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 January 31, 1996
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 March 13, 1996 the registrant had 4,568,228 shares of its Common
Stock, $1.00 par value, issued and outstanding.
This report contains a total of 12 pages.
1
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PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(000's omitted)
Unaudited
---------
January 31, April 30,
----------- ---------
1996 1995*
----------- ---------
<S> <C> <C>
Assets
------
Current Assets:
Cash and Cash Equivalents $ 1,346 $ 3,417
Marketable Securities 1,317 -
Refundable Income Taxes - 990
Accounts Receivable 235 186
Inventories (Note 2) 1,872 1,412
Prepaid Expenses 1,307 1,358
Deferred Income Taxes 1,788 1,788
Property Held For Sale (Note 1) 1,446 3,642
-------- -------
Total Current Assets 9,311 12,793
Property and Equipment - Net 17,597 14,868
Other, Primarily Cash Surrender Value
Of Life Insurance 2,003 1,841
------- -------
$28,911 $29,502
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts Payable $ 1,377 $ 1,011
Accrued Expenses 4,789 7,730
------- -------
Total Current Liabilities 6,166 8,741
Deferred Management Compensation 3,700 3,340
Deferred Post-Retirement Medical Benefits 283 260
Commitments and Contingencies
(Notes 1, 3 and 4)
Stockholders' Equity:
Common 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 8,672 7,071
------- -----
Total Stockholders' Equity 18,762 17,161
------- ------
$28,911 $29,502
======= =======
</TABLE>
* Derived From Audited Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(000's omitted except for per share information)
Unaudited
---------
Three Months Ended
-------------------
January 31,
-----------
1996 1995
------- -------
<S> <C> <C>
Net Sales $ 7,389 $ 7,582
Cost of sales 6,689 7,595
-------- --------
Gross Profit 700 ( 13)
Selling and administrative expense 2,704 2,770
-------- --------
Operating Income ( 2,004) ( 2,783)
Gain on sales of real properties 397 -
Interest income 53 95
-------- --------
Loss Before Income Taxes ( 1,554) ( 2,688)
Income tax benefit (Note 5) 36 ( 920)
--------- ---------
Net Loss $( 1,518) $( 1,768)
========== =========
Loss Per Share $( .33) $( .39)
========== ==========
Weighted Average Shares
Outstanding 4,568,000 4,563,000
========== ==========
</TABLE>
3
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<TABLE>
<CAPTION>
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(000's omitted except for per share information)
Unaudited
---------
Nine Months Ended
-----------------
January 31,
-----------
1996 1995
------- -------
<S> <C> <C>
Net Sales $ 32,062 $ 38,320
Cost of sales 24,175 29,669
-------- --------
Gross Profit 7,887 8,651
Selling and administrative expense 8,525 9,517
-------- --------
Operating Income ( 638) ( 866)
Gain on sales of real properties 2,193 109
Interest income 125 250
-------- --------
Income (Loss) Before Income Taxes 1,680 ( 507)
Income taxes (benefit) (Note 5) 79 ( 114)
--------- ---------
Net Income (Loss) $ 1,601 $( 393)
========= =========
Earnings (Loss) Per Share $ .34 $( 0.09)
========= =========
Weighted Average Shares
Outstanding 4,568,000 4,563,000
========== ==========
</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
---------
Nine Months Ended
-----------------
January 31,
-----------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating
activities $ (1,413) $ (756)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,817) (306)
Proceeds from disposals of
properties held for sale 4,638 393
Reduction (investment) in
marketable securities (1,317) 1,648
Increase in cash surrender value
of life insurance ( 159) ( 319)
Other-net ( 3) 21
------- -------
Net cash provided by (used in) investing
activities ( 658) 1,437
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,071) 157
Cash and Cash Equivalents at beginning
of period 3,417 4,288
------- -------
Cash and Cash Equivalents at end
of period $ 1,346 $ 4,445
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid during the period $ 51 $ 539
======== ========
</TABLE>
The Company reclassified $524,000 in net book value for certain closed
paint center properties to Assets Held For Sale during the nine months period
ended January 31, 1995.
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 nine month periods ended January 31, 1996 are not
necessarily indicative of a full year's operations due to the seasonality of
the Company's business.
It is recommended that these condensed consolidated financial statements
be read in conjunction with the consolidated financial statements for the
year ended April 30, 1995 and the notes thereto included in the Company's
Form 10-K.
NOTE 1. Restructuring
----------------------
During the fiscal year ended April 30, 1995 ("Fiscal 1995") the Company
restructured its operations and closed 84 unprofitable auto paint shops
located primarily in the Midwest 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 January 31, 1996 the amount
of restructuring liabilities remaining was $806,000 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 nine month period
ended January 31, 1996 the Company sold 16 of the properties at a net capital
gain of $1,916,000. The net book value of the remaining 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:
January 31, April 30,
1996 1995
---------- ----------
<S> <C> <C>
Finished goods $1,431,000 $1,040,000
Raw materials 441,000 372,000
---------- ---------
$1,872,000 $1,412,000
========== ==========
</TABLE>
6
<PAGE>
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 accrued $711,000 as its proportionate
share of the estimated cleanup cost as of April 30, 1995.
The Company was 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 estimate of the Company's probable
liability.
In the quarterly report for the period ended October 31, 1995 the
Company reported settlement of a municipal Superfund landfill site in the
amount of $86,250.
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 compliance with these financial covenants at
January 31, 1996. See Note 6 for Subsequent Event.
7
<PAGE>
The Estate of Earl A. Scheib ("Estate"), which, as of February 7, 1996
was the owner of 1,184,684 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. 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 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 Estate made a series of
principal reduction payments in the aggregate amount of $600,000 on or before
December 26, 1995 and must pay approximately $651,000 on or before June 30,
1996 with the remainder due under the New Loan on or before December 31,
1996. The Estate has prepaid approximately $112,000 to the New Bank thereby
reducing the payment due on June 30, 1996 to approximately $539,000. The
Company currently receives $15,000 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 have triggered 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 and marketable securities 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
not more than 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 may be required to purchase the New Loan from the New Bank
or renegotiate loan terms. It is possible that the Company would have to
obtain financing to purchase all or part of the New Loan from the New Bank.
No events occurred during the three and nine month periods ended January 31,
1996 which would trigger the New Bank's right to put the New Loan to the
Company.
In March, 1996 the Company reached agreement with the New Bank to reduce
the cash and cash equivalent marketable balance requirement at
April 30, 1996 and permanently eliminated all of the other financial
covenants (See Note 6).
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 nine month periods ended January
31, 1996 is substantially less than the statutory tax rate due to the
utilization of the available net operating loss carryforward.
8
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NOTE 6. SUBSEQUENT EVENT
-------------------------
In March, 1996 the Company reached agreement with its new Bank to reduce
the cash and cash equivalent and marketable securities balance requirement
at April 30, 1996 and permanently eliminated all of the other financial
covenants described in Note 4.
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 of the Company's fiscal year 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 has completed all or most of the renovations in a majority
of its auto paint shops, including approximately 80 shops which will be ready
for introductory promotions in March 1996. 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 majority of the
renovation expenditures will be capitalized and depreciated over at least 5
years. The Company had 20 real properties for sale at January 31, 1996.
The Company used $1,413,000 in cash flow from operating activities
during the nine month period ended January 31, 1996 ("1996 Nine Month
Period") compared with $756,000 in the nine month period ended January 31,
1995 ("1995 Period"). Although an increase in cash flow from operations
would be expected due to the increase in net income, $2,193,000 of the 1996
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 an increase in
inventory and a net reduction in current liabilities, primarily restructuring
liabilities from Fiscal 1995.
The Company produced a number of "New" 1996 color paints and a new
product called UV Supergloss Sunscreen during the 1996 Third Quarter. As a
result, raw material and finished goods inventories increased during the 1996
Nine Month Period.
Investing activities in the 1996 Nine Month Period included $3,817,000
in capital expenditures (primarily for paint shop renovations) a $1,317,000
increase in marketable securities and a $159,000 increase in the cash
surrender value of life insurance. In addition, the Company received
$4,638,000 in proceeds from sales of real properties. In the 1995 Period,
investing activities included $306,000 in capital expenditures and a $319,000
increase in the cash surrender value of life insurance, offset by $393,000 in
proceeds from sales of property and equipment and a $1,648,000 reduction in
marketable securities.
9
<PAGE>
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
---------------------
Sales
-----
On a same shop basis, sales increased by 24 percent ($1,260,000) in the
three month period ended January 31, 1996 ("1996 Third Quarter") compared to
the three month period ended January 31, 1995 ("1995 Quarter"). This
increase was the result of new product offerings, improvement in promotional
pricing, better shop operations and an increase in sales volume in the
recently renovated California paint shops. Same shop sales increased by 9
percent ($2,648,000) in the 1996 Nine Month Period for the same reasons.
The strong sales increases realized in the 1996 Third Quarter have
continued into February and March 1996. In addition, between March and May
1996 the Company intends to promote the introduction of 80 newly renovated
paint shops across the nation, which the Company expects will increase sales
even more strongly.
As discussed in Note 1, the Company closed 84 unprofitable auto paint
shops in Fiscal 1995 which represented 34 percent of the chain. Total shop
sales in the 1996 Third Quarter decreased by only 3 percent ($193,000)
compared to the 1995 Quarter. For the 1996 Nine Month Period, sales
decreased by $6,258,000 or 16 percent compared to the 1995 Period due to the
34 percent decrease in shops and weak sales during the first quarter of the
current fiscal year.
Gross Profit Margins
--------------------
Same shop gross profit margins increased by $801,000 or 15 percent in
the 1996 Third Quarter compared to the 1995 Quarter due primarily to the 24
percent increase in sales. Same shops gross profit margins in the 1996 Nine
Month Period increased by $932,000 or 1 percent of sales compared to the 1995
Period. The Company developed and has implemented an employee training
program to further improve shop efficiency and profit margins.
Total shop gross profit margins increased by $711,000 or 12 percent of
sales in the 1996 Third Quarter compared to the 1995 Quarter due primarily to
the reduction in fixed overhead expense resulting from shop closings. Total
shop gross profit margins decreased by $766,000 or 2 percent of sales in the
1996 Nine Month Period compared to the 1995 Period due primarily to the 16
percent decrease in sales resulting from shop closings in Fiscal 1995.
Selling and Administrative Expense
----------------------------------
Same shop selling and administrative expense decreased by 7 percent of
sales in the 1996 Third Quarter compared to the 1995 Quarter due to the 24
percent sales increase achieved in the 1996 Third Quarter. In the 1996 Nine
Month Period, selling and administrative expense increased by $401,000
compared to the 1995 Period due primarily to the cost of introduction and
promotional
10
<PAGE>
advertising of the newly renovated shops ($644,000) which was partially
offset by a decrease ($221,000) in professional fees for legal, accounting
and marketing consulting.
Total shop selling and administrative expense was $66,000 lower in the
1996 Third Quarter compared to the 1995 Quarter, and was $992,000 lower in
the 1996 Nine Month Period compared to the 1995 Period. Decreases in expense
in the 1996 Nine Month Period included advertising ($360,000), salaries and
related payroll taxes ($214,000) and professional services ($278,000), and
resulted primarily from the Fiscal 1995 shop closings and management
reorganization.
During the 1996 Third Quarter, the Company sold 4 real properties for a
net capital gain of $397,000. Three of those properties were closed in the
Fiscal 1995 restructuring. In the 1996 Nine Month Period, the Company sold
19 real properties, for a net capital gain of $2,193,000. Sixteen of those
properties were closed in the Fiscal 1995 restructuring.
Interest income, generated from investments of cash in short term
instruments, was lower in both the 1996 Third Quarter and the 1996 Nine Month
Period when compared to 1995 due primarily to less cash available for
investment.
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
1996 Nine Month Period on income up to the amount of the remaining loss
carryforward available. The Company did provide for state income taxes of
$79,000.
"Safe Harbor" Statement under the Private
Securities Litigation Reform Act of 1995
----------------------------------------
The statements which are not historical facts contained in this Form 10-
Q are forward looking statements that involve risks and uncertainties,
including, but not limited to, the effect of weather, the effect of economic
conditions, the impact of competitive products and services and pricing,
capacity and supply constraints or difficulties, the impact of the renovation
of a majority of the Company's remaining operating paint shops, the impact of
advertising and promotional activities and the effect of the Company's
accounting policies.
11
<PAGE>
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 herein.
(b) The Company has not filed any Current Reports on Form 8-K during
the Quarter ended January 31, 1996.
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
March 15, 1996 /s/ Daniel A. Seigel
--------------- ---------------------------
Dated Daniel A. Seigel, President
March 15, 1996 /s/ John K. Minnihan
--------------- ---------------------------
Dated John K. Minnihan, Vice President Finance
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of Earl Scheib, Inc., and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 1346
<SECURITIES> 1317
<RECEIVABLES> 235
<ALLOWANCES> 0
<INVENTORY> 1872
<CURRENT-ASSETS> 9311
<PP&E> 28103
<DEPRECIATION> 10506
<TOTAL-ASSETS> 28911
<CURRENT-LIABILITIES> 6166
<BONDS> 0
0
0
<COMMON> 4568
<OTHER-SE> 14194
<TOTAL-LIABILITY-AND-EQUITY> 28911
<SALES> 32062
<TOTAL-REVENUES> 32062
<CGS> 24175
<TOTAL-COSTS> 24175
<OTHER-EXPENSES> 8525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1680
<INCOME-TAX> 79
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1601
<EPS-PRIMARY> $.35
<EPS-DILUTED> $.35
</TABLE>
