ITEM 1. BUSINESS
(a) General: Republic Automotive Parts, Inc. is a Delaware corporation founded in 1923 as Republic Gear Company. The executive offices of the Company are located at 500 Wilson Pike Circle, Suite 115, Brentwood, Tennessee 37027 (a suburb of Nashville), telephone number (615) 373-2050. Unless the context indicates otherwise, the terms Republic and the Company refer to Republic Automotive Parts, Inc. and its subsidiaries.
The Company distributes a complete line of replacement parts (other than tires) for substantially all mass produced makes and models of automobiles manufactured within the last 15 years and most replacement parts for mass produced trucks and vans. The Company also distributes a number of replacement parts for heavy-duty trucks, snowmobiles, motorcycles, farm and marine equipment and other similar types of machinery through its automotive distribution centers and jobber stores.
The Company purchases replacement parts from over 100 principal suppliers and distributes them through its automotive parts distribution centers. These centers sell to the Company's jobber stores as well as to approximately 3,000 independent jobber stores. These stores in turn sell to service stations, repair shops, individuals and others, including automobile and truck dealers, fleet operators, leasing companies and mass merchandisers. The Company also distributes new replacement parts to repair vehicles damaged in collisions through its body parts and accessories distribution centers. These centers sell to automotive collision repair shops and smaller parts distributors.
(b) Industry Segment: Republic sells primarily automotive replacement parts and related merchandise which the Company considers to be one industry segment under Statement of Financial Accounting Standards No. 14. No single class of similar products, services or customers has contributed as much as 10% of total sales and revenues of the Company.
(c)(1)(i) The key competitive elements for distribution centers are service, price and breadth of product line. All Company-owned jobbers and most other independent jobbers are located within overnight delivery distance by the Company's delivery fleet or common carrier from one of the Company's distribution centers. This enables the Company's distribution centers to replenish jobber merchandise on a daily basis and enables the jobber to carry reduced amounts of inventory. The Company's jobber stores are served primarily by the Company's distribution centers.
Most jobber sales are made to repair shops, service stations and mechanics who perform installation and repairs. A repair facility typically stocks a few parts and purchases parts from the jobber as required. Thus, delivery time and product availability are critical competitive factors. Repairs are also made by car owners who go directly to the jobber for required parts. As a consequence, many of the Company's jobber stores have been remodeled to provide larger, well-lighted retail display areas and to utilize promotional displays and advertising to attract the do-it-yourself car owner. Breadth of parts selection and customer assistance are primary attractions for the car owner. Some of the jobber stores have machine shops which offer services such as cylinder head grinding, brake drum lathe work and valve refacing.
Damages and normal wear create a continuing demand for replacement parts. The number of automobiles and trucks registered in the United States has increased continually. However, the principal manufacturers of automobiles and trucks in recent years continue to improve the quality of their products and grant longer warranties on certain parts included in new vehicles. As a result the average age of vehicles is increasing. The Company is unable to assess what effect, if any, these factors may have on demand for the replacement parts it distributes.
(iii) The Company purchases the majority of its products from approximately 100 principal manufacturers and other suppliers, some of whom are competitors of the Company and some of whom are in foreign countries, primarily Taiwan. No material part of the Company's purchases is dependent on a single supplier. The Company's purchases of products from suppliers in foreign countries are subject to the customary risks of doing business abroad, including, among other things, transportation delays, currency fluctuations, political instability, the imposition of tariffs, import and export controls or quotas, as well as the uncertainty regarding the future relationship between China and Taiwan.
(iv) Patents, licenses, franchises, concessions held, research activities and environmental control are not significant in the business of the Company.
(v) No material part of the Company's business is significantly seasonal; however, summer sales generally exceed winter sales.
(vi) The number of domestic and imported automotive vehicle models in the United States continues to increase each year. A result of the increasing number of vehicle models is the proliferation in the number of automotive replacement parts supplied by distributors, which requires a substantial investment in inventory and warehousing space. The Company distributes in excess of 100,000 separate parts of nationally and privately branded items. The Company provides rights to return merchandise for parts purchased by its customers in excess of their needs, certain defective items and used parts which are returned to the Company's suppliers to be remanufactured, as well as certain obsolete parts which are returned to the Company's suppliers generally for full credit.
(vii) No material part of the Company's business is dependent upon a single customer or upon very few customers.
(viii) Backlog is not significant in the business of the Company.
(ix) No material portion of the Company's business is dependent upon the U.S. Government.
(x) The Company competes with numerous distribution outlets of parts manufacturers and automobile manufacturers, as well as other parts distributors, including some of the large national retail chain stores. The automotive replacement parts industry is highly competitive and is becoming more competitive as the major automotive manufacturers now manufacture and distribute replacement parts for other models in addition to their own. Some of its competitors have much greater financial resources than the Company. The sales volume of the entire Company, in the aggregate, represented less than 1% of the total automotive replacement parts market.
The automotive parts aftermarket is highly fragmented with the majority of distribution centers and jobbers being relatively small and privately owned. The Alaskan market is the only one in which the Company is a major factor. Republic has acquired its distribution centers and jobber stores in what it considers to be advantageous market areas. New jobber stores opened or acquired by the Company are located so as to be supplied primarily from Company-owned distribution centers. This favorably affects economics in material handling, delivery and local advertising costs.
(xiii) The Company employs approximately 1,500 persons.
(d) The Company does not engage in operations in foreign countries and no material portion of its sales or revenues are derived from customers in foreign countries.
ITEM 2
ITEM 2 PROPERTIES.
The Company and its subsidiaries occupy and operate distribution centers and jobber stores at the following locations:
The longest lease binds the Company through July 6, 2007. The Company is fully utilizing all of its owned and leased facilities. The Company believes its facilities are adequate for its present and immediately foreseeable needs. The Company owns substantially all of the equipment used in its facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company has been named as defendant in legal proceedings incidental to the ordinary conduct of its business operations. Management is vigorously defending these proceedings and believes none will have a significant impact on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the calendar year covered by this Annual Report on Form 10-K, no matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The prices in the table below represent the high and low sales price for the common stock as reported in The Nasdaq Stock Market under the symbol RAUT. At March 2, 1998, there were 431 stockholders of record.
The Company did not pay dividends in 1997 and 1996 and does not intend to pay dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
*Earnings per share for 1993 include reduction of earnings for the cumulative effect of changes in accounting principles of $0.30 and $0.28 on a basic and diluted basis, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the consolidated financial statements of the Company and related notes to consolidated financial statements.
SIGNIFICANT TRANSACTIONS
On February 18, 1998, the Company jointly announced with Keystone Automotive Industries, Inc. ("Keystone") that they had entered into a definitive merger agreement pursuant to which Keystone would acquire the Company. Under the terms of the agreement, Keystone would issue 0.8 of a share of its common stock in exchange for each share of the Company's common stock.
The transaction, which has been approved unanimously by the board of directors of each company, is intended to qualify as a tax-free reorganization. The merger agreement is subject to certain regulatory approvals as well as approval by the shareholders of each company at special meetings expected to be held within the next 90 days. Closing of the merger is expected during the second quarter of 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income statement data in dollar amount and as a percentage of net sales:
This report contains certain forward looking statements. Specifically, the forward looking statements relate to anticipated future growth through acquisitions and openings of new distribution centers by the Company's subsidiary, Fenders & More, Inc. The ability of the Company to achieve the expectations expressed in these forward looking statements will be subject to several factors that could cause actual results to differ materially from those expressed in the forward looking statements, such as the cost of acquired businesses and new distribution centers, difficulties in integrating newly acquired businesses and the availability of capital to finance both acquisitions and openings of new distribution centers. Results actually achieved thus may differ materially from expected results included in such statements.
1997 COMPARED TO 1996
Net sales increased $4,143,000 or 2.2% from $184,810,000 in 1996 to $188,953,000 in 1997. Several factors affected the increase in net sales. Sales attributable to operations included in both 1997 and 1996 were $153,646,000 and $154,232,000, respectively. Sales attributable to new locations that have not been opened at least twelve months in either 1997 and 1996 were $15,300,000 in 1997 compared with $3,734,000 in 1996. Sales attributable to locations which were either sold or closed in either 1997 or 1996 were $20,007,000 in 1997 compared with $26,844,000 in 1996. The Company's subsidiary, Fenders & More, Inc. opened eight distribution centers in 1997 compared to four distribution centers opened and one distribution center acquired in 1996. The Company sold or closed five traditional automotive hard parts distribution centers and six jobber stores
during 1997. Decreases in net sales occurred at the Company's traditional automotive hard parts distribution centers and jobber stores due to the mild fourth quarter winter weather, a generally soft retail economy plus competitive pressures in some of the Company's trading areas.
Gross profit for 1997 was $76,487,000 or 40.5% of net sales, compared with $73,461,000 or 39.8% of net sales in 1996. The changes in cost of products sold are generally consistent with changes in net sales; however, the gross profit percentage for 1997 increased due to the continuing shift in the mix of wholesale and retail sales as a result of the opening of new distribution centers by the Company's subsidiary, Fenders & More, Inc., and the sale or closing of traditional automotive hard parts distribution centers and jobber stores.
Selling, general and administrative expenses were $68,873,000 or 36.5% of net sales in 1997 compared with $63,199,000 or 34.2% of net sales in 1996. The dollar increase in selling, general and administrative expenses principally resulted from the expenses associated with the increased sales volume generated at the distribution centers opened by Fenders & More, Inc. in 1997 and 1996 and acquisitions made in the latter half of 1996.
Operating income was $7,614,000 or 4.0% of net sales in 1997 compared with $10,262,000 or 5.6% of net sales in 1996. Increased operating expenses related to new distribution centers accounted for the decrease in operating income.
Interest expense was $2,346,000 or 1.2% of net sales in 1997 compared with $2,220,000 or 1.2% of net sales in 1996. The increase in interest expense is principally due to the higher borrowing levels for most of 1997 resulting from the Company's investment in the expansion of its Fenders & More, Inc. business. The reduction of debt during the fourth quarter of 1997 tempered the increase in interest expense that occurred in 1997. Interest rates were slightly lower in 1997 compared to 1996.
The Company's total effective income tax rate was 40.8% in 1997 compared to 41.0% in 1996. These differences from the statutory federal rate are due mostly to the impact of state income taxes as further discussed in Note 7 to the consolidated financial statements.
Net income was $3,258,000 or 1.7% of net sales in 1997 compared with $5,095,000 or 2.8% of net sales in 1996. The decrease in net income resulted primarily from the increased selling, general and administrative expenses and interest expense discussed above. The Company also incurred non-recurring expenses associated with the closing or sale of five traditional automotive hard parts distribution centers and six jobber stores during 1997.
1996 COMPARED TO 1995
Net sales increased $30,199,000 or 19.5% from $154,611,000 in 1995 to $184,810,000 in 1996. A full year of sales from acquisitions in 1995 plus distribution centers opened in 1995 and 1996 by Fenders & More, Inc. accounted for the increase in net sales. Sales attributable to properties and operations included in both years ended December 31, 1996 and 1995 were $131,765,000 and $131,224,000, respectively. The number of jobber stores owned and operated by the Company increased by a net of four stores in 1996. Acquisitions added six new jobber stores while two marginally profitable stores were closed.
Gross profit for 1996 was $73,461,000 or 39.8% of net sales, compared with $57,480,000 or 37.2% of net sales in 1995. The changes in cost of products sold are generally consistent with changes in net sales; however, the gross profit percentage for 1996 increased due to the shift in the mix of wholesale and retail sales as a result of the acquisitions and new distribution center openings discussed above.
Selling, general and administrative expenses were $63,199,000 or 34.2% of net sales, compared with $50,606,000 or 32.7% of net sales in 1995. The dollar increase in selling, general and administrative expenses principally resulted from the increased sales volume generated by the acquisitions made in mid-1995.
Operating income was $10,262,000 or 5.6% of net sales, compared with $6,874,000 or 4.5% of net sales in 1995. The increase in operating income was generally consistent with the increase in net sales.
Interest expense was $2,220,000 or 1.2% of net sales, compared with $1,828,000 or 1.2% of net sales in 1995. The increase
in interest expense is principally due to the higher borrowing levels resulting from the Company's investment in acquisitions and the expansion of its Fenders & More, Inc. business as well as the impact of changes in interest rates compared to the prior year.
The Company's total effective income tax rate was 41.0% in 1996 compared to 43.0% in 1995. These differences from the statutory federal rate are due mostly to the impact of state income taxes as further discussed in Note 7 to the consolidated financial statements.
Net income was $5,095,000 or 2.8% of net sales, compared with $1,884,000 or 1.2% of net sales in 1995.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A year end adjustment for LIFO expense resulted in decreasing net income during the fourth quarter of 1997 by approximately $123,000 ($0.03 per diluted share) A year end adjustment for LIFO expense resulted in increasing net income during the fourth quarter of 1996 by approximately $381,000 ($0.11 per diluted share) A year end adjustment for LIFO expense resulted in decreasing net income during the fourth quarter of 1995 by approximately $143,000 ($0.04 per diluted share).
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows: For the year ended December 31, 1997, operating activities provided $2,468,000 of net cash primarily from net earnings, depreciation and amortization of intangibles which was offset by decreases in income taxes recoverable and accounts payable. Investing activities provided $8,050,000 in cash from the sale of certain business operations. Financing activities used $11,133,000 in cash primarily for the reduction of long term debt.
For the year ended December 31, 1996, operating activities provided $1,077,000 of net cash primarily from net earnings, depreciation, amortization and income taxes recoverable which was offset by increases in inventories and reduction of accounts payable as favorable terms granted by suppliers in 1995 expired. Investing activities used $4,808,000 of cash, principally consisting of the Company's investment in acquisitions and capital expenditures. Financing activities provided $3,831,000 of cash principally from net borrowings under the Company's Revolving Credit Agreement.
For the year ended December 31, 1995, operating activities provided $4,533,000 of net cash primarily from net earnings, depreciation and amortization and accounts payable which was offset by increases in accounts receivable and income taxes recoverable. Investing activities used $13,788,000 of cash, principally consisting of the Company's investment in acquisitions and capital expenditures. Financing activities provided $9,378,000 of cash principally resulting from net borrowings under the Company's Revolving Credit Agreement which were used to finance acquisitions.
Working Capital: The Company's ratio of current assets to current liabilities was 4.9 at the end of 1997 compared with 4.1 at the end of 1996. Working capital at December 31, 1997 was $57,594,000 compared with $61,278,000 at December 31, 1996. The decrease in working capital at December 31, 1997 was primarily related to lower inventories due to the sale or closing of five distribution centers in 1997 which was offset by lower levels of accounts payable. Cash decreased by $615,000 from $2,898,000 at December 31, 1996 to $2,283,000 at December 31, 1997.
Credit Facilities: At December 31, 1997, the Company had available cash resources of $55,000,000 from banks, of which $24,000,000 was utilized. The Company's ability to open new distribution centers, to expand sales at existing distribution centers and to make strategic acquisitions of competitors in existing and new markets is dependent on the availability of capital. Note 8 to the consolidated financial statements contains a more complete explanation of the Company's credit facilities.
Capital Expenditures and Acquisitions: Capital expenditures, excluding new business acquisitions, were $1,535,000, $2,320,000 and $2,255,000 for 1997, 1996 and 1995, respectively. Normal replacement of equipment and fixtures and the opening of new Fenders & More, Inc. distribution centers accounted for the majority of capital expenditures. The Company has made a number of strategic acquisitions during the two years ended December 31, 1996. Note 6 to the consolidated financial statements contains a more complete explanation of these acquisitions. The Company anticipates future growth will come from further strategic acquisitions as well as additional openings of new distribution centers by its subsidiary Fenders & More, Inc. Eight new distribution centers were opened by Fenders & More, Inc. in 1997.
Sources of Liquidity: Although no other definitive arrangements have been reached, it is expected that cash generated from operations, other changes in working capital and the increased line of credit discussed above will be sufficient to support cash outlays for additional location openings and anticipated acquisitions, if any.
SEASONALITY AND INFLATION
Historically, the Company's net sales have been higher during April through September of each year than during the other months of the year. In addition, the demand for the Company's traditional automotive hard parts is somewhat affected by weather conditions as is the automotive body parts business. The Company's results of operations from period to period may be affected by such weather conditions. Temperature extremes tend to enhance sales by causing a higher incidence of parts failure while milder weather tends to depress sales. Severe winter weather tends to enhance the Company's automotive body part sales due to a higher incidence of automotive collisions.
The Company does not believe its operations have been materially affected by inflation. In general, the Company offsets increased costs from suppliers by increasing sales prices to customers.
The Company uses the LIFO method of accounting for most of its inventories. Under this method, the cost of products sold reported in the consolidated financial statements approximates current costs and thus reduces the distortion in reported income due to increasing costs. Note 4 to the consolidated financial statements contains additional detail concerning LIFO's effect on the Company.
YEAR 2000 COMPLIANCE
The Company has assessed its exposure to the impact of the Year 2000 issue on its information systems. This issue affects computer systems that may not properly recognize the year 2000. This could result in system failures or miscalculations that could have a material adverse effect on the operations of the Company.
For the traditional automotive hard parts distribution centers and jobber stores, the Company has contracted with a third party provider of software and hardware systems to the automotive industry to provide all new systems. The Company believes that the new systems will be Year 2000 compliant. The Company is utilizing both internal and external resources to install the systems. Approximately 40% of the Company's traditional hard parts operations have been installed with the new systems and the remaining locations are scheduled to be completed not later than December 1998. To date, the Company has incurred and expensed approximately $100,000 related to the conversion and approximately $300,000 has been capitalized in connection with the new systems. The total remaining costs are estimated at $2,100,000 of which $300,000 is expected to be expensed over the next nine months and $1,800,000 is expected to be capitalized.
For its Fenders & More, Inc. subsidiary ("Fenders"), the Company is presently concluding a search to replace its software and hardware systems. Presently, Fenders has two systems: one that was in use when Fenders was acquired in 1994 and one resulting from an acquisition. The Company believes that Fenders needs new systems to achieve its growth objectives irrespective of the Year 2000 issue. Any new software selected will be Year 2000 compliant. The Company anticipates that these new systems will be in place prior to July 1999. Total costs are estimated at $1,600,000 of which $700,000 is expected to be expensed over the next fifteen months and $900,000 is expected to be capitalized.
The costs for both new systems are being funded from operating cash flows and possibly lease financing. The costs of these new systems and the dates on which the Company plans to complete the projects are based upon management's best estimates, which were derived utilizing numerous assumptions of future events. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in these systems, the ability to install the systems without unforseen technical difficulties slowing the process, and similar uncertainties.
The Company's merger with Keystone, described above, could substantially alter the above-stated plans, particularly with respect to Fenders. Keystone has recently selected a software system which they could choose to install at Fenders after closing of the merger. Given the information known at this time about the Keystone systems, specific costs and dates on system implementation in that event are unknown.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosures about Segments of an Enterprise and Related Information". In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". The Company will adopt these new requirements in 1998. Management believes adoption of these requirements will not have a material impact on the Company's reported financial position, results of operation or cash flows.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company, together with the Report of Independent Accountants, are set forth on pages 11 through 23 in this report.
4400 Harding Road Telephone 615 292 5000 Nashville, TN 37205
PRICE WATERHOUSE LLP LOGO
REPORT OF INDEPENDENT ACCOUNTANTS
February 27, 1998
To the Board of Directors and Stockholders of Republic Automotive Parts, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under item 14 (a) (1) and (2) on page 32 present fairly, in all material respects, the financial position of Republic Automotive Parts, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Republic Automotive Parts, Inc. - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
Republic Automotive Parts, Inc. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these financial statements.
Republic Automotive Parts, Inc. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
Republic Automotive Parts, Inc. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
Republic Automotive Parts, Inc. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND NATURE OF BUSINESS:
Republic Automotive Parts, Inc. (the "Company") distributes new automotive aftermarket replacement parts, tools, supplies and accessories through a network of distribution centers and jobber stores. The Company also distributes new replacement parts to repair vehicles damaged in collisions through a network of distribution centers located in the Southeast United States. The Company is a member of the All Pro/Bumper to Bumper distribution group through which it is licensed to use the nationally known "All Pro Auto Parts" merchandising name. This association of operators of auto parts stores ranks as one of the largest in the nation with 85 warehouse distributor members and 1,800 jobber store members throughout the United States. As a member of the group, the Company is able to offer high quality parts at meaningful savings to its customers in the automotive aftermarket repair parts and service segment of the United States economy.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation The accompanying financial statements include the accounts of Republic Automotive Parts, Inc. and all subsidiary companies. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents Highly liquid investments purchased with an original maturity of less than three months are classified as cash equivalents.
Financial Instruments The Company has various financial instruments, including cash, accounts and notes receivable, accounts payable and accrued liabilities and debt. The carrying values of these financial instruments approximate their fair market values.
Concentration of Credit Risk The Company grants credit to certain customers who meet the Company's pre- established credit requirements. The Company's customers are not concentrated in one geographic region nor does any single customer account for a significant amount of sales or accounts receivable. Credit losses are provided for in the Company's consolidated financial statements and consistently have been within management's estimates.
Inventories Inventories, consisting principally of automotive replacement parts, are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for the majority of the Company's inventories. The costs of remaining inventories are determined by average cost methods.
Inventory Rebates The Company receives inventory rebates from a majority of its suppliers under numerous purchasing incentive programs. The volume of rebates received generally increases as annual purchasing volume increases. The Company records the receipt of these rebates as an offset to cost of products sold as the rebates are earned and become estimable.
Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated using the straight line method over the following estimated useful lives:
Land improvements -- 10 to 20 years Buildings and building improvements -- 5 to 30 years Equipment and fixtures -- 3 to 15 years
Leasehold improvements are amortized over the terms of the related leases.
Goodwill and Other Intangibles Goodwill is amortized using the straight-line method principally over 15 years. Other intangibles, comprising principally non-competition agreements, are amortized over their respective terms.
Impairment of Value Periodically, the Company assesses the recoverability of the carrying value of all long-lived assets using a cash flow model. If impairment is indicated, a loss is recognized. At December 31, 1997, no impairment of value was indicated.
Income Taxes The liability method is used in accounting for income taxes, whereby 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 are expected to be in effect when the differences are expected to reverse.
Net Income Per Share In February 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS 128 requires companies with complex capital structures that have publicly held common stock or common stock equivalents to present both basic and diluted earning per share ("EPS") on the face of the income statement. The presentation of basic EPS replaces the presentation of primary EPS previously required by Accounting Principles Board Opinion No. 15 ("APB 15"). Basic EPS is calculated as income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted EPS (previously referred to as fully diluted EPS) is calculated using the "if converted" method for convertible securities and the treasury stock method for options and warrants as prescribed by APB 15. Diluted EPS reflects the dilution from common stock options outstanding of 191,000, 192,000 and 173,000 in 1997, 1996 and 1995, respectively. These shares do not include options which would be antidilutive. All prior years EPS calculations have been restated to comply with SFAS 128.
Management 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications Certain prior year balances have been reclassified to conform with current year presentation.
NOTE 3-SUPPLEMENTAL CASH FLOW INFORMATION:
Cash interest payments during 1997, 1996 and 1995 totalled $2,324,000, $2,301,000 and $1,839,000, respectively. Cash payments for income taxes net of refunds totalled $3,324,000 in 1997, $2,562,000 in 1996 and $2,844,000 in 1995.
The following table summarizes non-cash investing and financing activities related to the Company's acquisitions in 1996 and 1995.
NOTE 4-INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for approximately 79% of inventories. Replacement cost of the inventories exceeded the LIFO carrying amount by approximately $5,331,000 at December 31, 1997 and $4,667,000 at December 31, 1996. The Company also provides a reserve in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists" in the amount of $452,000 at December 31, 1997 and $523,000 at December 31, 1996.
NOTE 5-PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the following:
NOTE 6-BUSINESS COMBINATIONS AND DIVESTITURES:
The Company sold certain assets of its business located in Tacoma, Washington on September 29, 1997. The Company also sold certain assets and liabilities of its businesses located in Charlotte and Raleigh, North Carolina and Columbia, South Carolina on November 3, 1997. The Company received sales proceeds of $9,383,000 in cash and $1,000,000 in a short term 8.5% note receivable (included in accounts receivable at December 31, 1997). A net loss of $378,000 was incurred by the Company on these sales. This loss is recorded under the caption Other Income and Expense in the consolidated statements of income. The Company remains contingently liable for collection of certain receivables sold in these transactions. A reserve for potentially uncollectible amounts is included in the allowance for doubtful accounts.
The Company acquired certain assets of an affiliated group of companies based in Davenport, Iowa on September 30, 1996. The purchase price was $922,000. The Company also acquired certain assets of a distributor of automotive crash parts based in Ft. Oglethorpe, Georgia on November 4, 1996. The purchase price was $572,000. Both acquisitions are subject to post-closing adjustments which are not expected to be material. The acquisitions have been accounted for by the purchase method of accounting. The operating results of these acquired businesses are included in the Consolidated Statements of Income from the acquisition date. The Company also acquired three jobber stores in the Pittsburgh, Pennsylvania metropolitan area and one jobber store in Dixon, Illinois during 1996. Total consideration paid for these four jobber stores was approximately $947,000 for inventories and equipment.
The Company acquired certain assets of Beacon Auto Parts Company ("BAP"), a privately-held distributor of automotive replacement parts and supplies in metropolitan Pittsburgh, Pennsylvania on July 7, 1995. The purchase price was $12,816,000. In addition, the Company assumed $3,305,000 of trade payables and accrued expenses. Of the purchase price, $1,000,000 was paid through the issuance of 69,232 shares of common stock, $2,000,000 by the issuance of a subordinated promissory note, $8,660,000 in cash paid at closing and $1,157,000 to be paid following settlement. Additional contingent purchase price payments of $995,000 were earned by the selling parties over the two and one half years ended December 31, 1997 based on the operations of the acquired business meeting certain targets. The Company also entered into a non-competition undertaking providing for payments aggregating $500,000 over five years. Direct acquisition costs of $179,000 were also incurred. The assets acquired were recorded at their fair values of $9,320,000 for inventory, $1,605,000 for accounts receivable, $1,971,000 for equipment, furniture, fixtures and vehicles, $116,000 for prepaid expenses, deferred tax asset and petty cash, $418,000 for non-competition undertaking and $3,288,000 for goodwill. The acquisition was accounted for under the purchase method with the results of Beacon Auto Parts Company included in the consolidated statements of income from the acquisition date.
The Company also purchased certain assets of PartsNet Incorporated, a privately- held distributor of automotive crash parts based in Austin, Texas with additional facilities in San Antonio and Harlingen, Texas on August 31, 1995. The consideration was given in the form of cash ($2,999,000) and the undertaking of certain liability payments in the amount of $215,000.
The following unaudited pro forma summary of financial information has been prepared as follows: for 1995, as though BAP had been acquired at the beginning of 1995. Pro forma results of operations are not necessarily indicative of the actual results that would have occurred had the purchase been made at the beginning of the year, or of the results which may occur in the future.
Pro forma results for 1997 and 1996 are not required or they have been omitted since they do not differ significantly from reported results.
NOTE 7 - INCOME TAXES:
The provision for income taxes consists of the following:
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate of 34% is as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
NOTE 8 - LONG-TERM DEBT:
Outstanding long-term debt is summarized as follows:
The maturities of long-term debt at December 31, 1997, for the succeeding years and in the aggregate are as follows (in thousands):
The Company maintains a revolving credit agreement with two banks that extends through March 31, 2000. Under this agreement, the Company may borrow up to $50,000,000 at variable rates based upon the prime or Eurodollar. The Company is required to restrict declaration or payment of dividends and redemption or acquisition of capital stock. The Company is also required to maintain various financial ratios relating to cashflow, working capital, tangible net worth and indebtedness. The Company has $5,000,000 in credit available through Bankers' Acceptance agreements with another bank.
NOTE 9 - STOCKHOLDERS' EQUITY:
Stockholders' Rights Plan
The Company issued Junior Participating Cumulative Preferred Stock Purchase Rights to common stockholders in June 1992. Each right entitles the holder to purchase from the Company one one-hundredth share of Junior Participating Cumulative Preferred Stock, $1.00 par value. The rights are not and will not become exercisable unless certain change of control events occur. Authorized are 50,000 shares, none of which have been issued as of December 31, 1997.
Stock Compensation Plans
The Company maintains an incentive stock option plan for certain management employees. The plan allows issuance of non-qualified incentive stock options, restricted stock and/or performance shares to officers, employees and directors of the Company as approved by a committee of the Board of Directors. Shares available for issuance under the plan aggregate 750,000 common shares plus any unused shares reverting to the Company as a result of nonexercise of previously outstanding options. Options are granted at fair market value on the date of grant, and typically vest 20% upon grant and 20% on the four succeeding anniversaries. Such options generally expire five years from the date of grant.
The activity of this stock option plan is summarized below:
The Board of Directors granted a performance share program to the Chairman during September 1989. Under the terms of the program, a maximum of 60,000 common shares, plus an additional number of shares equivalent to 12% per annum, may be issued. The award is to be credited in varying amounts over a ten year period as specified in the program; actual issuance of the shares will not occur until the earlier of September 1999 or occurrence of a terminating event specified by the program (see note 14).
The stockholders also approved a restricted stock award plan for directors during 1989. A total of 42,000 of a maximum allowable 72,000 restricted shares were issued to directors and recorded as additional common shares issued. Compensation expense was recognized over a five year vesting period and the unvested portion of the grant was carried as a reduction of stockholders' equity. Compensation expense associated with this plan is not material. Until shares are vested with the directors, the plan precludes sale or transfer of the securities although the grantees may vote the shares and participate in dividends or other distributions.
The stockholders approved a stock compensation plan for non-employee directors in 1997. Shares available for issuance under this plan aggregate 60,000. The plan allows for issuance of non-qualified stock options and is administered by the board of directors. A total of 30,000 options were granted at $15.88 per common share to non-employee directors in 1997. These options vest over a three year period beginning on the first anniversary of the date of grant. Options expire if not exercised within five years of the date of grant. Options become fully exercisable and vested in the event of an accelerating event as defined in the plan.
Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards in 1997, 1996 and 1995 consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share for 1997, 1996 and 1995 would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions using grants in 1997, 1996 and 1995, respectively: average expected volatility of 38%, 39% and 42% in 1997, 1996 and 1995, respectively; risk free interest rates of approximately 5.71%, 6.10% and 5.49% in 1997, 1996 and 1995, respectively; average expected lives of 5 years; and, no dividend yield for any year.
NOTE 10 - LEASE COMMITMENTS:
The Company has numerous operating leases which relate principally to real estate and generally include renewal options ranging from one to ten years. Rental expense under these leases was $6,257,000 in 1997, $5,551,000 in 1996 and $4,768,000 in 1995.
At December 31, 1997 future minimum rental commitments under non-cancelable operating leases with terms in excess of one year, excluding payments for taxes, insurance and other expenses, were (dollars in thousands):
NOTE 11 - PENSION AND POSTRETIREMENT PLANS:
The Company and its subsidiaries sponsor a defined benefit plan covering substantially all employees. Benefits under this plan generally are based upon the employee's years of service and compensation preceding retirement. The Company's general funding policy is to contribute amounts deductible for federal income taxes.
The following table summarizes the components of periodic pension income, the funded status of the plan and amounts recognized in the Company's financial statements.
The discount rate and the increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.50% and 5%, respectively in 1997, compared to 7.50% and 4.50% in 1996 and 7.50% and 5% in 1995. The expected long-term rate of return on assets was 9.5% in 1997, 1996 and 1995. The average remaining service lives of plan participants used to compute amortization of the projected obligation existing as of December 31, 1997 is 15 years.
The actuarial present value of vested and nonvested accumulated benefits as of January 1, 1997 was $6,121,000 and $812,000, respectively. The assumed average rate of return in determining the actuarial present value of accumulated plan benefits was 8.25%.
The Company has two non-qualified supplemental pension plans covering certain employees, which provide for incremental pension payments, upon retirement, from the Company's funds. These payments take into consideration the employee's total compensation without any of the limitations imposed by income tax regulations. Payments made by the Company under these plans are offset by pension payments received from the Company's defined benefit pension plan. The projected benefit obligation relating to these unfunded plans totaled $1,292,000 and $1,278,000 at December 31, 1997 and 1996, respectively. Pension expense for the plans was $234,000, $245,000 and $226,000 in 1997, 1996 and 1995, respectively.
The Company also sponsors a defined contribution plan covering all full time, non-union employees with at least one year of continuous employment who are 21 years or older. Employee participation in the plan is optional. Company contributions are made monthly and are based upon a percentage of participant contributions. Net expense under this plan was $408,000 in 1997, $355,000 in 1996 and $318,000 in 1995.
The Company provides a maximum defined benefit of $75 per month to retirees and eligible spouses who took normal retirement from the Company prior to July 1, 1992 to enable them to purchase a Medicare supplement health care plan. The Company also provides these retirees a $2,500 life insurance death benefit. Active employees who meet the eligibility requirements for early retirement from the Company are able to purchase from the Company health care benefits at the Company's monthly COBRA premium rate. Upon becoming eligible for Medicare, these early retirees are no longer eligible for coverage under the Company's health care plan. These benefits are unfunded.
The following table summarizes the components of postretirement benefit cost and accumulated postretirement benefit obligation ("APBO") recognized in the Company's financial statements at December 31:
The discount rate used in determining the APBO was 7.50% in 1997, 1996 and 1995. The assumed health care cost trend rate used in measuring the APBO was 9.0% for 1997, 10% for 1996 and 11% in 1995, and over the next two years, ultimately declining to a rate of 7% in 1999 and later. If the health care cost trend rate assumptions were increased by 1%, the APBO as of December 31, 1997 would be increased 4.39%. The effect of this change on the sum of the service cost and interest cost components of net postretirement benefit cost for the year ended December 31, 1997 would be an increase of 7.92%.
NOTE 12 - LITIGATION SETTLEMENT:
In December 1995, the Company settled an adverse litigation verdict affirmed by the Michigan State Appellate Court in June 1995 by making a payment of $2,150,000 ($1,307,200 or $0.37 per diluted share after tax). The Company had previously recognized a provision of $2,600,000 for this litigation action in June 1995.
NOTE 13 - CONTINGENT LIABILITIES:
The Company has been named as defendant in legal proceedings incidental to the ordinary conduct of its business operations. Management is vigorously defending these proceedings and believes none will have a significant impact on the Company's financial position or results of operations.
The Company was contingently liable as guarantor of various customers' installment notes payable to banks, secured by their inventories and other assets, amounting to approximately $676,000 at December 31, 1997 and $739,000 at December 31, 1996.
NOTE 14 - SUBSEQUENT EVENTS:
On February 18, 1998, the Company jointly announced with Keystone Automotive Industries, Inc. ("Keystone") that they had entered into a definitive merger agreement pursuant to which Keystone would acquire the Company. Under the terms of the agreement, Keystone would issue 0.8 of a share of its common stock in exchange for each share of the Company's common stock.
The transaction, which has been approved unanimously by the board of directors of each company, is intended to qualify as a tax-free reorganization. The merger agreement is subject to certain regulatory approvals as well as approval by the shareholders of each company at special meetings expected to be held within the second quarter of 1998. Closing of the merger is expected during the second quarter of 1998.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There are no Company Disclosures required by Item 304 of Regulation S-K, 17 C.F.R. Section 229.304.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
(a) Directors of Registrant
(b) Executive Officers of the Registrant
Each of the executive officers listed above has served the Company in that capacity for the past five years except for Messrs. Goetsch, Rutkowski and Dainora who joined the Company in 1986, 1992 and 1985, respectively, and were elected executive officers of the Company in 1995. Mr. Rutkowski was employed by Hayden, Inc., a wholly-owned subsidiary of The Equion Corporation, a supplier of automotive replacement parts to the Company, as Vice President and General Manager from 1988 to 1992. Mr. Rutkowski was previously employed by one of the Company's subsidiaries from January 1987 until July 1988 at which time the Company sold the business and related assets of the subsidiary, which employed Mr. Rutkowski, to Hayden, Inc. Mr. Goetsch has been responsible for the Company's management information systems since 1989. Mr. Dainora is the Controller and has been responsible for financial and tax reporting and compliance since 1989.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or to be paid by the Company and its subsidiaries for the fiscal years ended December 31, 1997, 1996 and 1995 to: (a) the Chief Executive Officer ("CEO") and (b) the four most highly compensated executive officers other than the CEO:
SUMMARY COMPENSATION TABLE
(1) Bonuses awarded for fiscal year shown, but paid in subsequent year.
(2) On September 21, 1989, the Company granted Mr. Edgar R. Berner a performance share program under the Stock Compensation Plan. The program provides an award cycle commencing September 21, 1989, and continuing until September 21, 1999. The program target for the program is to compensate and retain Mr. Berner as Chairman of the Company. If Mr. Berner is employed as Chairman of the Company on September 21, 1999, the program target will have been 100% met. Mr. Berner will have no rights as a stockholder with respect to any performance shares. All performance shares shall be forfeited by Mr. Berner in the event that he terminates his employment with the Company prior to the occurrence of a "Terminating Event." A "Terminating Event" is defined as one of the following occurrences: (i) the program target is considered to have been 100% met as provided above; (ii) Mr. Berner is terminated by the Company for any reason as Chairman; (iii) Mr. Berner dies while he is an employee of the Company; or (iv) there is a change of control of the Company (as defined in the Stock Compensation Plan) and Mr. Berner terminates his employment within three years after such change of control. If the Terminating Event occurs on or after September 21, 1990, in order to create an ongoing incentive for Mr. Berner to remain with the Company and to perform the important role he has in the past, and because the award under the performance share program would not be made until such later date and is therefore at risk for an extended period of time, Mr. Berner shall receive an award under the Plan of 65,760 shares of Common Stock plus an additional amount of shares equivalent to 12% per annum of such number of shares, as compounded, calculated with a starting date of September 21, 1990 and prorated over the number of days which have elapsed subsequent to such date and prior to the date the Terminating Event occurs. Effective August 2, 1993, Mr. Berner's interest in the performance share program was transferred to an irrevocable trust, of which he is neither a trustee nor a beneficiary, for the benefit of his descendants. Effective April 3, 1997, Mr. Berner's performance share program was amended to include a provision providing for earlier payment if there is a change in control of the Company prior to September 21, 1999. The amount so payable would be equal to the benefits forfeited under the performance share program granted on September 21, 1989 as a result of a change in control occurring prior to September 21, 1999. Of the amounts reported as All Other Compensation for Mr. Berner, $42,349 for 1997, $43,659 for 1996 and $29,743 for 1995 is calculated by dividing the difference between 12% and 120% of the long term applicable federal rate at the inception of the plan by 12% and multiplying the quotient by the December value of the total number of shares allocated in the year. The balance of $3,288 for 1997, $3,288 for 1996 and $3,288 for 1995 represents Company contributions under a defined contribution plan under Section 401(k) of the Internal Revenue Code equal to that of Mr. Berner's contribution not to exceed 3% of his annual compensation.
(3) Represents Company contributions under a defined contribution plan under Section 401(k) of the Internal Revenue Code equal to 50% of each participant's contribution not to exceed 3% of each participant's annual compensation.
(4) Mr. Goetsch and Mr. Rutkowski were appointed executive officers of the Company effective January 1, 1995.
(5) Includes car allowances of $13,916, $13,557 and $13,279 for 1997, 1996 and 1995, respectively.
OPTION GRANTS IN LAST FISCAL YEAR
(1) Options vest 20% upon grant and 20% on the four succeeding anniversaries of the date of grant.
(2) The amounts shown in these two columns represent the potential realizable values using the options granted and the exercise price. The assumed rates of return are set by the SEC proxy statement disclosure rules and are not intended to forecast the future appreciation of the Company's Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
(1) Calculated based on the share price of the Common Stock on December 31, 1997 of $14.63 less the option exercise price. An option is in-the-money if the market value of the Common Stock subject to the option exceeds the exercise price.
PENSION PLANS
The following table shows estimated annual pension benefits payable to a participant at normal retirement age under the Company's qualified defined benefit plan and non-qualified supplemental executive retirement plan based on average compensation that is covered under the plans and years of service with the Company and its subsidiaries.
PENSION PLAN TABLE YEARS OF SERVICE
The Company and its subsidiaries have a pension plan for substantially all of their employees. Contributions by the Company are made on an aggregate basis and no amounts are identified as to any individuals. The amount of benefit payable under the plan is dependent upon average compensation, age at retirement, length of service and various other
factors. The Company's officers, including those officers who also serve as directors, participate in the plan on the same basis as other employees. The above table sets forth the estimated annual straight life annuity benefits under the plan following retirement at age 65 and indicated average compensation and years of service levels. Average compensation means the average of the participant's salary and bonuses during the five highest paid consecutive years of employment. Covered compensation for 1997 for Messrs. Berner, Thompson, Hauk, Rutkowski and Goetsch was: $109,930, $160,000, $160,000, $160,000 and $142,350, respectively. Covered compensation and benefits under the plan are limited by applicable federal law. Actual benefits will not be offset by applicable Social Security or other benefits. All named executive officers have twelve years of credited service except Mr. Goetsch and Mr. Rutkowski with eleven years of credited service.
On January 1, 1995, the Company adopted a Supplemental Executive Retirement Plan ("SERP") for key executive employees. Messrs. Thompson and Hauk have been selected by the Company to be participants in the SERP. The plan provides a supplemental pension benefit calculated based on average compensation as determined under the Company's pension plan without regard to the limitations under Sections 401(a)(17) and 415 of the Internal Revenue Code as defined in the Company's pension plan which is described above less the actual benefit payable under the Company's pension plan subject to the above limitations. All payments will be paid in cash from the Company's general funds at the time the payments become due. For the fiscal year 1997, $143,502 was accrued under the SERP.
On September 21, 1989, the Company granted Mr. Edgar R. Berner a supplemental retirement benefit. This benefit provides a 100% joint and survivor annuity commencing at age 60 for Mr. Berner and his surviving spouse commencing at $35,000 per year, payable monthly, which sum will be increased quarterly by $1,250 for each additional quarter he is employed by the Company. The starting date for measuring each such year is September 30, 1989. In no event will the annuity exceed $75,000 per year. Actual benefits will be offset by applicable benefits provided from the Company's pension plan described in the preceding paragraph. In the event of Mr. Berner's death, his spouse will be paid the annuity as if he had survived until age 60. In the event of a change of control, three additional years of service will be credited and the pension will be paid immediately in a cash lump sum reduced actuarially and subject to offset by the Company's pension plan. If Mr. Berner should terminate his employment before age 60, he will retain a vested benefit payable at age 60 determined by his length of service. All payments will be paid in cash from the Company's general funds at the time payments become due. For the fiscal year 1997, $90,016 was accrued under this plan.
The Company and each of Messrs. Thompson and Hauk have entered into agreements dated October 26, 1988, which provide that the Company, in order to encourage its management to remain with the Company and to continue to devote full attention to the Company's business in the event an effort is made to obtain control of the Company through a tender offer or otherwise, will continue paying such executives their then current annual base salary for a period of two years after termination in the event that a change of control takes place and the executive is involuntarily terminated. The Company and each of Messrs. Rutkowski and Goetsch have entered into agreements dated December 11, 1997, which provide that the Company, in order to encourage its management to remain with the Company and to continue to devote full attention to the Company's business in the event an effort is made to obtain control of the Company through a tender offer or otherwise, will continue paying such executives their then current annual base salary for a period of one year after termination in the event that a change of control takes place and the executive is involuntarily terminated. There are no employment contracts between the Company and any executive officer.
The Company provides a medical reimbursement plan for all executive officers which covers eligible expenses which are not payable under the basic group insurance plan.
The Board of Directors has four standing committees, the Audit Committee, the Compensation and Stock Option Committee, the Executive Committee and the Retirement Committee. The Board of Directors does not have a nominating committee. The functions normally performed by a nominating committee are performed by the Board of Directors.
The Board of Directors' Executive Committee (Messrs. Edgar R. Berner, Richard O. Berner and Thompson) met four times in 1997. Primarily, it exercises the power of the Board when the latter is in recess. The Board's Compensation and Stock Option Committee (Messrs. Ballhaus, Stern and Richard O. Berner) met once in 1997; its primary function is to review officers' and directors' compensation and to grant awards under the Company's Stock Compensation Plan.
The Board's Audit Committee (Messrs. Ballhaus, Fedoruk and Parker) met two times in 1997; its primary function is to review the work of the Company's internal auditors and independent accountants. The Board's Retirement Committee (Messrs. Richard O. Berner, Fedoruk and Grace) met once in 1997; its primary function is to review the Company's retirement and Section 401(k) savings plans.
The Board of Directors met four times in 1997. During 1997, all directors attended at least 75% of the aggregate number of meetings of (1) the Board of Directors held during the period for which they were directors and (2) standing committees on which they served during the period except Mr. Grace who attended 60% of the aggregate number of scheduled meetings.
Directors (other than the Chairman of the Board, the President and Executive Vice President) receive monthly retainers of $750. Additionally, directors (other than the Chairman of the Board, the President and Executive Vice President) receive $750 for attendance at each meeting of the Board of Directors or meeting of a Committee of the Board. The Executive Committee members (other than the Chairman of the Board and the President) receive an additional monthly retainer of $300. Each nonemployee director, except for Messrs. Ballhaus, Parker and Stern, is included in a group life insurance policy in the amount of $50,000 for which the Company paid an average annual premium of $144 each in 1997. In addition, directors may be reimbursed for their expenses for attendance at meetings of the Board or committees thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Board's Compensation and Stock Option Committee are Messrs. Ballhaus, Stern and Richard O. Berner. Neither Messrs. Ballhaus nor Stern is or was, during 1997 or previously, an officer or employee of the Company or any of its subsidiaries. During 1997, Richard O. Berner served as Assistant Secretary of the Company, but was not an employee of the Company.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation and Stock Option Committee (the "Committee") of the Board of Directors is responsible for the administration of the executive compensation program of the Company. The Committee is composed of three non-employee Directors who are not eligible to participate in the Company's employee compensation plans.
In 1997, the Company's executive compensation program consisted of a mixture of base salary, cash awards under the Executive Bonus Plan (the "Bonus Plan") and stock option awards under the Company's Stock Compensation Plan. The executive compensation program is reviewed by the Committee, generally annually, primarily on the basis of individual performance and contributions to the Company. The recommendations of the Committee as to base salary adjustments, the parameters of the Bonus Plan and awards under the Stock Compensation Plan are acted upon by the Board.
In the case of base salary adjustments, the Committee subjectively considers the performance and contributions of each executive officer as measured against formal and informal goals and objectives with respect to the total Company performance, as appropriate for the respective responsibilities of each officer. From a quantitative perspective, specific measures of performance considered in dealing with compensation in the aggregate include net earnings, cash flow and return on investment. From a qualitative point of view, objectives have included the quality of long-term planning and progress in organizational and management development.
At the same time, the Committee has taken into account the relationship of the compensation of the Company's executive officers to the compensation of individuals occupying comparable positions in other retail and wholesale organizations of similar size to the Company, with a view to ensuring that executives are fairly compensated and thus appropriately motivated and are retained in the employment of the Company. Base pay levels for the executive officers are generally in the middle of a competitive range of salaries.
In the case of the Bonus Plan, the amount available each year for awards is based solely on a formula tied to the increase in earnings of the Company over the prior year, before income taxes and after deducting such awards. The Committee establishes a target bonus level for each participant in the Bonus Plan which represents a specified percentage of the participant's base salary which will be awarded as a bonus if the Company's earnings exceed a target level set by the Committee for the year. Certain adjustments beyond the control of the executive officers are made to the earnings. Additionally, the awards are increased or decreased based upon a formula tied to the change in return on investment from the prior year. No cash awards under the Bonus Plan were earned in 1997 by any of the executive officers.
All executive officers and key management employees participate in the Stock Compensation Plan under which options granted typically vest 20% upon grant and 20% on the four succeeding anniversaries of the date of grant. Such options generally expire five years from the date of grant. The Committee believe stock option grants are an effective way to align the interests of the Company's executive and key management employees with its shareholders. During 1997, the Committee awarded stock option grants in the aggregate of 47,500 shares to certain executive officers and key management employees. The number of options awarded to each individual was based on the Committee's assessment of the
contributions of each individual toward accomplishment of Company objectives. The size of the previous option grants are considered in determining current awards.
In making a salary increase of approximately 7.6% effective January, 1997 to Mr. Keith M. Thompson, President and CEO of the Company, the Committee subjectively evaluated specific measures of performance of the Company, including quantitative factors such as percent increase in net earnings, return on stockholders' equity and return on assets and qualitative factors such as his progress in developing acquisitions and strategic alternatives for the Company. For 1997, Mr. Thompson did not receive an award under the Company's Bonus Plan but did receive an award under the Stock Compensation Plan.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") imposes a limit of $1 million, with certain exceptions, on the amount that a publicly held corporation may deduct in any year for the compensation paid or accrued with respect to each of its five most highly compensated officers. None of the Company's executive officers currently receives compensation exceeding the limits imposed by the Act. While the Committee cannot predict with certainty how the Company's executive compensation might be affected in the future by the Act or applicable tax regulations issued thereunder, the Committee intends to try to preserve the tax deductibility of all executive compensation while maintaining the Company's executive compensation plan as described in this report.
Compensation and Stock Option Committee
William F. Ballhaus, Chairman Richard O. Berner Douglas R. Stern
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company knows of no person who, as of March 2, 1998, owned beneficially more than five percent (5%) of the Company's outstanding voting securities, except as indicated in the table below:
(1) These securities are owned by various individuals and institutional investors including T. Rowe Price Small Cap Value Fund, Inc. (which owns 300,500 shares, representing 8.8% of the shares outstanding) as to which T. Rowe Price Associates, Inc. ("Price Associates") serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be the beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities.
(2) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment adviser, is deemed to have beneficial ownership of 206,200 shares of common stock as of December 31, 1997, all of which shares are held in portfolios of DFA Investment Dimensions Group, Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, all of which Dimension Fund Advisors Inc. serves as investment manager. Dimensional disclaims beneficial ownership of all such shares.
* Less than one percent
(1) Directors Edgar R. Berner and Richard O. Berner are brothers, Director Nicholas A. Fedoruk's wife is their sister as is the wife of Director Dr. Leroy M. Parker. Edgar R. Berner is the controlling shareholder of the general partner of limited partnerships through which he is deemed to be the beneficial owner of 24,120 shares and the beneficiary of a trust which owns 168 shares. Richard O. Berner is the controlling shareholder of the general partner of a limited partnership through which he is deemed to be the beneficial owner of 47,614 shares. Mr. Fedoruk's wife is the controlling shareholder of the general partner of limited partnerships through which she is deemed to be the beneficial owner of 30,131 shares. She is also the owner of 12,895 shares directly as to which Mr. Fedoruk disclaims beneficial ownership of all shares beneficially owned by his wife. Dr. Parker's wife is the controlling shareholder of the general partner of limited partnerships through which she is deemed to be the beneficial owner of 19,513 shares. Dr. Parker's wife also owns 29,413 shares directly. Dr. Parker disclaims beneficial ownership of all shares beneficially owned by his wife.
(2) Includes 43,000 shares issuable upon the exercise of stock options which are either presently exercisable or which may be exercised within sixty days of March 2, 1998 and 35,803 shares owned by Mr. Hauk's wife as to which Mr. Hauk disclaims beneficial ownership.
(3) Includes 27,500 shares issuable upon the exercise of stock options which are either presently exercisable or which may be exercised within sixty days of March 2, 1998.
(4) Includes 37,500 shares issuable upon the exercise of stock options which are either presently exercisable or which may be exercised within sixty days of March 2, 1998.
(5) Includes 47,600 shares issuable upon the exercise of stock options which are either presently exercisable or which may be exercised within sixty days of March 2, 1998 and 6,000 shares owned by Mr. Thompson's wife as to which Mr. Thompson disclaims beneficial ownership.
(6) Includes 173,000 shares issuable upon the exercise of stock options which are either presently exercisable or which may be exercised within sixty days of March 2, 1998.
The share totals listed in the table above include the shares for which directors or their spouses hold voting or dispositive power regardless of whether beneficial ownership is disclaimed.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return of a $100 investment on December 31, 1992 in the Company's Common Stock against The NASDAQ Stock Market and the Standard & Poor's Auto Parts & Equipment Stock Price Index, assuming reinvestment of all dividends.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers and the beneficial owners of more than 10 percent of the Company's Common Stock to file reports of ownership and changes in ownership of their equity securities of the Company. Directors and executive officers of the Company and such beneficial owners file such reports with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Directors and executive officers and such beneficial owners are required to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of Forms 3, 4 and 5 and amendments thereto received by the Company, and written representations from certain directors and executive officers and such beneficial owners of the Company that no Forms 5 were required for such persons, the Company believes that all Section 16(a) filing requirements applicable to its directors and executive officers and such beneficial owners were complied with during 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Berner & Berner, P.C., a legal firm in New York, New York of which Richard O. Berner, a director of the Company, is a member, provides legal services to the Company from time to time in return for fees and certain other benefits. The Company utilized the services of Berner & Berner, P.C. during 1997. It is expected that Berner & Berner, P.C. will continue to provide legal services to the Company during 1998 although the amount of such services is unknown at this time.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
* Document not filed because substantially identical to filed document identified as Exhibit 10.4. ** Document not filed because substantially identical to filed document identified as Exhibit 10.6. *** Document not filed because substantially identical to filed document identified as Exhibit 10.13.
(b) No reports on Form 8-K have been filed during the last quarter of the period covered by this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REPUBLIC AUTOMOTIVE PARTS, INC. Registrant
By: /S/KEITH M. THOMPSON March 4, 1998 ------------------------------------------- Keith M. Thompson Date President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Republic Automotive Parts, Inc. - -------------------------------------------------------------------------------- SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(1) Write-offs in excess of recoveries.
LIST OF EXHIBITS
The following Exhibits are filed as a part of this Report: