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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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)
54 Monument Circle, Suite 600, Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (317) 237-3678
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
Name of each exchange on
Title of each class which registered
Common Stock - without par value Nasdaq Stock Market
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 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 1, 1999 was $11,719,208.
At March 1, 1999, 7,535,856 shares of Registrant's common stock were
outstanding.
Documents Incorporated By Reference
Portions of the annual proxy statement for the year ended December 31, 1998 are
incorporated by reference into Part III.
FINISHMASTER, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
1 Business............................................................. 1
2 Properties........................................................... 9
3 Legal Proceedings.................................................... 10
4 Submission of Matters to a Vote of Security Holders.................. 10
5 Market for Registrant's Common Equity and
Related Shareholder Matters..................................... 11
6 Selected Consolidated Financial Data................................. 12
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 13
8 Financial Statements and Supplemental Data........................... 23
9 Changes in, and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 41
10 Directors and Executive Officers of the Registrant................... 41
11 Executive Compensation............................................... 41
12 Security Ownership of Certain Beneficial Owners and Management....... 41
13 Certain Relationships and Related Transactions....................... 41
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................. 41
15 Signatures........................................................... 42
16 List of Financial Statements and Financial Statement Schedules....... E-1
PART I
ITEM 1 - BUSINESS
General
FinishMaster, Inc. (the "Company") is the leading distributor of automotive
paints, coatings and paint-related accessories to the automotive collision
repair industry in the United States. The Company serves its customers through
151 sales outlets and seven distribution centers located in 22 states. The
Company has approximately 27,000 customers to which it provides a comprehensive
selection of brand name products supplied by BASF Corporation ("BASF"), E. I.
duPont de Nemours and Co. ("DuPont"), Minnesota Mining & Manufacturing Co., Inc.
("3M") and PPG Industries, Inc. ("PPG") in addition to its own FinishMaster
PrivateBrand refinishing accessory products. The Company is typically the
primary source of supply to its customers and offers a broad range of services
designed to enhance the operating efficiencies and competitive positions of its
customers and suppliers. The Company's operations are currently organized into
three divisions: Southeastern, Western, and Central/Northeastern.
The Company is the leading consolidator in the automotive refinishing
distribution industry, having successfully completed approximately 25
acquisitions over the past seven years, ranging from fill-in acquisitions to the
more recent strategic acquisitions of Thompson PBE, Inc. ("Thompson") and LDI
AutoPaints, Inc. ("AutoPaints").
On November 21, 1997, the Company acquired Thompson for an aggregate purchase
price of approximately $73.5 million, including acquisition costs. In addition
to the cash purchase price, the Company refinanced approximately $34.5 million
of Thompson indebtedness in conjunction with the transaction. The Thompson
acquisition significantly expanded the Company's geographic presence in the
Southeastern and Western United States.
On June 30, 1998, the Company completed the acquisition by merger of AutoPaints
in exchange for the issuance of 1.5 million shares of the Company's common
stock. Since AutoPaints was acquired from the Company's majority shareholder,
the acquisition constituted a transaction within a controlled group. Thus, the
acquisition was accounted for using the historical cost basis of AutoPaints' net
assets, which approximated $14.4 million at the date of acquisition. The Company
intends to continue its strategy of expanding through additional acquisitions.
The Company is an Indiana corporation. On March 1, 1998, the Company relocated
its corporate headquarters from Kentwood, Michigan, to newly renovated office
space in Indianapolis, Indiana. The Company leases that space from LDI, Ltd.
("LDI"), an Indiana limited partnership, which indirectly owns 74.1% of the
outstanding shares of the Company. The Company believes that the terms of the
lease are at least as favorable to the Company as those that could be obtained
by arms-length negotiations with an unaffiliated third party. As a result of
this move, the principal executive offices of the Company are located at 54
Monument Circle, Suite 600, Indianapolis, IN 46204, and its telephone number is
(317) 237-3678.
- 1 -
Industry Overview
The U.S. automotive paint distribution market is approximately $2.5 billion. The
end users of the products distributed by the Company are principally independent
collision repair shops and automobile dealers. Additionally, organizations that
maintain their own automobile fleet, sellers of automotive salvage and other
commercial/industrial users make up a smaller percentage of the Company's
customer base. Automotive paint and related supplies, in contrast to labor and
parts, represent only a small portion (approximately 7-10%) of the total cost of
a typical collision repair job. However, while paint is a relatively minor
component of the total repair cost, it is a critical factor in the customer's
level of satisfaction.
The domestic wholesale aftermarket for automotive paint and related supplies is
characterized by a small number of manufacturers of paint and supplies. The five
predominant manufacturers of automotive paint distributed in the United States
are Akzo Nobel ("Sikkens"), BASF, DuPont, PPG, and The Sherwin-Williams Company
("Sherwin-Williams"). In addition, several other large foreign manufacturers
have recently taken steps to expand the distribution of their paint products in
the United States. 3M is the predominant manufacturer of related supplies which
include refinishing materials, supplies, accessories and tools such as sand
paper, masking tape and paint masks.
While automotive paint manufacturing is highly concentrated, automotive paint
distribution and the end users of automotive paint are highly fragmented. The
Company believes that a large number of independent distributors of automotive
paint serve an aggregate of approximately 50,000 collision repair shops
nationwide. Distributors, which tend to be family-owned with one to three
distribution sites, typically serve a highly localized customer base with each
distribution site serving customers located within 20 miles of the site
depending upon demographics, road access and geography.
Below is a Market Profile obtained from Collision Repair Industry INSIGHT:
Annual Shop
No. of Collision Revenue
Repair Shops ($Millions)
--------------------------------------------------------
9,000 $0.2
13,000 $0.2 to $0.3
12,500 $0.3 to $0.45
7,000 $0.45 to $0.6
3,500 $0.6 to $1.0
2,800 $1.0 to $2.0
800 $2.0 to $3.0
450 $3.0 to $5.0
100 $5.0
Due to the large number of end users, and their increasing demands for
personalized services such as multiple daily deliveries, assistance with
color-mixing and matching, and assistance with paint application techniques and
environmental compliance reporting, manufacturers typically service end users
through distributors such as FinishMaster. Nevertheless, some of the Company's
paint manufacturers have elected to operate company-owned distribution
facilities in selected markets, including markets in which the Company operates.
The Company believes, however, that the largest automotive paint manufacturers
have generally avoided the cost of operating their own distribution network due
to their inability to offer multiple lines of paint which prevents them from
spreading distribution expenses across the market's entire potential customer
base. Consequently, the Company believes that independent distributors such as
the Company, which can sell the products of several paint manufacturers, are
better situated to service the end users' needs than the distribution facilities
of automotive paint manufacturers.
- 2 -
Distributors and collision repair shops are in the process of consolidation due
to, among other things, the declining number of repair jobs. According to the
estimates of one industry source, the total number of vehicles on the road has
increased from approximately 140 million in 1980 to 215 million in 1997, while
the number of repair jobs has declined over this same period of time. This
decline is due to, among other things, automotive safety improvements such as
anti-lock brakes, rear window-placed brake lights and more reliable radial
tires. Stricter drunk driving laws, more vigorous law enforcement and the
increasing percentage of drivers reaching middle age have also resulted in fewer
accidents. Additionally, a higher percentage of collision damaged cars are
declared total losses, rather than repaired, due to uni-body construction and
rising costs of repair and refinishing. Over the past several years, the
industry has benefited from warranty work to repair defective paint finishes on
certain domestic vehicles manufactured in the late 1980s and early 1990s.
However, the Company believes that the volume of warranty repair work has
decreased significantly since 1995 because of steps taken by the major U.S.
automobile manufacturers to reduce multi-year warranty programs to repaint
certain vehicles. The Company does not expect to realize significant future
benefits from these former warranty programs.
The Company believes that environmental and other regulatory pressures and
technological advancements in paints and coatings are also significant factors
leading to consolidation of both distributors and collision repair shops.
Historically, the application of paints and coatings has released 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.
Furthermore, the application equipment itself has been improved. For example,
the latest high volume low pressure ("HVLP") spray guns deliver paint more
efficiently to a given surface, resulting in less paint being emitted into the
atmosphere. As a result, automotive refinishing has become a complex process,
often requiring advanced spray booths and air filtration systems to reduce
unwanted particulates and 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 or the financial resources to acquire the
necessary equipment. The Company believes that its experience in assisting
customers with regulatory compliance and reporting in California and Colorado
will be applicable in other geographic areas as EPA-sponsored VOC regulations
are enacted nationwide.
Further, insurance companies have begun to designate certain collision repair
shops as so-called "direct repair providers." As such, the designated collision
repair shops (approximately 12,000 in the U.S.) are directed business by the
insurance carriers in return for price concessions from customary rates. The
Company believes this trend favors larger, more efficient repair shops and will
likely continue in the foreseeable future.
Products and Suppliers
The Company offers its customers a comprehensive selection of prominent brand
name products and its own FinishMaster PrivateBrand products. The product line
consists of over 20,000 stock keeping units ("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.
- 3 -
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
Manufacturers and Suppliers Approximate
Product Category Number of SKUs Selected Brand
- ------------------------------------------------------------------------- -----------------------------------------------------
Branded Paints and Coatings 3+ 5,200 BASF, DuPont, PPG, others
Branded Accessories 3 8,300 3M, Dynatron, US Chemical
Private Label Accessories 25 100 FinishMaster
Other Miscellaneous Products 6,400 Various
- -------------------------------------------------------------------------------------------------------------------------------
Total 20,000
- -------------------------------------------------------------------------------------------------------------------------------
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. Products supplied by BASF, DuPont, 3M and PPG accounted for
approximately 60% of purchases in 1998. The Company continuously seeks
opportunities with new and existing suppliers to supply the highest quality
products.
The Company believes that BASF, DuPont, and PPG are market leaders, accounting
for a majority of total domestic automotive paint sales. The Company believes
that in 1998, it was the largest purchaser of aftermarket automotive paint in
the United States from each of these manufacturers. The Company also acquires a
modest amount of its paint requirements from several foreign manufacturers. As
is common industry practice, the Company does not maintain long-term supply
contracts with any of its key suppliers. 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. Although each of these suppliers generally competes with the others along
product lines, the Company does not believe the products are completely
interchangeable because of high brand loyalty among customers and their
brand-specific color matching computer systems. For this reason, the Company's
acquisition program is also dependent on the willingness of the principal paint
suppliers to continue to supply acquired businesses. The Company has agreements
with other warehouse suppliers for the purchase of certain paint and non-paint
supplies in specified geographic locations. Some of these agreements contain
minimum volume commitments.
- 4 -
Whenever practical, purchases from suppliers are made in large volumes to
maximize volume discounts and optimize payment terms. In addition, the Company's
size generally permits it to benefit from periodic special incentive programs
available from suppliers. These programs provide additional purchase discounts
and extended payment terms in exchange for large volume purchases. The Company
also benefits from manufacturer-provided discounts upon early payment of certain
accounts and from other supplier-supported programs. Branded products carry the
manufacturers' guaranties. Defective products typically may be returned to
manufacturers at no charge to the Company and obsolete products generally may be
returned for a slight restocking fee. Due to the manufacturers' favorable return
policies, the Company also accepts customer returns of defective or obsolete
products. The Company has arrangements with its suppliers that enable the
Company to return product to the suppliers subject to certain restocking
charges.
The Company purchases substantially all of its automotive paint related
accessories directly from 3M, although such supplies are also generally
available from independent warehouse distributors at somewhat higher costs. The
Company regularly purchases a small number of products not available directly
from the manufacturers and certain low volume items from independent warehouse
distributors.
Services
The Company offers comprehensive value-added services designed to assist
customers in operating their businesses more effectively. These services
include:
Rapid Delivery. Products are delivered to customers using the Company's delivery
fleet of approximately 800 trucks. The Company offers multiple daily deliveries
per customer to meet its customers' just-in-time inventory needs. Customer
concerns for product availability typically take priority over all other
competitive considerations, including price.
Technical Support. The Company's technical support personnel demonstrate and
recommend products. In addition, they assist customers with problems related to
their particular product applications. Equipment specialists provide information
to customers regarding their heavy equipment requirements, such as spray booths
and frame straightening equipment.
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 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 environmental regulations and compliance, techniques
to improve productivity, and industry trends.
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 sophisticated PC-based color matching equipment and specialists, the
Company provides color matching services to its customers.
- 5 -
Inventory Management. The Company performs monthly physical inventories for
customers who request this service. The Company also provides customers with
management information reports on product usage.
Assistance with Environmental Compliance Reporting. California air quality
regulations mandate paint and application methods which result in reduced
atmospheric emissions of paint and other related materials. In California, the
Company provides information to its customers with respect to air quality
reporting and arranges demonstrations of new products and applications designed
to comply with air quality regulations. In addition, in California and in
Colorado, the Company assists its customers with environmental reporting
requirements by providing special reports designed to simplify their compliance.
The EPA has proposed regulations to control VOC emissions from automobile
refinishing nationwide and, accordingly, the Company is considering an expansion
of these programs.
Personnel Placement. Certain of the Company's divisions maintain an employment
data base which includes employment openings and/or persons seeking employment
with collision repair shops located in the market served. Upon request from a
customer to fill an opening, the Company may provide the names of one or more
persons for the position. Similar services are available to persons seeking
employment. The Company does not charge for this service but benefits from
enhanced relationships with its customers and their employees.
Operations
Warehouse. The Company operates seven distribution centers which are located in
Michigan, California, Florida, North Carolina, and Colorado. Products are
delivered from the distribution centers to sales outlets weekly by the Company's
semi-trucks.
Sales Outlets. As of March 1, 1999, the Company operated 151 sales outlets
servicing customers in 22 states with a delivery fleet of approximately 800
vehicles. 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 or directly from the
manufacturer.
Management Information Systems. Each of the Company's sales outlets uses either
personal computers or terminals for inventory control and order processing. The
Company utilizes IBM AS/400 and HP 9000 computers to collect and process data
required for operations analysis, finance, warehouse and administrative
functions and the management of receivables and inventory. The Company believes
that its current systems are adequate but is in the process of migrating to a
single information technology platform. The Company has also implemented a
detailed plan to ensure Year 2000 compliance. For further information on the
Company's Year 2000 efforts and progress, see Item 7 -- "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Sales and Marketing
As of December 31, 1998, the Company employed a 322 person direct sales force.
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 the customer's 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.
- 6 -
Customers
The Company serves approximately 27,000 customers, none of which accounted for
more than 1% of the Company's sales. The Company believes that it is the
principal source of supply of automotive paint and related supplies for most of
its customers. In addition to independent collision repair shops and automobile
dealers, which are the Company's largest category of customers, the Company's
customers include van converters, trucking companies, schools, municipalities,
government agencies, sellers of automotive salvage, refinishers, marine and
aviation refinishers and other commercial and industrial users.
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. There are no other independent
national distributors of automotive refinish paints and accessories. There are a
number of independent regional distributors, many of which are in direct
competition with the Company on a regional or local level. Competition in the
purchase of independent distributors and sales outlets may occur between the
Company and other automotive refinishing distributors which are also pursuing
growth through acquisitions.
The Company may also encounter significant sales competition from new market
entrants, automotive paint manufacturers, buying groups or other large
distributors which may seek to enter such markets or may seek to compete with
the Company for attractive acquisition candidates. Although the largest
automotive paint manufacturers have generally not operated their own
distributors, or have done so only on a limited basis, they may decide to expand
such activity in the future. For example, Sherwin-Williams distributes its own
automotive paints through its sales 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 affected 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 van converters, small manufacturers and large
fleet operators.
Employees
As of December 31, 1998, the Company employed approximately 1,600 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.
Governmental Regulation
The Company is subject to various federal, state and local laws and regulations.
These regulations impose requirements on the Company and its customers and
provide opportunities to the Company for providing services to customers with
respect to the use of new products and applications designed to comply with air
quality 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 centers and
sales 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 operating costs in complying with such regulations. The Company
believes that, on balance, these regulations favorably affect the Company
because it is, in most instances, better able than its smaller competitors to
comply with such regulations and to assist its customers with compliance.
- 7 -
Environmental
The principal environmental legislation presently affecting the Company and its
customers in a significant manner is described below.
Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA regulates the
treatment, storage and disposal of hazardous and solid wastes. Under RCRA,
liability and stringent management standards are imposed on a person who is a
generator or transporter of a hazardous waste or an owner or operator of a waste
treatment, storage or disposal facility. At some of its locations, the Company
is subject to RCRA requirements as a small quantity generator.
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). CERCLA addresses cleanup of sites at which there has been or may be
a release of hazardous substances into the environment. CERCLA assigns liability
for costs of cleanup and for damage to natural resources (i) to any person who,
currently or at the time of disposal of a hazardous substance, owned or operated
any facility at which hazardous substances were deposited; (ii) to any person
who by agreement or otherwise arranged for the disposal or treatment, or
arranged with a transporter for transport for disposal or treatment of hazardous
substances owned or possessed by such person; and (iii) to any person who
accepted hazardous substances for transport to disposal or treatment facilities
or sites selected by such person from which there is a release or threatened
release of hazardous substances. The Company has acquired a number of businesses
which prior to acquisition may have sent waste to sites which have become
subject to government cleanup under CERCLA.
Clean Air Act and 1990 Amendments. The Clean Air Act requires compliance with
national ambient air quality standards ("NAAQS") and empowers the EPA to
establish and enforce limits on the emission of various pollutants from specific
types of facilities. The Clean Air Act Amendments of 1990 (the "Amendments")
modify the Clean Air Act in a number of significant areas. The Amendments, among
other things, establish new programs and deadlines for achieving compliance with
NAAQS, establish controls for hazardous air pollutants, establish a new national
permit program for all major sources of pollutants and create significant new
penalties, both civil and criminal, for violations of the Clean Air Act. The
Amendments specifically require a review of VOC emissions from commercial
products (which encompass emissions relating to the application of paint to
automobiles). Pursuant to this review, the EPA decided to develop regulations
controlling automotive refinishing coatings. At some of its locations the
Company is subject to the Clean Air Act because it uses paint spraying equipment
for paint matching and for training of customers.
Other Federal and State Environmental Laws. The Company's operations are subject
to regulation under, among others, the following federal laws: the Clean Water
Act, the Safe Drinking Water Act, the Emergency Planning and Community
Right-to-Know Act, the Occupational Safety and Health Act and the Hazardous
Materials Transportation Act. In addition, many states have other regulations
and policies to cover more detailed aspects of hazardous materials management.
Local Air Quality Regulations. The South Coast Air Quality Management District
(the "SCAQMD") (Southern California) and the Bay Area Air Quality Management
District (the "BAAQMD") (San Francisco Bay Area) have detailed regulations
pertaining to metal coating and the use of VOCs. These regulations prohibit the
sale of nonconforming automobile paint at the distributor level, which increases
somewhat the compliance obligations of the Western Division's distribution
sites. Other states have adopted VOC regulations which impose VOC limits similar
to the VOC limits proposed by the EPA. The national regulations proposed by the
EPA will not override more restrictive state and local regulations such as
California's regulations, which have the lowest VOC limits in the country. The
Company believes its experience with such regulations, including compliance
reporting and the use of paints and equipment designed to meet such regulations,
is not matched by most smaller competitors.
Compliance by the Company with environmental protection laws has had no material
effect upon capital expenditures, earnings or competitive position.
- 8 -
ITEM 2 - PROPERTIES
The following table sets forth certain information regarding the facilities
operated by the Company as of March 1, 1999.
Number of
Number of Distribution Centers
State (by Division) Sales Outlets
- --------------------------------------------------------------------------------
Central/Northeastern Division
Connecticut 3
Delaware 1
Illinois 4
Indiana 3
Maryland 3
Massachusetts 5
Michigan 11 1
New Jersey 7
Ohio 2
Oklahoma 1
Pennsylvania 3
Texas 11
Virginia 2
Wisconsin 4
- --------------------------------------------------------------------------------
60 1
Southeastern Division
Alabama 1
Florida 39 3
Georgia 3
North Carolina 6 1
South Carolina 4
Virginia 1
- --------------------------------------------------------------------------------
54 4
Western Division
Arizona 3
California 28 1
Colorado 6 1
- --------------------------------------------------------------------------------
37 2
- --------------------------------------------------------------------------------
Total Sales Outlets and
Distribution Centers 151 7
- --------------------------------------------------------------------------------
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 from which they supply other sales outlets. Sales outlets consist of
inventory storage areas, mixing facilities, display and counter space and, in
some instances, sales office space. Sales outlets are strategically located in
major markets to maximize market penetration, transportation logistics and
overall customer service. The Company's distribution centers range in size from
5,000 square feet to 38,500 square feet. The distribution centers are equipped
with efficient material handling and storage equipment.
- 9 -
The Company owns the distribution center and two sales outlets in Michigan, one
sales outlet in Indiana, and one in Florida. The remainder of the sales outlets
and the other distribution centers are leased with terms expiring from 1999 to
2006, with options to renew. The Company typically assumes the lease of the
former owner in acquisitions. In a number of instances, the Company's sales
outlets are leased from the former owners of businesses acquired by the Company.
The Company believes that all of its leases were at fair market rates when
executed, that presently no single lease is material to its operations, and that
alternative sites are presently available at market rates.
The Company is leasing 15,259 square feet of executive offices which are located
in Indianapolis, Indiana.
ITEM 3 - LEGAL PROCEEDINGS
In January 1999, the Company was named in an unfair business practices lawsuit
by an automotive paint distributor located in the State of California. The
plaintiff in such suit alleges that the Company offered, in a manner which
injured the plaintiff, rebates and cash bonuses to businesses in the Southern
California area if those businesses would buy exclusively from the Company and
use its products. The plaintiff claims damages in the amount of $3.8 million,
trebled to $11.4 million. The Company believes that the claims are without merit
and is aggressively defending itself against all allegations. Accordingly, it
has not recorded any loss provision relative to damages sought by the plaintiff
in this lawsuit.
The Company is subject to various claims and contingencies arising out of the
normal course of business, including those relating to commercial transactions,
product liability, automobile, taxes, discrimination, employment and other
matters. Management believes that the ultimate liability, if any, in excess of
amounts already provided or covered by insurance, is not likely to have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information concerning the executive officers
of the Company who are not also directors:
Thomas E. Case (age 53) serves as a Senior Vice President of the Company and as
the manager of its Western Division, a position he has held since June, 1998.
Mr. Case joined the Company upon completion of the Company's acquisition of
Thompson in November, 1997. Formerly, Mr. Case was a Vice President of Thompson
and served as the general manager of Thompson's California Division.
John Andre Lacy (age 34) joined the Company as Senior Vice President-Planning
and Marketing in January, 1999. From January, 1997 to December, 1998, Mr. Lacy
served as President of Tucker Rocky Distributing Canada, Inc., a leading
after-market distributor of motorcycle components and accessories. Prior to
this, Mr. Lacy earned an MBA from the University of Chicago and was a Vice
President at the J. Walter Thompson advertising company. Over his eight years in
the advertising field, Mr. Lacy managed package-goods assignments in both North
America and the Asia Pacific region. Mr. Lacy is the son of Andre B. Lacy, the
Chairman and Chief Executive Officer of the Company.
Robert R. Millard (age 41) joined the Company in October, 1998, as its Senior
Vice President-Finance and Chief Financial Officer. From February, 1996 until
September, 1998, Mr. Millard served as Vice President of Finance, Chief
Financial Officer, Secretary and Treasurer of Personnel Management, Inc., a
publicly-held personnel staffing company based in Indianapolis, Indiana. From
July, 1991 until January, 1996, Mr. Millard served as the Corporate Controller
of Lacy Diversified Industries, Ltd., an affiliate of LDI.
- 10 -
Roger A. Sorokin (age 58) has served as the Company's Senior Vice
President-Acquisitions and Development since November, 1998. Prior to such date,
Mr. Sorokin had served as Vice-President-Finance of the Company for more than
the previous five years.
Charles "Remy" Stephenson (age 44) was named Senior Vice President of the
Company, with responsibility for sales and store operations for the
Central/Northeastern Division, in October, 1997. Mr. Stephenson served as the
Company's Vice President of Marketing from August, 1997 to October, 1997. Prior
to joining the Company, Mr. Stephenson was employed by Sherwin-Williams Auto
Finishes Inc. as Director of Sales from September, 1994 to August, 1997 and as
Regional Director of the Western Region from October, 1991 to September, 1994.
Charles VanSlaars (age 48) serves as a Senior Vice President of the Company and
as the manager of its Southeastern Division, a position he has held since June,
1998. From June, 1996 until May, 1998, Mr. VanSlaars served as an executive
officer of AutoPaints. From 1994, until 1996, Mr. VanSlaars served as a Vice
President of Parts Depot Company, L.P., a Florida-based distributor of auto
paints.
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 holders of FinishMaster's common stock at December 31, 1998,
was approximately 600, based on information provided by the Company's transfer
agent.
The range of high and low prices reported by NASDAQ for the last twelve quarters
were:
Year Quarter Ended High Low
- --------------------------------------------------------------------------------
1997 March 31 $ 8-1/2 $ 5-3/4
1997 June 30 8-3/4 5-1/4
1997 September 30 8-3/4 5-3/8
1997 December 31 11-3/4 6-1/4
1998 March 31 11-3/4 7-3/4
1998 June 30 10-3/4 8-5/8
1998 September 30 10 5-1/4
1998 December 31 7-3/8 3-1/2
The closing price on March 26, 1999 was $5-3/4. 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.
Consistent with FinishMaster's current capital structure, effective April 5,
1999, shares of FinishMaster's common stock will be traded on The Nasdaq
SmallCap Market.
On June 30, 1998, the Company completed the acquisition by merger of AutoPaints
in exchange for the issuance of 1,542,416 shares of the Company's common stock.
Such shares were issued to Lacy Distribution, Inc., the majority shareholder of
the Company and a wholly owned subsidiary of LDI. Such shares were issued
pursuant to the exemption provided in Section 4(2) of the Securities Act of
1933, as amended.
- 11 -
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the years ended
December 31, 1998 and 1997 and the nine months ended December 31, 1996, are
derived from the Company's audited consolidated financial statements which are
included elsewhere herein. The selected consolidated financial data as of and
for the years ended March 31, 1996 and 1995 are derived from the Company's
audited consolidated financial statements which are not included herein. The
financial data should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto, included elsewhere herein,
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Nine Months Fiscal
Year Ended Ended Year Ended
December 31, December 31, March 31,
-------------------------------- ---------------- ------------------------------
(In thousands, except per share data) 1998 (2)(3) 1997 (2) 1996 (1) 1996 1995
--------------- --------------- ---------------- ------------- -------------
Per Share
Net income
Basic $ 0.29 $ 0.11 $ 0.11 $ 0.44 $ 0.58
Diluted $ 0.29 $ 0.11 $ 0.11 $ 0.44 $ 0.58
Pro forma net income (loss) (4) $ 0.33 $ (1.01) $ - $ - $ -
Statements of Operations Data
Net sales $ 309,946 $ 130,175 $ 95,822 $ 107,511 $ 79,382
Gross margin $ 109,678 $ 47,107 $ 33,891 $ 38,012 $ 28,048
Income from operations $ 15,895 $ 3,832 $ 2,566 $ 5,073 $ 5,394
Net income $ 1,988 $ 656 $ 660 $ 2,649 $ 3,462
Pro forma net income (loss) (4) $ 2,459 $ (7,585) $ - $ - $ -
Weighted average
shares outstanding 6,780 5,994 6,000 6,000 6,000
Pro forma weighted average
shares outstanding 7,536 7,536 - - -
December 31, March 31,
-------------------------------------------------- --------------------------------
1998 (3) 1997 (2) 1996 1996 (1) 1995
--------------- --------------- ---------------- --------------- ---------------
Balance Sheet Data
Working capital $ 42,296 $ 42,928 $ 22,819 $ 25,036 $ 17,763
Total assets $ 226,947 $ 215,418 $ 66,477 $ 66,772 $ 46,442
Long-term debt $ 119,120 $ 134,135 $ 17,831 $ 19,605 $ 5,952
Shareholders' equity $ 49,348 $ 32,932 $ 32,326 $ 31,665 $ 28,956
(1) The Company changed its fiscal year-end from March 31 to December 31,
effective for the period ended December 31, 1996.
(2) The operating results for the years ended December 31, 1998 and 1997 are
affected by the acquisition of Thompson on November 21, 1997. The
operating results of Thompson are included in the Company's consolidated
operating results since the acquisition date.
(3) The operating results for the year ended December 31, 1998 are affected by
the acquisition of AutoPaints on June 30, 1998. The operating results of
AutoPaints for the six-month period from July 1, 1998 through December 31,
1998 are included in the Company's December 31, 1998 consolidated
operating results.
(4) Pro forma amounts for the years ended December 31, 1998 and 1997 have been
prepared to give effect to the acquisitions of Thompson and AutoPaints as
if the transactions had occurred on January 1, 1997. These amounts are
unaudited and are presented for informational purposes only. The unaudited
pro forma financial amounts should be read in conjunction with Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
- 12 -
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis about the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and related notes presented in this annual report.
Overview
FinishMaster, Inc. is the leading distributor of automotive paints, coatings and
paint-related accessories to the automotive collision repair industry in the
United States. The Company serves its customers through 151 sales outlets and
seven distribution centers located in 22 states. The Company has approximately
27,000 customers to which 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. The Company is
typically the primary source of supply to its customers and offers a broad range
of services designed to enhance the operating efficiencies and competitive
positions of its customers and suppliers. The Company's operations are currently
organized into three divisions: Southeastern, Western, and Central/Northeastern.
The Company is the leading consolidator in the automotive refinishing
distribution industry, having successfully completed approximately 25
acquisitions over the past seven years, ranging from fill-in acquisitions to the
more recent strategic acquisitions of Thompson and AutoPaints.
On November 21, 1997, the Company acquired Thompson for an aggregate purchase
price of approximately $73.5 million, including acquisition costs. In addition
to the cash purchase price, the Company refinanced approximately $34.5 million
of Thompson indebtedness in conjunction with the transaction. The Thompson
acquisition significantly expanded the Company's geographic presence in the
Southeastern and Western United States.
On June 30, 1998, the Company completed the acquisition by merger of AutoPaints
in exchange for the issuance of 1.5 million shares of the Company's common
stock. Since AutoPaints was acquired from the Company's majority shareholder,
the acquisition constituted a transaction within a controlled group. Thus, the
acquisition was accounted for using the historical cost basis of AutoPaints' net
assets, which approximated $14.4 million at the date of acquisition. The Company
intends to continue its strategy of expanding through additional acquisitions.
Results of Operations
The Company changed its fiscal year-end from March 31 to December 31, effective
for the period ended December 31, 1996. As a result, the audited amounts for the
years ended December 31, 1998 and 1997 are presented with the comparable
unaudited amounts for the twelve months ended December 31, 1996. Furthermore, as
a result of the significant acquisitions completed in the past two years of
Thompson and AutoPaints, pro forma results of operations are also presented for
the years ended December 31, 1998 and 1997. The Company believes that for
purposes of Management's Discussion and Analysis, a more meaningful
understanding of the Company's performance can be obtained by a comparison of
the pro forma results for the years ended December 31, 1998 and 1997, and the
historical twelve-month results for the periods ended December 31, 1997 and
1996.
- 13 -
The unaudited pro forma consolidated amounts for the years ended December 31,
1998 and 1997 have been prepared to give effect to the acquisitions of Thompson
and AutoPaints as if the transactions had occurred on January 1, 1997. In
calculating the pro forma amounts, the historical amounts of the Company and the
acquired entities have been adjusted for items directly attributable to the
acquisitions including interest expense related to acquisition financing,
charges for amortization of intangibles, depreciation of fair value adjustments
to property and equipment, and the related tax effects. The unaudited pro forma
amounts do not purport to be indicative of the results of operations that would
have actually been obtained if the transactions had occurred on January 1, 1997,
or the results of operations that may be obtained in the future.
Net Sales
- -------------------------------------------------------------------------------
(In thousands) 1998 Change 1997 Change 1996
(unaudited)
- -------------------------------------------------------------------------------
Historical $ 309,946 138.1% $ 130,175 3.5% $ 125,795
- -------------------------------------------------------------------------------
Pro forma $ 321,710 4.8% $ 337,818
- -------------------------------------------------------------------------------
Pro forma net sales decreased $16.1 million or 4.8% from 1997 to 1998. With the
acquisition of Thompson and AutoPaints, certain unprofitable store locations
were closed and store locations serving the same geographical area were
consolidated. The closure and consolidation of 22 sales outlets during this time
period decreased sales between 1997 and 1998 by approximately $10.1 million.
Same store sales declined approximately $7.0 million or 2.1% as a result of flat
industry market conditions, the anticipated customer attrition related to the
acquisition and integration of Thompson and AutoPaints, and competitive market
conditions. Approximately 70% of net sales consisted of automotive paint
products while the remaining portion was paint-related accessories.
Net sales increased by $4.4 million or 3.5% from 1996 to 1997. This increase was
attributable to the additional sales contributed by Thompson of $12.4 million
for the month of December and sales from other acquisitions of $1.7 million for
the year. The Thompson sales were offset by a decline in same store sales. Same
store sales declined primarily due to a slowdown in the van conversion industry,
the exiting of certain low margin business, and flat industry market conditions.
Gross Margin
- --------------------------------------------------------------------------------
(In thousands) 1998 Change 1997 Change 1996
(unaudited)
- --------------------------------------------------------------------------------
Historical $ 109,678 132.8% $ 47,107 6.6% $ 44,204
Percentage of net sales 35.4% 36.2% 35.1%
- --------------------------------------------------------------------------------
Pro forma $ 114,199 2.8% $ 117,495
Percentage of net sales 35.5% 34.8%
- --------------------------------------------------------------------------------
Pro forma gross margin decreased $3.3 million or 2.8% between 1997 and 1998 due
primarily to the decrease in pro forma net sales. Lower pro forma net sales
volume impacted gross margin in 1998 by approximately $5.6 million. Partially
offsetting this amount was an improvement in pro forma gross margin as a
percentage of net sales. With increased inventory purchase volumes in 1998, the
Company was better able to take advantage of vendor discounts and supplier
incentive programs.
- 14 -
Gross margin increased by $2.9 million or 6.6% from 1996 to 1997 on higher net
sales. The increase in gross margin as a percentage of net sales was the result
of participation in suppliers' rebate and incentive programs and optimizing
prompt payment discounts from suppliers.
Operating Expenses
- -------------------------------------------------------------------------------
(In thousands) 1998 Change 1997 Change 1996
(unaudited)
- -------------------------------------------------------------------------------
Historical operating
expenses $46,746 127.3% $ 20,568 1.3% $ 20,295
Percentage of net sales 15.1% 15.8% 16.1%
- -------------------------------------------------------------------------------
Pro forma operating
expenses $48,099 17.1% $ 57,993
Percentage of net sales 15.0% 17.2%
- -------------------------------------------------------------------------------
Operating expenses consist of wages, facility expenses, vehicle and related
costs for the Company's store and distribution locations. Pro forma operating
expenses decreased $9.9 million or 17.1% between 1997 and 1998. This decrease
was a direct result of the Company's profit improvement initiatives that
included savings from the consolidation or closure of 22 sales outlets following
the acquisitions of Thompson and AutoPaints, reduced spending programs at store
and distribution locations, and improved bad debt experience. Also contributing
to the decrease is the inclusion in 1997 of a $3.8 million Thompson charge taken
prior to the acquisition to close five sales outlets and to consolidate five
other sites into existing locations. The charge included the write-off of
unamortized goodwill and future lease costs associated with closed locations.
Operating expenses increased from 1996 to 1997 by $0.3 million or 1.3%. As a
percentage of net sales, operating expenses decreased from 16.1% to 15.8%. This
decrease in operating expenses as a percentage of net sales was a result of the
Company's profit improvement activities, including, but not limited to, staffing
reductions and streamlining store and distribution activities, which reduced
operating expenses by approximately $2.4 million. Offsetting these savings were
Thompson's operating expenses of $2.3 million for the month of December and
operating expenses associated with other acquisitions of $0.4 million.
Selling, General and Administrative Expenses
- -------------------------------------------------------------------------------
(In thousands) 1998 Change 1997 Change 1996
(unaudited)
- -------------------------------------------------------------------------------
Historical $ 36,895 105.2% $ 17,982 3.2% $ 17,427
Percentage of net sales 11.9% 13.8% 13.9%
- -------------------------------------------------------------------------------
Pro forma $ 38,510 16.5% $ 46,126
Percentage of net sales 12.0% 13.7%
- -------------------------------------------------------------------------------
Selling, general and administrative expenses ("SG&A") consist of costs
associated with the Company's corporate support staff and expenses for
commissions, wages, and customer sales support activities. Pro forma SG&A
expenses decreased $7.6 million or 16.5% between 1997 and 1998 as a result of
the consolidation of four corporate offices into one, the closure and
consolidation of 22 sales outlets, reduced spending initiatives and lower
selling expenses related to the reduced sales volume. Effective March 1998, the
Company moved its corporate offices to Indianapolis, Indiana.
- 15 -
SG&A expenses increased $0.6 million or 3.2% from 1996 to 1997, but decreased by
0.1% as a percentage of net sales. SG&A expenses were reduced approximately $2.5
million as the result of the Company's cost reduction activities, that included
reductions in head count, professional fees, travel and entertainment, and
advertising. These savings were offset by Thompson's SG&A expenses for the month
of December 1997 of $2.2 million, SG&A expenses from other acquisitions of $0.3
million, and one time costs related to the integration of Thompson of $0.6
million.
Depreciation
- -------------------------------------------------------------------------------
(In thousands) 1998 Change 1997 Change 1996
(unaudited)
- -------------------------------------------------------------------------------
Historical $ 3,666 155.5% $ 1,435 47.3% $ 974
Percentage of net sales 1.2% 1.1% 0.8%
- -------------------------------------------------------------------------------
Pro forma $ 3,898 3.0% $ 3,784
Percentage of net sales 1.2% 1.1%
- -------------------------------------------------------------------------------
The $0.1 million or 3.0% increase in pro forma depreciation expense from 1997 to
1998 was due to capital expenditures of $3.3 million in the current year.
Included in current year expenditures is $1.0 million for new information
technology equipment associated with a continuing upgrade of the Company's
management information systems.
The $0.5 million or 47.3% increase in 1997 depreciation expense from the prior
year was attributable to $0.2 million of depreciation for the month of December
1997 from assets acquired in the Thompson acquisition, $0.3 million from 1997
capital expenditures and a full year's depreciation on assets from prior year
acquisitions.
Amortization of Intangible Assets
- --------------------------------------------------------------------------------
(In thousands) 1998 Change 1997 Change 1996
(unaudited)
- -------------------------------------------------------------------------------
Historical $ 6,476 96.8% $ 3,290 32.3% $ 2,487
Percentage of net sales 2.1% 2.5% 2.0%
- -------------------------------------------------------------------------------
Pro forma $ 6,996 0.8% $ 7,052
Percentage of net sales 2.2% 2.1%
- -------------------------------------------------------------------------------
The 0.8% decrease in pro forma amortization expense between 1997 and 1998 was a
result of certain intangible assets, principally non-compete agreements,
becoming fully amortized in the current year.
The $0.8 million or 32.3% increase in amortization expense between 1996 and 1997
was attributable to $0.3 million of goodwill amortization associated with the
Thompson acquisition for the month of December 1997 and $0.5 million
representing a full year's amortization from prior year acquisitions.
Interest Expense, net
- -------------------------------------------------------------------------------
(In thousands) 1998 Change 1997 Change 1996
(unaudited)
- -------------------------------------------------------------------------------
Historical $ 11,475 331.2% $ 2,661 64.9% $ 1,614
Percentage of net sales 3.7% 2.0% 1.3%
- -------------------------------------------------------------------------------
Pro forma $ 11,510 13.1% $ 13,240
Percentage of net sales 3.6% 3.9%
- -------------------------------------------------------------------------------
- 16 -
Pro forma interest expense decreased $1.7 million or 13.1% between 1997 and 1998
due to lower outstanding borrowings and interest rates. The Company repaid $14.6
million of outstanding borrowings in 1998 and the implied interest rates on
these borrowings fell from 9.2% to 8.6%.
Interest expense increased $1.0 million or 64.9% from 1996 to 1997. This
increase was principally the result of interest on debt incurred to finance the
Thompson acquisition that occurred on November 21, 1997 and to refinance
Thompson indebtedness at the date of acquisition. The total acquisition price
for Thompson was $73.5 million and the debt refinanced approximated $34.5
million.
Income Tax Expense (Benefit)
- -------------------------------------------------------------------------------
(In thousands) 1998 Change 1997 Change 1996
(unaudited)
- -------------------------------------------------------------------------------
Historical $ 2,432 372.2% $ 515 30.9% $ 745
Percentage of net sales 0.8% 0.4% 0.6%
Effective tax rate 55.0% 44.0% 52.9%
- -------------------------------------------------------------------------------
Pro forma $ 2,727 N/A $(3,115)
Percentage of net sales 0.8% (0.9%)
Effective tax rate 52.6% 29.1%
- -------------------------------------------------------------------------------
The pro forma income tax expense reflected in 1998, compared to the tax benefit
in the prior year, is directly attributable to the pro forma income before
income taxes in 1998. The pro forma effective tax rate varied from the federal
statutory rate as a result of certain expenses, principally nondeductible
intangible amortization. The nondeductible amortization increased the effective
tax rate in 1998, and decreased the effective rate in 1997 as a result of the
losses incurred. The effect on the 1997 rate was somewhat lessened as a result
of the higher level of pre-tax losses.
The effective tax rate for 1997 decreased to 44.0% from 52.9% in 1996 due
primarily to lower state taxes and the effect of certain expenses that are not
deductible for income tax purposes.
- 17 -
Net Income (Loss) and Income (Loss) Per Share
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 Change 1997 Change 1996
(unaudited)
- ---------------------------------------------------------------------------------------------------------
Historical net income $ 1,988 203.0% $ 656 0.9% $ 662
Percentage of net sales 0.6% 0.5% 0.5%
Net income per share $ 0.29 163.6% $ 0.11 0.0% $ 0.11
- ---------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 2,459 N/A $(7,585)
Percentage of net sales 0.8% (2.2%)
Pro forma net income (loss)
per share $ 0.33 N/A $ (1.01)
- ---------------------------------------------------------------------------------------------------------
Factors contributing to the changes in net income and pro forma net income and
the related per share amounts are discussed in the detail above.
Inflation and Other Economic Factors
Inflation affects 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. The Company's financial performance is also
dependent on its ability to acquire businesses and profitably integrate them
into its operations.
Quantitative and Qualitative Disclosure about Market Risk
The Company had no holdings of derivative financial or commodity based
instruments at December 31, 1998 and 1997. A review of the Company's other
financial instruments and risk exposures indicated the Company had exposure to
interest rate risk. Based upon the Company's outstanding debt at December 31,
1998 and the term for which current interest rates are fixed, a 10% increase in
interest rates would increase interest expense for 1999 by an estimated $0.5
million.
Seasonality and Quarterly Fluctuations
The Company's sales and operating results have varied from quarter to quarter
due to various factors and the Company expects these fluctuations to continue.
Among these factors are seasonal buying patterns of the Company's customers and
the timing of acquisitions. Historically, 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 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 special incentive programs available from
its suppliers that extend the due date of inventory purchases beyond terms
normally available with large volume purchases. The timing of these programs can
contribute to fluctuations in the Company's quarterly cash flows. 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 flows will not continue to
display seasonal patterns.
- 18 -
Financial Condition, Liquidity and Capital Resources
- ------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 (1)
- ------------------------------------------------------------------------------------------------
Working capital $ 42,296 $ 42,928 $ 22,819
Long-term debt $ 119,120 $ 134,135 $ 17,831
Cash provided by operating activities $ 17,599 $ 1,257 $ 2,342
Cash used in investing activities $ (2,168) $ (74,846) $ (3,714)
Cash (used in) provided by financing activities $ (14,786) $ 73,653 $ 563
- ------------------------------------------------------------------------------------------------
(1) The cash flow amounts for 1996 are for the nine months ended December 31,
1996.
The Company's primary sources of funds over the past three years were from
operations and borrowings under its credit facilities. The Company's principal
uses of cash were to fund working capital, capital expenditures, acquisitions,
and the repayment of outstanding borrowings.
Net cash generated from operating activities was $17.6 million in 1998 compared
with $1.3 million in 1997. This increase was a result of higher earnings,
increased depreciation and amortization expense and a positive change in
operating assets and liabilities. Depreciation and amortization expense
increased as a result of the properties and intangible assets acquired with the
AutoPaints merger, a full year's amortization on the assets acquired in the
Thompson acquisition and a higher level of capital expenditures in the current
year. The positive change in operating assets and liabilities was primarily due
to a higher level of accounts payable and other liabilities at December 31,
1998.
Net cash used in investing activities decreased from $74.8 million in 1997 to
$2.2 million in 1998. This decrease from 1997 was attributable to the $73.5
million purchase of Thompson. Investing activities in 1998 included $3.3 million
for capital expenditures, partially offset by $1.8 million of cash acquired
through the merger with AutoPaints. The Company estimates that capital
expenditures for 1999, principally for information technology equipment, will
approximate $3.5 million.
Net cash used in financing activities, primarily the repayment of debt, was
$14.8 million in 1998, compared with $73.7 million of cash provided in 1997.
Borrowings to finance the acquisition of Thompson were the primary source of
cash for investing activities in the prior year.
Total capitalization at December 31, 1998 was $178.5 million, comprised of
$129.1 million of debt and $49.4 million of equity. Debt as a percentage of
total capitalization decreased from 81.2% to 72.3% between 1997 and 1998. This
improvement was attributable to the increase in equity resulting from the merger
with AutoPaints and current year net income, along with the decrease in debt
resulting from repayments.
- 19 -
At December 31, 1998, the Company had term credit and revolving credit
facilities totaling $100 million, and senior subordinated debt of $30 million.
The Company also had a senior subordinated revolving credit facility in the
amount of $10 million with its majority shareholder, which was available to fund
working capital and acquisition needs. This facility expires on March 27, 1999.
The Company was in compliance with the covenants underlying its credit
facilities, and had availability under its revolving credit facility of $1.9
million as of year-end.
Based on current and projected operating results and giving effect to total
indebtedness, the Company believes that cash flow from operations and funds
available from lenders and other creditors will provide adequate funds for
ongoing operations, debt service and planned capital expenditures. The Company
is, however, currently pursuing other financing arrangements. Should the Company
be successful in obtaining acceptable financing terms, proceeds will be used to
retire certain bank term loans, a portion of amounts outstanding under the
revolving credit facility and the subordinated debt payable to LDI. Early
retirement of indebtedness will result in an extraordinary loss in the amount of
the net book value of capitalized debt issuance costs. At December 31, 1998,
unamortized debt issuance costs were approximately $1.5 million.
Year 2000 Date Conversion
Many existing computer programs use only two digits to identify years. These
programs were designed without consideration for the effects of the upcoming
change in the century, and if not corrected, could fail or create erroneous
results by or at the Year 2000. Essentially all of the Company's information and
technology-based systems, as well as many non-information technology-based
systems, are potentially affected by the Year 2000 issue. Technology-based
systems reside on the Company's midrange computer, servers and personal
computers in the corporate office as well as in division offices and stores.
Specific systems include accounting, financial reporting, inventory tracking and
control, budgeting, tax, accounts receivable, accounts payable, purchasing,
distribution, word processing and spreadsheet applications. Non-information
technology-based systems include equipment and services containing embedded
microprocessors such as alarm systems and voice mail systems. The Company has
relationships with numerous third parties, including several paint
manufacturers, equipment suppliers, utility companies, insurance companies,
banks, and payroll processors, that may be affected by the Year 2000 issue.
The Company's State of Readiness
Remediation plans have been established for all major systems potentially
affected by the Year 2000 issue. The current status of the plans for information
technology-based systems are summarized as follows:
1. Identification of all applications and hardware with potential Year 2000
issues. To the best of the Company's knowledge, this has been completed.
2. For each item identified, performance of an assessment to determine an
appropriate action plan and timetable for remediation of each item. The
plan may consist of replacement, upgrade or elimination of the application.
This phase has been completed.
3. Implementation of the specific action plan. Action plans have been
completed for all known mission critical systems.
4. Testing each application upon completion. All in-house developed systems
have been tested and found to be compliant. Vendor-supplied software has
been upgraded to Year 2000 compliant versions, and the Company has
certification of compliance from the software vendors.
5. Placement of the new process into production. All applications and systems
will be in production by the end of the first quarter of 1999. The
exception to this is the store paint formula systems supplied by paint
vendors. These systems will be upgraded by the end of the third quarter of
1999.
- 20 -
The Company is in the process of identifying all non-information technology
based systems. Appropriate remediation plans are being developed, implemented
and tested when each affected system is identified. Identification should be
completed by the end of the first quarter of 1999 and remedied by the end of the
third quarter.
Identification of areas of potential third party risk is nearly complete and,
for those areas identified to date, remediation plans are being developed.
Identification and assessment should be completed by the end of the second
quarter of 1999 and implemented by the end of the third quarter of 1999.
The Costs Involved
The total cost to the Company of achieving Year 2000 compliance is not expected
to exceed $0.2 million and will consist primarily of the utilization of internal
resources. Spending to date totals approximately $0.1 million. Costs relating to
internal systems' Year 2000 compliance are included in the Information Systems
budget and are immaterial as a percentage of that budget. All costs related to
achieving Year 2000 compliance are based on management's best estimates. There
can be no assurance that actual results will not differ from these estimates.
Risks and Contingency Plan
The Company is in the process of determining the risks it would face in the
event certain aspects of its Year 2000 remediation plan failed. It is also
developing contingency plans for all mission-critical processes. Under a "worst
case" scenario, the Company's operations would be unable to deliver product due
to internal system failures and/or the inability of vendors to deliver materials
for distribution. Inventory levels of certain key products may be temporarily
increased to minimize exposure. While virtually all internal systems can be
replaced with manual systems on a temporary basis, the failure of any
mission-critical system will have at least a short-term negative effect on
operations. The failure of national and worldwide banking information systems or
the loss of essential utilities services due to the Year 2000 issue could result
in the inability of many businesses, including the Company, to conduct business.
Risk assessment should be completed by the end of the first quarter, and
contingency plans should be completed in the third quarter of 1999.
Other Matters
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes standards for derivative
instruments and hedging activities and will require all derivatives to be
recognized on the balance sheet at fair value. As the Company is not routinely
involved in derivative and hedging activities, adoption of this Statement is not
expected to have a material impact on financial condition or results of
operations. The Company is required to adopt this Statement in the third quarter
of 1999.
Forward-Looking Statements
This Report contains certain forward-looking statements pertaining to, among
other things, the Company's future results of operations, cash flow needs and
liquidity, acquisitions, and other aspects of its business. The Company may make
similar forward-looking statements from time to time. These statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties. Actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include changes in external market factors, changes
in the Company's business strategy or an inability to execute its strategy due
to changes in its industry or the economy generally, difficulties associated
with assimilating acquisitions, the emergence of new or growing competitors,
seasonal and quarterly fluctuations, governmental regulations, the potential
loss of key suppliers, and various other competitive factors. In light of these
risks and uncertainties, there can be no assurance that the future developments
described in the forward-looking statements contained in this Report will in
fact occur.
- 21 -
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
Report of Independent Accountants 23
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Cash Flows 26
Consolidated Statements of Shareholders' Equity 27
Notes to Consolidated Financial Statements 28
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
- 22 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of FinishMaster, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
FinishMaster, Inc. and its subsidiaries (the "Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended and for the nine months ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 26, 1999
- 23 -
CONSOLIDATED
BALANCE SHEETS
FinishMaster, Inc.
December 31, December 31,
(In thousands, except share amounts) 1998 1997
ASSETS
Current assets
Cash $ 1,009 $ 364
Accounts receivable, net of allowance for doubtful
accounts of $1,680 and $2,247, respectively 30,212 28,744
Inventory 57,744 53,442
Refundable income taxes 1,395 1,299
Deferred income taxes 3,788 3,844
Prepaid expenses and other current assets 3,739 2,751
--------------------------------------
Total current assets 97,887 90,444
Property and equipment
Land 368 368
Vehicles 1,362 1,082
Buildings and improvements 5,428 3,797
Machinery, equipment and fixtures 11,925 9,065
--------------------------------------
19,083 14,312
Accumulated depreciation (7,824) (4,016)
--------------------------------------
11,259 10,296
Other assets
Intangible assets, net 114,526 110,870
Deferred income taxes 2,888 3,374
Other 387 434
--------------------------------------
117,801 114,678
--------------------------------------
$ 226,947 $ 215,418
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 35,921 $ 28,227
Amounts due to LDI 864 47
Accrued compensation and benefits 3,836 3,066
Other accrued expenses and current liabilities 4,985 8,171
Current maturities of long-term debt 9,985 8,005
--------------------------------------
Total current liabilities 55,591 47,516
Long-term debt, less current maturities 119,120 134,135
Other long-term liabilities 2,888 835
Commitments and contingencies (Note 8)
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $1 stated value; 25,000,000 shares authorized;
7,535,856 and 5,992,640 shares issued and outstanding 7,536 5,993
Additional paid-in capital 27,351 14,466
Retained earnings 14,461 12,473
--------------------------------------
49,348 32,932
--------------------------------------
$ 226,947 $ 215,418
======================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 24 -
CONSOLIDATED STATEMENTS
OF OPERATIONS
FinishMaster, Inc.
Nine
Year Year Months
Ended Ended Ended
December 31, December 31, December 31,
(In thousands, except per share data) 1998 1997 1996
Net sales $ 309,946 $ 130,175 $ 95,822
Cost of sales 200,268 83,068 61,931
-----------------------------------------------------------
Gross margin 109,678 47,107 33,891
Expenses
Operating 46,746 20,568 15,313
Selling, general and administrative 36,895 17,982 13,192
Depreciation 3,666 1,435 755
Amortization of intangible assets 6,476 3,290 2,065
-----------------------------------------------------------
93,783 43,275 31,325
-----------------------------------------------------------
Income from operations 15,895 3,832 2,566
Other income (expense)
Investment income 56 128 77
Interest expense (11,531) (2,789) (1,373)
-----------------------------------------------------------
(11,475) (2,661) (1,296)
-----------------------------------------------------------
Income before income taxes 4,420 1,171 1,270
Income tax expense 2,432 515 610
-----------------------------------------------------------
Net income $ 1,988 $ 656 $ 660
===========================================================
Net income per share (Note 10):
Basic $ 0.29 $ 0.11 $ 0.11
===========================================================
Diluted $ 0.29 $ 0.11 $ 0.11
===========================================================
Weighted average shares outstanding 6,780 5,994 6,000
===========================================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 25 -
CONSOLIDATED STATEMENTS
OF CASH FLOWS
FinishMaster, Inc.
Nine
Year Year Months
Ended Ended Ended
December 31, December 31, December 31,
(In thousands) 1998 1997 1996
Operating activities
Net income $ 1,988 $ 656 $ 660
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,142 4,725 2,820
Amortization of financing costs 322 -- --
Deferred income taxes 2,249 (681) (400)
Changes in operating assets and liabilities:
Accounts receivable, net 758 4,247 3,122
Inventories (15) (1,456) (815)
Prepaids and other assets (707) 177 (270)
Accounts payable and other liabilities 2,862 (6,411) (2,775)
----------------------------------------------
Net cash provided by operating activities 17,599 1,257 2,342
Investing activities
Business acquisitions and payments under
earn-out provisions for prior acquisitions (191) (74,149) (3,083)
Purchases of property and equipment (3,349) (697) (620)
Proceeds from disposal of property and equipment 58 -- --
Cash acquired through merger with LDI
AutoPaints, Inc. 1,786 -- --
Other (472) -- (11)
----------------------------------------------
Net cash used in investing activities (2,168) (74,846) (3,714)
Financing activities
Borrowings under note payable, bank -- 20,603 21,255
Repayments under note payable, bank -- (22,444) (19,415)
Purchase of common stock -- (50) --
Acquisition financing -- 73,819 1,191
Proceeds from the exercise of stock options 7 -- 1
Debt issuance costs (168) (1,689) --
Proceeds from long-term debt 43,300 41,951 --
Repayment of long-term debt (57,925) (38,537) (2,469)
----------------------------------------------
Net cash (used in) provided by financing activities (14,786) 73,653 563
----------------------------------------------
Increase (decrease) in cash 645 64 (809)
Cash at beginning of period 364 300 1,109
----------------------------------------------
Cash at end of period $ 1,009 $ 364 $ 300
==============================================
Supplemental disclosure of cash flow information
Cash paid (received) during the period for:
Interest $ 10,360 $ 2,192 $ 1,313
==============================================
Taxes $ (291) $ 1,520 $ 687
==============================================
Non-cash activities
Acquisition of LDI AutoPaints, Inc.:
Assets acquired $ 17,667
Less liabilities assumed 3,246
---------
Equity purchased 14,421
Less cash acquired in transaction 1,786
---------
Net assets acquired, excluding cash $ 12,635
=========
Earn-out adjustments for prior acquisitions $ 810 $ -- $ --
==============================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 26 -
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
FinishMaster, Inc.
Additional
Common Paid-in Retained
(In thousands) Stock Capital Earnings Totals
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
Purchase of common stock (7) (43) - (50)
Net income for the year - - 656 656
---------------------------------------------------------------------------
Balances at
December 31, 1997 5,993 14,466 12,473 32,932
Options exercised 1 6 - 7
Issuance of stock related to merger of
LDI AutoPaints, Inc. 1,542 12,879 - 14,421
Net income for the year - - 1,988 1,988
---------------------------------------------------------------------------
Balances at
December 31, 1998 $ 7,536 $ 27,351 $ 14,461 $ 49,348
===========================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 27 -
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FinishMaster, Inc.
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: FinishMaster, Inc. ("the Company" or "FinishMaster") is the
leading national distributor of automotive paints, coatings, and paint-related
accessories to the automotive collision repair industry. As of December 31,
1998, the Company operated 151 sales outlets and seven distribution centers in
22 states and is organized into three major geographic regions - the
Southeastern, Western, and Central/Northeastern Divisions. The Company has
approximately 27,000 customers to which 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. The Company is highly
dependent on the key suppliers outlined above, which account for 60% of the
Company's purchases.
Principles of Consolidation: The Company's consolidated financial statements
include the accounts of FinishMaster and Refinishers Warehouse, Inc., as well as
Thompson PBE, Inc., ("Thompson") and LDI AutoPaints, Inc., from the dates of
their respective acquisitions. All significant intercompany accounts and
transactions are eliminated. References to the Company or FinishMaster
throughout this report relate to the consolidated entity.
Majority Shareholder: At December 31, 1997, LDI AutoPaints, Inc., ("AutoPaints")
owned 4,045,100 shares of FinishMaster common stock, representing a 67.5%
ownership interest in the Company. AutoPaints was a wholly-owned subsidiary of
Lacy Distribution, Inc. ("Distribution"), an Indiana corporation, which is an
indirect wholly-owned subsidiary of LDI, Ltd., ("LDI"), an Indiana limited
partnership. Effective June 30, 1998, AutoPaints was merged into the Company
(see Note 2, Acquisitions) in exchange for the issuance of an additional
1,542,416 shares of FinishMaster common stock. Upon completion of this
transaction, Distribution became the majority shareholder of the Company with
5,587,516 shares of common stock, representing 74.1% of the outstanding shares
at December 31, 1998. Throughout the remainder of these financial statements,
LDI and Distribution are collectively known as "LDI."
Transactions with Majority Shareholder: The Company obtains certain managerial
services from its majority shareholder, LDI. Expense related to such services
amounted to $538,000, $291,000 and $262,000 for the years ended December 31,
1998 and 1997, and the nine months ended December 31, 1996, respectively. In
addition, the Company leases its corporate office space, to which it moved in
1998, from LDI. Lease expense and payments for repairs and maintenance to LDI
totaled $105,000 for the year ended December 31, 1998. The Company also has
subordinated debt payable to LDI (see Note 4, Long-Term Debt).
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 reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. At
December 31, 1998 and 1997, checks drawn on future deposits and borrowings of
$15,000,000 and $3,781,000, respectively, were classified as accounts payable.
These amounts represent outstanding checks in excess of funds on deposit.
Receivables: Trade accounts receivable represent amounts due primarily from
automotive body repair shops and dealerships. Trade receivables are typically
not collateralized. No single customer exceeds 10% of the Company's receivables
at December 31, 1998.
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.
- 28 -
Properties and Depreciation: Property and equipment are recorded at 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 expense as
incurred. Depreciation is computed by the straight-line method over the
following range of estimated useful lives:
Buildings & improvements...................................... Up to 40 years
Vehicles...................................................... 5 years
Leasehold improvements........................................ Life of Lease
Machinery, equipment & fixtures............................... 3 to 10 years
Revenue Recognition: Revenues from product sales are recognized at the time of
shipment or delivery to the customer.
Income Taxes: Deferred income taxes are recognized for the temporary differences
between the tax basis of assets and liabilities and their financial reporting
amounts in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." 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 consist primarily of the excess of cost over the fair
market value of net assets of acquired businesses ("goodwill"). Intangible
assets, including goodwill and non-compete agreements, are amortized on a
straight-line basis over periods ranging from 5 to 30 years. The majority of the
Company's goodwill relates to its November 1997 acquisition of Thompson and is
being amortized over 30 years. The carrying value of goodwill is periodically
reviewed to determine if an impairment has occurred. The Company measures for
potential impairment of recorded goodwill based on the estimated undiscounted
cash flows of the entity acquired over the remaining amortization period. If the
estimated future undiscounted cash flows are less than the carrying amount of
such goodwill, an impairment would be deemed to have occurred and a loss would
be recognized. Such loss would be determined based upon expected discounted cash
flows or market prices. Debt issuance costs are amortized over the term of debt
agreements.
Advertising: Advertising costs are expensed as incurred. The amounts were
immaterial for all periods presented.
Recent Accounting Pronouncements: Over the past two years, the Financial
Accounting Standards Board has issued SFAS No. 130, "Reporting Comprehensive
Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The effective date of adoption for SFAS No.'s 130 and 131
is as of January 1, 1998, while SFAS No. 133 is not required to be adopted until
the third quarter of 1999. As the Company currently has none of the components
of other comprehensive income and aggregates its three operating segments into a
single reportable segment, there is no current disclosure effect with regard to
SFAS No.'s 130 and 131. With regard to SFAS No. 133, as the Company is not
routinely involved in derivative and hedging activities, adoption of this
Statement is not expected to have a material impact on financial condition or
results of operations.
Reclassification: Certain reclassifications have been reflected in prior year
amounts to conform with the presentation of corresponding amounts in the current
period.
- 29 -
2. ACQUISITIONS
The following table summarizes the assets acquired and liabilities assumed in
acquisitions made by FinishMaster in each of the periods presented. All
acquisitions, except for the merger with AutoPaints discussed below, 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. Operating results of acquired entities have been included
in FinishMaster's consolidated financial statements from the respective date of
purchase.
Nine
Year Year Months
Ended Ended Ended
December 31, December 31, December 31,
(In thousands) 1998 1997 1996
Accounts receivable $ 2,225 $ 20,239 $ 755
Inventory 4,389 27,158 511
Deferred taxes 535 6,082 -
Equipment and other 3,128 8,029 456
Intangible assets 7,390 91,629 2,617
----------------------------------------------------------
17,667 153,137 4,339
Less liabilities assumed 3,246 78,988 1,256
----------------------------------------------------------
Acquisition price 14,421 74,149 3,083
Acquisition debt - 73,819 1,191
----------------------------------------------------------
Net assets of businesses acquired, net of acquisition debt $ 14,421 $ 330 $ 1,892
==========================================================
Number of acquisitions 1 3 1
----------------------------------------------------------
On June 30, 1998, the Company completed the acquisition by merger of AutoPaints
pursuant to which the Company merged with AutoPaints and issued to LDI an
additional 1,542,416 shares of common stock. Since this was a transaction within
a controlled group, the acquisition of AutoPaints was accounted for using its
historical cost basis. Equity securities issued to LDI in exchange for the net
assets of AutoPaints were recorded at the historical cost basis of the net
assets acquired as of the effective date of the transaction.
- 30 -
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson for $8.00 per share. Thompson, like FinishMaster, was
an aftermarket distributor of automotive paints, coatings, and related supplies.
The total purchase price, including related acquisition costs, was $73,471,000.
The Company also refinanced $34,474,000 of Thompson indebtedness in conjunction
with the transaction. The Company funded the acquisition with a combination of
bank financing and subordinated borrowings from LDI. The acquisition was
accounted for as a purchase and, accordingly, the purchase price was allocated
to assets acquired and liabilities assumed based upon their estimated fair
values at the date of acquisition. Goodwill resulting from the acquisition of
Thompson is being amortized over 30 years. Goodwill associated with the
acquisition of Thompson increased $2,152,000 during the current year resulting
from the recognition of obligations associated with pre-acquisition
contingencies for which estimates were not available at the time of acquisition.
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. The unaudited pro forma results of operations
consist of the historical results of the Company and the acquired entities, as
adjusted to give effect to additional interest, depreciation and amortization
expense arising from the acquisitions. This pro forma information does not
include reductions to operating expenses resulting from the elimination of
duplicate functions and facilities directly attributable to the acquisitions.
This pro forma information does not purport to be indicative of the combined
results of operations which would have actually been obtained had the
acquisitions been made as of those dates, or which may be obtained in the
future.
Nine
Year Year Months
Ended Ended Ended
December 31, December 31, December 31,
(In thousands) 1998 1997 1996
Pro forma net sales $ 321,710 $ 337,818 $ 245,112
Pro forma net income (loss) $ 2,459 $ (7,585) $ (3,321)
Pro forma net income (loss) per common share:
Basic $ 0.33 $ (1.01) $ (0.55)
Diluted $ 0.33 $ (1.01) $ (0.55)
Weighted average number of common shares 7,536 7,536 6,000
3. INTANGIBLE ASSETS
Intangible assets consisted of the following:
December 31, December 31,
(In thousands) 1998 1997
Goodwill $ 117,147 $ 107,923
Non-compete agreements 14,181 11,080
Debt issuance costs 1,857 1,689
--------------------------------------
133,185 120,692
Less accumulated amortization 18,659 9,822
--------------------------------------
Intangible assets, net $ 114,526 $ 110,870
======================================
- 31 -
Increases in intangible assets during the current year relate primarily to the
merger of AutoPaints, which resulted in the carryover of goodwill and other
intangible amounts previously existing at AutoPaints. Other increases occurred
as a result of contingent earn-out provisions associated with other acquisitions
and the recognition of obligations associated with pre-acquisition contingencies
related to Thompson.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31, December 31,
(In thousands) 1998 1997
Revolving Credit Facility $ 44,900 $ 51,479
Term Credit Facility 40,000 40,000
Senior Subordinated Debt 30,000 30,000
Notes payable to former owners of acquired businesses
with interest at various rates up to 12%, due at
various dates through 2007 12,418 18,353
Other long-term financing at various rates 1,787 2,308
--------------------------------------
129,105 142,140
Less current maturities 9,985 8,005
--------------------------------------
$ 119,120 $ 134,135
======================================
Revolving Credit Facility: The Company has a revolving credit facility with a
syndicate of banks, limited to the lesser of $60 million less letter of credit
obligations, or 80 percent of eligible accounts receivable plus 65 percent of
eligible inventory, less letter of credit obligations and a reserve for three
months facility rent. Principal is due on November 19, 2003. Interest rates and
payment dates are variable based upon interest rate and term options selected by
management. Interest rates at December 31, 1998 on outstanding revolving credit
borrowings varied from 7.4% to 7.7%. Revolving credit borrowings are subject to
interest rates, which fluctuate based on the Company's Leverage Ratio, as
defined in the Credit Facility, of 2.25% over LIBOR or 1.0% over prime in the
case of Floating Rate Advances. The Company is charged an annual administrative
fee of $50,000, and an annual commitment fee, payable monthly, of 0.5% on the
unused portion of the revolving line of credit. At December 31, 1998, the
Company had $1,933,000 of available borrowings under its revolving credit
facility.
Term Credit Facility: The term loan requires quarterly principal payments
beginning March 31, 1999. These quarterly principal payments begin at $1 million
and increase in amount each year over the term of the loan, which expires
November 19, 2003. Interest rates and payment dates are variable based upon
interest rate and term options selected by management. Interest rates at
December 31, 1998 varied from 7.3% to 7.8% on outstanding term borrowings. Term
borrowings are subject to interest rates, which fluctuate based on the Company's
Leverage Ratio, as defined in the Credit Facility, of 2.25% over LIBOR.
- 32 -
Combined Facilities: Substantially, all of the Company's assets serve as
collateral for the revolving credit facility and term credit facility. These
credit agreements contain various covenants pertaining to, among other things,
achieving a minimum fixed charge coverage ratio, a maximum leverage ratio, a
minimum interest expense coverage ratio and a minimum consolidated net worth
level. The covenants also limit purchases and sales of assets, restrict payment
of dividends and direct the use of excess cash flow. These quarterly covenants
are effective over the entire term of the facilities, with the various coverage
ratios and net worth levels becoming more stringent during the life of the
credit facilities. As of December 31, 1998, the Company was in compliance with
its covenants.
Senior Subordinated Debt: The senior subordinated debt owed to LDI matures May
19, 2004. Interest accrues at 9.0% annually and is payable quarterly. The
subordinated debt is expressly subordinate in right of payment to all senior
indebtedness.
Senior Subordinated Revolving Credit Facility: The Company has a senior
subordinated revolving credit facility with LDI for $10 million which is
available to fund working capital and acquisition needs. The facility expires on
March 27, 1999. Interest rates and payment dates are variable based upon
interest and term options selected by management. The interest rates fluctuate
consistent with those under the Revolving Credit Facility. Any borrowings under
the senior subordinated revolving credit facility are expressly subordinate in
right of payment to all senior indebtedness. There were no borrowings under this
facility during 1998.
The aggregate principal payments for the next five years subsequent to December
31, 1998 are as follows:
(In thousands)
1999 $ 9,985
2000 11,290
2001 10,410
2002 10,483
2003 56,291
Thereafter 30,646
-----------------
$ 129,105
=================
The Company is currently pursuing other financing arrangements. Should the
Company be successful in obtaining acceptable financing terms, proceeds will be
used to retire certain bank term loans, a portion of amounts outstanding under
the revolving credit facility and the subordinated debt payable to LDI. Early
retirement of indebtedness will result in an extraordinary loss in the amount of
the net book value of capitalized debt issuance costs. At December 31, 1998,
unamortized debt issuance costs were approximately $1,483,000.
The carrying amounts of certain financial instruments such as cash, accounts
receivable, accounts payable, and long-term debt approximate their fair values.
The fair value of the long-term debt is estimated using discounted cash flows
and the Company's current incremental borrowing rates for similar types of
arrangements.
- 33 -
5. EMPLOYEE SAVINGS PLAN
The Company has an Employee Savings Plan ("Plan") which covers substantially all
employees who have met certain requirements as to date of service. The Company
currently contributes $0.25 for each $1.00 contributed by employees up to 6% of
their annual compensation. In addition, the Company may contribute, 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 $191,000 for year ended December 31, 1998,
$182,000 for the year ended December 31, 1997, and $189,000 for the nine months
ended December 31, 1996. Employees of AutoPaints were merged into the Plan
during 1998 and employees of Thompson will begin to participate in the Plan
effective January 1, 1999.
6. 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 not less than the market price at the
date of grant. All options granted have a maximum life of ten years from the
date of the grant. All grants prior to 1998 were fully vested at the date of
issue. Certain stock options granted in 1998 were also fully vested at the date
of issue, while others vest over periods ranging from two to four years.
The Company recognizes compensation expense related to its stock option plan in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Options are granted at a price not less than the market price of the Company's
common stock on the date of grant, therefore, no compensation expense is
recognized. Had compensation expense been determined at the date of grant based
on the fair value of the awards consistent with SFAS No. 123, "Accounting for
Stock Based Compensation", the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated in the following
table:
- 34 -
Nine
Year Year Months
Ended Ended Ended
December 31, December 31, December 31,
(In thousands, except per share data) 1998 1997 1996
Net income:
As reported $ 1,988 $ 656 $ 660
Pro forma $ 1,299 $ 523 $ 660
Net income per share:
As reported, Basic $ 0.29 $ 0.11 $ 0.11
As reported, Diluted $ 0.29 $ 0.11 $ 0.11
Pro forma, Basic $ 0.19 $ 0.09 $ 0.11
Pro forma, Diluted $ 0.19 $ 0.09 $ 0.11
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 the years
ended December 31, 1998 and 1997, and the nine months ended December 31, 1996,
respectively: risk free interest rate of 5.0%, 5.5%, and 5.7%; no dividend yield
for all periods; expected option lives of nine, nine, and eight years; and stock
price volatility of 49.6% for the year ended December 31, 1998, and 46.8% for
the year ended December 31, 1997 and the nine months ended December 31, 1996.
December 31, December 31, December 31,
1998 1997 1996
Weighted Weighted Weighted
-Average -Average -Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding-beginning of year 210,000 $ 9.92 169,310 $ 10.71 222,085 $ 10.72
Granted 263,800 $ 8.38 45,000 $ 7.00 - $ -
Exercised 800 $ 8.25 - $ - 140 $ 10.50
Forfeited 46,510 $ 10.65 4,310 $ 10.50 52,635 $ 10.76
-------------------------------------------------------------------------------------
Outstanding-end of year 426,490 $ 8.89 210,000 $ 9.92 169,310 $ 10.71
=====================================================================================
Exercisable-end of year 260,890 $ 9.09 210,000 $ 9.92 169,310 $ 10.71
=====================================================================================
- 35 -
Exercise Price Range
-------------------------------------------------------------
$5.63-$8.25 $10.25-$11.55 Total
------------------ ------------------ -------------------
Options outstanding 228,600 197,890 426,490
Weighted average exercise price $ 7.07 $ 11.00 $ 8.89
Average remaining contractual life 9.2 years 7.2 years 8.3 years
Options exercisable 120,600 140,290 260,890
Weighted average exercise price $ 7.13 $ 10.77 $ 9.09
The weighted-average fair value of options granted during the years ended
December 31, 1998 and 1997 were $4.62 and $4.85 per option, respectively, where
the exercise price of the options equalled the market price on the date of
grant. Certain options were granted during 1998 where the exercise price of the
options exceeded the market value on the date of grant. The weighted average
fair value of these options was $6.51 per option. The remaining contractual life
of options outstanding at December 31, 1998 is 8.3 years.
7. INCOME TAXES
The provision for federal and state income taxes consisted of the following:
Nine
Year Year Months
Ended Ended Ended
December 31, December 31, December 31,
(In thousands) 1998 1997 1996
Current:
Federal $ 96 $ 1,010 $ 778
State 87 186 232
-------------------------------------------------------------
183 1,196 1,010
-------------------------------------------------------------
Deferred:
Federal 2,082 (616) (327)
State 167 (65) (73)
-------------------------------------------------------------
2,249 (681) (400)
-------------------------------------------------------------
$ 2,432 $ 515 $ 610
=============================================================
- 36 -
The reconciliation of income taxes computed at the federal statutory tax rate to
the Company's effective tax rate is as follows:
Nine
Year Year Months
Ended Ended Ended
December 31, December 31, December 31,
1998 1997 1996
Federal statutory tax rate 34.0% 34.0% 34.0%
State tax provision 3.8% 6.8% 8.3%
Nondeductible intangible amortization 14.7% 3.9% 0.8%
Other 2.5% (0.7%) 4.9%
------------------------------------------------------------
Effective tax rate 55.0% 44.0% 48.0%
============================================================
Significant components of the Company's deferred tax assets as of December 31,
1998 and 1997 are as follows:
December 31, December 31,
(In thousands) 1998 1997
Deferred tax assets:
Depreciation $ 915 $ 712
Amortization of intangibles 1,319 1,023
Allowances 1,435 1,106
Inventory 967 1,770
Accrued expenses 1,991 2,555
Other, net 49 52
----------------------------------------
$ 6,676 $ 7,218
========================================
- 37 -
8. COMMITMENTS AND CONTINGENCIES
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, 1998:
(In thousands)
1999 $ 5,639
2000 3,114
2001 1,268
2002 889
2003 542
Thereafter 755
----------------
$ 12,207
================
Rent expense charged to operations, including short-term leases, aggregated
$6,306,000, $3,832,000, and $2,725,000 for the years ended December 31, 1998 and
1997, and the nine months ended December 31, 1996, respectively.
The Company is dependent on four main suppliers for the purchases of the paint
and related supplies that it distributes. A loss of one of the suppliers or a
disruption in the supply of the products provided could have a material adverse
effect on the Company's operating results. The suppliers also provide purchase
discounts, prompt payment discounts, extended terms, and other incentive
programs. To the extent these programs are changed or terminated, there could be
a material adverse impact to the Company.
The Company has three agreements with warehouse suppliers for the purchase of
certain paint and non-paint supplies in specified geographic locations. The
agreements provide for aggregate specified minimum purchases of $7.9 million for
1999 and 2000, and $1.5 million for 2001, 2002, and 2003. The agreements expire
in 1999, 2000, and 2003.
In January 1999, the Company was named in an unfair business practices lawsuit
by an automotive paint distributor located in the State of California. The
plaintiff in such suit alleges that the Company offered, in a manner which
injured the plaintiff, rebates and cash bonuses to businesses in the Southern
California area if those businesses would buy exclusively from the Company and
use its products. The plaintiff claims damages in the amount of $3.8 million,
trebled to $11.4 million. The Company believes that the claims are without merit
and is aggressively defending itself against all allegations. Accordingly, it
has not recorded any loss provision relative to damages sought by the plaintiff
in this lawsuit.
The Company is subject to various claims and contingencies arising out of the
normal course of business, including those relating to commercial transactions,
product liability, automobile, taxes, discrimination, employment and other
matters. Management believes that the ultimate liability, if any, in excess of
amounts already provided or covered by insurance, is not likely to have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
- 38 -
9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the quarterly results of operations for each period
presented.
Three Months ended
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except per share data) 1998 1998 1998 1998
----------------- ---------------- ------------------ ------------------
Net sales $ 76,024 $ 76,758 $ 80,338 $ 76,826
Gross margin $ 26,945 $ 27,027 $ 28,306 $ 27,400
Income from operations $ 3,881 $ 4,156 $ 3,884 $ 3,974
Income before income taxes $ 1,007 $ 1,329 $ 951 $ 1,133
Net income $ 528 $ 699 $ 79 $ 682
Net income per share - Diluted $ 0.09 $ 0.12 $ 0.01 $ 0.09
Three Months ended
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except per share data) 1997 1997 1997 1997
----------------- ---------------- ------------------ ------------------
Net sales $ 29,239 $ 31,034 $ 30,696 $ 39,206
Gross margin $ 10,629 $ 11,572 $ 11,157 $ 13,749
Income (loss) from operations $ 1,144 $ 2,011 $ 1,458 $ (781)
Income (loss) before income taxes $ 656 $ 1,600 $ 1,148 $ (2,233)
Net income (loss) $ 406 $ 1,005 $ 712 $ (1,467)
Net income (loss) per share - Diluted $ 0.07 $ 0.17 $ 0.12 $ (0.24)
10. NET INCOME PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share." SFAS No. 128 requires disclosure of basic and diluted earnings per share
in place of primary and fully diluted earnings per share, which were previously
required. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed based upon the weighed average number of common
shares outstanding, adjusted for the effect of dilutive stock options. All net
income per share amounts reported herein are in accordance with the provisions
of this Statement.
- 39 -
The following table sets forth the computation of basic and diluted net income
per share:
Nine
Year Year Months
Ended Ended Ended
December 31, December 31, December 31,
(In thousands, except per share data) 1998 1997 1996
Numerator:
Net income $ 1,988 $ 656 $ 660
----------------------------------------------------------
Denominator:
Basic-weighted average shares 6,775 5,994 6,000
Effect of dilutive stock options 5 - -
----------------------------------------------------------
Diluted-weighted average shares 6,780 5,994 6,000
----------------------------------------------------------
Basic net income per share $ 0.29 $ 0.11 $ 0.11
==========================================================
Diluted net income per share $ 0.29 $ 0.11 $ 0.11
==========================================================
The effect of employee stock options on the calculation of weighted average
shares outstanding for purposes of determining diluted earnings per share was
antidilutive for the year ended December 31, 1997 and the nine months ended
December 31, 1996.
- 40 -
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, 1998.
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, 1998.
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, 1998.
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, 1998.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents have been filed as a part of this report, or where
noted, incorporated by reference:
(1) Financial Statements: The Consolidated Financial Statements of the
Company are included in Item 8 of this report.
(2) Financial Statement Schedule: The financial statement schedule filed
in response to Item 8 and Item 14(d) of Form 10-K is listed in the
Index to Consolidated Financial Statements included in Item 8 of this
report.
(3) The Exhibits filed herewith or incorporated herein by reference are
set forth in the Exhibit Index on page E-1.
(b) Reports on Form 8-K: None
- 41 -
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 26, 1999 FINISHMASTER, INC.
By: /s/ Thomas U. Young
-------------------------------------
Thomas U. Young,
President, Vice Chairman of the
Board and Chief Operating 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.
Signature Date Title
- --------------------------------------------------------------------------------
(1) Principal Executive Officer:
/s/ Andre B. Lacy
- -------------------------------
Andre B. Lacy March 26, 1999 Chairman of the Board
(2) Principal Financial
and Accounting Officer:
/s/ Robert R. Millard
- -------------------------------
Robert R. Millard March 26, 1999 Vice President, Finance
and Chief Financial Officer
(3) A Majority of the
Board of Directors:
/s/ Andre B. Lacy
- -------------------------------
Andre B. Lacy March 26, 1999 Director
/s/ Thomas U. Young
- -------------------------------
Thomas U. Young March 26, 1999 Director
/s/ Margot L. Eccles
- -------------------------------
Margot L. Eccles March 26, 1999 Director
/s/ William J. Fennessy
- -------------------------------
William J. Fennessy March 26, 1999 Director
/s/ Peter L. Frechette
- -------------------------------
Peter L. Frechette March 26, 1999 Director
/s/ David W. Knall
- -------------------------------
David W. Knall March 26, 1999 Director
/s/ Michael L. Smith
- -------------------------------
Michael L. Smith March 26, 1999 Director
/s/ Walter S. Wiseman
- -------------------------------
Walter S. Wiseman March 26, 1999 Director
- 42 -
FINISHMASTER, INC. AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K
EXHIBITS
EXHIBIT LIST
Exhibit No. Description of Document
2.1* Agreement and Plan of Merger, dated as of October 14, 1997,
by and among FinishMaster, Inc., FMST Acquisition
Corporation and ThompsonPBE, Inc. (incorporated by reference
to Exhibit (c)(2) of Schedule 14D-1 previously filed by FMST
Acquisition Corporation on October 21, 1997).
2.2* Agreement and Plan of Merger, dated February 16, 1998, by
and among FinishMaster, Inc., LDI AutoPaints, Inc. and Lacy
Distribution, Inc. (previously filed with Form 10-K dated
March 31, 1998)
3.1* Articles of Incorporation of FinishMaster, Inc., an Indiana
corporation (previously filed with Form 10-K dated March 31,
1997)
3.2* Bylaws of FinishMaster, Inc., an Indiana corporation
(previously filed with Form 10-K dated March 31, 1997)
10.1 FinishMaster, Inc. Stock Option Plan (Amended and Restated
as of June 30, 1998)
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
99(a)* Credit Agreement, dated as of November 19, 1997, among
FinishMaster, Inc., the Institutions from Time to Time
Parties Thereto as Lenders and NBD Bank, N.A., as Agent
(previously filed with Form 8-K dated December 3, 1997)
99(b)* Subordinated Note Agreement, dated as of November 19, 1997,
by and between FinishMaster, Inc. and LDI, Ltd. (previously
filed with Form 8-K dated December 3, 1997)
99(c)* First Amendment to Credit Agreement dated December 10, 1997
(previously filed with Form 10-K dated March 31, 1998)
99(d)* Second Amendment to Credit Agreement dated March 27, 1998
(previously filed with Form 10-K dated March 31, 1998)
99(e)* Credit Agreement dated March 27, 1998 between FinishMaster,
Inc. and LDI, Ltd. (previously filed with Form 10-K dated
March 31, 1998)
99(f) Third Amendment to the Credit Agreement dated as of October
30, 1998.
* Previously filed
E-1
Schedule II - Valuation and Qualifying Accounts (In thousands)
Additions
-------------------------------
Balance
Balance at Charged to Charged to at End
Beginning Costs and Other of
Description of Period Expenses Accounts Deductions Period
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Allowance for doubtful accounts $ 2,247 $ 464 $ 147 (A) $ 1,178 (B) $ 1,680
Year ended December 31, 1997:
Allowance for doubtful accounts $ 700 $ 859 $ 1,758 (A) $ 1,070 (B) $ 2,247
Nine months ended December 31, 1996:
Allowance for doubtful accounts $ 350 $ 798 $ - $ 448 (B) $ 700
(A) Represents allowance for doubtful accounts of acquired entities.
(B) Represents uncollectible accounts written off, less recoveries.
S-1