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, 1998


                         Commission File Number 0-23222

                               FINISHMASTER, INC.
             (Exact Name of Registrant as Specified in its Charter)

                  Indiana                                 38-2252096
      (State or other Jurisdiction of                 (I.R.S.  Employer
      Incorporation or Organization)               Identification Number)

54 Monument Circle, Suite 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, 1999 was $11,719,208.

At  March  1,  1999,   7,535,856  shares  of  Registrant's   common  stock  were
outstanding.

                       Documents Incorporated By Reference

Portions of the annual proxy  statement for the year ended December 31, 1998 are
incorporated by reference into Part III.



<PAGE>



                               FINISHMASTER, INC.
                           ANNUAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS

ITEM                                                                       PAGE

1   Business.............................................................    1

2   Properties...........................................................    9

3   Legal Proceedings....................................................   10

4   Submission of Matters to a Vote of Security Holders..................   10

5   Market for Registrant's Common Equity and
         Related Shareholder Matters.....................................   11

6   Selected Consolidated Financial Data.................................   12

7   Management's Discussion and Analysis of
         Financial Condition and Results of Operations...................   13

8   Financial Statements and Supplemental Data...........................   23

9   Changes in, and Disagreements with Accountants on
         Accounting and Financial Disclosure.............................   41

10  Directors and Executive Officers of the Registrant...................   41

11  Executive Compensation...............................................   41

12  Security Ownership of Certain Beneficial Owners and Management.......   41

13  Certain Relationships and Related Transactions.......................   41

14  Exhibits, Financial Statement Schedules, and
         Reports on Form 8-K.............................................   41

15  Signatures...........................................................   42

16  List of Financial Statements and Financial Statement Schedules.......   E-1



<PAGE>
                                     PART I

ITEM 1 - BUSINESS

General

FinishMaster,  Inc.  (the  "Company") is the leading  distributor  of automotive
paints,  coatings and  paint-related  accessories  to the  automotive  collision
repair industry in the United States.  The Company serves its customers  through
151 sales  outlets  and seven  distribution  centers  located in 22 states.  The
Company has approximately  27,000 customers to which it provides a comprehensive
selection of brand name products  supplied by BASF Corporation  ("BASF"),  E. I.
duPont de Nemours and Co. ("DuPont"), Minnesota Mining & Manufacturing Co., Inc.
("3M") and PPG  Industries,  Inc.  ("PPG") in addition  to its own  FinishMaster
PrivateBrand  refinishing  accessory  products.  The  Company is  typically  the
primary  source of supply to its  customers and offers a broad range of services
designed to enhance the operating  efficiencies and competitive positions of its
customers and suppliers.  The Company's  operations are currently organized into
three divisions: Southeastern, Western, and Central/Northeastern.

The  Company  is  the  leading   consolidator  in  the  automotive   refinishing
distribution   industry,   having   successfully   completed   approximately  25
acquisitions over the past seven years, ranging from fill-in acquisitions to the
more recent  strategic  acquisitions of Thompson PBE, Inc.  ("Thompson") and LDI
AutoPaints, Inc. ("AutoPaints").

On November 21, 1997, the Company  acquired  Thompson for an aggregate  purchase
price of approximately $73.5 million,  including  acquisition costs. In addition
to the cash purchase price, the Company refinanced  approximately  $34.5 million
of Thompson  indebtedness  in  conjunction  with the  transaction.  The Thompson
acquisition  significantly  expanded the  Company's  geographic  presence in the
Southeastern and Western United States.

On June 30, 1998, the Company  completed the acquisition by merger of AutoPaints
in  exchange  for the  issuance of 1.5 million  shares of the  Company's  common
stock.  Since AutoPaints was acquired from the Company's  majority  shareholder,
the acquisition  constituted a transaction  within a controlled group. Thus, the
acquisition was accounted for using the historical cost basis of AutoPaints' net
assets, which approximated $14.4 million at the date of acquisition. The Company
intends to continue its strategy of expanding through additional acquisitions.

The Company is an Indiana  corporation.  On March 1, 1998, the Company relocated
its corporate  headquarters from Kentwood,  Michigan,  to newly renovated office
space in  Indianapolis,  Indiana.  The Company  leases that space from LDI, Ltd.
("LDI"),  an Indiana  limited  partnership,  which  indirectly owns 74.1% of the
outstanding  shares of the Company.  The Company  believes that the terms of the
lease are at least as  favorable  to the Company as those that could be obtained
by arms-length  negotiations  with an  unaffiliated  third party. As a result of
this move,  the  principal  executive  offices of the  Company are located at 54
Monument Circle, Suite 600, Indianapolis,  IN 46204, and its telephone number is
(317) 237-3678.



                                     - 1 -
<PAGE>

Industry Overview

The U.S. automotive paint distribution market is approximately $2.5 billion. The
end users of the products distributed by the Company are principally independent
collision repair shops and automobile dealers. Additionally,  organizations that
maintain their own  automobile  fleet,  sellers of automotive  salvage and other
commercial/industrial  users  make  up a  smaller  percentage  of the  Company's
customer base.  Automotive paint and related supplies,  in contrast to labor and
parts, represent only a small portion (approximately 7-10%) of the total cost of
a typical  collision  repair job.  However,  while paint is a  relatively  minor
component of the total repair cost,  it is a critical  factor in the  customer's
level of satisfaction.

The domestic wholesale  aftermarket for automotive paint and related supplies is
characterized by a small number of manufacturers of paint and supplies. The five
predominant  manufacturers of automotive paint  distributed in the United States
are Akzo Nobel ("Sikkens"),  BASF, DuPont, PPG, and The Sherwin-Williams Company
("Sherwin-Williams").  In addition,  several other large  foreign  manufacturers
have recently taken steps to expand the  distribution of their paint products in
the United States. 3M is the predominant  manufacturer of related supplies which
include  refinishing  materials,  supplies,  accessories  and tools such as sand
paper, masking tape and paint masks.

While automotive paint  manufacturing is highly  concentrated,  automotive paint
distribution  and the end users of automotive paint are highly  fragmented.  The
Company  believes that a large number of independent  distributors of automotive
paint  serve  an  aggregate  of  approximately  50,000  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.


<PAGE>

Below is a Market Profile obtained from Collision Repair Industry INSIGHT:

                                                       Annual Shop
            No. of Collision                             Revenue
              Repair Shops                             ($Millions)
            --------------------------------------------------------
                   9,000                              $0.2
                  13,000                              $0.2 to $0.3
                  12,500                              $0.3 to $0.45
                   7,000                              $0.45 to $0.6
                   3,500                              $0.6 to $1.0
                   2,800                              $1.0 to $2.0
                     800                              $2.0 to $3.0
                     450                              $3.0 to $5.0
                     100                              $5.0

Due to  the  large  number  of end  users,  and  their  increasing  demands  for
personalized  services  such  as  multiple  daily  deliveries,  assistance  with
color-mixing and matching,  and assistance with paint application techniques and
environmental  compliance reporting,  manufacturers  typically service end users
through distributors such as FinishMaster.  Nevertheless,  some of the Company's
paint   manufacturers  have  elected  to  operate   company-owned   distribution
facilities in selected markets, including markets in which the Company operates.
The Company believes,  however,  that the largest automotive paint manufacturers
have generally avoided the cost of operating their own distribution  network due
to their  inability to offer  multiple  lines of paint which  prevents them from
spreading  distribution  expenses across the market's entire potential  customer
base.  Consequently,  the Company believes that independent distributors such as
the Company,  which can sell the products of several  paint  manufacturers,  are
better situated to service the end users' needs than the distribution facilities
of automotive paint manufacturers.



                                     - 2 -
<PAGE>

Distributors and collision repair shops are in the process of consolidation  due
to, among other things,  the declining  number of repair jobs.  According to the
estimates of one industry  source,  the total number of vehicles on the road has
increased from  approximately  140 million in 1980 to 215 million in 1997, while
the  number of repair  jobs has  declined  over this same  period of time.  This
decline is due to, among other things,  automotive  safety  improvements such as
anti-lock  brakes,  rear  window-placed  brake lights and more  reliable  radial
tires.  Stricter  drunk driving  laws,  more  vigorous law  enforcement  and the
increasing percentage of drivers reaching middle age have also resulted in fewer
accidents.  Additionally,  a higher  percentage  of  collision  damaged cars are
declared total losses,  rather than repaired,  due to uni-body  construction and
rising  costs of  repair  and  refinishing.  Over the past  several  years,  the
industry has benefited from warranty work to repair  defective paint finishes on
certain  domestic  vehicles  manufactured  in the late  1980s and  early  1990s.
However,  the  Company  believes  that the volume of  warranty  repair  work has
decreased  significantly  since 1995  because  of steps  taken by the major U.S.
automobile  manufacturers  to reduce  multi-year  warranty  programs  to repaint
certain  vehicles.  The Company  does not expect to realize  significant  future
benefits from these former warranty programs.

The Company  believes  that  environmental  and other  regulatory  pressures and
technological  advancements in paints and coatings are also significant  factors
leading to  consolidation  of both  distributors  and  collision  repair  shops.
Historically,  the application of paints and coatings has released emissions due
to the products' high solvent  content.  In an effort to reduce these emissions,
environmental  regulations  have been proposed or implemented at federal,  state
and local levels.  Paint  manufacturers  have responded to these  regulations by
introducing  technologically  advanced lower volatile organic  compounds ("VOC")
and  water-borne  paints which  require more  advanced  application  techniques.
Furthermore,  the application  equipment itself has been improved.  For example,
the latest high  volume low  pressure  ("HVLP")  spray guns  deliver  paint more
efficiently to a given  surface,  resulting in less paint being emitted into the
atmosphere.  As a result,  automotive  refinishing has become a complex process,
often  requiring  advanced  spray  booths and air  filtration  systems to reduce
unwanted  particulates and emissions.  This complexity  places new challenges on
automotive  refinishers who may not have the training or expertise  necessary to
apply the new paints and  coatings  or the  financial  resources  to acquire the
necessary  equipment.  The Company  believes  that its  experience  in assisting
customers  with  regulatory  compliance and reporting in California and Colorado
will be applicable in other geographic  areas as  EPA-sponsored  VOC regulations
are enacted nationwide.

Further,  insurance  companies have begun to designate  certain collision repair
shops as so-called "direct repair providers." As such, the designated  collision
repair shops  (approximately  12,000 in the U.S.) are  directed  business by the
insurance  carriers in return for price  concessions  from customary  rates. The
Company believes this trend favors larger,  more efficient repair shops and will
likely continue in the foreseeable future.

Products and Suppliers

The Company offers its customers a  comprehensive  selection of prominent  brand
name products and its own FinishMaster  PrivateBrand  products. The product line
consists  of over 20,000  stock  keeping  units  ("SKUs"),  including  the three
leading brands of automotive  paints and coatings and a leading brand of related
accessories.  FinishMaster  PrivateBrand  products  include  some  of  the  most
frequently used refinishing accessories such as masking materials, body fillers,
thinners, reducers and cleaners.



                                     - 3 -
<PAGE>

The following table  illustrates the approximate  number of SKUs,  suppliers and
selected  brand names in each of the  Company's  major product  categories.  The
Company may change from time to time the selection and mix of its products.
<TABLE>
<CAPTION>

                                            Approximate Number of
                                          Manufacturers and Suppliers            Approximate
            Product Category                                                   Number of SKUs                 Selected Brand
------------------------------------------------------------------------- -----------------------------------------------------
<S>                                                     <C>                          <C>            <C> 
Branded Paints and Coatings                             3+                           5,200           BASF, DuPont, PPG, others
Branded Accessories                                     3                            8,300           3M, Dynatron, US Chemical
Private Label Accessories                              25                              100           FinishMaster
Other Miscellaneous Products                                                         6,400           Various
-------------------------------------------------------------------------------------------------------------------------------
Total                                                                               20,000
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


The Company  relies on four  leading  suppliers  for the majority of its product
requirements.  BASF, DuPont, and PPG supply virtually all of the Company's paint
products,   while  3M  is  the  Company's   largest  supplier  of  paint-related
accessories.  Products  supplied  by  BASF,  DuPont,  3M and PPG  accounted  for
approximately  60%  of  purchases  in  1998.  The  Company   continuously  seeks
opportunities  with new and  existing  suppliers  to supply the highest  quality
products.

The Company  believes that BASF, DuPont, and PPG are market leaders,  accounting
for a majority of total domestic  automotive  paint sales.  The Company believes
that in 1998, it was the largest  purchaser of aftermarket  automotive  paint in
the United States from each of these manufacturers.  The Company also acquires a
modest amount of its paint requirements from several foreign  manufacturers.  As
is common  industry  practice,  the Company does not maintain  long-term  supply
contracts  with  any of its key  suppliers.  The  Company  enters  into  written
agreements  with  most of its  major  suppliers  for each  sales  outlet.  These
agreements are nonexclusive and set forth the suppliers' warranties,  procedures
for resolving disputes,  and provisions which generally allow for annual returns
of obsolete  inventory  to the  supplier in return for credit or new  inventory.
Prices and terms are established by the suppliers'  invoices and published price
lists and may be  changed by the  supplier  without  notice.  In  addition,  the
agreements  require the Company to maintain adequate  inventories at a regularly
established  place of business,  to train and manage its sales staff, and to use
its best efforts to promote the products.  These  agreements  typically  contain
reciprocal clauses allowing cancellation on written notice ranging from 30 to 90
days.  Although each of these suppliers generally competes with the others along
product  lines,  the  Company  does not  believe  the  products  are  completely
interchangeable  because  of  high  brand  loyalty  among  customers  and  their
brand-specific  color matching computer systems.  For this reason, the Company's
acquisition  program is also dependent on the willingness of the principal paint
suppliers to continue to supply acquired businesses.  The Company has agreements
with other  warehouse  suppliers for the purchase of certain paint and non-paint
supplies in specified  geographic  locations.  Some of these agreements  contain
minimum volume commitments.



                                     - 4 -
<PAGE>

Whenever  practical,  purchases  from  suppliers  are made in large  volumes  to
maximize volume discounts and optimize payment terms. In addition, the Company's
size generally  permits it to benefit from periodic special  incentive  programs
available from suppliers.  These programs provide additional  purchase discounts
and extended payment terms in exchange for large volume  purchases.  The Company
also benefits from manufacturer-provided discounts upon early payment of certain
accounts and from other supplier-supported  programs. Branded products carry the
manufacturers'  guaranties.  Defective  products  typically  may be  returned to
manufacturers at no charge to the Company and obsolete products generally may be
returned for a slight restocking fee. Due to the manufacturers' favorable return
policies,  the Company  also accepts  customer  returns of defective or obsolete
products.  The  Company  has  arrangements  with its  suppliers  that enable the
Company  to return  product  to the  suppliers  subject  to  certain  restocking
charges.

The  Company  purchases  substantially  all  of  its  automotive  paint  related
accessories  directly  from  3M,  although  such  supplies  are  also  generally
available from independent warehouse  distributors at somewhat higher costs. The
Company  regularly  purchases a small number of products not available  directly
from the manufacturers  and certain low volume items from independent  warehouse
distributors.

Services

The  Company  offers  comprehensive  value-added  services  designed  to  assist
customers  in  operating  their  businesses  more  effectively.  These  services
include:

Rapid Delivery. Products are delivered to customers using the Company's delivery
fleet of approximately 800 trucks.  The Company offers multiple daily deliveries
per  customer to meet its  customers'  just-in-time  inventory  needs.  Customer
concerns  for  product  availability  typically  take  priority  over all  other
competitive considerations, including price.

Technical  Support.  The Company's  technical support personnel  demonstrate and
recommend products. In addition,  they assist customers with problems related to
their particular product applications. Equipment specialists provide information
to customers regarding their heavy equipment requirements,  such as spray booths
and frame straightening equipment.

Product  Training.  As a result of increasing  regulations,  manufacturers  have
introduced   technologically   advanced,   lower  VOC  paints,   which   require
significantly more sophisticated  application  techniques.  The Company provides
training to its customers in order to teach them the techniques required to work
with these products.  Training  sessions are typically  conducted jointly by the
Company and by one or more of its major suppliers at the customer's  location or
at an off-site location.

Management  Seminars.  Management seminars are conducted at convenient locations
to inform customers about 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 120,000 mix formulas.
With  sophisticated  PC-based  color  matching  equipment and  specialists,  the
Company provides color matching services to its customers.



                                     - 5 -
<PAGE>

Inventory  Management.  The Company performs  monthly  physical  inventories for
customers who request this service.  The Company also  provides  customers  with
management information reports on product usage.

Assistance  with  Environmental  Compliance  Reporting.  California  air quality
regulations  mandate  paint and  application  methods  which  result in  reduced
atmospheric emissions of paint and other related materials.  In California,  the
Company  provides  information  to its  customers  with  respect to air  quality
reporting and arranges  demonstrations of new products and applications designed
to comply  with air quality  regulations.  In  addition,  in  California  and in
Colorado,  the  Company  assists  its  customers  with  environmental  reporting
requirements by providing special reports designed to simplify their compliance.
The EPA has  proposed  regulations  to control  VOC  emissions  from  automobile
refinishing nationwide and, accordingly, the Company is considering an expansion
of these programs.

Personnel  Placement.  Certain of the Company's divisions maintain an employment
data base which includes  employment  openings and/or persons seeking employment
with collision  repair shops located in the market  served.  Upon request from a
customer  to fill an  opening,  the Company may provide the names of one or more
persons for the  position.  Similar  services are  available to persons  seeking
employment.  The  Company  does not charge for this  service but  benefits  from
enhanced relationships with its customers and their employees.

Operations

Warehouse.  The Company operates seven distribution centers which are located in
Michigan,  California,  Florida,  North  Carolina,  and  Colorado.  Products are
delivered from the distribution centers to sales outlets weekly by the Company's
semi-trucks.

Sales  Outlets.  As of March 1, 1999,  the Company  operated  151 sales  outlets
servicing  customers  in 22 states with a delivery  fleet of  approximately  800
vehicles.  Sales outlets are  strategically  located in order to provide  prompt
service to the Company's customers.  Each sales outlet maintains a comprehensive
selection of competitively priced products tailored to the specific market needs
of its customers.  While supplier commitments in a given market may prevent some
outlets  from  carrying  all of the  Company's  product  lines,  each  outlet is
authorized to carry the majority of the  products,  including at least two major
paint brands. Sales outlets electronically order their inventory requirements on
a regular  basis from the  Company's  distribution  center or directly  from the
manufacturer.

Management  Information Systems. Each of the Company's sales outlets uses either
personal computers or terminals for inventory control and order processing.  The
Company  utilizes  IBM AS/400 and HP 9000  computers to collect and process data
required  for  operations  analysis,   finance,   warehouse  and  administrative
functions and the management of receivables and inventory.  The Company believes
that its current  systems are  adequate  but is in the process of migrating to a
single  information  technology  platform.  The Company has also  implemented  a
detailed plan to ensure Year 2000  compliance.  For further  information  on the
Company's Year 2000 efforts and progress, see Item 7 -- "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Sales and Marketing

As of December 31, 1998,  the Company  employed a 322 person direct sales force.
The Company  assigns its sales  personnel  to specific  customer  accounts in an
effort to build long-term  relationships.  Sales  representatives  make frequent
visits to customer sites in order to review the customer's  requirements  and to
offer general,  technical and product support. The Company's sales personnel are
generally  compensated  through  a  combination  of sales  commissions  and base
salaries.  The Company emphasizes continuing education and training of its sales
force in order to provide a high degree of support for its customers.



                                     - 6 -
<PAGE>

Customers

The Company serves approximately  27,000 customers,  none of which accounted for
more  than  1% of the  Company's  sales.  The  Company  believes  that it is the
principal  source of supply of automotive paint and related supplies for most of
its customers.  In addition to independent collision repair shops and automobile
dealers,  which are the Company's  largest category of customers,  the Company's
customers include van converters,  trucking companies, schools,  municipalities,
government  agencies,  sellers of automotive  salvage,  refinishers,  marine and
aviation refinishers and other commercial and industrial users.

Competition

The  distribution  segment  of the  automotive  refinishing  industry  is highly
fragmented  and  competitive  with  many  independent   distributors   competing
primarily on the basis of technical  assistance and expertise,  price,  speed of
delivery  and  breadth  of  product  offering.  There  are no other  independent
national distributors of automotive refinish paints and accessories. There are a
number  of  independent  regional  distributors,  many of  which  are in  direct
competition  with the Company on a regional or local level.  Competition  in the
purchase of  independent  distributors  and sales  outlets may occur between the
Company and other automotive  refinishing  distributors  which are also pursuing
growth through acquisitions.

The Company may also encounter  significant  sales  competition  from new market
entrants,   automotive  paint  manufacturers,   buying  groups  or  other  large
distributors  which may seek to enter such  markets or may seek to compete  with
the  Company  for  attractive  acquisition  candidates.   Although  the  largest
automotive   paint   manufacturers   have   generally  not  operated  their  own
distributors, or have done so only on a limited basis, they may decide to expand
such activity in the future. For example,  Sherwin-Williams  distributes its own
automotive  paints  through its sales  outlets.  In addition,  BASF,  one of the
Company's principal  suppliers,  distributes through its own outlets.  While the
Company does not believe that current direct distribution  efforts by automotive
paint  manufacturers  have  significantly  affected  its sales,  there can be no
assurance  that the Company  will not  encounter  increased  competition  in the
future.  The Company may also compete  with its  suppliers in selling to certain
large volume end users such as van  converters,  small  manufacturers  and large
fleet operators.

Employees

As of December 31, 1998, the Company employed  approximately  1,600 persons on a
full and  part-time  basis.  None of the  employees  are covered by a collective
bargaining agreement, and the Company considers its relations with its employees
to be good.

Governmental Regulation

The Company is subject to various federal, state and local laws and regulations.
These  regulations  impose  requirements  on the Company and its  customers  and
provide  opportunities  to the Company for providing  services to customers with
respect to the use of new products and applications  designed to comply with air
quality regulations. Pursuant to the regulations of the United States Department
of Transportation  and certain state  transportation  departments,  a license is
required to transport the Company's products and annual permits are required due
to classification of certain of the Company's  products as "hazardous."  Various
state and  federal  regulatory  agencies,  such as the  Occupational  Safety and
Health  Administration  and the United States  Environmental  Protection Agency,
have jurisdiction over the operation of the Company's  distribution  centers and
sales outlets,  including worker safety,  community and employee "right-to-know"
laws, and laws regarding clean air and water. In addition,  state and local fire
regulations  extensively  control  the design  and  operation  of the  Company's
facilities.  Such  regulations are complex and subject to change.  Regulatory or
legislative  changes may cause future increases in the Company's operating costs
or otherwise negatively affect operations.  Although the Company believes it has
been and is  currently  in  compliance  with the  applicable  standards  imposed
pursuant to such laws and  regulations,  there can be no  assurance  that in the
future the Company may not be adversely  affected by such  regulations  or incur
increased  operating  costs in  complying  with such  regulations.  The  Company
believes  that,  on  balance,  these  regulations  favorably  affect the Company
because it is, in most  instances,  better able than its smaller  competitors to
comply with such regulations and to assist its customers with compliance.



                                     - 7 -
<PAGE>

Environmental

The principal environmental  legislation presently affecting the Company and its
customers in a significant manner is described below.

Resource  Conservation  and Recovery Act of 1976  ("RCRA").  RCRA  regulates the
treatment,  storage and  disposal of  hazardous  and solid  wastes.  Under RCRA,
liability  and stringent  management  standards are imposed on a person who is a
generator or transporter of a hazardous waste or an owner or operator of a waste
treatment,  storage or disposal facility. At some of its locations,  the Company
is subject to RCRA requirements as a small quantity generator.

Comprehensive  Environmental  Response,  Compensation  and Liability Act of 1980
("CERCLA").  CERCLA addresses cleanup of sites at which there has been or may be
a release of hazardous substances into the environment. CERCLA assigns liability
for costs of cleanup and for damage to natural  resources (i) to any person who,
currently or at the time of disposal of a hazardous substance, owned or operated
any facility at which hazardous  substances  were deposited;  (ii) to any person
who by  agreement  or  otherwise  arranged  for the  disposal or  treatment,  or
arranged with a transporter for transport for disposal or treatment of hazardous
substances  owned or  possessed  by such  person;  and (iii) to any  person  who
accepted hazardous  substances for transport to disposal or treatment facilities
or sites  selected by such  person  from which there is a release or  threatened
release of hazardous substances. The Company has acquired a number of businesses
which  prior to  acquisition  may have sent  waste to sites  which  have  become
subject to government cleanup under CERCLA.

Clean Air Act and 1990  Amendments.  The Clean Air Act requires  compliance with
national  ambient  air  quality  standards  ("NAAQS")  and  empowers  the EPA to
establish and enforce limits on the emission of various pollutants from specific
types of  facilities.  The Clean Air Act  Amendments of 1990 (the  "Amendments")
modify the Clean Air Act in a number of significant areas. The Amendments, among
other things, establish new programs and deadlines for achieving compliance with
NAAQS, establish controls for hazardous air pollutants, establish a new national
permit  program for all major sources of pollutants and create  significant  new
penalties,  both civil and  criminal,  for  violations of the Clean Air Act. The
Amendments  specifically  require  a review  of VOC  emissions  from  commercial
products  (which  encompass  emissions  relating to the  application of paint to
automobiles).  Pursuant to this review,  the EPA decided to develop  regulations
controlling  automotive  refinishing  coatings.  At  some of its  locations  the
Company is subject to the Clean Air Act because it uses paint spraying equipment
for paint matching and for training of customers.

Other Federal and State Environmental Laws. The Company's operations are subject
to regulation under,  among others,  the following federal laws: the Clean Water
Act,  the  Safe  Drinking  Water  Act,  the  Emergency  Planning  and  Community
Right-to-Know  Act,  the  Occupational  Safety and Health Act and the  Hazardous
Materials  Transportation  Act. In addition,  many states have other regulations
and policies to cover more detailed aspects of hazardous materials management.

Local Air Quality  Regulations.  The South Coast Air Quality Management District
(the "SCAQMD")  (Southern  California)  and the Bay Area Air Quality  Management
District (the  "BAAQMD")  (San  Francisco  Bay Area) have  detailed  regulations
pertaining to metal coating and the use of VOCs. These regulations  prohibit the
sale of nonconforming automobile paint at the distributor level, which increases
somewhat  the  compliance  obligations  of the Western  Division's  distribution
sites. Other states have adopted VOC regulations which impose VOC limits similar
to the VOC limits proposed by the EPA. The national  regulations proposed by the
EPA will not  override  more  restrictive  state and local  regulations  such as
California's  regulations,  which have the lowest VOC limits in the country. The
Company  believes its experience  with such  regulations,  including  compliance
reporting and the use of paints and equipment designed to meet such regulations,
is not matched by most smaller competitors.

Compliance by the Company with environmental protection laws has had no material
effect upon capital expenditures, earnings or competitive position.

                                     - 8 -
<PAGE>


ITEM 2 - PROPERTIES

The following  table sets forth  certain  information  regarding the  facilities
operated by the Company as of March 1, 1999.

                                                                  Number of
                                          Number of         Distribution Centers
          State (by Division)           Sales Outlets
--------------------------------------------------------------------------------
Central/Northeastern Division
     Connecticut                              3
     Delaware                                 1
     Illinois                                 4
     Indiana                                  3
     Maryland                                 3
     Massachusetts                            5
     Michigan                                11                       1
     New Jersey                               7
     Ohio                                     2
     Oklahoma                                 1
     Pennsylvania                             3
     Texas                                   11
     Virginia                                 2
     Wisconsin                                4
--------------------------------------------------------------------------------
                                             60                       1
Southeastern Division
     Alabama                                  1
     Florida                                 39                       3
     Georgia                                  3
     North Carolina                           6                       1
     South Carolina                           4
     Virginia                                 1
--------------------------------------------------------------------------------
                                             54                       4
Western Division
     Arizona                                  3
     California                              28                       1
     Colorado                                 6                       1
--------------------------------------------------------------------------------
                                             37                       2
--------------------------------------------------------------------------------
Total Sales Outlets and
     Distribution Centers                   151                       7
--------------------------------------------------------------------------------

The  Company's  sales  outlets  range in size from 1,200  square  feet to 13,000
square  feet.  Some of the larger  sales  outlets  are also used as "drop  ship"
points from which they supply  other sales  outlets.  Sales  outlets  consist of
inventory storage areas,  mixing  facilities,  display and counter space and, in
some instances,  sales office space. Sales outlets are strategically  located in
major  markets to maximize  market  penetration,  transportation  logistics  and
overall customer service. The Company's  distribution centers range in size from
5,000 square feet to 38,500 square feet. The  distribution  centers are equipped
with efficient material handling and storage equipment.



                                     - 9 -
<PAGE>

The Company owns 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 1999 to
2006,  with  options to renew.  The Company  typically  assumes the lease of the
former owner in  acquisitions.  In a number of instances,  the  Company's  sales
outlets are leased from the former owners of businesses acquired by the Company.
The  Company  believes  that all of its leases  were at fair  market  rates when
executed, that presently no single lease is material to its operations, and that
alternative sites are presently available at market rates.

The Company is leasing 15,259 square feet of executive offices which are located
in Indianapolis, Indiana.

ITEM 3 - LEGAL PROCEEDINGS

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  alleges  that the Company  offered,  in a manner  which
injured the  plaintiff,  rebates and cash bonuses to  businesses in the Southern
California area if those  businesses  would buy exclusively from the Company and
use its products.  The plaintiff  claims  damages in the amount of $3.8 million,
trebled to $11.4 million. The Company believes that the claims are without merit
and is aggressively  defending itself against all allegations.  Accordingly,  it
has not recorded any loss provision  relative to damages sought by the plaintiff
in this lawsuit.

The Company is subject to various  claims and  contingencies  arising out of the
normal course of business,  including those relating to commercial transactions,
product  liability,  automobile,  taxes,  discrimination,  employment  and other
matters.  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 the  Company's  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 53) serves as a Senior Vice  President of the Company and as
the manager of its Western  Division,  a position he has held since June,  1998.
Mr. Case joined the Company upon  completion  of the  Company's  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.

John Andre Lacy (age 34) joined the  Company as Senior  Vice  President-Planning
and Marketing in January,  1999. 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  earned an MBA from the  University  of Chicago  and was a Vice
President at the J. Walter Thompson advertising company. Over his eight years in
the advertising field, Mr. Lacy managed package-goods  assignments in both North
America and the Asia Pacific  region.  Mr. Lacy is the son of Andre B. Lacy, the
Chairman and Chief Executive Officer of the Company.

Robert R.  Millard (age 41) joined the Company in October,  1998,  as its Senior
Vice  President-Finance and Chief Financial Officer.  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.



                                     - 10 -
<PAGE>

Roger  A.   Sorokin   (age  58)  has  served  as  the   Company's   Senior  Vice
President-Acquisitions and Development since November, 1998. Prior to such date,
Mr.  Sorokin had served as  Vice-President-Finance  of the Company for more than
the previous five years.

Charles  "Remy"  Stephenson  (age 44) was named  Senior  Vice  President  of the
Company,   with   responsibility   for  sales  and  store   operations  for  the
Central/Northeastern  Division,  in October,  1997. Mr. Stephenson served as the
Company's Vice President of Marketing from August, 1997 to October,  1997. Prior
to joining the Company,  Mr.  Stephenson was employed by  Sherwin-Williams  Auto
Finishes Inc. as Director of Sales from September,  1994 to August,  1997 and as
Regional Director of the Western Region from October, 1991 to September, 1994.

Charles  VanSlaars (age 48) serves as a Senior Vice President of the Company and
as the manager of its Southeastern  Division, a position he has held since June,
1998.  From June,  1996 until May,  1998, Mr.  VanSlaars  served as an executive
officer of AutoPaints.  From 1994,  until 1996, Mr.  VanSlaars  served as a 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
FinishMaster's  common  stock trades on The NASDAQ Stock Market under the symbol
FMST. The number of holders of FinishMaster's common stock at December 31, 1998,
was approximately  600, based on information  provided by the Company's transfer
agent.

The range of high and low prices reported by NASDAQ for the last twelve quarters
were:

 Year         Quarter Ended                 High                   Low
--------------------------------------------------------------------------------
 1997         March 31                     $   8-1/2            $   5-3/4
 1997         June 30                          8-3/4                5-1/4
 1997         September 30                     8-3/4                5-3/8
 1997         December 31                     11-3/4                6-1/4
 1998         March 31                        11-3/4                7-3/4
 1998         June 30                         10-3/4                8-5/8
 1998         September 30                    10                    5-1/4
 1998         December 31                      7-3/8                3-1/2
                                                            
The  closing  price on March 26, 1999 was $5-3/4.  No cash  dividends  on common
stock have been paid  during any period and none are  expected to be paid in the
foreseeable  future.  The Company  anticipates  that all earnings and other cash
resources of the Company will be retained by the Company for  investment  in its
business.

Consistent with  FinishMaster's  current capital  structure,  effective April 5,
1999,  shares of  FinishMaster's  common  stock  will be  traded  on The  Nasdaq
SmallCap Market.

On June 30, 1998, the Company  completed the acquisition by merger of AutoPaints
in exchange for the issuance of 1,542,416  shares of the Company's common stock.
Such shares were issued to Lacy Distribution,  Inc., the majority shareholder of
the  Company  and a wholly  owned  subsidiary  of LDI.  Such  shares were issued
pursuant to the  exemption  provided in Section  4(2) of the  Securities  Act of
1933, as amended.


                                     - 11 -
<PAGE>

ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data as of and for the years ended
December  31, 1998 and 1997 and the nine months ended  December  31,  1996,  are
derived from the Company's audited  consolidated  financial statements which are
included  elsewhere herein. The selected  consolidated  financial data as of and
for the years  ended  March 31,  1996 and 1995 are  derived  from the  Company's
audited  consolidated  financial  statements which are not included herein.  The
financial  data  should  be read  in  conjunction  with  the  Company's  audited
consolidated financial statements and notes thereto,  included elsewhere herein,
and with  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations."

<TABLE>
<CAPTION>

                                                                                Nine Months                  Fiscal
                                                      Year Ended                   Ended                   Year Ended
                                                     December 31,              December 31,                 March 31,
                                            --------------------------------  ----------------    ------------------------------

(In thousands, except per share data)        1998 (2)(3)        1997 (2)         1996 (1)             1996             1995
                                            ---------------  ---------------  ----------------    -------------    -------------
<S>                                         <C>              <C>              <C>               <C>              <C>           
Per Share
      Net income
          Basic                             $        0.29    $        0.11    $          0.11   $         0.44   $         0.58
          Diluted                           $        0.29    $        0.11    $          0.11   $         0.44   $         0.58
      Pro forma net income (loss) (4)       $        0.33    $       (1.01)   $             -   $            -   $            -

Statements of Operations Data
      Net sales                             $     309,946    $     130,175    $        95,822   $      107,511   $       79,382
      Gross margin                          $     109,678    $      47,107    $        33,891   $       38,012   $       28,048
      Income from operations                $      15,895    $       3,832    $         2,566   $        5,073   $        5,394
      Net income                            $       1,988    $         656    $           660   $        2,649   $        3,462
      Pro forma net income (loss) (4)       $       2,459    $      (7,585)   $             -   $            -   $            -
      Weighted average
          shares outstanding                        6,780            5,994              6,000            6,000            6,000
      Pro forma weighted average
          shares outstanding                        7,536            7,536                  -                -                -

                                                              December 31,                                 March 31,
                                            --------------------------------------------------  --------------------------------

                                               1998 (3)         1997 (2)           1996            1996 (1)                1995
                                            ---------------  ---------------  ----------------  ---------------  ---------------
Balance Sheet Data
      Working capital                       $      42,296    $       42,928   $        22,819   $       25,036   $       17,763
      Total assets                          $     226,947    $      215,418   $        66,477   $       66,772   $       46,442
      Long-term debt                        $     119,120    $      134,135   $        17,831   $       19,605   $        5,952
      Shareholders' equity                  $      49,348    $       32,932   $        32,326   $       31,665   $       28,956
</TABLE>

(1)   The Company  changed  its fiscal  year-end  from March 31 to December  31,
      effective for the period ended December 31, 1996.

(2)   The operating  results for the years ended  December 31, 1998 and 1997 are
      affected  by the  acquisition  of  Thompson  on  November  21,  1997.  The
      operating  results of Thompson are included in the Company's  consolidated
      operating results since the acquisition date.

(3)   The operating results for the year ended December 31, 1998 are affected by
      the  acquisition of AutoPaints on June 30, 1998. The operating  results of
      AutoPaints for the six-month period from July 1, 1998 through December 31,
      1998  are  included  in  the  Company's  December  31,  1998  consolidated
      operating results.

(4)   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. The unaudited
      pro forma financial  amounts should be read in conjunction  with Item 7 --
      "Management's  Discussion and Analysis of Financial  Condition and Results
      of Operations."

                                     - 12 -
<PAGE>

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 the Company's  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 distributor of automotive paints, coatings and
paint-related  accessories to the automotive  collision  repair  industry in the
United States.  The Company  serves its customers  through 151 sales outlets and
seven  distribution  centers located in 22 states. The Company has approximately
27,000  customers 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
typically the primary source of supply to its customers and offers a broad range
of services  designed  to enhance the  operating  efficiencies  and  competitive
positions of its customers and suppliers. The Company's operations are currently
organized into three divisions: Southeastern, Western, and Central/Northeastern.

The  Company  is  the  leading   consolidator  in  the  automotive   refinishing
distribution   industry,   having   successfully   completed   approximately  25
acquisitions over the past seven years, ranging from fill-in acquisitions to the
more recent strategic acquisitions of Thompson and AutoPaints.

On November 21, 1997, the Company  acquired  Thompson for an aggregate  purchase
price of approximately $73.5 million,  including  acquisition costs. In addition
to the cash purchase price, the Company refinanced  approximately  $34.5 million
of Thompson  indebtedness  in  conjunction  with the  transaction.  The Thompson
acquisition  significantly  expanded the  Company's  geographic  presence in the
Southeastern and Western United States.

On June 30, 1998, the Company  completed the acquisition by merger of AutoPaints
in  exchange  for the  issuance of 1.5 million  shares of the  Company's  common
stock.  Since AutoPaints was acquired from the Company's  majority  shareholder,
the acquisition  constituted a transaction  within a controlled group. Thus, the
acquisition was accounted for using the historical cost basis of AutoPaints' net
assets, which approximated $14.4 million at the date of acquisition. The Company
intends to continue its strategy of expanding through additional acquisitions.

Results of Operations

The Company changed its fiscal year-end from March 31 to December 31,  effective
for the period ended December 31, 1996. As a result, the audited amounts for the
years  ended  December  31,  1998  and 1997 are  presented  with the  comparable
unaudited amounts for the twelve months ended December 31, 1996. Furthermore, as
a result  of the  significant  acquisitions  completed  in the past two years of
Thompson and AutoPaints,  pro forma results of operations are also presented for
the years ended  December  31,  1998 and 1997.  The  Company  believes  that for
purposes  of   Management's   Discussion   and  Analysis,   a  more   meaningful
understanding  of the Company's  performance  can be obtained by a comparison of
the pro forma  results for the years ended  December 31, 1998 and 1997,  and the
historical  twelve-month  results for the periods  ended  December  31, 1997 and
1996.



                                     - 13 -
<PAGE>

The unaudited pro forma  consolidated  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.  In
calculating the pro forma amounts, the historical amounts of the Company and the
acquired  entities have been  adjusted for items  directly  attributable  to the
acquisitions  including  interest  expense  related  to  acquisition  financing,
charges for amortization of intangibles,  depreciation of fair value adjustments
to property and equipment,  and the related tax effects. The unaudited pro forma
amounts do not purport to be indicative of the results of operations  that would
have actually been obtained if the transactions had occurred on January 1, 1997,
or the results of operations that may be obtained in the future.

Net Sales
-------------------------------------------------------------------------------
(In thousands)   1998         Change       1997          Change      1996
                                                                 (unaudited)
-------------------------------------------------------------------------------
Historical      $  309,946    138.1%      $   130,175      3.5%  $ 125,795
-------------------------------------------------------------------------------
Pro forma       $  321,710      4.8%      $   337,818
-------------------------------------------------------------------------------

Pro forma net sales  decreased $16.1 million or 4.8% from 1997 to 1998. With the
acquisition of Thompson and  AutoPaints,  certain  unprofitable  store locations
were  closed  and  store  locations  serving  the same  geographical  area  were
consolidated. The closure and consolidation of 22 sales outlets during this time
period  decreased  sales between 1997 and 1998 by  approximately  $10.1 million.
Same store sales declined approximately $7.0 million or 2.1% as a result of flat
industry market  conditions,  the anticipated  customer attrition related to the
acquisition and integration of Thompson and AutoPaints,  and competitive  market
conditions.  Approximately  70% of  net  sales  consisted  of  automotive  paint
products while the remaining portion was paint-related accessories.

Net sales increased by $4.4 million or 3.5% from 1996 to 1997. This increase was
attributable  to the additional  sales  contributed by Thompson of $12.4 million
for the month of December and sales from other  acquisitions of $1.7 million for
the year. The Thompson sales were offset by a decline in same store sales.  Same
store sales declined primarily due to a slowdown in the van conversion industry,
the exiting of certain low margin business, and flat industry market conditions.

Gross Margin
--------------------------------------------------------------------------------
(In thousands)             1998       Change    1997       Change      1996
                                                                    (unaudited)
--------------------------------------------------------------------------------
Historical               $ 109,678    132.8%   $  47,107     6.6%    $ 44,204
Percentage of net sales       35.4%                 36.2%                35.1%
--------------------------------------------------------------------------------
Pro forma                $ 114,199      2.8%   $ 117,495
Percentage of net sales       35.5%                 34.8%
--------------------------------------------------------------------------------

Pro forma gross margin  decreased $3.3 million or 2.8% between 1997 and 1998 due
primarily  to the  decrease  in pro forma net  sales.  Lower pro forma net sales
volume impacted gross margin in 1998 by  approximately  $5.6 million.  Partially
offsetting  this  amount  was an  improvement  in pro  forma  gross  margin as a
percentage of net sales. With increased  inventory purchase volumes in 1998, the
Company was better  able to take  advantage  of vendor  discounts  and  supplier
incentive programs.



                                     - 14 -
<PAGE>

Gross  margin  increased by $2.9 million or 6.6% from 1996 to 1997 on higher net
sales.  The increase in gross margin as a percentage of net sales was the result
of  participation  in suppliers'  rebate and incentive  programs and  optimizing
prompt payment discounts from suppliers.

Operating Expenses
-------------------------------------------------------------------------------
(In thousands)             1998     Change      1997   Change        1996
                                                                  (unaudited)
-------------------------------------------------------------------------------
Historical operating
    expenses             $46,746    127.3%   $ 20,568   1.3%       $ 20,295
Percentage of net sales     15.1%                15.8%                 16.1%
-------------------------------------------------------------------------------
Pro forma operating
    expenses             $48,099     17.1%   $ 57,993
Percentage of net sales     15.0%                17.2%
-------------------------------------------------------------------------------

Operating  expenses  consist of wages,  facility  expenses,  vehicle and related
costs for the Company's store and  distribution  locations.  Pro forma operating
expenses  decreased  $9.9 million or 17.1% between 1997 and 1998.  This decrease
was a  direct  result  of the  Company's  profit  improvement  initiatives  that
included savings from the consolidation or closure of 22 sales outlets following
the acquisitions of Thompson and AutoPaints,  reduced spending programs at store
and distribution locations, and improved bad debt experience.  Also contributing
to the decrease is the inclusion in 1997 of a $3.8 million Thompson charge taken
prior to the  acquisition  to close five sales outlets and to  consolidate  five
other sites into  existing  locations.  The charge  included  the  write-off  of
unamortized goodwill and future lease costs associated with closed locations.

Operating  expenses  increased  from 1996 to 1997 by $0.3 million or 1.3%.  As a
percentage of net sales,  operating expenses decreased from 16.1% to 15.8%. This
decrease in operating  expenses as a percentage of net sales was a result of the
Company's profit improvement activities, including, but not limited to, staffing
reductions and  streamlining  store and distribution  activities,  which reduced
operating expenses by approximately $2.4 million.  Offsetting these savings were
Thompson's  operating  expenses of $2.3  million  for the month of December  and
operating expenses associated with other acquisitions of $0.4 million.

Selling, General and Administrative Expenses

-------------------------------------------------------------------------------
(In thousands)               1998     Change      1997      Change     1996
                                                                     (unaudited)
-------------------------------------------------------------------------------
Historical               $  36,895    105.2%   $  17,982     3.2%    $   17,427
Percentage of net sales       11.9%                 13.8%                  13.9%
-------------------------------------------------------------------------------
Pro forma                $  38,510     16.5%   $  46,126
Percentage of net sales       12.0%                 13.7%
-------------------------------------------------------------------------------

Selling,   general  and  administrative   expenses  ("SG&A")  consist  of  costs
associated  with  the  Company's   corporate  support  staff  and  expenses  for
commissions,  wages,  and  customer  sales  support  activities.  Pro forma SG&A
expenses  decreased  $7.6 million or 16.5%  between 1997 and 1998 as a result of
the   consolidation  of  four  corporate  offices  into  one,  the  closure  and
consolidation  of 22 sales  outlets,  reduced  spending  initiatives  and  lower
selling expenses related to the reduced sales volume.  Effective March 1998, the
Company moved its corporate offices to Indianapolis, Indiana.



                                     - 15 -
<PAGE>

SG&A expenses increased $0.6 million or 3.2% from 1996 to 1997, but decreased by
0.1% as a percentage of net sales. SG&A expenses were reduced approximately $2.5
million as the result of the Company's cost reduction activities,  that included
reductions  in head count,  professional  fees,  travel and  entertainment,  and
advertising. These savings were offset by Thompson's SG&A expenses for the month
of December 1997 of $2.2 million,  SG&A expenses from other acquisitions of $0.3
million,  and one time costs  related to the  integration  of  Thompson  of $0.6
million.

Depreciation

-------------------------------------------------------------------------------
(In thousands)                 1998   Change      1997     Change       1996
                                                                    (unaudited)
-------------------------------------------------------------------------------
Historical                 $ 3,666     155.5%   $ 1,435      47.3%      $ 974
Percentage of net sales       1.2%                  1.1%                  0.8%
-------------------------------------------------------------------------------
Pro forma                  $ 3,898       3.0%   $ 3,784
Percentage of net sales       1.2%                  1.1%
-------------------------------------------------------------------------------

The $0.1 million or 3.0% increase in pro forma depreciation expense from 1997 to
1998 was due to  capital  expenditures  of $3.3  million  in the  current  year.
Included  in current  year  expenditures  is $1.0  million  for new  information
technology  equipment  associated  with a  continuing  upgrade of the  Company's
management information systems.

The $0.5 million or 47.3% increase in 1997  depreciation  expense from the prior
year was  attributable to $0.2 million of depreciation for the month of December
1997 from assets  acquired in the Thompson  acquisition,  $0.3 million from 1997
capital  expenditures  and a full year's  depreciation on assets from prior year
acquisitions.


Amortization of Intangible Assets

--------------------------------------------------------------------------------
(In thousands)            1998       Change     1997       Change      1996
                                                                   (unaudited)
-------------------------------------------------------------------------------
Historical               $    6,476   96.8%  $    3,290    32.3%    $  2,487
Percentage of net sales         2.1%                2.5%                 2.0%
-------------------------------------------------------------------------------
Pro forma                $    6,996    0.8%  $    7,052
Percentage of net sales         2.2%                2.1%
-------------------------------------------------------------------------------

The 0.8% decrease in pro forma amortization  expense between 1997 and 1998 was a
result  of  certain  intangible  assets,   principally  non-compete  agreements,
becoming fully amortized in the current year.

The $0.8 million or 32.3% increase in amortization expense between 1996 and 1997
was  attributable to $0.3 million of goodwill  amortization  associated with the
Thompson   acquisition   for  the  month  of  December  1997  and  $0.5  million
representing a full year's amortization from prior year acquisitions.

Interest Expense, net
-------------------------------------------------------------------------------
(In thousands)            1998       Change    1997       Change      1996
                                                                    (unaudited)
-------------------------------------------------------------------------------
Historical               $   11,475  331.2%   $    2,661  64.9%  $       1,614
Percentage of net sales         3.7%                 2.0%                  1.3%
-------------------------------------------------------------------------------
Pro forma                $   11,510   13.1%   $   13,240
Percentage of net sales         3.6%                 3.9%
-------------------------------------------------------------------------------



                                     - 16 -
<PAGE>

Pro forma interest expense decreased $1.7 million or 13.1% between 1997 and 1998
due to lower outstanding borrowings and interest rates. The Company repaid $14.6
million of  outstanding  borrowings  in 1998 and the implied  interest  rates on
these borrowings fell from 9.2% to 8.6%.

Interest  expense  increased  $1.0  million  or 64.9%  from  1996 to 1997.  This
increase was  principally the result of interest on debt incurred to finance the
Thompson  acquisition  that  occurred  on  November  21,  1997 and to  refinance
Thompson  indebtedness at the date of acquisition.  The total  acquisition price
for  Thompson  was $73.5  million  and the debt  refinanced  approximated  $34.5
million.

Income Tax Expense (Benefit)
-------------------------------------------------------------------------------
(In thousands)                1998  Change      1997   Change         1996
                                                                     (unaudited)
-------------------------------------------------------------------------------
Historical                $  2,432  372.2%   $   515     30.9%      $   745
Percentage of net sales       0.8%               0.4%                   0.6%
Effective tax rate           55.0%              44.0%                  52.9%
-------------------------------------------------------------------------------
Pro forma                 $  2,727     N/A   $(3,115)
Percentage of net sales       0.8%              (0.9%)
Effective tax rate           52.6%              29.1%
-------------------------------------------------------------------------------

The pro forma income tax expense reflected in 1998,  compared to the tax benefit
in the prior  year,  is directly  attributable  to the pro forma  income  before
income taxes in 1998.  The pro forma  effective tax rate varied from the federal
statutory  rate as a  result  of  certain  expenses,  principally  nondeductible
intangible amortization.  The nondeductible amortization increased the effective
tax rate in 1998,  and decreased  the effective  rate in 1997 as a result of the
losses incurred.  The effect on the 1997 rate was somewhat  lessened as a result
of the higher level of pre-tax losses.

The  effective  tax rate  for 1997  decreased  to 44.0%  from  52.9% in 1996 due
primarily to lower state taxes and the effect of certain  expenses  that are not
deductible for income tax purposes.


                                     - 17 -
<PAGE>

<TABLE>
<CAPTION>
Net Income (Loss) and Income (Loss) Per Share

---------------------------------------------------------------------------------------------------------
(In thousands, except per share data)      1998         Change        1997       Change            1996
                                                                                                (unaudited)
---------------------------------------------------------------------------------------------------------
<S>                                    <C>              <C>          <C>          <C>            <C>    
Historical net income                  $   1,988        203.0%       $   656      0.9%           $   662
Percentage of net sales                     0.6%                        0.5%                        0.5%
Net income per share                   $    0.29        163.6%       $  0.11      0.0%           $  0.11
---------------------------------------------------------------------------------------------------------
Pro forma net income (loss)            $   2,459           N/A       $(7,585)
Percentage of net sales                     0.8%                       (2.2%)
Pro forma net income (loss)
    per share                          $    0.33           N/A       $ (1.01)
---------------------------------------------------------------------------------------------------------
</TABLE>

Factors  contributing  to the changes in net income and pro forma net income and
the related per share amounts are discussed in the detail above.

Inflation and Other Economic Factors

Inflation  affects  FinishMaster's  costs of materials sold,  salaries and other
related  costs  of  distribution.   To  the  extent  permitted  by  competition,
FinishMaster has offset these higher costs of materials  through selective price
increases.

The Company's business may be negatively affected by cyclical economic downturns
in the markets in which it operates. The Company's financial performance is also
dependent on its ability to acquire  businesses  and  profitably  integrate them
into its operations.

Quantitative and Qualitative Disclosure about Market Risk

The  Company  had  no  holdings  of  derivative  financial  or  commodity  based
instruments  at December  31,  1998 and 1997.  A review of the  Company's  other
financial  instruments and risk exposures  indicated the Company had exposure to
interest rate risk.  Based upon the Company's  outstanding  debt at December 31,
1998 and the term for which current  interest rates are fixed, a 10% increase in
interest  rates would  increase  interest  expense for 1999 by an estimated $0.5
million.

Seasonality and Quarterly Fluctuations

The Company's  sales and  operating  results have varied from quarter to quarter
due to various factors and the Company  expects these  fluctuations to continue.
Among these factors are seasonal buying patterns of the Company's  customers and
the timing of acquisitions. Historically, sales have slowed in the late fall and
winter of each year largely due to inclement  weather and the reduced  number of
business days during the holiday season. As a result,  financial performance for
the Company is generally  lower during the December and March quarters  compared
to the June and September quarters. In addition,  the timing of acquisitions may
cause substantial fluctuations of operating results from quarter to quarter. The
Company takes advantage of periodic special  incentive  programs  available from
its  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 the Company's  quarterly cash flows.  Although the
Company  continues to investigate  strategies to smooth the seasonal  pattern of
its  quarterly  results  of  operations,  there  can be no  assurance  that  the
Company's net sales,  results of operations  and cash flows will not continue to
display seasonal patterns.


                                     - 18 -
<PAGE>


<TABLE>
<CAPTION>
Financial Condition, Liquidity and Capital Resources

------------------------------------------------------------------------------------------------
(In thousands)                                   1998              1997                 1996 (1)
------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>               <C>      
Working capital                                 $   42,296        $   42,928        $  22,819
Long-term debt                                  $  119,120        $  134,135        $  17,831
Cash provided by operating activities           $   17,599        $    1,257        $   2,342
Cash used in investing activities               $   (2,168)       $  (74,846)       $  (3,714)
Cash (used in) provided by financing activities $  (14,786)       $   73,653        $     563
------------------------------------------------------------------------------------------------
</TABLE>


(1)  The cash flow amounts for 1996 are for the nine months  ended  December 31,
     1996.

The  Company's  primary  sources of funds  over the past  three  years were from
operations and borrowings under its credit facilities.  The Company's  principal
uses of cash were to fund working capital,  capital expenditures,  acquisitions,
and the repayment of outstanding borrowings.

Net cash generated from operating  activities was $17.6 million in 1998 compared
with $1.3  million  in 1997.  This  increase  was a result  of higher  earnings,
increased  depreciation  and  amortization  expense  and a  positive  change  in
operating  assets  and  liabilities.   Depreciation  and  amortization   expense
increased as a result of the properties and intangible  assets acquired with the
AutoPaints  merger,  a full year's  amortization  on the assets  acquired in the
Thompson  acquisition and a higher level of capital  expenditures in the current
year. The positive change in operating  assets and liabilities was primarily due
to a higher  level of accounts  payable and other  liabilities  at December  31,
1998.

Net cash used in investing  activities  decreased  from $74.8 million in 1997 to
$2.2 million in 1998.  This  decrease  from 1997 was  attributable  to the $73.5
million purchase of Thompson. Investing activities in 1998 included $3.3 million
for capital  expenditures,  partially  offset by $1.8  million of cash  acquired
through  the  merger  with  AutoPaints.   The  Company  estimates  that  capital
expenditures for 1999,  principally for information  technology equipment,  will
approximate $3.5 million.

Net cash used in financing  activities,  primarily  the  repayment of debt,  was
$14.8  million in 1998,  compared  with $73.7  million of cash provided in 1997.
Borrowings to finance the  acquisition  of Thompson  were the primary  source of
cash for investing activities in the prior year.

Total  capitalization  at December  31, 1998 was $178.5  million,  comprised  of
$129.1  million of debt and $49.4  million of equity.  Debt as a  percentage  of
total  capitalization  decreased from 81.2% to 72.3% between 1997 and 1998. This
improvement was attributable to the increase in equity resulting from the merger
with  AutoPaints  and current  year net income,  along with the decrease in debt
resulting from repayments.



                                     - 19 -
<PAGE>

At  December  31,  1998,  the  Company  had term  credit  and  revolving  credit
facilities  totaling $100 million,  and senior subordinated debt of $30 million.
The Company  also had a senior  subordinated  revolving  credit  facility in the
amount of $10 million with its majority shareholder, which was available to fund
working capital and acquisition  needs. This facility expires on March 27, 1999.
The  Company  was  in  compliance  with  the  covenants  underlying  its  credit
facilities,  and had  availability  under its revolving  credit facility of $1.9
million as of year-end.

Based on current and  projected  operating  results  and giving  effect to total
indebtedness,  the Company  believes  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.  The Company
is, however, currently pursuing other financing arrangements. Should the Company
be successful in obtaining acceptable financing terms,  proceeds will be used to
retire  certain  bank term  loans,  a portion of amounts  outstanding  under the
revolving  credit  facility  and the  subordinated  debt  payable to LDI.  Early
retirement of indebtedness will result in an extraordinary loss in the amount of
the net book value of  capitalized  debt issuance  costs.  At December 31, 1998,
unamortized debt issuance costs were approximately $1.5 million.

Year 2000 Date Conversion

Many existing  computer  programs use only two digits to identify  years.  These
programs were  designed  without  consideration  for the effects of the upcoming
change in the  century,  and if not  corrected,  could fail or create  erroneous
results by or at the Year 2000. Essentially all of the Company's information and
technology-based  systems,  as  well as  many  non-information  technology-based
systems,  are  potentially  affected  by the Year 2000  issue.  Technology-based
systems  reside  on  the  Company's  midrange  computer,  servers  and  personal
computers  in the  corporate  office as well as in division  offices and stores.
Specific systems include accounting, financial reporting, inventory tracking and
control,  budgeting,  tax, accounts  receivable,  accounts payable,  purchasing,
distribution,  word  processing and  spreadsheet  applications.  Non-information
technology-based  systems  include  equipment and services  containing  embedded
microprocessors  such as alarm systems and voice mail  systems.  The Company has
relationships   with   numerous   third   parties,   including   several   paint
manufacturers,  equipment  suppliers,  utility companies,  insurance  companies,
banks, and payroll processors, that may be affected by the Year 2000 issue.

The Company's State of Readiness

Remediation  plans  have  been  established  for all major  systems  potentially
affected by the Year 2000 issue. The current status of the plans for information
technology-based systems are summarized as follows:

1.   Identification  of all  applications  and hardware with potential Year 2000
     issues. To the best of the Company's knowledge, this has been completed.

2.   For each item  identified,  performance  of an  assessment  to determine an
     appropriate  action plan and timetable for  remediation  of each item.  The
     plan may consist of replacement, upgrade or elimination of the application.
     This phase has been completed.

3.   Implementation  of  the  specific  action  plan.  Action  plans  have  been
     completed for all known mission critical systems.

4.   Testing each application upon completion.  All in-house  developed  systems
     have been tested and found to be  compliant.  Vendor-supplied  software has
     been  upgraded  to  Year  2000  compliant  versions,  and the  Company  has
     certification of compliance from the software vendors. 

5.   Placement of the new process into production.  All applications and systems
     will  be in  production  by the  end of the  first  quarter  of  1999.  The
     exception  to this is the store  paint  formula  systems  supplied by paint
     vendors.  These systems will be upgraded by the end of the third quarter of
     1999.



                                     - 20 -
<PAGE>

The  Company is in the process of  identifying  all  non-information  technology
based systems.  Appropriate  remediation plans are being developed,  implemented
and tested when each affected  system is  identified.  Identification  should be
completed by the end of the first quarter of 1999 and remedied by the end of the
third quarter.

Identification  of areas of potential  third party risk is nearly  complete and,
for those  areas  identified  to date,  remediation  plans are being  developed.
Identification  and  assessment  should be  completed  by the end of the  second
quarter of 1999 and implemented by the end of the third quarter of 1999.

The Costs Involved

The total cost to the Company of achieving Year 2000  compliance is not expected
to exceed $0.2 million and will consist primarily of the utilization of internal
resources. Spending to date totals approximately $0.1 million. Costs relating to
internal  systems' Year 2000 compliance are included in the Information  Systems
budget and are  immaterial as a percentage of that budget.  All costs related to
achieving Year 2000 compliance are based on management's  best estimates.  There
can be no assurance that actual results will not differ from these estimates.

Risks and Contingency Plan

The  Company  is in the  process of  determining  the risks it would face in the
event  certain  aspects of its Year 2000  remediation  plan  failed.  It is also
developing contingency plans for all mission-critical  processes. Under a "worst
case" scenario,  the Company's operations would be unable to deliver product due
to internal system failures and/or the inability of vendors to deliver materials
for  distribution.  Inventory  levels of certain key products may be temporarily
increased to minimize  exposure.  While  virtually  all internal  systems can be
replaced  with  manual  systems  on  a  temporary  basis,  the  failure  of  any
mission-critical  system  will  have at least a  short-term  negative  effect on
operations. The failure of national and worldwide banking information systems or
the loss of essential utilities services due to the Year 2000 issue could result
in the inability of many businesses, including the Company, to conduct business.
Risk  assessment  should  be  completed  by the end of the  first  quarter,  and
contingency plans should be completed in the third quarter of 1999.

Other Matters

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities."  This Statement  establishes  standards for derivative
instruments  and  hedging  activities  and will  require all  derivatives  to be
recognized on the balance  sheet at fair value.  As the Company is not routinely
involved in derivative and hedging activities, adoption of this Statement is not
expected  to have a  material  impact  on  financial  condition  or  results  of
operations. The Company is required to adopt this Statement in the third quarter
of 1999.

Forward-Looking Statements

This Report contains  certain  forward-looking  statements  pertaining to, among
other things,  the Company's  future results of operations,  cash flow needs and
liquidity, acquisitions, and other aspects of its business. The Company may make
similar forward-looking statements from time to time. These statements are based
largely on the  Company's  current  expectations  and are subject to a number of
risks and  uncertainties.  Actual  results  could differ  materially  from these
forward-looking  statements.  Important  factors to consider in evaluating  such
forward-looking  statements include changes in external market factors,  changes
in the Company's  business  strategy or an inability to execute its strategy due
to changes in its  industry or the economy  generally,  difficulties  associated
with  assimilating  acquisitions,  the emergence of new or growing  competitors,
seasonal and quarterly  fluctuations,  governmental  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.


                                     - 21 -
<PAGE>



ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Financial Statements:                                             Page

       Report of Independent Accountants                           23

       Consolidated Balance Sheets                                 24

       Consolidated Statements of Operations                       25

       Consolidated Statements of Cash Flows                       26

       Consolidated Statements of Shareholders' Equity             27

       Notes to Consolidated Financial Statements                  28

       Financial Statement Schedule:

             Schedule II - Valuation and Qualifying Accounts       S-1

All other  schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.



                                     - 22 -
<PAGE>






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 (the "Company") at December 31, 1998 and
1997,  and the  results of their  operations  and their cash flows for the years
then ended and for the nine months ended  December 31, 1996, in conformity  with
generally accepted  accounting  principles.  These financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards 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 the opinion expressed above.




/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 26, 1999




                                     - 23 -
<PAGE>

<TABLE>
<CAPTION>

CONSOLIDATED
BALANCE SHEETS 
FinishMaster, Inc.
                                                                                                 December 31,         December 31,  
(In thousands, except share amounts)                                                                1998                 1997

ASSETS
Current assets
<S>                                                                                           <C>                  <C>            
      Cash                                                                                    $         1,009      $           364
      Accounts receivable, net of allowance for doubtful
          accounts of $1,680 and $2,247, respectively                                                  30,212               28,744
      Inventory                                                                                        57,744               53,442
      Refundable income taxes                                                                           1,395                1,299
      Deferred income taxes                                                                             3,788                3,844
      Prepaid expenses and other current assets                                                         3,739                2,751
                                                                                              --------------------------------------
      Total current assets                                                                             97,887               90,444

Property and equipment
      Land                                                                                                368                  368
      Vehicles                                                                                          1,362                1,082
      Buildings and improvements                                                                        5,428                3,797
      Machinery, equipment and fixtures                                                                11,925                9,065
                                                                                              --------------------------------------
                                                                                                       19,083               14,312
      Accumulated depreciation                                                                         (7,824)              (4,016)
                                                                                              --------------------------------------
                                                                                                       11,259               10,296

Other assets
      Intangible assets, net                                                                          114,526              110,870
      Deferred income taxes                                                                             2,888                3,374
      Other                                                                                               387                  434
                                                                                              --------------------------------------
                                                                                                      117,801              114,678
                                                                                              --------------------------------------
                                                                                              $       226,947      $       215,418
                                                                                              ======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
      Accounts payable                                                                        $        35,921      $        28,227
      Amounts due to LDI                                                                                  864                   47
      Accrued compensation and benefits                                                                 3,836                3,066
      Other accrued expenses and current liabilities                                                    4,985                8,171
      Current maturities of long-term debt                                                              9,985                8,005
                                                                                              --------------------------------------
      Total current liabilities                                                                        55,591               47,516

Long-term debt, less current maturities                                                               119,120              134,135
Other long-term liabilities                                                                             2,888                  835
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;
          7,535,856 and 5,992,640 shares issued and outstanding                                         7,536                5,993
      Additional paid-in capital                                                                       27,351               14,466
      Retained earnings                                                                                14,461               12,473
                                                                                              --------------------------------------
                                                                                                       49,348               32,932
                                                                                              --------------------------------------
                                                                                              $       226,947      $       215,418
                                                                                              ======================================
</TABLE>


The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                     - 24 -
<PAGE>


CONSOLIDATED STATEMENTS
OF OPERATIONS
FinishMaster, Inc.
<TABLE>
<CAPTION>

                                                                                                                              Nine  
                                                                                    Year                 Year               Months
                                                                                   Ended                Ended                Ended
                                                                            December 31,         December 31,         December 31,
(In thousands, except per share data)                                               1998                 1997                 1996

<S>                                                                      <C>                  <C>                  <C>            
Net sales                                                                $       309,946      $       130,175      $        95,822
Cost of sales                                                                    200,268               83,068               61,931
                                                                         -----------------------------------------------------------
Gross margin                                                                     109,678               47,107               33,891

Expenses
      Operating                                                                   46,746               20,568               15,313
      Selling, general and administrative                                         36,895               17,982               13,192
      Depreciation                                                                 3,666                1,435                  755
      Amortization of intangible assets                                            6,476                3,290                2,065
                                                                         -----------------------------------------------------------
                                                                                  93,783               43,275               31,325
                                                                         -----------------------------------------------------------
Income from operations                                                            15,895                3,832                2,566

Other income (expense)
      Investment income                                                               56                  128                   77
      Interest expense                                                           (11,531)              (2,789)              (1,373)
                                                                         -----------------------------------------------------------
                                                                                 (11,475)              (2,661)              (1,296)
                                                                         -----------------------------------------------------------

Income before income taxes                                                         4,420                1,171                1,270
Income tax expense                                                                 2,432                  515                  610
                                                                         -----------------------------------------------------------
Net income                                                               $         1,988      $           656      $           660
                                                                         ===========================================================

Net income per share (Note 10):
      Basic                                                              $          0.29      $          0.11      $          0.11
                                                                         ===========================================================
      Diluted                                                            $          0.29      $          0.11      $          0.11
                                                                         ===========================================================

Weighted average shares outstanding                                                6,780                5,994                6,000
                                                                         ===========================================================

</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.



                                     - 25 -
<PAGE>


CONSOLIDATED STATEMENTS
OF CASH FLOWS
FinishMaster, Inc.
<TABLE>
<CAPTION>
                                                                                                    Nine
                                                              Year               Year             Months
                                                             Ended              Ended              Ended
                                                      December 31,       December 31,       December 31,
(In thousands)                                                1998               1997               1996
                                                                                             
Operating activities                                                                           
<S>                                                       <C>                <C>                <C>           
      Net income                                          $  1,988           $    656           $    660
      Adjustments to reconcile net income to net cash                                          
      provided by operating activities:                                                        
          Depreciation and amortization                     10,142              4,725              2,820
          Amortization of financing costs                      322                 --                 --
          Deferred income taxes                              2,249               (681)              (400)
      Changes in operating assets and liabilities:                                             
          Accounts receivable, net                             758              4,247              3,122
          Inventories                                          (15)            (1,456)              (815)
          Prepaids and other assets                           (707)               177               (270)
          Accounts payable and other liabilities             2,862             (6,411)            (2,775)
                                                           ----------------------------------------------
Net cash provided by operating activities                   17,599              1,257              2,342
                                                                                               
Investing activities                                                                           
      Business acquisitions and payments under                                                 
          earn-out provisions for prior acquisitions          (191)           (74,149)            (3,083)
      Purchases of property and equipment                   (3,349)              (697)              (620)
      Proceeds from disposal of property and equipment          58                 --                 --
      Cash acquired through merger with LDI                                                    
          AutoPaints, Inc.                                   1,786                 --                 --
      Other                                                   (472)                --                (11)
                                                           ----------------------------------------------
Net cash used in investing activities                       (2,168)           (74,846)            (3,714)
                                                                                               
Financing activities                                                                           
      Borrowings under note payable, bank                       --             20,603             21,255
      Repayments under note payable, bank                       --            (22,444)           (19,415)
      Purchase of common stock                                  --                (50)                --
      Acquisition financing                                     --             73,819              1,191
      Proceeds from the exercise of stock options                7                 --                  1
      Debt issuance costs                                     (168)            (1,689)                --
      Proceeds from long-term debt                          43,300             41,951                 --
      Repayment of long-term debt                          (57,925)           (38,537)            (2,469)
                                                           ----------------------------------------------
Net cash (used in) provided by financing activities        (14,786)            73,653                563
                                                           ----------------------------------------------
                                                                                               
Increase (decrease) in cash                                    645                 64               (809)
Cash at beginning of period                                    364                300              1,109
                                                           ----------------------------------------------
Cash at end of period                                     $  1,009           $    364           $    300
                                                           ==============================================
Supplemental disclosure of cash flow information                                               
Cash paid (received) during the period for:                                                    
          Interest                                        $ 10,360           $  2,192           $  1,313
                                                           ==============================================
                                                                                               
          Taxes                                           $   (291)          $  1,520           $    687
                                                           ==============================================
Non-cash activities                                                                            
      Acquisition of LDI AutoPaints, Inc.:                                                     
          Assets acquired                                 $ 17,667                             
          Less liabilities assumed                           3,246                             
                                                           ---------
          Equity purchased                                  14,421                             
          Less cash acquired in transaction                  1,786                             
                                                           ---------
          Net assets acquired, excluding cash             $ 12,635                             
                                                           =========
                                                                                               
      Earn-out adjustments for prior acquisitions         $    810           $     --           $     --
                                                           ==============================================
                                                                                               
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                     - 26 -
<PAGE>


CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
FinishMaster, Inc.
<TABLE>
<CAPTION>
                                                                                  Additional
                                                                  Common             Paid-in           Retained
(In thousands)                                                     Stock             Capital           Earnings              Totals

<S>                                                      <C>                <C>                 <C>                 <C>            
Balances at
March 31, 1996                                           $         6,000     $         14,508   $        11,157     $        31,665
Options exercised                                                      -                    1                 -                   1
Net income for the nine month period                                   -                    -               660                 660
                                                         ---------------------------------------------------------------------------

Balances at
December 31, 1996                                                  6,000               14,509            11,817              32,326
Purchase of common stock                                              (7)                 (43)                -                 (50)
Net income for the year                                                -                    -               656                 656
                                                         ---------------------------------------------------------------------------

Balances at
December 31, 1997                                                  5,993               14,466            12,473              32,932
Options exercised                                                      1                    6                 -                   7
Issuance of stock related to merger of
      LDI AutoPaints, Inc.                                         1,542               12,879                 -              14,421
Net income for the year                                                -                    -             1,988               1,988
                                                         ---------------------------------------------------------------------------

Balances at
December 31, 1998                                        $         7,536    $          27,351   $        14,461     $        49,348
                                                         ===========================================================================

</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.




                                     - 27 -
<PAGE>



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 December 31,
1998, the Company operated 151 sales outlets and seven  distribution  centers in
22  states  and  is  organized  into  three  major  geographic   regions  -  the
Southeastern,  Western,  and  Central/Northeastern  Divisions.  The  Company has
approximately 27,000 customers 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 60% of the
Company's purchases.

Principles of Consolidation:  The Company's  consolidated  financial  statements
include the accounts of FinishMaster and Refinishers Warehouse, Inc., as well as
Thompson PBE, Inc.,  ("Thompson")  and LDI  AutoPaints,  Inc., from the dates of
their  respective  acquisitions.   All  significant  intercompany  accounts  and
transactions   are  eliminated.   References  to  the  Company  or  FinishMaster
throughout this report relate to the consolidated entity.

Majority Shareholder: At December 31, 1997, LDI AutoPaints, Inc., ("AutoPaints")
owned  4,045,100  shares of  FinishMaster  common  stock,  representing  a 67.5%
ownership interest in the Company.  AutoPaints was a wholly-owned  subsidiary of
Lacy Distribution,  Inc. ("Distribution"),  an Indiana corporation,  which is an
indirect  wholly-owned  subsidiary of LDI,  Ltd.,  ("LDI"),  an Indiana  limited
partnership.  Effective  June 30, 1998,  AutoPaints  was merged into the Company
(see  Note 2,  Acquisitions)  in  exchange  for the  issuance  of an  additional
1,542,416  shares  of  FinishMaster   common  stock.  Upon  completion  of  this
transaction,  Distribution  became the majority  shareholder of the Company with
5,587,516 shares of common stock,  representing  74.1% of the outstanding shares
at December 31, 1998.  Throughout the remainder of these  financial  statements,
LDI and Distribution are collectively known as "LDI."

Transactions with Majority  Shareholder:  The Company obtains certain managerial
services from its majority  shareholder,  LDI.  Expense related to such services
amounted to $538,000,  $291,000  and  $262,000 for the years ended  December 31,
1998 and 1997,  and the nine months ended  December 31, 1996,  respectively.  In
addition,  the Company leases its corporate  office space,  to which it moved in
1998,  from LDI.  Lease expense and payments for repairs and  maintenance to LDI
totaled  $105,000 for the year ended  December  31,  1998.  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 and
the disclosure of contingent assets and liabilities at the date of the financial
statements,  as well as the reported  amounts of revenue and expense  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, 1998 and 1997,  checks drawn on future  deposits and  borrowings of
$15,000,000 and $3,781,000,  respectively,  were classified as accounts payable.
These amounts represent outstanding checks in excess of funds on deposit.

Receivables:  Trade  accounts  receivable  represent  amounts due primarily from
automotive body repair shops and  dealerships.  Trade  receivables are typically
not collateralized.  No single customer exceeds 10% of the Company's receivables
at December 31, 1998.

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.


                                     - 28 -
<PAGE>



Properties  and  Depreciation:  Property and  equipment are recorded at cost and
include expenditures for new facilities and equipment and those which materially
extend the useful lives of existing facilities and equipment.

Expenditures  for  normal  repairs  and  maintenance  are  charged to expense as
incurred.  Depreciation  is  computed  by  the  straight-line  method  over  the
following range of estimated useful lives:

Buildings & improvements......................................   Up to 40 years
Vehicles......................................................          5 years
Leasehold improvements........................................    Life of Lease
Machinery, equipment & fixtures...............................    3 to 10 years

Revenue  Recognition:  Revenues from product sales are recognized at the time of
shipment or delivery to the customer.

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/recoverable  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 the entity acquired 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 debt
agreements.

Advertising:  Advertising  costs are  expensed as  incurred.  The  amounts  were
immaterial for all periods presented.

Recent  Accounting  Pronouncements:  Over  the  past two  years,  the  Financial
Accounting  Standards  Board has issued SFAS No. 130,  "Reporting  Comprehensive
Income," SFAS No. 131,  "Disclosures about Segments of an Enterprise and Related
Information,"  and SFAS No. 133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities."  The effective date of adoption for SFAS No.'s 130 and 131
is as of January 1, 1998, while SFAS No. 133 is not required to be adopted until
the third quarter of 1999. As the Company  currently has none of the  components
of other comprehensive income and aggregates its three operating segments into a
single reportable segment,  there is no current disclosure effect with regard to
SFAS  No.'s 130 and 131.  With  regard to SFAS No.  133,  as the  Company is not
routinely  involved  in  derivative  and  hedging  activities,  adoption of this
Statement  is not expected to have a material  impact on financial  condition or
results of operations.

Reclassification:  Certain  reclassifications  have been reflected in prior year
amounts to conform with the presentation of corresponding amounts in the current
period.


                                     - 29 -
<PAGE>



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,  except for the merger with AutoPaints  discussed below, have been
accounted for as purchases and accordingly,  the acquired assets and liabilities
have been recorded at their  estimated fair values at the dates of  acquisition.
Intangible assets related to goodwill and covenants not to compete were recorded
with each acquisition. Operating results of acquired entities have been included
in FinishMaster's  consolidated financial statements from the respective date of
purchase.
<TABLE>
<CAPTION>
                                                                                                                 Nine
                                                                          Year               Year              Months
                                                                         Ended              Ended               Ended
                                                                  December 31,       December 31,        December 31,
(In thousands)                                                            1998               1997                1996


<S>                                                            <C>                 <C>                 <C>           
Accounts receivable                                            $         2,225     $       20,239      $          755
Inventory                                                                4,389             27,158                 511
Deferred taxes                                                             535              6,082                   -
Equipment and other                                                      3,128              8,029                 456
Intangible assets                                                        7,390             91,629               2,617
                                                               ----------------------------------------------------------

                                                                        17,667            153,137               4,339
Less liabilities assumed                                                 3,246             78,988               1,256
                                                               ----------------------------------------------------------

Acquisition price                                                       14,421             74,149               3,083
Acquisition debt                                                             -             73,819               1,191
                                                               ----------------------------------------------------------

Net assets of businesses acquired, net of acquisition debt     $        14,421     $          330      $        1,892
                                                               ==========================================================

Number of acquisitions                                                       1                  3                   1
                                                               ----------------------------------------------------------
</TABLE>

On June 30, 1998, the Company  completed the acquisition by merger of AutoPaints
pursuant  to which the  Company  merged  with  AutoPaints  and  issued to LDI an
additional 1,542,416 shares of common stock. Since this was a transaction within
a controlled  group,  the  acquisition of AutoPaints was accounted for using its
historical cost basis.  Equity  securities issued to LDI in exchange for the net
assets of  AutoPaints  were  recorded  at the  historical  cost basis of the net
assets acquired as of the effective date of the transaction.



                                     - 30 -
<PAGE>

On November 21, 1997, the Company acquired  substantially all of the outstanding
common stock of Thompson for $8.00 per share. Thompson,  like FinishMaster,  was
an aftermarket distributor of automotive paints, coatings, and related supplies.
The total purchase price,  including related acquisition costs, was $73,471,000.
The Company also refinanced  $34,474,000 of Thompson indebtedness in conjunction
with the  transaction.  The Company funded the acquisition with a combination of
bank  financing  and  subordinated  borrowings  from LDI.  The  acquisition  was
accounted for as a purchase and,  accordingly,  the purchase price was allocated
to assets  acquired and  liabilities  assumed  based upon their  estimated  fair
values at the date of  acquisition.  Goodwill  resulting from the acquisition of
Thompson  is  being  amortized  over 30  years.  Goodwill  associated  with  the
acquisition of Thompson  increased  $2,152,000 during the current year resulting
from  the   recognition   of   obligations   associated   with   pre-acquisition
contingencies for which estimates were not available at the time of acquisition.

The following table sets forth the unaudited pro forma results of operations for
the  current  period  in which  acquisitions  occurred  and for the  immediately
preceding period as if the acquisitions were consummated at the beginning of the
immediately  preceding  period.  The  unaudited  pro forma results of operations
consist of the historical results of the Company and the acquired  entities,  as
adjusted to give effect to additional  interest,  depreciation  and amortization
expense  arising  from the  acquisitions.  This pro forma  information  does not
include  reductions to operating  expenses  resulting  from the  elimination  of
duplicate  functions and facilities  directly  attributable to the acquisitions.
This pro forma  information  does not purport to be  indicative  of the combined
results  of  operations   which  would  have  actually  been  obtained  had  the
acquisitions  been  made as of those  dates,  or which  may be  obtained  in the
future.
<TABLE>
<CAPTION>
                                                                                                         Nine
                                                                  Year               Year              Months
                                                                 Ended              Ended               Ended
                                                          December 31,       December 31,        December 31,
(In thousands)                                                    1998               1997                1996


<S>                                                    <C>                 <C>                 <C>           
Pro forma net sales                                    $       321,710     $      337,818      $      245,112
Pro forma net income (loss)                            $         2,459     $       (7,585)     $       (3,321)
Pro forma net income (loss) per common share:
      Basic                                            $          0.33     $        (1.01)     $        (0.55)
      Diluted                                          $          0.33     $        (1.01)     $        (0.55)
Weighted average number of common shares                         7,536              7,536               6,000

</TABLE>

3.    INTANGIBLE ASSETS

Intangible assets consisted of the following:
<TABLE>
<CAPTION>


                                                                             December  31,        December 31,
(In thousands)                                                                       1998                1997


<S>                                                                        <C>                 <C>           
Goodwill                                                                   $      117,147      $      107,923
Non-compete agreements                                                             14,181              11,080
Debt issuance costs                                                                 1,857               1,689
                                                                           --------------------------------------
                                                                                  133,185             120,692
Less accumulated amortization                                                      18,659               9,822
                                                                           --------------------------------------

Intangible assets, net                                                     $      114,526      $      110,870
                                                                           ======================================

</TABLE>


                                     - 31 -
<PAGE>

Increases in intangible  assets during the current year relate  primarily to the
merger of  AutoPaints,  which  resulted in the  carryover  of goodwill and other
intangible amounts previously  existing at AutoPaints.  Other increases occurred
as a result of contingent earn-out provisions associated with other acquisitions
and the recognition of obligations associated with pre-acquisition contingencies
related to Thompson.

4.    LONG-TERM DEBT

Long-term debt consisted of the following:
<TABLE>
<CAPTION>

                                                                                December 31,        December 31,
(In thousands)                                                                          1998                1997


<S>                                                                         <C>                 <C>           
Revolving Credit Facility                                                   $       44,900      $       51,479
Term Credit Facility                                                                40,000              40,000
Senior Subordinated Debt                                                            30,000              30,000
Notes payable to former owners of acquired businesses
      with interest at various rates up to 12%, due at
      various dates through 2007                                                    12,418              18,353
Other long-term financing at various rates                                           1,787               2,308
                                                                            --------------------------------------
                                                                                   129,105             142,140
Less current maturities                                                              9,985               8,005
                                                                            --------------------------------------

                                                                            $      119,120      $      134,135
                                                                            ======================================
</TABLE>


Revolving  Credit  Facility:  The Company has a revolving credit facility with a
syndicate  of banks,  limited to the lesser of $60 million less letter of credit
obligations,  or 80 percent of eligible  accounts  receivable plus 65 percent of
eligible  inventory,  less letter of credit  obligations and a reserve for three
months facility rent.  Principal is due on November 19, 2003. Interest rates and
payment dates are variable based upon interest rate and term options selected by
management.  Interest rates at December 31, 1998 on outstanding revolving credit
borrowings varied from 7.4% to 7.7%.  Revolving credit 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 or 1.0% over prime in the
case of Floating Rate Advances.  The Company is charged an annual administrative
fee of $50,000,  and an annual  commitment fee, payable monthly,  of 0.5% on the
unused  portion of the  revolving  line of credit.  At December  31,  1998,  the
Company had  $1,933,000  of  available  borrowings  under its  revolving  credit
facility.

Term  Credit  Facility:  The term loan  requires  quarterly  principal  payments
beginning March 31, 1999. These quarterly principal payments begin at $1 million
and  increase  in amount  each year  over the term of the  loan,  which  expires
November  19, 2003.  Interest  rates and payment  dates are variable  based upon
interest  rate  and term  options  selected  by  management.  Interest  rates at
December 31, 1998 varied from 7.3% to 7.8% 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.



                                     - 32 -
<PAGE>

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 covenants  pertaining to, among other things,
achieving a minimum fixed charge  coverage  ratio, a maximum  leverage  ratio, a
minimum  interest  expense  coverage ratio and a minimum  consolidated net worth
level. The covenants also limit purchases and sales of assets,  restrict payment
of dividends and direct the use of excess cash flow.  These quarterly  covenants
are effective over the entire term of the facilities,  with the various coverage
ratios  and net worth  levels  becoming  more  stringent  during the life of the
credit  facilities.  As of December 31, 1998, the Company was in compliance with
its covenants.

Senior  Subordinated Debt: The senior  subordinated debt owed to LDI matures May
19,  2004.  Interest  accrues at 9.0%  annually  and is payable  quarterly.  The
subordinated  debt is  expressly  subordinate  in right of payment to all senior
indebtedness.

Senior  Subordinated  Revolving  Credit  Facility:  The  Company  has  a  senior
subordinated  revolving  credit  facility  with  LDI for $10  million  which  is
available to fund working capital and acquisition needs. The facility expires on
March 27,  1999.  Interest  rates and  payment  dates are  variable  based  upon
interest and term options  selected by management.  The interest rates fluctuate
consistent with those under the Revolving Credit Facility.  Any borrowings under
the senior subordinated  revolving credit facility are expressly  subordinate in
right of payment to all senior indebtedness. There were no borrowings under this
facility during 1998.

The aggregate  principal payments for the next five years subsequent to December
31, 1998 are as follows:

(In thousands)

1999                                          $          9,985
2000                                                    11,290
2001                                                    10,410
2002                                                    10,483
2003                                                    56,291
Thereafter                                              30,646
                                              -----------------

                                              $        129,105
                                              =================

The Company is  currently  pursuing  other  financing  arrangements.  Should the
Company be successful in obtaining acceptable financing terms,  proceeds will be
used to retire certain bank term loans, a portion of amounts  outstanding  under
the revolving  credit facility and the  subordinated  debt payable to LDI. Early
retirement of indebtedness will result in an extraordinary loss in the amount of
the net book value of  capitalized  debt issuance  costs.  At December 31, 1998,
unamortized debt issuance costs were approximately $1,483,000.

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 the long-term debt is estimated  using  discounted  cash flows
and the  Company's  current  incremental  borrowing  rates for similar  types of
arrangements.




                                     - 33 -
<PAGE>

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 $0.25 for each $1.00 contributed by employees up to 6% of
their annual  compensation.  In  addition,  the Company may  contribute,  at the
discretion  of the Board of Directors,  an additional  amount equal to 1% of the
employees'  annual  compensation.  Company  contributions  charged to operations
under the Plan were  approximately  $191,000  for year ended  December 31, 1998,
$182,000 for the year ended  December 31, 1997, and $189,000 for the nine months
ended  December 31,  1996.  Employees  of  AutoPaints  were merged into the Plan
during 1998 and  employees  of Thompson  will begin to  participate  in the Plan
effective January 1, 1999.


6.    STOCK OPTIONS

On November  30,  1993,  an  Employee  Stock  Option Plan was  ratified to grant
options on up to 600,000 shares of the Company's  common stock to officers,  key
employees,  and non-employee directors of the Company. All options granted under
this plan have been  granted  at a price not less than the  market  price at the
date of grant.  All options  granted  have a maximum  life of ten years from the
date of the  grant.  All grants  prior to 1998 were fully  vested at the date of
issue.  Certain stock options granted in 1998 were also fully vested at the date
of issue, while others vest over periods ranging from two 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 market  price 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:


                                     - 34 -
<PAGE>

<TABLE>
<CAPTION>

                                                                                              Nine
                                                       Year               Year              Months
                                                      Ended              Ended               Ended
                                               December 31,       December 31,        December 31,
(In thousands, except per share data)                  1998               1997                1996

Net income:
<S>                                       <C>                 <C>                 <C>             
      As reported                         $           1,988   $            656    $            660
      Pro forma                           $           1,299   $            523    $            660

Net income per share:
      As reported, Basic                  $            0.29   $           0.11    $           0.11
      As reported, Diluted                $            0.29   $           0.11    $           0.11

      Pro forma, Basic                    $            0.19   $           0.09    $           0.11
      Pro forma, Diluted                  $            0.19   $           0.09    $           0.11
</TABLE>

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following  assumptions for the years
ended  December 31, 1998 and 1997,  and the nine months ended December 31, 1996,
respectively: risk free interest rate of 5.0%, 5.5%, and 5.7%; no dividend yield
for all periods; expected option lives of nine, nine, and eight years; and stock
price  volatility of 49.6% for the year ended  December 31, 1998,  and 46.8% for
the year ended December 31, 1997 and the nine months ended December 31, 1996.

<TABLE>
<CAPTION>


                                           December 31,                 December 31,                 December 31,
                                               1998                         1997                         1996

                                                      Weighted                     Weighted                     Weighted
                                                      -Average                     -Average                     -Average
                                                      Exercise                     Exercise                     Exercise
                                     Options             Price    Options             Price    Options             Price

<S>                                    <C>       <C>                <C>       <C>                <C>       <C>          
Outstanding-beginning of year          210,000   $        9.92      169,310   $       10.71      222,085   $       10.72
Granted                                263,800   $        8.38       45,000   $        7.00            -   $           -
Exercised                                  800   $        8.25            -   $           -          140   $       10.50
Forfeited                               46,510   $       10.65        4,310   $       10.50       52,635   $       10.76

                                     -------------------------------------------------------------------------------------
Outstanding-end of year                426,490   $        8.89      210,000   $        9.92      169,310   $       10.71
                                     =====================================================================================

Exercisable-end of year                260,890   $        9.09      210,000   $        9.92      169,310   $       10.71
                                     =====================================================================================
</TABLE>



                                     - 35 -
<PAGE>

<TABLE>
<CAPTION>

                                                              Exercise Price Range
                                          -------------------------------------------------------------

                                             $5.63-$8.25         $10.25-$11.55            Total
                                          ------------------   ------------------   -------------------

<S>                                                 <C>                  <C>                   <C>    
Options outstanding                                 228,600              197,890               426,490
Weighted average exercise price           $            7.07    $           11.00    $             8.89
Average remaining contractual life                9.2 years            7.2 years             8.3 years
Options exercisable                                 120,600              140,290               260,890
Weighted average exercise price           $            7.13    $           10.77    $             9.09
</TABLE>

The  weighted-average  fair value of  options  granted  during  the years  ended
December 31, 1998 and 1997 were $4.62 and $4.85 per option, respectively,  where
the  exercise  price of the  options  equalled  the market  price on the date of
grant.  Certain options were granted during 1998 where the exercise price of the
options  exceeded  the market value on the date of grant.  The weighted  average
fair value of these options was $6.51 per option. The remaining contractual life
of options outstanding at December 31, 1998 is 8.3 years.


7.    INCOME TAXES

The provision for federal and state income taxes consisted of the following:
<TABLE>
<CAPTION>

                                                                                       Nine
                                             Year                 Year               Months
                                            Ended                Ended                Ended
                                     December 31,         December 31,         December 31,
(In thousands)                               1998                 1997                 1996

Current:
<S>                               <C>                  <C>                  <C>            
      Federal                     $            96      $         1,010      $           778
      State                                    87                  186                  232
                                  -------------------------------------------------------------
                                              183                1,196                1,010
                                  -------------------------------------------------------------
Deferred:
      Federal                               2,082                 (616)                (327)
      State                                   167                  (65)                 (73)
                                  -------------------------------------------------------------
                                            2,249                 (681)                (400)
                                  -------------------------------------------------------------

                                  $         2,432      $           515      $           610
                                  =============================================================
</TABLE>



                                     - 36 -
<PAGE>

The reconciliation of income taxes computed at the federal statutory tax rate to
the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>

                                                                                                      Nine
                                                          Year                 Year                 Months
                                                         Ended                Ended                  Ended
                                                  December 31,         December 31,           December 31,
                                                          1998                 1997                   1996

<S>                                                      <C>                  <C>                    <C>  
      Federal statutory tax rate                         34.0%                34.0%                  34.0%
      State tax provision                                 3.8%                 6.8%                   8.3%
      Nondeductible intangible amortization              14.7%                 3.9%                   0.8%
      Other                                               2.5%                (0.7%)                  4.9%
                                                ------------------------------------------------------------

Effective tax rate                                       55.0%                44.0%                  48.0%
                                                ============================================================

</TABLE>
Significant  components of the Company's  deferred tax assets as of December 31,
1998 and 1997 are as follows:

                                          December 31,         December 31,
(In thousands)                                    1998                 1997

Deferred tax assets:
      Depreciation                    $            915     $            712
      Amortization of intangibles                1,319                1,023
      Allowances                                 1,435                1,106
      Inventory                                    967                1,770
      Accrued expenses                           1,991                2,555
      Other, net                                    49                   52
                                      ----------------------------------------

                                      $          6,676     $          7,218
                                      ========================================



                                     - 37 -
<PAGE>

8.    COMMITMENTS AND CONTINGENCIES


FinishMaster  occupies  facilities  and uses  equipment  under  operating  lease
agreements requiring annual rental payments  approximating the following amounts
for the five years subsequent to December 31, 1998:

(In thousands)

1999                                          $          5,639
2000                                                     3,114
2001                                                     1,268
2002                                                       889
2003                                                       542
Thereafter                                                 755
                                              ----------------

                                              $         12,207
                                              ================

Rent expense  charged to operations,  including  short-term  leases,  aggregated
$6,306,000, $3,832,000, and $2,725,000 for the years ended December 31, 1998 and
1997, and the nine months ended December 31, 1996, 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  terms,  and  other  incentive
programs. To the extent these programs are changed or terminated, there could be
a material adverse impact to the Company.

The Company has three  agreements  with warehouse  suppliers for the purchase of
certain  paint and non-paint  supplies in specified  geographic  locations.  The
agreements provide for aggregate specified minimum purchases of $7.9 million for
1999 and 2000, and $1.5 million for 2001, 2002, and 2003. The agreements  expire
in 1999, 2000, and 2003.

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  alleges  that the Company  offered,  in a manner  which
injured the  plaintiff,  rebates and cash bonuses to  businesses in the Southern
California area if those  businesses  would buy exclusively from the Company and
use its products.  The plaintiff  claims  damages in the amount of $3.8 million,
trebled to $11.4 million. The Company believes that the claims are without merit
and is aggressively  defending itself against all allegations.  Accordingly,  it
has not recorded any loss provision  relative to damages sought by the plaintiff
in this lawsuit.

The Company is subject to various  claims and  contingencies  arising out of the
normal course of business,  including those relating to commercial transactions,
product  liability,  automobile,  taxes,  discrimination,  employment  and other
matters.  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 the  Company's  financial  condition,  results  of
operations or cash flows.

                                     - 38 -
<PAGE>


9.    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table presents the quarterly results of operations for each period
presented.
<TABLE>
<CAPTION>


                                                                              Three Months ended
                                                  ----------------------------------------------------------------------------
                                                        March 31,           June 30,     September 30,         December 31,
(In thousands,  except per share data)                       1998               1998              1998                 1998
                                                  -----------------  ----------------  ------------------   ------------------

<S>                                               <C>                <C>               <C>                  <C>            
Net sales                                         $       76,024     $      76,758     $       80,338       $        76,826
Gross margin                                      $       26,945     $      27,027     $       28,306       $        27,400
Income from operations                            $        3,881     $       4,156     $        3,884       $         3,974
Income before income taxes                        $        1,007     $       1,329     $          951       $         1,133
Net income                                        $          528     $         699     $           79       $           682
Net income per share - Diluted                    $         0.09     $        0.12     $         0.01       $          0.09

                                                                              Three Months ended
                                                  ----------------------------------------------------------------------------
                                                       March 31,          June 30,       September 30,         December 31,
(In thousands,  except per share data)                      1997              1997                1997                 1997
                                                  -----------------  ----------------  ------------------   ------------------

Net sales                                         $       29,239     $      31,034     $       30,696       $        39,206
Gross margin                                      $       10,629     $      11,572     $       11,157       $        13,749
Income (loss) from operations                     $        1,144     $       2,011     $        1,458       $          (781)
Income (loss) before income taxes                 $          656     $       1,600     $        1,148       $        (2,233)
Net income (loss)                                 $          406     $       1,005     $          712       $        (1,467)
Net income (loss) per share - Diluted             $         0.07     $        0.17     $         0.12       $         (0.24)
</TABLE>


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
in place of primary and fully diluted earnings per share,  which were previously
required.  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 weighed  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.


                                     - 39 -
<PAGE>

The following  table sets forth the  computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
                                                                                                           Nine
                                                                    Year               Year              Months
                                                                   Ended              Ended               Ended
                                                             December 31,       December 31,        December 31,
(In thousands, except per share data)                               1998               1997                1996

<S>                                                      <C>                 <C>                 <C>           
Numerator:
      Net income                                         $         1,988     $          656      $          660
                                                         ----------------------------------------------------------
Denominator:
      Basic-weighted average shares                                6,775              5,994               6,000

      Effect of dilutive stock options                                 5                  -                   -
                                                         ----------------------------------------------------------
      Diluted-weighted average shares                              6,780              5,994               6,000
                                                         ----------------------------------------------------------

Basic net income per share                               $          0.29     $         0.11      $         0.11
                                                         ==========================================================

Diluted net income per share                             $          0.29     $         0.11      $         0.11
                                                         ==========================================================

</TABLE>

The effect of employee  stock  options on the  calculation  of weighted  average
shares  outstanding for purposes of determining  diluted  earnings per share was
antidilutive  for the year ended  December  31, 1997 and the nine  months  ended
December 31, 1996.



                                     - 40 -
<PAGE>


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, 1998.


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, 1998.


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, 1998.


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, 1998.

                                     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 E-1.

(b)    Reports on Form 8-K:  None



                                     - 41 -
<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date    March 26, 1999                   FINISHMASTER, INC.

                                     By: /s/ Thomas U. Young
                                     -------------------------------------
                                         Thomas U.  Young,
                                         President, Vice Chairman of the
                                         Board and Chief Operating Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

       Signature                      Date            Title
--------------------------------------------------------------------------------
(1) Principal Executive Officer:

/s/ Andre B.  Lacy
-------------------------------
Andre B.  Lacy                    March 26, 1999    Chairman of the Board

(2)     Principal Financial
       and Accounting Officer:

/s/ Robert R. Millard
-------------------------------
Robert R. Millard                 March 26, 1999    Vice President, Finance
                                                    and Chief Financial Officer
(3)    A Majority of the
       Board of Directors:

/s/ Andre B.  Lacy
-------------------------------
Andre B.  Lacy                    March 26, 1999    Director

/s/ Thomas U.  Young
-------------------------------
Thomas U.  Young                  March 26, 1999    Director

/s/ Margot L.  Eccles
-------------------------------
Margot L.  Eccles                 March 26, 1999    Director

/s/ William J.  Fennessy
-------------------------------
William J.  Fennessy              March 26, 1999    Director

/s/  Peter L.  Frechette
-------------------------------
Peter L.  Frechette               March 26, 1999    Director

/s/ David W. Knall
-------------------------------
David W. Knall                    March 26, 1999    Director

/s/ Michael L.  Smith
-------------------------------
Michael L.  Smith                 March 26, 1999    Director

/s/ Walter S.  Wiseman
-------------------------------
Walter S.  Wiseman                March 26, 1999    Director


                                     - 42 -
<PAGE>




                        FINISHMASTER, INC. AND SUBSIDIARY
                           ANNUAL REPORT ON FORM 10-K

EXHIBITS

                                  EXHIBIT LIST

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 ThompsonPBE, 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 (previously filed with Form 10-K dated March 31,
               1997)

       3.2*    Bylaws  of  FinishMaster,   Inc.,  an  Indiana   corporation
               (previously filed with Form 10-K dated March 31, 1997)

       10.1    FinishMaster,  Inc.  Stock Option Plan (Amended and Restated
               as of June 30, 1998)

       21      Subsidiaries of the Registrant

       23      Consent of Independent Accountants

       27      Financial Data Schedule

       99(a)*  Credit  Agreement,  dated as of  November  19,  1997,  among
               FinishMaster,  Inc.,  the  Institutions  from  Time  to Time
               Parties  Thereto as  Lenders  and NBD Bank,  N.A.,  as Agent
               (previously filed with Form 8-K dated December 3, 1997)

       99(b)*  Subordinated Note Agreement,  dated as of November 19, 1997,
               by and between FinishMaster,  Inc. and LDI, Ltd. (previously
               filed with Form 8-K dated December 3, 1997)

       99(c)*  First Amendment to Credit  Agreement dated December 10, 1997
               (previously filed with Form 10-K dated March 31, 1998)

       99(d)*  Second  Amendment to Credit  Agreement  dated March 27, 1998
               (previously filed with Form 10-K dated March 31, 1998)

       99(e)*  Credit Agreement dated March 27, 1998 between  FinishMaster,
               Inc. and LDI,  Ltd.  (previously  filed with Form 10-K dated
               March 31, 1998)

       99(f)   Third Amendment to the Credit  Agreement dated as of October
               30, 1998.

*  Previously filed



                                      E-1
<PAGE>



         Schedule II - Valuation and Qualifying Accounts (In thousands)
<TABLE>
<CAPTION>


                                                                        Additions
                                                              -------------------------------
                                                                                                                       Balance
                                               Balance at       Charged to     Charged to                              at End
                                               Beginning        Costs and      Other                                   of
Description                                    of Period        Expenses       Accounts            Deductions          Period
---------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>              <C>          <C>                   <C>               <C>        
Year ended December 31, 1998:
     Allowance for doubtful accounts          $    2,247       $      464   $        147  (A)     $    1,178  (B)   $     1,680

Year ended December 31, 1997:
     Allowance for doubtful accounts          $      700       $      859   $      1,758  (A)     $    1,070  (B)   $     2,247

Nine months ended December 31, 1996:
     Allowance for doubtful accounts          $      350       $      798   $          -          $      448  (B)   $       700

</TABLE>
(A) Represents allowance for doubtful accounts of acquired entities.

(B) Represents uncollectible accounts written off, less recoveries.









                                      S-1