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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 Quarter Ended September 30, 1999
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
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
On November 12, 1999, there were 7,537,637 shares of the Registrant's common
stock outstanding.
<PAGE>
FINISHMASTER, INC.
FORM 10-Q
For the Quarter Ended September 30, 1999
TABLE OF CONTENTS
PAGE
Part I. Financial Information 3
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4
Condensed Consolidated Statements of Cash Flows (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
<PAGE>
PART I. FINANCIAL STATEMENTS
FINISHMASTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 (1)
-------- --------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,165 $ 1,009
Accounts receivable, net of allowance for doubtful
accounts of $1,848 and $1,680 respectively 31,262 30,212
Inventory 50,588 57,744
Prepaid expenses and other current assets 6,171 8,922
-------- --------
TOTAL CURRENT ASSETS 89,186 97,887
PROPERTY AND EQUIPMENT, NET 9,901 11,259
OTHER ASSETS
Intangible assets, net 109,238 114,526
Other 3,302 3,275
-------- --------
112,540 117,801
$211,627 $226,947
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 22,526 $ 36,785
Accrued expenses and other current liabilities 10,867 8,821
Current maturities of long-term debt 14,522 9,985
-------- --------
TOTAL CURRENT LIABILITIES 47,915 55,591
LONG-TERM OBLIGATIONS 110,835 122,008
COMMITMENTS AND CONTINGENCIES
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
shares issued and outstanding 7,536 7,536
Additional paid-in capital 27,351 27,351
Retained earnings 17,990 14,461
-------- --------
52,877 49,348
-------- --------
$211,627 $226,947
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
(1) The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
<PAGE>
FINISHMASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three~Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 82,460 $ 80,338 $245,778 $233,120
COST OF SALES 52,582 52,032 157,503 150,842
-------- -------- -------- --------
GROSS PROFIT 29,878 28,306 88,275 82,278
-------- -------- -------- --------
EXPENSES
Operating 12,285 11,899 35,524 35,142
Selling, general and administrative 10,260 9,815 29,678 27,993
Depreciation 828 1,054 2,705 2,554
Amortization of intangible assets 1,777 1,653 5,297 4,668
-------- -------- -------- --------
TOTAL 25,150 24,421 73,204 70,357
-------- -------- -------- --------
INCOME FROM OPERATIONS 4,728 3,885 15,071 11,921
Interest expense, net 2,652 2,934 8,060 8,634
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,076 951 7,011 3,287
Income tax expense 1,025 872 3,482 1,981
-------- -------- -------- --------
NET INCOME $ 1,051 $ 79 $ 3,529 $ 1,306
======== ======== ======== ========
NET INCOME PER SHARE-BASIC 0.14 $ 0.01 $ 0.47 $ 0.20
======== ======== ======== ========
NET INCOME PER SHARE DILUTED 0.14 $ 0.01 $ 0.47 $ 0.20
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING--BASIC 7,536 7,535 7,536 6,518
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING--DILUTED 7,543 7,535 7,541 6,518
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
FINISHMASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
OPERATING ACTIVITIES 1999 1998
-------- --------
<S> <C> <C>
Net income $ 3,529 $ 1,306
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,002 7,222
Amortization of financing costs 256 242
Changes in operating assets and liabilities:
Accounts receivable (776) 882
Inventories 7,015 5,896
Prepaid expenses and other current assets 2,724 1,116
Accounts payable and accrued expenses (12,509) (4,357)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,241 12,307
-------- --------
INVESTING ACTIVITIES
Business acquisitions and payments under
earn-out provisions of prior acquisition
agreements (231) (405)
Proceeds from disposal of assets 25 174
Purchases of property and equipment (840) (1,199)
Cash acquired through merger of LDI AutoPaints -- 1,786
Other (113) (156)
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,159) 200
-------- --------
FINANCING ACTIVITIES
Borrowings from long-term debt 79,483 70,500
Repayments of long-term debt (86,409) (83,006)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (6,926) (12,506)
-------- --------
INCREASE IN CASH 156 1
CASH AT THE BEGINNING OF PERIOD 1,009 364
-------- --------
CASH AT THE END OF PERIOD $ 1,165 $ 365
======== ========
NON CASH ACTIVITIES
Acquisition of LDI AutoPaints
Assets acquired $ 17,667
Liabilities assumed (3,246)
--------
Equity purchased 14,421
Less: Cash acquired (1,786)
--------
Net assets acquired, excluding cash $ 12,635
========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
FINISHMASTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Basis of Presentation: The interim financial statements are unaudited but, in
the opinion of management, reflect all adjustments necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented. These adjustments consist of normal recurring items. The
results of operations for any interim period are not necessarily indicative of
results for the full year. The condensed consolidated financial statements and
notes are presented as permitted by the requirements for Form 10-Q and do not
contain certain information included in the Company's annual consolidated
financial statements and notes. This Form 10-Q should be read in conjunction
with the Company's consolidated financial statements and notes included in its
1998 Annual Report on Form 10-K.
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,
1999, the Company operated 154 sales outlets and three major distribution
centers in 22 states and is organized into three major geographic regions - the
Southeastern, Western, and Central/Northeastern Divisions. The Company
aggregates its three operating segments into a single reportable segment. The
Company provides a comprehensive selection of brand name products to its
customers and is highly dependent on four key suppliers, BASF, DuPont, 3M and
PPG, which account for approximately 60% of the Company's purchases.
Principles of Consolidation: The Company's condensed consolidated financial
statements include the accounts of FinishMaster, Refinishers Warehouse, Inc. and
Thompson PBE, Inc. ("Thompson"), as well as LDI AutoPaints, Inc. ("AutoPaints"),
from the date of its acquisition. All significant intercompany accounts and
transactions are eliminated. References to the Company or FinishMaster
throughout this report relate to the consolidated entity.
Majority Shareholder: Lacy Distribution, Inc. ("Distribution"), an Indiana
corporation, which is an indirect wholly-owned subsidiary of LDI, Ltd. ("LDI"),
an Indiana limited partnership, is the majority shareholder of the Company with
5,587,516 shares of common stock, representing 74.1% of the outstanding shares
at September 30, 1999. Throughout the remainder of this report, LDI and
Distribution are collectively referred to as "LDI."
Recent Accounting Pronouncement: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company is not routinely involved in derivative and hedging
activities and adoption of this Statement is not expected to have a material
impact on financial condition or results of operations. In June 1999, the FASB
issued SFAS No. 137, which delayed the effective date of this Statement to
January 1, 2001.
2. ACQUISITIONS
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.
The Company completed four acquisitions during the first nine months of 1999
that are not material to its historical or pro forma results of operations.
<PAGE>
3. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended September 30, Nine Months Ended
September 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,051 $ 79 $ 3,529 $ 1,306
================= ================ ================ ================
Denominator:
Basic-weighted average shares 7,536 7535 7,536 6,518
Effect of dilutive stock options 7 --- 5 ---
----------------- ---------------- ---------------- ----------------
Diluted-weighted average shares 7,543 7,535 7,541 6,518
================= ================ ================ ================
Basic net income per share $ 0.14 $ 0.01 $ 0.47 $ 0.20
================= ================ ================ ================
Diluted net income per share $ 0.14 $ 0.01 $ 0.47 $ 0.20
================= ================ ================ ================
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
In January 1999, the Company was named in an unfair business practices lawsuit
by an automotive paint distributor located in the State of California. The
plaintiff in such suit alleged that the Company offered, in a manner that
injured the plaintiff, secret rebates and cash bonuses to businesses in the
Southern California area if those businesses would buy exclusively from the
Company and use the Company's products. The plaintiff claimed 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.
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
The historical financial statements of the Company include the results of
operations of AutoPaints since its acquisition date of June 30, 1998. The
Company 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 effect of the AutoPaints acquisition. The
following tables include unaudited pro forma consolidated results, as if the
acquisition of AutoPaints had occurred on January 1, 1998. The unaudited pro
forma amounts do not purport to be indicative of results that would have
occurred had the acquisition been in effect for the periods presented, nor do
they purport to be indicative of the results that may be obtained in the future.
<TABLE>
<CAPTION>
Net Sales
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Historical $ 82,460 2.6% $ 80,338 $ 245,778 5.4% $ 233,120
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 82,460 2.6% $ 80,338 $ 245,778 0.4% $ 244,884
- --------------------------------------------------------------------------------------------------------------------------
Net sales for the third quarter increased $2.1 million or 2.6% and pro forma net
sales for the first nine months of 1999 increased $0.9 million or 0.4%. These
increases are due to same store sales growth and acquisitions. During the first
nine months, the Company completed four acquisitions.
Gross Margin
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
Historical $ 29,878 5.6% $ 28,306 $ 88,275 7.3% $ 82,278
Percentage of net sales 36.2% 35.2% 35.9% 35.3%
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 29,878 5.6% $ 28,306 $ 88,275 1.7% $ 86,799
Percentage of net sales 36.2% 35.2% 35.9% 35.4%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross margin for the third quarter increased $1.6 million or 5.6% due to
increased margins of approximately $0.8 million and higher sales volume of $0.8
million. Pro forma gross margin for the first nine months of the year increased
$1.5 million or 1.7% primarily due to increased margins of $1.2 million. These
increases are attributable to supplier incentive plans and the optimization of
early payment discounts.
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Historical $ 12,285 3.2% $ 11,899 $ 35,524 1.1% $ 35,142
Percentage of net sales 14.9% 14.8% 14.5% 15.1%
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 12,285 3.2% $ 11,899 $ 35,524 (2.7%) $ 36,495
Percentage of net sales 14.9% 14.8% 14.5% 14.9%
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses consist of wages, facility expenses, vehicle and related
costs for the Company's store and distribution locations. Operating expenses for
the third quarter increased $0.4 million or 3.2%, consistent with the increase
in net sales.
Pro forma operating expenses for the first nine months of the year decreased
$1.0 million or 2.7%. This decrease is a direct result of the Company's profit
improvement initiatives that included savings from the consolidation and closure
of sales outlets during 1998 and reduced spending programs at store and
distribution locations.
Selling, General and
Administrative Expenses
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
Historical $ 10,260 4.5% $ 9,815 $ 29,678 6.0% $ 27,993
Percentage of net sales 12.4% 12.2% 12.1% 12.0%
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 10,260 4.5% $ 9,815 $ 29,678 0.2% $ 29,608
Percentage of net sales 12.4% 12.2% 12.1% 12.1%
- --------------------------------------------------------------------------------------------------------------------------
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. SG&A expenses
increased $0.4 million or 4.5% during the third quarter, consistent with the
increase in net sales.
Pro forma SG&A expenses increased slightly less than $0.1 million or 0.2% for
the first nine months of 1999. Initiatives implemented by the Company in 1998
such as the consolidation of four corporate offices into one, the closure and
consolidation of sales outlets and reduced spending programs have offset normal
increases in SG&A.
Depreciation
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
Historical $ 828 (21.4%) $ 1,054 $ 2,705 5.9% $ 2,554
Percentage of net sales 1.0% 1.3% 1.1% 1.1%
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 828 (21.4%) $ 1,054 $ 2,705 (2.9%) $ 2,786
Percentage of net sales 1.0% 1.3% 1.1% 1.1%
- --------------------------------------------------------------------------------------------------------------------------
Amortization of Intangible Assets
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
Historical $ 1,777 7.5% $ 1,653 $ 5,297 13.5% $ 4,668
Percentage of net sales 2.2% 2.1% 2.2% 2.0%
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 1,777 7.5% $ 1,653 $ 5,297 2.1% $ 5,187
Percentage of net sales 2.2% 2.1% 2.2% 2.1%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Interest Expense, net
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Historical $ 2,652 (9.6%) $ 2,934 $ 8,060 (6.6%) $ 8,634
Percentage of net sales 3.2% 3.7% 3.3% 3.7%
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 2,652 (9.6%) $ 2,934 $ 8,060 (7.0%) $ 8,670
Percentage of net sales 3.2% 3.7% 3.3% 3.5%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense for the third quarter decreased $0.3 million or 9.6%, and for
the first nine months pro forma interest expense decreased $0.6 million or 7.0%
primarily due to lower average outstanding borrowings of approximately $10.2 and
$10.7 million, respectively.
<TABLE>
<CAPTION>
Income Tax Expense
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Historical $ 1,025 17.5% $ 872 $ 3,482 75.8% $ 1,981
Percentage of net sales 1.2% 1.1% 1.4% 0.8%
Effective tax rate 49.4% 91.7% 49.7% 60.3%
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 1,025 17.5% $ 872 $ 3,482 53.0% $ 2,276
Percentage of net sales 1.2% 1.1% 1.4% 0.9%
Effective tax rate 49.4% 91.7% 49.7% 56.2%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Income tax expense for the third quarter and pro forma income tax expense for
the first nine months of 1999 increased due to higher income before income
taxes. The Company's effective tax rate consistently varies from the federal
statutory rate as a result of certain expenses, principally nondeductible
intangible amortization. In 1998, the Company's pro forma effective tax rate for
the year was 55.0%. The lower projected rate for 1999 is reflective of higher
anticipated full year income before income taxes and consistent levels of
nondeductible items.
<TABLE>
<CAPTION>
Net Income and Income Per Share
Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 Change 1998 1999 Change 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Historical $ 1,051 1,230.4% $ 79 $ 3,529 170.2% $ 1,306
Percentage of net sales 1.3% 0.1% 1.4% 0.6%
Net income per share $ 0.14 1,300.0% $ 0.01 $ 0.47 135.0% $ 0.20
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ 1,051 1,230.4% $ 79 $ 3,529 98.6% $ 1,777
Percentage of net sales 1.3% 0.1% 1.4% 0.7%
Net income per share $ 0.14 1,300.0% $ 0.01 $ 0.47 95.8% $ 0.24
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Factors contributing to the changes in net income and pro forma net income and
the related per share amounts are discussed above.
<PAGE>
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. 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.
<TABLE>
<CAPTION>
Financial Condition, Liquidity and Capital Resources
(In thousands) September 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Working capital $ 41,271 $ 42,296
Long-term debt $ 107,947 $ 119,120
- ------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------
Cash provided by operating activities $ 8,241 $ 12,307
Cash (used in) provided by investing activities $ (1,159) $ 200
Cash used in financing activities $ (6,926) $ (12,506)
- ------------------------------------------------------------------------------------------------
</TABLE>
Net cash provided by operating activities was $8.2 million for the first nine
months of 1999 compared with $12.3 million in the prior year period. This
decrease was a result of a negative change in cash flows generated from
operating assets and liabilities, partially offset by higher earnings and
increased depreciation and amortization expense. The negative change in cash
flows generated from operating assets and liabilities was attributable to an
increase in accounts receivable and a decrease in accounts payable and accrued
expenses. The decrease in accounts payable and accrued expenses resulted from
differences in payment terms between years on large inventory purchases.
Net cash used in investing activities was $1.2 million for the first nine months
of 1999 compared to cash provided by investing activities of $0.2 million in the
same period of the previous year. The difference is primarily attributable to
the cash acquired through the merger with AutoPaints in 1998.
Net cash used in financing activities, primarily the repayment of debt, was $6.9
million for the first nine months of 1999, down from $12.5 million for the first
nine months of 1998. This decrease was due to higher borrowings needed to pay
vendors.
Total capitalization at September 30, 1999 was $175 million, comprised of $122
million of debt and $53 million of equity. Debt as a percentage of total
capitalization was 69.7% at September 30, 1999 compared to 72.3% at December 31,
1998.
At September 30, 1999, the Company had term credit and revolving credit
facilities with original commitments of $40 million and $60 million,
respectively. The term credit facility is being reduced through principal
payments in accordance with the credit agreement. The Company also had senior
subordinated debt of $30 million. During the third quarter portions of the
credit agreement were amended. The amendment modified certain loan covenants
through March 31, 2001, eliminated the excess cash flow repayment provisions and
increased availability under the revolver by $7.5 million through April 30,
2001. The Company was in compliance with the covenants underlying its credit
facilities, and had estimated availability under its revolving credit facility
of $11.8 million as of November 10, 1999, based upon the September 30, 1999
borrowing base calculation.
<PAGE>
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 and structures.
Should the Company be successful in obtaining acceptable financing terms under
new arrangements or negotiating favorable amendments to its existing facilities,
available proceeds may 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 or amendments of its
existing debt facilities may result in the write-off of all or a portion of
previously capitalized debt issuance costs. At September 30, 1999, unamortized
debt issuance costs were approximately $1.4 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. This phase has been completed.
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
are now in production. These systems were upgraded in the third quarter of
1999.
The Company has identified all non-information technology-based systems.
Appropriate remediation plans are being developed, implemented and tested when
each affected system is identified. Remediation plans will be completed during
the fourth quarter of 1999.
Identification of areas of potential third party risk is complete and, for those
areas identified to date, remediation plans are being developed and will be
completed during the fourth quarter of 1999.
<PAGE>
The Costs Involved
The total cost to the Company of achieving Year 2000 compliance is not expected
to exceed $0.1 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 has identified the risks and is continuing to work on contingency
plans 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.
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.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. 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 otherwise 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, 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, Inc. Stock Option Plan (Amended and
Restated as of April 29, 1999) (previously filed with
Registrant's proxy statement on Schedule 14/A dated
April 9, 1999)
21 Subsidiaries of the Registrant (previously filed with
Form 10-K dated March 31, 1999)
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) Third Amendment to the Credit Agreement dated as of
October 30, 1998.
99(f)* Fourth Amendment to the Credit Agreement dated as of
September 22, 1999.
* filed herewith
(b) No Reports on Form 8-K were filed during the quarter ended September 30,
1999.
<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 November 12, 1999 FINISHMASTER, INC.
By: /s/ Wesley N. Dearbaugh
----------------------------------
Wesley N. Dearbaugh
President and Chief
Operating Officer
By: /s/ Robert R. Millard
----------------------------------
Robert R. Millard
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
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(Replace this text with the legend)
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<CIK> 0000917321
<NAME> FinishMaster, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 1,165
<SECURITIES> 0
<RECEIVABLES> 31,262
<ALLOWANCES> 1,848
<INVENTORY> 50,588
<CURRENT-ASSETS> 89,186
<PP&E> 20,354
<DEPRECIATION> 10,453
<TOTAL-ASSETS> 211,627
<CURRENT-LIABILITIES> 47,915
<BONDS> 0
<COMMON> 7,536
0
0
<OTHER-SE> 45,341
<TOTAL-LIABILITY-AND-EQUITY> 52,877
<SALES> 245,778
<TOTAL-REVENUES> 245,778
<CGS> 157,503
<TOTAL-COSTS> 73,204
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,060
<INCOME-PRETAX> 7,011
<INCOME-TAX> 3,482
<INCOME-CONTINUING> 3,529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,529
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.47
</TABLE>
EXHIBIT 99(f)-Amendment Four to the Credit Agreement
AMENDMENT NO. 4 TO CREDIT AGREEMENT ("Amendment") is dated as of September 22,
1999, among FINISHMASTER, INC., an Indiana corporation (the "Borrower"), the
institutions listed on the signature pages hereof as Lenders (the "Lenders"),
and BANK ONE, INDIANA, N.A. (formerly known as NBD BANK, N.A.) in its capacity
as contractual representative for itself and the other Lenders (the "Agent")
under that certain Credit Agreement dated as of November 19, 1997 by and among
the Borrower, the Lenders and the Agent, as amended by Amendment No. 1 thereto
dated as of December 10, 1997, Amendment No. 2 thereto dated as of March 27,
1998 and Amendment No. 3 thereto dated as of October 30, 1998 (the "Credit
Agreement"). Defined terms used herein and not otherwise defined herein shall
have the meaning given to them in the Credit Agreement.
WHEREAS, the Borrower, the Lenders and the Agent have entered the
Credit Agreement; and
WHEREAS, Borrower, the Lenders and the Agent have agreed to amend the
Credit Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Borrower, the Lenders and the Agent agree as
follows:
1. Amendment to the Credit Agreement. Effective as of the date first
above written and subject to the execution of this Amendment by the parties
hereto and the satisfaction of the conditions precedent set forth in Section 2
below, the Credit Agreement shall be and hereby is amended as follows:
a. Section 1.1 shall be amended as follows:
(i) The definition of "Borrowing Base" shall be amended
to delete the current clauses (iv) and (v) in their
entirety and to substitute the following new clauses
(iv) and (v) therefor: "(iv) at all times between
November 3, 1998 and April 30, 1999 and between
September 22, 1999 and April 30, 2001, $7,500,000;
plus (v) at all times between December 1, 2001 (and
each year thereafter) and April 30, 2002 (and each
year thereafter), $5,000,000;".
(ii) The definition of "Excess Cash Flow" shall be deleted
in its entirety.
b. Section 2.5(B)(i)(b) shall be deleted in its entirety and the
words "(b) [RESERVED]" shall be substituted therefor.
<PAGE>
c. Section 2.15(D)(ii) shall be amended to delete the pricing
grid in its entirety and to substitute the following new
pricing grid therefor:
Applicable Applicable Applicable
Eurodollar Floating Rate Commitment
Leverage Ratio Margin Margin Fee Percentage
Greater than or
equal to 4.0 to 1.0 2.25% 0.75% 0.50%
Greater than or
equal to 3.5 to 1.0
and less than
4.0 to 1.0 2.00% 0.50% 0.375%
Greater than or
equal to 3.0 to 1.0
and less than
3.5 to 1.0 1.75% 0.25% 0.25%
Greater than or
equal to 2.5 to 1.0
and less than
3.0 to 1.0 1.50% 0.00% 0.25%
Greater than or
equal to 2.0 to 1.0
and less than
2.5 to 1.0 1.25% 0.00% 0.25%
Less than 2.0 to 1.0 1.00% 0.00% 0.20%
d. Section 7.4(A)(i) shall be amended to delete the reference to
"September 30, 2000" and to substitute therefor "March 31,
2001".
<PAGE>
e. Section 7.4(B) shall be amended to delete the portion of the
Leverage Ratios chart beginning with the quarter ending
September 30, 1999 through and including the quarter ending
March 31, 2001 in its entirety and to substitute the following
revised quarter ends and Leverage Ratios therefor:
"September 30, 1999 4.40 to 1.00
December 31, 1999 4.40 to 1.00
March 31, 2000 4.40 to 1.00
June 30, 2000 4.40 to 1.00
September 30, 2000 4.25 to 1.00
December 31, 2000 4.25 to 1.00
March 31, 2001 4.00 to 1.00".
f. Section 7.4(D) shall be amended to delete the portion of the
Interest Expense Coverage Ratio chart beginning with the
quarter ending March 31, 2000 through and including the
quarter ending March 31, 2001 in its entirety and to
substitute the following revised quarter ends and Interest
Expense Coverage Ratios therefor:
"March 31, 2000 2.25 to 1.0
June 30, 2000 2.25 to 1.0
September 30, 2000 2.25 to 1.0
December 31, 2000 2.25 to 1.0
March 31, 2001 2.25 to 1.0".
2. Conditions Precedent. This Amendment shall become
effective as of the date above written, if, and only
if:
a. the Agent has received duly executed originals of
this Amendment from the Borrower, the Lenders and the
Agent;
b. the Borrower shall have paid to the Agent, for the
benefit of each Lender that delivers a signature page
to this Amendment on or prior to the effective date
hereof, an amendment fee in the amount of ten basis
points on the aggregate Commitment of all of the
Lenders; and
c. the Borrower shall have paid to Banc One Capital
Markets, Inc. (formerly known as First Chicago
Capital Markets, Inc.), as Arranger, a fee in the
amount disclosed in that certain Fee Letter dated as
of September 13, 1999.
3. Representations and Warranties of the Borrower. The
Borrower hereby represents and warrants as follows:
(a) This Amendment and the Credit Agreement, as
amended hereby, constitute legal, valid and binding
obligations of the Borrower and are enforceable
against the Borrower in accordance with their terms.
(b) Upon the effectiveness of this Amendment, the
Borrower hereby reaffirms all representations and
warranties made in the Credit Agreement, and to the
extent the same are not amended hereby, agrees that
all such representations and warranties shall be
deemed to have been remade as of the date of delivery
of this Amendment, unless and to the extent that any
such representation and warranty is stated to relate
solely to an earlier date, in which case such
representation and warranty shall be true and correct
as of such earlier date.
<PAGE>
4. Reference to and Effect on the Credit Agreement.
(a) Upon the effectiveness of Section 1 hereof, on
and after the date hereof, each reference in the
Credit Agreement to "this Credit Agreement,"
"hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Credit
Agreement as amended hereby.
(b) The Credit Agreement, as amended hereby, and all
other documents, instruments and agreements executed
and/or delivered in connection therewith, shall
remain in full force and effect, and are hereby
ratified and confirmed.
(c) Except as expressly provided herein, the
execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right,
power or remedy of the Agent or the Lenders, nor
constitute a waiver of any provision of the Credit
Agreement or any other documents, instruments and
agreements executed and/or delivered in connection
therewith.
5. Governing Law. This Amendment shall be governed by
and construed in accordance with the internal laws
(as opposed to the conflict of law provisions) of the
State of Indiana.
6. Headings. Section headings in this Amendment are
included herein for convenience of reference only and
shall not constitute a part of this Amendment for any
other purpose.
7. Counterparts. This Amendment may be executed by one
or more of the parties to the Amendment on any number
of separate counterparts and all of said counterparts
taken together shall be deemed to constitute one and
the same instrument.
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered
on the date first above written.
FINISHMASTER, INC., as Borrower
By: /s/ Robert R. Millard
-------------------------------------
Name: Robert R. Millard
Title: Senior Vice President
and Chief Financial Officer
BANK ONE, INDIANA, N.A.
(formerly known as NBD BANK, N.A.),
as Agent
By: /s/ Scott C. Morrison
-------------------------------------
Name: Scott C. Morrison
Title: Vice President
<PAGE>
LENDERS:
BANK ONE, INDIANA, N.A.
(formerly known as NBD BANK, N.A.)
By: /s/
----------------------------------------
Name: Scott C. Morrison
Title: Vice President
BANK OF AMERICA, N.A.
(formerly known as BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION)
By: /s/
----------------------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS BANK
By: /s/
----------------------------------------
Name:
Title:
KEYBANK NATIONAL ASSOCIATION
By: /s/
----------------------------------------
Name:
Title:
LASALLE BANK NATIONAL ASSOCIATION
By: /s/
----------------------------------------
Name:
Title:
THE NORTHERN TRUST COMPANY
By: /s/
----------------------------------------
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By: /s/
----------------------------------------
Name:
Title:
