-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JzyjElEtzI0DpY8AUH+vx589V/e1zEuT23tUFrklzlkqrMzB8nMeV5NW5Y1xQQca SAQo6BM/UyyBDBd+ViowMQ== 0000908834-99-000230.txt : 19990817 0000908834-99-000230.hdr.sgml : 19990817 ACCESSION NUMBER: 0000908834-99-000230 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINISHMASTER INC CENTRAL INDEX KEY: 0000917321 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 382252096 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23222 FILM NUMBER: 99692714 BUSINESS ADDRESS: STREET 1: 54 MONUMENT CIRCLE STREET 2: SUITE 600 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3172373678 MAIL ADDRESS: STREET 1: 54 MONUMRNY CIRCLE STREET 2: SUITE 600 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10-Q 1 FINISHMASTER, INC. FORM 10-Q 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, 1999 Commission File Number 0-23222 FINISHMASTER, INC. (Exact Name of Registrant as Specified in its Charter) Indiana 38-2252096 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 54 Monument Circle, Suite 600, Indianapolis, IN 46204 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code: (317) 237-3678 Indicate by check mark whether the registrant (1) has filed all annual, quarterly and other reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No On August 16, 1999, there were 7,535,856 shares of the Registrant's common stock outstanding. FINISHMASTER, INC. FORM 10-Q For the Quarter Ended June 30, 1999 TABLE OF CONTENTS PAGE Part I. Financial Information 3 Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) 3 Condensed Consolidated Statements of Operations (unaudited) 4 Condensed Consolidated Statements of Cash Flows (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 16 PART I. FINANCIAL STATEMENTS FINISHMASTER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
June 30, December 31, 1999 1998 (1) -------- -------- ASSETS (unaudited) CURRENT ASSETS Cash $ 958 $ 1,009 Accounts receivable, net of allowance for doubtful accounts of $1,923 and $1,680, respectively 31,574 30,212 Inventory 51,160 57,744 Prepaid expenses and other current assets 5,815 8,922 -------- -------- TOTAL CURRENT ASSETS 89,507 97,887 PROPERTY AND EQUIPMENT, NET 10,237 11,259 OTHER ASSETS Intangible assets, net 111,055 114,526 Other 3,285 3,275 -------- -------- 114,340 117,801 -------- -------- $214,084 $226,947 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 27,444 $ 36,785 Accrued expenses and other current liabilities 9,351 8,821 Current maturities of long-term debt 10,791 9,985 -------- -------- TOTAL CURRENT LIABILITIES 47,586 55,591 LONG-TERM OBLIGATIONS 114,672 122,008 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, no par value, 1,000,000 shares authorized; no shares issued or outstanding Common stock, $1 stated value, 25,000,000 shares authorized; 7,535,856 shares issued and outstanding 7,536 7,536 Additional paid-in capital 27,351 27,351 Retained earnings 16,939 14,461 -------- -------- 51,826 49,348 -------- -------- $214,084 $226,947 ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. (1) The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. FINISHMASTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months EndedJune 30, Six Months EndedJune 30, -------------------------- ------------------------ 1999 1998 1999 1998 -------- -------- -------- -------- NET SALES $ 83,212 $ 76,758 $163,318 $152,782 COST OF SALES 53,435 49,731 104,921 98,810 -------- -------- -------- -------- GROSS PROFIT 29,777 27,027 58,397 53,972 -------- -------- -------- -------- EXPENSES Operating 11,788 11,529 23,239 23,243 Selling, general and administrative 9,951 9,240 19,418 18,178 Depreciation 986 580 1,877 1,500 Amortization of intangible assets 1,782 1,522 3,520 3,015 -------- -------- -------- -------- TOTAL 24,507 22,871 48,054 45,936 -------- -------- -------- -------- INCOME FROM OPERATIONS 5,270 4,156 10,343 8,036 Interest expense, net 2,661 2,827 5,408 5,700 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 2,609 1,329 4,935 2,336 Income tax expense 1,307 630 2,457 1,109 -------- -------- -------- -------- NET INCOME $ 1,302 $ 699 $ 2,478 $ 1,227 ======== ======== ======== ======== NET INCOME PER SHARE--BASIC $ 0.17 $ 0.12 $ 0.33 $ 0.21 ======== ======== ======== ======== NET INCOME PER SHARE--DILUTED $ 0.17 $ 0.12 $ 0.33 $ 0.21 ======== ======== ======== ======== WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING--BASIC 7,536 5,993 7,536 5,993 ======== ======== ======== ======== WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING--DILUTED 7,536 6,011 7,539 6,003 ======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. FINISHMASTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited)
Six Months Ended June 30, --------------------------- OPERATING ACTIVITIES 1999 1998 -------- -------- Net income $ 2,478 $ 1,227 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,397 4,515 Amortization of financing costs 167 161 Changes in operating assets and liabilities: Accounts receivable (1,149) (62) Inventories 6,615 8,104 Prepaid expenses and other current assets 3,097 1,272 Accounts payable and accrued expenses (9,069) (5,531) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,536 9,686 -------- -------- INVESTING ACTIVITIES Business acquisitions and payments under earn-out provisions of prior acquisition agreements (181) -- Proceeds from disposal of assets 18 180 Purchases of property and equipment (647) (1,066) Cash acquired through merger of LDI AutoPaints -- 1,786 Other (89) (192) -------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (899) 708 -------- -------- FINANCING ACTIVITIES Borrowings from long-term debt 57,280 45,400 Repayments of long-term debt (63,968) (53,970) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (6,688) (8,570) -------- -------- (DECREASE) INCREASE IN CASH (51) 1,824 CASH AT THE BEGINNING OF PERIOD 1,009 364 -------- -------- CASH AT THE END OF PERIOD $ 958 $ 2,188 ======== ======== NON CASH ACTIVITIES Acquisition of LDI AutoPaints Assets acquired $ 17,667 Liabilities assumed (3,246) -------- Equity purchased 14,421 Less: Cash acquired (1,786) -------- Net assets acquired, excluding cash $ 12,635 ========
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 the Company's annual consolidated financial statements and notes. This Form 10-Q should be read in conjunction with the Company's consolidated financial statements and notes included in its 1998 Annual Report on Form 10-K. Nature of Business: FinishMaster, Inc. (the "Company" or "FinishMaster") is the leading national distributor of automotive paints, coatings, and paint-related accessories to the automotive collision repair industry. As of June 30, 1999, the Company operated 153 sales outlets and three major distribution centers in 22 states and is organized into three major geographic regions - the Southeastern, Western, and Central/Northeastern Divisions. The Company aggregates its three operating segments into a single reportable segment. The Company provides a comprehensive selection of brand name products to its customers and is highly dependent on four key suppliers, BASF, DuPont, 3M and PPG, which account for approximately 60% of the Company's purchases. Principles of Consolidation: The Company's condensed consolidated financial statements include the accounts of FinishMaster, Refinishers Warehouse, Inc. and Thompson PBE, Inc. ("Thompson"), as well as LDI AutoPaints, Inc. ("AutoPaints"), from the date of its respective acquisition. All significant intercompany accounts and transactions are eliminated. References to the Company or FinishMaster throughout this report relate to the consolidated entity. Majority Shareholder: Lacy Distribution, Inc. ("Distribution"), an Indiana corporation, which is an indirect wholly-owned subsidiary of LDI, Ltd. ("LDI"), an Indiana limited partnership, is the majority shareholder of the Company with 5,587,516 shares of common stock, representing 74.1% of the outstanding shares at June 30, 1999. Throughout the remainder of this report, LDI and Distribution are collectively referred to as "LDI." Recent Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS No. 133). The Company is not routinely involved in derivative and hedging activities and adoption of this Statement, which is effective January 1, 2001, is not expected to have a material impact on financial condition or results of operations. 2. ACQUISITIONS On June 30, 1998, the Company completed the acquisition by merger of AutoPaints pursuant to which the Company merged with AutoPaints and issued to LDI an additional 1,542,416 shares of common stock. Since this was a transaction within a controlled group, the acquisition of AutoPaints was accounted for using its historical cost basis. Equity securities issued to LDI in exchange for the net assets of AutoPaints were recorded at the historical cost basis of the net assets acquired as of the effective date of the transaction. During the first half of 1999 the Company completed three additional acquisitions that are not material to its historical or pro forma results of operations. 3. NET INCOME PER SHARE
(in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 -------- ------ ------ ------ Numerator: Net income $ 1,302 $ 699 $2,478 $1,227 ======== ====== ====== ====== Denominator: Basic-weighted average shares 7,536 5,993 7,536 5,993 Effect of dilutive stock options -- 18 3 10 -------- ------ ------ ------ Diluted-weighted average shares 7,536 6,011 7,539 6,003 ======== ====== ====== ====== Basic net income per share $ 0.17 $ 0.12 $ 0.33 $ 0.21 ======== ====== ====== ====== Diluted net income per share $ 0.17 $ 0.12 $ 0.33 $ 0.21 ======== ====== ====== ======
4. COMMITMENTS AND CONTINGENCIES In January 1999, the Company was named in an unfair business practices lawsuit by an automotive paint distributor located in the State of California. The plaintiff in such suit alleged that the Company offered, in a manner that injured the plaintiff, rebates and cash bonuses to businesses in the Southern California area if those businesses would buy exclusively from the Company and use the Company's products. The plaintiff claimed damages in the amount of $3.8 million, trebled to $11.4 million. The Company filed a motion to dismiss, which was granted by the court. The court, however, allowed the plaintiff to refile their claim with more specificity, which it has done. The Company believes that the claims are without merit and is aggressively defending itself against all allegations. Accordingly, it has not recorded any loss provision relative to damages sought by the plaintiff in this lawsuit. The Company is subject to various claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, product liability, automobile, taxes, discrimination, employment and other matters. Management believes that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on the Company's financial condition, ITEM 2 MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The historical financial statements of the Company include the results of operations of AutoPaints since its acquisition date of June 30, 1998. The Company believes that the presentation of Management's Discussion and Analysis on a pro forma basis provides a more meaningful understanding of the Company's performance by better reflecting the effect of the AutoPaints acquisition. The following tables include unaudited pro forma consolidated results, as if the acquisition of AutoPaints had occurred on January 1, 1998. The unaudited pro forma amounts do not purport to be indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor do they purport to be indicative of the results that may be obtained in the future.
Net Sales Three Months Ended June 30, Six Months Ended June 30, - -------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - --------------------------------------------------------------------------------------------------------------- Historical $83,212 8.4% $76,758 $163,318 6.9% $ 152,782 - --------------------------------------------------------------------------------------------------------------- Pro forma $83,212 0.5% $82,803 $163,318 (0.7%) $ 164,546 - ---------------------------------------------------------------------------------------------------------------
Pro forma net sales for the second quarter increased $0.4 million or 0.5% primarily due to an increase in same store sales of $1.2 million or 1.6%. Pro forma net sales for the first half of 1999 decreased $1.2 million or 0.7%. The cause of this decrease, which also partially offset the increase for the second quarter, is the continuing effect on net sales of store closures and consolidations during 1998 following the acquistions of Thompson and AutoPaints.
Gross Margin Three Months Ended June 30, Six Months Ended June 30, - ----------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - ----------------------------------------------------------------------------------------------------------------- Historical $ 29,777 10.2% $ 27,027 $ 58,397 8.2% $53,972 Percentage of net sales 35.8% 35.2% 35.8% 35.3% - ----------------------------------------------------------------------------------------------------------------- Pro forma $ 29,777 2.0% $ 29,183 $ 58,397 (0.2%) $58,493 Percentage of net sales 35.8% 35.2% 35.8% 35.5% - -----------------------------------------------------------------------------------------------------------------
Pro forma gross margin for the second quarter increased $0.6 million or 2.0% primarily due to increased margins of approximately $0.5 million. This increase was due to supplier incentive programs and the optimization of early payment discounts. Pro forma gross margin for the first half of the year decreased $0.1 million or 0.2% due to lower pro forma net sales volume, which impacted gross margin by $0.4 million. Partially offsetting this impact of lower pro forma net sales was higher gross margins as a percentage of pro forma net sales. Operating Expenses
Three Months Ended June 30, Six Months Ended June 30, - ----------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - ----------------------------------------------------------------------------------------------------------------- Historical $ 11,788 2.2% $ 11,529 $ 23,239 0.0% $23,243 Percentage of net sales 14.2% 15.0% 14.2% 15.2% - ----------------------------------------------------------------------------------------------------------------- Pro forma $ 11,788 0.4% $ 11,740 $ 23,239 (1.8%) $23,657 Percentage of net sales 14.2% 14.2% 14.2% 14.4% - -----------------------------------------------------------------------------------------------------------------
Operating expenses consist of wages, facility expenses, vehicle and related costs for the Company's store and distribution locations. Pro forma operating expenses for the second quarter increased less than $0.1 million or 0.4%, consistent with the increase in pro forma net sales volume. Pro forma operating expenses for the first half of the year decreased $0.4 million or 1.8%. This decrease is a direct result of the Company's profit improvement initiatives that included savings from the consolidation and closure of sales outlets during 1998 and reduced spending programs at store and distribution locations. Selling, General and Administrative Expenses
Three Months Ended June 30, Six Months Ended June 30, - ----------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - ----------------------------------------------------------------------------------------------------------------- Historical $ 9,951 7.7% $ 9,240 $ 19,418 6.8% $18,178 Percentage of net sales 12.0% 12.0% 11.9% 11.9% - ----------------------------------------------------------------------------------------------------------------- Pro forma $ 9,951 (5.7%) $ 10,548 $ 19,418 (6.4%) $20,738 Percentage of net sales 12.0% 12.7% 11.9% 12.6% - -----------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses ("SG&A") consist of costs associated with the Company's corporate support staff and expenses for commissions, wages, and customer sales support activities. Pro forma SG&A expenses decreased $0.6 million or 5.7% and $1.3 million or 6.4% for the second quarter and the first half of 1999, respectively. This decrease is a result of the consolidation of four corporate offices into one, the closure and consolidation of sales outlets and reduced spending initiatives. Depreciation
Three Months Ended June 30, Six Months Ended June 30, - ----------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - ----------------------------------------------------------------------------------------------------------------- Historical $ 986 70.0% $ 580 $ 1,877 25.1% $1,500 Percentage of net sales 1.2% 0.8% 1.1% 1.0% - ----------------------------------------------------------------------------------------------------------------- Pro forma $ 986 41.5% $ 697 $ 1,877 8.4% $1,732 Percentage of net sales 1.2% 0.8% 1.1% 1.1% - -----------------------------------------------------------------------------------------------------------------
Amortization of Intangible Assets
Three Months Ended June 30, Six Months Ended June 30, - ----------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - ----------------------------------------------------------------------------------------------------------------- Historical $ 1,782 17.1% $ 1,522 $ 3,520 16.7% $3,015 Percentage of net sales 2.1% 2.0% 2.2% 2.0% - ----------------------------------------------------------------------------------------------------------------- Pro forma $ 1,782 0.0% $ 1,782 $ 3,520 (0.4%) $3,534 Percentage of net sales 2.1% 2.2% 2.2% 2.1% - -----------------------------------------------------------------------------------------------------------------
Interest Expense, net
Three Months Ended June 30, Six Months Ended June 30, - ----------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - ----------------------------------------------------------------------------------------------------------------- Historical $ 2,661 (5.9%) $ 2,827 $ 5,408 (5.1%) $5,700 Percentage of net sales 3.2% 3.7% 3.3% 3.7% - ----------------------------------------------------------------------------------------------------------------- Pro forma $ 2,661 (6.3%) $ 2,840 $ 5,408 (5.6%) $5,730 Percentage of net sales 3.2% 3.4% 3.3% 3.5% - -----------------------------------------------------------------------------------------------------------------
Pro forma interest expense for the second quarter decreased $0.2 million or 6.3%, and for the first half of 1999, $0.3 million or 5.6% due to lower average outstanding borrowings of approximately $9.9 and $12.6 million, respectively. Income Tax Expense
Three Months Ended June 30, Six Months Ended June 30, - ----------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - ----------------------------------------------------------------------------------------------------------------- Historical $ 1,307 107.5% $ 630 $ 2,457 121.6% $1,109 Percentage of net sales 1.6% 0.8% 1.5% 0.7% Effective tax rate 50.1% 47.4% 49.8% 47.5% - ----------------------------------------------------------------------------------------------------------------- Pro forma $ 1,307 79.0% $ 730 $ 2,457 75.0% $1,404 Percentage of net sales 1.6% 0.9% 1.5% 0.9% Effective tax rate 50.1% 46.3% 49.8% 45.3% - -----------------------------------------------------------------------------------------------------------------
Pro forma income tax expense rose $0.6 million or 79.0% for the second quarter and $1.1 million or 75.0% for the first half of 1999 due to higher pro forma income before income taxes. The pro forma effective tax rate varied from the federal statutory rate as a result of certain expenses, principally nondeductible intangible amortization. In 1998, the Company's pro forma effective tax rate for the year was 55.0%. The lower projected rate for 1999 is reflective of higher anticipated full year income before income taxes and consistent levels of nondeductible items. Net Income and Income Per Share
Three Months Ended June 30, Six Months Ended June 30, - ---------------------------------------------------------------------------------------------------------------------- (In thousands) 1999 Change 1998 1999 Change 1998 - ---------------------------------------------------------------------------------------------------------------------- Historical $ 1,302 86.3% $ 699 $ 2,478 102.0% $ 1,227 Percentage of net sales 1.6% 0.9% 1.5% 0.8% Net income per share $ 0.17 41.7% $ 0.12 $ 0.33 57.1% $ 0.21 - ---------------------------------------------------------------------------------------------------------------------- Pro forma $ 1,302 53.9% $ 846 $ 2,478 45.9% $ 1,698 Percentage of net sales 1.6% 1.0% 1.5% 1.0% Net income per share $ 0.17 54.5% $ 0.11 $ 0.33 43.5% $ 0.23 - ----------------------------------------------------------------------------------------------------------------------
Factors contributing to the changes in net income and pro forma net income and the related per share amounts are discussed above. Seasonality and Quarterly Fluctuations The Company's sales and operating results have varied from quarter to quarter due to various factors and the Company expects these fluctuations to continue. Among these factors are seasonal buying patterns of the Company's customers and the timing of acquisitions. Historically, sales have slowed in the late fall and winter of each year largely due to inclement weather and the reduced number of business days during the holiday season. In addition, the timing of acquisitions may cause substantial fluctuations of operating results from quarter to quarter. The Company takes advantage of periodic special incentive programs available from its suppliers that extend the due date of inventory purchases beyond terms normally available with large volume purchases. The timing of these programs can contribute to fluctuations in the Company's quarterly cash flows. Although the Company continues to investigate strategies to smooth the seasonal pattern of its quarterly results of operations, there can be no assurance that the Company's net sales, results of operations and cash flows will not continue to display seasonal patterns. Financial Condition, Liquidity and Capital Resources
(In thousands) June 30,1999 December 31,1998 - ------------------------------------------------------------------------------------------------ Working capital $ 41,921 $ 42,296 Long-term debt $ 111,783 $ 119,120 - ------------------------------------------------------------------------------------------------ Six Months Ended June 30, (In thousands) 1999 1998 - ------------------------------------------------------------------------------------------------ Cash provided by operating activities $ 7,536 $ 9,686 Cash (used in) provided by investing activities $ (899) $ 708 Cash used in financing activities $ (6,688) $ (8,570) - ------------------------------------------------------------------------------------------------
Net cash provided by operating activities was $7.5 million through the first half of 1999 compared with $9.7 million in the prior year period. This decrease was a result of a negative change in cash flows generated from operating assets and liabilities, partially offset by higher earnings and increased depreciation and amortization expense. The negative change in cash flows generated from operating assets and liabilities was attributable to an increase in accounts receivable and a decrease in accounts payable and accrued expenses. The decrease in accounts payable and accrued expenses resulted from differences in payment terms between years on large inventory purchases. Net cash used in investing activities was $0.9 million for the first half of 1999 compared to cash provided by investing activities of $0.7 million in the same period of the previous year. The difference is primarily attributable to the cash acquired through the merger with AutoPaints in 1998. Net cash used in financing activities, primarily the repayment of debt, was $6.7 million for the first half of 1999, down from $8.6 million for the first half of 1998. This decrease in debt repayments was due to the decrease in cash generated by operating activities. Total capitalization at June 30, 1999 was $175 million, comprised of $123 million of debt and $52 million of equity. Debt as a percentage of total capitalization was 70.3% at June 30, 1999 compared to 72.3% at December 31, 1998. At June 30, 1999, the Company had term credit and revolving credit facilities totaling $100 million, and senior subordinated debt of $30 million. The $10 million senior subordinated revolving credit facility with its majority shareholder, which was available to fund working capital and acquisition needs, expired on June 29, 1999 and is no longer available to the Company. The Company was in compliance with the covenants underlying its credit facilities, and had estimated availability under its revolving credit facility of $4.2 million as of August 10, 1999, based upon the June 30, 1999 borrowing base calculation. Based on current and projected operating results and giving effect to total indebtedness, the Company believes that cash flow from operations and funds available from lenders and other creditors will provide adequate funds for ongoing operations, debt service and planned capital expenditures. The Company is, however, currently pursuing other financing arrangements and structures. Should the Company be successful in obtaining acceptable financing terms under new arrangements or negotiating favorable amendments to its existing facilities, available proceeds may be used to retire certain bank term loans, a portion of amounts outstanding under the revolving credit facility and the subordinated debt payable to LDI. Early retirement of indebtedness or amendments of its existing debt facilities may result in the write-off of all or a portion of previously capitalized debt issuance costs. At June 30, 1999, unamortized debt issuance costs were approximately $1.3 million. Year 2000 Date Conversion Many existing computer programs use only two digits to identify years. These programs were designed without consideration for the effects of the upcoming change in the century, and if not corrected, could fail or create erroneous results by or at the Year 2000. Essentially all of the Company's information and technology-based systems, as well as many non-information technology-based systems, are potentially affected by the Year 2000 issue. Technology-based systems reside on the Company's midrange computer, servers and personal computers in the corporate office as well as in division offices and stores. Specific systems include accounting, financial reporting, inventory tracking and control, budgeting, tax, accounts receivable, accounts payable, purchasing, distribution, word processing and spreadsheet applications. Non-information technology-based systems include equipment and services containing embedded microprocessors such as alarm systems and voice mail systems. The Company has relationships with numerous third parties, including several paint manufacturers, equipment suppliers, utility companies, insurance companies, banks, and payroll processors, that may be affected by the Year 2000 issue. The Company's State of Readiness Remediation plans have been established for all major systems potentially affected by the Year 2000 issue. The current status of the plans for information technology-based systems are summarized as follows: 1. Identification of all applications and hardware with potential Year 2000 issues. To the best of the Company's knowledge, this has been completed. 2. For each item identified, performance of an assessment to determine an appropriate action plan and timetable for remediation of each item. The plan may consist of replacement, upgrade or elimination of the application. This phase has been completed. 3. Implementation of the specific action plan. This phase has been completed except for the store paint formula systems (see item 5). 4. Testing each application upon completion. All in-house developed systems have been tested and found to be compliant. Vendor-supplied software has been upgraded to Year 2000 compliant versions, and the Company has certification of compliance from the software vendors. 5. Placement of the new process into production. All applications and systems are now in production. The exception to this is the store paint formula systems supplied by paint vendors. These systems will be upgraded by the end of the third quarter of 1999. The Company is in the process of identifying all non-information technology based systems. Appropriate remediation plans are being developed, implemented and tested when each affected system is identified. Identification should be completed by the end of the third quarter and remedied during the fourth quarter of 1999. Identification of areas of potential third party risk is nearly complete and, for those areas identified to date, remediation plans are being developed. Identification and assessment should be completed by the end of the third quarter and implemented during the fourth quarter of 1999. The Costs Involved The total cost to the Company of achieving Year 2000 compliance is not expected to exceed $0.2 million and will consist primarily of the utilization of internal resources. Spending to date totals approximately $0.1 million. Costs relating to internal systems' Year 2000 compliance are included in the Information Systems budget and are immaterial as a percentage of that budget. All costs related to achieving Year 2000 compliance are based on management's best estimates. There can be no assurance that actual results will not differ from these estimates. Risks and Contingency Plan The Company is in the process of determining the risks it would face in the event certain aspects of its Year 2000 remediation plan failed. It is also developing contingency plans for all mission-critical processes. Under a "worst case" scenario, the Company's operations would be unable to deliver product due to internal system failures and/or the inability of vendors to deliver materials for distribution. Inventory levels of certain key products may be temporarily increased to minimize exposure. While virtually all internal systems can be replaced with manual systems on a temporary basis, the failure of any mission-critical system will have at least a short-term negative effect on operations. The failure of national and worldwide banking information systems or the loss of essential utilities services due to the Year 2000 issue could result in the inability of many businesses, including the Company, to conduct business. Risk assessment has been completed and contingency plans should be completed in the third quarter of 1999. Forward-Looking Statements This Report contains certain forward-looking statements pertaining to, among other things, the Company's future results of operations, cash flow needs and liquidity, acquisitions, and other aspects of its business. The Company may make similar forward-looking statements from time to time. These statements are based largely on the Company's current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in the Company's business strategy or an inability to execute its mergence 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 Form S-1 Registration Statement, No. 33-73804, effective date of February 22, 1994, or as exhibits otherwise filed by the Registrant, and are hereby incorporated by reference. Exhibit No. Description of Document 2.1 Agreement and Plan of Merger, dated as of October 14, 1997, by and among FinishMaster, Inc., FMST Acquisition Corporation and Thompson PBE, Inc. (incorporated by reference to Exhibit (c)(2) of Schedule 14D-1 previously filed by FMST Acquisition Corporation on October 21, 1997). 2.2 Agreement and Plan of Merger, dated February 16, 1998, by and among FinishMaster, Inc., LDI AutoPaints, Inc. and Lacy Distribution, Inc. (previously filed with Form 10-K dated March 31, 1998) 3.1 Articles of Incorporation of FinishMaster, Inc., an Indiana corporation, as amended June 30, 1998 (previously filed with Form 10-Q dated August 14, 1998) 3.2 Amended and Restated Code of Bylaws of FinishMaster, Inc., an Indiana corporation (previously filed with Form 10-K/A dated April 14, 1998) 10.1 FinishMaster, Inc. Stock Option Plan (Amended and Restated as of April 29, 1999) (previously filed with Registrant's proxy statement on Schedule 14/A dated April 9, 1999) 21 Subsidiaries of the Registrant (previously filed with Form 10-K dated March 31, 1999) 27* Financial Data Schedule 99(a) Credit Agreement, dated as of November 19, 1997, among FinishMaster, Inc., the Institutions from Time to Time Parties Thereto as Lenders and NBD Bank, N.A., as Agent (previously filed with Form 8-K dated December 3, 1997) 99(b) Subordinated Note Agreement, dated as of November 19, 1997, by and between FinishMaster, Inc. and LDI, Ltd. (previously filed with Form 8-K dated December 3, 1997) 99(c) First Amendment to Credit Agreement dated December 10, 1997 (previously filed with Form 10-K dated March 31, 1998) 99(d) Second Amendment to Credit Agreement dated March 27, 1998 (previously filed with Form 10-K dated March 31, 1998) 99(e) Credit Agreement dated March 27, 1998 between FinishMaster, Inc. and LDI, Ltd. (previously filed with Form 10-K dated March 31, 1998) 99(f) Third Amendment to the Credit Agreement dated as of October 30, 1998. (b) Reports on Form 8-K. The Company filed a report on Form 8-K on April 1, stating that effective April 5, 1999, the Company's Common Stock would be traded on the NASDAQ SmallCap Market and that its trading symbol (FMST) would remain the same. 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 August 16, 1999 FINISHMASTER, INC. By: /s/ Wesley N. Dearbaugh ---------------------------- Wesley N. Dearbaugh President and Chief Operating Officer By: /s/ Robert R. Millard ---------------------------- Robert R. Millard Senior Vice President and Chief Financial Officer EX-27 2 FDS OF FINISHMASTER, INC.
5 0000917321 FinishMaster, Inc. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1.000 958 0 31,574 1,923 51,160 89,507 19,895 9,658 214,084 47,586 0 7,536 0 0 44,290 51,826 163,318 163,318 104,921 48,054 0 0 5,408 4,935 2,457 2,478 0 0 0 2,478 0.33 0.33
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