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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, 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 October 1, 2002, there were 7,767,569 shares of the Registrant's common stock
outstanding.
FINISHMASTER, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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
Item 4. Controls and Procedures 15
Part II. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications 18
2
PART I. FINANCIAL INFORMATION
FINISHMASTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2002 2001 (1)
------------- -------------
ASSETS (unaudited)
CURRENT ASSETS
Cash $ 3,070 $ 2,977
Accounts receivable, net of allowance
for doubtful accounts of $1,829
and $1,434 respectively 32,151 28,401
Inventory 44,179 50,096
Refundable income taxes 556 543
Deferred income taxes 3,898 3,947
Prepaid expenses and other
current assets 2,637 3,627
------------- -------------
Total Current Assets 86,491 89,591
PROPERTY AND EQUIPMENT, NET 6,756 7,831
OTHER ASSETS
Intangible assets, net 102,298 102,273
Deferred income taxes 1,372 1,770
Other 1,279 571
------------- -------------
104,949 104,614
------------- -------------
$ 198,196 $ 202,036
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,322 $ 37,383
Amounts due LDI 1,166 812
Accrued compensation and benefits 6,564 8,578
Accrued expenses and other
current liabilities 2,448 2,124
Current maturities on long-term debt 7,592 7,607
------------- -------------
Total Current Liabilities 44,092 56,504
LONG-TERM DEBT, LESS CURRENT MATURITIES 74,274 77,868
OTHER LONG-TERM LIABILITIES 6,453 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 (1,218) (1,146)
Retained earnings 38,039 28,107
------------- -------------
73,377 62,535
------------- -------------
$ 198,196 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
NET SALES $ 88,122 $ 83,434 $259,943 $252,228
COST OF SALES 56,059 52,175 164,360 159,638
-------- -------- -------- --------
GROSS MARGIN 32,063 31,259 95,583 92,590
-------- -------- -------- --------
EXPENSES
Operating 13,251 12,961 38,659 39,612
Selling, general and
administrative 11,630 11,257 34,017 32,487
Amortization of
intangible assets 247 1,424 737 4,168
-------- -------- -------- --------
25,128 25,642 73,413 76,267
-------- -------- -------- --------
INCOME FROM OPERATIONS 6,935 5,617 22,170 16,323
INTEREST EXPENSE 1,775 2,409 5,486 6,692
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 5,160 3,208 16,684 9,631
Income tax expense 2,016 1,589 6,752 4,696
-------- -------- -------- --------
NET INCOME BEFORE EXTRAORDINARY
LOSS 3,144 1,619 9,932 4,935
Extraordinary loss on early
extinguishments of debt, net
of income tax benefit of $324 - - - (495)
-------- -------- -------- --------
NET INCOME
$ 3,144 $ 1,619 $ 9,932 $ 4,440
======== ======== ======== ========
NET INCOME PER SHARE - BASIC
Net income before
extraordinary loss $ 0.40 $ 0.21 $ 1.29 $ 0.65
Extraordinary loss, net of
income taxes - - - (0.07)
-------- -------- -------- --------
Net income $ 0.40 $ 0.21 $ 1.29 $ 0.58
NET INCOME PER SHARE - DILUTED
Net income before
extraordinary loss $ 0.40 $ 0.21 $ 1.27 $ 0.65
Extraordinary loss, net of
income taxes - - - (0.07)
-------- -------- -------- --------
Net income $ 0.40 $ 0.21 $ 1.27 $ 0.58
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 7,768 7,638 7,728 7,593
======== ======== ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 7,874 7,684 7,847 7,621
======== ======== ======== ========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
OPERATING ACTIVITIES 2002 2001
--------- ---------
Net income $ 9,932 $ 4,440
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,747 7,797
Deferred income taxes 1,447 -
Loss on early extinguishments of debt, net
of tax benefit of $324 - 495
Loss on disposal of property and equipment 110 -
Changes in operating assets and liabilities:
(excluding the impact of acquisitions):
Accounts receivable (3,322) 112
Inventories 7,453 21,207
Prepaid expenses and other current assets (699) 803
Accounts payable and other liabilities (12,526) (29,185)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,142 5,669
--------- ---------
INVESTING ACTIVITIES
Business acquisitions and payments under earn-out
provisions of prior acquisition agreements (2,050) (4,558)
Purchases of property and equipment (706) (587)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,756) (5,145)
--------- ---------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 982 -
Debt issuance costs - (1,279)
Proceeds from debt 69,972 155,445
Repayments of debt (74,247) (154,799)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (3,293) (633)
--------- ---------
INCREASE (DECREASE) IN CASH 93 (109)
CASH AT BEGINNING OF PERIOD 2,977 1,513
--------- ---------
CASH AT END OF PERIOD $ 3,070 $ 1,404
========= =========
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, 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 September 30, 2002 - - 9,932 - 9,932
Other comprehensive income (loss):
Interest rate swap - - - (72) (72)
------------
Total comprehensive income (loss) $ 9,860
Stock grants issued and options exercised 130 852 - - 982
------------ ------------ ------------ ------------ ------------
BALANCES AT SEPTEMBER 30, 2002 $ 7,768 $ 28,788 $ 38,039 $ (1,218) $ 73,377
============ ============ ============ ============ ============
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 September 30, 2002, we operated 161
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 September 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 Other Long Term Liabilities and the net of tax
effect is recorded 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
nine months ended September 30, 2002 and 2001, are $12.8 million and $13.2
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.
7
During the third quarter of 2002, we completed two acquisitions, Gil Bezy, Inc.,
D/B/A Color Master, Inc. in Kentucky and Southern Automotives, Inc. in South
Carolina. The acquisitions were completed on August 5, 2002 and August 16, 2002,
respectively. Both were 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 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 intangibles, consisting of customer lists
and non-compete agreements, are 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 September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Numerator:
Net income before extraordinary loss $ 3,144 $ 1,619 $ 9,932 $ 4,935
Extraordinary loss on early
extinguishments of debt, net of
income tax benefit of $324 - - - (495)
------------- ------------- ------------- -------------
Net income $ 3,144 $ 1,619 $ 9,932 $ 4,440
============= ============= ============= =============
Denominator:
Basic-weighted average shares 7,768 7,638 7,728 7,593
Effect of dilutive stock options 106 46 119 28
------------- ------------- ------------- -------------
Diluted-weighted average shares 7,874 7,684 7,847 7,621
============= ============= ============= =============
Net income per share - basic
Net income before extraordinary loss $ 0.40 $ 0.21 $ 1.29 $ 0.65
Extraordinary loss, net of income taxes - - - (0.07)
------------- ------------- ------------- -------------
Net income $ 0.40 $ 0.21 $ 1.29 $ 0.58
============= ============= ============= =============
Net income per share - diluted
Net income before extraordinary loss $ 0.40 $ 0.21 $ 1.27 $ 0.65
Extraordinary loss, net of income taxes - - - (0.07)
------------- ------------- ------------- -------------
Net income $ 0.40 $ 0.21 $ 1.27 $ 0.58
============= ============= ============= =============
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
8
insurance, is not likely to have a material adverse effect on our financial
condition, results of operations or cash flows.
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 third 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 ($0.8) million and ($1.4) million for the third
quarter 2002 and 2001, respectively, and ($1.1) million and ($1.6) million for
the nine months ending September 30, 2002 and 2001, respectively. The amounts
net of tax were 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 No. 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. We also completed our required annual impairment test as
of June 30, 2002 and determined the fair value of goodwill and indefinite lived
intangible assets 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ---------------
REPORTED NET INCOME BEFORE EXTRAORDINARY LOSS $ 3,144 $ 1,619 $ 9,932 $ 4,935
Extraordinary loss on early extinguishments of
debt, net of income tax benefit of $324 - - - (495)
---------------- ---------------- ---------------- ---------------
REPORTED NET INCOME $ 3,144 $ 1,619 $ 9,932 $ 4,440
Add-back goodwill and indefinite lived intangible
asset amortization, net of tax - 918 - 2,291
---------------- ---------------- ---------------- ---------------
ADJUSTED NET INCOME $ 3,144 $ 2,537 $ 9,932 $ 6,731
================ ================ ================ ===============
REPORTED BASIC EARNINGS PER SHARE BEFORE
EXTRAORDINARY LOSS $ 0.40 $ 0.21 $ 1.29 $ 0.65
Extraordinary loss on early extinguishments of
debt, net of tax - - - (0.07)
---------------- ---------------- ---------------- ---------------
REPORTED BASIC EARNINGS PER SHARE $ 0.40 $ 0.21 $ 1.29 $ 0.58
Add-back goodwill and indefinite lived intangible
asset amortization, net of tax - 0.12 - 0.30
---------------- ---------------- ---------------- ---------------
ADJUSTED BASIC EARNINGS PER SHARE $ 0.40 $ 0.33 $ 1.29 $ 0.88
================ ================ ================ ===============
REPORTED DILUTED EARNINGS PER SHARE BEFORE
EXTRAORDINARY LOSS $ 0.40 $ 0.21 $ 1.27 $ 0.65
Extraordinary loss on early extinguishments of
debt, net of tax - - - (0.07)
---------------- ---------------- ---------------- ---------------
REPORTED DILUTED EARNINGS PER SHARE $ 0.40 $ 0.21 $ 1.27 $ 0.58
Add-back goodwill and indefinite lived intangible
asset amortization, net of tax - 0.12 - 0.30
---------------- ---------------- ---------------- ---------------
ADJUSTED DILUTED EARNINGS PER SHARE $ 0.40 $ 0.33 $ 1.27 $ 0.88
================ ================ ================ ===============
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NET SALES
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------------------
Net Sales $ 88,122 5.6% $ 83,434 $ 259,943 3.1% $ 252,228
- ----------------------------------------------------------------------------------------------------------------
Net sales for the third quarter of 2002 increased $4.7 million, or 5.6%,
primarily due to acquisitions and "same store" sales growth. "Same store" sales
growth for the quarter was 1.5%. This improvement was attributable to increased
demand as a result of improved market conditions and higher purchase levels by
customers prior to annual price increases on two major product lines. Demand in
the prior year third quarter was impacted by the September 11th terrorist
attacks.
For the nine months ended September 30, 2002, net sales increased $7.7 million
or 3.1%. Since January 1, 2001, we have completed nine acquisitions that have
contributed significantly to the year-to-date increase in net sales. "Same
store" sales growth on a year-to-date basis was unfavorable by 0.7%.
GROSS MARGIN
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------------------
Gross Margin $ 32,063 2.6% $ 31,259 $ 95,583 3.2% $ 92,590
Percentage of
net sales 36.4% 37.5% 36.8% 36.7%
- ----------------------------------------------------------------------------------------------------------------
Gross margin for the third quarter of 2002 increased $0.8 million, or 2.6%,
compared to the prior year period. Higher net sales volume positively impacted
margin by $1.8 million for the quarter. Gross margin as a percentage of net
sales decreased 110 basis points to 36.4%, negatively impacting margin by $1.0
million for the quarter. Less favorable purchasing opportunities from our
vendors were the primary contributors to the decrease in gross margins as a
percentage of net sales.
Gross margin for the nine months ended September 30, 2002 increased $3.0
million, or 3.2%, compared to the prior year period. Higher net sales volume
positively impacted margin on a year-to-date basis by $2.8 million. Gross margin
as a percentage of net sales increased 10 basis points to 36.8% from 36.7%.
OPERATING EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------------------
Operating
Expenses $ 13,251 2.2% $ 12,961 $ 38,659 (2.4%) $ 39,612
Percentage of
net sales 15.0% 15.5% 14.9% 15.7%
- ----------------------------------------------------------------------------------------------------------------
Operating expenses consist of wages, facility, vehicle and related costs for our
branch and distribution locations. Operating expenses increased $0.3 million for
the third quarter and decreased $1.0 million for the nine months ended September
30, 2002, compared to prior year periods. The third quarter increase was a
result of higher wages and insurance related costs, partially offset by higher
finance charge income. For the nine months ended September 30, 2002, the
decreases in operating expenses were a result of lower utilities, fuel, and
freight expenses, and higher finance charge income. Partially offsetting these
decreases were increased expenses associated with acquired operations in 2001
and higher insurance costs. As a percentage of net sales, operating expenses
compared to the prior year period decreased 50 basis points to 15.0% in the
third quarter, and 80 basis points to 14.9% for the nine months ended September
30, 2002.
11
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, General
and Administrative Expenses $ 11,630 3.3% $ 11,257 $ 34,017 4.7% $ 32,487
Percentage of net sales 13.2% 13.5% 13.1% 12.9%
- ----------------------------------------------------------------------------------------------------------------------------------
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 third quarter of 2002 increased $0.4 million, or 3.3%, and
for the nine months ended September 30, 2002, $1.5 million, or 4.7%. The third
quarter increase was due primarily to an increase in insurance costs. For the
nine months ended September 30, 2002, the increase was due primarily to higher
wages, insurance, communication, and travel expenses. As a percentage of net
sales, SG&A expenses compared to the prior year period decreased 30 basis points
to 13.2% in the third quarter, and increased 20 basis points to 13.1% for the
nine months ended September 30, 2002.
AMORTIZATION OF INTANGIBLE ASSETS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Amortization of
Intangible Assets $ 247 (82.7%) $ 1,424 $ 737 (82.3%) $ 4,168
Percentage of net sales 0.3% 1.7% 0.3% 1.7%
- ----------------------------------------------------------------------------------------------------------------------------------
Lower amortization expense of $1.2 million, or 82.7%, for the third quarter of
2002, and $3.4 million, or 82.3%, for the nine months ended September 30, 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
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Expense $ 1,775 (26.3%) $ 2,409 $ 5,486 (18.0%) $ 6,692
Percentage of net sales 2.0% 2.9% 2.1% 2.7%
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Interest expense for the third quarter decreased $0.6 million, or 26.3%, and for
the nine months ended September 30, 2002, $1.2 million, or 18.0%, primarily due
to lower average outstanding borrowings. Average outstanding borrowings were
lower by $17.7 million and $9.8 million compared to the prior year for the three
and nine months ended September 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Income Tax Expense $ 2,016 26.9% $ 1,589 $ 6,752 43.8% $ 4,696
Percentage of net sales 2.3% 1.9% 2.6% 1.9%
Effective tax rate 39.1% 49.5% 40.5% 48.8%
- ----------------------------------------------------------------------------------------------------------------------------------
Income tax expense increased $0.4 million, or 26.9%, for the third quarter, and
for the nine months ended September 30, 2002, $2.1 million, or 43.8%, 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 41.5% and 41.0%
for the third quarter and the nine months ended September 30, 2001,
respectively.
12
EXTRAORDINARY LOSS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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% 0.2%
- ----------------------------------------------------------------------------------------------------------------------------------
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 extinguishments 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 CHANGE 2001 2002 CHANGE 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,144 94.2% $ 1.619 $ 9,932 123.7% $ 4,440
Percentage of net sales 3.6% 1.9% 3.8% 1.8%
Net income per share - Diluted $ 0.40 $ 0.21 $ 1.27 $ 0.58
- ----------------------------------------------------------------------------------------------------------------------------------
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) SEPTEMBER 30, DECEMBER 31,
2002 2001
- ---------------------------------------------------------------------------
Working capital $ 42,399 $ 33,087
Long-term debt $ 81,866 $ 85,475
- ---------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------
(In thousands) 2002 2001
- ---------------------------------------------------------------------------
Cash provided by operating activities $ 6,142 $ 5,669
Cash used in investing activities $ (2,756) $ (5,145)
Cash used in financing activities $ (3,293) $ (633)
- ---------------------------------------------------------------------------
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 for the nine months ended September 30, 2002 provided $6.1
million of net cash compared with $5.7 million of net cash in the prior year
period. This increase was the result of higher net income and non-cash items in
the current year period partially offset by a negative change in operating
assets and liabilities, primarily inventories and accounts receivable. 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 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
13
accounts payable and other liabilities in the comparable periods. Higher sales
levels in the current year period resulted in decreased cash flows from accounts
receivable.
Net cash used in investing activities was $2.8 million for the nine months ended
September 30, 2002, compared to $5.1 million in the prior year period due to
decreased expenditures for acquisitions. During 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 $1.0 million.
Net cash used by financing activities, primarily the repayment of borrowings,
was $3.3 million for the nine months ended September 30, 2002, compared to $0.6
million in the prior year period. The increase in net debt repayments was a
result of higher cash flows generated from operating activities in the current
year and lower cash used in investing activities.
Total capitalization at September 30, 2002, was $155.3 million, comprised of
$81.9 million of debt and $73.4 million of equity. Debt as a percentage of total
capitalization was 52.7% at September 30, 2002 compared to 57.7% at December 31,
2001.
At September 30, 2002, we had outstanding term credit and revolving credit
facilities totaling $55.7 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 $24.2
million as of October 31, 2002, based upon the September 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.
14
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 vendors, and our ability to sell excess inventory could
materially change these estimates.
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.
ITEM 4
CONTROLS AND PROCEDURES
We maintain a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of our consolidated financial
statements and other disclosures included in this report. Our Board of
Directors, operating through its audit committee, which is composed entirely of
independent outside directors, provides oversight to our financial reporting
process.
Within the 90-day period prior to the date of this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
upon that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
alerting them in a timely manner to material information relating to
FinishMaster, Inc. required to be included in this quarterly report on Form
10-Q.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.
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. 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: November 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: November 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
CERTIFICATION
I, Andre B. Lacy, Chairman and Chief Executive Officer of FinishMaster, Inc.,
(FinishMaster) certify that:
1. I have reviewed this quarterly report on Form 10-Q of FinishMaster;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of FinishMaster as of, and for, the periods presented in this
quarterly report;
4. FinishMaster's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for FinishMaster and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to FinishMaster, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of FinishMaster's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. FinishMaster's other certifying officer and I have disclosed, based on our
most recent evaluation, to FinishMaster's auditors and the Audit Committee
of FinishMaster's Board of Directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect FinishMaster's ability to
record, process, summarize and report financial data and have
identified for FinishMaster's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in FinishMaster's internal
controls; and
6. FinishMaster's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By: /s/ Andre B. Lacy
-------------------------------------------
Andre B. Lacy
Title: Chairman and Chief Executive Officer
(Principal Executive Officer)
18
CERTIFICATION
I, Robert R. Millard, Senior Vice President and Chief Financial Officer of
FinishMaster, Inc. (FinishMaster), certify that:
1. I have reviewed this quarterly report on Form 10-Q of FinishMaster;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of FinishMaster as of, and for, the periods presented in this
quarterly report;
4. FinishMaster's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14)for FinishMaster and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to FinishMaster, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of FinishMaster's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. FinishMaster's other certifying officer and I have disclosed, based on our
most recent evaluation, to FinishMaster's auditors and the Audit Committee
of FinishMaster's Board of Directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect FinishMaster's ability to
record, process, summarize and report financial data and have
identified for FinishMaster's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in FinishMaster's internal
controls; and
6. FinishMaster's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By: /s/ Robert R. Millard
--------------------------------------------------------
Robert R. Millard
Title: Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
19