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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED APRIL 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4822
EARL SCHEIB, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 652-4880
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Capital Stock, $1.00 Par Value American Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE
------------------------
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 at least the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
As of July 16, 1997 the registrant had 4,589,478 shares of its Capital
Stock, $1.00 par value, issued and outstanding, and the aggregate market value
of the voting stock held by non-affiliates of the registrant was $33,847,400
(approximately based upon the closing price of the Capital Stock on the American
Stock Exchange on such date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal
year ended April 30, 1997 are incorporated into Part II by reference.
Portions of the registrant's Proxy Statement dated July 28, 1997 for use at
the registrant's annual meeting of shareholders are incorporated into Part III
by reference.
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PART I
ITEM 1. BUSINESS
GENERAL
Earl Scheib, Inc., a Delaware corporation, and its subsidiaries
(collectively referred to as the "Company") is celebrating its 60th year in
business as the successor to a business founded as a sole proprietorship by Earl
A. Scheib in 1937. The Company's principal executive offices are located at 8737
Wilshire Boulevard, Beverly Hills, California 90211. The Company maintains
personnel, systems, advertising, real estate and accounting functions at its
principal executive offices. See ITEM 2. "PROPERTIES."
At April 30, 1997, the Company operated a chain of 158 automobile
production paint and body shops which specialize in low priced repainting of
automobiles and performing body repairs other than major collision repair. The
Company also offers at various shops the replacement of car body parts using
new, used and after-market parts, glass replacement as well as factory style
pinstriping, molding and vinyl top replacement. All of the Company's sales take
place in either cash or credit cards.
The Company's shops operate under the name of the New Earl Scheib Paint and
Body Shop. The Company's shops are located in 137 cities throughout the United
States with 48 shops in California.
RESTRUCTURING
In November, 1994, management of the Company was reconstituted when Donald
R. Scheib was appointed as Chairman of the Board and Daniel A. Seigel was
employed as President and Chief Executive Officer and elected to the Company's
Board of Directors. In March 1995, management was further reconstituted with the
resignation of officers Albert Scheib (who remained employed until December 1996
as the Company's Director of Research and Development), Richard Gariglio and Sam
LaMonto. Those three officers' positions were consolidated into one Executive
Vice President position held by Christian K. Bement who joined the Company in
January, 1995.
During the fiscal year ended April 30, 1995, ("fiscal 1995") the Company
evaluated its operations and developed a comprehensive restructuring plan with
the intent to reduce operating expenses and to focus its resources on profitable
operations. As part of this plan the Company closed 84 unprofitable shops
located primarily in the Midwestern and Eastern United States and eliminated the
executive, office and shop personnel associated with those operations. The
Company recorded a pre-tax charge of $4,287,000 in fiscal 1995 for costs
associated with the restructuring plan which included, but was not exclusively
related to, the closing of the unprofitable paint shops.
Thirty-two of the shops closed in the Company's restructuring were located
on real estate owned by the Company. During fiscal 1995 the Company sold 3 of
these real estate parcels for a net gain of $55,000.
During the fiscal year ended April 30, 1996, ("fiscal 1996") the Company
renovated and converted 137 of its shops to the New Earl Scheib Paint and Body
Shops (the "New Shops"). Conversion to a New Shop included new paint and
graphics, new exterior signage, a new customer information center and the
installation of a new Infrared Quartz Finish Drying System to dry the paint on
the car. New Shop conversions occurred in California during the first quarter of
fiscal 1996. Because of the significant comparable shop-for-shop sales increases
in the California New Shop remodels (New Shop remodels experienced a 37%
comparable shop-for-shop sales increase during the period from August 1, 1995,
through April 30, 1996) a decision was made to remodel a majority of the
Company's shops to New Shops.
The cost of converting shops to New Shops during fiscal 1996 was
approximately $4.6 million which was financed from the sale of 22 Company owned
properties (which had previously been occupied by unprofitable paint and body
shops closed during the restructuring) and from internal cashflow.
The Company also restructured its operational management organization in
fiscal 1996. The position of Production and Operation Manager, whose
responsibility was to directly supervise the shop manager, was eliminated, and
the number of Division Managers was increased from 12 to 17 positions. In
addition, a new
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Assistant Division Manager position was created. The restructuring resulted in
the Division Managers supervising fewer shops which improved the quality of the
shop supervision and enabled the shop managers to directly benefit from the
Division Managers' years of experience. The Company expects that the creation of
the smaller divisions with fewer shops will continue to improve sales and
decrease expenses.
During the fiscal year ended April 30, 1997 ("fiscal 1997"), the Company
made the decision to commence opening new shops. The Company's primary objective
is to expand in the existing strong markets in the Western United States.
Penetration in these markets will enable the Company to open new shops without
significantly increasing overhead expenses. The Company anticipates utilizing
state of the industry paint booths and enclosed dryers in most of the new shops
which should further improve quality. The expansion in existing markets is
expected to continue over the next couple of fiscal years and is then expected
to expand geographically into the other areas.
During fiscal 1997, the Company opened 5 new shops, located in California,
Washington, Oregon and Missouri. The Company plans to open approximately 10 - 20
new shops in the fiscal year ending April 30, 1998.
SERVICES
The Company currently offers three paint packages which range in price
based upon the color of the paint, number of coats of paint, additional services
and length of warranty provided in each package. Customers may also purchase
options to the paint packages such as UV Supergloss, Pearlescent paint colors
and new Euroclear(TM) clear coat for an additional cost.
The Company paints vehicles on a production line basis. The vehicle is
sanded to remove most chips, scratches, surface rust and oxidized paint. The
vehicle is then air-blown using a high pressured air hose to remove excess dust.
The exposed chrome and glass areas are masked and the vehicle is spray painted
in a dust-free fully filtered spray booth. In the Company's New Shops, the
vehicle is then dried in either a semi-enclosed or fully enclosed Infrared
Quartz Finish Drying System. This new drying process dries the paint by quartz
infrared waves increasing the metal temperature just enough to heat the paint
such that the paint on the vehicle dries from the inside to the outside. The
quartz heat tubes utilize high intensity electromagnetic waves to heat the metal
and are controlled by infrared sensors and computer aided temperature controls.
Finally, the vehicle is detailed, which involves removing the masking paper and
tape, removing overspray and reinstalling any accessories removed during the
painting process.
In connection with its painting operations, the Company also performs, for
an additional cost, body and fender repair work. Such body and fender work
accounted for approximately 22% of the Company's sales during fiscal 1997, and
24% in 1996 and 1995, respectively.
During fiscal 1997, the Company began the manufacture and distribution of a
new EuroPaint(TM) coating system. EuroPaint(TM) is a true two (2) component
acrylic polyurethane coating which offers superior quality and performance.
EuroPaint(TM) is characterized by having extremely high gloss and
distinctiveness of image, outstanding exterior durability and exceptional
chemical resistance. This type of paint is generally considered the highest
quality after market paint and far superior to the paint formulation used by the
Company's competitors and is commonly used by many European luxury car
manufacturers.
The Company also introduced EuroClear.(TM) EuroClear(TM) is an option which
offers customers a true and separate clear coat with the same superior quality
and performance properties offered by EuroPaint(TM). EuroClear(TM)enhances and
intensifies the high gloss and distinctiveness of image of EuroPaint(TM)
providing a very deep glossy look characteristic of basecoat/clearcoat (two
stage) paint systems.
The Company's color offering was expanded to include a new, unique line of
colors which capture the glamour and allure of pearlescence. Seven (7) new
colors offer an iridescence and lustre creating a visual excitement which can
only be achieved by the use of pearlescent pigments. Pearlescent colors are true
two-and three-stage color paint systems, which offer customers a unique
production shop product.
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During the fourth quarter of fiscal 1997, the Company introduced new and
updated 1997 Colors. These modern colors were based upon the earth's natural
hues and tones taken from satellite images of the earth from space. The 1997
Colors are in response to consumer demand for certain colors ranging from
non-metallic greens and reds to metallic shades of purple and blue. The 1997
Colors are available to the Company's customers for an additional charge.
During fiscal 1996, the Company introduced a new Company developed product
called UV Supergloss. This new product is sold as an additive for two of the
Company's paint packages. The UV Supergloss provides the car with a brighter
shine and is designed to protect the paint from the harmful effects of
Ultraviolet rays.
RAW MATERIALS
Most of the raw materials used by the Company in manufacturing its paint,
including silicones, resins and pigments, are available from a number of
sources. A majority of such raw materials are provided to the Company by a
variety of wholesale chemical companies, including Dupont and Akzo-Nobel. The
Company has not encountered any major difficulty in obtaining adequate supplies
of its major raw materials and does not expect to encounter any such difficulty
in the foreseeable future.
By manufacturing its own paint and paint related products, including
primers and sealers, the Company is better able to ensure the quality of its
products, to comply with environmental regulations regarding its products and to
control product availability and cost. However, if necessary, automobile paint
can be obtained from other wholesale manufacturers.
SEASONALITY
The Company's sales are seasonal in nature. Because of weather conditions
and winter holidays, sales for the months of November, December, January and
February are usually lower than the sales in the remaining months of the year.
As a result, a proportionately greater share of the Company's sales and earnings
have historically occurred in the first half of its fiscal year.
COMPETITION
The automobile painting business in which the Company is engaged is highly
competitive. The Company competes not only with nationally and regionally based
companies engaged in production style automobile painting utilizing techniques
similar to its own, but also with thousands of individual automobile paint and
body shops. Both types of competitors generally price their services higher than
those charged by the Company.
In the field of non-franchised production line automobile painting, the
Company believes that it is substantially larger than any of its competitors and
that its experience, and the reasonable prices of its services, will enable it
to continue to effectively compete. The Company expects that its recent shop
renovations and operational restructuring along with its increased emphasis on
developing new products will enable it to compete more effectively than it
currently does.
RESEARCH AND DEVELOPMENT
The Company is engaged in certain research and development to improve its
existing paint products, update product lines and develop new products which can
be introduced to the shops without significant cost or training such as the
Europaint(TM) and Euroclear(TM), UV Supergloss and the new colors introduced
during fiscal 1997 and 1996. The Company constantly reviews new products and
techniques developed by its suppliers and others in its and related industries
for their applicability to the Company's operations. Although the Company's
research and development costs are increasing to accomplish these objectives,
such expenditures during the three years ended April 30, 1997 were not a
significant percentage of sales.
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COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company's automobile painting and paint manufacturing operations are
subject to federal, state and local environmental regulations in many of the
areas in which it operates. The Company believes its operations substantially
comply with existing regulations in those geographic areas in which it now
operates. The Company, since it manufactures its owns products, has the ability
to modify and/or develop paint and paint related product formulations to
reasonably ensure continued compliance with new and changing environmental
regulations. In addition, since the Company primarily paints vehicles in its own
colors, there is little or no waste product produced.
EMPLOYEES
At April 30, 1997, the Company employed approximately 1,006 employees, of
which 309 were sales, administrative, management or executive personnel and 697
were production personnel. Production employees are represented by the
International Brotherhood of Teamsters with whom the current collective
bargaining agreement became effective as of September 16, 1993 and extends
through September 15, 1997. None of the Company's executive, administrative,
shop management or clerical personnel are represented by a union. Management
believes its employee relations are good.
ITEM 2. PROPERTIES
The Company owns the land and buildings occupied by 71 of the Company's
operating shops as of April 30, 1997. These properties are debt free. The
remaining 87 of the Company's 158 shops operating at the end of fiscal 1997 were
leased from outside third parties. The 158 shops are located in 137 cities in 31
states. During fiscal 1997 the Company opened 5 shops and closed 7 shops.
Leases for shop premises vary as to their terms, rental provisions,
expiration dates and the existence of renewal options. The number of years
remaining on leases for the Company's shops (excluding unexercised options)
range from 1 to 11 years. All of the leases have fixed rentals with no
additional rents based upon shop sales. Many leases also require the Company to
pay all or a portion of the real estate taxes, insurance charges and maintenance
expenses relating to the leased premises. The Company does not maintain
earthquake insurance for its shops.
The Company secures sites for new stores by a variety of methods, including
lease, purchase, assignment or sublease of existing facilities, build-to-suit
leases, or purchase and development of sites that may be owned by the Company or
sold and leased back by the Company under sale-and-leaseback arrangements. In
many cases, the Company is able to lease or sublease existing buildings that
have been previously used for other purposes, such as automobile repair shops.
These sites must be suitable for the Company's needs, at a lease rate that is
within the Company's guidelines and without the need for substantial
expenditures to convert the facilities to the Company's needs. In connection
with the opening of new shops, the Company generally makes capital investments
and incurs expenditures (excluding expenditures to purchase land, buildings or
leasehold interest) of less than $100,000. These costs consist of paint and
supply inventories, fixtures, equipment, signs and pre-opening expense.
The majority of the Company's stores are in stand-alone sites on main
streets and have adjacent parking facilities. Store hours are generally from
7:30 a.m. to 6:00 p.m. Monday through Friday and 8:00 a.m. to 12:00 p.m. on
Saturday. The Company's shops are generally 6,000 square feet with new shops
ranging from 4,000 square feet to 7,000 square feet and existing shops ranging
in size from approximately 5,000 square feet to approximately 12,000 square
feet.
As of April 30, 1997, the Company had 4 parcels of real estate for sale.
Upon sale, the Company should receive approximately $586,000 in cash. The
properties had a net book value at April 30, 1997, of approximately $530,000
which are shown in the financial statements as Property held for sale. Any gain
on the sale of these properties will be recognized when the properties are sold.
The Company owns its corporate offices, located at 8737 Wilshire Boulevard,
Beverly Hills, California 90211. The facility has three floors and approximately
10,500 square feet of office space. In addition, the
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Company owns a manufacturing and warehousing facility in Springfield, Missouri.
The Company manufactures and warehouses paint (and warehouses other supplies) in
this facility until needed by the Company's shops. This facility occupies
approximately 30,600 square feet. These properties are also debt free.
The Company believes its operating properties are in good operating
condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in several legal proceedings and claims arising in
the ordinary course of its business. Management believes that the final
disposition of such matters should not have a material adverse effect on the
Company's operations and/or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
The Company's Annual Report to Shareholders for the year ended April 30,
1997 ("1997 Annual Report") is filed as Exhibit 13 to this Report on Form 10-K.
The responses to Items 5, 6, 7 and 8 are contained in the 1997 Annual Report on
the pages noted and are specifically incorporated herein by reference in this
Report on Form 10-K. With the exception of these items, the 1997 Annual Report
is not deemed filed as a part of this Report.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
"Market Information" appearing on page 15 of the 1997 Annual Report is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" appearing on page 15 of the 1997 Annual Report is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing on pages 4 through 6 of the 1997 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appearing on pages 7
through 14 of the 1997 Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed a Current Report on Form 8-K dated March 12, 1996
disclosing a change in its certifying accountant.
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PART III
ITEMS 10., 12., 13. AND 14.
The information required by these items is contained in the Company's
definitive Proxy Statement dated July 28, 1997 which relates to election of the
Company's directors and which was filed with the Commission within 120 days
after the close of the Company's fiscal year pursuant to Regulation 14A of the
Securities Exchange Act of 1934.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and Report
of Independent Auditors, appearing on pages 7 through 14 of the 1997 Annual
Report, are filed as part of this Report on Form 10-K:
For the Fiscal Years Ended April 30, 1997, 1996 and 1995:
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Consolidated Balance Sheets as of April 30, 1997 and 1996
Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
The Exhibits required to be filed hereunder are indexed on pages 8
through 9.
(B) REPORTS ON FORM 8-K
Not applicable.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The statements which are not historical facts contained in this Annual
Report on Form 10-K 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, 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 new Europaint(TM), the impact of the
Company's organizational restructuring and the impact of advertising and
promotional activities.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: July 28, 1997
By /s/ DANIEL A. SEIGEL
Daniel A. Seigel
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
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SIGNATURES TITLE DATE
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By: /s/ DANIEL A. SEIGEL President and Director July 28, 1997
- ----------------------------------------------- [Chief Executive Officer]
Daniel A. Seigel
By: /s/ DONALD R. SCHEIB Chairman of the Board of July 28, 1997
- ----------------------------------------------- Directors
Donald R. Scheib
By: /s/ ALEXANDER L. KYMAN Director July 28, 1997
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Alexander L. Kyman
By: /s/ ROBERT L. SPENCER Director July 28, 1997
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Robert L. Spencer
By: /s/ PHILIP WM. COLBURN Director July 28, 1997
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Philip Wm. Colburn
By: /s/ ROBERT WILKINSON Director July 28, 1997
- -----------------------------------------------
Robert Wilkinson
By: /s/ JOHN D. BRANCH Senior Vice President and July 28, 1997
- ----------------------------------------------- Chief Financial Officer
John D. Branch [Principal Financial and
Accounting Officer]
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EXHIBIT INDEX
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SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
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3(a)(1) Certificate of Incorporation of Earl Scheib, Inc., dated December
22, 1961, as amended, filed as Exhibit 3(a) to Registrant's
Registration Statement No. 2-21540, effective as of August 7, 1963,
and hereby incorporated herein by reference.........................
3(a)(2) Amendment to Certificate of Incorporation dated October 28, 1969,
filed as Exhibit 1 to Registrant's Form 8-K Current Report for the
month of October, 1969 and hereby incorporated herein by
reference...........................................................
3(a)(3) Amendment to Certificate of Incorporation dated August 16, 1971,
filed as Exhibit 1 to Registrant's Form 8-K Current Report for the
month of August, 1971 and hereby incorporated herein by
reference...........................................................
3(a)(4) Amendment to Certificate of Incorporation dated November 4, 1983,
filed as Exhibit 3(a)(1) to Registrant's Form 8-K Current Report for
the month of August, 1983 and hereby incorporated herein by
reference...........................................................
3(a)(5) Amendment to Certificate of Incorporation dated October 2, 1986, as
set forth in the Proxy Statement dated July 22, 1986 and
Registrant's 10-Q Quarterly Report for the quarter ended July 31,
1986 and hereby incorporated herein by reference....................
3(b) Amended and restated Bylaws of Earl Scheib, Inc., filed as an
exhibit to Registrant's Current Report on Form 8-K dated August 15,
1995, and hereby incorporated herein by reference...................
10(d) Earl Scheib, Inc. 1982 Incentive Stock Option Plan, filed as Exhibit
10(d) to Registrant's Annual Report on Form 10-K for the fiscal year
ended April 30, 1982 and hereby incorporated herein by reference....
10(g) Employment Agreement dated as of November 18, 1994 between
Registrant and Daniel A. Seigel filed as Exhibit 10(g) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
April 30, 1995 ("1995 10-K") and hereby incorporated herein by
reference...........................................................
10(h) Stock Option Agreement dated as of November 30, 1994 between
Registrant and Daniel A. Seigel filed as Exhibit 10(h) to the
Registrant's 1995 Form 10-K and hereby incorporated herein by
reference...........................................................
10(i) Stock Option Agreement dated as of January 10, 1995 between
Registrant and Christian Bement filed as Exhibit 10(i) to the
Registrant's 1995 Form 10-K and hereby incorporated herein by
reference...........................................................
10(j) Employment Agreement dated as of November 18, 1994 between
Registrant and Donald R. Scheib filed as Exhibit 10(k) to the
Registrant's 1995 Form 10-K and hereby incorporated herein by
reference...........................................................
10(k) Earl Scheib, Inc. 1994 Performance Employee Stock Option Plan, June
27, 1994 filed as Exhibit 10(l) to the Registrant's 1995 Form 10-K
and hereby incorporated herein by reference.........................
10(l) Earl Scheib, Inc. 1994 Board of Directors Stock Option Plan, June
27, 1994 filed as Exhibit 10(m) to the Registrant's 1995 Form 10-K
and hereby incorporated herein by reference.........................
10(m) Agreement for Issuance of Letters of Credit dated as of February 16,
1995 between Registrant and City National Bank, filed as Exhibit
10(a) to Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1995, and hereby incorporated herein by
reference...........................................................
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SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
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10(n) Employment Agreement dated as of March 25, 1996 between Registrant
and John Branch.....................................................
13 1997 Annual Report to Stockholders of Earl Scheib, Inc. (not deemed
filed except to the extent that sections thereof are specifically
incorporated into this report on Form 10-K by reference)............
22 Subsidiaries of the Registrant filed as Exhibit 22 to Registrant's
Annual Report on Form 10-K for the fiscal year ended April 30, 1991
and hereby incorporated herein by reference.........................
24.1 Consent of Prior Independent Auditors...............................
24.2 Consent of Current Independent Auditors.............................
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EARL SCHEIB INC. AND SUBSIDIARIES
AVAILABILITY OF EXHIBITS
------------------------------------------------------
The Company will furnish upon request copies of the exhibits indicated on
pages 8 and 9 of the Form 10-K at a cost of 25c per page, which is the
reasonable cost to the Company in fulfilling the request.
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EARL SCHEIB, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following table sets forth the Company's operating results for the periods
indicated. Amounts are shown in thousands of dollars and as a percentage of
sales.
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YEAR ENDED APRIL 30,
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1997 1996 1995
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Net sales $48,348 100.0% $ 43,981 100.0% $ 47,288 100.0%
Cost of sales 34,543 71.4 33,069 75.2 37,705 79.7
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Gross profit 13,805 28.6 10,912 24.8 9,583 20.3
Selling, general and administrative expense 13,708 28.4 12,333 28.0 12,640 26.7
Restructuring charge -- -- -- -- 4,287 9.1
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Operating income (loss) 97 0.2 (1,421) (3.2) (7,344) (15.5)
Other income 1,050 2.2 2,401 5.4 366 0.8
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,147 2.4 980 2.2 (6,978) (14.7)
Provision (benefit) for income taxes 45 0.1 85 0.2 (1,425) (3.0)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,102 2.3% $ 895 2.0% $ (5,553) (11.7)
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FISCAL YEAR ENDED APRIL 30, 1997 ("FISCAL 1997") COMPARED TO FISCAL YEAR ENDED
APRIL 30, 1996 ("FISCAL 1996")
Total sales for fiscal 1997 increased $4,367 or 9.9% from fiscal 1996. This
increase resulted from a $5,740 or 13.8% same shop increase less $1,373 from net
shop closures. The same shop increase resulted from the roll-out of the
Company's "New Earl Scheib Shop" format for the paint and body shops, new
product offerings including the Company's recent introduction of EUROPAINT(TM),
improvements in shop operations and in the quality of our services.
Cost of sales decreased as a percent of sales from 75.2% in fiscal 1996
to 71.4% in fiscal 1997. The increase in gross margin is largely attributable to
the fixed nature of components of cost of goods sold which decrease as a percent
of sales as same shop sales increase. In dollars, cost of sales for fiscal 1997
increased $1,474 or 4.4% from fiscal 1996. The increase in dollars is largely
due to the increase in material costs and labor associated with the increase in
the number of cars painted plus increases in lease rates at certain locations.
Selling, general and administrative expense increased by $1,375 or 0.4%
of sales in fiscal 1997 compared to fiscal 1996. Advertising expense increased
by $666 (48.5% of the increase between fiscal 1997 and fiscal 1996) due to
additional promotion expense to introduce the New Earl Scheib Shop format as
well as various other advertising experiments. Decreases in net lease income and
miscellaneous income accounted for $277 (20.2% of the increase between fiscal
1997 and fiscal 1996) of the increase.
Other income consists of gains from the sale of excess real estate and
interest income. During fiscal 1997, the Company sold 21 properties (10 of which
were closed in the fiscal 1995 restructuring) for a net gain of $893 compared to
a net gain of $2,258 from the sale of 22 properties in fiscal 1996 (the majority
of which were closed in the 1995 restructuring). Interest income, generated from
the investment of cash in short-term instruments, was higher in fiscal 1997 than
in fiscal 1996, $157 and $143, respectively. This increase in interest income
resulted from a slightly higher amount of average funds available for investment
in fiscal 1997.
In fiscal 1996 the Company did not recognize its entire 1995 net
operating loss carryforward as a tax benefit for financial reporting purposes.
Accordingly, tax benefits from the 1995 net operating loss were available to
more than offset the Company's financial federal tax provision for fiscal 1997.
Due to income allocation and state income tax
4
<PAGE> 2
laws, the Company did have income tax liabilities in some states for which it
provided $45.
FISCAL YEAR ENDED APRIL 30, 1996 ("FISCAL 1996") COMPARED TO FISCAL YEAR ENDED
APRIL 30, 1995 ("FISCAL 1995")
Total sales for fiscal 1996 decreased $3,307 or 7.0% from fiscal 1995. This
decrease resulted from the Company closing, in fiscal 1995, 84 unprofitable auto
paint shops or 34% of the Company's shops, partially offset by a 16% or $5,841
increase in same shop sales.
The increase in same shop sales resulted mainly from the conversion of
the Company's paint and body shops to its New Earl Scheib Shop format. 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 drying systems.
The Company began remodeling its shops to the New Earl Scheib Shop
format in March, 1995, and had remodeled 137 shops by the end of fiscal 1996. As
can be seen in the table below, the Company's same shop sales increased with the
number of New Earl Scheib Shop remodels.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR.
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of New
Earl Scheib Shops 11 64 137 137
Same shop sales
percentage increase (1)% 16% 17% 38%
</TABLE>
Gross profit margins increased by $1,329 or 4.5% of sales in fiscal
1996 compared to fiscal 1995. The increase is due primarily to a reduction in
shop overhead expense resulting from the closure of 84 unprofitable shops in
fiscal 1995 as well as the introduction of new products in fiscal 1996.
Selling, general and administrative expense decreased by $307 in fiscal
1996 compared to fiscal 1995. Advertising expense increased by $222 due in part
to additional promotion expense to introduce the New Earl Scheib Shop format,
while other selling, general and administrative expenses decreased a net of $529
mainly as the result of closing 84 unprofitable shops in fiscal 1995. Selling,
general and administrative expense as a percent of sales increased in fiscal
1996, compared to fiscal 1995, mainly due to the increase in advertising spread
over fewer shops.
Other income consists of gains from the sale of excess real estate and
interest income. During fiscal 1996, the Company sold 22 properties (closed in
the fiscal 1995 restructuring) for a net gain of $2,258 compared to a net gain
of $84 from the sale of three properties in fiscal 1995. Interest income,
generated from the investment of cash in short-term instruments, was lower in
fiscal 1996 than in fiscal 1995, $143 and $282, respectively. This decrease in
interest income resulted from lower interest rates and lower average funds
available for investment in fiscal 1996.
In fiscal 1995 the Company did not recognize its entire net operating
loss carryforward as a tax benefit for financial reporting purposes.
Accordingly, tax benefits from the 1995 net operating loss carryforward were
available to more than offset the Company's financial federal tax provision for
fiscal 1996. Due to income allocation and state income tax laws, the Company did
have income tax liabilities in some states for which the Company provided $85.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are based upon its seasonal working capital
needs (the first and second quarters and occasionally the fourth quarter usually
have positive cash flow from operations while the third and occasionally the
fourth quarters are net users of cash) and its capital requirements for
capitalized additions and improvements and new shops.
As of April 30, 1997, the Company had current assets of $7,638 and
current liabilities of $6,418 for a net working capital position of $1,220. The
Company's long-term financial obligations consist of its deferred compensation
plan and two capital leases. During the fiscal year ending April 30, 1998
("fiscal 1998") the Company plans on opening up to 20 new shops (depending upon
the availability of locations) and performing various fixed asset improvements
for an estimated cost of $2,400.
5
<PAGE> 3
On July 13, 1997, the board of directors announced that it had
authorized the repurchase of up to 500,000 shares which is approximately 11% of
the Company's common stock outstanding. The stock purchase plan authorizes the
Company to make purchases from time-to-time in the open market or through
privately negotiated transactions and that the purchases will be dependent on
market conditions and availability of shares. Repurchased common shares will be
added to the Company's treasury shares and may be used to meet common stock
requirements for future benefit plans and other corporate purposes. Purchases
will be made with existing company cash or future cash flows from operations.
Historically, a major source of cash flow for the Company is from
operations. During fiscal 1997, cash provided by operations was $1,593 (some of
which was represented by an income tax refund), an improvement of $2,429 of
additional cash flow from operations compared to the $836 of cash used in
operations in fiscal 1996. Management believes (due to additional sales
resulting from the improved quality of the Company's product, new shops and
greatly decreased cash outlays for operating expenses), that cash flow from
operations will be higher in fiscal 1998 compared to fiscal 1997.
The other major source of cash flow for the Company is the sale of real
estate. As of April 30, 1997, the Company had 4 parcels of real estate it was
attempting to sell. If all of these sales close in fiscal 1998 then management
estimates it will receive approximately $586 in cash.
The Company also has an additional 73 parcels of nonencumbered
property, including the Company's headquarters and paint factory, which could be
used as security to obtain outside financing. In addition, the Company has
insurance policies on several employees which have a combined cash surrender
value of $1,683. If necessary the Company could either borrow against these
policies or liquidate these policies; however, management currently does not
believe that either of these action is necessary and has no plans to currently
seek outside financing.
In addition, the Company has an operating loss carryforward of $3,879
for tax purposes. Accordingly, the amount of taxes in fiscal 1998 which the
Company would normally pay from the improvement in operations and gain on the
sale of real estate will be greatly reduced, if not eliminated.
Management believes that internally generated funds as well as funds
from the sale of excess properties will be more than adequate to satisfy its
anticipated cash requirements in fiscal 1998.
6
<PAGE> 4
EARL SCHEIB, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $48,348 $ 43,981 $ 47,288
Cost of sales 34,543 33,069 37,705
- ------------------------------------------------------------------------------------------
Gross profit 13,805 10,912 9,583
Selling, general and administrative expense 13,708 12,333 12,640
Restructuring charge (Note 2) -- -- 4,287
- ------------------------------------------------------------------------------------------
Operating income (loss) 97 (1,421) (7,344)
Other income (Note 2) 1,050 2,401 366
- ------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,147 980 (6,978)
Provision (benefit) for income taxes (Note 3) 45 85 (1,425)
- ------------------------------------------------------------------------------------------
Net income (loss) $ 1,102 $ 895 $ (5,553)
==========================================================================================
Earnings (loss) per share (Note 1) $ 0.24 $ 0.19 $ (1.22)
==========================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
CAPITAL STOCK, $1 PAR
----------------------- ADDITIONAL
SHARES PAID-IN RETAINED
OUTSTANDING AMOUNT CAPITAL EARNINGS TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance May 1, 1994 4,563,000 $4,563 $5,504 $ 12,624 $ 22,691
Net loss for the year -- -- -- (5,553) (5,553)
Stock issued under stock option plan 5,000 5 18 -- 23
- ----------------------------------------------------------------------------------------------------------------
Balance April 30, 1995 4,568,000 4,568 5,522 7,071 17,161
Net income for the year -- -- -- 895 895
- ----------------------------------------------------------------------------------------------------------------
Balance April 30, 1996 4,568,000 4,568 5,522 7,966 18,056
Net income for the year -- -- -- 1,102 1,102
Stock issued under stock option plan 21,000 21 74 -- 95
- ----------------------------------------------------------------------------------------------------------------
Balance April 30, 1997 4,589,000 $4,589 $5,596 $ 9,068 $ 19,253
================================================================================================================
</TABLE>
See the accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 5
EARL SCHEIB, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,859 $ 1,827
Marketable securities 670 536
Accounts receivable 582 180
Inventories 1,284 1,389
Prepaid expenses 1,303 1,372
Deferred income taxes (Note 3) 410 963
Property held for sale (Note 2) 530 1,096
- -----------------------------------------------------------------------------------------------------------
Total current assets 7,638 7,363
Property and equipment, less accumulated depreciation and amortization (Note 4) 18,012 18,040
Deferred income taxes (Note 3) 1,898 1,345
Other, primarily cash surrender value of life insurance (Note 7) 1,902 1,762
- -----------------------------------------------------------------------------------------------------------
$29,450 $28,510
===========================================================================================================
LIABILITIES
Current liabilities:
Accounts payable $ 474 $ 1,762
Accrued expenses:
Income taxes (Note 3) 1,792 --
Insurance 990 1,570
Payroll 1,518 1,690
Restructuring (Note 2) 113 516
Other 1,531 1,107
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 6,418 6,645
Deferred management compensation (Note 7) 3,425 3,809
Capitalized leases (Note 5) 354 --
Commitments and contingencies (Notes 5, 7 and 8) -- --
SHAREHOLDERS' EQUITY
Capital stock $1 par -- shares authorized 12,000,000;
issued and outstanding 4,589,000 and 4,568,000 (Note 6) 4,589 4,568
Additional paid-in capital 5,596 5,522
Retained earnings 9,068 7,966
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 19,253 18,056
- -----------------------------------------------------------------------------------------------------------
$29,450 $28,510
===========================================================================================================
</TABLE>
See the accompanying Notes to Consolidated Financial Statements.
8
<PAGE> 6
EARL SCHEIB, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,102 $ 895 $(5,553)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Write-down of assets (closed shops) -- -- 581
Gain on disposals of property and equipment (675) (1,948) (139)
Depreciation 1,881 1,319 1,043
Deferred income taxes -- (220) (814)
Deferred management compensation (384) 209 116
Changes in operating assets and liabilities:
Refundable income taxes -- 990 179
Accounts receivable (149) 6 574
Inventories 105 23 211
Prepaid expenses 69 (14) 458
Accounts payable (1,288) 135 (80)
Accrued expenses 932 (2,231) 870
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,593 (836) (2,554)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,080) (5,155) (929)
Proceeds from disposals of property and equipment 2,708 5,158 343
(Investment) reduction in marketable securities (134) (536) 1,648
Other assets (140) (221) 598
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (646) (754) 1,660
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capitalized leases (10) -- --
Stock options exercised 95 -- 23
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 85 -- 23
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,032 (1,590) (871)
Cash and cash equivalents, at beginning of year 1,827 3,417 4,288
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of year $ 2,859 $ 1,827 $ 3,417
=====================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes refunded (paid) $ 1,609 $ (51) $ (549)
=====================================================================================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In fiscal 1997 the Company reclassified $516 from property and equipment to
property held for sale and sold two properties for $253, the proceeds of which
are included in accounts receivable. Additionally, the Company entered into two
capital leases totaling $493, of which the current portion of $129 is included
in accrued expenses.
See the accompanying Notes to Consolidated Financial Statements.
9
<PAGE> 7
EARL SCHEIB, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands except earnings per share and weighted average
share information)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Earl Scheib, Inc. (the "Company") operates the New Earl
Scheib Auto Paint and Body Shops throughout the United States which offer auto
painting and auto body repair services to consumers.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of the
Company include the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS: All highly liquid investment instruments with terms
of three months or less at the time of acquisition are considered to be cash
equivalents while those having maturities in excess of three months are
considered marketable securities.
MARKETABLE SECURITIES: Marketable securities are categorized as available for
sale and consist of commercial paper. Marketable securities are carried at fair
value based upon quoted market prices for each investment.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS: The carrying value of financial
assets and liabilities approximates fair value due to their short maturity.
INVENTORIES: Inventories, which are composed of auto paint and shop supplies and
materials, are stated at the lower of last-in, first-out (LIFO) cost or market.
A summary of inventories is as follows:
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Finished goods $1,577 $1,639
Raw materials 317 374
LIFO reserve (610) (624)
-------------------
Total inventories $1,284 $1,389
===================
</TABLE>
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets. Significant additions
or improvements extending asset lives are capitalized; normal maintenance and
repair costs are expensed as incurred. Property and equipment includes equipment
held by the service and supply subsidiary for sale to the auto paint shop
subsidiaries. It is the Company's policy to not depreciate equipment until it is
transferred to an auto paint shop for use. The Company uses the straight-line
method in computing depreciation and amortization for financial reporting
purposes and accelerated methods, with respect to certain assets, for income tax
purposes.
START-UP COSTS: Expenses associated with the opening of new auto paint shops are
expensed as incurred.
INCOME TAXES: Deferred income taxes are provided at the statutory rates on the
difference between the financial statement and tax basis of assets and
liabilities and are classified in the consolidated balance sheet as current or
long-term consistent with the classification of the related asset or liability
giving rise to the deferred income taxes.
CASUALTY INSURANCE: Prior to August 1, 1995, the Company was insured for workers
compensation claims expense through risk retention plans. Under these plans the
Company accrued for its estimated risk expense and remitted payment to the
Company's insurer as claims were paid. Unfunded liabilities are secured by
stand-by letters of credit issued by a bank. The Company currently insures for
workers compensation under a stop-loss funded deductible program.
STOCK-BASED COMPENSATION: The Company accounts for its stock option grants in
accordance with Accounting Principles Board Opinion No. 25 and related
Interpretations. Under the Company's current stock option plans, stock options
may not be granted at a price which is less than the quoted market price of the
underlying stock on the date of grant. Therefore, no compensation expense is
recognized for the stock options granted. See Note 6.
LONG-LIVED ASSETS: In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of", the Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. If the Company determines an impairment of a long-lived asset has
occurred, it will write-down the asset to its estimated fair value. The adoption
had no effect on the Company's financial position or operating results.
PROSPECTIVE ACCOUNTING CHANGES: In 1997, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings per Share". The Company will adopt SFAS No.
128 in fiscal 1998.
REVENUE RECOGNITION: The Company recognizes sales when the work is completed
and the customer accepts delivery of the vehicle.
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). 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 4,740,000 in
1997, 4,726,000 in 1996 and 4,568,000 in 1995.
2. RESTRUCTURING CHARGES
During 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 during fiscal
1995 to provide for costs associated with the restructuring plan. The charge
consisted of $1,556 for lease termination costs, $591 for the writedown of
long-term assets to their net realizable value, $355 for severance to terminated
employees, $338 for repairs and maintenance, $333 for property taxes, $327 for
warranty repair, $265 for utilities and $522 for other.
As of April 30, 1997, $113 of the reserve for restructuring remained
and was classified as a current liability in the accompanying financial
statements. Management of the
10
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Company believes the remaining reserves will be fully utilized during fiscal
1998.
At April 30, 1995, twenty-nine auto paint shop properties were held for
sale. In 1997 the Company sold 10 of the properties held for sale plus 11
additional properties for a net gain of $893. During fiscal 1996 the Company
sold 19 of the properties plus 3 additional properties at a net gain of $2,258.
The net book value of the 4 remaining parcels of real estate is included as a
current asset in the accompanying financial statements under the caption
Property Held for Sale. Any future gain from the sale of these properties will
be recognized when the properties are sold.
3. TAXES ON INCOME
The Company and its subsidiaries file a consolidated federal income tax return.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $220 $ (500)
State 45 85 66
-------------------------
45 305 (434)
Deferred -- (220) (991)
-------------------------
Total $45 $ 85 $(1,425)
=========================
</TABLE>
Reconciliation of the statutory federal income tax rate to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Tax (benefit) at U.S. federal
statutory tax rate 35.0% 35.0% (34.0)%
State taxes, net of
federal benefit 2.6 5.7 0.6
Federal net operating loss (32.7) (26.9) 10.5
Other (1.0) (5.1) 2.5
----------------------------
Total 3.9% 8.7% (20.4)%
============================
</TABLE>
At April 30, 1997, net current deferred income tax assets and net
long-term deferred income tax assets are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30,
-----------------
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Deferred income tax assets - current:
Accrued insurance $ 304 $1,609
Restructuring charges 39 175
Accrued payroll and vacation 67 179
-------------------
$ 410 $ 963
===================
Deferred income tax assets
(liabilities)-long term:
Net operating loss $1,395 $ 1,782
Deferred compensation 1,273 1,295
Depreciation (194) (364)
Other (204) (204)
Valuation allowance (372) (1,164)
-------------------
$1,898 $ 1,345
===================
</TABLE>
In 1997 and 1996 the Company had deferred tax assets, net of valuation
allowance, of $2,308. The Company owns a substantial number of unencumbered
properties, including its administrative office and its manufacturing and
warehouse facility. These properties were purchased a number of years ago and
could probably be sold for a gain. Should the Company's taxable income be
insufficient in any one year to realize the deferred tax asset, then one or more
properties could be sold for a gain to realize the tax asset. Accordingly, it is
management's opinion that it is more likely than not that the net deferred tax
asset of $2,308 will be realized. At April 30, 1997, the Company had federal
income tax loss carryforwards for income tax reporting purposes of approximately
$3,879. These loss carryforwards expire in 2010 and 2011.
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.
4. PROPERTY AND EQUIPMENT
Property and equipment including their estimated useful lives consist of the
following:
<TABLE>
<CAPTION>
APRIL 30,
-------- ESTIMATED
1997 1996 USEFUL LIVES
- -------------------------------------------------------------
<S> <C> <C> <C>
Land $ 5,339 $ 6,023
Buildings and building
improvements 9,269 10,718 8-33 years
Machinery and equipment 7,698 6,396 3-10 years
Automotive equipment 198 231 2- 4 years
Office furniture and
equipment 2,294 1,534 3-10 years
Life of
Leasehold improvements 4,746 3,838 Lease
-----------------
29,544 28,740
Less accumulated
depreciation and
amortization 11,532 10,700
-----------------
Net property and
equipment $18,012 $18,040
=================
</TABLE>
See Note 2 regarding property held for sale.
5. LEASES
In November and December 1996, the Company entered into two separate capital
lease agreements for a total of $493. The leases were for computer hardware and
software and were with the suppliers of the equipment. These agreements bear
interest at 3.5% and 6.7% and require monthly payments for 36 months and 48
months, respectively. The agreements are secured by the hardware and software
financed through these arrangements. As of April 30, 1997, the current and
long-term portions of these agreements were $129 and $354, respectively.
11
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The Company leases approximately one-half of its auto paint shops.
Management expects that in the normal course of business such leases will be
renewed or replaced by other leases. Certain lease agreements contain renewal
and/or purchase options. Rent expense for fiscal 1997, 1996 and 1995 was $2,651,
$2,260 and $4,656, respectively. Following is a schedule, by year, of the future
minimum lease commitments as of April 30, 1997.
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30:
- ----------------------------------------------------
<S> <C>
1997 $2,517
1998 1,892
1999 1,601
2000 1,296
2001 788
Thereafter 865
------
Total minimum lease payments $8,959
======
</TABLE>
6. STOCK OPTIONS
(Number of shares and options in thousands)
- -------------------------------------------
In August of 1994 the Company's stockholders approved two non-qualified stock
option plans. One plan allows for the granting of up to 100 shares of the
Company's capital stock to non-employee directors of the Company (the
"Directors' Plan"). A second plan allows for the granting of up to 300 shares of
the Company's capital stock to certain employees of the Company (the "Employees'
Plan"). Both plans require that the price of the shares underlying the option
granted be no less than the fair market value of the shares on the date of the
grant. The plans allow for discretionary vesting periods.
During June of 1996, the Company's Board of Directors authorized an
increase in the number of shares available under the Company's option plan to
150 shares for the Directors' Plan and 500 shares for the Employees' Plan.
Besides the two plans discussed, the Company has made separate grants of stock
options to its CEO and COO.
In November of 1994, the Company granted a stock option for 400 shares
of the Company's capital stock to the Company's president and chief executive
officer. The options become vested and exercisable in a 50% installment on the
first anniversary following the date of grant and in 12.5% installments in each
quarter following the first anniversary of the date of grant. The options have
an exercise price of $6.375 per share. As a result, the Company recognized
compensation expense of $100 in fiscal 1996 which is included in selling,
general and administrative expense in the consolidated statements of operations.
In January of 1995, the Company granted a stock option for 200 shares
of the Company's capital stock to the Company's chief operating officer. The
options were granted at fair market value or higher and become vested and
exercisable in a 50% installment on the first anniversary following the date of
grant and in 12.5% installments in each quarter following the first anniversary
of the date of grant. The exercise price is $5.50 per share for the option to
purchase the first 100 shares and $9.00 per share for the option to purchase the
second 100 shares.
Stock option transactions are summarized as follows;
<TABLE>
<CAPTION>
WEIGHT
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
April 30, 1994 46 $11.23 - $12.35 $11.62
Granted 932 $4.50 - $ 9.00 $6.28
Exercised (5) $4.50 $4.50
Cancelled (58) $4.50 - $11.23 $6.57
------------------------------------
Outstanding at
April 30, 1995 915 $4.50 - $12.35 $6.54
Granted 191 $5.13 - $ 9.00 $7.00
Exercised -- -- --
Cancelled (40) $4.50 - $12.35 $8.65
------------------------------------
Outstanding at
April 30, 1996 1,066 $4.50 - $11.23 $6.54
Granted 107 $6.88 - $10.00 $7.33
Exercised (21) $4.50 $4.50
Cancelled (83) $4.50 - $11.23 $6.51
------------------------------------
Outstanding at
April 30,1997 1,069 $4.50 - $11.23 $6.67
======================================
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
---------------------------
1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
Shares exercisable 749 387 28
Shares available for grant at
end of the year 164 253 108
--------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
April 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ---------------------------------------------------------
WEIGHTED WEIGHTED
OUTSTANDING AVERAGE AVERAGE
RANGE OF AT APRIL 30, REMAINING EXERCISE
EXERCISE PRICE 1997 LIFE (YEARS) PRICE
- ---------------------------------------------------------
<S> <C> <C> <C>
$4.50-$5.50 235 7.6 $5.05
$5.50-$6.50 450 3.3 $6.33
$6.50-$11.23 384 8.5 $8.04
-----
1,069
-----
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
- --------------------------------------------------------
RANGE OF EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICE APRIL 30, 1997 EXERCISE PRICE
- -------------------------------------------------------
<S> <C> <C>
$4.50-$5.50 157 $5.19
$5.50-$6.50 417 $6.36
$6.50-$11.23 175 $8.61
---
749
---
</TABLE>
12
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
If the Company had followed SFAS No. 123, "Accounting for Stock-Based
Compensation", in determining compensation cost from stock options, then the
Company would have had pro forma net income and earnings per share indicated
below:
<TABLE>
<CAPTION>
APRIL 30,
----------------
1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $1,102 $895
Pro forma 864 895
Net income per common share:
As reported $0.24 $0.19
Pro forma 0.19 0.19
</TABLE>
Because options vest over several years and additional options are granted each
year, the effects on pro forma net income and related per share amounts
presented above are not representative of the effect for future years.
The fair market value of stock options granted for purposes of the SFAS
123 compensation was determined by using the Black-Scholes option-pricing model
and the following assumptions: a risk-free interest rate of between 5.86% and
6.8%; an expected life of 10 years; expected volatility of 32.8% in fiscal 1997
and 52.9% in fiscal 1996 and no expected dividend. The weighted-average fair
value of the options issued by the Company in fiscal 1997 and 1996 was $4.25 and
$4.33, respectively.
7. DEFERRED MANAGEMENT COMPENSATION
In 1987 the Company adopted a non-qualified supplemental compensation plan (the
"Plan") to provide benefits (including post retirement health care and death
benefits) to certain employees who were officers or key employees of the Company
prior to fiscal 1995 (admission to the plan was discontinued at the beginning of
fiscal 1995). Participants are required to share in the cost of the Plan by
deferring a portion of their annual compensation for that purpose. Deferred
compensation expense under the Plan for fiscal 1997, 1996 and 1995 was $358,
$329 and $236, respectively.
The cost of the Plan is determined through actuarial methods using a 7%
discount rate in 1997 and 1996. The Plan at April 30, 1997 and 1996, had
nonvested and total obligations (all of which are accrued in the Company's
financial statements), net of unrecognized gains and prior service costs, of
$3,744 and $3,809 respectively. The net pension expense in fiscal 1997 consisted
principally of interest costs.
The Company entered into whole life insurance contracts, to meet its
obligations under the Plan. As of April 30, 1997, these contracts had cash
surrender values of $1,683. The Company was not obligated to enter into these
contracts and is not required to use the proceeds to pay for the Plan.
8. COMMITMENTS AND CONTINGENCIES
The Company has an agreement with its bank to finance a letter of credit
facility under which the bank has issued approximately $3,284 in standby letters
of credit at April 30, 1997. The letters of credit are in favor of the Company's
insurance carrier and secure the unfunded portion of the Company's estimated
worker's compensation insurance liabilities.
The Company is involved in several legal proceedings and claims 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 statements.
13
<PAGE> 11
INDEPENDENT AUDITORS' REPORT
Deloitte & Touche LLP
To the Stockholders and Board of Directors
Earl Scheib, Inc.
We have audited the accompanying consolidated balance sheets of Earl Scheib,
Inc. and subsidiaries as of April 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of the Company and subsidiaries for the year ended April 30, 1995, were audited
by other auditors whose report, dated June 26, 1995, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Earl Scheib, Inc. and
subsidiaries as of April 30, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
- --------------------------
Los Angeles, California
July 11, 1997
14
<PAGE> 12
EARL SCHEIB, INC.
SELECTED FINANCIAL DATA
(Amounts in thousands of dollars except per share data and number of shops)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $48,348 $43,981 $47,288 $48,492 $53,648
Net income (loss) 1,102 895 (5,553) (1,827) (110)
Per share:
Earnings (loss) 0.24 0.19 (1.22) (0.40) (0.02)
Cash dividends declared -- -- -- 0.09 0.18
FINANCIAL POSITION
Property and equipment, net $18,012 $18,040 $14,868 $19,409 $19,662
Total assets 29,450 28,510 29,502 34,126 34,762
Long-term liabilities 3,779 3,809 3,600 3,484 3,198
Shareholders' equity 19,253 18,056 17,161 22,691 24,929
Number of shops at the end of the year 158 160 164 248 260
===========================================================================================================================
</TABLE>
MARKET INFORMATION
Earl Scheib, Inc. is listed and traded on the America Stock Exchange under the
ticker symbol "ESH". As of April 30, 1997 there were approximately 287 record
holders of the Company's stock according to records maintained by the Company's
transfer agent. The high and low sales prices of the stock for each of the
fiscal quarters of 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $8 1/4 $8 13/16 $7 1/4 $7 3/8 $7 $6 3/4 $8 3/4 $8
Low 6 1/2 6 3/4 6 1/8 5 11/16 5 4 15/16 5 6
</TABLE>
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements which are not historical facts contained in this Annual
Report 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, 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 Format, the impact of the
Company's new Europaint(TM), the impact of the Company's organizational
restructuring, the impact of advertising and promotional activities and the
effect of the Company's accounting policies.
15
<PAGE> 1
EXHIBIT 24.1
Consent of Independent Certified Public Accountants
---------------------------------------------------
Earl Scheib, Inc.
Beverly Hills, California
We hereby consent to the incorporation by reference in the Registration
Statements of Earl Scheib, Inc. on Forms S-8 (Registration Numbers 33-87128,
33-87130 and 33-63327), Post-Effective Amendment No. 1 to Registration Statement
No. 33-87132 of Earl Scheib, Inc. on Form S-8, and Registration Statement on
Form S-3, (Registration Number 33-87126) of our report dated June 26, 1995,
relating to the audit of the consolidated financial statements of Earl Scheib,
Inc., and Subsidiaries for the year ended April 30, 1995 which are contained in
and incorporated by reference to the Audit Report on Form 10-K for the year
ended April 30, 1997.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
July 28, 1997
<PAGE> 2
To the Stockholders and Board of Directors
Earl Scheib, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders equity, and cash flows of Earl Scheib, Inc. and subsidiaries for
year ended April 30, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Earl Scheib, Inc. and subsidiaries for year ended April 30, 1995,
in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
June 26, 1995
<PAGE> 1
EXHIBIT 24.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-63327, 33-87128, and 33-87130 of Earl Scheib, Inc. on Form S-8,
Post-Effective Amendment No. 1 to Registration Statement No. 33-87132 of Earl
Scheib, Inc. of Form S-8, and Registration Statement No. 33-87126 of Earl
Scheib, Inc. on Form S-3 of our report dated July 11, 1997, incorporated by
reference in this Annual Report on Form 10-K of Earl Scheib Inc., for the year
ended April<WS>30, 1997.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------------
Deloitte & Touche LLP
Los Angeles, California
July 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 2,859,000
<SECURITIES> 670,000
<RECEIVABLES> 582,000
<ALLOWANCES> 0
<INVENTORY> 1,284,000
<CURRENT-ASSETS> 7,638,000
<PP&E> 29,544,000
<DEPRECIATION> 11,532,000
<TOTAL-ASSETS> 29,450,000
<CURRENT-LIABILITIES> 6,418,000
<BONDS> 0
0
0
<COMMON> 4,589,000
<OTHER-SE> 14,664,000
<TOTAL-LIABILITY-AND-EQUITY> 29,450,000
<SALES> 48,348,000
<TOTAL-REVENUES> 48,348,000
<CGS> 34,543,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,147,000
<INCOME-TAX> 45,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,102,000
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
