-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QYILgHyHghP7aGL0+YKqE2YctNqJ6CVa/bcVs2gNtkRoLXgPcrviw00hGgdKcji1 LbhBfUFKvdNLV2H9a71+sg== 0000908834-02-000095.txt : 20020415 0000908834-02-000095.hdr.sgml : 20020415 ACCESSION NUMBER: 0000908834-02-000095 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINISHMASTER INC CENTRAL INDEX KEY: 0000917321 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 382252096 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23222 FILM NUMBER: 02593890 BUSINESS ADDRESS: STREET 1: 54 MONUMENT CIRCLE STREET 2: SUITE 600 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3172373678 MAIL ADDRESS: STREET 1: 54 MONUMRNY CIRCLE STREET 2: SUITE 600 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10-K 1 fm2001_10k.txt FORM 10-K 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 For the fiscal year ended December 31, 2001 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 600, 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: None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- Common Stock - without par value Nasdaq Stock Market 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 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 March 1, 2002 was $20,421,335. On March 1, 2002, 7,648,363 shares of Registrant's common stock were outstanding. Documents Incorporated By Reference Portions of the annual proxy statement for the year ended December 31, 2001 are incorporated by reference into Part III. FINISHMASTER, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS ITEM PAGE 1 Business............................................................ 3 2 Properties.......................................................... 7 3 Legal Proceedings................................................... 8 4 Submission of Matters to a Vote of Security Holders................. 8 5 Market for Registrant's Common Equity and Related Shareholder Matters.................................... 9 6 Selected Consolidated Financial Data................................ 10 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 11 8 Financial Statements and Supplemental Data.......................... 17 9 Changes in, and Disagreements with Accountants on Accounting and Financial Disclosure............................ 34 10 Directors and Executive Officers of the Registrant.................. 34 11 Executive Compensation.............................................. 34 12 Security Ownership of Certain Beneficial Owners and Management...... 34 13 Certain Relationships and Related Transactions...................... 34 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 34 Signatures.......................................................... 35 PART I ITEM 1 - BUSINESS General We are the leading national independent distributor of automotive paints, coatings and paint-related accessories primarily to the automotive collision repair industry. As of March 1, 2002, we serve our customers through a 350 person direct sales force in 159 sales outlets and three major distribution centers located in 23 states, making us the only national independent distributor in the industry. We have approximately 15,000 customer charge accounts consisting principally of collision repair shops and automobile dealers, to which we provide a comprehensive selection of brand name products. Our product offering consists of over 32,000 stock keeping units ("SKUs"), including leading brands of automotive paints, coatings, thinners and reducers manufactured by BASF, DuPont, and PPG and the leading brands of paint-related accessories manufactured principally by 3M, such as masking materials, body fillers and cleaners. For the year ended December 31, 2001, net sales were $333.5 million and net income was $6.2 million. Our vision is to expand our leadership position in the distribution of products, services and technology that are recognized by customers as key factors in their success. We provide our customers with "local" value-added services such as rapid delivery, technical support, product training, management seminars, computerized color matching, inventory management, personnel placement and environmental compliance reporting. These value-added services are backed by "national" expertise in the systems and technology of warehouse distribution and supply chain management, and strategic partnering with the manufacturers of paint and paint-related accessories. Our local focus helps us respond to the unique customer needs in various geographic markets. Our national network allows us to provide better, consistent service at a lower cost than our competition. In addition, we are able to provide certain multi-site customers, such as "collision repair shop" chains and mega-dealerships, with efficient and consistent product distribution throughout their national or regional networks at competitive prices. We estimate the U.S. automotive paint and paint-related accessories distribution after-market ("distribution after-market") to be approximately $2.5 billion, with automotive collision repair shops being the primary customers for automotive paint and paint-related accessories. In addition to independent collision repair shops and automobile dealers, we supply products to organizations that maintain their own automobile fleet, van conversion companies and other commercial/industrial customers. The distribution after-market is supplied by a small number of manufacturers of paint and paint-related accessories and serves a highly fragmented customer base, consisting of approximately 40,000 collision repair shops alone. Our competitors tend to be family-owned, with one to three distribution sites and typically serve a highly localized customer base. We are an Indiana based corporation. Our principal executive offices are leased from LDI, Ltd. ("LDI"), an Indiana limited partnership, which indirectly owns 73.1% of our outstanding shares. We believe that the terms of the lease are at least as favorable to us as those that could be obtained by arms-length negotiations with an unaffiliated third party. Our principal executive offices are located at 54 Monument Circle, Suite 600, Indianapolis, Indiana 46204, and our telephone number is (317) 237-3678. Industry Overview We estimate the distribution after-market to be approximately $2.5 billion. The end users of the products distributed by us are principally independent collision repair shops and automobile dealers. Additionally, organizations that maintain their own automobile fleet, van conversion companies and other commercial/industrial customers make up a smaller percentage of our 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 collision repair job. However, while paint is a relatively minor component of the total repair cost, we play a critical role in the customer's level of satisfaction. The distribution after-market for automotive paint and related supplies is characterized by a small number of manufacturers of paint and paint-related accessories. The five predominant manufacturers of automotive paint distributed in the United States are Akzo Nobel, BASF, DuPont, PPG and The Sherwin-Williams Company. 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 paint-related accessories which include refinishing materials, supplies, accessories and tools such as sand paper, masking tape and paint masks. The paint manufacturers market is continuing to consolidate. Specifically, in July 1999, PPG acquired Imperial Chemical Industries' global automotive refinish and industrial coatings business and its automotive solvents and thinners business in North America. In March 1999, DuPont acquired Herberts Gmbh, the coatings company of Hoechst. The Herberts acquisition created the world's third largest coatings company and the leading automotive coatings supplier. While automotive paint manufacturing is highly concentrated, automotive paint distribution and the end users of automotive paint are highly fragmented. We believe that a large number of independent distributors of automotive paint serve an aggregate of approximately 40,000 collision repair shops nationwide. Distributors, which tend to be family-owned with one to three distribution sites, typically serve a highly localized customer base with each distribution site serving customers located within 20 miles of the site depending upon demographics, road access and geography. 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 like us. Nevertheless, some of the paint manufacturers have elected to operate company-owned distribution facilities in selected markets, including markets in which we operate. We believe, 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, we believe that independent distributors like us, which can sell the products of several paint manufacturers, are better situated to service the end users' needs than the company owned distribution facilities of automotive paint manufacturers. The market for paints and supplies for automotive collision repairs has changed significantly in recent years. Key factors affecting this market have been: o a decline in the number of vehicles repaired annually; o improvements in paint application technology and advances in paint system productivity; o environmental regulations which have required the reformulation of paints and the use of more advanced equipment and facilities; o automobile manufacturers' use of more complex and expensive automotive finishes; and o an increase in the number of vehicles repaired by insurance companies' designated "direct repair providers". Collision repair shops have been forced to invest in new equipment and additional training of their workers, while there has been a decline in the number of repair jobs. Accordingly, there has been some consolidation in the highly fragmented collision repair industry among end users of automotive paints and accessories. In addition, collision repair shops and car dealerships are seeking to improve their financial performance and competitive position by developing relationships with distributors that can support their businesses with value-added services. This demand for higher levels of service from distributors, combined with lower unit sales volume of paint and supplies, has resulted in a consolidation among after-market distributors. We have led the consolidation among distributors in recent years, having completed 39 acquisitions over the past ten years. Although the automotive collision repair industry is experiencing a trend toward consolidation, we believe that our size and current position as a market leader will enable us to continue to grow and remain profitable. We have been able to offset the decline in unit volume by material price increases that we have been able to pass on to our customers due to the technological advancements in paints and coatings. In addition, we believe we will continue to attract new customers due to our value-added services, such as our experience in helping customers comply with environmental regulations. This service, which we currently provide in California and Colorado, will be applicable in other geographic areas as the U.S. Environmental Protection Agency enacts volatile organic compound ("VOC") regulations nationwide. Products and Suppliers We offer our customers a comprehensive selection of prominent brand name products and our own PrivateBrand products. The product line consists of over 32,000 SKUs, including the three leading brands of automotive paints and coatings and a leading brand of related accessories. Our PrivateBrand products include some of the most frequently used refinishing accessories such as masking materials, body fillers, thinners, reducers and cleaners. We rely on four leading suppliers for the majority of our product requirements. BASF, DuPont, and PPG supply virtually all of our paint products, and 3M is our largest supplier of paint-related accessories. Products supplied by BASF, DuPont, 3M and PPG accounted for approximately 85% of purchases in 2001. Although each of these suppliers generally competes with the others along product lines, we do not believe the products are completely interchangeable because of high brand loyalty among customers and their brand-specific color matching computer systems. We continuously seek opportunities with new and existing suppliers to supply the highest quality products. Whenever practical, we make purchases from suppliers in large volumes to maximize volume discounts. In addition, we participate in periodic, special incentive programs available from suppliers. These programs provide additional purchase discounts and extended payment terms in exchange for large volume purchases. We also benefit from supplier-provided early payment discounts and from other supplier-supported programs. Services We offer 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 our delivery fleet of approximately 720 trucks. We offer multiple daily deliveries to meet our customers' just-in-time inventory needs. Customer concerns for product availability typically take priority over all other competitive considerations, including price. Technical Support Our 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. Product Training As a result of increasing regulations, manufacturers have introduced technologically advanced, lower VOC paints, which require significantly more sophisticated application techniques. We provide training to customers in order to teach them the techniques required to work with these products. Training sessions are typically conducted jointly by us and by one or more of our major suppliers at the customer's location or at an off-site location. Management Seminars Management seminars are conducted at convenient locations to inform our customers about environmental regulations and compliance, 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 350,000 mix formulas. With sophisticated PC-based color matching equipment and specialists, we provide color-matching services to our customers. Inventory Management We perform monthly physical inventories for customers who request this service. We also provide customers with management information reports on product usage. Assistance with Environmental Compliance Reporting All states have air quality regulations that mandate paint and application methods which result in reduced atmospheric emissions of paint and other related materials. In California in particular, we arrange demonstrations of new products and application techniques designed to comply with air quality regulations. In addition, in California and Colorado, we assist our 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, we are considering an expansion of these programs. Personnel Placement Certain of our locations assist our customers with filling 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, we may provide the names of one or more persons for the position. Similar services are available to persons seeking employment. We do not charge for this service but benefit from enhanced relationships with our customers and their employees. Competition The distribution after-market 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 us on a regional or local level. Competition in the purchase of independent distributors and sales outlets may occur between us and other automotive refinishing distributors that are also pursuing growth through acquisitions. We may also encounter significant sales competition from new market entrants, automotive paint manufacturers, buying groups or other large distributors that may seek to enter such markets or may seek to compete with us 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 our principal suppliers, also distributes in certain markets through its own outlets in North America. While we do not believe that current direct distribution efforts by automotive paint manufacturers have significantly affected our sales, there can be no assurance that we will not encounter increased competition in the future. We may also compete with our suppliers in selling to certain large volume end users such as van converters, small manufacturers and large fleet operators. Employees As of March 1, 2002, we employed approximately 1,530 persons on a full and part-time basis. None of the employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be good. Governmental and Environmental Regulations We are subject to various federal, state and local laws and regulations. These regulations impose requirements on our customers and us. Pursuant to the regulations of the U.S. Department of Transportation and certain state transportation departments, a license is required to transport our products and annual permits are required due to the classification of certain of our 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 our distribution centers and sales outlets. These agencies require us to comply with various governmental regulations, including worker safety laws, community and employee "right-to-know" laws and laws regarding clean air and water. In addition, state and local fire and environmental regulations extensively control the design and operation of our facilities, the sale of our products, and the application of these products by our customers. Such regulations are complex and subject to change. Regulatory or legislative changes may cause future increases in our operating costs or otherwise negatively affect operations. ITEM 2 - PROPERTIES The following table sets forth certain information regarding the facilities operated by us as of March 1, 2002. Number No. of No. of Of Sales Distribution State Offices Outlets Centers Alabama..................... 1 Arizona..................... 3 California.................. 1 28 1*** Colorado.................... 4 Connecticut................. 3 Delaware.................... 1 Florida..................... 1* 39 1*** Georgia..................... 3 Illinois.................... 5 Indiana..................... 1 3 Maryland.................... 4 Massachusetts............... 5 Michigan.................... 1* 12 1*** Minnesota................... 3 New Jersey.................. 8 North Carolina.............. 1 6 1** Ohio........................ 2 Oklahoma.................... 1 Pennsylvania................ 3 South Carolina.............. 6 Texas....................... 12 Virginia.................... 3 Wisconsin................... 4 ----------- --------------- -------------- Total Offices, Sales Outlets and Distribution Centers 5 159 4 -------------- * Locations where an office and distribution center are combined facilities; Kentwood, MI and Ft. Lauderdale, FL. ** Location where a store and distribution center are combined facilities; Greensboro, NC. *** Denotes major distribution centers; Kentwood, MI, Ft. Lauderdale, FL and Los Angeles, CA. Our sales outlets range in size from 1,250 square feet to 14,800 square feet. Some of the larger sales outlets are also used as "drop ship" points from which we 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. Our distribution centers range in size from 5,000 square feet to 18,000 square feet. The distribution centers are equipped with efficient material handling and storage equipment. We own the distribution center and two sales outlets 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 2002 to 2008, with options to renew. We typically assume the lease of the former owner in acquisitions. In a number of instances, our sales outlets are leased from the former owners of businesses acquired by us. We believe that all of our leases are at fair market rates, that presently no single lease is material to our operations, and that alternative sites are presently available at market rates. We are leasing approximately 15,000 square feet of executive offices for our national headquarters located in Indianapolis, Indiana. ITEM 3 - LEGAL PROCEEDINGS In January 1999, we were named in an unfair business practices lawsuit by an automotive paint distributor located in the State of California. The plaintiff in such suit alleged that we offered, in a manner that injured the plaintiff, rebates and cash bonuses to businesses in the Southern California area if those businesses would buy exclusively from us and use our products. The plaintiff claimed damages in the amount of $3.8 million, trebled to $11.4 million. During 2000, the court granted summary judgment in our favor. The plaintiff has not appealed the judgment against it, and the decision is now final. We are subject to various claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, environmental, product liability, automobile, taxes, discrimination, employment and other matters. Our management believes that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on our financial condition, results of operations or cash flows. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth certain information concerning the executive officers of the Company who are not also directors: Thomas E. Case (age 56) serves as the Senior Vice President of Sales for our West Region. He had previously served as the Senior Vice President and general manager of our Western Division from June 1998 to January 2001. Mr. Case joined us upon completion of our acquisition of Thompson in November 1997. Formerly, Mr. Case was a Vice President of Thompson and served as the general manager of Thompson's California Division. J. A. Lacy (age 37) serves as our Senior Vice President of Operations. He had previously served as the Senior Vice President of Planning and Marketing from January 1999 to January 2001. From January 1997 to December 1998, Mr. Lacy served as President of Tucker Rocky Distributing Canada, Inc., a leading after-market distributor of motorcycle components and accessories. Prior to this, Mr. Lacy was Vice President of J. Walter Thompson, an advertising agency. Robert R. Millard (age 44) joined us in October 1998 as the Senior Vice President of Finance, Chief Financial Officer, Secretary and Treasurer. From February 1996 until September 1998, Mr. Millard served as Vice President of Finance, Chief Financial Officer, Secretary and Treasurer of Personnel Management, Inc., a publicly held personnel staffing company based in Indianapolis, Indiana. From July 1991 until January 1996, Mr. Millard served as the Corporate Controller of Lacy Diversified Industries, Ltd., an affiliate of LDI. Charles VanSlaars (age 52) serves as the Senior Vice President of Marketing. He had previously served as the Senior Vice President of Sales for our Eastern Division, a position held from January 2001 until November 2001, and Senior Vice President and General Manager of our Southeastern Division, a position he held from June 1998 to January 2001. From June 1996 until May 1998, Mr. VanSlaars served as an executive officer of LDI AutoPaints, Inc. From 1994 until 1996, Mr. VanSlaars served as Vice President of Parts Depot Company, L.P., a Florida-based distributor of auto paints. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock trades on The NASDAQ Stock Market (SmallCap Market) under the symbol FMST. The number of beneficial owners of our common stock at December 31, 2001, was approximately 350. The range of high and low closing prices reported by NASDAQ for the last twelve quarters were: Year Quarter Ended High Low --------------------------------------------------------------- 1999 March 31 7.000 5.625 1999 June 30 6.000 4.750 1999 September 30 7.375 5.688 1999 December 31 7.938 5.750 2000 March 31 8.000 6.750 2000 June 30 8.000 4.750 2000 September 30 7.000 5.250 2000 December 31 7.000 4.700 2001 March 31 7.250 4.875 2001 June 30 9.000 6.000 2001 September 30 8.680 5.760 2001 December 31 10.270 7.250 No cash dividends on common stock have been paid during any period and none are expected to be paid in the foreseeable future. We anticipate that all earnings and other cash resources will be retained by us for investment in our business. ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000, and 1999, are derived from our audited consolidated financial statements that are included elsewhere herein. The selected consolidated financial data as of December 31, 1999, 1998 and 1997 and for the years ended December 31, 1998 and 1997 are derived from our audited consolidated financial statements, which are not included herein. The financial data should be read in conjunction with our audited consolidated financial statements and notes thereto, included elsewhere herein, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, ---------------------------------------------------------------------- (In thousands, except per share data) 2001(1)(2) 2000(1)(2) 1999(1)(2) 1998(1)(2) 1997(1) ---------- ---------- ---------- ---------- ------- Per Share Net income before extraordinary loss Basic $ 0.88 $ 0.49 $ 0.49 $ 0.29 $ 0.11 Diluted $ 0.88 $ 0.49 $ 0.49 $ 0.29 $ 0.11 Extraordinary loss on early extinguishment of debt, net Basic $ 0.07 $ - $ - $ - $ - Diluted $ 0.07 $ - $ - $ - $ - Net income Basic $ 0.81 $ 0.49 $ 0.49 $ 0.29 $ 0.11 Diluted $ 0.81 $ 0.49 $ 0.49 $ 0.29 $ 0.11 Pro forma net income (loss) (3) $ - $ - $ - $ 0.33 $ (1.01) Statements of Operations Data Net sales $ 333,468 $ 337,213 $ 324,490 $ 309,946 $ 130,175 Gross margin $ 124,183 $ 122,995 $ 117,002 $ 109,678 $ 47,107 Income from operations $ 21,695 $ 19,572 $ 18,745 $ 15,895 $ 3,832 Net income before extraordinary loss $ 6,703 $ 3,727 $ 3,711 $ 1,988 $ 656 Extraordinary loss on early extinguishment of debt, net $ 495 $ - $ - $ - $ - Net income $ 6,208 $ 3,727 $ 3,711 $ 1,988 $ 656 Pro forma net income (loss) (3) $ - $ - $ - $ 2,459 $ (7,585) Weighted average shares outstanding - Diluted 7,648 7,551 7,545 6,780 5,994 Pro forma weighted average shares outstanding - Diluted - - - 7,536 7,536 December 31, ---------------------------------------------------------------------- 2001(1)(2) 2000(1)(2) 1999(1)(2) 1998(1)(2) 1997(1) ---------- ---------- ---------- ---------- ------- Balance Sheet Data Net working capital $ 33,087 $ 35,209 $ 48,147 $ 43,452 $ 42,928 Total assets $ 202,036 $ 218,317 $ 214,235 $ 226,475 $ 215,418 Long-term debt $ 77,868 $ 90,652 $ 111,603 $ 119,120 $ 134,135 Shareholders' equity $ 62,535 $ 56,806 $ 53,069 $ 49,348 $ 32,932
- -------------------- (1) The operating results for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 are affected by the acquisition of Thompson on November 21, 1997. The operating results of Thompson are included in our consolidated operating results since the acquisition date. (2) The operating results for the years ended December 31, 2001, 2000, 1999, and 1998 are affected by the acquisition of AutoPaints on June 30, 1998. The operating results of AutoPaints are included in our consolidated operating results since the acquisition date. (3) Pro forma amounts for the years ended December 31, 1998 and 1997 have been prepared to give effect to the acquisitions of Thompson and AutoPaints as if the transactions had occurred on January 1, 1997. These amounts are unaudited and are presented for informational purposes only. No pro forma amounts are presented for other acquisitions completed by the Company in 1999, 2000 or 2001, as the impact of such acquisitions are not material. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis about our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes presented in this annual report. Overview FinishMaster, Inc. is the leading independent distributor of automotive paints, coatings and paint-related accessories primarily to the automotive collision repair industry in the United States. As of March 1, 2002, we served our customers through 159 sales outlets and three major distribution centers located in 23 states, making us the only national independent distributor in the industry. We have approximately 15,000 customer charge accounts that we provide a comprehensive selection of brand name products supplied by BASF, DuPont, 3M and PPG in addition to our own FinishMaster PrivateBrand refinishing accessory products. We typically are the primary source of supply to our customers and we offer a broad range of services designed to enhance the operating efficiencies and competitive positions of our customers and suppliers. Our operations are currently organized into five geographical regions. We aggregate these five regions into a single reportable segment. We are the leading consolidator in the automotive refinish distribution industry, having successfully completed as of March 1, 2002 approximately 39 acquisitions over the past ten years, ranging from "add-on" acquisitions to the strategic acquisitions of Thompson, AutoPaints, and Badger Paint Plus, Inc. We intend to continue our strategy of expanding through acquisitions. On May 7, 2001, we acquired the assets of Badger Paint Plus, Inc., a Wisconsin corporation, Badger Paint Plus of the Twin Cities, Inc., Badger Paint Plus of Duluth, Inc., Badger Paint Plus of St. Cloud, Inc., Lakeland Sales, Inc., each a Minnesota corporation, and Badger Paint Plus of Chicago, Inc., an Illinois corporation (collectively "Badger"). Badger, like FinishMaster, was an aftermarket distributor of automotive paints, coatings, and paint-related accessories. The purchase price, including related acquisition costs, was $7.4 million and includes the issuance of 93,999 shares of our common stock. The acquisition has been accounted for as a purchase and accordingly, the acquired assets and liabilities have been recorded at their estimated fair values on the date of the acquisition. Goodwill associated with the acquisition is being amortized over 15 years and all other intangible assets are amortized over 5 years. Operating results of Badger have been included in our consolidated financial statements from the effective date of the acquisition. Results of Operations - ------------------------------------------------------------------------------- (In thousands) 2001 Change 2000 Change 1999 - ------------------------------------------------------------------------------- Net sales $ 333,468 (1.1%) $ 337,213 3.9% $ 324,490 Continued weakness in demand for automotive paints and related accessories impacted our net sales, which decreased $3.7 million or 1.1% from 2000 to 2001. During 2001, "same store sales" decreased approximately 2.5% due to soft market conditions throughout most of our distribution network. Factors leading to this softening in demand included slower overall economic conditions; flat to declining number of automobiles being repaired; continued productivity improvements in the use of automotive paint by our customers; and changes in vendor supported marketing programs used to attract and retain customers. These industry dynamics are not expected to reverse in the near term. Net sales acquired through acquisitions contributed approximately $6.5 million or 1.9% of the net sales variance between years. Two acquisitions were completed during 2001, Badger in May and Scotty's Paint Supply, Inc. in December. Net sales increased $12.7 million or 3.9% from 1999 to 2000 due primarily to acquisitions. During 2000, we completed six acquisitions. As a result of competitive market conditions and flat industry demand, we experienced minimal "same store sales" growth. Approximately 70% of our net sales consisted of automotive paint products while the remaining portion was paint-related accessories. - ------------------------------------------------------------------------------- (In thousands) 2001 Change 2000 Change 1999 - ------------------------------------------------------------------------------- Gross margin $ 124,183 1.0% $ 122,995 5.1% $ 117,002 Percentage of net sales 37.2% 36.5% 36.1% - ------------------------------------------------------------------------------- Gross margin dollars in 2001 increased $1.2 million, or 1.0% over the prior year period. Strong gross margin as a percentage of net sales more than offset the negative impact of lower net sales volume. Gross margin as a percentage of net sales increased 70 basis points to 37.2%, positively impacting margin by $2.5 million for the year. Lower net sales volume negatively impacted margin by $1.3 million. The improvement in margin as a percentage of net sales was primarily the result of improved inventory management procedures, supplier purchasing incentive programs, and large inventory purchases in late 2000 made prior to manufacturers' price increases. Margin is affected by purchasing opportunities presented to us by our vendors. We do not anticipate being able to maintain our 2001 margin levels in 2002 as a result of less favorable purchasing opportunities from our vendors which reduced the level of inventory purchased by us in late 2001 prior to manufacturers' price increases. Gross margin in 2000 increased $6.0 million or 5.1% over 1999 due to higher sales volume and improved margins. Higher net sales volume positively impacted margin by $4.6 million. Gross margin as a percentage of net sales increased 40 basis points to 36.5%, positively impacting margins by $1.4 million. The improvement in margin as a percentage of net sales was primarily the result of supplier incentive programs and the optimization of early payment discounts. - ------------------------------------------------------------------------------- (In thousands) 2001 Change 2000 Change 1999 - ------------------------------------------------------------------------------- Operating expenses $ 52,485 0.6% $ 52,195 6.5% $ 49,029 Percentage of net sales 15.7% 15.5% 15.1% - ------------------------------------------------------------------------------- Operating expenses consist of wages, facility, vehicle and related costs for our store and distribution locations. Operating expenses increased $0.3 million or 0.6% from 2000 to 2001. As a percentage of net sales, operating expenses increased from 15.5% in 2000 to 15.7% in 2001. Excluding the operating expenses associated with acquired operations in 2001, operating expenses decreased $0.5 million between years due primarily to reduced labor costs. Operating expenses as a percentage of net sales increased from 15.1% in 1999 to 15.5% in 2000 due primarily to higher vehicle fuel costs and increased depreciation expense associated with the new point-of-sale computer system implemented during 2000. - ------------------------------------------------------------------------------- (In thousands) 2001 Change 2000 Change 1999 - ------------------------------------------------------------------------------- Selling, general and administrative expenses $ 44,111 (1.8%) $ 44,928 5.9% $ 42,436 Percentage of net sales 13.2% 13.3% 13.1% - ------------------------------------------------------------------------------- Selling, general and administrative expenses ("SG&A") consist of costs associated with our corporate support staff and expenses for commissions, wages, and customer sales support activities. SG&A expenses decreased $0.8 million or 1.8% from 2000 to 2001. As a percentage of net sales, SG&A expenses decreased from 13.3% in 2000 to 13.2% in 2001. Excluding the expenses associated with the acquired operations in 2001, SG&A expenses decreased $1.4 million due primarily to lower communication costs, supply expense, bad debt expense and professional fees associated with the implementation of our new computer systems in 2000. Partially offsetting these decreases was higher costs associated with wages and benefits. SG&A expenses as a percentage of net sales increased from 13.1% to 13.3% from 1999 to 2000 as a result of increased wages and benefit costs, higher bad debt expenses and increased costs associated with attracting and retaining customers. - ------------------------------------------------------------------------------- (In thousands) 2001 Change 2000 Change 1999 - ------------------------------------------------------------------------------- Amortization of intangible assets $ 5,892 (6.5%) $ 6,300 (7.2%) $ 6,792 Percentage of net sales 1.8% 1.9% 2.1% - ------------------------------------------------------------------------------- The decrease in amortization expense among 1999, 2000 and 2001, was a result of certain intangible assets, principally non-compete agreements, becoming fully amortized in those years. - ------------------------------------------------------------------------------- (In thousands) 2001 Change 2000 Change 1999 - ------------------------------------------------------------------------------- Interest expense, net $ 8,547 (26.3%) $ 11,604 7.4% $ 10,802 Percentage of net sales 2.6% 3.4% 3.3% - ------------------------------------------------------------------------------- Interest expense in 2001 decreased $3.1 million or 26.3% compared to the prior year. Lower average outstanding borrowings in 2001 of approximately $23.3 million were the primary contributor to this favorable decrease in interest expense. Lower effective interest rates of approximately 25 basis points also contributed to the decrease. Interest expense in 2000 increased $0.8 million or 7.4 % compared to the prior year due to higher effective interest rates of approximately 110 basis points, partially offset by lower average outstanding borrowings. Average outstanding borrowings decreased $13.7 million during 2000. - ------------------------------------------------------------------------------- (In thousands) 2001 Change 2000 Change 1999 - ------------------------------------------------------------------------------- Income tax expense $ 6,445 52.0% $ 4,241 0.2% $ 4,232 Percentage of net sales 1.9% 1.3% 1.3% Effective tax rate 49.0% 53.2% 53.3% - ------------------------------------------------------------------------------- Higher income before income taxes was responsible for the increased income tax expense among 1999, 2000, and 2001. The effective tax rate varied from the federal statutory rate as a result of certain expenses, principally nondeductible intangible amortization. The decrease in the effective tax rate between 2000 and 2001 was due to these nondeductible expenses remaining stable in relation to the higher income before income taxes. - ------------------------------------------------------------------------------- (In thousands) 2001 Change 2000 Change 1999 - ------------------------------------------------------------------------------- Extraordinary loss on early extinguishment of debt, net of tax $ 495 - $ - - $ - Percentage of net sales 0.1% - -------------------------------------------------------------------------------- An extraordinary loss on the early extinguishment of debt of $0.5 million, net of $0.3 million in income tax benefit, resulted from the write-off of the unamortized debt issuance costs related to the early extinguishment of our senior secured and senior subordinated credit facilities in March 2001. - ------------------------------------------------------------------------------- (In thousands, 2001 Change 2000 Change 1999 except per share data) - ------------------------------------------------------------------------------- Net income $ 6,208 66.6% $ 3,727 0.4% $ 3,711 Percentage of net sales 1.9% 1.1% 1.1% Net income per share $ 0.81 65.3% $ 0.49 0.0% $ 0.49 - -------------------------------------------------------------------------------- Factors contributing to the changes in net income and the related per share amounts are discussed in the detail above. Inflation and Other Economic Factors Inflation affects our cost of materials sold, salaries and other related costs of distribution. To the extent permitted by competition, we offset these higher costs of materials through selective price increases. Our business may be negatively affected by cyclical economic downturns in the markets in which we operate. Our financial performance is also dependent on our ability to acquire businesses and profitably integrate them into our operations. Quantitative and Qualitative Disclosure about Market Risk A review of our financial instruments and risk exposures indicates we have exposure to interest rate risk. To reduce this exposure, we entered into interest rate swap agreements in March 2001 with notional amounts of $40.0 million. These agreements intend to convert our senior term credit facility from a floating to a fixed interest rate obligation. The weighted average fixed interest rate under these agreements is 5.43%. In order to maintain effectiveness, the quarterly settlement terms of the swap agreements are established to match the interest payments on the term credit facility. Based upon the Company's outstanding debt at December 31, 2001 and the term for which current interest rates are fixed, a 10% increase in interest rates would increase interest expense for 2002 by an estimated $0.1 million. Seasonality and Quarterly Fluctuations Our sales and operating results have varied from quarter to quarter due to various factors and we expect these fluctuations to continue. Among these factors are seasonal buying patterns of our customers and the timing of acquisitions. Historically, 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, our financial performance 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. We also take advantage of periodic special incentive programs available from our suppliers that extend the due date of inventory purchases beyond terms normally available with large volume purchases. The timing of these programs can contribute to fluctuations in our quarterly cash flows and operating results. Although we continue to investigate strategies to smooth the seasonal pattern of our quarterly results of operations, there can be no assurance that our net sales, results of operations and cash flows will not continue to display seasonal patterns. Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------------------------------------------------- (In thousands) 2001 2000 1999 - ----------------------------------------------------------------------------------------------- Net working capital $ 33,087 $ 35,209 $ 48,147 Long-term debt $ 77,868 $ 90,652 $ 111,603 Cash provided by operating activities $ 27,865 $ 29,646 $ 8,781 Cash used in investing activities $ (5,853) $ (5,059) $ (2,371) Cash used in financing activities $ (20,548) $ (23,693) $ (6,800) - -----------------------------------------------------------------------------------------------
Our primary sources of funds over the past three years were from operating activities and borrowings under our credit facilities. Our principal uses of cash were to fund capital expenditures, acquisitions, and the repayment of outstanding borrowings. Net cash generated from operating activities was $27.9 million in 2001, compared with $29.6 million in 2000. This decrease was the result of a negative change in operating assets and liabilities, primarily accounts payable and other liabilities. This change in accounts payable and other liabilities resulted from differences in payment terms between years on large "year end" inventory purchases. Partially offsetting this use of cash for accounts payable and other liabilities was lower investments in inventory and prepaid and other assets. The year-end inventory balance decreased as a result of lower inventory purchases in late 2001 made prior to manufacturers' price increases compared to the prior year period. Net cash used in investing activities was $5.9 million in 2001, compared with $5.1 million in 2000 due to increased spending for acquisition activity. During 2001, we completed two acquisitions that utilized $5.0 million of cash compared to six acquisitions and $1.9 million of cash in the prior year. Partially offsetting this increase was lower capital spending in 2001. With the implementation of a new "point-of-sale" computer system and a consolidated general ledger system in 2000, our capital spending requirements were less in the current year period. We estimate that capital expenditures for 2002, principally for information technology equipment, will approximate $1.5 million. Net cash used in financing activities was $20.5 million in 2001, compared with $23.7 million in 2000. Lower debt repayments of $4.3 million, partially offset by higher debt issuance costs of $1.1 million were the primary factors contributing to the decrease in net cash used in financing activities. The decrease in debt repayments was a result of lower net cash provided by operating activities and increased spending on acquisitions. The use of cash for debt issuance costs was related to the refinancing of our credit facilities in March 2001. Total capitalization at December 31, 2001, was $148.0 million, comprised of $85.5 million of debt and $62.5 million of equity. Debt as a percentage of total capitalization was 57.8% compared to 64.1% in the prior year. This improvement was attributable to the increase in equity resulting from current year net income, along with the decrease in debt resulting from repayments. At December 31, 2001, we had term credit and revolving credit facilities totaling $58.9 million and senior subordinated debt of $19.9 million. We were in compliance with the covenants underlying these credit facilities, and had availability under our revolving credit facility of $25.0 million as of year-end. Based on current and projected operating results and giving effect to total indebtedness, we believe that cash flow from operations and funds available from lenders and other creditors will provide adequate funds for ongoing operations, debt service and planned capital expenditures. Other Matters In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, ("FAS 141"), "Business Combinations" and Statement of Financial Accounting Standard No. 142, ("FAS 142"), "Goodwill and Other Intangible Assets". Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt FAS 142 effective January 1, 2002. We are currently evaluating the effect that adoption of the provisions of FAS 142 that are effective January 1, 2002 will have on our results of operations and financial position. In August 2001,the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 143, ("FAS 143"), "Accounting for Asset Retirement Obligations". FAS 143 addresses the financial accounting and reporting obligations associated with the retirement of tangible assets and the associated asset retirement costs. It requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, which is adjusted to its present value each period. In addition, companies must capitalize a corresponding amount by increasing the carrying amount of the related long-lived asset, which is depreciated over the useful life of the related asset. We will adopt FAS 143 on January 1, 2002, and we do not expect that this Standard will have a material effect on our consolidated financial statements or results of operations. In October 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"). FAS 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill, which is specifically addressed by FAS 142. FAS 144 maintains the requirement that an impairment loss be recognized for a long-lived asset to be held and used if its carrying value is not recoverable from its undiscounted cash flows, with the recognized impairment being the difference between the carrying amount and fair value of the asset. With respect to long-lived assets to be disposed of other than by sale, FAS 144 requires that the asset be considered held and used until it is actually disposed of, but requires that its depreciable life be revised in accordance with APB Opinion No. 20. FAS 144 will be effective for us in the first quarter of 2002, and it is not expected to have a material effect on our consolidated financial statements or results of operations. Forward-Looking Statements This Report contains certain forward-looking statements pertaining to, among other things, our future results of operations, cash flow needs and liquidity, acquisitions, and other aspects of our business. We may make similar forward-looking statements from time to time. These statements are based largely on our 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 our business strategy or an inability to execute this strategy due to changes in our industry or the economy in general, difficulties associated with assimilating acquisitions, the emergence of new or growing competitors, seasonal and quarterly fluctuations, governmental regulations, 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 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements: Page Report of Independent Accountants 18 Consolidated Balance Sheets 19 Consolidated Statements of Operations 20 Consolidated Statements of Cash Flows 21 Consolidated Statements of Shareholders' Equity 22 Notes to Consolidated Financial Statements 23 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 37 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. Report of Independent Accountants To the Board of Directors and Shareholders of FinishMaster, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of FinishMaster, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Indianapolis, Indiana February 19, 2002
CONSOLIDATED BALANCE SHEETS FinishMaster, Inc. December 31, December 31, (In thousands, except share amounts) 2001 2000 ASSETS Current assets Cash $ 2,977 $ 1,513 Accounts receivable, net of allowance for doubtful accounts of $1,434 and $1,337, respectively 28,401 29,063 Inventory 50,096 63,346 Refundable income taxes 543 710 Deferred income taxes 3,947 3,459 Prepaid expenses and other current assets 3,627 4,349 ----------------------------------------- Total current assets 89,591 102,440 Property and equipment Land 368 368 Vehicles 1,205 1,432 Buildings and improvements 6,291 5,903 Machinery, equipment and fixtures 12,682 11,922 ----------------------------------------- 20,546 19,625 Accumulated depreciation (12,715) (10,649) ----------------------------------------- 7,831 8,976 Other assets Intangible assets, net 102,273 102,858 Deferred income taxes 1,770 1,870 Other 571 2,173 ----------------------------------------- 104,614 106,901 ----------------------------------------- $ 202,036 $ 218,317 ========================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 37,383 $ 46,470 Amounts due to LDI 812 506 Accrued compensation and benefits 8,578 6,033 Other accrued expenses and current liabilities 2,124 3,232 Current maturities of long-term debt 7,607 10,990 ----------------------------------------- Total current liabilities 56,504 67,231 Long-term debt, less current maturities 77,868 90,652 Other long-term liabilities 5,129 3,628 Commitments and contingencies (Note 8) Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized; no shares issued and outstanding - - Common stock, $1 stated value; 25,000,000 shares authorized; 7,638,863 and 7,540,804 shares issued and outstanding 7,638 7,540 Additional paid-in capital 27,936 27,367 Accumulated comprehensive loss (1,146) - Retained earnings 28,107 21,899 ----------------------------------------- 62,535 56,806 ----------------------------------------- $ 202,036 $ 218,317 =========================================
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS FinishMaster, Inc. Year Year Year Ended Ended Ended December 31, December 31, December 31, (In thousands, except per share data) 2001 2000 1999 Net sales $ 333,468 $ 337,213 $ 324,490 Cost of sales 209,285 214,218 207,488 -------------------------------------------------------------- Gross margin 124,183 122,995 117,002 Expenses Operating 52,485 52,195 49,029 Selling, general and administrative 44,111 44,928 42,436 Amortization of intangible assets 5,892 6,300 6,792 -------------------------------------------------------------- 102,488 103,423 98,257 -------------------------------------------------------------- Income from operations 21,695 19,572 18,745 Interest expense, net 8,547 11,604 10,802 -------------------------------------------------------------- Income before income taxes 13,148 7,968 7,943 Income tax expense 6,445 4,241 4,232 -------------------------------------------------------------- Net income before extraordinary loss $ 6,703 $ 3,727 $ 3,711 Extraordinary loss on early extinguishment of debt, net of tax benefit of $324 495 - - ============================================================== Net income $ 6,208 $ 3,727 $ 3,711 ============================================================== Net income per share - Basic and Diluted Net income before extraordinary loss $ 0.88 $ 0.49 $ 0.49 Extraordinary loss, net of income taxes $ 0.07 $ - $ - ------------------- ------------------- ----------------- Net income per share (Note 10): Basic $ 0.81 $ 0.49 $ 0.49 ============================================================== Diluted $ 0.81 $ 0.49 $ 0.49 ============================================================== Weighted average shares outstanding - Basic 7,638 7,540 7,536 ============================================================== Weighted average shares outstanding - Diluted 7,648 7,551 7,545 ==============================================================
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS FinishMaster, Inc. Year Year Year Ended Ended Ended December 31, December 31, December 31, (In thousands) 2001 2000 1999 Operating activities Net income $ 6,208 $ 3,727 $ 3,711 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,418 11,144 11,019 Deferred income taxes (388) 222 1,125 Loss on extinguishment of debt 495 - - Other (97) - - Gain on disposal of property and equipment (18) - - Changes in operating assets and liabilities (excluding the impact of acquisitions): Accounts receivable, net 2,182 1,854 785 Inventories 15,976 (4,530) 1,639 Prepaid and other assets 552 (4,091) 440 Accounts payable and other liabilities (7,463) 21,320 (9,938) -------------------------------------------------------------- Net cash provided by operating activities 27,865 29,646 8,781 Investing activities Business acquisitions and payments under earn-out provisions for prior acquisitions (5,001) (1,853) (1,280) Purchases of property and equipment (703) (3,110) (973) Proceeds from disposal of property and equipment 39 10 20 Other (188) (106) (138) -------------------------------------------------------------- Net cash used in investing activities (5,853) (5,059) (2,371) Financing activities Proceeds from the exercise of stock options 7 - - Debt issuance costs (1,284) (166) (155) Proceeds from debt 167,448 95,357 98,280 Repayment of debt (186,719) (118,884) (104,925) -------------------------------------------------------------- Net cash used in financing activities (20,548) (23,693) (6,800) -------------------------------------------------------------- Increase(decrease) in cash 1,464 894 (390) Cash at beginning of period 1,513 619 1,009 -------------------------------------------------------------- Cash at end of period $ 2,977 $ 1,513 $ 619 ============================================================== Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 9,464 $ 10,687 $ 10,998 ============================================================== Taxes $ 6,009 $ 4,230 $ 2,158 ==============================================================
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FinishMaster, Inc. Accumulated Common Paid-in Retained Comprehensive (In thousands) Stock Capital Earnings Loss Totals --------------- ---------------- -------------- ------------------- --------------- Balances at December 31, 1998 $ 7,536 $ 27,351 $ 14,461 $ - $ 49,348 Stock grants issued 2 8 - - 10 Net income for the year - - 3,711 - 3,711 --------------- ---------------- -------------- ------------------- --------------- Balances at December 31, 1999 $ 7,538 $ 27,359 $ 18,172 $ - $ 53,069 Stock grants issued 2 8 - - 10 Net income for the year - - 3,727 - 3,727 --------------- ---------------- -------------- ------------------- --------------- Balances at December 31, 2000 $ 7,540 $ 27,367 $ 21,899 $ - $ 56,806 Comprehensive income (loss): Net income for the year - - 6,208 - 6,208 Other comprehensive income (loss): Interest rate swap - - - (1,146) (1,146) --------------- Total comprehensive income (loss) $ 5,062 Stock grants issued and options exercised 98 569 - - 667 --------------- ---------------- -------------- ------------------- --------------- Balances at December 31, 2001 $ 7,638 $ 27,936 $ 28,107 $ (1,146) $ 62,535 =======================================================================================
The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FinishMaster, Inc. 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 February 15, 2002, the Company operated 159 sales outlets and three major distribution centers in 23 states and is organized into five major geographical regions - North East, Florida/Texas, Mid-Atlantic, Central, and Western. The Company aggregates its five geographic regions into a single reportable segment. The Company has approximately 15,000 customer charge accounts to which it provides a comprehensive selection of brand name products supplied by BASF, DuPont, 3M and PPG, in addition to its own FinishMaster PrivateBrand refinishing accessory products. The Company is highly dependent on the key suppliers outlined above, which account for approximately 85% of the Company's purchases. Principles of Consolidation: The Company's consolidated financial statements include the accounts of FinishMaster and its wholly owned subsidiaries from the dates of their respective acquisition. All significant intercompany accounts and transactions have been eliminated. References to the Company or FinishMaster throughout this report relate to the consolidated entity. Majority Shareholder: Lacy Distribution, Inc. ("Distribution"), an Indiana corporation, which is an indirect wholly-owned subsidiary of LDI, Ltd., ("LDI"), an Indiana limited partnership, owns 5,587,516 shares of the Company's common stock, representing 73.1% of the outstanding shares at December 31, 2001, and 74.1% of the outstanding shares at December 31, 2000, and 1999. Throughout the remainder of these financial statements, LDI and Distribution are collectively referred to as "LDI." Transactions with Majority Shareholder: The Company reimburses its majority shareholder, LDI, for the cost of insurance and certain other expenses. Those expenses amounted to $782,000, $183,000, and $158,000 for the years ended December 31, 2001, 2000, and 1999, respectively. In addition, the Company leases from LDI its corporate office space. Lease expense and payments for repairs and maintenance to LDI totaled approximately $206,000, $202,000, and $214,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The Company also has subordinated debt payable to LDI (see Note 4, Long-Term Debt). Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 2001, and 2000, checks drawn on future deposits and borrowings of $3,863,000 and $10,622,000, respectively, were classified as accounts payable. These amounts represent outstanding checks in excess of funds on deposit. Receivables: Trade accounts receivable represents amounts due primarily from automotive collision repair shops and dealerships. Trade receivables are typically not collateralized. No single customer exceeds 10% of the Company's receivables at December 31, 2001. 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 is stated at cost and includes expenditures for new facilities, equipment and improvements that materially extend the useful lives of existing assets. Expenditures for normal repairs and maintenance are charged to expense as incurred. Depreciation is computed using a combination of straight-line and accelerated methods over the following range of estimated useful lives: Buildings & improvements........................................Up to 30 years Vehicles........................................................ Up to 5 years Leasehold improvements.......................................... Life of lease Machinery, equipment & fixtures................................. 3 to 12 years Depreciation expense for 2001, 2000 and 1999 was $2,287,000, $2,215,000 and $2,427,000, respectively. Revenue Recognition: Revenues from product sales are recognized at the time of shipment or delivery to the customer. The company has reviewed the accounting and disclosure requirements of Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" and has determined that it is in compliance. Income Taxes: Deferred income taxes are recognized for the temporary differences between the tax basis of assets and liabilities and their financial reporting amounts in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The income tax provision is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Intangibles: Intangibles consist primarily of the excess of cost over the fair market value of net assets of acquired businesses ("goodwill"). Intangible assets, including goodwill and non-compete agreements, are amortized on a straight-line basis over periods ranging from 5 to 30 years. The majority of the Company's goodwill relates to its November 1997 acquisition of Thompson and is being amortized over 30 years. The carrying value of goodwill is periodically reviewed to determine if an impairment has occurred. The Company measures for potential impairment of recorded goodwill based on the estimated undiscounted cash flows of acquired entities over the remaining amortization period. If the estimated future undiscounted cash flows are less than the carrying amount of such goodwill, an impairment would be deemed to have occurred and a loss would be recognized. Such loss would be determined based upon expected discounted cash flows or market prices. Debt issuance costs are amortized over the term of the related debt agreements. Internal Use Software: Costs incurred to develop or obtain software for internal use within the business are capitalized in accordance with the provisions of Accounting Standards Executive Committee Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." During 2001 and 2000, the Company capitalized approximately $0 and $2,223,000, respectively, of costs related to efforts to migrate to a single information technology platform. Once placed in service, software costs incurred are depreciated over their estimated useful life that range from 3 to 5 years. Derivative Instruments and Hedging Activities: The Company utilizes derivative financial instruments, principally interest rate swaps, to reduce its exposure to fluctuations in interest rates. These instruments are recorded on the balance sheet at their fair value. Changes in the fair value are recorded each period in the Accumulated Comprehensive Loss section of Shareholders' Equity. Shipping and Handling Fees and Costs: The Company includes the cost of delivering the product to the customer in the operating expense section of the consolidated statements of operations. The total delivery costs incurred for 2001, 2000, and 1999 are estimated at $16,974,000, $17,564,000, and $17,035,000, respectively. Reclassification: Certain amounts in the consolidated financial statements have been reclassified to conform to the current year presentation. 2. ACQUISITIONS The following table summarizes the assets acquired and liabilities assumed in acquisitions made by FinishMaster in each of the periods presented. All 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, if appropriate. Operating results of acquired entities have been included in FinishMaster's consolidated financial statements from the respective date of purchase.
Year Year Year Ended Ended Ended December 31, December 31, December 31, (In thousands) 2001 2000 1999 Accounts receivable $ 1,520 $ 782 $ 708 Inventory 2,670 1,985 725 Equipment and other 506 370 202 Intangible assets 5,076 1,278 650 ---------------------------------------------------------- 9,772 4,415 2,285 Less liabilities assumed 1,075 513 714 ---------------------------------------------------------- Acquisition price 8,697 3,902 1,571 Acquisition debt 3,046 2,049 291 Stock grants 650 - - ---------------------------------------------------------- Net assets of businesses acquired, net of acquisition debt $ 5,001 $ 1,853 $ 1,280 ========================================================== Number of acquisitions 2 6 6 ----------------------------------------------------------
During 2001, the Company completed two acquisitions: Badger and Scotty's Paint Supply, Inc. The acquisitions involved operations in Minnesota, Illinois, Wisconsin, and Florida, and were funded with cash, debt and common stock. During 2000, the Company completed six acquisitions. The acquisitions occurred in California, South Carolina, Washington DC, Ohio and Texas, and were funded with cash and debt. During 1999, the Company completed six acquisitions. The acquisitions occurred in Illinois, New Jersey and Texas, and were funded with cash and debt. 3. INTANGIBLE ASSETS Intangible assets consisted of the following: December 31, December 31, (In thousands) 2001 2000 Goodwill $ 125,121 $ 121,018 Non-compete agreements 12,426 12,262 Other intangible 573 - Debt issuance costs 1,329 2,179 -------------------------------------- 139,449 135,459 Less accumulated amortization 37,176 32,601 -------------------------------------- Intangible assets, net $ 102,273 $ 102,858 ====================================== 4. LONG-TERM DEBT Long-term debt consisted of the following:
December 31, December 31, (In thousands) 2001 2000 Revolving Credit Facility $ 21,590 $ 35,100 Acquisition Revolving Credit Facility - 1,797 Term Credit Facility 37,000 28,495 Senior Subordinated Debt 19,850 30,000 Notes payable to former owners of acquired businesses with interest at various rates up to 10%, due at various dates through 2007 5,578 4,624 Other long-term financing at various rates, due at various dates through 2010 1,457 1,626 ---------------------------------------- 85,475 101,642 Less current maturities 7,607 10,990 ---------------------------------------- $ 77,868 $ 90,652 ========================================
Revolving Credit Facility: On March 29, 2001, the Company entered into a new $100.0 million senior secured credit facility with a syndicate of banks. The new senior secured credit facility consists of $40.0 million term credit facility and a $60.0 million revolving credit facility. The revolving credit facility is limited to the lesser of (1) $60 million less letter of credit obligations, or (2) 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 June 30, 2006. Interest rates and payment dates are variable based upon interest rate and term options selected by management. Interest rates at December 31, 2001 on outstanding revolving credit borrowings varied from 4.17% to 5.00%. Revolving credit borrowings are subject to interest rates, which fluctuate based on the Company's Leverage Ratio, as defined in the Credit Facility, which in 2001 was 2.25% over LIBOR or 0.25% over prime in the case of Floating Rate Advances. For a period of six months after the close of the transaction, the interest rate was fixed at LIBOR plus 3.00%. The Company is charged an annual administrative fee of $35,000, and an annual commitment fee, payable monthly, that ranges between 0.375% and 0.5% of the unused portion of the revolving line of credit. At December 31, 2001, the Company had $25.0 million of available borrowings under its revolving credit facility. Term Credit Facility: The term loan, which expires on June 30, 2006, requires quarterly principal payments that began on June 30, 2001. Quarterly principal payments in 2001 were $1.0 million and increase in amount each year over the remaining term of the loan. Interest rates and payment dates are variable based upon interest rate and term options selected by management. Interest rates at December 31, 2001 were at 4.84% on outstanding term borrowings. Term borrowings are subject to interest rates, which fluctuate based on the Company's Leverage Ratio, as defined in the Credit Facility, of 2.25% over LIBOR. To convert the Company's new senior term credit facility from a floating to a fixed interest rate obligation, the Company entered into interest rate swap agreements in March 2001 with notional amounts of $40.0 million. The notional amounts under the swap agreements are reduced according to the senior term credit facility's amortization schedule. The weighted average fixed interest rate under these agreements is 5.43%. In order to maintain effectiveness, the quarterly settlement terms of the swap agreements are established to match the interest payments on the term credit facility. The decrease in the fair value of the interest rate swap from the date of inception was $1.1 million, which was recorded in the Accumulated Comprehensive Loss section of the Shareholders' Equity. Combined Facilities: Substantially all of the Company's assets serve as collateral for the revolving credit facility and term credit facility. These credit agreements contain various quarterly and annual covenants pertaining to, among other things, achieving a minimum fixed charge coverage ratio, a maximum leverage ratio, a maximum senior debt leverage ratio, a minimum interest expense coverage ratio and a minimum consolidated net worth level. The covenants also limit purchases and sales of assets and restrict payment of dividends. If any default as described in the credit facilities occurs with respect to the Company, the obligations of the lenders to make additional loans automatically terminates and the outstanding obligations become immediately due and payable. As of December 31, 2001 and 2000, the Company was in compliance with its covenants. Senior Subordinated Debt: Concurrent with funding the senior secured credit facility, the Company repaid its $30.0 million senior subordinated term credit facility and entered into a new $20.0 million senior subordinated term credit facility with LDI. All outstanding principal is due on March 29, 2007, and interest is paid quarterly at a rate of 12.0% per annum. Early Extinquishment of Debt: An extraordinary loss on the early extinguishment of debt of $0.5 million, net of $0.3 million in income tax benefit, resulted from the write-off of the unamortized debt issuance costs related to the early extinguishment of our senior secured and senior subordinated credit facilities in March 2001. Prior Credit Facilities: Prior to March 29, 2001, the Company had a revolving credit facility with a syndicate of banks, limited to the lesser of (1) $60 million less letter of credit obligations, or (2) 80 percent of eligible accounts receivable plus 65 percent of eligible inventory plus $7.5 million less letter of credit obligations and a reserve for three months facility rent. Interest rates and payment dates were variable based upon interest rate and term options selected by management. Interest rates at December 31, 2000 on outstanding revolving credit borrowings varied from 8.91% to 10.25%. Revolving credit borrowings were subject to interest rates, which fluctuated based on the Company's Leverage Ratio, as defined in the Credit Facility, which in 2000 was 2.25% over LIBOR or 0.75% over prime in the case of Floating Rate Advances. Effective January 1, 2001, the interest rates were 2.00% over LIBOR or 0.50% over prime based upon the Company's Leverage Ratio as of September 30, 2000. The Company was charged an annual administrative fee of $50,000, and an annual commitment fee, payable monthly, that ranged between 0.2% and 0.5% of the unused portion of the revolving line of credit. At December 31, 2000, the Company had $24.9 million of available borrowings under its revolving credit facility. The Company also had a revolving credit facility with a syndicate of banks to finance future business acquisitions. Interest rates and payments were based upon one of two options selected by management: LIBOR plus 3.0% or an alternative base rate that was prime plus 1%. The Company was charged a commitment fee of 0.5% on the average daily unused portion of the facility, due quarterly. This facility was cancelled on March 29, 2001. The Company also had a term credit facility that required quarterly principal payments beginning on March 31, 1999. Quarterly principal payments in 2000 were $1.5 million. Interest rates and payment dates were variable based upon interest rate and term options selected by management. Interest rates at December 31, 2000 were at 8.98% on outstanding term borrowings. Term borrowings were subject to interest rates, which fluctuated based on the Company's Leverage Ratio, as defined in the Credit Facility, of 2.25% over LIBOR. Effective January 1, 2001, the interest rate was 2.00% over LIBOR based upon the Company's Leverage Ratio as of September 30, 2000. This facility was refinanced on March 29, 2001. The aggregate principal payments for the next five years subsequent to December 31, 2001 are as follows: (In thousands) 2002 7,607 2003 7,449 2004 9,312 2005 10,966 2006 29,102 Thereafter 21,039 --------------- $ 85,475 =============== The carrying amounts of certain financial instruments such as cash, accounts receivable, accounts payable, and long-term debt approximate their fair values. The fair value of long-term debt is estimated using discounted cash flows and the Company's current incremental borrowing rates for similar types of arrangements. 5. EMPLOYEE SAVINGS PLAN The Company has an Employee Savings Plan ("Plan"), which covers substantially all employees who have met certain requirements as to date of service. The Company currently contributes on a graduated scale up to 25% of each $1.00 contributed by employees up to 6% of their annual compensation. Effective January 1, 2002, the Company doubled the graduated scale up to 50% of each $1.00 contributed by employees up to 6% of their annual compensation. Company contributions charged to operations under the Plan were approximately $316,000, $279,000, and $213,000 for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, the Company may contribute to the Plan, at the discretion of the Board of Directors, an additional amount up to 4% of employees' annual compensation. In 2001, a discretionary contribution of 2% of employees' annual compensation was awarded in the amount of $895,000; no discretionary contribution was made in 2000. 6. STOCK OPTIONS The Company has a stock option plan that was amended on April 29, 1999, under which officers, key employees, and directors may be granted options to purchase stock. The amendments included increasing the number of shares of common stock reserved for issuance under the plan from 600,000 to 750,000 and changing the method for determining the exercise price of the options on the date of grant. All options granted under this plan have been granted at a price not less than the fair market value of the Company's common stock on the date of grant and have a maximum life of ten years from the date of the grant. Certain stock options granted in 2001, 2000, and 1999 were also fully vested at the date of issue, while others vest over periods ranging from one to four years. The Company recognizes compensation expense related to its stock option plan in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Options are granted at a price not less than the fair market value of the Company's common stock on the date of grant, therefore, no compensation expense is recognized. Had compensation expense been determined at the date of grant based on the fair value of the awards consistent with SFAS 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:
Year Year Year Ended Ended Ended December 31, December 31, December 31, (In thousands, except per share data) 2001 2000 1999 Net income before extraordinary loss As reported $ 6,703 $ 3,727 $ 3,711 Pro forma $ 6,538 $ 3,135 $ 3,201 Extraordinary loss on early extinguishment of debt, net As reported $ 495 $ - $ - Pro forma $ 495 $ - $ - Net income As reported $ 6,208 $ 3,727 $ 3,711 Pro forma $ 6,043 $ 3,135 $ 3,201 Net income per share before extraordinary loss As reported, Basic $ 0.88 $ 0.49 $ 0.49 As reported, Diluted $ 0.88 $ 0.49 $ 0.49 Pro forma, Basic $ 0.86 $ 0.42 $ 0.42 Pro forma, Diluted $ 0.86 $ 0.42 $ 0.42 Extraordinary loss on early extinguishment of debt, net As reported $ 0.07 $ - $ - Pro forma $ 0.07 $ - $ - Net income per share As reported, Basic $ 0.81 $ 0.49 $ 0.49 As reported, Diluted $ 0.81 $ 0.49 $ 0.49 Pro forma, Basic $ 0.79 $ 0.42 $ 0.42 Pro forma, Diluted $ 0.79 $ 0.42 $ 0.42
The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions for the years ended December 31, 2001, 2000, and 1999 respectively: risk free interest rate of 5.0%, 6.4%, and 5.6%; no dividend yield; expected option lives of nine years; and stock price volatility of 42.9%, 48.5%, and 50.4%.
December 31, December 31, December 31, 2001 2000 1999 ---- ---- ---- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding-beginning of year 612,334 $ 8.13 524,034 $ 8.35 426,490 $ 8.89 Granted 15,936 $ 7.74 92,200 $ 7.28 100,024 $ 6.03 Exercised 1,000 $ 6.59 - $ - - $ - Forfeited 34,090 $ 7.87 3,900 $ 8.50 2,480 $ 8.96 -------------------------------------------------------------------------------------- Outstanding-end of year 593,180 $ 8.14 612,334 $ 8.13 524,034 $ 8.35 ====================================================================================== Exercisable-end of year 578,780 $ 8.06 563,534 $ 8.06 363,034 $ 8.61 ======================================================================================
Exercise Price Range -------------------------------------------------------------- $5.34-$8.25 $10.25-$11.55 Total ------------------- ------------------- -------------------- Options outstanding 396,060 197,120 593,180 Weighted average exercise price $ 6.80 $ 10.83 $ 8.14 Average remaining contractual life 7.5 years 4.5 years 6.6 years Options exercisable 396,060 182,720 578,780 Weighted average exercise price $ 6.80 $ 10.81 $ 8.06
The weighted-average fair value of options granted during the years ended December 31, 2001, 2000, and 1999 were $4.66, $4.75, and $3.84, per option, respectively, where the exercise price of the options equaled the market price on the date of grant. Certain options were granted during 2000 and 1999 where the exercise price of the options exceeded the market value of the stock on the date of grant. The weighted-average fair value of these options was $4.61 and $3.67 per option at December 31, 2000 and 1999, respectively. The remaining contractual life of options outstanding at December 31, 2001 is 6.6 years. 7. INCOME TAXES The provision for federal and state income taxes consisted of the following: Year Year Year Ended Ended Ended December 31, December 31, December 31, (In thousands) 2001 2000 1999 Current: Federal $ 5,562 $ 3,202 $ 2,383 State 1,272 817 724 ---------------------------------------------------------- 6,834 4,019 3,107 ---------------------------------------------------------- Deferred: Federal (334) 193 952 State (55) 29 173 ---------------------------------------------------------- (389) 222 1,125 ---------------------------------------------------------- $ 6,445 $ 4,241 $ 4,232 ========================================================== The total provision for federal and state income taxes consisted of the following:
Year Year Year Ended Ended Ended December 31, December 31, December 31, (In thousands) 2001 2000 1999 Provision / (Benefit) from continuing operations $ 6,445 $ 4,241 $ 4,232 Provision / (Benefit) from extraordinary charge (324) - - ------------------------------------------------------------ $ 6,121 $ 4,241 $ 4,232 ------------------------------------------------------------
The reconciliation of income taxes computed at the federal statutory tax rate to the Company's effective tax rate is as follows:
Year Year Year Ended Ended Ended December 31, December 31, December 31, 2001 2000 1999 Federal statutory tax rate 34.0% 34.0% 34.0% State tax provision 7.0% 7.0% 7.5% Nondeductible intangible amortization 6.3% 8.4% 8.4% Other 1.7% 3.8% 3.4% ------------------------------------------------------------- Effective tax rate 49.0% 53.2% 53.3% =============================================================
Significant components of the Company's deferred tax assets as of December 31, 2001, and 2000 are as follows: December 31, December 31, (In thousands) 2001 2000 Deferred tax assets: Depreciation $ 1,038 $ 553 Amortization of intangibles 634 1,167 Allowances 1,264 856 Inventory 1,398 1,065 Accrued expenses and other 1,383 1,688 -------------------------------------- $ 5,717 $ 5,329 ====================================== 8. COMMITMENTS AND CONTINGENCIES FinishMaster occupies facilities and uses equipment and vehicles under operating lease agreements requiring annual rental payments approximating the following amounts for the five years subsequent to December 31, 2001: (In thousands) 2002 $ 7,928 2003 6,621 2004 4,577 2005 2,928 2006 1,295 Thereafter 670 --------------- $ 24,019 =============== Rent expense charged to operations, including short-term leases, totaled approximately $8.5 million, $8.4 million, and $8.5 million for the years ended December 31, 2001, 2000, and 1999, respectively. 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 payment terms, and other incentive programs to the Company. To the extent these programs are changed or terminated, there could be a material adverse impact to the Company. In January 1999, the Company was named in an unfair business practices lawsuit by an automotive paint distributor located in the State of California. The plaintiff in such suit alleged that we offered, in a manner that injured the plaintiff, rebates and cash bonuses to businesses in the Southern California area if those businesses would buy exclusively from us and use our products. The plaintiff claimed damages in the amount of $3.8 million, trebled to $11.4 million. During 2000, the court granted summary judgment in our favor. The plaintiff has not appealed the judgment against it, and the decision is now final. The Company is subject to various claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, environmental, product liability, automobile, taxes, discrimination, employment and other matters. Our management believes that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on our financial condition, results of operations or cash flows. 9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table presents the quarterly results of operations for each period presented.
Three Months ended ---------------------------------------------------------------------------- March 31, June 30, September 30, December 31, (In thousands, except per share data) 2001 2001 2001 2001 ---------------- ---------------- ------------------ ------------------- Net sales $ 83,235 $ 86,241 $ 83,706 $ 80,286 Gross margin 30,353 31,660 31,531 30,639 Income from operations 4,795 5,911 5,617 5,372 Income before income taxes 2,487 3,936 3,208 3,517 Net income before extraordinary loss 1,334 1,982 1,619 1,768 Net income $ 839 $ 1,982 $ 1,619 $ 1,768 Net income before extraordinary loss - Diluted $ 0.18 $ 0.26 $ 0.21 $ 0.23 Extraordinary loss, net of tax - Diluted 0.07 - - - ------------- ------------- --------------- ---------------- Net income per share - Diluted $ 0.11 $ 0.26 $ 0.21 $ 0.23 Three Months ended ---------------------------------------------------------------------------- March 31, June 30, September 30, December 31, (In thousands, except per share data) 2000 2000 2000 2000 ---------------- ---------------- ------------------ ------------------- Net sales $ 84,670 $ 87,343 $ 85,600 $ 79,600 Gross margin 29,933 31,359 31,391 30,312 Income from operations 4,643 5,457 4,980 4,492 Income before income taxes 1,755 2,407 2,012 1,794 Net income $ 904 $ 1,061 $ 957 $ 805 Net income per share - Diluted $ 0.12 $ 0.14 $ 0.13 $ 0.10
10. NET INCOME PER SHARE In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires disclosure of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed based upon the weighted average number of common shares outstanding, adjusted for the effect of dilutive stock options. All net income per share amounts reported herein are in accordance with the provisions of this Statement. The following table sets forth the computation of basic and diluted net income per share:
Year Year Year Ended Ended Ended December 31, December 31, December 31, (In thousands, except per share data) 2001 2000 1999 Numerator: Net income before extraordinary loss $ 6,703 $ 3,727 $ 3,711 Extraordinary loss on early extinguishment of debt, net of tax benefit of $324 495 - - ---------------------------------------------------------- Net income $ 6,208 $ 3,727 $ 3,711 ---------------------------------------------------------- Denominator: Basic-weighted average shares 7,638 7,540 7,536 Effect of dilutive stock options 10 11 9 ---------------------------------------------------------- Diluted-weighted average shares 7,648 7,551 7,545 ---------------------------------------------------------- Net income per share - Basic and Diluted Net income before extraordinary loss $ 0.88 $ 0.49 $ 0.49 Extraordinary loss, net of tax benefit 0.07 - - ---------------------------------------------------------- Basic net income per share $ 0.81 $ 0.49 $ 0.49 ========================================================== Diluted net income per share $ 0.81 $ 0.49 $ 0.49 ==========================================================
For all years presented, antidilutive stock options were excluded in the determination of dilutive earnings per share. 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, 2001. 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, 2001. 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, 2001. 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, 2001. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents have been filed as a part of this report, or where noted, incorporated by reference: (1) Financial Statements: The Consolidated Financial Statements of the Company are included in Item 8 of this report. (2) Financial Statement Schedule: The financial statement schedule filed in response to Item 8 and Item 14(d) of Form 10-K is listed in the Index to Consolidated Financial Statements included in Item 8 of this report. (3) The Exhibits filed herewith or incorporated herein by reference are set forth in the Exhibit Index on page 35. (b) Reports on Form 8-K: None 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 28, 2002 FINISHMASTER, INC. By: /s/ Robert R. Millard ----------------------- Robert R. Millard Senior Vice President, Finance And Chief Financial 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 28, 2002 Chairman of the Board and Chief Executive Officer (2) Principal Financial and Accounting Officer: /s/ Robert R. Millard - --------------------- Robert R. Millard March 28, 2002 Senior Vice President, Finance and Chief Financial Officer (3) A Majority of the Board of Directors: /s/ Andre B. Lacy - ----------------- Andre B. Lacy March 28, 2002 Director /s/ Thomas U. Young - ------------------- Thomas U. Young March 28, 2002 Director /s/ David N. Shane - ------------------ David Shane March 28, 2002 Director /s/ Margot L. Eccles - -------------------- Margot L. Eccles March 28, 2002 Director /s/ Wes N. Dearbaugh - -------------------- Wes N. Dearbaugh March 28, 2002 Director /s/ Peter L. Frechette - ---------------------- Peter L. Frechette March 28, 2002 Director /s/ David W. Knall - ------------------ David W. Knall March 28, 2002 Director /s/ Michael L. Smith - -------------------- Michael L. Smith March 28, 2002 Director /s/ Walter S. Wiseman - --------------------- Walter S. Wiseman March 28, 2002 Director FINISHMASTER, INC. AND SUBSIDIARIES ANNUAL REPORT ON FORM 10-K EXHIBITS Exhibit No. Description of Document 2.1 Agreement and Plan of Merger, dated as of October 14, 1997, by and among FinishMaster, Inc., FMST Acquisition Corporation and Thompson PBE, Inc. (incorporated by reference to Exhibit (c)(2) of Schedule 14D-1 previously filed by FMST Acquisition Corporation on October 21, 1997). 2.2 Agreement and Plan of Merger, dated February 16, 1998, by and among FinishMaster, Inc., LDI AutoPaints, Inc. and Lacy Distribution, Inc. (previously filed with Form 10-K dated March 31, 1998) 3.1 Articles of Incorporation of FinishMaster, Inc., an Indiana corporation, as amended June 30, 1998 (previously filed with Form 10-Q dated August 14, 1998) 3.2* Amended and Restated Code of Bylaws of FinishMaster, Inc., an Indiana corporation 10.1 FinishMaster, Inc. Stock Option Plan (Amended and Restated as of April 29, 1999) (previously filed with Registrant's proxy statement on Schedule 14/A dated April 9, 1999) 10.2 FinishMaster, Inc. Deferred Compensation Plan dated as of November 1, 2000 (previously filed with form 10-K dated March 29, 2001) 21* Subsidiaries of the Registrant 23* Consent of Independent Accountants 99(a) Credit Agreement, dated as of March 29, 2001, among FinishMaster, Inc., the Institutions from Time to Time Parties Thereto as Lenders and National City Bank of Indiana, as Agent (previously filed with Form 10-Q dated May 14, 2001) 99(b)* First Amendment to Credit Agreement dated as of December 14, 2001 among FinishMaster, Inc., the Institutions from Time to Time Parties Thereto as lenders and National City Bank of Indiana, as agent 99(c) Subordinated Note Agreement, dated as of March 29, 2001, by and between FinishMaster, Inc. and LDI, Ltd. (previously filed with Form 10-Q dated May 14, 2001) *filed herein Schedule II - Valuation and Qualifying Accounts (In thousands)
Charged Balance Balance at to Costs at End Beginning and of Description of Period Expenses Deductions Period - ----------------------------------------------------------------------------------------------------- Year ended December 31, 2001: Allowance for doubtful accounts $ 1,337 $ 723 $ 626 (A) $ 1,434 Year ended December 31, 2000: Allowance for doubtful accounts $ 1,419 $ 1,011 $ 1,093 (A) $ 1,337 Year ended December 31, 1999: Allowance for doubtful accounts $ 1,680 $ 433 $ 694 (A) $ 1,419
(A) Represents uncollectible accounts written off, less recoveries. EX-3.(II) 3 ex3_2.txt BY-LAWS Exhibit 3.2 ----------- AMENDED AND RESTATED CODE OF BY-LAWS OF FINISHMASTER, INC. ARTICLE I Offices Section 1. Principal Office. The principal office (the "Principal Office") of FinishMaster, Inc. (the "Corporation") shall be at 54 Monument Circle, Suite 700, Indianapolis, Indiana, or such other place as shall be determined by resolution of the Board of Directors of the Corporation (the "Board"). Section 2. Other Offices. The Corporation may have such other offices at such other places within or without the State of Indiana as the Board may from time to time designate, or as the business of the Corporation may require. ARTICLE II Shareholder Meetings Section 1. Place of Meeting. Every meeting of the shareholders of the Corporation (the "Shareholders") shall be held at the Principal Office, unless a different place is specified in the notice or waiver of notice of such meeting or by resolution of the Board or the Shareholders, in which event such meeting may be held at the place so specified, either within or without the State of Indiana. Section 2 Annual Meeting. The annual meeting of the Shareholders (the "Annual Meeting") shall be held each year within 120 days after the end of the Corporation's fiscal year, for the purpose of electing directors of the Corporation ("Directors") and for the transaction of such other business as may legally come before the Annual Meeting. If for any reason the Annual Meeting shall not be held within the time herein provided, the same may be held at any time thereafter, or the business to be transacted at such Annual Meeting may be transacted at any special meeting of the Shareholders (a "Special Meeting") called for that purpose. Section 3. Notice of Annual Meeting. Written or printed notice of the Annual Meeting, stating the date, time and place thereof, shall be delivered or mailed by the Secretary or an Assistant Secretary to each Shareholder of record entitled to notice of such Annual Meeting, at such address as appears on the records of the Corporation, at least ten and not more than sixty days before the date of such Annual Meeting. Section 4. Special Meetings. Special Meetings, for any purpose or purposes (unless otherwise prescribed by law), may be called by only the Chairman of the Board of Directors (the "Chairman"), or by the Board, pursuant to a resolution adopted by a majority of the total number of Directors of the Corporation, to vote on the business proposed to be transacted thereat. All requests for Special Meetings shall state the purpose or purposes thereof, and the business transacted at such Special Meeting shall be confined to the purposes stated in the call and matters germane thereto. Section 5. Notice of Special Meetings. Written or printed notice of all Special Meetings, stating the date, time, place and purpose or purposes thereof, shall be delivered or mailed by the Secretary or the Chairman, the President or any Vice President calling the Special Meeting to each Shareholder of record entitled to notice of such Special Meeting, at such address as appears on the records of the Corporation, at least ten and not more than sixty days before the date of such Special Meeting. Section 6. Waiver of Notice of Meetings. Notice of any Annual or Special Meeting (a "Meeting") may be waived in writing by any Shareholder, before or after the date and time of the Meeting specified in the notice thereof, by a written waiver delivered to the Corporation for inclusion in the minutes or filing with the corporate records. A Shareholder's attendance at any Meeting in person or by proxy shall constitute a waiver of (a) notice of such Meeting, unless the Shareholder at the beginning of the Meeting objects to the holding of or the transaction of business at the Meeting, and (b) consideration at such Meeting of any business that is not within the purpose or purposes described in the Meeting notice, unless the Shareholder objects to considering the matter when it is presented. Section 7. Quorum. At any Meeting, the holders of a majority of the voting power of all shares of the Corporation (the "Shares") issued and outstanding and entitled to vote at such Meeting, represented in person or by proxy, shall constitute a quorum for the election of Directors or for the transaction of other business, unless otherwise provided by law, the Articles of Incorporation of the Corporation, as the same may, from time to time, be amended (the "Articles")) or this Code of By-Laws, as the same may, from time to time, be amended (these "By-Laws"). If, however, a quorum shall not be present or represented at any Meeting, the Shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the Meeting from time to time, without notice other than announcement at the Meeting of the date, time and place of the adjourned Meeting, unless the date of the adjourned Meeting requires that the Board fix a new record date (the "Record Date") therefor, in which case notice of the adjourned Meeting shall be given. At such adjourned Meeting, if a quorum shall be present or represented, any business may be transacted that might have been transacted at the Meeting as originally scheduled. Section 8. Voting. At each Meeting, every Shareholder entitled to vote shall have one vote for each Share standing in his name on the books of the Corporation as of the Record Date fixed by the Board for such Meeting, except as otherwise provided by law or the Articles, and except that no Share shall be voted at any Meeting upon which any portion of the consideration required for the initial issuance thereof remains unpaid. Voting for Directors and, upon the demand of any Shareholder, voting upon any question properly before a Meeting, shall be by ballot. A plurality vote shall be necessary to elect any Director, and on all other matters, the action or a question shall be approved if the number of votes cast thereon in favor of the action or question exceeds the number of votes cast opposing the action or question, except as otherwise provided by law or the Articles. Section 9. Shareholder List. The Secretary shall prepare, or cause to be prepared, before each Meeting a complete list of the Shareholders entitled to notice of such Meeting, arranged in alphabetical order by class of Shares (and each series within a class), and showing the address of, and the number of Shares entitled to vote held by, each Shareholder (the "Shareholder List"). Beginning five business days before the Meeting and continuing throughout the Meeting, the Shareholder List shall be on file at the Principal Office or at a place identified in the Meeting notice in the city where the Meeting will be held, and shall be available for inspection by any Shareholder entitled to vote at the Meeting. On written demand, made in good faith and for a proper purpose and describing with reasonable particularity the Shareholder's purpose, and if the Shareholder List is directly connected with the Shareholder's purpose, a Shareholder (or such Shareholder's agent or attorney authorized in writing) shall be entitled to inspect and to copy the Shareholder List, during regular business hours and at the Shareholder's expense, during the period the Shareholder List is available for inspection. The original stock register or transfer book (the "Stock Book"), or a duplicate thereof kept in the State of Indiana, shall be the only evidence as to who are the Shareholders entitled to examine the Shareholder List, or to notice of or to vote at any Meeting. Section 10. Proxies. A Shareholder may vote either in person or by proxy executed in writing by the Shareholder or a duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless a shorter or longer time is expressly provided therein. Section 11. Notice of Shareholder Business. At an Annual Meeting of the Shareholders, only such business shall be conducted as shall have been properly brought before the Meeting. To be properly brought before an Annual Meeting, business must be (a) specified in the notice of Meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the Meeting by or at the direction of the Board, or (c) otherwise properly brought before the Meeting by a Shareholder. For business to be properly brought before an Annual Meeting by a Shareholder, the Shareholder must have the legal right and authority to make the Proposal for consideration at the Meeting and the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a Shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 120 days prior to the Meeting; provided, however, that in the event that less than 130 days' notice or prior public disclosure of the date of the Meeting is given or made to Shareholders (which notice or public disclosure shall include the date of the Annual Meeting specified in these By-Laws, if such By-Laws have been filed with the Securities and Exchange Commission and if the Annual Meeting is held on such date), notice by the Shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the Annual Meeting was mailed or such public disclosure was made. A Shareholder's notice to the Secretary shall set forth as to each matter the Shareholder proposes to bring before the Annual Meeting (a) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (b) the name and record address of the Shareholders proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the Shareholder, and (d) any material interest of the Shareholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an Annual Meeting except in accordance with the procedures set forth in this Section 11. The Chairman of an Annual Meeting shall, if the facts warrant, determine and declare to the Meeting that business was not properly brought before the Meeting and in accordance with the provisions of this Section 11, and if he should so determine, he shall so declare to the Meeting and any such business not properly brought before the Meeting shall not be transacted. At any Special Meeting of the Shareholders, only such business shall be conducted as shall have been brought before the Meeting by or at the direction of the Board of Directors. Section 12. Notice of Shareholder Nominees. Only persons who are nominated in accordance with the procedures set forth in this Section 12 shall be eligible for election as Directors. Nominations of persons for election to the Board may be made at a Meeting of Shareholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any Shareholder of the Corporation entitled to vote for the election of Directors at the Meeting who complies with the notice procedures set forth in this Section 12. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a Shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days prior to the Meeting; provided, however, that in the event that less than 130 days' notice or prior public disclosure of the date of the Meeting is given or made to Shareholders (which notice or public disclosure shall include the date of the Annual Meeting specified in these By-Laws, if such By-Laws have been filed with the Securities and Exchange Commission and if the Annual Meeting is held on such date), notice by the Shareholders to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the Meeting was mailed or such public disclosure was made. Such Shareholder's notice shall set forth (a) as to each person whom the Shareholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (b) as to the Shareholder giving the notice (i) the name and record address of such Shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such Shareholder. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth in this Section 12. The Chairman of the Meeting shall, if the facts warrant, determine and declare to the Meeting that a nomination was not made in accordance with the procedures prescribed by these By-Laws, and if he should so determine, he shall so declare to the Meeting and the defective nomination shall be disregarded. ARTICLE IV Board of Directors Section 1. Number. The business and affairs of the Corporation shall be managed by a Board of not less than two (2) nor more than fifteen (15) Directors, as may be specified from time to time by resolution adopted by a majority of the total number of the Corporation's Directors (the "Full Board"). If and whenever the Board of Directors has not specified the number of Directors, the number shall be seven (7). Section 2. Removal and Vacancies. (a) Any Director may be removed, either with or without cause, at any meeting of the Shareholders called for that purpose if the meeting notice states that the purpose or one of the purposes of the meeting is removal of the Director and if the number of votes cast to remove the Director exceeds the number of votes cast not to remove the Director. If the notice so provides, the vacancy caused by the removal may be filled at the meeting by vote of the holders of a majority of the outstanding shares present and entitled to vote for the election of Directors. (b) Any vacancy occurring in the Board, including a vacancy resulting from an increase in the number of Directors, may be filled by the Board, or if the Directors remaining in office constitute fewer than a quorum of the Board, they may fill the vacancy by the affirmative vote of a majority of all the Directors remaining in office. Each Director so chosen shall hold office until the expiration of the term of the Director, if any, whom he has been chosen to succeed, or, if none, until the expiration of the term designated by the Board for the directorship to which he has been elected, or until his earlier removal, resignation, death, or other incapacity. Section 3. Powers and Duties. In addition to the powers and duties expressly conferred upon it by law, the Articles or these By-Laws, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not inconsistent with the law, the Articles or these By-Laws. Without limiting the generality of the foregoing, the Board is authorized to fix the compensation of Directors for attendance at meetings of the Board and additional compensation for additional services any Director may perform for the Corporation. Section 4. Annual Board Meeting. Unless otherwise determined by the Board, the Board shall meet each year immediately after the Annual Meeting, at the place where such Meeting has been held, for the purpose of organization, election of Officers of the Corporation (the "Officers") and consideration of any other business that may properly be brought before such annual meeting of the Board (the "Annual Board Meeting"). No notice shall be necessary for the holding of the Annual Board Meeting. If the Annual Board Meeting is not held as above provided, the election of Officers may be held at any subsequent duly constituted meeting of the Board (a "Board Meeting"). Section 5. Regular Board Meetings. Regular meetings of the Board ("Regular Board Meetings") may be held at stated times or from time to time, and at such place, either within or without the State of Indiana, as the Board may determine, without call and without notice. Section 6. Special Board Meetings. Special meetings of the Board ("Special Board Meetings") may be called at any time or from time to time, and shall be called on the written request of at least two Directors, by the Chairman or the President, by causing the Secretary or any Assistant Secretary to give to each Director, either personally or by mail, telephone, telegraph, teletype or other form of wire or wireless communication at least two days' notice of the date, time and place of such Meeting. Special Board Meetings shall be held at the Principal Office or at such other place, within or without the State of Indiana, as shall be specified in the respective notices or waivers of notice thereof. Section 7. Waiver of Notice and Assent. A Director may waive notice of any Board Meeting before or after the date and time of the Board Meeting stated in the notice by a written waiver signed by the Director and filed with the minutes or corporate records. A Director's attendance at or participation in a Board Meeting shall constitute a waiver of notice of such Meeting and assent to any corporate action taken at such Meeting, unless (a) the Director at the beginning of such Meeting (or promptly upon his arrival) objects to holding of or transacting business at the Meeting and does not thereafter vote for or assent to action taken at the Meeting; (b) the Director's dissent or abstention from the action taken is entered in the minutes of such Meeting; or (c) the Director delivers written notice of his dissent or abstention to the presiding Director at such Meeting before its adjournment, or to the Secretary immediately after its adjournment. The right of dissent or abstention is not available to a Director who votes in favor of the action taken. Section 8. Quorum. At all Board Meetings, a majority of the Full Board shall be necessary to constitute a quorum for the transaction of any business, except (a) that for the purpose of filling of vacancies, a majority of Directors then in office shall constitute a quorum, and (b) that a lesser number may adjourn the Meeting from time to time until a quorum is present. The act of a majority of the Board present at a Meeting at which a quorum is present shall be the act of the Board, unless the act of a greater number is required by law, the Articles or these By-Laws. Section 9. Audit, Compensation, Executive and Other Committees of the Board. The Corporation shall have the following standing committees: (a) an Audit Committee comprised of two or more Directors, which shall recommend the annual employment of the Corporation's auditors with whom the Audit Committee will review the scope of audit and non-audit assignments, related fees, the accounting principles used by the Corporation in financial reporting, internal financial auditing procedures and the adequacies of the Corporation's internal control procedures; (b) a Compensation Committee comprised of two or more Directors, which shall determine executive officer salaries and bonuses and administer the Corporation's stock option plan; and (c) an Executive Committee comprised of two or more Directors, which shall, in addition to such other duties as may be prescribed from time to time by the Board, exercise, during intervals between the meetings of the Board, all powers invested in the Board, subject to applicable legal requirements. The Board may, by resolution adopted by such majority, also designate other regular or special committees of the Board ("Committees"), in each case comprised of one (1) or more Directors and having such powers and exercising such duties as shall be provided by resolution of the Board. Section 10. Resignations. Any Director may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Any such resignation shall take effect when delivered, unless the notice specifies a later effective date. Unless otherwise specified in the notice, the acceptance of such resignation shall not be necessary to make it effective. ARTICLE V Officers Section 1. Officers. The Officers shall be the Chairman of the Board, one or more Vice Chairmen, the President, one or more Vice Presidents, the Secretary and the Treasurer, and may include one or more Assistant Secretaries, one or more Assistant Treasurers, a Controller and one or more Assistant Controllers. Any two or more offices may be held by the same person. The Board may from time to time elect or appoint such other Officers as it shall deem necessary, who shall exercise such powers and perform such duties as may be prescribed from time to time by these By- Laws or, in the absence of a provision in these By-Laws in respect thereto, as may be prescribed from time to time by the Board. Section 2. Election of Officers. The Officers shall be elected by the Board at the Annual Board Meeting and shall hold office for one year or until their respective successors shall have been duly elected and shall have qualified; provided, however, that the Board may at any time elect one or more persons to new or different offices and/or change the title, designation and duties and responsibilities of any of the Officers consistent with the law, the Articles and these By-Laws. Section 3. Vacancies; Removal. Any vacancy among the Officers may be filled for the unexpired term by the Board. Any Officer may be removed at any time by the affirmative vote of a majority of the Full Board. Section 4. Delegation of Duties. In the case of the absence, disability, death, resignation or removal from office of any Officer, or for any other reason that the Board shall deem sufficient, the Board may delegate, for the time being, any or all of the powers or duties of such Officer to any other Officer or to any Director. Section 5. Chairman of the Board. The Chairman of the Board shall preside over meetings of the Board of Directors and of the Shareholders of the Corporation, discharge all the usual functions of the chief executive officer of a corporation, and perform such other duties as the Board of Directors may designate from time to time. The Chairman of the Board shall be, and may be referred to as, the Corporation's "Chief Executive Officer." The Chairman of the Board need not be an employee of the Corporation. Section 6. Vice Chairmen. Each of the Vice Chairmen shall have such powers and perform such duties as may be prescribed for him by the Board or delegated to him by the Chairman. In the case of the absence, disability, death, resignation or removal from office of the Chairman, the powers and duties of the Chairman shall, for the time being, devolve upon and be exercised by such one of the Vice Chairmen as the Board may designate, or, if there be but one Vice Chairman, then upon such Vice Chairman; and he shall thereupon, during such period, exercise and perform all of the powers and duties of the Chairman, including but not limited to presiding at all Shareholder Meetings and Board meetings, except as may be otherwise provided by the Board. Section 7. President. The President shall be a Director and, subject to the control of the Board, shall be, and may be referred to as, the Corporation's "Chief Operating Officer," shall have general charge of and supervision and authority over the business and affairs of the Corporation, and shall have such other powers and perform such other duties as are incident to the usual functions of a chief operating officer of a corporation and as may be assigned to him by the Board, the Chairman or a Vice Chairman. Section 8. Vice Presidents. Each of the Vice Presidents shall have such powers and perform such duties as may be prescribed for him by the Board or delegated to him by the Chairman or the President. In the case of the absence, disability, death, resignation or removal from office of the President, the powers and duties of the President shall, for the time being, devolve upon and be exercised by the Executive Vice President, if there be one, and if not, then by such one of the Vice Presidents as the Board or the President may designate, or, if there be but one Vice President, then upon such Vice President; and he shall thereupon, during such period, exercise and perform all of the powers and duties of the President, except as may be otherwise provided by the Board. Section 9. Secretary. The Secretary shall have the custody and care of the records, minutes and the Stock Book of the Corporation; shall attend all Shareholder Meetings and Board Meetings, and duly record and keep the minutes of their proceedings in a book or books to be kept for that purpose; shall give or cause to be given notice of all Shareholder Meetings and Board Meetings when such notice shall be required; shall file and take charge of all papers and documents belonging to the Corporation; and shall have such other powers and perform such other duties as are incident to the office of secretary of a business corporation, subject at all times to the direction and control of the Board, the Chairman and the President. Section 10. Assistant Secretaries. Each of the Assistant Secretaries shall assist the Secretary in his duties and shall have such other powers and perform such other duties as may be prescribed for him by the Board or delegated to him by the Chairman or the President. In case of the absence, disability, death, resignation or removal from office of the Secretary, his powers and duties shall, for the time being, devolve upon such one of the Assistant Secretaries as the Board, the Chairman, the President or the Secretary may designate, or, if there be but one Assistant Secretary, then upon such Assistant Secretary; and he shall thereupon, during such period, exercise and perform all of the powers and duties of the Secretary, except as may be otherwise provided by the Board. Section 11. Treasurer. The Treasurer shall have control over all records of the Corporation pertaining to moneys and securities belonging to the Corporation; shall have charge of, and be responsible for, the collection, receipt, custody and disbursements of funds of the Corporation; shall have the custody of all securities belonging to the Corporation; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; and shall disburse the funds of the Corporation as may be ordered by the Board, taking proper receipts or making proper vouchers for such disbursements and preserving the same at all times during his term of office. When necessary or proper, he shall endorse on behalf of the Corporation all checks, notes or other obligations payable to the Corporation or coming into his possession for or on behalf of the Corporation, and shall deposit the funds arising therefrom, together with all other funds and valuable effects of the Corporation coming into his possession, in the name and the credit of the Corporation in such depositories as the Board from time to time shall direct, or in the absence of such action by the Board, as may be determined by the Chairman, the President or any Vice President. If the Board has not elected a Controller or an Assistant Controller, or in the absence or disability of the Controller and each Assistant Controller or if, for any reason, a vacancy shall occur in such offices, then during such period the Treasurer shall have, exercise and perform all of the powers and duties of the Controller. The Treasurer shall also have such other powers and perform such other duties as are incident to the office of treasurer of a business corporation, subject at all times to the direction and control of the Board, the Chairman and the President. If required by the Board, the Treasurer shall give the Corporation a bond, in such an amount and with such surety or sureties as may be ordered by the Board, for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 12. Assistant Treasurers. Each of the Assistant Treasurers shall assist the Treasurer in his duties, and shall have such other powers and perform such other duties as may be prescribed for him by the Board or delegated to him by the Chairman or the President. In case of the absence, disability, death, resignation or removal from office of the Treasurer, his powers and duties shall, for the time being, devolve upon such one of the Assistant Treasurers as the Board, the Chairman, the President or the Treasurer may designate, or, if there be but one Assistant Treasurer, then upon such Assistant Treasurer; and he shall thereupon, during such period, exercise and perform all the powers and duties of the Treasurer except as may be otherwise provided by the Board. If required by the Board, each Assistant Treasurer shall likewise give the Corporation a bond, in such amount and with such surety or sureties as may be ordered by the Board, for the same purposes as the bond that may be required to be given by the Treasurer. Section 13. Controller. The Controller shall have direct control over all accounting records of the Corporation pertaining to moneys, properties, materials and supplies, including the bookkeeping and accounting departments; shall have direct supervision over the accounting records in all other departments pertaining to moneys, properties, materials and supplies; shall render to the President and the Board, at Regular Board Meetings or whenever the same shall be required, an account of all his transactions as Controller and of the financial condition of the Corporation; and shall have such other powers and perform such other duties as are incident to the office of comptroller of a business corporation, subject at all times to the direction and control of the Board and the President. Section 14. Assistant Controllers. Each of the Assistant Controllers shall assist the Controller in his duties, and shall have such other powers and perform such other duties as may be prescribed for him by the Board or delegated to him by the Chairman or the President. In case of the absence, disability, death, resignation or removal from office of the Controller, his powers and duties shall, for the time being, devolve upon such one of the Assistant Controllers as the Board, the Chairman, the President or the Controller may designate, or, if there be but one Assistant Controller, then upon such Assistant Controller; and he shall thereupon, during such period, exercise and perform all the powers and duties of the Controller, except as may be otherwise provided by the Board. ARTICLE VI Certificates for Shares Section 1. Certificates. Certificates for Shares ("Certificates") shall be in such form, consistent with law and the Articles, as shall be approved by the Board. Certificates for each class, or series within a class, of Shares, shall be numbered consecutively as issued. Each Certificate shall state the name of the Corporation and that it is organized under the laws of the State of Indiana; the name of the registered holder; the number and class and the designation of the series, if any, of the Shares represented thereby; and a summary of the designations, relative rights, preferences and limitations applicable to such class and, if applicable, the variations in rights, preferences and limitations determined for each series and the authority of the Board to determine such variations for future series; provided, however, that such summary may be omitted if the Certificate states conspicuously on its front or back that the Corporation will furnish the Shareholder such information upon written request and without charge. Each Certificate shall be signed (either manually or in facsimile) by (i) the President or a Vice President and (ii) the Secretary or an Assistant Secretary, or by any two or more Officers that may be designated by the Board, and may have affixed thereto the seal of the Corporation (if any), which may be a facsimile, engraved or printed. Section 2. Record of Certificates. Shares shall be entered in the Stock Book as they are issued, and shall be transferable on the Stock Book by the holder thereof in person, or by his attorney duly authorized thereto in writing, upon the surrender of the outstanding Certificate therefor properly endorsed. Section 3. Lost or Destroyed Certificates. Any person claiming a Certificate to be lost or destroyed shall make affidavit or affirmation of that fact and, if the Board, the Chairman or the President shall so require, shall give the Corporation and/or the transfer agents and registrars, if they shall so require, a bond of indemnity, in form and with one or more sureties satisfactory to the Board, the Chairman or the President and/or the transfer agents and registrars, in such amount as the Board, the Chairman or the President may direct and/or the transfer agents and registrars may require, whereupon a new Certificate may be issued of the same tenor and for the same number of Shares as the one alleged to be lost or destroyed. Section 4. Shareholder Addresses. Every Shareholder shall furnish the Secretary with an address to which notices of Meetings and all other notices may be served upon him or mailed to him, and in default thereof notices may be addressed to him at his last known address or at the Principal Office. ARTICLE VII Corporate Books and Records Section 1. Places of Keeping. Except as otherwise provided by law, the Articles or these By-Laws, the books and records of the Corporation may be kept at such place or places, within or without the State of Indiana, as the Board may from time to time by resolution determine or, in the absence of such determination by the Board, as shall be determined by the Chairman or the President. Section 2. Stock Book. The Corporation shall keep at the Principal Office the original Stock Book or a duplicate thereof, or, in case the Corporation employs a stock registrar or transfer agent within or without the State of Indiana, another record of the Shareholders in a form that permits preparation of a list of the names and addresses of all the Shareholders, in alphabetical order by class of Shares, stating the number and class of Shares held by each Shareholder (the "Record of Shareholders"). Section 3. Inspection of Corporate Records. Any Shareholder (or the Shareholder's agent or attorney authorized in writing) shall be entitled to inspect and copy at his expense, after giving the Corporation at least five business days' written notice of his demand to do so, the following corporate records: (1) the Articles; (2) these By-Laws; (3) minutes of all Shareholder Meetings and records of all actions taken by the Shareholders without a meeting (collectively, "Shareholders Minutes") for the prior three years; (4) all written communications by the Corporation to the Shareholders including the financial statements furnished by the Corporation to the Shareholders for the prior three years; (5) a list of the names and business addresses of the current Directors and the current Officers; and (6) the most recent Annual Report of the Corporation as filed with the Secretary of State of Indiana. Any Shareholder (or the Shareholder's agent or attorney authorized in writing) shall also be entitled to inspect and copy at his expense, after giving the Corporation at least five business days' written notice of his demand to do so, the following corporate records, if his demand is made in good faith and for a proper purpose and describes with reasonable particularity his purpose and the records he desires to inspect, and the records are directly connected with his purpose: (1) to the extent not subject to inspection under the previous sentence, Shareholders Minutes, excerpts from minutes of Board Meetings and of Committee meetings, and records of any actions taken by the Board or any Committee without a meeting; (2) appropriate accounting records of the Corporation; and (3) the Record of Shareholders. Section 4. Record Date. The Board may, in its discretion, fix in advance a Record Date not more than seventy days before the date (a) of any Shareholder Meeting, (b) for the payment of any dividend or the making of any other distribution, (c) for the allotment of rights, or (d) when any change or conversion or exchange of Shares shall go into effect. If the Board fixes a Record Date, then only Shareholders who are Shareholders of record on such Record Date shall be entitled (a) to notice of and/or to vote at any such Meeting, (b) to receive any such dividend or other distribution, (c) to receive any such allotment of rights, or (d) to exercise the rights in respect of any such change, conversion or exchange of Shares, as the case may be, notwithstanding any transfer of Shares on the Stock Book after such Record Date. Section 5. Transfer Agents; Registrars. The Board may appoint one or more transfer agents and registrars for its Shares and may require all Certificates to bear the signature either of a transfer agent or of a registrar, or both. ARTICLE VIII Checks, Drafts, Deeds and Shares of Stock Section 1. Checks, Drafts, Notes, Etc. All checks, drafts, notes or orders for the payment of money of the Corporation shall, unless otherwise directed by the Board or otherwise required by law, be signed by one or more Officers as authorized in writing by the Chairman or the President. In addition, the Chairman or the President may authorize any one or more employees of the Corporation ("Employees") to sign checks, drafts and orders for the payment of money not to exceed specific maximum amounts as designated in writing by the Chairman or the President for any one check, draft or order. When so authorized by the Chairman or the President, the signature of any such Officer or Employee may be a facsimile signature. Section 2. Deeds, Notes, Bonds, Mortgages, Contracts, Etc. All deeds, notes, bonds and mortgages made by the Corporation, and all other written contracts and agreements, other than those executed in the ordinary course of corporate business, to which the Corporation shall be a party, shall be executed in its name by the Chairman, the President, a Vice President or any other Officer so authorized by the Board and, when necessary or required, the Secretary or an Assistant Secretary shall attest the execution thereof. All written contracts and agreements into which the Corporation enters in the ordinary course of corporate business shall be executed by any Officer or by any other Employee designated by the Chairman, the President or a Vice President to execute such contracts and agreements. Section 3. Sale or Transfer of Stock. Subject always to the further orders and directions of the Board, any share of stock issued by any corporation and owned by the Corporation (including reacquired Shares of the Corporation) may, for sale or transfer, be endorsed in the name of the Corporation by the President or a Vice President, and said endorsement shall be duly attested by the Secretary or an Assistant Secretary either with or without affixing thereto the seal of the Corporation (if any). Section 4. Voting of Stock of Other Corporations. Subject always to the further orders and directions of the Board, any share of stock issued by any other corporation and owned or controlled by the Corporation (an "Investment Share") may be voted at any shareholders' meeting of such other corporation by the Chairman, the President or a Vice President. Whenever, in the judgment of the Chairman or the President, it is desirable for the Corporation to execute a proxy or give a shareholder's consent in respect of any Investment Share, such proxy or consent shall be executed in the name of the Corporation by the Chairman, the President or a Vice President, and, when necessary or required, shall be attested by the Secretary or an Assistant Secretary either with or without affixing thereto the seal of the Corporation (if any). Any person or persons designated in the manner above stated as the proxy or proxies of the Corporation shall have full right, power and authority to vote an Investment Share the same as such Investment Share might be voted by the Corporation. ARTICLE IX Fiscal Year Section 1. Fiscal Year. The Corporation's fiscal year shall begin on January 1 of each year and end on December 31 of the same year. ARTICLE X Amendments Section 1. Amendments. These By-Laws may be altered, amended or repealed, in whole or in part, and new By-Laws may be adopted, at any Board Meeting by the affirmative vote of a majority of the Full Board. EX-21 4 ex21.txt SUBSIDIARIES Exhibit 21 - Subsidiaries of the Registrant - ------------------------------------------- Subsidiary Domicile - ---------- -------- Refinishers Warehouse, Inc. Michigan Scotty's Paint Supply, Inc. Florida (Merged into FinishMaster, Inc. effective February 8, 2002) FinishMaster Services, Inc. Indiana EX-23 5 ex_23.txt CONSENT OF PWC Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-564) of FinishMaster, Inc. of our report dated February 19, 2002 relating to the consolidated financial statements and financial statement schedule, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Indianapolis, Indiana March 28, 2002 EX-99.B 6 ex99_b.txt 1ST AMEND CREDIT AGMT EXHIBIT 99(b) ------------- FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("First Amendment") is made and entered into as of the 14th day of December, 2001 (the "First Amendment Effective Date"), by and among NATIONAL CITY BANK OF INDIANA ("National City Bank"), FIRSTAR BANK, N.A., ("Firstar"), PNC BANK ("PNC"), HARRIS TRUST AND SAVINGS BANK ("Harris"), LASALLE BANK NATIONAL ASSOCIATION ("LaSalle Bank") and THE HUNTINGTON NATIONAL BANK ("Huntington") (National City Bank, Firstar, PNC, Harris, LaSalle Bank and Huntington being herein referred to collectively as the "Lenders"), National City Bank, as agent for the Lenders (the "Agent"), and FINISHMASTER, INC. (the "Borrower"). Recitals 1. The Borrower, the Lenders and the Agent are parties to a Credit Agreement dated as of March 29, 2001 (the "Credit Agreement"). 2. The Borrower desires to form a wholly-owned Subsidiary, FinishMaster Services, Inc., an Indiana corporation ("FSI"), and to transfer certain of its assets and properties to FSI (the "Asset Transfer"). By letter to the Agent dated December 11, 2001, the Borrower requested that the Agent and the Lenders (a) consent to the creation of FSI and the Asset Transfer, (b) agree to increase the maximum aggregate consideration for Permitted Acquisitions in calendar year 2001 from $8,000,000.00 to $9,000,000.00 and (c) waive certain provisions of the Credit Agreement as they pertain to the acquisition by the Borrower of Scotty's Paint Supply, Inc., a Florida corporation ("Scotty's") to the extent provided in Paragraph 7 of this First Amendment. 3. Subject to the terms and conditions stated in this First Amendment and pursuant to and in accordance with Section 9.3 of the Credit Agreement, the Lenders and the Agent are willing to modify and amend the Credit Agreement as provided in this First Amendment. Agreement NOW THEREFORE, the Borrower, the Lenders and the Agent agree as follows: 1. Definitions. All terms used in the Recitals and in this First Amendment that are defined in the Credit Agreement and are not otherwise defined herein are used in this First Amendment with the meanings ascribed to them in the Credit Agreement, as amended by this First Amendment. 2. Amendments to Credit Agreement. (a) Increase of Maximum Aggregate Permitted Acquisition Consideration. Section 7.3(G)(iii)(e) of the Credit Agreement is hereby deleted and replaced with the following, effective as of the First Amendment Effective Date: (e) the aggregate purchase price (excluding assumed liabilities but not indebtedness for borrowed money) in connection with all such transactions during any calendar year from and after the Closing Date shall not exceed ----------------------- -------------------------- Calendar Year Maximum Aggregate Consideration for All Acquisitions ----------------------- -------------------------- 2001 $9,000,000.00 ----------------------- -------------------------- 2002 $10,000,000.00 ----------------------- -------------------------- 2003 $10,000,000.00 ----------------------- -------------------------- 2004 $10,000,000.00 ----------------------- -------------------------- 2005 $10,000,000.00 ----------------------- -------------------------- 2006 $10,000,000.00 ----------------------- -------------------------- (b) Schedule 6.8 Replaced. Schedule 6.8 to the Credit Agreement, which sets forth a description of the corporate structure of the Borrower and its Subsidiaries, is hereby deleted and replaced with Schedule 6.8 attached hereto and made a part hereof for all purposes, effective as of the First Amendment Effective Date. 3. Amendment of Other Loan Documents. All references to the Credit Agreement in the other Loan Documents shall mean the Credit Agreement, as modified and amended by this First Amendment and as it may be further amended, modified, extended, renewed, supplemented and/or restated from time to time and at any time. The other Loan Documents are hereby modified and amended to the extent necessary to conform them to, or to cause them to accurately reflect, the terms of the Credit Agreement, as modified by this First Amendment. Except as otherwise expressly provided herein, all of the terms and provisions of the Credit Agreement and the other Loan Documents, as modified and amended by this First Amendment, remain in full force and effect, and fully binding on the parties thereto and their respective successors and assigns. 4. Binding on Successors and Assigns. All the terms and provisions of this First Amendment shall be binding upon and inure to the benefit of the parties hereto, their respective successors, assigns and legal representatives. Whenever in this First Amendment any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party. 5. Representations and Warranties. The Borrower represents and warrants to the Lenders and the Agent that: (i) (A) The execution, delivery and performance of this First Amendment and all agreements and documents delivered pursuant hereto by the Borrower have been duly authorized by all necessary action and do not and will not violate any provision of any law, rule, regulation, order, judgment, injunction, or writ presently in effect applying to the Borrower, or any of its constituent documents, or result in a breach of or constitute a default under any material agreement, lease or instrument to which the Borrower is a party or by which the Borrower or any of its properties may be bound or affected; (B) no authorization, consent, approval, license, exemption or filing of a registration with any court or governmental department, agency or instrumentality is or will be necessary to the valid execution, delivery or performance by the Borrower of this First Amendment and all agreements and documents delivered pursuant hereto; and (C) this First Amendment and all agreements and documents delivered pursuant hereto by the Borrower are the legal, valid and binding obligations of the Borrower, as a signatory thereto, and enforceable against the Borrower in accordance with the terms thereof. (ii) After giving effect to the amendments contained in this First Amendment, the representations and warranties contained in Article VI of the Credit Agreement are true and correct on and as of the First Amendment Effective Date with the same force and effect as if made on and as of the First Amendment Effective Date, except that the representation in Section 6.4 of the Credit Agreement shall be deemed to refer to the financial statements of the Borrower most recently delivered to the Agent prior to the First Amendment Effective Date. 6. Conditions. The obligation of the Lenders and the Agent to execute and to perform this First Amendment shall be subject to full satisfaction of the following conditions precedent on or before the First Amendment Effective Date: (a) The Agent shall have received copies, certified as of the First Amendment Effective Date by the Secretary or Assistant Secretary of the Borrower, of such corporate documents or resolutions of the Borrower as the Lenders or the Agent may request evidencing necessary corporate action by the Borrower with respect to this First Amendment and all other agreements or documents delivered pursuant hereto as the Lenders or the Agent may request. (b) The Agent shall have received a certificate, in form and substance satisfactory to the Agent, signed by the chief financial officer of the Borrower, stating that on the First Amendment Effective Date no Default or Unmatured Default has occurred and is continuing. (c) The Agent shall have received the pro forma financial statements required to be delivered pursuant to Section 7.3(G)(iii)(d) of the Credit Agreement. (d) This First Amendment shall have been (i) duly executed and delivered by the Borrower to the Lenders and the Agent, (ii) duly executed and delivered to the Lenders and the Agent by Refinishers Warehouse, Inc., a Michigan corporation, with respect to the Consent and Reaffirmation provided herein, and (iii) executed by the Lenders and the Agent. (e) The Borrower shall have paid all costs and expenses incurred by the Lenders and the Agent in connection with the negotiation, preparation and closing of this First Amendment and the other documents and agreements delivered pursuant hereto, including the reasonable fees and out-of-pocket expenses of Baker & Daniels, special counsel to the Agent. 7. Acquisition of Scotty's Paint Supply, Inc. On the First Amendment Effective Date, the Borrower will complete the acquisition of 100% of the outstanding Capital Stock of Scotty's. The Borrower has advised the Agent that it intends to merge Scotty's into the Borrower following the acquisition. The Agent and the Lenders hereby (a) consent to the acquisition by the Borrower of the Capital Stock of Scotty's and (b) so long as the Merger Condition (as such term is defined below) is satisfied in full on or before February 14, 2002, waive, in connection with the acquisition of the Capital Stock of Scotty's, (i) compliance by the Borrower with Sections 7.2(K), 7.2(L) and 7.3(G)(ii) and (ii) the requirement that the Borrower include on Schedule 6.8 any reference to Scotty's as a Subsidiary of the Borrower. As used in this Paragraph 7, the term "Merger Condition" shall mean a requirement that the Borrower and Scotty's complete a merger transaction pursuant to which Scotty's is merged into the Borrower, with the Borrower remaining the surviving entity, on terms and conditions in all respects satisfactory to the Agent. In the event the Merger Condition is not satisfied in full on or before February 14, 2002, the consent and waiver provided for in this Paragraph 7 shall be void ab initio. 8. Consent to Formation of FSI and Asset Transfer. Effective as of the Transfer Effective Date (as such term is defined below), and subject to the complete satisfaction of all of the conditions precedent described in Paragraph 6 of this First Amendment and this Paragraph 8, each of the Agent and the Lenders hereby (a) consents to the formation of FSI as a wholly-owned Subsidiary of the Borrower and (b) waives any breach of the Credit Agreement or Default thereunder or under any of the Loan Documents that is caused solely by the formation of FSI as described herein or by the Asset Transfer. As used herein, the term "Transfer Effective Date" shall mean the date on which the Borrower completes the Asset Transfer to FSI. The consent provided for in this Paragraph 8 is subject in all respects to the complete satisfaction of the following conditions precedent (the "Transfer Conditions") on or prior to the Transfer Effective Date: (a) The Agent shall have received a certificate of existence for FSI, certified by the Secretary of State of Indiana not more than twenty (20) days prior to the Transfer Effective Date. (b) The Agent shall have received copies, certified as of the Transfer Effective Date by the Secretary or Assistant Secretary of FSI, of its Articles of Incorporation (together with all amendments thereto), By-Laws and of its Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Lender) authorizing the execution and delivery of the FSI Loan Documents. (c) The Agent shall have received an incumbency certificate, executed by the Secretary or Assistant Secretary of FSI, which shall identify by name and title and bear the signature of the officers of FSI authorized to sign the FSI Loan Documents, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower or FSI. (d) FSI shall have executed and delivered to the Agent a Trademark Security Agreement, in form and substance the same as Exhibit B-6 attached hereto and made a part hereof for all purposes. (e) FSI shall have executed and delivered to the Agent a Security Agreement, in form and substance the same as Exhibit B-7 attached hereto and made a part hereof for all purposes. (f) FSI shall have executed and delivered to the Agent a Guaranty, in form and substance the same as Exhibit B-8 attached hereto and made a part hereof for all purposes. (j) The Borrower shall have (i) executed and delivered to the Agent an Amended and Restated Pledge Agreement, in form and substance the same as Exhibit B-9 attached hereto and made a part hereof for all purposes (the "Amended Pledge Agreement"), (ii) delivered to the Agent the original certificates evidencing one hundred percent (100%) of the issued and outstanding common stock of FSI, and (iii) executed and delivered to the Agent stock powers in the form of Exhibit B attached to the Amended Pledge Agreement, duly executed in blank. (k) The Agent shall have received Uniform Commercial Code search results pertaining to FSI showing only those Liens as are acceptable to the Agent. (l) The Agent shall have received evidence of the filing of Uniform Commercial Code financing statements reflecting the filing in all places required by applicable law to perfect the security interests granted to the Agent, for its benefit and for the benefit of the Lenders (the "FSI Lien"), in the Collateral (as such term is described in the FSI Security Agreement) as a first priority Lien as to items of Collateral (as such term is described in the FSI Security Agreement) in which a security interest may be perfected by the filing of financing statements, and such other documents and/or evidence of other actions as may be necessary under applicable law to perfect the FSI Lien as a first priority Lien, as the Agent may require. (m) The Agent shall have received a written opinion of the Borrower's and FSI's counsel, addressed to the Agent and the Lenders, dated as of the Transfer Effective Date addressing the issues identified in Exhibit A hereto containing assumptions and qualifications acceptable to the Agent and the Lenders. (n) The Lenders and the Agent shall have received such additional agreements, documents and certifications, fully executed by the Borrower, Refinishers Warehouse and/or FSI, as may be reasonably requested by the Lenders and the Agent. (o) FSI shall have executed and delivered to the Agent, for its benefit and the benefit of the Lenders, a certificate that contains the following representations and warranties, each effective as of the Transfer Effective Date: (i) (A) The execution, delivery and performance of the Loan Documents to be executed and delivered by it pursuant to this First Amendment (the "FSI Loan Documents") and all agreements and documents delivered pursuant hereto by FSI have been duly authorized by all necessary action and do not and will not violate any provision of any law, rule, regulation, order, judgment, injunction, or writ presently in effect applying to FSI, or any of its constituent documents, or result in a breach of or constitute a default under any material agreement, lease or instrument to which FSI is a party or by which FSI or any of its properties may be bound or affected; (B) no authorization, consent, approval, license, exemption or filing of a registration with any court or governmental department, agency or instrumentality is or will be necessary to the valid execution, delivery or performance by FSI of the FSI Loan Documents and all agreements and documents delivered pursuant hereto; and (C) the FSI Loan Documents and all agreements and documents delivered pursuant hereto by FSI are the legal, valid and binding obligations of FSI, as a signatory thereto, and enforceable against FSI in accordance with the terms thereof. (ii) FSI (i) is a corporation duly organized, validly existing and in existence under the laws of the State of Indiana, (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. (iii) FSI has good and marketable title to all of its material assets and properties (tangible and intangible, real or personal) owned by it or a valid leasehold interest in all of its material leased assets (except insofar as marketability may be limited by any laws or regulations of any Governmental Authority affecting such assets), and all such assets and property are free and clear of all Liens, except Liens permitted under Section 7.3(C) of the Credit Agreement. Substantially all of the assets and properties owned by, leased to or used by FSI are in adequate operating condition and repair, ordinary wear and tear excepted. Neither this First Amendment nor any other Loan Document, nor any transaction contemplated under any such agreement, will affect any right, title or interest of FSI in and to any of such assets in a manner that would have or could reasonably be expected to have a Material Adverse Effect. In the event the Transfer Conditions have not been satisfied in full and the Transfer Effective Date does not occur on or before March 31, 2002, the consent provided for in this Paragraph 8 shall be void ab initio. 9. Further Assurances. Each of the Borrower, Refinishers Warehouse, FSI, the Lenders and the Agent, as the case may be, shall duly execute and deliver, or cause to be executed and delivered, such further instruments and perform or cause to be performed such further acts as may be necessary or proper in the reasonable opinion of the Agent to carry out the provisions and purposes of this First Amendment. 10. Governing Law. This First Amendment shall be governed by, and construed in accordance with, the laws of the State of Indiana, without regard to its principles of conflicts or choice of law rules. 11. Survival. All covenants, agreements, undertakings, representations, and warranties made in this First Amendment shall survive the execution and delivery of this First Amendment, and shall not be affected by any investigation made by any party. 12. Entire Agreement. This First Amendment constitutes and expresses the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings, commitments, inducements or conditions with respect thereto, whether express or implied, oral or written. 13. Counterparts. This First Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one agreement. In the event any party executes and delivers this First Amendment via facsimile, such party hereby agrees that for the purposes of enforcement and all applicable statutes, laws and rules, including, without limitation, the Uniform Commercial Code, rules of evidence and statutes of fraud: (i) the facsimile signature of such party shall constitute a binding signature of such party as a symbol and mark executed and adopted by such party with a present intention to authenticate this First Amendment; (ii) the facsimile of this First Amendment shall constitute a writing signed by such party; and (iii) the facsimile of this First Amendment shall constitute an original of and best evidence of this First Amendment. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Credit Agreement to be executed and delivered by their duly authorized officers as of the date set forth above. FINISHMASTER, INC., as the Borrower By: /s/ Robert R. Millard ---------------------------------- Name: Robert R. Millard Title: Senior Vice President and Chief Financial Officer Address: 54 Monument Circle 7th Floor Indianapolis, Indiana 46204 Attention: Robert R. Millard Telephone No.: 317-237-3678 Facsimile No.: 317-237-2150 NATIONAL CITY BANK OF INDIANA, as Agent, as a Lender, as an Issuing Bank and as the Swing Line Bank By: /s/ Thomas R. Groh ------------------------------------ Name: Thomas R. Groh Title: Vice President Address: National City Bank of Indiana One National City Center Indianapolis, Indiana 46255 Attention: Thomas R. Groh Telephone No.: 317-267-7422 Facsimile No.: 317-267-8899 FIRSTAR BANK, N.A., as Lender and Documentation Agent By: /s/ Scott Dyornik ----------------------------------- Name: Scott Dvornik Title: Vice President Address: Firstar Bank, N.A. 3815 River Crossing Parkway Suite 100 Indianapolis, Indiana 36240 Attention: Scott Dvornik Telephone No.: 317-566-2145 Facsimile No.: 317-566-2065 PNC BANK, as Lender By: /s/ Bruce Kintner ------------------------------------- Name: Bruce Kintner Title: Vice President Address: PNC Bank 201 E. Fifth Street Cincinnati, Ohio 45201 Attention: Bruce Kintner Telephone No.: 513-651-7189 Facsimile No.: 513-651-8951 HARRIS TRUST AND SAVINGS BANK, as Lender By: /s/ Thad D. Rasche ------------------------------------- Name: Thad D. Rasche Title: Vice President Address: 111 West Monroe Street 10th Floor Chicago, Illinois 60603 Attention: Thad D. Rasche Telephone No.: 312-461-5739 Facsimile No.: 312-461-5225 THE HUNTINGTON NATIONAL BANK, as Lender By: /s/ Lori L. Abbott ------------------------------------- Name: Lori L. Abbott Title: Vice President Address: The Huntington National Bank Capital Center 201 North Illinois Suite 1800 Indianapolis, Indiana 46204 Attention: Lori L. Abbott Telephone No.: 317-237-2517 Facsimile No.: 317-237-2505 LASALLE NATIONAL BANK NATIONAL ASSOCIATION, as Lender and Syndication Agent By: /s/ William Lutes ------------------------------------ Name: William Lutes Title: First Vice President Address: LaSalle National Bank National Association One American Square Suite 1600 Indianapolis, Indiana 46282 Attention: William Lutes Telephone No.: 317-916-2219 Facsimile No.: 317-756-7021 CONSENT AND REAFFIRMATION The undersigned hereby acknowledges and consents to the execution of the First Amendment to Credit Agreement and reaffirms and agrees that its Guaranty executed on March 29, 2001 (the "Guaranty"), remains in full force and effect with respect to all of its obligations arising under, pursuant to or in connection with the Guaranty. REFINISHERS WAREHOUSE, INC. By: /s/ Robert R. Millard ------------------------------------- Name: Robert R. Millard Title: Secretary Exhibits Exhibit A: Opinion of Counsel Exhibit B-6: Form of Trademark Security Agreement Exhibit B-7: Form of Security Agreement Exhibit B-8: Form of Guaranty Exhibit B-9: Form of Amended and Restated Pledge Agreement Schedule 6.8: Organizational and Capital Structure -----END PRIVACY-ENHANCED MESSAGE-----