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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number 0-23222
FINISHMASTER, INC.
(Exact Name of Registrant as Specified in its Charter)
Indiana 38-2252096
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
54 Monument Circle, Suite 700
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (317) 237-3678
Indicate by check mark whether the registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding twelve months and (2) has
been subject to the filing requirements for at least the past 90 days.
Yes X No
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 16, 1998
Common Stock 7,535,856 shares
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<PAGE>
- - --------------------------------------------------------------------------------
FINISHMASTER, INC.
- - --------------------------------------------------------------------------------
Form 10-Q
For the Quarterly Period Ended
September 30, 1998
INDEX
Page
Part l. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
December 31, 1997 and September 30, 1998
Condensed Consolidated Statements of Operations (unaudited) 4
Three months ended September 30, 1997 and 1998
Nine months ended September 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows (unaudited) 5
Nine months ended September 30, 1997 and 1998
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part ll. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
PART I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
FINISHMASTER, INC.
(in thousands, except share data)
September 30 December 31
1998 1997
-------- --------
ASSET (unaudited)
CURRENT ASSETS
Cash $ 365 $ 364
Accounts receivable, net of allowance for doubtful
accounts of $ 2,374 and 2,247, respectively 30,087 28,744
Inventory 51,837 53,442
Prepaid expenses and other current assets 7,072 7,894
-------- --------
TOTAL CURRENT ASSETS 89,361 90,444
PROPERTY AND EQUIPMENT, NET 10,092 10,296
OTHER ASSETS
Intangible assets, net 114,350 110,870
Other 4,245 3,808
-------- --------
118,595 114,678
-------- --------
$218,048 $215,418
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 25,206 $ 28,274
Accrued expenses and other current liabilities 13,354 12,072
Current maturities of long-term obligations 8,619 8,005
-------- --------
TOTAL CURRENT LIABILITIES 47,179 48,351
LONG-TERM OBLIGATIONS, NET 122,203 134,135
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares
authorized; no shares issued or outstanding
Common stock, $ 1 stated value, 25,000,000 shares
authorized; 7,535,856 and 5,992,640 shares
issued and outstanding, respectively 7,536 5,993
Additional paid-in capital 27,351 14,466
Retained earnings 13,779 12,473
-------- --------
48,666 32,932
-------- --------
$218,048 $215,418
======== ========
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FINISHMASTER, INC.
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET SALES 80,338 30,696 233,120 90,968
COST OF SALES 52,032 19,539 150,842 57,610
------- ------- ------- -------
GROSS PROFIT 28,306 11,157 82,278 33,358
------- ------- ------- -------
EXPENSES
Operating 11,899 4,739 35,142 13,998
Selling, general and administrative 9,815 3,903 27,993 11,647
Depreciation 1,054 311 2,554 873
Amortization of intangible assets 1,734 746 4,910 2,227
------- ------- ------- -------
TOTAL 24,502 9,699 70,599 28,745
------- ------- ------- -------
INCOME FROM OPERATIONS 3,804 1,458 11,679 4,613
Interest expense, net 2,853 310 8,392 1,209
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 951 1,148 3,287 3,404
Income tax expense 872 436 1,981 1,281
------- ------- ------- -------
NET INCOME 79 712 1,306 2,123
======= ======= ======= =======
NET INCOME PER SHARE-BASIC 0.01 0.12 0.20 0.35
======= ======= ======= =======
NET INCOME PER SHARE-DILUTED 0.01 0.12 0.20 0.35
======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OF COMMON STOCK OUTSTANDING 7,535 5,993 6,518 5,993
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FINISHMASTER, INC.
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------
OPERATING ACTIVITIES 1998 1997
-------- --------
<S> <C> <C>
Net income 1,306 2,123
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 7,464 3,100
Changes in operating assets and liabilities:
Accounts receivable 882 (1,081)
Inventories 5,896 5,021
Prepaid expenses and other current assets 1,116 291
Accounts payable and other current liabilities (4,357) (3,733)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,307 5,721
INVESTING ACTIVITIES
Business acquisitions and payments under
earn-out provisions of prior acquisition agreements (405) (467)
Purchases of property and equipment (1,199) (616)
Proceeds from disposals of property and equipment 174 --
Cash acquired through merger with
LDI AutoPaints, Inc. 1,786 --
Other (156) --
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 200 (1,083)
FINANCING ACTIVITIES
Proceeds from long-term obligations 25,397 --
Repayments of long-term obligations (37,903) (2,901)
Repayments under note payable, bank -- (1,685)
Purchases of common stock -- (51)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (12,506) (4,637)
-------- --------
INCREASE IN CASH 1 1
CASH AT THE BEGINNING OF PERIOD 364 300
-------- --------
CASH AT THE END OF PERIOD 365 301
======== ========
NON-CASH ACTIVITIES
Acquisition of LDI AutoPaints, Inc.:
Assets acquired 17,666
Liabilities assumed (3,244)
--------
Equity purchased 14,422
Less: cash acquired in transaction (1,786)
========
Net assets acquired, excluding cash $ 12,636
========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FINISHMASTER, INC.
September 30, 1998
(unaudited)
NOTE 1--Nature of Business
FinishMaster, Inc. ("the Company" or "FinishMaster") is the leading
national distributor of automotive paints, coatings and paint-related
accessories to the automotive collision repair industry. As of September
30, 1998, the Company operated 149 sales outlets and three distribution
centers in 22 states. The Company has approximately 20,000 customers to
which it provides a comprehensive selection of brand name products supplied
by DuPont, PPG, BASF and 3M, in addition to its own FinishMaster
PrivateBrand refinishing accessory products. The Company is highly
dependent on a small number of key suppliers.
NOTE 2--Basis of Presentation
The condensed consolidated financial statements include the accounts of
FinishMaster and Refinishers Warehouse, Inc., as well as Thompson PBE,
Inc., and LDI AutoPaints, Inc. as of the dates of the respective
acquisitions. All significant intercompany balances and transactions have
been eliminated in consolidation. These condensed consolidated financial
statements are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation
of the results of the interim periods covered have been included. For
further information, refer to the consolidated financial statements and
notes thereto included in FinishMaster's Annual Report on Form 10K for the
year ended December 31, 1997. The results of operations for the interim
periods presented are not necessarily indicative of the results for the
full year. Certain reclassifications have been reflected in prior year
amounts to conform to the presentation of corresponding amounts in the
current period.
NOTE 3--Acquisitions
On June 30, 1998, the Company completed the acquisition by merger of LDI
AutoPaints, Inc. ("AutoPaints"), pursuant to which the Company merged with
AutoPaints and issued to Lacy Distribution, Inc. ("Lacy Distribution"), its
parent, an additional 1,542,416 shares of common stock of the Company.
Since this was a transaction within a controlled group, the acquisition of
AutoPaints was accounted for using its historical cost basis, thus
resulting in no recognition of goodwill, other than the carryover of
goodwill already existing on the financial statements of AutoPaints. Equity
securities that were issued to Lacy Distribution, in exchange for the
net assets of AutoPaints, were recorded as of the effective date of the
transaction.
On November 21, 1997, the Company acquired substantially all of the
outstanding common stock of Thompson PBE, Inc. ("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. The Company funded the
acquisition and refinanced Thompson's indebtedness with a combination of
bank financing and subordinated borrowings from its majority shareholder.
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.
NOTE 4--Net Income Per Share
The effect of stock options on the calculation of weighted average shares
outstanding for purposes of determining diluted earnings per share is
antidilutive for the nine months ended September 30, 1998 and 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINISHMASTER, INC.
September 30, 1998
RESULTS OF OPERATIONS
The following table sets forth FinishMaster's historical results in total and as
a percentage of net sales.
FINISHMASTER, INC.
HISTORICAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------ ------------------------------------------------
1998 1997 1998 1997
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 80,338 100.0% $ 30,696 100.0% $ 233,120 100.0% $ 90,968 100.0%
COST OF SALES 52,032 64.8% 19,539 63.7% 150,842 64.7% 57,610 63.3%
--------- --------- --------- ---------
GROSS PROFIT 28,306 35.2% 11,157 36.3% 82,278 35.3% 33,358 36.7%
--------- --------- --------- ---------
EXPENSES
Operating 11,899 14.8% 4,739 15.4% 35,142 15.1% 13,998 15.4%
Selling, general and
administrative 9,815 12.2% 3,903 12.7% 27,993 12.0% 11,647 12.8%
Depreciation 1,054 1.3% 311 1.0% 2,554 1.1% 873 1.0%
Amortization 1,734 2.2% 746 2.4% 4,910 2.1% 2,227 2.4%
--------- --------- --------- ---------
TOTAL EXPENSES 24,502 30.5% 9,699 31.6% 70,599 30.3% 28,745 31.6%
--------- --------- ---------
INCOME FROM OPERATIONS 3,804 4.7% 1,458 4.7% 11,679 5.0% 4,613 5.1%
Interest expense, net 2,853 3.6% 310 1.0% 8,392 3.6% 1,209 1.3%
INCOME BEFORE INCOME
TAXES 951 1.2% 1,148 3.7% 3,287 1.4% 3,404 3.7%
Income Tax Expense 872 1.1% 436 1.4% 1,981 0.8% 1,281 1.4%
--------- --------- --------- ---------
NET INCOME $ 79 0.1% $ 712 2.3% $ 1,306 0.6% $ 2,123 2.3%
========= ========= ========= =========
NET INCOME PER SHARE--BASIC
AND DILUTED $ 0.01 $ 0.12 $ 0.20 $ 0.35
========= ========= ========= =========
WEIGHTED AVERAGE
SHARES OF
COMMON STOCK
OUTSTANDING 7,535 5,993 6,518 5,993
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINISHMASTER, INC.
September 30, 1998
HISTORICAL RESULTS OF OPERATIONS
Net sales. Net sales increased from $30.7 million for the three months ended
September 30, 1997 to $80.3 million for the three months ended September 30,
1998. Net sales increased from $91.0 million for the nine months ended September
30, 1997 to $233.1 million for the nine months ended September 30, 1998. The
increase in net sales for the three and nine month periods ended September 30,
1998 results principally from the inclusion of net sales from Thompson which was
acquired on November 21, 1997, and AutoPaints which was acquired on June 30,
1998. The increase in net sales was partially offset by a decline in comparable
store net sales.
Gross profit. Gross profit increased from $11.2 million to $28.3 million, but
decreased as a percentage of net sales from 36.3% to 35.2% for the three month
period ended September 30, 1998, compared to the three month period ended
September 30, 1997. Gross profit increased from $33.4 million to $82.3 million,
but decreased as a percentage of net sales from 36.7% to 35.3% for the nine
month period ended September 30, 1998, compared to the nine month period ended
September 30, 1997. The increase in gross profit dollars for the three and nine
month periods ended September 30, 1998, is due to the additional gross profit on
sales from Thompson and AutoPaints. The decrease in gross profit percentage for
the three and nine month periods ended September 30, 1998, is due to lower
purchase discounts available to the Company as a result of lower inventory
purchases and price concessions granted to customers to meet competitive
pressures.
Operating expenses. Operating expenses increased from $4.7 million to $11.9
million for the three month period ended September 30, 1998 compared to the
three month period ended September 30, 1997. Operating expenses increased from
$14.0 million to $35.1 million for the nine month period ended September 30,
1998, compared to the nine month period ended September 30, 1997. The increase
in operating expenses for the three and nine month periods ended September 30,
1998 is due to the inclusion of operating expenses from Thompson and AutoPaints,
offset by savings from consolidating stores. Operating expenses as a percentage
of net sales decreased from 15.4% to 14.8% for the three month period ended
September 30, 1998, and from 15.4% to 15.1% for the nine month period ended
September 30, 1998, compared to the same periods in the prior year. The decrease
in operating expenses as a percentage of net sales is due to the Company's focus
on managing store and distribution costs and the planned consolidation of
certain stores as a result of the acquisitions of Thompson and AutoPaints.
Operating expenses consist of wages, benefits, building, lease, and vehicle
costs for the sales outlets and the distribution centers.
Selling, general and administrative. Selling, general and administrative
expenses increased from $3.9 million to $9.8 million, but decreased as a
percentage of net sales, from 12.7% to 12.2% for the three month period ended
September 30, 1998, compared to the three month period ended September 30, 1997.
For the nine months ended September 30, 1998, selling, general and
administrative expenses increased from $11.6 million to $28.0 million, but
decreased as a percentage of net sales, from 12.8% to 12.0% compared to the nine
months ended September 30, 1997. The increase in selling, general and
administrative expenses for the three and nine months ended September 30, 1998
is due to the inclusion of selling, general and administrative expenses of
Thompson and AutoPaints. The decrease in selling, general and administrative
expenses as a percentage of net sales for the three and nine months ended
September 30, 1998 is due to the consolidation of certain corporate functions
including management and accounting, and the reduction of public company and
insurance costs. Selling expenses include sales commissions, wages, and expenses
supporting customer sales activity. General and administrative expenses consist
of corporate support staff and expenses for marketing, data processing,
accounting, credit, purchasing and human resources.
Depreciation and amortization of intangible assets. Depreciation expense
increased from $0.3 million to $1.1 million for the three month period ended
September 30, 1998, compared to the three month period ended September 30, 1997.
Depreciation expense increased from $0.9 million to $2.6 million for the nine
months ended September 30, 1998, compared to the same period in the prior year.
The increase in depreciation expense for the three and nine months ended
September 30, 1998 is due to the inclusion of depreciation on Thompson's and
AutoPaints' fixed assets following their respective acquisition dates, and
higher fixed asset purchases in the current year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINISHMASTER, INC.
September 30, 1998
HISTORICAL RESULTS OF OPERATIONS (continued)
Amortization expense increased from $0.7 million to $1.7 million for the three
months ended September 30, 1998, compared to the same three months in the prior
year. Amortization expense increased from $2.2 million to $4.9 million for the
nine months ended September 30, 1998, compared to the nine months ended
September 30, 1997. The increase in amortization expense for the three and nine
months ended September 30, 1998 is due to the amortization of goodwill generated
from the Thompson acquisition, and the inclusion of amortization on goodwill
existing on the financial statements of AutoPaints at the time of its respective
acquisition.
Interest expense. Interest expense increased from $0.3 million to $2.9 million
and as a percentage of net sales from 1.0% to 3.6% for the three month period
ended September 30, 1998 compared to the three month period ended September 30,
1997. For the nine month period ended September 30, 1998, interest expense
increased from $1.2 million to $8.4 million and as a percentage of net sales
from 1.3% to 3.6% compared to the same period in the prior year. The increase in
interest expense dollars and as a percentage of net sales is primarily
attributable to interest on debt incurred to finance the Thompson transaction.
The acquisition of Thompson was funded with $73.5 million of debt.
Income Taxes. The effective tax rates for the three and nine month periods ended
September 30, 1998 are substantially higher than those in the same periods of
the prior year due to the non-deductible nature of certain expenses, primarily
the amortization of goodwill associated with the acquisition of Thompson.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources can be significantly affected by
its acquisition activity. The Company historically has financed acquisitions
through a combination of seller financing, internally generated cash flow and
bank borrowings under the Company's loan facilities.
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson for $8.00 per share. The total purchase price,
including related acquisition costs, was $73,471,000. The Company also
refinanced $34,474,000 of Thompson's indebtedness. The acquisition and debt
refinancing was funded with a combination of bank financing and subordinated
borrowings from its majority shareholder.
The Company has term credit and revolving credit facilities from banks totaling
$100 million. It also has senior subordinated debt of $30 million and a $10
million revolving line of credit from its majority shareholder. At September 30,
1998, the Company had under its revolving credit facility, $0.4 million of
unused borrowing capacity.
As a condition of the amended bank credit facility of $100 million, the Company
agreed to obtain additional equity of $14 million or such lesser amount as may
be acceptable to the Company's banks. The Company satisfied this requirement by
completing, on June 30, 1998, the acquisition by merger of AutoPaints, pursuant
to which the Company merged with AutoPaints and issued to Lacy Distribution an
additional 1,542,416 shares of common stock of the Company.
The Company's operating activities generated $12.3 million of cash during the
nine months ended September 30, 1998, and $5.7 million in the same period of the
prior year. Cash generated from operating activities is primarily attributable
to an increase in net income and non-cash items from $8.8 million for the nine
months ended September 30, 1998, compared to $5.2 million for the nine months
ended September 30, 1997. Decreases in current assets provided $7.9 million for
the nine months ended September 30, 1998 as compared to $4.2 million in the same
period of the prior year. The Company used cash of $4.4 million and $3.7 million
for the nine months ended September 30, 1998 and 1997, respectively, to pay
payables and other current liabilities.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINISHMASTER, INC.
September 30, 1998
LIQUIDITY AND CAPITAL RESOURCES (continued)
The decrease in inventory is the result of the normal sell down of major
inventory purchases made prior to December 31, 1997 in anticipation of vendor
price increases. The Company continues to focus on managing working capital
through inventory reduction programs and firm credit and collection policies.
The decrease in accounts payable is due to the payments related to meeting
certain purchasing programs that correlate with the Company's goal to manage
inventory costs and improve its margins.
The Company's investing activities provided $0.2 million in the nine months
ended September 30, 1998, but used $1.1 million in the same period of the prior
year. For the nine months ended September 30, 1998, the Company's investing
activities provided cash primarily from the cash existing on the financial
statements of AutoPaints at the time of purchase. This amount was partially
offset by purchases of property and equipment and payments under earn-out
provisions of prior acquisition agreements.
The Company's financing activities used cash totaling $12.5 million during the
nine months ended September 30, 1998, as compared to $4.6 million in the same
period of the prior year, primarily to repay outstanding indebtedness.
The Company believes its cash and other liquid resources, cash flow generated
from operating activities, and the available lines of credit will be sufficient
to support operations and general capital requirements for the next twelve
months.
YEAR 2000
The year 2000 ("Y2K") issue is the result of computer programs using a 2 digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
In 1998, the Company developed a two phased program for Y2K information systems
compliance. Phase I is to identify those systems with which the Company has
exposure to Y2K issues and to develop and implement action plans to be Y2K
compliant in all areas by late 1998. Phase II, to be completed by mid 1999,
deals with final testing of systems and attaining Y2K compliance documentation
from key vendors and third party suppliers.
The Company, in accordance with Phase I, has identified all major Y2K exposures
dealing with operational computer programs. All store and warehouse systems and
financial applications will be Y2K compliant by December 31, 1998. Additionally,
all personal computer hardware and operating systems will be Y2K compliant by
December 31, 1998. Through the balance of 1998 and first quarter of 1999, the
Company will be testing third party supplier paint systems that reside at its
retail locations. Additionally, its voice mail systems will be upgraded to Y2K
compliance during this timeframe.
The Company believes that remaining Y2K compliance items mentioned above will
cost approximately $125,000 to implement. Y2K versions of current paint and
voice mail systems exist and are readily available to the Company.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains certain forward-looking statements pertaining to, among
other things, the Company's future results of operations, cash flow needs and
liquidity, acquisitions and other aspects of its business. 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 monthly fluctuations, governmental regulation, the potential loss
of key suppliers, and various other competitive factors. In light of these risks
and uncertainties, there can be no assurance that the future developments
described in the forward-looking statements contained in this report will in
fact occur.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINISHMASTER, INC.
September 30, 1998
PRO FORMA PRESENTATION
The following table sets forth FinishMaster's unaudited pro forma consolidated
results in total and as a percentage of net sales, as if the acquisitions of
Thompson, which was acquired on November 21, 1997, and AutoPaints, which was
acquired on June 30, 1998, had occurred as of January 1, 1997. Management
believes that the presentation of management's discussion and analysis on a pro
forma basis provides a more meaningful understanding of the Company's
performance, by better reflecting the effects of its recent acquisitions. The
unaudited pro forma results do not purport to be indicative of results that
would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
<PAGE>
FINISHMASTER, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------ ------------------------------------------------
1998 1997 1998 1997
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 80,338 100.0% $ 85,793 100.0% $ 244,884 100.0% $ 261,156 100.0%
COST OF SALES 52,032 64.8% 57,136 66.6% 158,085 64.6% 169,700 65.0%
--------- --------- --------- ---------
GROSS PROFIT 28,306 35.2% 28,657 33.4% 86,799 35.4% 91,456 35.0%
EXPENSES
Operating 11,899 14.8% 13,938 16.2% 36,495 14.9% 41,472 15.9%
Selling, general and 9,815 12.2% 13,071 15.2% 29,608 12.1% 35,084 13.4%
Administrative
Depreciation 1,054 1.3% 960 1.1% 2,786 1.1% 2,705 1.0%
Amortization 1,734 2.2% 1,782 2.1% 5,430 2.2% 5,442 2.1%
Charge in connection with
the sale, consolidation or
closure of certain sites --- 0.0% --- 0.0% --- 0.0% 3,616 1.4%
--------- --------- --------- ---------
TOTAL EXPENSES 24,502 30.5% 29,751 34.7% 74,319 30.3% 88,319 33.8%
INCOME FROM OPERATIONS 3,804 4.7% (1,094) -1.3% 12,480 5.1% 3,137 1.2%
Interest expense, net 2,853 3.6% 3,196 3.7% 8,427 3.4% 9,993 3.8%
INCOME (LOSS) BEFORE
INCOME TAXES 951 1.2% (4,290) -5.0% 4,053 1.7% (6,856) -2.6%
Income Tax Expense 872 1.1% (2,368) -2.8% 2,276 0.9% (2,002) -0.8%
--------- --------- --------- ---------
NET INCOME (LOSS) $ 79 0.1% $ (1,922) -2.2% $ 1,777 0.8% $ (4,854) -1.8%
========= ========= ========= =========
NET INCOME (LOSS) PER
SHARE--BASIC AND DILUTED
$ 0.01 $ (0.26) $ 0.24 $ (0.64)
========= ========= ========= =========
WEIGHTED AVERAGE
SHARES OF
COMMON STOCK
OUTSTANDING 7,535 7,535 7,535 7,535
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINISHMASTER, INC.
September 30, 1998
PRO FORMA RESULTS OF OPERATIONS
Net sales. Pro forma net sales decreased from $85.8 million for the three months
ended September 30, 1997 to $80.3 million for the three months ended September
30, 1998. Pro forma net sales decreased from $261.2 million for the nine months
ended September 30, 1997 to $244.9 million for the nine months ended September
30, 1998. The pro forma net sales decrease is the result of volume losses in
comparable store net sales due to soft market conditions and strong competitive
pressures.
Gross profit. Pro forma gross profit decreased from $28.7 million to $28.3
million, but increased as a percentage of pro forma net sales from 33.4% to
35.2% for the three month period ended September 30, 1998, compared to the three
month period ended September 30, 1997. For the nine month period ended September
30, 1998, pro forma gross profit decreased from $91.5 million to $86.8 million,
but increased as a percentage of pro forma net sales from 35.0% to 35.4% as
compared to the same period in the prior year. The decrease in pro forma gross
profit dollars for the three and nine month periods ended September 30, 1998 is
primarily due to lower pro forma sales. The increase in pro forma gross profit
percentage for the three and nine month periods ended September 30, 1998, is due
to the Company's strategy to maximize vendor discounts and take advantage of
supplier incentive programs on inventory purchases.
Operating expenses. Pro forma operating expenses decreased from $13.9 million to
$11.9 million, and as a percentage of pro forma net sales, from 16.2% to 14.8%
for the three month period ended September 30, 1998, compared to the same period
in the prior year. For the nine month period ended September 30, 1998, pro forma
operating expenses decreased from $41.5 million to $36.5 million, and as a
percentage of pro forma net sales, from 15.9% to 14.9%, compared to the same
period in the prior year. The decrease in pro forma operating expenses and as a
percentage of pro forma net sales for the three and nine month periods ended
September 30, 1998 is due to savings that resulted from combining the operations
of the Company, Thompson, and AutoPaints. The savings primarily result from a
focus on managing store and distribution costs, and the consolidation of certain
stores. Operating expenses consist of wages, benefits, building, lease, and
vehicle costs for the sales outlets and the distribution centers.
Selling, general and administrative. Pro forma selling, general and
administrative expenses decreased from $13.1 million to $9.8 million, and as a
percentage of pro forma net sales, from 15.2% to 12.2% for the three month
period ended September 30, 1998, compared to the same period in the prior year.
For the nine month period ended September 30, 1998, pro forma selling, general
and administrative expenses decreased from $35.1 million to $29.6 million, and
as a percentage of pro forma net sales, from 13.4% to 12.1%, compared to the
same period in the prior year. The decrease in pro forma selling, general and
administrative expenses and as a percentage of pro forma net sales for the three
and nine month periods ended September 30, 1998 is due to savings from combining
the operations of the Company, Thompson and AutoPaints. The primary savings are
due to reduced payroll costs from combining corporate management functions.
These savings have been partially reduced by one-time non-recurring charges
related to the combining of the companies. The Company expects continued
improvement in selling, general and administrative expenses as more functions
are consolidated. General and administrative expenses consist of corporate
support staff and expenses for marketing, data processing, accounting, credit,
purchasing and human resources. Selling expenses include sales commissions,
wages, and expenses supporting customer sales activity.
Depreciation and amortization of intangible assets. Pro forma depreciation
expense increased from $1.0 million to $1.1 million and as a percentage of pro
forma net sales, from 1.1% to 1.3% for the three month period ended September
30, 1998, compared to the three month period ended September 30, 1997. For the
nine month period ended September 30, 1998, pro forma depreciation expense
increased $0.1 million, and as a percentage of pro forma net sales, from 1.0% to
1.1%, compared to the nine month period ended September 30, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINISHMASTER, INC.
September 30, 1998
PRO FORMA RESULTS OF OPERATIONS (continued)
Pro forma amortization expense decreased from $1.8 million to $1.7 million, but
increased as a percentage of pro forma net sales from 2.1% to 2.2% for the three
month period ended September 30, 1998, compared to the three month period ended
September 30, 1997. For the nine month period ended September 30, 1998, pro
forma amortization expense remained constant at $5.4 million, but increased as a
percentage of pro forma net sales from 2.1% to 2.2%, compared to the same period
in the prior year. The increase in pro forma amortization expense as a
percentage of pro forma net sales for the three and nine month periods ended
September 30, 1998 is attributable to reduced pro forma net sales.
Interest expense. Pro forma interest expense decreased from $3.2 million to $2.9
million and as a percentage of pro forma net sales from 3.7% to 3.6% for the
three month period ended September 30, 1998, compared to the three month period
ended September 30, 1997. For the nine month period ended September 30, 1998,
pro forma interest expense decreased from $10.0 million to $8.4 million and as a
percentage of pro forma net sales from 3.8% to 3.4%, compared to the same period
in the prior year. The decrease in pro forma interest expense and as a
percentage of pro forma net sales is due to lower debt levels as the Company
reduced its borrowings.
Income Taxes. The pro forma effective tax rate for the nine month period ended
September 30, 1998 is substantially higher than the combined federal and state
statutory rate due to the non-deductible nature of certain expenses, primarily
the amortization of goodwill associated with the acquisition of Thompson. The
pro forma effective tax rate on the loss before income taxes for the nine month
period ended September 30, 1997 is lower than the combined federal and state
statutory rate due to the non-deductible nature of certain expenses, primarily
the amortization of goodwill associated with the acquisition of Thompson.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information and Events
None
Item 6. Exhibits and Reports on Form 8-K
The following exhibits, unless otherwise indicated, have been filed as exhibits
to Form S-1 Registration Statement, No. 33-73804, effective date of February 22,
1994, or as exhibits filed by the Registrant, and are hereby incorporated by
reference.
Exhibit No. Description of Document
2.1 Agreement and Plan of Merger, dated as of October 14, 1997,
by and among FinishMaster, Inc., FMST Acquisition Corporation
and Thompson PBE, Inc. (incorporated by reference to Exhibit
(c)(2) of Schedule 14D-1 previously filed by FMST Acquisition
Corporation on October 21, 1997).
2.2 Agreement and Plan of Merger, dated February 16, 1998, by and
among FinishMaster, Inc., AutoPaints and Lacy Distribution,
Inc. (previously filed with Form 10-K dated April 1, 1998)
3.1 Articles of Incorporation of FinishMaster, Inc., an Indiana
corporation, as amended June 30, 1998 (previously filed with
Form 10-Q dated August 14, 1998).
3.2 Amended and restated code of bylaws of FinishMaster, Inc., an
Indiana corporation (previously filed with Form 10-K/A dated
April 14, 1998
10.1 FinishMaster Stock Option Plan as amended June 30, 1998
(previously filed with Form 10-Q dated August 14, 1998).
10.2 Agreement dated as of March 1, 1998 between FinishMaster,
Inc. and LDI AutoPaints, Inc. respecting certain management
and administrative functions (previously filed with Form 10-K
dated April 1, 1998)
2.1 Subsidiaries of the Registrant (previously filed with Form
10-K dated April 1, 1998)
27.1* Financial Data Schedule
99(a) Credit Agreement, dated as of November 19, 1997, among
FinishMaster, Inc., the Institutions from Time to Time
Parties Thereto as Lenders and NBD Bank, N.A., as Agent
(previously filed with Form 8-K dated December 3, 1997)
99(b) Subordinated Note Agreement, dated as of November 19, 1997,
by and between FinishMaster, Inc. and LDI, Ltd. (previously
filed with Form 8-K dated December 3, 1997)
99(c) First Amendment to Credit Agreement dated December 10, 1997
99(d) Second Amendment to Credit Agreement dated March 27, 1998
99(e) Credit Agreement dated March 27, 1998 between FinishMaster,
Inc. and LDI, Ltd.
* Filed herewith
No reports on Form 8-K were filed during the three months ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINISHMASTER, INC.
Date November 16, 1998 \S\ ANDRE B. LACY
----------------- -------------------------------
Andre B. Lacy, Chairman of the
Board and Chief
Executive Officer
\S\ ROBERT R. MILLARD
------------------------------
Robert R. Millard, Senior
Vice President-Finance
(Chief Financial and Accounting Officer)
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