<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 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)
Delaware 95-1759002
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8737 Wilshire Boulevard
Beverly Hills, California 90211-2795
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (310) 652-4880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of March 14, 1997, the registrant had 4,579,478 shares of its Capital
Stock, $1.00 par value, issued and outstanding.
This report contains a total of 9 pages.
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PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
January 31, April 30,
ASSETS 1997 1996
- ------ ---------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,315 $ 1,827
Marketable securities 921 536
Accounts receivable 255 180
Inventories 1,553 1,389
Prepaid expenses 1,216 1,372
Deferred income taxes 963 963
Property held for sale 1,142 1,096
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Total Current Assets 7,365 7,363
Property and Equipment, net 18,026 18,040
Deferred Income Taxes 1,345 1,345
Other, Primarily Cash Surrender Value
of Life Insurance 1,905 1,762
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Total Assets $28,641 $28,510
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 544 $ 1,762
Accrued expenses 5,823 4,883
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Total Current Liabilities 6,367 6,645
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Deferred Management Compensation 3,531 3,809
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Long-term Liabilities 390 -
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Commitments and Contingencies (Note 5) - -
Shareholders' Equity:
Capital stock $1 par - shares authorized
12,000,000; issued and outstanding
4,576,000 and 4,568,000 4,576 4,568
Additional paid-in capital 5,548 5,522
Retained earnings 8,229 7,966
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Total Shareholders' Equity 18,353 18,056
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Total Liabilities and Shareholders'
Equity $28,641 $28,510
======= =======
</TABLE>
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -------------------------
January 31, January 31,
----------------------- -------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 7,869 $ 7,389 $ 35,799 $ 32,062
Cost of sales 7,204 6,593 25,822 23,911
------- ------- -------- --------
Gross profit 665 796 9,977 8,151
Selling and administrative
expense 2,640 2,800 10,479 8,789
------- ------- -------- --------
Operating loss (1,975) (2,004) (502) (638)
Other income 295 450 794 2,318
------- ------- -------- --------
Income (loss) before
income taxes (1,680) (1,554) 292 1,680
Income tax (benefit) (28) (36) 29 79
------- ------- -------- --------
Net income (loss) $(1,652) $(1,518) $ 263 $ 1,601
======= ======= ======== ========
Earnings (loss) per share $ (0.36) $ (0.33) $ 0.06 $ 0.34
======= ======= ======== ========
Shares outstanding 4,576 4,568 4,691 4,568
======= ======= ======== ========
</TABLE>
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 199 $(1,413)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,376) (3,817)
Proceeds from disposal of property and equipment 2,159 4,638
Investment in marketable securities (385) (1,317)
Other - net (143) (162)
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Net cash used in investing activities (745) (658)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 34 -
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Net cash provided by financing activities 34 -
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NET DECREASE IN CASH AND CASH EQUIVALENTS: (512) (2,071)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 1,827 3,417
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 1,315 $ 1,346
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes refunded (paid) during this period $ 1,612 $ (51)
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company reclassified $795 of property to Assets Held For Sale during the
third quarter 1997 and entered into two capital leases totaling $493 (see Note
4).
<PAGE> 5
EARL SCHEIB, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1. Basis of Presentation
The condensed financial statements have been prepared by Earl Scheib, Inc.
(the "Company") without audit, in accordance with generally accepted accounting
principles. Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted or condensed. It is management's belief
that the disclosures made are adequate to make the information presented not
misleading and reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of financial position and results
of operations for the periods presented. The results of operations for the
periods presented should not be considered as necessarily indicative of
operations for the full year due to the seasonality of the Company's business.
It is recommended that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements for the year ended
April 30, 1996 and the notes thereto included in the Company's Form 10-K.
NOTE 2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, April 30,
1997 1996
--------- --------
<S> <C> <C>
Finished goods $1,688 $1,639
Raw materials 489 374
LIFO Reserve (624) (624)
------ ------
Inventories $1,553 $1,389
====== ======
</TABLE>
Note 3. Income Taxes
In the first quarter of fiscal 1997, the Company received federal income
tax refunds of $1,696 resulting from the application of net operating loss
carrybacks. 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. Long-term Liabilities
During the third quarter the Company purchased new accounting software and
hardware on which the new software will operate. The purchase was financed
through two lease agreements which were accounted for as capital leases.
Accordingly, the Company recorded a long-term liability for the amount financed
under the leasing arrangements. The leasing arrangements bear effective rates of
3.5% and 6.7% and are being paid through monthly installments of 36 months and
48 months.
Note 5. Commitments and Contingencies
In October 1996, the Company's bank fully released the Company from all
covenants, guarantees, and obligations relating to the loans discussed in Note 8
in the Company's Form 10-K for the fiscal year ended April 30, 1996.
<PAGE> 6
NOTE 6. 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).
Note 7. Reclassification
Certain reclassifications have been made to the amounts for the quarter and
nine months ended January 31, 1996, to conform to the 1997 presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
(Dollars in thousands)
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
QUARTER ENDED JANUARY 31, 1997 COMPARED TO THE QUARTER ENDED JANUARY 31, 1996
Total sales during the quarter ended January 31, 1997 ("1997 Third
Quarter") increased by $480 or 6.5% which consisted of same shop (shops open one
year or more) sales increases of $473 or 6.7% compared to the respective prior
year period, partially offset by 1 less shop in fiscal 1997 compared to fiscal
1996. The increase in sales resulted primarily from new products offered to
customers, the conversion of a majority of the Company's paint and body shops to
the New Earl Scheib Shop format and improvements in shop operations.
Gross profit dollars in the 1997 Third Quarter decreased by $131 compared
to the prior year period due mainly to a decrease in gross margin percent
partially offset by the increase in sales discussed above. Gross profit margins
decreased from 10.8% to 8.5% due mainly to higher depreciation charges related
to the conversion of shops to the New Earl Scheib Shop format. Historically, due
to the relatively high fixed cost of the Company's operations, gross margins
decrease significantly in the third quarter with the seasonal declines in the
Company's business.
Selling, general and administrative expense decreased by $160 or 4.4% of
sales compared to the prior year period. The decrease was due primarily to
decreases in advertising by $220 or 2.8% of sales and salaries by $111 or 1.4%
of sales. These decreases were partially offset by increases in net other
expenses of $171 or 2.2% of sales.
Other income consists of gains from sales of excess real estate and
interest income. During the 1997 Third Quarter, the Company sold 3 properties
for a net gain of $246 compared to a net gain of $397 from the sale of 4
properties in the same period last year. Interest income, generated from the
investment of cash in short-term instruments, was lower in the 1997 Third
Quarter than in the prior year period, $49 and $53 respectively
In the fiscal year ended April 30, 1996, the Company did not recognize its
entire net operating loss carryforward as a tax benefit for financial reporting
purposes. Accordingly, tax benefits from the 1996 net operating loss
carryforward were available to offset the Company's financial federal tax
provision for the 1997 Third Quarter. Due to income allocation and state income
tax laws, the Company did earn income tax benefits in some states for which the
Company recognized $28.
<PAGE> 7
NINE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THE NINE MONTHS ENDED JANUARY
31, 1996
Total sales during the nine months ended January 31, 1997 ("First Nine
Months") increased by $3,737 or 11.7% which consisted of same shop (shops open
one year or more) sales increases of $4,230 or 14.3% compared to the respective
prior year period, partially offset by 4 fewer shops in fiscal 1997 compared to
fiscal 1996. The increase in sales resulted primarily from increased car volume,
new products offered to customers, the conversion of a majority of the Company's
paint and body shops to the New Earl Scheib Shop format, increased advertising
and improvements in shop operations. The new shop format includes new color
schemes both inside and out, new graphics, new customer information centers, new
signage and installation of state-of-the-industry infrared quartz drying
systems.
Gross profit dollars in the 1997 First Nine Months increased by $1,826
compared to the prior year period due mainly to the increase in sales discussed
above. Gross profit margins increased from 25.4% to 27.9% of sales as a result
of new higher margin products and the absorption of direct labor and overhead
expense over an increased sales volume.
Selling, general and administrative expense increased by $1,690 or 1.9% of
sales compared to the same period last year. Advertising expense accounted for
$1,074 of the increase due, in part, to the testing of image advertising to
introduce the New Earl Scheib Shop format. Based upon results to date, the
Company has decided to reduce its image advertising program. In addition, to
further reduce its advertising expense the Company insourced the majority of its
advertising work effective November 15, 1996. Other selling, general and
administrative expenses increased a net of $617 primarily as a result of lower
sublease income, personnel additions and the testing of incentive programs at
the field level (which management does not believe were productive and has
subsequently discontinued) partially offset by expense reductions in the Third
Quarter.
Other income consists of gains from sales of excess real estate and
interest income. During the First Nine Months, the Company sold 13 properties
for a net gain of $665 compared to a net gain of $2,193 from the sale of 19
properties in the prior year period. Interest income, generated from the
investment of cash in short-term instruments, was higher in the First Nine
Months than in the prior year period, $129 and $125, respectively
In the fiscal year ended April 30, 1996, the Company did not recognize its
entire net operating loss carryforward as a tax benefit for financial reporting
purposes. Accordingly, tax benefits from the 1996 net operating loss
carryforward were available to offset the Company's financial federal tax
provision for the First Nine Months. Due to income allocation and state income
tax laws, the Company did have income tax liabilities in some states for which
the Company provided $29.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are based upon its seasonal working capital
needs and capital requirements for capitalized additions and improvements and
expansion. The first and second quarters usually have positive cash flow from
operations while the third and fourth quarters are net users of cash.
<PAGE> 8
As of January 31, 1996, the Company had current assets of $7,365 and
current liabilities of $6,367 for a net working capital position of $998. 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 2 capital leases. During the
fiscal year ending April 30, 1997 ("Fiscal 1997") the Company has opened 4 new
shops and plans to open 2 additional new shops (depending upon the availability
of locations) and perform various improvements for an estimated cost of $3.5
million.
In the First Nine Months, the Company had capitalized expenditures of
$2,376 (which are included in the $3.5 million of cash requirements described in
the previous paragraph) which were financed largely through $2,159 of net
proceeds from sales of excess real estate. The Company expects that future cash
flow from operations will be enhanced by these capital additions.
During the First Nine Months, net cash provided by operations increased
$1,612 over the amount provided in the nine months ended January 31, 1996. The
increase in cash flow resulted from decreased losses from operations ($136),
lower income tax expense and a reduction in the amount of cash needed to fund
other current assets partially offset by lower gains on sales of real estate
($1,528). Due to additional sales from remodeled shops, management believes that
cash flow from operations will be positive in fiscal 1997.
The other major source of cash flow for the Company is the sale of excess
real estate. As of January 31, 1997, the Company had 11 parcels of real estate
offered for sale. If all of these sales are consummated in fiscal 1997, the
Company should receive approximately $1.5 million in cash. The Company also has
an additional 73 parcels of unencumbered real estate, including the Company's
headquarters and paint factory, which could be used as security to obtain
outside financing; however, management currently does not believe this action is
necessary and has no present plans to seek outside financing.
Management believes that internally generated funds as well as funds from
the sale of excess real estate will satisfy its anticipated cash requirements in
fiscal 1997.
"Safe Harbor" Statement under the Private
Securities Litigation Reform Act of 1995
The Statements which are not historical facts contained in this Form 10-Q
are forward looking statements that involve risks and uncertainties, including,
but not limited to, the effect of weather, the effect of economic conditions,
the impact of competitive products, 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.
<PAGE> 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data , Article 5 is filed herein.
(b) The Registrant did not file a Form 8-K during the quarter ended
January 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
March 14, 1996 /s/ Daniel A. Seigel
- -------------- ------------------------------------
Dated Daniel A. Seigel, President and
Chief Executive Officer
March 14, 1996 /s/ John D. Branch
- -------------- ------------------------------------
Dated John D. Branch, Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF EARL SCHEIB, INC., AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 1,315
<SECURITIES> 921
<RECEIVABLES> 255
<ALLOWANCES> 0
<INVENTORY> 1,553
<CURRENT-ASSETS> 7,365
<PP&E> 29,028
<DEPRECIATION> 11,002
<TOTAL-ASSETS> 28,641
<CURRENT-LIABILITIES> 6,367
<BONDS> 0
0
0
<COMMON> 4,576
<OTHER-SE> 13,777
<TOTAL-LIABILITY-AND-EQUITY> 28,641
<SALES> 35,799
<TOTAL-REVENUES> 35,799
<CGS> 25,822
<TOTAL-COSTS> 25,822
<OTHER-EXPENSES> 10,479
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 292
<INCOME-TAX> 29
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 263
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
