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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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(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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4822
EARL SCHEIB, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-1759002
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8737 Wilshire Boulevard
Beverly Hills, California 90211-2795
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(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
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As of September 10, 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 10 pages.
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PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
---------
July 31, April 30,
1996 1996
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<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 4,207 $ 1,827
MARKETABLE SECURITIES 243 536
ACCOUNTS RECEIVABLE 254 180
INVENTORIES (NOTE 2) 1,369 1,389
PREPAID EXPENSES 1,438 1,372
DEFERRED INCOME TAXES 963 963
PROPERTY HELD FOR SALE 606 1,096
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TOTAL CURRENT ASSETS 9,080 7,363
PROPERTY AND EQUIPMENT - NET 18,182 18,040
DEFERRED INCOME TAXES 1,345 1,345
OTHER, PRIMARILY CASH SURRENDER VALUE
OF LIFE INSURANCE 1,829 1,762
-------- --------
$ 30,436 $ 28,510
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 716 $ 1,762
ACCRUED EXPENSES (NOTE 3) 6,162 4,883
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TOTAL CURRENT LIABILITIES 6,878 6,645
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DEFERRED MANAGEMENT COMPENSATION 3,867 3,809
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COMMITMENTS AND CONTINGENCIES (NOTE 3) - -
SHAREHOLDERS' EQUITY:
CAPITAL STOCK $1 PAR - SHARES AUTHORIZED
12,000,000; ISSUED AND OUTSTANDING 4,571,000
AND 4,568,000 4,571 4,568
ADDITIONAL PAID-IN CAPITAL 5,531 5,522
RETAINED EARNINGS 9,589 7,966
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TOTAL SHAREHOLDERS' EQUITY 19,691 18,056
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$ 30,436 $ 28,510
======== ========
</TABLE>
2
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Unaudited
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Three Months Ended July 31,
----------------------------
1996 1995
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<S> <C> <C>
Net Sales $ 14,640 $ 12,136
Cost of sales 9,369 8,952
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Gross Profit 5,271 3,184
Selling, general and administrative expense 4,043 2,853
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Operating Income 1,228 331
Other income 426 151
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Income Before Income Taxes 1,654 482
Provision for income taxes 31 20
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Net Income $ 1,623 $ 462
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Earnings Per Share (Note 4) $ .34 $ .10
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</TABLE>
3
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
---------
Three Months Ended July 31,
---------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 1,838 $ 518
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (925) (1,048)
Proceeds from disposal of property and equipment 1,207 971
Reduction in marketable securities 293 -
Other - net (45) (44)
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Net cash provided by (used in) investing
activities 530 ( 121)
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CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 12 -
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NET INCREASE IN CASH AND CASH EQUIVALENTS: 2,380 397
Cash and Cash Equivalents at beginning of period 1,827 3,417
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Cash and Cash Equivalents at end of period $ 4,207 $ 3,814
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes refunded (paid) during the period $ 1,657 $ (8)
======== ========
</TABLE>
4
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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>
July 31, April 30,
1996 1996
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<S> <C> <C>
Finished goods $1,578 $1,639
Raw materials 415 374
LIFO Reserve (624) (624)
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Inventories $1,369 $1,389
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</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. These refunds are
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. 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 4,718,000 in 1996 and
4,568,000 in 1995.
5
<PAGE> 6
NOTE 5. Reclassification
Certain reclassifications have been made to the amounts for the
quarter ended July 31, 1995, to conform to the quarter ended July 31,
1996, presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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(Dollars in thousands)
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Total sales during the first quarter ended July 31, 1996 ("1997 First
Quarter") increased by $2,504 or 21% which consisted of same shop sales (shops
open 1 year or more) increases of $2,771 or 24% compared to the respective prior
year period, partially offset by 7 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, better promotions 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 Quarter increased by $2,087
compared to the prior year period due mainly to the increase in sales
discussed above. Gross profit margins increased from 26% to 36% of
sales as a result of new higher margin products and the absorption of
direct labor and overhead expense over an increased sales volume.
Selling, general and administrative expense increased by $1,190 or 4% of
sales compared to the prior year period. Advertising expense accounted for
$848 of the increase due in large part to the testing of image advertising to
introduce the New Earl Scheib Shop Format, while other selling, general and
administrative expenses increased a net of $342 primarily as a result of
personnel additions and incentive programs at both the field and corporate
level.
Other income consists of gains from sales of excess real estate and
interest income. During the 1997 First Quarter, the Company sold seven
properties for a net gain of $383 compared to a net gain of $127 from the sale
of seven properties in the prior year period. Interest income, generated from
the investment of cash in short-term instruments, was higher in the 1997 First
Quarter than in the prior year period, $43 and $24 respectively. This increase
in interest income resulted mainly from an increase in the average funds
available for investment in the 1997 First Quarter.
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 First 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 $31.
6
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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 quarter are
net users of cash.
As of July 31, 1996, the Company had current assets of $9,080 and current
liabilities of $6,878 for a net working capital position of $2,202. The
Company has no long-term debt except for its deferred management compensation
plan. During the fiscal year ending April 30, 1997 ("fiscal 1997") the Company
plans to open 20 new shops (depending upon the availability of locations) and
perform various improvements for an estimated cost of $3,100.
In the 1997 First Quarter, the Company had capitalized expenditures of $925
(which is included in the $3,100 of cash requirements described in the previous
paragraph) which were financed largely through $1,207 of proceeds from sales of
excess real estate. The Company expects that future cash flow from operations
will be enhanced from the remodels of its paint and body shops.
Historically, a major source of cash flow for the Company is from
operations. During the 1997 First Quarter, cash provided by operations was
$1,838, a 255% increase over the amount of cash provided in the three months
ended July 31, 1995. The increase in cash flow resulted from increased
earnings ($1,161) and federal income tax refunds resulting from the carryback of
net operating losses ($1,696), partially offset by a net reduction in accounts
payable and other 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 July 31, 1996 the Company had 12 parcels of real estate
offered for sale. If all of these sales are consummated in fiscal 1997 (which
management believes is likely to happen), then the Company should receive
approximately $1,700 in cash. The Company also has an additional 76 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.
7
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The information called for in this Item has been previously disclosed
in the Company's Current Report on Form 8-K, filed on September 12, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule, Article 5 is filed herein.
(b) The Registrant has not filed any Current Reports on Form 8-K during
the quarter ended July 31, 1996.
8
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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
September 13, 1996 /s/ Daniel A. Seigel
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Dated Daniel A. Seigel, President and
Chief Executive Officer
September 13, 1996 /s/ John D. Branch
- ------------------ ----------------------------------------
Dated John D. Branch, Senior Vice President and
Chief Financial Officer
9
<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> JUL-31-1996
<CASH> 4,207
<SECURITIES> 243
<RECEIVABLES> 254
<ALLOWANCES> 0
<INVENTORY> 1,369
<CURRENT-ASSETS> 9,080
<PP&E> 29,076
<DEPRECIATION> 10,894
<TOTAL-ASSETS> 30,436
<CURRENT-LIABILITIES> 6,878
<BONDS> 0
0
0
<COMMON> 4,571
<OTHER-SE> 15,120
<TOTAL-LIABILITY-AND-EQUITY> 30,436
<SALES> 14,640
<TOTAL-REVENUES> 14,640
<CGS> 9,369
<TOTAL-COSTS> 9,369
<OTHER-EXPENSES> 4,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,654
<INCOME-TAX> 31
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,623
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
