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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-4822
------------------------
EARL SCHEIB, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-1759002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8737 WILSHIRE BOULEVARD
BEVERLY HILLS, CALIFORNIA 90211-2795
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 652-4880
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 10, 1997, the registrant had 4,590,728 shares of its
Capital Stock, $1.00 par value, issued and outstanding.
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This report contains a total of 8 pages.
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PART I -- FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1997 1997
----------- ---------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................... $ 1,783 $ 2,859
Marketable securities............................................... 3,161 670
Accounts receivable................................................. 327 582
Inventories......................................................... 1,728 1,284
Prepaid expenses.................................................... 1,460 1,303
Deferred income taxes............................................... 410 410
Property held for sale.............................................. 125 530
------- -------
Total Current Assets........................................ 8,994 7,638
Property and Equipment, net........................................... 18,232 18,012
Deferred Income Taxes................................................. 1,898 1,898
Other, Primarily Cash Surrender Value of Life Insurance............... 1,900 1,902
------- -------
Total Assets................................................ $31,024 $ 29,450
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 547 $ 474
Accrued expenses.................................................... 6,064 5,944
------- -------
Total Current Liabilities................................... 6,611 6,418
------- -------
Deferred Management Compensation...................................... 3,365 3,425
------- -------
Capitalized Leases.................................................... 327 354
Shareholders' Equity:
Capital stock $1 par -- shares authorized 12,000,000; issued and
outstanding 4,591,000 and 4,589,000.............................. 4,591 4,589
Additional paid-in capital.......................................... 5,601 5,596
Retained earnings................................................... 10,529 9,068
------- -------
Total Shareholders' Equity.................................. 20,721 19,253
------- -------
Total Liabilities and Shareholders' Equity.................. $31,024 $ 29,450
======= =======
</TABLE>
1
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Net sales................................................................ $14,755 $14,640
Cost of sales............................................................ 9,637 9,369
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Gross profit............................................................. 5,118 5,271
Selling and administrative expense....................................... 3,372 4,043
------- -------
Operating income......................................................... 1,746 1,228
Other income (expense)................................................... (28) 426
------- -------
Income before income taxes............................................... 1,718 1,654
Income taxes............................................................. 257 31
------- -------
Net income............................................................... $ 1,461 $ 1,623
======= =======
Net income per share..................................................... $ 0.31 $ 0.34
======= =======
</TABLE>
2
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JULY 31,
------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities............................... $ 1,860 $1,838
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................... (768) (925)
Proceeds from disposal of property and equipment........................ 358 1,207
(Investment) reduction in marketable securities......................... (2,491) 293
Other -- net............................................................ (15) (45)
------- ------
Net cash provided by (used in) investing activities..................... (2,916) 530
------- ------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options................................. 7 12
Principal payments on capitalized leases................................ (27) --
------- ------
Net cash provided by (used in) financing activities..................... (20) 12
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:..................... (1,076) 2,380
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD........................................................... 2,859 1,827
------- ------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD........................ $ 1,783 $4,207
======= ======
Supplemental Disclosure Of Cash Flow Information:
Income taxes refunded (paid).............................................. $ (35) $1,657
======= ======
</TABLE>
3
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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, 1997, 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,
1997 1997
-------- ---------
<S> <C> <C>
Finished goods.................................... $ 1,853 $ 1,577
Raw materials..................................... 485 317
LIFO reserve...................................... (610) (610)
------ ------
Total inventories....................... 1,728 $ 1,284
====== ======
</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. The refund is currently deferred on the Company's balance sheet and
will be recognized as tax benefits in the Company's future statement of
operations upon the resolution of various uncertainties.
NOTE 4. 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 4,737,000 for the quarter ended
July 31, 1997 and 4,718,000 for the quarter ended July 31, 1996.
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
QUARTER ENDED JULY 31, 1997 ("FIRST QUARTER OF 1998") COMPARED TO THE QUARTER
ENDED JULY 31, 1996 ("FIRST QUARTER OF 1997")
Total sales during the First Quarter of 1998 increased by $115 or 0.8%
compared to the 1997 First Quarter which consisted of same shop (shops open one
year or more) sales increases of $39 or 0.3% compared to the respective prior
year period. The remaining increase in sales is due to three new shops being
included in First Quarter of 1998 compared to the First Quarter of 1997. The
increase in sales resulted primarily from new products offered to customers
(including the Company's new Europaint(TM)) and improvements in shop operations.
First Quarter of 1998 sales were up notwithstanding a 27% decrease in
advertising and strong comparable shop sales in the First Quarter of 1997, up
24% over the same period in 1996.
Gross profit dollars in the First Quarter of 1998 decreased by $153
compared to the First Quarter of 1997 due mainly to a decrease in gross profit
margins partially offset by gross margin dollars from increased sales. Gross
profit margins decreased from 36.0% to 34.7% due to the higher material costs
related to the use of the Company's new Europaint(TM) and higher depreciation
charges related to the remodeling of the Company's shops to the New Earl Scheib
format.
Selling, general and administrative expense decreased by $671 or 4.7% of
sales in the First Quarter of 1998 compared to the First Quarter of 1997.
Advertising expense accounted for $478 of the decrease due, in part, to the
elimination of various image advertising and the insourcing of the advertising
department, while other selling, general and administrative expenses decreased a
net of $193 primarily as a result of the elimination of various incentive
programs at the field level (which management did not believe were productive).
Other income (expense) consists of the net gains and losses from sales of
excess real estate and interest income, net of interest expense. During the
First Quarter of 1998, the Company sold 2 properties for a net loss of $64
compared to a net gain of $383 in the First Quarter of 1997. Interest income,
generated from the investment of cash in short-term instruments, was $36 in the
First Quarter of 1998 and $43 in the First Quarter of 1997. This decrease in net
interest income resulted mainly from interest expense on capitalized leases in
the First Quarter of 1998.
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 partially offset the Company's financial federal
tax provision for the First Quarter of 1998 and fully offset the Company's
financial federal tax provision for the First Quarter of 1997. Due to income
allocation and state income tax laws, the Company did have income tax
liabilities in some states in both the First Quarter of 1998 and the First
Quarter of 1997 for which the Company provided $68 and $31, respectively.
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
improvements in existing shops and for new shops.
As of July 31, 1997, the Company had current assets of $8,994 and current
liabilities of $6,611 for a net working capital position of $2,383. The Company
has no long-term debt except for its deferred management compensation plan
(which is largely funded through the cash surrender value of various life
insurance policies the company maintains) and two capital leases. During the
fiscal year ending April 30, 1998 ("Fiscal 1998") the Company plans to open up
to 20 new shops (depending upon the availability of locations) and perform
various improvements for an estimated cost of $2.4 million.
5
<PAGE> 7
In the First Quarter of 1998 the Company had capitalized expenditures of
$768 (which are included in the $2.4 million of cash requirements described in
the previous paragraph) which were financed largely through proceeds from
operations and the sale of 2 properties with net proceeds of $358. The Company
expects that future cash flow from operations will be enhanced by these capital
additions.
During the First Quarter of 1998, net cash provided by operations was
$1,860, a 1.1% increase over the amount of cash provided in the First Quarter of
1997. Due to improved operating performance, management believes that cash flow
from operations will be greater in Fiscal 1998 than for the fiscal year ended
April 30, 1997.
The other major source of cash flow for the Company in the past has been
the sale of excess real estate. The Company owns 75 parcels of unencumbered real
estate, 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 $1,678. If necessary the Company could either borrow against these
policies or liquidate these policies; however, management currently does not
believe that either of these actions is necessary and has no current plans to
seek outside financing.
In addition, the Company has an operating loss carryforward of
approximately $2,200 for tax purposes. Accordingly, the amount of taxes in
fiscal 1998 which the Company would normally pay from the improvement in
operations will be greatly reduced or eliminated.
Management believes that internally generated funds will be more than
adequate to satisfy its anticipated cash requirements in fiscal 1998.
"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, 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 advertising and promotional activities and the
effect of the Company's accounting policies.
6
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PART II -- OTHER INFORMATION
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, 1997.
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
Dated: September 12, 1997 /s/ Daniel A. Seigel
--------------------------------------
Daniel A. Seigel, President and
Chief Executive Officer
Dated: September 12, 1997 /s/ John D. Branch
--------------------------------------
John D. Branch, Senior Vice President
and
Chief Financial Officer
7
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 1,783
<SECURITIES> 3,161
<RECEIVABLES> 327
<ALLOWANCES> 0
<INVENTORY> 1,728
<CURRENT-ASSETS> 8,994
<PP&E> 30,313
<DEPRECIATION> 12,081
<TOTAL-ASSETS> 31,024
<CURRENT-LIABILITIES> 6,611
<BONDS> 0
0
0
<COMMON> 4,591
<OTHER-SE> 16,130
<TOTAL-LIABILITY-AND-EQUITY> 31,024
<SALES> 14,755
<TOTAL-REVENUES> 14,755
<CGS> 9,637
<TOTAL-COSTS> 9,637
<OTHER-EXPENSES> 3,372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,718
<INCOME-TAX> 257
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,461
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
