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: December 29, 2000
or
[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the Transition period from ________ to ________
Commission file number 0-28568
KEYSTONE AUTOMOTIVE INDUSTRIES, INC.
------------------------------------
(Exact name of registrant as specified in its charter)
California 95-2920557
------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 December 29, 2000 was 14,359,345 shares.
This Form 10-Q contains 13 pages.
KEYSTONE AUTOMOTIVE INDUSTRIES, INC.
INDEX
-----
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
December 29, 2000 (unaudited) and March 31, 2000
Condensed Consolidated Statements of Income 4
Thirteen weeks (unaudited) and thirty-nine weeks ended December
29, 2000 (unaudited)
Thirteen weeks (unaudited) and forty weeks ended December 31,
1999 (unaudited)
Condensed Consolidated Statements of Cash Flows 5
Thirty-nine weeks ended December 29, 2000 (unaudited) and
Forty weeks ended December 31, 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results 7
of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risks 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Keystone Automotive Industries, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
December 29, March 31,
2000 2000
(Unaudited) (Note)
----------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,978 $ 2,884
Accounts receivable, net of allowance of $1,229 at December 2000
and $1,145 at March 2000 28,526 27,644
Inventories, primarily finished goods 85,440 80,176
Other current assets 6,896 7,317
----------- -----------
Total current assets 122,840 118,021
Plant, property and equipment, net 25,848 23,589
Goodwill, net of accumulated amortization of $4,366 at December 2000
and $3,274 at March 2000 33,962 35,204
Other intangibles, net of accumulated amortization of $2,171 at
December 2000 and $3,123 at March 2000 1,209 1,647
Other assets 4,951 5,356
----------- -----------
Total Assets $ 188,810 $ 183,817
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Credit facility $ 19,932 $ 12,500
Accounts payable 12,435 12,693
Accrued liabilities 5,112 6,559
Current portion of long-term debt 149 117
----------- -----------
Total current liabilities 37,628 31,869
Long-term debt, less current portion 58 68
Other long-term liabilities 1,624 1,685
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 14,359,000 at December 2000 and
14,892,000 at March 2000 78,581 81,817
Warrant 236 236
Additional paid-in capital 1,260 1,260
Retained earnings 69,423 66,882
----------- -----------
Total shareholders' equity 149,500 150,195
----------- -----------
Total liabilities and shareholders' equity $ 188,810 $ 183,817
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTE: The balance sheet at March 31, 2000 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 and per share amounts)
(Unaudited)
Thirteen Thirteen Thirty-nine Forty
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 29, December December 29, December
2000 31, 1999 2000 31, 1999
-------------- ------------ -------------- ------------
Net sales $ 85,450 $ 86,197 $ 254,895 $ 280,079
Cost of sales 49,481 48,970 147,467 158,663
------------ ------------ ------------ ------------
Gross profit 35,969 37,227 107,428 121,416
Operating expenses:
Selling and distribution expenses 27,251 27,226 80,780 82,648
General and administrative 7,632 7,971 22,747 23,194
------------ ------------ ------------ ------------
Operating income 1,086 2,030 3,901 15,574
Other income 521 564 1,495 1,883
Interest expense, net (394) (328) (1,087) (469)
------------ ------------ ------------ ------------
Income before income taxes 1,213 2,266 4,309 16,988
Income taxes 497 929 1,767 6,965
------------ ------------ ------------ ------------
Net income $ 716 $ 1,337 $ 2,542 $ 10,023
============ ============ ============ ============
Earnings per share:
Basic $ 0.05 $ 0.09 $ 0.18 $ 0.62
============ ============ ============ ============
Diluted $ 0.05 $ 0.09 $ 0.18 $ 0.62
============ ============ ============ ============
Weighted average shares
outstanding:
Basic 14,364,000 15,425,000 14,440,000 16,104,000
============ ============ ============ ============
Diluted 14,364,000 15,425,000 14,452,000 16,133,000
============ ============ ============ ============
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)
Thirty-nine Forty
Weeks Ended Weeks Ended
December 29, December 31,
2000 1999
---------------------------------
Operating activities
Net income $ 2,542 $ 10,023
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,477 5,430
Provision for losses on uncollectible accounts 84 392
Provision for losses on inventory (63) 194
Loss on sale of assets 10 7
Changes in operating assets and liabilities:
Accounts receivable (966) 4,596
Inventories (4,827) (12,764)
Other assets 1,729 (448)
Accounts payable and accrued liabilities (1,766) (4,441)
-------- --------
Net cash provided by operating activities 2,220 2,989
Investing activities
Proceeds from sale of assets 113 175
Purchases of property, plant and equipment (7,077) (5,568)
Cash paid for acquisitions (380) (8,829)
-------- --------
Net cash (used in) investing activities (7,344) (14,222)
Financing activities
Borrowings on credit facility 7,432 22,138
Bankers acceptances and other short-term debt, net -- (2,961)
Borrowings (payments) on long-term debt 22 (13)
Repurchases of common stock (3,236) (21,092)
Net proceeds on option exercise -- 101
-------- --------
Net cash provided by (used in) financing activities 4,218 (1,827)
-------- --------
Net (decrease) in cash and cash equivalents (906) (13,060)
Cash and cash equivalents at beginning of period 2,884 17,784
-------- --------
Cash and cash equivalents at end of period $ 1,978 $ 5,365
======== ========
Supplemental disclosures
Interest paid during the period $ 975 $ 213
======== ========
Income taxes paid during the period $ 1,503 $ 8,719
======== ========
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)
December 29, 2000
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States 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 39
week period ended December 29, 2000 are not necessarily indicative of the
results that may be expected for the full year ending March 30, 2001. For
further information, refer to the financial statements and footnotes thereto for
the year ended March 31, 2000, included in the Company's Form 10-K filed with
the Securities and Exchange Commission on June 26, 2000.
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 nine month periods ended December 29, 2000 and
December 31, 1999, included thirty-nine and forty-week periods, respectively.
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 June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133-- "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives in the statement of financial
position and measure those instruments at fair value. In 1999, the FASB issued
SFAS No. 137 - "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133-an amendment of FASB
Statement No. 133," for one year. The Company must implement SFAS No. 133 by the
first quarter of 2001 and has not yet made a final determination of its impact
on the financial statements.
In June 2000, the Securities and Exchange Commission ("SEC") amended Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. The revised effective date of SAB 101 is the fourth fiscal quarter
of the fiscal year beginning after December 15, 1999. The Company has not yet
made a final determination of its impact on the financial statements.
5. Acquisitions
The Company completed one acquisition during the nine month period ended
December 29, 2000. There was no excess purchase price over fair value of assets
acquired. The unaudited pro forma results for fiscal 2001 and 2000, assuming
this acquisition had been made at the beginning of fiscal 2000, would not be
materially different from the results presented above. During the 40-week period
ended December 31, 1999, the Company acquired four companies for approximately
$8.8 million in cash. These acquisitions were accounted for as purchases, and
accordingly the assets and liabilities of the acquired entities have been
recorded at their estimated fair values at the dates of acquisition. The excess
of purchase price over the estimated fair values of the assets acquired was
approximately $2.1 million and has been recorded as goodwill and is being
amortized over 15 years. The unaudited pro forma results for fiscal 2000,
assuming these four acquisitions had been made at the beginning of fiscal 2000,
would not be materially different from the results presented above.
6. Shareholders Equity
In September 1998, the Company initiated a stock repurchase program.
Repurchased shares are retired and treated as authorized but unissued shares.
Through December 29, 2000, the Company had repurchased approximately 3.5 million
shares of its
6
KEYSTONE AUTOMOTIVE INDUSTRIES, INC.
common stock at an average cost of $13.01 per share. Approximately 533,000
shares at an average cost of $6.03 per share were repurchased during the nine
months ended December 29, 2000, including 40,000 shares repurchased during the
13-week period ended December 29, 2000 at an average cost of $4.81 per share.
In August 2000, the Board of Directors of the Company granted officers,
employees and outside directors stock options to purchase an aggregate of
714,000 shares of Common Stock at an exercise price of $5.53 per share. Except
for the directors' options, which are vested, all of these options vest in equal
installments over four years.
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 31, 2000, on file with
the Securities and Exchange Commission.
General
-------
The results of operations for the nine months ended December 29, 2000 (the
"2000 Nine Months") reflect a 39-week period whereas the results for the
comparable nine months in the prior fiscal year (the "1999 Nine Months") reflect
a 40-week period. Consequently, comparisons of these results may not be
meaningful.
In addition, the results of operations for the 2000 Nine Months include the
results with respect to the four acquisitions completed during fiscal 2000
accounted for as "purchases." The 1999 Nine Months includes the results of
operations for the four acquired entities for only a portion of the period. Such
acquisitions include the acquisition of (i) the assets of Quality Bumpers, LLC
completed on May 3, 1999, (ii) the assets and stock of the Nordan Products group
of companies completed on May 10, 1999, (iii) certain assets of Supreme Bumpers,
Inc. completed on December 31, 1999 and (iv) certain assets of Auto Body Supply
Co., Inc. completed on November 1, 1999.
As a result of the verdict in the State Farm class action in October 1999
and the fact that numerous other class actions are pending, State Farm and
certain other insurance companies temporarily suspended specifying the use of
many aftermarket collision replacement parts in connection with the repair of
vehicles which they insure. However, recently two of these insurance companies
have begun to once again include certain aftermarket collision parts on repair
estimates, subject to stringent quality control standards. See Item 5 below.
These suspensions had a material, adverse effect on the Company's revenues and
earnings during the 2000 Nine Months.
7
KEYSTONE AUTOMOTIVE INDUSTRIES, INC.
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 Thirty-nine Forty
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 29, December 31, December 29, December 31,
2000 1999 2000 1999
---------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 57.9 56.8 57.9 56.6
----- ----- ----- -----
Gross profit 42.1 43.2 42.1 43.4
Selling and distribution expenses 31.9 31.6 31.7 29.5
General and administrative expenses 8.9 9.2 8.9 8.3
Other income 0.6 0.7 0.6 0.7
Interest expense, net (0.5) (0.4) (0.4) (0.2)
----- ----- ----- -----
Income before income taxes 1.4 2.6 1.7 6.1
Income taxes 0.6 1.1 0.7 2.5
----- ----- ----- -----
Net income 0.8% 1.6% 1.0% 3.6%
===== ===== ===== =====
Thirteen weeks ended December 29, 2000 compared to thirteen weeks ended December
--------------------------------------------------------------------------------
31, 1999
--------
Net sales were $85.5 million for the quarter ended December 29, 2000 (the
"2000 Quarter") compared to $86.2 million for the quarter ended December 31,
1999 (the "1999 Quarter"), a decrease of $747,000 or 0.9%. This decrease was due
primarily to decreases in sales of new and recycled bumpers. During the 2000
Quarter, sales of automotive body parts (including fenders, hoods, headlights,
radiators, grilles and other crash parts), decreased by $305,000, sales of new
and recycled bumpers decreased by $1.3 million and sales of paint and related
materials increased by $683,000 million, which changes represent decreases of
approximately 0.8% and 4.9% and an increase of 5.1%, respectively, over the 1999
Quarter. In addition, the Company sold approximately $6.0 million of
remanufactured alloy wheels in the 2000 Quarter compared to $5.6 million in the
prior year period, an increase of 8.2%. The decreases were attributable
primarily to the impact of the State Farm case. See "Item 5" below.
Gross profit decreased in the 2000 Quarter to $36.0 million (42.1% of net
sales) from $37.2 million (43.2% of net sales) in the 1999 Quarter, a decrease
of $1.3 million or 3.4%, primarily as a result of price competition and product
mix. The Company's decrease in gross profit as a percentage of net sales in the
2000 Quarter reflects the continued fluctuation in cost of sales, primarily
because of factors such as product mix and price competition. The Company's
gross profit margin has fluctuated, and is expected to continue to fluctuate,
depending on a number of factors, including changes in product mix, competition
and currency exchange rates.
Selling and distribution expenses increased to $27.3 million (31.9% of net
sales) in the 2000 Quarter from $27.2 million (31.6% of net sales) in the 1999
Quarter, an increase of 0.1%. The increase in these expenses as a percentage of
net sales was generally the result of moving and consolidation costs and higher
fuel costs, as well as reduced sales.
General and administrative expenses decreased to $7.6 million (8.9% of net
sales) in the 2000 Quarter compared to $8.0 million (9.2% of net sales) in the
1999 Quarter, a decrease of 4.3%. The decrease in these expenses as a percentage
of net sales was generally the result of reduced headcount, offset in part by
advertising and marketing expenses related to the introduction of the Platinum
Plus line of products.
Net income decreased to $716,000 (0.8% of net sales) in the 2000 Quarter
from $1.3 million (1.6% of net sales) in the 1999 Quarter. The decrease is
primarily attributable to the decrease in gross profits. Net income may be
adversely impacted by higher energy and fuel cost in the future.
8
Thirty-nine weeks ended December 29, 2000 compared to forty weeks ended December
--------------------------------------------------------------------------------
31, 1999
--------
Net sales were $254.9 million for the thirty-nine weeks ended December
29, 2000 (the 2000 Nine Months") compared to $280.1 million for the forty weeks
ended December 31, 1999 (the "1999 Nine Months"), a decrease of $25.2 million or
9.0%. This decrease was made up of decreases of $12.9 million in sales of
automotive body parts (including fenders, hood, headlights, radiators, grilles,
and other crash parts) and $13.2 million in sales of new and recycled bumpers
and an increase of $2.1 million in sales of paint and related materials, which
changes represent decreases of approximately 10.6% and 14.7% and an increase of
4.9%, respectively, over the comparable period in the prior fiscal year. In
addition, the Company sold approximately $17.7 million of remanufactured alloy
wheels in the 2000 Nine Months compared to $16.6 million in the 1999 Nine
Months, an increase of 6.7%. The decreases were primarily as a result of the
impact of the State Farm case and due to the 2000 nine month period being one
week shorter.
Gross profit decreased in the 2000 Nine Months to $107.4 million (42.1%
of net sales) from $121.4 million (43.4% of net sales) in the 1999 Nine Months,
a decrease of $14.0 million or 11.5%, primarily as a result of the decrease in
net sales. While the Company's gross profit margin improved during the 1999 Nine
Months, compared to the comparable period of the prior fiscal year, due in part
to the increased purchasing leverage (a direct result of acquisitions), internal
growth and the strengthening of the U.S. dollar relative to the Taiwanese
dollar, gross margins declined during the 2000 Nine Months primarily as a result
of a change in product mix and competition. The Company's gross profit margin
has fluctuated, and is expected to continue to fluctuate, depending on a number
of factors, including changes in product mix, competition and currency exchange
rates.
Selling and distribution expenses decreased to $80.8 million (31.7% of
net sales) in the 2000 Nine Months from $82.6 million (29.5% of sales) in the
1999 Nine Months, a decrease of 2.3%. The increase in these expenses as a
percentage of net sales was generally the result of moving and consolidation
expenses and higher fuel costs, as well as reduced net sales.
General and administrative expenses decreased to $22.7 million (8.9% of
net sales) in the 2000 Nine Months from $23.2 million (8.3% of net sales) in the
1999 Nine Months, a decrease of 1.9%. The increase in these expenses as a
percentage of net sales was primarily the result of certain fixed costs
and advertising and marketing expenses related to the introduction of the
Platinum Plus Line of Products, partially offset by reduced headcount.
Net income decreased to $2.5 million (1.0% of net sales) in the 2000
Nine Months from $10.0 million (3.6% of net sales) in the 1999 Nine Months. The
decrease in net income as a percentage of net sales was primarily the result of
the decrease in net sales and reduced gross margin.
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
influence quarterly variations include the reduced number of business days
during the holiday seasons, the timing of the introduction of new products, the
level of consumer acceptance of new products, general economic conditions that
affect consumer spending, the timing of supplier price changes and the timing of
expenditures in anticipation of increased sales and customer delivery
requirements.
Liquidity and Capital Resources
Historically, the Company's primary need for funds has been to finance the
growth of inventory and accounts receivable, the stock buyback program, capital
expenditures and acquisitions. At December 29, 2000, working capital was $85.2
million compared to $86.2 million at March 31, 2000. The Company has financed
its working capital requirements from its cash flow from operations, proceeds
from public offerings of its Common Stock and advances drawn under lines of
credit.
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
October 2001. Advances under the revolving line of credit bear interest at LIBOR
plus 1.0%. At December 29, 2000, $19.9 million had been drawn down under the
line of credit. The line of credit is subject to certain restrictive covenants
set forth in a loan agreement, which require that the Company maintain certain
financial ratios. The Company was in compliance with all covenants as of
December 29, 2000, and as of the date of the filing of this Quarterly Report.
9
During fiscal 1999, the Company initiated a stock repurchase program.
Through December 29, 2000, an aggregate of 3.5 million shares had been
repurchased at an average per share price of $13.01. During the 2000 Nine
Months, the Company repurchased approximately 533,000 shares of its common stock
at an average price of $6.03.
During the 2000 Nine Months, the Company's cash and cash equivalents
decreased by $0.9 million. This decrease is the result of a decrease in cash
used in investing activities of $7.3 million, primarily related to purchases of
plant, property and equipment, offset in part by increases in cash provided by
(i) operating activities of $2.2 million from a variety of sources, primarily
net income after adding back depreciation and amortization and (ii) financing
activities of $4.2 million, primarily as a result of borrowings under the
Company's credit facility offset by the repurchase of shares of the Company's
Common Stock.
The Company believes that its existing working capital, estimated cash flow
from operations and funds available under its line of credit will enable it to
finance its operations and stock repurchases, if any, for at least the next 12
months.
Inflation
---------
The Company does not believe that the relatively moderate rates of
inflation over the past three years have had a significant effect on its net
sales or its profitability.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133-- "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives in the statement of financial
position and measure those instruments at fair value. In 1999, the FASB issued
SFAS No. 137 - "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133-an amendment of FASB
Statement No. 133," for one year. The Company must implement SFAS No. 133 by the
first quarter of 2001 and has not yet made a final determination of its impact
on the financial statements.
In June 2000, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. The revised effective date of SAB 101 is the fourth fiscal quarter
of the fiscal year beginning after December 15, 1999. The Company has not yet
made a final determination of its impact on the financial statements.
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 based suppliers 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.
10
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 $460 million and the judge assessed punitive damages against State
Farm of over $700 million. State Farm has appealed the verdict and a decision on
the appeal, which was heard recently, is expected at any time.
Shortly after the verdict in the Williamson County case, State Farm
suspended specifying most non-OEM crash parts used in connection with repairing
cars covered by their insurance. Effective November 8, 1999, Nationwide
Insurance and Farmers Insurance also temporarily suspended specifying many non-
OEM crash parts. The action of these insurance companies has had a material
adverse impact on the Company's sales and net income. Certain other insurers
have also restricted the use of a limited number of aftermarket parts such as
bumpers and hoods. Nationwide Insurance and Farmers Insurance recently began
permitting the specification of certain of the crash parts suspended in November
1999, subject to stringent quality control standards. See "Management Discussion
and Analysis of Financial Condition and Result of Operations-General" above.
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
generally been brought as class actions and usually 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 the Certified Aftermarket Parts Association (CAPA) has been joined
as a defendant in connection with their certification of non-OEM crash parts.
While the Company was, and is, not a party to the State Farm lawsuit
or any of the pending lawsuits, a substantial portion of the Company's business
consists of the distribution of non-OEM crash parts to collision repair shops
for use in repairing automobiles, the vast majority of which are covered by
insurance policies. The Company has been informed that several of the class
action lawsuits have been dismissed and that no court has accepted the
diminished value theory. However, 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. In such event, 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. At the present time, the Company believes that
legislation is pending in over 22 states seeking to prohibit or limit the use of
aftermarket parts in collision repair work and/or require special disclosure
before using aftermarket parts.
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Over the past three years, such legislation has been passed in only four states
and it has not had a material impact on the Company's business. The Company
anticipates the introduction of similar legislation in other states over the
next year and beyond and if a number of states were to adopt legislation
prohibiting or restricting the use of non-OEM crash parts, it could have a
material adverse impact on the Company.
In addition, recently, persons with a business interest in restricting
the use of non-OEM parts have also sought help from insurance regulators in at
least three states to attempt to do administratively what to date has not be
accomplished legislatively. In Florida, the Commissioner of the Department of
Agriculture & Consumer Services, has taken action designed to eliminate the use
of non-OEM crash parts in connection with insured repairs. The Commissioner has
also brought a legal action against an insurance company for specifying the use
of non-OEM parts. This action is currently having a material adverse impact on
the Company's sales in Florida. Action in the other two states is in an early
stage and the Company cannot predict the outcome.
Further, a former U.S. Congressman had 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 study has been completed and it is expected
that a report will be published in early March.
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.
Management Information Systems. In October 1998, the Company entered into
an agreement with a vendor for the purchase of a software package to be
installed on an enterprise-wide basis. To date, the Company has expended an
aggregate of approximately $8.8 million on hardware and software implementation
relating to the installation of the new enterprise software package. Management
estimates that it will spend between $5.2 million and $8.0 million over the next
18 to 24 months to complete the installation. As the Company is still in the
implementation phase and such an implementation involves uncertainty, there can
be no assurance that the actual costs will not exceed the estimate or that the
implementation will not take longer than estimated. To date, the costs have been
paid using funds generated from operating cash flow and funds drawn 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 concerns, will be installed and operating
company-wide in 18 to 24 months. The estimated cost of the project described
above is based on management's best estimates, which were derived utilizing
numerous assumptions of future events. However, there can be no guarantee that
these time or cost estimates will be achieved, and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, 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.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
a. Exhibits - None
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: February 12, 2001
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