or the Company or the Selling Shareholders except for the expenses to be borne by the Company and the Selling Shareholders as provided in Section 6(i) hereof and the indemnity and contribution agreements in Section 9 hereof, but nothing herein shall relieve a defaulting Underwriter from liability for its default. 13. Default by the Company or the Selling Shareholders. If the Company or -------------------------------------------------- the Selling Shareholders shall fail at the First Closing Date to sell and deliver the respective aggregate number of Firm Shares that they are obligated to sell, then this Agreement shall terminate without any liability on the part of any nondefaulting party, except to the extent provided in Section 6(i) and except that the provisions of Section 9 shall remain in effect. No action taken pursuant to this Section shall relieve the Company or the Selling Shareholders from liability, if any, in respect of its default. 14. Notices. Except as otherwise provided in this Agreement, (a) whenever ------- notice is required by the provisions of this Agreement to be given to the Company, such notice shall be in writing, addressed to the Company at 700 East Bonita Avenue, Pomona, California 91767, or by telecopier (confirmed in writing) at (909) 624-9136, Attention: Charles J. Hogarty, with a copy to Manatt, Phelps & Phillips, LLP at 11355 West Olympic Boulevard, Los Angeles, California 90064, or by telecopier at (310) 312-4224, Attention: Paul H. Irving, (b) whenever notice is required by the provisions of this Agreement to be given to the Selling Shareholders, such notice shall be in writing addressed to the Selling Shareholders in care of Keystone Automotive Industries, Inc., 700 East Bonita Avenue, Pomona, California 91767, or by telecopier (confirmed in writing) at (909) 624-9136, with a copy to Manatt, Phelps & Phillips, LLP at 11355 West Olympic Boulevard, Los 41. Angeles, California 90064, or by a telecopier at (310) 312-4209, Attention: Paul H. Irving, and (c) whenever notice is required by the provisions of this Agreement to be given to the several Underwriters, such notice shall be in writing addressed to the Underwriters in care of Morgan Keegan & Company, Inc., 50 Front Street, Memphis, Tennessee 58103, or by telecopier at (901) 579-4355, Attention: William P. Allen, Jr., with a copy to Troy & Gould Professional Corporation at 1801 Century Park East, Suite 1600, Los Angeles, California 90067, or by telecopier at (310) 201-4746, Attention: Dale E. Short, Esq. 15. Parties. This Agreement is made solely for the benefit of the several ------- Underwriters, the Company, the Selling Shareholders, any officer, director or controlling person referred to in Section 9 hereof, and their respective successors and assigns, and no other person shall acquire or have any right by virtue of this Agreement. The term "successors and assigns," as used in this Agreement, shall not include any purchaser of any of the Shares from any of the Underwriters merely by reason of such purchase. In all dealings with the Company and the Selling Shareholders under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company and the Selling Shareholders shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by Morgan Keegan & Company, Inc. on behalf of you. 16. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Tennessee, without giving effect to the choice of law or conflict of laws principles thereof. 17. Counterparts. This Agreement may be signed in one or more ------------ counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement. 42. Please confirm, by signing and returning to us counterparts of this Agreement, that you are acting on behalf of yourselves and the several Underwriters and that the foregoing correctly sets forth the Agreement among the Company, the Selling Shareholders and the several Underwriters. Very truly yours, KEYSTONE AUTOMOTIVE INDUSTRIES, INC. By: --------------------------- Name: Charles J. Hogarty Title: Chief Executive Officer THE SELLING SHAREHOLDERS By: --------------------------- Charles J. Hogarty, as Attorney-in-Fact By: --------------------------- Virgil K. Benton, as Attorney-in-Fact Confirmed and accepted as of the date first above mentioned MORGAN KEEGAN & COMPANY, INC. A.G. EDWARDS & SONS, INC. CROWELL, WEEDON & CO. as Representatives of the several Underwriters named in Schedule II hereto By: MORGAN KEEGAN & COMPANY, INC. By: ----------------------------- Name: William P. Allen, Jr. Title: First Vice President 43. SCHEDULE I
Number of Number of Firm Shares Option Shares Name of Selling Shareholder to be Sold to be Sold - --------------------------- ----------- ------------- TOTAL........................... =========== =============
44. SCHEDULE II
Number of Firm Shares Name of Underwriter To be Purchased - ------------------- --------------- Morgan Keegan & Co................................. A.G. Edwards & Sons, Inc........................... Crowell, Weedon & Co.............................. --------------- TOTAL.......................................... ===============
45. EX-3.1.1 3 AMENDMENT TO AMENDED AND RESTATED BYLAWS EXHIBIT 3.1.1 AMENDMENT TO AMENDED AND RESTATED BYLAWS OF THE REGISTRANT --------------------------------- Sections 4.6 and 4.7 are studies in their entirety and replaced by the following new Sections 4.6 and 4.7 Section 4.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if --------------------- there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. Section 4.7 PRESIDENT. The President shall be the chief executive --------- officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of the President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. EX-5.1 4 OPINION OF MANATT PHELPS EXHIBIT 5.1 [LETTERHEAD OF MANATT PHELPS PHILLIPS] File No: 11629-044 June 6, 1997 Keystone Automotive Industries, Inc. 700 East Bonita Avenue Pomona, California 91767 Re: Registration Statement on Form S-1 ---------------------------------- Gentlemen: We have acted as special counsel for Keystone Automotive Industries, Inc., a California corporation (the "Company"), in connection with the proposed underwritten public offering (the "Offering") by the Company of 1,760,000 shares (the "Shares") of the Company's Common Stock, no par value, of which 260,000 shares may be issued pursuant to an option granted to the underwriters to cover over-allotments, if any, pursuant to that certain proposed form of Underwriting Agreement (the "Underwriting Agreement") by and among the Company and Morgan Keegan & Company, Inc., A.G. Edwards & Sons, Inc. and Crowell, Weedon & Co., the representatives of the several underwriters (the "Representatives"). In rendering the opinions contained herein, we have examined and relied upon the originals or copies, certified or otherwise identified to our satisfaction to be complete and accurate, of the following: 1. Amended and Restated Articles of Incorporation of the Company, as amended to date; 2. Amended and Restated Bylaws of the Company, as amended to date; 3. Registration Statement on Form S-1 (File No. 333-____) of the Company (the "Registration Statement"); 4. Records of proceedings of the Board of Directors of the Company pertaining to the issuance of the Shares; and 5. The proposed form of Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement. Keystone Automotive Industries, Inc. June 6, 1997 Page 2 With respect to the foregoing documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. In rendering the opinions expressed below, we have relied as to certain factual matters on certificates executed by officers of the Company. While we have no reason to believe that the officers executing such certificates did not have personal knowledge of the matters contained therein or did not accurately set out such knowledge in such certificates, we did not independently verify the matters set forth in such certificates. We have also obtained and relied on certificates and other communications from governmental authorities as to matters concerning the due incorporation, valid existence and good standing of the Company. Based upon the foregoing and subject to receipt of the following documents or satisfaction of the following conditions: (a) The order to be issued by the Securities and Exchange Commission declaring the Registration Statement to be effective; (b) As required, exemptive orders, permits, licenses or no action letters issued by the appropriate regulatory or governmental agencies in the states where the offer and sale of the Shares is to be made; (c) All other conditions and legal requirements necessary to consummate the transactions contemplated by the Underwriting Agreement; and (d) The due execution and delivery of the Underwriting Agreement; upon which our opinions are expressly conditioned, we are of the opinion that: 1. The Company has been duly incorporated and is validly existing under the laws of the State of California. 2. The issuance and sale of the Shares have been duly authorized and, when issued and delivered against payment therefor as provided in the Underwriting Agreement, will be validly issued by the Company, fully paid and nonassessable. We are members of the Bar of the State of California. This opinion is limited to the current laws of the State of California and the United States of America, to present judicial interpretations thereof and to facts as they presently exist. In rendering this opinion, we have no Keystone Automotive Industries, Inc. June 6, 1997 Page 3 obligation to revise or supplement it should the current laws of the State of California or the United States of America be changed by legislative action, judicial decision or otherwise. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference of this firm under the heading "Legal Matters" in the Prospectus constituting a part of the Registration Statement. Respectfully submitted, /s/ Manatt, Phelps & Phillips, LLP ---------------------------------- Manatt, Phelps & Phillips, LLP EX-10.38 5 CREDIT AGREEMENT EXHIBIT 10.38 CREDIT AGREEMENT KEYSTONE AUTOMOTIVE INDUSTRIES, INC. AND MELLON BANK, N.A. MARCH 25, 1997 TABLE OF CONTENTS -----------------
PAGE(S) ------- ARTICLE I DEFINITIONS..................................................... 1 SECTION 1.1 Defined Terms........................................... 1 SECTION 1.2 Other Definitional Provisions........................... 9 ARTICLE II THE CREDIT..................................................... 9 SECTION 2.1 The Revolving Loans..................................... 9 (a) The Revolving Commitment................................... 9 (b) Making the Revolving Loans................................. 9 (c) Reduction of the Revolving Commitment...................... 10 (d) Revolving Note............................................. 10 SECTION 2.2 Letters of Credit....................................... 10 SECTION 2.3 Repayment............................................... 13 (a) Mandatory Repayments....................................... 13 (b) Optional Payment........................................... 13 SECTION 2.4 Interest Rate and Payment Dates......................... 13 (a) Payment.................................................... 13 (b) Interest Rate.............................................. 13 (c) Rate Periods............................................... 14 (d) Default Rate of Interest................................... 14 (e) Selection, Conversion or Renewal of Rate Options........... 14 (f) Prime Rate Fallback........................................ 14 SECTION 2.5 Commitment Fee.......................................... 15 ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS....................... 15 SECTION 3.1 Use of Proceeds......................................... 15 SECTION 3.2 Computation of Interest and Fees........................ 15 (a) Calculations............................................... 15 (b) Determination by Bank...................................... 15 SECTION 3.3 Payments................................................ 15 SECTION 3.4 Payment on Non-Business Days............................ 16 SECTION 3.5 Reduced Return.......................................... 16 SECTION 3.6 Indemnities and Losses.................................. 16 (a) Indemnities................................................ 16 (b) Funding Losses............................................. 17 SECTION 3.7 Requirements of Law..................................... 17 ARTICLE IV CONDITIONS OF LENDING.......................................... 18 SECTION 4.1 Conditions Precedent to Initial Loans................... 18 SECTION 4.2 Conditions Precedent to Each Borrowing.................. 19 ARTICLE V REPRESENTATIONS AND WARRANTIES.................................. 20
i TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- SECTION 5.1 Representations and Warranties.......................... 20 (a) Organization............................................... 20 (b) Authorization.............................................. 20 (c) Governmental Consents...................................... 21 (d) Validity................................................... 21 (e) Financial Condition........................................ 21 (f) Litigation................................................. 21 (g) Employee Benefit Plans..................................... 21 (h) Disclosure................................................. 21 (i) Environmental Matters...................................... 22 (j) Employee Matters........................................... 22 (k) Solvency................................................... 22 (l) Title to Properties........................................ 22 (m) Tax Returns................................................ 23 (n) Compliance with Other Agreements and Applicable Laws....... 23 ARTICLE VI COVENANTS...................................................... 23 SECTION 6.1 Affirmative Covenants................................... 23 (a) Financial Information...................................... 23 (b) Notices and Information.................................... 24 (c) Corporate Existence, Etc................................... 25 (d) Payment of Taxes and Claims................................ 25 (e) Maintenance of Properties; Insurance....................... 26 (f) Inspection................................................. 26 (g) Compliance with Laws Etc................................... 26 (h) Hazardous Waste Studies.................................... 26 SECTION 6.2 Negative Covenants...................................... 27 (a) Consolidated Fixed Charge Coverage Ratio................... 27 (b) Consolidated Current Ratio................................. 27 (c) Consolidated Total Liabilities to Tangible Net Worth Ratio. 27 (d) Consolidated Net Income.................................... 27 (e) Liens Etc.................................................. 27 (f) Indebtedness............................................... 27 (g) Consolidation, Merger or Dissolution....................... 27 (h) Loans, Investments, Secondary Liabilities.................. 27 (i) Asset Sales................................................ 28 (j) Dividends.................................................. 28 (k) Limitation on Granting of Liens and on Restrictions on Subsidiary Dividends and Other Transfers................... 28
ii TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- (l) Transactions with Affiliates............................... 29 (m) Books and Records.......................................... 29 (n) Restructure................................................ 29 (o) No Further Negative Pledges................................ 29 ARTICLE VII EVENTS OF DEFAULT............................................. 29 SECTION 7.1 Events of Default....................................... 29 ARTICLE VIII MISCELLANEOUS................................................ 32 SECTION 8.1 Amendments, Etc......................................... 32 SECTION 8.2 Notices, Etc............................................ 32 SECTION 8.3 Right of Setoff......................................... 32 SECTION 8.4 No Waiver; Remedies..................................... 32 SECTION 8.5 Costs and Expenses...................................... 32 SECTION 8.6 Participations.......................................... 33 SECTION 8.7 Effectiveness: Binding Effect........................... 33 SECTION 8.8 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver........................................... 33 SECTION 8.9 Waiver of Notices....................................... 34 SECTION 8.10 Destruction of Borrower's Documents.................... 34 SECTION 8.11 Entire Agreement....................................... 34 SECTION 8.12 Severability of Provisions............................. 35 SECTION 8.13 Execution in Counterparts.............................. 35
iii CREDIT AGREEMENT This Credit Agreement dated as of March 25, 1997 is entered into between KEYSTONE AUTOMOTIVE INDUSTRIES, INC., a California corporation (the "Borrower") and MELLON BANK, N.A. (the "Bank"). The Borrower and the Bank agree - --------- ---- as follows: ARTICLE I DEFINITIONS SECTION 1.1 Defined Terms. As used in this Agreement, the following ------------- terms have the following meanings: "Agreement": This Credit Agreement, as amended, supplemented or --------- modified from time to time. "Applicable Margin": As of any date of determination, with respect to ----------------- Prime Rate Option Revolving Loans or Libor Rate Option Revolving Loans, as applicable, the percentage set forth opposite the Leverage Ratio in effect as of such date set forth in the table below:
================================================================================ LEVERAGE RATIO APPLICABLE MARGIN APPLICABLE MARGIN LIBOR RATE OPTION PRIME RATE OPTION - -------------------------------------------------------------------------------- Less than or equal to 1.15:1.00 .75% 0% - -------------------------------------------------------------------------------- Greater than 1.15:1.00 .875% 0% ================================================================================
provided, however, that, notwithstanding the foregoing, for purposes of - -------- ------- determining the Applicable Margin, the Leverage Ratio shall be deemed to be greater than 1.15 to 1.0 at all time when an Event of Default or Potential Event of Default has occurred and is continuing based on the Borrower's failure to deliver any financial statement or compliance certificate as and when required pursuant to Sections 6.1(a)(i) and (iv) or 6.1(a)(ii) and (iv), as applicable. For purposes of this Agreement, any change in the Applicable Margin based on a change in the Leverage Ratio shall be effective at such time as the Bank shall have (i) reviewed the financial statements and compliance certificate required by Sections 6.1(a)(i) and (iv) or 6.1(a)(ii) and (iv), as applicable, reflecting such change in the Leverage Ratio warranting a change in the Applicable Margin and (ii) redetermined the Applicable Margin based upon such financial statements and compliance certificate. The initial Applicable Margin to be effective as of the date hereof shall be .75% with respect to Libor Rate Option Revolving Loans and 0% with respect to the Prime Rate Option Revolving Loans until such time as Bank has received the audited annual financial statements for Borrower's fiscal year ending March 28, 1997. 1 "Average Unused Portion of the Revolving Commitment": The Revolving -------------------------------------------------- Credit less the average Daily Balance for the immediately preceding three-month period. "Bank": As set forth in the introductory paragraph of this Agreement. ---- "Borrower": As set forth in the introductory paragraph of this -------- Agreement. "Borrowing": As defined in Section 2.1. --------- "Business Day": Any day on which the Bank is open for business at the ------------ location where the Note is payable unless otherwise stated. "Capital Expenditures": As applied to any Person, all expenditures -------------------- made and liabilities incurred for the acquisition of any fixed asset or improvement, replacement, substitution or addition thereto which has a useful life of more than one year and including, without limitation, those arising in connection with Capital Leases. "Capital Leases": As applied to any Person, any lease of any property -------------- (whether real, personal or mixed) by that Person as lessee which would, in accordance with GAAP, be required to be accounted for as a capital lease on the balance sheet of that Person. "Change of Control": Shall be deemed to have occurred at such times ----------------- as: (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Act of 1934), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than thirty percent (30%) of the total voting power of all classes of stock then outstanding of Borrower normally entitled to vote in the election of directors; or (b) the Borrower shall fail to own directly one hundred percent (100%) of the issued and outstanding common stock of any Guarantor or shall lose voting control of the issued and outstanding common stock of any Guarantor. "Commitment": The Bank's obligation to make Loans to the Borrower ---------- pursuant to Article II in the amount or amounts referred to therein. "Consolidated Interest Expense": For any period shall mean total ----------------------------- interest expense (including amounts properly attributable to Capital Leases in accordance with GAAP) of Borrower and its Subsidiaries on a consolidated basis for such period determined in conformity with GAAP. "Consolidated Tangible Net Worth": At any date of determination, the ------------------------------- sum of the capital stock, additional paid-in capital, and retained earnings (or minus accumulated deficit) of the Borrower and its Subsidiaries on a consolidated basis, minus (i) treasury stock, and (ii) intangible assets ----- (including, without limitation, franchises, patents, patent applications, trademarks, brand names, goodwill, purchased contracts and deferred charges (including unamortized debt discount and expense and organization costs)), determined in conformity with GAAP. 2 "Daily Balance": The amount of Loans and Letters of Credit owed at ------------- the end of a given day. "Dollars and $": Dollars in lawful currency of the United States of ------------- America. "EBITDA": For any period, the consolidated net income of Borrower and ------ its Subsidiaries before Consolidated Interest Expense and provision for income taxes and without giving effect to any extraordinary gains and gains from sales of assets (other than sales of inventory in the ordinary course of business), for such period, adjusted by adding thereto the amount of (a) depreciation and (b) amortization of intangibles, in each case to the extent deducted in arriving at consolidated net income for such period. "ERISA": The Employee Retirement Income Security Act of 1974, as ----- amended to the date hereof and from time to time hereafter and any successor statute. "ERISA Affiliate": As applied to any Person, any trade or business --------------- (whether or not incorporated) which is a member of a group of which that Person is a member and which is under common control within the meaning of Section 414(b) and (c) of the Internal Revenue Code. "Events of Default": Has the meaning set forth in Section 7.1. ----------------- "Fixed Charge Coverage Ratio": As of the date of determination, --------------------------- EBITDA, for the twelve month period preceeding the date of determination minus ----- Capital Expenditures for the twelve month period preceeding the date of determination (excluding Permitted Acquisitions), divided by the sum of (i) ---------- Consolidated Interest Expense for the preceding twelve month period preceding the date of determination, (ii) cash dividends or other cash distributions on the capital stock of the Borrower actually paid during the twelve month period preceding the date of determination, (iii) the principal amount of all long-term liabilities determined in accordance with GAAP including Capital Leases coming due within the twelve month period following the date of determination, and (iv) provision for income taxes for the twelve month period preceeding the date of determination. "GAAP": Generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession or any public commission having regulatory responsibility over the Borrower or any Subsidiary. "Guarantors": Any material Subsidiary of the Borrower, as determined ---------- by Bank, organized under the laws of the United States of America or any political subdivision thereof. "Indebtedness": Of any Person, without duplication: ------------ 3 (a) all indebtedness of such Person for borrowed money; (b) all Obligations of such Person for the deferred purchase price of property or services but excluding trade payables and accrued expenses incurred in the ordinary course of business; (c) all Obligations of such Person evidenced by notes, bonds, debentures or other similar instruments but excluding trade payables and accrued expenses incurred in the ordinary course of business; (d) all Obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property); (e) all Obligations of such Person as lessee under Capital Leases; (f) all Obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities; (g) all Indebtedness of others referred to in clauses (a) through (f) above guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (iv) otherwise to assure a creditor against loss; and (h) all Indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "Interest Rate Options": Has the meaning set forth in Section 2.4(b). --------------------- "Internal Revenue Code": The Internal Revenue Code of 1986, as --------------------- amended to the date hereof and from time to time hereafter and any successor statute. 4 "Letters of Credit": The trade or standby letters of credit which are ----------------- from time to time issued or opened by Bank for the account of Borrower. "Leverage Ratio": At any date of determination, the ratio of (a) -------------- total liabilities of the Borrower and its Subsidiaries on a consolidated basis at such date to (b) Consolidated Tangible Net Worth. "Lien": Any lien, mortgage, deed of trust, pledge, security interest, ---- charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Libor Rate": For any day for any proposed or existing Rate Segment ---------- corresponding to a Rate Period shall mean the rate per annum determined by the Bank to be the rate per annum obtained by dividing (the resulting quotient to be rounded upward to the nearest 1/16 of 1%) (A) the rate of interest (which shall be the same for each day in such Rate Period) estimated in good faith by the Bank in accordance with its usual procedures (which determination shall be conclusive) to be the average of the rates per annum for deposits in United States dollars offered to major money center banks in the London interbank market at approximately 11:00 a.m., London time, two London Business Days prior to the first day of such Rate Period for delivery on the first day of such Rate Period in amounts comparable to such Rate Segment (or, if there are no such comparable amounts actively traded, the smallest amounts actively traded) and have maturities comparable to such Rate Period by (B) a number equal to 1.00 minus the Libor Rate Reserve Percentage for such day. The "Libor Rate" may also be expressed by the following formula: ---------- [average of rates offered to major money banks in the London inter- Libor Rate = bank market estimated by the Bank] ------------------------------------ [1.00 - Libor Rate Reserve Percentage] "LIBOR Rate Option": Has the meaning set forth in Section 2.4(b). ----------------- "Libor Rate Reserve Percentage": For any day shall mean the ----------------------------- percentage (rounded upward to the nearest 1/16 of 1%), as determined in good faith by the Bank (which determination shall be conclusive) as representing for such day the maximum effective reserve requirement (including, without limitation, supplemental, marginal and emergency requirements ) for member banks of the Federal Reserve System with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of any maturity. Each Libor Rate ------------------------ shall be adjusted automatically as of the effective date of any change in the Libor Rate Reserve Percentage. "Loans": Loans made to the Borrower pursuant to Section 2.1. ----- 5 "Loan Documents": This Agreement, the Note(s) and each guarantee, -------------- including, but not limited to, the guaranties of the Guarantors, and other document required by the Bank in connection with this Agreement and/or the credit extended hereunder. "London Business Day": A day for dealing in deposits in Dollars by ------------------- and among banks in the London interbank market. "Maturity Date": March 23, 1998. ------------- "Note" and "Notes": The Revolving Note(s). ---- ----- "Obligation": With respect to any Person, any obligation of such ---------- Person of any kind, including, without limitation, any liability of such Person on any claim, whether or not the right of any creditor to payment in respect of such claim is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed, legal, equitable, secured or unsecured, and whether or not such claim is discharged, stayed or otherwise affected by any insolvency proceeding under the U.S. Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law. Without limiting the generality of the foregoing, the Obligations of the Borrower under the Loan Documents include (a) the obligation to pay principal, interest, charges, expenses, fees, attorneys' fees and disbursements, indemnities and other amounts payable by the Borrower under any Loan Document and (b) the obligation to reimburse any amount in respect of any of the foregoing that any Lender, in its sole discretion, may elect to pay or advance on behalf of the Borrower. "PBGC": The Pension Benefit Guaranty Corporation established pursuant ---- to Subtitle A of Title IV of ERISA. "Permitted Acquisitions": Acquisitions, whether by merger or ---------------------- consolidation with any Person or the acquisition of all or substantially all of the assets of any Person, of the Borrower and its Subsidiaries that meet all of the following criteria: (i) the Borrower must be the surviving entity of any such acquisition, (ii) the acquired business shall be engaged in the manufacture or distribution of aftermarket collision replacement parts for automobiles and light trucks, (iii) the Borrower shall be in pro-forma covenant compliance after giving effect to the acquisition (including giving effect to the incurrence of any debt associated with the acquisition) as of the most recently ended reporting period, (iv) the acquired business, if acquired as an entity, must have a positive net income for the trailing twelve months to the date of the acquisition, (v) the Borrower shall not have acquired the business through a hostile takeover or similar nonconsensual transaction, (vi) the total cash consideration paid for any Permitted Acquisition (in a single transaction or in a series of related transactions) shall not exceed $5,000,000; provided that the -------- total cash consideration paid by Borrower for the acquisition of North Star Plating Company shall not be included in determining Borrower's compliance with the $5,000,000 maximum cash consideration to be paid for Permitted Acquisitions, (vii) no Event of Default or Potential Event of Default would result from such acquisition, and (viii) with respect to the acquisition by Borrower of North Star Plating 6 Company, the Bank shall have approved any Liens remaining on the assets of North Star Plating Company after giving effect to the acquisition. "Person": An individual, partnership, corporation, limited liability ------ company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Plan": Any employee pension benefit plan maintained or contributed ---- to by the Borrower or any ERISA Affiliate of the Borrower and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "Portion": "Prime Rate Portion" shall mean at any time the part, ------- ------------------ including the whole, of the unpaid principal amount of the Note bearing interest at such time under the Prime Rate Option, in accordance with the first sentence of Section 2.4(d) hereof, or in accordance with Section 2.4(f) hereof. "Libor ----- Rate Portion" shall mean at any time, the part, including the whole, of the - ------------ unpaid principal amount of the Note bearing interest at such time under the Libor Rate Option or in accordance with the second sentence of Section 2.4(d) hereof. "Potential Event of Default": A condition or event which, after -------------------------- notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period. "Prime Rate": The interest rate per annum announced from time to time ---------- by the Bank as its Prime Rate. The Prime Rate may be greater or less than other interest rates charged by the Bank to other borrowers and is not solely based or dependent upon the interest rate which the Bank may charge any particular borrower or class of borrowers. Information concerning the Prime Rate may be obtained from the Bank. "Prime Rate Option": Has the meaning set forth in Section 2.4(b). ----------------- "Rate Period": As defined in Section 2.4(c). ----------- "Rate Segment": Of the Libor Rate Portion at any time shall mean the ------------ entire principal amount of such Portion to which at such time there is applicable a particular Rate Period beginning on a particular day and ending on another particular day. (By definition, each Portion is at all times composed of an integral number of discrete Rate Segments, each corresponding to a particular Rate Period, and the sum of the principal amounts of all Rate Segments of a particular Portion at any time equals the principal amount of such Portion at such time). "Regulation G, T, U and X": Regulations G, T, U and X, respectively, ------------------------ promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time, and any successors thereto. 7 "Revolving Commitment": The amount of $25,000,000, as such amount may -------------------- be reduced pursuant to Section 2.1(c); provided, however, $5,000,000 of the -------- ------- Revolving Commitment amount shall be reserved to be made available by Bank to the Borrower at such time and as needed to finance the acquisition by Borrower of North Star Plating Company, such increased Revolving Commitment amount to remain in effect thereafter upon the effectiveness of such acquisition. "Revolving Loans": As defined in Section 2.1(a). --------------- "Revolving Note": As defined in Section 2.1(d). -------------- "S.E.C.": The United States Securities and Exchange Commission and ------ any successor institution or body which performs the functions or substantially all of the functions thereof. "Solvent": When used with respect to any Person, that as of the date ------- as to which the Person's solvency is to be measured: (i) the fair saleable value of its assets is in excess of the total amount of its liabilities (including contingent liabilities) as they become absolute and matured; (ii) it has sufficient capital to conduct its business; and (iii) it is able to meet its debts as they mature. "Standard Notice": An irrevocable notice provided by the Borrower to --------------- the Bank on a Business Day which is: (i) at least the Business Day of the selection of, conversion to or renewal of the Prime Rate Option or prepayment of any Prime Rate Portion; and (ii) at least three London Business Days in advance in the case of selection of, conversion to or renewal of the Libor Rate Option or prepayment of any Libor Rate Portion. Standard Notice must be provided no later than 11:00 a.m., Los Angeles time, on the last day permitted for such notice. "Subsidiary": Of any Person means any corporation, partnership, joint ---------- venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, 8 limited liability company or joint venture or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. References to a "wholly owned Subsidiary" shall be deemed to include a Subsidiary that is wholly owned by such Person except for directors or other qualifying shares. "Total Indebtedness": All consolidated Indebtedness of the Borrower ------------------ and its Subsidiaries. SECTION 1.2 Other Definitional Provisions. ----------------------------- (a) All terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in the Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms not defined in subsection 1.1, and accounting terms partly defined in subsection 1.1 to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. ARTICLE II THE CREDIT SECTION 2.1 The Revolving Loans. ------------------- (a) The Revolving Commitment. The Bank agrees, on the terms and ------------------------ conditions hereinafter set forth, to make loans ("Revolving Loans") to the --------------- Borrower from time to time during the period from the date hereof to and including the Maturity Date in an aggregate amount not to exceed the Revolving Commitment, as such amount may be reduced pursuant to Section 2.1(c). Each borrowing under this Section (a "Borrowing") shall be in a minimum amount of --------- $1.00; provided that every selection of, conversion to or renewal of the Libor -------- Rate Option shall be in a minimum principal amount of $500,000 or an integral multiple of $100,000 above such amount. Within the limits of the Revolving Commitment and prior to the Maturity Date, the Borrower may borrow, repay pursuant to Section 2.2(b) and reborrow under this Section. 9 (b) Making the Revolving Loans. The Borrower may borrow under the -------------------------- Revolving Commitment on any Business Day, provided that the Borrower shall give the Bank Standard Notice specifying (i) the amount of the proposed Borrowing and (ii) the requested date of the Borrowing. Upon satisfaction of the applicable conditions set forth in Article IV, the proceeds of all such Loans will then be made available to the Borrower by the Bank by crediting the account of the Borrower on the books of the Bank, or as otherwise directed by the Borrower. The Standard Notice may be given in writing (including facsimile transmission) signed by one (1) authorized officer of the Borrower or orally, but if the Standard Notice is provided orally, the Borrower shall confirm the oral Standard Notice on the same day in writing (including facsimile transmission) no later than 11:00 a.m., Los Angeles time, and any conflict regarding a written or oral notice and the Bank's books and records applicable to the same Borrowing shall be conclusively determined by the Bank's books and records. The Bank shall not incur any liability to the Borrower in acting upon any oral or written notice of Borrowing which the Bank believes in good faith to have been given by a Person duly authorized to borrow on behalf of the Borrower. (c) Reduction of the Revolving Commitment. The Borrower shall have ------------------------------------- the right, upon at least two Business Days' notice to the Bank, to terminate in whole or reduce permanently in part the unused portion of the Revolving Commitment, without premium or penalty, provided that each partial reduction shall be in the aggregate amount of One Million Dollars ($1,000,000) or an integral multiple thereof and that such reduction shall not reduce the Revolving Commitment to an amount less than the amount outstanding hereunder on the effective date of the reduction. Such notice shall be irrevocable and such reduction shall not be reinstated. (d) Revolving Note. The Loans made by the Bank pursuant hereto shall -------------- be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A, with any appropriate insertions (the "Revolving Note"), payable to - --------- -------------- the order of the Bank and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of all Revolving Loans made by the Bank, with interest thereon as prescribed in Section 2.4. The Bank is hereby authorized to record in its books and records and on any schedule annexed to the Revolving Note, the date and amount of each Revolving Loan made by the Bank, and the date and amount of each payment of principal thereof, and in the case of Libor Rate Option Loans, the Libor Rate, the Libor Rate Portion, and the Rate Period with respect thereto, and any such recordation shall constitute prima facie evidence ----- ----- of the accuracy of the information so recorded; provided that failure by the Bank to effect such recordation shall not affect the Borrower's obligations hereunder. SECTION 2.2 Letters of Credit. ----------------- (a) Subject to, and upon the terms and conditions contained herein, at the request of Borrower, Bank agrees to issue Letters of Credit for the account of Borrower containing terms and conditions acceptable to Bank. Borrower agrees to execute and deliver 10 any Bank applications or other agreements or documents required by the Bank for the issuance of a Letter of Credit. (b) In addition to any charges, fees or expenses charged by Bank in connection with the application for, issuance, administration, or amendment of any Letters of Credit, Borrower shall pay to Bank (i) with respect to each issued standby letter of credit, a letter of credit fee at a rate equal to one percent (1%) per annum of the face amount, subject to a minimum charge of $500, payable upon issuance, such fee calculated on the basis of a three hundred sixty (360) day year and for the actual number of days of the term for which the standby letter of credit is to be outstanding; and (ii) with respect to trade letters of credit, the Bank's customary charges, payable upon Borrower's receipt of the Bank's invoice for such charges. The Borrower's obligation to pay such fees shall survive the termination or non-renewal of this Agreement. (c) No Letters of Credit shall be available unless on the date of the proposed issuance of any Letter of Credit, the Revolving Loans available to Borrower (subject to the Revolving Commitment and any availability reserves) are equal to or greater than one hundred percent (100%) of the face amount thereof and all other commitments and obligations made or incurred by Bank with respect thereto. Effective on the issuance of each Letter of Credit, the amount of Revolving Loans which might otherwise be available to Borrower shall be reduced by one hundred percent (100%) of the face amount of the Letter of Credit. Each Letter of Credit shall have an expiry date no later than the Maturity Date and all such Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion. If Bank is obligated to advance funds under a Letter of Credit, Borrower shall immediately reimburse such amount to Bank and, in the absence of such reimbursement, the amount so advanced immediately and automatically shall be deemed to be an advance under Section 2.1(a) above and, thereafter, shall bear interest as a Revolving Loan initially at the Prime Rate Option. (d) Except in Bank's discretion, the amount of all outstanding Letters of Credit and all other commitments and obligations made or incurred by Bank in connection therewith shall not at any time exceed Five Million Dollars ($5,000,000). (e) Borrower shall indemnify and hold Bank harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which Bank may suffer or incur in connection with any Letter of Credit and any documents, drafts or acceptances relating thereto, including, but not limited to, any losses, claims, damages, liabilities, costs and expenses due to any action taken by any issuer or correspondent with respect to any Letter of Credit. Borrower assumes all risks with respect to the acts or omissions of the drawer under or beneficiary of any Letter of Credit and for such purposes the drawer or beneficiary shall be deemed Borrower's agent. Borrower assumes all risks for, and agrees to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to any Letter of Credit or any documents, drafts or acceptances thereunder. Borrower hereby releases and holds Bank harmless from and against any acts, waivers, errors, delays or omissions, whether caused by Borrower, by any correspondent or otherwise with respect to or relating to any Letter of Credit. The provisions of this Section 2.2(e) shall survive the payment of 11 Obligations and the termination or non-renewal of this Agreement. Bank agrees to provide Borrower written notice of any event giving rise to Borrower's indemnity obligation hereunder, but Bank shall not be liable to Borrower or any third party for any failure to provide such notice to Borrower. (f) Nothing contained herein shall be deemed or construed to grant Borrower any right or authority to pledge the credit of Bank in any manner. Borrower shall be bound by any interpretation made in good faith by Bank, absent gross negligence, or any correspondent under or in connection with any Letter of Credit or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of Borrower. Bank shall have the sole and exclusive right and authority to, and Borrower shall not: (i) at any time an Event of Default or Potential Event of Default exists or has occurred and is continuing, (A) approve or resolve any questions of non- compliance of documents, (B) give any instructions as to acceptance or rejection of any documents or goods or (C) execute any and all applications for steamship or airway guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents, and (B) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letters of Credit, or documents, drafts or acceptances thereunder. Bank may take such actions either in its own name or in Borrower's name. (g) Any rights, remedies, duties or obligations granted or undertaken by Borrower to any correspondent in any application for any Letter of Credit, or any other agreement in favor of any correspondent relating to any Letter of Credit, shall be deemed to have been granted or undertaken by Borrower to Bank. Any duties or obligations undertaken by Bank to any issuer or correspondent in any application for any Letter of Credit, or any other agreement by Bank in favor of any correspondent relating to any Letter of Credit, shall be deemed to have been undertaken by Borrower to Bank and to apply in all respects to Borrower. (h) Any and all charges, commission, fees, and costs incurred by Bank relating to the Letters of Credit shall be considered Bank expenses under Section 8.5 hereof and immediately reimbursable by Borrower to Bank. (i) Immediately upon the termination of this Agreement, Borrower agrees to either (i) provide cash collateral to be held by Bank in an amount equal to 102% of the maximum amount of Bank's obligations under outstanding Letters of Credit, or (ii) cause to be delivered to Bank releases of all of Bank's obligations under outstanding Letters of Credit. At any time an Event of Default or Potential Event of Default exists or has occurred and is continuing, upon Bank's request, Borrower will either furnish cash collateral to Bank for the Letters of Credit, and the Revolving Loans otherwise available to Borrower shall not be reduced as provided in Section 2.2(c) to the extent of such cash collateral. At Bank's discretion, any proceeds of Collateral received by Bank after the occurrence and during the 12 continuation of an Event of Default or Potential Event of Default may be held as the cash collateral required by this Section 2.2(i). (j) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application by any governmental authority of any such applicable law, treaty, rule, or regulation, or (ii) compliance by Bank with any direction, request, or requirement (irrespective of whether having the force of law) of any governmental authority or monetary authority including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect (and any successor thereto): (A) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letters of Credit issued hereunder, or (B) there shall be imposed on Bank any other condition regarding any letter of credit, or Letter of Credit, as applicable, issued pursuant thereto; and the result of the foregoing is to increase, directly or indirectly, the cost to the Bank of issuing, making, or maintaining any Letter of Credit, or to reduce the amount receivable in respect thereof by Bank, then, and in any such case, Bank may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Borrower, and Borrower shall pay on demand such amounts as the Bank may specify to be necessary to compensate the Bank for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the Prime Rate Option. The determination by the Bank, as the case may be, of any amount due pursuant to this Section (j), as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. SECTION 2.3 Repayment. --------- (a) Mandatory Repayments. The aggregate principal amount of the -------------------- Revolving Loans outstanding on the Maturity Date, together with accrued interest thereon, shall be due and payable in full on the Maturity Date. If at any time the aggregate outstanding Borrowings exceed the Revolving Commitment then in effect, the Borrower shall immediately repay the excess to the Bank. (b) Optional Payment. The Borrower shall have the right at its option ---------------- from time to time to prepay the Prime Rate Portion in whole or in part without premium or penalty. The Borrower shall have the right to prepay the Libor Rate Portion in whole or in part subject to Borrower's reimbursement of Lender's funding losses, if any, resulting from such prepayment under Section 3.6(b) hereof. Prepayments shall be made by giving the Bank Standard Notice thereof (which shall be irrevocable), specifying the date, and amount and type of prepayment, and upon such date the amount so specified, accrued interest thereon, and any amounts payable under Section 3.6(b) hereof shall be due and payable. 13 SECTION 2.4 Interest Rate and Payment Dates. ------------------------------- (a) Payment. The principal balance of the Note shall be paid in ------- accordance with the terms set forth in the Note. Accrued interest on the Prime Rate Portion shall be due and payable on the last Business Day of each month commencing on April 30, 1997. Interest on each Rate Segment of the Libor Rate Portion shall be due and payable on the last day of the corresponding Rate Period. Interest on each Rate Segment of the Libor Rate Portion which has a Rate Period equal to or less than three months shall be due and payable on the last day of the corresponding Rate Period. Interest on each Rate Segment of the Libor Rate Portion which has a Rate Period greater than three months shall be due and payable on the third and sixth month anniversary date of the first day of the corresponding Rate Period, if any, and on the last day of the corresponding Rate Period. After maturity of any part of a Note (by acceleration or otherwise), interest on such part of the Note shall be due and payable ON DEMAND. (b) Interest Rate. The unpaid principal amount of the Note shall bear ------------- interest for each day until due on one or more bases selected by the Borrower from among the interest rate options (the "Interest Rate Options") set forth --------------------- below. The Borrower understands and agrees that, subject to the provisions hereof, the Borrower may select any number of Interest Rate Options to apply simultaneously to different parts of the unpaid principal amount of the Note and may select any number of Rate Segments to apply simultaneously to different parts of the Libor Rate Portion. Available Interest Rate Options ------------------------------- Prime Rate Option: A rate per annum for each day equal to the Prime Rate plus - ----------------- the Applicable Margin. Libor Rate Option: A rate per annum for each day equal to the Libor Rate for - ----------------- such day plus the Applicable Margin. (c) Rate Periods. At any time the Borrower selects, converts to or ------------ renews the Libor Rate Option, the Borrower shall fix a period (the "Rate ---- Period") which shall be one, two, three or six months, which shall be acceptable to the Bank in the Bank's sole discretion, during which the Libor Rate Option shall apply to the corresponding Rate Segment; provided, that the Borrower may -------- not elect a Rate Period which will end after the Maturity Date. The Bank's right to payment of principal and interest under the Note shall in no way be affected by the fact that one or more Rate Periods may be in effect. (d) Default Rate of Interest. All Loans hereunder with accrued ------------------------ interest thereon, regardless of the Rate Option, and all other amounts owing under the Loan Documents shall bear interest at a rate equal to 2% above the applicable Interest Rate Option from and after the occurrence and during the continuance of an Event of Default. 14 (e) Selection, Conversion or Renewal of Rate Options. Subject to the ------------------------------------------------ other provisions hereof, the Borrower may select any Interest Rate Option to apply to the borrowings evidenced by the Note. Subject to the other provisions hereof, the Borrower may convert any part of the unpaid principal amount of the Note from any Interest Rate Option to the other Interest Rate Option: (a) at any time with respect to the conversion from the Prime Rate Option to the Libor Rate Option and (b) at the expiration of any Rate Period with respect to conversion from or renewals of the Libor Rate Option as to the Rate Segment corresponding to such expiring Rate Period. Whenever the Borrower desires to select, convert or renew the Libor Rate Option, the Borrower shall give the Bank Standard Notice thereof (which shall be irrevocable), specifying the date, amount and type of the proposed new Rate Option. If such notice has been duly given, and if the Bank in its sole discretion approves the proposed selection, conversion or renewal, on and after the date specified in such notice, interest shall be calculated upon the unpaid principal amount of the Note taking into account such selection, conversion or renewal. (f) Prime Rate Fallback. If any Rate Period expires, any part of the ------------------- Rate Segment corresponding to such Rate Period which has not been converted or renewed in accordance with Section 2.4(e) hereof automatically shall be converted to the Prime Rate Option. If the Borrower fails to select, or if the Bank fails to approve an Interest Rate Option to apply to the borrowings evidenced by the Note, such borrowings shall be deemed to be at the Prime Rate Option. If at any time the Bank shall have determined in good faith (which determination shall be conclusive) that the accrual of interest at the Libor Rate Option has been made unascertainable, impractical or unlawful by compliance by the Bank in good faith with any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic, or administration thereof by any official body charged with the interpretation or administration thereof or with any request or directive of any such event, the outstanding principal amount of the Note subject to the Libor Rate Option shall accrue interest at the Prime Rate Option and the Borrower shall not have the right to select the Libor Rate Option. SECTION 2.5 Commitment Fee. The Borrower shall pay to the Bank on -------------- the dates set forth in the following sentence, a fee (the "Commitment Fee") in -------------- an amount equal to one-eight of one percent (.125%) per annum times the Average Unused Portion of the Revolving Commitment. The Borrower shall pay the Commitment Fee to the Bank quarterly in arrears, commencing on the last Business Day of June 1997 and continuing on the last Business Day of each three-month period ending thereafter during the term of this Agreement, and on the Maturity Date. ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS 15 SECTION 3.1 Use of Proceeds. The proceeds of the Loans hereunder --------------- shall be initially used by Borrower to repay Borrower's existing Indebtedness with Union Bank of California and to refinance any Indebtedness assumed by the Borrower upon the acquisition of North Star Plating Company. The remaining balance of Loan proceeds shall be used from time to time for (i) general working capital and corporate purposes, and (ii) Permitted Acquisitions and related expenses. SECTION 3.2 Computation of Interest and Fees. -------------------------------- (a) Calculations. Interest in respect of the Prime Rate Option Loans ------------ shall be calculated on the basis of a 360 day year for the actual days elapsed. Any change in the interest rate on a Prime Rate Loan resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate shall become effective. Interest in respect of the Libor Rate Option Loans, and any fees payable hereunder, shall be calculated on the basis of a 360 day year for the actual days elapsed. (b) Determination by Bank. Each determination of an interest rate or --------------------- fee by the Bank pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower in the absence of manifest error. SECTION 3.3 Payments. The Borrower shall make each payment of -------- principal, interest and fees hereunder and under the Notes, without setoff or counterclaim, not later than 11:00 a.m. (Los Angeles time) on the day when due in lawful money of the United States of America to the Bank at the office of the Bank designated in writing in immediately available funds. SECTION 3.4 Payment on Non-Business Days. Whenever any payment to be ---------------------------- made hereunder or under the Notes shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. SECTION 3.5 Reduced Return. If the Bank shall have determined that -------------- any applicable law, regulation, rule or regulatory requirement generally applicable to banks located in California and Pennsylvania (collectively in this Section 3.5, "Requirement" regarding capital adequacy, or any change therein, or ----------- any change in the interpretation or administration thereof by any United States federal or state governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its Commitments and obligations hereunder to a level below that which would have been achieved but for such Requirement, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank to be material (which amount shall be 16 determined by the Bank's reasonable allocation of the aggregate of such reductions resulting from such events), then from time to time, within five (5) Business Days after demand by the Bank, the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. The Bank does not presently have knowledge of any new Requirement or any pending change in any existing Requirement which would result in such additional amounts being owed. SECTION 3.6 Indemnities and Losses. ---------------------- (a) Indemnities. Whether or not the transactions contemplated hereby ----------- shall be consummated, the Borrower agrees to indemnify, pay and hold the Bank, and the shareholders, officers, directors, employees and agents of the Bank (each, an "Indemnified Person"), harmless from and against any and all claims, ------------------- liabilities, losses, damages, costs and expenses (whether or not any of the foregoing Indemnified Persons is a party to any litigation), including, without limitation, reasonable attorneys' fees and costs (including, without limitation, the reasonable estimate of the allocated cost of in-house legal counsel and staff) and costs of investigation, document production, attendance at a deposition, or other discovery, prior to the assumption of defense by the Borrower, with respect to or arising out of any proposed acquisition by the Borrower or any of its Subsidiaries of any Person or any securities (including a self-tender), this Agreement or any use of proceeds hereunder, or any claim, demand, action or cause of action being asserted against the Borrower or any of its Subsidiaries (collectively, the "Indemnified Liabilities"), provided that ----------------------- the Borrower shall have no obligation hereunder with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of any such Indemnified Persons. If any claim is made, or any action, suit or proceeding is brought, against any Indemnified Person pursuant to this Section, the Indemnified Person shall notify the Borrower within thirty (30) days of the Bank's being notified in writing of the commencement of such action, suit or proceeding, and the Borrower will assume the defense of such action, suit or proceeding, employing counsel selected by the Borrower and reasonably satisfactory to the Indemnified Person, and pay the fees and expenses of such counsel. This covenant shall survive termination of this Agreement and payment of the outstanding Notes for a period of six (6) years. (b) Funding Losses. The Borrower agrees to indemnify the Bank and to -------------- hold the Bank harmless from any loss or expense, including, but not limited to, any such loss or expense arising from interest or fees payable by the Bank to lenders of funds obtained by it in order to maintain its Libor Rate Option Loans hereunder, which the Bank may sustain or incur as a consequence of (i) payment, prepayment or conversion of any part of any Rate Segment of the Libor Rate Portion on a day other than the last day of the corresponding Rate Period (whether or not any such payment is pursuant to demand by the Bank under the Note and whether or not any such payment, prepayment or conversion is consented to by the Bank, unless the Bank shall have expressly waived such indemnity in writing); (ii) default by the Borrower in making a conversion or continuation after the Borrower has given a notice thereof, (iii) default by the Borrower in making any payment after the Borrower has given a notice of payment, (iv) attempt by Borrower to revoke in whole or part any irrevocable notice given pursuant to Section 2.4(e) hereof; or (v) breach of or default by any obligor in the 17 performance or observance of any covenant or condition in the Note, any separate security, guarantee or suretyship agreement between the Bank and any obligor, or any other document executed and delivered to the Bank by any obligor in connection with the indebtedness evidenced by the Note. If the Bank sustains any such loss or expense, it shall from time to time notify the Borrower of the amount determined in good faith by the Bank (which determination shall be conclusive) to be necessary to indemnify the Bank for such loss or expense. Such amount shall be due and payable by the Borrower ON DEMAND. This covenant shall survive termination of this Agreement and payment of the outstanding Notes. SECTION 3.7 Requirements of Law. In the event that any law, ------------------- regulation or directive generally applicable to banks located in California or Pennsylvania or any change therein or in the interpretation or application thereof or compliance by the Bank with any request or directive (whether or not having the force of law) from any United States federal or state central bank or other governmental authority, agency or instrumentality: (a) does or shall impose, modify or hold applicable any reserve, assessment rate, special deposit, compulsory loan or other requirement (collectively in this Section 3.7 "Requirements") against assets held by, or ------------ deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of the Bank which are not otherwise included in the determination of any Libor Rate at the last Borrowing, conversion or continuation date of a Loan; (b) does or shall impose, modify or hold applicable any of the Requirements against Commitments to extend credit; (c) does or shall impose on the Bank any other condition; and the result of any of the foregoing is to increase the cost to the Bank of making, renewing or maintaining its Revolving Commitment, or the Libor Rate Option Loans or to reduce any amount receivable thereunder (which increase or reduction shall be determined by the Bank's reasonable allocation of the aggregate of such cost increases or reduced amounts receivable resulting from such events), then, in any such case, the Borrower shall pay to the Bank, within five (5) Business Days of its demand, any additional amounts necessary to compensate the Bank for such additional cost or reduced amount receivable as determined by the Bank with respect to Sections 3.5 and 3.7 of this Agreement. If the Bank becomes entitled to claim any additional amounts pursuant to this subsection, it shall notify the Borrower of the event by reason of which it has become so entitled. Such notice shall contain a statement incorporating the calculation as to any additional amounts payable pursuant to the foregoing sentence, and such statement submitted by the Bank to the Borrower shall be conclusive in the absence of manifest error. The Bank does not presently have knowledge of any new Requirement or any pending change in any existing Requirement which would result in such additional amounts being owed. 18 ARTICLE IV CONDITIONS OF LENDING SECTION 4.1 Conditions Precedent to Initial Loans. The obligation of ------------------------------------- the Bank to make its initial Loan is subject to the conditions precedent that: (a) The Bank shall have received on or before the day of the initial Borrowing the following, each dated prior to or as of such day, in form and substance satisfactory to the Bank: (i) The Note(s) issued by the Borrower to the order of the Bank; (ii) Copies of the Articles of Incorporation, partnership agreement or other organizational document of the Borrower, certified as of a recent date by the Secretary of State of its state of formation or incorporation; (iii) Copies of the Bylaws, if any, of the Borrower, certified by the Secretary or an Assistant Secretary of the Borrower; (iv) Copies of resolutions of the Board of Directors or other authorizing documents of the Borrower, in form and substance satisfactory to the Bank, approving the Loan Documents and the Borrowings hereunder; (v) An incumbency certificate executed by the Secretary or an Assistant Secretary of the Borrower, or equivalent document, certifying the names and signatures of the officers of the Borrower or other Persons authorized to sign the Loan Documents and the other documents to be delivered hereunder; (vi) An executed original of all Loan Documents; (b) The Bank shall have completed its due diligence review of the Borrower, and the scope and results thereof shall be satisfactory to the Bank in its discretion; (c) All fees required to be paid at closing shall have been paid; (d) The Bank shall have received an opinion of counsel to the Borrower and the Guarantors in form and substance acceptable to the Bank and its counsel; (e) No material adverse change shall have occurred since December 27, 1996 in the business, assets, operations, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries, taken as a whole, or in the facts and information regarding such entities represented by the Borrower to the Bank as of such date; 19 (f) No action, suit, investigation or proceeding shall have been pending or threatened in any court or before any arbitration or governmental authority that purports to affect the Borrower, any of its Subsidiaries or the Loans contemplated hereby, or that could have a material adverse effect on the Borrower or any of its Subsidiaries or the Loans contemplated hereby, or on the ability of the Borrower and its Subsidiaries to perform their obligations under the Loan Documents; (g) The Borrower and its Subsidiaries shall have been in compliance with all of their existing financial obligations; (h) All information previously furnished by the Borrower to the Bank shall be true and correct in all material respects; (i) With the exception of Liens permitted under Section 6.2(e) hereof, the Bank shall have received searches reflecting their release of all other financing statements and fixture filings including, but not limited to, those that may have been filed by Union Bank of California; and (j) All corporate and legal proceedings and all instruments and documents in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in content, form and substance to the Bank and its counsel, and the Bank and such counsel shall have received any and all further information and documents which the Bank or such counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities. SECTION 4.2 Conditions Precedent to Each Borrowing. The obligation -------------------------------------- of the Bank to make a Loan on the occasion of each Borrowing (including the initial Borrowing) shall be subject to the further conditions precedent that on the date of such Borrowing (a) the following statements shall be true and the Bank shall have received the notice required by Section 2.1(b), which notice shall be deemed to be a certification by the Borrower that: (i) The material representations and warranties contained in Section 5.1 are correct on and as of the date of such Borrowing as though made on and as of such date; (ii) No event has occurred and is continuing, or would result from such Borrowing, which constitutes an Event of Default or Potential Event of Default; (iii) Nothing shall have occurred and the Bank shall not have become aware of any fact or condition not previously known, which the Bank shall determine has, or could reasonably be expected to have, a material adverse effect on the rights or remedies of the Bank, or on the ability of the Borrower to perform its obligations to the Bank or which has, or could 20 reasonably be expected to have, a materially adverse effect on the performance, business, property, assets, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole; and (iv) The security interests and liens in favor of the Bank are valid, enforceable, and prior to all others' rights and interests, except those the Bank consents to in writing; and (v) All Loan Documents are in full force and effect; and (b) the Bank shall have received such other approvals, opinions or documents as the Bank may reasonably request. ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.1 Representations and Warranties. The Borrower represents ------------------------------ and warrants as follows: (a) Organization. The Borrower and each of its Subsidiaries is duly ------------ organized, validly existing and in good standing under the laws of the state of its incorporation. The Borrower and each of its Subsidiaries is also duly authorized, qualified and licensed in all applicable jurisdictions, and under all applicable laws, regulations, ordinances or orders of public authorities, to carry on its business in the locations and in the manner presently conducted except where the failure to do so would not cause a material adverse effect. (b) Authorization. The execution, delivery and performance by the ------------- Borrower of the Loan Documents, and the making of Borrowings hereunder, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Borrower's charter, by- laws or other organizational document or (ii) any law or regulation (including Regulations G, T, U and X) binding on or affecting the Borrower or its properties, and will not constitute an event of default under any material agreement to which the Borrower is a party or by which its assets or properties may be bound. (c) Governmental Consents. No authorization or approval or other --------------------- action by, and no notice to or filing with, any governmental authority or regulatory body (except routine reports required pursuant to the Securities Exchange Act of 1934, as amended (if such act is applicable to the Borrower), which reports will be made in the ordinary course of business) is required for the due execution, delivery and performance by the Borrower of the Loan Documents. 21 (d) Validity. The Loan Documents are the binding obligations of the -------- Borrower or other executing Person, if any, enforceable in accordance with their respective terms. (e) Financial Condition. The balance sheets of the Borrower and its ------------------- consolidated Subsidiaries as of March 29, 1996 and December 27, 1996, and the related statements of income and retained earnings of the Borrower and its consolidated Subsidiaries, respectively, for the fiscal year and for the fiscal nine months then ended, copies of which have been furnished to the Bank, fairly present the financial condition of the Borrower and its consolidated Subsidiaries as at such dates and the results of the operations of the Borrower and its consolidated Subsidiaries for the respective periods ended on such dates, all in accordance with GAAP, consistently applied, and since December 27, 1996, there has been no material adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole. (f) Litigation. Except as set forth on Schedule 5.1(f) hereto, there ---------- is no known pending or threatened action or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may materially and adversely affect the consolidated financial condition or operations of the Borrower or which may have a material adverse effect on the Borrower's ability to perform its obligations under the Loan Documents, having regard for its other financial obligations. (g) Employee Benefit Plans. The Borrower and each of its ERISA ---------------------- Affiliates has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the applicable provisions of ERISA and the Internal Revenue Code, and has not incurred any liability with respect to any Plan under Title IV of ERISA. No reportable event has occurred under Section 4043(b) of ERISA for which the PBGC requires 30 day notice. No action by the Borrower or of any ERISA Affiliate of the Borrower to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. No proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (h) Disclosure. No representation or warranty of the Borrower ---------- contained in this Agreement or any other document, certificate or written statement furnished to the Bank by or on behalf of the Borrower for use in connection with the transactions contemplated by this Agreement contains any known untrue statement of a material fact or omits to state a known material fact (known to the Borrower in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading. There is no fact known to the Borrower (other than matters of a general economic nature) which materially and adversely affects the business, operations, property, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole, which has not been disclosed herein or in such other documents, certificates and statements furnished to the Bank for use in connection with the transactions contemplated hereby. 22 (i) Environmental Matters. Except as set forth in Schedule 5.1(i) --------------------- hereto, neither the Borrower nor any Subsidiary, nor any of their respective officers, employees, representatives or agents, nor, to the best of their knowledge, any other person, has treated, stored, processed, discharged, spilled, or otherwise disposed of any substance defined as hazardous or toxic by any applicable federal, state or local law, rule, regulation, order or directive, or any waste or by-product thereof, at any real property or any other facility owned, leased or used by the Borrower or any Subsidiary, in violation of any applicable statutes, regulations, ordinances or directives of any governmental authority or court, which violations may result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $100,000 for all such violations; and the unresolved violations set forth in said Schedule 5.1(i) will not result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $100,000 for all such unresolved violations. Except as set forth in said Schedule, no employee or other person has made a claim or demand against the Borrower or any Subsidiary based on alleged damage to health caused by any such hazardous or toxic substance or by any waste or by-product thereof; and the unsatisfied claims or demands against the Borrower or any Subsidiary set forth in said Schedule 5.1(i) will not result in uninsured liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $100,000 in excess of reserves on the books of the Borrower for all such unsatisfied claims or demands. Except as set forth in said Schedule 5.1(i), neither the Borrower nor any Subsidiary has been charged by any governmental authority with improperly using, handling, storing, discharging or disposing of any such hazardous or toxic substance or waste or by-product thereof or with causing or permitting any pollution of any body of water; and the outstanding related charges set forth in said Schedule 5.1(i) will not result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $100,000 for all such outstanding charges. (j) Employee Matters. There is no known strike or work stoppage in ---------------- existence or threatened involving the Borrower or its Subsidiaries that may materially and adversely affect the consolidated financial condition or operations of the Borrower or that may have a material adverse effect on the Borrower's ability to perform its obligations under the Loan Documents. (k) Solvency. The Borrower and each of its Subsidiaries is Solvent. -------- (l) Title to Properties. The Borrower and each of its Subsidiaries ------------------- has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind except those permitted under Section 6.2(e) hereof. (m) Tax Returns. The Borrower and each of its Subsidiaries has filed ----------- or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to the Bank). All information in such tax returns, reports and declarations is complete 23 and accurate in all material respects. The Borrower and each of its Subsidiaries has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to the Borrower or its Subsidiary and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. (n) Compliance with Other Agreements and Applicable Laws. Neither ---------------------------------------------------- Borrower nor any of its Subsidiaries is in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and Borrower and each of its Subsidiaries is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. ARTICLE VI COVENANTS SECTION 6.1 Affirmative Covenants. So long as any Note shall remain --------------------- unpaid or the Bank shall have any Commitment hereunder, the Borrower will, unless the Bank shall otherwise consent in writing: (a) Financial Information. Furnish to the Bank: --------------------- (i) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower, (A) a copy of the Borrower's audited consolidated balance sheet of itself and its consolidated Subsidiaries as at the end of each fiscal year and the related audited consolidated statements of income and retained earnings (or comparable statement) employed in the business and changes in financial position and cash flow for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an unqualified report and opinion thereon of independent certified public accountants acceptable to the Bank, and, if prepared, such accountants' letter to management, and (B) a copy of the Borrower-prepared consolidating balance sheet, income statement and cash flow prepared in connection with the statement provided in subpart (A) above; (ii) as soon as available, but in any event within 45 days after the end of each fiscal quarter, the Borrower's unaudited consolidated and consolidating balance sheets of itself and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated and consolidating statements of income and retained earnings (or comparable statement) and changes in financial 24 position and cash flow for such period and year to date, setting forth in each case in comparative form the figures as at the end of the previous fiscal year as to the balance sheet and the figures for the previous corresponding period as to the other statements, certified by the Vice President - Finance or the Treasurer of the Borrower as being fairly stated in all material respects subject to year end adjustments; all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail acceptable to the Bank and in accordance with GAAP applied consistently throughout the periods reflected therein (except as approved by such accountants and disclosed therein); and (iii) as soon as available, copies of all reports which the Borrower sends to any of its security holders, and copies of all reports and registration statements which the Borrower or any Subsidiary files with the S.E.C. or any national securities exchange, if any; and (iv) (a) together with each delivery of financial statements of Borrower and its Subsidiaries pursuant to subdivision (i) above, a certificate, executed by the Vice President - Finance or the Treasurer of the Borrower stating that such officer has reviewed the terms of this Agreement and has made, or caused to be made under his supervision, a review in reasonable detail of the transactions and condition of the Borrower and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that such officer does not have knowledge of the existence as at the date of such certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken, is taking and proposes to take with respect thereto; and (b) together with each delivery of financial statements of the Borrower and its Subsidiaries pursuant to subdivision (i) and (ii) above, a certificate demonstrating in reasonable detail compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 6.2 hereof. (b) Notices and Information. Deliver to the Bank: ----------------------- (i) promptly upon any officer of the Borrower obtaining knowledge (a) of any condition or event which constitutes an Event of Default or Potential Event of Default, (b) that any Person has given any notice to the Borrower or any Subsidiary of the Borrower or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 7.1(e), (c) of the institution of any litigation involving an alleged liability (including possible forfeiture of property) of the Borrower or any of its Subsidiaries equal to or greater than $1,000,000 or any adverse determination in any litigation 25 involving a potential liability of the Borrower or any of its Subsidiaries equal to or greater than $100,000, or (d) of a material adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole, an officer's certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed default, Event of Default, Potential Event of Default, event or condition, and what action the Borrower has taken, is taking and proposes to take with respect thereto; (ii) promptly upon becoming aware of the occurrence of or forthcoming occurrence of (a) any reportable event under Section 4043(b) of ERISA for which the PBGC requires 30 day notice, (b) any action by the Borrower or any ERISA Affiliate of the Borrower to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA, (c) any notice of noncompliance made with respect to a Plan under Section 4041(b) of ERISA, and (d) the commencement of any proceeding with respect to a Plan under Section 4042 of ERISA; (iii) promptly, and in any event within 30 days after receipt thereof, a copy of any notice, summons, citation, directive, letter or other form of communication from any governmental authority or court in any way concerning any action or omission on the part of the Borrower or any of its Subsidiaries in connection with any substance defined as toxic or hazardous by any applicable federal, state or local law, rule, regulation, order or directive or any waste or byproduct thereof, or concerning the filing of a lien upon, against or in connection with the Borrower, its Subsidiaries, or any of their leased or owned real or personal property, in connection with a Hazardous Substance Superfund or a Post-Closure Liability Fund as maintained pursuant to (S) 9507 of the Internal Revenue Code; and (iv) promptly upon the Bank's request, such other statements, lists of property and accounts, budgets, forecasts or reports as to the Borrower and its Subsidiaries as the Bank may reasonably request. (c) Corporate Existence, Etc. At all times preserve and keep in full ------------------------- force and effect its and its Subsidiaries' corporate existence and rights and franchises material to its business and those of each of its Subsidiaries. (d) Payment of Taxes and Claims. Pay, and cause each of its --------------------------- Subsidiaries to pay, taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a lien upon any of its properties or assets, prior to the time 26 when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. (e) Maintenance of Properties; Insurance. Maintain or cause to be ------------------------------------ maintained in good repair, working order and condition all material properties used or useful in the business of the Borrower and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. The Borrower will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. The Borrower will comply with any other insurance requirement set forth in any other Loan Document and, upon the request of the Bank, deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. (f) Inspection. Permit any authorized representatives designated by ---------- the Bank to visit and inspect any of the properties of the Borrower or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested. (g) Compliance with Laws Etc. Exercise, and cause each of its ------------------------- Subsidiaries to exercise, all due diligence in order to comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including, without limitation, all rules and regulations of public utility commissions or similar regulatory authorities, and all environmental laws, rules, regulations and orders, noncompliance with which would materially and adversely affect the business, properties, assets, operations or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole. (h) Hazardous Waste Studies. Promptly, and in any event within thirty ----------------------- (30) days after submission, provide the Bank with copies of all such investigations, studies, samplings and testings as may be requested by any governmental or regulatory authority relative to any substance defined as hazardous or toxic by any applicable federal, state or local law, rule, regulation, order or directive, or any waste or by-product thereof, at or affecting any real property or any facility owned, leased or used by the Borrower or any Subsidiary. SECTION 6.2 Negative Covenants. So long as any Note shall remain ------------------ unpaid or the Bank shall have any Commitment hereunder, the Borrower will not, without the written consent of the Bank: 27 (a) Consolidated Fixed Charge Coverage Ratio. As of the end of each ---------------------------------------- fiscal quarter, Borrower and its Subsidiaries on a consolidated basis permit the Fixed Charge Coverage Ratio to be less than 1.2:1.0. (b) Consolidated Current Ratio. At any time, permit the ratio of (i) -------------------------- the total current assets of the Borrower and its Subsidiaries on a consolidated basis to (ii) the total current liabilities of the Borrower and its Subsidiaries on a consolidated basis to be less than 1.40:1.00. (c) Consolidated Total Liabilities to Tangible Net Worth Ratio. At ---------------------------------------------------------- any time, permit the ratio of (i) the total liabilities of the Borrower and its Subsidiaries on a consolidated basis to (ii) Consolidated Tangible Net Worth to be greater than 1.25:1.00. (d) Consolidated Net Income. For any fiscal quarter of the Borrower, ----------------------- commencing with the Borrower's fiscal quarter ending March 28, 1997, permit the net income of the Borrower and its Subsidiaries on a consolidated basis to be less than $1.00. (e) Liens Etc. Create or suffer to exist, or permit any of its --------- Subsidiaries to create or suffer to exist, any Lien upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income, in each case to secure any indebtedness of any Person other than Liens in favor of Bank and, to the extent the aggregate Indebtedness secured thereby does not exceed $2,500,000, the following: (i) Liens reflected on Schedule 6.2(e) hereto; (ii) --------------- purchase money Liens upon or in any property acquired or held by the Borrower or any Subsidiary in the ordinary course of business to secure the purchase price of such property or to secure indebtedness incurred solely for the purpose of financing the acquisition of such property; and (iii) Liens for taxes not yet due; (f) Indebtedness. Create, incur, assume or permit to exist, or permit ------------ any Subsidiary to create, incur, assume or permit to exist, any direct or contingent Indebtedness, liabilities or lease obligations (other than those to the Bank), or become liable for the debts of others without the Bank's written consent, except for (i) acquiring goods, supplies or merchandise on normal trade credit; (ii) endorsing negotiable instruments received in the usual course of business; (iii) obtaining surety bonds in the usual course of business; and (iv) Indebtedness of the Borrower and its Subsidiaries in an aggregate amount outstanding at any one time not to exceed $3,500,000. (g) Consolidation, Merger or Dissolution. Consolidate with or merge ------------------------------------ into any other corporation or entity except for Permitted Acquisitions. (h) Loans, Investments, Secondary Liabilities. Make or permit to ----------------------------------------- remain outstanding, or permit any Subsidiary to make or permit to remain outstanding, any loan or advance to, or guarantee, induce or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stock or dividends of, or own, purchase or acquire any stock, obligations or securities of or any other interest in, or make any capital 28 contribution to, any other Person, or make or permit to remain outstanding loans and advances to any of its officers, directors and shareholders or enter into or permit to remain outstanding guarantees in connection with the obligations of any of its officers, directors and shareholders, in an aggregate amount outstanding at any time, collectively among the Borrower and its Subsidiaries, in excess of $250,000, except that the Borrower and its Subsidiaries may, without limitation as to the dollar amount of any such transactions: (i) own, purchase or acquire certificates of deposit issued by the Bank, commercial paper rated Moody's P-1, municipal bonds rated Moody's AA or better, direct obligations of the United States of America or its agencies, and obligations guaranteed by the United States of America; (ii) continue to own the existing capital stock of the Borrower's Subsidiaries; (iii) endorse negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (iv) allow the Borrower's Subsidiaries to make or permit to remain outstanding advances from the Borrower's Subsidiaries to the Borrower. (i) Asset Sales. Convey, sell, lease, transfer or otherwise dispose ----------- of, or permit any Subsidiary to convey, sell, lease, transfer or otherwise dispose of, during any fiscal year of the Borrower, in one transaction or a series of transactions, outside the ordinary course of business, assets of the Borrower or of any of its Subsidiaries, whether now owned or hereafter acquired, having an aggregate value in excess of $100,000. (j) Dividends. Authorize, declare or pay any dividends, except that --------- for so long as no Event of Default or Potential Event of Default has occurred and is continuing, the Borrower may declare and pay dividends on its equity securities. (k) Limitation on Granting of Liens and on Restrictions on Subsidiary ----------------------------------------------------------------- Dividends and Other Transfers. Borrower will not, and it will not permit any of - ----------------------------- its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of (i) any Subsidiary to (A) pay dividends or make any other distribution on its capital stock or any other equity interest or participation in its profits owned by Borrower or any Subsidiary, or pay or repay any indebtedness owed to Borrower or a Subsidiary, (B) make loans or advances to Borrower or (C) transfer any of its properties or assets to the Borrower or any Subsidiary or (ii) Borrower or any Subsidiary to grant Liens or security interests on the assets of such Person in favor of Bank, except for such encumbrances or restrictions existing under or by reason of (A) applicable law, (B) this Agreement, (C) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of Borrower or any Subsidiary, and (D) customary restrictions on dispositions of real property interests found in reciprocal easement agreements of Borrower or any Subsidiary. 29 (l) Transactions with Affiliates. Neither the Borrower nor any of its ---------------------------- Subsidiaries shall enter into any transaction for the purchase, sale or exchange of property or the rendering of any service to or by any affiliate, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or its Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or its Subsidiary than the Borrower or its Subsidiary would obtain in a comparable arm's length transaction with an unaffiliated person. (m) Books and Records. The Borrower will, and will cause each of the ----------------- Guarantors to, keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of applicable law shall be made of all dealings and transactions in relation to their businesses and activities. (n) Restructure. Make any change in the principal nature of the ----------- Borrower's business operations (taken as a whole), or the date of its fiscal year. (o) No Further Negative Pledges. Except with respect to specific --------------------------- property encumbered to secure payment of particular Indebtedness, neither the Borrower nor any of its Subsidiaries shall enter into any agreement prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. ARTICLE VII EVENTS OF DEFAULT SECTION 7.1 Events of Default. If any of the following events ----------------- ("Events of Default") shall occur and be continuing: - ------------------- (a) The Borrower shall fail to pay any installment of principal or interest or any other amount payable hereunder within five (5) Business Days of the due date thereof; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in connection with the Loan Documents shall prove to have been incorrect in any material respect when made; or (c) The Borrower shall fail to perform or observe any term, covenant or agreement contained in this Agreement on its part to be performed or observed other than as described in Section 7.1(a) above and such failure shall continue for ten (10) consecutive days; provided, that such ten (10) day period shall not -------- ---- apply in the case of: (i) any failure to observe any such term, covenant, condition or provision which is not capable of being cured at all or within such ten (10) day period or which has been the subject of a prior failure within a six (6) month period, or (ii) an intentional breach by Borrower of any such term, covenant, condition or provision; or 30 (d) The Borrower or any of its Subsidiaries shall default in the performance of or compliance with any term contained in any Loan Document other than this Agreement and such default shall not have been remedied or waived within any applicable grace period; or (e) (i) The Borrower or any of its Subsidiaries shall (A) fail to pay any principal of, or premium or interest on, any indebtedness when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness, or (B) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such indebtedness or material to the performance, business, property, assets, condition (financing or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole, when required to be performed or observed, and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument; or (f) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unhanded for a period of sixty (60) days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) and (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance or reserves) equal to or greater than $250,000 and all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (h) Any guaranty for any reason other than satisfaction in full of all obligations of the Borrower under the Loan Documents, ceases to be in full force and effect or 31 is declared null and void, or any Guarantor denies that it has any further liability under such guaranty or gives notice to such effect and any such cessation, declaration or denial shall not have been rescinded, and such guarantee reaffirmed, to the satisfaction of the Bank within thirty (30) days after the Borrower knows of such development; or (i) The occurrence of any one or more of the following events with respect to the Borrower or any ERISA Affiliate of the Borrower provided such event or events could reasonably be expected, in the judgment of the Bank, to subject the Borrower or any ERISA Affiliate of the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower or any ERISA Affiliate of the Borrower with respect to a Plan: (A) a reportable event shall occur with respect to a Plan which is, in the reasonable judgment of the Bank, likely to result in the termination of such Plan for purposes of Title IV of ERISA, or (B) any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal from a Plan by the Borrower or any ERISA Affiliate of the Borrower; or (j) There shall be instituted against the Borrower or any Subsidiary, or against any Guarantor, any proceeding for which forfeiture of any property is a potential penalty and such proceeding remains undismissed, undischarged or unbonded for a period of thirty (30) days from the date the Borrower knows of such proceeding; or (k) A Change of Control shall have occurred. Then, (i) upon the occurrence of any Event of Default described in clause (f) above, the Commitment shall immediately terminate and all Loans hereunder with accrued interest thereon, and all other amounts owing under the Loan Documents shall automatically become due and payable, and (ii) upon the occurrence of any other Event of Default, the Bank may, by notice to the Borrower, declare the Commitment to be terminated forthwith, whereupon the Commitment shall immediately terminate; and, by notice to the Borrower, declare the Loans hereunder, with accrued interest thereon, and all other amounts owing under the Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable. Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including, without limitation, the right to make demand upon any or all of the Guarantors. All rights, powers and remedies of Bank in connection with each of the Loan Documents may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. Notwithstanding any other provision of this Agreement, including Section 8.2, notices to the Borrower under this Section shall be communicated in writing (including facsimile transmissions). 32 ARTICLE VIII MISCELLANEOUS SECTION 8.1 Amendments, Etc. No amendment or waiver of any provision --------------- of the Loan Documents nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 8.2 Notices, Etc. Except as otherwise set forth in this ------------ Agreement, all notices and other communications provided for hereunder shall be in writing (including facsimile communication) and mailed or sent by facsimile or delivered, if to the Borrower, at its address set forth on the signature page hereof; and if to the Bank, at its address set forth on the signature page hereof; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall be effective when sent by facsimile, or three days after such notice or communication is deposited in the mails, except that notices and communications to the Bank pursuant to Article II or VII shall not be effective until received by the Bank. SECTION 8.3 Right of Setoff. Upon and only after the occurrence of --------------- any uncured Event of Default, the Bank is hereby authorized by the Borrower, at any time and from time to time, without notice, (a) to set off against, and to appropriate and apply to the payment of, the obligations and liabilities of the Borrower under the Loan Documents (whether matured or unmatured, fixed or contingent or liquidated or unliquidated) any and all amounts owing by the Bank to the Borrower (whether payable in Dollars or any other currency, whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced) and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as the Bank in its sole discretion may elect. The Bank is authorized to debit any account maintained with it by the Borrower for any amount of principal, interest or fees which are then due and owing to the Bank. SECTION 8.4 No Waiver; Remedies. No failure on the part of either ------------------- party hereto to exercise, and no delay in exercising, any right under any of the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.5 Costs and Expenses. The Borrower shall pay to the Bank ------------------ immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the Bank's in-house counsel), incurred by the Bank in connection with (a) the negotiation and preparation of this 33 Agreement and each other of the Loan Documents, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of the Bank's rights and/or the collection of any amounts which become due to the Bank under any of the Loan Documents (including, without limitation, in appellate, bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings) or the restructuring of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including, without limitation, any action for declaratory relief. SECTION 8.6 Participations. The Bank may sell, assign, transfer, -------------- negotiate or grant participations to other financial institutions in all or part of the obligations of the Borrower outstanding under the Loan Documents, provided that any such sale, assignment, transfer, negotiation or participation shall be in compliance with the applicable federal and state securities laws; and provided further that any assignee or transferee agrees to be bound by the terms and conditions of this Agreement. The Bank may, in connection with any actual or proposed assignment or participation, disclose to the actual or proposed assignee or participant, any information relating to the Borrower or any of its Subsidiaries. SECTION 8.7 Effectiveness: Binding Effect. This Agreement shall ----------------------------- become effective when it shall have been executed by the Borrower and the Bank and thereafter shall be binding upon and inure to the benefit of the Borrower, the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. SECTION 8.8 Governing Law; Choice of Forum; Service of Process; Jury -------------------------------------------------------- Trial Waiver. - ------------ (a) The validity, interpretation and enforcement of this Agreement and the other Loan Documents and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of California (without giving effect to principles of conflicts of law). (b) The Borrower and the Bank irrevocably consent and submit to the non-exclusive jurisdiction of the state courts of the County of Los Angeles and the United States District Court for the Central District of California and waive any objection based on venue or forum non conveniens with respect to any ----- --- ---------- action instituted therein arising under this Agreement or any of the other Loan Documents or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Loan Documents or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above. (c) The Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so 34 deposited in the U.S. mails, or, at the Bank's option, by service upon the Borrower in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, the Borrower shall appear in answer to such process, failing which the Borrower shall be deemed in default and judgment may be entered by the Bank against the Borrower for the amount of the claim and other relief requested. (d) THE BORROWER AND THE BANK EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. THE BORROWER AND THE BANK EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT THE BORROWER OR THE BANK MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) The Bank shall not have any liability to the Borrower (whether in tort, contract, equity or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non- appealable judgment or court order binding on the Bank, that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, the Bank shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement. SECTION 8.9 Waiver of Notices. The Borrower hereby expressly waives ----------------- demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the obligations, and any and all other demands and notices of any kind or nature whatsoever with respect to the obligations and this Agreement, except such as are expressly provided for herein. No notice to or demand on the Borrower which the Bank may elect to give shall entitle the Borrower to any other or further notice or demand in the same, similar or other circumstances. SECTION 8.10 Destruction of Borrower's Documents. The Bank will not ----------------------------------- be obligated to return any schedules, invoices, statements, budgets, forecasts, reports or other papers delivered by the Borrower. The Bank will destroy or otherwise dispose of such materials at such time as the Bank, in its discretion, deems appropriate. 35 SECTION 8.11 Entire Agreement. This Agreement with Exhibits and ---------------- Schedules and the other Loan Documents embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof. SECTION 8.12 Severability of Provisions. In case any one or more of -------------------------- the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. SECTION 8.13 Execution in Counterparts. This Agreement may be ------------------------- executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. MELLON BANK, N.A. KEYSTONE AUTOMOTIVE INDUSTRIES, INC. By:____________________________ By:_____________________________ Name:__________________________ Name:___________________________ Title:_________________________ Title:__________________________ By:_____________________________ Name:___________________________ Title:__________________________ Address: Address: Mellon Bank 700 East Bonita Avenue Mellon Bank Center Pomona, California 91767 400 South Hope Street Attention: John M. Palumbo 5th Floor Vice President and Treasurer Los Angeles, California 90071 Attention: Kevin D. Kelly Vice President 36 EX-10.40 6 RESIGNATION AGREEMENT AND GENERAL RELEASE Exhibit 10.40 RESIGNATION AGREEMENT AND GENERAL RELEASE This Resignation Agreement and General Release ("Agreement") is made and entered into effect as of this _____ day of May, 1997, by and between Keystone Automotive Industries, Inc., a California corporation ("the Company") and Virgil K. Benton II, an individual residing in the State of California ("Executive"). RECITALS A. Executive has served as the Chief Executive Officer of the Company pursuant to that certain Employment Agreement between Executive and the Company, effective June 26, 1996 (the "Employment Agreement"); B. Executive as served as a member of the Board of Directors (the "Board") of the Company and has been designated by the Board as the Company's Chairman. C. Pursuant to and in consideration of this Agreement, Executive has determined to resign all of his respective positions as an officer and director of the Company, such resignation to be effective as of the date of this Agreement (the "Deemed Effective Date"); D. The Company wishes to accept Executive's resignation, such resignation to be deemed to be effective as of the close of the Company's business on the Deemed Effective Date, to terminate the Employment Agreement as of the Deemed Effective Date and to provide Executive with certain severance benefits, all as set forth herein; and E. As part of this Agreement and in consideration of certain accommodations provided to Executive by the Company hereunder and other mutual consideration, and Executive has agreed to release the Company and its respective directors, officers, employees, agents and assigns from certain claims and causes of action that Executive may now or hereafter have, whether known or unknown. NOW, THEREFORE, IN CONSIDERATION OF the foregoing recitals, which are incorporated as an integral part of this Agreement, the mutual promises of the parties and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. RESIGNATION OF EXECUTIVE. Executive hereby irrevocably resigns all of his positions as a director and officer of the Company, effective as of the close of the Company's business on the Deemed Effective Date. 2. SEVERANCE PAYMENT. On the Termination Date, as defined in Section 14 hereof, the Company shall pay to Executive, in cash or other readily available funds, the gross sum of Six Hundred and Seventy-One Thousand Dollars ($671,000), less any amounts required to be deducted by the Company for federal and state taxes or other applicable requirements. In addition, the Company agrees to convey to Executive as of the Termination Date, all of its right, title and interest in the following assets currently being used by Executive: (i) the 1994 Chevrolet Suburban, (ii) the 1994 Model 850 Volvo and (iii) certain computer equipment consisting of an AST laptop computer, docking station, monitor, keyboard and printer. 3. TERMINATION OF EMPLOYMENT AGREEMENT. The Employment Agreement shall be terminated as of the Deemed Effective Date, and all obligations of any party thereunder shall thereby be forever released and discharged, except for Section 4 of the Employment Agreement which shall remain in full force and effect according to its terms. 4. HEALTH/OTHER BENEFITS. Executive shall not be entitled to continue to participate in the Company's health and other benefit programs to which he is currently entitled, rights of Executive, if any, are compensated for in the payment provided in Section 2. Thereafter, Executive, if he so elects and pays all applicable costs and expenses, shall be entitled to receive the benefits to which he is entitled pursuant to the Consolidated Budget Reconciliation Act of 1985, as amended ("COBRA"). 5. ACCRUED VACATION PAY. Executive agrees that the Company is not to be obligated to Executive for any accrued but unused vacation pay, rights of Executive, if any, are compensated for in the payment provided in Section 2. 6. MUTUAL GENERAL RELEASE. In further consideration of the promises and agreements made hereunder, and except for the Indemnification Agreement, effective as of June 26, 1996 by and between Executive and the Company (the "Indemnification Agreement") which is not being released hereunder. Executive agrees unconditionally and forever to release and discharge the Company and its respective subsidiaries, affiliates, officers, directors, employees, representatives, attorneys, agents and assigns, and the Company agrees unconditionally and forever to release and discharge Executive and his representatives, attorneys, agents and assigns, from any and all claims, actions, causes of action, demands, liabilities, rights or damages of any kind or nature which any of them may now have, or ever have, whether known or unknown, against the other, including any claims, causes of action or demands of any nature arising out of or in any way relating to Executive's employment with, or separation from the Company. This release specifically includes, but is not limited to, any claims for discrimination and/or violation of any statutes, rules, regulations or ordinances, whether federal, state or local, including, but not limited to, Title VII of the Civil Rights Act of 1964, as amended, age claims under the Age Discrimination in Employment Act of 1967, as amended by the Older Workers Benefits Protection Act of 1990, Section 1981 of Title 42 of the United States Code, and the California Fair Employment and Housing Act. 2 The parties further agree knowingly to waive the provisions and protections of Section 1542 of the California Civil Code, which reads: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which, if known by him, must have materially affected his settlement with the debtor. Executive represents and agrees that, prior to the execution of this Agreement, Executive has had the opportunity to discuss the terms of this Agreement with legal counsel of his choosing. Executive affirms that no promise or inducement was made to cause him to enter into this Agreement, other than the severance benefits described herein. Executive further confirms that he has not relied upon any other statement or representation by anyone other than what is in this Agreement as a basis for his agreement. 7. NEWS RELEASE. The parties shall cooperate in the preparation of a news release for dissemination on or prior to the Termination Date; however, the final determination as to the content of such news release shall be made by the Company. 8. REIMBURSEMENT OF BUSINESS EXPENSES. Executive shall be entitled to reimbursement of properly submitted claims for business expenses in accordance with the Company's policies and practices through the Termination Date. 9. INDEMNIFICATION. The Indemnification Agreement shall remain in full force and effect in accordance with the terms and conditions set forth therein. Upon reasonable notice from the Company, Executive shall make himself reasonably available to assist and otherwise cooperate with the Company in connection with any litigation matters involving the Company. If said cooperation requires Executive to travel outside the San Diego, California area, the Company agrees to reimburse Executive for his reasonable travel expenses. 10. NON-DISPARAGEMENT. The parties hereby agree that none of them shall disparage the other in any future statements or communications concerning Executive and his employment with the Company or otherwise. 11. INQUIRIES BY THIRD PARTIES. The parties hereby agree that they will consult with one another with respect to appropriate responses to inquiries from stock exchanges, analysts, the press, customers, governmental authorities and other third parties regarding Executive's resignation from the Company. The parties further agree that, except as required by law or regulation, none of them will respond to such inquiries or make other public statements regarding these matters (other than the news release referred to in Section 7 hereof) until such consultation has occurred. 3 12. ARBITRATION. Any and all disputes or claims arising out of or in any way related to Executive's employment with, or separation from the Company, as well as any and all disputes or claims arising out of or in any way related to this Agreement, including without limitation, fraud in the inducement of this Agreement, or relating to the general validity or enforceability of this Agreement, shall be submitted to final and binding arbitration before a single arbitrator of the American Arbitration Association in Los Angeles County, California in accordance with the rules of that body governing commercial disputes, and the prevailing party shall be entitled to reasonable cost, other out-of-pocket expenses and attorneys' fees. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 13. GOVERNING LAW. This Agreement shall be construed under the laws of the State of California, both procedural and substantive, except as may be required under federal laws and regulations applicable to federally chartered savings associations or their subsidiaries or affiliates. 14. REVOCATION RIGHT. Executive acknowledges that he has been advised that he has twenty-one (21) days to consider this Agreement and that he was informed that he has the right to consult with counsel regarding this Agreement. To the extent that Executive has taken less than twenty-one (21) days to consider this Agreement, Executive acknowledges that he has had sufficient time to consider the Agreement and to consult with counsel and that he does not desire additional time. This Agreement is revocable by Executive for a period of seven (7) days following Executive's execution of this Agreement. The revocation by Executive of this Agreement must be in writing, must specifically revoke this Agreement, and must be received by the Company prior to the eighth (8th) day following the execution of this Agreement by Executive. This Agreement becomes effective, enforceable and irrevocable on the eighth (8th) day following Executive's execution of this Agreement (the "Termination Date"). 15. BOARD OF DIRECTORS ACTION. The Company represents and warrants that the resolutions attached hereto as Exhibit 15 have been duly adopted by the Board of Directors and are, and will be, in full force and effect as of the Termination Date. 16. REGISTRATION RIGHTS. The Company agrees to use its best efforts to include up to 1,500,000 shares of its Common Stock owned beneficially by Executive and those persons set forth on Schedule 1 to this Agreement ("Executive's Shares") in the proposed underwritten public offering currently being considered by the Company (the "1997 Public Offering"). In connection with the 1997 Public Offering, and as additional consideration to Executive for entering into this Agreement, the Company agrees to pay all fees, costs and expenses of and incidental to registering Executive's Shares for sale; provided, -------- however, that the holders of Executive's Shares shall bear their pro rata share of the underwriting discounts and commissions and shall bear their own legal and accounting expenses, if any, incurred in reviewing the registration statement and prospectus. In the event that less than all of Executive's Shares are sold in the 1997 Public Offering, each of the beneficial holders of Executive's Shares not sold in said Offering agree to enter into a lock-up agreement with the underwriters agreeing not to sell any of their remaining shares for such period after the effective date of the 1997 Public Offering as is being agreed to by the officers and directors 4 of the Company. In the event that less than 1,000,000 of Executive's Shares are actually sold in the 1997 Public Offering for any reason other than the beneficial owners of said shares withdrawing the shares from the 1997 Public Offering, then the Company agrees to register Executive's Shares under the following terms and conditions: (a) Whenever the Company proposes to register any of its securities under the Securities Act of 1933, as amended (the "Securities Act"), and the registration form to be used therefor may be used for the registration of the Common Stock of the Company (other than Forms S-8 or S-4 or any successor thereto), the Company shall give prompt written notice to the Executive of its intention to effect such a registration and, subject to the terms and conditions contained in this Agreement, shall include in such registration any unsold Executives' Shares with respect to which the Company has received a written request for inclusion therein within twenty (20) days after the Company has given the notice required by this subsection. (b) If a registration subject to subsection (a) above is an underwritten registration, and the managing underwriters advise the Company in writing that in their opinion the number of shares of Common Stock to be included in such registration exceeds the number which can be sold in such offering, the Company shall include in such registration (i) first, the securities the Company proposes to sell, (ii) second, such number of shares of Common Stock as the Company is obligated to include pursuant to the Registration Rights Agreement effective as of December 6, 1996 among the Company and shareholders of North Star Plating Company, (iii) third, unsold Executive's Shares for which a written request for inclusion has been timely received; and (iv) fourth, then other securities requested to be included in such registration; provided, however, that the Executive shall have the right to -------- include any Executive's Shares which are thus excluded from such registration in the next registration statement of the Company under the Securities Act which may be used for the registration of the Common Stock of the Company (other than Forms S-8 or S-4 or any successor thereto), all on the terms and conditions set forth in this Agreement applicable to the initial exercise by the Executive of registration rights hereunder. (c) Except as expressly provided in the proviso to subsection (b) above, notwithstanding anything to the contrary contained in this Agreement, the Company shall be required to give notice to the Executive of a registration, and to include therein Executive's Shares, only with respect to the first registration of the securities of the Company occurring after the later to occur of (i) the Termination Date and (ii) the consummation of the 1997 Public Offering. (d) The Company shall indemnify, to the extent permitted by law, each holder of Executive's Shares included in any registration statement pursuant to subsection (a) above, its officers and directors and each person who controls such holder (within the meaning of the Securities Act of 1933) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished to the Company in writing by such 5 holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. (e) Each holder of Executive's Shares included in any registration statement pursuant to subsection(a) above shall indemnify, to the extent permitted by law, the Company, its officers and directors and each person who controls the Company (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent the same are caused by or contained in any information furnished to the Company in writing by such holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, such holder shall indemnify the underwriters, their officers and directors and each person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Company. (f) With respect to each inclusion of Executive's Shares in a registration statement pursuant to subsection (a) above, all fees, costs and expenses of and incidental to such registration and public offering in connection therewith shall be borne by the Company; provided, however, that -------- holders participating in any such registration shall bear their pro rata share of the underwriting discount and commissions and shall bear their own legal and accounting expenses, if any, incurred in reviewing the registration statement or prospectus. (g) Any Executive's Shares which are included in an underwritten registration pursuant to subsection (a) above shall be sold by the holder thereof pursuant to the terms of the underwriting agreement among the Company, the managing underwriters and the holders of the securities included in such registration. 17. ESOP SHARES. The Company agrees to use its best efforts to distribute all shares of Common Stock beneficially owned by Executive in the Company's ESOP to Executive as soon as reasonably possible after the Termination Date. 18. REIMBURSEMENT OF ATTORNEY'S FEES. On the Termination Date, the Company agrees to pay Executive the sum of Five Thousand ($5,000) Dollars as reimbursement of Executive's legal fees. The parties hereto agree that all other costs and expenses shall be paid by the incurring party. 19. MISCELLANEOUS. This Agreement sets forth the entire agreement between Executive and the Company relating to the subject matter hereof and supersedes all prior oral or written agreements relating thereto, including, without limitation, the Employment Agreement. This 6 Agreement shall be binding upon all parties' respective heirs, representatives, successors and assigns. If any portion of this Agreement is found to be illegal or unenforceable, such action shall not affect the validity or enforceability of the remaining paragraphs or subparagraphs of this Agreement. No amendments to this Agreement will be valid unless written and signed by Executive and an authorized representative of the Company. This Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one original document. The undersigned agree to the terms of this Agreement and voluntarily enter into it with the intent to be bound thereby. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the day and year first written above. EXECUTIVE: KEYSTONE AUTOMOTIVE INDUSTRIES, INC. /s/ Virgil K. Benton II By: /s/ John M. Palumbo - ---------------------------- ----------------------------------- Virgil K. Benton II Its: Vice President ------------------------------- Reviewed and approved as to form and content as counsel to Executive this 23rd day of May, 1997. /s/ Tucker Cheadle - ---------------------------- Tucker Cheadle, Esq. 7 EX-10.41 7 LEASE AGREEMENT DATED JANUARY 1, 1995 EXHIBIT 10.41 NORTH STAR PLATING COMPANY BUILDING LEASE (PEORIA, ILLINOIS PROPERTY) THIS LEASE, Made and entered into as of the 1/st/ day of January, 1995, by and between J & K PROPERTIES, a Minnesota general partnership of Karen Wood and Jean M. Brown (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). WITNESSETH: Landlord hereby leases to Tenant, and Tenant leases from Landlord the premises described in Exhibit A attached and hereby made a part hereof, which ---------- premises are hereinafter referred to as the "leased premises". TO HAVE AND TO HOLD the leased premises and appurtenances for a term of ten (10) years, commencing on the date hereof and ending at 12:00 midnight, on the tenth (10th) anniversary of the date hereof, plus any renewal term pursuant to Article 13 hereinbelow, subject to the following terms and conditions. ARTICLE 1. RENT. Landlord reserves and Tenant covenants to pay to --------------- Landlord, without demand, at the place at which notices to Landlord are to be given pursuant to Article 16, base rent for the leased premises of Six Thousand Nine Hundred Seventy Five Dollars ($6,975.00) per calendar month payable in advance on the first day of each and every calendar month during the term and any renewal term of this Lease. A pro rata portion of such monthly base rent shall be due for any partial calendar month during the term or any renewal term of this Lease, in proportion to the number of days of such calendar month falling within the term or renewal term. ARTICLE 2. ESCALATION OF BASE RENT. The monthly base rent shall be ---------------------------------- increased as of the first day of the calendar month following the first (1/st/) anniversary of the commencement date of this Lease and following every anniversary of the commencement date of this Lease thereafter, during the term and any renewal term of this Lease, by a percentage equal to the percentage increase in the Consumers' Price Index for All Urban Consumers for the Minneapolis/St. Paul Metropolitan Area, "All Items" [1982-84 = 100] published by the United States Bureau of Labor Statistics (the "CPIU") between the CPIU last published as of the commencement date of this Lease or the second previous anniversary of the commencement date of this Lease, as the case may be, and the CPIU last published as of the immediately preceding anniversary of the commencement date of this Lease. Such adjusted monthly rent shall be rounded to the nearest One Dollar ($1.00). Should the CPIU be discontinued, or discontinued for the Minneapolis/St. Paul Metropolitan Area, a similar figure representative of an overall price average for the Minneapolis/St. Paul Metropolitan Area shall be used or the Consumers' Price Index for All Urban Consumers "All Items" for the United States shall be used. 1 FOR EXAMPLE: Assume the CPIU last published as of the first anniversary of the date hereof (in 1996) is 140 and the CPIU last published as of the second anniversary of the date hereof (in 1997) is 144.2 (representing a 3% annual increase), the monthly base rent shall be increased as of the first day of the calendar month following the second anniversary of the date hereof by 1.5%. ARTICLE 3. NET LEASE. Without limitation of the specific provisions of -------------------- this Lease, the parties declare that this Lease shall be construed in all respects to be a net lease, with all expenses of operating, maintaining and insuring the leased premises, and paying taxes and special assessments and similar charges against the leased premises, to be borne by Tenant, with the exception only of reasonable wear and tear and loss by reason of fire and other casualty insurable under the current "special cause of loss" form of building and personal property insurance policy published by the Insurance Services Office or equivalent (hereinafter referred to as "Standard Hazard Insurance"). ARTICLE 4. TAXES AND SPECIAL ASSESSMENTS. Tenant shall pay, when due and ----------------------------------------- before penalty attaches, all real estate taxes and installments of special assessments, and any similar charges or liens due and payable during the term hereof with respect to the leased premises and improvements situated thereon, provided that election shall be made to pay any special assessment over the longest period allowed by law. For any partial calendar year at the end of the term or any renewal term of this Lease, Tenant shall be responsible for a pro rata portion of such taxes and special assessments due and payable in such calendar year in proportion to the number of days of such calendar year falling within the term or renewal term of this Lease, and appropriate adjustments shall be made at the beginning of the term and at the end of the term or renewal term hereof. Tenant shall be responsible for all taxes and installments of special assessments payable in the year 1995, since Tenant will occupy the leased premises for the entire year, either pursuant to this Lease or pursuant to the Prior Lease (as defined in Article 15 below). In the event any mortgagee of the leased premises requires an escrow account to be maintained for the payment of real estate taxes and special assessments, with respect to the leased premises and improvements situated thereon, Tenant shall fund and make monthly or other periodic payments to such an escrow account all as may be required by such mortgagee. Any funds held in such escrow account in excess of Tenant's accrued liability under this Article 4 shall be the property of Tenant and purchased by Landlord upon expiration or termination of this Lease. ARTICLE 5. MAINTENANCE AND REPAIR. Tenant hereby accepts the leased --------------------------------- premises in the condition they are in. Tenant, at its sole cost and expense, will keep, maintain and rebuild, if necessary, the leased premises, including any altered, rebuilt, additional or substituted improvements, in good repair and appearance during the term an any renewal term of this Lease, ordinary wear and tear and damage by fire or other casualty insurable under Standard Hazard Insurance excepted. All repairs made by Tenant shall be at least equal to the original work in class and quality. Tenant shall put, keep and maintain all portions of the leased premises and the sidewalks, curbs, drives, parking areas, landscaped areas, and passageways adjoining the same in a clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstructions. 2 ARTICLE 6. ALTERATIONS AND ADDITIONS. Tenant may, at any time and from ------------------------------------ time to time during the term and any renewal term of this Lease, at its sole cost and expense, make additions to, alterations of, substitutions and replacements for, and removals from the improvements on the leased premises (hereinafter "alterations"), provided, however, that (i) the total market value of the leased premises shall not be lessened by reason of any such alterations, (ii) any alterations shall be done in a good and first class workmanlike manner, (iii) all such alterations shall be expeditiously completed in compliance with all laws, ordinances, orders, rules, regulations and requirements applicable thereto, (iv) if Tenant or Tenant's contractor estimates that any such alterations will cost more than Ten Thousand and no/100 Dollars ($10,000.00), Tenant shall give to Landlord notice of its intention to undertake the same at least thirty (30) days prior to commencement of the work, and (v) prior to commencement of the work Tenant shall have obtained all required consents and approvals of all mortgagees of the leased premises. Tenant shall promptly pay for all such alterations and shall hold Landlord harmless from any liens or charges against the leased premises by reason of any such work. Tenant shall procure and pay for all required permits, certificates and licenses in connection with such alterations. All such alterations shall become the property of Landlord, except that trade fixtures which may be removed without material damage to the leased premises shall remain t e property of Tenant. ARTICLE 7. USE OF LEASED PREMISES; COMPLIANCE WITH LAWS; ENVIRONMENTAL ---------------------------------------------------------------------- COVENANTS. The leased premises shall be used and occupied by Tenant as an - --------- automotive bumper sales and repair facility and other ancillary purposes, and for no other purpose, and such use and occupancy shall be in compliance with all applicable laws, ordinances and governmental regulations. Without limiting the foregoing, Tenant shall, at Tenant's expense, make all such improvements and alterations required by reason of Tenant's use of the leased premises under the Americans with Disabilities Act and shall comply with all Environmental Laws as hereinafter provided, and Landlord shall have no responsibility for the same. Tenant shall indemnify, defend and hold harmless Landlord from any loss or liability incurred by reason of any failure by Tenant to comply with applicable laws in its use and occupancy of the leased premises. As used herein, the following terms shall have the following meanings: "Environmental Law" - The Comprehensive Environmental Response Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S)9601 et seq.; the Resource Conservation and Recovery Act, 42 ------ U.S.C. (S)6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ------- (S)1802 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S)2601 et seq.; ------- ------- the Federal Water Pollution Control Act, 33 U.S.C. (S)1251 et seq.; the Clean ------- Water Act, 33 U.S.C. (S)1321 et seq.; the Clean Air Act, 42 U.S.C. (S)7401 et ------- -- seq.; and any other federal, state, county, municipal or local statute, law, - ---- ordinance or regulation which relates to or deals with human health or the environment, all as may from time to time be amended or subsequently enacted. "Hazardous Substances" - Asbestos, ureaformaldehyde, polychlorinated biphenyls, nuclear fuel or material, chemical or medical waste, radioactive material, explosives, known carcinogens, 3 petroleum products and by-products and any other dangerous, toxic or hazardous pollutants, contaminants, chemicals, materials or substances listed or identified as such in, or regulated by, any Environmental Law. Tenant covenants and agrees with Landlord that Tenant shall not use, or permit the use of, the leased premises for the handling, storage, transportation, manufacture, release or disposal of any Hazardous Substances, except for Hazardous Substances of such types and in such quantities as normally used in Tenant's business as specified in this Article, which are kept and used in compliance with all Environmental Laws. In addition, the Tenant shall not install or maintain, or permit the installation or maintenance of, any above- ground or underground storage tanks for the storage of petroleum, petroleum by- products or other Hazardous Substances in, about or under the leased premises unless (i) the Tenant has obtained the prior written consent of the Landlord for such installation and maintenance and (ii) the Tenant installs and maintains such above-ground or underground storage tanks in compliance with all applicable Environmental Laws. Upon the occurrence of an event of default hereunder or if the Landlord receives information which leads the Landlord, in its reasonable discretion, to believe that a Hazardous Substance is present on or is being handled, stored, transported, manufactured, released or disposed of in, on or about the leased premises, except as permitted above, the Landlord may, at its option, through its employees, agents or independent contractors, enter upon the leased premises and perform, at the Tenant's expense, environmental tests (including core drilling), studies, investigations and reports from a reputable environmental consultant chosen by Landlord. If any such environmental reports indicates any presence, handling, storage, transportation, manufacture, release or disposal of Hazardous Substances in, on or about the leased premises, except as permitted above, the Landlord may require the Tenant, at the Tenant's expense, to refrain from and take remedial action with respect to any such presence, handling, storage, transportation, manufacture, release or disposal to the satisfaction of the Landlord. The Tenant shall immediately notify the Landlord in writing of any claim, investigation, administrative proceeding, litigation, regulatory hearing or request or demand for remedial or response action or for compensation which may be proposed, threatened or pending, alleging the presence, handling, storage, transportation, manufacture, release, disposal or improper handling of Hazardous Substances in, on or about the leased premises not permitted hereby. The Landlord shall have the right, but not the obligation, to join and participate in any such investigation, administrative proceeding, litigation, regulatory hearing or other action, and Tenant shall pay upon demand its attorneys' fees and expenses in connection therewith. The Tenant shall not take any remedial or response action or enter into any settlement or other compromise with respect to any claim, investigation, administrative proceeding, litigation, regulatory hearing or request or demand for remedial or response action or for compensation without prior written notice to and consent by Tenant. Tenant shall defend, indemnify and hold Landlord harmless from any and all claims, actions, damages, costs, expenses and liability suffered or incurred or paid by or asserted against Landlord, including but not limited to reasonable attorneys fees incurred in the defense of such claims and actions, whether for cleanup or other response costs or for damage to property, personal injury or death, and whether to public agencies or authorities or to private persons (i) arising from or with respect to acts or practices of Tenant occurring prior to or after the date hereof in violation of any Environmental Law, or (ii) resulting from the presence on or about the leased premises or the release from or onto the leased premises of any Hazardous Substances 4 occurring during the term of this Lease. The Tenant's liability hereunder shall not be limited to the extent of insurance carried by or provided by the Tenant or subject to any exclusions from coverage in any insurance policy. The covenants and obligations of Tenant contained in this Article shall survive expiration or earlier termination of the term of this Lease. ARTICLE 8. UTILITIES. Tenant will pay or cause to be paid when due all -------------------- charges for gas, water, sewer, electricity, telephone and other utilities and services used, rendered or supplied to, upon or in connection with the leased premises, and Landlord shall have no responsibility to supply the same. Without limiting Tenant's general duty to maintain and repair, Tenant shall maintain in good order and condition during the term and any renewal term of this Lease all pipes, wires, conduits, boilers and other equipment for the provision of utility services to the leased premises. ARTICLE 9. INSURANCE. -------------------- (a) Public Liability. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect at its expense a policy or policies of commercial general liability insurance with respect to the leased premises and the business of Tenant and any subtenant, licensee or concessionaire, with companies licensed to do business in the State of Illinois, in which both Tenant and Landlord shall be named as insureds and adequately covered under reasonable limits of liability not less than $2,000,000 general liability aggregate and $1,000,000 per occurrence Such limits of liability shall be adjusted as of each fifth anniversary of the commencement date of this Lease according to the formula stated in Article 2 above. Tenant shall furnish Landlord with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of insurance. (b) Hazard Insurance. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect a policy of Standard Hazard Insurance, with companies licensed to do business in the State of Illinois, covering all improvements on the property in the amount of their full insurable replacement value, naming both Landlord and Tenant as insureds, but payable only to Landlord and containing a loss payable clause as required by any mortgagees of the leased premises; and shall furnish Landlord and all such mortgagees with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord and all such mortgagees shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of such insurance. In the event any mortgagee of the leased premises requires an escrow account to be maintained for the payment of hazard insurance premiums, Tenant shall fund and make monthly or other periodic payments to such an escrow account, all as may be required by such mortgagee. Any funds held in such escrow account in excess of Tenant's accrued liability under this Article shall be the property of Tenant and purchased by Landlord upon expiration or termination of this Lease. Tenant may separately or under the same policy insure any trade fixtures, equipment, supplies and other personal property owned by Tenant and located upon the leased premises. 5 (c) Waiver of Subrogation. To the extent such waiver does not void or diminish the coverage under any policy, Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, or their respective property, to the extent such loss or damage is covered by insurance carried by either Landlord or Tenant or may be insured (regardless of whether coverage is actually in effect) under Standard Hazard Insurance. ARTICLE 10. NON-LIABILITY; COVENANTS TO HOLD HARMLESS. Landlord shall be ------------------------------------------------------ held harmless by Tenant from any liability for damages to any person or property in or upon the leased premises and the sidewalks adjoining same, including the property of Tenant and its employees and all persons in the building at its or their invitation. All property kept, stored or maintained in the leased premises shall be so kept, stored or maintained at the sole risk of Tenant. Tenant agrees to make payment when due for any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to Tenant in or about the leased premises which may be secured by any mechanic's, materialmen's or other lien against the leased premises or the Landlord's interest therein and will cause each such lien to be discharged at the time performance of any obligation secured thereby i-natures; provided that Tenant may contest such lien by appropriate proceedings which stay the enforcement thereof, upon providing reasonable assurances or security to Landlord that Tenant will pay the amount secured by such lien if found to be valid, but if such lien is reduced to final judgment and if such judgment or process thereon is not stayed, or if stayed and said stay expires, then and in such event Tenant shall forthwith pay and discharge said judgment. Landlord shall have the right to post and maintain on the leased premises notice of nonresponsibility under the laws of Illinois. ARTICLE 11. EMINENT DOMAIN. -------------------------- (a) Entire Premises. If substantially all of the leased premises shall be taken under the power of eminent domain then the term of this Lease shall cease as of the day possession shall be taken and the rent shall be paid up to that day with a proportionate refund by Landlord of such rent as may have been paid in advance. (b) Partial Taking. If more than twenty percent (20%) of the floor space in the building or buildings located on the leased premises shall be taken under the power of eminent domain, both Landlord and Tenant shall have the right to terminate this Lease as of the day possession shall be taken by notice to the other party given within ten (10) days after possession is so taken. If the unexpired portion of the term or any renewal term of this Lease shall be two (2) years or less at the date of taking of any portion of the building or buildings located on the leased premises, Landlord shall have the right to terminate this Lease as of the day possession shall be taken by like notice to Tenant. If more than one third (1/3) of the parking area in the leased premises is taken under the power of eminent domain, Tenant shall have the right to terminate this Lease as of the day possession shall be taken by like notice to Landlord, unless Landlord shall provide, on or before the day possession shall be taken, a reasonably equivalent substitute parking area. Tenant shall be allowed a reasonable time not to exceed thirty (30) days after any such termination to vacate the remainder of the leased premises, and rent shall be paid 6 up to the day possession shall be taken or the day Tenant vacates the remainder of the leased premises, whichever is later. (c) Continuation of Lease. In the event this Lease is not terminated pursuant to paragraphs (a) or (b) of this Article, all the terms of this Lease shall continue in effect, except that the base rent shall be reduced in proportion to the reduction in floor space in the building or buildings located on the leased premises as a result of the taking, and Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the basic building or buildings, exterior and interior work to be in conformance with the then existing architectural design of the improvements so as to constitute the remaining premises a complete architectural unit. (d) Damages. In any event all damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the leased premises, shall belong to and be the property of Landlord whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the premises; provided, however, that Landlord shall not be entitled to any award made to Tenant for relocation benefits provided by Illinois law, "for going concern" value of its business, loss of business, fair value of, and cost of removal of stock and fixtures or for temporary requisition of the use or occupancy of the leased premises or a part thereof, which shall belong to Tenant. (e) Definition. The term "eminent domain" shall include the exercise of any similar power and any purchase or other acquisition in lieu of condemnation. ARTICLE 12. DAMAGE. ------------------- (a) Partial or Total Destruction. In case the leased premises shall be partially or totally destroyed by fire or other casualty insurable under Standard Hazard Insurance so as to become partially or totally untenantable, the same, unless Landlord or Tenant shall terminate this Lease as hereinafter provided, shall be repaired or rebuilt as quickly as practicable at the cost of Landlord, and the base rent shall abate during the period of repair in proportion to the portion of the floor space in the building or buildings located on the leased premises that is untenantable or unfit for use by Tenant in its business. (b) Extensive Damage; Election. If the building or buildings located on the leased premises shall be destroyed or damaged by fire or other casualty insurable under Standard Hazard Insurance, so as to become wholly untenantable, and: 1. the leased premises cannot be repaired or restored within one hundred eighty days (180) after such damage or destruction; or 2. the unexpired portion of the term or any renewal term of this Lease is two (2) years or less at the date of the damage; 7 then either Landlord or Tenant may terminate this Lease as of the date of such destruction or damage by giving written notice to the other party of such election within thirty (30) days after such damage or destruction. ARTICLE 13. SURRENDER; HOLDING OVER. On the last day of the term or any ----------------------------------- renewal term hereof or on the sooner termination thereof, Tenant shall peaceably surrender the leased premises in good order, condition and repair, broom-clean, fire and other casualty insurable under Standard Hazard Insurance and reasonable wear and tear only excepted. Tenant shall repair any damage to the leased premises caused by removal of Tenant's trade fixtures or equipment. Any of Tenant's property not removed on the last day of the term or any renewal term hereof or on the sooner termination thereof, shall be deemed abandoned. In the event Tenant remains in possession of the leased premises after the expiration of the term and any renewal term of this Lease without the execution of a new lease but with the acquiescence of Landlord, it shall be deemed to be occupying said premises as a Tenant from month-to-month, subject to all the conditions, provisions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy. The period of such month-to-month tenancy shall be considered a renewal term of this Lease. If Tenant desires to lease the leased premises after the expiration of the term and any renewal term of this Lease, Tenant will notify Landlord of Tenant's desire to enter into a lease of the leased premises at least six (6) months prior to the expiration of the term or the renewal term, as the case may be. ARTICLE 14. DEFAULT; REMEDIES. ------------------------------ (a) Default. The occurrence of any of the following shall constitute an event of default under this Lease: 1. Tenant shall have failed to pay any installment of base rent to Landlord when the same shall be due and payable; or 2. Tenant shall have failed to keep in full force and effect the insurance policies required by Article 9 above or shall have failed to pay taxes and special assessments when due as required by Article 4 above; or 3. Tenant shall have failed to comply with any other provision of this Lease, and shall not have cured such failure within thirty (30) days after Landlord, by written notice, has informed Tenant of such noncompliance; provided, however, in the case of a default which cannot be cured, with due diligence, within a period of thirty (30) days, Tenant shall have such additional time to cure such default as may be reasonably necessary, provided that Tenant proceeds promptly and with due diligence to cure such default after receipt of said notice; or 4. Tenant shall have filed a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee for it or its property, 8 or any similar petition, or shall have made an assignment for the benefit of creditors, or an order for relief shall have been entered in any proceeding under the federal Bankruptcy Code in which Tenant is named as the debtor; or 5. Any involuntary petition of the type or similar to those referred to in Paragraph 4 of this Subsection (a) shall have been filed against Tenant, and shall not be vacated or withdrawn within sixty (60) days after the date of the filing thereof; or 6. Tenant shall have abandoned the leased premises, which shall be conclusively presumed if Tenant shall vacate the premises for thirty (30) days without giving written notice of its intent to return to possession of the leased premises. (b) Remedies. Whenever any event of default shall have occurred and be subsisting, Landlord may elect either: 1. To cancel and terminate this Lease; or 2. To reenter and take possession of the leased premises, and terminate Tenant's right to possession of the leased premises, without terminating this Lease or any of Tenant's obligations for the balance of the term of this Lease. Landlord may at any time elect to terminate this Lease despite a prior election to exercise its remedies under Paragraph 2 above. In the event Landlord exercises its remedies under Paragraph 2 above, it may remove all persons and property from the leased premises and store such property at the cost of and for the account of Tenant, may make alterations and repairs and redecorate the premises to the extent deemed by Landlord necessary or desirable, and may relet the premises, or any part thereof, for the account of Tenant, to any person, firm or corporation, other than Tenant, for such rent, for such time and upon such terms as Landlord, in Landlord's sole discretion, shall determine; but Landlord shall not be required to accept any tenant offered by Tenant or to observe any instruction given by Tenant concerning such reletting. Any rent and other amounts received by Landlord upon such reletting shall be applied first to the costs and expenses of Landlord in regaining possession of the leased premises, storing property removed from the premises, making alterations or repairs or redecorating the leased premises, and reletting the premises, including, without limitation, brokerage and reasonable attorneys fees, then to the rentals and other obligations of Tenant under this Lease, and any surplus shall be paid to Tenant. In the event Landlord elects to terminate this Lease, all base rent and payments for hazard insurance premiums and taxes (excluding special assessments) for the balance of the term or any renewal term of this Lease shall be immediately due and payable to Landlord, without credit for any subsequent reletting by Landlord, provided that all such payments shall be discounted from the unaccelerated due dates to present value on the date of termination, using a discount factor of five percent (5%), and such accelerated payments shall bear interest from the date of termination to the date actually paid at the rate of ten percent (10%) per annum. For purposes of making this calculation, payments for hazard insurance premiums shall be presumed to remain the same as the last annual hazard insurance premium paid, and to be due and payable on each anniversary of 9 said last hazard insurance premium payments and payments for taxes and installments of special assessments shall be presumed to remain the same as the last semiannual payment of taxes and installments of special assessments, and to be due and payable semi-annually on May 15 and October 15 of each year. ARTICLE 15. PRIOR LEASE. This Lease supersedes the existing lease between ------------------------ Landlord and Tenant with respect to the leased premises (the "Prior Lease"), which shall have no further force or effect as of the date hereof, except for Tenant's continuing obligation to pay rent and perform its obligations which accrued under the Prior Lease prior to the date hereof which shall continue in effect until such rent has been paid and such obligations performed. ARTICLE 16. NOTICES. Any notice required or permitted under this Lease -------------------- shall be deemed sufficiently given or served when personally delivered (in person, by commercial courier service, by facsimile with confirmed transmission, or otherwise) or forty-eight (48) hours after mailed by registered or certified mail to Tenant at the address of the leased premises and to Landlord at the address then fixed for the payment of rent, and either party may by like written notice at any time designate a different address to which notices shall subsequently be sent. ARTICLE 17. GENERAL. This Lease does not create the relationship of -------------------- principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of Landlord and Tenant. One or more waivers of any default of Tenant by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent to or approval by Landlord of any act by Tenant requiring Landlord's consent or approval shall not waive or render unnecessary Landlord's consent to or approval of any subsequent similar act by Tenant. Each term and each provision of this Lease performable by Tenant shall be construed to be both a covenant and a condition. The marginal or topical headings of the several articles, paragraphs and clauses are for convenience only and do not define, limit or construe the contents of such articles, paragraphs or clauses. All preliminary negotiations and all prior written agreements regarding the subject matter of this Lease (including, without limitation, the Prior Lease) are superseded and merged into and incorporated in this Lease. The laws of the State of Illinois shall govern the validity, performance and enforcement of this Lease. The terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the successors in interest and assigns of the parties hereto. ARTICLE 18. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant ---------------------------- that upon Tenant paying the rent and performing all of the terms and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby leased, subject, nevertheless, to the terms and conditions of this Lease. ARTICLE 19. SUBORDINATION. Tenant agrees that its interest in the leased -------------------------- premises is and shall be subordinate to any mortgages that may hereafter be placed upon said premises and to any and all advances to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof, provided the mortgagee named in said mortgages shall agree not to disturb Tenant's occupancy under this Lease in the event of foreclosure if Tenant is 10 not in default beyond applicable periods of grace. Tenant agrees to execute such documents as may be reasonably required by such mortgagee to confirm the same. In the event that any mortgagee elects to have the Lease a prior lien to its mortgage, then and in such event upon such mortgagee notifying Tenant to that effect, this Lease shall be deemed prior in lien to the said mortgage, whether this Lease is dated prior to or subsequent to the date of said mortgage. ARTICLE 20. ASSIGNMENT AND SUBLETTING. Landlord may freely transfer the -------------------------------------- leased premises, subject to this Lease, and/or assign its rights under this Lease. Upon any transfer of the leased premises, subject to this Lease, Landlord shall be relieved of all of its obligations under this Lease provided the transferee assumes such obligations in writing. Tenant shall not assign this Lease or sublease all or part of the leased premises without the prior written consent of Landlord; provided that Tenant shall have the right to assign its interest under this Lease one time and one time only in connection with the sale or transfer of all or substantially all the assets of Tenant including all or substantially all of Tenant's assets located at the leased premises. ARTICLE 21. MEMORANDUM OF LEASE. The parties agree not to record or -------------------------------- register this Lease, but the parties shall execute on the date hereof two (2) copies of the Memorandum of Lease attached hereto as Exhibit B, and either party may record or register said Memorandum of Lease. 11 IN WITNESS WHEREOF, the Landlord and the Tenant have caused this Lease to be executed as of the day and year first above written. J & K PROPERTIES By______________________________________ Karen Wood, Partner And_____________________________________ Jean M. Brown, Partner NORTH STAR PLATING COMPANY By______________________________________ Its______________________________ [SIGNATURE PAGE TO BUILDING LEASE BETWEEN J & K PROPERTIES AND NORTH STAR PLATING COMPANY] 2021682-1 12 EXHIBIT A TO BUILDING LEASE LEGAL DESCRIPTION OF LEASED PREMISES [To be provided.] EXHIBIT B TO BUILDING LEASE MEMORANDUM OF LEASE THIS AGREEMENT, Made and entered into as of the ____, day of _____________ 1995, by and between J & K PROPERTIES, a Minnesota general partnership (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). WITNESSETH: WHEREAS, the parties have this day entered into that certain Building Lease, wherein Landlord has leased to Tenant certain property located in the City of Peoria, Illinois, described in Exhibit A attached hereto, which premises --------- are hereinafter referred to as the "leased premises". NOW, THEREFORE, in consideration of the mutual covenants contained in said Lease and for other good and valuable consideration, Landlord hereby leases to Tenant, upon the terms and conditions and for the rent set forth in the Lease, which is hereby incorporated herein and made a part hereof, the leased premises, for a term of ten (10) years from the date hereof. IN WITNESS WHEREOF, the parties have hereunto set their hands the day and year first above written. J & K PROPERTIES By______________________________________ Karen Wood, Partner And_____________________________________ Jean M. Brown, Partner NORTH STAR PLATING COMPANY By______________________________________ Its___________________________ 1 STATE OF MINNESOTA ) )SS. COUNTY OF___________ ) The foregoing instrument was acknowledged before me this _____ day of __________, 1995, by Karen Wood and Jean M. Brown, partners of J & K PROPERTIES, a Minnesota general partnership, on behalf of the partnership. (Notarial Seal) _______________________________ Notary Public STATE OF MINNESOTA ) )SS. COUNTY OF___________ ) The foregoing instrument was acknowledged before me this _____ day of __________, 1995, by _______________________, the ______________________ of NORTH STAR PLATING COMPANY, A Minnesota Corporation, on behalf of the corporation. (Notarial Seal) _______________________________ Notary Public THIS INSTRUMENT DRAFTED BY: FREDRIKSON & BYRON, P.A. I 1 00 International Centre 900 Second Avenue South Minneapolis, MN 55402 2 EXHIBIT A TO MEMORANDUM OF LEASE LEGAL DESCRIPTION OF LEASED PREMISES [To be provided.] 3 EX-10.42 8 LEASE AGREEMENT DATED JANUARY 1, 1995 EXHIBIT 10.42 NORTH STAR PLATING COMPANY BUILDING LEASE (BRAINERD INDUSTRIAL PARK) THIS LEASE, Made and entered into as of the 1st day of January, 1995, by and between BX PROPERTIES, a Minnesota general partnership of Marjorie A. Wood and Jean M. Brown (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). W I T N E S S E T H : Landlord hereby leases to Tenant, and Tenant leases from Landlord the premises described in Exhibit A attached and hereby made a part hereof, which ---------- premises are hereinafter referred to as the "leased premises." TO HAVE AND TO HOLD the leased premises and appurtenances for a term of ten (10) years, commencing on the date hereof and ending at 12:00 midnight, on the tenth (10th) anniversary of the date hereof, plus any renewal term pursuant to Article 13 hereinbelow, subject to the following terms and conditions. ARTICLE 1. RENT. Landlord reserves and Tenant covenants to pay to ---------------- Landlord, without demand, at the place at which notices to Landlord are to be given pursuant to Article 16, base rent for the leased premises of Twenty One Thousand Three Hundred Dollars ($21,300.00) per calendar month payable in advance on the first day of each and every calendar month during the term and any renewal term of this Lease. A pro rata portion of such monthly base rent shall be due for any partial calendar month during the term or any renewal term of this Lease, in proportion to the number of days of such calendar month falling within the term or renewal term. ARTICLE 2. ESCALATION OF BASE RENT. The monthly base rent shall be ----------------------------------- increased as of the first day of the calendar month following the first (1st) anniversary of the commencement date of this Lease and following every anniversary of the commencement date of this Lease thereafter, during the term and any renewal term of this Lease, by a percentage equal to the percentage increase in the Consumers' Price Index for All Urban Consumers for the Minneapolis/St. Paul Metropolitan Area, "All Items" [1982-84 = 100] published by the United States Bureau of Labor Statistics (the "CPIU") between the CPIU last published as of the commencement date of this Lease or the second previous anniversary of the commencement date of this Lease, as the case may be, and the CPIU last published as of the immediately preceding anniversary of the commencement date of this Lease. Such adjusted monthly rent shall be rounded to the nearest One Dollar ($1.00). Should the CPIU be discontinued, or discontinued for the Minneapolis/St. Paul Metropolitan Area, a similar figure representative of an overall price average for the Minneapolis/St. Paul Metropolitan Area shall be used or the Consumers' Price Index for All Urban Consumers "All Items" for the United States shall be used. 1 FOR EXAMPLE: Assume the CPIU last published as of the first anniversary of the date hereof (in 1996) is 140 and the CPIU last published as of the second anniversary of the date hereof (in 1997) is 144.2 (representing a 3% annual increase), the monthly base rent shall be increased as of the first day of the calendar month following the second anniversary of the date hereof by 1.5 %. ARTICLE 3. NET LEASE. Without limitation of the specific provisions of -------------------- this Lease, the parties declare that this Lease shall be construed in all respects to be a net lease, with all expenses of operating, maintaining and insuring the leased premises, and paying taxes and special assessments and similar charges against the leased premises, to be borne by Tenant, with the exception only of reasonable wear and tear and loss by reason of fire and other casualty insurable under the current "special cause of loss" form of building and personal property insurance policy published by the Insurance Services Office or equivalent (hereinafter referred to as "Standard Hazard Insurance"). ARTICLE 4. TAXES AND SPECIAL ASSESSMENTS. Tenant shall pay, when due and ----------------------------------------- before penalty attaches, all real estate taxes and installments of special assessments, and any similar charges or liens due and payable during the term hereof with respect to the leased premises and improvements situated thereon, provided that election shall be made to pay any special assessment over the longest period allowed by law. For any partial calendar year at the end of the term or any renewal term of this Lease, Tenant shall be responsible for a pro rata portion of such taxes and special assessments due and payable in such calendar year in proportion to the number of days of such calendar year falling within the term or renewal term of this Lease, and appropriate adjustments shall be made at the beginning of the term and at the end of the term or renewal term hereof. Tenant shall be responsible for all taxes and installments of special assessments payable in the year 1995, since Tenant will occupy the leased premises for the entire year, either pursuant to this Lease or pursuant to the Prior Lease (as defined in Article 15 below). In the event any mortgagee of the leased premises requires an escrow account to be maintained for the payment of real estate taxes and special assessments, with respect to the leased premises and improvements situated thereon, Tenant shall fund and make monthly or other periodic payments to such an escrow account all as may be required by such mortgagee. Any funds held in such escrow account in excess of Tenant's accrued liability under this Article 4 shall be the property of Tenant and purchased by Landlord upon expiration or termination of this Lease. ARTICLE 5. MAINTENANCE AND REPAIR. Tenant hereby accepts the leased ---------------------------------- premises in the condition they are in. Tenant, at its sole cost and expense, will keep, maintain and rebuild, if necessary, the leased premises, including any altered, rebuilt, additional or substituted improvements, in good repair and appearance during the term and any renewal term of this Lease, ordinary wear and tear and damage by fire or other casualty insurable under Standard Hazard Insurance excepted. All repairs made by Tenant shall be at least equal to the original work in class and quality. Tenant shall put, keep and maintain all portions of the leased premises and the sidewalks, curbs, drives, parking areas, landscaped areas, and passageways adjoining the same in a clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstructions. ARTICLE 6. ALTERATIONS AND ADDITIONS. Tenant may, at any time and from ------------------------------------- time to time during the term and any renewal term of this Lease, at its sole cost and expense, 2 make additions to, alterations of, substitutions and replacements for, and removals from the improvements on the leased premises (hereinafter "alterations"), provided, however, that (i) the total market value of the leased premises shall not be lessened by reason of any such alterations, (ii) any alterations shall be done in a good and first class workmanlike manner, (iii) all such alterations shall be expeditiously completed in compliance with all laws, ordinances, orders, rules, regulations and requirements applicable thereto, (iv) if Tenant or Tenant's contractor estimates that any such alterations will cost more than Ten Thousand and no/100 Dollars ($10,000.00), Tenant shall give to Landlord notice of its intention to undertake the same at least thirty (30) days prior to commencement of the work, and (v) prior to commencement of the work Tenant shall have obtained all required consents and approvals of all mortgagees of the leased premises. Tenant shall promptly pay for all such alterations and shall hold Landlord harmless from any liens or charges against the leased premises by reason of any such work. Tenant shall procure and pay for all required permits, certificates and licenses in connection with such alterations. All such alterations shall become the property of Landlord, except that trade fixtures which may be removed without material damage to the leased premises shall remain the property of Tenant. ARTICLE 7. USE OF LEASED PREMISES; COMPLIANCE WITH LAWS; ENVIRONMENTAL --------------------------------------------------------- ------------- COVENANTS. The leased premises shall be used and occupied by Tenant as an - --------- automotive bumper sales and repair facility and other ancillary purposes, and for no other purpose, and such use and occupancy shall be in compliance with all applicable laws, ordinances and governmental regulations. Without limiting the foregoing, Tenant shall, at Tenant's expense, make all such improvements and alterations required by reason of Tenant's use of the leased premises under the Americans with Disabilities Act and shall comply with all Environmental Laws as hereinafter provided, and Landlord shall have no responsibility for the same. Tenant shall indemnify, defend and hold harmless Landlord from any loss or liability incurred by reason of any failure by Tenant to comply with applicable laws in its use and occupancy of the leased premises. As used herein, the following terms shall have the following meanings: "Environmental Law" - The Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S)9601 et seq.; the Resource Conservation and Recovery Act, 42 ------- U.S.C. (S)6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ------- (S)1802 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S)2601 et seq.; ------- ------- the Federal Water Pollution Control Act, 33 U.S.C. (S)1251 et seq.; the Clean ------- Water Act, 33 U.S.C. (S)1321 et seq.; the Clean Air Act, 42 U.S.C. (S)7401 et ------- -- seq.; the Minnesota Environmental Response and Liability Act, Minn. Stat. Chap. - ---- 115B; the Minnesota Petroleum Tank Release Cleanup Act, Minn. Stat. Chap. 115C; and any other federal, state, county, municipal or local statute, law, ordinance or regulation which relates to or deals with human health or the environment, all as may from time to time be amended or subsequently enacted. "Hazardous Substances" - Asbestos, ureaformaldehyde, polychlorinated biphenyls, nuclear fuel or material, chemical or medical waste, radioactive material, explosives, known carcinogens, petroleum products and by-products and any other dangerous, toxic or hazardous pollutants, contaminants, chemicals, materials or substances listed or identified as such in, or regulated by, any Environmental Law. 3 Tenant covenants and agrees with Landlord that Tenant shall not use, or permit the use of, the leased premises for the handling, storage, transportation, manufacture, release or disposal of any Hazardous Substances, except for Hazardous Substances of such types and in such quantities as normally used in Tenant's business as specified in this Article, which are kept and used in compliance with all Environmental Laws. In addition, the Tenant shall not install or maintain, or permit the installation or maintenance of, any above- ground or underground storage tanks for the storage of petroleum, petroleum by- products or other Hazardous Substances in, about or under the leased premises unless (i) the Tenant has obtained the prior written consent of the Landlord for such installation and maintenance and (ii) the Tenant installs and maintains such above-ground or underground storage tanks in compliance with all applicable Environmental Laws. Upon the occurrence of an event of default hereunder or if the Landlord receives information which leads the Landlord, in its reasonable discretion, to believe that a Hazardous Substance is present on or is being handled, stored, transported, manufactured, released or disposed of in, on or about the leased premises, except as permitted above, the Landlord may, at its option, through its employees, agents or independent contractors, enter upon the leased premises and perform, at the Tenant's expense, environmental tests (including core drilling), studies, investigations and reports from a reputable environmental consultant chosen by Landlord. If any such environmental reports indicates any presence, handling, storage, transportation, manufacture, release or disposal of Hazardous Substances in, on or about the leased premises, except as permitted above, the Landlord may require the Tenant, at the Tenant's expense, to refrain from and take remedial action with respect to any such presence, handling, storage, transportation, manufacture, release or disposal to the satisfaction of the Landlord. The Tenant shall immediately notify the Landlord in writing of any claim, investigation, administrative proceeding, litigation, regulatory hearing or request or demand for remedial or response action or for compensation which may be proposed, threatened or pending, alleging the presence, handling, storage, transportation, manufacture, release, disposal or improper handling of Hazardous Substances in, on or about the leased premises not permitted hereby. The Landlord shall have the right, but not the obligation, to join and participate in any such investigation, administrative proceeding, litigation, regulatory hearing or other action, and Tenant shall pay upon demand its attorneys' fees and expenses in connection therewith. The Tenant shall not take any remedial or response action or enter into any settlement or other compromise with respect to any claim, investigation, administrative proceeding, litigation, regulatory hearing or request or demand for remedial or response action or for compensation without prior written notice to and consent by Tenant. Tenant shall defend, indemnify and hold Landlord harmless from any and all claims, actions, damages, costs, expenses and liability suffered or incurred or paid by or asserted against Landlord, including but not limited to reasonable attorneys fees incurred in the defense of such claims and actions, whether for cleanup or other response costs or for damage to property, personal injury or death, and whether to public agencies or authorities or to private persons (i) arising from or with respect to acts or practices of Tenant occurring prior to or after the date hereof in violation of any Environmental Law, or (ii) resulting from the presence on or about the leased premises or the release from or onto the leased premises of any Hazardous Substances occurring during the term of this Lease. The Tenant's liability hereunder shall not be limited to the extent of insurance carried by or provided by the Tenant or subject to any exclusions from coverage in any insurance policy. 4 The covenants and obligations of Tenant contained in this Article shall survive expiration or earlier termination of the term of this Lease. ARTICLE 8. UTILITIES. Tenant will pay or cause to be paid when due all --------------------- charges for gas, water, sewer, electricity, telephone and other utilities and services used, rendered or supplied to, upon or in connection with the leased premises, and Landlord shall have no responsibility to supply the same. Without limiting Tenant's general duty to maintain and repair, Tenant shall maintain in good order and condition during the term and any renewal term of this Lease all pipes, wires, conduits, boilers and other equipment for the provision of utility services to the leased premises. ARTICLE 9. INSURANCE. --------------------- (a) Public Liability. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect at its expense a policy or policies of commercial general liability insurance with respect to the leased premises and the business of Tenant and any subtenant, licensee or concessionaire, with companies licensed to do business in the State of Minnesota, in which both Tenant and Landlord shall be named as insureds and adequately covered under reasonable limits of liability not less than $2,000,000 general liability aggregate and $1,000,000 per occurrence. Such limits of liability shall be adjusted as of each fifth anniversary of the commencement date of this Lease according to the formula stated in Article 2 above. Tenant shall furnish Landlord with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of insurance. (b) Hazard Insurance. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect a policy of Standard Hazard Insurance, with companies licensed to do business in the State of Minnesota, covering all improvements on the property in the amount of their full insurable replacement value, naming both Landlord and Tenant as insureds, but payable only to Landlord and containing a loss payable clause as required by any mortgagees of the leased premises; and shall furnish Landlord and all such mortgagees with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord and all such mortgagees shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of such insurance. In the event any mortgagee of the leased premises requires an escrow account to be maintained for the payment of hazard insurance premiums, Tenant shall fund and make monthly or other periodic payments to such an escrow account, all as may be required by such mortgagee. Any funds held in such escrow account in excess of Tenant's accrued liability under this Article shall be the property of Tenant and purchased by Landlord upon expiration or termination of this Lease. Tenant may separately or under the same policy insure any trade fixtures, equipment, supplies and other personal property owned by Tenant and located upon the leased premises. (c) Waiver of Subrogation. To the extent such waiver does not void or diminish the coverage under any policy, Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, or their respective property, to the extent such loss or damage is covered by insurance carried 5 by either Landlord or Tenant or may be insured (regardless of whether coverage is actually in effect) under Standard Hazard Insurance. ARTICLE 10. NON-LIABILITY; COVENANTS TO HOLD HARMLESS. Landlord shall be ------------------------------------------------------ held harmless by Tenant from any liability for damages to any person or property in or upon the leased premises and the sidewalks adjoining same, including the property of Tenant and its employees and all persons in the building at its or their invitation. All property kept, stored or maintained in the leased premises shall be so kept, stored or maintained at the sole risk of Tenant. Tenant agrees to make payment when due for any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to Tenant in or about the leased premises which may be secured by any mechanic's, materialmen's or other lien against the leased premises or the Landlord's interest therein and will cause each such lien to be discharged at the time performance of any obligation secured thereby matures; provided that Tenant may contest such lien by appropriate proceedings which stay the enforcement thereof, upon providing reasonable assurances or security to Landlord that Tenant will pay the amount secured by such lien if found to be valid, but if such lien is reduced to final judgment and if such judgment or process thereon is not stayed, or if stayed and said stay expires, then and in such event Tenant shall forthwith pay and discharge said judgment. Landlord shall have the right to post and maintain on the leased premises notice of nonresponsibility under the laws of Minnesota. ARTICLE 11. EMINENT DOMAIN. --------------------------- (a) Entire Premises. If substantially all of the leased premises shall be taken under the power of eminent domain then the term of this Lease shall cease as of the day possession shall be taken and the rent shall be paid up to that day with a proportionate refund by Landlord of such rent as may have been paid in advance. (b) Partial Taking. If more than twenty percent (20%) of the floor space in the building or buildings located on the leased premises shall be taken under the power of eminent domain, both Landlord and Tenant shall have the right to terminate this Lease as of the day possession shall be taken by notice to the other party given within ten (10) days after possession is so taken. If the unexpired portion of the term or any renewal term of this Lease shall be two (2) years or less at the date of taking of any portion of the building or buildings located on the leased premises, Landlord shall have the right to terminate this Lease as of the day possession shall be taken by like notice to Tenant. If more than one third (1/3) of the parking area in the leased premises is taken under the power of eminent domain, Tenant shall have the right to terminate this Lease as of the day possession shall be taken by like notice to Landlord, unless Landlord shall provide, on or before the day possession shall be taken, a reasonably equivalent substitute parking area. Tenant shall be allowed a reasonable time not to exceed thirty (30) days after any such termination to vacate the remainder of the leased premises, and rent shall be paid up to the day possession shall be taken or the day Tenant vacates the remainder of the leased premises, whichever is later. (c) Continuation of Lease. In the event this Lease is not terminated pursuant to paragraphs (a) or (b) of this Article, all the terms of this Lease shall continue in effect, except that the base rent shall be reduced in proportion to the reduction in floor space in the building or 6 buildings located on the leased premises as a result of the taking, and Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the basic building or buildings, exterior and interior work to be in conformance with the then existing architectural design of the improvements so as to constitute the remaining premises a complete architectural unit. (d) Damages. In any event all damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the leased premises, shall belong to and be the property of Landlord whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the premises; provided, however, that Landlord shall not be entitled to any award made to Tenant for relocation benefits provided by M.S.A. Section 117.52 or similar successor statute, for "going concern" value of its business, loss of business, fair value of, and cost of removal of stock and fixtures or for temporary requisition of the use or occupancy of the leased premises or a part thereof, which shall belong to Tenant. (e) Definition. The term "eminent domain" shall include the exercise of any similar power and any purchase or other acquisition in lieu of condemnation. ARTICLE 12. DAMAGE. ------------------- (a) Partial or Total Destruction. In case the leased premises shall be partially or totally destroyed by fire or other casualty insurable under Standard Hazard Insurance so as to become partially or totally untenantable, the same, unless Landlord or Tenant shall terminate this Lease as hereinafter provided, shall be repaired or rebuilt as quickly as practicable at the cost of Landlord, and the base rent shall abate during the period of repair in proportion to the portion of the floor space in the building or buildings located on the leased premises that is untenantable or unfit for use by Tenant in its business. (b) Extensive Damage; Election. If the building or buildings located on the leased premises shall be destroyed or damaged by fire or other casualty insurable under Standard Hazard Insurance, so as to become wholly untenantable, and: 1. the leased premises cannot be repaired or restored within one hundred eighty days (180) after such damage or destruction; or 2. the unexpired portion of the term or any renewal term of this Lease is two (2) years or less at the date of the damage; then either Landlord or Tenant may terminate this Lease as of the date of such destruction or damage by giving written notice to the other party of such election within thirty (30) days after such damage or destruction. ARTICLE 13. SURRENDER; HOLDING OVER. On the last day of the term or any ------------------------------------ renewal term hereof or on the sooner termination thereof, Tenant shall peaceably surrender the leased premises in good order, condition and repair, broom-clean, fire and other casualty insurable under Standard Hazard Insurance and reasonable wear and tear only excepted. Tenant shall repair any damage to the leased premises caused by removal of Tenant's trade fixtures or equipment. Any of Tenant's property not removed on the last day of the term or any renewal term 7 hereof or on the sooner termination thereof, shall be deemed abandoned. In the event Tenant remains in possession of the leased premises after the expiration of the term and any renewal term of this Lease without the execution of a new lease but with the acquiescence of Landlord, it shall be deemed to be occupying said premises as a Tenant from month-to-month, subject to all the conditions, provisions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy. The period of such month-to-month tenancy shall be considered a renewal term of this Lease. If Tenant desires to lease the leased premises after the expiration of the term and any renewal term of this Lease, Tenant will notify Landlord of Tenant's desire to enter into a lease of the leased premises at least six (6) months prior to the expiration of the term or the renewal term, as the case may be. ARTICLE 14. DEFAULT; REMEDIES. ------------------------------ (a) Default. The occurrence of any of the following shall constitute an event of default under this Lease: 1. Tenant shall have failed to pay any installment of base rent to Landlord when the same shall be due and payable; or 2. Tenant shall have failed to keep in full force and effect the insurance policies required by Article 9 above or shall have failed to pay taxes and special assessments when due as required by Article 4 above; or 3. Tenant shall have failed to comply with any other provision of this Lease, and shall not have cured such failure within thirty (30) days after Landlord, by written notice, has informed Tenant of such noncompliance; provided, however, in the case of a default which cannot be cured, with due diligence, within a period of thirty (30) days, Tenant shall have such additional time to cure such default as may be reasonably necessary, provided that Tenant proceeds promptly and with due diligence to cure such default after receipt of said notice; or 4. Tenant shall have filed a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee for it or its property, or any similar petition, or shall have made an assignment for the benefit of creditors, or an order for relief shall have been entered in any proceeding under the federal Bankruptcy Code in which Tenant is named as the debtor; or 5. Any involuntary petition of the type or similar to those referred to in Paragraph 4 of this Subsection (a) shall have been filed against Tenant, and shall not be vacated or withdrawn within sixty (60) days after the date of the filing thereof; or 6. Tenant shall have abandoned the leased premises, which shall be conclusively presumed if Tenant shall vacate the premises for thirty (30) days without giving written notice of its intent to return to possession of the leased premises. 8 (b) Remedies. Whenever any event of default shall have occurred and be subsisting, Landlord may elect either: 1. To cancel and terminate this Lease; or 2. To reenter and take possession of the leased premises, and terminate Tenant's right to possession of the leased premises, without terminating this Lease or any of Tenant's obligations for the balance of the term of this Lease. Landlord may at any time elect to terminate this Lease despite a prior election to exercise its remedies under Paragraph 2 above. In the event Landlord exercises its remedies under Paragraph 2 above, it may remove all persons and property from the leased premises and store such property at the cost of and for the account of Tenant, may make alterations and repairs and redecorate the premises to the extent deemed by Landlord necessary or desirable, and may relet the premises, or any part thereof, for the account of Tenant, to any person, firm or corporation, other than Tenant, for such rent, for such time and upon such terms as Landlord, in Landlord's sole discretion, shall determine; but Landlord shall not be required to accept any tenant offered by Tenant or to observe any instruction given by Tenant concerning such reletting. Any rent and other amounts received by Landlord upon such reletting shall be applied first to the costs and expenses of Landlord in regaining possession of the leased premises, storing property removed from the premises, making alterations or repairs or redecorating the leased premises, and reletting the premises, including, without limitation, brokerage and reasonable attorneys fees, then to the rentals and other obligations of Tenant under this Lease, and any surplus shall be paid to Tenant. In the event Landlord elects to terminate this Lease, all base rent and payments for hazard insurance premiums and taxes (excluding special assessments) for the balance of the term or any renewal term of this Lease shall be immediately due and payable to Landlord, without credit for any subsequent reletting by Landlord, provided that all such payments shall be discounted from the unaccelerated due dates to present value on the date of termination, using a discount factor of five percent (5%), and such accelerated payments shall bear interest from the date of termination to the date actually paid at the rate of ten percent (10%) per annum. For purposes of making this calculation, payments for hazard insurance premiums shall be presumed to remain the same as the last annual hazard insurance premium paid, and to be due and payable on each anniversary of said last hazard insurance premium payments and payments for taxes and installments of special assessments shall be presumed to remain the same as the last semiannual payment of taxes and installments of special assessments, and to be due and payable semi-annually on May 15 and October 15 of each year. ARTICLE 15. PRIOR LEASE. This Lease supersedes the existing lease between ------------------------ Landlord and Tenant with respect to the leased premises (the "Prior Lease"), which shall have no further force or effect as of the date hereof, except for Tenant's continuing obligation to pay rent and perform its obligations which accrued under the Prior Lease prior to the date hereof which shall continue in effect until such rent has been paid and such obligations performed. ARTICLE 16. NOTICES. Any notice required or permitted under this Lease -------------------- shall be deemed sufficiently given or served when personally delivered (in person, by commercial courier 9 service, by facsimile with confirmed transmission, or otherwise) or forty-eight (48) hours after mailed by registered or certified mail to Tenant at the address of the leased premises and to Landlord at the address then fixed for the payment of rent, and either party may by like written notice at any time designate a different address to which notices shall subsequently be sent. ARTICLE 17. GENERAL. This Lease does not create the relationship of -------------------- principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of Landlord and Tenant. One or more waivers of any default of Tenant by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent to or approval by Landlord of any act by Tenant requiring Landlord's consent or approval shall not waive or render unnecessary Landlord's consent to or approval of any subsequent similar act by Tenant. Each term and each provision of this Lease performable by Tenant shall be construed to be both a covenant and a condition. The marginal or topical headings of the several articles, paragraphs and clauses are for convenience only and do not define, limit or construe the contents of such articles, paragraphs or clauses. All preliminary negotiations and all prior written agreements regarding the subject matter of this Lease (including, without limitation, the Prior Lease) are superseded and merged into and incorporated in this Lease. The laws of the State of Minnesota shall govern the validity, performance and enforcement of this Lease. The terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the successors in interest and assigns of the parties hereto. ARTICLE 18. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant ---------------------------- that upon Tenant paying the rent and performing all of the terms and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby leased, subject, nevertheless, to the terms and conditions of this Lease. ARTICLE 19. SUBORDINATION. Tenant agrees that its interest in the leased -------------------------- premises is and shall be subordinate to any mortgages that may hereafter be placed upon said premises and to any and all advances to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof, provided the mortgagee named in said mortgages shall agree not to disturb Tenant's occupancy under this Lease in the event of foreclosure if Tenant is not in default beyond applicable periods of grace. Tenant agrees to execute such documents as may be reasonably required by such mortgagee to confirm the same. In the event that any mortgagee elects to have the Lease a prior lien to its mortgage, then and in such event upon such mortgagee notifying Tenant to that effect, this Lease shall be deemed prior in lien to the said mortgage, whether this Lease is dated prior to or subsequent to the date of said mortgage. ARTICLE 20. ASSIGNMENT AND SUBLETTING. Landlord may freely transfer the -------------------------------------- leased premises, subject to this Lease, and/or assign its rights under this Lease. Upon any transfer of the leased premises, subject to this Lease, Landlord shall be relieved of all of its obligations under this Lease provided the transferee assumes such obligations in writing. Tenant shall not assign this Lease or sublease all or part of the leased premises without the prior written consent of Landlord; provided that Tenant shall have the right to assign its interest under this Lease one time and one time only in connection with the sale or transfer of all or substantially all the assets of Tenant including all or substantially all of Tenant's assets located at the leased premises. 10 ARTICLE 21. MEMORANDUM OF LEASE. The parties agree not to record or -------------------------------- register this Lease, but the parties shall execute on the date hereof two (2) copies of the Memorandum of Lease attached hereto as Exhibit B, and either party may record or register said Memorandum of Lease. ARTICLE 22. OPTION TO PURCHASE. If, during the term of this Lease or ------------------------------- during any tenancy after the end of such term (otherwise than pursuant to an agreement which supersedes this Lease), the Tenant shall sell substantially all of its assets, or if substantially all of the stock of the Tenant is sold, the Tenant, or its assigns, shall have the option to purchase the leased premises. Such option shall be exercised by written notice to the Landlord and shall terminate on the earlier of (i) one year after the closing of any such sale, or (ii) the date when the Tenant (or any assignee of the Tenant's interest under this Lease) no longer occupies the leased premises. The purchase price shall be the fair market value of the leased premises as then agreed upon by the Landlord and the Tenant or, if not so agreed upon, as determined by appraisal. The appraisal shall be conducted by an independent appraiser satisfactory to the Landlord and the Tenant or, in the event that a single independent appraiser cannot be agreed upon within thirty (30) days of a demand for appraisal, the Landlord and the Tenant shall each select an independent appraiser who is experienced in appraising similar property. If the Landlord and the Tenant are not able to agree upon the qualification of the appraiser as so selected by the other in accordance with the preceding sentence, than the senior judge of the District Court of the county in which the leased premises is located shall select both of the appraisers. The appraisers shall each render a written report within ninety (90) days after the selection of the second such appraiser, and the purchase price shall be the arithmetic mean of the value determined by such appraisers or, in the event that one appraiser is agreed upon, the purchase price shall be the value as determined by such single appraiser. The reasonable fees of the appraiser (or both appraisers if two are selected) shall be shared equally by the Landlord and the Tenant unless they shall otherwise agree. In determining the value of the leased premises, the rent and other terms of this Lease shall be ignored. The purchase price as so determined shall be paid, in cash, within thirty (30) days after the report of the appraisers. Upon payment of the purchase price, Landlord shall convey the leased premises to Tenant or its assigns by general warranty deed free and clear of all monetary liens and encumbrances and free and clear of all other easements, restrictions, covenants or encumbrances except any easements, restrictions, covenants or other encumbrances of record on the date hereof. If the Tenant fails to pay the purchase price as so determined within such thirty (30) day period, the Tenant shall be deemed to have not effectively exercised its option and all of the Tenant's rights to purchase the leased premises under this Article shall be terminated and of no further force or effect without notice or any action on the part of the Landlord. Tenant's option to purchase under this Article is hereby assigned and set over to Ronald G. Brown, and Ronald G. Brown shall have the exclusive right to purchase the leased premises on the terms and conditions set forth in this Article during the term of the option herein granted. 11 IN WITNESS WHEREOF, the Landlord and the Tenant have caused this Lease to be executed as of the day and year first above written. BX PROPERTIES By______________________________________________ Marjorie A. Wood, Partner And_____________________________________________ Jean M. Brown, Partner NORTH STAR PLATING COMPANY By______________________________________________ Its_______________________________________ [SIGNATURE PAGE TO BUILDING LEASE BETWEEN BX PROPERTIES AND NORTH STAR PLATING COMPANY] 2021668 12 EXHIBIT A TO BUILDING LEASE LEGAL DESCRIPTION OF LEASED PREMISES Lot 4, Block 4, Brainerd Industrial Park, except the South 250 feet thereof, according to the map or plat thereof on file and of record in the Office of the Registrar of Titles in and for Crow Wing County, Minnesota. EXHIBIT B TO BUILDING LEASE MEMORANDUM OF LEASE THIS AGREEMENT, Made and entered into as of the 2/nd/ day of January 1995, by and between BX PROPERTIES, a Minnesota general partnership (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). W I T N E S S E T H : WHEREAS, the parties have this day entered into that certain Building Lease, wherein Landlord has leased to Tenant certain property located in Crow Wing County, Minnesota, described in Exhibit A attached hereto, which premises are hereinafter referred to as the "leased premises". NOW, THEREFORE, in consideration of the mutual covenants contained in said Lease and for other good and valuable consideration, Landlord hereby leases to Tenant, upon the terms and conditions (including an option to purchase in favor of the Tenant or its assignees) and for the rent set forth in the Lease, which is hereby incorporated herein and made a part hereof, the leased premises, for a term of ten (10) years from the date hereof. IN WITNESS WHEREOF, the parties have hereunto set their hands the day and year first above written. BX PROPERTIES By______________________________________________ Marjorie A. Wood, Partner And_____________________________________________ Jean M. Brown, Partner NORTH STAR PLATING COMPANY By______________________________________________ Its_______________________________________ STATE OF MINNESOTA ) ) SS. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 2/nd /day of January, 1995, by Marjorie A. Wood and Jean M. Brown, partners of BX PROPERTIES, a Minnesota general partnership, on behalf of the partnership. ---------------------------------------------------- Notary Public (Notarial Seal) STATE OF MINNESOTA ) ) SS. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 2/nd /day of January, 1995, by Ronald G. Brown, the President of NORTH STAR PLATING COMPANY, a Minnesota corporation, on behalf of the corporation. ---------------------------------------------------- Notary Public (Notarial Seal) THIS INSTRUMENT DRAFTED BY: FREDRIKSON & BYRON, P.A. 1100 International Centre 900 Second Avenue South Minneapolis, MN 55402 2021668 2 EXHIBIT A TO MEMORANDUM OF LEASE LEGAL DESCRIPTION OF LEASED PREMISES Lot 4, Block 4, Brainerd Industrial Park, except the South 250 feet thereof, according to the map or plat thereof on file and of record in the Office of the Registrar of Titles in and for Crow Wing County, Minnesota. EX-10.43 9 LEASE AGREEMENT DATED JANUARY 1, 1995 EXHIBIT 10.43 NORTH STAR PLATING COMPANY BUILDING LEASE (ST. CLOUD PROPERTY) THIS LEASE, Made and entered into as of the 1st day of January, 1995, by and between K & R PROPERTIES, a Minnesota general partnership of Kim Wood and Richard Monson (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). WITNESSETH: Landlord hereby leases to Tenant, and Tenant leases from Landlord the premises located in the City of St. Cloud, Minnesota, described in Exhibit A attached and hereby made a part hereof, which premises are hereinafter referred to as the "leased premises". TO HAVE AND TO HOLD the leased premises and appurtenances for a term of ten (10) years, commencing on the date hereof and ending at 12:00 midnight, on the tenth (10th) anniversary of the date hereof, plus any renewal term pursuant to Article 13 hereinbelow, subject to the following terms and conditions. ARTICLE 1. RENT. Landlord reserves and Tenant covenants to pay to ---------------- Landlord, without demand, at the place at which notices to Landlord are to be given pursuant to Article 16, base rent for the leased premises of Five Thousand Dollars ($5,000.00) per calendar month payable in advance on the first day of each and every calendar month during the term and any renewal term of this Lease. A pro rata portion of such monthly base rent shall be due for any partial calendar month during the term or any renewal term of this Lease, in proportion to the number of days of such calendar month falling within the term or renewal term. ARTICLE 2. ESCALATION OF BASE RENT. The monthly base rent shall be increased - ----------------------------------- as of the first day of the calendar month following the first (1st) anniversary of the commencement date of this Lease and following every anniversary of the commencement date of this Lease thereafter, during the term and any renewal term of this Lease, by a percentage equal to the percentage increase in the Consumers' Price Index for All Urban Consumers for the Minneapolis/St. Paul Metropolitan Area, "All Items" [1982-84 = 100] published by the United States Bureau of Labor Statistics (the "CPIU") between the CPIU last published as of the commencement date of this Lease or the second previous anniversary of the commencement date of this Lease, as the case may be, and the CPIU last published as of the immediately preceding anniversary of the commencement date of this Lease. Such adjusted monthly rent shall be rounded to the nearest One Dollar ($1.00). Should the CPIU be discontinued, or discontinued for the Minneapolis/St. Paul Metropolitan Area, a similar figure representative of an overall price average for the Minneapolis/St. Paul Metropolitan Area shall be used or the Consumers' Price Index for All Urban Consumers "All Items" for the United States shall be used. 1 FOR EXAMPLE: Assume the CPIU last published as of the first anniversary of the date hereof (in 1996) is 140 and the CPIU last published as of the second anniversary of the date hereof (in 1997) is 144.2 (representing a 3% annual increase), the monthly base rent shall be increased as of the first day of the calendar month following the second anniversary of the date hereof by 1.5%. ARTICLE 3. NET LEASE. Without limitation of the specific provisions of --------------------- this Lease, the parties declare that this Lease shall be construed in all respects to be a net lease, with all expenses of operating, maintaining and insuring the leased premises, and paying taxes and special assessments and similar charges against the leased premises, to be borne by Tenant, with the exception only of reasonable wear and tear and loss by reason of fire and other casualty insurable under the current "special cause of loss" form of building and personal property insurance policy published by the Insurance Services Office or equivalent (hereinafter referred to as "Standard Hazard Insurance"). ARTICLE 4. TAXES AND SPECIAL ASSESSMENTS. Tenant shall pay, when due and ----------------------------------------- before penalty attaches, all real estate taxes and installments of special assessments, and any similar charges or liens due and payable during the term hereof with respect to the leased premises and improvements situated thereon, provided that election shall be made to pay any special assessment over the longest period allowed by law. For any partial calendar year at the end of the term or any renewal term of this Lease, Tenant shall be responsible for a pro rata portion of such taxes and special assessments due and payable in such calendar year in proportion to the number of days of such calendar year falling within the term or renewal term of this Lease, and appropriate adjustments shall be made at the beginning of the term and at the end of the term or renewal term hereof. Tenant shall be responsible for all taxes and installments of special assessments payable in the year 1995, since Tenant will occupy the leased premises for the entire year, either pursuant to this Lease or pursuant to the Prior Lease (as defined in Article 15 below). In the event any mortgagee of the leased premises requires an escrow account to be maintained for the payment of real estate taxes and special assessments, with respect to the leased premises and improvements situated thereon, Tenant shall fund and make monthly or other periodic payments to such an escrow account all as may be required by such mortgagee. Any funds held in such escrow account in excess of Tenant's accrued liability under this Article 4 shall be the property of Tenant and purchased by Landlord upon expiration or termination of this Lease. ARTICLE 5. MAINTENANCE AND REPAIR. Tenant hereby accepts the leased premises - ---------------------------------- in the condition they are in. Tenant, at its sole cost and expense, will keep, maintain and rebuild, if necessary, the leased premises, including any altered, rebuilt, additional or substituted improvements, in good repair and appearance during the term and any renewal term of this Lease, ordinary wear and tear and damage by fire or other casualty insurable under Standard Hazard Insurance excepted. All repairs made by Tenant shall be at least equal to the original work in class and quality. Tenant shall put, keep and maintain all portions of the leased premises and the sidewalks, curbs, drives, parking areas, landscaped areas, and passageways adjoining the same in a clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstructions. 2 ARTICLE 6. ALTERATIONS AND ADDITIONS. Tenant may, at any time and from ------------------------------------- time to time during the term and any renewal term of this Lease, at its sole cost and expense, make additions to, alterations of, substitutions and replacements for, and removals from the improvements on the leased premises (hereinafter "alterations"), provided, however, that (i) the total market value of the leased premises shall not be lessened by reason of any such alterations, (ii) any alterations shall be done in a good and first class workmanlike manner, (iii) all such alterations shall be expeditiously completed in compliance with all laws, ordinances, orders, rules, regulations and requirements applicable thereto, (iv) if Tenant or Tenant's contractor estimates that any such alterations will cost more than Ten Thousand and no/100 Dollars ($10,000.00), Tenant shall give to Landlord notice of its intention to undertake the same at least thirty (30) days prior to commencement of the work, and (v) prior to commencement of the work Tenant shall have obtained all required consents and approvals of all mortgagees of the leased premises. Tenant shall promptly pay for all such alterations and shall hold Landlord harmless from any liens or charges against the leased premises by reason of any such work. Tenant shall procure and pay for all required permits, certificates and licenses in connection with such alterations. All such alterations shall become the property of Landlord, except that trade fixtures which may be removed without material damage to the leased premises shall remain the property of Tenant. ARTICLE 7. USE OF LEASED PREMISES, COMPLIANCE WITH LAWS, ENVIRONMENTAL -------------------------------------------------------- ------------- COVENANTS. The leased premises shall be used and occupied by Tenant as an - --------- automotive bumper sales and repair facility and other ancillary purposes, and for no other purpose, and such use and occupancy shall be in compliance with all applicable laws, ordinances and governmental regulations. Without limiting the foregoing, Tenant shall, at Tenant's expense, make all such improvements and alterations required by reason of Tenant's use of the leased premises under the Americans with Disabilities Act and shall comply with all Environmental Laws as hereinafter provided, and Landlord shall have no responsibility for the same. Tenant shall indemnify, defend and hold harmless Landlord from any loss or liability incurred by reason of any failure by Tenant to comply with applicable laws in its use and occupancy of the leased premises. As used herein, the following terms shall have the following meanings: "Environmental Law" - The Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S) 9601 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ------- (S) 1802 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S) 2601 et seq.; ------- ------- the Federal Water Pollution Control Act, 33 U.S.C. (S) 1251 et seq.; the Clean ------- Water Act, 33 U.S.C. (S) 1321 et seq.; the Clean Air Act, 42 U.S.C. (S) 7401 et ------- -- seq.; the Minnesota Environmental Response and Liability Act, Minn. Stat. Chap. - ---- 115B; the Minnesota Petroleum Tank Release Cleanup Act, Minn. Stat. Chap. 115C; and any other federal, state, county, municipal or local statute, law, ordinance or regulation which relates to or deals with human health or the environment, all as may from time to time be amended or subsequently enacted. 3 "Hazardous Substances" - Asbestos, ureaformaldehyde, polychlorinated biphenyls, nuclear fuel or material, chemical or medical waste, radioactive material, explosives, known carcinogens, petroleum products and by-products and any other dangerous, toxic or hazardous pollutants, contaminants, chemicals, materials or substances listed or identified as such in, or regulated by, any Environmental Law. Tenant covenants and agrees with Landlord that Tenant shall not use, or permit the use of, the leased premises for the handling, storage, transportation, manufacture, release or disposal of any Hazardous Substances, except for Hazardous Substances of such types and in such quantities as normally used in Tenant's business as specified in this Article, which are kept and used in compliance with all Environmental Laws. In addition, the Tenant shall not install or maintain, or permit the installation or maintenance of, any above- ground or underground storage tanks for the storage of petroleum, petroleum by- products or other Hazardous Substances in, about or under the leased premises unless (i) the Tenant has obtained the prior written consent of the Landlord for such installation and maintenance and (ii) the Tenant installs and maintains such above-ground or underground storage tanks in compliance with all applicable Environmental Laws. Upon the occurrence of an event of default hereunder or if the Landlord receives information which leads the Landlord, in its reasonable discretion, to believe that a Hazardous Substance is present on or is being handled, stored, transported, manufactured, released or disposed of in, on or about the leased premises, except as permitted above, the Landlord may, at its option, through its employees, agents or independent contractors, enter upon the leased premises and perform, at the Tenant's expense, environmental tests (including core drilling), studies, investigations and reports from a reputable environmental consultant chosen by Landlord. If any such environmental reports indicates any presence, handling, storage, transportation, manufacture, release or disposal of Hazardous Substances in, on or about the leased premises, except as permitted above, the Landlord may require the Tenant, at the Tenant's expense, to refrain from and take remedial action with respect to any such presence, handling, storage, transportation, manufacture, release or disposal to the satisfaction of the Landlord. The Tenant shall immediately notify the Landlord in writing of any claim, investigation, administrative proceeding, litigation, regulatory hearing or request or demand for remedial or response action or for compensation which may be proposed, threatened or pending, alleging the presence, handling, storage, transportation, manufacture, release, disposal or improper handling of Hazardous Substances in, on or about the leased premises not permitted hereby. The Landlord shall have the right, but not the obligation, to join and participate in any such investigation, administrative proceeding, litigation, regulatory hearing or other action, and Tenant shall pay upon demand its attorneys' fees and expenses in connection therewith. The Tenant shall not take any remedial or response action or enter into any settlement or other compromise with respect to any claim, investigation, administrative proceeding, litigation, regulatory hearing or request or demand for remedial or response action or for compensation without prior written notice to and consent by Tenant. Tenant shall defend, indemnify and hold Landlord harmless from any and all claims, actions, damages, costs, expenses and liability suffered or incurred or paid by or asserted against Landlord, including but not limited to reasonable attorneys fees incurred in the defense of such claims and actions, whether for cleanup or other response costs or for damage to property, 4 personal injury or death, and whether to public agencies or authorities or to private persons (i) arising from or with respect to acts or practices of Tenant occurring prior to or after the date hereof in violation of any Environmental Law, or (ii) resulting from the presence on or about the leased premises or the release from or onto the leased premises of any Hazardous Substances occurring during the term of this Lease. The Tenant's liability hereunder shall not be limited to the extent of insurance carried by or provided by the Tenant or subject to any exclusions from coverage in any insurance policy. The covenants and obligations of Tenant contained in this Article shall survive expiration or earlier termination of the term of this Lease. ARTICLE 8. UTILITIES. Tenant will pay or cause to be paid when due all --------------------- charges for gas, water, sewer, electricity, telephone and other utilities and services used, rendered or supplied to, upon or in connection with the leased premises, and Landlord shall have no responsibility to supply the same. Without limiting Tenant's general duty to maintain and repair, Tenant shall maintain in good order and condition during the term and any renewal term of this Lease all pipes, wires, conduits, boilers and other equipment for the provision of utility services to the leased premises. ARTICLE 9. INSURANCE. --------------------- (a) Public Liability. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect at its expense a policy or policies of commercial general liability insurance with respect to the leased premises and the business of Tenant and any subtenant, licensee or concessionaire, with companies licensed to do business in the State of Minnesota, in which both Tenant and Landlord shall be named as insureds and adequately covered under reasonable limits of liability not less than $2,000,000 general liability aggregate and $1,000,000 per occurrence. Such limits of liability shall be adjusted as of each fifth anniversary of the commencement date of this Lease according to the formula stated in Article 2 above. Tenant shall furnish Landlord with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of insurance. (b) Hazard Insurance. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect a policy of Standard Hazard Insurance, with companies licensed to do business in the State of Minnesota, covering all improvements on the property in the amount of their full insurable replacement value, naming both Landlord and Tenant as insureds, but payable only to Landlord and containing a loss payable clause as required by any mortgagees of the leased premises; and shall furnish Landlord and all such mortgagees with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord and all such mortgagees shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of such insurance. In the event any mortgagee of the leased premises requires an escrow account to be maintained for the payment of hazard insurance premiums, Tenant shall fund and make monthly or other periodic payments to such an escrow account, all as may be required by such mortgagee. Any funds held in such escrow account in 5 excess of Tenant's accrued liability under this Article shall be the property of Tenant and purchased by Landlord upon expiration or termination of this Lease. Tenant may separately or under the same policy insure any trade fixtures, equipment, supplies and other personal property owned by Tenant and located upon the leased premises. (c) Waiver of Subrogation. To the extent such waiver does not void or diminish the coverage under any policy, Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, or their respective property, to the extent such loss or damage is covered by insurance carried by either Landlord or Tenant or may be insured (regardless of whether coverage is actually in effect) under Standard Hazard Insurance. ARTICLE 10. NON-LIABILITY; COVENANTS TO HOLD HARMLESS. Landlord shall ------------------------------------------------------ be held harmless by Tenant from any liability for damages to any person or property in or upon the leased premises and the sidewalks adjoining same, including the property of Tenant and its employees and all persons in the building at its or their invitation. All property kept, stored or maintained in the leased premises shall be so kept, stored or maintained at the sole risk of Tenant. Tenant agrees to make payment when due for any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to Tenant in or about the leased premises which may be secured by any mechanic's, materialmen's or other lien against the leased premises or the Landlord's interest therein and will cause each such lien to be discharged at the time performance of any obligation secured thereby matures; provided that Tenant may contest such lien by appropriate proceedings which stay the enforcement thereof, upon providing reasonable assurances or security to Landlord that Tenant will pay the amount secured by such lien if found to be valid, but if such lien is reduced to final judgment and if such judgment or process thereon is not stayed, or if stayed and said stay expires, then and in such event Tenant shall forthwith pay and discharge said judgment. Landlord shall have the right to post and maintain on the leased premises notice of nonresponsibility under the laws of Minnesota. ARTICLE 11. EMINENT DOMAIN. --------------------------- (a) Entire Premises. If substantially all of the leased premises shall be taken under the power of eminent domain then the term of this Lease shall cease as of the day possession shall be taken and the rent shall be paid up to that day with a proportionate refund by Landlord of such rent as may have been paid in advance. (b) Partial Taking. If more than twenty percent (20%) of the floor space in the building or buildings located on the leased premises shall be taken under the power of eminent domain, both Landlord and Tenant shall have the right to terminate this Lease as of the day possession shall be taken by notice to the other party given within ten (10) days after possession is so taken. If the unexpired portion of the term or any renewal term of this Lease shall be two (2) years or less at the date of taking of any portion of the building or buildings located on the leased premises, Landlord shall have the right to terminate this Lease as of the day possession shall be taken by like notice to Tenant. If more than one third (1/3) of the parking area in the leased premises is taken under the power of eminent domain, Tenant shall have the right to 6 terminate this Lease as of the day possession shall be taken by like notice to Landlord, unless Landlord shall provide, on or before the day possession shall be taken, a reasonably equivalent substitute parking area. Tenant shall be allowed a reasonable time not to exceed thirty (30) days after any such termination to vacate the remainder of the leased premises, and rent shall be paid up to the day possession shall be taken or the day Tenant vacates the remainder of the leased premises, whichever is later. (c) Continuation of Lease. In the event this Lease is not terminated pursuant to paragraphs (a) or (b) of this Article, all the terms of this Lease shall continue in effect, except that the base rent shall be reduced in proportion to the reduction in floor space in the building or buildings located on the leased premises as a result of the taking, and Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the basic building or buildings, exterior and interior work to be in conformance with the then existing architectural design of the improvements so as to constitute the remaining premises a complete architectural unit. (d) Damages. In any event all damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the leased premises, shall belong to and be the property of Landlord whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the premises; provided, however, that Landlord shall not be entitled to any award made to Tenant for relocation benefits provided by M.S.A. Section 117.52 or similar successor statute, for "going concern" value of its business, loss of business, fair value of, and cost of removal of stock and fixtures or for temporary requisition of the use or occupancy of the leased premises or a part thereof, which shall belong to Tenant. (e) Definition. The term "eminent domain" shall include the exercise of any similar power and any purchase or other acquisition in lieu of condemnation. ARTICLE 12. DAMAGE. ------------------- (a) Partial or Total Destruction. In case the leased premises shall be partially or totally destroyed by fire or other casualty insurable under Standard Hazard Insurance so as to become partially or totally untenantable, the same, unless Landlord or Tenant shall terminate this Lease as hereinafter provided, shall be repaired or rebuilt as quickly as practicable at the cost of Landlord, and the base rent shall abate during the period of repair in proportion to the portion of the floor space in the building or buildings located on the leased premises that is untenantable or unfit for use by Tenant in its business. (b) Extensive Damage; Election. If the building or buildings located on the leased premises shall be destroyed or damaged by fire or other casualty insurable under Standard Hazard Insurance, so as to become wholly untenantable, and: 1. the leased premises cannot be repaired or restored within one hundred eighty days (180) after such damage or destruction; or 7 2. the unexpired portion of the term or any renewal term of this Lease is two (2) years or less at the date of the damage; then either Landlord or Tenant may terminate this Lease as of the date of such destruction or damage by giving written notice to the other party of such election within thirty (30) days after such damage or destruction. ARTICLE 13. SURRENDER; HOLDING OVER. On the last day of the term or any ------------------------------------ renewal term hereof or on the sooner termination thereof, Tenant shall peaceably surrender the leased premises in good order, condition and repair, broom-clean, fire and other casualty insurable under Standard Hazard Insurance and reasonable wear and tear only excepted. Tenant shall repair any damage to the leased premises caused by removal of Tenant's trade fixtures or equipment. Any of Tenant's property not removed on the last day of the term or any renewal term hereof or on the sooner termination thereof, shall be deemed abandoned. In the event Tenant remains in possession of the leased premises after the expiration of the term and any renewal term of this Lease without the execution of a new lease but with the acquiescence of Landlord, it shall be deemed to be occupying said premises as a Tenant from month-to-month, subject to all the conditions, provisions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy. The period of such month-to-month tenancy shall be considered a renewal term of this Lease. If Tenant desires to lease the leased premises after the expiration of the term and any renewal term of this Lease, Tenant will notify Landlord of Tenant's desire to enter into a lease of the leased premises at least six (6) months prior to the expiration of the term or the renewal term, as the case may be. ARTICLE 14. DEFAULT, REMEDIES. ------------------------------ (a) Default. The occurrence of any of the following shall constitute an event of default under this Lease: 1. Tenant shall have failed to pay any installment of base rent to Landlord when the same shall be due and payable; or 2. Tenant shall have failed to keep in full force and effect the insurance policies required by Article 9 above or shall have failed to pay taxes and special assessments when due as required by Article 4 above; or 3. Tenant shall have failed to comply with any other provision of this Lease, and shall not have cured such failure within thirty (30) days after Landlord, by written notice, has informed Tenant of such noncompliance; provided, however, in the case of a default which cannot be cured, with due diligence, within a period of thirty (30) days, Tenant shall have such additional time to cure such default as may be reasonably necessary, provided that Tenant proceeds promptly and with due diligence to cure such default after receipt of said notice; or 8 4. Tenant shall have filed a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee for it or its property, or any similar petition, or shall have made an assignment for the benefit of creditors, or an order for relief shall have been entered in any proceeding under the federal Bankruptcy Code in which Tenant is named as the debtor; or 5. Any involuntary petition of the type or similar to those referred to in Paragraph 4 of this Subsection (a) shall have been filed against Tenant, and shall not be vacated or withdrawn within sixty (60) days after the date of the filing thereof; or 6. Tenant shall have abandoned the leased premises, which shall be conclusively presumed if Tenant shall vacate the premises for thirty (30) days without giving written notice of its intent to return to possession of the leased premises. (b) Remedies. Whenever any event of default shall have occurred and be subsisting, Landlord may elect either: 1. To cancel and terminate this Lease; or 2. To reenter and take possession of the leased premises, and terminate Tenant's right to possession of the leased premises, without terminating this Lease or any of Tenant's obligations for the balance of the term of this Lease. Landlord may at any time elect to terminate this Lease despite a prior election to exercise its remedies under Paragraph 2 above. In the event Landlord exercises its remedies under Paragraph 2 above, it may remove all persons and property from the leased premises and store such property at the cost of and for the account of Tenant, may make alterations and repairs and redecorate the premises to the extent deemed by Landlord necessary or desirable, and may relet the premises, or any part thereof, for the account of Tenant, to any person, firm or corporation, other than Tenant, for such rent, for such time and upon such terms as Landlord, in Landlord's sole discretion, shall determine; but Landlord shall not be required to accept any tenant offered by Tenant or to observe any instruction given by Tenant concerning such reletting. Any rent and other amounts received by Landlord upon such reletting shall be applied first to the costs and expenses of Landlord in regaining possession of the leased premises, storing property removed from the premises, making alterations or repairs or redecorating the leased premises, and reletting the premises, including, without limitation, brokerage and reasonable attorneys fees, then to the rentals and other obligations of Tenant under this Lease, and any surplus shall be paid to Tenant. In the event Landlord elects to terminate this Lease, all base rent and payments for hazard insurance premiums and taxes (excluding special assessments) for the balance of the term or any renewal term of this Lease shall be immediately due and payable to Landlord, without credit for any subsequent reletting by Landlord, provided that all such payments shall be discounted from the unaccelerated due dates to present value on the date of termination, using a discount factor of five percent (5%), and such accelerated payments shall bear interest from the date of termination 9 to the date actually paid at the rate of ten percent (10%) per annum. For purposes of making this calculation, payments for hazard insurance premiums shall be presumed to remain the same as the last annual hazard insurance premium paid, and to be due and payable on each anniversary of said last hazard insurance premium payments and payments for taxes and installments of special assessments shall be presumed to remain the same as the last semiannual payment of taxes and installments of special assessments, and to be due and payable semi-annually on May 15 and October 15 of each year. ARTICLE 15. PRIOR LEASE. This Lease supersedes the existing lease between ------------------------ Landlord and Tenant with respect to the leased premises (the "Prior Lease"), which shall have no further force or effect as of the date hereof, except for Tenant's continuing obligation to pay rent and perform its obligations which accrued under the Prior Lease prior to the date hereof which shall continue in effect until such rent has been paid and such obligations performed. ARTICLE 16. NOTICES. Any notice required or permitted under this Lease -------------------- shall be deemed sufficiently given or served when personally delivered (in person, by commercial courier service, by facsimile with confirmed transmission, or otherwise) or forty-eight (48) hours after mailed by registered or certified mail to Tenant at the address of the leased premises and to Landlord at the address then fixed for the payment of rent, and either party may by like written notice at any time designate a different address to which notices shall subsequently be sent. ARTICLE 17. GENERAL. This Lease does not create the relationship of principal - -------------------- and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of Landlord and Tenant. One or more waivers of any default of Tenant by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent to or approval by Landlord of any act by Tenant requiring Landlord's consent or approval shall not waive or render unnecessary Landlord's consent to or approval of any subsequent similar act by Tenant. Each term and each provision of this Lease performable by Tenant shall be construed to be both a covenant and a condition. The marginal or topical headings of the several articles, paragraphs and clauses are for convenience only and do not define, limit or construe the contents of such articles, paragraphs or clauses. All preliminary negotiations and all prior written agreements regarding the subject matter of this Lease (including, without limitation, the Prior Lease) are superseded and merged into and incorporated in this Lease. The laws of the State of Minnesota shall govern the validity, performance and enforcement of this Lease. The terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the successors in interest and assigns of the parties hereto. ARTICLE 18. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant ---------------------------- that upon Tenant paying the rent and performing all of the terms and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby leased, subject, nevertheless, to the terms and conditions of this Lease. ARTICLE 19. SUBORDINATION. Tenant agrees that its interest in the leased -------------------------- premises is and shall be subordinate to any mortgages that may hereafter be placed upon said premises and 10 to any and all advances to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof, provided the mortgagee named in said mortgages shall agree not to disturb Tenant's occupancy under this Lease in the event of foreclosure if Tenant is not in default beyond applicable periods of grace. Tenant agrees to execute such documents as may be reasonably required by such mortgagee to confirm the same. In the event that any mortgagee elects to have the Lease a prior lien to its mortgage, then and in such event upon such mortgagee notifying Tenant to that effect, this Lease shall be deemed prior in lien to the said mortgage, whether this Lease is dated prior to or subsequent to the date of said mortgage. ARTICLE 20. ASSIGNMENT AND SUBLETTING. Landlord may freely transfer the -------------------------------------- leased premises, subject to this Lease, and/or assign its rights under this Lease. Upon any transfer of the leased premises, subject to this Lease, Landlord shall be relieved of all of its obligations under this Lease provided the transferee assumes such obligations in writing. Tenant shall not assign this Lease or sublease all or part of the leased premises without the prior written consent of Landlord; provided that Tenant shall have the right to assign its interest under this Lease one time and one time only in connection with the sale or transfer of all or substantially all the assets of Tenant including all or substantially all of Tenant's assets located at the leased premises. ARTICLE 21. MEMORANDUM OF LEASE. The parties agree not to record or -------------------------- register this Lease, but the parties shall execute on the date hereof two (2) copies of the Memorandum of Lease attached hereto as Exhibit B, and either party --------- may record or register said Memorandum of Lease. IN WITNESS WHEREOF, the Landlord and the Tenant have caused this Lease to be executed as of the day and year first above written. K & R PROPERTIES By_____________________________________ Kim Wood, Partner And____________________________________ Richard Monson, Partner NORTH STAR PLATING COMPANY By_____________________________________ Ron Brown 2021683 Its President [SIGNATURE PAGE TO BUILDING LEASE BETWEEN K & R PROPERTIES AND NORTH STAR PLATING COMPANY] 11 EXHIBIT A TO BUILDING LEASE LEGAL DESCRIPTION OF LEASED PREMISES [To be provided.] 12 EXHIBIT B TO BUILDING LEASE MEMORANDUM OF LEASE THIS AGREEMENT, Made and entered into as of the _____ day of ____________ 1995, by and between K & R PROPERTIES, a Minnesota general partnership (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). WITNESSETH: WHEREAS, the parties have this day entered into that certain Building Lease, wherein Landlord has leased to Tenant certain property located in _____________ County, Minnesota, described in Exhibit A attached hereto, which premises are hereinafter referred to as the "leased premises". NOW, THEREFORE, in consideration of the mutual covenants contained in said Lease and for other good and valuable consideration, Landlord hereby leases to Tenant, upon the terms and conditions (including an option to purchase in favor of the Tenant or its assignees) and for the rent set forth in the Lease, which is hereby incorporated herein and made a part hereof, the leased premises, for a term of ten (10) years from the date hereof. IN WITNESS WHEREOF, the parties have hereunto set their hands the day and year first above written. K & R PROPERTIES By_________________________________________ Kim Wood, Partner And________________________________________ Richard Monson, Partner NORTH STAR PLATING COMPANY By_________________________________________ Ron Brown 2021683 Its President 1 STATE OF MINNESOTA ) ) SS. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this _____ day of __________, 1995, by Kim Wood and Richard Monson, partners of K & R PROPERTIES, a Minnesota general partnership, on behalf of the partnership. -------------------------------------------- Notary Public (Notarial Seal) STATE OF MINNESOTA ) ) SS. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this _____ day of __________, 1995, by ______________________, the ___________________ of NORTH STAR PLATING COMPANY, a Minnesota corporation, on behalf of the corporation. -------------------------------------------- Notary Public (Notarial Seal) THIS INSTRUMENT DRAFTED BY: FREDRIKSON & BYRON, P.A. 1100 International Centre 900 Second Avenue South Minneapolis, MN 55402 2 EXHIBIT A TO MEMORANDUM OF LEASE LEGAL DESCRIPTION OF LEASED PREMISES [To be provided.] 3 EX-10.44 10 LEASE AGREEMENT DATED MAY 20, 1996 EXHIBIT 10.44 NORTH STAR PLATING COMPANY BUILDING LEASE (MARSHALL STREET) THIS LEASE, Made and entered into as of the 20th day of May 1996, by and between J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). W I T N E S S E T H : Landlord hereby leases to Tenant, and Tenant leases from Landlord the premises described in Exhibit A attached and hereby made a part hereof, which --------- premises are hereinafter referred to as the "leased premises". TO HAVE AND TO HOLD the leased premises and appurtenances for a term of ten (10) years, commencing on the date hereof and ending at 12:00 midnight, on the tenth (10th) anniversary of the date hereof, plus any renewal term pursuant to Article 13 hereinbelow, subject to the following terms and conditions. ARTICLE 1. RENT. Landlord reserves and Tenant covenants to pay to --------------- Landlord, without demand, at the place at which notices to Landlord are to be given pursuant to Article 16, base rent for the leased premises of Twelve Thousand and no/100 Dollars ($12,000.00) per calendar month payable in advance on the first day of each and every calendar month during the term and any renewal term of this Lease. A pro rata portion of such monthly base rent shall be due for any partial calendar month during the term or any renewal term of this Lease, in proportion to the number of days of such calendar month falling within the term or renewal term. ARTICLE 2. ESCALATION OF BASE RENT. The monthly base rent shall be ---------------------------------- increased as of the first day of the calendar month following the first (1st) anniversary of the commencement date of this Lease and following every anniversary of the commencement date of this Lease thereafter, during the term and any renewal term of this Lease, by a percentage equal to the percentage increase in the Consumers' Price Index for All Urban Consumers for the Minneapolis/St. Paul Metropolitan Area, "All Items" [1982-84 = 100] published by the United States Bureau of Labor Statistics (the "CPIU") between the CPIU last published as of the commencement date of this Lease or the second previous anniversary of the commencement date of this Lease, as the case may be, and the CPIU last published as of the immediately preceding anniversary of the commencement date of this Lease. Such adjusted monthly rent shall be rounded to the nearest One Dollar ($1.00). Should the CPIU be discontinued, or discontinued for the Minneapolis/St. Paul Metropolitan Area, a similar figure representative of an overall price average for the Minneapolis/St. Paul Metropolitan Area shall be used or the Consumers' Price Index for All Urban Consumers "All Items" for the United States shall be used. 1 FOR EXAMPLE: Assume the CPIU last published as of the first anniversary of the date hereof (in 1996) is 140 and the CPIU last published as of the second anniversary of the date hereof (in 1997) is 144.2 (representing a 3% annual increase), the monthly base rent shall be increased as of the first day of the calendar month following the second anniversary of the date hereof by 3%. ARTICLE 3. NET LEASE. Without limitation of the specific provisions of -------------------- this Lease, the parties declare that this Lease shall be construed in all respects to be a net lease, with all expenses of operating, maintaining and insuring the leased premises, and paying taxes and special assessments and similar charges against the leased premises, to be borne by Tenant, with the exception only of reasonable wear and tear and loss by reason of fire and other casualty insurable under the current "special cause of loss" form of building and personal property insurance policy published by the Insurance Services Office or equivalent (hereinafter referred to as "Standard Hazard Insurance"). ARTICLE 4. TAXES AND SPECIAL ASSESSMENTS. Tenant shall pay, when due and ---------------------------------------- before penalty attaches, all real estate taxes and installments of special assessments, and any similar charges or liens due and payable during the term hereof with respect to the leased premises and improvements situated thereon, provided that election shall be made to pay any special assessment over the longest period allowed by law. For any partial calendar year at the end of the term or any renewal term of this Lease, Tenant shall be responsible for a pro rata portion of such taxes and special assessments due and payable in such calendar year in proportion to the number of days of such calendar year falling within the term or renewal term of this Lease, and appropriate adjustments shall be made at the beginning of the term and at the end of the term or renewal term hereof. Tenant shall be responsible for all taxes and installments of special assessments payable in the year 1995, since Tenant will occupy the leased premises for the entire year, either pursuant to this Lease or pursuant to the Prior Lease (as defined in Article 15 below). In the event any mortgagee of the leased premises requires an escrow account to be maintained for the payment of real estate taxes and special assessments, with respect to the leased premises and improvements situated thereon, Tenant shall fund and make monthly or other periodic payments to such an escrow account all as may be required by such mortgagee. Any funds held in such escrow account in excess of Tenant's accrued liability under this Article 4 shall be the property of Tenant and purchased by Landlord upon expiration or termination of this Lease. ARTICLE 5. MAINTENANCE AND REPAIR. Tenant hereby accepts the leased --------------------------------- premises in the condition they are in. Tenant, at its sole cost and expense, will keep, maintain and rebuild, if necessary, the leased premises, including any altered, rebuilt, additional or substituted improvements, in good repair and appearance during the term and any renewal term of this Lease, ordinary wear and tear and damage by fire or other casualty insurable under Standard Hazard Insurance excepted. All repairs made by Tenant shall be at least equal to the original work in class and quality. Tenant shall put, keep and maintain all portions of the leased premises and the sidewalks, curbs, drives, parking areas, landscaped areas, and passageways adjoining the same in a clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstructions. 2 ARTICLE 6. ALTERATIONS AND ADDITIONS. Tenant may, at any time and from ------------------------------------ time to time during the term and any renewal term of this Lease, at its sole cost and expense, make additions to, alterations of, substitutions and replacements for, and removals from the improvements on the leased premises (hereinafter "alterations"), provided, however, that (i) the total market value of the leased premises shall not be lessened by reason of any such alterations, (ii) any alterations shall be done in a good and first class workmanlike manner, (iii) all such alterations shall be expeditiously completed in compliance with all laws, ordinances, orders, rules, regulations and requirements applicable thereto, (iv) if Tenant or Tenant's contractor estimates that any such alterations will cost more than Ten Thousand and no/100 Dollars ($10,000.00), Tenant shall give to Landlord notice of its intention to undertake the same at least thirty (30) days prior to commencement of the work, and (v) prior to commencement of the work Tenant shall have obtained all required consents and approvals of all mortgagees of the leased premises. Tenant shall promptly pay for all such alterations and shall hold Landlord harmless from any liens or charges against the leased premises by reason of any such work. Tenant shall procure and pay for all required permits, certificates and licenses in connection with such alterations. All such alterations shall become the property of Landlord, except that trade fixtures which may be removed without material damage to the leased premises shall remain the property of Tenant. ARTICLE 7. USE OF LEASED PREMISES; COMPLIANCE WITH LAWS; ENVIRONMENTAL ---------------------------------------------------------------------- COVENANTS. The leased premises shall be used and occupied by Tenant as an - --------- automotive bumper sales and repair facility and other ancillary purposes, and for no other purpose, and such use and occupancy shall be in compliance with all applicable laws, ordinances and governmental regulations. Without limiting the foregoing, Tenant shall, at Tenant's expense, make all such improvements and alterations required by reason of Tenant's use of the leased premises under the Americans with Disabilities Act and shall comply with all Environmental Laws as hereinafter provided, and Landlord shall have no responsibility for the same. Tenant shall indemnify, defend and hold harmless Landlord from any loss or liability incurred by reason of any failure by Tenant to comply with applicable laws in its use and occupancy of the leased premises. As used herein, the following terms shall have the following meanings: "Environmental Law" - The Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S)9601 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. (S)6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ------- (S)1802 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S)2601 et seq.; ------- ------- the Federal Water Pollution Control Act, 33 U.S.C. (S)1251 et seq.; the Clean ------ Water Act, 33 U.S.C. (S)1321 et seq.; the Clean Air Act, 42 U.S.C. (S)7401 et ------- -- seq.; the Minnesota Environmental Response and Liability Act, Minn. Stat. Chap. - ---- 115B; the Minnesota Petroleum Tank Release Cleanup Act, Minn. Stat. Chap. 115C; and any other federal, state, county, municipal or local statute, law, ordinance or regulation which relates to or deals with human health or the environment, all as may from time to time be amended or subsequently enacted. "Hazardous Substances" - Asbestos, ureaformaldehyde, polychlorinated biphenyls, nuclear fuel or material, chemical or medical waste, radioactive material, explosives, known carcinogens, 3 petroleum products and by-products and any other dangerous, toxic or hazardous pollutants, contaminants, chemicals, materials or substances listed or identified as such in, or regulated by, any Environmental Law. Tenant covenants and agrees with Landlord that Tenant shall not use, or permit the use of, the leased premises for the handling, storage, transportation, manufacture, release or disposal of any Hazardous Substances, except for Hazardous Substances of such types and in such quantities as normally used in Tenant's business as specified in this Article, which are kept and used in compliance with all Environmental Laws. In addition, the Tenant shall not install or maintain, or permit the installation or maintenance of, any above- ground or underground storage tanks for the storage of petroleum, petroleum by- products or other Hazardous Substances in, about or under the leased premises unless (i) the Tenant has obtained the prior written consent of the Landlord for such installation and maintenance and (ii) the Tenant installs and maintains such above-ground or underground storage tanks in compliance with all applicable Environmental Laws. Upon the occurrence of an event of default hereunder or if the Landlord receives information which leads the Landlord, in its reasonable discretion, to believe that a Hazardous Substance is present on or is being handled, stored, transported, manufactured, released or disposed of in, on or about the leased premises, except as permitted above, the Landlord may, at its option, through its employees, agents or independent contractors, enter upon the leased premises and perform, at the Tenant's expense, environmental tests (including core drilling), studies, investigations and reports from a reputable environmental consultant chosen by Landlord. If any such environmental reports indicates any presence, handling, storage, transportation, manufacture, release or disposal of Hazardous Substances in, on or about the leased premises, except as permitted above, the Landlord may require the Tenant, at the Tenant's expense, to refrain from and take remedial action with respect to any such presence, handling, storage, transportation, manufacture, release or disposal to the satisfaction of the Landlord. The Tenant shall immediately notify the Landlord in writing of any claim, investigation, administrative proceeding, litigation, regulatory hearing or request or demand for remedial or response action or for compensation which may be proposed, threatened or pending, alleging the presence, handling, storage, transportation, manufacture, release, disposal or improper handling of Hazardous Substances in, on or about the leased premises not permitted hereby. The Landlord shall have the right, but not the obligation, to join and participate in any such investigation, administrative proceeding, litigation, regulatory hearing or other action, and Tenant shall pay upon demand its attorneys' fees and expenses in connection therewith. The Tenant shall not take any remedial or response action or enter into any settlement or other compromise with respect to any claim, investigation, administrative proceeding, litigation, regulatory hearing or request or demand for remedial or response action or for compensation without prior written notice to and consent by Tenant. Tenant shall defend, indemnify and hold Landlord harmless from any and all claims, actions, damages, costs, expenses and liability suffered or incurred or paid by or asserted against Landlord, including but not limited to reasonable attorneys fees incurred in the defense of such claims and actions, whether for cleanup or other response costs or for damage to property, personal injury or death, and whether to public agencies or authorities or to private persons (i) arising from or with respect to acts or practices of Tenant occurring prior to or after the date hereof in violation 4 of any Environmental Law, or (ii) resulting from the presence on or about the leased premises or the release from or onto the leased premises of any Hazardous Substances occurring during the term of this Lease. The Tenant's liability hereunder shall not be limited to the extent of insurance carried by or provided by the Tenant or subject to any exclusions from coverage in any insurance policy. The covenants and obligations of Tenant contained in this Article shall survive expiration or earlier termination of the term of this Lease. ARTICLE 8. UTILITIES. Tenant will pay or cause to be paid when due all -------------------- charges for gas, water, sewer, electricity, telephone and other utilities and services used, rendered or supplied to, upon or in connection with the leased premises, and Landlord shall have no responsibility to supply the same. Without limiting Tenant's general duty to maintain and repair, Tenant shall maintain in good order and condition during the term and any renewal term of this Lease all pipes, wires, conduits, boilers and other equipment for the provision of utility services to the leased premises. ARTICLE 9. INSURANCE. -------------------- (a) Public Liability. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect at its expense a policy or policies of commercial general liability insurance with respect to the leased premises and the business of Tenant and any subtenant, licensee or concessionaire, with companies licensed to do business in the State of Minnesota, in which both Tenant and Landlord shall be named as insureds and adequately covered under reasonable limits of liability not less than $2,000,000 general liability aggregate and $1,000,000 per occurrence Such limits of liability shall be adjusted as of each fifth anniversary of the commencement date of this Lease according to the formula stated in Article 2 above. Tenant shall furnish Landlord with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of insurance. (b) Hazard Insurance. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect a policy of Standard Hazard Insurance, with companies licensed to do business in the State of Minnesota, covering all improvements on the property in the amount of their full insurable replacement value, naming both Landlord and Tenant as insureds, but payable only to Landlord and containing a loss payable clause as required by any mortgagees of the leased premises; and shall furnish Landlord and all such mortgagees with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord and all such mortgagees shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of such insurance. In the event any mortgagee of the leased premises requires an escrow account to be maintained for the payment of hazard insurance premiums, Tenant shall fund and make monthly or other periodic payments to such an escrow account, all as may be required by such mortgagee. Any funds held in such escrow account in excess of Tenant's accrued liability under this Article shall be the property of Tenant and purchased by Landlord upon expiration or 5 termination of this Lease. Tenant may separately or under the same policy insure any trade fixtures, equipment, supplies and other personal property owned by Tenant and located upon the leased premises. (c) Waiver of Subrogation. To the extent such waiver does not void or diminish the coverage under any policy, Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, or their respective property, to the extent such loss or damage is covered by insurance carried by either Landlord or Tenant or may be insured (regardless of whether coverage is actually in effect) under Standard Hazard Insurance. ARTICLE 10. NON-LIABILITY; COVENANTS TO HOLD HARMLESS. Landlord shall be ----------------------------------------------------- held harmless by Tenant from any liability for damages to any person or property in or upon the leased premises and the sidewalks adjoining same, including the property of Tenant and its employees and all persons in the building at its or their invitation. All property kept, stored or maintained in the leased premises shall be so kept, stored or maintained at the sole risk of Tenant. Tenant agrees to make payment when due for any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to Tenant in or about the leased premises which may be secured by any mechanic's, materialmen's or other lien against the leased premises or the Landlord's interest therein and will cause each such lien to be discharged at the time performance of any obligation secured thereby matures; provided that Tenant may contest such lien by appropriate proceedings which stay the enforcement thereof, upon providing reasonable assurances or security to Landlord that Tenant will pay the amount secured by such lien if found to be valid, but if such lien is reduced to final judgment and if such judgment or process thereon is not stayed, or if stayed and said stay expires, then and in such event Tenant shall forthwith pay and discharge said judgment. Landlord shall have the right to post and maintain on the leased premises notice of nonresponsibility under the laws of Minnesota. ARTICLE 11. EMINENT DOMAIN. -------------------------- (a) Entire Premises. If substantially all of the leased premises shall be taken under the power of eminent domain then the term of this Lease shall cease as of the day possession shall be taken and the rent shall be paid up to that day with a proportionate refund by Landlord of such rent as may have been paid in advance. (b) Partial Taking. If more than twenty percent (20%) of the floor space in the building or buildings located on the leased premises shall be taken under the power of eminent domain, both Landlord and Tenant shall have the right to terminate this Lease as of the day possession shall be taken by notice to the other party given within ten (10) days after possession is so taken. If the unexpired portion of the term or any renewal term of this Lease shall be two (2) years or less at the date of taking of any portion of the building or buildings located on the leased premises, Landlord shall have the right to terminate this Lease as of the day possession shall be taken by like notice to Tenant. If more than one third (1/3) of the parking area in the leased premises is taken under the power of eminent domain, Tenant shall have the right to terminate this Lease as of the day 6 possession shall be taken by like notice to Landlord, unless Landlord shall provide, on or before the day possession shall be taken, a reasonably equivalent substitute parking area. Tenant shall be allowed a reasonable time not to exceed thirty (30) days after any such termination to vacate the remainder of the leased premises, and rent shall be paid up to the day possession shall be taken or the day Tenant vacates the remainder of the leased premises, whichever is later. (c) Continuation of Lease. In the event this Lease is not terminated pursuant to paragraphs (a) or (b) of this Article, all the terms of this Lease shall continue in effect, except that the base rent shall be reduced in proportion to the reduction in floor space in the building or buildings located on the leased premises as a result of the taking, and Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the basic building or buildings, exterior and interior work to be in conformance with the then existing architectural design of the improvements so as to constitute the remaining premises a complete architectural unit. (d) Damages. In any event all damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the leased premises, shall belong to and be the property of Landlord whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the premises; provided, however, that Landlord shall not be entitled to any award made to Tenant for relocation benefits provided by M.S.A. Section 117.52 or similar successor statute, for "going concern" value of its business, loss of business, fair value of, and cost of removal of stock and fixtures or for temporary requisition of the use or occupancy of the leased premises or a part thereof, which shall belong to Tenant. (e) Definition. The term "eminent domain" shall include the exercise of any similar power and any purchase or other acquisition in lieu of condemnation. ARTICLE 12. DAMAGE. ------------------ (a) Partial or Total Destruction. In case the leased premises shall be partially or totally destroyed by fire or other casualty insurable under Standard Hazard Insurance so as to become partially or totally untenantable, the same, unless Landlord or Tenant shall terminate this Lease as hereinafter provided, shall be repaired or rebuilt as quickly as practicable at the cost of Landlord, and the base rent shall abate during the period of repair in proportion to the portion of the floor space in the building or buildings located on the leased premises that is untenantable or unfit for use by Tenant in its business. (b) Extensive Damage; Election. If the building or buildings located on the leased premises shall be destroyed or damaged by fire or other casualty insurable under Standard Hazard Insurance, so as to become wholly untenantable, and: 1. the leased premises cannot be repaired or restored within one hundred eighty days (180) after such damage or destruction; or 7 2. the unexpired portion of the term or any renewal term of this Lease is two (2) years or less at the date of the damage; then either Landlord or Tenant may terminate this Lease as of the date of such destruction or damage by giving written notice to the other party of such election within thirty (30) days after such damage or destruction. ARTICLE 13. SURRENDER; HOLDING OVER. On the last day of the term or any ----------------------------------- renewal term hereof or on the sooner termination thereof, Tenant shall peaceably surrender the leased premises in good order, condition and repair, broom-clean, fire and other casualty insurable under Standard Hazard Insurance and reasonable wear and tear only excepted. Tenant shall repair any damage to the leased premises caused by removal of Tenant's trade fixtures or equipment. Any of Tenant's property not removed on the last day of the term or any renewal term hereof or on the sooner termination thereof, shall be deemed abandoned. In the event Tenant remains in possession of the leased premises after the expiration of the term and any renewal term of this Lease without the execution of a new lease but with the acquiescence of Landlord, it shall be deemed to be occupying said premises as a Tenant from month-to-month, subject to all the conditions, provisions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy. The period of such month-to-month tenancy shall be considered a renewal term of this Lease. If Tenant desires to lease the leased premises after the expiration of the term and any renewal term of this Lease, Tenant will notify Landlord of Tenant's desire to enter into a lease of the leased premises at least six (6) months prior to the expiration of the term or the renewal term, as the case may be. ARTICLE 14. DEFAULT; REMEDIES. ----------------------------- (a) Default. The occurrence of any of the following shall constitute an event of default under this Lease: 1. Tenant shall have failed to pay any installment of base rent to Landlord when the same shall be due and payable; or 2. Tenant shall have failed to keep in full force and effect the insurance policies required by Article 9 above or shall have failed to pay taxes and special assessments when due as required by Article 4 above; or 3. Tenant shall have failed to comply with any other provision of this Lease, and shall not have cured such failure within thirty (30) days after Landlord, by written notice, has informed Tenant of such noncompliance; provided, however, in the case of a default which cannot be cured, with due diligence, within a period of thirty (30) days, Tenant shall have such additional time to cure such default as may be reasonably necessary, provided that Tenant proceeds promptly and with due diligence to cure such default after receipt of said notice; or 8 4. Tenant shall have filed a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee for it or its property, or any similar petition, or shall have made an assignment for the benefit of creditors, or an order for relief shall have been entered in any proceeding under the federal Bankruptcy Code in which Tenant is named as the debtor; or 5. Any involuntary petition of the type or similar to those referred to in Paragraph 4 of this Subsection (a) shall have been filed against Tenant, and shall not be vacated or withdrawn within sixty (60) days after the date of the filing thereof; or 6. Tenant shall have abandoned the leased premises, which shall be conclusively presumed if Tenant shall vacate the premises for thirty (30) days without giving written notice of its intent to return to possession of the leased premises. (b) Remedies. Whenever any event of default shall have occurred and be subsisting, Landlord may elect either: 1. To cancel and terminate this Lease; or 2. To reenter and take possession of the leased premises, and terminate Tenant's right to possession of the leased premises, without terminating this Lease or any of Tenant's obligations for the balance of the term of this Lease. Landlord may at any time elect to terminate this Lease despite a prior election to exercise its remedies under Paragraph 2 above. In the event Landlord exercises its remedies under Paragraph 2 above, it may remove all persons and property from the leased premises and store such property at the cost of and for the account of Tenant, may make alterations and repairs and redecorate the premises to the extent deemed by Landlord necessary or desirable, and may relet the premises, or any part thereof, for the account of Tenant, to any person, firm or corporation, other than Tenant, for such rent, for such time and upon such terms as Landlord, in Landlord's sole discretion, shall determine; but Landlord shall not be required to accept any tenant offered by Tenant or to observe any instruction given by Tenant concerning such reletting. Any rent and other amounts received by Landlord upon such reletting shall be applied first to the costs and expenses of Landlord in regaining possession of the leased premises, storing property removed from the premises, making alterations or repairs or redecorating the leased premises, and reletting the premises, including, without limitation, brokerage and reasonable attorneys fees, then to the rentals and other obligations of Tenant under this Lease, and any surplus shall be paid to Tenant. In the event Landlord elects to terminate this Lease, all base rent and payments for hazard insurance premiums and taxes (excluding special assessments) for the balance of the term or any renewal term of this Lease shall be immediately due and payable to Landlord, without credit for any subsequent reletting by Landlord, provided that all such payments shall be discounted from the unaccelerated due dates to present value on the date of termination, using a discount factor of five 9 percent (5%), and such accelerated payments shall bear interest from the date of termination to the date actually paid at the rate of ten percent (10%) per annum. For purposes of making this calculation, payments for hazard insurance premiums shall be presumed to remain the same as the last annual hazard insurance premium paid, and to be due and payable on each anniversary of said last hazard insurance premium payments and payments for taxes and installments of special assessments shall be presumed to remain the same as the last semiannual payment of taxes and installments of special assessments, and to be due and payable semi-annually on May 15 and October 15 of each year. ARTICLE 15. PRIOR LEASE. This Lease supersedes Tenant's existing lease ----------------------- with respect to the leased premises (the "Prior Lease"), which shall have no further force or effect as of the date hereof, except for Tenant's continuing obligation to pay rent and perform its obligations which accrued under the Prior Lease prior to the date hereof which shall continue in effect until such rent has been paid and such obligations performed. ARTICLE 16. NOTICES. Any notice required or permitted under this Lease ------------------- shall be deemed sufficiently given or served when personally delivered (in person, by commercial courier service, by facsimile with confirmed transmission, or otherwise) or forty-eight (48) hours after mailed by registered or certified mail to Tenant at the address of the leased premises and to Landlord at the address then fixed for the payment of rent, and either party may by like written notice at any time designate a different address to which notices shall subsequently be sent. ARTICLE 17. GENERAL. This Lease does not create the relationship of ------------------- principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of Landlord and Tenant. One or more waivers of any default of Tenant by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent to or approval by Landlord of any act by Tenant requiring Landlord's consent or approval shall not waive or render unnecessary Landlord's consent to or approval of any subsequent similar act by Tenant. Each term and each provision of this Lease performable by Tenant shall be construed to be both a covenant and a condition. The marginal or topical headings of the several articles, paragraphs and clauses are for convenience only and do not define, limit or construe the contents of such articles, paragraphs or clauses. All preliminary negotiations and all prior written agreements regarding the subject matter of this Lease (including, without limitation, the Prior Lease) are superseded and merged into and incorporated in this Lease. The laws of the State of Minnesota shall govern the validity, performance and enforcement of this Lease. The terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the successors in interest and assigns of the parties hereto. ARTICLE 18. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant --------------------------- that upon Tenant paying the rent and performing all of the terms and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby leased, subject, nevertheless, to the terms and conditions of this Lease. 10 ARTICLE 19. SUBORDINATION. Tenant agrees that its interest in the leased ------------------------- premises is and shall be subordinate to any mortgages that may hereafter be placed upon said premises and to any and all advances to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof, provided the mortgagee named in said mortgages shall agree not to disturb Tenant's occupancy under this Lease in the event of foreclosure if Tenant is not in default beyond applicable periods of grace. Tenant agrees to execute such documents as may be reasonably required by such mortgagee to confirm the same. In the event that any mortgagee elects to have the Lease a prior lien to its mortgage, then and in such event upon such mortgagee notifying Tenant to that effect, this Lease shall be deemed prior in lien to the said mortgage, whether this Lease is dated prior to or subsequent to the date of said mortgage. ARTICLE 20. ASSIGNMENT AND SUBLETTING. Landlord may freely transfer the ------------------------------------- leased premises, subject to this Lease, and/or assign its rights under this Lease. Upon any transfer of the leased premises, subject to this Lease, Landlord shall be relieved of all of its obligations under this Lease provided the transferee assumes such obligations in writing. Tenant shall not assign this Lease or sublease all or part of the leased premises without the prior written consent of Landlord; provided that Tenant shall have the right to assign its interest under this Lease one time and one time only in connection with the sale or transfer of all or substantially all the assets of Tenant including all or substantially all of Tenant's assets located at the leased premises. ARTICLE 21. MEMORANDUM OF LEASE. The parties agree not to record or ------------------------------- register this Lease, but the parties shall execute on the date hereof two (2) copies of the Memorandum of Lease attached hereto as Exhibit B, and either party --------- may record or register said Memorandum of Lease. 11 IN WITNESS WHEREOF, the Landlord and the Tenant have caused this Lease to be executed as of the day and year first above written. J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP By____________________________________________ Karen Wood, Partner And___________________________________________ Jean M. Brown, Partner And BROWN FAMILY LIMITED PARTNERSHIP By Brown Family Corporation By____________________________________________ Ronald G. Brown, President NORTH STAR PLATING COMPANY By____________________________________________ Its___________________________________________ [SIGNATURE PAGE TO BUILDING LEASE BETWEEN J&K PROPERTIES AND NORTH STAR PLATING COMPANY] 12 EXHIBIT A TO BUILDING LEASE LEGAL DESCRIPTION OF LEASED PREMISES EXHIBIT B TO BUILDING LEASE MEMORANDUM OF LEASE THIS AGREEMENT, Made and entered into as of the ___ day of May, 1996, by and between J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). W I T N E S S E T H : WHEREAS, the parties have this day entered into that certain Building Lease, wherein Landlord has leased to Tenant certain property located in Hennepin County, Minnesota, described in Exhibit A attached hereto, which --------- premises are hereinafter referred to as the "leased premises". NOW, THEREFORE, in consideration of the mutual covenants contained in said Lease and for other good and valuable consideration, Landlord hereby leases to Tenant, upon the terms and conditions and for the rent set forth in the Lease, which is hereby incorporated herein and made a part hereof, the leased premises, for a term of ten (10) years from the date hereof. IN WITNESS WHEREOF, the parties have hereunto set their hands the day and year first above written. J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP By____________________________________________ Karen Wood, Partner And___________________________________________ Jean M. Brown, Partner And BROWN FAMILY LIMITED PARTNERSHIP By Brown Family Corporation By____________________________________________ Ronald G. Brown, President NORTH STAR PLATING COMPANY By____________________________________________ Its_____________________________________ STATE OF _________ ) ) SS. COUNTY OF_________ ) The foregoing instrument was acknowledged before me this _______ day of May, 1996, by Karen Wood, one of the partners of J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership, on behalf of the partnership. (Notarial Seal) Notary Public STATE OF _________ ) ) SS. COUNTY OF ________ ) The foregoing instrument was acknowledged before me this _______ day of May, 1996, by Jean M. Brown, one of the partners of J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership, on behalf of the partnership. (Notarial Seal) Notary Public STATE OF _________ ) ) SS. COUNTY OF ________ ) The foregoing instrument was acknowledged before me this _______ day of May, 1996, by Ronald G. Brown, President of Brown Family Corporation, the general partner of Brown Family Limited Partnership, a Minnesota limited partnership, one of the partners of J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership, on behalf of the partnership. (Notarial Seal) Notary Public STATE OF _________ ) ) SS. COUNTY OF ________ ) The foregoing instrument was acknowledged before me this _______ day of May, 1996, by __________________________, the _______________________ of NORTH STAR PLATING COMPANY, a Minnesota corporation, on behalf of the corporation. (Notarial Seal) Notary Public THIS INSTRUMENT DRAFTED BY: FREDRIKSON & BYRON, P.A. 1100 International Centre 900 Second Avenue South Minneapolis, MN 55402 EXHIBIT A TO MEMORANDUM OF LEASE LEGAL DESCRIPTION OF LEASED PREMISES MEMORANDUM OF LEASE THIS AGREEMENT, Made and entered into as of the ___ day of May, 1996, by and between J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership (hereinafter referred to as "Landlord"), and NORTH STAR PLATING COMPANY, a Minnesota corporation (hereinafter referred to as "Tenant"). W I T N E S S E T H : WHEREAS, the parties have this day entered into that certain Building Lease, wherein Landlord has leased to Tenant certain property located in Hennepin County, Minnesota, described in Exhibit A attached hereto, which --------- premises are hereinafter referred to as the "leased premises". NOW, THEREFORE, in consideration of the mutual covenants contained in said Lease and for other good and valuable consideration, Landlord hereby leases to Tenant, upon the terms and conditions and for the rent set forth in the Lease, which is hereby incorporated herein and made a part hereof, the leased premises, for a term of ten (10) years from the date hereof. IN WITNESS WHEREOF, the parties have hereunto set their hands the day and year first above written. J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP By____________________________________________ Karen Wood, Partner And___________________________________________ Jean M. Brown, Partner And BROWN FAMILY LIMITED PARTNERSHIP By Brown Family Corporation By____________________________________________ Ronald G. Brown, President NORTH STAR PLATING COMPANY By____________________________________________ Its_____________________________________ STATE OF _________ ) ) SS. COUNTY OF ________ ) The foregoing instrument was acknowledged before me this _______ day of May, 1996, by Karen Wood, one of the partners of J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership, on behalf of the partnership. (Notarial Seal) Notary Public STATE OF _________ ) ) SS. COUNTY OF ________ ) The foregoing instrument was acknowledged before me this _______ day of May, 1996, by Jean M. Brown, one of the partners of J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership, on behalf of the partnership. (Notarial Seal) Notary Public STATE OF _________ ) ) SS. COUNTY OF ________ ) The foregoing instrument was acknowledged before me this _______ day of May, 1996, by Ronald G. Brown, President of Brown Family Corporation, the general partner of Brown Family Limited Partnership, a Minnesota limited partnership, one of the partners of J&K PROPERTIES LIMITED LIABILITY PARTNERSHIP, a Minnesota limited liability partnership, on behalf of the partnership. (Notarial Seal) Notary Public STATE OF _________ ) ) SS. COUNTY OF ________ ) The foregoing instrument was acknowledged before me this _______ day of May, 1996, by __________________, the _______________________ of NORTH STAR PLATING COMPANY, a Minnesota corporation, on behalf of the corporation. (Notarial Seal) Notary Public THIS INSTRUMENT DRAFTED BY: FREDRIKSON & BYRON, P.A. 1100 International Centre 900 Second Avenue South Minneapolis, MN 55402 EXHIBIT A TO MEMORANDUM OF LEASE LEGAL DESCRIPTION OF LEASED PREMISES EX-11.1 11 WEIGHED AVERAGE SHARES OUTSTANDING EXHIBIT 11.1 Keystone Automotive Industries, Inc. Computation of Earnings per Share
YEAR -------------------------------- 1995 1996 1997 ---------- ---------- ---------- Common Shares outstanding at the beginning of the year..................................... 5,682,622 5,800,000 5,800,000 Pooling of Interest with North Star Plating, Inc.......................................... 2,450,000 2,450,000 2,450,000 ---------- ---------- ---------- 8,132,622 8,250,000 8,250,000 Issuance of 180,133........................... 106,689 -- -- Retirement of 62,755 shares................... 15,689 -- -- Initial Public Offering of 1,500,000 in June 1996......................................... 1,158,000 ---------- ---------- ---------- Weighted average shares outstanding........... 8,255,000 8,250,000 9,408,000 ========== ========== ========== Net income.................................... $2,435,000 $4,336,000 $6,789,000 ========== ========== ========== Earnings per share............................ $ .29 $ .53 $ .72 ========== ========== ==========
EX-21.1 12 SUBSIDIARIES EXHIBIT 21.1 Registrant had the following significant subsidiary as of March 28, 1997: Name State of Incorporation Percentage Ownership ---- ---------------------- -------------------- North Star Plating Company Minnesota 100% EX-23.1 13 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions, "Experts" and "Selected Consolidated Financial Data" and to the use of our report dated May 23, 1997 with respect to the financial statements and schedule, included in the Registration Statement (Form S-1 No. 333-3994) and related Prospectus of Keystone Automotive Industries, Inc. for the registration of 4,370,000 shares of its common stock. /s/ ERNST & YOUNG LLP Los Angeles, California June 6, 1997 EX-23.2 14 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions, "Experts" and "Selected Consolidated Financial Data" and to the use of our report dated November 11, 1996, with respect to the financial statements of North Star Plating Company included in the Registration Statement (Form S-1 No. 333-3994) and related Prospectus of Keystone Automotive Industries, Inc. for the registration of 4,370,000 shares of its common stock. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota June 6, 1997 -----END PRIVACY-ENHANCED MESSAGE-----