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 March 31, 2000
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 May 1, 2000, there were 7,539,140 shares of the Registrant's common stock
outstanding.
<PAGE>
FINISHMASTER, INC.
FORM 10-Q
For the Quarter Ended March 31, 2000
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 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART I. FINANCIAL STATEMENTS
FINISHMASTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999 (1)
-------- --------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,024 $ 619
Accounts receivable, net of allowance for doubtful
accounts of $1,389 and $1,419, respectively 32,684 30,135
Inventory 53,481 56,830
Prepaid expenses and other current assets 7,174 6,924
-------- --------
TOTAL CURRENT ASSETS 94,363 94,508
PROPERTY AND EQUIPMENT, NET 7,693 7,720
OTHER ASSETS
Intangible assets, net 107,583 108,115
Other 3,775 3,892
-------- --------
111,358 112,007
-------- --------
$213,414 $214,235
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 22,084 $ 26,623
Accrued expenses and other current liabilities 7,419 8,220
Current maturities of long-term debt 11,787 11,518
-------- --------
TOTAL CURRENT LIABILITIES 41,290 46,361
LONG-TERM OBLIGATIONS 118,151 114,805
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; 7,539,140 and 7,537,636
shares issued and outstanding 7,538 7,538
Additional paid-in capital 27,359 27,359
Retained earnings 19,076 18,172
-------- --------
53,973 53,069
-------- --------
$213,414 $214,235
======== ========
</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
March 31,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
NET SALES $ 84,670 $ 80,106
COST OF SALES 54,737 51,486
--------------- ----------------
GROSS PROFIT 29,933 28,620
--------------- ----------------
EXPENSES
Operating 13,447 11,797
Selling, general and administrative 10,326 10,054
Amortization of intangible assets 1,517 1,696
--------------- ----------------
TOTAL 25,290 23,547
--------------- ----------------
INCOME FROM OPERATIONS 4,643 5,073
Interest expense, net 2,888 2,747
--------------- ----------------
INCOME BEFORE INCOME TAXES 1,755 2,326
Income tax expense 851 1,150
--------------- ----------------
NET INCOME $ 904 $ 1,176
=============== ================
NET INCOME PER SHARE--BASIC $ 0.12 $ 0.16
=============== ================
NET INCOME PER SHARE--DILUTED $ 0.12 $ 0.16
=============== ================
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING--BASIC 7,538 7,536
=============== ================
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING--DILUTED 7,572 7,543
=============== ================
</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>
Three Months Ended
March 31,
------------------------
OPERATING ACTIVITIES 2000 1999
-------- --------
<S> <C> <C>
Net income $ 904 $ 1,176
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,556 2,709
Changes in operating assets and liabilities
(excluding the impact of acquisitions):
Accounts receivable, net (2,003) (1,583)
Inventories 4,878 6,341
Prepaid expenses and other assets (540) 1,139
Accounts payable and accrued expenses (5,570) (4,896)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 225 4,886
INVESTING ACTIVITIES
Business acquisitions and payments under
earn-out provisions of prior acquisition agreements (1,650) (264)
Purchases of property and equipment (255) (308)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,905) (572)
FINANCING ACTIVITIES
Borrowings from long-term debt 6,863 32,300
Repayments of long-term debt (4,778) (36,426)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,085 (4,126)
-------- --------
INCREASE IN CASH 405 188
CASH AT THE BEGINNING OF PERIOD 619 1,009
-------- --------
CASH AT THE END OF PERIOD $ 1,024 $ 1,197
======== ========
</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
1999 Annual Report on Form 10-K.
Nature of Business: FinishMaster, Inc. ("the Company" or "FinishMaster") is the
leading independent distributor of automotive paints, coatings, and
paint-related accessories primarily to the automotive collision repair industry
in the United States. As of March 31, 2000, the Company operated 161
distribution branches and three major distribution centers in 22 states, making
it the only national independent distributor in the industry. The Company is
organized into three major geographic regions and operating segments - the
Southeastern, Western, and Central/Northeastern Divisions. These three operating
segments are aggregated into a single reportable segment. The Company has over
30,000 customers to which it provides a comprehensive selection of brand name
products supplied by BASF, DuPont, 3M and PPG, in addition to its own
FinishMaster PrivateBrand refinishing accessory products. The Company is highly
dependent on the key suppliers outlined above, which account for approximately
80% of the Company's purchases.
Principles of Consolidation: The Company's consolidated financial statements
include the accounts of FinishMaster, Refinishers Warehouse, Inc., and Thompson
PBE, Inc. All significant intercompany accounts and transactions have been
eliminated. References to the Company or FinishMaster throughout this report
relate to the consolidated entity.
Majority Shareholder: Lacy Distribution, Inc. ("Distribution"), an Indiana
corporation, which is an indirect wholly-owned subsidiary of LDI, Ltd. ("LDI"),
an Indiana limited partnership, is the majority shareholder of the Company with
5,587,516 shares of common stock, representing 74.1% of the outstanding shares
at March 31, 2000. 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." In June 1999, the FASB issued SFAS No. 137, which delayed the
effective date of SFAS No. 133 to January 1, 2001. 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.
2. ACQUISITIONS
During the first quarter of 2000, the Company completed three acquisitions 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:
(in thousands, except per share data) Three Months Ended March 31,
----------------------------
2000 1999
------ ------
Numerator:
Net Income $ 904 $1,176
====== ======
Denominator:
Basic-weighted average shares 7,538 7,536
Effect of dilutive stock options 34 7
------ ------
Diluted-weighted average shares 7,572 7,543
====== ======
Basic net income per share $ 0.12 $ 0.16
====== ======
Diluted net income per share $ 0.12 $ 0.16
====== ======
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 alleges that the Company offered, in a manner which
injured the plaintiff, rebates and cash bonuses to businesses in the Southern
California area if those businesses would buy exclusively from the Company and
use its products. The plaintiff claims damages in the amount of $3.8 million,
trebled to $11.4 million. The Company believes that the claims are without merit
and is aggressively defending itself against all allegations. Accordingly, it
has not recorded any loss provision relative to damages sought by the plaintiff
in this lawsuit.
The Company is subject to various claims and contingencies arising out of the
normal course of business, including those relating to commercial transactions,
environmental, 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
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In thousands) 2000 Change 1999
- --------------------------------------------------------------------------------
Net sales $ 84,670 5.7% $ 80,106
- --------------------------------------------------------------------------------
Net sales for the first quarter increased $4.6 million, or 5.7%, due to same
branch sales growth and acquisitions. Same branch sales increased approximately
$2.0 million, or 2.5%, with the remainder of the increase attributed to the
effect of recent acquisitions.
Three Months Ended March 31,
- -------------------------------------------------------------------------------
(In thousands) 2000 Change 1999
- -------------------------------------------------------------------------------
Gross margin $ 29,933 4.6% $ 28,620
Percentage of net sales 35.4% 35.7%
- -------------------------------------------------------------------------------
Gross margin increased $1.3 million, or 4.6%, due entirely to the increase in
net sales. Higher net sales volume impacted gross margin by approximately $1.6
million. Gross margin as a percentage of net sales decreased slightly from 35.7%
to 35.4%, impacting margins by $0.3 million.
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In thousands) 2000 Change 1999
- --------------------------------------------------------------------------------
Operating expenses $ 13,447 14.0% $ 11,797
Percentage of net sales 15.9% 14.7%
- --------------------------------------------------------------------------------
Operating expenses consist of wages, facility, vehicle and related costs for the
Company's branch and distribution locations. Operating expenses increased $1.7
million, or 14.0%, as a result of higher operating expenses related to increased
sales volume and recently completed acquisitions, and a general overall increase
in expenses, principally wages and benefits. Management is implementing actions
to reduce expenses.
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In thousands) 2000 Change 1999
- --------------------------------------------------------------------------------
Selling, general and
administrative expenses $ 10,326 2.7% $ 10,054
Percentage of net sales 12.2% 12.6%
- --------------------------------------------------------------------------------
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 $0.3 million, or 2.7%, primarily as a result of higher wages and
commissions associated with the higher sales volume.
<PAGE>
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In thousands) 2000 Change 1999
- --------------------------------------------------------------------------------
Amortization of intangible
assets $ 1,517 10.6% $ 1,696
Percentage of net sales 1.8% 2.1%
- --------------------------------------------------------------------------------
Amortization expense decreased $0.2 million, or 10.6%, as a result of certain
intangible assets, principally non-compete agreements, becoming fully amortized.
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In thousands) 2000 Change 1999
- --------------------------------------------------------------------------------
Interest expense, net $ 2,888 5.1% $ 2,747
Percentage of net sales 3.4% 3.4%
- --------------------------------------------------------------------------------
Interest expense increased $0.1 million, or 5.1%, due to higher interest rates.
The Company's annualized effective interest rate in the first quarter increased
by 45 basis points compared to the prior year period. Partially offsetting the
impact of higher interest rates were lower average outstanding borrowings during
the quarter.
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In thousands) 2000 Change 1999
- --------------------------------------------------------------------------------
Income tax expense $ 851 26.0% $ 1,150
Percentage of net sales 1.0% 1.4%
Effective tax rate 48.5% 49.4%
- --------------------------------------------------------------------------------
Income tax expense decreased $0.3 million, or 26.0%, due to lower income before
income taxes. The effective tax rate varied from the federal statutory rate as a
result of certain expenses, principally nondeductible intangible amortization.
In 1999, the Company's effective tax rate for the year was 53.3%. The lower
projected rate for 2000 is reflective of higher anticipated full year income
before income taxes and consistent levels of nondeductible items.
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In thousands, except per share data) 2000 Change 1999
- --------------------------------------------------------------------------------
Net income $ 904 23.1% $ 1,176
Percentage of net sales 1.1% 1.5%
Net income per share $ 0.12 $ 0.16
- --------------------------------------------------------------------------------
Factors contributing to the changes in net income and the related per share
amounts are discussed in the detail above.
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.
Financial Condition, Liquidity and Capital Resources
(In thousands) March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------
Working capital $ 53,073 $ 48,147
Long-term debt $ 114,949 $ 111,603
- --------------------------------------------------------------------------------
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
Cash provided by (used in) operating activities $ 225 $ 4,886
Cash used in investing activities $ (1,905) $ (572)
Cash used in financing activities $ 2,085 $ (4,126)
- --------------------------------------------------------------------------------
Net cash generated from operating activities was $0.2 million in the first
quarter of 2000 compared with $4.9 million in 1999. This decrease was a result
of a negative change in cash flows generated from operating assets and
liabilities and lower earnings. The negative change in cash flows generated from
operating assets and liabilities was attributable to increased payments of
accounts payable and accrued expenses, increases in accounts receivable, a
change in the component mix of prepaid expenses and other assets, and a smaller
decrease in seasonal inventory levels than prior year.
Net cash used in investing activities, primarily for acquisitions, was $1.9
million for the first quarter, up from $0.6 million in the prior year period.
The Company completed three acquisitions in the current year period, one in
California and two in South Carolina.
Net cash provided by financing activities, primarily the borrowing of funds, was
$2.1 million for the quarter ended March 31, 2000, compared to $4.1 million used
in the prior year period. Lower cash provided by operating activities and
increased acquisition activity necessitated the borrowing of funds in the
current year quarter compared to the repayment of debt in 1999.
Total capitalization at March 31, 2000 was $180.7 million, comprised of $126.7
million of debt and $54.0 million of equity. Debt as a percentage of total
capitalization was 70.1% at March 31, 2000 compared to 69.9% at December 31,
1999.
At March 31, 2000 the Company had term credit and revolving credit facilities
totaling $93.0 million, and senior subordinated debt of $30.0 million. The
Company was in compliance with the covenants underlying its credit facilities,
and had estimated availability under its revolving credit facilities of $6.6
million as of May 1, 2000, based upon the March 31, 2000 borrowing base
calculation. The Company also obtained a $7.5 million revolving credit facility
to finance future acquisitions of which $6.2 million is currently available.
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.
Year 2000 Date Conversion
The Company successfully implemented its Year 2000 remediation plan for all
affected technology-based systems. Following the arrival of the Year 2000, the
Company has not experienced any problems with its technology-based systems or
materials supplied by third parties. There was no interruption in the Company's
ability to deliver its products and transact business with its suppliers and
customers. The Company continues to monitor its systems and suppliers for any
unanticipated issues that may not yet have manifested.
<PAGE>
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 documents 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 10K
dated March 30, 2000)
27.1* Financial Data Schedule
99(a) Amended and Restated Credit Agreement, dated as of February 1,
2000, among FinishMaster, Inc., the Institutions from Time to
Time Parties Thereto as Lenders and Bank One, Indiana, N.A., as
Agent (previously filed with Form 10K dated March 30, 2000)
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)
*filed herein
(b) Reports on Form 8-K. There were no reports on Form 8-K filed in the
quarter ended March 31, 2000
<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 May 9, 2000 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>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000917321
<NAME> FinishMaster, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.000
<CASH> 1,024
<SECURITIES> 0
<RECEIVABLES> 34,073
<ALLOWANCES> 1,389
<INVENTORY> 53,481
<CURRENT-ASSETS> 94,363
<PP&E> 16,427
<DEPRECIATION> 8,734
<TOTAL-ASSETS> 213,414
<CURRENT-LIABILITIES> 41,290
<BONDS> 0
0
0
<COMMON> 7,538
<OTHER-SE> 46,435
<TOTAL-LIABILITY-AND-EQUITY> 213,414
<SALES> 84,670
<TOTAL-REVENUES> 84,670
<CGS> 54,737
<TOTAL-COSTS> 25,290
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,888
<INCOME-PRETAX> 1,755
<INCOME-TAX> 851
<INCOME-CONTINUING> 904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
