UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934.
For the quarterly period ended: June 29, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the Transition period from ________ to ________
Commission file number 0-28568
KEYSTONE AUTOMOTIVE INDUSTRIES, INC.
------------------------------------
(Exact name of registrant as specified in its charter)
California 95-2920557
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
700 East Bonita Avenue, Pomona, CA 91767
(Address of principal executive offices) (Zip Code)
(909) 624-8041
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of the registrant's Common Stock, no par value,
at June 29, 2001 was 14,393,095 shares.
This Form 10-Q contains 14 pages.
KEYSTONE AUTOMOTIVE INDUSTRIES, INC.
INDEX
-----
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
June 29, 2001 (unaudited) and March 30, 2001
Condensed Consolidated Statements of Income 4
Thirteen weeks ended June 29, 2001 (unaudited)
and thirteen weeks ended June 30, 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows 5
Thirteen weeks ended June 29, 2001 (unaudited)
and thirteen weeks ended June 30, 2000 (unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risks 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Keystone Automotive Industries, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
June 29, 2001 March 30, 2001
(Unaudited) (Note)
---------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,395 $ 3,005
Accounts receivable, net of allowance of $1,230 at June 2001 and $1,029
at March 2001 28,112 29,702
Inventories, primarily finished goods 83,834 82,499
Other current assets 8,518 8,470
----------- -----------
Total current assets 121,859 123,676
Plant, property and equipment, net 22,102 21,270
Goodwill, net of accumulated amortization of $4,773 at June 2001 and $4,773
at March 2001 33,531 33,531
Other intangibles, net of accumulated amortization of $2,400 at June 2001
and $2,275 at March 2001 1,050 1,168
Other assets 4,229 4,111
----------- -----------
Total Assets $ 182,771 $ 183,756
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Credit facility $ 12,452 $ 14,880
Accounts payable 11,685 12,070
Accrued liabilities 7,935 8,293
Current portion of long-term debt 39 40
----------- ------------
Total current liabilities 32,111 35,283
Long-term debt, less current portion 40 49
Other long-term liabilities 2,276 2,483
Shareholders' Equity:
Preferred stock, no par value:
Authorized shares--3,000,000
None issued and outstanding -- --
Common stock, no par value:
Authorized shares--50,000,000
Issued and outstanding shares 14,393,000 at June 2001 and 78,867 78,581
14,359,000 at March 2001
Warrant 236 236
Additional paid-in capital 1,260 1,260
Retained earnings 68,522 66,405
Accumulated other comprehensive loss (541) (541)
----------- ----------
Total shareholders' equity 148,344 145,941
----------- ------------
Total liabilities and shareholders' equity $ 182,771 $ 183,756
=========== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTE: The balance sheet at March 30, 2001 has been derived from the audited
consolidated financial statements at that date but does not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
3
Keystone Automotive Industries, Inc.
Condensed Consolidated Statements of Income
(In thousands, except share amounts)
(Unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 29, 2001 June 30, 2000
------------- -------------
Net sales $ 91,527 $ 86,612
Cost of sales 52,653 49,674
------------- -------------
Gross profit 38,874 36,938
Operating expenses:
Selling and distribution expenses 28,130 26,937
General and administrative 7,463 7,658
------------- -------------
Operating income 3,281 2,343
Other income 523 438
Interest expense (229) (296)
------------- -------------
Income before income taxes 3,575 2,485
Income taxes 1,458 1,019
------------- -------------
Net income $ 2,117 $ 1,466
============= =============
Earnings per share:
Basic $ 0.15 $ 0.10
============= =============
Diluted $ 0.15 $ 0.10
============= =============
Weighted average shares outstanding:
Basic 14,367,000 14,557,000
============= =============
Diluted 14,567,000 14,557,000
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Keystone Automotive Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 29, 2001 June 30, 2000
----------------- -----------------
Operating activities:
Net income $ 2,117 $ 1,466
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,477 1,724
Provision for losses on uncollectible accounts 201 55
Provision for losses on inventory 246 --
Loss on sale of assets, net (7) (26)
Changes in operating assets and liabilities:
Accounts receivable 1,387 1,211
Inventories (1,581) (113)
Other assets (173) 675
Accounts payable (385) (1,614)
Accrued liabilities (566) (1,488)
----------------- -----------------
Net cash provided by operating activities 2,716 1,890
Investing activities:
Proceeds from sale of assets 14 48
Purchases of property, plant and equipment (2,189) (1,737)
----------------- -----------------
Net cash used in investing activities (2,175) (1,689)
Financing activities:
Other debt, net (10) 23
(Payments) borrowings on credit facility (2,427) 3,578
Repurchases of common stock -- (3,044)
Net proceeds on option exercises 286 --
----------------- -----------------
Net cash (used in) provided by financing activities (2,151) 557
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (1,610) 758
Cash and cash equivalents at beginning of period 3,005 2,884
----------------- -----------------
Cash and cash equivalents at end of period $ 1,395 $ 3,642
================= =================
Supplemental disclosures:
Interest paid during the period $ 252 $ 264
================= =================
Income taxes paid during the period $ 415 $ 67
================= =================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Keystone Automotive Industries, Inc.
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(Unaudited)
June 29, 2001
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions of Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting only of
normal recurring accruals, considered necessary for fair presentation, with
respect to the interim financial statements have been included. The results of
operations for the 13 week period ended June 29, 2001 are not necessarily
indicative of the results that may be expected for the full year ending March
29, 2002. For further information, refer to the financial statements and
footnotes thereto for the year ended March 30, 2001, included in the Keystone
Automotive Industries, Inc. Form 10-K filed with the Securities and Exchange
Commission on June 26, 2001.
2. Fiscal Year
The Company uses a 52/53 week fiscal year. The Company's fiscal year ends
on the last Friday of March. The quarters ended June 29, 2001 and June 30, 2000
included thirteen week periods.
3. Income Taxes
The income tax provision for interim periods is based on an estimated
effective annual income tax rate.
4. New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 supersedes APB No. 16 "Business Combinations" and
SFAS No. 38 "Accounting for Preacquisition Contingencies of Purchased
Enterprises." SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. Accordingly, the
Company will be applying the provisions of this statement with respect to any
business combination entered into after June 30, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes Accounting Principles Board Opinion No. 17. SFAS No.
142 applies to goodwill and intangible assets acquired after June 30, 2001, as
well as goodwill and intangible assets previously acquired. Under this statement
goodwill as well as certain other intangible assets, determined to have an
infinite life, will no longer be amortized. These assets will be reviewed for
impairment on a periodic basis. Early adoption of this statement is permitted
for non-calendar year-end companies if their fiscal year begins after March 15,
2001 and if their first interim period financial statements have not been
issued. The Company elected early adoption of SFAS No. 142 effective March 31,
2001. Consequently, all goodwill on the Company's balance sheet from that date
forward will no longer be subject to amortization. Other intangibles, consisting
of covenants not to compete, which have finite lives, will continue to be
amortized over the term of the respective covenant. Pursuant to SFAS No. 142,
the Company is in the process of performing a transitional assessment of
impairment of goodwill and other intangibles by applying a fair-value based test
to be completed by September 28, 2001. Such goodwill and other intangibles will
be subject to an annual assessment for impairment by applying a fair-value-based
test.
Effective March 31, 2001, the Company implemented SFAS No. 133, as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives in
the statement of financial position and measure those instruments at fair value.
The implementation of SFAS No. 133, as amended by SFAS No. 137, did not have a
significant impact on the Company's financial position, results of operations or
cash flows.
6
5. Other Intangible Assets
June 29, 2001 March 30, 2001
------------- --------------
(in thousands)
Covenants not to compete:
Gross carrying amount $ 3,450 $ 3,443
Accumulated amortization (2,400) (2,275)
------- -------
Other intangibles - net $ 1,050 $ 1,168
======= =======
Aggregate amortization expense for other intangible assets for the thirteen
weeks ended June 29, 2001 and June 30, 2000 was $0.1 million, respectively.
Other intangible assets will be fully amortized within the next five years.
6. Goodwill
The carrying amount of goodwill as of June 29, 2001 and March 30, 2001 was
$33.5 million, respectively.
The pro forma effect on prior year earnings of excluding amortization expense,
net of tax, is as follows:
Thirteen Weeks Ended
June 30, 2000
--------------------
(in thousands,
except per share
amounts)
Reported net income $1,466
Add back goodwill amortization, net of tax 294
------
Pro forma net income $1,700
======
Basic and diluted earnings per share
Reported net earnings per share $ .10
Add back goodwill amortization, net of tax .02
------
Pro forma net earnings per share $ .12
======
7. Acquisitions
The results of operations for the quarter ended June 29, 2001 reflect the
operations from certain assets acquired in December 2000, accounted for using
the purchase method of accounting. No results relating to that acquisition were
included with respect to the first quarter of fiscal 2001. The unaudited pro
forma results for the first quarter of fiscal 2001, assuming this acquisition
had been made at the beginning of fiscal 2001, would not be materially different
from the results presented.
8. Shareholders' Equity
In September 1998, the Company initiated a stock repurchase program.
Repurchased shares are retired and treated as authorized but unissued shares.
Through June 29, 2001, the Company had repurchased approximately 3.5 million
shares of its common stock at an average cost of $13.01 per share. No shares
were repurchased during the first quarter of fiscal 2002. During the first
quarter of fiscal 2001, the Company repurchased 493,200 shares at a cost of
approximately $3.0 million.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, certain matters
addressed in this Item 2 constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are subject to a variety of risks and uncertainties that could cause
actual results to differ materially from those anticipated by the Company's
management. The Private Securities Litigation Reform Act of 1995 (the "Act")
provides certain "safe harbor" provisions for forward-looking statements. All
forward-looking statements made in this Quarterly Report on Form 10-Q are made
pursuant to the Act and are subject to the cautionary statement set forth herein
and in the Company's Form 10-K for the year ended March 30, 2001, on file with
the Securities and Exchange Commission.
General
-------
Effective March 31, 2001, the Company adopted SFAS No.s 141 and 142. Under
SFAS No. 141, all business combinations entered into after June 30, 2001 must be
accounted for as purchases. Under SFAS No. 142, all intangibles, including
goodwill, with infinite lives, will no longer be amortized. Intangibles with
finite lives will continue to be amortized over those lives. As a result, the
Company ceased amortizing its goodwill beginning on March 31, 2001.
Substantially all of the Company's goodwill arose in connection with
acquisitions consummated on or before June 29, 2001, accounted for as purchases.
Goodwill represents that portion of the acquisition purchase price which
exceeded the fair value of the assets acquired. The Company is in the process of
performing a transitional assessment of impairment of intangibles by applying a
fair-value based test as of March 31, 2001. The assessment must be completed by
September 28, 2001. For a more detailed description of the impact of the
adoption of SFAS No. 142 on the Company, see Notes 4, 5 and 6 of Notes to the
Condensed Consolidated Financial Statements above, as well as managements
discussion below, with emphasis on the paragraph entitled, "Intangible Assets."
The results of operations for the quarter ended June 29, 2001 reflect the
operations from certain assets acquired in December 2000, accounted for using
the purchase method of accounting. No results relating to that acquisition were
included with respect to the first quarter of fiscal 2001. The unaudited pro
forma results for the first quarter of fiscal 2001, assuming this acquisition
had been made at the beginning of fiscal 2001, would not be materially different
from the results presented above.
8
Results of Operations
---------------------
The following table sets forth for the periods indicated, certain selected
income statement items as a percentage of net sales.
Thirteen Thirteen
Weeks Ended Weeks Ended
June 29, 2001 June 30, 2000
-----------------------------
Net sales 100.0% 100.0%
Cost of sales 57.5 57.4
----- -----
Gross profit 42.5 42.6
Selling and distribution expenses 30.7 31.1
General and administrative expenses 8.2 8.8
Other income 0.6 0.5
Interest expense (0.3) (0.3)
----- -----
Income before income taxes 3.9 2.9
Income taxes 1.6 1.2
----- -----
Net income 2.3% 1.7%
===== =====
Thirteen weeks ended June 29, 2001 compared to thirteen weeks ended June 30,
----------------------------------------------------------------------------
2000
----
Net sales were $91.5 million for the quarter ended June 29, 2001 (the "2001
Quarter") compared to $86.6 million for the quarter ended June 30, 2000 (the
"2000 Quarter"), an increase of $4.9 million or 5.7%. This increase was
primarily due to an increase in the sale of body parts. During the 2001 Quarter,
sales of automotive body parts (including fenders, hoods, headlights, radiators,
grilles and other crash parts), increased by $4.8 million (an increase of 13%),
sales of new and recycled bumpers increased by $721,000 (an increase of 3%) and
sales of paint and related materials decreased by $7,000. The increases were
attributable primarily to the fact that two insurance companies that had stopped
specifying aftermarket parts after the State Farm decision began specifying
certain aftermarket parts in the third quarter of fiscal 2001. See "Item 5"
below. In addition, the Company sold approximately $6.4 million of
remanufactured alloy wheels in the 2001 Quarter compared to $6.1 million in the
prior year period, an increase of 5.2%.
Gross profit increased in the 2001 Quarter to $38.9 million (42.5% of net
sales) from $36.9 million (42.6% of net sales) in the 2000 Quarter, an increase
of 5.2%, primarily as a result of the increase in net sales. The decrease in
gross profits as a percentage of net sales in the 2001 Quarter reflects the
continued fluctuation in cost of sales, generally because of factors such as
product mix and competition.
Selling and distribution expenses increased to $28.1 million (30.7% of net
sales) in the 2001 Quarter from $26.9 million (31.1% of net sales) in the 2000
Quarter, an increase of 4.4%. The decrease in selling and distribution expenses
as a percentage of net sales was generally the result of certain fixed costs
being spread over increased sales and the fixed return of certain of these
costs.
General and administrative expenses decreased to $7.5 million (8.2% of net
sales) in the 2001 Quarter compared to $7.7 million (8.8% of net sales) in the
2000 Quarter, a decrease of 2.5%. The decrease was primarily due to the adoption
of SFAS No. 142, under which the Company stopped amortizing goodwill effective
March 31, 2001. This change in accounting resulted in expenses being reduced by
$0.4 million in the 2001 Quarter. General and administrative expenses in the
2000 Quarter would also have been lower by $0.4 million on a pro forma basis,
excluding goodwill amortization. The decrease in general and administrative
expenses as a percentage of net sales was generally the result of certain fixed
costs being spread over increased sales and the fixed nature of certain of these
costs and the impact of SFAS No. 142.
9
Income taxes increased to $1.5 million (1.6% of net sales) in the 2001
Quarter compared to $1.0 million (1.2% of net sales) in the 2000 Quarter,
primarily as a result of increased income before income taxes. The change in the
method of accounting for the amortization of goodwill in the 2001 Quarter
resulted in a lower effective tax rate, due to the nondeductability for tax
purposes of most of the goodwill, which was being amortized in prior periods.
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 primarily
to the seasonal nature of the Company's business. The number of collision
repairs is directly impacted by the weather. Accordingly, the Company's sales
generally are highest during the five-month period from December to April. The
impact of seasonality may be reduced somewhat in the future as the Company
continues to become more geographically diversified. Other factors which may
influence quarterly variations include the reduced number of business days
during the holiday seasons, the timing of the introduction of new products,
acquisitions, the level of consumer acceptance of new products, general economic
conditions that affect consumer spending, the timing of supplier price changes
and the timing of expenditures in anticipation of increased sales and customer
delivery requirements.
Liquidity and Capital Resources
The Company's primary need for funds over the past two years has been to
finance the growth of inventory and accounts receivable and to develop and
implement an enterprise-wide management information system. Over the next 18 to
24 months, the Company estimates that it will spend an additional $7.0 million
to $9.0 million to complete the installation and implementation of the
management information system. At June 29, 2001, working capital was $89.7
million compared to $88.4 million at March 30, 2001. The increase in working
capital is primarily the result of increases in inventory and a decrease in
borrowings under the Company's credit facility, offset in part by decreases in
cash and accounts receivable. The Company has been financing its working capital
requirements from its cash flow from operations and advances drawn under its
line of credit.
During the 2001 Quarter, the Company's cash and cash equivalents decreased
by $1.6 million. This decrease is the result of (i) a decrease in cash used in
investing activities of $2.2 million, primarily as a result of cash used to
purchase property and equipment primarily related to the implementation of the
Company's enterprise software package; and (ii) a decrease in cash provided by
financing activities of $2.2 million, primarily as a result of paydowns with
respect to the Company's borrowings; offset in part by an increase in cash
provided by operating activities of $2.7 million from a variety of sources,
primarily as a result of net income and the non-cash impact of depreciation and
amortization.
The Company has in place a revolving line of credit with its commercial
lender that provides for a $30 million unsecured credit facility that expires in
November 2001. Advances under the revolving line of credit bear interest at
LIBOR plus 1.0%. At June 29, 2001, $12.5 million had been drawn down under the
line of credit. The line of credit is subject to certain restrictive covenants
set forth in the loan agreement, which requires that the Company maintain
certain financial ratios. The Company was in compliance with all such covenants
at June 29, 2001.
In fiscal 1999, the Company initiated a stock repurchase program. Through
June 29, 2001, an aggregate of 3.5 million shares had been repurchased for $45.8
million, an average of $13.01 per share. No shares were repurchased during the
2001 Quarter, while 493,200 shares were repurchased during the 2000 Quarter at
an aggregate cost of approximately $3.0 million.
The Company believes that its existing working capital, anticipated cash
flow from operations and funds available under its line of credit will enable it
to finance its operations, including implementation of the management
information system, and possible acquisitions, for at least the next 12 months.
Inflation
---------
The Company does not believe that the relatively moderate rates of
inflation over the past three years have had a significant effect on its net
sales or its profitability.
10
Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net
assets acquired, amounted to $33.5 million at June 29, 2001, or approximately
18.3% of total assets or 22.6% of consolidated shareholders' equity. As a result
of the early adoption of SFAS Nos.141 and 142, effective March 31, 2001, the
Company stopped amortizing goodwill. On or before September 28, 2001, the
Company plans to determine whether the fair value of each reporting unit exceeds
the carrying value of the reporting unit, including goodwill, on the balance
sheet. If the fair value of each reporting unit at March 31, 2001 exceeds its
carrying value, goodwill will not be considered impaired. If the fair value is
less than the carrying value as to a reporting unit at that date, then the
implied fair value of the goodwill must be compared to the carrying value of the
goodwill. If the carrying value exceeds the implied fair value, an impaired loss
will be recognized. Any impairment losses will be recognized by restating the
operating results for the first quarter which ended June 29, 2001. The
impairment loss, if any, would be accounted for as an effect of a change in
accounting principles.
Other intangible assets, consisting primarily of covenants not to compete
obtained in acquisitions, which have finite lives, will continue to be amortized
over the finite life. As of June 29, 2001, other intangible assets amounted to
1.0 million. For the 2001 Quarter, amortization of other intangible assets was
approximately $0.1 million or approximately 3.4% of pretax income. Other
intangible assets must be reviewed for impairment in the same manner as
goodwill, as described above.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's results of operations are exposed to changes in interest
rates primarily with respect to borrowings under its credit facility, where
interest rates are tied to the prime rate or LIBOR. Under its current policies,
the Company does not use interest rate derivative instruments to manage exposure
to interest rate changes. Based on the current levels of debt, the exposure to
interest rate fluctuations is not considered to be material. The Company is also
exposed to currency fluctuations, primarily with respect to its product
purchases in Taiwan. While all transactions with Taiwan are conducted in U.S.
Dollars, changes in the relationship between the U.S. dollar and the New Taiwan
dollar might impact the price of products purchased in Taiwan. The Company might
not be able to pass on any price increases to customers. Under its present
policies, the Company does not attempt to hedge its currency exchange rate
exposure.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None
-----------------
Item 2. Changes in Securities and Use of Proceeds. None
------------------------------------------
Item 3. Defaults Upon Senior Securities. None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. None
---------------------------------------------------
Item 5. Other Information.
-----------------
State Farm Decision and Pending Actions. In July 1997, certain individuals
initiated a class action lawsuit against State Farm in the Illinois Circuit
Court in Williamson County (Marion, Illinois), asserting claims for breach of
contract, consumer fraud and equitable relief relating to State Farm's then
practice of sometimes specifying the use of parts manufactured by sources other
than the original equipment manufacturer ("non-OEM crash parts") when adjusting
claims for the damage to insured vehicles. The Williamson County Court certified
a near-nationwide class. It was alleged that this practice breached State Farm's
insurance agreements with its policyholders and was a violation of the Illinois
Consumer Fraud and Deceptive Business Practices Act because non-OEM crash parts
are inherently inferior to OEM crash parts and, consequently, vehicles are not
restored to their "pre-loss condition" as specified in their policy. In October
1999, after a lengthy trial, the jury awarded the class damages in the amount of
approximately $586 million and the judge assessed punitive damages against State
Farm of over $600 million. State Farm appealed the verdict. In April 2001, the
Appellate Court of Illinois, Fifth District, upheld the verdict, reducing
damages by $130 million to an aggregate award of $1.06 billion.
Shortly after the verdict in the Williamson County case, State Farm
suspended specifying most non-OEM crash parts used in connection with repairing
cars covered by their insurance. Effective November 8, 1999, Nationwide
Insurance and Farmers Insurance also temporarily suspended specifying many non-
OEM crash parts. However, in early 2001, both companies announced that they were
again going to specify certain aftermarket parts in the repair of vehicles
insured by them. The action of insurance companies following the State Farm
decision has had, and continues to have, a material adverse impact on the
Company's sales and net income.
At the present time, lawsuits are pending in a number of states against
several insurance companies alleging violation of contractual provisions and
various laws and statutes relating to the specification of non-OEM crash parts
in connection with the repair of damaged vehicles. These cases have been brought
as class actions and generally involve two different legal theories. One line of
cases is similar to State Farm contending that non-OEM crash parts do not
restore a vehicle to their "pre-loss condition" as provided for in the insurance
policy. The other theory is that of "diminished value," with the contention
being that in addition to repairing the vehicle, the owner should be compensated
for the difference between the pre-loss value and the value after the vehicle is
repaired. In at least one pending action, the Company believes that CAPA has
been joined as a defendant in connection with their certification of non-OEM
crash parts.
While the Company was, or is, not a party to the State Farm lawsuit or the
other pending lawsuits, a substantial portion of the Company's business consists
of the distribution of non-OEM crash parts to collision repair shops for the use
in repairing automobiles, the vast majority of which are covered by insurance
policies. In the event that the State Farm verdict is repeated in other similar
cases or there is a substantial verdict upholding the diminished value theory,
and such cases are not overturned on appeal, with the result that non-OEM crash
parts are no longer specified by insurance companies to repair insured vehicles,
the aggregate cost to consumers will be substantial and the impact on Keystone
would be material and adverse. Once again, OEM's would likely have monopoly
pricing power with respect to many of the products required to repair damaged
vehicles.
The Company believes that substantially all of the non-OEM crash parts
which it distributes are of similar quality to OEM crash parts and when
installed in a competent manner by collision repair shops, vehicles are restored
to their "pre-loss condition." In addition, the Company provides a warranty with
respect to the parts it distributes for as long as the owner at the time repairs
are made continues to own the vehicle.
Federal and State Action. During the past four years, legislation was
introduced or considered in over 25 states seeking to prohibit or limit the use
of aftermarket parts in collision repair work and/or require special disclosure
before using aftermarket parts. Similar legislation has been introduced in many
states during 2001 and the Company anticipates that the introduction of such
legislation will continue in the foreseeable future. While legislation has been
passed in eight states requiring some form of consent
12
from the vehicle owner prior to installing aftermarket collision replacements
parts, to date, state laws have not had a material impact on the Company's
overall business. If a number of states were to adopt legislation prohibiting or
restricting the use of non-OEM crash parts, it could have a material adverse
impact on the Company.
During 2000, persons with a business interest in restricting the use of
non-OEM parts have also sought help from insurance regulators in at least three
states to attempt to do administratively what to date has not be accomplished
legislatively. In Florida, the Commissioner of the Department of Agriculture &
Consumer Services, has taken action designed to eliminate the use of non-OEM
crash parts in connection with insured repairs. The Commissioner has also
brought a legal action against an insurance company for specifying the use of
non-OEM parts. This action is currently having a material adverse impact on the
Company's sales in Florida. Action in the other two states is in an early stage
and the Company cannot predict the outcome.
In addition, during 2000, a U.S. Congressman requested that the General
Accounting Office ("GAO") review the role of the National Highway and
Transportation Safety Administration in regulating the safety and quality of
replacement automotive parts. A GAO report was released in January 2001. The
report may lead to congressional hearings and possible future legislation, which
could be adverse to the interests of the Company.
Management Information Systems. In October 1998, the Company entered into
an agreement with a vendor for the purchase of a software package to be
installed on an enterprise-wide basis. The Company has also entered into
agreements with various service providers and integrators to assist with the
installation of the package. Through June 29, 2001, the Company had expended an
aggregate of approximately $10.8 million on the purchase of hardware and the
software implementation relating to the installation of the new enterprise
software package. In fiscal year 2001, the Company wrote down approximately $4.7
million of these costs in accordance with SFAS No. 121. To date, the costs have
been paid using funds generated from operating cash flow or borrowings under the
Company's line of credit and it is anticipated that future costs will be paid
from existing working capital, cash flow from operations or borrowings under the
Company's line of credit.
At the present time, the Company estimates that the new enterprise software
system, which will consolidate the Company's various systems and address a
number of management issues, will be installed and operating company-wide in 18
to 24 months, at an additional cost of between $7.0 million and $9.0 million.
The estimated cost of the projects described above are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these time or cost estimates
are accurate, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
inherent difficulty in integrating new computer systems into the Company's
existing operations and the availability and cost of additional hardware which
may be needed to complete the installation.
Continued Acceptance of Aftermarket Collision Replacement Parts. Based upon
industry sources, the Company estimates that approximately 87% of automobile
collision repair work is paid for in part by insurance; accordingly, the
Company's business is highly dependent upon the continued acceptance of
aftermarket collision replacement parts by the insurance industry and the
governmental agencies that regulate insurance companies and the ability of
insurers to recommend the use of such parts for collision repair jobs, as
opposed to OEM parts. As described above, the use of many of the products
distributed by the Company is being disputed in various forums.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
a. Exhibits
Exhibit 10.24 Amendment No. 8 to Credit Agreement between
Registrant and Mellon Bank, N.A.
b. Reports on form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYSTONE AUTOMOTIVE INDUSTRIES, INC.
By: /S/ John M. Palumbo
-------------------------------------------------
John M. Palumbo
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
Date: August 13, 2001
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