Back to GetFilings.com
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 JUNE 30, 2002
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 July 1, 2002, there were 7,767,569 shares of the Registrant's common stock
outstanding.
FINISHMASTER, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PAGE
Part I. Financial Information 3
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statements of Shareholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I. FINANCIAL INFORMATION
FINISHMASTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
2002 2001 (1)
-------- ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash $ 4,807 $ 2,977
Accounts receivable, net of allowance for doubtful
accounts of $1,683 and $1,434 respectively 30,833 28,401
Inventory 43,640 50,096
Refundable income taxes -- 543
Deferred income taxes 3,511 3,947
Prepaid expenses and other current assets 2,276 3,627
--------- ---------
Total Current Assets 85,067 89,591
PROPERTY AND EQUIPMENT, NET 7,105 7,831
OTHER ASSETS
Intangible assets, net 101,812 102,273
Deferred income taxes 896 1,770
Other 932 571
--------- ---------
103,640 104,614
--------- ---------
$ 195,812 $ 202,036
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 27,844 $ 37,383
Amounts due LDI 725 812
Accrued compensation and benefits 6,646 8,578
Accrued expenses and other current liabilities 3,213 2,124
Current maturities on long-term debt 7,477 7,607
--------- ---------
Total Current Liabilities 45,905 56,504
LONG-TERM DEBT, LESS CURRENT MATURITIES 74,455 77,868
OTHER LONG-TERM LIABILITIES 5,420 5,129
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; 7,767,569 and 7,638,863
shares issued and outstanding 7,768 7,638
Additional paid-in capital 28,788 27,936
Accumulated comprehensive loss (1,419) (1,146)
Retained earnings 34,895 28,107
--------- ---------
70,032 62,535
--------- ---------
$ 195,812 $ 202,036
========= =========
(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.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
3
FINISHMASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
NET SALES $ 87,690 $ 85,898 $ 171,821 $ 168,794
COST OF SALES 55,451 54,581 108,301 107,463
--------- --------- --------- ---------
GROSS MARGIN 32,239 31,317 63,520 61,331
--------- --------- --------- ---------
EXPENSES
Operating 12,574 13,312 25,409 26,651
Selling, general and administrative 11,329 10,698 22,386 21,230
Amortization of intangible assets 244 1,396 489 2,744
--------- --------- --------- ---------
24,147 25,406 48,284 50,625
--------- --------- --------- ---------
INCOME FROM OPERATIONS 8,092 5,911 15,236 10,706
INTEREST EXPENSE, NET 1,875 1,975 3,712 4,283
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 6,217 3,936 11,524 6,423
Income tax expense 2,553 1,954 4,736 3,107
--------- --------- --------- ---------
NET INCOME BEFORE EXTRAORDINARY LOSS 3,664 1,982 6,788 3,316
Extraordinary loss on early extinguishments of debt,
net of income tax benefit of $324 -- -- -- (495)
--------- --------- --------- ---------
NET INCOME $ 3,664 $ 1,982 $ 6,788 $ 2,821
========= ========= ========= =========
NET INCOME PER SHARE - BASIC
Net income before extraordinary loss $ 0.47 $ 0.26 $ 0.88 $ 0.44
Extraordinary loss, net of income taxes -- -- -- (0.07)
--------- --------- --------- ---------
Net income $ 0.47 $ 0.26 $ 0.88 $ 0.37
NET INCOME PER SHARE - DILUTED
Net income before extraordinary loss $ 0.47 $ 0.26 $ 0.87 $ 0.44
Extraordinary loss, net of income taxes -- -- -- (0.07)
--------- --------- --------- ---------
Net income $ 0.47 $ 0.26 $ 0.87 $ 0.37
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,768 7,603 7,708 7,572
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 7,906 7,651 7,834 7,588
========= ========= ========= =========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
4
FINISHMASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
SIX MONTHS ENDED
JUNE 30,
-----------------------
OPERATING ACTIVITIES 2002 2001
--------- ----------
Net income $ 6,788 $ 2,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,553 5,076
Loss on early extinguishments of debt, net of tax benefit of $324 -- 495
Changes in operating assets and liabilities:
(excluding the impact of acquisitions):
Accounts receivable (2,374) (1,233)
Inventories 6,565 15,183
Prepaid expenses and other current assets 2,119 2,312
Accounts payable and accrued expenses (10,577) (952)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,074 23,702
--------- ---------
INVESTING ACTIVITIES
Business acquisitions and payments under earn-out provisions of prior
acquisition agreements (200) (4,447)
Purchases of property and equipment (475) (446)
Other -- --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (675) (4,893)
--------- ---------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 982 --
Debt issuance costs -- (1,322)
Proceeds from debt 46,201 116,575
Repayments of debt (49,752) (133,395)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (2,569) (18,142)
--------- ---------
INCREASE IN CASH 1,830 667
CASH AT BEGINNING OF PERIOD 2,977 1,513
--------- ---------
CASH AT END OF PERIOD $ 4,807 $ 2,180
========= =========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
5
FINISHMASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, unaudited)
ACCUMULATED
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS TOTALS
-------- -------- --------- ------------- ------------
BALANCES AT DECEMBER 31, 1998 $ 7,536 $ 27,351 $ 14,461 $ -- $ 49,348
Stock grants issued 2 8 -- -- 10
Net income for the year -- -- 3,711 -- 3,711
-------- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1999 $ 7,538 $ 27,359 $ 18,172 $ -- $ 53,069
Stock grants issued 2 8 -- -- 10
Net income for the year -- -- 3,727 -- 3,727
-------- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 2000 $ 7,540 $ 27,367 $ 21,899 $ -- $ 56,806
Comprehensive income (loss):
Net income for the year -- -- 6,208 -- 6,208
Other comprehensive income (loss):
Interest rate swap -- -- -- (1,146) (1,146)
--------
Total comprehensive income (loss) $ 5,062
Stock grants issued and options exercised 98 569 -- -- 667
-------- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 2001 $ 7,638 $ 27,936 $ 28,107 $ (1,146) $ 62,535
Comprehensive income (loss):
Net income through June 30, 2002 -- -- 6,788 -- 6,788
Other comprehensive income (loss):
Interest rate swap -- -- -- (273) (273)
--------
Total comprehensive income (loss) $ 6,515
Stock grants issued and options exercised 130 852 -- -- 982
-------- -------- -------- -------- --------
BALANCES AT JUNE 30, 2002 $ 7,768 $ 28,788 $ 34,895 $ (1,419) $ 70,032
======== ======== ======== ======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements
6
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
2001 Annual Report on Form 10-K.
NATURE OF BUSINESS: FinishMaster, Inc. ("FinishMaster") is the leading national
distributor of automotive paints, coatings, and paint-related accessories to the
automotive collision repair industry. As of June 30, 2002, we operated 159 sales
outlets and three major distribution centers in 24 states and were organized
into six major geographical regions - East, Midwest, Upper Midwest, West, South
and Southeast. We aggregate these six geographical regions into a single
reportable segment. We have approximately 15,000 customer charge accounts to
which we provide a comprehensive selection of brand name products supplied by
BASF, DuPont, 3M and PPG, in addition to our own FinishMaster PrivateBrand
refinishing accessory products. We are highly dependent on the key suppliers
outlined above, which account for approximately 85% of our purchases.
PRINCIPLES OF CONSOLIDATION: Our consolidated financial statements include the
accounts of FinishMaster and its wholly owned subsidiaries from the dates of
their respective acquisitions. All significant inter-company accounts and
transactions have been eliminated. References to FinishMaster throughout this
report relate to the consolidated entity.
MAJORITY SHAREHOLDER: Lacy Distribution, Inc. ("Distribution"), an Indiana
corporation, is a wholly-owned subsidiary of LDI, Ltd. ("LDI"), an Indiana
limited partnership, and is the majority shareholder of the Company with
5,587,516 shares of common stock, representing 71.9% of the outstanding shares
at June 30, 2002. LDI and Distribution are collectively referred to herein as
"LDI."
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: We utilize derivative financial
instruments, principally interest rate swaps, to reduce our exposure to
fluctuations in interest rates. These instruments are recorded on the balance
sheet at their fair value. Changes in the fair value of the interest rate swaps
are recorded each period in the Accumulated Comprehensive Loss section of
Shareholders' Equity.
SHIPPING AND HANDLING FEES AND COSTS: We include the cost of delivering product
to our customers in the operating expense section of the condensed consolidated
statements of operations. Total delivery costs primarily include wages,
benefits, vehicle costs, and freight. The total delivery costs incurred for the
six months ended June 30, 2002 and 2001, are estimated at $8.3 million and $8.8
million, respectively.
RECLASSIFICATION: Certain amounts in the condensed consolidated financial
statements have been reclassified to conform to the current year presentation.
2. ACQUISITIONS
During the first quarter of 2002, we completed one acquisition, Innovative
Refinish Supply, Inc., in Phoenix, Arizona. The acquisition was completed on
March 29, 2002, and was funded with cash and debt.
On May 7, 2001, we acquired the assets of Badger Paint Plus, Inc., a Wisconsin
corporation, Badger Paint Plus of the
7
Twin Cities, Inc., Badger Paint Plus of Duluth, Inc., Badger Paint Plus of St.
Cloud, Inc., Lakeland Sales, Inc., each a Minnesota corporation, and Badger
Paint Plus of Chicago, Inc., an Illinois corporation (collectively "Badger").
Badger, like FinishMaster, was an aftermarket distributor of automotive paints,
coatings, and paint-related accessories. The purchase price, including related
acquisition costs, was $7.4 million and included the issuance of 93,999 shares
of our common stock. The acquisition has been accounted for as a purchase and
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair values on the date of the acquisition. Finite life goodwill,
consisting of customer lists and non-compete agreements, is being amortized over
their estimated useful lives. Operating results of Badger have been included in
our consolidated financial statements from the effective date of the
acquisition. The pro forma results of operations for this acquisition have not
been presented, as the impact on reported results is not material.
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ --------- -----------
Numerator:
Net income before extraordinary loss $ 3,664 $ 1,982 $ 6,788 $ 3,316
Extraordinary loss on early
extinguishments of debt, net of
income tax benefit of $324 -- -- -- (495)
------- ------- ------- ---------
Net income $ 3,664 $ 1,982 $ 6,788 $ 2,821
======= ======= ======= =========
Denominator:
Basic-weighted average shares 7,768 7,603 7,708 7,572
Effect of dilutive stock options 138 48 126 16
------- ------- ------- ---------
Diluted-weighted average shares 7,906 7,651 7,834 7,588
======= ======= ======= =========
Net income per share - basic
Net income before extraordinary loss $ 0.47 $ 0.26 $ 0.88 $ 0.44
Extraordinary loss, net of income taxes -- -- -- (0.07)
------- ------- ------- ---------
Net income $ 0.47 $ 0.26 $ 0.88 $ 0.37
======= ======= ======= =========
Net income per share - diluted
Net income before extraordinary loss $ .47 $ 0.26 $ 0.87 $ 0.44
Extraordinary loss, net of income taxes -- -- -- (0.07)
------- ------- ------- ---------
Net income $ 0.47 $ 0.26 $ 0.87 $ 0.37
======= ======= ======= =========
4. COMMITMENTS AND CONTINGENCIES
We are dependent on four main suppliers for the paint and related supplies that
we distribute. A loss of one of these suppliers or a disruption in the supply of
their products could have a material adverse affect on our operating results.
These suppliers also provide purchase discounts, prompt payment discounts,
extended terms, and other incentive programs to us. To the extent these programs
are changed or terminated, there could be a material adverse impact on our
results of operations or cash flows.
We are 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 our financial condition, results of operations
or cash flows.
8
5. EARLY EXTINGUISHMENT OF DEBT
On March 29, 2001, we entered into a new senior secured credit facility with a
syndicate of banks and a new senior subordinated term credit facility with LDI.
The use of the proceeds from these facilities was used to repay our existing
senior secured and senior subordinated credit facilities prior to their original
expiration dates. An extraordinary loss on the early extinguishments of debt of
$0.5 million, net of $0.3 million in income tax benefit, resulted from the
write-off of the unamortized debt issuance costs related to these expired
facilities.
6. LONG TERM DEBT
On March 29, 2001, we entered into a new $100.0 million senior secured credit
facility with a syndicate of banks and a new $20.0 million senior subordinated
term credit facility with LDI. The new senior secured credit facility consisted
of a $40.0 million term credit facility and a $60.0 million revolving credit
facility. The term credit facility, which expires on June 30, 2006, requires
quarterly principal payments that increase in amount over the term of the loan.
Quarterly principal payments began on June 30, 2001, and are $1.5 million per
quarter in 2002. The revolving credit facility is limited to the lesser of (1)
$60.0 million less letter of credit obligations, or (2) 80 percent of eligible
accounts receivable plus 65 percent of eligible inventory less letter of credit
obligations and a reserve for three months facility rent. Principal is due on
June 30, 2006. Both the revolving credit and term facilities are subject to
interest rates, which fluctuate based on our Leverage Ratio, as defined in the
Credit Facility. During the second quarter of 2002, our interest rates were
2.25% over LIBOR or 0.25% over prime in the case of Floating Rate Advances.
To convert our new senior term credit facility from a floating to a fixed
interest rate obligation, we entered into interest rate swap agreements with
notional amounts of $40.0 million. The weighted average fixed interest rate
under these agreements is 5.43%. In order to maintain effectiveness, the
quarterly settlement terms of the swap agreements are established to match the
interest payments on the term credit facility. The change in the fair value of
the interest rate swap was ($0.3) million and ($0.2) million for the first half
of 2002 and 2001, respectively. As of June 30, 2002 and 2001, the fair value of
the interest rate swap was ($1.4) million and ($0.2) million, respectively, and
was recorded in the Accumulated Comprehensive Loss section of the Shareholders'
Equity.
Concurrent with funding the senior secured credit facility, we repaid our $30.0
million senior subordinated term credit facility and entered into a new $20.0
million senior subordinated term credit facility with LDI. All outstanding
principal is due on March 29, 2007, and interest is payable quarterly at a rate
of 12.0% per annum.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations after June 30, 2001.
SFAS No. 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. SFAS No. 142 also requires that these intangible assets
be reviewed for impairment at least annually. Intangible assets with finite
lives continue to be amortized over their estimated useful lives.
Effective January 1, 2002, we adopted SFAS No.142, which requires that goodwill
and indefinite lived assets be tested for impairment at the reporting unit level
at adoption and at least annually thereafter. An impairment charge is recognized
only when the calculated fair value of a reporting unit, including goodwill, is
less than its carrying amount. In accordance with SFAS 142, we completed the
required transitional impairment tests of goodwill and indefinite lived
intangible assets and determined the fair value to be in excess of the carrying
value of these assets.
As required by SFAS No. 142, intangible assets with finite lives are amortized
over their estimated useful lives. Included in intangible assets with finite
lives are non-compete agreements and customer lists.
9
A reconciliation of reported net income adjusted to reflect the adoption of SFAS
No. 142 is provided below:
(in thousands, except per share data) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ------------------------
2002 2001 2002 2001
----------- ----------- --------- ---------
REPORTED NET INCOME BEFORE EXTRAORDINARY LOSS $ 3,664 $1,982 $ 6,788 $3,316
Extraordinary loss on early extinguishments of
debt, net of income tax benefit of $324 -- -- -- (495)
------- ------ ------- ------
REPORTED NET INCOME $ 3,664 $1,982 $ 6,788 $2,821
Add-back goodwill and indefinite lived intangible
asset amortization, net of tax -- 692 -- 1,373
------- ------ ------- ------
ADJUSTED NET INCOME $ 3,664 $2,674 $ 6,788 $4,194
======= ====== ======= ======
REPORTED BASIC EARNINGS PER SHARE BEFORE
EXTRAORDINARY LOSS $ 0.47 $ 0.26 $ 0.88 $ 0.44
Extraordinary loss on early extinguishments of
debt, net of tax -- -- -- (0.07)
------- ------ ------- ------
REPORTED BASIC EARNINGS PER SHARE $ 0.47 $ 0.26 $ 0.88 $ 0.37
Add-back goodwill and indefinite lived intangible
asset amortization, net of tax -- 0.09 -- 0.18
------- ------ ------- ------
ADJUSTED BASIC EARNINGS PER SHARE $ 0.47 $ 0.35 $ 0.88 $ 0.55
======= ====== ======= ======
REPORTED DILUTED EARNINGS PER SHARE BEFORE
EXTRAORDINARY LOSS $ 0.47 $ 0.26 $ 0.87 $ 0.44
Extraordinary loss on early extinguishments of
debt, net of tax -- -- -- (0.07)
------- ------ ------- ------
REPORTED DILUTED EARNINGS PER SHARE $ 0.47 $ 0.26 $ 0.87 $ 0.37
Add-back goodwill and indefinite lived intangible
asset amortization, net of tax -- 0.09 -- 0.18
------- ------ ------- ------
ADJUSTED DILUTED EARNINGS PER SHARE $ 0.47 $ 0.35 $ 0.87 $ 0.55
======= ====== ======= ======
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NET SALES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ----------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------
Net Sales $ 87,690 2.1% $ 85,898 $ 171,821 1.8% $ 168,794
- ----------------------------------------------------------------------------------------------------
Net sales for the second quarter of 2002 increased $1.8 million, or 2.1%, and
for the first half of 2002, $3.0 million or 1.8%, primarily due to acquisitions.
"Same store" sale growth for the quarter ending June 30, 2002 was slightly
negative, and on a year-to-date basis was unfavorable by 1.8%. We continued to
experience soft market conditions throughout most of our distribution network.
Factors leading to this softening in demand included mild weather conditions;
slower overall economic conditions; flat to declining number of vehicles being
repaired; and continued productivity improvements in the use of automotive paint
by our customers. Even though these industry dynamics are not expected to
reverse in the near term, we continue to focus our efforts on increasing sales
and gaining market share.
GROSS MARGIN
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ---------------------------------------------------------------------------------------------------------
Gross Margin $32,239 2.9% $ 31,317 $ 63,520 3.6% $ 61,331
Percentage of net sales 36.8% 36.5% 37.0% 36.3%
- ---------------------------------------------------------------------------------------------------------
Gross margin for the second quarter of 2002 increased $0.9 million, or 2.9%, and
for the first half of 2002, $2.2 million, or 3.6%, compared to the prior year
periods. Gross margin as a percentage of net sales increased 30 basis points to
36.8%, positively impacting margin by $0.3 million for the quarter, and
increased 70 basis points to 37.0%, positively impacting margin by $1.2 million
for the first half of 2002. Higher net sales volume positively impacted margin
by $0.6 million and $1.0 million for the quarter and first half of 2002,
respectively. The improvement in margin as a percentage of net sales was
primarily due to higher discounts and rebates earned under normal vendor
programs. Throughout 2002, we do not anticipate being able to maintain our
current margin levels as a percentage of net sales due to less favorable
purchasing opportunities from our vendors which reduced the level of inventory
purchased in late 2001 by us prior to manufacturers' price increases.
OPERATING EXPENSES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ---------------------------------------------------------------------------------------------------------
Operating Expenses $ 12,574 (5.5%) $ 13,312 $ 25,409 (4.7%) $ 26,651
Percentage of net sales 14.3% 15.5% 14.8% 15.8%
- ---------------------------------------------------------------------------------------------------------
Operating expenses consist of wages, facility, vehicle and related costs for our
branch and distribution locations. Operating expenses decreased $0.7 million for
the second quarter and $1.2 million for the first half of 2002 as a result of
reduced wages and benefits, vehicle expenses, and freight, and higher finance
charges. Partially offsetting these decreases were increased expenses associated
with acquired operations in 2001. As a percentage of net sales, operating
expenses compared to the prior year period decreased 120 basis points to 14.3%
in the second quarter, and 100 basis points to 14.8% for the first half of 2002.
11
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ---------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses $ 11,329 5.9% $ 10,698 $ 22,386 5.4% $ 21,230
Percentage of net sales 12.9% 12.5% 13.0% 12.6%
- ---------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses ("SG&A") consist of costs
associated with our corporate support staff, and expenses for commissions,
wages, and customer sales support activities. Compared to the prior year period,
SG&A expenses for the second quarter of 2002 increased $0.6 million, or 5.9%,
and for the first half of 2002, $1.2 million, or 5.4% due primarily to higher
wages and benefits. We have added additional sales and marketing resources over
the last six months in an effort to increase sales and market share. As a
percentage of net sales, SG&A expenses compared to the prior year period
increased 40 basis points to 12.9% in the second quarter, and 40 basis points to
13.0% for the first half of 2002.
AMORTIZATION OF INTANGIBLE ASSETS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ---------------------------------------------------------------------------------------------------------
Amortization of
Intangible Assets $ 244 (82.5%) $ 1,396 $ 489 (82.2%) $2,744
Percentage of net sales 0.3% 1.6% 0.3% 1.6%
- ---------------------------------------------------------------------------------------------------------
Lower amortization expense of $1.2 million, or 82.5%, for the second quarter of
2002, and $2.3 million, or 82.2%, for the first six months of 2002, was due
primarily to the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," which eliminates the amortization
of goodwill and intangible assets with indefinite useful lives. Intangible
assets with finite lives, principally non-compete agreements and customer lists,
continue to be amortized over their estimated useful lives.
INTEREST EXPENSE, NET
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ---------------------------------------------------------------------------------------------------------
Interest Expense, net $ 1,875 (5.1%) $ 1,975 $ 3,712 (13.3%) $ 4,283
Percentage of net sales 2.1% 2.3% 2.2% 2.5%
- ---------------------------------------------------------------------------------------------------------
Interest expense for the second quarter decreased $0.1 million, or 5.1%, and for
the first half of 2002, $0.6 million, or 13.3%, primarily due to lower average
outstanding borrowings. Average outstanding borrowings were lower by $3.5
million and $8.6 million compared to the prior year for the three and six months
periods ended June 30, 2002, respectively. Lower effective interest rates in the
current year periods also contributed to the favorable decreases in interest
expense.
INCOME TAX EXPENSE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ---------------------------------------------------------------------------------------------------------
Income Tax Expense $ 2,553 30.7% $ 1,954 $ 4,736 52.4% $ 3,107
Percentage of net sales 2.9% 2.3% 2.8% 1.8%
Effective tax rate 41.9% 49.6% 41.4% 48.4%
- ---------------------------------------------------------------------------------------------------------
Income tax expense increased $0.6 million, or 30.7%, for the second quarter, and
for the first half of 2002, $1.6 million, or 52.4%, due to higher income before
income taxes. The adoption of SFAS No. 142 reduced our effective tax rate in the
current year due to the elimination of certain goodwill amortization, including
non-deductible goodwill amortization. On a SFAS No. 142 comparable basis, the
effective tax rate would have been 44.0% and 42.1% for the second quarter and
the first half of 2001, respectively.
12
EXTRAORDINARY LOSS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ---------------------------------------------------------------------------------------------------------
Extraordinary loss, net $ -- N/A $ -- $ -- N/A $ 495
Percentage of net sales 0.0% 0.0% 0.0% 0.3%
- ---------------------------------------------------------------------------------------------------------
In 2001, an extraordinary loss on the early extinguishments of debt of $0.5
million, net of $0.3 million in income tax benefit, resulted from the write-off
of the unamortized debt issuance costs related to the early extinguishment of
our senior secured and senior subordinated credit facilities. See Note 5 within
Condensed Financial Statements in Item 1.
NET INCOME AND INCOME PER SHARE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ---------------------------------------------------------------------------------------------------------
Net Income $ 3,664 84.9% $ 1,982 $ 6,788 140.6% $ 2,821
Percentage of net sales 4.2% 2.3% 4.0% 1.7%
Net income per share - Diluted $ 0.47 $ 0.35 $ 0.87 $ 0.55
- ---------------------------------------------------------------------------------------------------------
Factors contributing to the changes in net income and the related per share
amounts are discussed above.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our sales and operating results have varied from quarter to quarter due to
various factors, and we expect these fluctuations to continue. Among these
factors are seasonal buying patterns of our 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 in operating results from quarter to quarter. We
also take advantage of periodic special incentive programs available from our
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 our quarterly cash flows. Although we continue to
investigate strategies to smooth the seasonal pattern of our quarterly results
of operations, there can be no assurance that our net sales, results of
operations and cash flows will not continue to display seasonal patterns.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
(In thousands) JUNE 30, DECEMBER 31,
2002 2001
- --------------------------------------------------------------------------------
Working capital $39,162 $ 33,087
Long-term debt $81,932 $ 85,475
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
- --------------------------------------------------------------------------------
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
Cash provided by operating activities $ 5,074 $ 23,702
Cash used in investing activities (675) $ (4,893)
Cash used in financing activities $(2,569) $ (18,142)
- --------------------------------------------------------------------------------
Our primary sources of funds are from operations and borrowings under our credit
facilities. Our principal uses of cash are to fund working capital, capital
expenditures, acquisitions, and the repayment of outstanding borrowings.
Operating activities in the first half of 2002 provided $5.1 million of net cash
compared with $23.7 million of net cash in the prior year period. This decrease
was the result of a negative change in operating assets and liabilities,
primarily inventories and accounts payable and other liabilities. Lower
inventory purchases in late 2001 made prior to manufacturers' price increases
compared to the same period in 2000 decreased the cash flows provided by
inventories in
13
the first half of 2002 compared to the prior year period. Differences in payment
terms between years on the large year-end inventory purchases also impacted cash
used by accounts payable and other liabilities in the comparable periods.
Net cash used in investing activities was $0.7 million in the first half of
2002, compared to $4.9 million in the prior year period due to decreased
expenditures for acquisitions. During the first half of 2001, we completed the
Badger acquisition. This acquisition was significantly larger than those
completed in the current year period. See Note 2 within Condensed Financial
Statements in Item 1. We estimate that capital expenditures for 2002,
principally for information technology equipment, will approximate $1.5 million.
Net cash used by financing activities, primarily the repayment of borrowings,
was $2.6 million in the first half of 2002, compared to $18.1 million in the
prior year period. The decrease in net debt repayments was a result of reduced
cash flows generated from operating activities in the current year.
Total capitalization at June 30, 2002, was $151.9 million, comprised of $81.9
million of debt and $70.0 million of equity. Debt as a percentage of total
capitalization was 53.9% at June 30, 2002 compared to 57.7% at December 31,
2001.
At June 30, 2002, we had outstanding term credit and revolving credit facilities
totaling $56.0 million and senior subordinated debt of $19.9 million. We were in
compliance with the covenants underlying these credit facilities, and had
estimated availability under our revolving credit facilities of $23.3 million as
of July 31, 2002, based upon the June 30, 2002 borrowing base calculation.
Based on current and projected operating results and giving effect to total
indebtedness, we believe 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.
CRITICAL ACCOUNTING POLICIES
The accounting policies described below require us to make significant estimates
and assumptions using information available at the time the estimates are made.
Such estimates and assumptions significantly affect various reported amounts of
assets and liabilities. If our future experience differs materially from these
estimates and assumptions, our results of operations and financial condition
could be affected.
Allowance for Consigned Inventory - We routinely consign inventory with our
customers to attract and retain their business. The consigned inventory is an
asset on our balance sheet. Upon termination of the customer relationship, the
inventory is either returned or paid for by the customer. We periodically review
the realizable value of the consigned inventory by following a detailed process
that entails verifying that the customer's business relationship exists at a
level to justify the consigned inventory balance. A reserve has been established
to reduce the consigned inventory balance to its estimated net realizable value.
Provision for Income Taxes - We determine our provision for income taxes using
the balance sheet method. Under this method, deferred tax assets and liabilities
are recognized for the future tax effects of temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Changes in future tax provisions may be affected by
the passage of new tax laws, changes in taxable income and the resolution of the
tax audit issues.
Allowance for Doubtful Accounts Receivable - Our estimate of the allowance for
doubtful accounts receivable is based on historical customer payment experience
and reflects our best estimate of collectibility. Future events and
circumstances related to the financial condition of our customers could
materially change these estimates.
Allowance for Vendor Credits Due - Our estimate of the allowance for vendor
credits due is based on historical collection experience and reflects our best
estimate of collectibility. Future events and circumstances related to continued
vendor support could materially change these estimates.
Reserve for Obsolete Inventory - Our estimate of the reserve for obsolete
inventory is based on historical product usage information. Changes in the rate
of introduction of new products by our manufacturers, our ability to return
excess inventory to the vendor, and our ability to sell excess inventory could
materially change these estimates.
14
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements pertaining to, among
other things, our future results of operations, cash flow needs and liquidity,
acquisitions, and other aspects of our business. We may make similar
forward-looking statements from time to time. These statements are based largely
on our 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 our business
strategy or an inability to execute this strategy due to changes in our 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.
15
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 dated March
28, 2002)
10.1 FinishMaster, Inc. Stock Option Plan (Amended and Restated as of
April 29, 1999) (previously filed with Registrant's proxy
statement on Schedule 14A dated April 9, 1999)
10.2 FinishMaster, Inc. Deferred Compensation Plan dated as of
November 1, 2000 (previously filed with Registrant's proxy
statement on Schedule 14A dated April 9, 2001)
10.3 First Amendment to the FinishMaster, Inc. Deferred Compensation
Plan dated January 1, 2002 (previously filed with Form 10-Q dated
May 14, 2002)
21 Subsidiaries of the Registrant (previously filed with Form 10-K
dated March 28, 2002)
99(a) Credit Agreement, dated as of March 29, 2001, among FinishMaster,
Inc., the Institutions from Time to Time Parties Thereto as
Lenders and National City Bank of Indiana, as Agent (previously
filed with Form 10-Q dated May 14, 2001)
99(b) First Amendment to Credit Agreement, dated as of December 14,
2001, among FinishMaster, Inc., the Institutions from Time to
Time Parties Thereto as Lenders and National City Bank of
Indiana, as Agent (previously filed with Form 10-K dated March
28, 2002)
99(c) Subordinated Note Agreement, dated as of March 29, 2001, by and
between FinishMaster, Inc. and LDI, Ltd. (previously filed with
Form 10-Q dated May 14, 2001)
(b) Reports on Form 8-K. There were no reports on Form 8-K filed in the
quarter ended June 30, 2002. A Form 8-K was filed on July 23, 2002
announcing management changes at the Company.
16
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.
Date: August 14, 2002 FINISHMASTER, INC.
By: /s/ Andre B. Lacy
---------------------------
Andre B. Lacy
Chief Executive Officer
By: /s/ Robert R. Millard
---------------------------
Robert R. Millard
Senior Vice President and
Chief Financial Officer
CERTIFICATION
By signing below, each of the undersigned officers hereby certifies that, to his
knowledge, (i) this report fully complies with the requirements of Section 13(a)
or 15 (d) of the Securities Exchange Act of 1934 and (ii) the information
contained in this report fairly presents, in all material respects, the
financial condition and results of operations of FinishMaster, Inc.
Date: August 14, 2002
By: /s/ Andre B.Lacy
----------------------------
Andre B. Lacy
Chief Executive Officer
By: /s/ Robert R. Millard
----------------------------
Robert R. Millard
Senior Vice President and
Chief Financial Officer
17