SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
FinishMaster, Inc.
(Name Of Registrant As Specified In Its Charter)
FinishMaster, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: COMMON STOCK, WITHOUT PAR VALUE
(2) Aggregate number of securities to which transaction
applies: 1,542,416
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): The filing fee was calculated
based on the average of the high and low price on
April 7, 1997 of $9.4375
(4) Proposed maximum aggregate value of transaction: $14,556,551
(5) Total fee paid: $2,911.31
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
FINISHMASTER, INC.
54 MONUMENT CIRCLE, SUITE 700
INDIANAPOLIS, INDIANA 46204
(317) 237-3678
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
TO BE HELD MAY 28, 1998
To the Shareholders of FinishMaster, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders of
FinishMaster, Inc., an Indiana corporation (the "Company"), will be held at
University Place Conference Center & Hotel, 850 West Michigan Street,
Indianapolis, Indiana on Thursday, May 28, 1998, at 10:00 a.m., local time, for
the following purposes, all of which are more completely set forth in the
accompanying proxy statement.
1. Election of Directors. To elect seven (7) Directors for the ensuing
year.
2. Ratification of Auditors. To ratify and approve the selection of
Coopers & Lybrand, LLP, as auditors for the fiscal year ending
December 31, 1998.
3. Approval of Proposed Acquisition. To approve the acquisition by the
Company of LDI AutoPaints, Inc. pursuant to an Agreement and Plan of
Merger dated as of February 16, 1998 which provides that LDI
AutoPaints, Inc. will merge with and into the Company (the "Proposed
Acquisition").
4. Increase in Authorized Shares. To approve the amendment of the
Company's Articles of Incorporation to increase the number of
authorized shares of common stock, without par value, from 10,000,000
to 25,000,000 shares.
5. Other Business. To transact such other business as may properly come
before the meeting.
In accordance with the Bylaws of the Company and a resolution of the Board
of Directors, the record date for the meeting has been fixed at April 10, 1998.
Only Shareholders of record at the close of business on that date will be
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you may
be informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
proxy in the postage-paid envelope furnished for that purpose. A copy of our
Annual Report for the year ended December 31, 1997, is enclosed. Except as
specifically incorporated by reference into the Proxy Statement, the Annual
Report is not a part of the proxy soliciting material enclosed with this letter.
By Order of the Board of Directors
/s/ Andre B. Lacy
Andre B. Lacy, Chairman of the Board
and Chief Executive Officer
Indianapolis, Indiana
April 24, 1998
YOUR VOTE IS IMPORTANT
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER
OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE
AND COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
-1-
<PAGE>
FINISHMASTER, INC.
54 Monument Circle, Suite 700
Indianapolis, Indiana 46204
---------------
PROXY STATEMENT
---------------
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of FinishMaster, Inc., an Indiana
corporation (the "Company"), in connection with the solicitation of proxies by
the Board of Directors of the Company to be voted at the Annual Meeting of
Shareholders to be held at 10:00 a.m., local time, on Thursday, May 28, 1998,
University Place Conference Center & Hotel, 850 West Michigan Street,
Indianapolis, Indiana, and at any adjournment of such meeting. This Proxy
Statement is expected to be mailed to shareholders on or about April 24, 1998.
The proxy solicited hereby, if properly signed and returned to the Company
and not revoked prior to its use, will be voted in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted "FOR" each of the matters described below and, upon
the transaction of such other business as may properly come before the meeting,
in accordance with the best judgment of the persons appointed as proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Chief Financial Officer of the
Company written notice thereof at any time before the commencement of the
meeting (Roger Sorokin, 54 Monument Circle, Suite 700, Indianapolis, Indiana
46204), (ii) submitting a duly executed proxy bearing a later date, or (iii)
appearing at the Annual Meeting and giving the Secretary notice of his or her
intention to vote in person. Proxies solicited hereby may be exercised only at
the Annual Meeting and any adjournment thereof and will not be used for any
other meeting.
The purpose of this Annual Meeting of Shareholders shall be to (i) elect
Directors, (ii) ratify the selection of the Company's auditors for the fiscal
year ended December 31, 1998, (iii) consider the acquisition by the Company of
LDI AutoPaints, Inc., an Indiana corporation ("AutoPaints") pursuant to an
Agreement and Plan of Merger dated as of February 16, 1998 which provides that
AutoPaints will merge with and into the Company (the "Proposed Acquisition"),
(iv) consider an amendment to the Company's Articles of Incorporation to
increase the number of shares of Common Stock authorized for issuance, and (v)
transact such other business as may properly come before the meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The Common Stock is the only voting stock of the Company. Holders of
record at the close of business on April 10, 1998, are entitled to one (1) vote
for each share of Common Stock held. As of April 10, 1998, there were
approximately 5,992,640 shares of the Company's Common Stock issued and
outstanding, and the Company had no other class of equity securities
outstanding. Holders of stock entitled to vote at the meeting do not have
cumulative voting rights in respect of the election of directors.
In an election of directors, each director is elected by a plurality of
the votes cast. The affirmative vote of the holders of the majority of the
outstanding shares of Common Stock is required for the approval of the Proposed
Acquisition. Other actions are authorized by the affirmative vote of a majority
of the votes cast by the holders of shares of Common Stock represented in person
or by proxy at the meeting. Although Indiana law and the Articles of
Incorporation and Bylaws of the Company are silent on the issue, it is the
intent of the Company that proxies received which contain abstentions or broker
non-votes as to any matter will be included in the calculation of the presence
of a quorum, but will not be counted as votes cast for or against the action to
be taken on the matter. Therefore, abstentions or broker non-votes will have no
effect in the election of directors, but will have the same effect as a vote
against a particular issue with regard to the other matters to be considered,
including the approval of the Proposed Acquisition.
-1-
<PAGE>
Security Ownership By Principal Holders
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of April 10, 1998, by each
person who is known to the Company to own 5% or more of its Common Stock:
Number of Shares of
Name and Address of Common Stock
Beneficial Owner Beneficially Owned % of Class
---------------- ------------------ ----------
LDI AutoPaints, Inc.(1) 4,045,100(1) 67.5
54 Monument Circle
Indianapolis, Indiana 46204
Kaufman Fund, Inc. 485,700 8.1
140 East 45th Street
43rd Floor
New York, New York 10017
(1) LDI AutoPaints, Inc., an Indiana corporation ("AutoPaints"), is a
wholly-owned subsidiary of Lacy Distribution, Inc., an Indiana corporation
("Distribution"), and an indirect wholly-owned subsidiary of LDI, Ltd., an
Indiana limited partnership ("LDI"). LDI has two general partners: LDI
Management, Inc. ("LDIM"), its corporate managing general partner, and
Andre B. Lacy, the Chairman and Chief Executive Officer of the Company.
AutoPaints, Distribution, LDI, LDIM and Andre B. Lacy have jointly filed a
Schedule 13D to report beneficial ownership of the 4,045,000 shares held
of record by AutoPaints. Effective December 31, 1996, LDI transferred to
AutoPaints 100 shares of the Company which LDI had purchased on the open
market in August, 1995. Andre B. Lacy, individually, owns an additional
6,000 shares of the Company's Common Stock. An additional 1,542,416 shares
of Common Stock is to be issued to Distribution pursuant to the Agreement
and Plan of Merger dated February 16, 1998, subject to shareholder
approval. (See Proposal III-Approval of Proposed Acquisition herein.)
Following the Proposed Acquisition, if approved, Distribution will own
approximately 74.2% of the outstanding shares of Common Stock of the
Company.
PROPOSAL I - ELECTION OF DIRECTORS
The Company's Bylaws provide that the number of directors may be changed
from time to time, as determined by the Board of Directors or shareholders of
the Company. The Board of Directors currently consists of seven members. Unless
otherwise directed, each proxy executed and returned by a shareholder will be
voted for the election of the following nominees to the Board of Directors, to
hold office until the next Annual Meeting or until their successors are elected.
In the event any nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. Proxies will be voted
only to the extent of the number of nominees named. At this time, the Board of
Directors knows of no reason why any nominee may not be able to serve as a
director if elected. Directors are elected to serve until the next Annual
Meeting or until their successors are elected and qualified.
-2-
<PAGE>
Security Ownership by Directors and Executive Officers
The following table sets forth information as of April 10, 1998 with
respect to the number and percentage of shares of Common Stock beneficially
owned by (i) each director nominee, (ii) each Named Executive Officer (as
defined below), and (iii) all directors and executive officers of the Company as
a group.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership
of Common Stock as of
April 10, 1998 (1)
----------------------------------------
Name of Director of Sole Voting & Shared Voting & Percentage
Beneficial Owner (1) Company Since Investment Power Investment Power of Class
---------------- ------------- ---------------- ---------------- --------
<S> <C> <C> <C> <C>
Director Nominees:
Andre B. Lacy 1996 6,000 4,045,100(2) 67.5%
Thomas U. Young 1996 300 --- *
Margot L. Eccles 1996 1,000 4,045,100(2) 67.5%
William J. Fennessy 1996 400 --- *
Walter S. Wiseman 1996 --- --- *
Peter L. Frechette 1996 --- --- *
Michael L. Smith 1997 --- --- *
Other Executive Officers:
Roger A. Sorokin, --- 33,000(3) --- *
Vice President - Finance
Charles R. Stephenson, --- 5,000(4) --- *
Senior Vice President
All directors and executive --- 45,700 4,045,100(2) 68.3%
officers as a group (9)
- ---------------
</TABLE>
* Beneficial ownership does not exceed one percent (1%)
(1) Based upon information furnished by the respective director nominees and
executive officers. Under applicable regulations, shares are deemed to be
beneficially owned by a person if he directly or indirectly has or shares
the power to vote or dispose of the shares and if he has the right to
acquire such power with respect to shares within 60 days. Accordingly,
shares subject to options are only included if exercisable within 60 days.
Includes shares beneficially owned by members of the immediate families of
the director nominees or executive officers residing in their homes.
(2) Includes all 4,045,100 shares of Common Stock held directly by AutoPaints.
Mr. Lacy, the Chairman and CEO of the Company, is a general partner of
LDI, the ultimate parent entity of AutoPaints. Mr. Lacy is also the sole
shareholder and the Chairman, President and Chief Executive Officer of LDI
Management, Inc., the corporate managing general partner of LDI ("LDIM"),
and he is the Chairman and Chief Executive Officer of AutoPaints. Ms.
Eccles serves as a director and as a Vice President of LDIM and as a
director of AutoPaints. Due to their positions with LDIM and AutoPaints,
Mr. Lacy and Ms. Eccles may be deemed to have voting and dispositive power
with respect to these shares, and therefore to own such shares
beneficially under applicable regulations.
(3) Consists of 33,000 Shares subject to stock options which are currently
exercisable in accordance with their terms.
(4) Consists of 5,000 Shares subject to stock options which are currently
exercisable in accordance with their terms.
-3-
<PAGE>
Directors and Director Nominees
The following information is furnished concerning the director
nominees, all of whom have been nominated by the Board of Directors.
Mr. Lacy (age 58) was elected Chairman of the Board of Directors and
Chief Executive Officer of the Company in July, 1996. Mr. Lacy is President,
Chief Executive Officer and Chairman of the Board of Directors of LDIM, the
corporate managing general partner of LDI. Mr. Lacy, individually, also serves
as a general partner of LDI. Mr. Lacy serves as President, Chief Executive
Officer and Chairman of the Board of Directors of Distribution, and he has
served as Chairman of the Board of Directors and Chief Executive Officer of
AutoPaints since its formation in April, 1996. Except for his positions with the
Company and AutoPaints, Mr. Lacy has served in these capacities for more than
the previous five years. Mr. Lacy is also the Chairman of the Board of Directors
and Chief Executive Officer of Thompson PBE, Inc., a Delaware corporation
("Thompson"), which was acquired by the Company in November, 1997 (the "Thompson
Acquisition"). Mr. Lacy also serves as a director of Tredegar Industries, Inc.,
Albemarle Corporation, IPALCO Enterprises, Inc., Herff Jones, Inc., The National
Bank of Indianapolis, and Patterson Dental Company. Mr. Lacy is the brother of
Margot L. Eccles.
Mr. Young (age 65) was named Vice Chairman of the Board of Directors of
the Company in July, 1996, and was subsequently elected President and Chief
Operating Officer of the Company effective July 24, 1996. Mr. Young has served
as a Vice President of LDIM and as a director, President and Chief Operating
Officer of AutoPaints since June, 1996. Mr. Young also serves as a director and
as the President and Chief Operating Officer of Thompson, which was acquired by
the Company in November, 1997. From 1989 until May 31, 1996, Mr. Young served as
the World Wide Director of the Refinish Business for E.I. DuPont Co.,
Wilmington, Delaware.
Ms. Eccles (age 62) has served as a director of the Company since July,
1996. She has served as a director of LDIM and as its Vice President and
Assistant Secretary for more than the previous five years. Ms. Eccles also
serves as a director, Vice President and Assistant Secretary of Distribution,
and she has served as a director and Assistant Secretary of AutoPaints since its
formation in April, 1996. She has served as a director of Thompson since its
acquisition by the Company in November, 1997. Ms. Eccles is the sister of Andre
B. Lacy.
Mr. Fennessy (age 57) has served as the Treasurer and as a director of
the Company since July, 1996. He has served as a Vice President, Treasurer and
Chief Financial Officer of LDIM for more than the previous five years. Mr.
Fennessy also serves as a director and as the Vice President, Treasurer and
Chief Financial Officer of Distribution, and he has served as a director and
Treasurer of AutoPaints since its formation in April, 1996. He has served as a
director of Thompson since its acquisition by the Company in November, 1997.
Mr. Frechette (age 60) has served as a director of the Company since
August, 1996. He has also served as Chairman of the Board, President, and Chief
Executive Officer of Patterson Dental Company, a distributor of dental supplies
and equipment based in St. Paul, Minnesota, for more than the past five years.
Mr. Smith (age 49) has served as a director of the Company since
October, 1997. Since April, 1996, Mr. Smith has served as Chief Operating
Officer and Chief Financial Officer of American Health Network, Inc., an
Indianapolis-based provider of health care services. Between January, 1996 and
March, 1996, Mr. Smith served as President of Somerset Financial Services, an
Indianapolis-based provider of financial services and a division of Somerset
Group, Inc. Mr. Smith served as Chairman of the Board, President and Chief
Executive Officer of Mayflower Group, Inc., an Indianapolis-based holding
company with operations in the moving and storage and student transportation
industries, between June, 1990 and March, 1995. Mr. Smith also serves as a
Director of First Indiana Corporation and Somerset Group, Inc.
Mr. Wiseman (age 52) has served as a director of the Company since
July, 1996. Effective February 28, 1997, Mr. Wiseman retired as a Vice President
of LDIM and as President of Major Video Concepts, Inc. ("MVC"), a wholesale
distributor of videocassettes based in Indianapolis, Indiana, and a wholly-owned
subsidiary of Distribution, having held such positions for more than the
previous five years. From March 1, 1997 to the present, Mr. Wiseman has served
as a consultant to Distribution. In connection with his services for
Distribution, Mr. Wiseman was engaged to provide consulting services related to
certain administrative and systems functions of the Company following the
Thompson Acquisition. The Company paid no compensation for Mr. Wisemen's
services in fiscal year 1997.
Except for Mr. Lacy and Ms. Eccles, no director or nominee for director
is related to any other director or nominee for director or executive officer of
the Company by blood, marriage, or adoption, and there are no arrangements or
understandings between any nominee and any other person pursuant to which such
nominee was selected.
THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF VOTES CAST AT THE
ANNUAL MEETING
-4-
<PAGE>
Meetings and Committees of the Board of Directors
The management of the Company is under the direction of the Board of
Directors (the "Board"). During the year ended December 31, 1997, the Board met
six (6) times in addition to taking a number of actions by unanimous written
consent. During such period, no incumbent director of the Company attended fewer
than 75% of the aggregate of the total number of Board meetings and the total
number of meetings held by the committees of the Board of Directors on which he
or she served.
The Board has established an Audit Committee and a Compensation
Committee. For the year ended December 31, 1997, all of the members of the Board
were appointed to the Audit Committee, with Walter S. Wiseman serving as the
Chair of such committee. The Audit Committee met two (2) times in the year ended
December 31, 1997. The Audit Committee recommends the annual employment of the
Company's auditors and reviews the scope of audit and non-audit assignments,
related fees, the accounting principles used by the Company in financial
reporting, internal financial auditing procedures and the adequacies of the
Company's internal control procedures.
The Compensation Committee consisted of Margot L. Eccles (serving as
Chair), Peter L. Frechette and Mr. Wiseman for the year ended December 31, 1997.
The Compensation Committee determines executive officer salaries and bonuses and
administers the Company's stock option plan. The Compensation Committee met once
and otherwise took action by unanimous written consent during the year ended
December 31, 1997.
The Board does not have a standing nominating committee.
On November 6, 1997, prior to the completion of the Thompson
Acquisition, the Board of Directors of the Company appointed a committee of
independent directors (the "Independent Committee"), consisting of Peter L.
Frechette and Michael L. Smith, for the purposes of reviewing transactions
between the Company and LDI relating to the Thompson Acquisition. Based on the
determination of management with regard to the acquisition of the Florida
division of AutoPaints, the Independent Committee was also charged with
reviewing the fairness of the Proposed Acquisition, from a financial point of
view, to the shareholders of the Company not affiliated with LDI. (See
"Background of the Proposed Acquisition" herein.)
Director Compensation
In the year ended December 31, 1997, the non-employee directors of the
Company were paid an annual retainer of $6,000, a board meeting fee of $1,000
per meeting, a committee meeting fee of $750 per meeting, and a telephonic board
meeting fee of $250 per meeting. Directors of the Company who are employees of
FinishMaster, AutoPaints, Distribution, LDI, LDIM or their affiliates do not
receive compensation for their services as directors.
Compliance with Reporting Requirements
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's directors and executive officers and
beneficial owners of more than 10% of the Company's equity securities to file
with the Securities and Exchange Commission ("SEC") certain reports regarding
the ownership of the Company's securities or any changes in such ownership.
Officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms that
they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for such persons, the Company believes that, during the year ended
December 31, 1997 and except as set forth below, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
with respect to Section 16(a) of the 1934 Act were complied with. Following his
election as a director in November, 1997, Mr. Smith did not file on a timely
basis an Initial Statement of Beneficial Ownership of Securities on Form 3, but
such form has since been filed, reporting that Mr. Smith owns no securities of
the Company. Following his appointment as Senior Vice President on October 13,
1997, Mr. Stephenson did not file on a timely basis an Initial Statement of
Beneficial Ownership of Securities on Form 3, but such form has since been
filed, reporting that Mr. Stephenson held an option to purchase 5,000 shares of
Common Stock of the Company as of the time he became an executive officer.
-5-
<PAGE>
Remuneration of Executive Officers
The following table summarizes, for the Company's last three completed
fiscal years ended December 31, 1997, the compensation of the persons who served
as Chief Executive Officer of the Company during the year ended December 31,
1997 and each of the other most highly compensated executive officers of the
Company who were serving as such at the end of such period and whose salary and
bonus compensation exceeded $100,000 for services rendered in all capacities to
the Company and its subsidiary during the most recent fiscal year (collectively,
the "Named Executive Officers"). With the exception of Mr. Young, who serves as
President and Chief Operating Officer of the Company, employees of LDI who serve
as officers of the Company serve without compensation from the Company. See
"Certain Relationships and Related Transactions."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Securities All Other
Name and Fiscal Underlying Compen-
Principal Position Year Salary Bonus Options(1) sation(2)
------------------ ---- ------ ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
Andre B. Lacy..................... 1997 --- --- --- ----
Chief Executive Officer 1996(3) --- --- --- ----
1995(3) --- --- --- ----
Thomas U. Young...................
President and Chief Operating 1997 $64,000(4) --- --- ---
Officer 1996(3) $112,500(4) --- --- ---
1995(3) --- --- --- ---
Roger A. Sorokin.................. 1997 $100,000 $28,450 5,000 $3,211
Vice President-Finance and 1996 92,000 14,000 --- 2,921
Chief Financial Officer 1995 79,000 27,650 12,500 2,346
Charles R. Stephenson............. 1997 $ 48,077(5) 29,312 5,000 $30,355(6)
Senior Vice President 1996 --- --- --- ---
1995 --- --- --- ---
- --------------------
</TABLE>
(1) Represents the number of shares for which options have been granted.
(2) Represents the Company's 25% match of up to 6% of employee deferrals of
currently earned income into the 401(k) Employee Savings Plan and any
profit sharing contributions made by the Company for eligible employees
to the 401(k) Employee Savings Plan at the rate of 1% of compensation.
(3) Represents amounts paid in the period from July, 1996 through December
31, 1996. Mr. Lacy and Mr. Young were not executive officers of the
Company until July, 1996, when AutoPaints acquired the shares of Common
Stock held by Maxco, Inc., a Michigan corporation.
(4) Represents sums paid by the Company to AutoPaints for services provided
to the Company by Mr. Young.
(5) Represents amounts paid in the period from August 11, 1997 (the date on
which Mr. Stephenson joined the Company) through December 31, 1997.
(6) Consists principally of travel and moving expenses and related costs
associated with Mr. Stephenson's relocation upon joining the Company.
-6-
<PAGE>
Stock Options Granted in Year Ended December 31, 1997
The following table sets forth information related to options granted
during the fiscal year ended December 31, 1997 to each of the Named Executive
Officers to whom options have been granted.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term
- ---------------------------------------------------------------------------------------- ------------------------------
% of Total
Options
Securities Granted to Exercise or
Underlying Employees in Base Price
Options Fiscal Year ($/Sh) Expiration
Name Granted (#) 1997 Date 5%($)(1) 10%($)(1)
---- ----------- ---- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Roger A. Sorokin 5,000 11.1% $7.00 2/10/07 $22,011.50 $55,779.50
Charles R. Stephenson 5,000 11.1% $7.00 8/11/07 $22,011.50 $55,779.50
- -------------------
</TABLE>
(1) These gains are based upon assumed rates of annual compound stock
appreciation of 5% and 10% from the date the options were granted over the
full option term. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on option exercises are dependent
upon the future performance of the Shares and overall stock market
conditions. There can be no assurance that the amounts reflected on this
table will be achieved.
The following table sets forth certain information regarding the total
number of stock options held by each of the Named Executive Officers, and the
aggregate value of such stock options, as of December 31, 1997. None of such
stock options had been exercised as of such date.
Aggregated Option Exercises in Year Ended December 31, 1997
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of In-the-Money
Shares Options at the Year Unexercised Options
Acquired on Value Ended at the Year ended
Name Exercise (#) Realized ($) December 31, 1997 December 31, 1997 ($)
---- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
Andre B. Lacy --- --- --- $ ---
Thomas U. Young --- --- --- $ ---
Roger A. Sorokin --- --- 28,000 $46,250
Charles R. Stephenson --- --- 5,000 $23,750
</TABLE>
-7-
<PAGE>
Compensation Committee Interlocks and Insider Participation
For the year ended December 31, 1997, the Compensation Committee of the
Board (the "Committee") consisted of Ms. Eccles, Mr. Frechette and Mr. Wiseman.
Mr. Lacy, the Company's Chief Executive Officer, is a member of the
Compensation Committee of Patterson Dental Company. Mr. Frechette, who is a
Director and member of the Company's Compensation Committee, is the Chief
Executive Officer of Patterson Dental Company. Mr. Lacy did not receive any
compensation from the Company for the year ended December 31, 1997 for his
services as a director and the Chief Executive Officer of the Company.
Compensation Committee Report on Executive Compensation
Overview and Philosophy
The Committee is responsible for developing and making recommendations to
the Board with respect to the Company's executive compensation policies. In
addition, the Committee, pursuant to authority delegated by the Board,
determines on an annual basis the compensation to be paid to the executive
officers of the Company.
The objectives of the Company's executive compensation program are to:
_ Support the achievement of desired Company performance.
_ Provide compensation that will attract and retain superior talent and
reward performance.
_ Align the executive officers' interests with the success of the
Company by placing a portion of pay at risk, with payout dependent
upon corporate performance.
The executive compensation program provides an overall level of
compensation opportunity that is competitive with companies of comparable size
and complexity. The Committee will use its discretion to set executive
compensation where in its judgment external, internal or an individual's
circumstances warrant it.
Executive Officer Compensation Program
The Company's executive officer compensation program is comprised of base
salary, annual cash incentive compensation, long-term incentive compensation in
the form of stock options, and various benefits, including medical and deferred
compensation plans, generally available to employees of the Company.
Base Salary
Base salary levels for the Company's executive officers are competitively
set relative to other comparable companies. In determining salaries the
Committee also takes into account individual experience and performance.
Annual Incentive Compensation
The Company's annual incentive program for executive officers and key
managers provides direct financial incentives in the form of an annual cash
bonus to executives based on the Company's ability to create economic value.
Economic value is measured by the Company's ability to generate a return in
excess of the Company's cost of capital. Specific individual performance was
also taken into account in determining bonuses.
Stock Option Program
The stock option program is the Company's long-term incentive plan for
executive officers and key employees. The objectives of the program are to align
executive and shareholder long-term interests by creating a strong and direct
link between executive pay and shareholder return, and to enable executives to
develop and maintain a significant, long-term ownership position in the
Company's Common Stock.
The Company's stock option plan (the "Stock Option Plan") was adopted by
the Company's Board of Directors in November 1993, was ratified by the then sole
stockholder on November 30, 1993 and was amended and restated by the Board
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of Directors on April 30, 1997. The Stock Option Plan provides for the grant of
both incentive stock options intended to qualify for preferential tax treatment
under Section 422 of the Internal Revenue Code of 1986, as amended, and
nonqualified stock options that do not qualify for such treatment. The Stock
Option Plan authorizes a committee of directors to award executive and key
employee stock options. The Committee functions as the Stock Option Plan
committee. Stock options are granted at an option price equal to the fair market
value of the Company's Common Stock on the date of grant, have ten year terms
and can have exercise restrictions established by the Committee. A total of
600,000 shares of Common Stock have been reserved for issuance under the Stock
Option Plan.
During the year ended December 31, 1997, options for 45,000 shares were
granted to officers and key employees.
Deferred Compensation
The Company's employees participate in the FinishMaster, Inc. 401(k)
Employee Savings Plan. The 401(k) plan is a "cash or deferred" plan under which
employees may elect to contribute a certain portion of their annual compensation
which they would otherwise be eligible to receive in cash. The Company has
agreed to make a matching contribution of 25% of the employees' contributions of
up to 6% of their annual compensation. Contributions must be made from current
or retained earnings of the Company. All full time employees of the Company or
its subsidiary who have completed one year of service are eligible to
participate in the plan. Participants are immediately 100% vested in all
participant contributions and vest 20% per year over five years with respect to
"company match" contributions. The plan does not contain an established
termination date, and it is not anticipated that it will be terminated at any
time in the foreseeable future.
Benefits
The Company provides medical benefits to the executive officers that are
generally available to Company employees. The amount of perquisites, as
determined in accordance with the rules of the SEC relating to executive
compensation, did not exceed 10% of salary for the year ended December 31, 1997.
Chief Executive Officer
Andre B. Lacy served as the Company's Chief Executive Officer for year
ended December 31, 1997, having first been named to such position in July, 1996.
Mr. Lacy did not receive any compensation from the Company for the year ended
December 31, 1997 for his services as a director and the Chief Executive Officer
of the Company.
The Compensation Committee of the Company for the year ended December 31,
1997:
Margot L. Eccles
Peter L. Frechette
Walter S. Wiseman
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COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total shareholder return on the
Common Stock of the Company for the period beginning February 23, 1994 and
ending December 31, 1997, with the cumulative total return on the CRSP Total
Return Index for the Nasdaq Stock Market (US Companies) (1) and the Nasdaq Index
of Non-Financial Companies (2) over the same period, assuming the investment of
$100 in the Company's Common Stock, the Nasdaq U.S. Index and the Nasdaq
Non-Financial Index on February 23, 1994, and reinvestment of all dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, PEER GROUP AND BROAD MARKET
FISCAL YEAR ENDING
COMPANY BASE 3/31/94 3/31/95 3/31/96 12/31/96 12/31/97
FINISHMASTER 100 82.95 139.77 104.55 65.91 106.82
PEER GROUP 100 93.07 101.98 137.59 159.16 186.85
BROAD MARKET 100 93.85 104.40 141.76 166.59 204.42
THE PEER GROUP CHOSEN WAS:
NASDAQ NON-FINANCIAL INDEX
THE BROAD MARKET INDEX CHOSEN WAS:
NASDAQ MARKET INDEX -- U.S. COMPANIES
- ----------------------
(1) The CRSP Total Return Index for the Nasdaq Stock Market (US Companies)
is composed of all domestic common shares traded on the Nasdaq National
Market and the Nasdaq Small-Cap Market.
(2) Nasdaq index of non-financial companies.
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Certain Relationships and Related Transactions
AutoPaints is a wholly-owned subsidiary of Distribution, which is, in
turn, a wholly-owned subsidiary of LDI. AutoPaints currently owns 4,045,100
shares, or approximately 67.5% of the outstanding Common Stock of the Company.
Andre B. Lacy is a general partner of LDI and is President, Chairman of the
Board and Chief Executive Officer of LDIM, the corporate managing general
partner of LDI. Mr. Lacy also serves as Chairman of the Board, President and
Chief Executive Officer of Distribution and as Chairman of the Board and Chief
Executive Officer of both the Company and AutoPaints. Thomas U. Young is the
President and Chief Operating Officer of both the Company and AutoPaints.
Pursuant to an arrangement between the Company and AutoPaints, the Company pays
to AutoPaints an amount in respect of the services Mr. Young provides to the
Company. (See "Remuneration of Executive Officers" herein.)
During the period between July 10, 1996 and December 31, 1997,
AutoPaints has made certain services and certain AutoPaints employees available
to the Company to perform certain managerial tasks. Accordingly, the Company
paid $291,000 in the aggregate to AutoPaints during the year ended December 31,
1997, in return for the services of AutoPaints and its employees. Of such
amount, $64,000 was paid in connection with the services of Mr. Young as the
Company's President and Chief Operating Officer. The remainder was paid in
connection with miscellaneous services provided by AutoPaints from time to time,
when requested by the Company. Mr. Walt Wiseman, a director of the Company,
provided certain consulting services for the benefit of the Company in fiscal
year 1997, for which the Company paid no compensation. (See "Directors and
Directors Nominees" herein.)
In connection with the Thompson Acquisition, the Company entered into a
Subordinated Note Agreement with LDI dated November 19, 1997 pursuant to which
LDI loaned the Company $30 Million on an unsecured basis. The obligation bears
interest at a rate of 9%, with interest payable quarterly and with principal due
on May 19, 2004. Repayment of this obligation is subordinated to the Company's
bank credit facility. On March 27, 1998, the Company entered into a Credit
Agreement with LDI pursuant to which LDI has agreed to make available to the
Company a $10 million unsecured, revolving line of credit for a one year period.
The interest rate borne by loans under the Credit Agreement is the same as the
interest rates borne under the Company's bank credit facility. The obligations
of the Company under the Credit Agreement are also subordinated to the Company's
bank credit facility. The Company believes that both credit facilities with LDI
are on terms at least as favorable as those that could be obtained by
arms-length negotiations with an unaffiliated third party.
Subsequent to the execution of the Merger Agreement between the Company
and AutoPaints (as described more particularly under Proposal III below), the
Company and AutoPaints entered into an agreement effective March 1, 1998,
pursuant to which certain management and administrative services are provided to
the Company's southeast operations by AutoPaints without charge.
Effective March 1, 1998, the Company relocated its administrative
headquarters from the Kentwood, Michigan distribution center to newly renovated
office space located in Indianapolis, Indiana that will be leased by the Company
from LDI. Although no formal lease agreement has yet been entered into, the
Company believes that its terms will be at least as favorable as those that
could be obtained by arms-length negotiations with an unaffiliated third party.
(See "Conflicts of Interest" herein.)
The Merger Agreement contains an agreement by AutoPaints to vote the
shares it owns in the Company for the Proposed Acquisition. Because AutoPaints
owns approximately 67.5% of the outstanding shares of the Company, approval of
the Proposed Acquisition is assured. (See "Conflicts of Interest" herein.)
Recent Developments
Pursuant to the terms and subject to the conditions of the Agreement
and Plan of Merger, dated October 14, 1997 by and among the Company, FMST
Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of
the Company ("FMST"), and Thompson, (i) FMST acquired 8,460,161 shares, or
approximately 97.9%, of the outstanding shares of common stock, par value $.001
per share, of Thompson, including the stock purchase rights associated therewith
issued under the Rights Agreement dated as of May 6, 1997, pursuant to a cash
tender offer of $8.00 net per share for all the outstanding stock of Thompson
(the "Offer"); and (ii) subsequent to the acceptance of the Shares tendered in
the Offer, FMST was merged with and into Thompson, with Thompson surviving the
Merger. As a result of the Thompson Acquisition, the separate corporate
existence of FMST terminated, Thompson became a wholly owned subsidiary of
FinishMaster, and all of the remaining outstanding Shares (other than any Shares
held by FinishMaster or any wholly owned subsidiary of FinishMaster or in the
treasury of Thompson or by any wholly owned subsidiary of Thompson) were
converted into the right to receive $8.00 net per share in cash. (See
"Background and Purpose of the Proposed Acquisition" herein.)
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On February 16, 1998, the Company, AutoPaints and Distribution entered
into an Agreement and Plan of Merger. (See Proposal III-Approval of Proposed
Acquisition herein.)
PROPOSAL II - RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors proposes the ratification by the shareholders at
the Annual Meeting of the appointment of the accounting firm of Coopers &
Lybrand, LLP ("Coopers & Lybrand") as independent auditors for the fiscal year
ended December 31, 1998. A representative of Coopers & Lybrand is expected to be
present at the Annual Meeting with the opportunity to make a statement if the
representative so desires. Such representative will also be available to respond
to any appropriate questions shareholders may have.
PROPOSAL III-APPROVAL OF PROPOSED ACQUISITION
Introduction
On February 16, 1998, the Company, AutoPaints and Distribution 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 be the surviving corporation. At the effective time of the Proposed
Acquisition, all of the issued and outstanding shares of AutoPaints owned by
Distribution and the 4,045,100 shares of common stock of the Company owned by
AutoPaints immediately prior to the effective time shall, by virtue of the
Proposed Acquisition, be cancelled and converted into a right of Distribution to
receive (i) 4,045,100 shares of the common stock of the Company, issued in
respect of the shares owned by AutoPaints that were cancelled in connection with
the Proposed Acquisition, and (ii) 1,542,416 additional shares of the common
stock of the Company. As a result of the Proposed Acquisition, Distribution will
own 5,587,416 shares, or approximately 74.2%, of the outstanding Common Stock of
the Company. Other than the issuance of the additional shares to Distribution as
described above, the Proposed Acquisition will have no affect on the rights of
shareholders of the Company.
AutoPaints, which is an Indiana corporation, has its principal executive
offices at 54 Monument Circle, Indianapolis, Indiana 46204 (telephone
317-236-5400). AutoPaints is a wholly owned subsidiary of Distribution, which
is, in turn, a subsidiary of LDI. (See "Certain Relationships and Related
Transactions" and "Conflicts of Interest" herein.). There is no established
trading market for the shares of AutoPaints. AutoPaints distributes automotive
paints, coatings and paint related accessories to the automotive collision
repair industry through 14 retail locations and one distribution center in
central and southwest Florida.
In the Merger Agreement, AutoPaints agreed to vote its shares of the
Company for the approval of the Proposed Acquisition and the Merger Agreement.
Because AutoPaints owns approximately 67.5% of the outstanding shares of the
Company, approval of the Proposed Acquisition and the Merger Agreement is
assured.
Background and Purpose of the Proposed Acquisition
Effective May 31, 1996, AutoPaints acquired the assets of the "Steego"
division of Parts Depot Company, L.P., a Delaware limited partnership ("Parts
Depot"), pursuant to the exercise of an option to acquire such assets granted
under a certain Option Agreement dated November 24, 1995 by and between Parts
Depot and LDI (the "Option Agreement"). LDI assigned its rights under the Option
Agreement to AutoPaints effective May 30, 1996. The assets acquired by
AutoPaints pursuant to the Option Agreement consisted primarily of 12 retail
locations and one distribution center in central and southeast Florida which
market and distribute paints to automobile collision repair facilities.
On July 9, 1996, AutoPaints completed the purchase of 4,045,000 shares,
or approximately 67.4% of the then outstanding shares of Common Stock of the
Company, from Maxco, Inc., a Michigan corporation, at a price of $11.50 per
share in cash, or $46,517,500 in the aggregate.
On November 21, 1998, the Company acquired substantially all of the
outstanding shares of common stock of Thompson for $8.00 net per share in cash,
or an aggregate of approximately $73,471,000, including related acquisition
costs. In addition to the cash purchase price, the Company refinanced
approximately $34,474,000 of Thompson's outstanding indebtedness. The Thompson
Acquisition provided the Company with approximately 90 additional retail
facilities for the distribution of automotive paint and refinishing supplies,
primarily in the West, the Northeast and the Southeast, including retail
facilities that Thompson operated in northern and central Florida.
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In connection with the acquisition of Thompson, the Company borrowed $30
million from LDI. (See "Certain Relationships and Related Transactions" herein.)
The Company also entered into a bank credit facility for which NBD Bank, N.A.
("NBD") acts as agent, and which provided the Company with up to $100,000,000.
The proceeds from these two financings provided funds for the acquisition of
Thompson, the refinancing of Thompson's outstanding indebtedness and the
refinancing of the Company's outstanding line of credit.
As a condition of its amended bank credit facility, the Company agreed
to obtain by June 30, 1998 an additional equity investment in the Company of
$14,000,000 or such lesser amount as may be acceptable to NBD. It was determined
by management of the Company that an acquisition of the Florida division of
AutoPaints in exchange for equity in the Company would be the best means of
satisfying the requirement of the bank credit facility.
In addition to the need to comply with the equity investment requirement
under the bank credit facility, the Company is pursuing the Proposed Acquisition
in an effort to realize certain efficiencies that are expected to result from
the combination and integration of the Florida division of AutoPaints and the
southeast operations of the Company. It is anticipated that such a combination
will present significant opportunities to realize certain economies of scale and
synergies through the consolidation of overlapping sales and administrative
functions. Management views the integration of the technologies, management and
work forces of these two operations as an opportunity to capitalize on these
efficiencies with the goal of reducing costs and increasing the profitability of
the Company.
On November 6, 1997, prior to the completion of the Thompson
Acquisition, the Board of Directors of the Company appointed a committee of
independent directors (the "Independent Committee"), consisting of Peter L.
Frechette and Michael L. Smith, for the purpose of reviewing transactions
between the Company and LDI relating to the Thompson Acquisition. Based on the
determination of management with regard to the acquisition of the Florida
division of AutoPaints, the Independent Committee was also charged with
reviewing the fairness of the Proposed Acquisition, from a financial point of
view, to the shareholders of the Company not affiliated with LDI.
The Independent Committee retained independent legal counsel and, on
December 23, 1997, retained the investment banking firm of McDonald & Company
Securities, Inc. ("McDonald & Company") to assist it. McDonald & Company was
asked to render an opinion that the Proposed Acquisition is fair to the
unaffiliated shareholders of the Company from a financial point of view (the
"Fairness Opinion").
The Independent Committee negotiated the price and certain other
material terms of the Proposed Acquisition with representatives of AutoPaints.
Once the price and other material terms were generally agreed upon, counsel for
the Company prepared a draft Merger Agreement. The draft was reviewed by the
Independent Committee and its counsel and revisions were made in response to
their comments and requests.
Effective January 31, 1998, AutoPaints distributed to its parent,
Distribution, all of its assets other than (i) the Florida division of
AutoPaints, and (ii) the shares of the Company owned by AutoPaints.
On February 16, 1998, the Board of Directors of the Company met to
consider the Proposed Acquisition and the Merger Agreement. At that meeting,
McDonald & Company rendered its Fairness Opinion to the Independent Committee
and, based in part on such Fairness Opinion, the Independent Committee made its
recommendation to the Board of Directors that the Proposed Acquisition and the
Merger Agreement be approved.
The Independent Committee, voting separately, and Board of Directors
both unanimously approved the Proposed Acquisition and the Merger Agreement on
February 16, 1998. The Merger Agreement was executed on February 16, 1998.
Opinion of the Financial Advisor to the Independent Committee
On December 23, 1997 the Independent Committee, consisting of Peter L.
Frechette and Michael L. Smith, retained McDonald & Company as its financial
advisor to render an opinion concerning the fairness, from a financial point of
view, to the unaffiliated holders of the shares of Common Stock of the Company,
of the consideration to be paid by the Company in connection with the Proposed
Acquisition. McDonald & Company was retained by the Independent Committee on the
basis of, among other things, its experience and expertise and familiarity with
distribution and automotive related businesses. As part of its investment
banking business, McDonald & Company is customarily engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
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A representative of McDonald & Company attended the February 16, 1998
meeting of the Independent Committee at which the Independent Committee
considered the Proposed Acquisition and approved the Merger Agreement. At such
meeting, and at a meeting on February 9, 1998 with the Independent Committee,
representatives of McDonald & Company made presentations and reviewed various
aspects of the Proposed Acquisition, including the financial terms and
conditions of the Proposed Acquisition.
At the February 16, 1998 meeting, McDonald & Company advised the
Independent Committee that, at the Independent Committee's request, it would be
in a position to render a written opinion as to the fairness, from a financial
point of view, to the unaffiliated holders of the shares of Common Stock of the
Company, of the consideration to be paid by the Company in connection with the
Proposed Acquisition. On February 16, 1998, the Independent Committee requested,
and McDonald & Company delivered, such opinion. The full text of McDonald &
Company's opinion dated as of February 16, 1998 is attached as Appendix I to
this Proxy Statement and is incorporated herein by reference. The description of
the opinion set forth herein is qualified in its entirety by reference to
Appendix I. Shareholders are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions and qualifications made,
matters considered and limitations undertaken by McDonald & Company. The opinion
of McDonald & Company will not be updated prior to the Annual Meeting of
Shareholders.
McDonald & Company was advised that Distribution, as the sole
shareholder of AutoPaints, is the beneficial owner of 4,045,100 shares of the
Company's Common Stock, all of which shares are currently owned of record by
AutoPaints. McDonald & Company was also advised that, at the effective time of
the Proposed Acquisition and pursuant to the Merger Agreement, all of the
4,045,100 shares of the Company's Common Stock owned by AutoPaints will be
canceled, and Distribution will be issued a new certificate registered in its
name with respect to such shares. McDonald & Company was advised that this one
for one exchange of currently issued and outstanding Company shares for a new
certificate as a consequence of the Proposed Acquisition is for a valid business
purpose. There is no dilution suffered by the public shareholders as a
consequence of this exchange nor is the economic effect of the Proposed
Acquisition on the public shareholders affected in any way by such exchange.
Accordingly, McDonald & Company disregarded any effect of this exchange for
purposes of its opinion.
McDonald & Company's opinion is directed to the Independent Committee of
the Board of Directors of the Company and addresses only the fairness, from a
financial point of view, to the unaffiliated holders of the shares of Common
Stock of the Company, of the consideration to be paid by the Company in
connection with the Proposed Acquisition as of the date of the opinion. The
opinion does not constitute a recommendation to any shareholder as to how such
shareholder should vote at the Company's Annual Meeting.
In connection with rendering its opinion, McDonald & Company reviewed
and analyzed, among other things: (i) the Merger Agreement; (ii) certain
publicly available information concerning the Company, including the Company's
Annual Reports on Form 10-K for each of the years in the three year period ended
December 31, 1996 and the Company's Quarterly Reports on Form 10-Q for each of
the first three quarters of fiscal 1997; (iii) audited financial information for
the Florida Division of AutoPaints for the year ended December 31, 1997; (iv)
certain other internal information, primarily financial in nature, including
projections, concerning the business and operations of the Company and
AutoPaints furnished to McDonald & Company by the Company and AutoPaints for
purposes of its analysis; (v) certain publicly available information concerning
the trading of, and the trading market for, the Company's Common Stock; (vi)
certain publicly available information with respect to certain other companies
that McDonald & Company believed to be comparable to the Company or to
AutoPaints and the trading markets for certain of such other companies'
securities; and (vii) certain publicly available information concerning the
nature and terms of certain other transactions that McDonald & Company
considered relevant to its inquiry. McDonald & Company also met with certain
officers and employees of the Company and AutoPaints to discuss the business and
prospects of the Company and AutoPaints, as well as other matters McDonald &
Company believed to be relevant to its inquiry.
McDonald & Company was not engaged to verify, and relied, without
independent verification, upon the accuracy and completeness of all of the
financial and other information reviewed by it and the representations and
warranties of AutoPaints, the Company and Distribution contained in the Merger
Agreement for purposes of its opinion. McDonald & Company also relied upon the
managements of the Company and AutoPaints as to the reasonableness and
achievability of the financial and operating projections (and the assumptions
and bases therefor) provided to it, and assumed that such projections and
forecasts reflect the best currently available estimates and judgments of such
respective managements and that such projections and forecasts will be realized
in the amounts and in the time periods currently estimated by the management of
the Company and AutoPaints. McDonald & Company was not engaged to assess the
achievability of such projections or the assumptions on which they were based
and expressed no view as to such projections or assumptions. McDonald & Company
was not engaged to, and did not, make an independent evaluation or appraisal of
the assets and
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liabilities of the Company and AutoPaints and was not furnished with any such
evaluation or appraisal. In addition, McDonald & Company was informed by the
Company and AutoPaints that any dividends or other transfers of assets made by
AutoPaints prior to the closing of the Proposed Acquisition will not include any
assets reflected in the audited financial statements of the Florida Division of
AutoPaints as of December 31, 1997. McDonald & Company was not engaged to, and
did not independently attempt to, verify any such information.
The following is a summary of the financial and other analyses on
AutoPaints and the Company performed by McDonald & Company in connection with
its opinion.
AutoPaints
Analysis of Comparable Merger & Acquisition Transactions. In order to
assess market pricing for recent acquisitions of automotive paint distributors,
McDonald & Company identified 11 transactions completed between 1994 and 1997.
Five of the transactions involved the Company prior to AutoPaint's purchase of
67.4% of the then outstanding Common Stock of the Company and two of the
transactions involved Thompson prior to its sale to the Company. The
transactions identified by McDonald & Company also included AutoPaints' purchase
of the assets of the Steego division of Parts Depot, Inc. and County Autopaints,
Inc., AutoPaint's purchase of 67.4% of the then outstanding Common Stock of the
Company, and the Company's purchase of Thompson.
McDonald & Company analyzed the range of multiples of last twelve month
("LTM") sales and multiples of earnings before interest, income tax,
depreciation and amortization expense ("EBITDA") represented by the purchase
price paid in the transactions it reviewed to derive the Enterprise Value of
AutoPaints. For purposes of its analysis McDonald & Company made adjustments to
AutoPaints' actual EBITDA to reflect certain one-time expenses, which included
certain extraordinary medical expenses and expenses relating to the integration
of an acquisition into AutoPaints' operations, incurred during the year (the
"Adjusted 1997 EBITDA"). Sales multiples ranged from .41x to 1.09x, with a
median of .57x and EBITDA multiples ranged from 5.76x to 27.14x, with a median
multiple of 7.66x. McDonald & Company applied the multiple of .60x to
AutoPaints' 1997 Sales and of 7.5x to AutoPaints' Adjusted 1997 EBITDA. McDonald
& Company also applied the multiple of .55x to AutoPaints' projected 1998 Sales
and of 7.0x to AutoPaints' projected 1998 EBITDA. McDonald & Company then
weighted the Enterprise Values derived using 1997 Sales and Adjusted EBITDA
figures 35%, respectively, and the Enterprise Values derived using projected
1998 Sales and EBITDA figures 15%, respectively, to determine a Weighted Average
Enterprise Value for AutoPaints. McDonald & Company gave higher weighting to
1997 multiples based on its experience in prior transactions. The value of
AutoPaints' equity was calculated by taking the Weighted Average Enterprise
Value and subtracting outstanding debt and adding excess cash. This valuation
technique resulted in an implied equity value for AutoPaints of $15.5 million.
Leveraged Buyout Analysis. McDonald & Company also performed a leveraged
buyout ("LBO") analysis of AutoPaints as a means of establishing its value
assuming a sale to a typical financial buyer. An LBO involves the acquisition or
recapitalization of a company financed primarily by incurring indebtedness that
is serviced by the post-LBO operating cash flow of the Company. McDonald &
Company used financial and operating projections provided by management on a
stand-alone basis (the "Stand-Alone Scenario") and assumed, for purposes of the
LBO analysis, a leveraged capital structure (48.4% senior debt, 25.8%
subordinated debt and 25.8% equity). Management's Stand-Alone Scenario
projections supported an aggregate equity value for AutoPaints of $14.8 million.
This purchase price and capital structure resulted in a senior debt to 1997
Adjusted EBITDA multiple of 3.1x and a total debt to 1997 Adjusted EBITDA
multiple of 4.7x. Based on management's Stand-Alone Scenario projections, the
LBO equity and subordinated debt holders would earn internal rates of return of
33.6% and 18.5%, respectively.
Discounted Cash Flow Analysis. McDonald & Company completed discounted
cash flow analyses on AutoPaints' operations utilizing management's projections
using the same Stand-Alone Scenario used in its LBO analysis and for AutoPaints
utilizing management's projections taking into account synergies expected to be
realized in connection with the Proposed Acquisition (the "Synergy Scenario").
McDonald & Company estimated the theoretical present value of cash flows
generated by AutoPaints' operations based on the sum of (i) the discounted cash
flows which AutoPaints could generate over a five-year period in each scenario
and (ii) a terminal value for AutoPaints which assumes that a buyer will place a
certain value on the cash flow generated by AutoPaints in accordance with the
final projected year in each scenario.
McDonald & Company's calculation of a theoretical terminal value of
AutoPaints in each scenario was based on a multiple of EBITDA in the fifth year.
This terminal value and the cash flows generated by AutoPaints were discounted
using a discount rate that in McDonald & Company's judgment reflects the risks
associated with the cash flows to derive the Enterprise Value of AutoPaints. The
value of the equity was calculated by taking the Enterprise Value and
subtracting outstanding debt and adding excess cash. McDonald & Company derived
discount rates of 14.0% to 16.0% for the Stand- Alone Scenario and 16.0% to
18.0% for the Synergy Scenario and exit multiples of EBITDA of 7.0x to 8.0x for
each scenario. In determining an appropriate discount rate, McDonald & Company
started with a conventional capital asset pricing model which calculated a cost
of capital. McDonald & Company added a premium to this cost of capital to
determine a discount rate which reflected McDonald & Company's judgment
concerning the risks associated with the future cash flows of each scenario.
Applying these discount rates and exit multiples, McDonald & Company estimated
that, based on a discounted cash flow analysis of management's Stand-Alone
Scenario and Synergy Scenario projections, the present value of the equity of
AutoPaints ranged from $17.8 million to $20.8 million and $21.5 million to $25.2
million, respectively.
Inherent in any discounted cash flow valuation are the use of a number
of assumptions, including the accuracy of management's projections, and the
subjective determination of an appropriate terminal value and discount rate to
apply to the projected cash flows of the entity under examination. Variations in
any of these assumptions or judgments could materially alter the results of a
discounted cash flow analysis.
The Company
Analysis of Comparable Merger & Acquisition Transactions. McDonald &
Company used the same comparable merger and acquisition transactions to
establish the value of the Company as it used to establish the value of
AutoPaints. Sales multiples ranged from .41x to 1.09x, with a median of .57x and
EBITDA multiples ranged from 5.76x to 27.14x, with a median multiple of 7.66x.
McDonald & Company applied the multiple of .60x to the Company's 1997 Pro Form
Sales and of 7.5x to the Company's 1997 Pro Forma EBITDA. The Company's 1997 Pro
Forma Sales and EBITDA were provided by management and derived from the
estimated full year effect of the Thompson Acquisition. McDonald & Company also
applied the multiple of .55x to the Company's projected 1998 Sales and of 7.0x
to the Company's projected 1998 EBITDA. McDonald & Company then weighted the
Enterprise Values derived using 1997 Pro Form Sales and EBITDA figures 35%,
respectively, and the Enterprise Values derived using projected 1998 Sales and
EBITDA figures 15%, respectively, to determined a Weighted Average Enterprise
Value for the Company. McDonald & Company gave higher weighting to 1997
multiples based on its experience in prior transactions. The value of the
Company's equity was calculated by taking the Weighted Average Enterprise Value
and subtracting outstanding debt and adding excess cash. This valuation
techniques resulted in an implied equity value for the Company of $61.8 million,
or $10.30 per share.
Comparable Company Analysis. McDonald & Company compared selected
historical and projected market value multiples of seven publicly traded
companies that it deemed to be comparable to the Company (the "Peer Group"). The
companies included in the Peer Group for purposes of McDonald & Company's
analysis were Autozone, Inc., Keystone Automotive Industries, Inc., the
Sherwin-Williams Company, Hahn Automotive Warehouse, Inc., O'Reilly Automotive,
Inc., Republic Automotive Parts, Inc. and Wilmar Industries, Inc. No company
used in McDonald & Company's analysis was identical to the Company. Accordingly,
McDonald & Company considered the market multiples for the composite of
comparable companies to be more relevant than the market multiples of any single
company.
McDonald & Company calculated a range of implied values based upon the
market multiples of companies in the Peer Group and applied them to the
historical and projected results of the Company in order to determine a range of
implied values for the Company's Common Stock. The companies comprising the Peer
Group generally had significantly larger equity market capitalizations than the
Company. Accordingly, in conducting its comparable company analysis, McDonald &
Company applied a 20% discount to the Peer Group multiples to reflect the
Company's smaller equity market capitalization. The amount of the discount was
determined by McDonald & Company based on its experience dealing with sale
transactions involving smaller capitalization companies and its experience in
the trading markets for such companies' securities. After applying this
discount, the Peer Group had median multiples of 1.0x LTM sales, 8.2x LTM
EBITDA, 10.1x LTM EBIT, 16.1x LTM net income, 14.0x projected 1998 net income
and 2.5x book value.
McDonald & Company calculated a weighted average equity value for the
Company by assigning relative weights to each of the various discounted Peer
Group multiples. McDonald & Company gave higher weighting to LTM cash flow
multiples based on its experience in prior transactions. The LTM EBITDA multiple
was given a weight of 30%, the LTM net income multiple was given a weight of
25%, the LTM EBIT multiple was given a weight of 20%, the projected 1998 net
income and book value multiples were given weights of 10% each and the multiple
of LTM sales was given a multiple of 5%. This analysis resulted in an implied
weighted average equity value for the Company of $73.8 million, or $12.30 per
share.
Discounted Cash Flow Analysis. McDonald & Company completed discounted
cash flow analyses on the Company's operations utilizing management's
projections on a stand-alone basis. McDonald & Company estimated the theoretical
present value of cash flows generated by the Company's operations based on the
sum of (i) the discounted cash
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<PAGE>
flows which the Company could generate over a five-year period and (ii) a
terminal value for the Company which assumes that a buyer will place a certain
value on the cash flow generated by the Company in accordance with the final
projected year.
McDonald & Company's calculation of a theoretical terminal value of the
Company was based on a multiple of EBITDA in the fifth year. This terminal value
and the cash flows generated by the Company were discounted using a discount
rate that in McDonald & Company's judgment reflects the risks associated with
the cash flows to derive the Enterprise Value of the Company. The value of the
equity was calculated by taking the Enterprise Value and subtracting outstanding
debt and adding excess cash. McDonald & Company derived discount rates of 19.0%
to 21.0% and exit multiples of EBITDA of 7.0x to 8.0x. In determining an
appropriate discount rate, McDonald & Company started with a conventional
capital asset pricing model which calculated a cost of capital. McDonald &
Company added a premium to this cost of capital to determine a discount rate
which reflected McDonald & Company's judgment concerning the risks associated
with the future cash flows of the Company. The discount rates derived by
McDonald & Company for the Company reflect its qualitative judgment concerning
the specific risks associated with the Company's projected cash flows which are
dependent on the successful integration of the Thompson Acquisition. Applying
these discount rates and exit multiples, McDonald & Company estimated that the
average present value of the equity of the Company was $80.6 Million, or $13.44
per share.
Inherent in any discounted cash flow valuation are the use of a number
of assumptions, including the accuracy of management's projections, and the
subjective determination of an appropriate terminal value and discount rate to
apply to the projected cash flows of the entity under examination. Variations in
any of these assumptions or judgments could materially alter the results of a
discounted cash flow analysis.
Current Company Equity Value. McDonald & Company reviewed the trading
volume and market prices for the Company's Common Stock since March 1994. As of
January 28, 1998 the Company's Common Stock closed at a per share value of
$9.50, implying an equity value for the Company of $57.0 million.
All analyses utilized by McDonald & Company to determine the range of
values for AutoPaints and the Company were equally weighted. These analyses
resulted in a range of equity values for AutoPaints and the Company of $17.1
million to $18.9 million and $64.8 million, or $10.80 per share, to $71.6
million, or $11.93 per share, respectively. Such analysis implies an indicated
range of shares of the Common Stock of the Company to be exchanged for
AutoPaints of 1,431,000 to 1,748,000 shares.
Other Analyses. In rendering its opinion, McDonald & Company considered
certain other factors and conducted certain other analyses. These analyses did
not directly focus on the consideration for the Proposed Acquisition, but were
undertaken to provide contextual data and comparative market data to assist in
assessing the Proposed Acquisition and the market's valuation of the Company's
Common Stock. McDonald & Company also reviewed a group of transactions to assess
the premiums paid for the purchase of 15%-25% of the outstanding shares of a
target company by a company which prior to each respective transaction already
owned in excess of 50% of the target company's shares. Furthermore, McDonald &
Company reviewed AutoPaints' and the Company's relative contribution to the
combined company with respect to various balance sheet and income statement
items and compared this with the range of consideration to be received by the
AutoPaints shareholder in the combined company after the Proposed Acquisition.
Lastly, McDonald & Company reviewed the impact of the Proposed Acquisition on
the financial projections of the Company. The Company's projections were
compared with pro forma combined company projections for earnings per share to
determine the degree of dilution, if any, to the Company shareholders subsequent
to the Proposed Acquisition. This analysis indicated that the Proposed
Acquisition was dilutive, on an earnings per share basis, with respect to the
Company in 1998 - 2000.
No company or transaction used in the comparable companies and
comparable transactions analyses for comparative purposes is identical to
AutoPaints, the Company or the Proposed Acquisition. Accordingly, an analysis of
the results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors. Mathematical analysis (such as determining the
average or median) is not, in itself, a meaningful method of using comparable
company or transaction data.
The summary of the McDonald & Company report set forth above does not
purport to be a complete description of the presentation by McDonald & Company
of the McDonald & Company report to the Independent Committee or of the analyses
performed by McDonald & Company. The preparation of a fairness opinion is not
necessarily susceptible to partial analysis or summary description. McDonald &
Company believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or of the above summary, without considering all
factors and analyses, would create an incomplete view of the process underlying
the analyses set forth in the McDonald & Company report and its opinion. In
addition, McDonald & Company may have deemed
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<PAGE>
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting from any particular analysis described above
should not be taken to represent the actual value of AutoPaints, the Company or
the combined company.
In performing its analyses, McDonald & Company made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of AutoPaints or the
Company. The analyses performed by McDonald & Company are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of McDonald & Company's analysis of the fairness, from a
financial point of view, to the unaffiliated holders of the shares of Common
Stock of the Company, of the consideration to be paid by the Company in
connection with the Proposed Acquisition. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or at any time
in the future. In addition, as described above, McDonald & Company's
presentation to the Independent Committee and opinion was one of many factors
taken into consideration by the Independent Committee in making its
determination recommend to the Board of Directors that the Proposed Acquisition
and the Merger Agreement be approved.
In the ordinary course of its business, McDonald & Company may trade
securities of the Company for its own account and for the account of its
customers and may at any time hold a short or long position in such securities.
McDonald & Company has expressed no opinion as to the prices at which shares of
the Company's Common Stock may trade following completion of the Proposed
Acquisition.
The Company paid McDonald & Company a fee of $150,000 for its services
pursuant to the engagement letter. No portion of McDonald & Company's fee is
contingent upon the closing of the Proposed Acquisition. The Company also agreed
to reimburse McDonald & Company for its reasonable out-of-pocket expenses of up
to $10,000 and to indemnify McDonald & Company against certain liabilities,
including liabilities under the federal securities laws.
Selected Financial Data
The following selected financial data of the Florida division AutoPaints
is for the year ended December 31, 1997 and the seven months ended December 31,
1996. As of May 31, 1996, AutoPaints acquired the assets constituting the
Florida division. Financial information prior to such time is not available as
the assets constituting the Florida division were previously operated as the
Steego division of Parts Depot and did not report separate financial information
and AutoPaints had no operations prior to the acquisition of such assets.
-17-
<PAGE>
Fiscal Year Ended Seven Months Ended
December 31, December 31,
1997 1996 (1)
----------------- ------------------
LDI AutoPaints - Florida Division (in thousands)
Statements of Operations Data
Net sales $21,924 $10,287
Gross profit 8,078 3,735
Income from operations 273 (983)
Net Income (Loss) from Operations $ 177 $ (614)
========= ========
December 31,
1997 1996 (1)
----------------- ------------------
(in thousands)
Balance Sheet Data
Working capital $ 4,911 $ 3,927
Total assets 16,401 16,725
Long-term debt 669 844
Stockholders' equity 13,950 13,773
(1) The above financial information for AutoPaints is for the period from May
31, 1996 (the date of acquisition by AutoPaints of the assets constituting
the Florida division) to December 31, 1996.
Financial Statements of AutoPaints
Attached to this Proxy Statement as Appendix II are the audited
financial statements of the Florida division of AutoPaints for the year ending
December 31, 1997 and unaudited financial statements for the Florida division of
AutoPaints for the seven months ended December 31, 1996. As of May 31, 1996,
AutoPaints acquired the assets constituting the Florida division. Financial
information prior to such time is not available as the assets constituting
Florida division were previously operated as the Steego division of Parts Depot
and did not report separate financial information and AutoPaints had no
operations prior the acquisition of such assets.
Financial and Other Information of the Company
Accompanying this Proxy Statement is an Annual Report to Shareholders of
the Company for the fiscal year ending December 31, 1997 (the "Annual Report").
The Annual Report contains selected financial information of the Company,
audited financial statements of the Company, management's discussion and
analysis of financial condition and results of operations and market price and
dividend information, all of which is incorporated by this reference into this
Proxy Statement. (See "Incorporation By Reference" herein.)
Shareholders of the Company are urged to review carefully the
information contained in the Annual Report which is incorporated by reference
into this Proxy Statement in considering the Proposed Acquisition.
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<PAGE>
Proforma Financial Information
The following unaudited pro forma consolidated financial data is based
on the Company's audited financial statements, adjusted to give effect to the
acquisition of Thompson and the Proposed Acquisition of AutoPaints.
The unaudited pro forma consolidated statement of operations for the
year ended December 31, 1997 has been adjusted to give effect to the
acquisitions as if they had occurred on January 1, 1997. The unaudited pro forma
balance sheet at December 31, 1997 has been adjusted to give effect to the
acquisition of AutoPaints as if it occurred on December 31, 1997 (the
acquisition of Thompson is reflected in the historical balance sheet data of the
Company).
The unaudited pro forma data does not purport to be indicative of the
results of operations or the financial position that would actually have been
obtained if the transactions had occurred on the dates indicated or of the
results of operations or the financial position that may be obtained in the
future. The pro forma adjustments, as described in the accompanying data, are
based on available information and certain assumptions that management believes
are reasonable. The unaudited proforma financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
related notes thereto accompanying this Proxy Statement in the Annual Report.
The unaudited pro forma financial data with respect to the acquisition
of Thompson and proposed acquisition of AutoPaints are based on the historical
financial statements of the businesses and have been accounted for using the
purchase method of accounting. The purchase price of Thompson, including the
related fees and expenses, have been allocated to the tangible and identifiable
intangible assets and liabilities of the acquired business based on the
Company's estimates of their fair value, with the remainder allocated to
goodwill. As the proposed acquisition of AutoPaints is within the controlled
group of the Company, the assets and liabilities of AutoPaints have been
recorded at the historical values at the date of acquisition. The pro forma
adjustments directly attributable to the acquisitions include adjustments to
interest expense related to the financing of Thompson, charges for amortization
of intangibles, depreciation of property and equipment relating to the
allocation of the purchase price, facility exit costs and salary and severance
costs related to the closure of certain locations incident to the acquisitions
and the related tax effects.
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<PAGE>
[THE FOLLOWING TABLES APPEAR AS A LANDSCAPED TABLE
WHICH HAS BEEN DIVIDED INTO TWO FOR EDGAR PURPOSES ONLY]
Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Thompson LDI AutoPaints Adjustments for
FinishMaster, Inc. PBE, Inc.(a) Inc (b) Thompson (c)
------------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 130,175 201,159 21,924 (15,440)
COST OF SALES 83,068 132,099 13,846 (8,690)
--------- ------- ------ -------
GROSS PROFIT 47,107 69,060 8,078 (6,750)
EXPENSES
Operating, selling, general
and administrative expenses 38,542 60,733 5,942 (4,943)
Depreciation 1,443 2,283 518 (47)
Amortization of intangible assets 3,290 2,904 1,040 (178)
--------- ------- ------ -------
Total operating expenses 43,275 65,920 7,500 (5,168)
--------- ------- ------ -------
INCOME FROM OPERATIONS 3,832 3,140 578 (1,582)
OTHER INCOME (EXPENSE)
Interest expense, net 2,661 4,131 76 (403)
Charge in connection with the sale,
consolidation or closure of certain sites 3,616 229
--------- ------- ------ -------
2,661 7,747 305 (403)
--------- ------- ------ -------
INCOME (LOSS) BEFORE INCOME TAXES 1,171 (4,607) 273 (1,179)
Income tax expense (benefit) 515 (1,618) 96 (386)
--------- ------- ------ -------
NET INCOME (LOSS) $ 656 $ (2,989) $ 177 $ (793)
========= ========= ========= =========
</TABLE>
<PAGE>
Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 1997
(in thousands, except per share data)
(Continued)
<TABLE>
<CAPTION>
Thompson Pro
Forma Purchase AutoPaints
Accounting Pro Forma Pro Forma
Adjustments (d) Adjustments (n) Combined
--------------- --------------- --------
<S> <C> <C> <C>
NET SALES $ 0 $ 0 337,818
COST OF SALES 220,323
------ --- ------
GROSS PROFIT 0 0 117,495
EXPENSES
Operating, selling, general
and administrative expenses (3,759)(e) (50)(e) 95,184
(866)(f) (27)(g)
(388)(g)
Depreciation (405)(h) 3,792
Amortization of intangible assets 8 (i) 7,374
310 (j)
------ --- -------
Total operating expenses (5,100) (77) 106,350
------ --- -------
INCOME FROM OPERATIONS 5,100 77 11,145
------ --- ------
OTHER INCOME (EXPENSE)
Interest expense, net 9,008 (k) 12,917
(2,556)(l)
Charge in connection with the sale,
consolidation or closure of certain sites 3,845
------ --- ------
6,452 0 16,762
------ --- ------
INCOME (LOSS) BEFORE INCOME TAXES (1,352) 77 (5,617)
Income tax expense (benefit) (182)(m) (1,575)
------ --- ------
NET INCOME (LOSS) $(1,170) $ 77 $ (4,042)
====== ========= =========
Net loss per share data:
NET LOSS PER SHARE - BASIC $ (.54)
=========
- DILUTED (.54)
=========
WEIGHTED AVERAGE SHARES OUTSTANDING (o) 7,536
=========
</TABLE>
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<PAGE>
Notes to Unaudited Pro Forma Consolidated Statement of Operations (in
thousands):
(a) This column is the historical results of Thompson for the twelve months
ended September 27, 1997.
(b) This column is the historical results of AutoPaints for the twelve months
ended December 31, 1997.
(c) This column adjusts the historical results of Thompson by eliminating the
period from October 1, 1996 through December 31, 1996 included in the historical
twelve months ended September 27, 1997 and including the approximate two month
period from September 28, 1997 through the date of acquisition of November 21,
1997. The remaining eleven month period is thus combined with the approximate
one month from the date of acquisition, which is included in the Company's
historical Statement of Operations.
(d) This column gives effect to the acquisition of Thompson as if it had
occurred at the beginning of the year.
(e) Reduced employment expense to reflect elimination of staffing and closure of
certain facilities incident to the acquisition.
(f) Reduced rental and facility costs to reflect closure of certain distribution
and store locations incident to the acquisition.
(g) Elimination of duplicate board of directors' fees and related costs.
(h) Reduced depreciation expense for fair value of assets acquired.
(i) Increase in amortization of goodwill over an estimated useful life of 30
years.
(j) Amortization related to capitalized debt issue costs.
(k) Record interest expense for new financing agreements with estimated annual
interest rates ranging from 8% to 9%.
(l) Eliminate interest expense on debt refinanced in connection with the
acquisition.
(m) Represents the income tax expense related to the pro forma adjustments at an
effective rate of 28% after consideration of non-deductible goodwill
amortization and other non-deductible expenses.
(n) This column gives effect to the proposed acquisition of AutoPaints as if it
had occurred as of January 1, 1997.
(o) Reflects the 1,542,416 additional shares of Common Stock of the Company to
be issued pursuant to the Proposed Acquisition.
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<PAGE>
FinishMaster, Inc.
Pro Forma Consolidated Balance Sheet
December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
FinishMaster AutoPaints Adjustments Combined
--------------- ----------- ------------ ----------
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash $ 364 $ 619 $ 0 $ 983
Accounts receivable 28,744 1,548 30,292
Inventory 53,442 4,230 57,672
Prepaid expenses and other current assets 7,894 296 8,190
---------- -------- -------- --------
TOTAL CURRENT ASSETS 90,444 6,693 0 97,137
Property plant and equipment, net 10,296 1,448 11,744
Intangible assets, net 110,870 7,910 118,780
Other assets 3,808 350 4,158
---------- -------- -------- --------
TOTAL ASSETS $ 215,418 $ 16,401 $ 0 $ 231,819
========== ======== ======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,274 $ 854 $ 0 $ 29,128
Accrued expenses and other current liabilities 12,072 709 12,781
Current maturities of long-term obligations 8,005 219 8,224
---------- -------- -------- --------
TOTAL CURRENT LIABILITIES 48,351 1,782 0 50,133
LONG-TERM OBLIGATIONS, less current maturities 134,135 669 134,804
STOCKHOLDERS' EQUITY
Common stock 5,993 1,542 (p) 7,535
Additional paid-in capital 14,466 14,387 (1,979)(p) 26,874
Retained earnings (accumulated deficit) 12,473 (437) 437 (p) 12,473
---------- -------- -------- --------
Total stockholders equity 32,932 13,950 0 46,882
---------- -------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 215,418 $ 16,401 $ 0 231,819
========== ======== ======== ========
</TABLE>
Note to Unaudited Pro Forma Consolidated Balance Sheet
(p) Reflects the 1,542,416 additional shares of Common Stock of the Company to
be issued pursuant to the Proposed Acquisition.
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<PAGE>
Conflicts of Interest
AutoPaints is a wholly-owned subsidiary of Distribution, which, in
turn, is a wholly-owned subsidiary of LDI. AutoPaints currently owns 4,045,100
shares, or approximately 67.5% of the outstanding Common Stock of the Company.
Andre B. Lacy is a general partner of LDI and is President, Chairman of the
Board and Chief Executive Officer of LDIM, the corporate managing general
partner of LDI. Mr. Lacy also serves as Chairman of the Board, President and
Chief Executive Officer of Distribution and as Chairman of the Board and Chief
Executive Officer of both the Company and AutoPaints. Thomas U. Young is the
President and Chief Operating Officer of both the Company and AutoPaints.
Pursuant to an arrangement between the Company and AutoPaints, the Company pays
to AutoPaints an amount in respect of the services Mr. Young provides to the
Company (See "Remuneration of Executive Officers" and "Certain Relationships and
Related Transactions" herein).
In considering the recommendation of the Board with respect to the
Proposed Acquisition, shareholders should be aware that certain officers and
directors of the Company have interests in AutoPaints and its affiliates which
present them with conflicts of interest inherent in considering the Proposed
Acquisition. AutoPaints is the controlling shareholder of the Company and Andre
B. Lacy (who is an indirect beneficial owner of the shares of the Company held
by AutoPaints) serves on the Board of Directors of each of Distribution,
AutoPaints, and the Company. All other members of the Board of Directors, except
the members of the Independent Committee, have management positions or
consulting arrangements with LDI or its affiliates. (See "Directors and Director
Nominees" herein).
Because of the conflicts inherent in considering any transaction
between the Company and AutoPaints, the Proposed Acquisition was considered and
approved by the Independent Committee of the Board of Directors of the Company.
(See "Background of the Proposed Acquisition" herein.) In addition, the
Independent Committee obtained an opinion from McDonald & Company that the
Proposed Acquisition is fair from a financial point of view to the shareholders
of the Company who are not affiliated with LDI. (See "Opinion of the Financial
Advisor to the Independent Committee" herein.)
Subsequent to the execution of the Merger Agreement, the Company and
AutoPaints entered into a contractual arrangement pursuant to which certain
management and administrative functions are provided to the Company's southeast
operations by AutoPaints without charge.
The Merger Agreement contains an agreement by AutoPaints to vote the
shares it owns in the Company for the Proposed Acquisition. Because AutoPaints
owns approximately 67.5% of the outstanding shares of the Company, approval of
the Proposed Acquisition is assured.
For their duties on the Independent Committee, the members of the
Independent Committee each received the Company's standard fee of $1,000 per
Board meeting, $750 per Board Committee Meeting and $250 per telephonic Board
meeting. (See "Director Compensation" herein.)
Summary of the Merger Agreement
The following summary of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement,
a copy of which is Appendix III to this Proxy Statement (excluding the schedules
and exhibits thereto).
The Merger
In accordance with the provisions of the Merger Agreement, at the
Effective Time (as defined in the Merger Agreement and which is anticipated to
follow immediately the receipt of the approval of shareholders of the Company),
AutoPaints will be merged with and into the Company.
At the Effective Time, all of the issued and outstanding shares of
AutoPaints owned by Distribution and the 4,045,100 shares of the Common Stock of
the Company owned by AutoPaints immediately prior to the Effective Time shall,
by virtue of the Proposed Acquisition, be cancelled and converted into a right
of Distribution to receive (i) 4,045,100 shares of the Common Stock of the
Company, issued in respect of the shares owned by AutoPaints which were
cancelled in connection with the Proposed Acquisition, and (ii) 1,542,416
additional shares of the Common Stock of the Company.
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<PAGE>
Representations and Warranties
The Merger Agreement contains representations and warranties by the
parties including, but not limited to, representations and warranties regarding
their organization, authority to enter into the Merger Agreement, required
governmental approvals and obligations to pay broker or finder fees in
connection with the Proposed Acquisition. In addition, Distribution, with
respect to Distribution and AutoPaints, made certain representations and
warranties concerning AutoPaints' capitalization, financial statements,
undisclosed liabilities, litigation, compliance with law, taxes, employment
arrangements, employee benefit plans, properties and labor matters.
Certain Covenants
In addition, AutoPaints has made certain covenants in the Merger
Agreement. Such covenants include the conduct of the business of AutoPaints
prior to the Effective Time, access to information, and an agreement by
AutoPaints that at the meeting of the shareholders of the Company at which the
Proposed Acquisition is considered, all shares of the Company owned by
AutoPaints will be voted in favor of the Proposed Acquisition. In addition, each
of the parties made certain covenants regarding access to information,
cooperation, notification of certain matters and consultation with regard to
public announcements.
Conditions to Closing
The respective obligations of each party to effect the Proposed
Acquisition are subject to the satisfaction or waiver prior to the Effective
Time of conditions relating to (i) approval by the shareholders of the Company
in accordance with applicable law, (ii) consummation of the Proposed Acquisition
not being enjoined or prohibited by law, court order, decree or injunction,
(iii) the delivery of the fairness opinion rendered by McDonald & Company to the
Independent Committee and (iv) the representations and warranties of the parties
set forth in the Merger Agreement continuing to be true and correct in all
material respects.
Termination
The Merger Agreement may be terminated (i) by mutual written consent of
the parties to the Merger Agreement; (ii) by the parties thereto if the
Effective Time shall not occur on or prior to June 30, 1998, provided, however,
that the right to terminate the Merger Agreement pursuant to such provision
shall not be available to any party whose failure to fulfill any obligation
under the Merger Agreement has been the cause of, or resulted in, the failure of
the Effective Time to occur on or before such date; (iii) by the parties
thereto, if any court of competent jurisdiction in the United States or other
United States governmental body shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting the
Proposed Acquisition and such order, decree, ruling or other action shall become
final and not appealable; (iv) by the Company if (a) there shall have been a
breach of any representation or warranty on the part of AutoPaints or
Distribution under the Merger Agreement having a material adverse effect which
shall not have been cured prior to 10 days following notice of such breach, or
(b) there shall have been a material breach of any covenant or agreement in the
Merger Agreement on the part of AutoPaints or Distribution, which materially
adversely affects the consummation of the Proposed Acquisition which shall not
have been cured prior to 10 days notice of such breach; or (v) by AutoPaints or
Distribution if (a) there shall have been a breach of any representation or
warranty in the Merger Agreement on the part of the Company which materially
adversely affects the consummation of the Proposed Acquisition which shall not
have been cured prior to 10 days following notice of such breach; or (b) there
shall have a material breach of any covenant or agreement in the Merger
Agreement on the part of the Company which materially adversely affects the
consummation of the Proposed Acquisition which shall not have been cured prior
to 10 days following notice of such breach.
Survival; Indemnification
The representations and warranties made in the Merger Agreement shall
terminate on the first anniversary of the Effective Time, provided, however,
that if the Proposed Acquisition is consummated, the representation and warranty
relating to tax issues shall survive for a period equal to the applicable
statute of limitations for tax matters. During the one year period in which the
representations and warranties survive, Distribution and the Company,
respectively, agree to hold the other harmless from any and all claims, actions,
damages, losses, costs and expenses (including reasonable attorneys' fees)
incurred by such other party in connection with any representation or warranty
made by Distribution and the Company, respectively, in the Merger Agreement
having been untrue in any material respect as of the date made.
-24-
<PAGE>
Regulatory Approvals Required for Consummation of the Proposed Acquisition
The Company has determined that no approval of the Proposed Acquisition
by federal or state regulatory authorities is required.
Federal Income Tax Consequences of the Proposed Acquisition
In General
The following is a summary of the material federal income tax
consequences of the Proposed Acquisition to the Company and its shareholders.
This summary is based upon the Internal Revenue Code of 1986 (the "Code"), as
currently in effect, the rules and regulations promulgated thereunder, current
administrative interpretation and court decisions. No assurance can be given
that future legislation, regulations, administrative interpretations or court
decisions will not significantly change these authorities, possibly with
retroactive effect.
No rulings have been requested or received from the Internal Revenue
Service ("IRS") as to the matters discussed and there is no intent to seek any
such ruling. Accordingly, no assurance can be given that the IRS will not
challenge the tax treatment of certain matters discussed or, if it does
challenge the tax treatment, that it will not be successful.
Federal Income Tax Consequences to the Company
AutoPaints will merge into the Company in a tax free reorganization.
For federal income tax purposes this will result in the Company having a
carryover basis in the assets and liabilities of AutoPaints.
Federal Income Tax Consequences to the Company Shareholders
The Proposed Acquisition will not affect the individual tax situation
of the Company's shareholders.
Accounting Treatment of the Proposed Acquisition
The proposed acquisition of AutoPaints will be accounted for using the
purchase method of accounting. Because the proposed acquisition of AutoPaints is
within the controlled group of the Company, the assets and liabilities of
AutoPaints will be recorded at the historical values at their date of
acquisition.
Common Stock Price Preceding Public Announcements of the Proposed Acquisition
On February 20, 1998, the last full trading day before the public
announcement of the execution of the Merger Agreement with respect to the
Proposed Acquisition, the high and low sales prices of the shares of Common
Stock on the Nasdaq National Market were both $8.25 per share.
Absence of Dissenters' Rights of Appraisal
Indiana law governs the rights of the Company's shareholders in connection with
the Proposed Acquisition. Under the applicable provisions of Indiana law, the
Company's shareholders will have no right of appraisal or similar rights of
dissenters with respect to the Proposed Acquisition. The Company's Common Stock
is traded on the Nasdaq National Market.
Recommendations of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE PROPOSED ACQUISITION AND THE MERGER AGREEMENT.
-25-
<PAGE>
PROPOSAL IV - APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION
The Board of Directors have approved a proposed amendment to the Company's
Articles of Incorporation that would increase the number of authorized shares of
Common Stock.
The Company is currently authorized to issue 10,000,000 shares of
Common Stock. The proposed amendment to the Company's Articles of Incorporation
would increase the number of authorized shares of Common Stock to 25,000,000
shares of Common Stock. The proposed increase in authorized shares is being made
primarily for the following reasons: (a) to permit the Company to declare
potential future stock splits and/or stock dividends, (b) to permit the Company
to issue additional shares as consideration for potential future mergers or
acquisitions, and (c) to permit the Company to issue additional shares for other
general corporate purposes. Continued availability of shares of Common Stock is
necessary to provide the Company with the flexibility to take advantage of such
opportunities. There are, at present, no plans, understandings, agreements or
arrangements concerning the issuance of additional shares of the Company's
Common Stock except for the shares presently reserved for issuance and for the
Proposed Acquisition described elsewhere in this Proxy Statement.
Authorized and unissued shares of the Company's Common Stock may be
issued for such consideration as the Board of Directors determines to be
adequate. The shareholders may or may not be given the opportunity to vote
thereon, depending on the nature of any such transactions, applicable law, the
rules and policies of the National Association of Securities Dealers, Inc. and
the judgment of the Board of Directors. Shareholders have no pre-emptive rights
to subscribe to newly issued shares of Common Stock.
The Board of Directors believes that the proposed increase in the
number of authorized shares of Common Stock will provide the flexibility needed
to meet corporate objectives and that such proposed increase is in the best
interest of shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE AMENDMENT TO THE ARTICLES OF INCORPORATION.
VOTE REQUIRED TO APPROVE MATTERS
A quorum for the meeting requires the presence in person or by proxy of
holders of a majority of the outstanding shares of the Common Stock of the
Company. Votes cast by proxy or in person at the Annual Meeting will be
tabulated by the inspector(s) of election appointed for the meeting.
Abstentions, "broker non-votes" (i.e., where brokers or nominees indicate that
such persons have not received instructions from the beneficial owner or other
person entitled to vote shares as to a matter with respect to which the brokers
or nominees do not have discretionary power to vote) and votes withheld will be
included in the calculation of the presence of a quorum, but will not be counted
as votes cast for or against the action to be taken on the matter. Therefore,
abstentions or broker non-votes will have no effect in the election of
directors, but will have the same effect as a vote against a particular issue
with regard to the other matters to be considered, including the approval of the
Proposed Acquisition.
The election of each director requires a plurality of the votes cast.
Votes withheld will be deemed not to have been cast. The Company's shareholders
do not have the power to cumulate votes in the election of directors by (i)
multiplying the number of votes they are entitled to cast by the number of
directors for whom they are entitled to vote and (ii) casting the product for a
single candidate or distributing the product among two or more candidates.
The affirmative vote of the holders of the majority of the outstanding
shares of Common Stock is required for the approval of the Proposed Acquisition.
Other actions are authorized by the affirmative vote of a majority of the votes
cast by the holders of shares of Common Stock represented in person or by proxy
at the Annual Meeting.
SHAREHOLDER PROPOSALS
Any proposals which shareholders of the Company intend to present at
the next annual meeting of the Company must be received by the Company by
December 20, 1998, for inclusion in the Company's proxy statement and proxy form
for that meeting.
-26-
<PAGE>
OTHER MATTERS
Management is not aware of any business to come before the Annual
Meeting other than those matters described in the Proxy Statement. However, if
any other matters should properly come before the Annual Meeting, it is intended
that the proxies solicited hereby will be voted with respect to those other
matters in accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Company. The
Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy material
to the beneficial owners of the Common Stock. In addition to solicitation by
mail, directors, officers, and employees of the Company may solicit proxies
personally or by telephone without additional compensation.
Each Shareholder is urged to complete, date and sign the proxy and
return it promptly in the enclosed return envelope.
Insofar as any of the information in this Proxy Statement may rest
peculiarly within the knowledge of persons other than the Company, the Company
relies upon information furnished by others for the accuracy and completeness
thereof.
INCORPORATION BY REFERENCE
The following documents filed with the Securities and Exchange
Commission by the Company (File No. 0-23222) pursuant to the Exchange Act are
incorporated herein by this reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997; and
2. All documents filed by the Company with the Securities and Exchange
Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act subsequent to
December 31, 1997 and prior to the date of the Annual Meeting are hereby
incorporated by reference into this Proxy Statement and shall be deemed a part
hereof from the date of filing such documents or reports.
3. The following sections of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1997:
(i) Market Price and Dividend Information;
(ii) Selected Financial Data;
(iii) Management's Discussion and Analysis of Financial Condition
and Results of Operations; and
(iv) Audited Financial Statements of the Company.
No other portions of the Company's Annual Report to Shareholders shall be
incorporated by reference in, or deemed a part of, this Proxy Statement.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROXY STATEMENT IS DELIVERED, ON WRITTEN OR ORAL REQUEST TO THE
COMPANY AT 54 MONUMENT CIRCLE, SUITE 700, INDIANAPOLIS, INDIANA 46204 ATTN:
CHIEF FINANCIAL OFFICER
-27-
<PAGE>
(TELEPHONE NO. (317) 237-3678). SUCH DOCUMENTS WILL BE PROVIDED TO SUCH PERSON
BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF
RECEIPT OF SUCH REQUEST. IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS PRIOR TO
THE ANNUAL MEETING, REQUESTS SHOULD BE RECEIVED BY May 23, 1998.
By Order of the Board of Directors
/s/ Andre B. Lacy
Andre B. Lacy, Chairman of the Board
and Chief Executive Officer
-28-
<PAGE>
Appendix I to
Proxy Statement
PRIVATE AND CONFIDENTIAL
February 16, 1998
The Special Committee of the
Board of Directors of
FinishMaster, Inc.
4259 40th Street S.E.
Kenwood, Michigan 49512
Gentlemen:
You have requested our opinion as to the fairness, from a financial
point of view, to the unaffiliated holders of the shares of Common Stock,
without par value (the "Common Stock"), of FinishMaster, Inc. (the "Company") of
the consideration to be paid by the Company in connection with the proposed
merger (the "Merger") of LDI AutoPaints, Inc. ("LDI AutoPaints") with and into
the Company pursuant to the Agreement and Plan of Merger dated as of February
16, 1998 (the "Agreement") by and among the Company, LDI AutoPaints and Lacy
Distribution, Inc. ("LDI").
We understand that LDI AutoPaints is a wholly-owned subsidiary of LDI.
You have advised us that LDI is the beneficial owner of 4,045,100 shares of the
Company's Common Stock, all of which shares are currently owned of record by LDI
AutoPaints. You have also advised us that, pursuant to the Agreement, LDI
AutoPaints will be merged with and into the Company and all of the shares of
common stock of LDI AutoPaints issued and outstanding prior to the Effective
Time of the Merger will be converted into the right to receive an aggregate of
1,542,416 shares of Common Stock (the "Consideration"). In addition, at the
Effective Time of the Merger and pursuant to the Agreement, all of the 4,045,100
shares of the Company's Common Stock owned by LDI AutoPaints will be cancelled,
and LDI will be issued a new certificate registered in its name with respect to
such shares. We have been advised that this one for one exchange of currently
issued and outstanding Company shares for a new certificate as a consequence of
the Merger is for a valid business purpose. There is no dilution suffered by the
public shareholders as a consequence of this exchange nor is the net economic
effect of the Merger on the public shareholders affected in any way by such
exchange. Accordingly, we have disregarded any effect of this exchange for
purposes of this opinion.
<PAGE>
The Special Committee of the
Board of Directors
February 16, 1998
Page -2-
McDonald & Company Securities, Inc., as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
In connection with rendering this opinion, we have reviewed and
analyzed, among other things, the following: (i) the Agreement; (ii) certain
publicly available information concerning the Company, including the Company's
Annual Reports on Form 10-K for each of the years in the three year period ended
December 31, 1996 and the Company's Quarterly Reports on Form 10-Q for each of
the first three quarters of fiscal 1997; (iii) audited financial information for
LDI AutoPaints--Florida Division for the year ended December 31, 1997; (iv)
certain other internal information, primarily financial in nature, including
projections, concerning the business and operations of the Company and LDI
AutoPaints furnished to us by the Company and LDI AutoPaints for purposes of our
analysis; (v) certain publicly available information concerning the trading of,
and the trading market for, the Company's Common Stock; (vi) certain publicly
available information with respect to certain other companies that we believe to
be comparable to the Company or to LDI AutoPaints and the trading markets for
certain of such other companies' securities; and (vii) certain publicly
available information concerning the nature and terms of certain other
transactions that we consider relevant to our inquiry. We have also met with
certain officers and employees of the Company and LDI AutoPaints to discuss the
business and prospects of the respective companies, as well as other matters we
believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to us or publicly available and have assumed and
relied upon the representations and warranties of the Company, LDI AutoPaints
and LDI contained in the Agreement. In addition, we have assumed that any
dividends or other transfers of assets made by LDI AutoPaints prior to the
closing of the Merger will not include any assets reflected in the LDI
AutoPaints--Florida Division audited financial statements as of December 31,
1997. We have not been engaged to, and have not independently attempted to,
verify any of such information. We also have relied upon the managements of the
Company and LDI AutoPaints as to the reasonableness and achievability of the
financial and operating projections (and the assumptions and bases therefor)
provided to us and, with your consent, we have assumed that such projections,
including without limitation, projected cost savings and operating synergies
from the Merger have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of such respective managements of
the Company and LDI AutoPaints. We have not been engaged to assess the
achievability of such projections or the assumptions on which they were based
and express no
<PAGE>
The Special Committee of the
Board of Directors
February 16, 1998
Page -3-
view as to such projections or assumptions. In addition, we have not conducted
an appraisal of any of the assets, properties or facilities of either the
Company or LDI AutoPaints nor have we been furnished with any such evaluation or
appraisal. We also have assumed that the conditions to the Merger as set forth
in the Agreement would be satisfied and that the Merger would be consummated on
a timely basis in the manner contemplated by the Agreement.
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made available
as of, the date hereof and does not address any matters subsequent to such date.
In addition, our opinion is, in any event, limited to the fairness, as of the
date hereof, from a financial point of view, to the unaffiliated holders of the
Company's Common Stock, of the Consideration and does not address the Company's
underlying business decision to effect the Merger or any other terms of the
Merger.
We will receive a fee for our services in rendering this opinion, and
the Company has agreed to indemnify us under certain circumstances.
In the ordinary course of our business, we may actively trade
securities of the Company for our own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
It is understood that this opinion is directed to the Special Committee
of the Board of Directors of the Company and may not be disclosed, summarized,
excerpted from or otherwise publicly referred to without our prior written
consent. We understand, however, that this opinion may be shared with the Board
of Directors of the Company or become part of a public disclosure either as a
part of a proxy statement or a notice to the public shareholders of the Company.
Accordingly, we hereby consent to that use, provided however, that, any
disclosure, summarization or excerpt from this opinion in such documents is
subject to our prior review and consent, which consent shall not be unreasonably
withheld. This opinion does not constitute a recommendation to any shareholder
of the Company as to how such shareholder should vote at the shareholders'
meeting, if any, held in connection with the Merger.
<PAGE>
The Special Committee of the
Board of Directors
February 16, 1998
Page -4-
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion that as of the date hereof, the
Consideration to be paid by the Company pursuant to the Agreement is fair, from
a financial point of view, to the unaffiliated shareholders of the Company.
Very truly yours,
/s/ McDonald & Company Securities, Inc.
<PAGE>
Appendix II to
Proxy Statement
Report of Independent Accountants
To the Board of Directors LDI AutoPaints, Inc.
We have audited the accompanying balance sheet of LDI
AutoPaints-Florida Division as of December 31, 1997 and the related statements
of operations and retained earnings and cash flows for the year then ended.
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, the financial statements referred to above present
fairly, in all material respects, the financial position of LDI
AutoPaints-Florida Division as of December 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
January 21, 1998
-1-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Balance Sheet
as of December 31, 1997
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $ 619
Accounts receivable, net 1,548
Inventories 4,230
Deferred tax asset 205
Other current assets 91
--------
Total current assets 6,693
Property, plant and equipment, net 1,448
Intangible assets, net 7,910
Deferred tax asset 330
Other assets 20
--------
Total assets $ 16,401
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 854
Accrued liabilities 709
Current portion, long-term debt 219
--------
Total current liabilities 1,782
Long-term debt 669
--------
Total liabilities 2,451
--------
Retained earnings (437)
Contributed capital 14,387
--------
Total shareholder's equity 13,950
--------
Total liabilities and shareholder's equity $ 16,401
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Statement of Operations and Retained Earnings
for the year ended December 31, 1997
(dollars in thousands)
Net sales $ 21,924
Cost of sales 13,846
---------
Gross margin 8,078
Selling expenses 2,093
Distribution expenses 1,047
General and administrative expenses 3,311
Interest expense 76
Other expenses, net 1,278
---------
Income before income taxes 273
Federal and state income taxes 96
---------
Net income 177
Retained earnings, beginning of year (614)
---------
Retained earnings, end of year $ (437)
=========
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Statement of Cash Flows
for the year ended December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net income $ 177
Adjustments to reconcile net income to net cash provided by operations:
Amortization and depreciation 1,558
Benefit for deferred income taxes (182)
Loss on sale of property, plant and equipment 31
Increase (decrease) in cash resulting from changes in assets and liabilities:
Accounts receivable (40)
Inventories 18
Accounts payable 209
Accrued liabilities 408
Other, net 9
-------
Net cash provided by operating activities 2,188
-------
Cash flows from investing activities:
Capital expenditures, net (451)
-------
Net cash used in investing activities (451)
-------
Cash flows from financing activities:
Repayments of amounts due to affiliates (947)
Repayments of long-term debt (171)
-------
Net cash used in financing activities (1,118)
-------
Net increase in cash 619
Cash and cash equivalents, beginning of period --
-------
Cash and cash equivalents, end of period $ 619
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Notes to Financial Statements
(dollars in thousands)
1. Organization:
LDI AutoPaints-Florida (the Company), a division of LDI AutoPaints,
Inc., is a distributor of automotive paint and accessories in the state
of Florida. LDI AutoPaints, Inc. is a wholly owned subsidiary of Lacy
Distribution, Inc.
2. Significant Accounting Policies:
a. Cash and Amounts Deposited with the Parent: Substantially all
cash is deposited with the Company's parent, Lacy
Distribution, Inc. The parent maintains cash balances and
lines of credit sufficient to fund the cash requirements of
the Company on demand. All interest income is recorded by the
parent. Cash on deposit with the parent is considered as cash
for Statement of Cash Flows presentation purposes.
b. Accounts Receivable, Net: Accounts receivable are recorded net
of an allowance for doubtful accounts of $113 at December 31,
1997.
c. Inventories: Inventories are valued at the lower of cost or
market with cost determined utilizing the first- in, first-out
method.
d. Property, Plant and Equipment, Net: Property, plant and
equipment are carried at cost, with depreciation generally
determined using accelerated methods over the estimated useful
lives of the assets, which range from 3 to 30 years.
e. Intangible Assets: Intangible assets consist primarily of
goodwill arising from acquisitions. Intangible assets are
amortized using the straight-line method over the estimated
useful lives, which range from 5 to 15 years. Intangible
assets are removed from the accounts when fully amortized.
Accumulated amortization of intangible assets totaled $1,492
at December 31, 1997.
On a periodic basis, the Company evaluates the carrying value
of intangible assets by estimating the future undiscounted
cash flows of the businesses to which the intangible assets
relate.
f. Income Taxes: The Company uses the liability method of
accounting for income taxes pursuant to Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes.
Deferred taxes are provided to reflect the tax consequences on
future years of differences between the tax and financial
reporting basis of assets and liabilities. The Company files a
federal tax return with Lacy Distribution, Inc. and either
consolidated or stand-alone state income tax returns depending
upon the applicable state filing requirements. Taxes are
computed in accordance with a tax sharing agreement with the
Company's parent. The agreement generally provides that the
Company must remit taxes to the parent as if the Company filed
a separate tax return.
g. Pervasiveness of Estimates: The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions affecting the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenue and expense during the reporting
period. Actual amounts could differ from the estimated
amounts.
-5-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Notes to Financial Statements (continued)
3. Property, Plant and Equipment, Net:
<TABLE>
<CAPTION>
Property, plant and equipment, net, consists of the following at December 31, 1997:
<S> <C>
Building and leasehold improvements $ 813
Furniture and equipment 1,184
Vehicles 215
---------
2,212
Accumulated depreciation and leasehold amortization (764)
---------
Property, plant and equipment, net $ 1,448
========
Depreciation expense was $518 in 1997.
4. Long-term Debt:
Long-term debt at December 31, 1997 consist of the following:
Notes payable $ 888
Less current portion 219
---------
$ 669
=========
Notes payable consists of various unsecured term notes requiring
monthly or quarterly payments with interest at rates ranging from 6% to
8%. These agreements mature in October 2001.
Scheduled repayments of long-term debt are as follows:
1998 $ 219
1999 223
2000 227
2001 219
---------
$ 888
=========
</TABLE>
5. Retirement and Savings Plan:
Substantially all employees become eligible for participation in the
401(k) Retirement and Savings Plan (Plan) after completion of one year
of employment. The Plan requires that the Company contribute 4% of each
eligible employee's annual earnings and match 50% of employee
contributions to the Plan up to 6% of annual earnings.
Employer contributions to the Plan in 1997 totaled $121.
-6-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Notes to Financial Statements (continued)
6. Commitments and Contingencies:
a. Operating Leases: The Company leases various warehouse and
store sites as well as some vehicles under operating leases.
Future minimum rental payments under such leases are as
follows:
1998 $ 510
1999 444
2000 394
2001 268
2002 186
Thereafter 273
Total rent expense 1997 was $519.
b. Other Matters: In the ordinary course of business, the Company
may be involved, along with others, as defendants in product
liability or similar claims. Insurance has been obtained to
substantially mitigate losses that might arise from any such
claim. Management believes that the effect of these matters
will not have a material impact on the financial position of
the Company.
7. Other Expenses, Net:
Other expenses, net, consist of the following:
1997
Amortization of intangibles $ 1,040
Loss associated with store closings 229
Other, net 9
-----------
$ 1,278
===========
During 1997, the Company closed a number of store locations in
accordance with a plan of consolidation. Accordingly, a reserve for
estimated losses of $229 was established, of which $169 remains
outstanding at December 31, 1997. The estimated losses consist
primarily of future obligations for operating leases, assuming the
Company is not successful in finding tenants to sublease.
8. Income Taxes:
The income tax provision consists of the following:
1997
Current:
Federal income taxes $ 238
State income taxes 40
----------
278
----------
Deferred:
Federal income taxes (156)
State income taxes (26)
----------
(182)
----------
$ 96
==========
-7-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Notes to Financial Statements (continued)
Deferred tax assets consist of the following:
1997
Current portion:
Inventory capitalization $ 80
Valuation reserves 120
Other 5
----------
Deferred tax asset, current portion $ 205
========
Noncurrent portion:
Depreciation $ 121
Intangible amortization 209
---------
Deferred tax asset, noncurrent portion $ 330
========
The reconciliation of federal income tax computed at the U.S. federal
statutory tax rates to income tax expense for 1997 is:
<TABLE>
<CAPTION>
Amount Percent
<S> <C> <C>
Tax at U.S. statutory rates $ 93 34.0 %
State income taxes, net of federal tax benefit 9 3.3
Other (6) (2.1)
---------- ------
$ 96 35.2 %
========== =======
</TABLE>
-8-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Unaudited Balance Sheet as of December 31, 1996
(in thousands)
December 31,
1996
-----------------
ASSETS (unaudited)
Current assets:
Cash $ -
Accounts receivable, net 1,508
Inventory 4,248
Deferred tax asset 177
Prepaid expenses and other current assets 102
------------
Total current assets 6,035
Property plant and equipment, net 1,546
Intangible assets, net 8,950
Deferred tax asset 176
Other assets 18
------------
Total assets $ 16,725
============
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable $ 1,592
Accrued expenses and other current liabilities 301
Current maturities of long-term obligations 215
------------
Total current liabilities 2,108
Long-term debt 844
------------
Total liabilities 2,952
------------
Accumulated deficit (614)
Contributed capital 14,387
------------
Total shareholders' equity 13,773
------------
Total liabilities and shareholder's equity $ 16,725
============
-9-
<PAGE>
LDI AUTOPAINTS - FLORIDA DIVISION
(a division of LDI AutoPaints, Inc.,
a privately held Indiana Corporation)
Unaudited Statement of Operations
for the seven months ended December 31, 1996
(in thousands)
Seven Months
Ended
December 31, 1996
----------------------
(unaudited)
Net sales $ 10,287
Cost of sales 6,552
----------------------
Gross margin 3,735
Selling expenses 1,118
Distribution expenses 594
General and administrative expenses 1,817
Interest expense 15
Other expenses, net 1,174
----------------------
Loss before income taxes (983)
Federal and state income taxes (benefit) (369)
----------------------
Net loss $ (614)
======================
-10-
<PAGE>
Appendix III to
Proxy Statement
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FINISHMASTER, INC.,
LDI AUTOPAINTS, INC.
AND
LACY DISTRIBUTION, INC.
Dated as of February 16, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I THE MERGER.......................................................1
SECTION 1.1 The Merger..........................................1
SECTION 1.2 Effective Time......................................1
SECTION 1.3 Effects of the Merger...............................1
SECTION 1.4 Articles of Incorporation and By-Laws...............1
SECTION 1.5 Directors...........................................1
SECTION 1.6 Officers............................................1
SECTION 1.7 Conversion of Shares................................1
SECTION 1.8 Reorganization......................................1
ARTICLE II REPRESENTATIONS AND WARRANTIES OF AP AND
DISTRIBUTION.....................................................1
SECTION 2.1 Organization........................................1
SECTION 2.2 Capitalization......................................2
SECTION 2.3 Authority Relative to This Agreement................2
SECTION 2.4 No Violation........................................2
SECTION 2.5 Financial Statements................................2
SECTION 2.6 Information. ......................................3
SECTION 2.7 Absence of Certain Changes;
No Undisclosed Liabilities........................3
SECTION 2.8 Litigation..........................................3
SECTION 2.9 Compliance with Applicable Law......................3
SECTION 2.10 Taxes..............................................3
SECTION 2.11 Termination, Severance and Employment Agreements...4
SECTION 2.12 Employee Benefit Plans; ERISA......................4
SECTION 2.13 Environmental Matters..............................5
SECTION 2.14 Assets, Real Property, Intellectual Property.......5
SECTION 2.15 Labor Matters......................................6
SECTION 2.16 Certain Fees.......................................6
SECTION 2.17 No Default.........................................6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF FMST...........................6
SECTION 3.1 Organization........................................6
SECTION 3.2 Authority Relative to This Agreement................6
SECTION 3.3 No Violation........................................7
SECTION 3.4 Proxy Statement, Other Information.................7
SECTION 3.5 Certain Fees........................................7
ARTICLE IV COVENANTS........................................................7
SECTION 4.1 Conduct of Business of AP...........................7
SECTION 4.2 Access to Information...............................8
SECTION 4.3 Shareholders' Meeting...............................9
SECTION 4.4 Cooperation.........................................9
SECTION 4.5 Notification of Certain Matters.....................9
SECTION 4.6 Public Announcements................................9
ARTICLE V CONDITIONS TO CONSUMMATION OF THE MERGER........................10
SECTION 5.1 Conditions to Each Party's
Obligation To Effect the Merger.................10
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ARTICLE VI TERMINATION; AMENDMENT; WAIVER..................................10
SECTION 6.1 Termination........................................10
SECTION 6.2 Fees and Expenses..................................11
SECTION 6.3 Effect of Termination..............................11
SECTION 6.4 Amendment..........................................11
SECTION 6.5 Extension; Waiver..................................11
ARTICLE VII MISCELLANEOUS...................................................11
SECTION 7.1 Non-Survival of Representations,
Warranties and Agreements......................11
SECTION 7.2 Indemnification....................................11
SECTION 7.3 Entire Agreement; Assignment.......................11
SECTION 7.4 Validity...........................................11
SECTION 7.5 Notices............................................12
SECTION 7.6 Governing Law......................................12
SECTION 7.7 Interpretation.....................................13
SECTION 7.8 Parties in Interest................................13
SECTION 7.9 Counterparts.......................................13
SECTION 7.10 Expenses..........................................13
SECTION 7.11 Obligation of Distribution........................13
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the AAgreement@) is dated as of
February 16, 1998, by and among FinishMaster, Inc., an Indiana corporation
("FMST"), LDI AutoPaints, Inc., an Indiana corporation ("AP"), and Lacy
Distribution, Inc., an Indiana corporation ("Distribution").
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the Indiana Business Corporation Law ("IBCL"), AP
shall be merged with and into FMST (the "Merger") as soon as practicable
following the satisfaction of the conditions set forth in Section 6.1 hereof.
Following the Merger, FMST shall continue as the surviving corporation (the
"Surviving Corporation") and the separate corporate existence of AP shall cease.
SECTION 1.2 Effective Time. The Merger shall be consummated by filing,
and shall be effective at the time of acceptance for filing by the Indiana
Secretary of State of, articles of merger (the "Articles of Merger") in such
form as is required by, and executed in accordance with, the relevant provisions
of the IBCL, and such other documents as shall be required by the provisions of
the IBCL (the time of such filing being the "Effective Time").
SECTION 1.3 Effects of the Merger. The Merger shall have the effects
set forth in the IBCL.
SECTION 1.4 Articles of Incorporation and By-Laws. The Articles of
Incorporation and Amended and Restated Code of By-Laws of FMST as in effect at
the Effective Time shall be the articles of incorporation and code of by-laws of
the Surviving Corporation.
SECTION 1.5 Directors. The directors of FMST at the Effective Time
shall be the directors of the Surviving Corporation, until the next annual
shareholders' meeting of the Surviving Corporation and until their successors
shall be elected or appointed and shall duly qualify.
SECTION 1.6 Officers. The officers of FMST at the Effective Time shall
be the officers of the Surviving Corporation and will hold office from the
Effective Time until their respective successors are duly elected or appointed
and qualify in the manner provided in the articles of incorporation and code of
by-laws of the Surviving Corporation, or as otherwise provided by law.
SECTION 1.7 Conversion of Shares. At the Effective Time, all of the
issued and outstanding shares of AP (the "Shares") and the Four Million
Forty-Five Thousand One Hundred (4,045,100) shares of the common stock of FMST
owned by AP immediately prior to the Effective Time, shall, by virtue of the
Merger and without any action on the part of the holder thereof, be cancelled
and converted into the right to receive (i) Four Million Forty-Five Thousand One
Hundred (4,045,100) shares of common stock of FMST, issued in respect of the
Shares owned by AP which were cancelled in connection with the Merger, and (ii)
One Million Five Hundred Forty-Two Thousand Four Hundred Sixteen (1,542,416)
additional shares of the common stock of FMST (collectively the AMerger
Consideration@).
SECTION 1.8 Reorganization. The parties intend that the transaction to
be effected under this Agreement will be and is a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and
each of the provisions of this Agreement shall be limited and construed in a
manner consistent with that intention and result.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF AP AND DISTRIBUTION
Distribution represents and warrants to FMST as follows:
SECTION 2.1 Organization. Distribution and AP are corporations duly
organized and validly existing under the laws of the State of Indiana. AP is in
good standing as a foreign corporation in each jurisdiction where the properties
owned,
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leased or operated, or the business conducted, by it require such qualification
and where failure to be in good standing or to so qualify would have a material
adverse effect on the financial condition, results of operations, business or
prospects of AP or on the ability of AP to consummate the transaction
contemplated by this Agreement (which for all purposes hereof consists solely of
the Merger) (a "Company Material Adverse Effect"). AP has made available to FMST
true and correct copies of its articles of incorporation and code of by-laws.
SECTION 2.2 Capitalization.
(a) AP Capitalization. The authorized shares of AP consists of One
Thousand (1,000) shares of common stock. As of the date hereof, there are One
Hundred (100) shares issued and outstanding. Since December 31, 1997 through the
date hereof, no shares have been issued. There are not now, and at the Effective
Time there will not be, any existing options, warrants, calls, subscriptions, or
other rights, or other agreements or commitments, obligating AP to issue,
transfer or sell any shares of AP. All issued and outstanding Shares are validly
issued, fully paid, nonassessable and free of preemptive rights.
SECTION 2.3 Authority Relative to This Agreement.
(a) Approvals. The execution and approval of this Agreement by
Distribution and AP and the consummation of the transaction contemplated hereby
have been duly authorized by the Board of Directors of Distribution and AP, and
by Distribution in its capacity as the sole shareholder of AP. No other
corporate proceedings on the part of Distribution or AP are necessary for the
execution and delivery of this Agreement by AP and the consummation of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by AP and Distribution and, assuming this Agreement constitutes a
valid and binding obligation of FMST, this Agreement constitutes a valid and
binding agreement of AP and Distribution enforceable against AP and Distribution
in accordance with its terms, except to the extent that its enforceability may
be limited by applicable bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally or by equitable
principles.
(b) Other Authorizations. Other than in connection with, or in
compliance with, applicable requirements of the IBCL with respect to the
transaction contemplated hereby, no authorization, consent or approval of, or
filing with, any court or any public body or authority is necessary for the
consummation by AP of the transaction contemplated by this Agreement other than
authorizations, consents and approvals the failure to obtain, or filings the
failure to make, which would not, in the aggregate, cause or result in a Company
Material Adverse Effect.
SECTION 2.4 No Violation. Neither the execution or delivery of this
Agreement by AP, the performance by AP of its obligations hereunder nor the
consummation by AP of the transaction contemplated hereby will (a) constitute a
breach or violation of any provision of the articles of incorporation or code of
by-laws of AP, (b) constitute a breach, violation or default (or any event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in the creation of any lien or encumbrance upon any of the properties or
assets of AP under, any note, bond, mortgage, indenture, deed of trust, license,
agreement or other instrument to which AP is a party or by which it or any of
its respective properties or assets is bound or (c) constitute a violation of
any order, writ, injunction, decree, statute, rule or regulation of any court or
governmental authority applicable to AP, or any of its properties or assets,
other than, in the case of clauses (b) and (c) above, such breaches, violations,
defaults, terminations, accelerations or creation of liens and encumbrances
which, in the aggregate, would not have a Company Material Adverse Effect. No
representation or warranty is made regarding whether or not any consent may be
required in respect of any AP site lease.
SECTION 2.5 Financial Statements. The audited financial statements of
LDI AutoPaints -Florida Division as of December 31, 1997 have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis (except as otherwise stated in such financial statements,
including the related notes) and fairly present in all material respects the
financial position of LDI AutoPaints -Florida Division as of the date thereof
and the results of its operations and cash flows for the period then ended. The
unaudited financial statements of AP as of January 31, 1998 have been prepared
in accordance with GAAP applied on a consistent basis (except as otherwise
stated in such financial statements, including the related notes, and except
that such financial statements do not contain all of the footnote disclosures
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required by GAAP) and fairly presents, in all material respects, the financial
position of AP as of the date thereof. The unaudited balance sheet of AP as of
January 31, 1998 excludes certain assets and liabilities of AP which have been
distributed to and assumed by Distribution as of January 31, 1998 (which assets
and liabilities were not, as of December 31, 1997, a part of the assets and
liabilities of LDI AutoPaints -Florida), and are not, at the time of the
execution of this Agreement, and will not be, at the Effective Time, a part of
the assets or liabilities of AP. The assets and liabilities of AP shown on such
balance sheet of AP as of January 31, 1998 consist of (1) all of the assets and
liabilities of LDI AutoPaints -Florida Division, and (2) the Four Million Forty
Five Thousand One Hundred (4,045,100) shares of FMST owned by AP. Neither AP nor
any of its assets, businesses, or operations, is a party to, or is bound or
affected by, or receives benefits under, any material contract or agreement or
amendment thereto, except those contracts and agreements copies of which have
been made available to FMST.
SECTION 2.6 Information. None of the information supplied in writing by
AP specifically for inclusion or incorporation by reference in the Proxy
Statement, if any, or any other document filed or to be filed by or on behalf of
FMST with the SEC or any other governmental entity in connection with the
transaction contemplated by this Agreement, contains, or will contain, any
untrue statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
SECTION 2.7 Absence of Certain Changes; No Undisclosed Liabilities.
Since December 31, 1997, there has not been a Company Material Adverse Effect.
Since December 31, 1997, AP has not (i) except in the ordinary course of
business, incurred any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, or suffered any event or occurrence which,
individually or in the aggregate, would have a Company Material Adverse Effect
or (ii) made any material changes in accounting methods, principles or practices
or (iii) declared, set aside or paid any dividend or other the distribution with
respect to its shares other than the distribution to Distribution, as of January
31, 1998, of all assets and liabilities of AP other than (x) the business of LDI
AutoPaints -Florida Division and (y) the Four Million Forty Five Thousand One
Hundred (4,045,100) shares of FMST owned by AP. Since December 31, 1997, AP has
conducted its operations in the ordinary course of business consistent with past
practice in all material respects.
SECTION 2.8 Litigation. There is no suit, claim, action, proceeding, or
investigation pending or threatened in writing or, to the knowledge of AP,
otherwise threatened against AP or any of its properties or assets before any
court or governmental entity which, individually or in the aggregate, could, if
determined adversely, reasonably be expected to have a Company Material Adverse
Effect or delay the consummation of the transaction contemplated by this
Agreement in any material respect. AP is not subject to any outstanding order,
writ, injunction or decree which, insofar as can be reasonably foreseen,
individually or in the aggregate, in the future would have a Company Material
Adverse Effect or would delay the consummation of the transaction contemplated
hereby in any material respect.
SECTION 2.9 Compliance with Applicable Law. AP holds all permits,
licenses, variances, exemptions, orders and approvals of all governmental
entities necessary for the lawful conduct of its businesses, if any (the "AP
Permits"), except where such failures to hold such permits, licenses, variances,
exemptions, orders and approvals would not, individually or in the aggregate,
reasonably be expected to result in a Company Material Adverse Effect. AP is in
compliance with the terms of the AP Permits, except where the failure so to
comply would not, individually or in the aggregate, reasonably be expected to
result in a Company Material Adverse Effect. The business of AP is not being
conducted in violation of any law, ordinance or regulation of any governmental
entity except for violations or possible violations which individually or in the
aggregate are not reasonably expected to result in a Company Material Adverse
Effect. No investigation or review by any governmental entity with respect to AP
is pending or threatened in writing or, to the knowledge of AP, otherwise
threatened, other than, in each case, those which would not, individually or in
the aggregate, reasonably be expected to result in a Company Material Adverse
Effect.
SECTION 2.10 Taxes. AP has filed, or caused to be filed, all federal,
state, local and foreign income and other tax returns required to be filed by
it, has paid or withheld, or caused to be paid or withheld, all taxes of any
nature whatsoever, with any related penalties, interest and liabilities (any of
the foregoing being referred to herein as a "Tax"), that are shown on such tax
returns as due and payable, or otherwise required to be paid, other than such
Taxes as are being contested in good faith and for which reserves have been
established in accordance with GAAP except where the failure so
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to file or pay would not, individually or in the aggregate, reasonably be
expected to result in a Company Material Adverse Effect. AP has or will have
paid all Taxes due with respect to any period ending on or prior to the
Effective Time, or where the payment of Taxes is not yet due, have or will have
established, or with respect to Taxes incurred after the date hereof, will
timely establish in accordance with past practices, an adequate accrual in
accordance with GAAP except for failures to pay or accrue that would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. There are no claims, assessments or audits pending or
threatened in writing, or to AP's knowledge otherwise threatened, against AP for
any alleged deficiency in any Tax, and AP does not know of any Tax claims or
assessments threatened against AP which if upheld could, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect
(after giving effect to any reserves maintained by AP). AP has not filed a
consent under Section 341(f) of the Internal Revenue Code of 1986, as amended
(the "Code"). There is no material inter-company item which would be taken into
account by, or excess loss account which would be includable in income of, AP as
a result of the transaction contemplated by this Agreement pursuant to the
Treasury Regulations promulgated under Section 1502 of the Code. There are no
waivers or extensions of any applicable statute of limitation to assess any
Taxes. All returns filed by or on behalf of AP with respect to Taxes are true
and correct in all material respects. There are no outstanding requests by AP
for any extension of time within which to file any return (except for normal
automatic extensions) or within which to pay any Taxes shown to be due on any
return. There are no liens for any Taxes upon the assets of AP (other than
statutory liens for Taxes not yet due and payable and liens for real estate
taxes being contested in good faith) which individually or in the aggregate
could have a Company Material Adverse Effect. AP is not a party to, is not bound
by or does not have any obligation under, a tax sharing or tax allocation
agreement or arrangement for the allocation, apportionment, sharing,
indemnification or payment of taxes. The cancellation of the 4,045,100 shares of
FMST held by AP, and the issuance in the Merger of a like number of shares to
Distribution as part of the Merger Consideration, will not result in an adverse
tax consequence to FMST of a magnitude greater than $50,000.
SECTION 2.11 Termination, Severance and Employment Agreements. AP has
provided to FMST a complete and accurate list of each employment or severance
agreement of any officer of LDI AutoPaints -Florida not terminable by the terms
thereof without material liability or obligation (either individually or
collectively) on 60 days' or less notice.
SECTION 2.12 Employee Benefit Plans; ERISA.
(a) Except as previously disclosed to the FMST in writing, (i) each
"employee benefit plan" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), and all other employee
benefit, bonus, incentive, stock option (or other equity-based), severance,
change in control, welfare (including post-retirement medical and life
insurance) and fringe benefit plans (whether or not subject to ERISA) maintained
or sponsored by AP or any member of Distribution's controlled group of entities
(within the meaning of Code Sections 414(b), (c), (m) or (o)) (each, an "ERISA
Affiliate), for the benefit of any employee or former employee of AP or any of
its ERISA Affiliates (individually, a "Plan," and collectively, the "Plans") is,
and has been operated in accordance with its terms and in compliance (including
the making of governmental filings) with all applicable laws, including ERISA
and the applicable provisions of the Code, except for failures that would not,
individually or in the aggregate, have a Company Material Adverse Effect, (ii)
each of the Plans presently maintained by AP and intended to be "qualified"
within the meaning of Section 401(a) of the Code has been determined by the
Internal Revenue Service to be so qualified, (iii) no "reportable event," as
such term is defined in Section 4043(c) of ERISA (for which the 30-day notice
requirement to the Pension Benefit Guaranty Corporation ("PBGC") has not been
waived), has occurred with respect to any Plan that is subject to Title IV of
ERISA which presents a risk of liability to any governmental entity or other
person which, individually or in the aggregate, may reasonably be expected to
have a Company Material Adverse Effect, and (iv) there are no pending or
threatened in writing or to AP's knowledge otherwise threatened, claims (other
than routine claims for benefits) by, on behalf of or against, any of the Plans
or any trust related thereto which would, individually or in the aggregate, have
a Company Material Adverse Effect. No Plan is a "multiemployer plan" (within the
meaning of ERISA) nor to the knowledge of AP has AP or any ERISA Affiliate ever
contributed or been required to contribute to any multiemployer plan.
(b) (i) No Plan has incurred a material "accumulated funding
deficiency" (as defined in Section 302 of ERISA or Section 412 of the Code)
whether or not waived and (ii) neither AP nor any ERISA Affiliate has incurred
any liability under Title IV of ERISA except for required premium payments to
the PBGC, which payments have been made when due, and no events have occurred
which are reasonably likely to give rise to any liability of AP or an ERISA
Affiliate under Title
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IV of ERISA or which could reasonably be anticipated to result in any claims
being made against AP by the PBGC, in any such case, which presents a risk of
liability which would, individually or in the aggregate, have a Company Material
Adverse Effect.
(c) With respect to each Plan, if any, that is subject to Title IV of
ERISA, (i) AP has provided to FMST copies of the most recent actuarial valuation
report prepared for such Plan prior to the date hereof, (ii) the assets and
liabilities in respect of the accrued benefits as set forth in the most recent
actuarial valuation report prepared by the Plan's actuary fairly presented the
funded status of such Plan in all material respects, and (iii) since the date of
such valuation report there has been no adverse change in the funded status of
any such Plan which would, individually or in the aggregate, have a Company
Material Adverse Effect.
(d) Neither AP nor any ERISA Affiliate has failed to make any
contribution or payment to any Plan which has resulted or could result in the
imposition of a lien or the posting of a bond or other security under ERISA or
the Code which would have a Company Material Adverse Effect.
(e) AP has not sponsored, maintained, administered or contributed to or
participated in a Plan subject to Title VI of ERISA within the last seven years.
SECTION 2.13 Environmental Matters. AP has obtained and is in
substantial compliance with the terms and conditions of all required permits,
licenses and other authorizations required under Environmental Laws (as
hereinafter defined), except for failures or noncompliance which would not
reasonably be expected to, individually or in the aggregate, have a Company
Material Adverse Effect. AP is in substantial compliance with all applicable
Environmental Laws, except for failures to comply which would not reasonably be
expected to, individually or in the aggregate, have a Company Material Adverse
Effect. AP has disclosed past and present noncompliance with, or liability
under, Environmental Laws and discharges, emissions, leaks, releases or
disposals of any substance or waste regulated under or defined by Environmental
Laws that have formed the basis of any claim, action, suite, proceeding, hearing
or investigation under any applicable Environmental Laws which, in any such
case, individually or in the aggregate, would have a Company Material Adverse
Effect. AP has not received notice of any past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans that have
resulted in any common law or legal liability, or otherwise form the basis of
any material liability under, any applicable Environmental Laws, which would,
individually or in the aggregate, have a Company Material Adverse Effect. For
purposes of this Section 2.13, (a) AEnvironmental Laws@ mean applicable federal,
and local laws, regulations and codes relating in any respect to pollution or
protection of the environment and (b) "Hazardous Substances" means any toxic,
caustic, or otherwise dangerous substance (whether or not regulated under
federal, state or local environmental statutes, rules, ordinances, or orders),
including (i) "hazardous Substance" as defined in 42 U.S.C. ss. 9601, and (ii)
petroleum products, derivatives, byproducts and other hydrocarbons.
SECTION 2.14 Assets, Real Property, Intellectual Property.
(a) AP owns or has rights to use all assets necessary to permit AP to
conduct its business as it is currently being conducted except where the failure
to own or have the right to use such assets would not, individually or in the
aggregate, have a Company Material Adverse Effect.
(b) Except as previously disclosed to FMST, AP has, (i) good, valid and
marketable or indefeasible title to all real property material to its business
operations, free and clear of any liens, encumbrances, mortgages and security
interests other than Permitted Liens (as hereinafter defined), or (ii) rights by
lease or other agreement to use all such real property. The term "Permitted
Liens" shall mean (i) liens or encumbrances for water, sewage and similar
charges and current taxes and assessments not yet due and payable or being
contested in good faith, (ii) mechanics', carriers', workers', repairers',
materialmen's, warehousemen's and other similar liens or encumbrances arising or
incurred in the ordinary course of business, (iii) liens, encumbrances,
mortgages and security interests arising or resulting from any action taken by
FMST, (iv) liens, encumbrances, mortgages and security interests of record or
securing indebtedness, (v) liens, encumbrances, mortgages and security interests
incurred in the ordinary course of business since December 31, 1997, (vi)
easements, rights of way, restrictions and other similar charges or
encumbrances, and any other liens, encumbrances, mortgages and security
interests, that do not materially interfere with the ordinary conduct of AP's
business. All real property leases under which
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AP is a lessee or lessor are, as of the date hereof, valid, binding and
enforceable in accordance with their terms, and there are not existing defaults
thereunder which would, individually or in the aggregate, have a Company
Material Adverse Effect.
(c) As presently used by AP, none of the Intellectual Property owned by
AP is infringed or challenged or threatened in any way, except for
infringements, challenges or threats which would not individually or in the
aggregate, have a Company Material Adverse Effect. "Intellectual Property" means
trademarks, trade names, service marks, service names, mark registrations,
logos, assumed names, copyright registrations, patents and all applications
therefor and all other similar proprietary rights.
SECTION 2.15 Labor Matters. AP has not (i) been subject to, threatened
in writing, or to AP's knowledge otherwise threatened, with any strike, lockout
or other labor dispute the result of which had or could reasonably be expected
to have or constitute, a Company Material Adverse Effect, or (ii) received
written notice of any pending petition for certification before the National
Labor Relations Board with respect to any group of employees of AP who are not
currently organized. AP is not a party to any collective bargaining agreement
with a labor union.
SECTION 2.16 Certain Fees. Neither AP nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any financial advisory, brokerage or finder's fees or commissions
in connection with the transaction contemplated herein.
SECTION 2.17 No Default. Except for defaults or violations which, in
the aggregate, would not reasonably be expected to constitute a Company Material
Adverse Effect, AP is not in default or violation (and no event has occurred
which with notice or lapse of time or both would constitute a default or
violation) of any material term, condition or provision of (i) its articles of
incorporation, code of by-laws, or other governing documents, (ii) any note,
mortgage, indenture or other evidence of indebtedness, guarantee, license,
agreement or other contract, instrument or contractual obligation to which AP is
now a party or by which it or any of its assets may be bound, or (iii) any
order, writ, injunction, decree, statute, rule or regulation applicable to AP on
the date hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FMST
FMST represents and warrants to AP and Distribution as follows:
SECTION 3.1 Organization. FMST is a corporation duly organized and
validly existing under the laws of the State of Indiana and is in good standing
as a foreign corporation in each other jurisdiction where the properties owned,
leased or operated, or the business conducted, by it require such qualification
and where failure to be in good standing or so to qualify would have a material
adverse effect on the financial condition, results of operations or businesses
of FMST.
SECTION 3.2 Authority Relative to This Agreement.
(a) Approvals. FMST has full corporate power and authority to execute
and deliver this Agreement and, subject to obtaining the necessary approval of
this Agreement by its shareholders to the extent required by applicable law or
the NASDAQ National Market System ("NMS"), to consummate the transaction
contemplated hereby. The execution and delivery of this Agreement by FMST and
the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of FMST, and no other corporate proceedings
on the part of FMST are necessary for the execution and delivery of this
Agreement by FMST and, subject to the filing of the Articles of Merger pursuant
to Section 1.2 and obtaining the necessary approvals of FMST's shareholders to
the extent required by applicable law or the NMS, the performance by FMST of its
obligations hereunder and the consummation by FMST of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by FMST
and, assuming this Agreement constitutes a valid and binding obligation of each
of AP and Distribution, this Agreement constitutes a valid and binding agreement
of FMST, enforceable against FMST in accordance with its terms, except to the
extent that its enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors
rights generally or by general equitable principles.
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(b) Other Authorizations. Other than in connection with, or in
compliance with applicable requirements of the IBCL with respect to the
transaction contemplated hereby, the Exchange Act, the securities laws of the
various states, no authorization, consent or approval of, or filing with, any
court or any public body or authority is necessary for the consummation by FMST
of the transactions contemplated by this Agreement other than authorizations,
consents and approvals of which the failure to obtain, or filings of which the
failure to make, would not, in the aggregate, have a material adverse effect on
the financial condition, results of operations or business of FMST or on the
ability of FMST to consummate the transaction contemplated hereby.
SECTION 3.3 No Violation. Neither the execution or delivery of this
Agreement by FMST, the performance by FMST of its respective obligations
hereunder nor the consummation by it of the transaction contemplated hereby will
(a) constitute a breach or violation under the Articles of Incorporation or Code
of By-Laws of FMST or (b) constitute a breach, violation or default (or any
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in the creation of any lien or encumbrance upon any of the
properties or assets of FMST under, any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument to which either FMST is a
party or by which they or any of their properties or assets are bound or (c)
constitute a violation of any order, writ, injunction, decree, statute, rule or
regulation of any court or governmental authority applicable to FMST or any of
their properties or assets, other than, in the case of clauses (b) and (c)
above, such breaches. violations, defaults, terminations, accelerations or
creation of liens and encumbrances which, in the aggregate, would not have a
material adverse effect on the financial condition, results of operations or
business of FMST taken as a whole or on the ability of FMST to consummate the
transaction contemplated hereby.
SECTION 3.4 Proxy Statement, Other Information. No document filed or to
be filed by or on behalf of FMST with the SEC or any other governmental entity
in connection with the transaction contemplated by this Agreement, contained
when filed, or will contain, at the respective times filed with the SEC or other
governmental entity, any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading; provided that the foregoing shall not apply to information
supplied by AP in writing specifically for inclusion or incorporation by
reference in any such document. None of the information supplied in writing by
FMST specifically for inclusion or incorporation by reference in the Proxy
Statement, if any, or any other document filed or to be filed by or on behalf of
FMST with the SEC or any other governmental entity in connection with the
transaction contemplated by this Agreement, contains, or will contain, any
untrue statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
SECTION 3.5 Certain Fees. Neither FMST nor its officers, directors or
employees has employed any broker or finder or incurred any liability for any
financial advisory, brokerage or finder's fees or commissions in connection with
the transaction contemplated herein for which AP could have any liability,
except for the financial advisory fee payable to McDonald & Company in
connection with the rendering of its fairness opinion to the Independent
Committee.
ARTICLE IV
COVENANTS
SECTION 4.1 Conduct of Business of AP. Except as contemplated by this
Agreement, as previously disclosed to FMST or as otherwise agreed by the parties
hereto, during the period from the date of this Agreement to the Effective Time,
AP will conduct its operations in accordance with its ordinary and usual course
of business and consistent with past practice in all material respects. Without
limiting the generality of the foregoing, and except as contemplated by this
Agreement or as previously disclosed to FMST, prior to the Effective Time, AP
will not, without the prior written consent of FMST (such consent not to be
unreasonably withheld):
(a) issue, sell or repurchase, or authorize or propose the issuance,
sale or repurchase of any shares of common stock of AP, or securities
convertible into such shares, or any rights, warrants or options to acquire such
shares or other convertible securities;
(b) declare or pay any dividend or distribution on its shares;
-7-
<PAGE>
(c) except for such transactions in the ordinary course of business or
fees and expenses related to the transaction contemplated hereby, authorize or
enter into any agreement with respect to any commitment or transaction which
requires AP to pay in excess of $50,000 in the aggregate;
(d) except in the ordinary course of business consistent with past
practice and except as previously disclosed to FMST or as may be required by
law, adopt or amend in any material respect or terminate any profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, plan, fund or other
arrangement (collectively, "Compensation Plans"), or grant, or become obligated
to grant, any general increase in the compensation of executive officers or any
increase in the compensation payable or to become payable to any executive
officer or institute any material new welfare program or Compensation Plan, or
make any material change in any Compensation Plan;
(e) except as required by the consummation of the Merger, pay,
discharge or satisfy any material claims, liabilities or obligations (absolute,
accrued, contingent or otherwise) other than the payment, discharge or
satisfaction in the ordinary course of business;
(f) except for transactions in the ordinary course of business (i)
incur, assume or prepay any long-term or short-term debt or issue any debt
securities except for borrowing under existing lines of credit or prepayments or
other borrowings not to exceed $100,000 in the aggregate; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for any material obligations of any other person;
(iii) make any loans, advances or capital contributions to, or investments in,
any other person (other than advances to customers in amounts not to exceed
$25,000 in the aggregate, or customary loans to employees in amounts not
material to the maker of such loan); (iv) pledge or otherwise encumber shares of
AP; or (v) mortgage or pledge any of its material assets, tangible or
intangible, or create or suffer to exist any lien thereupon, excluding Permitted
Liens;
(g) propose or adopt any amendments to its article of incorporation or
code of by-laws;
(h) except for transactions in the ordinary course of business,
contemplated hereby or otherwise disclosed herein, acquire, sell, lease or
dispose of any assets which in the aggregate are material to AP taken as a
whole, or enter into or modify, amend, terminate or waive any rights under any
commitments, contracts, agreements or transactions which would, individually or
in the aggregate, be material to AP taken as a whole;
(i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or division
thereof or any equity interest therein;
(j) make any material tax election or settle or compromise any material
federal, state or local tax liability or assent to the assessment of any
federal, state or local tax;
(k) authorize any new capital expenditure or expenditures not reflected
in the capital expenditure budget provided to FMST and which in the aggregate
are in excess of $25,000; or
(1) agree, in writing or otherwise, to take any of the foregoing
actions.
SECTION 4.2 Access to Information. So long as this Agreement has not
been terminated, between the date of this Agreement and the Effective Time, AP
will give FMST and its authorized representatives access during normal business
hours to all stores, offices, warehouses and other facilities and to all books
and records, will permit FMST to make such inspections as it may reasonably
require and will cause its officers and use reasonable best efforts to cause its
accountants promptly to furnish FMST with such financial and operating data and
other information with respect to the business and properties of AP as FMST may
from time to time reasonably request.
-8-
<PAGE>
SECTION 4.3 Shareholders' Meeting.
(a) Shareholder Approval of FMST. If required by applicable law or the
NMS in order to consummate the Merger, FMST, acting through its Board of
Directors, shall, in accordance with its articles of incorporation and such
requirements:
(i) duly call, give notice of, convene and hold a meeting of
its shareholders as soon as practicable after the execution of this
Agreement or to take such actions necessary to cause the Merger to be
considered at its next annual meeting of shareholders;
(ii) subject to its fiduciary duties under applicable law as
advised by counsel, include in the Proxy Statement the recommendation
of its Board of Directors that shareholders of FMST vote in favor of
the approval and adoption of this Agreement; and
(iii) use its reasonable best efforts (x) to obtain and
furnish the information required to be included by it in the Proxy
Statement, to respond promptly to any comments made by the SEC with
respect to the Proxy Statement and any preliminary version thereof and
to cause the Proxy Statement to be mailed to its shareholders at the
earliest practicable time following the execution of this Agreement and
(y) subject to its fiduciary duties under applicable law as advised by
counsel, to obtain the necessary approval of the Merger by its
shareholders.
(b) Voting of Shares by AP. AP agrees that, at the meeting of the
shareholders of FinishMaster at which the Merger is considered, all of the
shares of FinishMaster owned by AP will be voted in favor of the Merger.
SECTION 4.4 Cooperation. Subject to the terms and conditions herein
provided and to the fiduciary duties of FMST's directors as advised by counsel
to FMST, each of the parties hereto agrees to use its reasonable best efforts
(and to use its reasonable best efforts to cause its affiliates) (a) to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transaction contemplated by this Agreement
including, without limitation, (i) promptly making any filings that are required
to be made or seeking any consents, approvals, permits or authorizations that
are required to be obtained under any federal, state or other law or regulation,
(ii) using its reasonable best efforts to respond promptly and fully to any and
all inquiries of government officials or agencies and to endeavor to resolve any
inquiries or objections made by any such officials or agencies, and (iii) using
its reasonable best efforts to prevent or ameliorate the effects of any Order or
Injunction to refrain from taking, directly or indirectly, any action contrary
to or inconsistent with the provisions of this Agreement, including action which
would impair such party's ability to consummate the transactions contemplated
hereby. In case at any time before or after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall use
their respective reasonable best efforts to take all such necessary action.
SECTION 4.5 Notification of Certain Matters. Each of the parties hereto
shall give the others prompt notice of (i) the occurrence, or non-occurrence, of
any event which causes or has caused any representation or warranty of any party
contained in this Agreement to be untrue or inaccurate in any material respect
at any time from the date hereof to the Effective Time, and (ii) any material
failure of AP or FMST, as the case may be, or any officer, director, employee,
representative or agent thereof, to comply with or satisfy any material
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 4.5 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
SECTION 4.6 Public Announcements. FMST and AP will consult with each
other before issuing any press release or otherwise making any public statements
with respect to the Merger and shall not issue any such press release or make
any such public statement prior to such consultation except as may be required
by law or any securities exchange or similar authority. The parties agree that,
upon execution of this Agreement, they will cause to be disseminated a joint
press release.
-9-
<PAGE>
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 5.1 Conditions to Each Party's Obligation To Effect the Merger.
The respective obligations of each party to effect the Merger are subject to the
satisfaction or waiver, where legally permissible, prior to the Effective Time
of the following conditions:
(a) This Agreement shall have been adopted by the requisite vote of the
shareholders of FMST in accordance with applicable law and the requirements of
NMS, if such vote is required by applicable law or the NMS;
(b) No statute, rule, regulation, order, decree or injunction shall
have been enacted, entered, promulgated or enforced by any court or governmental
authority of competent jurisdiction which restrains, enjoins or otherwise
prohibits the consummation of the Merger; provided, however, that AP and FMST
shall use their reasonable best efforts to have any such order, decree or
injunction vacated and otherwise take all actions required pursuant to Section
4.4;
(c) delivery of fairness opinion rendered by McDonald & Company to the
Independent Directors; and
(d) the representations and warranties of AP and Distribution (which
may be waived by FMST) and of FMST (which may be waived by Distribution) shall
be true and correct in all material respects.
ARTICLE VI
TERMINATION; AMENDMENT; WAIVER
SECTION 6.1 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time prior to the Effective
Time, notwithstanding approval thereof by the shareholders of FMST:
(a) by mutual written consent duly authorized by the boards of
directors of AP, Distribution and FMST (including, if required, the Independent
Committee);
(b) by FMST, Distribution or AP if the Effective Time shall not have
occurred on or before June 30, 1998; provided, however, that the right to
terminate this Agreement pursuant to this Section 6.1(b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Effective Time to occur on
or before such date;
(c) by FMST, Distribution or AP if any court of competent jurisdiction
in the United States or other United States governmental body shall have issued
an order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall have become final and nonappealable;
(d) by FMST if (i) there shall have been a breach of any representation
or warranty on the part of the AP or Distribution under this Agreement having a
Company Material Adverse Effect, which shall not have been cured prior to 10
days following notice of such breach (provided, however, that if any of the
representations and warranties is already qualified in any respect by
materiality or as to the Company Material Adverse Effect for purposes of this
Section 6.1(d) such materiality or the Company Material Adverse Effect
qualification will be in all respects ignored (but subject to the overall
standard as to materiality set forth immediately prior to this proviso)), or
(ii) there shall have been a material breach of any covenant or agreement in
this Agreement on the part of the AP or Distribution, which materially adversely
affects the consummation of the Merger which shall not have been cured prior to
10 days following notice of such breach;
(e) by AP or Distribution if (i) there shall have been a breach of any
representation or warranty in this Agreement on the part of FMST which
materially adversely affects the consummation of the Merger, which shall not
have been cured prior to 10 days following notice of such breach (provided,
however, that if any of the representations and warranties is already qualified
in any respect by materiality or as to a material adverse effect for purposes of
this Section 6.1(e) such materiality or material adverse effect qualification
will be in all respects ignored (but subject to the overall standard as to
materiality set forth immediately prior to this proviso)), or (ii) there shall
have been a material breach of any
-10-
<PAGE>
covenant or agreement in this Agreement on the part of FMST which materially
adversely affects the consummation of the Merger which shall not have been cured
prior to 10 days following notice of such breach.
SECTION 6.2 Fees and Expenses. Except as set forth in this Agreement,
whether or not the Merger is consummated, all legal and other costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs and expenses.
SECTION 6.3 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 6.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party or its directors, officers or shareholders, other than the
provisions of Sections 4.7, 6.2 and 7.9. Nothing contained in this Section 6.3
shall relieve AP or Distribution, or FMST, from liability for any breach of this
Agreement.
SECTION 6.4 Amendment. To the extent permitted by applicable law, this
Agreement may be amended by action taken by AP, Distribution and FMST (and the
shareholders of FMST, if required by applicable law) at any time before or after
adoption of this Agreement by the shareholders of FMST, but no amendment shall
be made which increases the consideration, changes the form of consideration to
be received by the holder of the Shares in the Merger, or which adversely
affects the rights of shareholders of FMST hereunder without the approval of
such shareholders and, if required, the Independent Committee. This Agreement
may not be amended except by an instrument in writing signed on behalf of all
the parties.
SECTION 6.5 Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto or (c) waive
compliance with any of the agreements or conditions contained herein unless
waiver is unlawful or specifically prohibited. Any agreement on the part of any
party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 Non-Survival of Representations, Warranties and Agreements.
The representations and warranties made herein shall terminate on the first
anniversary of the Effective Time or the earlier termination of this Agreement
pursuant to Section 6.1 as the case may be; provided, however, that if the
Merger is consummated, the representation and warranty contained in Section 2.10
shall survive for a period equal to the applicable statute of limitations for
tax matters (each of the above referenced time periods being hereinafter
referred to as a "Survival Period").
SECTION 7.2 Indemnification. During the Survival Period applicable to
that certain representation and warranty, Distribution agrees to indemnify and
hold harmless FMST from any and all claims, action, damages, losses, costs and
expenses (including reasonably attorneys' fees) incurred by FMST in connection
with any representation or warranty made by Distribution in this agreement
having been untrue in any material respect at the time made. During the Survival
Period applicable to that certain representation and warranty, FMST hereby
agrees to indemnify and hold harmless Distribution from any and all claims,
actions, damages, losses, costs and expenses (including reasonably attorneys'
fees) incurred by Distribution in connection with any representation or warranty
made by FMST in this agreement having been untrue in any material respect as of
the date made.
SECTION 7.3 Entire Agreement; Assignment. This Agreement (a)
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof and (b) shall not be assigned by operation of law or otherwise.
SECTION 7.4 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
-11-
<PAGE>
SECTION 7.5 Notices. All notices and other communications among the
parties shall be in writing and shall be deemed to have been duly given when (i)
delivered in person, or (ii) one business day after delivery to a reputable
overnight courier service (e.g. Federal Express), postage pre-paid, or (iii)
delivered by telecopy and promptly confirmed by telephone and by delivery of a
copy in person or overnight as aforesaid, in each case with postage prepaid,
addressed as follows:
If to FMST:
FinishMaster, Inc.
54 Monument Circle
Indianapolis, Indiana 46204
Telecopy: (317) 237-5430
Attention: Andre B. Lacy, Chairman of the Board
with a copy to:
Barnes & Thornburg
11 S. Meridian Street, Suite 1300
Indianapolis, Indiana 46204
Telecopy: (317) 231-7433
Attention: Robert H. Reynolds, Esquire
and
Sommer & Barnard
111 Monument Circle, Suite 4000
Indianapolis, Indiana 46204
Telecopy: (317) 236-9802
Attention: James A. Strain, Esquire
If to AP or Distribution:
LDI AutoPaints, Inc.
54 Monument Circle
Indianapolis, Indiana 46204
Telecopy: (317) 237-5430
Attention: Andre B. Lacy, Chairman of the Board
with a copy to:
Barnes & Thornburg
11 S. Meridian Street, Suite 1300
Indianapolis, Indiana 46204
Telecopy: (317) 231-7433
Attention: Robert H. Reynolds, Esquire
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
SECTION 7.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
-12-
<PAGE>
SECTION 7.7 Interpretation. When a reference is made in this Agreement
to the "knowledge of AP," such reference shall mean the actual knowledge of the
Chief Executive Officer or President of AP. For purposes of this Agreement AP
shall not be deemed to be an affiliate of FMST. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. If an ambiguity or question of
intent or interpretation arises, then this Agreement will be construed as if
drafted jointly by the parties to this Agreement, and no presumption or burden
of proof will arise favoring or disfavoring any party to this Agreement by
virtue of the authorship of any of the provisions of this Agreement.
SECTION 7.8 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and except for the
provisions of Section 1.7 and 4.7, which are intended to be for the benefit of
the persons referred to therein and their beneficiaries (and may be enforced by
such persons as intended third-party beneficiaries), nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 7.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 7.10 Expenses. All costs and expenses incurred in connection
with the transactions contemplated by this Agreement shall be paid by the party
incurring such expenses.
SECTION 7.11 Obligation of Distribution. Whenever this Agreement
requires AP to take any action, such requirement will be deemed to include an
undertaking on the part of Distribution to cause AP to take such action.
-13-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
FINISHMASTER, INC.
("FMST")
By: /s/ Andre B. Lacy
Name: Andre B. Lacy
Title: Chairman of the Board & CEO
LDI AUTOPAINTS, INC. ("AP")
By: /s/ Andre B. Lacy
Name: Andre B. Lacy
Title: Chairman of the Board & CEO
LACY DISTRIBUTION, INC.
("Distribution")
By: /s/ Andre B. Lacy
Name: Andre B. Lacy
Title: Chairman of the Board & CEO
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
REVOCABLE PROXY
FINISHMASTER, INC.
Annual Meeting of Shareholders
May 28, 1998
The undersigned hereby appoints Andre B. Lacy and Thomas U. Young, with
full powers of substitution, to act as attorneys and proxies for the undersigned
to vote all shares of capital stock of FinishMaster, Inc. (the "Company") which
the undersigned is entitled to vote at the Annual Meeting of Shareholders to be
held at University Place Conference Center & Hotel, 850 West Michigan Street,
Indianapolis, Indiana, on Thursday, May 28, 1998, at 10:00 A.M., local time, and
at any and all adjournments thereof, as follows:
1. The election as directors of all nominees listed below,
except as marked to the contrary [ ] FOR [ ] VOTE [ ] WITHHELD
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name on the list below:
Andre B. Lacy Thomas U. Young Margot L. Eccles
William J. Fennessy Walter S. Wiseman Peter L. Frechette Michael L. Smith
(each for a one year term expiring at the next annual meeting)
2. Ratification of the appointment of Coopers & Lybrand, LLP as auditors
for the year ending December 31, 1998.
|_| FOR |_| AGAINST [ ] ABSTAIN
3. Approval of the acquisition of LDI AutoPaints, Inc. pursuant to an
Agreement and Plan of Merger dated as of February 16, 1998 which provides
that LDI AutoPaints, Inc. will merge with and into the Company.
|_| FOR |_| AGAINST [ ] ABSTAIN
4. Approval of the amendment of the Company's Articles of Incorporation to
increase the number of authorized shares of common stock, without par
value, from 10,000,000 to 25,000,000 shares.
|_| FOR |_| AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" each of the listed propositions.
<PAGE>
This Proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from the Company, prior to the
execution of this proxy, of notice of the meeting, a proxy statement and an
Annual Report to Shareholders.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED. IF ANY OTHER
BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED
IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF
DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
Date __________________________, 1998
--------------------------------------
Print Name of Shareholder
--------------------------------------
Signature of Shareholder
--------------------------------------
Print Name of Shareholder
--------------------------------------
Signature of Shareholder
Please sign as your name appears on
the envelope in which this card was
mailed. When signing as attorney,
executor, administrator, trustee or
guardian, please give your full title.
If shares are held jointly, each
holder should sign.
<PAGE>
[Information incorporated by reference from the Annual Report to Shareholders is
filed in electronic format only pursuant to Note D.4. to Schedule 14A]
MARKET PRICE AND DIVIDEND INFORMATION
- -------------------------------------------------------------------------------
FinishMaster's common stock trades on The NASDAQ stock market under the symbol
FMST. The number of beneficial owners of FinishMaster's common stock at December
31, 1997 was approximately 588.
The range of high and low sales prices reported by NASDAQ for the last eight
quarters were:
YEAR QUARTER ENDED HIGH LOW
1996 March 31 15 9-1/2
1996 June 30 15-1/4 9-9/16
1996 September 30 11-5/8 8-1/4
1996 December 31 9-3/8 6-1/2
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 January 1-March 27 10-1/2 8
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.
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the year ended
December 31, 1997, the nine month period ended December 31, 1996 and three years
ended March 31,1996, 1995 and 1994 are derived from the Company's audited
consolidated financial statements. The financial data should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto, which are included elsewhere herein, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended December Ended December
31, 31, Year Ended March 31,
1997 (2) 1996 (1) 1996 1995 1994
---------------- ----------------- ---------------- ----------------- -----------------
(in thousands, except per share data)
Statements of Operations Data
<S> <C> <C> <C> <C> <C>
Net sales $130,175 $ 95,822 $107,511 $ 79,382 $ 64,693
Gross profit 47,107 33,891 38,012 28,048 22,068
Income from operations 3,832 2,566 5,073 5,394 3,710
Net income $ 656 $ 660 $ 2,649 $ 3,462 $ 2,145
======== ======== ======== ======== ========
Net income per share - Basic $ 0.11 $ 0.11 $ 0.44 $ 0.58 $ 0.48
======== ======== ======== ======== ========
Diluted $ 0.11 $ 0.11 $ 0.44 $ 0.58 $ 0.48
======== ======== ======== ======== ========
Weighted average shares outstanding 5,994 6,000 6,000 6,000 4,472
</TABLE>
(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 year ended December 31, 1997 are affected
by the acquisition of Thompson, PBE, Inc. on November 21, 1997. The
results of Thompson for the month of December, 1997 are included in the
December 31, 1997 amounts. For further explanation of the operating
effect of the Thompson acquisition, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at Item 7
for the year ended December 31, 1997.
<TABLE>
<CAPTION>
December 31, March 31,
1997 1996 1996 1995 1994
---------------- --------------- --------------- --------------- -----------------
(1)
(in thousands)
Balance Sheet Data
<S> <C> <C> <C> <C> <C>
Working capital $ 42,093 $ 22,819 $ 25,036 $ 17,763 $ 21,734
Total assets 215,418 66,477 66,772 46,442 39,287
Long-term debt 142,140 21,970 23,248 7,208 3,967
Stockholders' equity 32,932 32,326 31,665 28,956 25,554
</TABLE>
(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 year ended December 31, 1997 are affected
by the acquisition of Thompson, PBE, Inc. on November 21, 1997. The
results of Thompson for the month of December, 1997 are included in the
December 31, 1997 amounts. For further explanation of the operating
effect of the Thompson acquisition, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at Item 7
for the year ended December 31, 1997.
Acquisition Data
Acquisitions made by FinishMaster have been accounted for as purchases and
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair values at the dates of acquisition. Operating results of these
acquired organizations are included in FinishMaster's consolidated financial
statements from the respective dates of purchase. Details of these acquisitions
are contained in the notes to the consolidated financial statements. The
Thompson, PBE, Inc. 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
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 143 sales outlets and
three distribution centers located in 22 states. The Company has approximately
20,000 customers to which it provides a comprehensive selection of brand name
products supplied by E.I. DuPont de Nemours & Co. ("DuPont"), PPG Industries,
Inc. ("PPG"), BASF Corporation ("BASF") and Minnesota Mining & Manufacturing
Co., Inc. ("3M") 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 is the leading consolidator in the automotive refinishing
distribution industry, having successfully completed approximately 25
acquisitions over the past seven years, ranging in size from $0.3 million
fill-in acquisitions to the acquisition of Thompson PBE, Inc. (the "Thompson
acquisition"). On November 21, 1997, the Company acquired substantially all
outstanding shares of common stock of Thompson PBE, Inc., a Delaware
corporation, for $8.00 per share, or an aggregate of approximately $73,471,000,
including acquisition costs. In addition to the cash purchase price, the Company
refinanced approximately $34,474,000 of Thompson's outstanding indebtedness at
the date of purchase. The Thompson acquisition, significantly expanded the
Company's geographic presence in the Southeastern and Western United States. The
Company's operations are currently organized into three divisions: Southeastern
Division, Western Division, and Central/Northeastern Division. The Company
intends to continue its strategy of expanding through additional acquisitions.
As part of the integration of Thompson PBE and FinishMaster, the Company is
planning to consolidate and upgrade its store and corporate computer systems
over the next two years. Current estimates for this upgrade amount to
approximately $3.5 million.
Effective March 1, 1998 the Company moved its corporate offices to 54 Monument
Circle, Indianapolis, IN 46204. Relocating to the new headquarters will be
executive management including the President and Chief Operating Officer,
Purchasing, Management Information Systems, Human Resources, Operations and
Finance Executives, as well as the Accounting department.
Computer memory was very expensive on early mainframe computers, therefore, some
computer programs used only the final two digits for the year in the date field
and assumed that the first two digits were "19." As a result, some computer
applications may be unable to interpret the change from year 1999 to year 2000.
The Company has implemented a detailed plan to ensure Year 2000 compliance. The
Company contemplates working closely with its major suppliers and customers in
their Year 2000 compliance efforts. FinishMaster, like most organizations, has
not completed the Year 2000 Compliance process but does not believe that the
cost of such process will be material or that there is a material uncertainty
regarding its ability to complete said process by Year 2000. The Company has in
place a detailed testing and correction plan which would provide for a smooth
transition into 2000. The focus is to confirm that the supply chain, from
manufacturer to FinishMaster to customer, is not broken due to computer problems
at the change of the century. In addition, the Company has written verification
of Year 2000 compliance from all its hardware, software and suppliers with which
it has data processing relationships.
The Company changed its fiscal year-end from March 31 to December 31, effective
for the period ending December 31, 1996.
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain items from the
Company's Statement of Operations and the corresponding calculations as a
percentage of net sales.
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended
12/31/96 12/31/95
Year Ended 12/31/97 (unaudited) (1) (unaudited) (1)
$ % of NS $ % of NS $ % of NS
------------------------ -------------------------- ---------------------
NET SALES $130,175 100.0% $125,795 100.0% $ 99,235 100.0%
COST OF SALES 83,068 63.8% 81,591 64.9% 63,568 64.1%
------------------------ -------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
GROSS PROFIT 47,107 36.2% 44,204 35.1% 35,667 35.9%
EXPENSES:
Operating 20,568 15.8% 20,295 16.1% 14,676 14.8%
Selling, general and administrative 17,982 13.8% 17,427 13.8% 13,381 13.5%
Depreciation 1,435 1.1% 974 0.8% 559 0.5%
Amortization of intangible assets 3,290 2.6% 2,487 2.0% 1,284 1.3%
------------------------ -------------------------- ---------------------
43,275 33.3% 41,183 32.7% 29,900 30.1%
------------------------ -------------------------- ---------------------
INCOME FROM OPERATIONS 3,832 2.9% 3,021 2.4% 5,767 5.8%
OTHER INCOME (EXPENSE)
Investment income 128 0.1% 99 0.1% 261 0.3%
Interest expense (2,789) (2.1%) (1,713) (1.4%) (687) (0.7%)
------------------------ -------------------------- ---------------------
(2,661) (2.0%) (1,614) (1.3%) (426) (0.4%)
------------------------ -------------------------- ---------------------
INCOME BEFORE INCOME TAXES 1,171 0.9% 1,407 1.1% 5,341 5.4%
Income tax expense 515 0.4% 745 0.6% 1,871 1.9%
------------------------ -------------------------- ---------------------
NET INCOME $ 656 0.5% $ 662 0.5% $ 3,470 3.5%
======================== ========================== =====================
NET INCOME PER SHARE - BASIC $ 0.11 $ 0.11 $ 0.58
============ ========== ========
- DILUTED $ 0.11 $ 0.11 $ 0.58
============ ========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING
5,994 6,000 6,000
============ ========= ========
</TABLE>
(1) The Company changed its fiscal year-end from March 31 to
December 31, effective for the period ended December 31, 1996.
Year ended December 31, 1997 versus Twelve months ended December 31, 1996
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
year ended December 31, 1997 are presented with the comparable unaudited amounts
for the twelve months ended December 31, 1996 and 1995. Management believes that
for purposes of management's discussion and analysis the comparison between the
twelve month periods provides a more meaningful understanding of the Company's
performance. The results of operations for the fiscal year ended December 31,
1997 include the results of operations for Thompson from December 1, 1997 to
December 31, 1997. The results of operations for the period from November 21,
1997, the date of the acquisition, to November 30, 1997 is not significant.
Net Sales. Net sales for the year ended December 31, 1997 increased by $4.4
million or 3.5% to $130.2 million from $125.8 million for the same period in
1996. 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 outlet sales. Same outlet sales declined primarily due to a
slowdown in the van conversion industry, the loss of certain low margin business
resulting from small market share, suppliers discounting and offering large
incentives in certain markets to increase market share and flat industry market
conditions.
Gross Profit. Gross profit for the year ended December 31, 1997 increased to
$47.1 million from $44.2 million for the same period in 1996. Gross profit as a
percentage of sales increased to 36.2% for the year ended December 31, 1997 from
35.1% for the same period in 1996. The increase in gross profit percentage is
the result of participation in suppliers' rebate and incentive programs and
optimizing early payment discounts from suppliers.
Operating Expenses. Operating expenses for the year ended December 31, 1997
increased by $0.3 million to $20.6 million from $20.3 million for the same
period in the prior year. Operating expenses as a percent of sales decreased to
15.8% for the year ended December 31, 1997 compared to 16.1% for the same period
in 1996. Operating expenses consist of wages, building and vehicle costs for the
outlets and the distribution centers. The decrease in operating expenses as a
percentage of sales is the result of the Company's profit improvement
activities, including, but not limited to, staffing reductions and streamlining
sales outlet and distribution activities, which reduced operating expenses by
approximately $2.4 million. The profit improvements of $2.4 million were offset
by Thompson's operating expenses of $2.3 million for the month of December and
other acquisitions of $0.4 million for the year.
Selling, General, and Administrative Expenses. (SG&A) SG&A expenses for the year
ended December 31, 1997 increased by $0.6 million to $18.0 million from $17.4
million for the same period in the prior year. SG&A decreased as a percentage of
sales to 13.8% for the year ended December 31, 1997 compared to 13.9% for the
same period for the year ended December 1996. SG&A costs for the year ended
December 31, 1997 were reduced approximately $2.5 million over the same period
in the prior year as the result of the Company's cost reduction activities,
including head count reductions, professional fees, travel and entertainment,
and advertising. The cost reduction of $2.5 million was offset by Thompson's
SG&A costs for the month of December of $2.2 million, selling costs of other
acquisitions of $0.3 million and one time costs related to the integration of
Thompson and future acquisitions of $0.6 million. General and administrative
expenses consist of corporate support staff and expenses for commission, wages,
and expenses supporting customer sales activity.
Depreciation and Amortization of Intangible Assets. Depreciation expenses for
the year ended December 31, 1997 increased by $0.5 million over the same period
in the prior year. Depreciation and amortization consists primarily of
depreciation expenses related to the corporate distribution center and store
locations and amortization of goodwill and non-compete costs related to
acquisitions. The increase is attributable to $0.2 million of Thompson's
depreciation for the month of December. In addition, $0.3 million is from
depreciable assets acquired to improve operating efficiencies as well as a full
year's depreciation on assets from the prior year's acquisitions. Amortization
of intangible assets increased by $0.8 million for the year ended December 31,
1997 over the same period of the prior year. The increase is attributable to
$0.3 million of goodwill amortization for the Thompson acquisition and $0.5
million of additional acquired intangibles.
Interest Expense. Interest expense increased $1.1 million for the year ended
December 31, 1997 over the same period in the prior year. Interest expense
primarily includes interest on mortgages and notes payable to former owners of
acquired businesses as well as interest on the Company's credit facilities. The
increase in interest expense was the result of interest on debt incurred to
finance the Thompson transaction. The Thompson transaction occurred November 21,
1997 and the total acquisition price of $73.5 million was funded through
borrowings.
Provision for Income Tax. The Company's effective tax rate for the for the year
ended December 31, 1997 was 44% compared to 53% for the twelve months ended
December 31, 1996. This rate varied from the Company's statutory tax rate of 34%
primarily due to state taxes along with certain expenses which are not
deductible for tax purposes.
Twelve months ended December 31, 1996 versus Twelve months ended December 31,
1995
For purposes of management's discussion and analysis, the unaudited amounts for
the twelve months ended December 31, 1996 are presented with the comparable
unaudited amounts for the twelve months ended December 31, 1995.
Net Sales. Net sales for the twelve months ended December 31, 1996 were $125.8
million, an increase of approximately 26.8% compared to $99.2 million for the
twelve months ended December 31, 1995. The sales increase resulted from sales
generated by acquisitions in Maryland and Virginia in the twelve months ended
December 31, 1996. In addition, acquisitions in Delaware, Michigan, New Jersey,
Oklahoma, Pennsylvania, and Texas in 1995 contributed sales to the entire twelve
months ended December 31, 1996.
Gross Profit. Gross profit for the twelve months ended December 31, 1996 was
$44.2 million compared to $35.7 million for the twelve months ended December 31,
1995 and as a percentage of net sales decreased to 35.1% from 35.9%. Gross
profit percentage declined as a percentage of net sales as competitive pricing
pressures increased in the twelve months ended December 31, 1996 as paint
manufacturers intensified efforts to gain market share.
Operating Expenses. Operating expenses for the twelve months ended December 31,
1996 were $20.3 million compared to $14.7 million for the twelve months ended
December 31, 1995. Operating expenses as a percentage of net sales increased to
16.1% for the twelve months ended December 31, 1996 compared to 14.8% for the
twelve months ended December 31, 1995. Operating expenses consist of wages,
building and vehicle costs for the outlets and the distribution centers. The
increase as a percentage of net sales resulted from higher operating costs of
recent acquisitions along with one-time expenses related to consolidating and
relocating several facilities in 1996. Efficiencies gained from sales outlet
consolidations in the Southwestern Region has enabled the Company to close its
Texas distribution center during the first quarter of 1997. Certain expenses
related to the closing of the Texas distribution center affected the twelve
months ended December 31, 1996. The additional expense increase was partially
offset by the Company's programs to reduce costs.
Selling, General and Administrative. SG&A expenses for the twelve months ended
December 31, 1996 were $17.4 million compared to $13.4 million for the twelve
months ended December 31, 1995. SG&A expenses as a percentage of net sales
increased to 13.8% for the twelve months ended December 31, 1996 compared to
13.5% for the twelve months ended December 31, 1995. General and administrative
expenses consist of corporate support staff and expenses for commission, wages,
and expenses supporting customer sales activity.
Depreciation and Amortization. Depreciation and amortization for the twelve
month period was $3.5 million compared to $1.8 million for the twelve months
ended December 31, 1995. Depreciation and amortization as a percentage of net
sales increased to 2.8% for the twelve months ended December 31, 1996 compared
to 1.8% for the twelve months ended December 31, 1995. Depreciation and
amortization consist primarily of depreciation expenses related to the Michigan
distribution center and sales outlets and amortization of goodwill and costs of
non-competition agreements related to acquisitions. The increase results from
amortization of intangibles and depreciation of fixed assets incurred in
connection with the Company's acquisitions in Virginia and Maryland during the
current period and a full year's amortization and depreciation for prior year's
acquisitions along with revisions, in 1996, to the estimated lives of certain
intangibles.
Interest Expense. Interest expense for the twelve months ended December 31, 1996
was $1.7 million compared to $0.7 million for the twelve months ended December
31, 1995. Interest expense primarily includes interest on mortgages and notes
payable to former owners of acquired businesses as well as interest on the
Company's line of credit. The increase was the result of interest incurred in
connection with seller financing for current year acquisitions and the increased
use of the Company's line of credit to support acquisitions and working capital
requirements.
Provision for Income Tax. The Company's effective tax rate for the twelve months
ended December 31, 1996 was 53% compared to 40% for the twelve months ended
December 31, 1995. This rate varied from the Company's statutory tax rate of 34%
primarily due to state taxes along with certain expenses which are not
deductible for tax purposes.
<PAGE>
Quarterly Information
The following table sets forth consolidated statements of operations data for
each of the eight quarters ended December 31, 1997. The unaudited quarterly
information has been prepared on the same basis as the annual information and,
in management's opinion, includes all adjustments, consisting of only normal
recurring entries, necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarterly Results for the Periods Ended
December 31, 1997 December 31, 1996
-------------------------------------------- ------------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97(3) 3/31/96 6/30/96 9/30/96 12/31/96
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $29,239 $31,034 $30,696 $39,206 $29,973 $33,149 $33,399 $29,274
Cost of sales 18,610 19,462 19,539 25,457 19,660 21,222 21,584 19,125
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 10,629 11,572 11,157 13,749 10,313 11,927 11,815 10,149
Operating expenses 4,667 4,593 4,739 6,569 4,982 5,062 5,182 5,069
Selling, general and
administration 3,801 3,942 3,903 6,336 4,235 4,425 4,062 4,705
Depreciation and amortization(1) 1,017 1,026 1,057 1,625 641 705 769 1,346
-------- -------- -------- -------- -------- -------- -------- --------
Income(loss) from operations 1,144 2,011 1,458 (781) 455 1,735 1,802 (971)
Investment income, net 6 26 35 61 22 29 12 36
Interest expense (494) (437) (345) (1,513) (340) (478) (509) (386)
-------- -------- -------- -------- -------- -------- -------- --------
Income(loss) before income taxes 656 1,600 1,148 (2,233) 137 1,286 1,305 (1,321)
Income tax expense(benefit) (1) 250 595 436 (766) 135 587 478 (455)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 406 $ 1,005 $ 712 $(1,467) $ 2 $ 699 $ 827 $ (866)
======== ========= ========= ========== ======= ======== ========= =========
Net income (loss) per share - Basic (2) $ 0.07 $ 0.17 $ 0.12 $ (0.24) $ 0.00 $ 0.12 $ 0.14 $ (0.14)
======== ========= ========= ========= ========= ======== ========= ==========
- Diluted (2) $ 0.07 $ 0.17 $ 0.12 $ (0.24) $ 0.00 $ 0.12 $ 0.14 $ (0.14)
======== ========= ========= ========= ========= ======== ========= ==========
</TABLE>
(1) The increase in depreciation and amortization results from amortization
of intangibles and depreciation of fixed assets incurred in connection
with the Company's acquisitions in the periods ended December 31, 1997
and 1996 and a full year's amortization and depreciation for prior
year's acquisitions along with revisions to the estimated lives of
certain intangibles in the quarter ending December 31, 1996.
(2) The sum of the quarterly net income (loss) per share amounts for the
periods presented may not equal the annual amount reported because net
income per share is computed independently for each quarter.
(3) The operating results for the quarter ended December 31, 1997 are
affected by the Thompson acquisition, which was completed on November
21, 1997. The results of Thompson for the month of December, 1997 are
included in the December 31, 1997 amounts. For further explanation of
the operating effect of the Thompson acquisition, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for the year ended December 31, 1997.
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, outlet sales have slowed in the late fall and winter of each year
largely due to inclement weather and the reduced number of business days during
the holiday season. As a result, financial performance for the Company's outlets
is generally lower during the December and March quarters compared to the June
and September quarters. In addition, the timing of acquisitions may cause
substantial fluctuations of operating results from quarter to quarter. The
Company takes advantage of periodic special incentive programs available from
suppliers which extend the due date of purchases beyond terms normally available
with large volume purchases. The timing of these programs can contribute to
fluctuations in the Company's quarterly cash flow. Although the Company
continues to investigate strategies to smooth the seasonal pattern of its
quarterly results of operations, there can be no assurance that the Company's
net sales, results of operations and cash flow will not continue to display
these seasonal patterns.
<PAGE>
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. In addition, markets in the van conversion
industry may increase the cyclical nature of the Company's operations. Sales in
this market accounted for approximately 5-10% of sales for the periods reported.
There is no assurance that the Company will not be materially adversely affected
in the future by cyclical downturns in its markets. The Company's financial
performance is also dependent on its ability to acquire businesses and
profitably integrate them into their operations.
Quantitative and Qualitative Disclosure About Market Risk
The Company considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity based instruments at
December 31, 1997. A review of the Company's other financial instruments and
risk exposures at December 31, 1997 indicated that the Company had exposure to
interest rate risk. At December 31, 1997, the Company concluded that near-term
changes to interest rates should not materially affect the Company's financial
position, results of operations or cash flows.
Other discussion regarding the Company's business risks is presented in Item 1
"Business" on this Form 10-K.
Liquidity and Capital Resources
The consolidated financial statements contain audited statements of cash flows
for the year ended December 31, 1997, the nine months ended December 31, 1996
and the year ended March 31, 1996. The following table shows unaudited condensed
consolidated statements of cash flows for the three comparable twelve month
periods.
<TABLE>
<CAPTION>
Year Ended Twelve Months Ended Twelve Months Ended
December 31, 1997 December 31, 1996 December 31, 1995
(unaudited) (unaudited)
--------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Net cash provided by (used in):
Operating activities $ 1,257 $ 3,280 $ (1,875)
Investing activities (74,846) (6,135) (5,085)
Financing activities 73,653 2,617 7,084
-------- -------- --------
Increase (decrease) in cash 64 (238) 124
Cash at beginning of period 300 1,647 2,138
-------- -------- --------
Cash at end of period $ 364 $ 1,409 $ 2,262
======== ======== ========
</TABLE>
The Company's liquidity and capital resources have been significantly influenced
by acquisition activity. The Company historically has financed acquisitions
through a combination of seller financing, internally generated cash flow and
unsecured bank borrowings under the Company's loan facilities. In addition, net
proceeds of $16.2 million from a February, 1994 public stock offering were used
to accelerate the Company's acquisition program.
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 also refinanced $34,474,000 of Thompson
indebtedness. The Company funded the acquisition and refinanced Thompson's
indebtedness with a combination of bank financing and subordinated borrowings
from LDI.
Cash provided by operating activities was $1.3 million for the year ended
December 31,1997, compared to $3.3 million for the comparable period of the
prior year. The decrease in cash provided by operations is primarily
attributable to cash used to take advantage of early payment discounts available
from suppliers and for partial payment of the past due Thompson accounts
payable. In addition, cash was used for large inventory buys at year end in
advance of price increases.
Cash of $3.4 million was provided by accounts receivable reductions for the year
ended December 31, 1997 compared to $1.0 million in the same period of the prior
year. This was a result of increased collection efforts and improvements in days
sales outstanding.
The Company used cash of $1.5 million in the year ended December 31, 1997 and
$0.4 million in the same period in the prior year as the result of large
inventory buys from major suppliers in advance of price increases. Inventory at
December 31, 1997 included approximately $5.0 million attributable to large
year-end buys.
Cash used of $6.4 million for accounts payable and other current liabilities
increased $5.3 million over the same period in the prior year. The increase in
cash used was a result of increased participation in major supplier discount
programs and the payment of Thompson's past due accounts payable.
The Company's investing activities used cash of $74.1 million to acquire three
businesses, including Thompson, in the year ended December 31, 1997. This
compares to $5.3 million used to acquire six businesses in the same period in
the prior year. In addition the Company had capital expenditures of $0.7 million
and $0.6 million in the years ended December 31, 1997 and 1996, respectively.
Capital expenditures were primarily for sales outlet and warehouse improvements
and equipment. The Company uses operating leases to finance its computer system
and delivery vehicles.
The Company's financing activities provided cash of $73.7 million for the year
ended December 31, 1997 compared to $2.6 million in the same period in the prior
year. For the year ended December 31, 1997 cash was provided from borrowings to
finance the Thompson acquisition of $73.8 million and $34.4 million to refinance
Thompson's debt. In addition, $5.6 million was borrowed on the working capital
line to reduce Thompson's past due accounts payable and $4.1 million was used
for repayment of long term seller financing on other current and prior
acquisitions. For the year ended December 31, 1996 cash provided by financing
activities of $2.6 million was used for working capital and acquisition
requirements.
The Company had working capital of approximately $42.0 million at December 31,
1997. In addition to working capital, the Company had term credit and revolving
credit facilities totaling $100 million, and senior subordinated debt of $30
million. At December 31, 1997 the Company had available $8.5 million of unused
revolving credit.
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.
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 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.
Forward-looking Statements and Associated Risks
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. Similar
forward-looking statements may be made by the Company 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
regulation, 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.
<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:
Net borrowings (repayments) under note payable, bank (1,841) 1,841 --
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. 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, the Company received certain services from Maxco. These
services included central processing of all insurance, including employee
benefit coverages, general and automobile liability, property and casualty. All
expenses directly attributable to FinishMaster were allocated by Maxco to
FinishMaster.
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
(1) a reduction in employment and rental expense to reflect closure and
consolidation of certain facilities, (2) amortization of goodwill and debt
issuance costs, and (3) an increase in interest expense attributable to
financing of 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 Year Ended
December December March 31,
31, 1997 31, 1996
1996
--------------------- ------------------------ -----------------------
(in thousands except per share data)
<S> <C> <C> <C>
Net sales $ 317,594 $ 245,337 $ 115,104
Net income (loss) (5,305) (2,139) 2,737
Net income (loss) per common share - Basic $ (0.89) $ (0.36) $ 0.46
- Diluted $ (0.89) $ (0.36) $ 0.46
Weighted average number of common shares 5,994 6,000 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.
