FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1995
OR
[___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-4822
EARL SCHEIB, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-1759002
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8737 Wilshire Boulevard
Beverly Hills, California 90211-2795
------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 652-4880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
As of December 15, 1995 the registrant had 4,568,228 shares of its Capital
Stock, $1.00 par value, issued and outstanding.
This report contains a total of 13 pages.
1
<PAGE>
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(000's omitted)
Unaudited
---------
October 31, April 30,
----------- ---------
1995 1995*
----------- ---------
<S> <C> <C>
Assets
- ------
Current Assets:
Cash and Cash Equivalents $ 4,724 $ 3,417
Marketable Securities 781 -
Refundable Income Taxes - 990
Accounts Receivable 188 186
Inventories (Note 2) 1,589 1,412
Prepaid Expenses 1,304 1,358
Deferred Income Taxes 1,788 1,788
Property Held For Sale (Note 1) 1,897 3,642
------- -------
Total Current Assets 12,271 12,793
Property and Equipment - Net 16,382 14,868
Other, Primarily Cash Surrender Value
Of Life Insurance 1,938 1,841
------- -------
$30,591 $29,502
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Accounts Payable $ 476 $ 1,011
Accrued Expenses 5,981 7,730
------- -------
Total Current Liabilities 6,457 8,741
Deferred Management Compensation 3,579 3,340
Deferred Post-Retirement Medical Benefits 275 260
Commitments and Contingencies
(Notes 1, 3 and 4)
Stockholders' Equity:
Capital Stock $1 Par - Shares Authorized
12,000; Issued and Outstanding 4,568;
Reserved For Stock Options 1,023 4,568 4,568
Additional Paid-In Capital 5,522 5,522
Retained Earnings 10,190 7,071
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Total Stockholders' Equity 20,280 17,161
------- ------
$30,591 $29,502
======= =======
</TABLE>
* Derived From Audited Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(000's omitted except for per share and dividends)
Unaudited
---------
Three Months Ended
-------------------
October 31,
-----------
1995 1994
------- -------
<S> <C> <C>
Net Sales $12,537 $14,013
Cost of sales 8,451 10,077
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Gross Profit 4,086 3,936
Selling and administrative expense 3,051 3,254
------- -------
Operating Income 1,035 682
Gain on sales of real properties 1,669 -
Interest income 48 81
------- -------
Income Before Income Taxes 2,752 763
Income taxes (Note 5) 95 293
------- -------
Net Income $ 2,657 $ 470
======= =======
Net Income Per Share $ .58 $ .10
======= =======
Cash Dividends Per Share - -
======= =======
Shares Outstanding 4,568 4,563
======= =======
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(000's omitted except for per share and dividends)
Unaudited
---------
Six Months Ended
-----------------
October 31,
-----------
1995 1994
------- -------
<S> <C> <C>
Net Sales $24,673 $30,738
Cost of sales 17,486 22,074
------- -------
Gross Profit 7,187 8,664
Selling and administrative expense 5,821 6,747
------- -------
Operating Income 1,366 1,917
Gain on sales of real properties 1,796 109
Interest income 72 155
------- -------
Income Before Income Taxes 3,234 2,181
Income taxes (Note 5) 115 806
------- -------
Net Income $ 3,119 $ 1,375
======= =======
Net Income Per Share $ .68 $ .30
======= =======
Cash Dividends Per Share - -
======= =======
Shares Outstanding 4,568 4,563
======= =======
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION> EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
Increase (decrease) in cash and cash equivalents
(000'S omitted)
Unaudited
---------
Six Months Ended
-----------------
October 31,
-----------
1995 1994
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating
activities $ 683 $1,508
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,282) (189)
Proceeds from sales of properties 3,784 53
Increase in cash surrender value
of life insurance (781) (216)
Other-net (97) 66
------- -------
Net cash provided by (used in) investing
activities 624 (286)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,307 1,222
Cash and Cash Equivalents at beginning
of period 3,417 4,288
------- -------
Cash and Cash Equivalents at end
of period $ 4,724 $ 5,510
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid during the period $ 43 $ 371
======= =======
</TABLE>
5
<PAGE>
EARL SCHEIB, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
The information furnished in this report reflects all adjustments which
are, in the opinion of management of Earl Scheib, Inc. (the "Company"),
necessary for a fair presentation of the results of operations for the interim
periods presented. All adjustments are of a normal recurring nature. Results
for the three and six month periods ended October 31, 1995 are not necessarily
indicative of a full year's operations due to the seasonality of the Company's
business.
NOTE 1. Restructuring
- ----------------------
During the fiscal year ended April 30, 1995 ("Fiscal 1995") the Company
restructured its operations which included the closing of 84 unprofitable auto
paint shops located primarily in the Midwestern and Eastern United States. The
Company recorded a pre-tax charge of $4,287,000 at April 30, 1995 to provide for
costs associated with the restructuring plan. At October 31, 1995 the amount of
restructuring liabilities remaining was $1,215,000 and is included in the
Balance Sheet under the caption "Accrued Expenses".
At April 30, 1995 twenty-nine auto paint shop real properties, closed
during the restructuring, were held for sale. During the six month period ended
October 31, 1995 the Company sold 13 of the properties at a net capital gain of
$1,851,000. The net book value of the remaining 16 properties is listed in the
Balance Sheet under the caption "Property Held For Sale". Any gain on sales of
these properties will be recognized for accounting purposes when the properties
are sold.
NOTE 2. Inventories
- --------------------
<TABLE>
<CAPTION>
Inventories consist of the following:
October 31, April 30,
1995 1995
---------- ----------
<S> <C> <C>
Finished goods $1,280,000 $1,040,000
Raw materials 309,000 372,000
---------- ---------
$1,589,000 $1,412,000
========== ==========
</TABLE>
6
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NOTE 3. Litigation
- -------------------
The Company is one of numerous parties which entered into a consent decree
with the United States Environmental Protection Agency ("US E.P.A.") to cleanup
a landfill site under the United States Superfund statute. The Company's
insurance carrier is representing the Company in this matter under a reservation
of rights. The Company had accrued $711,000 as its proportionate share of the
estimated cleanup cost at April 30, 1995.
The Company was one of several defendants in a lawsuit filed by a
municipality seeking contribution from the defendants for cleanup of a municipal
Superfund landfill site operated by the municipality. The parties reached a
settlement agreement for $86,250 in June 1995, which the Company accrued for as
of April 30, 1995. On November 10, 1995 the settlement was entered and approved
in the United States District Court for the Eastern District of California and
the lawsuit has been dismissed as to the Company.
The Company has been designated as a potentially responsible party by the
US E.P.A. under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, and by certain states under applicable state laws, with
respect to cleanup of hazardous substances at several landfill sites. The
Company's involvement relates to alleged disposal of the Company's auto paint
shop trash at landfills by private or municipal rubbish services which the
Company used in the normal conduct of its business. The Company cannot predict
with certainty the total costs relating to cleanup at these sites nor the
Company's share of the cost. However, based upon, among other things, its
previous experience with respect to its proportionate share of cleanup costs at
other hazardous landfill sites, the Company accrued $150,000 at April 30, 1995
which represents its current estimate of the Company's probable liability.
The Company is involved in several other legal proceedings, claims and
liabilities including federal and state occupational safety and health
administration matters and environmental matters which arise in the ordinary
course of its business. Management believes that the amount of ultimate
liability with respect to these matters should not materially affect the
Company's financial position.
NOTE 4. Commitments
- --------------------
The Company has a loan agreement with its bank to finance a letter of
credit facility under which the bank has issued approximately $3,491,000 in
standby letters of credit in favor of the Company's insurance carrier to secure
the unfunded portion of estimated deferred workers' compensation insurance
premiums. The loan agreement requires that the Company comply with certain
financial covenants including maintaining minimum working capital, cash and cash
equivalent balances, net worth and debt to equity ratios. The Company was in
full compliance with these financial covenants at October 31, 1995.
7
<PAGE>
The Estate of Earl A. Scheib ("Estate"), which, as of November 30, 1995 was
the owner of 1,204,684 shares of the capital stock of the Company ("Shares")
obtained a loan in November 1993 ("Original Loan") in the original principal
amount of $3,500,000 from a bank ("Original Bank") pursuant to a credit
agreement ("Credit Agreement") to fund its state and federal tax payments. The
Estate executed a Stock Pledge Agreement ("Original Stock Pledge Agreement")
with the Original Bank whereby the Estate pledged it's then owned Shares to the
Original Bank to secure the Original Loan. As part of the transaction, the
Company executed agreements with the Original Bank and with the Estate whereby
the Original Bank had the right to "put" the Original Loan to the Company
pursuant to a Put, Call and Registration Rights Agreement ("Original Put
Agreement") upon a default in the Credit Agreement. The Company received a fee
of $18,750 from the Estate each quarter the Original Loan was outstanding. In
addition, as further security, the Estate granted the Company a lien on a parcel
of real property ("Real Property") owned by the Estate which is currently under
contract for sale at a purchase price of $3,650,000.
On February 16, 1995, the Estate obtained a new loan ("New Loan") from a
new bank ("New Bank") for $3,000,000, having previously paid $500,000 to the
Original Bank. The Estate also executed a new Stock Pledge Agreement ("New
Stock Pledge Agreement")in favor of the New Bank upon terms substantially
identical to the Original Stock Pledge Agreement. The proceeds from the New
Loan were used to pay off the amount then due under the Original Loan.
Concurrent therewith, the Company executed a new Put Agreement ("New Put
Agreement") in favor of the New Bank whose terms are substantially identical to
the Original Put Agreement. The Estate exercised its registration rights under
the Original Put Agreement and the Estate's Shares have been registered under
the Securities Act of 1933, as amended. The terms of the New Loan require the
Estate to make a principal reduction payment in the amount of $1,000,000 on or
before December 31, 1995 and to pay the remainder due under the New Loan on or
before December 31, 1996. The Estate has prepaid $500,000 to the New Bank
thereby reducing the payment due on December 31, 1995 to $500,000. The Company
continues to receive $18,750 from the Estate each quarter the New Loan is
outstanding and maintains its lien on the Real Property.
In the event of a default under the New Loan and a foreclosure under the
New Stock Pledge Agreement, a change in control of the Company could result.
The events that would trigger a default and the New Bank's right to "put" the
New Loan to the Company include: (a) a failure by the Company (i) to maintain
cash and cash equivalent balances at least equal to $500,000 less than the
amount outstanding under the New Loan, (ii) to maintain a current ratio of 1:1,
a liabilities to net worth ratio of 0.70:1 and a minimum net worth of
$17,000,000 and such failure not being properly cured; (b) the amount
outstanding under the New Loan exceeding 63% of the market value (as quoted on
the American Stock Exchange) of the Shares; or (c) a monetary default by the
Estate. Should a default occur, the Company would have to purchase the loan
from the bank or renegotiate loan terms. It is possible that the Company would
have to obtain financing to purchase all or part of the loan from the bank. No
events occurred during the three and six month periods ended October 31, 1995
which would trigger the New Bank's right to put the New Loan to the Company.
8
<PAGE>
The Company has employment agreements with certain of its directors,
executive officers and management personnel. These agreements generally
continue until terminated by the employee or the Company and provide for salary
continuation for a specified number of months under certain circumstances.
NOTE 5. Income Taxes
- ---------------------
The income tax rate for the three and six month periods ended October 31,
1995 is substantially less than the statutory tax rate due to the utilization of
the available net operating loss carryforward.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company assesses liquidity based upon its ability to provide adequate
sources of funds to meet foreseeable cash requirements. Due to the seasonal
nature of its business, cash is generated during the first and second quarters
which is expected to sustain operations during the winter season. The Company
owns a substantial number of its properties, including its administrative office
and its manufacturing and warehousing facility. These properties are free of
encumbrances and could be used as a source of additional funds if needed at a
future date.
The Company is in the process of renovating a majority of its operating
auto paint shops. The renovations include painting, graphics, signage,
installing state of the art drying ovens and, in certain locations, repairs to
building roofs and parking lots. The Company estimates the approximate
expenditure for future renovations to be between $2.0 and $3.0 million and plans
to use the proceeds from sales of real properties to fund these expenditures.
The Company had 16 real properties listed for sale at October 31, 1995 as
discussed in Note 1. The majority of the renovation expenditures will be
capitalized and depreciated over at least 5 years. During the 1995 Second
Quarter the Company completed renovation of 46 auto paint shops in California.
The Company generated $683,000 in cash flow from operating activities
during the six month period ended October 31, 1995 ("1995 Six Month Period")
compared with $1,508,000 in the six month period ended October 31, 1994 ("1994
Period"). Although increased cash flow from operations would be expected due to
the increase in net income, $1,796,000 of the net income resulted from capital
gains on sales of properties which is included under investing activities. The
balance of the decrease in cash flow from operating activities results primarily
from timing of collections of accounts receivable and refundable income taxes,
and payments of restructuring liabilities previously accrued.
9
<PAGE>
Finished goods inventories increased during the 1995 Six Month Period. The
increase resulted primarily to materials other than paint, which are used in
painting vehicles. These materials are purchased in bulk at various times
throughout the year.
Investing activities in the 1995 Six Month Period included $2,282,000 in
capital expenditures (primarily paint shop renovation expenditures) a $781,000
increase in marketable securities and a $105,000 increase in the cash surrender
value of life insurance. In addition, the Company received $3,784,000 in
proceeds from sales of real properties which included a $1,796,000 capital
gain. In the 1994 Period, investing activities included $189,000 in capital
expenditures and a $216,000 increase in the cash surrender value of life
insurance, offset by $53,000 in proceeds from sales of property and equipment
and $66,000 in all other investing activities.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
- ---------------------
On a same shop basis, sales during the three month period ended October 31,
1995 ("1995 Second Quarter") increased by 16 percent or $1,692,000 compared to
the three month period ended October 31, 1994 ("1994 Quarter"). The sales
increase resulted primarily from a 37 percent sales increase in the newly
renovated California paint shops and from higher average unit sales prices. As
discussed in Note 1, the Company restructured its operations during Fiscal
1995. Primarily as a result of the closure of auto paint shops, total
sales during the 1995 Second Quarter decreased by 11 percent or $1,476,000
compared to sales in the 1994 Quarter.
On a same shop basis, sales during the 1995 Six Month Period increased by 6
percent or $1,456,000 compared to the 1994 Period due primarily to increased
sales in the California paint shops and higher average unit sales prices. Total
sales during the 1995 Six Month Period decreased by 20 percent or $6,065,000
compared to the 1994 Period due primarily to the closure of auto paint shops
during last year's restructuring.
Gross profit margins during the 1995 Second Quarter increased by $150,000
or 5 percent of sales compared to the 1994 Quarter. On a same shop basis, gross
profit margins during the 1995 Second Quarter increased by $802,000 or 2 percent
of sales compared to the 1994 Quarter. Same shop material costs increased by 2
percent of sales due to higher material costs. Direct labor costs increased by
1 percent of sales due to Company objectives of meeting higher production and
quality standards (the Company has developed an employee training program which
is expected to help improve labor efficiency). Overhead expense decreased by 5
percent of sales due primarily to lower travel, indirect labor and payroll
related tax expenses.
Gross profit margins during the 1995 Six Month Period increased by 1
percent of sales compared to the 1994 Period. On a same shop basis, gross
profit margins during the 1995 Six Month Period decreased by 1 percent of sales
due primarily to higher costs in the first quarter of 1995. Same shop material
and direct labor costs each increased by 1.5 percent of sales while overhead
expense decreased by 2 percent of sales.
10
<PAGE>
Selling and administrative expense during the 1995 Second Quarter decreased
by $203,000 or 6 percent compared to the 1994 Quarter due to a reduction in cost
resulting from last year's restructuring. On a same shop basis, selling and
administrative expense during the 1995 Second Quarter increased by $334,000 due
primarily to the cost of introductory and promotional advertising of the newly
renovated California paint shops.
Selling and administrative expense during the 1995 Six Month Period
decreased by $926,000 or 14 percent compared to the 1994 Period due to a
reduction in cost resulting from last year's restructuring. On a same shop
basis, selling and administrative expense during the 1995 Six Month Period
increased by $259,000 due primarily to the cost of introductory and promotional
advertising of the California paint shops.
During the 1995 Second Quarter the Company sold eight real properties for a
net capital gain of $1,669,000. During the 1995 Six Month Period the Company
sold fifteen real properties for a net capital gain of $1,796,000. Interest
income, generated from investments of cash in short term instruments, was lower
in both the 1995 Second Quarter and the 1995 Six Month Period when compared to
1994 due primarily to less cash available to invest.
The Company did not previously provide for an income tax benefit resulting
from the net operating loss carryforward for the fiscal year ended April 30,
1995. Accordingly federal income taxes were not provided in the 1995 Six Month
Period on income up to the amount of the remaining loss carryforward available.
The Company did provide for state income taxes of $54,000 and federal income
taxes of $61,000, primarily in the 1995 Second Quarter.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Note 3. Litigation appearing on page 7 in Part 1 is incorporated
herein by reference.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibit 27 Financial Data Schedule, Article 5 is filed hereunder on
page 13.
(b) The Company filed a Current Report on Form 8-K on August 25, 1995
reporting Shareholder adoption and approval of the Amended and
Restated Bylaws of Earl Scheib, Inc.
11
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EARL SCHEIB, INC.
-----------------
Registrant
December 15, 1995 /s/ Daniel A. Seigel
- ----------------- ---------------------------
Dated Daniel A. Seigel, President
December 15, 1995 /s/ John K. Minnihan
- ----------------- ---------------------------
Dated John K. Minnihan, Vice President Finance
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted
from the Condensed Consolidated Financial Statements of Earl
Scheib, Inc., as is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 4724
<SECURITIES> 781
<RECEIVABLES> 188
<ALLOWANCES> 0
<INVENTORY> 1589
<CURRENT-ASSETS> 12271
<PP&E> 26807
<DEPRECIATION> 10425
<TOTAL-ASSETS> 30591
<CURRENT-LIABILITIES> 6457
<BONDS> 0
<COMMON> 4568
0
0
<OTHER-SE> 15712
<TOTAL-LIABILITY-AND-EQUITY> 30591
<SALES> 24673
<TOTAL-REVENUES> 24673
<CGS> 17486
<TOTAL-COSTS> 17486
<OTHER-EXPENSES> 5821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3234
<INCOME-TAX> 115
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3119
<EPS-PRIMARY> $.68
<EPS-DILUTED> $.68
</TABLE>
