SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock - without par value Nasdaq Stock Market
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
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 1, 2002 was $20,421,335.
On March 1, 2002, 7,648,363 shares of Registrant's common stock were
outstanding.
Documents Incorporated By Reference
Portions of the annual proxy statement for the year ended December 31, 2001 are
incorporated by reference into Part III.
FINISHMASTER, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
1 Business............................................................ 3
2 Properties.......................................................... 7
3 Legal Proceedings................................................... 8
4 Submission of Matters to a Vote of Security Holders................. 8
5 Market for Registrant's Common Equity and
Related Shareholder Matters.................................... 9
6 Selected Consolidated Financial Data................................ 10
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 11
8 Financial Statements and Supplemental Data.......................... 17
9 Changes in, and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 34
10 Directors and Executive Officers of the Registrant.................. 34
11 Executive Compensation.............................................. 34
12 Security Ownership of Certain Beneficial Owners and Management...... 34
13 Certain Relationships and Related Transactions...................... 34
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................ 34
Signatures.......................................................... 35
PART I
ITEM 1 - BUSINESS
General
We are the leading national independent distributor of automotive paints,
coatings and paint-related accessories primarily to the automotive collision
repair industry. As of March 1, 2002, we serve our customers through a 350
person direct sales force in 159 sales outlets and three major distribution
centers located in 23 states, making us the only national independent
distributor in the industry. We have approximately 15,000 customer charge
accounts consisting principally of collision repair shops and automobile
dealers, to which we provide a comprehensive selection of brand name products.
Our product offering consists of over 32,000 stock keeping units ("SKUs"),
including leading brands of automotive paints, coatings, thinners and reducers
manufactured by BASF, DuPont, and PPG and the leading brands of paint-related
accessories manufactured principally by 3M, such as masking materials, body
fillers and cleaners. For the year ended December 31, 2001, net sales were
$333.5 million and net income was $6.2 million.
Our vision is to expand our leadership position in the distribution of products,
services and technology that are recognized by customers as key factors in their
success. We provide our customers with "local" value-added services such as
rapid delivery, technical support, product training, management seminars,
computerized color matching, inventory management, personnel placement and
environmental compliance reporting. These value-added services are backed by
"national" expertise in the systems and technology of warehouse distribution and
supply chain management, and strategic partnering with the manufacturers of
paint and paint-related accessories. Our local focus helps us respond to the
unique customer needs in various geographic markets. Our national network allows
us to provide better, consistent service at a lower cost than our competition.
In addition, we are able to provide certain multi-site customers, such as
"collision repair shop" chains and mega-dealerships, with efficient and
consistent product distribution throughout their national or regional networks
at competitive prices.
We estimate the U.S. automotive paint and paint-related accessories distribution
after-market ("distribution after-market") to be approximately $2.5 billion,
with automotive collision repair shops being the primary customers for
automotive paint and paint-related accessories. In addition to independent
collision repair shops and automobile dealers, we supply products to
organizations that maintain their own automobile fleet, van conversion companies
and other commercial/industrial customers. The distribution after-market is
supplied by a small number of manufacturers of paint and paint-related
accessories and serves a highly fragmented customer base, consisting of
approximately 40,000 collision repair shops alone. Our competitors tend to be
family-owned, with one to three distribution sites and typically serve a highly
localized customer base.
We are an Indiana based corporation. Our principal executive offices are leased
from LDI, Ltd. ("LDI"), an Indiana limited partnership, which indirectly owns
73.1% of our outstanding shares. We believe that the terms of the lease are at
least as favorable to us as those that could be obtained by arms-length
negotiations with an unaffiliated third party. Our principal executive offices
are located at 54 Monument Circle, Suite 600, Indianapolis, Indiana 46204, and
our telephone number is (317) 237-3678.
Industry Overview
We estimate the distribution after-market to be approximately $2.5 billion. The
end users of the products distributed by us are principally independent
collision repair shops and automobile dealers. Additionally, organizations that
maintain their own automobile fleet, van conversion companies and other
commercial/industrial customers make up a smaller percentage of our customer
base. Automotive paint and related supplies, in contrast to labor and parts,
represent only a small portion (approximately 7-10%) of the total cost of a
typical collision repair job. However, while paint is a relatively minor
component of the total repair cost, we play a critical role in the customer's
level of satisfaction.
The distribution after-market for automotive paint and related supplies is
characterized by a small number of manufacturers of paint and paint-related
accessories. The five predominant manufacturers of automotive paint distributed
in the United States are Akzo Nobel, BASF, DuPont, PPG and The Sherwin-Williams
Company. In addition, several other large foreign manufacturers have recently
taken steps to expand the distribution of their paint products in the United
States. 3M is the predominant manufacturer of paint-related accessories which
include refinishing materials, supplies, accessories and tools such as sand
paper, masking tape and paint masks.
The paint manufacturers market is continuing to consolidate. Specifically, in
July 1999, PPG acquired Imperial Chemical Industries' global automotive refinish
and industrial coatings business and its automotive solvents and thinners
business in North America. In March 1999, DuPont acquired Herberts Gmbh, the
coatings company of Hoechst. The Herberts acquisition created the world's third
largest coatings company and the leading automotive coatings supplier.
While automotive paint manufacturing is highly concentrated, automotive paint
distribution and the end users of automotive paint are highly fragmented. We
believe that a large number of independent distributors of automotive paint
serve an aggregate of approximately 40,000 collision repair shops nationwide.
Distributors, which tend to be family-owned with one to three distribution
sites, typically serve a highly localized customer base with each distribution
site serving customers located within 20 miles of the site depending upon
demographics, road access and geography.
Due to the large number of end users and their increasing demands for
personalized services, such as multiple daily deliveries, assistance with
color-mixing and matching, and assistance with paint application techniques and
environmental compliance reporting, manufacturers typically service end users
through distributors like us. Nevertheless, some of the paint manufacturers have
elected to operate company-owned distribution facilities in selected markets,
including markets in which we operate. We believe, however, that the largest
automotive paint manufacturers have generally avoided the cost of operating
their own distribution network due to their inability to offer multiple lines of
paint which prevents them from spreading distribution expenses across the
market's entire potential customer base. Consequently, we believe that
independent distributors like us, which can sell the products of several paint
manufacturers, are better situated to service the end users' needs than the
company owned distribution facilities of automotive paint manufacturers.
The market for paints and supplies for automotive collision repairs has changed
significantly in recent years. Key factors affecting this market have been:
o a decline in the number of vehicles repaired annually;
o improvements in paint application technology and advances in paint
system productivity;
o environmental regulations which have required the reformulation of
paints and the use of more advanced equipment and facilities;
o automobile manufacturers' use of more complex and expensive automotive
finishes; and
o an increase in the number of vehicles repaired by insurance companies'
designated "direct repair providers".
Collision repair shops have been forced to invest in new equipment and
additional training of their workers, while there has been a decline in the
number of repair jobs. Accordingly, there has been some consolidation in the
highly fragmented collision repair industry among end users of automotive paints
and accessories. In addition, collision repair shops and car dealerships are
seeking to improve their financial performance and competitive position by
developing relationships with distributors that can support their businesses
with value-added services. This demand for higher levels of service from
distributors, combined with lower unit sales volume of paint and supplies, has
resulted in a consolidation among after-market distributors. We have led the
consolidation among distributors in recent years, having completed 39
acquisitions over the past ten years.
Although the automotive collision repair industry is experiencing a trend toward
consolidation, we believe that our size and current position as a market leader
will enable us to continue to grow and remain profitable. We have been able to
offset the decline in unit volume by material price increases that we have been
able to pass on to our customers due to the technological advancements in paints
and coatings. In addition, we believe we will continue to attract new customers
due to our value-added services, such as our experience in helping customers
comply with environmental regulations. This service, which we currently provide
in California and Colorado, will be applicable in other geographic areas as the
U.S. Environmental Protection Agency enacts volatile organic compound ("VOC")
regulations nationwide.
Products and Suppliers
We offer our customers a comprehensive selection of prominent brand name
products and our own PrivateBrand products. The product line consists of over
32,000 SKUs, including the three leading brands of automotive paints and
coatings and a leading brand of related accessories. Our PrivateBrand products
include some of the most frequently used refinishing accessories such as masking
materials, body fillers, thinners, reducers and cleaners.
We rely on four leading suppliers for the majority of our product requirements.
BASF, DuPont, and PPG supply virtually all of our paint products, and 3M is our
largest supplier of paint-related accessories. Products supplied by BASF,
DuPont, 3M and PPG accounted for approximately 85% of purchases in 2001.
Although each of these suppliers generally competes with the others along
product lines, we do not believe the products are completely interchangeable
because of high brand loyalty among customers and their brand-specific color
matching computer systems. We continuously seek opportunities with new and
existing suppliers to supply the highest quality products.
Whenever practical, we make purchases from suppliers in large volumes to
maximize volume discounts. In addition, we participate in periodic, special
incentive programs available from suppliers. These programs provide additional
purchase discounts and extended payment terms in exchange for large volume
purchases. We also benefit from supplier-provided early payment discounts and
from other supplier-supported programs.
Services
We offer comprehensive value-added services designed to assist customers in
operating their businesses more effectively. These services include:
Rapid Delivery
Products are delivered to customers using our delivery fleet of approximately
720 trucks. We offer multiple daily deliveries to meet our customers'
just-in-time inventory needs. Customer concerns for product availability
typically take priority over all other competitive considerations, including
price.
Technical Support
Our technical support personnel demonstrate and recommend products. In addition,
they assist customers with problems related to their particular product
applications. Equipment specialists provide information to customers regarding
their heavy equipment requirements, such as spray booths and frame straightening
equipment.
Product Training
As a result of increasing regulations, manufacturers have introduced
technologically advanced, lower VOC paints, which require significantly more
sophisticated application techniques. We provide training to customers in order
to teach them the techniques required to work with these products. Training
sessions are typically conducted jointly by us and by one or more of our major
suppliers at the customer's location or at an off-site location.
Management Seminars
Management seminars are conducted at convenient locations to inform our
customers about environmental regulations and compliance, techniques to improve
productivity, and industry trends.
Color Matching
The growing number of paint colors is a challenge for the refinishing industry.
DuPont, for example, has more than 350,000 mix formulas. With sophisticated
PC-based color matching equipment and specialists, we provide color-matching
services to our customers.
Inventory Management
We perform monthly physical inventories for customers who request this service.
We also provide customers with management information reports on product usage.
Assistance with Environmental Compliance Reporting
All states have air quality regulations that mandate paint and application
methods which result in reduced atmospheric emissions of paint and other related
materials. In California in particular, we arrange demonstrations of new
products and application techniques designed to comply with air quality
regulations. In addition, in California and Colorado, we assist our customers
with environmental reporting requirements by providing special reports designed
to simplify their compliance. The EPA has proposed regulations to control VOC
emissions from automobile refinishing nationwide and, accordingly, we are
considering an expansion of these programs.
Personnel Placement
Certain of our locations assist our customers with filling employment openings
and/or persons seeking employment with collision repair shops located in the
market served. Upon request from a customer to fill an opening, we may provide
the names of one or more persons for the position. Similar services are
available to persons seeking employment. We do not charge for this service but
benefit from enhanced relationships with our customers and their employees.
Competition
The distribution after-market of the automotive refinishing industry is highly
fragmented and competitive with many independent distributors competing
primarily on the basis of technical assistance and expertise, price, speed of
delivery and breadth of product offering. There are no other independent
national distributors of automotive refinish paints and accessories. There are a
number of independent regional distributors, many of which are in direct
competition with us on a regional or local level. Competition in the purchase of
independent distributors and sales outlets may occur between us and other
automotive refinishing distributors that are also pursuing growth through
acquisitions.
We may also encounter significant sales competition from new market entrants,
automotive paint manufacturers, buying groups or other large distributors that
may seek to enter such markets or may seek to compete with us for attractive
acquisition candidates. Although the largest automotive paint manufacturers have
generally not operated their own distributors, or have done so only on a limited
basis, they may decide to expand such activity in the future. For example,
Sherwin-Williams distributes its own automotive paints through its sales
outlets. In addition, BASF, one of our principal suppliers, also distributes in
certain markets through its own outlets in North America. While we do not
believe that current direct distribution efforts by automotive paint
manufacturers have significantly affected our sales, there can be no assurance
that we will not encounter increased competition in the future. We may also
compete with our suppliers in selling to certain large volume end users such as
van converters, small manufacturers and large fleet operators.
Employees
As of March 1, 2002, we employed approximately 1,530 persons on a full and
part-time basis. None of the employees are covered by a collective bargaining
agreement, and we consider our relations with our employees to be good.
Governmental and Environmental Regulations
We are subject to various federal, state and local laws and regulations. These
regulations impose requirements on our customers and us. Pursuant to the
regulations of the U.S. Department of Transportation and certain state
transportation departments, a license is required to transport our products and
annual permits are required due to the classification of certain of our products
as "hazardous." Various state and federal regulatory agencies, such as the
Occupational Safety and Health Administration and the United States
Environmental Protection Agency, have jurisdiction over the operation of our
distribution centers and sales outlets. These agencies require us to comply with
various governmental regulations, including worker safety laws, community and
employee "right-to-know" laws and laws regarding clean air and water. In
addition, state and local fire and environmental regulations extensively control
the design and operation of our facilities, the sale of our products, and the
application of these products by our customers. Such regulations are complex and
subject to change. Regulatory or legislative changes may cause future increases
in our operating costs or otherwise negatively affect operations.
ITEM 2 - PROPERTIES
The following table sets forth certain information regarding the facilities
operated by us as of March 1, 2002.
Number No. of No. of
Of Sales Distribution
State Offices Outlets Centers
Alabama..................... 1
Arizona..................... 3
California.................. 1 28 1***
Colorado.................... 4
Connecticut................. 3
Delaware.................... 1
Florida..................... 1* 39 1***
Georgia..................... 3
Illinois.................... 5
Indiana..................... 1 3
Maryland.................... 4
Massachusetts............... 5
Michigan.................... 1* 12 1***
Minnesota................... 3
New Jersey.................. 8
North Carolina.............. 1 6 1**
Ohio........................ 2
Oklahoma.................... 1
Pennsylvania................ 3
South Carolina.............. 6
Texas....................... 12
Virginia.................... 3
Wisconsin................... 4
----------- --------------- --------------
Total Offices, Sales
Outlets and Distribution
Centers 5 159 4
--------------
* Locations where an office and distribution center are combined facilities;
Kentwood, MI and Ft. Lauderdale, FL.
** Location where a store and distribution center are combined facilities;
Greensboro, NC.
*** Denotes major distribution centers; Kentwood, MI, Ft. Lauderdale, FL and
Los Angeles, CA.
Our sales outlets range in size from 1,250 square feet to 14,800 square feet.
Some of the larger sales outlets are also used as "drop ship" points from which
we supply other sales outlets. Sales outlets consist of inventory storage areas,
mixing facilities, display and counter space and, in some instances, sales
office space. Sales outlets are strategically located in major markets to
maximize market penetration, transportation logistics and overall customer
service. Our distribution centers range in size from 5,000 square feet to 18,000
square feet. The distribution centers are equipped with efficient material
handling and storage equipment.
We own the distribution center and two sales outlets in Michigan, one sales
outlet in Indiana, and one in Florida. The remainder of the sales outlets and
the other distribution centers are leased with terms expiring from 2002 to 2008,
with options to renew. We typically assume the lease of the former owner in
acquisitions. In a number of instances, our sales outlets are leased from the
former owners of businesses acquired by us. We believe that all of our leases
are at fair market rates, that presently no single lease is material to our
operations, and that alternative sites are presently available at market rates.
We are leasing approximately 15,000 square feet of executive offices for our
national headquarters located in Indianapolis, Indiana.
ITEM 3 - LEGAL PROCEEDINGS
In January 1999, we were 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 we 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 us and use our products. The plaintiff
claimed damages in the amount of $3.8 million, trebled to $11.4 million. During
2000, the court granted summary judgment in our favor. The plaintiff has not
appealed the judgment against it, and the decision is now final.
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. Our 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information concerning the executive officers
of the Company who are not also directors:
Thomas E. Case (age 56) serves as the Senior Vice President of Sales for our
West Region. He had previously served as the Senior Vice President and general
manager of our Western Division from June 1998 to January 2001. Mr. Case joined
us upon completion of our acquisition of Thompson in November 1997. Formerly,
Mr. Case was a Vice President of Thompson and served as the general manager of
Thompson's California Division.
J. A. Lacy (age 37) serves as our Senior Vice President of Operations. He had
previously served as the Senior Vice President of Planning and Marketing from
January 1999 to January 2001. From January 1997 to December 1998, Mr. Lacy
served as President of Tucker Rocky Distributing Canada, Inc., a leading
after-market distributor of motorcycle components and accessories. Prior to
this, Mr. Lacy was Vice President of J. Walter Thompson, an advertising agency.
Robert R. Millard (age 44) joined us in October 1998 as the Senior Vice
President of Finance, Chief Financial Officer, Secretary and Treasurer. From
February 1996 until September 1998, Mr. Millard served as Vice President of
Finance, Chief Financial Officer, Secretary and Treasurer of Personnel
Management, Inc., a publicly held personnel staffing company based in
Indianapolis, Indiana. From July 1991 until January 1996, Mr. Millard served as
the Corporate Controller of Lacy Diversified Industries, Ltd., an affiliate of
LDI.
Charles VanSlaars (age 52) serves as the Senior Vice President of Marketing. He
had previously served as the Senior Vice President of Sales for our Eastern
Division, a position held from January 2001 until November 2001, and Senior Vice
President and General Manager of our Southeastern Division, a position he held
from June 1998 to January 2001. From June 1996 until May 1998, Mr. VanSlaars
served as an executive officer of LDI AutoPaints, Inc. From 1994 until 1996, Mr.
VanSlaars served as Vice President of Parts Depot Company, L.P., a Florida-based
distributor of auto paints.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock trades on The NASDAQ Stock Market (SmallCap Market) under the
symbol FMST. The number of beneficial owners of our common stock at December 31,
2001, was approximately 350.
The range of high and low closing prices reported by NASDAQ for the last twelve
quarters were:
Year Quarter Ended High Low
---------------------------------------------------------------
1999 March 31 7.000 5.625
1999 June 30 6.000 4.750
1999 September 30 7.375 5.688
1999 December 31 7.938 5.750
2000 March 31 8.000 6.750
2000 June 30 8.000 4.750
2000 September 30 7.000 5.250
2000 December 31 7.000 4.700
2001 March 31 7.250 4.875
2001 June 30 9.000 6.000
2001 September 30 8.680 5.760
2001 December 31 10.270 7.250
No cash dividends on common stock have been paid during any period and none are
expected to be paid in the foreseeable future. We anticipate that all earnings
and other cash resources will be retained by us for investment in our business.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 2001 and
2000 and for the years ended December 31, 2001, 2000, and 1999, are derived from
our audited consolidated financial statements that are included elsewhere
herein. The selected consolidated financial data as of December 31, 1999, 1998
and 1997 and for the years ended December 31, 1998 and 1997 are derived from our
audited consolidated financial statements, which are not included herein. The
financial data should be read in conjunction with our audited consolidated
financial statements and notes thereto, included elsewhere herein, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Year Ended
December 31,
----------------------------------------------------------------------
(In thousands, except per share data) 2001(1)(2) 2000(1)(2) 1999(1)(2) 1998(1)(2) 1997(1)
---------- ---------- ---------- ---------- -------
Per Share
Net income before extraordinary loss
Basic $ 0.88 $ 0.49 $ 0.49 $ 0.29 $ 0.11
Diluted $ 0.88 $ 0.49 $ 0.49 $ 0.29 $ 0.11
Extraordinary loss on early extinguishment of debt, net
Basic $ 0.07 $ - $ - $ - $ -
Diluted $ 0.07 $ - $ - $ - $ -
Net income
Basic $ 0.81 $ 0.49 $ 0.49 $ 0.29 $ 0.11
Diluted $ 0.81 $ 0.49 $ 0.49 $ 0.29 $ 0.11
Pro forma net income (loss) (3) $ - $ - $ - $ 0.33 $ (1.01)
Statements of Operations Data
Net sales $ 333,468 $ 337,213 $ 324,490 $ 309,946 $ 130,175
Gross margin $ 124,183 $ 122,995 $ 117,002 $ 109,678 $ 47,107
Income from operations $ 21,695 $ 19,572 $ 18,745 $ 15,895 $ 3,832
Net income before extraordinary loss $ 6,703 $ 3,727 $ 3,711 $ 1,988 $ 656
Extraordinary loss on early extinguishment of debt, net $ 495 $ - $ - $ - $ -
Net income $ 6,208 $ 3,727 $ 3,711 $ 1,988 $ 656
Pro forma net income (loss) (3) $ - $ - $ - $ 2,459 $ (7,585)
Weighted average shares
outstanding - Diluted 7,648 7,551 7,545 6,780 5,994
Pro forma weighted average
shares outstanding - Diluted - - - 7,536 7,536
December 31,
----------------------------------------------------------------------
2001(1)(2) 2000(1)(2) 1999(1)(2) 1998(1)(2) 1997(1)
---------- ---------- ---------- ---------- -------
Balance Sheet Data
Net working capital $ 33,087 $ 35,209 $ 48,147 $ 43,452 $ 42,928
Total assets $ 202,036 $ 218,317 $ 214,235 $ 226,475 $ 215,418
Long-term debt $ 77,868 $ 90,652 $ 111,603 $ 119,120 $ 134,135
Shareholders' equity $ 62,535 $ 56,806 $ 53,069 $ 49,348 $ 32,932
--------------------
(1) The operating results for the years ended December 31, 2001, 2000, 1999,
1998 and 1997 are affected by the acquisition of Thompson on November 21,
1997. The operating results of Thompson are included in our consolidated
operating results since the acquisition date.
(2) The operating results for the years ended December 31, 2001, 2000, 1999,
and 1998 are affected by the acquisition of AutoPaints on June 30, 1998.
The operating results of AutoPaints are included in our consolidated
operating results since the acquisition date.
(3) Pro forma amounts for the years ended December 31, 1998 and 1997 have been
prepared to give effect to the acquisitions of Thompson and AutoPaints as
if the transactions had occurred on January 1, 1997. These amounts are
unaudited and are presented for informational purposes only. No pro forma
amounts are presented for other acquisitions completed by the Company in
1999, 2000 or 2001, as the impact of such acquisitions are not material.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis about our financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and related notes presented in this annual report.
Overview
FinishMaster, Inc. is the leading independent distributor of automotive paints,
coatings and paint-related accessories primarily to the automotive collision
repair industry in the United States. As of March 1, 2002, we served our
customers through 159 sales outlets and three major distribution centers located
in 23 states, making us the only national independent distributor in the
industry. We have approximately 15,000 customer charge accounts that 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 typically are the primary source of supply to our customers and we
offer a broad range of services designed to enhance the operating efficiencies
and competitive positions of our customers and suppliers. Our operations are
currently organized into five geographical regions. We aggregate these five
regions into a single reportable segment.
We are the leading consolidator in the automotive refinish distribution
industry, having successfully completed as of March 1, 2002 approximately 39
acquisitions over the past ten years, ranging from "add-on" acquisitions to the
strategic acquisitions of Thompson, AutoPaints, and Badger Paint Plus, Inc. We
intend to continue our strategy of expanding through acquisitions.
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 includes 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. Goodwill associated with the acquisition is being
amortized over 15 years and all other intangible assets are amortized over 5
years. Operating results of Badger have been included in our consolidated
financial statements from the effective date of the acquisition.
Results of Operations
-------------------------------------------------------------------------------
(In thousands) 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Net sales $ 333,468 (1.1%) $ 337,213 3.9% $ 324,490
Continued weakness in demand for automotive paints and related accessories
impacted our net sales, which decreased $3.7 million or 1.1% from 2000 to 2001.
During 2001, "same store sales" decreased approximately 2.5% due to soft market
conditions throughout most of our distribution network. Factors leading to this
softening in demand included slower overall economic conditions; flat to
declining number of automobiles being repaired; continued productivity
improvements in the use of automotive paint by our customers; and changes in
vendor supported marketing programs used to attract and retain customers. These
industry dynamics are not expected to reverse in the near term.
Net sales acquired through acquisitions contributed approximately $6.5 million
or 1.9% of the net sales variance between years. Two acquisitions were completed
during 2001, Badger in May and Scotty's Paint Supply, Inc. in December.
Net sales increased $12.7 million or 3.9% from 1999 to 2000 due primarily to
acquisitions. During 2000, we completed six acquisitions. As a result of
competitive market conditions and flat industry demand, we experienced minimal
"same store sales" growth.
Approximately 70% of our net sales consisted of automotive paint products while
the remaining portion was paint-related accessories.
-------------------------------------------------------------------------------
(In thousands) 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Gross margin $ 124,183 1.0% $ 122,995 5.1% $ 117,002
Percentage of
net sales 37.2% 36.5% 36.1%
-------------------------------------------------------------------------------
Gross margin dollars in 2001 increased $1.2 million, or 1.0% over the prior year
period. Strong gross margin as a percentage of net sales more than offset the
negative impact of lower net sales volume. Gross margin as a percentage of net
sales increased 70 basis points to 37.2%, positively impacting margin by $2.5
million for the year. Lower net sales volume negatively impacted margin by $1.3
million. The improvement in margin as a percentage of net sales was primarily
the result of improved inventory management procedures, supplier purchasing
incentive programs, and large inventory purchases in late 2000 made prior to
manufacturers' price increases. Margin is affected by purchasing opportunities
presented to us by our vendors. We do not anticipate being able to maintain our
2001 margin levels in 2002 as a result of less favorable purchasing
opportunities from our vendors which reduced the level of inventory purchased by
us in late 2001 prior to manufacturers' price increases.
Gross margin in 2000 increased $6.0 million or 5.1% over 1999 due to higher
sales volume and improved margins. Higher net sales volume positively impacted
margin by $4.6 million. Gross margin as a percentage of net sales increased 40
basis points to 36.5%, positively impacting margins by $1.4 million. The
improvement in margin as a percentage of net sales was primarily the result of
supplier incentive programs and the optimization of early payment discounts.
-------------------------------------------------------------------------------
(In thousands) 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Operating expenses $ 52,485 0.6% $ 52,195 6.5% $ 49,029
Percentage of
net sales 15.7% 15.5% 15.1%
-------------------------------------------------------------------------------
Operating expenses consist of wages, facility, vehicle and related costs for our
store and distribution locations.
Operating expenses increased $0.3 million or 0.6% from 2000 to 2001. As a
percentage of net sales, operating expenses increased from 15.5% in 2000 to
15.7% in 2001. Excluding the operating expenses associated with acquired
operations in 2001, operating expenses decreased $0.5 million between years due
primarily to reduced labor costs.
Operating expenses as a percentage of net sales increased from 15.1% in 1999 to
15.5% in 2000 due primarily to higher vehicle fuel costs and increased
depreciation expense associated with the new point-of-sale computer system
implemented during 2000.
-------------------------------------------------------------------------------
(In thousands) 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Selling, general and
administrative
expenses $ 44,111 (1.8%) $ 44,928 5.9% $ 42,436
Percentage of net
sales 13.2% 13.3% 13.1%
-------------------------------------------------------------------------------
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 decreased $0.8 million or 1.8% from 2000 to 2001. As a percentage
of net sales, SG&A expenses decreased from 13.3% in 2000 to 13.2% in 2001.
Excluding the expenses associated with the acquired operations in 2001, SG&A
expenses decreased $1.4 million due primarily to lower communication costs,
supply expense, bad debt expense and professional fees associated with the
implementation of our new computer systems in 2000. Partially offsetting these
decreases was higher costs associated with wages and benefits.
SG&A expenses as a percentage of net sales increased from 13.1% to 13.3% from
1999 to 2000 as a result of increased wages and benefit costs, higher bad debt
expenses and increased costs associated with attracting and retaining customers.
-------------------------------------------------------------------------------
(In thousands) 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Amortization of
intangible
assets $ 5,892 (6.5%) $ 6,300 (7.2%) $ 6,792
Percentage of
net sales 1.8% 1.9% 2.1%
-------------------------------------------------------------------------------
The decrease in amortization expense among 1999, 2000 and 2001, was a result of
certain intangible assets, principally non-compete agreements, becoming fully
amortized in those years.
-------------------------------------------------------------------------------
(In thousands) 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Interest expense,
net $ 8,547 (26.3%) $ 11,604 7.4% $ 10,802
Percentage of
net sales 2.6% 3.4% 3.3%
-------------------------------------------------------------------------------
Interest expense in 2001 decreased $3.1 million or 26.3% compared to the prior
year. Lower average outstanding borrowings in 2001 of approximately $23.3
million were the primary contributor to this favorable decrease in interest
expense. Lower effective interest rates of approximately 25 basis points also
contributed to the decrease.
Interest expense in 2000 increased $0.8 million or 7.4 % compared to the prior
year due to higher effective interest rates of approximately 110 basis points,
partially offset by lower average outstanding borrowings. Average outstanding
borrowings decreased $13.7 million during 2000.
-------------------------------------------------------------------------------
(In thousands) 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Income tax expense $ 6,445 52.0% $ 4,241 0.2% $ 4,232
Percentage of
net sales 1.9% 1.3% 1.3%
Effective tax rate 49.0% 53.2% 53.3%
-------------------------------------------------------------------------------
Higher income before income taxes was responsible for the increased income tax
expense among 1999, 2000, and 2001. The effective tax rate varied from the
federal statutory rate as a result of certain expenses, principally
nondeductible intangible amortization. The decrease in the effective tax rate
between 2000 and 2001 was due to these nondeductible expenses remaining stable
in relation to the higher income before income taxes.
-------------------------------------------------------------------------------
(In thousands) 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Extraordinary loss
on early
extinguishment of
debt, net of tax $ 495 - $ - - $ -
Percentage of net
sales 0.1%
--------------------------------------------------------------------------------
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 in March 2001.
-------------------------------------------------------------------------------
(In thousands, 2001 Change 2000 Change 1999
except per
share data)
-------------------------------------------------------------------------------
Net income $ 6,208 66.6% $ 3,727 0.4% $ 3,711
Percentage of
net sales 1.9% 1.1% 1.1%
Net income
per share $ 0.81 65.3% $ 0.49 0.0% $ 0.49
--------------------------------------------------------------------------------
Factors contributing to the changes in net income and the related per share
amounts are discussed in the detail above.
Inflation and Other Economic Factors
Inflation affects our cost of materials sold, salaries and other related costs
of distribution. To the extent permitted by competition, we offset these higher
costs of materials through selective price increases.
Our business may be negatively affected by cyclical economic downturns in the
markets in which we operate. Our financial performance is also dependent on our
ability to acquire businesses and profitably integrate them into our operations.
Quantitative and Qualitative Disclosure about Market Risk
A review of our financial instruments and risk exposures indicates we have
exposure to interest rate risk. To reduce this exposure, we entered into
interest rate swap agreements in March 2001 with notional amounts of $40.0
million. These agreements intend to convert our senior term credit facility from
a floating to a fixed interest rate obligation. 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. Based
upon the Company's outstanding debt at December 31, 2001 and the term for which
current interest rates are fixed, a 10% increase in interest rates would
increase interest expense for 2002 by an estimated $0.1 million.
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. As a result, our financial performance is
generally lower during the December and March quarters compared to the June and
September quarters. In addition, the timing of acquisitions may cause
substantial fluctuations of 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 and operating results.
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) 2001 2000 1999
-----------------------------------------------------------------------------------------------
Net working capital $ 33,087 $ 35,209 $ 48,147
Long-term debt $ 77,868 $ 90,652 $ 111,603
Cash provided by operating activities $ 27,865 $ 29,646 $ 8,781
Cash used in investing activities $ (5,853) $ (5,059) $ (2,371)
Cash used in financing activities $ (20,548) $ (23,693) $ (6,800)
-----------------------------------------------------------------------------------------------
Our primary sources of funds over the past three years were from operating
activities and borrowings under our credit facilities. Our principal uses of
cash were to fund capital expenditures, acquisitions, and the repayment of
outstanding borrowings.
Net cash generated from operating activities was $27.9 million in 2001, compared
with $29.6 million in 2000. This decrease was the result of a negative change in
operating assets and liabilities, primarily accounts payable and other
liabilities. This change in accounts payable and other liabilities resulted from
differences in payment terms between years on large "year end" inventory
purchases. Partially offsetting this use of cash for accounts payable and other
liabilities was lower investments in inventory and prepaid and other assets. The
year-end inventory balance decreased as a result of lower inventory purchases in
late 2001 made prior to manufacturers' price increases compared to the prior
year period.
Net cash used in investing activities was $5.9 million in 2001, compared with
$5.1 million in 2000 due to increased spending for acquisition activity. During
2001, we completed two acquisitions that utilized $5.0 million of cash compared
to six acquisitions and $1.9 million of cash in the prior year. Partially
offsetting this increase was lower capital spending in 2001. With the
implementation of a new "point-of-sale" computer system and a consolidated
general ledger system in 2000, our capital spending requirements were less in
the current year period. We estimate that capital expenditures for 2002,
principally for information technology equipment, will approximate $1.5 million.
Net cash used in financing activities was $20.5 million in 2001, compared with
$23.7 million in 2000. Lower debt repayments of $4.3 million, partially offset
by higher debt issuance costs of $1.1 million were the primary factors
contributing to the decrease in net cash used in financing activities. The
decrease in debt repayments was a result of lower net cash provided by operating
activities and increased spending on acquisitions. The use of cash for debt
issuance costs was related to the refinancing of our credit facilities in March
2001.
Total capitalization at December 31, 2001, was $148.0 million, comprised of
$85.5 million of debt and $62.5 million of equity. Debt as a percentage of total
capitalization was 57.8% compared to 64.1% in the prior year. This improvement
was attributable to the increase in equity resulting from current year net
income, along with the decrease in debt resulting from repayments.
At December 31, 2001, we had term credit and revolving credit facilities
totaling $58.9 million and senior subordinated debt of $19.9 million. We were in
compliance with the covenants underlying these credit facilities, and had
availability under our revolving credit facility of $25.0 million as of
year-end.
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.
Other Matters
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, ("FAS 141"), "Business Combinations" and
Statement of Financial Accounting Standard No. 142, ("FAS 142"), "Goodwill and
Other Intangible Assets". Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, we are required to adopt FAS 142 effective January 1, 2002. We are
currently evaluating the effect that adoption of the provisions of FAS 142 that
are effective January 1, 2002 will have on our results of operations and
financial position.
In August 2001,the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 143, ("FAS 143"), "Accounting for Asset
Retirement Obligations". FAS 143 addresses the financial accounting and
reporting obligations associated with the retirement of tangible assets and the
associated asset retirement costs. It requires companies to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred, which is adjusted to its present value each period. In addition,
companies must capitalize a corresponding amount by increasing the carrying
amount of the related long-lived asset, which is depreciated over the useful
life of the related asset. We will adopt FAS 143 on January 1, 2002, and we do
not expect that this Standard will have a material effect on our consolidated
financial statements or results of operations.
In October 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("FAS 144"). FAS 144 modifies and expands the
financial accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill, which is specifically addressed by FAS 142. FAS 144
maintains the requirement that an impairment loss be recognized for a long-lived
asset to be held and used if its carrying value is not recoverable from its
undiscounted cash flows, with the recognized impairment being the difference
between the carrying amount and fair value of the asset. With respect to
long-lived assets to be disposed of other than by sale, FAS 144 requires that
the asset be considered held and used until it is actually disposed of, but
requires that its depreciable life be revised in accordance with APB Opinion No.
20. FAS 144 will be effective for us in the first quarter of 2002, and it is not
expected to have a material effect on our consolidated financial statements or
results of operations.
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 in general, 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 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
Report of Independent Accountants 18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Cash Flows 21
Consolidated Statements of Shareholders' Equity 22
Notes to Consolidated Financial Statements 23
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 37
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
Report of Independent Accountants
To the Board of Directors and
Shareholders of FinishMaster, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
FinishMaster, Inc. and its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 19, 2002
CONSOLIDATED
BALANCE SHEETS
FinishMaster, Inc.
December 31, December 31,
(In thousands, except share amounts) 2001 2000
ASSETS
Current assets
Cash $ 2,977 $ 1,513
Accounts receivable, net of allowance for doubtful
accounts of $1,434 and $1,337, respectively 28,401 29,063
Inventory 50,096 63,346
Refundable income taxes 543 710
Deferred income taxes 3,947 3,459
Prepaid expenses and other current assets 3,627 4,349
-----------------------------------------
Total current assets 89,591 102,440
Property and equipment
Land 368 368
Vehicles 1,205 1,432
Buildings and improvements 6,291 5,903
Machinery, equipment and fixtures 12,682 11,922
-----------------------------------------
20,546 19,625
Accumulated depreciation (12,715) (10,649)
-----------------------------------------
7,831 8,976
Other assets
Intangible assets, net 102,273 102,858
Deferred income taxes 1,770 1,870
Other 571 2,173
-----------------------------------------
104,614 106,901
-----------------------------------------
$ 202,036 $ 218,317
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 37,383 $ 46,470
Amounts due to LDI 812 506
Accrued compensation and benefits 8,578 6,033
Other accrued expenses and current liabilities 2,124 3,232
Current maturities of long-term debt 7,607 10,990
-----------------------------------------
Total current liabilities 56,504 67,231
Long-term debt, less current maturities 77,868 90,652
Other long-term liabilities 5,129 3,628
Commitments and contingencies (Note 8)
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $1 stated value; 25,000,000 shares authorized;
7,638,863 and 7,540,804 shares issued and outstanding 7,638 7,540
Additional paid-in capital 27,936 27,367
Accumulated comprehensive loss (1,146) -
Retained earnings 28,107 21,899
-----------------------------------------
62,535 56,806
-----------------------------------------
$ 202,036 $ 218,317
=========================================
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS
OF OPERATIONS
FinishMaster, Inc.
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
(In thousands, except per share data) 2001 2000 1999
Net sales $ 333,468 $ 337,213 $ 324,490
Cost of sales 209,285 214,218 207,488
--------------------------------------------------------------
Gross margin 124,183 122,995 117,002
Expenses
Operating 52,485 52,195 49,029
Selling, general and administrative 44,111 44,928 42,436
Amortization of intangible assets 5,892 6,300 6,792
--------------------------------------------------------------
102,488 103,423 98,257
--------------------------------------------------------------
Income from operations 21,695 19,572 18,745
Interest expense, net 8,547 11,604 10,802
--------------------------------------------------------------
Income before income taxes 13,148 7,968 7,943
Income tax expense 6,445 4,241 4,232
--------------------------------------------------------------
Net income before extraordinary loss $ 6,703 $ 3,727 $ 3,711
Extraordinary loss on early extinguishment of debt, net of tax
benefit of $324 495 - -
==============================================================
Net income $ 6,208 $ 3,727 $ 3,711
==============================================================
Net income per share - Basic and Diluted
Net income before extraordinary loss $ 0.88 $ 0.49 $ 0.49
Extraordinary loss, net of income taxes $ 0.07 $ - $ -
------------------- ------------------- -----------------
Net income per share (Note 10):
Basic $ 0.81 $ 0.49 $ 0.49
==============================================================
Diluted $ 0.81 $ 0.49 $ 0.49
==============================================================
Weighted average shares outstanding - Basic 7,638 7,540 7,536
==============================================================
Weighted average shares outstanding - Diluted 7,648 7,551 7,545
==============================================================
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
FinishMaster, Inc.
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
(In thousands) 2001 2000 1999
Operating activities
Net income $ 6,208 $ 3,727 $ 3,711
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,418 11,144 11,019
Deferred income taxes (388) 222 1,125
Loss on extinguishment of debt 495 - -
Other (97) - -
Gain on disposal of property and equipment (18) - -
Changes in operating assets and liabilities
(excluding the impact of acquisitions):
Accounts receivable, net 2,182 1,854 785
Inventories 15,976 (4,530) 1,639
Prepaid and other assets 552 (4,091) 440
Accounts payable and other liabilities (7,463) 21,320 (9,938)
--------------------------------------------------------------
Net cash provided by operating activities 27,865 29,646 8,781
Investing activities
Business acquisitions and payments under
earn-out provisions for prior acquisitions (5,001) (1,853) (1,280)
Purchases of property and equipment (703) (3,110) (973)
Proceeds from disposal of property and equipment 39 10 20
Other (188) (106) (138)
--------------------------------------------------------------
Net cash used in investing activities (5,853) (5,059) (2,371)
Financing activities
Proceeds from the exercise of stock options 7 - -
Debt issuance costs (1,284) (166) (155)
Proceeds from debt 167,448 95,357 98,280
Repayment of debt (186,719) (118,884) (104,925)
--------------------------------------------------------------
Net cash used in financing activities (20,548) (23,693) (6,800)
--------------------------------------------------------------
Increase(decrease) in cash 1,464 894 (390)
Cash at beginning of period 1,513 619 1,009
--------------------------------------------------------------
Cash at end of period $ 2,977 $ 1,513 $ 619
==============================================================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 9,464 $ 10,687 $ 10,998
==============================================================
Taxes $ 6,009 $ 4,230 $ 2,158
==============================================================
The accompanying notes are an integral part of the consolidated financial
statements.
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
=======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FinishMaster, Inc.
1. SIGNIFICANT ACCOUNTING POLICIES
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 February 15,
2002, the Company operated 159 sales outlets and three major distribution
centers in 23 states and is organized into five major geographical regions -
North East, Florida/Texas, Mid-Atlantic, Central, and Western. The Company
aggregates its five geographic regions into a single reportable segment. The
Company has approximately 15,000 customer charge accounts to which it provides a
comprehensive selection of brand name products supplied by BASF, DuPont, 3M and
PPG, in addition to its own FinishMaster PrivateBrand refinishing accessory
products. The Company is highly dependent on the key suppliers outlined above,
which account for approximately 85% of the Company's purchases.
Principles of Consolidation: The Company's consolidated financial statements
include the accounts of FinishMaster and its wholly owned subsidiaries from the
dates of their respective acquisition. All significant intercompany accounts and
transactions have been eliminated. References to the Company or FinishMaster
throughout this report relate to the consolidated entity.
Majority Shareholder: Lacy Distribution, Inc. ("Distribution"), an Indiana
corporation, which is an indirect wholly-owned subsidiary of LDI, Ltd., ("LDI"),
an Indiana limited partnership, owns 5,587,516 shares of the Company's common
stock, representing 73.1% of the outstanding shares at December 31, 2001, and
74.1% of the outstanding shares at December 31, 2000, and 1999. Throughout the
remainder of these financial statements, LDI and Distribution are collectively
referred to as "LDI."
Transactions with Majority Shareholder: The Company reimburses its majority
shareholder, LDI, for the cost of insurance and certain other expenses. Those
expenses amounted to $782,000, $183,000, and $158,000 for the years ended
December 31, 2001, 2000, and 1999, respectively. In addition, the Company leases
from LDI its corporate office space. Lease expense and payments for repairs and
maintenance to LDI totaled approximately $206,000, $202,000, and $214,000 for
the years ended December 31, 2001, 2000 and 1999, respectively. The Company also
has subordinated debt payable to LDI (see Note 4, Long-Term Debt).
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.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. At
December 31, 2001, and 2000, checks drawn on future deposits and borrowings of
$3,863,000 and $10,622,000, respectively, were classified as accounts payable.
These amounts represent outstanding checks in excess of funds on deposit.
Receivables: Trade accounts receivable represents amounts due primarily from
automotive collision repair shops and dealerships. Trade receivables are
typically not collateralized. No single customer exceeds 10% of the Company's
receivables at December 31, 2001.
Inventories: Inventories are stated at the lower of first-in, first-out cost or
market and consist primarily of purchased paint and refinishing supplies.
Substantially, all inventories consist of finished goods.
Properties and Depreciation: Property and equipment is stated at cost and
includes expenditures for new facilities, equipment and improvements that
materially extend the useful lives of existing assets.
Expenditures for normal repairs and maintenance are charged to expense as
incurred. Depreciation is computed using a combination of straight-line and
accelerated methods over the following range of estimated useful lives:
Buildings & improvements........................................Up to 30 years
Vehicles........................................................ Up to 5 years
Leasehold improvements.......................................... Life of lease
Machinery, equipment & fixtures................................. 3 to 12 years
Depreciation expense for 2001, 2000 and 1999 was $2,287,000, $2,215,000 and
$2,427,000, respectively.
Revenue Recognition: Revenues from product sales are recognized at the time of
shipment or delivery to the customer. The company has reviewed the accounting
and disclosure requirements of Staff Accounting Bulletin (SAB) No. 101 "Revenue
Recognition in Financial Statements" and has determined that it is in
compliance.
Income Taxes: Deferred income taxes are recognized for the temporary differences
between the tax basis of assets and liabilities and their financial reporting
amounts in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." The income tax
provision is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Intangibles: Intangibles consist primarily of the excess of cost over the fair
market value of net assets of acquired businesses ("goodwill"). Intangible
assets, including goodwill and non-compete agreements, are amortized on a
straight-line basis over periods ranging from 5 to 30 years. The majority of the
Company's goodwill relates to its November 1997 acquisition of Thompson and is
being amortized over 30 years. The carrying value of goodwill is periodically
reviewed to determine if an impairment has occurred. The Company measures for
potential impairment of recorded goodwill based on the estimated undiscounted
cash flows of acquired entities over the remaining amortization period. If the
estimated future undiscounted cash flows are less than the carrying amount of
such goodwill, an impairment would be deemed to have occurred and a loss would
be recognized. Such loss would be determined based upon expected discounted cash
flows or market prices. Debt issuance costs are amortized over the term of the
related debt agreements.
Internal Use Software: Costs incurred to develop or obtain software for internal
use within the business are capitalized in accordance with the provisions of
Accounting Standards Executive Committee Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use."
During 2001 and 2000, the Company capitalized approximately $0 and $2,223,000,
respectively, of costs related to efforts to migrate to a single information
technology platform. Once placed in service, software costs incurred are
depreciated over their estimated useful life that range from 3 to 5 years.
Derivative Instruments and Hedging Activities: The Company utilizes derivative
financial instruments, principally interest rate swaps, to reduce its exposure
to fluctuations in interest rates. These instruments are recorded on the balance
sheet at their fair value. Changes in the fair value are recorded each period in
the Accumulated Comprehensive Loss section of Shareholders' Equity.
Shipping and Handling Fees and Costs: The Company includes the cost of
delivering the product to the customer in the operating expense section of the
consolidated statements of operations. The total delivery costs incurred for
2001, 2000, and 1999 are estimated at $16,974,000, $17,564,000, and $17,035,000,
respectively.
Reclassification: Certain amounts in the consolidated financial statements have
been reclassified to conform to the current year presentation.
2. ACQUISITIONS
The following table summarizes the assets acquired and liabilities assumed in
acquisitions made by FinishMaster in each of the periods presented. All
acquisitions have been accounted for as purchases and accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values at the
dates of acquisition. Intangible assets related to goodwill and covenants not to
compete were recorded with each acquisition, if appropriate. Operating results
of acquired entities have been included in FinishMaster's consolidated financial
statements from the respective date of purchase.
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
(In thousands) 2001 2000 1999
Accounts receivable $ 1,520 $ 782 $ 708
Inventory 2,670 1,985 725
Equipment and other 506 370 202
Intangible assets 5,076 1,278 650
----------------------------------------------------------
9,772 4,415 2,285
Less liabilities assumed 1,075 513 714
----------------------------------------------------------
Acquisition price 8,697 3,902 1,571
Acquisition debt 3,046 2,049 291
Stock grants 650 - -
----------------------------------------------------------
Net assets of businesses acquired, net of acquisition debt $ 5,001 $ 1,853 $ 1,280
==========================================================
Number of acquisitions 2 6 6
----------------------------------------------------------
During 2001, the Company completed two acquisitions: Badger and Scotty's Paint
Supply, Inc. The acquisitions involved operations in Minnesota, Illinois,
Wisconsin, and Florida, and were funded with cash, debt and common stock.
During 2000, the Company completed six acquisitions. The acquisitions occurred
in California, South Carolina, Washington DC, Ohio and Texas, and were funded
with cash and debt.
During 1999, the Company completed six acquisitions. The acquisitions occurred
in Illinois, New Jersey and Texas, and were funded with cash and debt.
3. INTANGIBLE ASSETS
Intangible assets consisted of the following:
December 31, December 31,
(In thousands) 2001 2000
Goodwill $ 125,121 $ 121,018
Non-compete agreements 12,426 12,262
Other intangible 573 -
Debt issuance costs 1,329 2,179
--------------------------------------
139,449 135,459
Less accumulated amortization 37,176 32,601
--------------------------------------
Intangible assets, net $ 102,273 $ 102,858
======================================
4. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31, December 31,
(In thousands) 2001 2000
Revolving Credit Facility $ 21,590 $ 35,100
Acquisition Revolving Credit Facility - 1,797
Term Credit Facility 37,000 28,495
Senior Subordinated Debt 19,850 30,000
Notes payable to former owners of acquired businesses
with interest at various rates up to 10%, due at
various dates through 2007 5,578 4,624
Other long-term financing at various rates, due at
various dates through 2010 1,457 1,626
----------------------------------------
85,475 101,642
Less current maturities 7,607 10,990
----------------------------------------
$ 77,868 $ 90,652
========================================
Revolving Credit Facility: On March 29, 2001, the Company entered into a new
$100.0 million senior secured credit facility with a syndicate of banks. The new
senior secured credit facility consists of $40.0 million term credit facility
and a $60.0 million revolving credit facility. The revolving credit facility is
limited to the lesser of (1) $60 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. Interest rates and payment
dates are variable based upon interest rate and term options selected by
management. Interest rates at December 31, 2001 on outstanding revolving credit
borrowings varied from 4.17% to 5.00%. Revolving credit borrowings are subject
to interest rates, which fluctuate based on the Company's Leverage Ratio, as
defined in the Credit Facility, which in 2001 was 2.25% over LIBOR or 0.25% over
prime in the case of Floating Rate Advances. For a period of six months after
the close of the transaction, the interest rate was fixed at LIBOR plus 3.00%.
The Company is charged an annual administrative fee of $35,000, and an annual
commitment fee, payable monthly, that ranges between 0.375% and 0.5% of the
unused portion of the revolving line of credit. At December 31, 2001, the
Company had $25.0 million of available borrowings under its revolving credit
facility.
Term Credit Facility: The term loan, which expires on June 30, 2006, requires
quarterly principal payments that began on June 30, 2001. Quarterly principal
payments in 2001 were $1.0 million and increase in amount each year over the
remaining term of the loan. Interest rates and payment dates are variable based
upon interest rate and term options selected by management. Interest rates at
December 31, 2001 were at 4.84% on outstanding term borrowings. Term borrowings
are subject to interest rates, which fluctuate based on the Company's Leverage
Ratio, as defined in the Credit Facility, of 2.25% over LIBOR. To convert the
Company's new senior term credit facility from a floating to a fixed interest
rate obligation, the Company entered into interest rate swap agreements in March
2001 with notional amounts of $40.0 million. The notional amounts under the swap
agreements are reduced according to the senior term credit facility's
amortization schedule. 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 decrease in the fair value of the
interest rate swap from the date of inception was $1.1 million, which was
recorded in the Accumulated Comprehensive Loss section of the Shareholders'
Equity.
Combined Facilities: Substantially all of the Company's assets serve as
collateral for the revolving credit facility and term credit facility. These
credit agreements contain various quarterly and annual covenants pertaining to,
among other things, achieving a minimum fixed charge coverage ratio, a maximum
leverage ratio, a maximum senior debt leverage ratio, a minimum interest expense
coverage ratio and a minimum consolidated net worth level. The covenants also
limit purchases and sales of assets and restrict payment of dividends. If any
default as described in the credit facilities occurs with respect to the
Company, the obligations of the lenders to make additional loans automatically
terminates and the outstanding obligations become immediately due and payable.
As of December 31, 2001 and 2000, the Company was in compliance with its
covenants.
Senior Subordinated Debt: Concurrent with funding the senior secured credit
facility, the Company repaid its $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 paid quarterly at a rate of 12.0% per annum.
Early Extinquishment of Debt: 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
in March 2001.
Prior Credit Facilities: Prior to March 29, 2001, the Company had a revolving
credit facility with a syndicate of banks, limited to the lesser of (1) $60
million less letter of credit obligations, or (2) 80 percent of eligible
accounts receivable plus 65 percent of eligible inventory plus $7.5 million less
letter of credit obligations and a reserve for three months facility rent.
Interest rates and payment dates were variable based upon interest rate and term
options selected by management. Interest rates at December 31, 2000 on
outstanding revolving credit borrowings varied from 8.91% to 10.25%. Revolving
credit borrowings were subject to interest rates, which fluctuated based on the
Company's Leverage Ratio, as defined in the Credit Facility, which in 2000 was
2.25% over LIBOR or 0.75% over prime in the case of Floating Rate Advances.
Effective January 1, 2001, the interest rates were 2.00% over LIBOR or 0.50%
over prime based upon the Company's Leverage Ratio as of September 30, 2000. The
Company was charged an annual administrative fee of $50,000, and an annual
commitment fee, payable monthly, that ranged between 0.2% and 0.5% of the unused
portion of the revolving line of credit. At December 31, 2000, the Company had
$24.9 million of available borrowings under its revolving credit facility.
The Company also had a revolving credit facility with a syndicate of banks to
finance future business acquisitions. Interest rates and payments were based
upon one of two options selected by management: LIBOR plus 3.0% or an
alternative base rate that was prime plus 1%. The Company was charged a
commitment fee of 0.5% on the average daily unused portion of the facility, due
quarterly. This facility was cancelled on March 29, 2001.
The Company also had a term credit facility that required quarterly principal
payments beginning on March 31, 1999. Quarterly principal payments in 2000 were
$1.5 million. Interest rates and payment dates were variable based upon interest
rate and term options selected by management. Interest rates at December 31,
2000 were at 8.98% on outstanding term borrowings. Term borrowings were subject
to interest rates, which fluctuated based on the Company's Leverage Ratio, as
defined in the Credit Facility, of 2.25% over LIBOR. Effective January 1, 2001,
the interest rate was 2.00% over LIBOR based upon the Company's Leverage Ratio
as of September 30, 2000. This facility was refinanced on March 29, 2001.
The aggregate principal payments for the next five years subsequent to December
31, 2001 are as follows:
(In thousands)
2002 7,607
2003 7,449
2004 9,312
2005 10,966
2006 29,102
Thereafter 21,039
---------------
$ 85,475
===============
The carrying amounts of certain financial instruments such as cash, accounts
receivable, accounts payable, and long-term debt approximate their fair values.
The fair value of long-term debt is estimated using discounted cash flows and
the Company's current incremental borrowing rates for similar types of
arrangements.
5. EMPLOYEE SAVINGS PLAN
The Company has an Employee Savings Plan ("Plan"), which covers substantially
all employees who have met certain requirements as to date of service. The
Company currently contributes on a graduated scale up to 25% of each $1.00
contributed by employees up to 6% of their annual compensation. Effective
January 1, 2002, the Company doubled the graduated scale up to 50% of each $1.00
contributed by employees up to 6% of their annual compensation. Company
contributions charged to operations under the Plan were approximately $316,000,
$279,000, and $213,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. In addition, the Company may contribute to the Plan, at the
discretion of the Board of Directors, an additional amount up to 4% of
employees' annual compensation. In 2001, a discretionary contribution of 2% of
employees' annual compensation was awarded in the amount of $895,000; no
discretionary contribution was made in 2000.
6. STOCK OPTIONS
The Company has a stock option plan that was amended on April 29, 1999, under
which officers, key employees, and directors may be granted options to purchase
stock. The amendments included increasing the number of shares of common stock
reserved for issuance under the plan from 600,000 to 750,000 and changing the
method for determining the exercise price of the options on the date of grant.
All options granted under this plan have been granted at a price not less than
the fair market value of the Company's common stock on the date of grant and
have a maximum life of ten years from the date of the grant. Certain stock
options granted in 2001, 2000, and 1999 were also fully vested at the date of
issue, while others vest over periods ranging from one to four years.
The Company recognizes compensation expense related to its stock option plan in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Options are granted at a price not less than the fair market value of the
Company's common stock on the date of grant, therefore, no compensation expense
is recognized. Had compensation expense been determined at the date of grant
based on the fair value of the awards consistent with SFAS No. 123, "Accounting
for Stock Based Compensation," the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated in the following
table:
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
(In thousands, except per share data) 2001 2000 1999
Net income before extraordinary loss
As reported $ 6,703 $ 3,727 $ 3,711
Pro forma $ 6,538 $ 3,135 $ 3,201
Extraordinary loss on early extinguishment of debt, net
As reported $ 495 $ - $ -
Pro forma $ 495 $ - $ -
Net income
As reported $ 6,208 $ 3,727 $ 3,711
Pro forma $ 6,043 $ 3,135 $ 3,201
Net income per share before extraordinary loss
As reported, Basic $ 0.88 $ 0.49 $ 0.49
As reported, Diluted $ 0.88 $ 0.49 $ 0.49
Pro forma, Basic $ 0.86 $ 0.42 $ 0.42
Pro forma, Diluted $ 0.86 $ 0.42 $ 0.42
Extraordinary loss on early extinguishment of debt, net
As reported $ 0.07 $ - $ -
Pro forma $ 0.07 $ - $ -
Net income per share
As reported, Basic $ 0.81 $ 0.49 $ 0.49
As reported, Diluted $ 0.81 $ 0.49 $ 0.49
Pro forma, Basic $ 0.79 $ 0.42 $ 0.42
Pro forma, Diluted $ 0.79 $ 0.42 $ 0.42
The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions for
the years ended December 31, 2001, 2000, and 1999 respectively: risk free
interest rate of 5.0%, 6.4%, and 5.6%; no dividend yield; expected option lives
of nine years; and stock price volatility of 42.9%, 48.5%, and 50.4%.
December 31, December 31, December 31,
2001 2000 1999
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding-beginning of year 612,334 $ 8.13 524,034 $ 8.35 426,490 $ 8.89
Granted 15,936 $ 7.74 92,200 $ 7.28 100,024 $ 6.03
Exercised 1,000 $ 6.59 - $ - - $ -
Forfeited 34,090 $ 7.87 3,900 $ 8.50 2,480 $ 8.96
--------------------------------------------------------------------------------------
Outstanding-end of year 593,180 $ 8.14 612,334 $ 8.13 524,034 $ 8.35
======================================================================================
Exercisable-end of year 578,780 $ 8.06 563,534 $ 8.06 363,034 $ 8.61
======================================================================================
Exercise Price Range
--------------------------------------------------------------
$5.34-$8.25 $10.25-$11.55 Total
------------------- ------------------- --------------------
Options outstanding 396,060 197,120 593,180
Weighted average exercise price $ 6.80 $ 10.83 $ 8.14
Average remaining contractual life 7.5 years 4.5 years 6.6 years
Options exercisable 396,060 182,720 578,780
Weighted average exercise price $ 6.80 $ 10.81 $ 8.06
The weighted-average fair value of options granted during the years ended
December 31, 2001, 2000, and 1999 were $4.66, $4.75, and $3.84, per option,
respectively, where the exercise price of the options equaled the market price
on the date of grant. Certain options were granted during 2000 and 1999 where
the exercise price of the options exceeded the market value of the stock on the
date of grant. The weighted-average fair value of these options was $4.61 and
$3.67 per option at December 31, 2000 and 1999, respectively. The remaining
contractual life of options outstanding at December 31, 2001 is 6.6 years.
7. INCOME TAXES
The provision for federal and state income taxes consisted of the following:
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
(In thousands) 2001 2000 1999
Current:
Federal $ 5,562 $ 3,202 $ 2,383
State 1,272 817 724
----------------------------------------------------------
6,834 4,019 3,107
----------------------------------------------------------
Deferred:
Federal (334) 193 952
State (55) 29 173
----------------------------------------------------------
(389) 222 1,125
----------------------------------------------------------
$ 6,445 $ 4,241 $ 4,232
==========================================================
The total provision for federal and state income taxes consisted of the
following:
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
(In thousands) 2001 2000 1999
Provision / (Benefit) from continuing operations $ 6,445 $ 4,241 $ 4,232
Provision / (Benefit) from extraordinary charge (324) - -
------------------------------------------------------------
$ 6,121 $ 4,241 $ 4,232
------------------------------------------------------------
The reconciliation of income taxes computed at the federal statutory tax rate to
the Company's effective tax rate is as follows:
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
2001 2000 1999
Federal statutory tax rate 34.0% 34.0% 34.0%
State tax provision 7.0% 7.0% 7.5%
Nondeductible intangible amortization 6.3% 8.4% 8.4%
Other 1.7% 3.8% 3.4%
-------------------------------------------------------------
Effective tax rate 49.0% 53.2% 53.3%
=============================================================
Significant components of the Company's deferred tax assets as of December 31,
2001, and 2000 are as follows:
December 31, December 31,
(In thousands) 2001 2000
Deferred tax assets:
Depreciation $ 1,038 $ 553
Amortization of intangibles 634 1,167
Allowances 1,264 856
Inventory 1,398 1,065
Accrued expenses and other 1,383 1,688
--------------------------------------
$ 5,717 $ 5,329
======================================
8. COMMITMENTS AND CONTINGENCIES
FinishMaster occupies facilities and uses equipment and vehicles under operating
lease agreements requiring annual rental payments approximating the following
amounts for the five years subsequent to December 31, 2001:
(In thousands)
2002 $ 7,928
2003 6,621
2004 4,577
2005 2,928
2006 1,295
Thereafter 670
---------------
$ 24,019
===============
Rent expense charged to operations, including short-term leases, totaled
approximately $8.5 million, $8.4 million, and $8.5 million for the years ended
December 31, 2001, 2000, and 1999, respectively.
The Company is dependent on four main suppliers for the purchases of the paint
and related supplies that it distributes. A loss of one of the suppliers or a
disruption in the supply of the products provided could have a material adverse
effect on the Company's operating results. The suppliers also provide purchase
discounts, prompt payment discounts, extended payment terms, and other incentive
programs to the Company. To the extent these programs are changed or terminated,
there could be a material adverse impact to the Company.
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 we 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 us and use our products. The
plaintiff claimed damages in the amount of $3.8 million, trebled to $11.4
million. During 2000, the court granted summary judgment in our favor. The
plaintiff has not appealed the judgment against it, and the decision is now
final.
The Company is subject to various claims and contingencies arising out of the
normal course of business, including those relating to commercial transactions,
environmental, product liability, automobile, taxes, discrimination, employment
and other matters. Our 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.
9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the quarterly results of operations for each period
presented.
Three Months ended
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except per share data) 2001 2001 2001 2001
---------------- ---------------- ------------------ -------------------
Net sales $ 83,235 $ 86,241 $ 83,706 $ 80,286
Gross margin 30,353 31,660 31,531 30,639
Income from operations 4,795 5,911 5,617 5,372
Income before income taxes 2,487 3,936 3,208 3,517
Net income before extraordinary loss 1,334 1,982 1,619 1,768
Net income $ 839 $ 1,982 $ 1,619 $ 1,768
Net income before extraordinary loss - Diluted $ 0.18 $ 0.26 $ 0.21 $ 0.23
Extraordinary loss, net of tax - Diluted 0.07 - - -
------------- ------------- --------------- ----------------
Net income per share - Diluted $ 0.11 $ 0.26 $ 0.21 $ 0.23
Three Months ended
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except per share data) 2000 2000 2000 2000
---------------- ---------------- ------------------ -------------------
Net sales $ 84,670 $ 87,343 $ 85,600 $ 79,600
Gross margin 29,933 31,359 31,391 30,312
Income from operations 4,643 5,457 4,980 4,492
Income before income taxes 1,755 2,407 2,012 1,794
Net income $ 904 $ 1,061 $ 957 $ 805
Net income per share - Diluted $ 0.12 $ 0.14 $ 0.13 $ 0.10
10. NET INCOME PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share." SFAS No. 128 requires disclosure of basic and diluted earnings per
share. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed based upon the weighted average number of common
shares outstanding, adjusted for the effect of dilutive stock options. All net
income per share amounts reported herein are in accordance with the provisions
of this Statement.
The following table sets forth the computation of basic and diluted net income
per share:
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
(In thousands, except per share data) 2001 2000 1999
Numerator:
Net income before extraordinary loss $ 6,703 $ 3,727 $ 3,711
Extraordinary loss on early extinguishment of debt, net of tax
benefit of $324 495 - -
----------------------------------------------------------
Net income $ 6,208 $ 3,727 $ 3,711
----------------------------------------------------------
Denominator:
Basic-weighted average shares 7,638 7,540 7,536
Effect of dilutive stock options 10 11 9
----------------------------------------------------------
Diluted-weighted average shares 7,648 7,551 7,545
----------------------------------------------------------
Net income per share - Basic and Diluted
Net income before extraordinary loss $ 0.88 $ 0.49 $ 0.49
Extraordinary loss, net of tax benefit 0.07 - -
----------------------------------------------------------
Basic net income per share $ 0.81 $ 0.49 $ 0.49
==========================================================
Diluted net income per share $ 0.81 $ 0.49 $ 0.49
==========================================================
For all years presented, antidilutive stock options were excluded in the
determination of dilutive earnings per share.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 2001.
ITEM 11 - EXECUTIVE COMPENSATION
Item 11 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 2001.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 2001.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is incorporated by reference from the Registrant's definitive proxy
statement to be filed within 120 days of December 31, 2001.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents have been filed as a part of this report, or where
noted, incorporated by reference:
(1) Financial Statements: The Consolidated Financial Statements of the
Company are included in Item 8 of this report.
(2) Financial Statement Schedule: The financial statement schedule filed
in response to Item 8 and Item 14(d) of Form 10-K is listed in the
Index to Consolidated Financial Statements included in Item 8 of this
report.
(3) The Exhibits filed herewith or incorporated herein by reference are
set forth in the Exhibit Index on page 35.
(b) Reports on Form 8-K: None
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 March 28, 2002 FINISHMASTER, INC.
By: /s/ Robert R. Millard
-----------------------
Robert R. Millard
Senior Vice President, Finance
And Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Date Title
--------------------------------------------------------------------------------
(1) Principal Executive Officer
/s/ Andre B. Lacy
-----------------
Andre B. Lacy March 28, 2002 Chairman of the Board and
Chief Executive Officer
(2) Principal Financial
and Accounting Officer:
/s/ Robert R. Millard
---------------------
Robert R. Millard March 28, 2002 Senior Vice President,
Finance and Chief
Financial Officer
(3) A Majority of the
Board of Directors:
/s/ Andre B. Lacy
-----------------
Andre B. Lacy March 28, 2002 Director
/s/ Thomas U. Young
-------------------
Thomas U. Young March 28, 2002 Director
/s/ David N. Shane
------------------
David Shane March 28, 2002 Director
/s/ Margot L. Eccles
--------------------
Margot L. Eccles March 28, 2002 Director
/s/ Wes N. Dearbaugh
--------------------
Wes N. Dearbaugh March 28, 2002 Director
/s/ Peter L. Frechette
----------------------
Peter L. Frechette March 28, 2002 Director
/s/ David W. Knall
------------------
David W. Knall March 28, 2002 Director
/s/ Michael L. Smith
--------------------
Michael L. Smith March 28, 2002 Director
/s/ Walter S. Wiseman
---------------------
Walter S. Wiseman March 28, 2002 Director
FINISHMASTER, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
EXHIBITS
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
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)
10.2 FinishMaster, Inc. Deferred Compensation Plan dated as of
November 1, 2000 (previously filed with form 10-K dated March 29,
2001)
21* Subsidiaries of the Registrant
23* Consent of Independent Accountants
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
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)
*filed herein
Schedule II - Valuation and Qualifying Accounts (In thousands)
Charged Balance
Balance at to Costs at End
Beginning and of
Description of Period Expenses Deductions Period
-----------------------------------------------------------------------------------------------------
Year ended December 31, 2001:
Allowance for doubtful accounts $ 1,337 $ 723 $ 626 (A) $ 1,434
Year ended December 31, 2000:
Allowance for doubtful accounts $ 1,419 $ 1,011 $ 1,093 (A) $ 1,337
Year ended December 31, 1999:
Allowance for doubtful accounts $ 1,680 $ 433 $ 694 (A) $ 1,419
(A) Represents uncollectible accounts written off, less recoveries.