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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
(X) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from April 1, 1996 to
December 31, 1996
Commission File Number 0-23222
FINISHMASTER, INC.
(Exact Name of Registrant as Specified in its Charter)
Indiana 38-2252096
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4259 40th Street, SE, Kentwood, Michigan 49512
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (616) 949-7604
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act
Common stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months and (2) has
been subject to the filing requirements for at least the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1997 $12,111,000.
At December 31, 1996, there were outstanding 6,000,140 shares of Registrant's
common stock.
Documents Incorporated By Reference
Portions of the annual proxy statement for the nine months ended December 31,
1996 are incorporated by reference into Part III.
Page 1 of 52
FINISHMASTER, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
1 Business...........................................................3
2 Properties.........................................................7
3 Legal Proceedings..................................................7
4 Submission of Matters to a Vote of Security Holders................7
5 Market for Registrant's Common Equity
and Related Shareholder Matters....................................8
6 Selected Financial Data............................................9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................10
8 Financial Statements and Supplemental Data........................16
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................16
10 Directors and Executive Officers of the Registrant................16
11 Executive Compensation............................................16
12 Security Ownership of Certain Beneficial Owners and Management....16
13 Certain Relationships and Related Transactions....................16
14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...........................................16
15 Signatures........................................................18
16 List of Financial Statements and Financial Statement Schedules....19
PART I
ITEM 1 - BUSINESS
General
FinishMaster, Inc. ("FinishMaster") began operation as a single outlet in Grand
Rapids, Michigan in 1968 and was acquired by Maxco, Inc. in 1973. The current
FinishMaster corporation was incorporated in 1979 in Michigan as a wholly owned
subsidiary of Maxco. On February 23, 1994 the Company made an initial public
offering of 1,700,000 shares of its common stock to provide funds to accelerate
its growth and take advantage of its industry's consolidation. This reduced
Maxco's ownership of the Company to 67.4%. A change in control of the Company
occurred on July 9, 1996. On that date, LDI AutoPaints, Inc. an Indiana
corporation, and Maxco consummated the purchase and sale of all 4,045,000 shares
of common stock of the Company which were owned by Maxco. Effective December 31,
1996, LDI, Ltd. transferred to AutoPaints 100 shares of the Company which it had
purchased on the open market in August, 1995. As a result of these transactions,
LDI AutoPaints' ownership of FinishMaster stock was 4,045,100 shares or 67.4% at
December 31, 1996. On December 20, 1996, FinishMaster changed its corporate
domicile from Michigan to Indiana by merging with and into FinishMaster, Inc.,
an Indiana corporation originally organized as a wholly owned subsidiary of the
Michigan corporation.
The Company is a leading distributor of automotive paints, coatings and
paint-related accessories to the automotive collision repair industry operating
as a single business segment. As of December 31, 1996 the Company operated 54
sales outlets and two distribution centers in twelve states. The Company has
approximately 12,000 customers that it provides a comprehensive selection of
brand name products supplied by BASF, DuPont, 3M and PPG, in addition to its own
FinishMaster PrivateBrand refinishing accessory products.
Industry Overview
FinishMaster's principal market for automotive finishing is divided between
independent automotive body repair shops and automobile dealerships. Automotive
finishing products consist of paints, coatings and related supplies used in
automobile production and after-market refinishing, including topcoats, primers,
clear coats, abrasives, masking materials and body fillers. A relatively large
number of small distributors serving narrow geographic markets distribute these
products.
The Company believes that regulatory pressures, technological advancements in
paints and coatings, and general economic factors are creating an attractive
opportunity for consolidation in the distribution of refinishing products.
Historically, the application of paints and coatings has released potentially
harmful emissions due to the products' high solvent content. In an effort to
reduce these emissions, environmental regulations have been proposed or
implemented at federal, state and local levels. Paint manufacturers have
responded to these regulations by introducing technologically advanced lower
volatile organic compounds ("VOC") and water-borne paints which require more
advanced application techniques. As a result, automotive refinishing has become
a complex process, often requiring spray booths and air filtration systems to
reduce unwanted dust, air currents and harmful emissions. This complexity places
new challenges on automotive refinishers who may not have the training or
expertise necessary to apply the new paints and coatings. The Company believes
it has the technical expertise and resources to provide needed training and
consulting services to its customers.
The Company benefits from MIS capabilities, standardized operating procedures
and volume purchasing. Through volume purchasing, the Company takes advantage of
periodic supplier incentive programs which provide additional purchase discounts
and extend the due dates of purchases beyond normal terms with large volume
purchases. The Company believes the distribution segment of the refinishing
business is consolidating as a result of the above factors and that FinishMaster
is one of the leading consolidators.
Business Strategy
The Company's goal is to be the dominant distributor of automotive paints,
coatings and related products to the after-market in its existing regions, while
pursuing additional growth opportunities by entering new markets through
acquisition. The following are key elements of the Company's business strategy:
Comprehensive Product Selection. The breadth and depth of the Company's
selection of approximately 9,000 SKUs enables it to fulfill virtually all of its
customers' refinishing needs. The Company carries the most frequently used
products in the refinishing industry today, including the three leading brands
of automotive paints and coatings, and the products manufactured by a leading
supplier of related accessories.
Value-Added Services. The Company offers a wide array of customer services
including technical training and support, management seminars, trade shows,
productivity and profitability consulting, and PC-based color matching. In the
past, automotive body repair shops required only a spray gun and a compressor in
order to apply high solvent-based paints. As a result of increasing
environmental regulation, manufacturers have introduced technologically
advanced, lower VOC paints. These products require significantly more
sophisticated application techniques and equipment. The Company provides
training services to its customers addressing the necessary techniques for
application of these products. The Company continuously seeks to provide
additional services that add value to its products and improve its customer
relations.
Private Labeling. The Company sells and markets its own line of FinishMaster
PrivateBrand products. These products include some of the most frequently used
refinishing accessories such as masking materials, body fillers, thinners,
reducers and cleaners. The Company believes this product line enhances its name
recognition.
Efficient Operations. The Company has established central warehouses and a
streamlined system of distribution to its sales outlets. The Company believes
this regional hub approach allows it to effectively serve all major markets
within its regions. This approach allows the Company to leverage the operations
of its central distribution centers to achieve operating efficiencies. In
addition, the Company maintains a high degree of operating efficiency in its
sales outlets by employing consistent interior layout, computer systems,
procedures and inventory management.
Expansion
The Company's annual revenues have increased rapidly from approximately $32
million in fiscal 1991 to approximately $96 million for the nine months ended
December 31, 1996 due to both acquisitions and increases in same outlet sales.
Since 1991, the Company has acquired 31 refinishing distributors in Michigan,
Illinois, Wisconsin, Indiana, Ohio, Pennsylvania, Delaware, Maryland, Virginia,
New Jersey, Oklahoma, and Texas. The Company has also expanded into a limited
number of markets by opening new outlets, and may utilize this method of
expansion in the future. Internal growth has resulted from the addition of new
customers and increased sales to existing customers.
In considering potential acquisitions, the Company seeks opportunities to
increase sales while improving operating efficiencies and profitability of the
outlets to be acquired. These efficiencies are achieved by reducing outlet
inventory levels, streamlining outlet operations and centralizing administrative
functions such as accounts payable, payroll, credit management and accounting.
To further increase efficiencies, the Company has consolidated the operations of
certain outlets it has acquired.
Increasing Sales of Existing Outlets. The Company's business strategy has
enabled it to obtain new customers as well as expand sales to current customers
at existing individual outlets.
Acquisitions Within the Great Lakes Region. The Company's expansion strategy is
to continue to be a leader in consolidating the distribution of automotive
refinishing products in the Great Lakes Region. The Company believes there are
attractive acquisition opportunities which will enable it to continue to
consolidate its leading position in the Great Lakes Region, attract new
customers, improve operating margins, and increase service levels to existing
customers. The Company continually evaluates potential acquisitions.
New Regional Markets. A significant element of FinishMaster's expansion strategy
is to pursue growth opportunities by entering new markets. In the twelve months
ended March 31, 1995 a new Southwest Region was established with the acquisition
of seven outlets in the Dallas/Fort Worth area of Texas with annual revenues of
approximately $11 million. In the twelve months ended March 31, 1996
FinishMaster supplemented this new region with acquisitions in Lubbock, Houston,
Midland, and Odessa, Texas and Tulsa, Oklahoma. These acquisitions in the
Southwest Region will bring annual revenues to approximately $26 million for the
twelve months ended December 31, 1997 with 13 outlets operating in this region
after consolidations. FinishMaster also established an East Coast Region in the
year ended March 31, 1996. This East Coast Region was established by acquiring 5
distributors operating 15 outlets with annual revenues of approximately $18
million in the year ended March 31, 1996 and another distributor with annual
revenues of approximately $8 million in the nine months ended December 31, 1996.
The Company currently operates 17 outlets after consolidations in New Jersey,
Pennsylvania, Delaware, Maryland and Virginia with annual revenues of
approximately $27 million for the twelve months ended December 31, 1997.
Products
The Company offers its customers a comprehensive selection of brand names and
its own FinishMaster PrivateBrand products. The product line consists of
approximately 9,000 SKUs, including the three leading brands of automotive
paints and coatings, and a leading brand of related accessories. FinishMaster
PrivateBrand products include some of the most frequently used refinishing
accessories such as masking materials, body fillers, thinners, reducers and
cleaners.
The following table illustrates the approximate number of SKUs, suppliers and
selected brand names in each of the Company's major product categories. The
Company may change from time to time the selection and mix of its products.
Approximate
Number of Approximate Selected
Manufacturers Number of Vendors and
Product Category and Suppliers SKUs Brand Names
- ----------------------- ----------------- ------------------- ----------------------
Paints and Coatings 3 3,400 BASF
DuPont
PPG
Paint-related Accessories 3 2,700 3M
Dynatron
US Chemical
Private Label 25 100 FinishMaster
PrivateBrand
Historically, products supplied by BASF, DuPont, and PPG account for
approximately 70% and 3M approximately 15% of revenues. The Company continuously
seeks opportunities with new and existing vendors to supply the highest quality
products.
Sales, Services and Customers
The Company employs a direct sales force consisting of sales representatives,
regional managers, equipment specialists, technicians and general managers. The
Company assigns its sales personnel to specific customer accounts in an effort
to build long-term relationships. Sales representatives make frequent visits to
customer sites in order to review customer requirements and to offer general,
technical and product support. The Company's sales personnel are generally
compensated through a combination of sales commissions and base salaries. The
Company emphasizes continuing education and training of its sales force in order
to provide a high degree of support for its customers. The Company's customers
primarily consist of independent automotive body repair shops and automobile
dealerships. The Company does not maintain long-term contracts with its
customers and sales are made on a per order basis.
The Company offers comprehensive value-added services designed to assist
customers in operating their businesses more effectively. These services
include:
Rapid Delivery. The Company can generally deliver products within two hours from
the time the Company receives an order. Products are delivered to customers
using the Company's delivery fleet of approximately 300 trucks.
Technical Support. The Company's technical support personnel demonstrate and
recommend products. In addition, they assist customers with problems related to
their particular applications. Equipment specialists provide expert information
to customers regarding their heavy equipment requirements, such as spray booths
and frame straightening equipment which are sold by the Company.
Product Training. As a result of increasing regulations, manufacturers have
introduced technologically advanced, lower VOC paints, which require
significantly more sophisticated application techniques. The Company provides
training services to its customers in order to teach them the techniques
required to work with these products. Training sessions are typically conducted
jointly by the Company and by one or more of its major suppliers at the
customer's location or at an off-site location.
Management Seminars. Management seminars are conducted at convenient locations
to inform customers about regulations, compliance, and techniques to improve
productivity and industry trends.
Trade Shows. The Company sponsors trade shows in which its suppliers display and
demonstrate products and the latest technical innovations to its customers at
one convenient location. Trade shows also provide opportunities for customers to
make large volume purchases at special prices.
Color Matching. The growing number of paint colors is a challenge for the
refinishing industry. DuPont, for example, has more than 120,000 mix formulas.
With its sophisticated PC-based color matching equipment and specialists, the
Company provides color matching services to its customers.
Operations
Warehouse. The Company operates a 38,500 square foot distribution center in
Kentwood and a 10,000 square foot distribution center in Arlington, Texas to
service its product requirements. Corporate offices occupy 8,000 square feet of
the facility in Kentwood, with the remainder used for the storage of paint,
accessories and equipment inventories. Products are delivered from the Kentwood,
Michigan distribution center to the outlets serviced at least twice per week by
one of the Company's semi-trucks. The Kentwood distribution center currently
operates on two shifts. Products are delivered from the Arlington distribution
center via common carriers. A decision has been made to close the Texas
distribution center. The Company expects to cease all operations of the Texas
distribution center before April 1, 1997.
Sales Outlets. As of December 31, 1996, the Company operated 54 sales outlets
servicing customers in twelve states with a delivery fleet of approximately 300
vehicles. These vehicles are easily identified by their standard colors and
prominent display of the Company's logo. Sales outlets are strategically located
in order to provide prompt service to the Company's customers. Each sales outlet
maintains a comprehensive selection of competitively priced products tailored to
the specific market needs of its customers. While supplier commitments in a
given market may prevent some outlets from carrying all of the Company's product
lines, each outlet is authorized to carry the majority of the products including
at least two major paint brands. Sales outlets electronically order their
inventory requirements on a regular basis from the Company's distribution
center. In order to convey a consistent, professional image to its customers,
all of the Company's sales outlet employees wear FinishMaster apparel. These
employees are also provided with ongoing customer support and technical
training.
Management Information Systems. Each of the Company's sales outlets uses a
stand-alone computer for inventory control, order processing and invoicing. The
Company's main computer, an IBM AS/400, is used to collect data required for
receivables and inventory management, operations analysis, as well as general
finance, warehouse and administrative functions. The Company believes that its
current systems are adequate and intends to continuously enhance its systems to
meet future requirements. The Company's systems are currently year 2000
compliant.
Suppliers The Company relies on four leading suppliers for the majority of its
product requirements. BASF, DuPont and PPG supply virtually all of the Company's
paint products, while 3M is the Company's largest supplier of paint-related
accessories. The Company believes that BASF, DuPont and PPG are market leaders,
accounting for a majority of total domestic automotive paint sales. The Company
enters into written agreements with most of its major suppliers for each sales
outlet. These agreements are nonexclusive and set forth the suppliers'
warranties, procedures for resolving disputes and provisions which generally
allow for annual returns of obsolete inventory to the supplier in return for
credit or new inventory. Prices and terms are established by the suppliers'
invoices and published price lists, and may be changed by the supplier without
notice. In addition, the agreements require the Company to maintain adequate
inventories at a regularly established place of business, to train and manage
its sales staff, and to use its best efforts to promote the products. These
agreements typically contain reciprocal clauses allowing cancellation on written
notice ranging from 30 to 90 days.
Competition
The distribution segment of the automotive refinishing industry is highly
fragmented and competitive, with many independent distributors competing
primarily on the basis of technical assistance and expertise, price, speed of
delivery and breadth of product offering. The Company principally competes with
these independent distributors. In addition, the Company faces competition from
certain paint manufacturers who operate distribution outlets. For example,
Sherwin-Williams distributes its own automotive paints through its outlets. In
addition, BASF, one of the Company's principal suppliers, distributes through
its own outlets. While the Company does not believe that current direct
distribution efforts by automotive paint manufacturers have significantly
impacted its sales, there can be no assurance that the Company will not
encounter increased competition in the future. The Company may also compete with
its suppliers in selling to certain large volume end users such as small
manufacturers and large fleet operators. Additional competition may occur
between the Company and other automotive refinishing distributors that are also
pursuing growth through acquisitions.
Employees
As of December 31, 1996, the Company employed approximately 650 persons on a
full and part-time basis. None of the employees are covered by a collective
bargaining agreement and the Company considers its relations with its employees
to be good.
Government Regulation
The Company is subject to various federal, state and local laws and regulations.
Pursuant to the regulations of the United States Department of Transportation
and certain state transportation departments, a license is required to transport
the Company's products and annual permits are required due to classification of
certain of the Company's products as "hazardous." Various state and federal
regulatory agencies, such as the Occupational Safety and Health Administration
and the United States Environmental Protection Agency, have jurisdiction over
the operation of the Company's distribution center and outlets, including worker
safety, community and employee "right-to-know" laws, and laws regarding clean
air and water. In addition, state and local fire regulations extensively control
the design and operation of the Company's facilities. Such regulations are
complex and subject to change. Regulatory or legislative changes may cause
future increases in the Company's operating costs or otherwise negatively affect
operations. Although the Company believes it has been and is currently in
compliance with the applicable standards imposed pursuant to such laws and
regulations, there can be no assurance that in the future the Company may not be
adversely affected by such regulations or incur increased operation costs in
complying with such regulations. Under various federal, state and local laws,
ordinances and regulations, an owner or lessee of real estate may be liable for
the costs of removal or remediation of certain hazardous or toxic substances
located on or in , or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose such liability without
regard to whether the owner or lessee knew of, or was responsible for, the
presence of such hazardous or toxic substances. The Company has obtained
environmental reports (which typically involve inspection without soil sampling
or ground water analysis) by independent environmental consultants for its newly
acquired acquisitions. Although the Company is not aware of environmental
problems at any of its outlets, no assurance can be given that a prior owner or
lessee did not create a material environmental condition or that future uses or
conditions (including without limitation, changes in applicable laws and
regulations) will not result in imposition of environmental liability upon the
Company. The Company does not at present, and has not in its history had a claim
for environmental damage.
Compliance by the Company with environmental protection laws has had no material
effect upon capital expenditures, earnings or competitive position.
ITEM 2 - PROPERTIES
As of December 31, 1996, the Company operated eleven sales outlets and a
distribution center located in Michigan, five sales outlets in Illinois, three
outlets in Wisconsin, three outlets in Indiana, two outlets in Ohio, three
outlets in Pennsylvania, one outlet in Delaware, seven outlets in New Jersey,
one outlet in Oklahoma, three outlets in Maryland, three outlets in Virginia and
twelve outlets and a distribution center in Texas. A decision has been made to
close the Texas distribution center. The Company expects to cease all operations
of the Texas distribution center before April 1, 1997. The Company has 8,000
square feet of executive offices which are located in Kentwood, Michigan, as
part of the distribution center facilities. Sales outlets are strategically
located in major markets to maximize market penetration, transportation
logistics and overall customer service.
The Company's sales outlets range in size from 1,200 square feet to 13,000
square feet. Some of the larger sales outlets are also used as "drop ship"
points to service other sales outlets. Sales outlets consist of stock storage
areas, display and counter space and in some instances, sales office space.
Sales outlets are equipped with some of the latest technology to minimize space
and maximize customer service. The Company's distribution centers are 10,000
square feet and 38,500 square feet. The distribution centers are equipped with
efficient material handling and storage equipment. The Company owns the
distribution center and two outlets in Michigan and one sales outlet in Indiana.
The remainder of the sales outlets and the other distribution center are leased
with terms expiring from 1997 to 2006, with options to renew. The Company
typically assumes the lease of the former owner in acquisitions. The Company
believes that all of its leases were at fair market rates when entered into,
that presently no single lease is material to its operations, and that
alternative sites are presently available at market rates.
ITEM 3 - LEGAL PROCEEDINGS
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- -------------------------------------------------------------------------------
FinishMaster's common stock trades on The NASDAQ stock market under the symbol
FMST. The number of beneficial owners of FinishMaster's common stock at December
31, 1996 was approximately 824.
The range of high and low sales prices reported by NASDAQ were:
YEAR QUARTER ENDED HIGH LOW
---- ----------------- ------ -----
1994 March 31 11-1/2 9-1/8
1994 June 30 11-5/8 8
1994 September 30 9-1/2 7-1/2
1994 December 31 10-7/8 8
1995 March 31 15-3/8 9-1/4
1995 June 30 15-7/8 13
1995 September 30 16-1/4 14
1995 December 31 15-1/2 9
1996 March 31 15 9-1/2
1996 June 30 15-1/4 9-9/16
1996 September 30 11-5/8 8-1/4
1996 December 31 9-3/8 6-1/2
No cash dividends on common stock have been paid during any period and none are
expected to be paid in the foreseeable future. The Company anticipates that all
earnings and other cash resources of the Company will be retained by the Company
for investment in its business.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the nine month
period ended December 31, 1996 and 1995 and four years ended March 31,1996 are
derived from the Company's audited consolidated financial statements. The
financial data should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto, which are included
elsewhere herein, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Nine Months
Nine Months Ended
Ended December 31,
December 31, 1995(1) Fiscal Year Ended March 31,
1996(1) (unaudited) 1996 1995 1994 1993
---------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statements of Operations Data
Net sales $ 95,822 $ 77,538 $107,511 $ 79,382 $ 64,693 $ 50,551
Gross margin 33,891 27,699 38,012 28,048 22,068 17,147
Income from operations(2) 2,566 4,619 5,073 5,394 3,710 2,238
Net income $ 660 $ 2,647 $ 2,649 $ 3,462 $ 2,145 $ 1,356
======== ======== ======== ======== ======== ========
Net income per share $ 0.11 $ 0.44 $ 0.44 $ 0.58 $ 0.48 $ 0.32
======== ======== ======== ======== ======== ========
Shares used in the computation
of net income per share 6,000 6,000 6,000 6,000 4,472 4,300
(1) The Company elected to change its fiscal year-end from March 31 to December
31, effective for the period ended December 31, 1996. As a result of this
change the Company has shown unaudited comparative information for the nine
months ended December 31, 1995.
(2) State income taxes have been reclassified from operating expenses to income
tax expense in the prior year amounts to conform with the presentation of
corresponding amounts in the current period.
December
31, March 31,
1996 1996 1995 1994 1993
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data
Working capital $22,819 $25,036 $17,763 $21,734 $ 4,531
Total assets 66,477 66,772 46,442 39,287 21,138
Long-term debt 21,970 23,248 7,208 3,967 4,573
Stockholders' equity 32,326 31,665 28,956 25,554 7,201
Acquisition Data
Acquisitions made by FinishMaster have been accounted for as purchases and
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair values at the dates of acquisition. Operating results of these
acquired organizations are included in FinishMaster's financial statements from
the respective dates of purchase. Details of these acquisitions are contained in
the notes to the consolidated financial statements.
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company was founded in 1968 as a single outlet in Grand Rapids, Michigan. As
of December 31, 1996, the Company had grown to 54 outlets in twelve states. The
Great Lakes and East Coast Regions (Illinois, Indiana, Michigan, Ohio,
Wisconsin, Pennsylvania, Delaware, New Jersey, Maryland and Virginia) are
supported by a 38,500 square foot distribution center near Grand Rapids,
Michigan. In addition the Company operates a total of approximately 10,000
square feet of warehouse space in Arlington, Texas to service its present
product requirements in the Southwest Region. As a result of the efficiencies
gained in the Southwest Region, the Company plans to close the distribution
center located in Arlington, Texas during the first quarter of 1997.
The increase in the number of outlets has primarily been a result of the
Company's acquisition strategy. In 1986 the Company entered the Detroit market,
its first expansion into a major metropolitan area. In 1989 the Company expanded
into Illinois by acquiring businesses in metropolitan Chicago and began a
strategy to achieve dominance in the Great Lakes Region focused around its
central distribution center. To further its strategy of dominating this region,
in 1992 the Company expanded into the Wisconsin market and also entered the
specialty manufacturing market, primarily the van conversion and truck cap
markets, in northern Indiana. In 1993, the Company further expanded the Indiana
market with acquisitions in the Indianapolis area. In twelve months ended March
31, 1995, the Company entered the Ohio market and during the third quarter of
fiscal 1995, the Company established a Southwest Region by acquiring seven
outlets in Texas. FinishMaster intensified acquisitions in fiscal 1996 acquiring
a total of 16 separate entities totaling 35 outlets in Michigan, Pennsylvania,
Delaware, New Jersey, Oklahoma, and Texas. The 35 outlets have been consolidated
to 19 outlets. In the nine months ended December 31, 1996 the Company
strengthened its East Coast Region by acquiring three outlets in Virginia and
three outlets in Maryland.
The Company's revenues are derived primarily from the sales of automotive paints
and related supplies to independent automotive body repair shops, automobile
dealerships and specialty manufacturers. While the margins on automotive paints
and those on related accessories differ, historically the mix of the Company's
revenues and margins have been relatively consistent. For example, the Company's
revenues for the nine months ended December 31, 1996, were approximately 70%
attributable to automotive paints and 30% to all refinishing accessories, which
include FinishMaster PrivateBrand products. These products include some of the
most frequently used refinishing accessories, such as masking materials, body
fillers, thinners, reducers and cleaners.
The Company purchases the majority of its products from four major manufacturers
of automotive paint and refinishing supplies; BASF, DuPont, 3M, and PPG.
Purchases are generally made in large volumes to maximize manufacturer volume
discounts and optimize payment terms. The Company often takes advantage of
periodic supplier special incentive programs which provide additional purchase
discounts and extend the due date of purchases beyond normal terms with large
volume purchases. The Company also benefits from manufacturer provided discounts
upon early payment of certain accounts.
Inventory obsolesce is minimal as branded products carry the manufacturers'
guaranties, with defective products returned at no charge to the Company and
obsolete products are accepted for a slight restocking fee. The Company has
arrangements with its suppliers to balance inventory and/or credit the Company
for a certain percentage of returned merchandise.
The results of operations and financial condition are presented based on
historical cost. While it is difficult to measure the impact of inflation, the
Company believes that the effect of inflation on its operations has been
immaterial.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from the
Company's Statement of Operations as a percentage of net sales.
Nine Months Nine Months
Ended December Ended December Year Ended March 31,
31, 31, 1995
1996 (unaudited) 1996 1995
-------------- -------------- ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.6 64.3 64.6 64.7
----- ----- ----- -----
Gross margin 35.4 35.7 35.4 35.3
Operating expenses(1) 16.0 14.7 15.3 13.3
Selling, general and administrative 13.8 13.2 13.5 13.5
Depreciation and amortization 2.9 1.9 1.9 1.7
----- ----- ----- -----
32.7 29.8 30.7 28.5
----- ----- ----- -----
Income from operations (1) 2.7 5.9 4.7 6.8
Investment income 0.1 0.2 0.2 1.0
Interest expense (1.5) (0.6) (0.8) (0.7)
----- ----- ----- -----
Income before income taxes 1.3 5.5 4.1 7.1
Income tax expense(1) .6 2.1 1.6 2.7
----- ----- ----- -----
Net income .7% 3.4% 2.5% 4.4%
===== ===== ===== =====
(1) State income taxes have been reclassified from operating expenses to income
tax expense in the prior year percentages to conform with the presentation
of corresponding percentages in the current period.
RESULTS OF OPERATIONS
Nine months ended December 31, 1996 versus Nine months ended December 31, 1995
For purposes of management's discussion and analysis, the audited amounts for
the nine months ended December 31, 1996 are presented with the comparable
unaudited amounts for the nine months ended December 31, 1995.
Net Sales. Net sales for the nine months ended December 31, 1996 were $95.8
million, an increase of approximately 24%, compared to $77.5 million for the
nine months ended December 31, 1995. The sales increase resulted from sales
generated by acquisitions in Maryland and Virginia in the nine months ended
December 31, 1996. In addition, acquisitions in Delaware, Michigan, New Jersey,
Oklahoma, Pennsylvania, and Texas in the prior fiscal year have contributed
sales to the entire nine months ended December 31, 1996.
Gross Margin. Gross margin for the nine months ended December 31, 1996 was $33.9
million compared to $27.7 million for the nine months ended December 31, 1995
and as a percentage of net sales decreased to 35.4% from 35.7%. Gross margin
percentage declined as a percentage of net sales as competitive pricing
pressures increased in the nine months ended December 31, 1996 as paint
manufacturers intensified efforts to gain market share.
Operating expenses. Operating expenses for the nine months ended December 31,
1996 were $15.3 million compared to $11.4 million for the nine months ended
December 31, 1995. Operating expenses as a percentage of net sales increased to
16.0% for the nine months ended December 31, 1996 compared to 14.7% for the nine
months ended December 31, 1995. Operating expenses consist of wages, building
and vehicle costs for the outlets and the distribution centers. The increase as
a percentage of net sales resulted from higher operating costs of recent
acquisitions along with one-time expenses related to consolidating and
relocating several facilities. Efficiencies gained from store consolidations in
the Southwest Region has enabled the Company to close its Texas distribution
center during the first quarter of 1997. Certain expenses related to the closing
of the Texas distribution center affected the nine months ended December 31,
1996. The additional expense increase was partially offset by the Company's
programs to reduce costs.
Selling, general and administrative. S, G, & A expenses for the nine months
ended December 31, 1996 were $13.2 million compared to $10.2 million for the
nine months ended December 31, 1995. S, G, & A expenses as a percentage of net
sales increased to 13.8% for the nine months ended December 31, 1996 compared to
13.2% for the nine months ended December 31, 1995. General and administrative
expenses consist of corporate support staff and expenses for marketing, data
processing, accounting, credit, purchasing and human resources. Selling expenses
include sales commissions, wages, and expenses supporting customer sales
activity. The higher expense level resulted from higher costs of recent
acquisitions along with an increase in bad debt expense due to a customer
dispute over the collectability of an account receivable. The Company believes
this account is collectible in the future, but because of the uncertainty of
this transaction, the Company reserved an allowance for this account. The
Company expects a reduction in expenses as a percentage of sales as efficiencies
are gained from recent acquisitions and the cost reduction programs developed by
the Company are in place for an extended period of time.
Depreciation and amortization. Depreciation and amortization for the nine month
period was $2.8 million compared to $1.4 million for the nine months ended
December 31, 1995. Depreciation and amortization as a percentage of net sales
increased to 2.9% for the nine months ended December 31, 1996 compared to 1.9%
for the nine months ended December 31, 1995. Depreciation and amortization
consists primarily of depreciation expenses related to the corporate
distribution center and store locations and amortization of goodwill and
non-compete costs related to acquisitions. The increase results from
amortization of intangibles and depreciation of fixed assets incurred in
connection with the Company's acquisitions in Virginia and Maryland during the
current period and a full year's amortization and depreciation for prior year's
acquisitions along with revisions to the estimated lives of certain intangibles.
Operating Income. As a result of the foregoing, income from operations for the
nine months ended December 31, 1996 was $2.6 million compared to $4.6 million
for the nine months ended December 31, 1995. Income from operations as a
percentage of net sales decreased to 2.7% for the nine months ended December 31,
1996 compared to 5.9% for the nine months ended December 31, 1995.
Investment income. Investment income for the nine months ended December 31, 1996
was $0.1 million compared to $0.2 million for the nine months ended December 31,
1995. Investment income includes primarily earnings on investments.
Interest expense. Interest expense for the nine months ended December 31, 1996
was $1.4 million compared to $0.5 million for the nine months ended December 31,
1995. Interest expense primarily includes interest on mortgages and notes
payable to former owners of acquired businesses as well as interest on the
Company's line of credit. The increase was the result of interest incurred in
connection with seller financing for current year acquisitions and the increased
use of the Company's line of credit to support acquisitions and working capital
requirements.
Provision for Income Tax. The Company's effective tax rate for the for the nine
months ended December 31, 1996 was 48% compared to 38% for the nine months ended
December 31, 1995. This rate varied from the Company's statutory tax rate of 34%
primarily due to state taxes along with certain expenses which are not
deductible for tax purposes.
Twelve months ended March 31, 1996 versus Twelve months ended March 31, 1995
Net Sales. Net sales increased $28.1 million or 35.4% from $79.4 million for the
twelve months ended March 31, 1995 to $107.5 million for the twelve months ended
March 31, 1996. Of the net sales increase, $26.4 million resulted from sales
generated by acquisitions in Michigan, Pennsylvania, Delaware, New Jersey,
Oklahoma, and Texas, with the remainder coming from same outlet sales growth.
Same outlet sales growth represents the increase in sales for a given outlet
open for the period compared to the same period of the prior year.
Gross Margin. Gross margin increased from $28.0 million in 1995 to $38.0 million
in 1996 and as a percentage of net sales from 35.3% to 35.4%. Gross margin
percentage remained high due to the Company's participation in vendor discounts
and volume buying to maximize profit opportunities.
Operating expenses. Operating expenses increased from $10.6 in 1995 million to
$16.4 million in 1996 and as a percentage of net sales from 13.3% to 15.3%.
Operating expenses consist of wages, building and vehicle costs for the outlets
and the distribution center. The increase as a percentage of net sales resulted
from rapid expansion in two new regions where additional fixed costs were added
to support growth.
Selling, general and administrative. S, G, & A expenses increased from $10.7
million in 1995 to $14.5 million in 1996, however, remained constant as a
percentage of net sales at 13.5%. General and administrative expenses consist of
corporate support staff and expenses for marketing, data processing, accounting,
credit, purchasing and human resources. Selling expenses include sales
commissions, wages, and expenses supporting customer sales activity. The higher
expense level resulted from increased staffing and programs to support
additional training, employee development, sales and customer service, and
marketing programs to increase market penetration. In addition, expenses
increased to support the new Southwest and East Coast Regions.
Depreciation and amortization. Depreciation and amortization increased from $1.4
million in 1995 to $2.1 million in 1996 and as a percentage of net sales from
1.7% to 1.9%. Depreciation and amortization consists primarily of depreciation
expenses related to the corporate distribution center and amortization of
goodwill and non-compete costs related to acquisitions. The increase results
from amortization of intangibles incurred in connection with the Company's
acquisitions in Michigan, Pennsylvania, Delaware, New Jersey, Oklahoma, and
Texas during fiscal 1996 and a full year's amortization of intangibles for prior
year's acquisitions.
Operating Income. As a result of the foregoing, income from operations decreased
by 6.0% from $5.4 million in 1995 to $5.1 million in 1996 and decreased from
6.8% to 4.7% of net sales.
Investment income. Investment income decreased from $0.8 million in 1995 to $0.2
million in 1996 and decreased as a percentage of net sales from 1.0% to 0.2%.
Investment income includes primarily earnings on the investments. Investment
income was lower as funds from the Company's IPO were used to fund continued
growth of the business.
Interest expense. Interest expense increased from $0.5 million in 1995 to $0.8
million in 1996 and increased as a percentage of net sales from 0.7% to 0.8%.
Interest expense primarily includes interest on mortgages and notes payable to
former owners of acquired businesses. The increase was the result of interest
incurred in connection with seller financing for current year acquisitions.
Provision for Income Tax. The Company's effective tax rate for the year ended
March 31, 1996 and 1995 was 40% and 38% respectively. This rate varied from the
Company's statutory tax rate of 34% primarily due to state income taxes along
with certain expenses which are not deductible for tax purposes.
QUARTERLY INFORMATION
The following table sets forth consolidated statements of operations data for
each of the seven quarters ended December 31, 1996. The unaudited quarterly
information has been prepared on the same basis as the annual information and,
in management's opinion, includes all adjustments, consisting of only normal
recurring entries, necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
Quarterly Results for the Periods Ended
December 31, 1996 March 31, 1996
-------------------------------------------------------------------------------------
6/30/96 9/30/96 12/31/96 6/30/95 9/30/95 12/31/95 3/31/96
(in thousands, except per share data)
Net sales $ 33,149 $ 33,399 $ 29,274 $ 23,485 $ 26,928 $ 27,125 $ 29,973
Cost of sales 21,222 21,584 19,125 15,019 17,417 17,403 19,660
-------- -------- -------- -------- -------- -------- --------
Gross margin 11,927 11,815 10,149 8,466 9,511 9,722 10,313
Operating expenses (1) 5,062 5,182 5,069 3,337 3,886 4,176 4,982
Selling, general and
administration 4,425 4,062 4,705 3,154 3,494 3,584 4,235
Depreciation and amortization(2) 705 769 1,346 425 483 541 641
-------- -------- -------- -------- -------- -------- --------
Income(loss) from operations (1) 1,735 1,802 (971) 1,550 1,648 1,421 455
Investment income, net 29 12 36 104 37 20 22
Interest expense (478) (509) (386) (151) (164) (186) (340)
-------- -------- -------- -------- -------- -------- --------
Income(loss) before income taxes 1,286 1,305 (1,321) 1,503 1,521 1,255 137
Income tax expense(benefit)(1) 587 478 (455) 571 572 489 135
-------- -------- -------- -------- -------- -------- --------
Net income $ 699 $ 827 $ (866) $ 932 $ 949 $ 766 $ 2
Net income per share(3) $ 0.12 $ 0.14 $ (0.14) $ 0.16 $ 0.16 $ 0.13 $ 0.00
(1) State income taxes have been reclassified from operating expenses to
income tax expense to conform with the presentation of corresponding
amounts in the current period.
(2) The increase in depreciation and amortization results from amortization
of intangibles and depreciation of fixed assets incurred in connection
with the Company's acquisitions in the nine months ended December 31,
1996 and a full year's amortization and depreciation for prior year's
acquisitions along with revisions to the estimated lives of certain
intangibles in the quarter ending December 31, 1996.
(3) The sum of the quarterly net income(loss) per share amounts for the
periods presented may not equal the annual amount reported as net
income per share is computed independently for each quarter.
Seasonality and Quarterly Fluctuations. The Company's sales and operating
results have varied from quarter to quarter due to certain factors and the
Company expects these fluctuations to continue. Chief among these factors are
seasonal buying patterns of the Company's customers and the timing of
acquisitions. Historically, outlet sales have slowed in the late fall and winter
of each year largely due to inclement weather and the reduced number of business
days during the holiday season. As a result, financial performance for the
Company's outlets is generally lower during the December and March quarters
compared to the June and September quarters. In addition, the timing of
acquisitions may cause substantial fluctuations of operating results from
quarter to quarter. The Company takes advantage of periodic supplier special
incentive programs which extend the due date of purchases beyond normal terms
with large volume purchases. The timing of these programs can contribute to wide
fluctuations in the Company's quarterly cash flow. Although the Company
continues to investigate strategies to smooth the seasonal pattern of its
quarterly results of operations, there can be no assurance that the Company's
net sales, results of operations and cash flow will not continue to display
these seasonal patterns.
INFLATION AND OTHER ECONOMIC FACTORS
Inflation impacts FinishMaster's costs of materials sold, salaries and other
related costs of distribution. To the extent permitted by competition,
FinishMaster has offset these higher costs of materials through selective price
increases.
The Company's business may be negatively affected by cyclical economic downturns
in the markets in which it operates. In addition, markets in the van conversion
industry may increase the cyclical nature of the Company's operations. Sales in
this market accounted for approximately 5-10% of sales for the periods reported.
There is no assurance that the Company will not be materially adversely affected
in the future by cyclical downturns in its markets. The Company's financial
performance is also dependent on its ability to acquire businesses and
profitably integrate them into their operations. The Company believes that
future acquisitions in the Southwest and East Coast Regions, increased market
penetration, store consolidations and improved operating efficiencies will bring
the performance of recent acquisitions in line with existing outlets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources are significantly affected by its
acquisition activity. Acquisitions typically are financed by a combination of
internally generated cash flow, seller financing and borrowings under the
Company's loan facilities. The net proceeds from the public stock offering were
$16.2 million and have been used for acquisitions as well as to meet working
capital and other obligations in the prior periods. See notes to Consolidated
Financial Statements.
The Company's operating activities provided $2.3 million of cash in the nine
months ended December 31, used $0.5 million of cash for the year ended March 31,
1996 and provided $1.0 million in the year ended March 31, 1995.
The accounts receivable decrease of $2.3 million since March 31, 1996 was
primarily the result of intensive collection activity with certain slower paying
customers during the period. The accounts receivable increase of $4.7 million
from March 31, 1995 to March 31, 1996 was primarily the result of acquisitions
during that period.
The inventory increase of $1.3 million since March 31, 1996 was the result of
$0.5 million from acquisition activity, with the remainder being special
truckload purchases in advance of supplier price increases. Inventory days on
hand were approximately 108 days in the period ended December 31, 1996 compared
to 123 days in the period ended March 31, 1996. The decrease in days compared to
the prior year is primarily due to the volume and timing of acquisitions and
large inventory purchases. The inventory increase of $9.3 million from March 31,
1995 to March 31, 1996 was primarily the result of acquisition activity.
Accounts payable decreased approximately $2.3 million since March 31, 1996
primarily due to extended term purchases near the end of March 31, 1996 with
payments coming due in the period ended December 31, 1996. Accounts payable
increased approximately $1.0 million from March 31, 1995 to March 31, 1996
primarily due to a high volume of inventory purchases, which were offset by
payment discounts to major vendors.
The Company's investing activities in the period ended December 31, 1996
primarily consisted of an acquisition with a purchase price of $3.1 million
financed in part by $1.2 million of long-term obligations to the seller. The
twelve months ended March 31, 1996 investing activities primarily consisted of
the sale of marketable securities of $6.9 million used to fund acquisition
downpayments of $11.4 million. The balance of acquisition down payments were
funded through the Company's credit facilities.
The Company believes its cash and other liquid resources, cash flow generated
from operating activities, and the $10.8 million of available line of credit,
will be sufficient to support operations and general capital requirements for
the next twelve months. Depending on the availability of acquisitions, the
Company may incur additional debit or issue equity securities. There can be no
assurance that such additional capital will be available to the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is submitted in a separate section of this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 1996.
ITEM 11 - EXECUTIVE COMPENSATION
Item 11 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 1996.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 1996.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 1996.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2)--The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) Listing of Exhibits
The following exhibits, unless otherwise indicated, have been
filed as exhibits to Form S-1 Registration Statement, No.
33-73804, effective date of February 22, 1994 and are hereby
incorporated by reference.
Exhibit
No. Description of Document
2.1* Agreement and Plan of Merger by and between FinishMaster,
Inc., a Michigan corporation, and FinishMaster, Inc., an
Indiana corporation, dated November 12, 1996
3.1* Articles of Incorporation of FinishMaster, Inc., an Indiana
corporation
3.2* Bylaws of FinishMaster, Inc., an Indiana corporation
10.1 Deferred Compensation Agreement dated April 1, 1977 by and
between the Company and James F. White
10.11 Amendment to Deferred Compensation Agreement dated December
15, 1995 by and between the Company and James F.
White(incorporated by reference to Form 10-Q dated December
31, 1995)
10.12 Loan Agreement dated June 7, 1990 between the Company and FB
Annuity Company relating to the purchase of the Company's
Kentwood, Michigan central distribution facility
10.13 FinishMaster Inc. Stock Option Plan
10.14 Stock Transfer Agreement dated November 30, 1993 between the
Company and Maxco, Inc.
10.15 Intercompany Agreement dated December 31, 1993 between the
Company and Maxco, Inc.
10.16 Credit Agreement dated August 24, 1995 between the Company and
National Bank of Detroit to fund acquisitions and working
capital requirements(incorporated by reference to Form 10-Q
dated September 30, 1995)
10.17 Amendment to Credit Agreement dated July 1, 1996
10.18* Amendment to Credit Agreement dated February 18, 1997
11.1* Statement regarding computation of per share earnings
21.1* Subsidiary of the Registrant
27.1* Financial Data Schedule
* Filed herewith
(b) Reports on Form 8-K:
Form 8-K was originally filed on July 16, 1996
regarding a change in control of Registrant and a
change in Registrant's certifying accountant, as
amended by a Form 8-K/A filed on July 29, 1996
regarding a clarification with respect to the change
in Registrant's certifying accountant.
Form 8-K was filed on November 8, 1996 regarding a
change in the fiscal year of the Registrant from a
fiscal year ending March 31 to a fiscal year ending
December 31.
(c) Exhibits
-Amendment to Credit Agreement
-Subsidiary of the Registrant
-Financial Data Schedule
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date March 14, 1997 FINISHMASTER, INC.
By /S/THOMAS U. YOUNG
-------------------------------------
Thomas U. Young, President,
Vice Chairman of the Board, and
Chief Operating Officer
By /S/ROGER A. SOROKIN
-------------------------------------
Roger A. Sorokin, Vice President-Finance
(Principal Financial and Accounting 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.
/S/ANDRE B. LACY March 14, 1997 Chairman of the Board,
- ----------------------------------------------- Chief Executive Officer
Andre B. Lacy Date and Director
/S/WILLIAM J. FENNESSY March 14, 1997 Treasurer and Director
- -----------------------------------------------
William J. Fennessy Date
/S/ROBERT H. REYNOLDS March 14, 1997 Secretary
- -----------------------------------------------
Robert H. Reynolds Date
/S/MARGOT L. ECCLES March 14, 1997 Director
- -----------------------------------------------
Margot L. Eccles Date
/S/PETER L. FRECHETTE March 14, 1997 Director
- -----------------------------------------------
Peter L. Frechette Date
/S/MICHAEL J. SIEREVELD March 14, 1997 Director
- -----------------------------------------------
Michael J. Siereveld Date
/S/WALTER S. WISEMAN March 14, 1997 Director
- -----------------------------------------------
Walter S. Wiseman Date
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) AND (2), (c), AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
NINE MONTHS ENDED DECEMBER 31,1996
FINISHMASTER, INC.
KENTWOOD, MICHIGAN
FORM 10-K--ITEM 14(a)(1) AND (2)
FINISHMASTER, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of FinishMaster, Inc. and
Subsidiary are included in Item 8:
Page
Reports of Independent Auditors ............................ 21
Consolidated Balance Sheets ................................ 24
Consolidated Statements of Operations ...................... 25
Consolidated Statements of Cash Flows ...................... 26
Consolidated Statements of Stockholders' Equity............. 27
Notes to Consolidated Financial Statements ................. 28
The following consolidated financial statement schedule of FinishMaster, Inc.
and Subsidiary is submitted herewith:
Schedule II................................................. 35
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instruction or are inapplicable and, therefore, have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
FinishMaster, Inc.
We have audited the accompanying consolidated balance sheet of FinishMaster,
Inc. and Subsidiary as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the
nine-month period ended December 31, 1996. Our audit also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FinishMaster, Inc. and Subsidiary at December 31, 1996 and the consolidated
results of their operations and their cash flows for the nine-month period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
COOPERS & LYBRAND LLP
Grand Rapids, Michigan
February 18, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
FinishMaster, Inc.
We have audited the accompanying consolidated balance sheet of FinishMaster,
Inc. and Subsidiary as of March 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FinishMaster, Inc. and Subsidiary at March 31, 1996 and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended March 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Detroit, Michigan
April 18,1996
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
FinishMaster, Inc.
We have audited the consolidated financial statements of FinishMaster, Inc. as
of March 31, 1996 and 1995 and for the years then ended, and have issued our
report thereon dated April 18, 1996. Our audits also included Schedule II of
FinishMaster, Inc. which is included in the related schedule of FinishMaster,
Inc. in its Annual Report on Form 10-K for the year ended March 31, 1996. This
financial statement schedule is the responsibility of FinishMaster, Inc.
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statements schedule of FinishMaster, Inc. referred
to above, when considered in relation to the FinishMaster, Inc. basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
Detroit, Michigan
April 18, 1996
CONSOLIDATED BALANCE SHEETS
FINISHMASTER, INC. AND SUBSIDIARY
December 31, March 31,
1996 1996
-------- --------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$ 300 $ 1,109
Accounts receivable, net of allowance for doubtful
accounts of $700,000 and $350,000, respectively 12,752 15,119
Inventory 24,828 23,502
Deferred income taxes
474 293
Prepaid expenses and other current assets 785 515
-------- --------
TOTAL CURRENT ASSETS 39,139 40,538
PROPERTY AND EQUIPMENT
Land 368 368
Buildings and improvements 3,105 2,927
Machinery, equipment and fixtures 5,964 5,809
-------- --------
9,437 9,104
Accumulated depreciation
(2,866) (2,855)
-------- --------
6,571 6,249
OTHER ASSETS
Intangible assets, net 20,357 19,805
Deferred income taxes 289 70
Other 121 110
-------- --------
20,767 19,985
-------- --------
$ 66,477 $ 66,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable, bank $ 1,841 $ ----
Accounts payable 7,786 10,093
Accrued expenses and other current liabilities 2,554 1,766
Current maturities of long-term obligations 4,139 3,643
-------- --------
TOTAL CURRENT LIABILITIES 16,320 15,502
LONG-TERM OBLIGATIONS, less current maturities 17,831 19,605
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized;
no shares issued and outstanding
Common stock, $1 stated value; 10,000,000 shares authorized;
6,000,140 and 6,000,000 shares issued and outstanding 6,000 6,000
Additional paid-in capital 14,509 14,508
Retained earnings
11,817 11,157
-------- --------
32,326 31,665
-------- --------
$ 66,477 $ 66,772
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
FINISHMASTER, INC. AND SUBSIDIARY
Nine Months
Ended Year Ended March 31,
December 31,
1996 1996 1995
--------- --------- ---------
(in thousands, except per share data)
NET SALES $ 95,822 $ 107,511 $ 79,382
COST OF SALES 61,931 69,499 51,334
--------- --------- ---------
GROSS PROFIT 33,891 38,012 28,048
EXPENSES:
Operating 15,313 16,382 10,556
Selling, general and administrative 13,192 14,467 10,700
Depreciation 755 779 560
Amortization of intangible assets 2,065 1,311 838
--------- --------- ---------
31,325 32,939 22,654
--------- --------- ---------
INCOME FROM OPERATIONS 2,566 5,073 5,394
OTHER INCOME (EXPENSE):
Investment income 77 183 755
Interest expense (1,373) (841) (520)
--------- --------- ---------
(1,296) (658) 235
--------- --------- ---------
INCOME BEFORE INCOME TAXES 1,270 4,415 5,629
Income tax expense 610 1,766 2,167
--------- --------- ---------
NET INCOME $ 660 $ 2,649 $ 3,462
========= ========= =========
NET INCOME PER SHARE $ .11 $ .44 $ .58
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OF 6,000 6,000 6,000
COMMON STOCK OUTSTANDING ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FINISHMASTER, INC. AND SUBSIDIARY
Nine months
ended Year ended March 31,
December 31,
1996 1996 1995
---------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net Income $ 660 $ 2,649 $ 3,462
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,820 2,090 1,398
Bad debt expense 798 548 439
Deferred income taxes (400) (38) (109)
Changes in operating assets and liabilities:
Account receivable 2,324 (1,997) (1,467)
Inventories (815) (778) (1,664)
Prepaids and other current assets (270) (243) (167)
Accounts payable and other current liabilities (2,775) (2,694) (843)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,342 (463) 1,049
INVESTING ACTIVITIES:
Business acquisitions (3,083) (22,193) (8,851)
Purchases of property and equipment (620) (762) (439)
Sale of (investment in) marketable securities -- 6,906 (6,920)
Other (11) (313) (166)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,714) (16,362) (16,376)
FINANCING ACTIVITIES:
Net borrowings under note payable, bank 1,841 -- --
Proceeds from long-term obligations 1,191 18,583 4,670
Repayment of long-term obligations (2,469) (2,787) (1,429)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 563 15,796 3,241
-------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (809) (1,029) (12,086)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,109 2,138 14,224
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 300 $ 1,109 $ 2,138
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,313 $ 762 $ 511
======== ======== ========
Taxes $ 687 $ 774 $ 2,313
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FINISHMASTER, INC. AND SUBSIDIARY
Additional Net
Common paid-in Unrealized Retained
Stock Capital Gain/(Loss) Earnings Totals
---------------------------------------------------------
(in thousands)
BALANCES AT APRIL 1, 1994 $ 6,000 $ 14,508 $ -- $ 5,046 $ 25,554
Net unrealized loss on
marketable securities (60) (60)
Net income for the year 3,462 3,462
-------- -------- -------- -------- --------
BALANCES AT MARCH 31, 1995 6,000 14,508 (60) 8,508 28,956
Adjustment related to sale of marketable 60 60
Net income for the year 2,649 2,649
-------- -------- -------- -------- --------
BALANCES AT MARCH 31, 1996 6,000 14,508 -- 11,157 31,665
Options exercised 1 1
Net income for the nine month period 660 660
-------- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1996 $ 6,000 $ 14,509 $ -- $ 11,817 $ 32,326
======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINISHMASTER, INC. AND SUBSIDIARY
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: The Company is a leading distributor of automotive paints,
coatings and paint-related accessories to the automotive collision repair
industry. As of December 31, 1996 the Company operated 54 sales outlets and two
distribution centers in twelve states organized into three major geographic
regions, the Great Lakes Region, the Southwest Region and the Eastern Region.
The Company has approximately 12,000 customers that it provides a comprehensive
selection of brand name products supplied by BASF, DuPont, 3M and PPG, in
addition to its own FinishMaster PrivateBrand refinishing accessory products.
Majority Stockholder: On February 23, 1994, the Company completed the initial
public offering of common stock on the NASDAQ national market under the trading
symbol "FMST." The Company sold 1.7 million shares of common stock at an initial
public offering price of $10.50 per share. The net proceeds from the offering of
approximately $16.2 million were used by FinishMaster to fund acquisitions,
repay indebtedness, finance working capital and for general corporate purposes.
As a result of these transactions, 4,045,000 shares or 67.4% of the Company's
outstanding stock was owned by Maxco at March 31, 1996. On July 9, 1996, LDI
AutoPaints, Inc., an Indiana corporation, purchased all of the shares of common
stock owned by Maxco, Inc. Effective December 31, 1996, LDI, Ltd. transferred to
LDI AutoPaints 100 shares of the Company which it had purchased on the open
market in August, 1995. As a result of these transactions, LDI AutoPaints,
Inc.'s ownership of FinishMaster stock was 4,045,100 shares or 67.4% at December
31, 1996.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation: The consolidated financial statements include the
consolidated accounts of FinishMaster and Refinishers Warehouse, Inc. Sales by
Refinishers Warehouse are primarily to FinishMaster and are eliminated in
consolidation. All other significant intercompany and equity accounts and
transactions are eliminated. References to the Company or FinishMaster
throughout this report the consolidated entity.
Transactions with Majority Stockholder: Prior to July 9, 1996, the company
received certain services from Maxco, Inc. These services included central
processing of all insurance, including employee benefit coverages, general and
automobile liability, property and casualty. All expenses directly attributable
to FinishMaster were allocated by Maxco to FinishMaster.
Preferred Stock: FinishMaster has authorized up to 1,000,000 shares of preferred
stock for possible future issuance.
Cash and Cash Equivalents: The Company considers cash and other highly liquid
investments with maturities of 90 days or less, including investments in
interest bearing repurchase agreements, as cash and cash equivalents.
Receivables: Trade accounts receivable represent amounts due primarily from
automotive body repair shops and dealerships. Trade receivables are typically
not collateralized.
Inventories: Inventories are stated at the lower of first-in, first-out cost or
market and consist primarily of purchased paint and refinishing supplies.
Substantially all inventories consist of finished goods.
Properties and Depreciation: Property and equipment are stated on the basis of
cost and include expenditures for new facilities and equipment and those which
materially extend the useful lives of existing facilities and equipment.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. Depreciation for financial reporting purposes is computed by the
straight-line method based on the estimated useful lives of the assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINISHMASTER, INC. AND SUBSIDIARY
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Deferred income taxes are recognized for the temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. The income tax provision is the tax payable/recoverable for the period
and the change during the period in deferred tax assets and liabilities.
Intangibles: Intangibles primarily consist of the excess of cost over fair
market value of net assets of acquired businesses. Intangible assets, including
non-compete agreements, are amortized on a straight-line basis over periods
ranging from 5 to 40 years.
The carrying value of goodwill is periodically reviewed to determine if an
impairment, has occurred. The Company measures the potential impairment of
recorded goodwill based on the undiscounted cash flows of the entity acquired
over the remaining amortization period.
Advertising: Advertising costs are expensed as incurred. The amounts were
immaterial for all periods presented.
Earnings per Share: In February of 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share". This Statement simplifies the standards for computing earnings per
share, replacing the presentation of primary earnings per share with a
presentation of basic earnings per share. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures. Basic earnings per
share is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed similarly to fully diluted earnings per share
pursuant to APB Opinion No. 15, Earnings per Share, which is superseded by this
Statement. This Statement is effective for financial statements issued for
periods ending after December 15, 1997, with early application being prohibited.
The Company has not yet determined the impact of this Statement on the
consolidated financial statements.
Reclassification: Certain reclassifications have been reflected in prior year
amounts to conform with the presentation of corresponding amounts in the current
period.
2. CHANGE IN FISCAL YEAR
The Company elected to change its fiscal year-end from March 31 to December 31,
effective for the period ending December 31, 1996. Comparative information for
the nine months ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
(unaudited) (unaudited)
--------------------------------------------------
(in thousands, except per share data)
Net sales $ 95,822 $ 77,538 $ 57,685
Gross margin 33,891 27,699 20,080
Income taxes 610 1,645 1,596
Net income 660 2,647 2,639
Net income per share 0.11 0.44 0.44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINISHMASTER, INC. AND SUBSIDIARY
3. ACQUISITIONS
The following table summarizes the assets purchased in acquisitions made by
FinishMaster in each of the periods presented. These acquisitions have been
accounted for as purchases and accordingly, the acquired assets and liabilities
have been recorded at their estimated fair values at the dates of acquisition.
Intangible assets related to goodwill and covenants not to compete were recorded
with each acquisition.
Nine Months
Ended
December 31, Year Ended March 31,
1996 1996 1995
--------------------------------------
(in thousands)
Accounts receivable $ 755 $ 3,229 $ 1,313
Inventory 511 8,500 2,392
Equipment and other 456 1,492 878
Intangible assets 2,617 13,247 5,624
------- ------- -------
4,339 26,468 10,207
Accounts payable 1,256 4,275 1,356
------- ------- -------
ACQUISITION PRICE 3,083 22,193 8,851
Acquisition debt 1,191 10,774 4,670
------- ------- -------
NET ASSETS OF BUSINESSES ACQUIRED,
NET OF ACQUISITION DEBT
$ 1,892 $11,419 $ 4,181
======= ======= =======
Number of acquisitions 1 16 5
The acquisitions were funded with cash and debt. Operating results of these
acquired organizations are included in FinishMaster's financial statements from
the respective dates of purchase. The acquisitions made during the nine months
ended December 31, 1996 and years ended March 31, 1996 and 1995 were not
significant to reported results of operations, cash flows or financial position.
The following table sets forth the unaudited pro forma results of operations for
the current period in which acquisitions occurred and for the immediately
preceding period as if the acquisitions were consummated at the beginning of the
immediately preceding period. This proforma information does not purport to be
indicative of what would have been made as of those dates or of results which
may occur in the future.
Nine Months
Ended
December 31, Year Ended March 31,
1996 1996
----------------------------------
(in thousands except per share data)
Net Sales $ 96,456 $ 115,104
Net Income 667 2,737
Net Income per common share 0.11 0.46
Weighted average number of common shares 6,000 6,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINISHMASTER, INC. AND SUBSIDIARY
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
December 31, March 31,
1996 1996
----------------------------------
(in thousands)
Non-compete agreements $ 10,860 $ 9,760
Goodwill 16,044 14,552
--------- ---------
26,904 24,312
Less accumulated amortization 6,547 4,507
--------- ---------
Intangible assets, net $ 20,357 $ 19,805
========= =========
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
December 31, March 31,
1996 1996
---------------------------------
(in thousands)
Notes payable, to former owners of acquired businesses with
interest at various rates up to 9%, due 1997 though 2004 $ 12,911 $13,535
Note payable, to bank under line of credit with
interest rate not exceeding the
prime interest rate(7.71% at December
31,1996), due in 2001 7,288 7,809
Mortgage note payable, collateralized by a building, to an
insurance corporation with interest at 8.05%, due July, 2000 1,587 1,625
Other long-term financing at various rates 184 279
--------- ---------
21,970 23,248
Less current maturities 4,139 3,643
-------- --------
$ 17,831 $19,605
======== ========
The aggregate principal payments for the next five years subsequent to December
31, 1996 are as follows:
1997 $ 4,139,000
1998 3,921,000
1999 3,733,000
2000 4,354,000
2001 4,852,000
Thereafter 971,000
------------
$ 21,970,000
============
The Company has a $5.0 million unsecured line of credit at a rate of 8.25% to
fund periodic working capital requirements and a separate $15.0 million
unsecured line of credit to fund acquisitions. At December 31, 1996 there was
$10.8 million of these credit facilities available. These lines contain
restrictive covenants which require maintenance of certain financial ratios
including working capital, debt and interest coverage.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINISHMASTER, INC. AND SUBSIDIARY
5. LONG-TERM OBLIGATIONS (continued)
The carrying amounts of certain financial instruments such as cash and
equivalents, accounts receivable and accounts payable approximate their fair
values. The fair value of the long-term debt is estimated using discounted cash
flow analysis and the Company's current incremental borrowing rates for similar
types of arrangements. A table comparing December 31, 1996 and March 31, 1996
carrying amounts and estimated fair values is as follows:
December 31, March 31,
1996 1996
-----------------------------------------
(in thousands)
Carrying amount $ 23,811 $ 23,248
========= =========
Fair value $ 23,500 $ 22,800
========= =========
6. EMPLOYEE SAVINGS PLAN
The Company has an Employee Savings Plan which covers substantially all
employees who have met certain requirements as to date of service. FinishMaster
contributes $.20 for each $1 contributed by employees up to 6% of their annual
compensation. In addition, FinishMaster contributes, at the discretion of the
Board of Directors, an additional amount equal to 1% of the employees' annual
compensation. Company contributions charged to operations under the Plan were
approximately $189,000 for the nine months ended December 31, 1996 and $198,000
and $178,000 for the years ended March 31, 1996 and 1995, respectively.
7. STOCK OPTIONS
On November 30, 1993, an Employee Stock Option Plan was ratified to grant
options on up to 600,000 shares of the Company's common stock to officers, key
employees and non-employee directors of the Company. All options granted under
this plan have been granted at a price equal to the market price at the date of
the grant. Options granted in the year ended March 31, 1994 had a vesting period
of two years. Options granted in the year ended March 31, 1996 were fully vested
when granted. All options granted have a maximum life of ten years from the date
of the grant.
Options are granted at not less than the fair market value of the Company's
common stock on the date of grant, therefore, no compensation is recognized. Had
compensation expense been determined at the date of the grant based on the fair
value of the awards consistent with the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation", the Company's net
income and earnings per share would have been reduced to the proforma amounts
indicated in the following table:
Nine Months Year Ended
Ended December 31, March 31,
1996 1996
------------------------------------
Net Income
As Reported $ 660 $ 2,649
Pro Forma $ 660 $ 2,010
Earnings per share
As Reported $0.11 $ 0.44
Pro Forma $0.11 $ 0.34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINISHMASTER, INC. AND SUBSIDIARY
7. STOCK OPTIONS(continued)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for December
31, 1996 and March 31, 1996 respectively: risk free rate of 5.7 percent; no
dividend yield for all years; expected life 8 years; and volatility of 46.8
percent. Option valuation models, like the stock price Black-Scholes model,
require the input of highly subjective assumptions including the expected stock
price volatility. Because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
December 31, 1996 March 31, 1996 March 31, 1995
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding-beginning
of year 222,085 $10.72 123,800 $10.50 124,540 $10.50
Granted 99,500 $11.00 $10.50
Exercised 140 $10.50
Forfeited 52,635 $10.76 1,215 $10.50 740 $10.50
------ ------ ----- ------ ------- ------
Outstanding-end of year 169,310 $10.71 222,085 $10.72 123,800 $10.50
======= ====== ======= ====== ======= ======
Exerciseable at end of
year($10.50 to $11.00
per share) 169,310 $10.71 222,085 $10.72
======= ====== ======= ======
The weighted-average fair value of options granted during the year ended March
31, 1996 was $6.65 per option. The remaining contractual life of options
outstanding at December 31, 1996 is 7.9 years.
8. INCOME TAXES
The provision for federal and state income taxes consisted of the following:
Nine Months Ended Year Ended March 31,
December 31, 1996 1996 1995
-------------------------------------------------------------
(in thousands)
Current:
Federal $ 778 $1,477 $ 1,976
State 232 327 300
Deferred (400) (38) (109)
---- --- ----
$ 610 $1,766 $ 2,167
===== ====== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINISHMASTER, INC. AND SUBSIDIARY
8. INCOME TAXES(continued)
The reconciliation of income taxes computed at the federal statutory tax rate to
the Company's effective tax rate is as follows:
Nine Months
Ended Year Ended March 31,
December
31, 1996 1996 1995
------------------- --------------- ----------------
Federal statutory tax rate 34.0% 34.0% 34.0%
State tax provision(net of federal income tax
benefit of state taxes) 8.3 4.9 3.5
Other 5.7 1.1 1.0
------------------- --------------- ----------------
Effective tax rate 48.0% 40.0% 38.5%
=================== =============== ================
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996 and March 31, 1996, are as follows:
December 31, 1996 March 31, 1996
---------------------------------
(in thousands)
Deferred tax assets
Amortization of intangibles $ 647 $ 287
Allowance for doubtful accounts 277 119
Inventory 190 188
Other, net 23 6
------- -------
1,137 600
Deferred tax liabilities
Depreciation 374 237
------- -------
$ 763 $ 363
====== =======
9. CONTINGENCIES AND COMMITMENTS
FinishMaster occupies facilities and uses equipment under operating lease
agreements requiring annual rental payments approximating the following amounts
for the five years subsequent to December 31, 1996:
1997 $ 2,679,000
1998 2,223,000
1999 1,855,000
2000 1,284,000
2001 336,000
Thereafter 563,000
------------
$ 8,940,000
============
Rent expense charged to operations including short-term leases for the nine
months ended December 31, 1996 aggregated $2,783,000. Rent expense for the years
ended March 31, 1996 and 1995 aggregated $2,500,000 and $1,706,000,
respectively.
FinishMaster is not involved in any material legal actions.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
---------------------------
Charged
Balance at Charged to to Other
Beginning of Costs and Accounts-- Deductions-- Balance at
DESCRIPTION Period Expenses Describe Describe End of Period
- -----------------------------------------------------------------------------------------------------------------------------------
Nine months ended December 31, 1996:
Allowance for doubtful accounts $ 350 $798 $448 (A) $700
------ ---- ---- ----
Year ended March 31, 1996:
Allowance for doubtful accounts $ 260 $548 $458 (A) $350
------ ---- ---- ----
Year ended March 31, 1995:
Allowance for doubtful accounts $ 155 $439 $334 (A) $260
------ ---- ---- ----
(A) Represents uncollectible accounts written off, less recoveries.
FINISHMASTER, INC. AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K
EXHIBITS
Exhibit ......................... .............................. PAGE
2.1 Agreement and Plan of Merger by and between
FinishMaster, Inc., a Michigan corporation,
and FinishMaster, Inc., an Indiana corporation,
dated November 12, 1996......................................37
3.1 Articles of Incorporation of FinishMaster, Inc.,
an Indiana corporation.......................................41
3.2 Bylaws of FinishMaster, Inc., an Indiana corporation.........44
10.18 Amendment to Credit Agreement ...............................47
11.1 Statement regarding computation of per share earnings........49
21.1 Subsidiary of the Registrant.................................50
23.1 Consent of Independent Auditors..............................51
27.1 Financial Data Schedule......................................52
FINISHMASTER INC. AND SUBSIDIARY
EXHIBIT 2.1-AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER
FINISHMASTER, INC.
Parties:
THIS AGREEMENT AND PLAN OF MERGER ("Merger Agreement") is entered into
by and between FinishMaster, Inc., a Michigan corporation
("FinishMaster-Michigan") and FinishMaster, Inc., an Indiana corporation
("FinishMaster-Indiana").
Recitals:
1. FinishMaster-Michigan is a corporation duly organized and
existing under the laws of the State of Michigan.
2. FinishMaster-Indiana is a corporation duly organized and
existing under the laws of the State of Indiana.
3. On the date of this Merger Agreement, the authorized capital stock
of FinishMaster-Michigan consists of (i) ten million (10,000,000) shares of
common stock, without par value (the "FinishMaster-Michigan Common Stock"), of
which six million (6,000,000) shares are issued and outstanding, and (ii) one
million (1,000,000) shares of preferred stock, without par value, of which none
are outstanding.
4. On the date of this Merger Agreement, the authorized capital stock
of FinishMaster-Indiana consists of (i) ten million (10,000,000) shares of
common stock, without par value (the "FinishMaster-Indiana Common Stock"), of
which ten (10) shares are issued and outstanding and owned by
FinishMaster-Michigan, and (ii) one million (1,000,000) shares of preferred
stock, without par value, of which none are outstanding.
5. The respective Boards of Directors of FinishMaster-Michigan and
FinishMaster-Indiana have determined that it is advisable and in the best
interests of each such corporation that FinishMaster-Michigan merge with and
into FinishMaster-Indiana upon the terms and subject to the conditions of this
Merger Agreement for the purpose of effecting the reincorporation of
FinishMaster-Michigan in the State of Indiana.
6. The respective Boards of Directors of FinishMaster-Michigan and
FinishMaster-Indiana have approved and adopted this Merger Agreement. The
affirmative vote of the holders of a majority of the outstanding shares of
FinishMaster-Michigan Common Stock entitled to vote on this Merger Agreement
must approve this Merger Agreement for the merger to become effective. The Board
of Directors of FinishMaster-Michigan has therefore directed that this Merger
Agreement be submitted to a vote of its shareholders, which vote was taken at
the duly called and constituted annual meeting of shareholders of
FinishMaster-Michigan on September 18, 1996, and resulted in the approval of
this Merger Agreement by such shareholders. FinishMaster-Michigan, as the sole
shareholder of FinishMaster-Indiana, has unanimously approved this Merger
Agreement by written consent dated as of November 12, 1996.
7. The parties intend by this Merger Agreement to effect a
"reorganization" under Section 368 of the Internal Revenue Code of 1986, as
amended.
Terms and Provisions:
In consideration of the foregoing recitals and of the following terms
and provisions, and subject to the following conditions, it is agreed:
1. Merger. At the Effective Time (as defined in this Section 1),
FinishMaster-Michigan shall be merged with and into FinishMaster-Indiana (the
"Merger"). FinishMaster-Indiana shall be the surviving corporation of the Merger
and the separate corporate existence of FinishMaster-Michigan shall cease. The
Merger shall become effective upon the later of: (i) the filing of Articles of
Merger with the Secretary of State of the State of Indiana, or (ii) the filing
of a Certificate of Merger with the Secretary of State of the State of Michigan.
The date and time when the Merger shall become effective is herein referred to
as the "Effective Time."
2. Governing Documents.
a. The Articles of Incorporation of FinishMaster-Indiana as it
may be amended or restated subject to applicable law, as in effect immediately
prior to the Effective Time, shall constitute the Articles of Incorporation of
FinishMaster-Indiana without further change or amendment until thereafter
amended in accordance with the provisions thereof and applicable law.
b. The Bylaws of FinishMaster-Indiana as in effect immediately
prior to the Effective Time shall constitute the Bylaws of FinishMaster-Indiana
without change or amendment until thereafter amended in accordance with the
provisions thereof and applicable law.
3. Officers and Directors. The persons who are officers and directors
of FinishMaster-Michigan immediately prior to the Effective Time shall, after
the Effective Time, be the officers and directors of FinishMaster-Indiana,
without change until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with FinishMaster-Indiana's Articles of Incorporation and Bylaws and applicable
law.
4. Name. The name of FinishMaster-Indiana shall continue to be
FinishMaster, Inc.
5. Succession. At the Effective Time, the separate corporate existence
of FinishMaster-Michigan shall cease, and FinishMaster-Indiana shall possess all
the rights, privileges, powers and franchises of a public or private nature and
be subject to all the restrictions, liabilities and duties of
FinishMaster-Michigan and all the rights, privileges, powers and franchises of
FinishMaster-Michigan, and all property, real, personal and mixed, and all debts
due to FinishMaster-Michigan on whatever account, as well for share
subscriptions and all other things in action, shall be vested in
FinishMaster-Indiana; and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as effectively
the property of FinishMaster-Indiana as the same were of FinishMaster-Michigan,
and the title to any real estate vested by deed or otherwise shall not revert or
be in any way impaired by reason of the Merger, but all rights of creditors and
liens upon any property of FinishMaster-Michigan shall be preserved unimpaired,
and all debts, liabilities and duties of FinishMaster-Michigan shall thenceforth
attach to FinishMaster-Indiana and may be enforced against it to the same extent
as if such debts, liabilities and duties had been incurred or contracted by it;
provided, however, that such liens upon property of FinishMaster-Michigan will
be limited to the property affected thereby immediately prior to the Merger.
FinishMaster-Indiana shall be substituted for FinishMaster-Michigan in any suit,
action, proceeding, or other litigation pending against FinishMaster-Michigan
prior to the Effective Time. All corporate acts, plans, policies, agreements,
arrangements, approvals and authorizations of FinishMaster-Michigan, its
shareholders, Board of Directors and committees thereof, officers and agents
which were valid and effective immediately prior to the Effective Time, shall be
taken for all purposes as the acts, plans, policies, agreements, arrangements,
approvals and authorizations of FinishMaster-Indiana, its shareholders, Board of
Directors and committees thereof, respectively, and shall be as effective and
binding thereon as the same were with respect to FinishMaster-Michigan.
6. Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof:
a. Each share of FinishMaster-Michigan Common Stock
outstanding immediately prior to the Effective Time shall be converted into, and
shall become, one fully paid and nonassessable share of FinishMaster-Indiana
Common Stock.
b. The ten (10) shares of FinishMaster-Indiana Common Stock
issued and outstanding in the name of FinishMaster-Michigan shall be canceled
and retired, and no payment shall be made with respect thereto, and such shares
shall resume the status of unauthorized and unissued shares of
FinishMaster-Indiana Common Stock.
7. Stock Certificates. At and after the Effective Time, all of the
outstanding certificates which immediately prior to the Effective Time
represented shares of FinishMaster-Michigan Common Stock shall be deemed for all
purposes to evidence ownership of, and to represent shares of,
FinishMaster-Indiana Common Stock into which the shares of FinishMaster-Michigan
Common Stock formerly represented by such certificates have been converted as
herein provided. The registered owner on the books and records of
FinishMaster-Michigan or its transfer agent of any such outstanding stock
certificate shall, until such certificate shall have been surrendered for
transfer or otherwise accounted for to FinishMaster-Indiana or its transfer
agent, have and be entitled to exercise any voting or other rights with respect
to and to receive any dividends and other distributions upon the shares of
FinishMaster-Indiana Common Stock evidenced by such outstanding certificate as
above provided. Nothing contained herein shall be deemed to require the holder
of any shares of FinishMaster-Michigan Common Stock to surrender the certificate
or certificates representing such shares in exchange for a certificate or
certificates representing shares of FinishMaster-Indiana Common Stock.
8. Other Employee Benefit Plans. As of the Effective Time,
FinishMaster-Indiana hereby assumes all obligations of FinishMaster-Michigan
under any and all employee benefit plans in effect as of the Effective Time or
with respect to which employee rights or accrued benefits are outstanding as of
the Effective Time.
9. Conditions. The consummation of the Merger is subject to
satisfaction of the following conditions prior to the Effective Time.
a. The Merger shall have received the requisite approval of
the holders of FinishMaster-Michigan Common Stock and all necessary
action shall have been taken to authorize the execution, delivery and
performance of the Merger Agreement by FinishMaster-Michigan and
FinishMaster-Indiana.
b. All approvals and consents necessary or desirable, if any,
in connection with the consummation of the Merger shall have been
obtained.
c. No suit, action, proceeding or other litigation shall have
been commenced or threatened to be commenced which, in the opinion of
FinishMaster-Michigan or FinishMaster-Indiana, would pose a material
restriction on or impair consummation of the Merger, performance of
this Merger Agreement or the conduct of the business of
FinishMaster-Indiana after the Effective Time, or create a risk of
subjecting FinishMaster-Michigan or FinishMaster-Indiana, or their
respective shareholders, officers or directors, to material damages,
costs, liability or other relief in connection with the Merger or this
Merger Agreement.
10. Governing Law. This Merger Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana applicable to
contracts entered into and to be performed wholly within the State of Indiana,
except to the extent that the laws of the State of Michigan are mandatorily
applicable to the Merger.
11. Amendment. Subject to applicable law and subject to the rights of
FinishMaster-Michigan's shareholders further to approve any amendment which
would have a material adverse effect on such shareholders, this Merger Agreement
may be amended, modified or supplemented by written agreement of the parties
hereto at any time prior to the Effective Time with respect to any of the terms
contained herein.
12. Deferral or Abandonment. At any time prior to the Effective Time,
this Merger Agreement may be terminated and the Merger may be abandoned or the
time of consummation of the Merger may be deferred for a reasonable time by the
Board of Directors of either FinishMaster-Michigan or FinishMaster-Indiana or
both, notwithstanding approval of this Merger Agreement by the shareholders of
FinishMaster-Michigan or the shareholders of FinishMaster-Indiana or both, if
circumstances arise which, in the opinion of the Board of Directors of
FinishMaster-Michigan or FinishMaster-Indiana, make the Merger inadvisable or
such deferral of the time of consummation thereof advisable.
13. Counterparts. This Merger Agreement may be executed in any number
of counterparts, each of which when taken alone shall constitute an original
instrument and when taken together shall constitute one and the same Agreement.
14. Further Assurances. From time to time, as and when required or
requested by either FinishMaster-Michigan or FinishMaster-Indiana, as
applicable, or by its respective successors and assigns, there shall be executed
and delivered on behalf of the other corporation, or by its respective
successors and assigns, such deeds, assignments and other instruments, and there
shall be taken or caused to be taken by it all such further and other action, as
shall be appropriate or necessary in order to vest, perfect or confirm, of
record or otherwise, in FinishMaster-Indiana, title to and possession of all
property, interests, assets, rights, privileges, immunities, powers, franchise
and authority of FinishMaster-Michigan and otherwise to carry out the purposes
of this Merger Agreement, and the officers and directors of each corporation are
fully authorized in the name and on behalf of such corporation or otherwise to
take any and all such action and to execute and deliver any and all such deeds,
assignments and other instruments.
[signature page follows]
IN WITNESS WHEREOF, FinishMaster-Michigan and FinishMaster-Indiana have
caused this Merger Agreement to be signed by their respective duly authorized
officers and delivered this 12th day of November, 1996.
FINISHMASTER INC.,
a Michigan corporation
/s/ Andre B. Lacy
Andre B. Lacy
Chairman of the Board & C.E.O.
ATTEST:
By: /s/ Robert H. Reynolds
Robert H. Reynolds
Secretary
FINISHMASTER, INC.,
a Indiana corporation
/s/ Andre B. Lacy
Andre B. Lacy
Chairman of the Board & C.E.O.
ATTEST:
By: /s/ Robert H. Reynolds
Robert H. Reynolds
Secretary