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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by Rule
14a-6(e)(2))
[X] 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
[ ] 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
[X] 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 previouIdentify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filingN/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 JUNE 30, 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 Tuesday, June 30, 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 June 1,
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
June 17, 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.
<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 Tuesday, June 30, 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 June 17, 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 June 1, 1998, are entitled to one (1) vote
for each share of Common Stock held. As of June 1, 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 June 1, 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 June 1, 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
June 1, 1998 (1)
Name of Director of Sole Voting & Shared Voting & Percentage
Beneficial Owner (1) Company Since Investment Power Investment Power of Class
-------------------- ------------- ---------------- ---------------- --------
Director Nominees:
<S> <C> <C> <C> <C>
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.
4
<PAGE>
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
5
<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.
6
<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."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Securities All Other
Name and Fiscal Underlying Compen-
Principal Position Year Salary Bonus Options(1) sation(2)
<S> <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 $30,355(6)
Senior Vice President 1996 --- --- --- ---
1995 --- --- --- ---
</TABLE>
(1) Represents the number of shares for which options have been granted.
(2) Represents the Company's 25% match of up to 6% of employee deferrals of
currently earned income into the 401(k) Employee Savings Plan and any
profit sharing contributions made by the Company for eligible employees
to the 401(k) Employee Savings Plan at the rate of 1% of compensation.
(3) Represents amounts paid in the period from July, 1996 through December
31, 1996. Mr. Lacy and Mr. Young were not executive officers of the
Company until July, 1996, when AutoPaints acquired the shares of Common
Stock held by Maxco, Inc., a Michigan corporation.
(4) Represents sums paid by the Company to AutoPaints for services provided
to the Company by Mr. Young.
(5) Represents amounts paid in the period from August 11, 1997 (the date on
which Mr. Stephenson joined the Company) through December 31, 1997.
(6) Consists principally of travel and moving expenses and related costs
associated with Mr. Stephenson's relocation upon joining the Company.
7
<PAGE>
Stock Options Granted in Year Ended December 31, 1997
The following table sets forth information related to options granted
during the fiscal year ended December 31, 1997 to each of the Named Executive
Officers to whom options have been granted.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term
% of Total
Options
Securities Granted to Exercise or
Underlying Employees in Base Price
Options Fiscal Year ($/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 $55,779.50
</TABLE>
(1) These gains are based upon assumed rates of annual compound stock
appreciation of 5% and 10% from the date the options were granted over
the full option term. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on option exercises are
dependent upon the future performance of the Shares and overall stock
market conditions. There can be no assurance that the amounts reflected
on this table will be achieved.
The following table sets forth certain information regarding the total
number of stock options held by each of the Named Executive Officers, and the
aggregate value of such stock options, as of December 31, 1997. None of such
stock options had been exercised as of such date.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Year Ended December 31, 1997
and Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of In-the-Money
Shares Options at the Year Unexercised Options
Acquired on Value Ended at the Year ended
Name Exercise (#) Realized ($) 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>
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.
8
<PAGE>
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
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.
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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
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
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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.)
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.
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On November 21, 1997, 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.
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. NBD has confirmed to the
Company that the Proposed Acquisition will satisfy 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 opportunities to realize certain economies
through the consolidation of overlapping sales, inventory, distribution and
administrative functions. Except as reflected under "Proforma Financial
Information" herein, management of the Company is unable at this time to
precisely quantify the benefits expected to be realized by the combination of
the Florida division of AutoPaints and the southeast operations of the Company.
No material charges to earnings or integration costs are expected to be
associated with the Proposed Acquisition.
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 officers of AutoPaints,
primarily the Treasurer of AutoPaints (who also serves as an officer and
director of the Company). (See "Certain Relationships and Related Transactions"
herein). AutoPaints initially proposed to the Independent Committee a
transaction structure and price which were deemed inadequate. At the request of
the Independent Committee, McDonald & Company reviewed with AutoPaints certain
of their analyses of the Company and AutoPaints. As a result of these
discussions, the Company revised its proposal in order to make it acceptable to
the Independent Committee. 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.
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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.
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 or reconfirmed 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
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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 has not
reviewed 1997 year-end and first quarter 1998 financial information, which
became available after the date of their opinion.
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 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 $15.0 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 $17.4 million to $20.4 million and $21.1 million to $24.7
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. AutoPaint's forecast assumptions include a modest
increase in same-store sales, and gross margins in line with historical results.
General and administrative expenses as a percentage of sales are expected to
improve moderately as certain fixed cost elements are factored over a larger
sales base.
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").
15
<PAGE>
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 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. The fundamental assumptions employed in the
Company's projections reflect a continuation of the Company's acquisition
program, a modest increase in same-store sales, and gross margins in line with
historical results. Management also assumed that general and administrative
expenses as a percentage of sales will decline over time as certain fixed costs
are factored over a larger sales base and synergies are realized from closing
non-essential locations.
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<PAGE>
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.
Results of Analyses
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.
The range of equity value for AutoPaints of $17.1 million to $18.9
million was determined by taking the average of the four valuation techniques
described (Mid-Point of Discounted Cash Flow Analysis - Stand-Alone Scenario -
$17.4 million to $20.4 million, Mid-Point of Discounted Cash Flow Analysis -
Synergy Scenario - $21.1 million to $24.7 million, Analysis of Comparable Merger
& Acquisition Transactions - $15.0 million, and Leveraged Buyout Analysis -
$14.8 million) and applying a range to the result of plus/minus 5%.
The range of equity value for the Company of $64.8 million, or $10.80
per share, to $71.6 million, or $11.93 per share was determined by taking the
average of the four valuation techniques described (Mid-Point of Discounted Cash
Flow Analysis - $63.4 million to $97.9 million, Analysis of Comparable Merger &
Acquisition Transactions - $61.8 million, Comparable Company Analysis - $73.8
million, and Current Company Equity Value - $57.0 million) and applying a range
to the result of plus/minus 5%.
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.
Dilution Analysis. 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.
Other Analyses. 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.
General
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
17
<PAGE>
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 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 of AutoPaints
The following selected financial data of AutoPaints is for the three
months ended March 31, 1998, the year ended December 31, 1997 and the eight
months ended December 31, 1996. As of May 31, 1996, AutoPaints acquired the
assets constituting the Florida division of AutoPaints. 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.
18
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Fiscal Year Ended Eight Months Ended
March 31, December 31, December 31,
1998(1) 1997(2) 1996 (3)
--------------------------------------------------------------------
(Unaudited)
LDI AutoPaints, Inc. (in thousands)
Statements of Operations Data
<S> <C> <C> <C>
Net sales $81,743 $152,099 $72,960
Gross profit 29,310 55,185 25,698
Income (loss) from operations 3,917 (1,971) (3,790)
Net Income (Loss) $ 420 $ (3,049) $ (3,139)
======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 1996 (1)
------------- ------------ ------------
(Unaudited)
(in thousands)
Balance Sheet Data
<S> <C> <C> <C>
Working capital $40,975 $46,631 $20,504
Total assets 227,761 271,863 123,902
Long-term debt 124,688 134,804 18,676
Stockholders' equity 36,859 73,261 66,361
</TABLE>
(1) The above includes the accounts of AutoPaints majority-owned
subsidiary, FinishMaster, Inc. (the "Company"). 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.
(2) The above includes the accounts of AutoPaints majority-owned
subsidiary, FinishMaster, Inc. It also reflects the acquisition of
Thompson PBE, Inc. by FinishMaster in November 1997.
(3) 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. The above
includes the accounts of its majority-owned subsidiary, FinishMaster,
from July 9, 1996 (the date of acquisition by AutoPaints) to December
31, 1996.
Financial Statements of AutoPaints
Attached to this Proxy Statement as Appendix II are (i) the audited
financial statements of AutoPaints for the year ending December 31, 1997 and for
the eight months ended December 31, 1996, and (ii) the unaudited financial
statements of AutoPaints for the three months ended March 31, 1998. As of May
31, 1996, AutoPaints acquired the assets constituting its 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. 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.
19
<PAGE>
Business of the Company
General
The Company is the leading national 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 has been 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 $73.4 million acquisition of Thompson. In addition
to the cash purchase price, the Company refinanced approximately $34.5 million
of Thompson's outstanding indebtedness at the date of purchase. The Thompson
Acquisition, completed in November 1997, significantly expanded the Company's
geographic presence in the Southeastern and Western United States. Subject to
receipt of shareholder approval, the Company expects to close the Proposed
Acquisition, which will increase the Company's presence in Florida. The Company
intends to continue its strategy of expanding through additional acquisitions.
Industry Overview
The U.S. automotive paint distribution market is approximately $2.4
billion. The end users of the products distributed by the Company are
principally independent collision repair shops and automobile dealers.
Additionally, businesses and government entities that maintain their own
automobile fleets, sellers of automotive salvage and other commercial and
industrial users make up smaller percentages of the Company's customer base.
Automotive paint and related supplies, in contrast to labor and parts, represent
only a small portion (approximately 7-10%) of the total cost of a typical repair
job. However, while paint is a relatively minor component of the total repair
cost, it is a critical factor in the customer's level of satisfaction.
The domestic wholesale aftermarket for automotive paint and related
supplies is characterized by a small number of manufacturers of paint and
supplies. The five predominant manufacturers of automotive paint distributed in
the United States are DuPont, PPG, BASF, the Sherwin-Williams Company and Akzo
Nobel. In addition, several other large foreign manufacturers have recently
taken steps to expand the distribution of their paint products in the United
States. 3M is the predominant manufacturer of related supplies which include the
most frequently used refinishing materials, supplies, accessories and tools such
as sand paper, masking tape and paint masks.
While automotive paint manufacturing is highly concentrated, automotive
paint distribution and the end users of automotive paint are highly fragmented.
The Company believes that a large number of independent distributors of
automotive paint serve an aggregate of up to 50,000 collision repair shops
nationwide. Based on published industry data, the Company believes that the
number of collision repair shops has decreased approximately 5% in each of the
last two years. Distributors, which tend to be family-owned with only one to
three distribution sites, typically serve a highly localized customer base with
each distribution site serving customers located within 5 to 10 miles of the
site depending upon demographics, road access and geography.
20
<PAGE>
Below is a Market Profile obtained from Industry Publications:
No. of Collision Annual Shop
Repair Shops Revenue
($Millions)
9,000 Less than $0.2
13,000 $0.2 to $0.3
12,500 $0.3 to $0.45
7,000 $0.45 to $0.6
3,500 $0.6 to $1.0
2,800 $1.0 to $2.0
800 $2.0 to $3.0
450 $3.0 to $5.0
100 Greater than $5.0
Due to the large number of end users, and their increasing demands for
personalized services such as multiple daily deliveries, assistance with
color-mixing and matching, and assistance with paint application techniques and
environmental compliance reporting, manufacturers typically service end-users
through distributors such as FinishMaster. Nevertheless, some of the Company's
paint manufacturers have elected to operate company-owned distribution
facilities in selected markets, including markets in which the Company operates.
The Company believes, however, that the largest automotive paint manufacturers
have generally avoided the cost of operating their own distribution network due
to their inability to offer multiple lines of paint which prevents them from
spreading distribution expenses across the market's entire potential customer
base. Consequently, the Company believes that independent distributors such as
the Company, which can sell the products of several paint manufacturers, are
better situated to service end users' needs than the distribution facilities of
automotive paint manufacturers.
Distributors and repair shops are in the process of consolidation due
to, among other things, the declining number of repair jobs. According to the
estimates of one industry source, the total number of vehicles on the road has
increased from approximately 140 million in 1980 to 189 million in 1996, while
the number of repair jobs has declined from approximately 18.5 million in 1980
to an estimated 13.0 million in 1995. This decline has been due to, among other
things, automotive safety improvements such as anti-lock brakes, rear
window-placed brake lights and more reliable radial tires. Stricter drunk
driving laws, more vigorous law enforcement and the increasing percentage of
drivers reaching middle age have also resulted in fewer accidents. Additionally,
a higher percentage of collision damaged cars are declared total losses, rather
than repaired, due to uni-body construction and rising costs of repair and
refinishing. Over the past several years, the industry has benefited from
warranty work to repair defective paint finishes on certain domestic vehicles
manufactured in the late 1980s and early 1990s. However, the Company believes
that the volume of warranty repair work decreased significantly in 1995, 1996
and 1997 from the levels experienced in prior years because of steps taken by
the major U.S. automobile manufacturers to reduce multi-year warranty programs
to repaint certain vehicles. The Company does not expect to realize significant
future benefits from this set of warranty programs.
The Company believes that environmental and other regulatory pressures
and technological advancements in paints and coatings are also significant
factors leading to consolidation of both distributors and collision repair
shops. Historically, the application of paints and coatings has released
emissions due to the products' high solvent content. In an effort to reduce
these emissions, environmental regulations have been proposed or implemented at
federal, state and local levels. Paint manufacturers have responded to these
regulations by introducing technologically advanced lower volatile organic
compounds ("VOC") and water-borne paints which require more advanced application
techniques. Furthermore, the application equipment itself has been improved. For
example, the latest high volume low pressure ("HVLP") spray guns deliver paint
more efficiently to a given surface, resulting in less paint being emitted into
the atmosphere. As a result, automotive refinishing has become a complex
process, often requiring advanced spray booths and air filtration systems to
reduce unwanted particulates and emissions. This complexity places new
challenges on automotive refinishers who may not have the training or expertise
necessary to apply the new paints and coatings or the financial resources to
acquire the necessary equipment. The Company believes that its experience in
assisting customers with regulatory compliance and reporting in California and
Colorado will be applicable in other geographic areas as EPA-sponsored VOC
regulations are enacted nationwide.
Further, insurance companies have begun to designate certain collision
repair shops as so-called "direct repair providers." As such, the designated
collision repair shops (approximately 6,500 in the U.S.) are directed business
by
21
<PAGE>
the insurance carriers in return for price concessions from customary rates. The
Company believes this trend favors larger, more efficient repair shops.
Products and Suppliers
The Company offers its customers a comprehensive selection of prominent
brand name products and its own FinishMaster PrivateBrand products. The product
line consists of approximately 9,000 stock keeping units ("SKUs"), including the
three leading brands of automotive paints and coatings and a leading brand of
related accessories. FinishMaster PrivateBrand products include some of the most
frequently used refinishing accessories such as masking materials, body fillers,
thinners, reducers and cleaners.
The following table illustrates the approximate number of SKUs,
suppliers and selected brand names in each of the Company's major product
categories. The Company may change from time to time the selection and mix of
its products.
<TABLE>
<CAPTION>
Approximate
Number of Approximate
Manufacturers Number of Selected Suppliers and
Product Category and Suppliers SKUs Brand Names
<S> <C> <C> <C>
Branded Paints and Coatings 3+ 3,400 DuPont, PPG, BASF, etc.
Branded Accessories 3 2,700 3M, Dynatron, US Chemical
Private Label Accessories 25 100 FinishMaster PrivateBrand
Other Miscellaneous Products 2,800 Various
-----
Total 9,000
</TABLE>
The Company relies on four leading suppliers for the majority of its
product requirements. DuPont, PPG, and BASF supply virtually all of the
Company's paint products, while 3M is the Company's largest supplier of
paint-related accessories. Products supplied by DuPont, PPG and BASF accounted
for approximately 65% and 3M approximately 25% of revenues in 1997. The Company
continuously seeks opportunities with new and existing suppliers to supply the
highest quality products.
The Company believes that DuPont, PPG and BASF are market leaders,
accounting for a majority of total domestic automotive paint sales. The Company
believes that in fiscal 1997, it was the largest purchaser of aftermarket
automotive paint in the United States from each of these manufacturers. The
Company also acquires a modest amount of its paint requirements from several
foreign manufacturers which have recently taken steps to expand the distribution
of their paint products in the United States. As is common industry practice,
the Company does not maintain long-term supply contracts with any of its key
suppliers. The Company enters into written agreements with most of its major
suppliers for each sales outlet. These agreements are nonexclusive and set forth
the suppliers' warranties, procedures for resolving disputes and provisions
which generally allow for annual returns of obsolete inventory to the supplier
in return for credit or new inventory. Prices and terms are established by the
suppliers' invoices and published price lists and may be changed by the supplier
without notice. In addition, the agreements require the Company to maintain
adequate inventories at a regularly established place of business, to train and
manage its sales staff, and to use its best efforts to promote the products.
These agreements typically contain reciprocal clauses allowing cancellation on
written notice ranging from 30 to 90 days. Although each of these suppliers
generally competes with the others along product lines, the Company does not
believe the products are completely interchangeable because of high brand
loyalty among customers and their brand-specific color matching computer
systems. For this reason, the Company's acquisition program is also dependent on
the willingness of the principal paint suppliers to continue to supply acquired
businesses. The Company has agreements with other warehouse suppliers for the
purchase of certain paint and non-paint supplies in specified geographic
locations. These agreements contain minimum volume commitments.
Whenever practical, purchases from suppliers are made in large volumes
to maximize volume discounts and optimize payment terms. In addition, the
Company's size generally permits it to benefit from periodic special incentive
programs available from suppliers, which programs provide additional purchase
discounts and extended due dates of payments in exchange for large volume
purchases. The Company also benefits from manufacturer-provided discounts upon
early payment of certain accounts and from other supplier-supported programs.
Branded products carry the manufacturers' guaranties. Defective products
typically may be returned to manufacturers at no charge to the Company and
obsolete products generally may be returned for a slight restocking fee. Due to
the manufacturers' favorable return
22
<PAGE>
policies, the Company also accepts customer returns of defective or obsolete
products. The Company has arrangements with its suppliers that enable the
Company to return product to the suppliers subject to certain restocking
charges.
The Company purchases substantially all of its automotive paint related
accessories directly from 3M, although such supplies are also generally
available from independent warehouse distributors at somewhat higher costs. The
Company regularly purchases a small number of products not available directly
from the manufacturers and certain low volume items from independent warehouse
distributors.
Services
The Company offers comprehensive value-added services designed to
assist customers in operating their businesses more effectively. These services
include:
Rapid Delivery. Products are delivered to customers using the Company's
delivery fleet of approximately 800 trucks. The Company offers multiple daily
deliveries per customer to meet its customers' just-in-time inventory needs.
Customer concerns for product availability typically take priority over all
other competitive considerations, including price.
Technical Support. The Company's technical support personnel
demonstrate and recommend products. In addition, they assist customers with
problems related to their particular product applications. Equipment specialists
provide information to customers regarding their heavy equipment requirements,
such as spray booths and frame straightening equipment, which are sold by the
Company.
Product Training. As a result of increasing regulations, manufacturers
have introduced technologically advanced, lower VOC paints, which require
significantly more sophisticated application techniques. The Company provides
training services to its customers in order to teach them the techniques
required to work with these products. Training sessions are typically conducted
jointly by the Company and by one or more of its major suppliers at the
customer's location or at an off-site location.
Management Seminars. Management seminars are conducted at convenient
locations to inform customers about regulations, compliance, and techniques to
improve productivity and industry trends.
Color Matching. The growing number of paint colors is a challenge for
the refinishing industry. DuPont, for example, has more than 120,000 mix
formulas. With its sophisticated PC-based color matching equipment and
specialists, the Company provides color matching services to its customers.
Inventory Management. The Company performs monthly physical inventories
for customers who request this service. The Company also provides customers with
management information reports on product usage.
Assistance with Environmental Compliance Reporting. California air
quality regulations mandate paint and application methods which result in
reduced atmospheric emissions of paint and other related materials. In
California, the Company provides information to its customers with respect to
air quality reporting and arranges demonstrations of new products and
applications designed to comply with air quality regulations. In addition, in
California and in Colorado, the Company assists its customers with environmental
reporting requirements by providing special reports designed to simplify their
compliance. The EPA has proposed regulations to control VOC emissions from
automobile refinishing nationwide and, accordingly, the Company is considering
an expansion of these programs.
Personnel Placement. Certain of the Company's divisions maintain an
employment data base which includes employment openings and/or persons seeking
employment with collision repair shops located in the market served. Upon
request from a customer to fill an opening, the Company may provide the names of
one or more persons for the position. Similar services are available to persons
seeking employment. The Company does not charge for this service but benefits
from enhanced relationships with its customers and their employees.
Operations
Warehouse. The Company operates three distribution centers which are
located in Michigan, California and Florida. Products are delivered from the
distribution centers to sales outlets weekly by one of the Company's six semi-
trucks.
23
<PAGE>
Sales Outlets. As of March 31, 1998, the Company operated 143 sales
outlets servicing customers in 22 states with a delivery fleet of approximately
800 vehicles. Sales outlets are strategically located in order to provide prompt
service to the Company's customers. Each sales outlet maintains a comprehensive
selection of competitively priced products tailored to the specific market needs
of its customers. While supplier commitments in a given market may prevent some
outlets from carrying all of the Company's product lines, each outlet is
authorized to carry the majority of the products, including at least two major
paint brands. Sales outlets electronically order their inventory requirements on
a regular basis from the Company's distribution center or directly from the
manufacturer.
Management Information Systems. Each of the Company's sales outlets
uses either personal computers or terminals for inventory control and order
processing. The Company's main IBM AS/400 computers collect and process data
required for operations analysis, finance, warehouse and administrative
functions and the management of receivables and inventory. The Company believes
that its current systems are adequate but has initiated a program to research
further system integration potential and operational efficiencies. The Company
has also 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.
Sales and Marketing
As of March 31, 1998, the Company employed a 309 person direct sales
force consisting of approximately 244 sales representatives, 29 regional
managers, 27 technicians and 9 general managers. The Company assigns its sales
personnel to specific customer accounts in an effort to build long-term
relationships. Sales representatives make frequent visits to customer sites in
order to review the customer's requirements and to offer general, technical and
product support. The Company's sales personnel are generally compensated through
a combination of sales commissions and base salaries. The Company emphasizes
continuing education and training of its sales force in order to provide a high
degree of support for its customers. The Company's customers primarily consist
of independent automotive body repair shops and automobile dealerships. The
Company does not maintain long-term contracts with its customers.
Customers
In 1997, the Company served approximately 20,000 customers, none of
which accounted for more than 1% of the Company's sales. The Company believes
that it is the principal source of supply of automotive paint and related
supplies for most of its customers. In addition to independent collision repair
shops and automobile dealers, which are the Company's largest category of
customers, the Company's customers include van converters, trucking companies,
schools, municipalities, government agencies, sellers of automotive salvage,
refinishers, marine and aviation refinishers and other commercial and industrial
users.
Competition
The distribution segment of the automotive refinishing industry is
highly fragmented and competitive with many independent distributors competing
primarily on the basis of technical assistance and expertise, price, speed of
delivery and breadth of product offering. There are no other independent
national distributors of automotive refinish paints and accessories. There are a
number of independent regional distributors, many of which are in direct
competition with the Company on a regional or local level. Competition in the
purchase of independent distributors and sales outlets may occur between the
Company and other automotive refinishing distributors which are also pursuing
growth through acquisitions.
The Company may also encounter significant sales competition from new
market entrants, automotive paint manufacturers, buying groups or other large
distributors which may seek to enter such markets or may seek to compete with
the Company for attractive acquisition candidates. Although the largest
automotive paint manufacturers have generally not operated their own
distributors, or have done so only on a limited basis, they may decide to expand
such activity in the future. For example, the Sherwin-Williams Company
distributes its own automotive paints through its sales outlets. In addition,
BASF, one of the Company's principal suppliers, distributes through its own
outlets. While
24
<PAGE>
the Company does not believe that current direct distribution efforts by
automotive paint manufacturers have significantly affected its sales, there can
be no assurance that the Company will not encounter increased competition in the
future. The Company may also compete with its suppliers in selling to certain
large volume end users such as van converters, small manufacturers and large
fleet operators.
Employees
As of March 31, 1998, the Company employed approximately 1,660 persons
on a full and part-time basis. None of the employees are covered by a collective
bargaining agreement and the Company considers its relations with its employees
to be good.
Governmental Regulation
The Company is subject to various federal, state and local laws and
regulations. These regulations impose requirements on the Company and its
customers and provide opportunities to the Company for providing services to
customers with respect to the use of new products and applications designed to
comply with air quality regulations. Pursuant to the regulations of the United
States Department of Transportation and certain state transportation
departments, a license is required to transport the Company's products and
annual permits are required due to classification of certain of the Company's
products as "hazardous." Various state and federal regulatory agencies, such as
the Occupational Safety and Health Administration and the United States
Environmental Protection Agency, have jurisdiction over the operation of the
Company's distribution centers and sales outlets, including worker safety,
community and employee "right-to-know" laws, and laws regarding clean air and
water. In addition, state and local fire regulations extensively control the
design and operation of the Company's facilities. Such regulations are complex
and subject to change. Regulatory or legislative changes may cause future
increases in the Company's operating costs or otherwise negatively affect
operations. Although the Company believes it has been and is currently in
compliance with the applicable standards imposed pursuant to such laws and
regulations, there can be no assurance that in the future the Company may not be
adversely affected by such regulations or incur increased operating costs in
complying with such regulations. The Company believes that, on balance, these
regulations favorably affect the Company because it is, in most instances,
better able than its smaller competitors to comply with such regulations and to
assist its customers with compliance.
Environmental
The principal environmental legislation presently affecting the Company
and its customers in a significant manner is described below.
Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA regulates
the treatment, storage and disposal of hazardous and solid wastes. Under RCRA,
liability and stringent management standards are imposed on a person who is a
generator or transporter of a hazardous waste or an owner or operator of a waste
treatment, storage or disposal facility. At some of its locations, the Company
is subject to RCRA requirements as a small quantity generator.
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"). CERCLA addresses cleanup of sites at which there has been or
may be a release of hazardous substances into the environment. CERCLA assigns
liability for costs of cleanup and for damage to natural resources (i) to any
person who, currently or at the time of disposal of a hazardous substance, owned
or operated any facility at which hazardous substances were deposited; (ii) to
any person who by agreement or otherwise arranged for the disposal or treatment,
or arranged with a transporter for transport for disposal or treatment of
hazardous substances owned or possessed by such person; and (iii) to any person
who accepted hazardous substances for transport to disposal or treatment
facilities or sites selected by such person from which there is a release or
threatened release of hazardous substances. The Company has acquired a number of
businesses which prior to acquisition may have sent waste to sites which have
become subject to government cleanup under CERCLA.
Clean Air Act and 1990 Amendments. The Clean Air Act requires
compliance with national ambient air quality standards ("NAAQS") and empowers
the EPA to establish and enforce limits on the emission of various pollutants
from specific types of facilities. The Clean Air Act Amendments of 1990 (the
"Amendments") modify the Clean Air Act in a number of significant areas. The
Amendments, among other things, establish new programs and deadlines for
achieving compliance with NAAQS, establish controls for hazardous air
pollutants, establish a new national permit program for all major sources of
pollutants and create significant new penalties, both civil and criminal, for
violations
25
<PAGE>
of the Clean Air Act. The Amendments specifically require a review of VOC
emissions from commercial products (which encompass emissions relating to the
application of paint to automobiles). Pursuant to this review, the EPA decided
to develop regulations controlling automotive refinishing coatings. At some of
its locations the Company is subject to the Clean Air Act because it uses paint
spraying equipment for paint matching and for training of customers.
Other Federal and State Environmental Laws. The Company's operations
are subject to regulation under, among others, the following federal laws: the
Clean Water Act, the Safe Drinking Water Act, the Occupational Safety and Health
Act and the Hazardous Materials Transportation Act. In addition, many states
have other regulations and policies to cover more detailed aspects of hazardous
materials management.
Local Air Quality Regulations. The South Coast Air Quality Management
District (the "SCAQMD") (Southern California) and the Bay Area Air Quality
Management District (the "BAAQMD") (San Francisco Bay Area) have detailed
regulations pertaining to metal coating and the use of VOCs. These regulations
prohibit the sale of nonconforming automobile paint at the distributor level,
which increases somewhat the compliance obligations of the Western Division's
distribution sites. Subsequently, based on published industry data, 15 states
have adopted VOC regulations through March 1998. Most of these states have VOC
limits similar to the VOC limits proposed by the EPA. The national regulations
proposed by the EPA will not override more restrictive state and local
regulations such as California's regulations, which have the lowest VOC limits
in the country. The Company believes its experience with such regulations,
including compliance reporting and the use of paints and equipment designed to
meet such regulations, is not matched by most smaller competitors.
Compliance by the Company with environmental protection laws has had no
material effect upon capital expenditures, earnings or competitive position.
Properties of the Company
The following table sets forth certain information regarding the
facilities operated by the Company as of March 31, 1998.
<TABLE>
<CAPTION>
State (By Division) Number of Number of
Sales Outlets Distribution Centers
<S> <C> <C>
Central/Northeastern Division
Connecticut 3
Delaware 1
Illinois 5
Indiana 3
Maryland 3
Massachusetts 4
Michigan 11 1
New Jersey 7
Ohio 2
Oklahoma 1
Pennsylvania 3
Texas 12
Virginia 4
Wisconsin 3
-
62 1
Southeastern Division
Alabama 1
Florida 30 1
Georgia 2
North Carolina 6
South Carolina 3
42 1
Western Division
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Arizona 3
California 30 1
Colorado 6
-
39 1
-- -
Total 143 3
</TABLE>
The Company's sales outlets range in size from 1,200 square feet to
13,000 square feet. Some of the larger sales outlets are also used as "drop
ship" points from which they supply other sales outlets. Sales outlets consist
of inventory storage areas, mixing facilities, display and counter space and, in
some instances, sales office space. Sales outlets are strategically located in
major markets to maximize market penetration, transportation logistics and
overall customer service. The Company's distribution centers range in size from
5,000 square feet to 38,500 square feet. The distribution centers are equipped
with efficient material handling and storage equipment.
The Company owns the distribution center and one sales outlet in
Michigan, one sales outlet in Indiana, and one in Florida. The remainder of the
sales outlets and the other distribution centers are leased with terms expiring
from 1997 to 2006, with options to renew. The Company typically assumes the
lease of the former owner in acquisitions. In a number of instances, the
Company's sales outlets are leased from the former owners of businesses acquired
by the Company. The Company believes that all of its leases were at fair market
rates when executed, that presently no single lease is material to its
operations, and that alternative sites are presently available at market rates.
The Company is leasing 8,800 square feet of executive offices which are
located in Indianapolis, Indiana.
Legal Proceedings of the Company
Neither the Company nor any of its subsidiaries is a party to any
material pending legal proceeding.
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.)
Appendix IV to this Proxy Statement contains the unaudited financial
statements of the Company and management's discussion and analyses of financial
condition and results of operations for the quarter ended March 31, 1998, and
selected financial data for such quarter, all of which is incorporated by this
reference into this Proxy Statement.
Shareholders of the Company are urged to review carefully the
information contained in the Annual Report and in Appendix IV in considering the
Proposed Acquisition.
<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 historical results of operations for AutoPaints include the
accounts of the Company, which is a majority-owned subsidiary of AutoPaints.
Accordingly, the pro forma adjustments for AutoPaints will eliminate the
accounts of the Company.
The unaudited pro forma consolidated statement of operations for the
year ended December 31, 1997 and the three months ended March 31, 1998 have been
adjusted to give effect to the acquisitions as if they had occurred on January
1, 1997. The unaudited pro forma balance sheet at March 31, 1998 has been
adjusted to give effect to the acquisition of AutoPaints as if it occurred on
March 31, 1998 (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. Thompson has been accounted for using
the purchase method of accounting. The purchase price of Thompson, including the
related fees and expenses, has 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.
The Company is subject to indirect, majority ownership by Distribution,
while AutoPaints is a wholly-owned subsidiary of Distribution. Accordingly,
since the proposed acquisition of AutoPaints is a transaction within a
controlled
<PAGE>
group, AutoPaints has been accounted for using its historical cost basis in the
unaudited pro forma financial data which results in no recognition of goodwill.
The historical results of operations for Thompson for the year ended
September 27, 1997 have been presented with pro forma adjustments to eliminate
the results of operations for the period from October 1, 1996 through December
31, 1996 and including the results of operations for the period from September
28, 1997 through the date of acquisition of November 21, 1997.
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, and the related tax effects.
The pro forma adjustments were prepared in accordance with current SEC
guidelines and, accordingly, do not include reductions to operating expenses
resulting from the elimination of duplicate functions and facilities directly
attributable to the acquisitions.
<PAGE>
Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Thompson Pro
Pro Forma Forma Purchase FinishMaster &
Thompson PBE Adjustments for Accounting Thompson Pro
FinishMaster, Inc. Inc.(a) Thompson (c) Adjustments (d) Forma Combined (m)
------------------ ------- ------------ --------------- ------------------
<S> <C> <C> <C> <C> <C>
NET SALES $130,175 $201,159 $(15,440) $ --- $315,894
COST OF SALES 83,068 132,099 (8,690) --- 206,477
-------- -------- -------- --------- --------
GROSS PROFIT 47,107 69,060 (6,750) --- 109,417
EXPENSES
Operating, selling, general
and administrative expenses 38,542 60,733 (4,943) --- 94,332
Depreciation 1,443 2,283 (47) (405) (e) 3,274
Amortization of intangible assets 3,290 2,904 (178) 8 (f) 6,334
310 (g)
-------- -------- -------- --------- --------
Total operating expenses 43,275 65,920 (5,168) (87) 103,940
-------- -------- -------- --------- --------
INCOME (LOSS)
FROM OPERATIONS 3,832 3,140 (1,582) 87 5,477
OTHER INCOME (EXPENSE)
Interest expense, net 2,661 4,131 (403) 9,008 (h) 12,841
(2,556) (i)
Minority Interest --- --- --- --- ---
Charge in connection with
the sale, consolidation or
closure of certain sites --- 3,616 --- --- 3,616
-------- -------- -------- --------- --------
2,661 7,747 (403) 6,452 16,457
-------- -------- -------- --------- --------
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY GAIN 1,171 (4,607) (1,179) (6,365) (10,980)
Income tax expense (benefit) 515 (1,618) (386) (1,722) (j) (3,211)
-------- -------- -------- --------- --------
NET INCOME (LOSS)
BEFORE EXTRA-
ORDINARY GAIN (t) $656 ($2,989) ($793) ($4,643) ($7,769)
======== ======== ======== ======== ========
Net income (loss) per share data:
NET INCOME (LOSS) BEFORE
EXTRAORDINARY GAIN
PER SHARE- BASIC .11 (1.30)
- DILUTED .11 (1.30)
WEIGHTED AVERAGE
SHARES OUT-
STANDING (l) 5,993 5,993
</TABLE>
<PAGE>
Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 1997 (in
thousands, except per share data)
<TABLE>
<CAPTION>
FinishMaster
Related
AutoPaints AutoPaints
LDI AutoPaints Pro Forma Pro Forma Pro Forma
Inc. (b) Adjustments (n) Adjustments (k) Combined
-------- --------------- --------------- --------
<S> <C> <C> <C> <C>
NET SALES $152,099 $(130,175) --- $337,818
COST OF SALES 96,914 (83,068) --- 220,323
--------- ----------- -------- --------
GROSS PROFIT 55,185 (47,107) --- 117,495
EXPENSES
Operating, selling, general
and administrative expenses 46,478 (38,542) (1,994) (o) 100,274
Depreciation 1,959 (1,443) (6) (p) 3,784
Amortization of intangible assets 8,490 (3,290) (4,160) (q) 7,374
--------- ----------- -------- --------
Total operating expenses 56,927 (43,275) (6,160) 111,432
--------- ----------- -------- --------
INCOME (LOSS)
FROM OPERATIONS (1,742) (3,832) 6,160 6,063
OTHER INCOME (EXPENSE)
Interest expense, net 2,738 (2,661) --- 12,918
Minority Interest 165 --- (165) (r) ---
Charge in connection with
the sale, consolidation or
closure of certain sites 229 --- --- 3,845
--------- ----------- -------- --------
3,132 (2,661) (165) 16,763
--------- ----------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY GAIN (4,874) (1,171) 6,325 (10,700)
Income tax expense (benefit) (1,381) (515) 1,992 (s) (3,115)
--------- ----------- -------- --------
NET INCOME (LOSS)
BEFORE EXTRA-
ORDINARY GAIN (t) ($3,493) ($656) $4,333 ($7,585)
========= =========== ======== ========
Net income (loss) per share data:
NET INCOME (LOSS) BEFORE
EXTRAORDINARY GAIN
PER SHARE- BASIC (1.01)
- DILUTED (1.01)
WEIGHTED AVERAGE
SHARES OUT-
STANDING (l) 7,535
</TABLE>
<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 depreciation expense for the fair value of assets acquired.
(f) Increase in amortization of goodwill over an estimated useful life of
30 years.
(g) Amortization related to capitalized debt issue costs.
(h) Record interest expense for new financing agreements with estimated
annual interest rates ranging from 8% to 9%.
Principal Interest Maturity
Subordinated Notes Payable 30,000 9.0% May, 2004
Bank Financing 77,298 8.2% Nov., 2003
------
107,298
(i) Eliminate interest expense on debt refinanced in connection with the
acquisition.
Principal Interest
Heller 32,769 7.8%
(j) Adjusts the pro forma combined income tax expense to an effective rate
of 29%, which differs from the statutory rate as a result of
non-deductible goodwill amortization and other non-deductible expenses.
(k) This column gives effect to the proposed acquisition of AutoPaints as
if it had occurred as of January 1, 1997. Effective January 31, 1998,
AutoPaints distributed to its parent, Distribution, all of its net
assets other than (i) the Florida Division of AutoPaints and (ii) the
shares of the Company owned by AutoPaints. Accordingly, these
adjustments reflect the costs associated with the administrative and
other activities transferred to Distribution.
The January 31, 1998 distribution consisted of the following net assets
associated with the AutoPaints headquarters function and office:
Furniture and equipment $5
Deferred income tax balances 1,334
Non-compete agreements (unamortized portion) 11,275
Goodwill (unamortized portion) 24,490
Accounts payable and accrued liabilities (331)
-------
$36,773
=======
The non-compete agreements and goodwill arose from the original
acquisition by AutoPaints of 67.5% of the outstanding shares of
FinishMaster. In connection with this distribution, all administrative
functions and employees associated with the headquarters office of
AutoPaints were transferred to Distribution and the headquarters
function ceased.
(l) Reflects the 1,542,416 additional shares of Common Stock of the Company
to be issued pursuant to the Proposed Acquisition.
(m) This column is the pro forma results of operations of the Company for
the year ended December 31, 1997, assuming that the acquisition of
Thompson took place on January 1, 1997.
<PAGE>
(n) This column eliminates the accounts of FinishMaster which are already
reflected in the first column of this pro forma statement.
(o) Operating expenses related to administrative and other activities
transferred to Distribution. These operating expenses are directly
associated with the AutoPaints headquarters function and office
transferred to Distribution (see note (k)). These expenses consist of
compensation, benefits and related payroll taxes for headquarters
employees; audit, legal and other professional fees; as well as
allocations of general corporate expenses from Distribution.
(p) Depreciation expense associated with fixed assets transferred to
Distribution.
(q) Amortization expense associated with noncompete agreements and goodwill
transferred to Distribution (see note (k)). This amortization expense
consists of $860 associated with goodwill and $3,300 associated with
non-compete agreements.
(r) Elimination of minority interests related to the shares of the Company
to be transferred to Distribution.
(s) Adjustment to income tax expense resulting from the preceding
AutoPaints pro forma adjustments. Effective rate differs from the
statutory rate as a result of non-deductible goodwill amortization.
(t) During 1997, AutoPaints recorded an extraordinary gain of $444 (net of
related taxes of $271) resulting from the extinguishment of a long-term
obligation. This gain has been excluded from the pro forma
presentation.
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
For the Quarter Ended March 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
FinishMaster
Related
AutoPaints AutoPaints
LDI AutoPaints Pro Forma Pro Forma Pro Forma
FinishMaster(a) Inc. (b) Adjustments(d) Adjustments (e) Combined
--------------- -------- -------------- --------------- --------
<S> <C> <C> <C> <C> <C>
NET SALES $ 76,024 $ 81,743 (76,024) --- $ 81,743
COST OF SALES 49,079 52,433 (49,079) --- 52,433
-------- ---------- ------- ----------- ----------
GROSS PROFIT 26,945 29,310 (26,945) --- 29,310
EXPENSES
Operating, selling, general
and administrative expenses 20,652 22,249 (20,652) (142) (f) 22,107
Depreciation 920 1,035 (920) --- 1,035
Amortization of intangible
assets 1,574 2,109 (1,574) (275) (g) 1,834
-------- ---------- ------- ----------- ----------
Total operating expenses 23,146 25,393 (23,146) (417) 24,976
-------- ---------- ------- ----------- ----------
INCOME (LOSS) FROM
OPERATIONS 3,799 3,917 (3,799) 417 4,334
OTHER INCOME (EXPENSE)
Interest expense, net 2,792 2,808 (2,792) --- 2,808
Minority Interest --- 172 --- (172)(h) ---
-------- ---------- ---- ----------- ----------
2,792 2,980 (2,792) (172) 2,808
-------- ---------- ---- ----------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 1,007 937 (1,007) 589 1,526
Income tax expense 479 517 (479) 157(i) 674
-------- ---------- -------- ----------- ----------
NET INCOME $ 528 $ 420 (528) $ 432 $ 852
======== ========== ======== =========== ==========
Net income (loss)
per share data:
NET INCOME (LOSS)
PER SHARE - BASIC 0.09 0.27 0.11
- DILUTED 0.09 0.27 0.11
WEIGHTED AVERAGE
SHARES OUTSTANDING (c) 5,993 1,542 7,535
</TABLE>
Notes to Unaudited Pro Forma Consolidated Statement of Operations (in
thousands):
(a) This column is the historical results of FinishMaster (including
Thompson) for the three months ended March 31, 1998.
(b) This column is the historical results of AutoPaints for the three
months ended March 31,1998. AutoPaints includes the accounts of its
majority-owned subsidiary, FinishMaster, Inc.
(c) Reflects the 1,542,416 additional shares of Common Stock of the Company
to be issued pursuant to the Proposed Acquisition.
(d) This column eliminates the accounts of FinishMaster which are already
reflected in the first column of this pro forma statement.
(e) Effective January 31, 1998, AutoPaints distributed to its parent,
Distribution, all of its net assets other than (i) the Florida Division
of AutoPaints and (ii) the shares of the Company owned by AutoPaints.
Accordingly, these adjustments reflect the costs associated with the
administrative and other activities transferred to Distribution.
(f) Operating expenses related to administrative and other activities
transferred to Distribution.
(g) Amortization expense associated with non-compete agreements and
goodwill transferred to Distribution.
(h) Elimination of minority interests related to the shares of the Company
to be transferred to Distribution.
(i) Adjustment to income tax expense resulting from the preceding
AutoPaints pro forma adjustments. Effective rate differs from the
statutory rate as a result of non-deductible goodwill amortization.
<PAGE>
FinishMaster, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
March 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
FinishMaster AutoPaints (k) Adjustments (k) Combined
------------ -------------- --------------- --------
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash $ 575 $ 1,208 $ (575) $ 1,208
Accounts receivable 29,167 30,894 (29,167) 30,894
Inventory 51,717 56,749 (51,717) 56,749
Prepaid expenses and
other current assets 7,144 7,464 (7,144) 7,464
----------- ------------- ---------- -----------
TOTAL CURRENT ASSETS 88,603 96,315 (88,603) 96,315
Property plant and equip-
ment, net 9,607 10,948 (9,607) 10,948
Intangible assets, net 109,662 117,312 (109,662) 117,312
Other assets 2,838 3,186 (2,838) 3,186
----------- ------------- ---------- -----------
TOTAL ASSETS $ 210,710 $ 227,761 $ (210,710) $ 227,761
=========== ============= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,104 $ 34,324 $ (33,104) $ 34,324
Accrued expenses and other
current liabilities 11,546 12,269 (11,546) 12,269
Current maturities of
long-term obligations 8,526 8,746 (8,526) 8,746
----------- ------------- ---------- -----------
TOTAL CURRENT LIABILITIES 53,176 55,339 (53,176) 55,339
LONG-TERM OBLIGATIONS,
less current maturities 124,074 124,688 (124,074) 124,688
Minority Interest 10,875 (10,875)
STOCKHOLDERS' EQUITY
Common Stock 5,993 1,542 (j) 7,535
Additional paid-in capital 14,466 42,625 (29,893)(j) 27,198
Retained earnings (accumulated
deficit) 13,001 (5,766) 5,766 (j) 13,001
----------- ------------- ---------- -----------
Total stockholders' equity 33,460 36,859 (22,585) 47,734
----------- ------------- ---------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 210,710 $ 227,761 $ ( 210,710) $ 227,761
============ ============= ============= ==========
</TABLE>
Notes to Unaudited Pro Forma Consolidated Balance Sheet (in thousands).
(j) Reflects the 1,542,416 additional shares of Common Stock of the Company
to be issued pursuant to the Proposed Acquisition.
(k) AutoPaints includes the accounts of its majority-owned subsidiary,
FinishMaster, accordingly, the pro forma adjustments eliminate these
amounts in determining the pro forma combined totals.
<PAGE>
FinishMaster
Additional Proxy Disclosures
For the Year Ended December 31, 1997
and the Quarter Ended March 31, 1998
(in thousands, except per share data)
Selected Financial Data As of and For the Year Ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
FinishMaster, Inc.
and Thompson PBE, Inc.
FinishMaster, Inc. Pro Forma Combined LDI AutoPaints Pro Forma Combined
------------------ ------------------ -------------- ------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE - BASIC $ 0.11 $ (1.30) $ 0.12 (a) $ (1.01)
- DILUTED $ 0.11 $ (1.30) $ 0.12 (a) $ (1.01)
CASH DIVIDENDS PER SHARE $ - $ - $ - $ -
BOOK VALUE PER SHARE $ 5.50 n/a $ 9.05 (b) $ 6.22
WEIGHTED AVERAGE SHARES OUTSTANDING 5,993 5,993 1,542 (a) 7,535
SHARES OUTSTANDING AT YEAR END 5,993 5,993 1,542 (a) 7,535
</TABLE>
Selected Financial Data As of and For the Quarter Ended March 31, 1998
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
FinishMaster, Inc. LDI AutoPaints, Inc. Pro Forma Combined
------------------ -------------------- ------------------
<S> <C> <C> <C>
NET INCOME PER SHARE - BASIC $ 0.09 $ 0.21 (a) $ 0.11
- DILUTED $ 0.09 $ 0.21 (a) $ 0.11
CASH DIVIDENDS PER SHARE $ - $ - $ -
BOOK VALUE PER SHARE $ 5.58 $ 9.26 (b) $ 6.33
WEIGHTED AVERAGE SHARES OUTSTANDING 5,993 1,542 (a) 7,535
SHARES OUTSTANDING AT YEAR END 5,993 1,542 (a) 7,535
</TABLE>
(a) Per share amounts for LDI AutoPaints, Inc. have been calculated using
the number of the Company's shares to be issued pursuant to the
Proposed Acquisition. Additionally, the per shares amounts have been
computed for LDI AutoPaints, Inc. after consideration of the pro forma
adjustments for each period presented.
(b) The book value per share for LDI AutoPaints has been determined
excluding the book value of the AutoPaints investment in FinishMaster
and the January 31, 1998 distribution of non-Florida Division assets to
Distribution. The shares of FinishMaster owned by AutoPaints will be
canceled and reissued to Distribution prior to the issuance of the
shares reflected above. The resulting book value represents the net
assets of the Florida Division of AutoPaints.
<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.
35
<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, where legally
permissible, 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. The Merger Agreement does not
provide for the payment of any termination fees.
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
36
<PAGE>
made by Distribution and the Company, respectively, in the Merger Agreement
having been untrue in any material respect as of the date made.
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; Ratification of Transaction
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.
A vote to approve the Proposed Transaction may be viewed as a
ratification of the Proposed Transaction by a court or other regulatory body
which may later review the Proposed Transaction. Such ratification may preclude
a shareholder that votes to approve the Proposed Transaction from bringing or
participating in such a proceeding.
37
<PAGE>
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
FOR THE APPROVAL OF THE PROPOSED ACQUISITION AND THE MERGER AGREEMENT.
In making this recommendation, the Board of Directors considered the
following material factors: (i) the need to meet the requirement for an
additional equity investment in the Company under the Company's bank credit
agreement (see "Background and Purpose of the Proposed Transaction"), (ii) the
recommendation of management with regard to the Proposed Acquisition, (iii) the
Fairness Opinion issued by McDonald & Company with respect to the Proposed
Acquisition, and (iv) the recommendation of the Proposed Acquisition by the
Independent Committee.
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.
38
<PAGE>
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
February 12, 1999, for inclusion in the Company's proxy statement and proxy form
for that meeting.
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 sections of the Company's Annual Report to Shareholders
for the fiscal year ended December 31, 1997, a copy of which accompanies this
Proxy Statement, are hereby incorporated by reference:
(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.
By Order of the Board of Directors
/s/ Andre B. Lacy
Andre B. Lacy, Chairman of the Board
and Chief Executive Officer
39
<PAGE>
The Special Committee of the
Board of Directors
February 16, 1998
Page -1-
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.
Kentwood, 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.
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.
<PAGE>
The Special Committee of the
Board of Directors
February 16, 1998
Page -2-
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 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.
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
Board of Directors and Stockholders LDI AutoPaints, Inc.
We have audited the accompanying consolidated balance sheets of LDI AutoPaints,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1997 and the eight-month period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LDI
AutoPaints, Inc. and Subsidiaries at December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997 and the eight-month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Indianapolis, Indiana
March 20, 1998
-1-
<PAGE>
LDI AutoPaints, Inc.
Consolidated Balance Sheets
at December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
ASSETS
Current assets:
<S> <C> <C>
Cash $ 997 $ 300
Accounts receivable, net of allowance for
doubtful accounts of
$2,360 and $898, respectively 30,294 14,270
Inventory 57,671 29,076
Refundable income taxes 1,299 --
Deferred income taxes 4,086 697
Prepaid expenses and other current assets 2,841 887
--------- -------------
Total current assets 97,188 45,230
Property and equipment:
Land 368 368
Vehicles 1,297 270
Buildings and improvements 4,610 3,662
Machinery, equipment and fixtures 10,264 6,992
--------- ------------
16,539 11,292
Accumulated depreciation (4,789) (3,158)
---------- ------------
11,750 8,134
Other assets:
Intangible assets, net 154,821 69,507
Due from affiliate 2,650 --
Deferred income taxes 5,001 892
Other 453 139
--------- -------------
162,925 70,538
--------- -----------
$ 271,863 $ 123,902
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank $ -- $ 1,841
Accounts payable 29,109 14,326
Due to affiliate 1,168 1,093
Accrued expenses and other current liabilities 12,056 3,112
Current maturities of long-term obligations 8,224 4,354
--------- -----------
Total current liabilities 50,557 24,726
Long-term obligations, less current maturities 134,804 18,676
Other noncurrent liabilities 2,538 3,600
Minority interest 10,703 10,539
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, no par value; 1,000 shares
authorized and 100 shares issued and outstanding 1 1
Additional paid-in capital 79,448 69,499
Retained earnings (deficit) (6,188) (3,139)
---------- -------------
73,261 66,361
--------- -----------
$ 271,863 $ 123,902
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
<PAGE>
LDI AutoPaints, Inc.
Consolidated Statements of Operations
for the year ended December 31, 1997
and the eight months ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Year Eight Months
Ended Ended
December 31, December 31,
1997 1996
<S> <C> <C>
Net sales $ 152,099 $ 72,960
Cost of sales 96,914 47,262
------------- -----------
Gross profit 55,185 25,698
------------- -----------
Expenses:
Operating 21,513 10,801
Selling, general and administrative 25,194 13,626
Depreciation 1,959 915
Amortization of intangible assets 8,490 4,146
-------------- ------------
57,156 29,488
------------- -----------
Loss from operations (1,971) (3,790)
--------------- ------------
Other income (expense):
Investment income 128 47
Interest expense (2,866) (916)
--------------- -------------
(2,738) (869)
--------------- -------------
Loss before income taxes, minority interest and
extraordinary item (4,709) (4,659)
Income tax benefit (1,381) (1,507)
--------------- ------------
Loss before minority interest and extraordinary item (3,328) (3,152)
Minority interest 165 (13)
--------------- --------------
Net loss before extraordinary item (3,493) (3,139)
Extraordinary item 444 --
--------------- ---------------
Net loss $ (3,049) $ (3,139)
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
LDI AutoPaints, Inc.
Consolidated Statements of Cash Flows
for the year ended December 31, 1997
and the eight months ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Year Eight Months
Ended Ended
December 31, December 31,
1997 1996
Operating activities:
<S> <C> <C>
Net loss $ (3,049) $ (3,139)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,449 5,061
Bad debt expense 967 653
Gain on retirement of debt (715) --
Deferred income taxes (1,725) (1,227)
Minority interest 165 (13)
Loss on sale of property and equipment -- 738
Changes in operating assets and liabilities:
Accounts receivable 3,250 1,388
Inventories (1,438) (582)
Prepaid and other current assets 186 (207)
Accounts payable and other current liabilities (11,830) 8,052
------------- -----------
Net cash provided by (used in) operating activities (3,740) 10,724
-------------- ----------
Investing activities:
Business acquisitions (74,149) (75,125)
Purchases of property and equipment (1,111) (739)
-------------- ------------
Net cash used in investment activities (75,260) (75,864)
------------- -------------
Financing activities:
Borrowings under note payable, bank 20,603 11,533
Repayments under note payable, bank (22,444) (14,736)
Acquisition financing 73,819 1,144
Debt issuance costs (1,689) --
Proceeds from long-term obligations 41,952 --
Repayment of long-term obligations (42,493) (2,001)
Capital contributions 9,949 69,500
------------ -----------
Net cash provided by financing activities 79,697 65,440
----------- -----------
Increase in cash 697 300
Cash at beginning of year 300 --
------------ --------------
Cash at end of year $ 997 $ 300
=========== ============
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 2,234 $ 916
========== ============
Income taxes $ 1,520 $ 1,368
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE>
LDI AutoPaints, Inc.
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1997 and the eight
months ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficit) Totals
<S> <C> <C> <C> <C>
Initial capitalization at April 30, 1996 $ 1 $ -- $ -- $ 1
Capital contributions -- 69,499 -- 69,499
Net loss for the year -- -- (3,139) (3,139)
-------------- ------------- ------------ -----------
Balances at December 31, 1996 1 69,499 (3,139) 66,361
Capital contributions -- 9,949 -- 9,949
Net loss for the year -- -- (3,049) (3,049)
-------------- ------------- ------------ -----------
Balances at December 31, 1997 $ 1 $ 79,448 $ (6,188) $ 73,261
============= ======== =========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. Significant Accounting Policies:
a. Nature of Business: LDI AutoPaints, Inc. (the "Company" or
"AutoPaints") was formed as a wholly owned subsidiary of Lacy
Distribution, Inc. ("Distribution") on April 30, 1996 as a
holding company for distribution operations. The Company owns
67.5% of the outstanding common stock of FinishMaster, Inc.
("FinishMaster"). 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 FinishMaster operated 143 sales outlets
and three distribution centers in 22 states. FinishMaster is
organized into three major geographic regions--the
Southeastern, Western and Central/Northeastern Divisions. The
Company also operates 14 stores and one warehouse in the state
of Florida under the name LDI AutoPaints. 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.
b. 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.
c. Principles of Consolidation: The consolidated financial
statements, identified as LDI AutoPaints, Inc., include the
consolidated accounts of LDI AutoPaints, Inc., FinishMaster,
Inc., Thompson PBE, Inc., and Refinishers Warehouse, Inc., all
wholly owned subsidiaries. Sales by Refinishers Warehouse are
primarily to FinishMaster and are eliminated in consolidation.
All other significant intercompany, equity accounts and
transactions are eliminated. References to the Company
throughout this report relate to the consolidated entity.
d. Transactions with Majority Shareholder: AutoPaints is a wholly
owned subsidiary of Lacy Distribution, Inc., which is, in
turn, a wholly owned subsidiary of LDI, Ltd. (LDI). Pursuant
to an arrangement between the Company and Distribution, the
Company pays Distribution for services it provides to the
Company. During the period between April 30, 1996 and December
31, 1997, Distribution has provided services to the Company to
support certain managerial tasks. Accordingly, the Company
paid $1,037 to Distribution during the year ended December 31,
1997, and $988 in the eight months ended December 31, 1996 in
return for the services of Distribution.
e. 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.
f. 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.
g. 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:
-6-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. Significant Accounting Policies, continued:
Vehicles 5 years
Building and Improvement Up to 40 years
Leasehold Improvement Life of lease
Machinery, Equipment and Fixtures 3 to 10 years
h. 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.
i. Intangibles: Intangibles primarily consist of the excess of
cost over fair market value of net assets of acquired
businesses. Intangible assets, including noncompete
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.
j. Advertising: Advertising costs are expensed as incurred. The
amounts were immaterial for all periods presented.
k. 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.
2. Acquisitions:
The following table summarizes the assets acquired and liabilities
assumed in acquisitions made by the Company 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
-7-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
2. Acquisitions, continued:
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 the Company's consolidated
financial statements as of the respective date of purchase.
<TABLE>
<CAPTION>
Year Eight Months
Ended Ended
December 31, December 31,
1997 1996
<S> <C> <C>
Accounts receivable $ 20,239 $ 16,311
Inventory 27,158 28,503
Deferred taxes 6,082 70
Equipment and other 8,029 11,475
Intangible assets 91,629 73,716
----------- -----------
153,137 130,075
Liabilities assumed 78,988 54,950
----------- -----------
Acquisition price 74,149 75,125
Acquisition debt 73,819 1,144
----------- ------------
Net assets of business acquired,
net of acquisition debt $ 330 $ 73,981
============ ==========
Number of acquisitions 3 4
</TABLE>
On November 21, 1997, FinishMaster acquired substantially all of the outstanding
common stock of Thompson PBE, Inc. for $8.00 per share. The total purchase
price, including related acquisition costs, was $73,471. The Company funded the
acquisition with a combination of bank financing and subordinated borrowings
from LDI, Ltd., the parent of Distribution. 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.
Effective July 1, 1996, the Company acquired 67.4% of the common stock of
FinishMaster for a cash price of $47,594, including acquisition expenses. The
purchase agreement includes a noncompetition agreement with the former owners
for which the Company has agreed to pay $16,500, of which $12,000 was paid at
close with the remainder due in five equal annual installments.
On May 31, 1996, the Company acquired the product lines, assets and related
rights of Steego Automotive Paints ("Steego"), a division of Parts Depot
Company, L.P., for a cash price of $11,687, including acquisition expenses.
The Company made additional acquisitions in 1997 and 1996 which were
individually immaterial.
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
-8-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
2. Acquisitions, continued:
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 Eight Months
Ended Ended
December 31, December 31,
1997 1996
<S> <C> <C>
Net sales $ 339,515 $ 255,625
Net income (loss) (9,011) (5,237)
3. Intangible Assets:
Intangible assets consisted of the following:
December 31,
1997 1996
Goodwill $ 127,273 $ 35,644
Noncompete agreements 43,161 42,941
Debt issuance costs 1,689 --
------------ -------------
172,123 78,585
Less accumulated amortization 17,302 9,078
---------- ----------
Intangible assets, net $ 154,821 $ 69,507
========= ========
</TABLE>
Included in the 1997 balance is goodwill as well as amounts associated
with non-compete agreements totaling $24,490 and $11,550, respectively,
net of related accumulated amortization, that were subsequently
transferred to Distribution (see note 9).
-9-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
4. Long-term Obligations:
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
Notes payable to former owners of acquired businesses with interest at
<S> <C> <C>
various rates up to 12%, due 1998 through 2007 $ 19,241 $ 13,971
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
------------ -----------
143,028 23,030
Less current maturities 8,224 4,354
------------ -----------
$ 134,804 $ 18,676
========= ========
</TABLE>
a. Revolving Credit Facility: FinishMaster 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. FinishMaster is charged an annual
administrative fee of $50 thousand, and an annual commitment
fee, payable monthly, of 0.5% on the unused portion of the
revolving credit facility.
b. 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 FinishMaster'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 into
FinishMaster of $14 million or such lesser amount as may be
acceptable to the Company's bank. The Company intends to
satisfy this requirement through a sale of the Florida
operation to FinishMaster in exchange for equity in
FinishMaster. (See Note 9.)
-10-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
4. Long-term Obligations, continued:
c. 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:
1998 $ 8,224
1999 9,736
2000 10,952
2001 10,323
2002 10,494
Thereafter 93,299
------------
$ 143,028
==========
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.
During 1997, the Company recorded an extraordinary gain of $444 (net of
related taxes of $271) resulting from the extinguishment of a long-term
obligation.
5. 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 $326 and $158 for years ended December 31, 1997 and 1996,
respectively.
-11-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
6. Stock Options:
FinishMaster has an Employee Stock Option Plan under which options up
to 600,000 shares of FinishMaster's common stock may be granted to
officers, key employees and nonemployee directors of FinishMaster. 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.
FinishMaster 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 FinishMaster's common stock on the date of grant, therefore,
no compensation is recognized. Had compensation expense been determined
at the date of the grant based on the fair value of the awards
consistent with Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation, the Company's net income would
have been reduced to the pro forma amounts indicated in the following
table:
Year Eight Months
Ended Ended
December 31, December 31,
1997 1996
Net loss:
As reported $ (3,049) $ (3,139)
Pro forma (3,182) (3,139)
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 and 1996, respectively: risk free
interest rate of 5.5 and 5.7 percent; no dividend yield for all years;
expected lives of 9 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>
<CAPTION>
December 31, 1997 December 31, 1996
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year 169,310 $ 10.71 222,085 $
Granted 45,000 7.00 -- --
Exercised -- -- 140 10.50
Forfeited 4,310 10.50 52,635 10.76
-------- ------- -------- --------
Outstanding and exercisable, end of
year ($7.00 to $11.00 per share) 210,000 $ 9.92 169,310 $ 10.71
======= ======== ======== =======
</TABLE>
The weighted-average fair value of options granted during the years
ended December 31, 1997 and 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.
-12-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
7. Income Taxes:
The provision for federal and state income taxes consisted of the
following:
Year Eight Months
Ended Ended
December 31, December 31,
1997 1996
Current:
Federal $ 272 $ (360)
State 72 80
Deferred (1,725) (1,227)
----------- ----------
$ (1,381) $ (1,507)
========== =========
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 Eight Months
Ended Ended
December 31, December 31,
1997 1996
<S> <C> <C>
Federal statutory tax rate 34.0 % 34.0 %
State tax provision 1.5 1.7
Nondeductible intangible amortization (6.9) (3.5)
Other 0.7 0.2
-------- -----
Effective tax rate 29.3 % 32.4 %
======== ======
</TABLE>
-13-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
7. Income Taxes, continued:
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
Deferred tax assets:
<S> <C> <C>
Depreciation $ 834 $ 143
Amortization of intangibles 2,474 1,171
Allowance for doubtful accounts 1,147 295
Inventory 1,865 326
Accrued expenses 2,715 3
Other, net 52 25
---------- -----------
9,087 1,963
Deferred tax liabilities:
Depreciation -- 374
---------- ----------
$ 9,087 $ 1,589
======= ========
</TABLE>
8. Contingencies and Commitments:
The Company occupies facilities and uses equipment under operating
lease agreements requiring annual rental payments approximating the
following amounts for the five years subsequent to December 31, 1997:
1998 $ 7,120
1999 5,928
2000 3,251
2001 1,383
2002 649
Thereafter 1,271
----------
$ 19,602
========
Rent expense charged to operations, including short-term leases,
aggregated $4,351 and $2,171 for the years ended December 31, 1997 and
1996, respectively.
On January 14, 1998, FinishMaster 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.
-14-
<PAGE>
LDI AutoPaints, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
8. 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 nonpaint 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.
The Company is not involved in any material legal actions as of
December 31, 1997.
9. Subsequent Event:
Effective January 31, 1998, AutoPaints made a dividend to Distribution
consisting of all its net assets, excluding the net assets related to
the Florida Division and the shares of FinishMaster owned by
AutoPaints. This distribution consisted of the following net assets:
Furniture and equipment $ 5
Deferred income tax balances 1,334
Non-compete agreements (unamortized portion) 11,275
Goodwill (unamortized portion) 24,490
Accounts payable and accrued liabilities (331)
-------
$36,773
=======
On February 16, 1998, FinishMaster, 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 FinishMaster's shareholders, AutoPaints will merge with and into
FinishMaster, and FinishMaster will issue an additional 1,542,416
shares of the common stock of FinishMaster to Distribution.
FinishMaster will also seek shareholder approval for an increase in the
number of authorized common shares from 10 million to 25 million
shares.
On March 27, 1998, FinishMaster 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.
-15-
<PAGE>
LDI AutoPaints, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,208 $ 997
Accounts receivable, net of allowance for doubtful
accounts of $1,854 and $2,360 respectively 30,894 30,294
Inventories 56,749 57,671
Prepaid expenses and other current asset 7,464 8,226
--------- -----------
Total current assets 96,315 97,188
Property, plant and equipment, net 10,948 11,750
Other Assets:
Intangible assets, net 117,312 154,821
Other 3,186 8,104
--------- ----------
120,498 162,925
--------- ----------
Total assets $ 227,761 $ 271,863
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 34,324 $ 30,277
Accrued expenses and other current liabilities 12,269 12,056
Current maturities of long-term obligations 8,746 8,224
----------- ----------
Total current liabilities 55,339 50,557
Long-term obligations, net of current maturities 124,688 134,804
Other non-current liabilities 0 2,538
Minority Interest 10,875 10,703
----------- ---------
Total liabilities 190,902 198,602
---------- --------
Common Stock 1 1
Additional paid-in capital 42,624 79,448
Retained earnings (deficit) (5,766) (6,188)
----------- ---------
Total stockholders' equity 36,859 73,261
----------- ---------
Total liabilities and stockholders' equity $ 227,761 $ 271,863
========= =========
</TABLE>
<PAGE>
LDI AutoPaints, Inc.
Condensed Consolidated Statements of Operations
(dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
Net Sales $ 81,743 $ 34,915
Cost of Sales 52,433 22,122
---------- ---------
Gross Margin 29,310 12,793
Expenses
Operating 11,913 4,925
Selling, general and administrative 10,336 5,303
Depreciation 1,035 393
Amortization 2,109 2,040
--------- ---------
Total 25,393 12,661
-------- --------
Income From Operations 3,917 132
Interest expense, net 2,808 506
--------- ---------
Income (loss) before income taxes and minority interest 1,109 (374)
Income tax expense (benefit) 517 (65)
---------- ---------
Net income (loss) before minority interest 592 (309)
Minortiy interest 172 132
----------- --------
Net Income (Loss) $420 ($441)
========== =======
</TABLE>
<PAGE>
LDI AutoPaints, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net Income 420 (441)
Adjustments to reconcile net income to net cash provided by operations:
Amortization and depreciation 3,144 2,433
Changes in operating assets and liabilities:
Accounts receivable (656) (469)
Inventories 962 615
Prepaid expenses and other assets 2,268 (885)
Accounts payable and other current liabilities 4,197 (2,546)
--------- -------
Net cash provided by (used in) operating 10,335 (1,293)
Cash flows from investing activities:
Purchases of property and equipment (165) (357)
Other (297) 0
--------- ----------
Net cash used in investing activities (462) (357)
Cash flows from financing activities:
Borrowings under note payable, bank 0 12,811
Repayments under note payable, bank 0 (9,367)
Proceeds from long term obligations 33,300 0
Repayments from long term obligations (42,894) (1,197)
Debt issuance costs (69) 0
Purchase of common stock 0 (51)
-------------- --------
Net cash provided by (used in) financing (9,663) 2,196
---------- --------
Net increase (decrease) in cash 210 546
Cash and cash equivalents, beginning of period 998 300
----------- --------
Cash and cash equivalents, end of period $ 1,208 $ 846
========= ========
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LDI AutoPaints, Inc.
March 31, 1998
NOTE 1 - Basis of Presentation
The condensed consolidated financial statements include the accounts of LDI
AutoPaints, Inc. (AutoPaints) and its wholly owned subsidiaries FinishMaster,
Inc., Thompson PBE, Inc., and Refinishers Warehouse, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements are unaudited and
have been prepared in accordance with generally accepted accounting principles
for interim financial information 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 for the year ended December
31, 1997 included in FinishMaster's proxy statement. The results of operation
for the interim periods presented are not necessarily indicative of the results
for the full year.
NOTE 2 - Distribution to Parent
Effective January 31, 1998, AutoPaints distributed to its Parent, Lacy
Distribution, Inc., all of its net assets other than the Florida Division and
shares of FinishMaster owned by AutoPaints. This distribution consisted of the
following net assets:
Furniture and equipment $ 5
Deferred income tax balances 1,334
Non-compete agreements (unamortized portion) 11,275
Goodwill (unamortized portion) 24,490
Accounts payable and accrued liabilities (331)
-------
$36,773
=======
<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
<PAGE>
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
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement") 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 "Merger
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:
-1-
<PAGE>
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, 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
-2-
<PAGE>
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
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.
-3-
<PAGE>
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 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,
-4-
<PAGE>
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 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) "Environmental 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.
-5-
<PAGE>
(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 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.
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<PAGE>
(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.
(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
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<PAGE>
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;
(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;
-8-
<PAGE>
(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.
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
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<PAGE>
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.
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;
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<PAGE>
(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 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.
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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.
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
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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.
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.
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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
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<PAGE>
Appendix IV to
Proxy Statement
CONDENSED CONSOLIDATED BALANCE SHEETS
FINISHMASTER, INC.
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
CURRENT ASSETS (unaudited)
<S> <C> <C>
Cash $ 575 $ 364
Accounts receivable, net of allowance for doubtful
accounts of $1,722 and $2,247 respectively 29,167 28,744
Inventory 51,717 53,442
Prepaid expenses and other current assets 7,144 7,894
---------- -----
TOTAL CURRENT ASSETS 88,603 90,444
PROPERTY AND EQUIPMENT, NET 9,607 10,296
OTHER ASSETS:
Intangibles assets, net 109,662 110,870
Other 2,838 3,808
---------- ----------
112,500 114,678
-------- -------
$210,710 $215,418
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,104 $ 28,274
Accrued expenses and other current liabilities 11,546 12,072
Current maturities of long-term obligations 8,526 8,005
-------- -------
TOTAL CURRENT LIABILITIES 53,176 48,351
LONG-TERM OBLIGATIONS, net of current maturities 124,074 134,135
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, 1,000,000 shares authorized;
no shares issued or outstanding
Common stock, $1 stated value, 10,000,000
shares authorized, 5,992,640 shares issued
and outstanding 5,993 5,993
Additional paid-in capital 14,466 14,466
Retained earnings 13,001 12,473
---------- ---------
33,460 32,932
---------- ---------
$210,710 $215,418
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FINISHMASTER, INC.
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
<S> <C> <C>
NET SALES $76,024 $29,239
COST OF SALES 49,079 18,610
------ ------
GROSS PROFIT 26,945 10,629
EXPENSES
Operating 11,714 4,667
Selling, general and administrative 8,938 3,801
Depreciation 920 277
Amortization of intangible assets 1,574 740
----- ---
TOTAL 23,146 9,485
------ -----
INCOME FROM OPERATIONS 3,799 1,144
Interest expense, net 2,792 488
----- ---
INCOME BEFORE INCOME TAXES 1,007 656
Income tax expense 479 250
--- ---
NET INCOME $528 $406
==== ====
NET INCOME PER SHARE - BASIC $.09 $.07
==== ====
- DILUTED $.09 $.07
==== ====
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 5,993 5,996
===== =====
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FINISHMASTER, INC.
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $528 $406
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,494 1,017
Changes in operating assets and liabilities:
Accounts receivable (423) (157)
Inventories 1,725 1,038
Prepaid expenses and other assets 1,720 146
Accounts payable and other current liabilities 4,304 (3,966)
----- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 10,348 (1,516)
INVESTING ACTIVITIES
Purchases of property and equipment (231) (144)
Other (297) (1)
----- ---
NET CASH USED IN
INVESTING ACTIVITIES (528) (145)
FINANCING ACTIVITIES
Borrowings under note payable, bank -- 12,811
Repayment under note payable, bank -- (9,367)
Proceeds from long term obligations 33,300 --
Repayment of long term obligations (42,840) (1,186)
Debt issuance costs (69) --
Purchase of common stock -- (51)
--------- ---------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (9,609) 2,207
------- ---------
INCREASE IN CASH 211 546
CASH AT BEGINNING OF PERIOD 364 300
--- ---
CASH AT END OF PERIOD $575 $846
==== ====
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-17-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FINISHMASTER, INC.
March 31, 1998
NOTE 1 - Basis of Presentation
The condensed consolidated financial statements include the accounts of
FinishMaster, Inc., Thompson PBE, Inc. and Refinishers Warehouse, Inc. 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 10-K 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 2 - Income Taxes
The effective tax rate for the three months ended March 31, 1998
increased over that of the three months ended March 31, 1997 due to the
non-deductible nature of certain expenses, primarily the amortization of
goodwill associated with the acquisition of Thompson PBE, Inc.
NOTE 3 - 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):
Three Months Ended March 31,
1998 1997
Numerator:
NET INCOME $528 $406
==== ====
Denominator:
BASIC-WEIGHTED AVERAGE SHARES 5,993 5,996
Effect of dilutive securities:
EMPLOYEE STOCK OPTIONS -- --
-------- ---------
DILUTED-WEIGHTED AVERAGE SHARES 5,993 5,996
===== =====
Basic net income per share $0.09 $0.07
===== =====
Diluted net income per share $0.09 $0.07
===== =====
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 three months ended March 31, 1998 and 1997.
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FinishMaster, Inc.
March 31, 1998
Results of Operations
The following table sets forth, certain items from the Company's Statement of
Operations as a percentage of net sales for the three months ended March 31,
1998 and 1997, respectively,
Three months ended
March 31,
1998 1997
---- ----
Net sales 100.0% 100.0%
Cost of sales 64.6 63.6
---- ----
Gross profit 35.4 36.4
Operating expenses 15.4 16.0
Selling, general and administrative 11.7 13.0
Depreciation and amortization 3.3 3.4
--- ---
30.4 32.4
---- ----
Income from operations 5.0 4.0
Interest expense 3.7 1.7
Provision for income taxes 0.6 0.9
--- ---
Net income 0.7% 1.4%
==== ====
Net Sales. Net sales for the quarter ended March 31, 1998 increased by $46.8
million or 160% to $76.0 million from $29.2 million for the same period in 1997.
The increase is the result of the acquisition of Thompson in November 1997. 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 and flat
industry market conditions.
Gross Profit. Gross profit for the quarter ended March 31, 1998 increased by
$16.3 million to $26.9 million from $10.6 million for the same period in 1997.
Gross profit as a percentage of sales decreased to 35.4% for the quarter ended
March 31, 1998 from 36.4% for the same period in 1997. The decrease in gross
profit as a percentage of sales is due to the sale of Thompson's higher cost
inventories which were acquired through the acquisition.
Operating Expenses. Operating expenses for the quarter ended March 31, 1998
increased by $7.1 million to $11.7 million from $4.6 million for the same period
in the prior year. Operating expenses as a percent of sales decreased to 15.4%
for the quarter ended March 31, 1998 compared to 16.0% for the same period in
1997. 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 cost containment measures
including, but not limited to, headcount reductions and streamlining sales
outlet and distribution activities.
Selling, General, and Administrative Expenses. (SG&A) SG&A expenses for the
quarter ended March 31, 1998 increased by $5.1 million to $8.9 million from $3.8
million for the same period in the prior year. SG&A expenses decreased as a
percentage of sales to 11.7% for the quarter ended March 31, 1998 compared to
13.0% for the same period in the prior year. The decrease in SG&A expenses as a
percentage of sales is due to the Company's cost containment measures including,
but not limited to, head count reductions, and reductions in travel and
entertainment and advertising expense. General and administrative expenses
consist of corporate support staff and expenses for commission, wages, and
expenses supporting customer sales activity. The Company expects continued
improvement in SG&A expenses as a percentage of sales as the Company
consolidates certain corporate functions as a result of the Thompson
acquisition.
-19-
<PAGE>
Depreciation and Amortization of Intangible Assets. Depreciation expense for the
quarter ended March 31, 1998 increased by $0.6 million to $0.9 million from $0.3
million for the same period in the prior year. Amortization of intangible assets
for the quarter ended March 31, 1998 increased by $0.8 to $1.6 million from $0.7
million for the same period in the prior year. Depreciation and amortization
consists primarily of depreciation expenses related to the distribution center
and store locations and amortization of goodwill and non-compete costs related
to acquisitions. The increase in depreciation and amortization is primarily
attributable to the Thompson acquisition.
Interest Expense. Interest expense for the quarter ended March 31, 1998
increased by $2.3 million for the quarter ended March 31, 1998 to $2.8 million
from $0.5 million for the same period in the prior year. Interest expense
primarily includes interest on the Company's credit facilities as well as
interest on mortgages and notes payable to former owners of acquired businesses.
The increase in interest expense 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.
Provision for Income Tax. The Company's effective tax rate for the quarter ended
March 31, 1998 was 47.6% compared to 38.1% for the three months ended March 31,
1998. This rate varied from the Company's statutory tax rate of 34%, primarily
due to state taxes along with certain non-deductible expenses, primarily the
amortization of goodwill associated with the acquisition of Thompson.
Liquidity and Capital Resources
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.
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson for $8.00 net per share. Thompson, like the Company, 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, the Company's majority
shareholder.
Cash provided by operating activities was $10.3 million for the quarter ended
March 31,1998, in contrast to cash used of $1.5 million for the comparable
period of the prior year. The increase in cash provided by operations is
primarily attributable to accounts payable management, prepaid management and
increased operating profitability compared to the prior period. Accounts payable
increased $8.3 million as a result of favorable vendor terms from prior
purchases, as well as an increased focus on cash management. Prepaid expenses
and other current assets decreased $1.8 million, primarily as a result of the
collection of non-trade receivables. Net income before non-cash charges, or
depreciation and amortization, increased $1.6 million compared to the same
period of the prior year.
Cash used in investing activities was $0.5 million for the quarter ended March
31, 1998, compared to $0.1 million for the comparable period of the prior year.
Capital expenditures used $0.3 million of cash to improve sales outlet
facilities and purchase equipment. The Company uses operating leases to finance
its computer system and delivery vehicles. Contingent costs incurred in
conjunction with previous acquisitions used $0.2 million of cash for the period
ended March 31, 1998.
Cash used for financing activities was $9.6 million for the quarter ended March
31, 1998, in contrast to cash provided of $2.2 million in the same period of the
prior year. For the quarter ended March 31, 1998, cash was used to repay debt
associated with bank financing.
The Company had working capital of approximately $35.4 million at March 31,
1998. In addition to working capital, the Company had term credit and revolving
credit facilities totaling $110 million, and senior subordinated debt of $30
million. At March 31, 1998 the Company had available $26.0 million of unused
revolving credit.
-20-
<PAGE>
As a condition of the amended bank credit facility of $100 million, the Company
agreed to obtain by June 30, 1998, additional equity of $14 million or such
lesser amount as may be acceptable to the Company's bank. The Company intends to
satisfy this requirement, subject to shareholder approval, through the
acquisition of AutoPaints, an indirect wholly-owned subsidiary of LDI, in
exchange for additional equity in the Company.
The Company is currently considering other financing arrangements. Should the
Company be successful in obtaining alternate financing arrangements on favorable
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 March 31, 1998, unamortized debt issue costs were approximately
$1.6 million.
Forward-looking Statements and Associated Risks
This Appendix may contain 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 Appendix will in fact occur.
-21-
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the quarter
ended March 31, 1998 are derived from the Company's unaudited consolidated
financial statements. The financial data should be read in conjunction with the
Company's unaudited consolidated financial statements and notes thereto, which
are included elsewhere in this Appendix IV, and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Quarter Ended March 31, 1998
(in thousands, except per share data)
Statements of Operations Data
Net sales 76,024
Gross profit 26,945
Income from operations 3,799
Net income 528
========
Net income per share - Basic .09
=========
- Diluted .09
=========
Weighted average shares outstanding 5,993
March 31, 1998
(in thousands)
Balance Sheet Data
Working capital 35,427
Total assets 210,710
Long-term debt 132,600
Stockholders' equity 33,460
-22-
<PAGE>
REVOCABLE PROXY
FINISHMASTER, INC.
Annual Meeting of Shareholders
June 30, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
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 Tuesday, June 30, 1998, at 10:00 A.M., local time, and
at any and all adjournments thereof, as follows on the reverse side.
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.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
[X] Please mark votes as in this example.
The Board of Directors recommends a vote "FOR" each of the listed propositions.
1. The election as directors of all nominees listed below for a one year
term expiring at the next annual meeting, except as marked to the
contrary.
Nominees: Andre B. Lacy, Thomas U. Young, Margot L. Eccles,
William J. Fennessy, Walter S. Wiseman,
Peter L. Frechette and Michael L. Smith
[ ] For All Nominees [ ] Withheld From All Nominees
[ ] --------------------------------
For all nominees except as noted above
[ ] MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW
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
<PAGE>
5. In their discretion, the proxies are authorized to vote on any other
business that may properly come before the Meeting or any adjournment
thereof.
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.
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.
Signature: Date
----------------------------------- -------------------------
Signature: Date
----------------------------------- -------------------------
<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's National Market
(NASDAQ) under the symbol FMST. The number of beneficial owners of
FinishMaster's common stock at March 31, 1998 was approximately 761.
The range of high and low sales prices reported by NASDAQ for the last nine
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 March 31 11-3/4 7-3/4
These quotations reflect interdealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
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" for the year
ended December 31, 1997 included herein.
<TABLE>
<CAPTION>
December 31, March 31,
1997 (2) 1996 1996 (1) 1995 1994
---------------- --------------- --------------- --------------- -----------------
(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) Reflects the acquisition of Thompson PBE, Inc. on November 21, 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.
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:
Borrowings under note payable, bank 20,603 21,256 14,162
Repayments under note payable, bank (22,444) (19,415) (14,162)
Purchase of common stock (50) -- --
Acquisition financing 73,819 1,191 10,774
Debt issuance costs (1,689) -- --
Proceeds from long-term obligations 41,951 -- 7,809
Repayment of long-term obligations (38,537) (2,469) (2,787)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 73,653 563 15,796
-------- -------- --------
INCREASE (DECREASE) IN CASH 64 (809) (1,029)
CASH AT BEGINNING OF PERIOD 300 1,109 2,138
-------- -------- --------
CASH AT END OF PERIOD $ 364 $ 300 $ 1,109
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 2,192 $ 1,313 $ 762
======== ======== ========
Taxes $ 1,520 $ 687 $ 774
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Net
Common paid-in Unrealized Retained
Stock Capital Gain/(Loss) Earnings Totals
------------- ------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES AT APRIL 1, 1995 $ 6,000 $ 14,508 $ (60) $ 8,508 $ 28,956
Adjustment related to sale of marketable securities 60 60
Net income for the year 2,649 2,649
------- ------- --------- ------- ------
BALANCES AT MARCH 31, 1996 6,000 14,508 - 11,157 31,665
Options exercised 1 1
Net income for the nine month period 660 660
------- ------- --------- ------- ------
BALANCES AT DECEMBER 31, 1996 6,000 14,509 11,817 32,326
-
Purchase of common stock (7) (43)
(50)
Net income for the year 656 656
------- ------- --------- ------- ------
BALANCES AT DECEMBER 31, 1997 $ 5,993 $ 14,466 $ - $12,473 $32,932
======= ======== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: FinishMaster, Inc. ("the Company" or "FinishMaster") is the
leading national distributor of automotive paints, coatings and paint-related
accessories to the automotive collision repair industry. As of December 31, 1997
the Company operated 143 sales outlets and three distribution centers in 22
states. The Company is organized into three major geographic regions - the
Southeastern, Western and Central/Northeastern Divisions. The Company has
approximately 20,000 customers to which it provides a comprehensive selection of
brand name products supplied by DuPont, PPG, BASF and 3M, in addition to its own
FinishMaster PrivateBrand refinishing accessory products. The Company is highly
dependent on a small number of key suppliers.
Majority Stockholder: On February 23, 1994, the Company completed an initial
public offering of common stock on the NASDAQ national market under the trading
symbol "FMST." The Company sold 1.7 million shares of common stock at an initial
public offering price of $10.50 per share. The net proceeds from the offering of
approximately $16.2 million were used by FinishMaster to fund acquisitions,
repay indebtedness, finance working capital and for general corporate purposes.
As a result of these transactions, 4,045,000 shares or 67.4% of the Company's
outstanding stock was owned by Maxco, Inc. ("Maxco") at March 31, 1996. On July
9, 1996, LDI AutoPaints, Inc. ("AutoPaints"), an Indiana corporation, purchased
all of the shares of common stock owned by Maxco. Effective December 31, 1996,
LDI, Ltd. ("LDI") transferred to AutoPaints 100 shares of the Company which it
had purchased on the open market in August, 1995. As a result of these
transactions, AutoPaints' ownership of FinishMaster stock was 4,045,100 shares
or 67.5% at December 31, 1997.
Use of Estimates: The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation: The consolidated financial statements, identified
as FinishMaster, Inc., include the consolidated accounts of FinishMaster, Inc.,
Thompson PBE, Inc., and Refinishers Warehouse, Inc., which are wholly owned
subsidiaries. Sales by Refinishers Warehouse are primarily to FinishMaster and
are eliminated in consolidation. All other significant intercompany, equity
accounts and transactions are eliminated. References to the Company or
FinishMaster throughout this report relate to the consolidated entity.
Transactions with Majority Shareholder: AutoPaints is a wholly-owned subsidiary
of Lacy Distribution, which is, in turn, a wholly-owned subsidiary of LDI.
Pursuant to an arrangement between the Company and AutoPaints, the Company pays
AutoPaints for services it provides to the Company. During the period between
July 10, 1996 and December 31, 1997, AutoPaints has provided services to the
Company to support certain managerial tasks. Accordingly, the Company paid
$291,000 to AutoPaints during the year ended December 31, 1997, and $262,000 in
the nine months ended December 31, 1996 in return for the services of
AutoPaints.
Prior to July 9, 1996, Maxco provided to the Company certain services. The
services included central purchasing of all insurance, including employee
benefit coverages, general and automobile liability, property and casualty.
Accordingly, the Company paid $1,723,000 to Maxco during the period between
January 1, 1996 and July 9, 1996 for these services. The amounts charged by
Maxco and AutoPaints are representative of arm's length prices.
Receivables: Trade accounts receivable represent amounts due primarily from
automotive body repair shops and dealerships. Trade receivables are typically
not collateralized. No single customer exceeds 10% of the Company's receivables
at December 31, 1997.
Inventories: Inventories are stated at the lower of first-in, first-out cost or
market and consist primarily of purchased paint and refinishing supplies.
Substantially all inventories consist of finished goods.
Properties and Depreciation: Property and equipment are stated on the basis of
cost and include expenditures for new facilities and equipment and those which
materially extend the useful lives of existing facilities and equipment.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. Depreciation is computed by the straight-line method over the
following range of estimated useful lives:
Vehicles 5 Years
Building & Improvement Up to 40 Years
Leasehold Improvement Life of Lease
Machinery, Equipment & Fixtures 3 to 10 Years
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Deferred income taxes are recognized for the temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. The income tax provision is the tax payable/recoverable for the period
and the change during the period in deferred tax assets and liabilities.
Intangibles: Intangibles primarily consist of the excess of cost over fair
market value of net assets of acquired businesses. Intangible assets, including
non-compete agreements, are amortized on a straight-line basis over periods
ranging from 5 to 30 years. Debt issuance costs are amortized over the term of
the debt agreement.
The carrying value of goodwill is periodically reviewed to determine if an
impairment has occurred. The Company measures the potential impairment of
recorded goodwill based on the estimated undiscounted cash flows of the entity
acquired over the remaining amortization period.
Advertising: Advertising costs are expensed as incurred. The amounts were
immaterial for all periods presented.
Recent Accounting Pronouncements: In June of 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components within the
financial statements. Comprehensive income includes items such as foreign
currency items, minimum pension liability adjustments, and unrealized gains and
losses on certain investments in debt and equity securities. This statement is
effective for fiscal years beginning after December 15, 1997, with
reclassification of prior periods required.
In June of 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way in which public entities report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement requires that general-purpose financial statements include
selected information reported on a single basis of segmentation. This statement
is effective for fiscal years beginning after December 15, 1997, with
restatement of comparative information for earlier years being required.
The Company is currently evaluating the impact of these pronouncements.
Reclassification: Certain reclassifications have been reflected in prior year
amounts to conform with the presentation of corresponding amounts in the current
period.
2. NET INCOME PER SHARE
In February of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share". This Statement
simplifies the standards for computing earnings per share, replacing the
presentation of primary earnings per share with a presentation of basic earnings
per share. SFAS No. 128 also requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed
similarly to fully diluted earnings per share pursuant to APB Opinion No. 15,
"Earnings per Share", which is superseded by this Statement.
<PAGE>
2. NET INCOME PER SHARE (continued)
The following table sets forth the computation of basic and diluted net income
per share (in thousands except per share data):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended March 31,
December 31, 1997 December 31, 1996
1996
------------------ ----------------- ------------------
Numerator:
<S> <C> <C> <C>
NET INCOME $ 656 $ 660 $2,649
------ ------ ------
Denominator:
BASIC-WEIGHTED AVERAGE SHARES 5,994 6,000 6,000
Effect of dilutive securities:
EMPLOYEE STOCK OPTIONS -- -- 46
DILUTED-WEIGHTED AVERAGE SHARES 5,994 6,000 6,046
------ ------ ------
Basic net income per share $ 0.11 $ 0.11 $ 0.44
====== ====== ======
Diluted net income per share $ 0.11 $ 0.11 $ 0.44
====== ====== ======
</TABLE>
The effect of employee stock options on the calculation of weighted average
shares outstanding for purposes of determining diluted earnings per share is
antidilutive for the year ended December 31, 1997 and the nine months ended
December 31, 1996.
3. ACQUISITIONS
The following table summarizes the assets acquired and liabilities assumed in
acquisitions made by FinishMaster in each of the periods presented. These
acquisitions have been accounted for as purchases and accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values at the
dates of acquisition. Intangible assets related to goodwill and covenants not to
compete were recorded with each acquisition. Operating results of acquired
entities have been included in FinishMaster's consolidated financial statements
as of the respective date of purchase.
<TABLE>
<CAPTION>
Nine Months
Year Ended ended December Year Ended
December 31, 31, March 31,
1997 1996 1996
-------------------- ----------------- ----------------
(in thousands)
<S> <C> <C> <C>
Accounts receivable $ 20,239 $ 755 $ 3,229
Inventory 27,158 511 8,500
Deferred taxes 6,082 - -
Equipment and other 8,029 456 1,492
Intangible assets 91,629 2,617 13,247
------ ----- ------
153,137 4,339 26,468
Liabilities assumed 78,988 1,256 4,275
------- ------ ------
ACQUISITION PRICE 74,149 3,083 22,193
Acquisition debt 73,819 1,191 10,774
------- ------ -------
NET ASSETS OF BUSINESSES ACQUIRED,
NET OF ACQUISITION DEBT $ 330 $ 1,892 $ 11,419
========== ======== ========
Number of acquisitions 3 1 16
</TABLE>
<PAGE>
3. ACQUISITIONS (continued)
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson PBE, Inc. for $8.00 per share. Thompson, like
FinishMaster, is an aftermarket distributor of automotive paints, coatings and
related supplies. The total purchase price, including related acquisition costs,
was $73,471,000. The Company funded the acquisition with a combination of bank
financing and subordinated borrowings from LDI. The acquisition was accounted
for as a purchase and accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based upon their estimated fair values at the
date of acquisition. Goodwill resulting from the acquisition of Thompson is
being amortized over 30 years.
The following table sets forth the unaudited pro forma results of operations for
the current period in which acquisitions occurred and for the immediately
preceding period as if the acquisitions were consummated at the beginning of the
immediately preceding period. The unaudited pro forma results of operations data
consists of the historical results of the Company as adjusted to give effect to
additional interest, depreciation and amortization expense arising from the
acquisitions. This pro forma information does not include reductions to
operating expense resulting from the elimination of duplicate functions and
facilities directly attributable to the acquisitions. This pro forma information
does not purport to be indicative what results would have been had the
acquisitions been made as of those dates or of results which may occur in the
future.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December December
31, 1997 31,
1996
--------------------- --------------------
(in thousands except per share data)
<S> <C> <C>
Net sales $ 317,594 $ 245,112
Net income (loss) (7,669) (3,321)
Net income (loss) per common share - Basic $ (1.28) $ (0.55)
- Diluted $ (1.28) $ (0.55)
Weighted average number of common shares 5,994 6,000
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
December 31, 1997 December 31, 1996
----------------- -----------------
Goodwill $107,673 $ 16,044
Non-compete agreements 11,080 10,860
Debt issuance costs 1,689 --
-------- --------
120,442 26,904
Less accumulated amortization 9,572 6,547
-------- --------
Intangible assets, net $110,870 $ 20,357
======== ========
<PAGE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
--------------- -- --------------
(in thousands)
<S> <C> <C>
Notes payable to former owners of acquired businesses with
interest at various rates up to 12%, due 1998 though 2007 $ 18,353 $ 12,911
Note payable to bank under line of credit with interest
rate not exceeding the prime interest rate, refinanced in 1997
- 7,288
Term credit facility payable to bank, bearing interest at 8.16%,
payments 1999 through 2003 40,000 -
Revolving credit facility bearing interest at 8.16 to 9.5%,
due November 2003 51,479 -
Senior subordinated debt payable to LDI at 9.0%,
due May 2004 30,000 -
Other long-term financing at various rates 2,308 1,771
---------- ----------
142,140 21,970
Less current maturities 8,005 4,139
--------- ---------
$134,135 $ 17,831
======== ========
</TABLE>
Revolving Credit Facility: The Company has a revolving credit facility with a
bank, limited to the lesser of $60 million less letter of credit obligations, or
80 percent of eligible accounts receivable plus 65 percent of eligible
inventory, less letter of credit obligations and a reserve for three months
facility rent. Principal is due on November 19, 2003. Interest rates and payment
dates are variable based upon interest rate options selected by management.
Interest rates at December 31, 1997 varied from 8.16% to 9.5%. The interest
rates are 2.25% over LIBOR or 1% over prime in the case of Floating Rate
Advances. The Company is charged an annual administrative fee of $50,000, and an
annual commitment fee, payable monthly, of 0.5% on the unused portion of the
revolving credit facility.
Term Credit Facility: The term loan requires quarterly principal payments
beginning March 31, 1999. Interest rates and payment dates are variable based
upon interest rate options selected by management. The interest rate at December
31, 1997 was 8.16%. This rate is 2.25% over LIBOR.
Substantially all of the Company's assets serve as collateral for the revolving
credit facility and term credit facility. These credit agreements contain
various covenants pertaining to, among other things, achieving a minimum fixed
coverage ratio, a leverage ratio, and an interest expense coverage ratio. The
covenants also limit purchases and sales of assets, restrict payment of
dividends and direct the use of excess cash flow. These quarterly covenants
become effective with the period ending March 31, 1998. As a condition of the
amended bank credit facility of $100 million, LDI agreed to make by June 30,
1998 an additional equity investment of $14 million or such lesser amount as may
be acceptable to the Company's bank. The Company intends to satisfy this
requirement through an acquisition of LDI AutoPaints ("AutoPaints") in exchange
for equity in the Company. (See Note 10).
Senior Subordinated Debt: The senior subordinated debt matures May 19, 2004.
Interest accrues at 9.0% annually, and is payable quarterly. Holders of
subordinated debt are expressly subordinate in right of payment to all senior
indebtedness.
The aggregate principal payments for the next five years subsequent to December
31, 1997 are as follows, in thousands:
1998 $ 8,005
1999 9,513
2000 10,725
2001 10,104
2002 10,494
Thereafter 93,299
-----------
$ 142,140
===========
<PAGE>
5. LONG-TERM OBLIGATIONS (continued)
The Company is currently pursuing other financing arrangements. Should the
Company be successful in implementing favorable financing terms, proceeds will
be used to retire certain bank term loans, a portion of amounts outstanding
under the revolving credit facility and the subordinated debt payable to LDI.
Early retirement of indebtedness will result in an extraordinary loss in the
amount of the net book value of capitalized debt issue costs. At December 31,
1997 unamortized debt issue costs were approximately $1.6 million.
The carrying amounts of certain financial instruments such as cash, accounts
receivable, accounts payable and long term obligations approximate their fair
values. The fair value of the long-term debt is estimated using discounted cash
flow analysis and the Company's current incremental borrowing rates for similar
types of arrangements.
6. EMPLOYEE SAVINGS PLAN
The Company has an Employee Savings Plan which covers substantially all
employees who have met certain requirements as to date of service. The Company
currently contributes $0.25 for each $1 contributed by employees up to 6% of
their annual compensation. In addition, the Company may contribute, at the
discretion of the Board of Directors, an additional amount equal to 1% of the
employees' annual compensation. Company contributions charged to operations
under the Plan were approximately $182,000 for year ended December 31, 1997,
$189,000 for the nine months ended December 31, 1996 and $198,000 for the year
ended March 31, 1996.
7. STOCK OPTIONS
On November 30, 1993, an Employee Stock Option Plan was ratified to grant
options on up to 600,000 shares of the Company's common stock to officers, key
employees and non-employee directors of the Company. All options granted under
this plan have been granted at a price equal to the market price at the date of
the grant. All options granted have a maximum life of ten years from the date of
the grant and are fully vested at the date of issue.
The Company recognizes compensation expense related to its stock option plan in
accordance with APB No. 25 "Accounting for Stock Issued to Employees." Options
are granted at not less than the fair market value of the Company's common stock
on the date of grant, therefore, no compensation is recognized. Had compensation
expense been determined at the date of the grant based on the fair value of the
awards consistent the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated in
the following table:
<TABLE>
<CAPTION>
Year Ended December Nine Months Year Ended March
31, Ended December 31, 31,
1997 1996 1996
----------------------- ----------------------- ---------------------
Net Income (in thousands, except per share data)
<S> <C> <C> <C>
As Reported $ 656 $ 660 $ 2,649
Pro Forma $ 523 $ 660 $ 2,010
Net income per share
As Reported - Basic $ 0.11 $ 0.11 $ 0.44
- Diluted $ 0.11 $ 0.11 $ 0.44
Pro Forma - Basic $ 0.09 $ 0.11 $ 0.34
- Diluted $ 0.09 $ 0.11 $ 0.33
</TABLE>
<PAGE>
7. STOCK OPTIONS (continued)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for December
31, 1997, December 31, 1996 and March 31, 1996 respectively: risk free interest
rate of 5.5, 5.7 and 5.7 percent; no dividend yield for all years; expected
lives of 9, 8 and 8 years; and volatility of 46.8 percent for all years. Option
valuation models, like the stock price Black-Scholes model, require the input of
highly subjective assumptions including the expected stock price volatility.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its stock
options.
<TABLE>
December 31, 1997 December 31, 1996 March 31, 1996
----------------------------- ---------------------------- -------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year
169,310 $ 10.71 222,085 $10.72 123,800 $10.50
Granted 45,000 $ 7.00 - - 99,500 $11.00
Exercised - - 140 $10.50 - -
Forfeited 4,310 $10.50 52,635 $10.76 1,215 $10.50
------- ------ ------- ------ ------- ------
Outstanding and
exercisable-end of year
($7.00 to $11.00 per share)
210,000 $ 9.92 169,310 $10.71 222,085 $10.72
======= ====== ======= ====== ======= ======
</TABLE>
The weighted-average fair value of options granted during the year ended
December 31, 1997 and March 31, 1996 were $4.85 and $6.65 per option,
respectively. The remaining contractual life of options outstanding at December
31, 1997 is 8.3 years.
8. INCOME TAXES
The provision for federal and state income taxes consisted of the following, in
thousands:
Year Ended Nine Months Ended Year Ended
December 31, 1997 December 31, 1996 March 31,1996
-------------------- ----------------- -------------
Current:
Federal $ 1,010 $ 778 $ 1,477
State 186 232 327
Deferred (681) (400) (38)
------- ------- -------
$ 515 $ 610 $ 1,766
======= ======= =======
<PAGE>
8. INCOME TAXES (continued)
The reconciliation of income taxes computed at the federal statutory tax rate to
the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, 1997 December 31, 1996 March 31, 1996
------------------ ----------------- ---------------
<S> <C> <C> <C>
Federal statutory tax rate 34.0% 34.0% 34.0%
State tax provision 6.8 8.3 4.9
Other 3.3 5.7
1.1
================== ================= ===============
Effective tax rate 44.1% 48.0% 40.0%
================== ================= ===============
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997 and 1996 are as follows (in thousands):
December 31, 1997 December 31, 1996
----------------- -----------------
Deferred tax assets
Depreciation $ 712
Amortization of intangibles 1,023 $ 647
Allowance for doubtful accounts 1,106 277
Inventory 1,770 190
Accrued expenses 2,555
Other, net 52 23
------ ------
7,218 1,137
Deferred tax liabilities
Depreciation -- 374
------ ------
$7,218 $ 763
====== ======
9. CONTINGENCIES AND COMMITMENTS
FinishMaster occupies facilities and uses equipment under operating lease
agreements requiring annual rental payments approximating the following amounts
(in thousands) for the five years subsequent to December 31, 1997:
1998 $ 6,610
1999 5,484
2000 2,857
2001 1,115
2002 463
Thereafter 998
----------
$ 17,527
=========
Rent expense charged to operations, including short-term leases, aggregated
$3,831,963, $2,724,621, and $2,500,101 for the year ended December 31, 1997, the
nine months ended December 31, 1996, and the year ended March 31, 1996,
respectively.
On January 14, 1998, the Company announced the planned relocation of its
administrative headquarters from the Kentwood, Michigan distribution center to
new office space located in Indianapolis, Indiana that will be leased by the
Company from LDI. The Company anticipates incurring relocation and integration
costs in 1998 in conjunction with the combination of certain stores and moving
of administrative functions.
<PAGE>
9. CONTINGENCIES AND COMMITMENTS (continued)
The Company is dependent on four main suppliers for the purchases of the paint
and related supplies that it distributes. A loss of one of the suppliers or a
disruption in the supply of the products provided could have a material adverse
effect on the Company's operating results. The suppliers also provide purchase
discounts, prompt payment discounts, extended terms and other incentive
programs. To the extent these programs are changed or terminated, there could be
a material adverse impact to the Company.
The Company has three agreements with warehouse suppliers for the purchase of
certain paint and non-paint supplies in specified geographic locations. The
agreements provide for aggregate specified minimum purchases of $8.1 million in
1998, $7.8 million in 1999 and 2000, and $2.8 million in 2001, 2002 and 2003.
The agreements expire in 1999, 2000, and 2003.
FinishMaster is not involved in any material legal actions as of December 31,
1997.
10. SUBSEQUENT EVENT
On February 16, 1998, the Company, AutoPaints and LDI entered into an Agreement
and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger
Agreement, which is subject to the approval of the Company's shareholders,
AutoPaints will merge with and into the Company, and the Company will issue an
additional 1,542,416 shares of the common stock of the Company to LDI. The
Company will also seek shareholder approval for an increase in the number of
authorized common shares from 10 million to 25 million shares. The financial
position, results of operations and cash flows of AutoPaints have not been
reflected in the consolidated financial statements of FinishMaster as of or for
the year ended December 31, 1997.
On March 27, 1998 the Company entered into a subordinated revolving credit
agreement with LDI for $10.0 million to fund working capital and acquisition
needs. Principal is due March 27, 1999. Interest rates and payment dates are
variable based upon interest options selected by management. The interest rates
are 2.25% over LIBOR or 1.0% over prime in the case of floating rate advances.
Holders of subordinated debt are expressly made subordinate in right of payment
of all senior indebtedness.
