<PAGE> 1
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, 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 (Zip Code)
executive offices)
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 3, 1996 the registrant had 4,570,728 shares of its Capital Stock,
$1.00 par value, issued and outstanding.
This report contains a total of 9 pages.
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PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
---------
October 31, April 30,
1996 1996
- ------ ---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,639 $ 1,827
Marketable securities 1,169 536
Accounts receivable 207 180
Inventories 1,206 1,389
Prepaid expenses 1,259 1,372
Deferred income taxes 963 963
Property held for sale 526 1,096
------- -------
Total Current Assets 8,969 7,363
Property and Equipment, net 18,374 18,040
Deferred Income Taxes 1,345 1,345
Other, Primarily Cash Surrender Value
of Life Insurance 1,882 1,762
------- -------
Total Assets $30,570 $28,510
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 858 $ 1,762
Accrued expenses 5,753 4,883
------- -------
Total Current Liabilities 6,611 6,645
------- -------
Deferred Management Compensation 3,976 3,809
------- -------
Commitments and Contingencies (Note 4) -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized
12,000,000; issued and outstanding
4,571,000 and 4,568,000 4,571 4,568
Additional paid-in capital 5,531 5,522
Retained earnings 9,881 7,966
------- -------
Total Shareholders' Equity 19,983 18,056
------- -------
Total Liabilities and Shareholders'
Equity $30,570 $28,510
======= =======
</TABLE>
<PAGE> 3
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
October 31, October 31,
----------- -----------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $13,290 $12,537 $27,930 $24,673
Cost of sales 9,249 8,368 18,618 17,318
------- ------- ------- -------
Gross profit 4,041 4,169 9,312 7,355
Selling and administrative expense 3,796 3,134 7,839 5,989
------- ------- ------- -------
Operating income 245 1,035 1,473 1,366
Other income 73 1,717 499 1,868
------- ------- ------- -------
Income before income taxes 318 2,752 1,972 3,234
Income taxes 26 95 57 115
------- ------- ------- -------
Net income $ 292 $ 2,657 $ 1,915 $ 3,119
======= ======= ======= =======
Net income per share $ .06 $ .58 $ .40 $ .68
======= ======= ======= =======
Cash dividend per share - - - -
======= ======= ======= =======
Shares outstanding 4,741 4,568 4,741 4,568
======= ======= ======= =======
</TABLE>
<PAGE> 4
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
-----------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 2,781 $ 683
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,645) (2,282)
Proceeds from disposal of property and
equipment 1,414 3,784
Investment in marketable securities (633) (781)
Other - net (117) (97)
-------- -------
Net cash provided by (used in) investing
activities (981) 624
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 12 --
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS: 1,812 1,307
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE
PERIOD 1,827 3,417
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 3,639 $ 4,724
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes refunded (paid) during this period $ 1,625 $ (43)
======= =======
</TABLE>
<PAGE> 5
EARL SCHEIB, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1. Basis of Presentation
The condensed financial statements have been prepared by Earl Scheib, Inc.
(the "Company") without audit, in accordance with generally accepted accounting
principles. Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted or condensed. It is management's belief
that the disclosures made are adequate to make the information presented not
misleading and reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of financial position and results
of operations for the periods presented. The results of operations for the
periods presented should not be considered as necessarily indicative of
operations for the full year 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, 1996 and the notes thereto included in the Company's Form 10-K.
NOTE 2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, April 30,
1996 1996
---- ----
<S> <C> <C>
Finished goods $1,383 $1,639
Raw materials 447 374
LIFO Reserve (624) (624)
------- ------
Inventories $1,206 $1,389
======= ======
</TABLE>
Note 3. Income Taxes
In the first quarter of fiscal 1997, the Company received federal
income tax refunds of $1,696 resulting from the application of net operating
loss carrybacks. Approximately $448 of the tax refunds relate to the benefit of
carrying back net operating losses to periods for which the tax rates exceeded
the current federal income tax rate. The $1,696 refund is currently deferred on
the Company's balance sheet and will be recognized as tax benefits in the
Company's future statement of operations upon the resolution of various
uncertainties.
Note 4. Commitments and Contingencies
In October 1996, the bank fully released the Company from all
covenants, guarantees, and obligations relating to the estate of Earl A. Scheib
bank loans discussed in Note 8 in the Company's Form 10-K for the fiscal year
ended April 30, 1996.
NOTE 5. Earnings Per Share
Earnings per share is computed using the weighted average number of shares
of common stock outstanding and common stock equivalents when dilutive (using
the modified treasury stock method in 1996). Fully diluted amounts for each
period do not differ materially from amounts presented. The weighted average
number of shares used to compute earnings per share were 4,741,000 in fiscal
1997 and 4,568,000 in fiscal 1996.
<PAGE> 6
Note 6. Reclassification
Certain reclassifications have been made to the amounts for the quarter and
six months ended October 31, 1995, to conform to the 1996 presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
QUARTER ENDED OCTOBER 31, 1996 COMPARED TO THE QUARTER ENDED OCTOBER 31, 1995
Total sales during the quarter ended October 31, 1996 ("1997 Second
Quarter") increased by $753 or 6.0% which consisted of same shop (shops open one
year or more) sales increases of $1,143 or 9.7% compared to the respective prior
year period, partially offset by 6 fewer shops in fiscal 1997 compared to fiscal
1996. The increase in sales resulted primarily from new products offered to
customers, the conversion of a majority of the Company's paint and body shops to
the New Earl Scheib Shop format, more extensive advertising and improvements in
shop operations
Gross profit dollars in the 1997 Second Quarter decreased by $128 compared
to the prior year period due mainly to a decrease in gross margin percent
partially offset by the increase in sales discussed above. Gross profit margins
decreased from 33.3% to 30.4% due to higher payroll for shop management and
payroll taxes, higher depreciation charges related to the conversion of shops to
the New Earl Scheib Shop format and higher charges for insurance.
Selling, general and administrative expense increased by $662 or 3.6% of
sales compared to the prior year period. Advertising expense accounted for $446
of the increase due, in part, to the testing of image advertising to introduce
the New Earl Scheib Shop format (based upon results to date, the Company has
decided to reduce its image advertising program and to further reduce its
advertising expense has insourced the majority of its advertising work effective
November 15, 1996), while other selling, general and administrative expenses
increased a net of $216 primarily as a result of personnel additions and testing
new incentive programs at the field level (which management does not believe
were productive and has subsequently discontinued).
Other income consists of gains from sales of excess real estate and
interest income. During the 1997 Second Quarter, the Company sold 2 properties
for a net gain of $36 compared to a net gain of $1,669 from the sale of seven
properties in the prior year period. Interest income, generated from the
investment of cash in short-term instruments, was lower in the 1997 Second
Quarter than in the prior year period, $37 and $48 respectively.
In the fiscal year ended April 30, 1996, the Company did not recognize its
entire net operating loss carryforward as a tax benefit for financial reporting
purposes. Accordingly, tax benefits from the 1996 net operating loss
carryforward were available to more than offset the Company's financial federal
tax provision for the 1997 Second Quarter. Due to income allocation and state
income tax laws, the Company did have income tax liabilities in some states for
which the Company provided $26.
<PAGE> 7
SIX MONTHS ENDED OCTOBER 31, 1996 COMPARED TO THE SIX MONTHS ENDED OCTOBER 31,
1995
Total sales during the six months ended October 31, 1996 ("First Six
Months") increased by $3,257 or 13.2% which consisted of same shop (shops open
one year or more) sales increases of $3,935 or 17.0% compared to the respective
prior year period, partially offset by 5 fewer shops in fiscal 1997 compared to
fiscal 1996. The increase in sales resulted primarily from increased car volume,
new products offered to customers, the conversion of a majority of the Company's
paint and body shops to the New Earl Scheib Shop format, heavier advertising and
improvements in shop operations. The new shop format includes new color schemes
both inside and out, new graphics, new customer information centers, new signage
and installation of state-of-the-industry infrared quartz drying systems.
Gross profit dollars in the 1997 First Six Months increased by $1,957
compared to the prior year period due mainly to the increase in sales discussed
above. Gross profit margins increased from 29.8% to 33.3% of sales as a result
of new higher margin products partially offset by higher costs in labor and
depreciation expense, primarily in the 1997 Second Quarter.
Selling, general and administrative expense increased by $1,850 or 3.8% of
sales compared to the prior year period. Advertising expense accounted for
$1,294 of the increase due, in part, to the testing of image advertising to
introduce the New Earl Scheib Shop format (based upon results to date, the
Company has decided to reduce its image advertising program and to further
reduce its advertising expense has insourced the majority of its advertising
work effective November 15, 1996), while other selling, general and
administrative expenses increased a net of $556 primarily as a result of
personnel additions and the testing of incentive programs at the field level
(which management does not believe were productive and has subsequently
discontinued).
Other income consists of gains from sales of excess real estate and
interest income. During the First Six Months, the Company sold 10 properties for
a net gain of $419 compared to a net gain of $1,796 from the sale of 15
properties in the prior year period. Interest income, generated from the
investment of cash in short-term instruments, was higher in the First Six Months
than in the prior year period, $80 and $72 respectively.
In the fiscal year ended April 30, 1996, the Company did not recognize its
entire net operating loss carryforward as a tax benefit for financial reporting
purposes. Accordingly, tax benefits from the 1996 net operating loss
carryforward were available to more than offset the Company's financial federal
tax provision for the First Six Months. Due to income allocation and state
income tax laws, the Company did have income tax liabilities in some states for
which the Company provided $57.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are based upon its seasonal working capital
needs and capital requirements for capitalized additions and improvements and
expansion. The first and second quarters usually have positive cash flow from
operations while the third and fourth quarters are net users of cash.
As of October 31, 1996, the Company had current assets of $8,969 and
current liabilities of $6,611 for a net working capital position of $2,358. The
Company has no long-term debt except for its deferred management
<PAGE> 8
compensation plan which is partially funded through various life insurance
policies the company maintains. During the fiscal year ending April 30, 1997
("Fiscal 1997") the Company plans to open up to 10 new shops (depending upon the
availability of locations) and perform various improvements for an estimated
cost of $2.7 million.
In the First Six Months, the Company had capitalized expenditures of $1,645
(which are included in the $2.7 million of cash requirements described in the
previous paragraph) which were financed largely through $1,414 of proceeds from
sales of excess real estate. The Company expects that future cash flow from
operations will be enhanced by these capital additions.
During the First Six Months, net cash provided by operations was $2,781, a
307% increase over the amount of cash provided in the six months ended October
31, 1995. The increase in cash flow resulted from increased earnings ($174) net
of gains on sales of real estate and federal income tax refunds resulting from
the carryback of net operating losses ($1,696), partially offset by a net
reduction in other liabilities (primarily restructuring liabilities). Due to
additional sales from remodeled shops, management believes that cash flow from
operations will be positive in fiscal 1997.
The other major source of cash flow for the Company is the sale of excess
real estate. As of October 31, 1996 the Company had 13 parcels of real estate
offered for sale. If all of these sales are consummated in fiscal 1997, then the
Company should receive approximately $2.2 million in cash. The Company also has
an additional 72 parcels of unencumbered real estate, including the Company's
headquarters and paint factory, which could be used as security to obtain
outside financing; however, management currently does not believe this action is
necessary and has no present plans to seek outside financing.
Management believes that internally generated funds as well as funds from
the sale of excess real estate will be more than adequate to satisfy its
anticipated cash requirements in fiscal 1997.
"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, changes in laws and regulations applicable to the
Company, the impact of the renovation of a majority of the Company's operating
paint shops to the New Earl Scheib Shop format, the impact of the Company's
organizational restructuring and the impact of advertising and promotional
activities.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data, Article 5 is filed herein.
(b) The Registrant filed on September 12, 1996, a current report on
Form 8-K furnishing information of those matters submitted to a
vote of security holders at the Company's Annual Meeting of
Shareholders held on August 23, 1996.
<PAGE> 9
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 13, 1996 /s/ Daniel A. Seigel
- ----------------- --------------------
Dated Daniel A. Seigel, President and
Chief Executive Officer
December 13, 1996 /s/ John D. Branch
- ----------------- ------------------
Dated John D. Branch, Senior Vice President and
Chief Financial Officer
<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> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 3,639
<SECURITIES> 1,169
<RECEIVABLES> 207
<ALLOWANCES> 0
<INVENTORY> 1,206
<CURRENT-ASSETS> 8,969
<PP&E> 29,662
<DEPRECIATION> 11,288
<TOTAL-ASSETS> 30,570
<CURRENT-LIABILITIES> 6,611
<BONDS> 0
0
0
<COMMON> 4,571
<OTHER-SE> 15,412
<TOTAL-LIABILITY-AND-EQUITY> 30,570
<SALES> 27,930
<TOTAL-REVENUES> 27,930
<CGS> 18,618
<TOTAL-COSTS> 18,618
<OTHER-EXPENSES> 7,839
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,972
<INCOME-TAX> 57
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,915
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
