SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 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 (I.R.S. Employer
of 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 13, 1995, the registrant had 4,568,228 shares of its
Capital Stock, $1.00 par value, issued and outstanding.
Total Pages: 12
1
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
July 31, April 30,
1995 1995
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 3,814 $ 3,417
Refundable income taxes 500 990
Accounts receivable 201 186
Inventories (Note 2) 1,750 1,412
Prepaid expenses 1,288 1,358
Deferred income taxes 1,788 1,788
Property held for sale (Note 1) 3,011 3,642
------------ -----------
Total Current Assets 12,352 12,793
Property and equipment - net 15,449 14,868
Other, primarily cash surrender value
of life insurance 1,889 1,841
------------ -----------
$ 29,690 $ 29,502
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 1,052 $ 1,011
Accrued expenses 7,289 7,730
------------ -----------
Total Current Liabilities 8,341 8,741
Deferred management compensation 3,458 3,340
Deferred postretirement medical benefits 268 260
Commitments and contingencies (Notes 1, 3 and 4,)
Stockholders' Equity:
Capital stock $1 par - shares authorized
12,000; issued and outstanding 4,568; 4,568 4,568
reserved for stock options 1,023
Additional paid-in capital 5,522 5,522
Retained earnings 7,533 7,071
------------ -----------
Total Stockholders' Equity 17,623 17,161
------------ -----------
$ 29,690 $ 29,502
============ ===========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(000's omitted except for per share data)
THREE MONTHS ENDED JULY 31,
---------------------------
1995 1994
------------ -----------
<S> <C> <C>
Net sales $ 12,136 $ 16,725
Cost of sales 9,035 11,997
------------ -----------
Gross profit 3,101 4,728
Selling and administrative expense 2,770 3,493
------------ -----------
Operating income 331 1,235
Gain on sales of real properties 127 109
Interest income 24 74
------------ -----------
Income before income taxes 482 1,418
Income taxes 20 513
------------ -----------
Net income $ 462 $ 905
============ ===========
Net income per share $ .10 $ .20
============ ===========
Shares outstanding 4,568 4,563
============ ===========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's omitted)
Increase (decrease) in cash and cash equivalents
THREE MONTHS ENDED JULY 31,
---------------------------
1995 1994
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net cash provided by operating activities $ 518 $ 377
------------ -----------
Cash Flows From Investing Activities:
Capital expenditures (1,048) (137)
Proceeds from sales of properties 971 168
Increase in cash surrender value
of life insurance (51) (108)
Other - net 7 19
------------ -----------
Net cash used in investing activities (121) (58)
------------ -----------
Cash Flows From Financing Activities: -- --
Net increase in cash and
cash equivalents 397 319
Cash and cash equivalents at beginning of period 3,417 4,288
------------ -----------
Cash and cash equivalents at end of period $ 3,814 $ 4,607
============ ===========
Supplemental Disclosure of Cash Flow Information:
Income taxes paid during the period $ 8 $ 8
============ ===========
</TABLE>
4
<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 month period ended July 31, 1995 are not necessarily indicative of a
full year's operations due to the seasonality of the Company's business.
Note 1. Restructuring
----------------------
In November 1994, management of the Company was restructured with the
resignation of Donald Scheib as President and Chief Executive Officer and his
appointment as Chairman of the Board. Mr. Daniel Seigel was hired as President
and Chief Executive Officer and elected to the Company's Board of Directors. In
March 1995, management was further restructured with the resignation of the
three vice presidents of operations. These three officer positions were combined
into one Executive Vice President and Chief Operating Officer position held by
Christian Bement, who joined the Company in January 1995.
During the fiscal year ended April 30, 1995 ("Fiscal 1995"), the Company
closed 84 unprofitable auto paint centers, located primarily in the Midwestern
and Eastern United States, and eliminated certain executive and management
personnel. Consequently, the financial information for the first quarter ended
July 31, 1995 ("1995 First Quarter") reflects 84 fewer paint shop locations than
the first quarter ended July 31, 1994 ("1994 First Quarter").
The 84 locations which were closed during Fiscal 1995 generated $4,353,000 in
net sales and an operating loss of $517,000 in the 1994 First Quarter.
32 of the closed auto paint centers were company-owned real properties. During
Fiscal 1995, the Company sold 3 of these properties at a net capital gain of
$55,000. During the 1995 First Quarter, the Company sold an additional 6 of
these properties at a net capital gain of $172,000. The net book value of the
remaining 23 properties is listed in the Balance Sheet under the caption
"Property Held For Sale". Any gain on the sales of these real properties will be
recognized, for accounting purposes, when the properties are sold.
Subsequent to July 31, 1995, the Company sold one of the 23 real properties, a
closed auto paint center located in Beverly Hills, California, at a capital gain
of $1,230,000 which will be included in the Company's second quarter results.
The Company recorded a pre-tax charge of $4,287,000 at April 30, 1995 to provide
for the costs associated with the restructuring plan. The type and amount of
restructuring liabilities remaining at July 31, 1995 as reported in the
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
Restructuring Liabilities
--------------------------
July 31, April 30,
Closed Operations 1995 1995
----------------- --------- --------
<S> <C> <C>
Lease termination costs $ 677,000 $ 813,000
Salaries and benefits for terminated employees 322,000 374,000
Property taxes 282,000 353,000
Repairs, maintenance and utilities 255,000 298,000
Warranty repairs 264,000 285,000
All other costs 9,000 48,000
---------- ----------
$1,809,000 $2,171,000
</TABLE>
5
<PAGE>
Note 2. Inventories
-------------------
<TABLE>
<CAPTION>
Inventories consist of the following:
July 31, April 30,
1995 1995
---------- ----------
<S> <C> <C>
Finished goods $1,409,000 $1,040,000
Raw materials 341,000 372,000
---------- ----------
$1,750,000 $1,412,000
========== ==========
</TABLE>
The increase in finished goods inventory relates primarily to materials,
other than paint, which are used in painting vehicles. These materials are
purchased in bulk at various times throughout the year and will be used during
the fiscal year ending April 30, 1996.
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's proportionate share of the estimated cleanup cost is
$711,000 which the Company recorded and funded at April 30, 1995.
The Company is 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 Company's insurance
carrier is defending the Company in this matter under a reservation of rights.
The parties reached a tentative settlement agreement in June 1995 pursuant to
which the Company will pay $86,000 which the Company accrued as of April 30,
1995.
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 its use of private or municipal rubbish
services for alleged disposal of the Company's auto paint center rubbish at the
landfills 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 potential 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 issued approximately $4,737,000 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 compliance with these financial covenants at July 31, 1995.
6
<PAGE>
The Estate of Earl A. Scheib ("Estate"), which, as of July 31, 1995, was
the owner of 1,254,684 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 state and federal tax payments. The
Estate executed a Stock Pledge Agreement ("Original Stock Pledge Agreement")
with the Original Bank whereby the Estate pledged its 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. Since the Credit Agreement
was secured by a pledge of the Shares, if the Company had acquired the Original
Loan it also would have acquired the Shares as security. 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 under a
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 1993, 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 $250,000 to the New Bank
thereby reducing the payment due on December 31, 1995 to $750,000. 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 below 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. No events
occurred during the first quarter ended July 31, 1995 which would trigger the
New Bank's right to put the New Loan to the Company.
The Company has employment agreements with certain of its 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.
7
<PAGE>
EARL SCHEIB, INC.
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 the Company's business, cash has historically been generated during
the first and second fiscal quarters which is expected to sustain operations
during the winter season. The Company owns a substantial number of its real
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 the remaining
164 operating auto paint centers. 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 cost of the renovations to be between $3.5 to $4.5 million and plans
to use the proceeds from sales of real properties to fund these costs. The
Company had 23 real properties listed for sale at July 31, 1995 as discussed in
Note 1 to the financial statements. The majority of the renovation costs will
be capitalized and depreciated over at least 5 years. The Company plans to
proceed quickly with this project and during the 1995 First Quarter commenced
renovation of 46 auto paint centers in California.
The Company generated $518,000 in cash flow from operating activities
during the 1995 First Quarter compared with $377,000 in the 1994 First Quarter.
The $141,000 improvement between this year's cash flow and last year's cash flow
from operating activities resulted from an $853,000 increase in current
liabilities (primarily accrued insurance) and a $330,000 decrease in refundable
income taxes, less a $443,000 decrease in net income, a $387,000 decrease in
accounts receivable, a $152,000 decrease in prepaid expenses and a $60,000 net
decrease in cash flow from other operating activities.
Investing activities in the 1995 First Quarter included $1,048,000 in
capital expenditures (primarily paint center renovation costs) and a $51,000
increase in the cash surrender value of life insurance, less $971,000 in
proceeds from sales of real properties. In the 1994 First Quarter, investing
activities included $137,000 in capital expenditures and a $108,000 increase in
the cash surrender value of life insurance, less $168,000 in proceeds from sales
of property and equipment.
There were no financing activities in the 1995 First Quarter or the 1994
First Quarter.
As discussed in Note 4 to the financial statements, the Company entered
into an agreement with the Estate of Earl Scheib ("Estate") and with a bank to
which the Estate is currently indebted for $2,750,000. Should the Estate or
the Company default in their agreements with the bank, the bank has the right
to "put" the loan to the Company. In that event, 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 part or all of the loan
from the bank.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
---------------------
As described in Note 1 to the financial statements, the Company restructured
its operations during the fiscal year ended April 30, 1995. Primarily, as a
result of the closure of the 84 auto paint centers, sales during the 1995 First
Quarter decreased by 27 percent or $4,589,000 compared to sales in the 1994
First Quarter. On a same center basis, sales during the 1995 First Quarter
decreased by 2 percent or $195,000 compared to the 1994 First Quarter.
Gross profit margins during the 1995 First Quarter decreased by 3 percent
of sales compared to the 1994 First Quarter. On a same center basis, gross
profit margins decreased by 4 percent of sales or $565,000.
8
<PAGE>
Same center material costs increased by 1 percent of sales or $104,000 due to
higher raw material prices and less efficient usage of materials. Same center
direct labor costs increased by 2 percent of sales or $201,000 due to less
efficiency in meeting higher production requirements and quality standards (the
Company has developed and refined an employee training program which is expected
to help meet the higher anticipated production requirements and quality
standards). Same center overhead expense increased by 1 percent of sales or
$65,000 due primarily to higher group medical insurance costs.
Selling and administrative expense during the 1995 First Quarter decreased
by $723,000 on a total center basis compared to the 1994 First Quarter. On a
same center basis, selling and administrative expense decreased by $75,000 as a
result of reductions in salary expense.
During the 1995 First Quarter the Company sold 7 real properties,
including a parcel of excess land adjacent to an operating auto paint center,
for a net capital gain of $127,000. Interest income decreased by $50,000 in the
1995 First Quarter due to less cash available to invest and lower rates earned.
As a result of the net operating loss carryforward from the fiscal year ended
April 30, 1995, federal income taxes were not provided in the 1995 First Quarter
since an income tax benefit was not previously provided by the Company for the
net operating loss carry forward. The Company did, however, provide for state
income taxes of $20,000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 3. Litigation appearing on page 6 in Part I is incorporated herein
by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On August 15, 1995 the Company held its Annual Meeting of
Stockholders.
(b) Matters Voted Upon
------------------
(i) Election of Directors:
<TABLE>
<CAPTION>
To Term Expiring 1996 For Withheld
---------------------- -------- --------
<S> <C> <C>
Donald R. Scheib 3,754,034 348,988
Daniel A. Seigel 3,772,908 330,114
Robert L. Spencer 3,766,778 336,244
Philip Wm. Colburn 3,772,928 330,094
Alexander L. Kyman 3,773,168 329,854
Robert F. Wilkinson 3,773,168 329,854
</TABLE>
(ii) Amended and Restated Bylaws
The Company proposed adoption of amended and restated Bylaws for Earl
Scheib, Inc. which, among other things, expands the number of directors to a
range from five to nine directors the exact number being set by resolution of
the Board of Directors, eliminates stockholders' cumulative voting rights,
requires directors to retire at age 76 (current directors at age 80), allows the
Board of Directors to amend the Bylaws and provides for other changes in
Delaware law.
<TABLE>
<CAPTION>
Shares Voted
------------
<S> <C>
For 3,261,301
Against 414,718
Abstain 13,404
Broker non-votes 413,599
</TABLE>
9
<PAGE>
Such Amended and Restated By-Laws were included in a Current Report on
Form 8-K filed August 28, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 27 Financial Data Schedule, Article 5 is filed hereunder on
page 12.
(B) The Registrant did not file any Current Reports on Form 8-K during
the quarter ended July 31, 1995.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EARL SCHEIB, INC.
-----------------
(Registrant)
Date: September 13, 1995 /s/ Daniel A. Seigel
---------------------------------------------
Daniel A. Seigel,
President
Date: September 13, 1995 /s/ John K. Minnihan
---------------------------------------------
John K. Minnihan,
Vice President Finance
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the
Consensed Consolidated Financial Statements of Earl Scheib, Inc.,
and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> JUL-31-1995
<CASH> 3814
<SECURITIES> 0
<RECEIVABLES> 701
<ALLOWANCES> 0
<INVENTORY> 1750
<CURRENT-ASSETS> 12352
<PP&E> 25649
<DEPRECIATION> 10200
<TOTAL-ASSETS> 29690
<CURRENT-LIABILITIES> 8341
<BONDS> 0
<COMMON> 4568
0
0
<OTHER-SE> 13055
<TOTAL-LIABILITY-AND-EQUITY> 29690
<SALES> 12136
<TOTAL-REVENUES> 12136
<CGS> 9035
<TOTAL-COSTS> 9035
<OTHER-EXPENSES> 2770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 482
<INCOME-TAX> 20
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 462
<EPS-PRIMARY> $.10
<EPS-DILUTED> $.10
</TABLE>
