================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File Number 0-23222
FINISHMASTER, INC.
(Exact Name of Registrant as Specified in its Charter)
Indiana 38-2252096
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
54 Monument Circle, Suite 700
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (317) 237-3678
Indicate by check mark whether the registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding twelve months and (2) has
been subject to the filing requirements for at least the past 90 days.
Yes X No
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 14, 1998
----- ------------------------------
Common Stock 7,535,056 shares
================================================================================
<PAGE>
PART I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
FINISHMASTER, INC.
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
-------- --------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash $ 2,188 $ 364
Accounts receivable, net of allowance for doubtful
accounts of $2,163 and $2,247, respectively 31,031 28,744
Inventory 49,727 53,442
Prepaid expenses and other current assets 6,938 7,894
-------- --------
TOTAL CURRENT ASSETS 89,884 90,444
PROPERTY AND EQUIPMENT, NET 10,811 10,296
OTHER ASSETS:
Intangible assets, net 115,806 110,870
Other 4,135 3,808
119,941 114,678
-------- --------
$220,636 $215,418
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 21,871 $ 28,274
Accrued expenses and other current liabilities 15,412 12,072
Current maturities of long-term obligations 8,575 8,005
-------- --------
TOTAL CURRENT LIABILITIES 45,858 48,351
LONG-TERM OBLIGATIONS, net of current maturities 126,198 134,135
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, 1,000,000 shares authorized;
no shares issued or outstanding
Common stock, $1 stated value, 25,000,000 shares authorized,
7,535,056 and
5,992,640 shares issued
and outstanding, respectively 7,535 5,993
Additional paid-in capital 26,873 14,466
Retained earnings 14,172 12,473
-------- --------
48,580 32,932
$220,636 $215,418
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FINISHMASTER, INC.
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
------------------------- ---------------------
<S> <C> <C> <C> <C>
NET SALES $ 76,758 $ 31,034 $152,782 $ 60,273
COST OF SALES 49,731 19,462 98,810 38,072
-------- --------- -------- --------
GROSS PROFIT 27,027 11,572 53,972 22,201
EXPENSES
Operating 11,529 4,593 23,243 9,258
Selling, general and administrative 9,240 3,942 18,178 7,744
Depreciation 580 284 1,500 562
Amortization of intangible assets 1,602 742 3,176 1,482
-------- --------- -------- --------
TOTAL 22,951 9,561 46,097 19,046
-------- --------- -------- --------
INCOME FROM OPERATIONS 4,076 2,011 7,875 3,155
Interest expense, net 2,747 411 5,539 899
-------- --------- -------- --------
INCOME BEFORE INCOME TAXES 1,329 1,600 2,336 2,256
Income tax expense 630 595 1,109 846
-------- --------- -------- --------
NET INCOME $ 699 $ 1,005 $ 1,227 $ 1,410
======== ======== ======== ========
NET INCOME PER SHARE - BASIC $ .12 $ . 17 $ . 21 $ . 24
======== ======== ======== ========
NET INCOME PER SHARE - DILUTED $ .12 $ . 17 $ . 21 $ . 24
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 5,993 5,993 5,993 5,993
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
FinishMaster, Inc
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
-------- --------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 1,227 $ 1,410
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,676 2,044
Gain on sale of fixed assets (40) --
Changes in operating assets and liabilities:
Accounts receivable (62) (500)
Inventories 8,104 4,341
Prepaid expenses and other 1,272 420
Accounts payable and other current liabilities (5,531) (3,309)
-------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,646 4,406
INVESTING ACTIVITIES
Business acquisitions -- (193)
Proceeds from disposal of assets 180 --
Purchases of property and equipment (1,026) (390)
Other (192) (175)
-------- --------
NET CASH USED IN
INVESTING ACTIVITIES (1,038) (758)
FINANCING ACTIVITIES
Net repayments under note payable, bank -- (1,313)
Proceeds from long term obligations 1,163 --
Repayment of long term obligations (9,733) (2,188)
Purchase of common stock -- (51)
Cash acquired through merger of LDI AutoPaints 1,786 --
-------- --------
NET CASH USED IN
FINANCING ACTIVITIES (6,784) (3,552)
-------- --------
INCREASE IN CASH 1,824 96
CASH AT BEGINNING OF PERIOD 364 300
-------- --------
CASH AT END OF PERIOD $ 2,188 $ 396
======== ========
SUPPLEMENTAL DISCLOSURES Cash paid for:
Income Taxes $ 0
Interest $ 4,829
========
NON CASH ACTIVITIES
Acquisition of LDI AutoPaints:
Assets acquired $ 17,666
Liabilities assumed (3,244)
--------
Equity Purchased $ 14,422
Less: Cash acquired in transaction (1,786)
--------
Net assets acquired, excluding cash $ 12,636
========
Additional debt incurred with prior business acquisitions $ 425
========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FinishMaster, Inc.
June 30, 1998
NOTE 1--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 June 30,
1998, the Company operated 153 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.
NOTE 2--Basis of Presentation
The condensed consolidated financial statements include the accounts of
FinishMaster, Inc., and Refinishers Warehouse, Inc., as well as Thompson
PBE, Inc., and LDI AutoPaints, Inc. as of the dates of the respective
acquisitions. All significant intercompany balances and transactions have
been eliminated in consolidation. These condensed consolidated financial
statements are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation
of the results of the interim periods covered have been included. For
further information, refer to the consolidated financial statements and
notes thereto included in FinishMaster's annual report on Form 10K for the
year ended December 31, 1997. The results of operations for the interim
periods presented are not necessarily indicative of the results for the
full year. Certain reclassifications have been reflected in prior year
amounts to conform with the presentation of corresponding amounts in the
current period.
NOTE 3--Acquisition
On June 30, 1998, the Company completed the acquisition of 100% of the
common stock of LDI AutoPaints, Inc., from its parent, Lacy Distribution
Inc., in consideration for the issuance of 1,542,416 shares of common stock
of Finishmaster Inc. As this is a transaction within a controlled group,
the acquisition of LDI AutoPaints has been accounted for using its
historical cost basis, and results in no recognition of goodwill. Equity
securities that were issued to the parent company of LDI AutoPaints, Inc.,
in exchange for the net assets of LDI AutoPaints, Inc., are recorded as of
the effective date of the transaction.
NOTE 4--Income Taxes
The effective tax rate for the three months ended June 30, 1998 is 47.4%
compared to 37.5% for the three months ended June 30, 1997 due to the
non-deductible nature of certain expenses, primarily the amortization of
goodwill associated with the acquisition of Thompson PBE, Inc.
NOTE 5--Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share data):
Six Months Ended June 30
1998 1997
---- ----
Numerator:
NET INCOME $1,227 $1,410
Denominator:
BASIC-WEIGHTED AVERAGE SHARES 5,993 5,993
Effect of dilutive securities:
EMPLOYEE STOCK OPTIONS -- --
DILUTED-WEIGHTED AVERAGE SHARES 5,993 5,993
Basic net income per share .21 .24
Diluted net income per share .21 .24
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 six months ended June 30, 1998 and 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINISHMASTER
JUNE 30, 1998
RESULTS OF OPERATIONS
The following table sets forth FinishMaster's historical results in total and as
a percentage of net sales.
FINISHMASTER, INC.
HISTORICAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
6/30/98 6/30/97 6/30/98 6/30/97
(In thousands, except per share data) (In thousands, except per share data)
------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 76,758 100.0% $ 31,034 100.0% $152,782 100.0% $ 60,273 100.0%
COST OF SALES 49,731 64.8% 19,462 62.7% 98,810 64.7% 38,072 63.2%
-------- ----- -------- ----- -------- ---- -------- ----
GROSS MARGIN 27,027 35.2% 11,572 37.3% 53,972 35.3% 22,201 36.8%
EXPENSES
Operating 11,529 15.0% 4,593 14.8% 23,243 15.2% 9,258 15.4%
Selling, general and administrative 9,240 12.0% 3,942 12.7% 18,178 11.9% 7,744 12.8%
Depreciation 580 0.8% 284 0.9% 1,500 1.0% 562 0.9%
Amortization 1,602 2.1% 742 2.4% 3,176 2.1% 1,482 2.5%
------ ---- -------- ---- -------- ---- -------- ----
TOTAL EXPENSES 22,951 29.9% 9,561 30.8% 46,097 30.2% 19,046 31.6%
------ ---- -------- ---- -------- ---- -------- ----
INCOME FROM OPERATIONS 4,076 5.3% 2,011 6.5% 7,875 5.1% 3,155 5.2%
Interest Expense, net 2,747 3.6% 411 1.3% 5,539 3.6% 899 1.5%
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,329 1.7% 1,600 5.2% 2,336 1.5% 2,256 3.7%
Income tax expense 630 0.8% 595 1.9% 1,109 0.7% 846 1.4%
-------- ---- -------- --- -------- --- -------- ---
NET INCOME $ 699 0.9% $ 1,005 3.3% $ 1,227 0.8% $ 1,410 2.3%
======== ==== ======== === ======== === ======== ===
NET INCOME PER SHARE $ 0.12 0.17 $ 0.21 $ 0.24
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES OF
COMMON STOCK OUTSTANDING 5,993 5,993 5,993 5,993
======== ======== ======== ========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FinishMaster, Inc.
June 30, 1998
HISTORICAL RESULTS OF OPERATIONS
Net sales. Net sales increased from $31.0 million for the three months ended
June 30, 1997 to $76.8 million for the three months ended June 30, 1998. Net
sales increased from $60.3 million for the six months ended June 30, 1997 to
$152.8 million for the six months ended June 30, 1998. The increase in net sales
for the three month and six month periods ended June 30, 1998 is a result of the
inclusion of net sales from Thompson PBE which was acquired in November 1997,
offset by a decline in same outlet sales due to flat market conditions.
<PAGE>
Gross profit. Gross profit increased from $11.6 million to $27.0 million but
decreased as a percentage of net sales from 37.3% to 35.2% for the three month
period ended June 30, 1998 compared to the three month period ended June 30,
1997. For the six month period ended June 30, 1998, compared to the six month
period ended June 30, 1997, gross profit increased from $22.2 million to $54.0
million but decreased as a percentage of net sales from 36.8% to 35.3%. The
increase in gross profit dollars for the three month and six month periods ended
June 30, 1998, is attributable to the additional gross profit resulting from
Thompson's sales. The decrease in gross profit as a percentage of sales for the
three month and six month periods ended June 30, 1998 is a product of managed
inventory reduction programs, resulting in lower inventory purchases and
corresponding lower cash discounts available to the company. In addition, gross
profit for the six month period ended June 30, 1998 decreased due to the sale of
Thompson's higher cost inventories and lower than expected margins in one of
Thompson's acquired regions.
Operating expenses. Operating expenses increased from $4.6 million to $11.5
million for the three month period ending June 30, 1998 compared to the three
month period ending June 30, 1997. For the six month period ended June 30, 1998,
operating expenses increased from $9.3 million to $23.2 million. The increase in
operating expense amounts for the three month and six month periods ended June
30, 1998 is due to the inclusion of operating expenses from Thompson, offset by
synergies resulting from combining the companies. The primary savings from the
combination has been the result of store consolidations. Operating expenses as a
percentage of net sales were 15.4% for the quarter ended March 31, 1998, 15.0%
for the quarter ended June 30, 1998 and 15.2% for the six months ended June 30,
1998; compared to 16.0%, 14.8%, and 15.4% for the same periods in the prior
year. The overall decrease in operating expenses as a percentage of net sales
from the prior year, during a period of decline in same outlet sales, is due to
the company's cost containment measures covering wages, store and distribution
costs. The company has also realized savings by consolidating certain stores.
Operating expenses consist of wages, benefits, building, and vehicle costs for
the sales outlets and the distribution centers.
Selling, general and administrative. Selling, general and administrative
expenses increased from $3.9 million to $9.2 million, but decreased as a
percentage of net sales, from 12.7% to 12.0% for the three month period ending
June 30, 1998 compared to the three month period ending June 30, 1997. For the
six month period ending June 30, 1998, selling, general and administrative
expenses increased from $7.7 million to $18.2 million, but decreased as a
percentage of net sales, from 12.8% to 11.9% compared to the six month period
ending June 30, 1997. The increase in selling, general and administrative
expense amounts for both the three and six month periods ended June 30, 1998 is
due to the inclusion of selling, general and administrative expenses of
Thompson. The decrease in selling, general and administrative expenses as a
percentage of net sales for the three month and six month periods ended June 30,
1998 is due to the consolidation of certain corporate functions including
management and accounting, and the reduction of public company and insurance
costs. Selling expenses include sales commissions, wages, and expenses
supporting customer sales activity. General and administrative expenses consist
of corporate support staff and expenses for marketing, data processing,
accounting, credit, purchasing and human resources.
Depreciation and amortization of intangible assets. Depreciation expense
increased from $0.3 million to $0.6 million for the three month period ended
June 30, 1998 compared to the three month period ended June 30, 1997. For the
six month period ending June 30, 1998, depreciation expense increased from $0.6
million to $1.5 million compared to the six month period ending June 30, 1997.
The increase in depreciation expense amounts for the three and six month periods
ended June 30, 1998, is due to the inclusion of depreciation on Thompson's fixed
assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FinishMaster, Inc.
June 30, 1998
HISTORICAL RESULTS OF OPERATIONS (continued)
Amortization expense increased from $0.7 million to $1.6 million for the three
month period ending June 30, 1998 compared to the three month period ending June
30, 1997. For the six month period ending June 30, 1998 amortization expense
increased from $1.5 million to $3.2 million compared to the six month period
ending June 30, 1997. The increase in amortization expense for the three month
and six month periods ended June 30, 1998 is due to the inclusion of
amortization for Thompson.
Interest expense. Interest expense increased from $0.4 million to $2.7 million
and as a percentage of net sales from 1.3% to 3.6% for the three month period
ending June 30, 1998 compared to the three month period ending June 30, 1997.
For the six month period ending June 30, 1998, interest expense increased from
$0.9 million to $5.5 million and as a percentage of net sales from 1.5% to 3.6%
compared to the same period in the prior year. The increase in interest expense
dollars and as a percentage of net sales is primarily attributable to 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources can be significantly affected by
its acquisition activity. The company historically has financed acquisitions
through a combination of seller financing, internally generated cash flow and
bank borrowings under the company's loan facilities.
The Company had working capital of $44 million at June 30, 1998 compared to
$23.4 million at June 30, 1997. The company had term credit and revolving credit
facilities from banks totaling $100 million. The company also had senior
subordinated debt of $30 million and a $10 million revolving line of credit from
its majority shareholder. At June 30, 1998 the company had available $22.9
million of unused revolving credit.
As a condition of the amended bank credit facility of $100 million, the company
agreed to obtain additional equity of $14 million or such lesser amount as may
be acceptable to the company's bank. The company satisfied this requirement
through the acquisition of LDI AutoPaints.
The company is currently considering other financing arrangements. Should the
company be successful in obtaining alternate financing arrangements on favorable
financing terms, proceeds will be used to retire certain bank term loans, a
portion of outstanding indebtedness 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 June 30, 1998, the unamoritzed debt issue costs were
approximately $1.5 million.
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson PBE, Inc. for $8.00 net 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 the Company's majority shareholder.
On June 30, 1998, the Company acquired LDI AutoPaints, Inc. through a merger
from its majority shareholder for 1,542,416 shares of common stock. LDI
AutoPaints is an aftermarket distributor of automotive paint, coatings and
related supplies located in Florida.
The Company's operating activities generated $9.6 million of cash during the six
months ended June 30, 1998; and $4.4 million in the same period of the prior
year. The increase in cash generated from operating activities is primarily
attributable to additional depreciation and amortization totaling $4.6 million,
a decrease in inventory of approximately $8.1 million, offset in part by a
decrease in accounts payable of approximately $5.5 million. The decrease in
inventory is the result of the normal sell down of major inventory purchases
made prior to December 31, 1997 in anticipation of vendor price increases as
well as Company wide efforts to reduce inventory. Accounts payable declined as
the Company continues to use operating cash flows to take advantage of favorable
cash discount terms and vendor price protection programs which support the
Company's margin enhancement efforts.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FinishMaster, Inc.
June 30, 1998
LIQUIDITY AND CAPITAL RESOURCES (continued)
The Company's investing activities used $1.0 million in the six months ended
June 30, 1998, compared to $0.7 million in the same period of the prior year,
primarily for the purchase of property and equipment including computer systems
and consigned equipment.
The Company's financing activities used cash totaling $6.8 million during the
six months ended June 30, 1998 to repay working capital loans, previously
borrowed to fund major inventory purchases, and to repay long term loans. In the
six months ended June 30, 1997, financing activities used $3.5 million to repay
working capital and long term loans.
The Company believes its cash and other liquid resources, cash flow generated
from operating activities, and the available lines of credit will be sufficient
to support operations and general capital requirements for the next twelve
months.
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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FinishMaster, Inc.
June 30, 1998
PRO FORMA PRESENTATION
The following table sets forth Finishmaster's unaudited pro forma consolidated
results in total and as a percentage of pro forma net sales, as if the
acquisitions of Thompson PBE, which was acquired on November 21, 1997, and LDI
AutoPaints, Inc., which was acquired on June 30, 1998, had occurred as of
January 1, 1997. Management believes that the presentation of management's
discussion and analysis on a pro forma basis provides a meaningful understanding
of the company's performance by better reflecting the effects of its recent
acquisitions. The unaudited pro forma results do not purport to be indicative of
results that would have occurred had the acquisitions been in effect for the
periods presented, nor do they purport to be indicative of the results that will
be obtained in the future.
FINISHMASTER, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
6/30/98 6/30/97 6/30/98 6/30/97
(In thousands, except per share data) (In thousands, except per share data)
------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 82,803 100.0% $ 89,007 100.0% $ 164,546 100.0% $ 175,363 100.0%
COST OF SALES 53,620 64.8% 56,715 63.7% 106,053 64.5% 112,564 64.2%
--------- ----- --------- ----- --------- ----- --------- -----
GROSS MARGIN 29,183 35.2% 32,292 36.3% 58,493 35.5% 62,799 35.8%
--------- ----- --------- ----- --------- ----- --------- -----
EXPENSES
Operating 11,740 14.2% 13,075 14.7% 23,657 14.4% 26,457 15.1%
Selling, general and administrative 10,548 12.7% 11,546 13.0% 20,738 12.6% 23,055 13.1%
Depreciation 697 0.8% 911 1.0% 1,732 1.1% 1,749 1.0%
Amortization 1,862 2.2% 1,844 2.1% 3,696 2.2% 3,659 2.1%
--------- ----- --------- ----- --------- ----- --------- -----
TOTAL EXPENSES 24,847 29.9% 27,376 30.8% 49,823 30.3% 54,920 31.3%
--------- ----- --------- ----- --------- ----- --------- -----
INCOME FROM OPERATIONS 4,336 5.3% 4,916 5.5% 8,670 5.2% 7,879 4.5%
Interest Expense, net 2,760 3.3% 3,257 3.7% 5,568 3.4% 6,828 3.9%
Charge in connection with the sale,
consolidation or closure of certain sites -- 0.0% 3,616 4.1% -- 0.0% 3,616 2.1%
--------- ----- --------- ----- --------- ----- --------- -----
2,760 3.3% 6,873 7.7% 5,568 3.4% 10,444 6.0%
INCOME (LOSS) BEFORE INCOME TAXES 1,576 2.0% (1,957) -2.2% 3,102 1.8% (2,565) -1.5%
Income tax expense 730 0.9% 390 0.4% 1,404 0.9% 366 0.2%
--------- ----- --------- ----- --------- ----- --------- -----
NET INCOME (LOSS) $ 846 1.1% $ (2,347) -2.6% 1,698 0.9% (2,931) -1.7%
========= ===== ========= ===== ========= ===== ========= =====
NET INCOME (LOSS) PER SHARE $ 0.11 $ (0.31) $ 0.23 $ (0.39)
========= ========= ======= ========
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 7,535 7,535 7,535 7,535
========= ========= ======= ========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FinishMaster, Inc.
June 30, 1998
PRO FORMA RESULTS OF OPERATIONS
Net sales. Pro forma net sales decreased from $89.0 million for the three months
ending June 30, 1997 to $82.8 million for the three months ending June 30, 1998.
Pro forma net sales decreased from $175.4 million for the six months ending June
30, 1997 to $164.5 million for the six months ended June 30, 1998. The sales
decrease is a result of soft market conditions, intense competition, and a
decline in same outlet sales due to flat market conditions.
Gross profit. Pro forma gross profit decreased $3.1 million and as a percentage
of pro forma net sales from 36.3% to 35.2% for the three month period ending
June 30, 1998 compared to the three month period ending June 30, 1997. For the
six month period ending June 30, 1998, pro forma gross profit decreased $4.3
million and as a percentage of pro forma net sales from 35.8% to 35.5% for the
six months ending June 30, 1998. The decrease in gross profit dollars for the
three and six month periods ended June 30, 1998 is primarily due to lower pro
forma sales. The decrease in gross profit percentage for the three and six month
periods ended June 30, 1998, is a product of managed inventory reduction
programs, resulting in lower inventory purchases and corresponding lower cash
discounts available to the company. In addition, gross profit for the six month
period ended June 30, 1998 decreased due to the sale of Thompson's higher cost
inventories and lower than expected margins in one of Thompson's acquired
regions.
Operating expenses. Pro forma operating expenses decreased from $13.1 million to
$11.7 million, and as a percentage of pro forma net sales, from 14.7% to 14.2%
for the three month period ending June 30, 1998 compared to the three month
period ending June 30, 1997. For the six month period ending June 30, 1998, pro
forma operating expenses decreased from $26.5 million to $23.7 million, and as a
percentage of pro forma net sales, from 15.1% to 14.4% compared to the six month
period ending June 30, 1997. The decrease in operating expenses and as a
percentage of pro forma net sales for the three month and six month periods
ended June 30, 1998 is due to cost reductions that resulted from combining the
operations of the company and Thompson PBE. The savings primarily result from
the consolidation of certain stores. In addition, the company has been heavily
focused on streamlining sales outlet and distribution activities. Operating
expenses consist of wages, benefits, building, and vehicle costs for the sales
outlets and the distribution center.
Selling, general and administrative. Pro forma selling, general and
administrative expenses decreased from $11.5 million to $10.5 million, and as a
percentage of pro forma net sales, from 13.0% to 12.7% for the three month
period ending June 30, 1998 compared to the three month period ending June 30,
1997. For the six month period ending June 30, 1998, pro forma selling, general
and administrative expenses decreased from $23.1 million to $20.7 million, and
as a percentage of pro forma net sales, from 13.1% to 12.6% compared to the six
month period ending June 30, 1997. The decrease in selling, general and
administrative expenses and as a percentage of pro forma net sales for the three
and six month periods ended June 30, 1998 is due to cost reductions that
resulted from combining the operations of the company and Thompson PBE. The
savings primarily are due to combining corporate management functions resulting
in lower payroll expenses. Furthermore, the company has realized additional
savings through lower professional fees and better insurance rates due to the
increased size of the company. These savings have been partially offset by
one-time non-recurring charges related to the combining of the companies. The
company expects continued improvement in selling, general and administrative
expenses as more functions are consolidated. General and administrative expenses
consist of corporate support staff and expenses for marketing, data processing,
accounting, credit, purchasing and human resources. Selling expenses include
sales commissions, wages, and expenses supporting customer sales activity.
Depreciation and amortization of intangible assets. Pro forma depreciation
expense decreased $0.2 million and as a percentage of pro forma net sales, from
1.0% to 0.8% for the three month period ended June 30, 1998 compared to the
three month period ended June 30, 1997. The decrease in depreciation expense and
as a percentage of pro forma net sales for the three month period ended June 30,
1998 is due to a revaluation of Thompson at acquisition. For the six month
period ending June 30, 1998 pro forma depreciation expense remained constant at
$1.7, but increased as a percentage of pro forma net sales, from 1.0% to 1.1%
compared to the six month period ending June 30, 1997. The increase in
depreciation as a percentage of pro forma net sales for the six month period
ended June 30, 1998 is attributable to lower pro forma sales.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FinishMaster, Inc.
June 30, 1998
PRO FORMA RESULTS OF OPERATIONS (continued)
Pro forma amortization expense increased from $1.8 million to $1.9 million and
as a percentage of pro forma net sales from 2.1% to 2.2% for the three month
period ending June 30, 1998 compared to the three month period ending June 30,
1997. For the six month period ending June 30, 1998, pro forma amortization
expense remained constant at $3.7 million but increased as a percentage of pro
forma net sales, from 2.1% to 2.2% compared to the six month period ending June
30, 1997. The increase in amortization expense as a percentage of pro forma net
sales for the three and six month periods ended June 30, 1998 is attributable to
reduced pro forma net sales.
Interest expense. Pro forma interest expense decreased from $3.3 million to $2.8
million and as a percentage of pro forma net sales from 3.7% to 3.3% for the
three month period ending June 30, 1998 compared to the three month period
ending June 30, 1997. For the six month period ending June 30, 1998, pro forma
interest expense decreased from $6.8 million to $5.6 million and as a percentage
of pro forma net sales from 3.9% to 3.4% compared to the same period in the
prior year. The decrease in pro forma interest expense and as a percentage of
pro forma net sales is due to lower debt levels as the company reduced borrowing
through asset management.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders was held on June 30, 1998.
(b) The following directors were elected at the meeting:
For Withheld
--- --------
Margot L. Eccles 4,416,520 50
William J. Fennessy 4,416,520 50
Peter L. Frechette 4,416,520 50
Andre B. Lacy 4,416,520 50
Michael L. Smith 4,416,520 50
Walter S. Wiseman 4,416,520 50
Thomas U. Young 4,416,520 50
(c) Ratification of Auditors.
For Against Abstain
--------- ----- ---
4,412,770 3,700 100
(e) Approval of the merger of LDI AutoPaints, Inc. with and into the Company.
For Against Abstain
--------- ----- ---
4,416,405 165 0
(f) Approval of the amendment to 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
--------- ----- ---
4,283,626 132,944 0
No other matters were voted upon at the meeting.
Item 5. Other Information and Events
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
The following exhibits, unless otherwise indicated, have been filed as exhibits
to Form S-1 Registration Statement, No. 33-73804, effective date of February 22,
1994, or as exhibits filed by the Registrant, and are hereby incorporated by
reference.
Exhibit No. Description of Document
2.1 Agreement and Plan of Merger, dated as of October 14, 1997,
by and among FinishMaster, Inc., FMST Acquisition
Corporation and Thompson PBE, Inc. (incorporated by
reference to Exhibit (c)(2) of Schedule 14D-1 previously
filed by FMST Acquisition Corporation on October 21, 1997).
2.2 Agreement and Plan of Merger, dated February 16, 1998, by
and among FinishMaster, Inc., LDI AutoPaints, Inc. and Lacy
Distribution, Inc. (previously filed with Form 10-K dated
April 1, 1998)
3.1* Articles of Incorporation of FinishMaster, Inc., an Indiana
corporation, as amended June 30, 1998
3.2 Amended and restated code of bylaws of FinishMaster, Inc.,
an Indiana corporation (previously filed with Form 10-K/A
dated April 14, 1998)
10.1* FinishMaster, Inc. Stock Option Plan as amended June 30,
1998
10.2 Agreement dated as of March 1, 1998 between FinishMaster,
Inc. and LDI AutoPaints, Inc. respecting certain management
and administrative functions (previously filed with Form
10-K dated April 1, 1998)
21 Subsidiaries of the Registrant (previously filed with Form
10-K dated April 1, 1998)
27.1* Financial Data Schedule
99(a) Credit Agreement, dated as of November 19, 1997, among
FinishMaster, Inc., the Institutions from Time to Time
Parties Thereto as Lenders and NBD Bank, N.A., as Agent
(previously filed with Form 8-K dated December 3, 1997)
99(b) Subordinated Note Agreement, dated as of November 19, 1997,
by and between FinishMaster, Inc. and LDI, Ltd. (previously
filed with Form 8-K dated December 3, 1997)
99(c) First Amendment to Credit Agreement dated December 10, 1997
99(d) Second Amendment to Credit Agreement dated March 27,
1998 99(e) Credit Agreement dated March 27, 1998 between
FinishMaster, Inc. and LDI, Ltd.
* Filed herewith
No reports on Form 8-K were filed during the quarter ended June
30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINISHMASTER, INC.
Date: August 14, 1998 \S\ ANDRE B. LACY
-----------------------------------------
Andre B. Lacy, Chairman of the Board
and Chief Executive Officer
\S\ ROGER A. SOROKIN
-----------------------------------------
Roger A. Sorokin, Senior Vice
President-Finance
(Chief Financial and Accounting Officer)
As Amended Effective
June 30, 1998
ARTICLES OF INCORPORATION
OF
FINISHMASTER, INC.
The undersigned, desiring to form a corporation (the "Corporation")
pursuant to the provisions of the Indiana Business Corporation Law (as amended
from time to time, the "Act"), executes the following Articles of Incorporation.
ARTICLE 1
Identification
Section 1.01. Name. The name of the Corporation is:
FinishMaster, Inc.
ARTICLE 2
Purpose
Section 2.01. Purpose. The purpose for which the Corporation is
organized is to engage in any lawful business for which corporations may be
incorporated under the Act.
ARTICLE 3
Capital Stock
Section 3.01. Amount. The total number of shares which the Corporation
shall have authority to issue is Twenty-Six Million (26,000,000) shares.
Section 3.02. Designation of Classes, Number and Par Value of Shares.
The shares of authorized capital shall be divided into One Million (1,000,000)
shares of Preferred Stock, without par value, as hereinafter provided
("Preferred Stock"), and Twenty-Five Million (25,000,000) shares of Common
Stock, without par value ("Common Stock"), as hereinafter provided.
Section 3.03. Rights, Privileges, Limitations and Restrictions of
Preferred Stock. Shares of preferred stock may be issued from time to time in
one or more series, each such series to have such distinctive designation or
title and to include such number of shares as may be fixed and determined by the
Board of Directors (the "Board") prior to the issuance of any shares thereof.
Each such series may differ from every other series already outstanding, as may
be determined from time to time by the Board prior to the issuance of any shares
thereof, in any or all of the following
<PAGE>
respects:
(i) The rate of dividend which the Preferred Stock of any such
series shall be entitled to receive and whether such series shall be
entitled to receive a dividend and whether such dividend shall be
cumulative or non-cumulative;
(ii) The amount per share which the Preferred Stock of any
such series shall be entitled to receive in cash of the redemption
thereof or in case of a voluntary liquidation distribution or sale of
assets, dissolution or winding up of the Corporation, or in case of the
involuntary liquidation, dissolution or sale of asset, dissolution or
winding up of the Corporation;
(iii) The relative rights, if any, of the holder of Preferred
Stock of any such series to vote the same, and the extent, terms and
conditions of such voting rights;
(iv) The right, if any, of holders of Preferred Stock of any
such series to convert the same into other classes of stock, and the
terms and conditions of such conversion; and
(v) The terms of the sinking fund or redemption of purchase
account, if any, to be provided for the Preferred Stock of any such
series.
The description and terms of the Preferred Stock of each series shall
be fixed and determined by the Board by appropriate resolution or resolutions at
or prior to the time of the authorization if the issue of the original shares of
each such series, shall be summarized in the certificates therefor, and a
Certificate containing the resolution of the Board establishing and designating
the series and prescribing the relative rights and preferences thereof shall be
filed with the Indiana Secretary of State, which, when filed shall constitute an
amendment to the Articles of Incorporation. All shares of Preferred Stock shall
be of equal rank, and shall be identical in all respects except in respect of
the particulars that may be fixed by the Board as hereinabove in this Article 3
provided.
Section 3.04. Rights, Privileges, Limitations and Restrictions of
Common Stock. The authorized shares of Common Stock shall have the same
preferences, limitations and relative rights. Each shareholder of Common Stock
shall be entitled to one vote for each share of Common Stock standing in the
shareholder's name on the books of the Corporation on each matter voted on at a
shareholders' meeting. Holders of outstanding Common Stock shall be entitled to
receive the net assets of the Corporation upon dissolution.
Section 3.05. Distributions. A distribution to shareholders may not be
made if, after giving it effect, the Corporation would not be able to pay its
debts as they become due in the usual course of business or the Corporation's
total assets would be less than the sum of its total liabilities.
<PAGE>
ARTICLE 4
Directors
Section 4.01. Number. The number of directors of the Corporation may be
fixed from time to time in accordance with the Code of By-Laws of the
Corporation (the "By-Laws").
ARTICLE 5
Indemnification
Section 5.01. Scope of Indemnity. The Corporation shall indemnify every
person who is or was a director or officer of the Corporation (each of which,
together with such person's heirs, estate, executors, administrators and
personal representatives, is hereinafter referred to as an "Indemnitee") against
all liability to the fullest extent permitted by Indiana Code 23-1-37, provided
that such person is determined in the manner specified by Indiana Code 23-1-37
to have met the standard of conduct specified in Indiana Code 23-1-37. The
Corporation shall, to the fullest extent permitted by Indiana Code 23-1-37, pay
for or reimburse the reasonable expenses incurred by every Indemnitee who is a
party to a proceeding in advance of final disposition of the proceeding, in the
manner specified by Indiana Code 23-1-37. The foregoing indemnification and
advance of expenses for each Indemnitee shall apply to service in the
Indemnitee's official capacity with the Corporation, and to service at the
Corporation's request, while also acting in an official capacity with the
Corporation, as a director, officer, partner, member, manager, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
limited liability company, joint venture, trust, employee benefit plan, or other
enterprise, whether for profit or not.
Section 5.02. Binding Nature. The provisions of this Article shall be
binding upon any successor to the Corporation so that each Indemnitee shall be
in the same position with respect to any resulting, surviving, or succeeding
entity as the Indemnitee would have been had the separate legal existence of the
Corporation continued; provided, that unless expressly provided or agreed
otherwise, this sentence shall be applicable only to an Indemnitee acting in an
official capacity or in another capacity described in Section 5.01 prior to
termination of the separate legal existence of the Corporation. The foregoing
provisions shall be deemed to create a contract right for the benefit of every
Indemnitee if (i) any act or omission complained of in a proceeding against the
Indemnitee, (ii) any portion of a proceeding, or (iii) any determination or
assessment of liability, occurs while this Article is in effect.
<PAGE>
Section 5.03. Interpretation. All references in this Article to Indiana
Code 23-1-37 shall be deemed to include any amendment or successor thereto. When
a word or phrase used in this paragraph is defined in Indiana Code 23-1-37, such
word or phrase shall have the same meaning in this Article that it has in
Indiana Code 23-1-37. Nothing contained in this Article shall limit or preclude
the exercise of any right relating to indemnification or advance of expenses to
any Indemnitee or the ability of the Corporation to otherwise indemnify or
advance expenses to any Indemnitee.
Section 5.04. Severability. If any word, clause, or sentence of the
foregoing provisions regarding indemnification or advancement of expenses shall
be held invalid as contrary to law or public policy, it shall be severable and
the provisions remaining shall not be otherwise affected. If any court holds any
word, clause, or sentence of this paragraph invalid, the court is authorized and
empowered to rewrite these provisions to achieve their purpose to the extent
possible.
ARTICLE 6
Registered Agent and Registered Office
[Original provision deleted pursuant to the Act; a Notice of Change of
Registered Agent and Office is on file with the Indiana Secretary of State
identifying the registered agent and office as:
Roger A. Sorokin
54 Monument Circle
Suite 7000
Indianapolis, Indiana 46204]
ARTICLE 7
Incorporator
Section 7.01. Identification of Incorporator. The name and address of
the incorporator are:
Robert H. Reynolds
1313 Merchants Bank Building
11 South Meridian
Indianapolis, Indiana 46204
<PAGE>
ARTICLE 8
Code of By-Laws; Amendments of Articles
Section 8.01. Code of By-Laws. The board of directors of the
Corporation shall have power, without the assent or vote of the shareholders, to
make, alter, amend or repeal the By-Laws, but the affirmative vote of the number
of directors equal to a majority of the number holding such position at the time
of such action shall be necessary to take any action for the making, alteration,
amendment or repeal of the By-Laws.
Section 8.02. Amendments of Articles. The Corporation may amend these
Articles of Incorporation at any time to add or change a provision that is
required or permitted to be in the Articles of Incorporation or to delete a
provision not required to be in the Articles of Incorporation. Whether a
provision is required or permitted to be in the Articles of Incorporation is
determined as of the effective date of the amendment.
A shareholder of the Corporation does not have a vested property right
resulting from any provision in these Articles of Incorporation, or authorized
to be in the By-Laws by the Act or the Articles of Incorporation including
provisions relating to management, control, capital structure, dividend
entitlement, or purpose or duration of the Corporation.
EXECUTED this 31st day of October, 1996.
/s/ Robert H. Reynolds
--------------------------------
Robert H. Reynolds, Incorporator
As Last Amended 6/30/98
FINISHMASTER, INC.
(AMENDED AND RESTATED AS OF APRIL 30, 1997)
STOCK OPTION PLAN
1. Purpose. The purpose of the FinishMaster, Inc. Stock Option Plan
(the "Plan") is to provide to certain officers and other key employees of
FinishMaster, Inc. (the "Corporation") or its wholly-owned subsidiaries (the
"Subsidiaries"), as well as to directors who are not employees of the
Corporation, who are materially responsible for the management or operation of
the business of the Corporation or the Subsidiaries, a favorable opportunity to
acquire Common Stock, without par value, of the Corporation ("Common Stock"),
thereby providing them with an increased incentive to work for the success of
the Corporation and the Subsidiaries and to enable the Corporation and the
Subsidiaries to attract and retain capable executive personnel. The means by
which an individual may acquire Common Stock is the grant to an officer or key
employee of an option to acquire shares of Common Stock (an "Option") in
accordance with Section 5 hereof.
2. Administration of the Plan. The Plan shall be administered,
construed and interpreted by the Board of Directors or by a committee of the
Corporation's Board of Directors (the "Committee"). The Committee must be
composed of two or more persons who qualify as "Non- Employee Directors" within
the meaning of Rule 16b-3(b)(3) promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act") and as "outside directors" as defined in
Treasury Reg. ss. 1.162-27(e)(3). A member of the Committee may not, during one
year prior to serving as a Committee member or during such service, be granted
an Option pursuant to the Plan. The decision of a majority of the members of the
Committee shall constitute the decision of the Committee, and the Committee may
act either at a meeting at which a majority of the members of the Committee is
present or by a written consent signed by all members of the Committee. The
Committee shall have the sole, final and conclusive authority to determine,
consistent with and subject to the provisions of the Plan:
(a) the individuals (the "Optionees") to whom Options are
granted under the Plan;
(b) the time when Options shall be granted hereunder;
(c) the number of shares of Common Stock of the Corporation to
be covered under each Option;
(d) the price to be paid upon the exercise of each Option;
(e) the period within which each Option may be exercised;
(f) the extent to which an Option is an incentive stock option
or a non-qualified stock option; and
-1-
<PAGE>
(g) the terms and conditions of the respective agreements by
which Options shall be evidenced.
The Committee shall also have authority to prescribe, amend and rescind rules
and regulations relating to the Plan, and to make all other determinations
necessary or advisable in the administration of the Plan.
3. Eligibility.
(a) The Committee may, consistent with the purposes of the
Plan, grant Options to officers and other key employees of the
Corporation or of a Subsidiaries who in the opinion of the Committee
are from time to time materially responsible for the management or
operation of the business of the Corporation or of a Subsidiaries, as
well to Non-Employee Directors consistent with applicable rules under
the 1934 Act; provided, however, that in no event may any employee who
owns (after application of the ownership rules in ss. 424(d) of the
Internal Revenue Code of 1986, as amended (the "Code")) shares of
Common Stock possessing more than 10% of the total combined voting
power of all classes of Common Stock of the Corporation be granted an
incentive stock option hereunder unless at the time such option is
granted the option price is at least 110% of the fair market value of
the Common Stock subject to the Option and such incentive stock option
by its terms is not exercisable after the expiration of five (5) years
from the date such Option is granted. Subject to the provisions of
Section 4 hereof, an individual who has been granted an Option under
the Plan, if he is otherwise eligible, may be granted an additional
Option or Options if the Committee shall so determine. The maximum
number of shares of Common Stock with respect to which Options may be
granted in any calendar year to any individual shall not exceed fifty
thousand (50,000).
(b) Each Non-Employee Director serving as such on June 30,
1998 shall automatically receive on such date an Option to purchase one
thousand (1,000) shares of Common Stock in accordance with the terms
and subject to the conditions of the Plan. Each Non-Employee Director
who is elected as such at any subsequent annual shareholder meeting
shall automatically receive, on the date of such shareholder meeting,
an Option to purchase an additional one thousand (1,000) shares of
Common Stock in accordance with the terms and subject to the conditions
of the Plan. If, on the date of the annual shareholder meeting in any
given year, the number of shares of Common Stock available for Options
to be granted to Non-Employee Directors under the Plan is insufficient
to grant each Non-Employee Director entitled thereto an Option for the
full number of shares contemplated by this subsection 3(b), the shares
of Common Stock available shall be allocated ratably (to the nearest
whole share) among the Options to be granted to the Non-Employee
Directors on such date. All of such Options to be awarded to
Non-Employee Directors shall be "non-qualified" stock options (i.e.,
not qualified under Section 422 of the Code).
-2-
<PAGE>
4. Stock Subject to the Plan. There shall be reserved for issuance
upon the exercise of Options granted under the Plan, six hundred thousand
(600,000) shares of Common Stock which may be authorized but unissued shares of
the Corporation, of which fifty thousand (50,000) shares shall be reserved for
issuance to Directors who are not otherwise employees of the Corporation.
Subject to Section 6 hereof, the shares for which Options may be granted under
the Plan shall not exceed that number. If any Option shall expire or terminate
for any reason without having been exercised in full, the unpurchased shares
subject thereto shall (unless the Plan shall have terminated) become available
for other Options under the Plan.
5. Terms of Option. Each Option granted under the Plan shall be subject
to the following terms and conditions and to such other terms and conditions not
inconsistent therewith as the Committee may deem appropriate in each case:
(a) Option Price. The price to be paid for shares of Common
Stock upon the exercise of each Option shall be the closing price of
the shares of Common Stock as reported on the Nasdaq Stock Market's
National Market on the date of grant (or, if the date of grant is not a
trading date, then on the last previous trading day), but such price in
the case of an incentive stock option in no event shall be less than
the fair market value, as determined by the Committee consistent with
the requirements of ss. 422 of the Code, of Common Stock on the date on
which the Option is granted.
(b) Period for Exercise of Option. An Option shall not be
exercisable after the expiration of such period as shall be fixed by
the Committee at the time such Option is granted, but such period in no
event shall exceed ten (10) years from the date on which such Option is
granted; provided, however, that incentive stock options shall have
terms not in excess of ten (10) years.
(c) Exercise of Options. The option price of each share of
Common Stock purchased upon exercise of an Option shall be paid in full
(1) in cash at the time of such exercise, or (2) if the Optionee may do
so in conformity with Regulation T (12 C.F.R. Section 220.3(e)(4)) and
without violating Section 16(b) or (c) of the 1934 Act (to the extent
applicable) and to the extent permitted under the agreement entered
into by the Committee and the Optionee relating to the Option, by
delivering a properly executed exercise note together with irrevocable
instructions to a broker to deliver promptly to the Corporation the
total option price in cash and, if desired, the amount of any taxes to
be withheld from the Optionee's compensation as a result of any
withholding tax obligation of the Corporation or any of its
Subsidiaries, as specified in such notice. The Committee shall have the
authority to grant Options exercisable in full at any time during their
term, or exercisable in such installments, equal or non-equal, as the
Committee shall determine. An Option may be exercised at any time or
from time to time during the term of the Option as to any or all whole
shares which have become subject to purchase pursuant to the terms of
the Option (including, without limitation, any quotas with respect to
option exercise) or the Plan.
(d) Termination of Option. Except as set forth in the proviso
immediately succeeding this sentence, if an Optionee ceases to be an
employee of the Corporation or one of the Subsidiaries or if there is a
disposition of a Subsidiary for which the Optionee
-3-
<PAGE>
performed the majority of his or her services, any Option granted to
such Optionee shall terminate at the expiration of three (3) months
from such cessation; provided, however, that if an Optionee ceases to
be an employee of the Corporation or one of the Subsidiaries solely by
reason of such Optionee's retirement upon or after reaching age sixty
(60), the Committee may, in its sole and complete discretion, extend
the period within which the Options held by such Optionee may be
exercised following cessation of his or her employment to the end of
the period fixed by the Committee for each such Option at the time it
was granted in accordance with subsection 5(b) above. If cessation of
employment is due to permanent and total disability the Optionee shall
have the right to exercise options granted to such Optionee at any time
within twelve (12) months after such cessation. Leave of absence
approved by the Committee shall not constitute cessation of employment.
Notwithstanding the foregoing provisions of this subsection 5(d), no
Option shall in any event be exercisable after the expiration of the
period fixed by the Committee in accordance with subsection 5(b) above.
(e) Nontransferability of Option. An Optionee's rights under
the Plan may not be transferred by the Optionee otherwise than by will
or the laws of descent and distribution, and during the lifetime of the
Optionee shall be exercisable only by the Optionee.
(f) Investment Representations. Unless the transfer of shares
of Common Stock subject to an Option are registered under applicable
federal and state securities laws, each Optionee by accepting an Option
shall be deemed to agree for himself and his legal representatives that
any Option granted to him and any and all shares of Common Stock
purchased upon the exercise of the Option shall be acquired for
investment and not with a view to, or for the sale in connection with,
any distribution thereof, and each notice of the exercise of any
portion of an Option shall be accompanied by a representation in
writing, signed by the Optionee or his legal representatives, as the
case may be, that the shares of Common Stock are being acquired in good
faith for investment and not with a view to, or for sale in connection
with, any distribution thereof (except in case of the Optionee's legal
representatives for distribution, but not for sale, to his legal heirs,
legatees and other testamentary beneficiaries). Any shares issued
pursuant to an exercise of an option may, but need not, bear a legend
evidencing such representations and restrictions.
(g) Maximum Incentive Stock Options. The aggregate fair market
value (determined as of the time the Option is granted) of Common Stock
subject to incentive stock options that are exercisable for the first
time by an employee during any calendar year under the Plan or any
other plan of the Corporation or any Subsidiaries shall not exceed
$100,000. For this purpose, the fair market value of such shares shall
be determined as of the date the Option is granted and shall be
computed in such manner as shall be determined by the Committee,
consistent with the requirements of ss. 422 of the Code. If the
immediate exercisability of incentive stock options arising from the
retirement, death or permanent and total disability of an Optionee
consistent with the terms of the applicable option agreement or arising
from any change of control of the Corporation in accordance with
Section 7 hereof would cause this $100,000 limitation to be exceeded
for an Optionee, such incentive stock options shall automatically be
converted into non-qualified stock options as of the date on which such
incentive stock options become exercisable but only to the extent
necessary to comply with the $100,000 limitation.
-4-
<PAGE>
(h) Agreement. Each Option shall be evidenced by an agreement
between the Optionee and the Corporation which shall provide, among
other things, that, with respect to incentive stock options, the
Optionee shall advise the Corporation immediately upon any sale or
transfer of the shares of Common Stock received upon exercise of the
Option to the extent such sale or transfer takes place prior to the
later of (a) two (2) years from the date of grant or (b) one (1) year
from the date of exercise. The agreement shall include the Option term
and exercise conditions.
(i) Certificates. The certificate or certificates for the
shares issuable upon an exercise of an Option shall be issued as
promptly as practicable after such exercise. An Optionee shall not have
any rights of a shareholder in respect to the shares of Common Stock
subject to an Option until the date of issuance of a stock certificate
to him for such shares. In no case may a fraction of a share be
purchased or issued under the Plan, but if, upon the exercise of an
Option, a fractional share would otherwise be issuable, the Corporation
shall either (a) sell the same and credit the proceeds of the sale to
the Optionee or (b) credit to the Optionee a cash sum equal to the
market value of such fractional share interest on the date such
fractional share interest was created.
(j) No Right to Continued Service. Nothing in the Plan or in
any agreement entered into pursuant hereto shall confer on any person
any right to continue in the employ of the Corporation or the
Subsidiaries or affect any rights of the Corporation, a Subsidiary, or
the shareholders of the Corporation may have to terminate his service
at any time.
(k) Incentive Stock Options and Non-Qualified Stock Options.
Options granted under the Plan may be incentive stock options under ss.
422 of the Code or non-qualified stock options. All Options granted
hereunder shall be clearly identified as either incentive stock options
or non-qualified stock options. In no event shall the exercise of an
incentive stock option affect the right to exercise any non-qualified
stock option, nor shall the exercise of any non-qualified stock option
affect the right to exercise any incentive stock option. Nothing in the
Plan shall be construed to prohibit the grant of incentive stock
options and non-qualified stock options to the same person; provided,
however, that incentive stock options and non-qualified stock options
shall not be granted in a manner whereby the exercise of one
non-qualified stock option or incentive stock option affects the
exercisability of the other.
6. Adjustment of Shares. In the event of any change after the effective
date of the Plan in the outstanding shares of stock of the Corporation by reason
of any reorganization, recapitalization, stock split, stock dividend,
combination of shares, exchange of shares, merger or consolidation, liquidation,
or any other change after the effective date of the Plan in the nature of the
shares of stock of the Corporation, the Committee shall determine what changes,
if any, are appropriate in the number and kind of shares of stock reserved under
the Plan, in the number of shares which may be issued to any individual in any
calendar year and in the option price under and the number and kind of shares of
stock covered by outstanding Options granted under the Plan. Any determination
of the Committee hereunder shall be conclusive.
7. Amendment. The Board of Directors of the Corporation may amend the
Plan from time to time, except that without the approval of the Corporation's
shareholders:
-5-
<PAGE>
(a) the number of shares of Common Stock which may be reserved
for issuance under the Plan may not be increased except as provided in
Section 6 hereof;
(b) the period during which an Option may be exercised may not
be extended beyond ten (10) years from the date on which such Option
was granted;
(c) the class of employees to whom options may be granted
under the Plan may not be modified materially; and
(d) no other amendment to the Plan may be made which requires
the approval of the Corporation's shareholders under applicable law or
under the rules and regulations of the NASDAQ Stock Market.
No amendment of the Plan may, without the consent of the Optionee, make
any changes in any outstanding Option theretofore granted under the Plan which
would adversely affect the rights of such Optionee.
8. Termination. The Board of Directors of the Corporation may
terminate the Plan at any time and no Option shall be granted thereafter. Such
termination, however, shall not affect the validity of any Option theretofore
granted under the Plan. In any event, no stock option may be granted after the
conclusion of a ten (10) year period commencing on the date the Plan was
adopted. The Board of Directors of the Corporation may from time to time suspend
or discontinue the Plan with respect to any shares as to which Options have not
been granted.
9. Successors. The Plan shall be binding upon the successors and
assigns of the Corporation.
10. Governing Law. The terms of Options granted hereunder and the
rights and obligations hereunder of the Corporation, the Optionees and their
successors in interest shall, except to the extent governed by federal law, be
governed by Indiana law without regard to conflict of law rules.
11. Government and Other Regulations. The obligations of the
Corporation to issue or transfer and deliver shares under Options granted under
the Plan shall be subject to compliance with all applicable laws, governmental
rules and regulations, and administrative action.
12. Effective Date. The Plan became effective when it was approved by
the Corporation's Board of Directors.
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