SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarter Ended March 31, 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 April 30, 2002, there were 7,648,363 shares of the Registrant's common stock
outstanding.
FINISHMASTER, INC.
FORM 10-Q
For the Quarter Ended March 31, 2002
TABLE OF CONTENTS
PAGE
Part I. Financial Information 3
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4
Condensed Consolidated Statements of Cash Flows (unaudited) 5
Condensed Consolidated Statements of Shareholders' Equity (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINISHMASTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31, December 31,
2002 2001(1)
-------------- ---------------
ASSETS (unaudited)
Current Assets
Cash $ 2,982 $ 2,977
Accounts receivable, net of allowance for doubtful
accounts of $1,542 and $1,434, respectively 31,122 28,401
Inventory 48,868 50,096
Refundable income taxes - 543
Deferred income taxes 4,062 3,947
Prepaid expenses and other current assets 2,522 3,627
-------------- ---------------
Total Current Assets 89,556 89,591
Property and Equipment, net 7,584 7,831
Other Assets
Intangible assets, net 102,100 102,273
Deferred income taxes 1,387 1,770
Other 1,018 571
-------------- ---------------
104,505 104,614
-------------- ---------------
$ 201,645 $ 202,036
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 32,478 $ 37,383
Amounts due to LDI 869 812
Accrued compensation and benefits 5,731 8,578
Accrued expenses and other current liabilities 3,538 2,124
Current maturities of long-term debt 7,504 7,607
-------------- ---------------
Total Current Liabilities 50,120 56,504
Long-Term Debt, less current maturities 80,693 77,868
Other Long-Term Liabilities 4,703 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; 7,648,363 and 7,638,863
shares issued and outstanding 7,648 7,638
Additional paid-in capital 28,009 27,936
Other comprehensive income (loss) (759) (1,146)
Retained earnings 31,231 28,107
-------------- ---------------
66,129 62,535
-------------- ---------------
$ 201,645 $ 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.
FINISHMASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-------------------------------------
2002 2001
-------------- ---------------
Net Sales $ 84,131 $ 82,896
Cost of Sales 52,850 52,882
-------------- ---------------
Gross Margin 31,281 30,014
-------------- ---------------
Expenses
Operating 12,835 13,339
Selling, general and administrative 11,057 10,532
Amortization of intangible assets 307 1,348
-------------- ---------------
24,199 25,219
-------------- ---------------
Income from Operations 7,082 4,795
Interest Expense, net 1,775 2,308
-------------- ---------------
Income Before Income Taxes and Extraordinary Loss 5,307 2,487
Income Tax Expense 2,183 1,153
-------------- ---------------
Net Income Before Extraordinary Loss 3,124 1,334
Extraordinary Loss on Early Extinguishments of Debt, net
of Income Tax Benefit of $324 - 495
-------------- ---------------
Net Income $ 3,124 $ 839
============== ===============
Net Income per Share - Basic
Net Income before extraordinary loss $ 0.41 $ 0.18
Extraordinary loss, net of income taxes - 0.07
-------------- ---------------
Net income $ 0.41 $ 0.11
============== ===============
Net Income per Share - Diluted
Net Income before extraordinary loss $ 0.40 $ 0.18
Extraordinary loss, net of income taxes - 0.07
-------------- ---------------
Net income $ 0.40 $ 0.11
============== ===============
Weighted Average Shares Outstanding - Basic 7,648 7,541
============== ===============
Weighted Average Shares Outstanding - Diluted 7,762 7,556
============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
FINISHMASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
-------------------------------------
Operating Activities 2002 2001
-------------- ---------------
Net income $ 3,124 $ 839
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,289 3,443
Changes in operating assets and liabilities
(excluding the impact of acquisition):
Accounts receivable, net (2,663) (1,076)
Inventories 1,352 6,217
Prepaid expenses and other assets 1,118 1,050
Accounts payable and other liabilities (6,445) 4,544
-------------- ---------------
Net Cash Provided (Used) by Operating Activities (2,225) 15,017
Investing Activities
Business acquisitions and payments under earn-out
provisions of prior acquisition agreements (200) (30)
Purchases of property and equipment (346) (215)
-------------- ---------------
Net Cash Used in Investing Activities (546) (245)
Financing Activities
Debt issuance costs - (1,138)
Proceeds from debt 28,993 86,574
Repayment of debt (26,217) (92,763)
-------------- ---------------
Net Cash Provided by (Used In) Financing Activities 2,776 (7,327)
-------------- ---------------
Increase in Cash 5 7,445
Cash at Beginning of Period 2,977 1,513
-------------- ---------------
Cash at End of Period $ 2,982 $ 8,958
============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
FinishMaster, Inc.
Accumulated
Common Paid-in Retained Comprehensive
(In thousands) 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 for the quarter - - 3,124 - 3,124
Other comprehensive income (loss):
Interest rate swap - - - 387 387
Total comprehensive income (loss)
Stock grants issued and options exercised 10 73 - - 83
------------- --------------- ------------- ------------- --------------
Balances at March 31, 2002 $ 7,648 $ 28,009 $ 31,231 $ (759) $ 66,129
============= =============== ============= ============= ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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 our annual consolidated financial
statements and notes. This Form 10-Q should be read in conjunction with our
consolidated financial statements and notes included in our 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 March 31, 2002, we operated 159
sales outlets and three major distribution centers in 23 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 acquisition. 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 our majority shareholder with 5,587,516 shares of
common stock, representing 73.1% of the outstanding shares at March 31, 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 interest rate swap 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 products
to our customers in the operating expense section of the consolidated statements
of operations. Total delivery costs primarily include wages, benefits, vehicle
costs, and freight. The total delivery costs incurred for the first quarter
ended March 31, 2002 and 2001, are estimated at $4,195,000, and $4,325,000,
respectively.
Reclassification: Certain amounts in the 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 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 a customer list and
non-compete agreement, 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 March 31,
-----------------------------------
2002 2001
------------- --------------
Numerator:
Net income before extraordinary loss $ 3,124 $ 1,334
Extraordinary loss on early extinguishments
of debt, net of income tax benefit of $324 - 495
------------- --------------
Net income $ 3,124 $ 839
============= ==============
Denominator:
Basic-weighted average shares 7,648 7,541
Effect of dilutive stock options 114 15
------------- --------------
Diluted-weighted average shares 7,762 7,556
============= ==============
Net income per share - basic
Net income before extraordinary loss $ 0.41 $ 0.18
Extraordinary loss, net of income taxes - 0.07
------------- --------------
Net income $ 0.41 $ 0.11
============= ==============
Net income per share - diluted
Net income before extraordinary loss $ 0.40 $ 0.18
Extraordinary loss, net of income taxes - 0.07
------------- --------------
Net income $ 0.40 $ 0.11
============= ==============
4. COMMITMENTS AND CONTINGENCIES
We are dependent on four main suppliers for the purchases of 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 effect
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.
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 extinguishment 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 first 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 first quarter change in the
fair value of the interest rate swap was $0.4 million and ($0.4) million for
2002 and 2001, respectively, which 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. An impairment charge is
recognized only when the calculated fair value of a reporting unit, including
goodwill, is less than its carrying cost. In accordance with SFAS No.142, we
have six months from adoption to complete our initial impairment review. Based
upon currently available information, we do not anticipate a material impact on
our financial position or results of operations from our initial impairment
review.
As required by SFAS No. 142, intangible assets with finite lives are amortized
over their estimated useful lives. Included in intangible assets are non-compete
agreements and customer lists.
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
March 31,
-----------------------------------
2002 2001
--------------- ---------------
Reported net income before extraordinary loss $ 3,124 $ 1,334
Extraordinary loss on early extinguishments of debt, net
of income tax benefit $324 - 495
-------------- --------------
Reported net income $ 3,124 $ 839
Add-back goodwill and indefinite lived intangible asset
amortization, net of tax - 681
-------------- --------------
Adjusted net income $ 3,124 $ 1,520
============== ==============
Reported basic earnings per share before extraordinary loss $ 0.41 $ 0.18
Extraordinary loss on early extinguishments of debt, net of tax - 0.07
-------------- --------------
Reported basis earnings per share $ 0.41 $ 0.11
Add-back goodwill and indefinite lived intangible asset
amortization, net of tax - 0.09
-------------- --------------
Adjusted basic earnings per share $ 0.41 $ 0.20
============== ==============
Reported diluted earnings per share before extraordinary loss $ 0.40 $ .18
Extraordinary loss on early extinguishments of debt, net of tax - 0.07
-------------- --------------
Reported diluted earnings per share $ 0.40 $ 0.11
Add-back goodwill and indefinite lived intangible asset
amortization, net of tax - $ 0.09
-------------- --------------
Adjusted diluted earnings per share $ 0.40 $ 0.20
============== ==============
Weighted Average Shares Outstanding - Basic 7,648 7,541
============== ==============
Weighted Average Shares Outstanding - Diluted 7,762 7,556
============== ==============
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 Change 2001
--------------------------------------------------------------------------------
Net sales $ 84,131 1.5% $ 82,896
--------------------------------------------------------------------------------
Net sales for the first quarter increased $1.2 million, or 1.5%, due to a full
quarter sales effect of prior year acquisitions, partially offset by a "same
store" sales decline of approximately 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.
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 Change 2001
--------------------------------------------------------------------------------
Gross margin $ 31,281 4.2% $ 30,014
Percentage of net sales 37.2% 36.2%
--------------------------------------------------------------------------------
Gross margin increased $1.3 million, or 4.2%. Higher net sales volume positively
impacted margin by approximately $0.5 million. Gross margin as a percentage of
net sales increased 100 basis points to 37.2%, positively impacting margin by
$0.8 million. 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 first
quarter 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.
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 Change 2001
--------------------------------------------------------------------------------
Operating expenses $ 12,835 (3.8%) $ 13,339
Percentage of net sales 15.3% 16.1%
--------------------------------------------------------------------------------
Operating expenses consist of wages, facility, vehicle and related costs for our
branch and distribution locations.
Operating expenses decreased $0.5 million, or 3.8%, as a result of lower wages,
employee benefit costs, facility expenses and vehicle expenses. Partially
offsetting these decreases were increased expenses associated with acquired
operations in 2001. As a percentage of net sales, operating expenses decreased
from 16.1% to 15.3%.
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 Change 2001
--------------------------------------------------------------------------------
Selling, general and
administrative expenses $ 11,057 5.0% $ 10,532
Percentage of net sales 13.1% 12.7%
--------------------------------------------------------------------------------
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.
SG&A expenses increased $0.5 million, or 5.0% due primarily to higher labor and
employee benefit costs, expenses associated with acquired operations in 2001,
and increased travel and entertainment expenses. Partially offsetting these
increases was lower depreciation expense. As a percentage of net sales, SG&A
expenses increased from 12.7% to 13.1%.
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 Change 2001
--------------------------------------------------------------------------------
Amortization of intangible
Assets $ 307 (77.2%) $ 1,348
Percentage of net sales 0.4% 1.6%
--------------------------------------------------------------------------------
Lower amortization expense of $1.0 million, or 77.2%, 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.
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 Change 2001
--------------------------------------------------------------------------------
Interest expense, net $ 1,775 (23.1%) $ 2,308
Percentage of net sales 2.1% 2.8%
--------------------------------------------------------------------------------
Interest expense decreased $0.5 million, or 23.1%, due primarily to the lower
average outstanding borrowings and lower interest rates. Average outstanding
borrowings were approximately $13.7 million lower in the first quarter of 2002
compared to the prior year period. Our effective interest rate was also lower in
the current quarter by approximately 70 basis points.
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 Change 2001
--------------------------------------------------------------------------------
Income tax expense $ 2,183 89.3% $ 1,153
Percentage of net sales 2.6% 1.4%
Effective tax rate 41.1% 46.4%
--------------------------------------------------------------------------------
Income tax expense increased $1.0 million, or 89.3%, as a result of higher
income before income taxes. The adoption of SFAS No. 142 reduced our effective
tax rate in the current year quarter due to the elimination of certain goodwill
amortization, including non-deductible goodwill amortization. On a SFAS No. 142
comparable basis, the effective tax rate was 40.9% in the prior year period.
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 Change 2001
--------------------------------------------------------------------------------
Extraordinary loss, net $ - N/A $ 495
Percentage of net sales 0.0% 0.6%
--------------------------------------------------------------------------------
In 2001, an extraordinary loss on the early extinguishment 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.
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands, except per share data) 2002 Change 2001
--------------------------------------------------------------------------------
Net income $ 3,124 272.4% $ 839
Percentage of net sales 3.7% 1.0%
Net income per share - Diluted $ 0.40 $ 0.11
--------------------------------------------------------------------------------
On a SFAS No. 142 comparable basis, net income in the prior year period was $1.5
million, or $0.20 per share after extraordinary item. See Note 7 within
Condensed Financial Statements in Item 1. Factors contributing to the changes in
net income and the related per share amounts are discussed in the detail 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) March 31, December 31,
2002 2001
--------------------------------------------------------------------------------
Working capital $ 39,436 $ 33,087
Long-term debt $ 88,197 $ 85,475
--------------------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------------------------------------------------------
(In thousands) 2002 2001
--------------------------------------------------------------------------------
Cash provided (used) by operating activities $ (2,225) $ 15,017
Cash used in investing activities $ (546) $ (245)
Cash provided by (used in) financing activities $ 2,776 $ (7,327)
--------------------------------------------------------------------------------
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 quarter of 2002 used $2.2 million of net cash
compared with $15.0 million of net cash provided 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 the first quarter 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 first quarter periods.
Net cash used in investing activities was $0.5 million in the first quarter of
2002, compared to $0.2 million in the prior year period due to increased
expenditures for the purchase of fixed assets and acquisitions. One acquisition
was completed during the current year period, while none were completed during
the same time period in 2001. We estimate that capital expenditures for 2002,
principally for information technology equipment, will approximate $1.5 million.
Proceeds from borrowings used primarily to support working capital provided $2.8
million of net cash from financing activities in the first quarter of 2002. In
the prior year period, $7.3 million of net cash was used for the repayment of
debt and for the debt issuance costs associated with the refinancing of our
credit facilities.
Total capitalization at March 31, 2002, was $154.3 million, comprised of $88.2
million of debt and $66.1 million of equity. Debt as a percentage of total
capitalization was 57.1% at March 31, 2002 compared to 57.7% at December 31,
2001.
At March 31, 2002, we had outstanding term credit and revolving credit
facilities totaling $61.8 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 $29.6
million as of April 30, 2002, based upon the March 31, 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.
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.
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 as of January 1, 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 March 31, 2002.
*filed herein
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: May 14, 2002 FINISHMASTER, INC.
By: /s/ Wes N. Dearbaugh
------------------------
Wes N. Dearbaugh
President and Chief Operating Officer
By: /s/ Robert R. Millard
-------------------------
Robert R. Millard
Senior Vice President and
Chief Financial Officer