================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number 0-23222
FINISHMASTER, INC.
(Exact Name of Registrant as Specified in its Charter)
Indiana 38-2252096
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
54 Monument Circle, Suite 700, Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (317) 237-3678
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act
Common stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months and (2) has
been subject to the filing requirements for at least the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1998 $49,384,000.
At February 28, 1998, there were outstanding 5,993,640 shares of Registrant's
common stock.
Documents Incorporated By Reference
Portions of the annual proxy statement for the year ended December 31, 1997 are
incorporated by reference into Part III.
Page 1 of ____
================================================================================
FINISHMASTER, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
1 Business........................................................
2 Properties......................................................
3 Legal Proceedings...............................................
4 Submission of Matters to a Vote of Security Holders.............
5 Market for Registrant's Common Equity
and Related Shareholder Matters.............................
6 Selected Financial Data.........................................
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations...................
8 Financial Statements and Supplemental Data......................
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................
10 Directors and Executive Officers of the Registrant..............
11 Executive Compensation..........................................
12 Security Ownership of Certain Beneficial Owners and Management..
13 Certain Relationships and Related Transactions..................
14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.....................................
15 Signatures......................................................
16 List of Financial Statements and Financial Statement Schedules..
<PAGE>
PART I
ITEM 1 - BUSINESS
General
FinishMaster, Inc. ("FinishMaster" or "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 PBE, Inc. (the
"Thompson Acquisition"). 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 acquisition of LDI AutoPaints, Inc.("AutoPaints") (the "LDI
Acquisition"), which will increase the Company's presence in Florida. The
Company intends to continue its strategy of expanding through additional
acquisitions.
The Company is an Indiana corporation. On March 1, 1998, the Company relocated
its corporate headquarters from the Kentwood, Michigan distribution center to
newly renovated office space in Indianapolis, Indiana. The Company has agreed to
lease that space from LDI, Ltd. ("LDI"), an Indiana limited partnership and the
indirect parent of AutoPaints, an Indiana corporation which owns approximately
67.5% of the outstanding shares of the Company. The Company believes that the
terms of the lease will be at least as favorable to the Company as those that
could be obtained by arms-length negotiations with an unaffiliated third party.
As a result of this move the principal executive offices of the Company are
located at 54 Monument Circle, Suite 700, Indianapolis, IN 46204, and its
telephone number is (317) 237-3678.
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 ("Sherwin-Williams") and
Akzo Nobel ("Sikkens"). 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.
Below is a Market Profile obtained from Industry Publications:
No. of Collision Annual Shop
Repair Shops Revenue
($Millions)
9,000 *$0.2
13,000 $0.2 to $0.3
12,500 $0.3 to $0.45
7,000 $0.45 to $0.6
3,500 $0.6 to $1.0
2,800 $1.0 to $2.0
800 $2.0 to $3.0
450 $3.0 to $5.0
100 **$5.0
* Less than
** Greater than
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 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
Product Category Manufacturers Number of Selected Suppliers and
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 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.
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, Sherwin-Williams distributes its own
automotive paints through its sales outlets. In addition, BASF, one of the
Company's principal suppliers, distributes through its own outlets. While the
Company does not believe that current direct distribution efforts by automotive
paint manufacturers have significantly affected its sales, there can be no
assurance that the Company will not encounter increased competition in the
future. The Company may also compete with its suppliers in selling to certain
large volume end users such as van converters, small manufacturers and large
fleet operators.
Employees
As of 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 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.
<PAGE>
ITEM 2 - PROPERTIES
The following table sets forth certain information regarding the facilities
operated by the Company as of March 31, 1998.
State (By Division) Number of Number of
Sales Outlets Distribution Centers
- -----------------------------------------------------------------------------
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
Arizona 3
California 30 1
Colorado 6
- --------------------------------------------------------------------------
39 1
- --------------------------------------------------------------------------
Total 143
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.
Effective March 1, 1998, the Company relocated its corporate headquarters from
the Kentwood, Michigan distribution center to newly renovated office space in
Indianapolis, Indiana. The Company has agreed to lease that space from LDI. The
Company believes that the terms of the lease will be at least as favorable to
the Company as those that could be obtained by arms-length negotiations with an
unaffiliated third party.
ITEM 3 - LEGAL PROCEEDINGS
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEM - EXECUTIVE OFFICER OF THE REGISTRANT
The following sets forth certain information concerning the executive officers
of the Company who are not also directors:
Roger A. Sorokin (age 57) has served as Vice President-Finance of the Company
for more than the previous five years.
Charles "Remy" Stephenson (age 44) was named Senior Vice President of the
Company, with responsibility for sales and store operations for the
Central/Northeastern Division, in October, 1997. Prior to joining the Company,
Mr. Stephenson served as Vice President of Marketing of the Company from August,
1997 to October, 1997. Prior to joining the Company, Mr. Stephenson was employed
by Sherwin Williams Auto Finishes Inc. as Director of Sales from September, 1994
to August, 1997 and Regional Director of the Western Region from October, 1991
to September, 1994.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- -------------------------------------------------------------------------------
FinishMaster's common stock trades on The NASDAQ stock market under the symbol
FMST. The number of beneficial owners of FinishMaster's common stock at December
31, 1997 was approximately 588.
The range of high and low sales prices reported by NASDAQ for the last eight
quarters were:
YEAR QUARTER ENDED HIGH LOW
1996 March 31 15 9-1/2
1996 June 30 15-1/4 9-9/16
1996 September 30 11-5/8 8-1/4
1996 December 31 9-3/8 6-1/2
1997 March 31 8-1/2 5-3/4
1997 June 30 8-3/4 5-1/4
1997 September 30 8-3/4 5-3/8
1997 December 31 11-3/4 6-1/4
1998 January 1-March 27 10-1/2 8
No cash dividends on common stock have been paid during any period and none are
expected to be paid in the foreseeable future. The Company anticipates that all
earnings and other cash resources of the Company will be retained by the Company
for investment in its business.
<PAGE>
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the year ended
December 31, 1997, the nine month period ended December 31, 1996 and three years
ended March 31,1996, 1995 and 1994 are derived from the Company's audited
consolidated financial statements. The financial data should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto, which are included elsewhere herein, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended December Ended December
31, 31, Year Ended March 31,
1997 (2) 1996 (1) 1996 1995 1994
---------------- ----------------- ---------------- ----------------- -----------------
(in thousands, except per share data)
Statements of Operations Data
<S> <C> <C> <C> <C> <C>
Net sales $130,175 $ 95,822 $107,511 $ 79,382 $ 64,693
Gross profit 47,107 33,891 38,012 28,048 22,068
Income from operations 3,832 2,566 5,073 5,394 3,710
Net income $ 656 $ 660 $ 2,649 $ 3,462 $ 2,145
======== ======== ======== ======== ========
Net income per share - Basic $ 0.11 $ 0.11 $ 0.44 $ 0.58 $ 0.48
======== ======== ======== ======== ========
Diluted $ 0.11 $ 0.11 $ 0.44 $ 0.58 $ 0.48
======== ======== ======== ======== ========
Weighted average shares outstanding 5,994 6,000 6,000 6,000 4,472
</TABLE>
(1) The Company changed its fiscal year-end from March 31 to
December 31, effective for the period ended December 31, 1996.
(2) The operating results for the year ended December 31, 1997 are affected
by the acquisition of Thompson, PBE, Inc. on November 21, 1997. The
results of Thompson for the month of December, 1997 are included in the
December 31, 1997 amounts. For further explanation of the operating
effect of the Thompson acquisition, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at Item 7
for the year ended December 31, 1997.
<TABLE>
<CAPTION>
December 31, March 31,
1997 1996 1996 1995 1994
---------------- --------------- --------------- --------------- -----------------
(1)
(in thousands)
Balance Sheet Data
<S> <C> <C> <C> <C> <C>
Working capital $ 42,093 $ 22,819 $ 25,036 $ 17,763 $ 21,734
Total assets 215,418 66,477 66,772 46,442 39,287
Long-term debt 142,140 21,970 23,248 7,208 3,967
Stockholders' equity 32,932 32,326 31,665 28,956 25,554
</TABLE>
(1) The Company changed its fiscal year-end from March 31 to
December 31, effective for the period ended December 31, 1996.
(2) The operating results for the year ended December 31, 1997 are affected
by the acquisition of Thompson, PBE, Inc. on November 21, 1997. The
results of Thompson for the month of December, 1997 are included in the
December 31, 1997 amounts. For further explanation of the operating
effect of the Thompson acquisition, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at Item 7
for the year ended December 31, 1997.
Acquisition Data
Acquisitions made by FinishMaster have been accounted for as purchases and
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair values at the dates of acquisition. Operating results of these
acquired organizations are included in FinishMaster's consolidated financial
statements from the respective dates of purchase. Details of these acquisitions
are contained in the notes to the consolidated financial statements. The
Thompson, PBE, Inc. acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to assets acquired and liabilities assumed
based upon their estimated fair values at the date of acquisition.
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
FinishMaster, Inc. is the leading distributor of automotive paints, coatings and
paint-related accessories to the automotive collision repair industry in the
United States. The Company serves its customers through 143 sales outlets and
three distribution centers located in 22 states. The Company has approximately
20,000 customers to which it provides a comprehensive selection of brand name
products supplied by E.I. DuPont de Nemours & Co. ("DuPont"), PPG Industries,
Inc. ("PPG"), BASF Corporation ("BASF") and Minnesota Mining & Manufacturing
Co., Inc. ("3M") in addition to its own FinishMaster PrivateBrand refinishing
accessory products. The Company is typically the primary source of supply to its
customers and offers a broad range of services designed to enhance the operating
efficiencies and competitive positions of its customers and suppliers.
The Company is the leading consolidator in the automotive refinishing
distribution industry, having successfully completed approximately 25
acquisitions over the past seven years, ranging in size from $0.3 million
fill-in acquisitions to the acquisition of Thompson PBE, Inc. (the "Thompson
acquisition"). On November 21, 1997, the Company acquired substantially all
outstanding shares of common stock of Thompson PBE, Inc., a Delaware
corporation, for $8.00 per share, or an aggregate of approximately $73,471,000,
including acquisition costs. In addition to the cash purchase price, the Company
refinanced approximately $34,474,000 of Thompson's outstanding indebtedness at
the date of purchase. The Thompson acquisition, significantly expanded the
Company's geographic presence in the Southeastern and Western United States. The
Company's operations are currently organized into three divisions: Southeastern
Division, Western Division, and Central/Northeastern Division. The Company
intends to continue its strategy of expanding through additional acquisitions.
As part of the integration of Thompson PBE and FinishMaster, the Company is
planning to consolidate and upgrade its store and corporate computer systems
over the next two years. Current estimates for this upgrade amount to
approximately $3.5 million.
Effective March 1, 1998 the Company moved its corporate offices to 54 Monument
Circle, Indianapolis, IN 46204. Relocating to the new headquarters will be
executive management including the President and Chief Operating Officer,
Purchasing, Management Information Systems, Human Resources, Operations and
Finance Executives, as well as the Accounting department.
Computer memory was very expensive on early mainframe computers, therefore, some
computer programs used only the final two digits for the year in the date field
and assumed that the first two digits were "19." As a result, some computer
applications may be unable to interpret the change from year 1999 to year 2000.
The Company has implemented a detailed plan to ensure Year 2000 compliance. The
Company contemplates working closely with its major suppliers and customers in
their Year 2000 compliance efforts. FinishMaster, like most organizations, has
not completed the Year 2000 Compliance process but does not believe that the
cost of such process will be material or that there is a material uncertainty
regarding its ability to complete said process by Year 2000. The Company has in
place a detailed testing and correction plan which would provide for a smooth
transition into 2000. The focus is to confirm that the supply chain, from
manufacturer to FinishMaster to customer, is not broken due to computer problems
at the change of the century. In addition, the Company has written verification
of Year 2000 compliance from all its hardware, software and suppliers with which
it has data processing relationships.
The Company changed its fiscal year-end from March 31 to December 31, effective
for the period ending December 31, 1996.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from the
Company's Statement of Operations and the corresponding calculations as a
percentage of net sales.
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended
12/31/96 12/31/95
Year Ended 12/31/97 (unaudited) (1) (unaudited) (1)
$ % of NS $ % of NS $ % of NS
------------------------ -------------------------- ---------------------
NET SALES $130,175 100.0% $125,795 100.0% $ 99,235 100.0%
COST OF SALES 83,068 63.8% 81,591 64.9% 63,568 64.1%
------------------------ -------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
GROSS PROFIT 47,107 36.2% 44,204 35.1% 35,667 35.9%
EXPENSES:
Operating 20,568 15.8% 20,295 16.1% 14,676 14.8%
Selling, general and administrative 17,982 13.8% 17,427 13.8% 13,381 13.5%
Depreciation 1,435 1.1% 974 0.8% 559 0.5%
Amortization of intangible assets 3,290 2.6% 2,487 2.0% 1,284 1.3%
------------------------ -------------------------- ---------------------
43,275 33.3% 41,183 32.7% 29,900 30.1%
------------------------ -------------------------- ---------------------
INCOME FROM OPERATIONS 3,832 2.9% 3,021 2.4% 5,767 5.8%
OTHER INCOME (EXPENSE)
Investment income 128 0.1% 99 0.1% 261 0.3%
Interest expense (2,789) (2.1%) (1,713) (1.4%) (687) (0.7%)
------------------------ -------------------------- ---------------------
(2,661) (2.0%) (1,614) (1.3%) (426) (0.4%)
------------------------ -------------------------- ---------------------
INCOME BEFORE INCOME TAXES 1,171 0.9% 1,407 1.1% 5,341 5.4%
Income tax expense 515 0.4% 745 0.6% 1,871 1.9%
------------------------ -------------------------- ---------------------
NET INCOME $ 656 0.5% $ 662 0.5% $ 3,470 3.5%
======================== ========================== =====================
NET INCOME PER SHARE - BASIC $ 0.11 $ 0.11 $ 0.58
============ ========== ========
- DILUTED $ 0.11 $ 0.11 $ 0.58
============ ========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING
5,994 6,000 6,000
============ ========= ========
</TABLE>
(1) The Company changed its fiscal year-end from March 31 to
December 31, effective for the period ended December 31, 1996.
Year ended December 31, 1997 versus Twelve months ended December 31, 1996
The Company changed its fiscal year-end from March 31 to December 31, effective
for the period ended December 31, 1996. As a result, the audited amounts for the
year ended December 31, 1997 are presented with the comparable unaudited amounts
for the twelve months ended December 31, 1996 and 1995. Management believes that
for purposes of management's discussion and analysis the comparison between the
twelve month periods provides a more meaningful understanding of the Company's
performance. The results of operations for the fiscal year ended December 31,
1997 include the results of operations for Thompson from December 1, 1997 to
December 31, 1997. The results of operations for the period from November 21,
1997, the date of the acquisition, to November 30, 1997 is not significant.
Net Sales. Net sales for the year ended December 31, 1997 increased by $4.4
million or 3.5% to $130.2 million from $125.8 million for the same period in
1996. This increase was attributable to the additional sales contributed by
Thompson of $12.4 million for the month of December and sales from other
acquisitions of $1.7 million for the year. The Thompson sales were offset by a
decline in same outlet sales. Same outlet sales declined primarily due to a
slowdown in the van conversion industry, the loss of certain low margin business
resulting from small market share, suppliers discounting and offering large
incentives in certain markets to increase market share and flat industry market
conditions.
Gross Profit. Gross profit for the year ended December 31, 1997 increased to
$47.1 million from $44.2 million for the same period in 1996. Gross profit as a
percentage of sales increased to 36.2% for the year ended December 31, 1997 from
35.1% for the same period in 1996. The increase in gross profit percentage is
the result of participation in suppliers' rebate and incentive programs and
optimizing early payment discounts from suppliers.
Operating Expenses. Operating expenses for the year ended December 31, 1997
increased by $0.3 million to $20.6 million from $20.3 million for the same
period in the prior year. Operating expenses as a percent of sales decreased to
15.8% for the year ended December 31, 1997 compared to 16.1% for the same period
in 1996. Operating expenses consist of wages, building and vehicle costs for the
outlets and the distribution centers. The decrease in operating expenses as a
percentage of sales is the result of the Company's profit improvement
activities, including, but not limited to, staffing reductions and streamlining
sales outlet and distribution activities, which reduced operating expenses by
approximately $2.4 million. The profit improvements of $2.4 million were offset
by Thompson's operating expenses of $2.3 million for the month of December and
other acquisitions of $0.4 million for the year.
Selling, General, and Administrative Expenses. (SG&A) SG&A expenses for the year
ended December 31, 1997 increased by $0.6 million to $18.0 million from $17.4
million for the same period in the prior year. SG&A decreased as a percentage of
sales to 13.8% for the year ended December 31, 1997 compared to 13.9% for the
same period for the year ended December 1996. SG&A costs for the year ended
December 31, 1997 were reduced approximately $2.5 million over the same period
in the prior year as the result of the Company's cost reduction activities,
including head count reductions, professional fees, travel and entertainment,
and advertising. The cost reduction of $2.5 million was offset by Thompson's
SG&A costs for the month of December of $2.2 million, selling costs of other
acquisitions of $0.3 million and one time costs related to the integration of
Thompson and future acquisitions of $0.6 million. General and administrative
expenses consist of corporate support staff and expenses for commission, wages,
and expenses supporting customer sales activity.
Depreciation and Amortization of Intangible Assets. Depreciation expenses for
the year ended December 31, 1997 increased by $0.5 million over the same period
in the prior year. Depreciation and amortization consists primarily of
depreciation expenses related to the corporate distribution center and store
locations and amortization of goodwill and non-compete costs related to
acquisitions. The increase is attributable to $0.2 million of Thompson's
depreciation for the month of December. In addition, $0.3 million is from
depreciable assets acquired to improve operating efficiencies as well as a full
year's depreciation on assets from the prior year's acquisitions. Amortization
of intangible assets increased by $0.8 million for the year ended December 31,
1997 over the same period of the prior year. The increase is attributable to
$0.3 million of goodwill amortization for the Thompson acquisition and $0.5
million of additional acquired intangibles.
Interest Expense. Interest expense increased $1.1 million for the year ended
December 31, 1997 over the same period in the prior year. Interest expense
primarily includes interest on mortgages and notes payable to former owners of
acquired businesses as well as interest on the Company's credit facilities. The
increase in interest expense was the result of interest on debt incurred to
finance the Thompson transaction. The Thompson transaction occurred November 21,
1997 and the total acquisition price of $73.5 million was funded through
borrowings.
Provision for Income Tax. The Company's effective tax rate for the for the year
ended December 31, 1997 was 44% compared to 53% for the twelve months ended
December 31, 1996. This rate varied from the Company's statutory tax rate of 34%
primarily due to state taxes along with certain expenses which are not
deductible for tax purposes.
Twelve months ended December 31, 1996 versus Twelve months ended December 31,
1995
For purposes of management's discussion and analysis, the unaudited amounts for
the twelve months ended December 31, 1996 are presented with the comparable
unaudited amounts for the twelve months ended December 31, 1995.
Net Sales. Net sales for the twelve months ended December 31, 1996 were $125.8
million, an increase of approximately 26.8% compared to $99.2 million for the
twelve months ended December 31, 1995. The sales increase resulted from sales
generated by acquisitions in Maryland and Virginia in the twelve months ended
December 31, 1996. In addition, acquisitions in Delaware, Michigan, New Jersey,
Oklahoma, Pennsylvania, and Texas in 1995 contributed sales to the entire twelve
months ended December 31, 1996.
Gross Profit. Gross profit for the twelve months ended December 31, 1996 was
$44.2 million compared to $35.7 million for the twelve months ended December 31,
1995 and as a percentage of net sales decreased to 35.1% from 35.9%. Gross
profit percentage declined as a percentage of net sales as competitive pricing
pressures increased in the twelve months ended December 31, 1996 as paint
manufacturers intensified efforts to gain market share.
Operating Expenses. Operating expenses for the twelve months ended December 31,
1996 were $20.3 million compared to $14.7 million for the twelve months ended
December 31, 1995. Operating expenses as a percentage of net sales increased to
16.1% for the twelve months ended December 31, 1996 compared to 14.8% for the
twelve months ended December 31, 1995. Operating expenses consist of wages,
building and vehicle costs for the outlets and the distribution centers. The
increase as a percentage of net sales resulted from higher operating costs of
recent acquisitions along with one-time expenses related to consolidating and
relocating several facilities in 1996. Efficiencies gained from sales outlet
consolidations in the Southwestern Region has enabled the Company to close its
Texas distribution center during the first quarter of 1997. Certain expenses
related to the closing of the Texas distribution center affected the twelve
months ended December 31, 1996. The additional expense increase was partially
offset by the Company's programs to reduce costs.
Selling, General and Administrative. SG&A expenses for the twelve months ended
December 31, 1996 were $17.4 million compared to $13.4 million for the twelve
months ended December 31, 1995. SG&A expenses as a percentage of net sales
increased to 13.8% for the twelve months ended December 31, 1996 compared to
13.5% for the twelve months ended December 31, 1995. General and administrative
expenses consist of corporate support staff and expenses for commission, wages,
and expenses supporting customer sales activity.
Depreciation and Amortization. Depreciation and amortization for the twelve
month period was $3.5 million compared to $1.8 million for the twelve months
ended December 31, 1995. Depreciation and amortization as a percentage of net
sales increased to 2.8% for the twelve months ended December 31, 1996 compared
to 1.8% for the twelve months ended December 31, 1995. Depreciation and
amortization consist primarily of depreciation expenses related to the Michigan
distribution center and sales outlets and amortization of goodwill and costs of
non-competition agreements related to acquisitions. The increase results from
amortization of intangibles and depreciation of fixed assets incurred in
connection with the Company's acquisitions in Virginia and Maryland during the
current period and a full year's amortization and depreciation for prior year's
acquisitions along with revisions, in 1996, to the estimated lives of certain
intangibles.
Interest Expense. Interest expense for the twelve months ended December 31, 1996
was $1.7 million compared to $0.7 million for the twelve months ended December
31, 1995. Interest expense primarily includes interest on mortgages and notes
payable to former owners of acquired businesses as well as interest on the
Company's line of credit. The increase was the result of interest incurred in
connection with seller financing for current year acquisitions and the increased
use of the Company's line of credit to support acquisitions and working capital
requirements.
Provision for Income Tax. The Company's effective tax rate for the twelve months
ended December 31, 1996 was 53% compared to 40% for the twelve months ended
December 31, 1995. This rate varied from the Company's statutory tax rate of 34%
primarily due to state taxes along with certain expenses which are not
deductible for tax purposes.
<PAGE>
QUARTERLY INFORMATION
The following table sets forth consolidated statements of operations data for
each of the eight quarters ended December 31, 1997. The unaudited quarterly
information has been prepared on the same basis as the annual information and,
in management's opinion, includes all adjustments, consisting of only normal
recurring entries, necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarterly Results for the Periods Ended
December 31, 1997 December 31, 1996
-------------------------------------------- ------------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97(3) 3/31/96 6/30/96 9/30/96 12/31/96
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $29,239 $31,034 $30,696 $39,206 $29,973 $33,149 $33,399 $29,274
Cost of sales 18,610 19,462 19,539 25,457 19,660 21,222 21,584 19,125
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 10,629 11,572 11,157 13,749 10,313 11,927 11,815 10,149
Operating expenses 4,667 4,593 4,739 6,569 4,982 5,062 5,182 5,069
Selling, general and
administration 3,801 3,942 3,903 6,336 4,235 4,425 4,062 4,705
Depreciation and amortization(1) 1,017 1,026 1,057 1,625 641 705 769 1,346
-------- -------- -------- -------- -------- -------- -------- --------
Income(loss) from operations 1,144 2,011 1,458 (781) 455 1,735 1,802 (971)
Investment income, net 6 26 35 61 22 29 12 36
Interest expense (494) (437) (345) (1,513) (340) (478) (509) (386)
-------- -------- -------- -------- -------- -------- -------- --------
Income(loss) before income taxes 656 1,600 1,148 (2,233) 137 1,286 1,305 (1,321)
Income tax expense(benefit) (1) 250 595 436 (766) 135 587 478 (455)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 406 $ 1,005 $ 712 $(1,467) $ 2 $ 699 $ 827 $ (866)
======== ========= ========= ========== ======= ======== ========= =========
Net income (loss) per share - Basic (2) $ 0.07 $ 0.17 $ 0.12 $ (0.24) $ 0.00 $ 0.12 $ 0.14 $ (0.14)
======== ========= ========= ========= ========= ======== ========= ==========
- Diluted (2) $ 0.07 $ 0.17 $ 0.12 $ (0.24) $ 0.00 $ 0.12 $ 0.14 $ (0.14)
======== ========= ========= ========= ========= ======== ========= ==========
</TABLE>
(1) The increase in depreciation and amortization results from amortization
of intangibles and depreciation of fixed assets incurred in connection
with the Company's acquisitions in the periods ended December 31, 1997
and 1996 and a full year's amortization and depreciation for prior
year's acquisitions along with revisions to the estimated lives of
certain intangibles in the quarter ending December 31, 1996.
(2) The sum of the quarterly net income (loss) per share amounts for the
periods presented may not equal the annual amount reported because net
income per share is computed independently for each quarter.
(3) The operating results for the quarter ended December 31, 1997 are
affected by the Thompson acquisition, which was completed on November
21, 1997. The results of Thompson for the month of December, 1997 are
included in the December 31, 1997 amounts. For further explanation of
the operating effect of the Thompson acquisition, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for the year ended December 31, 1997.
Seasonality and Quarterly Fluctuations. The Company's sales and operating
results have varied from quarter to quarter due to various factors and the
Company expects these fluctuations to continue. Among these factors are seasonal
buying patterns of the Company's customers and the timing of acquisitions.
Historically, outlet sales have slowed in the late fall and winter of each year
largely due to inclement weather and the reduced number of business days during
the holiday season. As a result, financial performance for the Company's outlets
is generally lower during the December and March quarters compared to the June
and September quarters. In addition, the timing of acquisitions may cause
substantial fluctuations of operating results from quarter to quarter. The
Company takes advantage of periodic special incentive programs available from
suppliers which extend the due date of purchases beyond terms normally available
with large volume purchases. The timing of these programs can contribute to
fluctuations in the Company's quarterly cash flow. Although the Company
continues to investigate strategies to smooth the seasonal pattern of its
quarterly results of operations, there can be no assurance that the Company's
net sales, results of operations and cash flow will not continue to display
these seasonal patterns.
<PAGE>
INFLATION AND OTHER ECONOMIC FACTORS
Inflation affects FinishMaster's costs of materials sold, salaries and other
related costs of distribution. To the extent permitted by competition,
FinishMaster has offset these higher costs of materials through selective price
increases.
The Company's business may be negatively affected by cyclical economic downturns
in the markets in which it operates. In addition, markets in the van conversion
industry may increase the cyclical nature of the Company's operations. Sales in
this market accounted for approximately 5-10% of sales for the periods reported.
There is no assurance that the Company will not be materially adversely affected
in the future by cyclical downturns in its markets. The Company's financial
performance is also dependent on its ability to acquire businesses and
profitably integrate them into their operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity based instruments at
December 31, 1997. A review of the Company's other financial instruments and
risk exposures at December 31, 1997 indicated that the Company had exposure to
interest rate risk. At December 31, 1997, the Company concluded that near-term
changes to interest rates should not materially affect the Company's financial
position, results of operations or cash flows.
Other discussion regarding the Company's business risks is presented in Item 1
"Business" on this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements contain audited statements of cash flows
for the year ended December 31, 1997, the nine months ended December 31, 1996
and the year ended March 31, 1996. The following table shows unaudited condensed
consolidated statements of cash flows for the three comparable twelve month
periods.
<TABLE>
<CAPTION>
Year Ended Twelve Months Ended Twelve Months Ended
December 31, 1997 December 31, 1996 December 31, 1995
(unaudited) (unaudited)
--------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Net cash provided by (used in):
Operating activities $ 1,257 $ 3,280 $ (1,875)
Investing activities (74,846) (6,135) (5,085)
Financing activities 73,653 2,617 7,084
-------- -------- --------
Increase (decrease) in cash 64 (238) 124
Cash at beginning of period 300 1,647 2,138
-------- -------- --------
Cash at end of period $ 364 $ 1,409 $ 2,262
======== ======== ========
</TABLE>
The Company's liquidity and capital resources have been significantly influenced
by acquisition activity. The Company historically has financed acquisitions
through a combination of seller financing, internally generated cash flow and
unsecured bank borrowings under the Company's loan facilities. In addition, net
proceeds of $16.2 million from a February, 1994 public stock offering were used
to accelerate the Company's acquisition program.
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson PBE, Inc. for $8.00 per share. Thompson, like
FinishMaster, is an aftermarket distributor of automotive paints, coatings and
related supplies. The total purchase price, including related acquisition costs,
was $73,471,000. The Company also refinanced $34,474,000 of Thompson
indebtedness. The Company funded the acquisition and refinanced Thompson's
indebtedness with a combination of bank financing and subordinated borrowings
from LDI.
Cash provided by operating activities was $1.3 million for the year ended
December 31,1997, compared to $3.3 million for the comparable period of the
prior year. The decrease in cash provided by operations is primarily
attributable to cash used to take advantage of early payment discounts available
from suppliers and for partial payment of the past due Thompson accounts
payable. In addition, cash was used for large inventory buys at year end in
advance of price increases.
Cash of $3.4 million was provided by accounts receivable reductions for the year
ended December 31, 1997 compared to $1.0 million in the same period of the prior
year. This was a result of increased collection efforts and improvements in days
sales outstanding.
The Company used cash of $1.5 million in the year ended December 31, 1997 and
$0.4 million in the same period in the prior year as the result of large
inventory buys from major suppliers in advance of price increases. Inventory at
December 31, 1997 included approximately $5.0 million attributable to large
year-end buys.
Cash used of $6.4 million for accounts payable and other current liabilities
increased $5.3 million over the same period in the prior year. The increase in
cash used was a result of increased participation in major supplier discount
programs and the payment of Thompson's past due accounts payable.
The Company's investing activities used cash of $74.1 million to acquire three
businesses, including Thompson, in the year ended December 31, 1997. This
compares to $5.3 million used to acquire six businesses in the same period in
the prior year. In addition the Company had capital expenditures of $0.7 million
and $0.6 million in the years ended December 31, 1997 and 1996, respectively.
Capital expenditures were primarily for sales outlet and warehouse improvements
and equipment. The Company uses operating leases to finance its computer system
and delivery vehicles.
The Company's financing activities provided cash of $73.7 million for the year
ended December 31, 1997 compared to $2.6 million in the same period in the prior
year. For the year ended December 31, 1997 cash was provided from borrowings to
finance the Thompson acquisition of $73.8 million and $34.4 million to refinance
Thompson's debt. In addition, $5.6 million was borrowed on the working capital
line to reduce Thompson's past due accounts payable and $4.1 million was used
for repayment of long term seller financing on other current and prior
acquisitions. For the year ended December 31, 1996 cash provided by financing
activities of $2.6 million was used for working capital and acquisition
requirements.
The Company had working capital of approximately $42.0 million at December 31,
1997. In addition to working capital, the Company had term credit and revolving
credit facilities totaling $100 million, and senior subordinated debt of $30
million. At December 31, 1997 the Company had available $8.5 million of unused
revolving credit.
As a condition of the amended bank credit facility of $100 million, LDI agreed
to make by June 30, 1998 an additional equity investment of $14 million or such
lesser amount as may be acceptable to the Company's bank. The Company intends to
satisfy this requirement through an acquisition of LDI AutoPaints ("AutoPaints")
in exchange for equity in the Company.
The Company is currently pursuing other financing arrangements. Should the
Company be successful in implementing favorable financing terms, proceeds will
be used to retire certain bank term loans, a portion of outstanding under the
revolving credit facility and the subordinated debt payable to LDI. Early
retirement of indebtedness will result in an extraordinary loss in the amount of
the net book value of capitalized debt issue costs. At December 31, 1997
unamortized debt issue costs were approximately $1.6 million.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Report contains certain forward-looking statements pertaining to, among
other things, the Company's future results of operations, cash flow needs and
liquidity, acquisitions and other aspects of its business. Similar
forward-looking statements may be made by the Company from time to time. These
statements are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. Important factors to consider
in evaluating such forward-looking statements include changes in external market
factors, changes in the Company's business strategy or an inability to execute
its strategy due to changes in its industry or the economy generally,
difficulties associated with assimilating acquisitions, the emergence of new or
growing competitors, seasonal and quarterly fluctuations, governmental
regulation, the potential loss of key suppliers, and various other competitive
factors. In light of these risks and uncertainties, there can be no assurance
that the future developments described in the forward-looking statements
contained in this Report will in fact occur.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is submitted in a separate section of this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 1997.
ITEM 11 - EXECUTIVE COMPENSATION
Item 11 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 1997.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 1997.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 1997.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)List the following documents filed as part of this report:
Financial Statements -- Included elsewhere in this report.
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
Financial Statement Schedules
(b) Reports on Form 8-K:
- A Form 8-K was filed on October 15, 1997 to accompany the press
release issued in connection with the execution of the Agreement and
Plan of Merger, dated as of October 14, 1997, by and among
FinishMaster, Inc., FMST Acquisition Corporation and Thompson PBE, Inc.
("Thompson"), pursuant to which the Company would acquire the
outstanding shares of Thompson for a price of $8.00 per share.
- A Form 8-K was filed on December on December 3, 1997 to report the
completion of the acquisition by the Company of Thompson, and was
amended by a Form 8-K/A filed on February 2, 1998 to incorporate
certain pro forma consolidated financial statements of the Company,
after giving effect to the acquisition of Thompson.
(c) The Exhibits filed herewith or incorporated herein by reference are set
forth in the Exhibit Index on page ___.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date March 31, 1998 FINISHMASTER, INC.
By: /s/ Thomas U. Young
------------------------------
Thomas U. Young,
President, Vice Chairman of the
Board and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Date Title
----------------------------------------------------------------------------
(1) Principal Executive Officer:
/s/Andre B. Lacy
-------------------
Andre B. Lacy March 31, 1998 Chairman of the Board
and Chief Executive Officer
(2) Principal Financial
and Accounting Officer:
/s/Roger A. Sorokin
-------------------
Roger A. Sorokin March 31, 1998 Vice President--Finance
(3) A Majority of the
Board of Directors:
/s/Andre B. Lacy
-------------------
Andre B. Lacy March 31, 1998 Director
/s/Thomas U. Young
-------------------
Thomas U. Young March 31, 1998 Director
/s/Margot L. Eccles
-------------------
Margot L. Eccles March 31, 1998 Director
/s/William J. Fennessy
-------------------
William J. Fennessy March 31, 1998 Director
/s/Peter L. Frechette
-------------------
Peter L. Frechette March 31, 1998 Director
/s/Michael L. Smith
-------------------
Michael L. Smith March 31, 1998 Director
/s/Walter S. Wiseman
-------------------
Walter S. Wiseman March 31, 1998 Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8 and 14(a)(1) AND (2), (c),
AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1997
FINISHMASTER, INC.
INDIANAPOLIS, INDIANA
<PAGE>
FORM 10-K--ITEM 8 and 14(a)(1) AND (2)
FINISHMASTER, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of FinishMaster, Inc. and
Subsidiaries are included in Item 8 of this Report:
Page
Report of Independent Auditors ____
Consolidated Balance Sheets ____
Consolidated Statements of Operations ____
Consolidated Statements of Cash Flows ____
Consolidated Statements of Shareholders' Equity ____
Notes to Consolidated Financial Statements ____
The following consolidated financial statement schedule of
FinishMaster, Inc. and Subsidiaries is submitted herewith:
Schedule II ____
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are either
included within the financial statements, not required under the related
instruction or are inapplicable and, therefore, have been omitted.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
FinishMaster, Inc.
We have audited the accompanying consolidated balance sheets of FinishMaster,
Inc. and Subsidiaries as of December 31, 1997 and December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 1997 and the nine month period ended
December 31, 1996. Our audits also included the financial statement schedule
listed in the index at Item 14(a). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FinishMaster, Inc. and Subsidiaries at December 31, 1997 and December 31, 1996
and the consolidated results of their operations and their cash flows for the
year ended December 31, 1997 and the nine-month period ended December 31, 1996,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
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.
ERNST & YOUNG L.L.P.
Detroit, Michigan
April 18,1996
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
FinishMaster, Inc.
We have audited the consolidated financial statements of FinishMaster, Inc. as
of March 31, 1996 and for the year then ended and have issued our report thereon
dated April 18, 1996. Our audit also included Schedule II of FinishMaster, Inc.
which is included in the financial statement schedule listed in the index at
Item 14(a) of FinishMaster, Inc. in its Annual Report on Form 10-K for the year
ended March 31, 1996. This financial statement schedule is the responsibility of
FinishMaster, Inc. management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statements schedule of FinishMaster, Inc. referred
to above, when considered in relation to the FinishMaster, Inc. basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG L.L.P.
Detroit, Michigan
April 18, 1996
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------- --------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 364 $ 300
Accounts receivable, net of allowance for doubtful
accounts of $2,247 and $700 respectively 28,744 12,752
Inventory 53,442 24,828
Refundable income taxes 1,299 -
Deferred income taxes 3,844 474
Prepaid expenses and other current assets 2,751 785
-------- ------
TOTAL CURRENT ASSETS 90,444 39,139
PROPERTY AND EQUIPMENT
Land 368 368
Vehicles 1,082 55
Buildings and improvements 3,797 3,105
Machinery, equipment and fixtures 9,065 5,909
------ ------
14,312 9,437
Accumulated depreciation (4,016) (2,866)
----------- ---------
10,296 6,571
OTHER ASSETS
Intangible assets, net 110,870 20,357
Deferred income taxes 3,374 289
Other 434 121
----------- ----------
114,678 20,767
-------- --------
$ 215,418 $ 66,477
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable, bank $ - $ 1,841
Accounts payable 28,274 7,786
Accrued expenses and other current liabilities 12,072 2,554
Current maturities of long-term obligations 8,005 4,139
------ ------
TOTAL CURRENT LIABILITIES 48,351 16,320
LONG-TERM OBLIGATIONS, less current maturities 134,135 17,831
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized;
no shares issued and outstanding
Common stock, $1 stated value; 10,000,000 shares authorized;
5,992,640 and 6,000,140 shares issued and outstanding 5,993 6,000
Additional paid-in capital 14,466 14,509
Retained earnings 12,473 11,817
------- -------
32,932 32,326
-------- -------
$ 215,418 $ 66,477
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
-------------------- ------------------- ------------------
<S> <C> <C> <C>
NET SALES $130,175 $ 95,822 $107,511
COST OF SALES 83,068 61,931 69,499
------- ------- -------
GROSS PROFIT 47,107 33,891 38,012
EXPENSES:
Operating 20,568 15,313 16,382
Selling, general and administrative 17,982 13,192 14,467
Depreciation 1,435 755 779
Amortization of intangible assets 3,290 2,065 1,311
------ ------ ------
43,275 31,325 32,939
------- ------- -------
INCOME FROM OPERATIONS 3,832 2,566 5,073
OTHER INCOME (EXPENSE):
Investment income 128 77 183
Interest expense (2,789) (1,373) (841)
-------- -------- ---------
(2,661) (1,296) (658)
--------- -------- --------
INCOME BEFORE INCOME TAXES 1,171 1,270 4,415
Income tax expense 515 610 1,766
------- ------- ------
$ 656 $ 660 $ 2,649
======== ======== =======
NET INCOME
NET INCOME PER SHARE - BASIC $ .11 $ .11 $ .44
========== ========== ==========
- DILUTED $ .11 $ .11 $ .44
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 5,994 6,000 6,000
======== ========= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months Year ended
Year ended ended December March 31,
December 31, 31,
1997 1996 1996
-------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 656 $ 660 $ 2,649
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,725 2,820 2,090
Bad debt expense 859 798 548
Deferred income taxes (681) (400) (38)
Changes in operating assets and liabilities:
Account receivable 3,388 2,324 (1,997)
Inventories (1,456) (815) (778)
Prepaids and other current assets 177 (270) (243)
Accounts payable and other current liabilities (6,411) (2,775) (2,694)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,257 2,342 (463)
INVESTING ACTIVITIES:
Business acquisitions (74,149) (3,083) (22,193)
Purchases of property and equipment (697) (620) (762)
Sale of marketable securities -- -- 6,906
Other -- (11) (313)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (74,846) (3,714) (16,362)
FINANCING ACTIVITIES:
Net borrowings (repayments) under note payable, bank (1,841) 1,841 --
Purchase of common stock (50) -- --
Acquisition financing 73,819 1,191 10,774
Debt issuance costs (1,689) -- --
Proceeds from long-term obligations 41,951 -- 7,809
Repayment of long-term obligations (38,537) (2,469) (2,787)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 73,653 563 15,796
-------- -------- --------
INCREASE (DECREASE) IN CASH 64 (809) (1,029)
CASH AT BEGINNING OF PERIOD 300 1,109 2,138
-------- -------- --------
CASH AT END OF PERIOD $ 364 $ 300 $ 1,109
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 2,192 $ 1,313 $ 762
======== ======== ========
Taxes $ 1,520 $ 687 $ 774
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Net
Common paid-in Unrealized Retained
Stock Capital Gain/(Loss) Earnings Totals
------------- ------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES AT APRIL 1, 1995 $ 6,000 $ 14,508 $ (60) $ 8,508 $ 28,956
Adjustment related to sale of marketable securities 60 60
Net income for the year 2,649 2,649
------- ------- --------- ------- ------
BALANCES AT MARCH 31, 1996 6,000 14,508 - 11,157 31,665
Options exercised 1 1
Net income for the nine month period 660 660
------- ------- --------- ------- ------
BALANCES AT DECEMBER 31, 1996 6,000 14,509 11,817 32,326
-
Purchase of common stock (7) (43)
(50)
Net income for the year 656 656
------- ------- --------- ------- ------
BALANCES AT DECEMBER 31, 1997 $ 5,993 $ 14,466 $ - $12,473 $32,932
======= ======== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FINISHMASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: FinishMaster, Inc. ("the Company" or "FinishMaster") is the
leading national distributor of automotive paints, coatings and paint-related
accessories to the automotive collision repair industry. As of December 31, 1997
the Company operated 143 sales outlets and three distribution centers in 22
states. The Company is organized into three major geographic regions - the
Southeastern, Western and Central/Northeastern Divisions. The Company has
approximately 20,000 customers to which it provides a comprehensive selection of
brand name products supplied by DuPont, PPG, BASF and 3M, in addition to its own
FinishMaster PrivateBrand refinishing accessory products. The Company is highly
dependent on a small number of key suppliers.
Majority Stockholder: On February 23, 1994, the Company completed an initial
public offering of common stock on the NASDAQ national market under the trading
symbol "FMST." The Company sold 1.7 million shares of common stock at an initial
public offering price of $10.50 per share. The net proceeds from the offering of
approximately $16.2 million were used by FinishMaster to fund acquisitions,
repay indebtedness, finance working capital and for general corporate purposes.
As a result of these transactions, 4,045,000 shares or 67.4% of the Company's
outstanding stock was owned by Maxco, Inc. ("Maxco") at March 31, 1996. On July
9, 1996, LDI AutoPaints, Inc. ("AutoPaints"), an Indiana corporation, purchased
all of the shares of common stock owned by Maxco. Effective December 31, 1996,
LDI, Ltd. ("LDI") transferred to AutoPaints 100 shares of the Company which it
had purchased on the open market in August, 1995. As a result of these
transactions, AutoPaints' ownership of FinishMaster stock was 4,045,100 shares
or 67.5% at December 31, 1997.
Use of Estimates: The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation: The consolidated financial statements, identified
as FinishMaster, Inc., include the consolidated accounts of FinishMaster, Inc.,
Thompson PBE, Inc., and Refinishers Warehouse, Inc. Sales by Refinishers
Warehouse are primarily to FinishMaster and are eliminated in consolidation. All
other significant intercompany, equity accounts and transactions are eliminated.
References to the Company or FinishMaster throughout this report relate to the
consolidated entity.
Transactions with Majority Shareholder: AutoPaints is a wholly-owned subsidiary
of Lacy Distribution, which is, in turn, a wholly-owned subsidiary of LDI.
Pursuant to an arrangement between the Company and AutoPaints, the Company pays
AutoPaints for services it provides to the Company. During the period between
July 10, 1996 and December 31, 1997, AutoPaints has provided services to the
Company to support certain managerial tasks. Accordingly, the Company paid
$291,000 to AutoPaints during the year ended December 31, 1997, and $262,000 in
the nine months ended December 31, 1996 in return for the services of
AutoPaints.
Prior to July 9, 1996, the Company received certain services from Maxco. These
services included central processing of all insurance, including employee
benefit coverages, general and automobile liability, property and casualty. All
expenses directly attributable to FinishMaster were allocated by Maxco to
FinishMaster.
Receivables: Trade accounts receivable represent amounts due primarily from
automotive body repair shops and dealerships. Trade receivables are typically
not collateralized. No single customer exceeds 10% of the Company's receivables
at December 31, 1997.
Inventories: Inventories are stated at the lower of first-in, first-out cost or
market and consist primarily of purchased paint and refinishing supplies.
Substantially all inventories consist of finished goods.
Properties and Depreciation: Property and equipment are stated on the basis of
cost and include expenditures for new facilities and equipment and those which
materially extend the useful lives of existing facilities and equipment.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. Depreciation is computed by the straight-line method over the
following range of estimated useful lives:
Vehicles 5 Years
Building & Improvement Up to 40 Years
Leasehold Improvement Life of Lease
Machinery, Equipment & Fixtures 3 to 10 Years
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Deferred income taxes are recognized for the temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. The income tax provision is the tax payable/recoverable for the period
and the change during the period in deferred tax assets and liabilities.
Intangibles: Intangibles primarily consist of the excess of cost over fair
market value of net assets of acquired businesses. Intangible assets, including
non-compete agreements, are amortized on a straight-line basis over periods
ranging from 5 to 30 years.
Debt issuance costs are amortized over the term of the debt agreement.
The carrying value of goodwill is periodically reviewed to determine if an
impairment has occurred. The Company measures the potential impairment of
recorded goodwill based on the estimated undiscounted cash flows of the entity
acquired over the remaining amortization period.
Advertising: Advertising costs are expensed as incurred. The amounts were
immaterial for all periods presented.
Recent Accounting Pronouncements: In June of 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components within the
financial statements. Comprehensive income includes items such as foreign
currency items, minimum pension liability adjustments, and unrealized gains and
losses on certain investments in debt and equity securities. This statement is
effective for fiscal years beginning after December 15, 1997, with
reclassification of prior periods required.
In June of 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way in which public entities report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement requires that general-purpose financial statements include
selected information reported on a single basis of segmentation. This statement
is effective for fiscal years beginning after December 15, 1997, with
restatement of comparative information for earlier years being required.
The Company is currently evaluating the impact of these pronouncements.
Reclassification: Certain reclassifications have been reflected in prior year
amounts to conform with the presentation of corresponding amounts in the current
period.
2. NET INCOME PER SHARE
In February of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share". This Statement
simplifies the standards for computing earnings per share, replacing the
presentation of primary earnings per share with a presentation of basic earnings
per share. SFAS No. 128 also requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed
similarly to fully diluted earnings per share pursuant to APB Opinion No. 15,
"Earnings per Share", which is superseded by this Statement.
<PAGE>
2. NET INCOME PER SHARE (continued)
The following table sets forth the computation of basic and diluted net income
per share (in thousands except per share data):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended March 31,
December 31, 1997 December 31, 1996
1996
------------------ ----------------- ------------------
Numerator:
<S> <C> <C> <C>
NET INCOME $ 656 $ 660 $2,649
------ ------ ------
Denominator:
BASIC-WEIGHTED AVERAGE SHARES 5,994 6,000 6,000
Effect of dilutive securities:
EMPLOYEE STOCK OPTIONS -- -- 46
DILUTED-WEIGHTED AVERAGE SHARES 5,994 6,000 6,046
------ ------ ------
Basic net income per share $ 0.11 $ 0.11 $ 0.44
====== ====== ======
Diluted net income per share $ 0.11 $ 0.11 $ 0.44
====== ====== ======
</TABLE>
The effect of employee stock options on the calculation of weighted average
shares outstanding for purposes of determining diluted earnings per share is
antidilutive for the year ended December 31, 1997 and the nine months ended
December 31, 1996.
3. ACQUISITIONS
The following table summarizes the assets acquired and liabilities assumed in
acquisitions made by FinishMaster in each of the periods presented. These
acquisitions have been accounted for as purchases and accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values at the
dates of acquisition. Intangible assets related to goodwill and covenants not to
compete were recorded with each acquisition. Operating results of acquired
entities have been included in FinishMaster's consolidated financial statements
as of the respective date of purchase.
<TABLE>
<CAPTION>
Nine Months
Year Ended ended December Year Ended
December 31, 31, March 31,
1997 1996 1996
-------------------- ----------------- ----------------
(in thousands)
<S> <C> <C> <C>
Accounts receivable $ 20,239 $ 755 $ 3,229
Inventory 27,158 511 8,500
Deferred taxes 6,082 - -
Equipment and other 8,029 456 1,492
Intangible assets 91,629 2,617 13,247
------ ----- ------
153,137 4,339 26,468
Liabilities assumed 78,988 1,256 4,275
------- ------ ------
ACQUISITION PRICE 74,149 3,083 22,193
Acquisition debt 73,819 1,191 10,774
------- ------ -------
NET ASSETS OF BUSINESSES ACQUIRED,
NET OF ACQUISITION DEBT $ 330 $ 1,892 $ 11,419
========== ======== ========
Number of acquisitions 3 1 16
</TABLE>
<PAGE>
3. ACQUISITIONS (continued)
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson PBE, Inc. for $8.00 per share. Thompson, like
FinishMaster, is an aftermarket distributor of automotive paints, coatings and
related supplies. The total purchase price, including related acquisition costs,
was $73,471,000. The Company funded the acquisition with a combination of bank
financing and subordinated borrowings from LDI. The acquisition was accounted
for as a purchase and accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based upon their estimated fair values at the
date of acquisition. Goodwill resulting from the acquisition of Thompson is
being amortized over 30 years.
The following table sets forth the unaudited pro forma results of operations for
the current period in which acquisitions occurred and for the immediately
preceding period as if the acquisitions were consummated at the beginning of the
immediately preceding period. The unaudited pro forma results of operations data
consists of the historical results of the Company as adjusted to give effect to
(1) a reduction in employment and rental expense to reflect closure and
consolidation of certain facilities, (2) amortization of goodwill and debt
issuance costs, and (3) an increase in interest expense attributable to
financing of the acquisitions. This pro forma information does not purport to be
indicative what results would have been had the acquisitions been made as of
those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December December March 31,
31, 1997 31, 1996
1996
--------------------- ------------------------ -----------------------
(in thousands except per share data)
<S> <C> <C> <C>
Net sales $ 317,594 $ 245,337 $ 115,104
Net income (loss) (5,305) (2,139) 2,737
Net income (loss) per common share - Basic $ (0.89) $ (0.36) $ 0.46
- Diluted $ (0.89) $ (0.36) $ 0.46
Weighted average number of common shares 5,994 6,000 6,000
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
December 31, 1997 December 31, 1996
----------------- -----------------
Goodwill $107,673 $ 16,044
Non-compete agreements 11,080 10,860
Debt issuance costs 1,689 --
-------- --------
120,442 26,904
Less accumulated amortization 9,572 6,547
-------- --------
Intangible assets, net $110,870 $ 20,357
======== ========
<PAGE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
--------------- -- --------------
(in thousands)
<S> <C> <C>
Notes payable to former owners of acquired businesses with
interest at various rates up to 12%, due 1998 though 2007 $ 18,353 $ 12,911
Note payable to bank under line of credit with interest
rate not exceeding the prime interest rate, refinanced in 1997
- 7,288
Term credit facility payable to bank, bearing interest at 8.16%,
payments 1999 through 2003 40,000 -
Revolving credit facility bearing interest at 8.16 to 9.5%,
due November 2003 51,479 -
Senior subordinated debt payable to LDI at 9.0%,
due May 2004 30,000 -
Other long-term financing at various rates 2,308 1,771
---------- ----------
142,140 21,970
Less current maturities 8,005 4,139
--------- ---------
$134,135 $ 17,831
======== ========
</TABLE>
Revolving Credit Facility: The Company has a revolving credit facility with a
bank, limited to the lesser of $60 million less letter of credit obligations, or
80 percent of eligible accounts receivable plus 65 percent of eligible
inventory, less letter of credit obligations and a reserve for three months
facility rent. Principal is due on November 19, 2003. Interest rates and payment
dates are variable based upon interest rate options selected by management.
Interest rates at December 31, 1997 varied from 8.16% to 9.5%. The interest
rates are 2.25% over LIBOR or 1% over prime in the case of Floating Rate
Advances. The Company is charged an annual administrative fee of $50,000, and an
annual commitment fee, payable monthly, of 0.5% on the unused portion of the
revolving credit facility.
Term Credit Facility: The term loan requires quarterly principal payments
beginning March 31, 1999. Interest rates and payment dates are variable based
upon interest rate options selected by management. The interest rate at December
31, 1997 was 8.16%. This rate is 2.25% over LIBOR.
Substantially all of the Company's assets serve as collateral for the revolving
credit facility and term credit facility. These credit agreements contain
various covenants pertaining to, among other things, achieving a minimum fixed
coverage ratio, a leverage ratio, and an interest expense coverage ratio. The
covenants also limit purchases and sales of assets, restrict payment of
dividends and direct the use of excess cash flow. These quarterly covenants
become effective with the period ending March 31, 1998. As a condition of the
amended bank credit facility of $100 million, LDI agreed to make by June 30,
1998 an additional equity investment of $14 million or such lesser amount as may
be acceptable to the Company's bank. The Company intends to satisfy this
requirement through an acquisition of LDI AutoPaints ("AutoPaints") in exchange
for equity in the Company. (See Note 10).
Senior Subordinated Debt: The senior subordinated debt matures May 19, 2004.
Interest accrues at 9.0% annually, and is payable quarterly. Holders of
subordinated debt are expressly subordinate in right of payment to all senior
indebtedness.
The aggregate principal payments for the next five years subsequent to December
31, 1997 are as follows, in thousands:
1998 $ 8,005
1999 9,513
2000 10,725
2001 10,104
2002 10,494
Thereafter 93,299
-----------
$ 142,140
===========
<PAGE>
5. LONG-TERM OBLIGATIONS (continued)
The Company is currently pursuing other financing arrangements. Should the
Company be successful in implementing favorable financing terms, proceeds will
be used to retire certain bank term loans, a portion of amounts outstanding
under the revolving credit facility and the subordinated debt payable to LDI.
Early retirement of indebtedness will result in an extraordinary loss in the
amount of the net book value of capitalized debt issue costs. At December 31,
1997 unamortized debt issue costs were approximately $1.6 million.
The carrying amounts of certain financial instruments such as cash, accounts
receivable, accounts payable and long term obligations approximate their fair
values. The fair value of the long-term debt is estimated using discounted cash
flow analysis and the Company's current incremental borrowing rates for similar
types of arrangements.
6. EMPLOYEE SAVINGS PLAN
The Company has an Employee Savings Plan which covers substantially all
employees who have met certain requirements as to date of service. The Company
currently contributes $0.25 for each $1 contributed by employees up to 6% of
their annual compensation. In addition, the Company may contribute, at the
discretion of the Board of Directors, an additional amount equal to 1% of the
employees' annual compensation. Company contributions charged to operations
under the Plan were approximately $182,000 for year ended December 31, 1997,
$189,000 for the nine months ended December 31, 1996 and $198,000 for the year
ended March 31, 1996.
7. STOCK OPTIONS
On November 30, 1993, an Employee Stock Option Plan was ratified to grant
options on up to 600,000 shares of the Company's common stock to officers, key
employees and non-employee directors of the Company. All options granted under
this plan have been granted at a price equal to the market price at the date of
the grant. All options granted have a maximum life of ten years from the date of
the grant and are fully vested at the date of issue.
The Company recognizes compensation expense related to its stock option plan in
accordance with APB No. 25 "Accounting for Stock Issued to Employees." Options
are granted at not less than the fair market value of the Company's common stock
on the date of grant, therefore, no compensation is recognized. Had compensation
expense been determined at the date of the grant based on the fair value of the
awards consistent the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated in
the following table:
<TABLE>
<CAPTION>
Year Ended December Nine Months Year Ended March
31, Ended December 31, 31,
1997 1996 1996
----------------------- ----------------------- ---------------------
Net Income (in thousands, except per share data)
<S> <C> <C> <C>
As Reported $ 656 $ 660 $ 2,649
Pro Forma $ 523 $ 660 $ 2,010
Net income per share
As Reported - Basic $ 0.11 $ 0.11 $ 0.44
- Diluted $ 0.11 $ 0.11 $ 0.44
Pro Forma - Basic $ 0.09 $ 0.11 $ 0.34
- Diluted $ 0.09 $ 0.11 $ 0.33
</TABLE>
<PAGE>
7. STOCK OPTIONS (continued)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for December
31, 1997, December 31, 1996 and March 31, 1996 respectively: risk free interest
rate of 5.5, 5.7 and 5.7 percent; no dividend yield for all years; expected
lives of 9, 8 and 8 years; and volatility of 46.8 percent for all years. Option
valuation models, like the stock price Black-Scholes model, require the input of
highly subjective assumptions including the expected stock price volatility.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its stock
options.
<TABLE>
December 31, 1997 December 31, 1996 March 31, 1996
----------------------------- ---------------------------- -------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year
169,310 $ 10.71 222,085 $10.72 123,800 $10.50
Granted 45,000 $ 7.00 - - 99,500 $11.00
Exercised - - 140 $10.50 - -
Forfeited 4,310 $10.50 52,635 $10.76 1,215 $10.50
------- ------ ------- ------ ------- ------
Outstanding and
exercisable-end of year
($7.00 to $11.00 per share)
210,000 $ 9.92 169,310 $10.71 222,085 $10.72
======= ====== ======= ====== ======= ======
</TABLE>
The weighted-average fair value of options granted during the year ended
December 31, 1997 and March 31, 1996 were $4.85 and $6.65 per option,
respectively. The remaining contractual life of options outstanding at December
31, 1997 is 8.3 years.
8. INCOME TAXES
The provision for federal and state income taxes consisted of the following, in
thousands:
Year Ended Nine Months Ended Year Ended
December 31, 1997 December 31, 1996 March 31,1996
-------------------- ----------------- -------------
Current:
Federal $ 1,010 $ 778 $ 1,477
State 186 232 327
Deferred (681) (400) (38)
------- ------- -------
$ 515 $ 610 $ 1,766
======= ======= =======
<PAGE>
8. INCOME TAXES (continued)
The reconciliation of income taxes computed at the federal statutory tax rate to
the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, 1997 December 31, 1996 March 31, 1996
------------------ ----------------- ---------------
<S> <C> <C> <C>
Federal statutory tax rate 34.0% 34.0% 34.0%
State tax provision 6.8 8.3 4.9
Other 3.3 5.7
1.1
================== ================= ===============
Effective tax rate 44.1% 48.0% 40.0%
================== ================= ===============
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997 and 1996 are as follows (in thousands):
December 31, 1997 December 31, 1996
----------------- -----------------
Deferred tax assets
Depreciation $ 712
Amortization of intangibles 1,023 $ 647
Allowance for doubtful accounts 1,106 277
Inventory 1,770 190
Accrued expenses 2,555
Other, net 52 23
------ ------
7,218 1,137
Deferred tax liabilities
Depreciation -- 374
------ ------
$7,218 $ 763
====== ======
9. CONTINGENCIES AND COMMITMENTS
FinishMaster occupies facilities and uses equipment under operating lease
agreements requiring annual rental payments approximating the following amounts
(in thousands) for the five years subsequent to December 31, 1997:
1998 $ 6,610
1999 5,484
2000 2,857
2001 1,115
2002 463
Thereafter 998
----------
$ 17,527
=========
Rent expense charged to operations, including short-term leases, aggregated
$3,831,963, $2,724,621, and $2,500,101 for the year ended December 31, 1997, the
nine months ended December 31, 1996, and the year ended March 31, 1996,
respectively.
On January 14, 1998, the Company announced the planned relocation of its
administrative headquarters from the Kentwood, Michigan distribution center to
new office space located in Indianapolis, Indiana that will be leased by the
Company from LDI. The Company anticipates incurring relocation and integration
costs in 1998 in conjunction with the combination of certain stores and moving
of administrative functions.
<PAGE>
9. CONTINGENCIES AND COMMITMENTS (continued)
The Company is dependent on four main suppliers for the purchases of the paint
and related supplies that it distributes. A loss of one of the suppliers or a
disruption in the supply of the products provided could have a material adverse
effect on the Company's operating results. The suppliers also provide purchase
discounts, prompt payment discounts, extended terms and other incentive
programs. To the extent these programs are changed or terminated, there could be
a material adverse impact to the Company.
The Company has three agreements with warehouse suppliers for the purchase of
certain paint and non-paint supplies in specified geographic locations. The
agreements provide for aggregate specified minimum purchases of $8.1 million in
1998, $7.8 million in 1999 and 2000, and $2.8 million in 2001, 2002 and 2003.
The agreements expire in 1999, 2000, and 2003.
FinishMaster is not involved in any material legal actions as of December 31,
1997.
10. SUBSEQUENT EVENT
On February 16, 1998, the Company, AutoPaints and LDI entered into an Agreement
and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger
Agreement, which is subject to the approval of the Company's shareholders,
AutoPaints will merge with and into the Company, and the Company will issue an
additional 1,542,416 shares of the common stock of the Company to LDI. The
Company will also seek shareholder approval for an increase in the number of
authorized common shares from 10 million to 25 million shares. The financial
position, results of operations and cash flows of AutoPaints have not been
reflected in the consolidated financial statements of FinishMaster as of or for
the year ended December 31, 1997.
On March 27, 1998 the Company entered into a subordinated revolving credit
agreement with LDI for $10.0 million to fund working capital and acquisition
needs. Principal is due March 27, 1999. Interest rates and payment dates are
variable based upon interest options selected by management. The interest rates
are 2.25% over LIBOR or 1.0% over prime in the case of floating rate advances.
Holders of subordinated debt are expressly made subordinate in right of payment
of all senior indebtedness.
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
- ----------------------------------------- ---------------- --------------------------------- ------------------ -----------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------- ---------------- --------------------------------- ------------------ -----------------
ADDITIONS
---------------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts-- Deductions--DescribeBalance at End
DESCRIPTION Period Expenses Describe of Period
- ----------------------------------------- ---------------- ---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $ 700 $859 $1,758 (A) $1,070 (B) $2,247
------ ---- ------ ------ ------
Nine months ended December 31, 1996:
Allowance for doubtful accounts $ 350 $798 $448 (B) $700
------ ---- ---- ----
Year ended March 31, 1996:
Allowance for doubtful accounts $ 260 $548 $458 (B) $350
------ ---- ---- ----
</TABLE>
(A) Represents allowance for doubtful accounts from acquisition. (B) Represents
uncollectible accounts written off, less recoveries.
<PAGE>
FINISHMASTER, INC. AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K
EXHIBITS
EXHIBIT LIST
Exhibit No. Description of Document Page
2.1* Agreement and Plan of Merger, dated as of
October 14, 1997, by and among FinishMaster,
Inc., FMST Acquisition Corporation and Thompson
PBE, Inc. (incorporated by reference to Exhibit
(c)(2) of Schedule 14D-1 previously filed by
FMST Acquisition Corporation on October 21,
1997).
2.2 Agreement and Plan of Merger, dated February
16, 1998, by and among FinishMaster, Inc., LDI
AutoPaints, Inc. and Lacy Distribution, Inc.
3.1* Articles of Incorporation of FinishMaster,
Inc., an Indiana corporation (previously filed
with Form 10-K dated March 31, 1997)
3.2* Bylaws of FinishMaster, Inc., an Indiana
corporation (previously filed with Form 10-K
dated March 31, 1997)
10.1 FinishMaster, Inc. Stock Option Plan (Amended
and Restated as of April 30, 1997)
10.2 Agreement dated as of March 1, 1998 between
FinishMaster, Inc. and LDI AutoPaints, Inc.
respecting certain management and
administrative functions
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27.1 Financial Data Schedule
99(a)* Credit Agreement, dated as of November 19,
1997, among FinishMaster, Inc., the
Institutions from Time to Time Parties Thereto
as Lenders and NBD Bank, N.A., as Agent
(previously filed with Form 8-K dated December
3, 1997)
99(b)* Subordinated Note Agreement, dated as of
November 19, 1997, by and between FinishMaster,
Inc. and LDI, Ltd. (previously filed with Form
8-K dated December 3, 1997)
99(c) First Amendment to Credit Agreement dated
December 10, 1997
99(d) Second Amendment to Credit Agreement dated
March 27, 1998
99(e) Credit Agreement dated March 27, 1998 between
FinishMaster, Inc. and LDI, Ltd.
- ------------------
* Previously filed
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...........................................2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF AP AND
DISTRIBUTION..............................................2
SECTION 2.1 Organization.............................................2
SECTION 2.2 Capitalization...........................................2
SECTION 2.3 Authority Relative to This Agreement.....................2
SECTION 2.4 No Violation.............................................3
SECTION 2.5 Financial Statements.....................................3
SECTION 2.6 Information. ...........................................4
SECTION 2.7 Absence of Certain Changes;
No Undisclosed Liabilities............................4
SECTION 2.8 Litigation...............................................4
SECTION 2.9 Compliance with Applicable Law...........................4
SECTION 2.10 Taxes...................................................5
SECTION 2.11 Termination, Severance and Employment Agreements........6
SECTION 2.12 Employee Benefit Plans; ERISA...........................6
SECTION 2.13 Environmental Matters...................................7
SECTION 2.14 Assets, Real Property, Intellectual Property............7
SECTION 2.15 Labor Matters...........................................8
SECTION 2.16 Certain Fees............................................8
SECTION 2.17 No Default..............................................8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF FMST....................9
SECTION 3.1 Organization.............................................9
SECTION 3.2 Authority Relative to This Agreement.....................9
SECTION 3.3 No Violation.............................................9
SECTION 3.4 Proxy Statement, Other Information.....................10
SECTION 3.5 Certain Fees............................................10
ARTICLE IV COVENANTS................................................10
SECTION 4.1 Conduct of Business of AP...............................10
SECTION 4.2 Access to Information...................................12
<PAGE>
SECTION 4.3 Shareholders' Meeting...................................12
SECTION 4.4 Cooperation.............................................13
SECTION 4.5 Notification of Certain Matters.........................13
SECTION 4.6 Public Announcements....................................13
ARTICLE V CONDITIONS TO CONSUMMATION OF THE MERGER.................14
SECTION 5.1 Conditions to Each Party's Obligation
To Effect the Merger.................................14
ARTICLE VI TERMINATION; AMENDMENT; WAIVER...........................14
SECTION 6.1 Termination.............................................14
SECTION 6.2 Fees and Expenses.......................................15
SECTION 6.3 Effect of Termination...................................15
SECTION 6.4 Amendment...............................................15
SECTION 6.5 Extension; Waiver.......................................16
ARTICLE VII MISCELLANEOUS............................................16
SECTION 7.1 Non-Survival of Representations,
Warranties and Agreements............................16
SECTION 7.2 Indemnification.........................................16
SECTION 7.3 Entire Agreement; Assignment............................16
SECTION 7.4 Validity................................................16
SECTION 7.5 Notices.................................................17
SECTION 7.6 Governing Law...........................................18
SECTION 7.7 Interpretation..........................................18
SECTION 7.8 Parties in Interest.....................................18
SECTION 7.9 Counterparts............................................18
SECTION 7.10 Expenses...............................................18
SECTION 7.11 Obligation of Distribution.............................18
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement") is dated as of
February ___, 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
1
<PAGE>
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:
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.
2
<PAGE>
This Agreement has been duly executed and delivered by AP and Distribution and,
assuming this Agreement constitutes a valid and binding obligation of FMST, this
Agreement constitutes a valid and binding agreement of AP and Distribution
enforceable against AP and Distribution in accordance with its terms, except to
the extent that its enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors'
rights generally or by equitable principles.
(b) Other Authorizations. Other than in connection with, or in
compliance with, applicable requirements of the IBCL with respect to the
transaction contemplated hereby, no authorization, consent or approval of, or
filing with, any court or any public body or authority is necessary for the
consummation by AP of the transaction contemplated by this Agreement other than
authorizations, consents and approvals the failure to obtain, or filings the
failure to make, which would not, in the aggregate, cause or result in a Company
Material Adverse Effect.
SECTION 2.4 No Violation. Neither the execution or delivery of this
Agreement by AP, the performance by AP of its obligations hereunder nor the
consummation by AP of the transaction contemplated hereby will (a) constitute a
breach or violation of any provision of the articles of incorporation or code of
by-laws of AP, (b) constitute a breach, violation or default (or any event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in the creation of any lien or encumbrance upon any of the properties or
assets of AP under, any note, bond, mortgage, indenture, deed of trust, license,
agreement or other instrument to which AP is a party or by which it or any of
its respective properties or assets is bound or (c) constitute a violation of
any order, writ, injunction, decree, statute, rule or regulation of any court or
governmental authority applicable to AP, or any of its properties or assets,
other than, in the case of clauses (b) and (c) above, such breaches, violations,
defaults, terminations, accelerations or creation of liens and encumbrances
which, in the aggregate, would not have a Company Material Adverse Effect. No
representation or warranty is made regarding whether or not any consent may be
required in respect of any AP site lease.
SECTION 2.5 Financial Statements. The audited financial statements of
LDI AutoPaints - Florida Division as of December 31, 1997 have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis (except as otherwise stated in such financial statements,
including the related notes) and fairly present in all material respects the
financial position of LDI AutoPaints - Florida Division as of the date thereof
and the results of its operations and cash flows for the period then ended. The
unaudited financial statements of AP as of January 31, 1998 have been prepared
in accordance with GAAP applied on a consistent basis (except as otherwise
stated in such financial statements, including the related notes, and except
that such financial statements do not contain all of the footnote disclosures
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
3
<PAGE>
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,
4
<PAGE>
reasonably be expected to result in a Company Material Adverse Effect. The
business of AP is not being conducted in violation of any law, ordinance or
regulation of any governmental entity except for violations or possible
violations which individually or in the aggregate are not reasonably expected to
result in a Company Material Adverse Effect. No investigation or review by any
governmental entity with respect to AP is pending or threatened in writing or,
to the knowledge of AP, otherwise threatened, other than, in each case, those
which would not, individually or in the aggregate, reasonably be expected to
result in a Company Material Adverse Effect.
SECTION 2.10 Taxes. AP has filed, or caused to be filed, all federal,
state, local and foreign income and other tax returns required to be filed by
it, has paid or withheld, or caused to be paid or withheld, all taxes of any
nature whatsoever, with any related penalties, interest and liabilities (any of
the foregoing being referred to herein as a "Tax"), that are shown on such tax
returns as due and payable, or otherwise required to be paid, other than such
Taxes as are being contested in good faith and for which reserves have been
established in accordance with GAAP except where the failure so 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.
5
<PAGE>
SECTION 2.11 Termination, Severance and Employment Agreements. AP has
provided to FMST a complete and accurate list of each employment or severance
agreement of any officer of LDI AutoPaints - Florida not terminable by the terms
thereof without material liability or obligation (either individually or
collectively) on 60 days' or less notice.
SECTION 2.12 Employee Benefit Plans; ERISA.
(a) Except as previously disclosed to the FMST in writing, (i) each
"employee benefit plan" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), and all other employee
benefit, bonus, incentive, stock option (or other equity- based), severance,
change in control, welfare (including post-retirement medical and life
insurance) and fringe benefit plans (whether or not subject to ERISA) maintained
or sponsored by AP or any member of Distribution's controlled group of entities
(within the meaning of Code Sections 414(b), (c), (m) or (o)) (each, an "ERISA
Affiliate"), for the benefit of any employee or former employee of AP or any of
its ERISA Affiliates (individually, a "Plan," and collectively, the "Plans") is,
and has been operated in accordance with its terms and in compliance (including
the making of governmental filings) with all applicable laws, including ERISA
and the applicable provisions of the Code, except for failures that would not,
individually or in the aggregate, have a Company Material Adverse Effect, (ii)
each of the Plans presently maintained by AP and intended to be "qualified"
within the meaning of Section 401(a) of the Code has been determined by the
Internal Revenue Service to be so qualified, (iii) no "reportable event," as
such term is defined in Section 4043(c) of ERISA (for which the 30-day notice
requirement to the Pension Benefit Guaranty Corporation ("PBGC") has not been
waived), has occurred with respect to any Plan that is subject to Title IV of
ERISA which presents a risk of liability to any governmental entity or other
person which, individually or in the aggregate, may reasonably be expected to
have a Company Material Adverse Effect, and (iv) there are no pending or
threatened in writing or to AP's knowledge otherwise threatened, claims (other
than routine claims for benefits) by, on behalf of or against, any of the Plans
or any trust related thereto which would, individually or in the aggregate, have
a Company Material Adverse Effect. No Plan is a "multiemployer plan" (within the
meaning of ERISA) nor to the knowledge of AP has AP or any ERISA Affiliate ever
contributed or been required to contribute to any multiemployer plan.
(b) (i) No Plan has incurred a material "accumulated funding
deficiency" (as defined in Section 302 of ERISA or Section 412 of the Code)
whether or not waived and (ii) neither AP nor any ERISA Affiliate has incurred
any liability under Title IV of ERISA except for required premium payments to
the PBGC, which payments have been made when due, and no events have occurred
which are reasonably likely to give rise to any liability of AP or an ERISA
Affiliate under Title 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
6
<PAGE>
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.
(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),
7
<PAGE>
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.
8
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FMST
FMST represents and warrants to AP and Distribution as follows:
SECTION 3.1 Organization. FMST is a corporation duly organized and
validly existing under the laws of the State of Indiana and is in good standing
as a foreign corporation in each other jurisdiction where the properties owned,
leased or operated, or the business conducted, by it require such qualification
and where failure to be in good standing or so to qualify would have a material
adverse effect on the financial condition, results of operations or businesses
of FMST.
SECTION 3.2 Authority Relative to This Agreement.
(a) Approvals. FMST has full corporate power and authority to execute
and deliver this Agreement and, subject to obtaining the necessary approval of
this Agreement by its shareholders to the extent required by applicable law or
the NASDAQ National Market System ("NMS"), to consummate the transaction
contemplated hereby. The execution and delivery of this Agreement by FMST and
the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of FMST, and no other corporate proceedings
on the part of FMST are necessary for the execution and delivery of this
Agreement by FMST and, subject to the filing of the Articles of Merger pursuant
to Section 1.2 and obtaining the necessary approvals of FMST's shareholders to
the extent required by applicable law or the NMS, the performance by FMST of its
obligations hereunder and the consummation by FMST of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by FMST
and, assuming this Agreement constitutes a valid and binding obligation of each
of AP and Distribution, this Agreement constitutes a valid and binding agreement
of FMST, enforceable against FMST in accordance with its terms, except to the
extent that its enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors
rights generally or by general equitable principles.
(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
9
<PAGE>
termination of, or accelerate the performance required by, or result in the
creation of any lien or encumbrance upon any of the properties or assets of FMST
under, any note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument to which either FMST is a party or by which they
or any of their properties or assets are bound or (c) constitute a violation of
any order, writ, injunction, decree, statute, rule or regulation of any court or
governmental authority applicable to FMST or any of their properties or assets,
other than, in the case of clauses (b) and (c) above, such breaches. violations,
defaults, terminations, accelerations or creation of liens and encumbrances
which, in the aggregate, would not have a material adverse effect on the
financial condition, results of operations or business of FMST taken as a whole
or on the ability of FMST to consummate the transaction contemplated hereby.
SECTION 3.4 Proxy Statement, Other Information. No document filed or to
be filed by or on behalf of FMST with the SEC or any other governmental entity
in connection with the transaction contemplated by this Agreement, contained
when filed, or will contain, at the respective times filed with the SEC or other
governmental entity, any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading; provided that the foregoing shall not apply to information
supplied by AP in writing specifically for inclusion or incorporation by
reference in any such document. None of the information supplied in writing by
FMST specifically for inclusion or incorporation by reference in the Proxy
Statement, if any, or any other document filed or to be filed by or on behalf of
FMST with the SEC or any other governmental entity in connection with the
transaction contemplated by this Agreement, contains, or will contain, any
untrue statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
SECTION 3.5 Certain Fees. Neither FMST nor its officers, directors or
employees has employed any broker or finder or incurred any liability for any
financial advisory, brokerage or finder's fees or commissions in connection with
the transaction contemplated herein for which AP could have any liability,
except for the financial advisory fee payable to McDonald & Company in
connection with the rendering of its fairness opinion to the Independent
Committee.
ARTICLE IV
COVENANTS
SECTION 4.1 Conduct of Business of AP. Except as contemplated by this
Agreement, as previously disclosed to FMST or as otherwise agreed by the parties
hereto, during the period from the date of this Agreement to the Effective Time,
AP will conduct its operations in accordance with its ordinary and usual course
of business and consistent with past practice in all material respects. Without
limiting the generality of the foregoing, and except as contemplated by this
Agreement or as previously disclosed to FMST, prior to the Effective Time, AP
will not, without the prior written consent of FMST (such consent not to be
unreasonably withheld):
10
<PAGE>
(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;
11
<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.
12
<PAGE>
(b) Voting of Shares by AP. AP agrees that, at the meeting of the
shareholders of FinishMaster at which the Merger is considered, all of the
shares of FinishMaster owned by AP will be voted in favor of the Merger.
SECTION 4.4 Cooperation. Subject to the terms and conditions herein
provided and to the fiduciary duties of FMST's directors as advised by counsel
to FMST, each of the parties hereto agrees to use its reasonable best efforts
(and to use its reasonable best efforts to cause its affiliates) (a) to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transaction contemplated by this Agreement
including, without limitation, (i) promptly making any filings that are required
to be made or seeking any consents, approvals, permits or authorizations that
are required to be obtained under any federal, state or other law or regulation,
(ii) using its reasonable best efforts to respond promptly and fully to any and
all inquiries of government officials or agencies and to endeavor to resolve any
inquiries or objections made by any such officials or agencies, and (iii) using
its reasonable best efforts to prevent or ameliorate the effects of any Order or
Injunction to refrain from taking, directly or indirectly, any action contrary
to or inconsistent with the provisions of this Agreement, including action which
would impair such party's ability to consummate the transactions contemplated
hereby. In case at any time before or after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall use
their respective reasonable best efforts to take all such necessary action.
SECTION 4.5 Notification of Certain Matters. Each of the parties hereto
shall give the others prompt notice of (i) the occurrence, or non-occurrence, of
any event which causes or has caused any representation or warranty of any party
contained in this Agreement to be untrue or inaccurate in any material respect
at any time from the date hereof to the Effective Time, and (ii) any material
failure of AP or FMST, as the case may be, or any officer, director, employee,
representative or agent thereof, to comply with or satisfy any material
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 4.5 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
SECTION 4.6 Public Announcements. FMST and AP will consult with each
other before issuing any press release or otherwise making any public statements
with respect to the Merger and shall not issue any such press release or make
any such public statement prior to such consultation except as may be required
by law or any securities exchange or similar authority. The parties agree that,
upon execution of this Agreement, they will cause to be disseminated a joint
press release.
13
<PAGE>
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 5.1 Conditions to Each Party's Obligation To Effect the Merger.
The respective obligations of each party to effect the Merger are subject to the
satisfaction or waiver, where legally permissible, prior to the Effective Time
of the following conditions:
(a) This Agreement shall have been adopted by the requisite vote of the
shareholders of FMST in accordance with applicable law and the requirements of
NMS, if such vote is required by applicable law or the NMS;
(b) No statute, rule, regulation, order, decree or injunction shall
have been enacted, entered, promulgated or enforced by any court or governmental
authority of competent jurisdiction which restrains, enjoins or otherwise
prohibits the consummation of the Merger; provided, however, that AP and FMST
shall use their reasonable best efforts to have any such order, decree or
injunction vacated and otherwise take all actions required pursuant to Section
4.4;
(c) delivery of fairness opinion rendered by McDonald & Company to the
Independent Directors; and
(d) the representations and warranties of AP and Distribution (which
may be waived by FMST) and of FMST (which may be waived by Distribution) shall
be true and correct in all material respects.
ARTICLE VI
TERMINATION; AMENDMENT; WAIVER
SECTION 6.1 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time prior to the Effective
Time, notwithstanding approval thereof by the shareholders of FMST:
(a) by mutual written consent duly authorized by the boards of
directors of AP, Distribution and FMST (including, if required, the Independent
Committee);
(b) by FMST, Distribution or AP if the Effective Time shall not have
occurred on or before June 30, 1998; provided, however, that the right to
terminate this Agreement pursuant to this Section 6.1(b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Effective Time to occur on
or before such date;
(c) by FMST, Distribution or AP if any court of competent jurisdiction
in the United States or other United States governmental body shall have issued
an order, decree or ruling or taken
14
<PAGE>
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,
15
<PAGE>
the Independent Committee. This Agreement may not be amended except by an
instrument in writing signed on behalf of all the parties.
SECTION 6.5 Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto or (c) waive
compliance with any of the agreements or conditions contained herein unless
waiver is unlawful or specifically prohibited. Any agreement on the part of any
party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 Non-Survival of Representations, Warranties and Agreements.
The representations and warranties made herein shall terminate on the first
anniversary of the Effective Time or the earlier termination of this Agreement
pursuant to Section 6.1 as the case may be; provided, however, that if the
Merger is consummated, the representation and warranty contained in Section 2.10
shall survive for a period equal to the applicable statute of limitations for
tax matters (each of the above referenced time periods being hereinafter
referred to as a "Survival Period").
SECTION 7.2 Indemnification. During the Survival Period applicable to
that certain representation and warranty, Distribution agrees to indemnify and
hold harmless FMST from any and all claims, action, damages, losses, costs and
expenses (including reasonably attorneys' fees) incurred by FMST in connection
with any representation or warranty made by Distribution in this agreement
having been untrue in any material respect at the time made. During the Survival
Period applicable to that certain representation and warranty, FMST hereby
agrees to indemnify and hold harmless Distribution from any and all claims,
actions, damages, losses, costs and expenses (including reasonably attorneys'
fees) incurred by Distribution in connection with any representation or warranty
made by FMST in this agreement having been untrue in any material respect as of
the date made.
SECTION 7.3 Entire Agreement; Assignment. This Agreement (a)
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof and (b) shall not be assigned by operation of law or otherwise.
SECTION 7.4 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
16
<PAGE>
SECTION 7.5 Notices. All notices and other communications among the
parties shall be in writing and shall be deemed to have been duly given when (i)
delivered in person, or (ii) one business day after delivery to a reputable
overnight courier service (e.g. Federal Express), postage pre-paid, or (iii)
delivered by telecopy and promptly confirmed by telephone and by delivery of a
copy in person or overnight as aforesaid, in each case with postage prepaid,
addressed as follows:
If to FMST:
FinishMaster, Inc.
54 Monument Circle
Indianapolis, Indiana 46204
Telecopy: (317) 237-5430
Attention: Andre B. Lacy, Chairman of the Board
with a copy to:
Barnes & Thornburg
11 S. Meridian Street, Suite 1300
Indianapolis, Indiana 46204
Telecopy: (317) 231-7433
Attention: Robert H. Reynolds, Esquire
and
Sommer & Barnard
111 Monument Circle, Suite 4000
Indianapolis, Indiana 46204
Telecopy: (317) 236-9802
Attention: James A. Strain, Esquire
If to AP or Distribution:
LDI AutoPaints, Inc.
54 Monument Circle
Indianapolis, Indiana 46204
Telecopy: (317) 237-5430
Attention: Andre B. Lacy, Chairman of the Board
17
<PAGE>
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.
18
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
FINISHMASTER, INC.
("FMST")
By: /s/ Andre B. Lacy
---------------------------------
Name: Andre B. Lacy
Title: Chairman of the Board & CEO
LDI AUTOPAINTS, INC. (" AP ")
By: /s/ Andre B. Lacy
---------------------------------
Name: Andre B. Lacy
Title: Chairman of the Board & CEO
LACY DISTRIBUTION, INC.
("Distribution")
By: /s/ Andre B. Lacy
---------------------------------
Name: Andre B. Lacy
Title: Chairman of the Board & CEO
FINISHMASTER, INC.
(AMENDED AND RESTATED AS OF APRIL 30, 1997)
STOCK OPTION PLAN
1. Purpose. The purpose of the Finishmaster, Inc. Stock Option Plan
(the "Plan") is to provide to certain officers and other key employees of
FinishMaster, Inc. (the "Corporation") or its wholly-owned subsidiary (the
"Subsidiary"), as well as to directors who are not employees of the Corporation,
who are materially responsible for the management or operation of the business
of the Corporation or the Subsidiary, a favorable opportunity to acquire Common
Stock, without par value, of the Corporation ("Common Stock"), thereby providing
them with an increased incentive to work for the success of the Corporation and
the Subsidiary and to enable the Corporation and the Subsidiary to attract and
retain capable executive personnel. The means by which an individual may acquire
Common Stock is the grant to an officer or key employee of an option to acquire
shares of Common Stock (an "Option") in accordance with Section 5 hereof.
2. Administration of the Plan. The Plan shall be administered,
construed and interpreted by the Board of Directors or by a committee of the
Corporation's Board of Directors (the "Committee"). The Committee must be
composed of two or more persons who qualify as "Non-Employee Directors" within
the meaning of Rule 16b-3(b)(3) promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act") and as "outside directors" as defined in
Treasury Reg. ss. 1.162-27(e)(3). A member of the Committee may not, during one
year prior to serving as a Committee member or during such service, be granted
an Option pursuant to the Plan. The decision of a majority of the members of the
Committee shall constitute the decision of the Committee, and the Committee may
act either at a meeting at which a majority of the members of the Committee is
present or by a written consent signed by all members of the Committee. The
Committee shall have the sole, final and conclusive authority to determine,
consistent with and subject to the provisions of the Plan:
(a) the individuals (the "Optionees") to whom Options are
granted under the Plan;
(b) the time when Options shall be granted hereunder;
(c) the number of shares of Common Stock of the
Corporation to be covered under each Option;
(d) the price to be paid upon the exercise of each
Option;
(e) the period within which each Option may be exercised;
(f) the extent to which an Option is an incentive stock
option or a non-qualified stock option; and
<PAGE>
(g) the terms and conditions of the respective agreements
by which Options shall be evidenced.
The Committee shall also have authority to prescribe, amend and rescind rules
and regulations relating to the Plan, and to make all other determinations
necessary or advisable in the administration of the Plan.
3. Eligibility. The Committee may, consistent with the purposes of the
Plan, grant Options to officers and other key employees of the Corporation or of
a Subsidiary who in the opinion of the Committee are from time to time
materially responsible for the management or operation of the business of the
Corporation or of a Subsidiary, as well to Non-Employee Directors consistent
with applicable rules under the 1934 Act; provided, however, that in no event
may any employee who owns (after application of the ownership rules in ss.
424(d) of the Internal Revenue Code of 1986, as amended (the "Code")) shares of
Common Stock possessing more than 10% of the total combined voting power of all
classes of Common Stock of the Corporation be granted an incentive stock option
hereunder unless at the time such option is granted the option price is at least
110% of the fair market value of the Common Stock subject to the Option and such
incentive stock option by its terms is not exercisable after the expiration of
five (5) years from the date such Option is granted. Subject to the provisions
of Section 4 hereof, an individual who has been granted an Option under the
Plan, if he is otherwise eligible, may be granted an additional Option or
Options if the Committee shall so determine. The maximum number of shares of
Common Stock with respect to which Options may be granted in any calendar year
to any individual shall not exceed fifty thousand (50,000).
4. Stock Subject to the Plan. There shall be reserved for issuance
upon the exercise of Options granted under the Plan, six hundred thousand
(600,000) shares of Common Stock which may be authorized but unissued shares of
the Corporation, of which fifty thousand (50,000) shares shall be reserved for
issuance to Directors who are not otherwise employees of the Corporation.
Subject to Section 6 hereof, the shares for which Options may be granted under
the Plan shall not exceed that number. If any Option shall expire or terminate
for any reason without having been exercised in full, the unpurchased shares
subject thereto shall (unless the Plan shall have terminated) become available
for other Options under the Plan.
5. Terms of Option. Each Option granted under the Plan shall be subject
to the following terms and conditions and to such other terms and conditions not
inconsistent therewith as the Committee may deem appropriate in each case:
(a) Option Price. The price to be paid for shares of Common
Stock upon the exercise of each Option shall be the closing price of
the shares of Common Stock as reported on the Nasdaq Stock Market's
National Market on the date of grant (or, if the date of grant is not a
trading date, then on the last previous trading day), but such price in
the case of an incentive stock option in no event shall be less than
the fair market value, as determined by the Committee consistent with
the requirements of ss. 422 of the Code, of Common Stock on the date on
which the Option is granted.
<PAGE>
(b) Period for Exercise of Option. An Option shall not be
exercisable after the expiration of such period as shall be fixed by
the Committee at the time such Option is granted, but such period in no
event shall exceed ten (10) years from the date on which such Option is
granted; provided, however, that incentive stock options shall have
terms not in excess of ten (10) years.
(c) Exercise of Options. The option price of each share of
Common Stock purchased upon exercise of an Option shall be paid in full
(1) in cash at the time of such exercise, or (2) if the Optionee may do
so in conformity with Regulation T (12 C.F.R. Section 220.3(e)(4)) and
without violating Section 16(b) or (c) of the 1934 Act (to the extent
applicable) and to the extent permitted under the agreement entered
into by the Committee and the Optionee relating to the Option, by
delivering a properly executed exercise note together with irrevocable
instructions to a broker to deliver promptly to the Corporation the
total option price in cash and, if desired, the amount of any taxes to
be withheld from the Optionee's compensation as a result of any
withholding tax obligation of the Corporation or any of its
Subsidiaries, as specified in such notice. The Committee shall have the
authority to grant Options exercisable in full at any time during their
term, or exercisable in such installments, equal or non-equal, as the
Committee shall determine. An Option may be exercised at any time or
from time to time during the term of the Option as to any or all whole
shares which have become subject to purchase pursuant to the terms of
the Option (including, without limitation, any quotas with respect to
option exercise) or the Plan.
(d) Termination of Option. If an Optionee ceases to be an
employee of the Corporation or one of the Subsidiaries or if there is a
disposition of the Subsidiary for which the Optionee performed the
majority of his services, any Option granted to such Optionee shall
terminate at the expiration of three (3) months from such cessation. If
cessation of employment is due to permanent and total disability the
Optionee shall have the right to exercise options granted to such
Optionee at any time within twelve (12) months after such cessation.
Leave of absence approved by the Committee shall not constitute
cessation of employment. Notwithstanding the foregoing provisions of
this subsection (d), no Option shall in any event be exercisable after
the expiration of the period fixed by the Committee in accordance with
subsection (b) above.
(e) Nontransferability of Option. An Optionee's rights under
the Plan may not be transferred by the Optionee otherwise than by will
or the laws of descent and distribution, and during the lifetime of the
Optionee shall be exercisable only by the Optionee.
(f) Investment Representations. Unless the transfer of shares
of Common Stock subject to an Option are registered under applicable
federal and state securities laws, each Optionee by accepting an Option
shall be deemed to agree for himself and his legal representatives that
any Option granted to him and any and all shares of Common Stock
purchased upon the exercise of the Option shall be acquired for
investment and not with a view to, or for the sale in connection with,
any distribution thereof, and each notice of the
<PAGE>
exercise of any portion of an Option shall be accompanied by a
representation in writing, signed by the Optionee or his legal
representatives, as the case may be, that the shares of Common Stock
are being acquired in good faith for investment and not with a view to,
or for sale in connection with, any distribution thereof (except in
case of the Optionee's legal representatives for distribution, but not
for sale, to his legal heirs, legatees and other testamentary
beneficiaries). Any shares issued pursuant to an exercise of an option
may, but need not, bear a legend evidencing such representations and
restrictions.
(g) Maximum Incentive Stock Options. The aggregate fair market
value (determined as of the time the Option is granted) of Common Stock
subject to incentive stock options that are exercisable for the first
time by an employee during any calendar year under the Plan or any
other plan of the Corporation or any Subsidiary shall not exceed
$100,000. For this purpose, the fair market value of such shares shall
be determined as of the date the Option is granted and shall be
computed in such manner as shall be determined by the Committee,
consistent with the requirements of ss. 422 of the Code. If the
immediate exercisability of incentive stock options arising from the
retirement, death or permanent and total disability of an Optionee
consistent with the terms of the applicable option agreement or arising
from any change of control of the Corporation in accordance with
Section 7 hereof would cause this $100,000 limitation to be exceeded
for an Optionee, such incentive stock options shall automatically be
converted into non-qualified stock options as of the date on which such
incentive stock options become exercisable but only to the extent
necessary to comply with the $100,000 limitation.
(h) Agreement. Each Option shall be evidenced by an agreement
between the Optionee and the Corporation which shall provide, among
other things, that, with respect to incentive stock options, the
Optionee shall advise the Corporation immediately upon any sale or
transfer of the shares of Common Stock received upon exercise of the
Option to the extent such sale or transfer takes place prior to the
later of (a) two (2) years from the date of grant or (b) one (1) year
from the date of exercise. The agreement shall include the Option term
and exercise conditions.
(i) Certificates. The certificate or certificates for the
shares issuable upon an exercise of an Option shall be issued as
promptly as practicable after such exercise. An Optionee shall not have
any rights of a shareholder in respect to the shares of Common Stock
subject to an Option until the date of issuance of a stock certificate
to him for such shares. In no case may a fraction of a share be
purchased or issued under the Plan, but if, upon the exercise of an
Option, a fractional share would otherwise be issuable, the Corporation
shall either (a) sell the same and credit the proceeds of the sale to
the Optionee or (b) credit to the Optionee a cash sum equal to the
market value of such fractional share interest on the date such
fractional share interest was created.
(j) No Right to Continued Service. Nothing in the Plan or in
any agreement entered into pursuant hereto shall confer on any person
any right to continue in the employ
<PAGE>
of the Corporation or the Subsidiaries or affect any rights of the
Corporation, a Subsidiary, or the shareholders of the Corporation may
have to terminate his service at any time.
(k) Incentive Stock Options and Non-Qualified Stock Options.
Options granted under the Plan may be incentive stock options under ss.
422 of the Code or non-qualified stock options. All Options granted
hereunder shall be clearly identified as either incentive stock options
or non-qualified stock options. In no event shall the exercise of an
incentive stock option affect the right to exercise any non-qualified
stock option, nor shall the exercise of any non-qualified stock option
affect the right to exercise any incentive stock option. Nothing in the
Plan shall be construed to prohibit the grant of incentive stock
options and non-qualified stock options to the same person; provided,
however, that incentive stock options and non-qualified stock options
shall not be granted in a manner whereby the exercise of one
non-qualified stock option or incentive stock option affects the
exercisability of the other.
6. Adjustment of Shares. In the event of any change after the effective
date of the Plan in the outstanding shares of stock of the Corporation by reason
of any reorganization, recapitalization, stock split, stock dividend,
combination of shares, exchange of shares, merger or consolidation, liquidation,
or any other change after the effective date of the Plan in the nature of the
shares of stock of the Corporation, the Committee shall determine what changes,
if any, are appropriate in the number and kind of shares of stock reserved under
the Plan, in the number of shares which may be issued to any individual in any
calendar year and in the option price under and the number and kind of shares of
stock covered by outstanding Options granted under the Plan. Any determination
of the Committee hereunder shall be conclusive.
7. Amendment. The Board of Directors of the Corporation may amend the
Plan from time to time, except that without the approval of the Corporation's
shareholders:
(a) the number of shares of Common Stock which may be reserved
for issuance under the Plan may not be increased except as provided in
Section 6 hereof;
(b) the period during which an Option may be exercised may not
be extended beyond ten (10) years from the date on which such Option
was granted;
(c) the class of employees to whom options may be granted
under the Plan may not be modified materially; and
(d) no other amendment to the Plan may be made which requires
the approval of the Corporation's shareholders under applicable law or
under the rules and regulations of the NASDAQ Stock Market.
No amendment of the Plan may, without the consent of the Optionee, make
any changes in any outstanding Option theretofore granted under the Plan which
would adversely affect the rights of such Optionee.
<PAGE>
8. Termination. The Board of Directors of the Corporation may
terminate the Plan at any time and no Option shall be granted thereafter. Such
termination, however, shall not affect the validity of any Option theretofore
granted under the Plan. In any event, no stock option may be granted after the
conclusion of a ten (10) year period commencing on the date the Plan was
adopted. The Board of Directors of the Corporation may from time to time suspend
or discontinue the Plan with respect to any shares as to which Options have not
been granted.
9. Successors. The Plan shall be binding upon the successors and
assigns of the Corporation.
10. Governing Law. The terms of Options granted hereunder and the
rights and obligations hereunder of the Corporation, the Optionees and their
successors in interest shall, except to the extent governed by federal law, be
governed by Indiana law without regard to conflict of law rules.
11. Government and Other Regulations. The obligations of the
Corporation to issue or transfer and deliver shares under Options granted under
the Plan shall be subject to compliance with all applicable laws, governmental
rules and regulations, and administrative action.
12. Effective Date. The Plan became effective when it was approved by
the Corporation's Board of Directors.
MANAGEMENT & SERVICES AGREEMENT
This Management and Services Agreement is by and between FinishMaster,
Inc., an Indiana corporation with headquarters at 4259 40th Street, SE,
Kentwood, Michigan 49512 ("FMST"), and LDI AutoPaints, Inc. ("LDI A/P"), an
Indiana corporation with headquarters at 54 Monument Circle, Indianapolis,
Indiana 42604.
Recitals
A. FMST and LDI A/P have agreed to a merger, subject to the approval of
the shareholders of FMST. That vote is expected to occur at the annual meeting
of FMST in May, 1998.
B. The merger would satisfy an affirmative covenant of FMST to its
lending institutions.
C. The merger is anticipated to provide synergies to FMST that will
have a favorable impact on its financial performance.
D. FMST is losing the services of the division management of its
Mid-Atlantic and Southern operations. FMST has use for access to existing
inventory. Rather than hire an interim manager pending the merger, and rather
than purchase inventory in the open market, FMST would prefer to utilize
available management assistance from LDI A/P and to purchase inventory at cost
from LDI A/P.
E. LDI A/P is prepared to provide such management assistance and to
provide mutual access to inventory at cost.
F. Both FMST and LDI A/P require that the terms of such a relationship
be temporary and be of a nature so as to inure to the benefit of FMST.
Agreement
1. Effective Date and Term. This agreement shall be effective March 1,
1998 until the earlier of (a) a vote by the shareholders of FMST on the proposed
merger of FMST and LDI A/P or (b) June 30, 1998.
2. Management Services. Charles VanSlaars, the President of the Florida
Division of LDI A/P, shall provide management services to FMST as its Acting
Senior Vice-President for the Mid-Atlantic and Southern operations of FMST.
(a) Activities. In such capacity, VanSlaars shall undertake
such management activities as the President of FMST shall direct.
(b) Computer. At LDI A/P's expense, FMST will set up a
computer terminal
Page 1
<PAGE>
at VanSlaar's office, to allow him access to the information necessary
for him to provide management services to FMST.
(b) Management Reports. VanSlaars shall provide weekly reports
of his activities on behalf of FMST to the President of FMST. Such
reports shall distinguish between activities that do and activities
that do not involve LDI A/P.
(c) No Compensation. For providing VanSlaars to FMST, LDI A/P
shall receive no financial compensation.
(d) Indemnity. FMST shall indemnify and hold harmless LDI A/P,
its parent and affiliated entities, and its and their directors,
officers and employees from any and all claims, actions and causes of
action arising from or as a result of the management services provided
by VanSlaars to FMST.
2. Access To Inventory.
(a) FMST shall have access to acquire available inventory of
LDI A/P and FMST shall have opportunity to provide available inventory
of FMST to LDI A/P.
(I) The price of the inventory shall be the cost per
books of the inventory item(s) as purchased, with no markup,
plus a shipping and handling charge of ten percent (10%) of
such cost. Cost shall be defined as the amount normally used
by LDI A/P or FMST, whichever is the seller, to value its
existing inventory for financial reporting purposes, applied
on a consistent basis.
(II) The credit terms shall be the same as the
provider makes available to its customers in good standing.
(b) No inventory shall be acquired by FMST or provided to LDI
A/P except through the normal processes, systems and controls that
would be used by each party in a purchase and sale of product from or
to a third party.
(I) Each shipment of product must be invoiced from
the providing organization to the receiving organization in
the same manner as a normal customer, with the pricing in
compliance with Section 2.(a)(I) of this Agreement.
(II) The receiving organization must reflect the
receipt against the open purchase order in the same manner as
normal supplier receipts.
(III) The invoice must be recorded by the receiving
organization in accounts payable and paid in accordance with
the credit terms of Section 2.(a)(II) of this Agreement.
Page 2/5
<PAGE>
(c) No inventory may be transferred from FMST to LDI A/P if
the effect is to divert any customer shipment or order from FMST to LDI
A/P.
3. Special Circumstances. The following possible circumstances may
arise. If they do, they shall be handled in the following manner:
(a) Store Closing. Thompson P.B.E., a subsidiary of FMST,
previously determined to close one store within its Mid-Atlantic and
Southern operations. For that store, and in the event the President of
FMST determines that it is in the best interests of FMST, independently
of the possible merger, to close any other store within its Mid-
Atlantic and Southern operations, the following procedures shall be
followed:
(I) An inventory of all assets of the store must be
completed by FMST.
(II) Inventory from the closed store shall be
considered by FMST as available to other FMST stores in the
region. In the event none of such stores has need for the
inventory, it may be declared as surplus and made available to
LDI A/P in the sole discretion of the President of FMST, upon
the terms and subject to the procedures of Section 2 of this
Agreement.
(III) Employees from the closed store may be assigned
by FMST to continue after the closure to take such action as
is necessary for or useful to FMST in concluding activities at
the store. If such action results in an assignment of such
employee(s) to provide services to or for LDI A/P, LDI A/P
shall compensate FMST for the services of such employee(s),
including but not limited to reimbursement of FMST for such
employee(s)'s full wage or salary for the time of such
services, payroll taxes, and benefit costs.
(IV) Such other activities as are useful to and
requested by FMST may be undertaken concerning the process of
closing the store, subject to the mutual approval of the Chief
Financial Officer or Controller of FMST and the Controller of
LDI A/P.
(b) Consolidation of Management and Operations Within FMST. It
is possible that while VanSlaars is serving as acting Senior
Vice-President for the Mid- Atlantic and Southern operations FMST may
determine that it is in the best interests of FMST to consolidate its
management and/or operations in the region.
(I) In all circumstances, such decisions and the
communication of such decisions must be made by and authored
by the President of FMST.
(II) In the event such consolidation involves
management, VanSlaars
Page 3/5
<PAGE>
may assist the President, Chief Financial Officer and/or
Controller of FMST in accomplishing the consolidation of
management.
(III) In the event such consolidation involves
locations outside of Southern Florida, VanSlaars may assist
the President, Chief Financial Officer and/or Controller of
FMST in accomplishing the consolidation of locations.
(IV) Except for store closings handled in the manner
prescribed in Section 3.(a) above, no such consolidation of
locations may take place involving locations in Southern
Florida (where LDI A/P has locations).
(c) Other. In the event other actions involving FMST and LDI
A/P not covered by the terms of this Agreement are contemplated, such
other actions must be initiated by the President, Chief Financial
Officer or Controller of FMST.
4. Prohibited Transactions. The parties agree there shall be no
commingling of assets or liabilities, and no diversion of customer orders or
shipments from FMST to LDI A/P. Each party will treat the other as a
supplier/purchaser using their normal processes, systems and controls.
5. Cooperation. The Chief Financial Officer and Controller of FMST and
the Controller of LDI A/P shall cooperate to resolve any issues that arise
concerning inventory or other transactions between the parties during the term
of this Agreement.
6. General Provisions.
(a) Modification or Amendment. This agreement may not be
modified or amended except by an instrument in writing specifically
referring to this agreement and executed by the parties to this
agreement.
(b) Governing Law. This agreement shall be construed and
enforced in accordance with the laws of the State of Indiana.
Page 4/5
<PAGE>
Agreed to and accepted by:
FINISHMASTER, INC. LDI AUTOPAINTS, INC.
By: [Thomas U. Young] By: [Andre B. Lacy]
Title: President/Chief Operating Officer Title: Chairman/President/CEO
Date: February 28, 1998 Date: February 28, 1998
Page 5/5
Refinishers Warehouse, Inc., a Michigan corporation
Thompson PBE, Inc., a Delaware corporation
Grand Distributing Corp., a California corporation and a subsidiary of Thompson
PBE, Inc. Thompson Lacquer Co., a California corporation and a subsidiary of
Thompson PBE, Inc. Arnold Paint Company, a Florida corporation and a subsidiary
of Thompson PBE, Inc. Santa Clara Color, Inc., a California corporation and a
subsidiary of Thompson PBE, Inc. McNeil & Sons Auto Paint, Inc., a Massachusetts
corporation and a subsidiary of Thompson PBE, Inc. Automotive Paint & Supply,
Inc., a Virginia corporation and a subsidiary of Thompson PBE, Inc. Auto Body
Supply Corporation, a Massachusetts corporation and a subsidiary of Thompson
PBE, Inc.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statement of
FinishMaster, Inc. and Subsidiaries on Form S-8 (File No. 333-564) of our
report, dated March 20, 1998, on our audit of the consolidated financial
statements and financial statement schedule of FinishMaster, Inc. and
Subsidiaries as of December 31, 1997 and 1996 and for the year and nine-month
period then ended which is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Grand Rapids, Michigan
March 31, 1998
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
pertaining to the FinishMaster, Inc. Stock Option Plan (Form S-8 filed with the
SEC on January 23, 1996) of FinishMaster, Inc. of our report dated April 18,
1996, with respect to consolidated financial statements and schedule of
FinishMaster, Inc. included in the annual report (Form 10-K) for the year ended
March 31, 1996.
ERNST & YOUNG L.L.P.
Detroit, Michigan
May 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000917321
<NAME> FinishMaster, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 364
<SECURITIES> 0
<RECEIVABLES> 30,991
<ALLOWANCES> 2,247
<INVENTORY> 53,442
<CURRENT-ASSETS> 90,444
<PP&E> 14,312
<DEPRECIATION> 4,016
<TOTAL-ASSETS> 21,418
<CURRENT-LIABILITIES> 48,351
<BONDS> 0
<COMMON> 0
0
5,993
<OTHER-SE> 26,939
<TOTAL-LIABILITY-AND-EQUITY> 215,418
<SALES> 130,175
<TOTAL-REVENUES> 130,175
<CGS> 83,068
<TOTAL-COSTS> 43,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 859
<INTEREST-EXPENSE> 2,661
<INCOME-PRETAX> 1,171
<INCOME-TAX> 515
<INCOME-CONTINUING> 656
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 656
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000917321
<NAME> FinishMaster Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 300
<SECURITIES> 0
<RECEIVABLES> 13,452
<ALLOWANCES> 700
<INVENTORY> 24,828
<CURRENT-ASSETS> 39,139
<PP&E> 9,437
<DEPRECIATION> 2,866
<TOTAL-ASSETS> 66,477
<CURRENT-LIABILITIES> 16,320
<BONDS> 0
<COMMON> 6,000
0
0
<OTHER-SE> 26,326
<TOTAL-LIABILITY-AND-EQUITY> 66,477
<SALES> 95,822
<TOTAL-REVENUES> 95,822
<CGS> 61,931
<TOTAL-COSTS> 31,325
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,296
<INCOME-PRETAX> 1,270
<INCOME-TAX> 610
<INCOME-CONTINUING> 660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 660
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
AMENDMENT NO. 1
TO
CREDIT AGREEMENT
AMENDMENT NO. 1 TO CREDIT AGREEMENT ("Amendment") dated as of
December 10, 1997, among FINISHMASTER, INC., an Indiana corporation (the
"Borrower"), the institutions listed on the signature pages hereof as Lenders
(the "Lenders"), and NBD BANK, N.A. in its capacity as contractual
representative for itself and the other Lenders (the "Agent") under that certain
Credit Agreement dated as of November 19, 1997 by and among the Borrower, the
Lenders and the Agent (the "Credit Agreement"). Defined terms used herein and
not otherwise defined herein shall have the meaning given to them in the Credit
Agreement.
WHEREAS, the Borrower, the Lenders and the Agent have entered
the Credit Agreement; and
WHEREAS, Borrower, the Lenders and the Agent have agreed to
amend the Credit Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth
above, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the
Agent agree as follows:
1. Amendment to the Credit Agreement. Effective as of the date
first above written and subject to the execution of this Amendment by the
parties hereto and the satisfaction of the conditions precedent set forth in
Section 2 below, the Credit Agreement shall be and hereby is amended as follows:
(a) Section 2.5(b)(i)(d)(II) is amended in its entirety to
read as follows:
(II) the amount of each Designated Prepayment
attributable to the issuance of Subordinated Notes pursuant to
the High Yield Note Agreement shall be applied as follows:
first, to each of the then remaining installments payable
under the Term Loans in the inverse order of maturity; second,
at the Borrower's option, up to $5,000,000 may be applied to
reduce the outstanding balance of the Revolving Credit
Obligations (without reducing the Aggregate Revolving Loan
Commitment); and third, to repay in full the Subordinated
Notes issued to LDI, Ltd. as of the Closing Date;
(b) Section 9.3(vi) is amended to delete the words "all or
substantially all" and to substitute therefor the words "a significant
portion".
(c) Section 11.8(i) is amended to add the words ", which are
not unreasonable or excessive," after the word "amounts".
<PAGE>
(d) Section 11.8(ii) is amended to add the word "reasonable"
after the word "other."
(e) Section 11.8(iii) is amended to delete the words ", costs,
expenses or disbursements" and to substitute therefor the words "or any
reasonable costs, expenses or disbursements".
(f) Section 13.2(B) is amended to delete the words "all or
substantially all" and to substitute therefor the words "a significant
portion."
2. Conditions Precedent. This Amendment shall become effective
as of the date above written, if, and only if, the Agent has received duly
executed originals of this Amendment from the Borrower, the Lenders and the
Agent.
3. Representations and Warranties of the Borrower. The
Borrower hereby represents and warrants as follows:
(a) This Amendment and the Credit Agreement, as amended
hereby, constitute legal, valid and binding obligations of the Borrower and are
enforceable against the Borrower in accordance with their terms.
(b) Upon the effectiveness of this Amendment, the Borrower
hereby reaffirms all representations and warranties made in the Credit
Agreement, and to the extent the same are not amended hereby, agrees that all
such representations and warranties shall be deemed to have been remade as of
the date of delivery of this Amendment, unless and to the extent that any such
representation and warranty is stated to relate solely to an earlier date, in
which case such representation and warranty shall be true and correct as of such
earlier date.
4. Reference to and Effect on the Credit Agreement.
(a) Upon the effectiveness of Section 1 hereof, on and after
the date hereof, each reference in the Credit Agreement to "this Credit
Agreement," "hereunder," "hereof," "herein" or words of like import shall mean
and be a reference to the Credit Agreement as amended hereby.
(b) The Credit Agreement, as amended hereby, and all other
documents, instruments and agreements executed and/or delivered in connection
therewith, shall remain in full force and effect, and are hereby ratified and
confirmed.
(c) Except as expressly provided herein, the execution,
delivery and effectiveness of this Amendment shall not operate as a waiver of
any right, power or remedy of the Agent or the Lenders, nor constitute a waiver
of any provision of the Credit Agreement or any other documents, instruments and
agreements executed and/or delivered in connection therewith.
2
<PAGE>
5. Governing Law. This Amendment shall be governed by and
construed in accordance with the internal laws (as opposed to the conflict of
law provisions) of the State of Indiana.
6. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
7. Counterparts. This Amendment may be executed by one or more
of the parties to the Amendment on any number of separate counterparts and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument.
3
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered on the date first above written.
FINISHMASTER, INC., as Borrower
By: /s/ Roger Sorokin
---------------------------------
Name: Roger Sorokin
Title: Vice President, Finance
NBD BANK, N.A., as Agent
By: /s/ Scott C. Morrison
---------------------------------
Name: Scott C. Morrison
Title: Vice President
LENDERS:
NBD BANK, N.A.
By: /s/ Scott C. Morrison
---------------------------------
Name: Scott C. Morrison
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Michael Healy
---------------------------------
Name: Michael Healy
Title: Vice President
HARRIS TRUST AND SAVINGS BANK
By: /s/ Peter Krawchuk
---------------------------------
Name: Peter Krawchuk
Title: Vice President
<PAGE>
KEYBANK NATIONAL ASSOCIATION
By: /s/ Frank Jancar
---------------------------------
Name: Frank Jancar
Title: Vice President
LASALLE NATIONAL BANK
By: /s/ Gary Jacobson
---------------------------------
Name: Gary Jacobson
Title: SVP
THE NORTHERN TRUST COMPANY
By: /s/ Candelario Martinez
---------------------------------
Name: Candelario Martinez
Title: Second Vice President
PNC BANK, OHIO
By: /s/ David F. Knuth
---------------------------------
Name: David F. Knuth
Title:
AMENDMENT NO. 2
TO
CREDIT AGREEMENT
AMENDMENT NO. 2 TO CREDIT AGREEMENT ("Amendment") dated as of
March 27, 1998, among FINISHMASTER, INC., an Indiana corporation (the
"Borrower"), the institutions listed on the signature pages hereof as Lenders
(the "Lenders"), and NBD BANK, N.A. in its capacity as contractual
representative for itself and the other Lenders (the "Agent") under that certain
Credit Agreement dated as of November 19, 1997 by and among the Borrower, the
Lenders and the Agent, as amended by Amendment No. 1 thereto dated as of
December 10, 1997 (the "Credit Agreement"). Defined terms used herein and not
otherwise defined herein shall have the meaning given to them in the Credit
Agreement.
WHEREAS, the Borrower, the Lenders and the Agent have entered
the Credit Agreement; and
WHEREAS, Borrower, the Lenders and the Agent have agreed to
amend the Credit Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth
above, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the
Agent agree as follows:
1. Amendment to the Credit Agreement. Effective as of the date
first above written and subject to the execution of this Amendment by the
parties hereto and the satisfaction of the conditions precedent set forth in
Section 2 below, the Credit Agreement shall be and hereby is amended as follows:
(a) Section 1.1 of the Credit Agreement is amended to add the
following defined terms:
"Supplemental Subordinated Debt" means amounts outstanding and
issued from time to time, in an amount not to exceed
$10,000,000, pursuant to that Certain Credit Agreement between
the Borrower and LDI, Ltd. dated as of March __, 1998 and
subject to the terms of the Supplemental Subordination
Agreement.
"Supplemental Subordination Agreement" means that certain
Agreement between LDI, Ltd. and the Agent on behalf of the
Lenders with respect to the Supplemental Subordinated Debt.
(b) Section 2.5(B)(i)(d)(II) is amended to add the words "and
any Supplemental Subordinated Debt owed to LDI, Ltd." after the words
"Closing Date".
<PAGE>
(c) Section 7.3(A)(ii) is amended in its entirety to read as
follows:
(ii) the Subordinated Notes, the Supplemental
Subordinated Debt and any Permitted Refinancing Indebtedness,
provided, however, that with respect to Subordinated Notes
issued pursuant to the High Yield Note Agreement, the amount
thereof may exceed the sum of (i) the principal amount of the
Subordinated Notes issued to LDI, Ltd. as of the Closing Date
plus (ii) the Supplemental Subordinated Debt, but such
Subordinated Notes issued pursuant to the High Yield Note
Agreement must (a) have a Weighted Average Life to Maturity
that is equal to or greater than the aggregate Weighted
Average Life to Maturity of the Subordinated Notes issued to
LDI, Ltd. as of the Closing Date and (b) must contain terms,
including, without limitation, terms with respect to amount,
maturity, amortization, interest rate, premiums, fees,
redemption, covenants, subordination terms, events of default
and remedies that are reasonably satisfactory to the Required
Lenders;
(d) Section 7.3(F) is amended to add the words "and as
permitted pursuant to Section 7.3(Q)." after the last word of the
section.
(e) The following new Section 7.3(Q) is added:
(Q) Subordinated Notes and Supplemental Subordinated
Debt. The Borrower shall not amend, supplement or modify the
terms of the Subordinated Notes or the Supplemental
Subordinated Debt, or make any payment required as a result of
any amendment or change thereto. Except as permitted in
Section 2.5(B) hereof, Section 3 of the Subordination
Agreement as in effect on the date hereof and Section 3 of the
Supplemental Subordination Agreement as in effect on the date
hereof, the Borrower shall not redeem, purchase, prepay (by
setoff or otherwise), defease or repay any principal of,
premium, if any, or other amount payable in respect of the
Subordinated Notes or the Supplemental Subordinated Debt,
provided, however, that, if the Borrower has not executed the
High Yield Note Agreement, the Borrower may repay all or a
portion of the Supplemental Subordinated Debt, provided that
at the time of such repayment no Default or Unmatured Default
has occurred and is continuing and LDI, Ltd. agrees that if a
Default or Unmatured Default occurs within ninety (90) days
after such repayment, LDI, Ltd. will return all amounts it has
received from the Borrower with respect to the principal of
the Supplemental Subordinated Debt during the preceding ninety
(90) days, provided that the Supplemental Subordinated Debt
has not been refinanced by Subordinated Notes issued pursuant
to the High Yield Note Agreement.
(f) Section 7.2(K) is amended to delete the reference to
"March 31, 1998" and to substitute therefor "June 30, 1998".
2
<PAGE>
2. Conditions Precedent. This Amendment shall become effective
as of the date above written, if, and only if, the Agent has received duly
executed originals of this Amendment from the Borrower, the Lenders and the
Agent.
3. Representations and Warranties of the Borrower. The
Borrower hereby represents and warrants as follows:
(a) This Amendment and the Credit Agreement, as amended
hereby, constitute legal, valid and binding obligations of the Borrower and are
enforceable against the Borrower in accordance with their terms.
(b) Upon the effectiveness of this Amendment, the Borrower
hereby reaffirms all representations and warranties made in the Credit
Agreement, and to the extent the same are not amended hereby, agrees that all
such representations and warranties shall be deemed to have been remade as of
the date of delivery of this Amendment, unless and to the extent that any such
representation and warranty is stated to relate solely to an earlier date, in
which case such representation and warranty shall be true and correct as of such
earlier date.
4. Reference to and Effect on the Credit Agreement.
(a) Upon the effectiveness of Section 1 hereof, on and after
the date hereof, each reference in the Credit Agreement to "this Credit
Agreement," "hereunder," "hereof," "herein" or words of like import shall mean
and be a reference to the Credit Agreement as amended hereby.
(b) The Credit Agreement, as amended hereby, and all other
documents, instruments and agreements executed and/or delivered in connection
therewith, shall remain in full force and effect, and are hereby ratified and
confirmed.
(c) Except as expressly provided herein, the execution,
delivery and effectiveness of this Amendment shall not operate as a waiver of
any right, power or remedy of the Agent or the Lenders, nor constitute a waiver
of any provision of the Credit Agreement or any other documents, instruments and
agreements executed and/or delivered in connection therewith.
5. Governing Law. This Amendment shall be governed by and
construed in accordance with the internal laws (as opposed to the conflict of
law provisions) of the State of Indiana.
6. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
3
<PAGE>
7. Counterparts. This Amendment may be executed by one or more
of the parties to the Amendment on any number of separate counterparts and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument.
4
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered on the date first above written.
FINISHMASTER, INC., as Borrower
By: /s/ Roger Sorokin
--------------------------------
Name: Roger Sorokin
Title: Vice President, Finance
NBD BANK, N.A., as Agent
By: /s/ Scott C. Morrison
--------------------------------
Name: Scott C. Morrison
Title: Vice President
LENDERS:
NBD BANK, N.A.
By: /s/ Scott C. Morrison
--------------------------------
Name: Scott C. Morrison
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Michael Healy
--------------------------------
Name: Michael Healy
Title: Vice President
HARRIS TRUST AND SAVINGS BANK
By: /s/ Peter Krawchuk
--------------------------------
Name: Peter Krawchuk
Title: Vice President
<PAGE>
KEYBANK NATIONAL ASSOCIATION
By: /s/ Frank Jancar
--------------------------------
Name: Frank Jancar
Title: Vice President
LASALLE NATIONAL BANK
By: /s/ Gary Jacobson
--------------------------------
Name: Gary Jacobson
Title: SVP
THE NORTHERN TRUST COMPANY
By: /s/ Candelario Martinez
--------------------------------
Name: Candelario Martinez
Title: Vice President
PNC BANK, OHIO
By: /s/ David F. Knuth
--------------------------------
Name: David F. Knuth
Title: Vice President
CREDIT AGREEMENT
Dated as of March 27, 1998
between
FINISHMASTER, INC.,
and
LDI, LTD.
-1-
<PAGE>
CREDIT AGREEMENT
This Credit Agreement dated as of March 27, 1998 is entered into between
FinishMaster, Inc., an Indiana corporation and LDI, Ltd., an Indiana limited
partnership. The parties hereto agree as follows:
ARTICLE I: DEFINITIONS
1.1 Certain Defined Terms. In addition to the terms defined above, the
following terms used in this Agreement shall have the following meanings,
applicable both to the singular and the plural forms of the terms defined.
As used in this Agreement:
"Advance" means a borrowing hereunder consisting of the aggregate amount
of the several Loans made by the Lender to the Borrower of the same Type and, in
the case of Eurodollar Rate Advances, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person is the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of greater than ten percent (10%) or more of any class of voting
securities (or other voting interests) of the controlled Person or possesses,
directly or indirectly, the power to direct or cause the direction of the
management or policies of the controlled Person, whether through ownership of
capital stock, by contract or otherwise.
"Agreement" means this Credit Agreement, as it may be amended, restated or
otherwise modified and in effect from time to time.
"Alternate Base Rate" means, for any day, a fluctuating rate of interest
per annum equal to the higher of (i) the Prime Rate for such day and (ii) the
sum of (a) the Federal Funds Effective Rate for such day and (b) one-half of one
percent (0.5%) per annum.
"Applicable Eurodollar Margin" means, as at any date of determination, the
Applicable Eurodollar Margin as defined in the Senior Credit Facility.
"Applicable Floating Rate Margin" means, as at any date of determination,
the Applicable Floating Rate Margin as defined in the Senior Credit Facility.
"Authorized Officer" means any of the Chairman, President, Chief Financial
Officer, Treasurer or Assistant Secretary of the Borrower, acting singly.
-1-
<PAGE>
"Borrower" means FinishMaster, Inc., an Indiana corporation, together with
its successors and assigns, including a debtor-in-possession on behalf of the
Borrower.
"Borrowing Notice" is defined in Section 2.8 hereof.
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Loans bearing interest at the Eurodollar Rate, a day (other than a
Saturday or Sunday) on which banks are open for business in Indianapolis,
Indiana and Chicago, Illinois and on which dealings in Dollars are carried on in
the London interbank market and (ii) for all other purposes a day (other than a
Saturday or Sunday) on which banks are open for business in Indianapolis,
Indiana and Chicago, Illinois.
"Closing Date" means the date on which the Revolving Loans are advanced
hereunder.
"Conversion/Continuation Notice" is defined in Section 2.10(D) hereof.
"Default" means an event described in Article V hereof.
"Dollar" and "$" means dollars in the lawful currency of the United
States.
"Eurodollar Base Rate" means, with respect to a Eurodollar Rate Loan for
any specified Interest Period, either (i) the rate of interest per annum equal
to the rate for deposits in U.S. Dollars in the approximate amount of such
Eurodollar Rate Loan with a maturity approximately equal to such Interest Period
which appears on Telerate Page 3750, or, if there is more than one such rate,
the average of such rates rounded to the nearest 1/100 of 1%, as of 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period
or (ii) if no such rate of interest appears on Telerate Page 3750 for any
specified Interest Period, the rate at which deposits in U.S. Dollars are
offered by NBD Bank, N.A. to first-class banks in the London interbank market at
approximately 11:00 a.m. (London time) two Business Days prior to the first day
of such Interest Period, in the approximate amount of the pro rata share of NBD
Bank, N.A. of such Eurodollar Rate Loan and having a maturity approximately
equal to such Interest Period. The term "Telerate Page 3750" means the display
designated as "Page 3750" on the Associated Press-Dow Jones Telerate Service (or
such other page as may replace Page 3750 on the Associated Press-Dow Jones
Telerate Service or such other service as may be nominated by the British
Bankers' Association as the information vendor for the purpose of displaying
British Bankers' Association interest rate settlement rates for U.S. Dollars).
Any Eurodollar Base Rate determined on the basis of the rate displayed on
Telerate Page 3750 in accordance with the foregoing provisions of this
subparagraph shall be subject to corrections, if any, made in such rate and
displayed by the Associated Press-Dow Jones Telerate Service within one hour of
the time when such rate is first displayed by such service.
"Eurodollar Rate" means, with respect to a Eurodollar Rate Loan for the
relevant Interest Period, the Eurodollar Base Rate applicable to such Interest
Period plus the then Applicable Eurodollar Margin. The Eurodollar Rate shall be
rounded to the next higher multiple of 1/100 of 1% if the rate is not such a
multiple.
-2-
<PAGE>
"Eurodollar Rate Advance" means an Advance which bears interest at the
Eurodollar Rate.
"Eurodollar Rate Loan" means a Loan, or portion thereof, which bears
interest at the Eurodollar Rate.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago
time) on such day on such transactions received by the Lender from three Federal
funds brokers of recognized standing selected by the Lender in its sole
discretion.
"Floating Rate" means, for any day for any Loan, a rate per annum equal to
the Alternate Base Rate for such day, changing and as the Alternate Base Rate
changes, plus the then Applicable Floating Rate Margin.
"Floating Rate Advance" means an Advance which bears interest at the
Floating Rate.
"Floating Rate Loan" means a Loan, or portion thereof, which bears
interest at the Floating Rate.
"Interest Period" means, with respect to a Eurodollar Rate Loan, a period
of one (1), two (2), three (3) months or, six (6) months commencing on a
Business Day selected by the Borrower pursuant to this Agreement; provided,
however, that if there is no such numerically corresponding day in such next,
second, third or sixth succeeding month, such Interest Period shall end on the
last Business Day of such next, second, third or sixth succeeding month, as the
case may be. If an Interest Period would otherwise end on a day which is not a
Business Day, such Interest Period shall end on the next succeeding Business
Day, provided, however, that if said next succeeding Business Day falls in a new
calendar month, such Interest Period shall end on the immediately preceding
Business Day.
"Loan(s)" means, any Advance made pursuant to Section 2.2 and any
Revolving Loans hereof, whether made or continued as or converted to Floating
Rate Loans or Eurodollar Rate Loans.
"Loan Documents" means this Agreement, the Note and all other documents,
instruments and agreements executed in connection therewith or contemplated
thereby, as the same may be amended, restated or otherwise modified and in
effect from time to time.
"Note" means the Revolving Note.
"Obligations" means all Loans, advances, debts, liabilities, obligations,
covenants and duties owing by the Borrower to the Lender, or any Indemnitee, of
any kind or nature, present or future,
-3-
<PAGE>
arising under this Agreement, the Note or any other Loan Document, whether or
not evidenced by any note, guaranty or other instrument, whether or not for the
payment of money, whether arising by reason of an extension of credit, loan,
guaranty, indemnification, or in any other manner, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due or to
become due, now existing or hereafter arising and however acquired. The term
includes, without limitation, all interest, charges, expenses, fees, attorneys'
fees and disbursements, paralegals' fees (in each case whether or not allowed),
and any other sum chargeable to the Borrower under this Agreement or any other
Loan Document.
"Payment Date" means the last Business Day of each calendar quarter.
"Person" means any individual, corporation, firm, enterprise, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, limited liability company or other entity of any kind, or any
government or political subdivision or any agency, department or instrumentality
thereof.
"Prime Rate" means the prime rate of interest announced by NBD Bank, N.A.
from time to time, changing when and as said prime rate changes. The prime rate
announced by NBD Bank, N.A. is merely an index rate and use of the term "prime
rate" shall not imply that it is the lowest rate charged by NBD Bank, N.A. to
any of its customers.
"Rate Option" means the Eurodollar Rate of the Floating Rate.
"Revolving Loan" is defined in Section 2.2 hereof.
"Revolving Loan Commitment" means Ten Million and 00/100 Dollars, as
reduced from time to time pursuant to the terms hereof.
"Revolving Loan Termination Date" means March 27, 1999.
"Revolving Note" means a promissory note, in substantially the form of
Exhibit A hereto, duly executed by the Borrower and payable to the order of a
Lender in the amount of its Revolving Loan Commitment, including any amendment,
restatement, modification, renewal or replacement of such Revolving Note.
"Senior Credit Facility" means the credit facility evidenced by that
certain Credit Agreement dated as of November 19, 1997 among FinishMaster, Inc.,
the institutions from time to time a party thereto and NBD Bank, N.A., as Agent.
"Subordination Agreement" means that certain Supplemental Subordination
Agreement dated March __, 1998 between LDI, Ltd., FinishMaster, Inc., and NBD
Bank, N.A., as Agent for the lenders under the Senior Credit Facility (as the
same may be amended from time to time), with respect to this Agreement.
-4-
<PAGE>
"Type" means, with respect to any Loan, its nature as a Floating Rate Loan
or a Eurodollar Rate Loan.
1.2 References. The existence throughout the Agreement of references to
the Borrower's Subsidiaries is for a matter of convenience only. Any references
to Subsidiaries of the Borrower set forth herein shall not in any way be
construed as consent by the Lender or any Lender to the establishment,
maintenance or acquisition of any Subsidiary, except as may otherwise be
permitted hereunder.
ARTICLE II: THE REVOLVING LOAN FACILITIES
2.1. Purpose. The purpose of this Agreement is to set forth the terms and
conditions upon which the Lender shall make the Revolving Loans.
2.2 Revolving Loans. Prior to the Termination Date, the Lender jointly
agrees, on the terms and conditions set forth in this Agreement, to make
revolving loans to the Borrower from time to time, in Dollars, in an amount not
to exceed the Revolving Credit Commitment at such time (each individually, a
"Revolving Loan" and, collectively, the "Revolving Loans"). Subject to the terms
of this Agreement, the Borrower may borrow, repay and reborrow Revolving Loans
at any time prior to the Termination Date. The Revolving Loans made on the
Closing Date shall initially be Floating Rate Loans and thereafter may be
continued as Floating Rate Loans or converted into Eurodollar Rate Loans in the
manner provided in Section 2.10 and subject to the other conditions and
limitations therein set forth and set forth in this Article II. On the
Termination Date, the Borrower shall repay in full the outstanding principal
balance of the Revolving Loans.
2.3 [Reserved].
2.4 Rate Options for all Advances. The Revolving Loans may be Floating
Rate Advances or Eurodollar Rate Advances, or a combination thereof, selected by
the Borrower in accordance with Section 2.10. The Borrower may select, in
accordance with Section 2.10, Rate Options and Interest Periods applicable to
portions of the Revolving Loans and the Term Loans; provided that there shall be
no more than eight (8) Interest Periods in effect with respect to all of the
Loans at any time.
2.5 Optional Payments; Mandatory Prepayments.
(A) Optional Payments. The Borrower may from time to time repay or prepay,
without penalty or premium all or any part of outstanding Floating Rate
Advances. Eurodollar Rate Advances may be voluntarily repaid or prepaid prior to
the last day of the applicable Interest Period, subject to the indemnification
provisions contained in subsection (B) below, provided, that the Borrower may
not so prepay Eurodollar Rate Advances unless it shall have provided at least
three Business Days' written notice to the Lender of such prepayment.
-5-
<PAGE>
(B) Funding Indemnification. If any payment of a Eurodollar Rate Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment, or otherwise, or a Eurodollar Rate
Advance is not made on the date specified by the Borrower for any reason other
than default by the Lender, the Borrower indemnifies each Lender for any loss or
cost incurred by it resulting therefrom, including, without limitation, any loss
or cost in liquidating or employing deposits acquired to fund or maintain the
Eurodollar Rate Advance.
2.6 Reduction of Commitments. The Borrower may permanently reduce the
Revolving Loan Commitment in whole, or in part, in an aggregate minimum amount
of $1,000,000 and integral multiples of $100,000 in excess of that amount
(unless the Revolving Loan Commitment is reduced in whole), upon at least one
Business Day's written notice to the Lender, which notice shall specify the
amount of any such reduction; provided, however, that the amount of the
Revolving Loan Commitment may not be reduced below the aggregate principal
amount of the outstanding Revolving Credit Obligations. All accrued commitment
fees shall be payable on the effective date of any termination of the
obligations of the Lender to make Loans hereunder.
2.7 [Reserved].
2.8 Method of Selecting Types and Interest Periods for Advances. The
Borrower shall select the Type of Advance and, in the case of each Eurodollar
Rate Advance, the Interest Period applicable to each Advance from time to time.
The Borrower shall give the Lender irrevocable notice in the form of Exhibit B
hereto (a "Borrowing Notice") not later than 9:30 a.m. (Indianapolis time) (a)
on the Borrowing Date of each Floating Rate Advance and (b) three Business Days
before the Borrowing Date for each Eurodollar Rate Advance, specifying: (i) the
Borrowing Date (which shall be a Business Day) of such Advance; (ii) the
aggregate amount of such Advance; (iii) the Type of Advance selected; and (iv)
in the case of each Eurodollar Rate Advance, the Interest Period applicable
thereto. The Borrower shall select Interest Periods so that, to the best of the
Borrower's knowledge, it will not be necessary to prepay all or any portion of
any Eurodollar Rate Advance prior to the last day of the applicable Interest
Period in order to make mandatory prepayments as required pursuant to the terms
hereof. Each Floating Rate Advance and all Obligations other than Loans shall
bear interest from and including the date of the making of such Advance to (but
not including) the date of repayment thereof at the Floating Rate, changing when
and as such Floating Rate changes. Changes in the rate of interest on that
portion of any Advance maintained as a Floating Rate Loan will take effect
simultaneously with each change in the Alternate Base Rate. Each Eurodollar Rate
Advance shall bear interest from and including the first day of the Interest
Period applicable thereto to (but not including) the last day of such Interest
Period at the interest rate determined as applicable to such Eurodollar Rate
Advance.
2.9 Minimum Amount of Each Advance. Each Advance shall be in the minimum
amount of $500,000 (and in multiples of $100,000 if in excess thereof),
provided, however, that any Floating Rate Advance may be in the amount of the
unused Aggregate Revolving Loan Commitment.
-6-
<PAGE>
2.10 Method of Selecting Types and Interest Periods for Conversion and
Continuation of Advances.
(A) Right to Convert. The Borrower may elect from time to time, subject to
the provisions of Section 2.4 and this Section 2.10, to convert all or any part
of a Loan of any Type into any other Type or Types of Loans; provided that any
conversion of any Eurodollar Rate Advance shall be made on, and only on, the
last day of the Interest Period applicable thereto.
(B) Automatic Conversion and Continuation. Floating Rate Loans shall
continue as Floating Rate Loans unless and until such Floating Rate Loans are
converted into Eurodollar Rate Loans. Eurodollar Rate Loans shall continue as
Eurodollar Rate Loans until the end of the then applicable Interest Period
therefor, at which time such Eurodollar Rate Loans shall be automatically
converted into Floating Rate Loans unless the Borrower shall have given the
Lender notice in accordance with Section 2.10(D) requesting that, at the end of
such Interest Period, such Eurodollar Rate Loans continue as a Eurodollar Rate
Loan.
(C) No Conversion Post-Default or Post-Unmatured Default. Notwithstanding
anything to the contrary contained in Section 2.10(A) or Section 2.10(B), no
Loan may be converted into or continued as a Eurodollar Rate Loan (except with
the consent of the Lender) when any Default or Unmatured Default has occurred
and is continuing.
(D) Conversion/Continuation Notice. The Borrower shall give the Lender
irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a
Floating Rate Loan into a Eurodollar Rate Loan or continuation of a Eurodollar
Rate Loan not later than 10:00 a.m. (Indianapolis time) three Business Days
prior to the date of the requested conversion or continuation, specifying: (1)
the requested date (which shall be a Business Day) of such conversion or
continuation; (2) the amount and Type of the Loan to be converted or continued;
and (3) the amount of Eurodollar Rate Loan(s) into which such Loan is to be
converted or continued and the duration of the Interest Period applicable
thereto.
2.11 Default Rate. After the occurrence and during the continuance of a
Default, at the option of the Lender, the interest rate(s) applicable to the
Obligations shall be increased by two percent (2.0%) per annum above the
Floating Rate or Eurodollar Rate, as applicable.
2.12 Method of Payment. All payments of principal, interest, and fees
hereunder shall be made, without setoff, deduction or counterclaim, in
immediately available funds to the Lender at the Lender's address specified
herein, by 2:00 p.m. (Indianapolis time) on the date when due.
2.13 Note. The Lender is authorized to record the principal amount of each
of its Loans and each repayment with respect to its Loans on the schedule
attached to the Note; provided, however, that the failure to so record shall not
affect the Borrower's obligations under any such Note.
-7-
<PAGE>
2.14 Telephonic Notices. The Borrower authorizes the Lender to extend
Advances, effect selections of Types of Advances and to transfer funds based on
telephonic notices made by any person or persons the Lender or any Lender in
good faith believes to be acting on behalf of the Borrower. The Borrower agrees
to deliver promptly to the Lender a written confirmation, signed by an
Authorized Officer, if such confirmation is requested by the Lender or any
Lender, of each telephonic notice. If the written confirmation differs in any
material respect from the action taken by the Lender, (i) the telephonic notice
shall govern absent manifest error and (ii) the Lender or the Lender, as
applicable, shall promptly notify the Authorized Officer who provided such
confirmation of such difference.
2.15 Promise to Pay; Interest Payment Dates; Interest and Fee Basis;
Taxes; Loan and Control Accounts.
(A) Promise to Pay. The Borrower unconditionally promises to pay when due
the principal amount of each Loan and all other Obligations incurred by it, and
to pay all unpaid interest accrued thereon, in accordance with the terms of this
Agreement and the Note.
(B) Interest Payment Dates. Interest accrued on each Floating Rate Loan
shall be payable on each Payment Date, commencing with the first such date to
occur after the date hereof, and at maturity (whether by acceleration or
otherwise). Interest accrued on each Eurodollar Rate Loan shall be payable on
the last day of its applicable Interest Period, on any date on which the
Eurodollar Rate Loan is prepaid, whether by acceleration or otherwise, and at
maturity. Interest accrued on each Eurodollar Rate Loan having an Interest
Period longer than three months shall also be payable on the last day of each
three-month interval during such Interest Period. Interest accrued on the
principal balance of all other Obligations shall be payable in arrears (i) on
the last day of each calendar month, commencing on the first such day following
the incurrence of such Obligation, (ii) upon repayment thereof in full or in
part, and (iii) if not theretofore paid in full, at the time such other
Obligation becomes due and payable (whether by acceleration or otherwise).
2.16 Termination Date. This Agreement shall be effective until the
Termination Date. Notwithstanding the termination of this Agreement on the
Termination Date, until all of the Obligations (other than contingent indemnity
obligations) shall have been fully and indefeasibly paid and satisfied, and all
financing arrangements among the Borrower and the Lender shall have been
terminated, all of the rights and remedies under this Agreement and the other
Loan Documents shall survive.
ARTICLE III: CONDITIONS PRECEDENT
3.1 Each Advance. The Lender shall not be required to make any Advance,
unless on the applicable Borrowing Date there exists no Default or Unmatured
Default and the representations and warranties contained in Article IV continue
to be true and correct in all material respects.
-8-
<PAGE>
ARTICLE IV: REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and to make
the Loans and the other financial accommodations to the Borrower and to issue
the Letters of Credit described herein, the Borrower represents and warrants as
follows to each Lender and the Lender as of the Closing Date, and thereafter on
each date as required by Article III.
4.1 Organization; Corporate Powers. The Borrower and each of its
Subsidiaries (i) is a corporation duly organized, validly existing and in
existence under the laws of the jurisdiction of its organization, (ii) is duly
qualified to do business as a foreign corporation and is in good standing under
the laws of each jurisdiction in which failure to be so qualified and in good
standing could not reasonably be expected to have a Material Adverse Effect, and
(iii) has all requisite corporate power and authority to own, operate and
encumber its property and to conduct its business as presently conducted and as
proposed to be conducted.
4.2 Authority. The Borrower and each of its Subsidiaries has the requisite
corporate power and authority to execute, deliver and perform each of the Loan
Documents.
4.3 Enforceability. The Loan Documents are enforceable against the
Borrower in accordance with their respective terms.
ARTICLE V: DEFAULTS
5.1 Defaults. Each of the following occurrences shall constitute a Default
under this Agreement:
(A) Failure to Make Payments When Due. The Borrower shall (i) fail to pay
when due any of the Obligations consisting of principal with respect to the
Loans or (ii) shall fail to pay within three (3) Business Days of the date when
due any of the other Obligations under this Agreement or the other Loan
Documents.
(B) Other Defaults. The Borrower shall default in the performance of or
compliance with any term contained in this Agreement, and such default shall
continue for thirty (30) days after the occurrence thereof.
(C) Default as to Other Indebtedness. The Borrower or any of its
Subsidiaries shall fail to make any payment when due (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise) with respect
to any Indebtedness the outstanding principal amount of which Indebtedness is in
excess of $2,500,000 ("Cross Default Indebtedness"), or any breach, default or
event of default shall occur, or any other condition shall exist under any
instrument, agreement or indenture pertaining to any such Cross Default
Indebtedness, if the effect thereof is to cause an acceleration, mandatory
redemption, a requirement that the Borrower offer to purchase such Cross Default
Indebtedness or other required repurchase of such Cross Default Indebtedness, or
permit the
-9-
<PAGE>
holder(s) of such Cross Default Indebtedness to accelerate the maturity of any
such Cross Default Indebtedness or require a redemption or other repurchase of
such Cross Default Indebtedness; or any such Cross Default Indebtedness shall be
otherwise declared to be due and payable (by acceleration or otherwise) or
required to be prepaid, redeemed or otherwise repurchased by the Borrower or any
of its Subsidiaries (other than by a regularly scheduled required prepayment)
prior to the stated maturity thereof.
(D) Involuntary Bankruptcy; Appointment of Receiver, Etc.
(i) An involuntary case shall be commenced against the
Borrower or any of the Borrower's Subsidiaries and the petition shall
not be dismissed, stayed, bonded or discharged within sixty (60) days
after commencement of the case; or a court having jurisdiction in the
premises shall enter a decree or order for relief in respect of the
Borrower or any of the Borrower's Subsidiaries in an involuntary case,
under any applicable bankruptcy, insolvency or other similar law now or
hereinafter in effect; or any other similar relief shall be granted
under any applicable federal, state, local or foreign law.
(ii) A decree or order of a court having jurisdiction in the
premises for the appointment of a receiver, liquidator, sequestrator,
trustee, custodian or other officer having similar powers over the
Borrower or any of the Borrower's Subsidiaries or over all or a
substantial part of the property of the Borrower or any of the
Borrower's Subsidiaries shall be entered; or an interim receiver,
trustee or other custodian of the Borrower or any of the Borrower's
Subsidiaries or of all or a substantial part of the property of the
Borrower or any of the Borrower's Subsidiaries shall be appointed or a
warrant of attachment, execution or similar process against any
substantial part of the property of the Borrower or any of the
Borrower's Subsidiaries shall be issued and any such event shall not be
stayed, dismissed, bonded or discharged within sixty (60) days after
entry, appointment or issuance.
(E) Voluntary Bankruptcy; Appointment of Receiver, Etc. The Borrower or
any of the Borrower's Subsidiaries shall (i) commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, (ii) consent to the entry of an order for relief in an involuntary case,
or to the conversion of an involuntary case to a voluntary case, under any such
law, (iii) consent to the appointment of or taking possession by a receiver,
trustee or other custodian for all or a substantial part of its property, (iv)
make any assignment for the benefit of creditors or (v) take any corporate
action to authorize any of the foregoing.
(F) Judgments and Attachments. Any money judgment(s) (other than a money
judgment covered by insurance as to which the insurance company has not
disclaimed or reserved the right to disclaim coverage), writ or warrant of
attachment, or similar process against the Borrower or any of its Subsidiaries
or any of their respective assets involving in any single case or in the
aggregate an amount in excess of $2,500,000 is or are entered and shall remain
undischarged, unvacated, unbonded or unstayed for a period of sixty (60) days or
in any event later than fifteen (15) days prior to the date of any proposed sale
thereunder.
-10-
<PAGE>
(G) Dissolution. Any order, judgment or decree shall be entered against
the Borrower decreeing its involuntary dissolution or split up and such order
shall remain undischarged and unstayed for a period in excess of sixty (60)
days; or the Borrower shall otherwise dissolve or cease to exist except as
specifically permitted by this Agreement.
(H) Loan Documents. At any time, for any reason, any Loan Document as a
whole that materially affects the ability of the Lender to enforce the
Obligations ceases to be in full force and effect or the Borrower or any of the
Borrower's Subsidiaries party thereto seeks to repudiate its obligations
thereunder.
A Default shall be deemed "continuing" until cured or until waived in
writing in accordance with Section 6.3.
ARTICLE VI: ACCELERATION, DEFAULTING LENDERS; WAIVERS, AMENDMENTS
AND REMEDIES
6.1 Termination of Commitments; Acceleration. If any Default described in
Section 5.1(D) or 5.1(E) occurs with respect to the Borrower, the obligations of
the Lender to make Loans hereunder shall automatically terminate and the
Obligations shall immediately become due and payable without any election or
action on the part of the Lender. If any other Default occurs, the Lender may
terminate or suspend the obligations of the Lender to make Loans hereunder, or
declare the Obligations to be due and payable, or both, whereupon the
Obligations shall become immediately due and payable, without presentment,
demand, protest or notice of any kind, all of which the Borrower expressly
waives.
6.2 Amendments. Subject to the provisions of this Article VI, the Lender
and the Borrower may enter into agreements supplemental hereto for the purpose
of adding or modifying any provisions to the Loan Documents or changing in any
manner the rights of the Lender or the Borrower hereunder or waiving any Default
hereunder.
6.3 Preservation of Rights. No delay or omission of the Lender to exercise
any right under the Loan Documents shall impair such right or be construed to be
a waiver of any Default or an acquiescence therein, notwithstanding the
existence of a Default or the inability of the Borrower to satisfy the
conditions precedent to such Loan shall not constitute any waiver or
acquiescence. Any single or partial exercise of any such right shall not
preclude other or further exercise thereof or the exercise of any other right,
and no waiver, amendment or other variation of the terms, conditions or
provisions of the Loan Documents whatsoever shall be valid unless in writing
signed by the Lender required pursuant to Section 6.2, and then only to the
extent in such writing specifically set forth. All remedies contained in the
Loan Documents or by law afforded shall be cumulative and all shall be available
to the Lender until the Obligations have been paid in full.
-11-
<PAGE>
ARTICLE VII: GENERAL PROVISIONS
7.1 Governmental Regulation. Anything contained in this Agreement to the
contrary notwithstanding, no Lender shall be obligated to extend credit to the
Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
7.2 Headings. Section headings in the Loan Documents are for convenience
of reference only, and shall not govern the interpretation of any of the
provisions of the Loan Documents.
7.3 Entire Agreement. The Loan Documents embody the entire agreement and
understanding among the Borrower, the Lender and supersede all prior agreements
and understandings among the Borrower, and the Lender relating to the subject
matter thereof.
7.4 Expenses; Indemnification.
(A) Expenses. The Borrower shall reimburse the Lender for any reasonable
costs, charges for internal legal services and out-of-pocket expenses (including
attorneys' and paralegals' fees and time charges of attorneys and paralegals for
the Lender, which attorneys and paralegals may be employees of the Lender) paid
or incurred by the Lender in connection with the preparation, negotiation,
execution, delivery, syndication, review, amendment, modification, and
administration of the Loan Documents. The Borrower also agrees to reimburse the
Lender for any costs, internal charges and out-of-pocket expenses (including
attorneys' and paralegals' fees and time charges of attorneys and paralegals for
the Lender, which attorneys and paralegals may be employees of the Lender) paid
or incurred by the Lender in connection with the collection of the Obligations
and enforcement of the Loan Documents.
(B) Indemnity. The Borrower further agrees to defend, protect, indemnify,
and hold harmless the Lender and each of their respective Affiliates, and each
of the Lender's, or Affiliate's respective officers, directors, employees,
attorneys and Lender (collectively, the "Indemnitees") from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, claims, costs, expenses of any kind or nature whatsoever (including,
without limitation, the fees and disbursements of counsel for such Indemnitees
in connection with any investigative, administrative or judicial proceeding,
whether or not such Indemnitees shall be designated a party thereto), imposed
on, incurred by, or asserted against such Indemnitees in any manner relating to
or arising out of:
(i) this Agreement, or any act, event or transaction related
or attendant thereto or to the making of the Loans; or
(ii) any liabilities, obligations, responsibilities, losses,
damages, personal injury, death, punitive damages, economic damages,
consequential damages, treble damages, intentional, willful or
wanton injury, damage or threat to the environment, natural
resources or public health or welfare, costs and expenses
(including, without limitation, attorney, expert and consulting fees
and costs of investigation, feasibility or remedial action studies),
fines,
-12-
<PAGE>
penalties and monetary sanctions, interest, direct or indirect,
known or unknown, absolute or contingent, past, present or future
relating to violation of any environmental, health or safety
Requirements of Law arising from or in connection with the past,
present or future operations of the Borrower, its Subsidiaries or
any of their respective predecessors in interest, or, the past,
present or future environmental, health or safety condition of any
respective property of the Borrower or its Subsidiaries, the
presence of asbestos-containing materials at any respective property
of the Borrower or its Subsidiaries or the Release or threatened
Release of any Contaminant into the environment (collectively, the
"Indemnified Matters");
provided, however, the Borrower shall have no obligation to an Indemnitee
hereunder with respect to Indemnified Matters caused solely by or resulting
solely from the willful misconduct or Gross Negligence of such Indemnitee or
breach of contract by such Indemnitee with respect to the Loan Documents, in
each case, as determined by the final non-appealed judgment of a court of
competent jurisdiction. If the undertaking to indemnify, pay and hold harmless
set forth in the preceding sentence may be unenforceable because it is violative
of any law or public policy, the Borrower shall contribute the maximum portion
which it is permitted to pay and satisfy under applicable law, to the payment
and satisfaction of all Indemnified Matters incurred by the Indemnitees.
(C) Survival of Agreements. The obligations and agreements of the Borrower
under this Section 10.7 shall survive the termination of this Agreement.
7.5 Severability of Provisions. Any provision in any Loan Document that is
held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as
to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other jurisdiction, and to
this end the provisions of all Loan Documents are declared to be severable.
7.6 GOVERNING LAW. ANY DISPUTE BETWEEN THE BORROWER AND THE LENDER ARISING
OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE,
SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO THE
CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF INDIANA.
7.7 CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL.
(A) JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION (B), EACH OF THE
PARTIES HERETO AGREES THAT ALL DISPUTES AMONG THEM ARISING OUT OF, CONNECTED
WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN
CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS WHETHER
ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, MAY BE RESOLVED EXCLUSIVELY BY
STATE OR FEDERAL COURTS
-13-
<PAGE>
LOCATED IN INDIANAPOLIS, INDIANA, BUT THE PARTIES HERETO ACKNOWLEDGE THAT ANY
APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
INDIANAPOLIS, INDIANA. EACH OF THE PARTIES HERETO WAIVES IN ALL DISPUTES BROUGHT
PURSUANT TO THIS SUBSECTION (A) ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION
OF THE COURT CONSIDERING THE DISPUTE.
(B) OTHER JURISDICTIONS. THE BORROWER AGREES THAT THE LENDER SHALL HAVE
THE RIGHT TO PROCEED AGAINST THE BORROWER OR ITS PROPERTY IN A COURT IN ANY
LOCATION TO ENABLE SUCH PERSON TO (1) OBTAIN PERSONAL JURISDICTION OVER THE
BORROWER OR (2) REALIZE ON ANY SECURITY FOR THE OBLIGATIONS OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PERSON. THE BORROWER
AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING
BROUGHT BY SUCH PERSON TO REALIZE ON ANY SECURITY FOR THE OBLIGATIONS OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF SUCH PERSON. THE BORROWER
WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH SUCH
PERSON HAS COMMENCED A PROCEEDING DESCRIBED IN THIS SUBSECTION (B).
(C) VENUE. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING,
WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS
OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF
ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH
IN ANY JURISDICTION SET FORTH ABOVE.
(D) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES
ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING
IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS
AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED
IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY
SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
-14-
<PAGE>
7.8 SUBORDINATION. THE OBLIGATIONS UNDER THIS AGREEMENT ARE SUBORDINATED
TO CERTAIN SENIOR INDEBTEDNESS TO THE EXTENT AND ON THE TERMS SET FORTH IN THE
SUBORDINATION AGREEMENT.
ARTICLE VI: NOTICES
6.1 Giving Notice. Except as otherwise permitted herein, all notices and
other communications provided to any party hereto under this Agreement or any
other Loan Documents shall be in writing or by telex or by facsimile and
addressed or delivered to such party at its address set forth below its
signature hereto or at such other address as may be designated by such party in
a notice to the other parties. Any notice, if mailed and properly addressed with
postage prepaid, shall be deemed given when received; any notice, if transmitted
by telex or facsimile, shall be deemed given when transmitted (answerback
confirmed in the case of telexes).
6.2 Change of Address. The Borrower and the Lender may each change the
address for service of notice upon it by a notice in writing to the other
parties hereto.
ARTICLE VII: COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one agreement, and any of the parties hereto may
execute this Agreement by signing any such counterpart. This Agreement shall be
effective when it has been executed by the Borrower and the Lender.
[Remainder of This Page Intentionally Blank]
-15-
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Lender have executed this
Agreement as of the date first above written.
FINISHMASTER, INC.,
as the Borrower
By: /s/ Roger A. Sorokin
------------------------------
Roger A. Sorokin,
Vice President Finance
Address:
4259 40th Street
Kentwood, Michigan 49512
Attention: Roger A. Sorokin
Telephone No.: 616-949-0607
Facsimile No.: 616-949-1264
LDI, LTD.,
as Lender
By: LDI Management, Inc.
------------------------------
By: /s/ Andre B. Lacy
------------------------------
Andre B. Lacy, Chairman and CEO
Address:
54 Monument Circle
Indianapolis, Indiana 46204
Attention: Andre B. Lacy
Telephone No.: 317-237-2272
Facsimile No.: 317-237-5430
-16-
<PAGE>
EXHIBIT A
TO
CREDIT AGREEMENT
Form of Revolving Note
THE OBLIGATIONS UNDER THIS NOTE ARE SUBORDINATED TO CERTAIN SENIOR INDEBTEDNESS
TO THE EXTENT AND ON THE TERMS SET FORTH IN THAT CERTAIN SUPPLEMENTAL
SUBORDINATION AGREEMENT DATED AS OF MARCH 27, 1998, BY AND AMONG LDI, LTD.,
FINISHMASTER, INC. AND NBD BANK, N.A., AS AGENT, AS SUCH AGREEMENT IS FROM TIME
TO TIME AMENDED.
REVOLVING NOTE
U.S. $10,000,000 Indianapolis, Indiana
March 27, 1998
FOR VALUE RECEIVED, the undersigned, FINISHMASTER, INC., an Indiana
corporation (the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the
order of LDI LTD., an Indiana limited partnership (the "Lender") the principal
sum of TEN MILLION DOLLARS ($10,000,000), or, if less, the aggregate unpaid
amount of all "Revolving Loans" (as defined in the Credit Agreement referred to
below) made by the Lender to the Borrower pursuant to Section 2.2 of the "Credit
Agreement" (as defined below) on the "Revolving Loan Termination Date" (as
defined in the Credit Agreement), or on such earlier date as may be required by
the terms of the Credit Agreement. Capitalized terms used herein and not
otherwise defined herein are as defined in the Credit Agreement.
The Borrower promises to pay interest on the unpaid principal amount
of each Revolving Loan from the date of such Revolving Loan until such principal
amount is paid in full at a rate or rates per annum determined in accordance
with the terms of the Credit Agreement. Interest hereunder is due and payable at
such times and on such dates as set forth in the Credit Agreement.
Both principal and interest are payable in lawful money of the United
States of America to the Agent (as defined below), to such domestic account as
the Agent may designate, in same day funds. At the time of each Revolving Loan,
and upon each payment or prepayment of principal of each Revolving Loan, the
Lender shall make a notation either on the schedule attached hereto and made a
part hereof, or in such Lender's own books and records, in each case specifying
the amount of such Revolving Loan, the respective Interest Period thereof, in
the case of Eurodollar Rate Loans, or the amount of principal paid or prepaid
with respect to such Revolving Loan, as the case may be; provided that the
failure of the Lender to make any such recordation or notation shall not affect
the Obligations of the Borrower hereunder or under the Credit Agreement.
This Revolving Note is one of the "Revolving Note" referred to in,
and is entitled to the benefits of, the Credit Agreement dated as of March 27,
1998 (as amended, restated, supplemented or modified from
-1-
<PAGE>
time to time, the "Credit Agreement") among the Borrower and the Lender. The
Credit Agreement, among other things, (i) provides for the making of Revolving
Loans by the Lender to the Borrower from time to time in an aggregate amount not
to exceed at any time the outstanding U.S. Dollar amount first above mentioned,
the indebtedness of the Borrower resulting from each such Revolving Loan being
evidenced by this Revolving Note and (ii) contains provisions for acceleration
of the maturity hereof upon the happening of certain stated events and also for
prepayments of the principal hereof prior to the maturity hereof, without
penalty or premium, upon the terms and conditions therein specified.
Demand, presentment, protest and notice of nonpayment are hereby
waived by the Borrower.
Whenever in this Revolving Note reference is made to the Agent, the
Lender or Borrower, such reference shall be deemed to include, as applicable, a
reference to their respective successors and assigns permitted pursuant to the
Credit Agreement. The provisions of this Revolving Note shall be binding upon
and shall inure to the benefit of said successors and assigns. Borrower's
successors and assigns shall include, without limitation, a receiver, trustee or
debtor in possession of or for Borrower.
This Revolving Note shall be governed by, interpreted and enforced,
and the rights and liabilities of the parties hereto determined, in accordance
with the internal laws (without regard to the conflicts of law provisions) of
the State of Indiana.
FINISHMASTER, INC.
By: /s/ Roger A. Sorokin
------------------------------
Name: Roger A. Sorokin
Title: Vice President - Finance
-2-
<PAGE>
SCHEDULE OF REVOLVING LOANS AND PAYMENTS OR PREPAYMENTS
Amount of
Interest Principal Unpaid
Amount of Type of Period/ Paid or Principal Notation
Date Loan Loan Rate Prepaid Balance Made By
- ---- ---- ---- ---- ------- ------- -------
-3-
<PAGE>
EXHIBIT B
TO
CREDIT AGREEMENT
Form of Borrowing Notice
TO: LDI, LTD., as lender (the "Lender"), under that certain Credit
Agreement dated as of March 27, 1998 (the "Credit Agreement") by and
among FinishMaster, Inc. (the "Borrower") and the Lender (such Credit
Agreement, as the same may be amended, restated, supplemented or
otherwise modified from time to time, the "Credit Agreement")
The Borrower hereby gives to the Lender a Borrowing Notice pursuant
to Section 2.8 of the Credit Agreement, and Borrower hereby requests to borrow
on , (the "Borrowing Date") from the Lender on a pro rata basis an aggregate
principal amount of:
$ in Revolving Loans as a
---
---Floating Rate Advance
---
---Eurodollar Advance
o Applicable Interest Period of month(s).
The Borrower hereby represents and warrants that the conditions
contained in Article III have been satisfied.
Unless otherwise defined herein, terms defined in the Credit
Agreement shall have the same meanings in this Notice.
Dated: ,
FINISHMASTER, INC.
By:
------------------------------
Name:
Title:
-1-
