================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number 0-23222
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 700, 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:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act
Common stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months and (2) has
been subject to the filing requirements for at least the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1998 $49,384,000.
At February 28, 1998, there were outstanding 5,993,640 shares of Registrant's
common stock.
Documents Incorporated By Reference
Portions of the annual proxy statement for the year ended December 31, 1997 are
incorporated by reference into Part III.
================================================================================
<PAGE>
PART II
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is submitted in a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this amended
report to be signed on its behalf by the undersigned, thereto duly authorized.
FINISHMASTER, INC.
June 15, 1998 By: /s/ Roger A. Sorokin
------------------------------------
Roger A. Sorokin
Vice President-Finance and
Chief Financial Officer
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8 and 14(a)(1) AND (2), (c),
AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1997
FINISHMASTER, INC.
INDIANAPOLIS, INDIANA
<PAGE>
FORM 10-K--ITEM 8 and 14(a)(1) AND (2)
FINISHMASTER, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of FinishMaster, Inc. and
Subsidiaries are included in Item 8 of this Report:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of FinishMaster,
Inc. and Subsidiaries is submitted herewith:
Schedule II
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are either
included within the financial statements, not required under the related
instruction or are inapplicable and, therefore, have been omitted.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
FinishMaster, Inc.
We have audited the accompanying consolidated balance sheets of FinishMaster,
Inc. and Subsidiaries as of December 31, 1997 and December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 1997 and the nine month period ended
December 31, 1996. Our audits also included the financial statement schedule
listed in the index at Item 14(a). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FinishMaster, Inc. and Subsidiaries at December 31, 1997 and December 31, 1996
and the consolidated results of their operations and their cash flows for the
year ended December 31, 1997 and the nine-month period ended December 31, 1996,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Grand Rapids, Michigan
March 20, 1998
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
FinishMaster, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of FinishMaster, Inc. and Subsidiary for
the year ended March 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, consolidated financial statements referred to above present
fairly, in all material respects the consolidated results of operations and cash
flows of FinishMaster, Inc. and Subsidiary for the year ended March 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG L.L.P.
ERNST & YOUNG L.L.P.
Detroit, Michigan
April 18,1996
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------- --------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 364 $ 300
Accounts receivable, net of allowance for doubtful
accounts of $2,247 and $700 respectively 28,744 12,752
Inventory 53,442 24,828
Refundable income taxes 1,299 -
Deferred income taxes 3,844 474
Prepaid expenses and other current assets 2,751 785
-------- ------
TOTAL CURRENT ASSETS 90,444 39,139
PROPERTY AND EQUIPMENT
Land 368 368
Vehicles 1,082 55
Buildings and improvements 3,797 3,105
Machinery, equipment and fixtures 9,065 5,909
------ ------
14,312 9,437
Accumulated depreciation (4,016) (2,866)
----------- ---------
10,296 6,571
OTHER ASSETS
Intangible assets, net 110,870 20,357
Deferred income taxes 3,374 289
Other 434 121
----------- ----------
114,678 20,767
-------- --------
$ 215,418 $ 66,477
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable, bank $ - $ 1,841
Accounts payable 28,274 7,786
Accrued expenses and other current liabilities 12,072 2,554
Current maturities of long-term obligations 8,005 4,139
------ ------
TOTAL CURRENT LIABILITIES 48,351 16,320
LONG-TERM OBLIGATIONS, less current maturities 134,135 17,831
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized;
no shares issued and outstanding
Common stock, $1 stated value; 10,000,000 shares authorized;
5,992,640 and 6,000,140 shares issued and outstanding 5,993 6,000
Additional paid-in capital 14,466 14,509
Retained earnings 12,473 11,817
------- -------
32,932 32,326
-------- -------
$ 215,418 $ 66,477
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
-------------------- ------------------- ------------------
<S> <C> <C> <C>
NET SALES $130,175 $ 95,822 $107,511
COST OF SALES 83,068 61,931 69,499
------- ------- -------
GROSS PROFIT 47,107 33,891 38,012
EXPENSES:
Operating 20,568 15,313 16,382
Selling, general and administrative 17,982 13,192 14,467
Depreciation 1,435 755 779
Amortization of intangible assets 3,290 2,065 1,311
------ ------ ------
43,275 31,325 32,939
------- ------- -------
INCOME FROM OPERATIONS 3,832 2,566 5,073
OTHER INCOME (EXPENSE):
Investment income 128 77 183
Interest expense (2,789) (1,373) (841)
-------- -------- ---------
(2,661) (1,296) (658)
--------- -------- --------
INCOME BEFORE INCOME TAXES 1,171 1,270 4,415
Income tax expense 515 610 1,766
------- ------- ------
$ 656 $ 660 $ 2,649
======== ======== =======
NET INCOME
NET INCOME PER SHARE - BASIC $ .11 $ .11 $ .44
========== ========== ==========
- DILUTED $ .11 $ .11 $ .44
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 5,994 6,000 6,000
======== ========= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months Year ended
Year ended ended December March 31,
December 31, 31,
1997 1996 1996
-------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 656 $ 660 $ 2,649
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,725 2,820 2,090
Bad debt expense 859 798 548
Deferred income taxes (681) (400) (38)
Changes in operating assets and liabilities:
Account receivable 3,388 2,324 (1,997)
Inventories (1,456) (815) (778)
Prepaids and other current assets 177 (270) (243)
Accounts payable and other current liabilities (6,411) (2,775) (2,694)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,257 2,342 (463)
INVESTING ACTIVITIES:
Business acquisitions (74,149) (3,083) (22,193)
Purchases of property and equipment (697) (620) (762)
Sale of marketable securities -- -- 6,906
Other -- (11) (313)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (74,846) (3,714) (16,362)
FINANCING ACTIVITIES:
Borrowings under note payable, bank 20,603 21,256 14,162
Repayments under note payable, bank (22,444) (19,415) (14,162)
Purchase of common stock (50) -- --
Acquisition financing 73,819 1,191 10,774
Debt issuance costs (1,689) -- --
Proceeds from long-term obligations 41,951 -- 7,809
Repayment of long-term obligations (38,537) (2,469) (2,787)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 73,653 563 15,796
-------- -------- --------
INCREASE (DECREASE) IN CASH 64 (809) (1,029)
CASH AT BEGINNING OF PERIOD 300 1,109 2,138
-------- -------- --------
CASH AT END OF PERIOD $ 364 $ 300 $ 1,109
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 2,192 $ 1,313 $ 762
======== ======== ========
Taxes $ 1,520 $ 687 $ 774
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Net
Common paid-in Unrealized Retained
Stock Capital Gain/(Loss) Earnings Totals
------------- ------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES AT APRIL 1, 1995 $ 6,000 $ 14,508 $ (60) $ 8,508 $ 28,956
Adjustment related to sale of marketable securities 60 60
Net income for the year 2,649 2,649
------- ------- --------- ------- ------
BALANCES AT MARCH 31, 1996 6,000 14,508 - 11,157 31,665
Options exercised 1 1
Net income for the nine month period 660 660
------- ------- --------- ------- ------
BALANCES AT DECEMBER 31, 1996 6,000 14,509 11,817 32,326
-
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
======= ======== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997
the Company operated 143 sales outlets and three distribution centers in 22
states. The Company is organized into three major geographic regions - the
Southeastern, Western and Central/Northeastern Divisions. The Company has
approximately 20,000 customers to which it provides a comprehensive selection of
brand name products supplied by DuPont, PPG, BASF and 3M, in addition to its own
FinishMaster PrivateBrand refinishing accessory products. The Company is highly
dependent on a small number of key suppliers.
Majority Stockholder: On February 23, 1994, the Company completed an initial
public offering of common stock on the NASDAQ national market under the trading
symbol "FMST." The Company sold 1.7 million shares of common stock at an initial
public offering price of $10.50 per share. The net proceeds from the offering of
approximately $16.2 million were used by FinishMaster to fund acquisitions,
repay indebtedness, finance working capital and for general corporate purposes.
As a result of these transactions, 4,045,000 shares or 67.4% of the Company's
outstanding stock was owned by Maxco, Inc. ("Maxco") at March 31, 1996. On July
9, 1996, LDI AutoPaints, Inc. ("AutoPaints"), an Indiana corporation, purchased
all of the shares of common stock owned by Maxco. Effective December 31, 1996,
LDI, Ltd. ("LDI") transferred to AutoPaints 100 shares of the Company which it
had purchased on the open market in August, 1995. As a result of these
transactions, AutoPaints' ownership of FinishMaster stock was 4,045,100 shares
or 67.5% at December 31, 1997.
Use of Estimates: The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation: The consolidated financial statements, identified
as FinishMaster, Inc., include the consolidated accounts of FinishMaster, Inc.,
Thompson PBE, Inc., and Refinishers Warehouse, Inc., which are wholly owned
subsidiaries. Sales by Refinishers Warehouse are primarily to FinishMaster and
are eliminated in consolidation. All other significant intercompany, equity
accounts and transactions are eliminated. References to the Company or
FinishMaster throughout this report relate to the consolidated entity.
Transactions with Majority Shareholder: AutoPaints is a wholly-owned subsidiary
of Lacy Distribution, which is, in turn, a wholly-owned subsidiary of LDI.
Pursuant to an arrangement between the Company and AutoPaints, the Company pays
AutoPaints for services it provides to the Company. During the period between
July 10, 1996 and December 31, 1997, AutoPaints has provided services to the
Company to support certain managerial tasks. Accordingly, the Company paid
$291,000 to AutoPaints during the year ended December 31, 1997, and $262,000 in
the nine months ended December 31, 1996 in return for the services of
AutoPaints.
Prior to July 9, 1996, Maxco provided to the Company certain services. The
services included central purchasing of all insurance, including employee
benefit coverages, general and automobile liability, property and casualty.
Accordingly, the Company paid $1,723,000 to Maxco during the period between
January 1, 1996 and July 9, 1996 for these services. The amounts charged by
Maxco and AutoPaints are representative of arm's length prices.
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, 1997.
Inventories: Inventories are stated at the lower of first-in, first-out cost or
market and consist primarily of purchased paint and refinishing supplies.
Substantially all inventories consist of finished goods.
Properties and Depreciation: Property and equipment are stated on the basis of
cost and include expenditures for new facilities and equipment and those which
materially extend the useful lives of existing facilities and equipment.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. Depreciation is computed by the straight-line method over the
following range of estimated useful lives:
Vehicles 5 Years
Building & Improvement Up to 40 Years
Leasehold Improvement Life of Lease
Machinery, Equipment & Fixtures 3 to 10 Years
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Deferred income taxes are recognized for the temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. The income tax provision is the tax payable/recoverable for the period
and the change during the period in deferred tax assets and liabilities.
Intangibles: Intangibles primarily consist of the excess of cost over fair
market value of net assets of acquired businesses. Intangible assets, including
non-compete agreements, are amortized on a straight-line basis over periods
ranging from 5 to 30 years. Debt issuance costs are amortized over the term of
the debt agreement.
The carrying value of goodwill is periodically reviewed to determine if an
impairment has occurred. The Company measures the potential impairment of
recorded goodwill based on the estimated undiscounted cash flows of the entity
acquired over the remaining amortization period.
Advertising: Advertising costs are expensed as incurred. The amounts were
immaterial for all periods presented.
Recent Accounting Pronouncements: In June of 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components within the
financial statements. Comprehensive income includes items such as foreign
currency items, minimum pension liability adjustments, and unrealized gains and
losses on certain investments in debt and equity securities. This statement is
effective for fiscal years beginning after December 15, 1997, with
reclassification of prior periods required.
In June of 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way in which public entities report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement requires that general-purpose financial statements include
selected information reported on a single basis of segmentation. This statement
is effective for fiscal years beginning after December 15, 1997, with
restatement of comparative information for earlier years being required.
The Company is currently evaluating the impact of these pronouncements.
Reclassification: Certain reclassifications have been reflected in prior year
amounts to conform with the presentation of corresponding amounts in the current
period.
2. NET INCOME PER SHARE
In February of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share". This Statement
simplifies the standards for computing earnings per share, replacing the
presentation of primary earnings per share with a presentation of basic earnings
per share. SFAS No. 128 also requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed
similarly to fully diluted earnings per share pursuant to APB Opinion No. 15,
"Earnings per Share", which is superseded by this Statement.
<PAGE>
2. NET INCOME PER SHARE (continued)
The following table sets forth the computation of basic and diluted net income
per share (in thousands except per share data):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended March 31,
December 31, 1997 December 31, 1996
1996
------------------ ----------------- ------------------
Numerator:
<S> <C> <C> <C>
NET INCOME $ 656 $ 660 $2,649
------ ------ ------
Denominator:
BASIC-WEIGHTED AVERAGE SHARES 5,994 6,000 6,000
Effect of dilutive securities:
EMPLOYEE STOCK OPTIONS -- -- 46
DILUTED-WEIGHTED AVERAGE SHARES 5,994 6,000 6,046
------ ------ ------
Basic net income per share $ 0.11 $ 0.11 $ 0.44
====== ====== ======
Diluted net income per share $ 0.11 $ 0.11 $ 0.44
====== ====== ======
</TABLE>
The effect of employee stock options on the calculation of weighted average
shares outstanding for purposes of determining diluted earnings per share is
antidilutive for the year ended December 31, 1997 and the nine months ended
December 31, 1996.
3. ACQUISITIONS
The following table summarizes the assets acquired and liabilities assumed in
acquisitions made by FinishMaster in each of the periods presented. These
acquisitions have been accounted for as purchases and accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values at the
dates of acquisition. Intangible assets related to goodwill and covenants not to
compete were recorded with each acquisition. Operating results of acquired
entities have been included in FinishMaster's consolidated financial statements
as of the respective date of purchase.
<TABLE>
<CAPTION>
Nine Months
Year Ended ended December Year Ended
December 31, 31, March 31,
1997 1996 1996
-------------------- ----------------- ----------------
(in thousands)
<S> <C> <C> <C>
Accounts receivable $ 20,239 $ 755 $ 3,229
Inventory 27,158 511 8,500
Deferred taxes 6,082 - -
Equipment and other 8,029 456 1,492
Intangible assets 91,629 2,617 13,247
------ ----- ------
153,137 4,339 26,468
Liabilities assumed 78,988 1,256 4,275
------- ------ ------
ACQUISITION PRICE 74,149 3,083 22,193
Acquisition debt 73,819 1,191 10,774
------- ------ -------
NET ASSETS OF BUSINESSES ACQUIRED,
NET OF ACQUISITION DEBT $ 330 $ 1,892 $ 11,419
========== ======== ========
Number of acquisitions 3 1 16
</TABLE>
<PAGE>
3. ACQUISITIONS (continued)
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson PBE, Inc. for $8.00 per share. Thompson, like
FinishMaster, is an aftermarket distributor of automotive paints, coatings and
related supplies. The total purchase price, including related acquisition costs,
was $73,471,000. 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.
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 data
consists of the historical results of the Company 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 expense resulting from the elimination of duplicate functions and
facilities directly attributable to the acquisitions. This pro forma information
does not purport to be indicative what results would have been had the
acquisitions been made as of those dates or of results which may occur in the
future.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December December
31, 1997 31,
1996
--------------------- --------------------
(in thousands except per share data)
<S> <C> <C>
Net sales $ 317,594 $ 245,112
Net income (loss) (7,669) (3,321)
Net income (loss) per common share - Basic $ (1.28) $ (0.55)
- Diluted $ (1.28) $ (0.55)
Weighted average number of common shares 5,994 6,000
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
December 31, 1997 December 31, 1996
----------------- -----------------
Goodwill $107,673 $ 16,044
Non-compete agreements 11,080 10,860
Debt issuance costs 1,689 --
-------- --------
120,442 26,904
Less accumulated amortization 9,572 6,547
-------- --------
Intangible assets, net $110,870 $ 20,357
======== ========
<PAGE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
--------------- -- --------------
(in thousands)
<S> <C> <C>
Notes payable to former owners of acquired businesses with
interest at various rates up to 12%, due 1998 though 2007 $ 18,353 $ 12,911
Note payable to bank under line of credit with interest
rate not exceeding the prime interest rate, refinanced in 1997
- 7,288
Term credit facility payable to bank, bearing interest at 8.16%,
payments 1999 through 2003 40,000 -
Revolving credit facility bearing interest at 8.16 to 9.5%,
due November 2003 51,479 -
Senior subordinated debt payable to LDI at 9.0%,
due May 2004 30,000 -
Other long-term financing at various rates 2,308 1,771
---------- ----------
142,140 21,970
Less current maturities 8,005 4,139
--------- ---------
$134,135 $ 17,831
======== ========
</TABLE>
Revolving Credit Facility: The Company has a revolving credit facility with a
bank, 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 options selected by management.
Interest rates at December 31, 1997 varied from 8.16% to 9.5%. The interest
rates are 2.25% over LIBOR or 1% 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 credit facility.
Term Credit Facility: The term loan requires quarterly principal payments
beginning March 31, 1999. Interest rates and payment dates are variable based
upon interest rate options selected by management. The interest rate at December
31, 1997 was 8.16%. This rate is 2.25% over LIBOR.
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
coverage ratio, a leverage ratio, and an interest expense coverage ratio. The
covenants also limit purchases and sales of assets, restrict payment of
dividends and direct the use of excess cash flow. These quarterly covenants
become effective with the period ending March 31, 1998. As a condition of the
amended bank credit facility of $100 million, LDI agreed to make by June 30,
1998 an additional equity investment of $14 million or such lesser amount as may
be acceptable to the Company's bank. The Company intends to satisfy this
requirement through an acquisition of LDI AutoPaints ("AutoPaints") in exchange
for equity in the Company. (See Note 10).
Senior Subordinated Debt: The senior subordinated debt matures May 19, 2004.
Interest accrues at 9.0% annually, and is payable quarterly. Holders of
subordinated debt are expressly subordinate in right of payment to all senior
indebtedness.
The aggregate principal payments for the next five years subsequent to December
31, 1997 are as follows, in thousands:
1998 $ 8,005
1999 9,513
2000 10,725
2001 10,104
2002 10,494
Thereafter 93,299
-----------
$ 142,140
===========
<PAGE>
5. LONG-TERM OBLIGATIONS (continued)
The Company is currently pursuing other financing arrangements. Should the
Company be successful in implementing favorable 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 issue costs. At December 31,
1997 unamortized debt issue costs were approximately $1.6 million.
The carrying amounts of certain financial instruments such as cash, accounts
receivable, accounts payable and long term obligations approximate their fair
values. The fair value of the long-term debt is estimated using discounted cash
flow analysis and the Company's current incremental borrowing rates for similar
types of arrangements.
6. EMPLOYEE SAVINGS PLAN
The Company has an Employee Savings Plan which covers substantially all
employees who have met certain requirements as to date of service. The Company
currently contributes $0.25 for each $1 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 $182,000 for year ended December 31, 1997,
$189,000 for the nine months ended December 31, 1996 and $198,000 for the year
ended March 31, 1996.
7. STOCK OPTIONS
On November 30, 1993, an Employee Stock Option Plan was ratified to grant
options on up to 600,000 shares of the Company's common stock to officers, key
employees and non-employee directors of the Company. All options granted under
this plan have been granted at a price equal to the market price at the date of
the grant. All options granted have a maximum life of ten years from the date of
the grant and are fully vested at the date of issue.
The Company recognizes compensation expense related to its stock option plan in
accordance with APB No. 25 "Accounting for Stock Issued to Employees." Options
are granted at not less than the fair market value of the Company's common stock
on the date of grant, therefore, no compensation is recognized. Had compensation
expense been determined at the date of the grant based on the fair value of the
awards consistent the Statement of Financial Accounting Standards 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:
<TABLE>
<CAPTION>
Year Ended December Nine Months Year Ended March
31, Ended December 31, 31,
1997 1996 1996
----------------------- ----------------------- ---------------------
Net Income (in thousands, except per share data)
<S> <C> <C> <C>
As Reported $ 656 $ 660 $ 2,649
Pro Forma $ 523 $ 660 $ 2,010
Net income per share
As Reported - Basic $ 0.11 $ 0.11 $ 0.44
- Diluted $ 0.11 $ 0.11 $ 0.44
Pro Forma - Basic $ 0.09 $ 0.11 $ 0.34
- Diluted $ 0.09 $ 0.11 $ 0.33
</TABLE>
<PAGE>
7. STOCK OPTIONS (continued)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for December
31, 1997, December 31, 1996 and March 31, 1996 respectively: risk free interest
rate of 5.5, 5.7 and 5.7 percent; no dividend yield for all years; expected
lives of 9, 8 and 8 years; and volatility of 46.8 percent for all years. Option
valuation models, like the stock price Black-Scholes model, require the input of
highly subjective assumptions including the expected stock price volatility.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its stock
options.
<TABLE>
December 31, 1997 December 31, 1996 March 31, 1996
----------------------------- ---------------------------- -------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year
169,310 $ 10.71 222,085 $10.72 123,800 $10.50
Granted 45,000 $ 7.00 - - 99,500 $11.00
Exercised - - 140 $10.50 - -
Forfeited 4,310 $10.50 52,635 $10.76 1,215 $10.50
------- ------ ------- ------ ------- ------
Outstanding and
exercisable-end of year
($7.00 to $11.00 per share)
210,000 $ 9.92 169,310 $10.71 222,085 $10.72
======= ====== ======= ====== ======= ======
</TABLE>
The weighted-average fair value of options granted during the year ended
December 31, 1997 and March 31, 1996 were $4.85 and $6.65 per option,
respectively. The remaining contractual life of options outstanding at December
31, 1997 is 8.3 years.
8. INCOME TAXES
The provision for federal and state income taxes consisted of the following, in
thousands:
Year Ended Nine Months Ended Year Ended
December 31, 1997 December 31, 1996 March 31,1996
-------------------- ----------------- -------------
Current:
Federal $ 1,010 $ 778 $ 1,477
State 186 232 327
Deferred (681) (400) (38)
------- ------- -------
$ 515 $ 610 $ 1,766
======= ======= =======
<PAGE>
8. INCOME TAXES (continued)
The reconciliation of income taxes computed at the federal statutory tax rate to
the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, 1997 December 31, 1996 March 31, 1996
------------------ ----------------- ---------------
<S> <C> <C> <C>
Federal statutory tax rate 34.0% 34.0% 34.0%
State tax provision 6.8 8.3 4.9
Other 3.3 5.7
1.1
================== ================= ===============
Effective tax rate 44.1% 48.0% 40.0%
================== ================= ===============
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997 and 1996 are as follows (in thousands):
December 31, 1997 December 31, 1996
----------------- -----------------
Deferred tax assets
Depreciation $ 712
Amortization of intangibles 1,023 $ 647
Allowance for doubtful accounts 1,106 277
Inventory 1,770 190
Accrued expenses 2,555
Other, net 52 23
------ ------
7,218 1,137
Deferred tax liabilities
Depreciation -- 374
------ ------
$7,218 $ 763
====== ======
9. CONTINGENCIES AND COMMITMENTS
FinishMaster occupies facilities and uses equipment under operating lease
agreements requiring annual rental payments approximating the following amounts
(in thousands) for the five years subsequent to December 31, 1997:
1998 $ 6,610
1999 5,484
2000 2,857
2001 1,115
2002 463
Thereafter 998
----------
$ 17,527
=========
Rent expense charged to operations, including short-term leases, aggregated
$3,831,963, $2,724,621, and $2,500,101 for the year ended December 31, 1997, the
nine months ended December 31, 1996, and the year ended March 31, 1996,
respectively.
On January 14, 1998, the Company announced the planned relocation of its
administrative headquarters from the Kentwood, Michigan distribution center to
new office space located in Indianapolis, Indiana that will be leased by the
Company from LDI. The Company anticipates incurring relocation and integration
costs in 1998 in conjunction with the combination of certain stores and moving
of administrative functions.
<PAGE>
9. CONTINGENCIES AND COMMITMENTS (continued)
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 $8.1 million in
1998, $7.8 million in 1999 and 2000, and $2.8 million in 2001, 2002 and 2003.
The agreements expire in 1999, 2000, and 2003.
FinishMaster is not involved in any material legal actions as of December 31,
1997.
10. SUBSEQUENT EVENT
On February 16, 1998, the Company, AutoPaints and LDI entered into an Agreement
and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger
Agreement, which is subject to the approval of the Company's shareholders,
AutoPaints will merge with and into the Company, and the Company will issue an
additional 1,542,416 shares of the common stock of the Company to LDI. The
Company will also seek shareholder approval for an increase in the number of
authorized common shares from 10 million to 25 million shares. The financial
position, results of operations and cash flows of AutoPaints have not been
reflected in the consolidated financial statements of FinishMaster as of or for
the year ended December 31, 1997.
On March 27, 1998 the Company entered into a subordinated revolving credit
agreement with LDI for $10.0 million to fund working capital and acquisition
needs. Principal is due March 27, 1999. Interest rates and payment dates are
variable based upon interest options selected by management. The interest rates
are 2.25% over LIBOR or 1.0% over prime in the case of floating rate advances.
Holders of subordinated debt are expressly made subordinate in right of payment
of all senior indebtedness.
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
- ----------------------------------------- ---------------- --------------------------------- ------------------ -----------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------- ---------------- --------------------------------- ------------------ -----------------
ADDITIONS
---------------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts-- Deductions--DescribeBalance at End
DESCRIPTION Period Expenses Describe of Period
- ----------------------------------------- ---------------- ---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
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
------ ---- ---- ----
Year ended March 31, 1996:
Allowance for doubtful accounts $ 260 $548 $458 (B) $350
------ ---- ---- ----
</TABLE>
(A) Represents allowance for doubtful accounts from acquisition.
(B) Represents uncollectible accounts written off, less recoveries.
