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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 March 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 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 April 30, 1998
Common Stock 5,993,640 shares
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<PAGE>
PART I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
FINISHMASTER, INC.
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
-------- --------
CURRENT ASSETS (unaudited)
<S> <C> <C>
Cash $ 575 $ 364
Accounts receivable, net of allowance for doubtful
accounts of $1,722 and $2,247 respectively 29,167 28,744
Inventory 51,717 53,442
Prepaid expenses and other current assets 7,144 7,894
-------- --------
TOTAL CURRENT ASSETS 88,603 90,444
PROPERTY AND EQUIPMENT, NET 9,607 10,296
OTHER ASSETS:
Intangibles assets, net 109,662 110,870
Other 2,838 3,808
-------- --------
112,500 114,678
-------- --------
$210,710 $215,418
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,104 $ 28,274
Accrued expenses and other current liabilities 11,546 12,072
Current maturities of long-term obligations 8,526 8,005
-------- --------
TOTAL CURRENT LIABILITIES 53,176 48,351
LONG-TERM OBLIGATIONS, net of current maturities 124,074 134,135
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, 1,000,000 shares authorized;
no shares issued or outstanding
Common stock, $1 stated value, 10,000,000
shares authorized, 5,992,640 shares issued
and outstanding 5,993 5,993
Additional paid-in capital 14,466 14,466
Retained earnings 13,001 12,473
-------- --------
33,460 32,932
-------- --------
$210,710 $215,418
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FINISHMASTER, INC.
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
NET SALES $76,024 $29,239
COST OF SALES 49,079 18,610
------- -------
GROSS PROFIT 26,945 10,629
EXPENSES
Operating 11,714 4,667
Selling, general and administrative 8,938 3,801
Depreciation 920 277
Amortization of intangible assets 1,574 740
------- -------
TOTAL 23,146 9,485
------- -------
INCOME FROM OPERATIONS 3,799 1,144
Interest expense, net 2,792 488
------- -------
INCOME BEFORE INCOME TAXES 1,007 656
Income tax expense 479 250
------- -------
NET INCOME $ 528 $ 406
======= =======
NET INCOME PER SHARE - BASIC $ .09 $ .07
======= =======
- DILUTED $ .09 $ .07
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 5,993 5,996
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FINISHMASTER, INC.
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
-------- --------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 528 $ 406
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,494 1,017
Changes in operating assets and liabilities:
Accounts receivable (423) (157)
Inventories 1,725 1,038
Prepaid expenses and other assets 1,720 146
Accounts payable and other current liabilities 4,304 (3,966)
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 10,348 (1,516)
INVESTING ACTIVITIES
Purchases of property and equipment (231) (144)
Other (297) (1)
-------- --------
NET CASH USED IN
INVESTING ACTIVITIES (528) (145)
FINANCING ACTIVITIES
Net borrowings under note payable, bank -- 3,444
Repayment of long term obligations (9,540) (1,186)
Debt issuance costs (69) --
Purchase of common stock -- (51)
-------- --------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (9,609) 2,207
-------- --------
INCREASE IN CASH 211 546
CASH AT BEGINNING OF PERIOD 364 300
-------- --------
CASH AT END OF PERIOD $ 575 $ 846
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FINISHMASTER, INC.
March 31, 1998
NOTE 1 - Basis of Presentation
The condensed consolidated financial statements include the accounts of
FinishMaster, Inc., Thompson PBE, Inc. and Refinishers Warehouse, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. These condensed consolidated financial statements are unaudited
and have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods covered have been included.
For further information, refer to the consolidated financial statements and
notes thereto included in FinishMaster's annual report on Form 10-K for the year
ended December 31, 1997. The results of operations for the interim periods
presented are not necessarily indicative of the results for the full year.
Certain reclassifications have been reflected in prior year amounts to conform
with the presentation of corresponding amounts in the current period.
NOTE 2 - Income Taxes
The effective tax rate for the three months ended March 31, 1998 increased
over that of the three months ended March 31, 1997 due to the
non-deductible nature of certain expenses, primarily the amortization of
goodwill associated with the acquisition of Thompson PBE, Inc.
NOTE 3 - Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share data):
Three Months Ended March 31,
1998 1997
----- ------
Numerator:
NET INCOME $ 528 $ 406
===== ======
Denominator:
BASIC-WEIGHTED AVERAGE SHARES 5,993 5,996
Effect of dilutive securities:
EMPLOYEE STOCK OPTIONS -- --
----- ------
DILUTED-WEIGHTED AVERAGE SHARES 5,993 5,996
===== ======
Basic net income per share $0.09 $ 0.07
===== ======
Diluted net income per share $0.09 $ 0.07
===== ======
The effect of employee stock options on the calculation of weighted average
shares outstanding for purposes of determining diluted earnings per share is
antidilutive for the three months ended March 31, 1998 and 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FinishMaster, Inc.
March 31, 1998
RESULTS OF OPERATIONS
The following table sets forth, certain items from the Company's Statement of
Operations as a percentage of net sales for the three months ended March 31,
1998 and 1997, respectively,
Three months ended
March 31,
1998 1997
------ ------
Net sales 100.0% 100.0%
Cost of sales 64.6 63.6
------ ------
Gross profit 35.4 36.4
Operating expenses 15.4 16.0
Selling, general and administrative 11.7 13.0
Depreciation and amortization 3.3 3.4
------ ------
30.4 32.4
------ ------
Income from operations 5.0 4.0
Interest expense 3.7 1.7
Provision for income taxes 0.6 0.9
------ ------
Net income 0.7% 1.4%
====== ======
Net Sales. Net sales for the quarter ended March 31, 1998 increased by $46.8
million or 160% to $76.0 million from $29.2 million for the same period in 1997.
The increase is the result of the acquisition of Thompson PBE, Inc. ("Thompson")
in November 1997. The Thompson sales were offset by a decline in same outlet
sales. Same outlet sales declined primarily due to a slowdown in the van
conversion industry and flat industry market conditions.
Gross Profit. Gross profit for the quarter ended March 31, 1998 increased by
$16.3 million to $26.9 million from $10.6 million for the same period in 1997.
Gross profit as a percentage of sales decreased to 35.4% for the quarter ended
March 31, 1998 from 36.4% for the same period in 1997. The decrease in gross
profit as a percentage of sales is due to the sale of Thompson's higher cost
inventories which were acquired through the acquisition.
Operating Expenses. Operating expenses for the quarter ended March 31, 1998
increased by $7.1 million to $11.7 million from $4.6 million for the same period
in the prior year. Operating expenses as a percent of sales decreased to 15.4%
for the quarter ended March 31, 1998 compared to 16.0% for the same period in
1997. Operating expenses consist of wages, building and vehicle costs for the
outlets and the distribution centers. The decrease in operating expenses as a
percentage of sales is the result of the Company's cost containment measures
including, but not limited to, headcount reductions and streamlining sales
outlet and distribution activities.
Selling, General, and Administrative Expenses. (SG&A) SG&A expenses for the
quarter ended March 31, 1998 increased by $5.1 million to $8.9 million from $3.8
million for the same period in the prior year. SG&A expenses decreased as a
percentage of sales to 11.7% for the quarter ended March 31, 1998 compared to
13.0% for the same period in the prior year. The decrease in SG&A expenses as a
percentage of sales is due to the Company's cost containment measures including,
but not limited to, head count reductions, and reductions in travel and
entertainment and advertising expense. General and administrative expenses
consist of corporate support staff and expenses for commission, wages, and
expenses supporting customer sales activity. The Company expects continued
improvement in SG&A expenses as a percentage of sales as the Company
consolidates certain corporate functions as a result of the Thompson
acquisition.
<PAGE>
Depreciation and Amortization of Intangible Assets. Depreciation expense for the
quarter ended March 31, 1998 increased by $0.6 million to $0.9 million from $0.3
million for the same period in the prior year. Amortization of intangible assets
for the quarter ended March 31, 1998 increased by $0.8 to $1.6 million from $0.7
million for the same period in the prior year. Depreciation and amortization
consists primarily of depreciation expenses related to the distribution center
and store locations and amortization of goodwill and non-compete costs related
to acquisitions. The increase in depreciation and amortization is primarily
attributable to the Thompson acquisition.
Interest Expense. Interest expense for the quarter ended March 31, 1998
increased by $2.3 million for the quarter ended March 31, 1998 to $2.8 million
from $0.5 million for the same period in the prior year. Interest expense
primarily includes interest on the Company's credit facilities as well as
interest on mortgages and notes payable to former owners of acquired businesses.
The increase in interest expense is primarily attributable to interest on debt
incurred to finance the Thompson transaction. The Thompson transaction occurred
November 21, 1997 and the total acquisition price of $73.5 million was funded
through borrowings.
Provision for Income Tax. The Company's effective tax rate for the quarter ended
March 31, 1998 was 47.6% compared to 38.1% for the three months ended March 31,
1998. This rate varied from the Company's statutory tax rate of 34%, primarily
due to state taxes along with certain non-deductible expenses, primarily the
amortization of goodwill associated with the acquisition of Thompson.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources have been significantly influenced
by acquisition activity. The Company historically has financed acquisitions
through a combination of seller financing, internally generated cash flow and
unsecured bank borrowings under the Company's loan facilities.
On November 21, 1997, the Company acquired substantially all of the outstanding
common stock of Thompson PBE, Inc. for $8.00 net per share. Thompson, like
FinishMaster, is an aftermarket distributor of automotive paints, coatings and
related supplies. The total purchase price, including related acquisition costs,
was $73,471,000. The Company also refinanced $34,474,000 of Thompson
indebtedness. The Company funded the acquisition and refinanced Thompson's
indebtedness with a combination of bank financing and subordinated borrowings
from LDI, Ltd ("LDI"), the Company's majority shareholder.
Cash provided by operating activities was $10.3 million for the quarter ended
March 31,1998, in contrast to cash used of $1.5 million for the comparable
period of the prior year. The increase in cash provided by operations is
primarily attributable to accounts payable management, prepaid management and
increased operating profitability compared to the prior period. Accounts payable
increased $8.3 million as a result of favorable vendor terms from prior
purchases, as well as an increased focus on cash management. Prepaid expenses
and other current assets decreased $1.8 million, primarily as a result of the
collection of non-trade receivables. Net income before non-cash charges, or
depreciation and amortization, increased $1.6 million compared to the same
period of the prior year.
Cash used in investing activities was $0.5 million for the quarter ended March
31, 1998, compared to $0.1 million for the comparable period of the prior year.
Capital expenditures used $0.3 million of cash to improve sales outlet
facilities and purchase equipment. The Company uses operating leases to finance
its computer system and delivery vehicles. Contingent costs incurred in
conjunction with previous acquisitions used $0.2 million of cash for the period
ended March 31, 1998.
Cash used for financing activities was $9.6 million for the quarter ended March
31, 1998, in contrast to cash provided of $2.2 million in the same period of the
prior year. For the quarter ended March 31, 1998, cash was used to repay debt
associated with bank financing.
The Company had working capital of approximately $35.4 million at March 31,
1998. In addition to working capital, the Company had term credit and revolving
credit facilities totaling $110 million, and senior subordinated debt of $30
million. At March 31, 1998 the Company had available $26.0 million of unused
revolving credit.
<PAGE>
As a condition of the amended bank credit facility of $100 million, the Company
agreed to obtain by June 30, 1998, additional equity of $14 million or such
lesser amount as may be acceptable to the Company's bank. The Company intends to
satisfy this requirement, subject to shareholder approval, through the
acquisition of LDI AutoPaints, Inc. ("AutoPaints"), an indirect wholly-owned
subsidiary of LDI, in exchange for additional equity in the Company.
The Company is currently considering other financing arrangements. Should the
Company be successful in obtaining alternate financing arrangements on favorable
terms, proceeds will be used to retire certain bank term loans, a portion of
outstanding indebtedness under the revolving credit facility and the
subordinated debt payable to LDI. Early retirement of indebtedness will result
in an extraordinary loss in the amount of the net book value of capitalized debt
issue costs. At March 31, 1998, unamortized debt issue costs were approximately
$1.6 million.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Report may contain certain forward-looking statements pertaining to, among
other things, the Company's future results of operations, cash flow needs and
liquidity, acquisitions and other aspects of its business. Similar
forward-looking statements may be made by the Company from time to time. These
statements are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. Important factors to consider
in evaluating such forward-looking statements include changes in external market
factors, changes in the Company's business strategy or an inability to execute
its strategy due to changes in its industry or the economy generally,
difficulties associated with assimilating acquisitions, the emergence of new or
growing competitors, seasonal and quarterly fluctuations, governmental
regulation, the potential loss of key suppliers, and various other competitive
factors. In light of these risks and uncertainties, there can be no assurance
that the future developments described in the forward-looking statements
contained in this Report will in fact occur.
<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 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., 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, 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, Inc. Stock Option Plan (previously filed
with Form 10-K dated March 31, 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 March 31, 1998)
21 Subsidiaries of the Registrant (previously filed with
Form 10-K dated March 31, 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 (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)
* Filed herewith
- A Form 8-K was filed on December 3, 1997 to report the completion
of the acquisition by the Company of Thompson, and was amended by a
Form 8-K/A filed on February 2, 1998 to incorporate certain pro forma
consolidated financial statements of the Company, after giving effect
to the acquisition of Thompson.
<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 May 13, 1998 /s/ THOMAS U. YOUNG
---------------------- ----------------------------------
Thomas U. Young, President
(Chief Operating Officer)
/s/ ROGER A. SOROKIN
----------------------------------
Roger A. Sorokin, Vice President-
Finance (Chief Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000917321
<NAME> FinishMaster, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 575
<SECURITIES> 0
<RECEIVABLES> 30,889
<ALLOWANCES> 1,722
<INVENTORY> 51,717
<CURRENT-ASSETS> 88,603
<PP&E> 22,672
<DEPRECIATION> 13,065
<TOTAL-ASSETS> 210,710
<CURRENT-LIABILITIES> 53,176
<BONDS> 0
<COMMON> 5,993
0
0
<OTHER-SE> 27,467
<TOTAL-LIABILITY-AND-EQUITY> 33,460
<SALES> 76,024
<TOTAL-REVENUES> 76,024
<CGS> 49,079
<TOTAL-COSTS> 23,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (142)
<INTEREST-EXPENSE> 2,792
<INCOME-PRETAX> 1,007
<INCOME-TAX> 479
<INCOME-CONTINUING> 528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 528
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
