<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8737 Wilshire Boulevard
Beverly Hills, California 90211-2795
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (310) 652-4880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of November 26, 1997 the registrant had 4,590,728 shares of its
Capital Stock, $1.00 par value, issued and outstanding.
This report contains a total of 9 pages.
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PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
October 31, April 30,
ASSETS 1997 1997
- ------ ----------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,261 $ 2,859
Marketable securities 1,435 670
Accounts receivable 371 582
Inventories 1,670 1,284
Prepaid expenses 1,436 1,303
Deferred income taxes 410 410
Property held for sale 125 530
------- -------
Total Current Assets 9,708 7,638
Property and Equipment, net 18,287 18,012
Deferred Income Taxes 1,898 1,898
Other, Primarily Cash Surrender Value
of Life Insurance 1,931 1,902
------- -------
Total Assets $31,824 $29,450
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 428 $ 474
Accrued expenses 6,283 5,944
------- -------
Total Current Liabilities 6,711 6,418
------- -------
Deferred Management Compensation 3,393 3,425
------- -------
Capitalized leases 290 354
------- -------
Commitments and Contingencies - -
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 11,238 9,068
------- -------
Total Shareholders' Equity 21,430 19,253
------- -------
Total Liabilities and Shareholders' Equity $31,824 $29,450
======= =======
</TABLE>
<PAGE> 3
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31 October 31,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $13,900 $13,290 $28,655 $27,930
Cost of sales 9,602 9,249 19,239 18,618
------- ------- ------- -------
Gross profit 4,298 4,041 9,416 9,312
Selling and administrative
expense 3,216 3,796 6,588 7,839
------- ------- ------- -------
Operating income 1,082 245 2,828 1,473
Other income 37 73 9 499
------- ------- ------- -------
Income before income taxes 1,119 318 2,837 1,972
Income taxes 410 26 667 57
------- ------- ------- -------
Net income $ 709 $ 292 $ 2,170 $ 1,915
======= ======= ======= =======
Earnings per share $ 0.15 $ .06 $ 0.46 $ .40
======= ======= ======= =======
</TABLE>
<PAGE> 4
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 3,503 $ 2,781
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,583) (1,645)
Proceeds from sale of property and equipment 358 1,414
Investment in marketable securities (765) (633)
Other - net (54) (117)
------- -------
Net cash used in investing activities (2,044) (981)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 7 12
Principal payments on capitalized leases (64) -
------- -------
Net cash provided by (used in) financing activities (57) 12
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS: 1,402 1,812
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 2,859 1,827
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 4,261 $ 3,639
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes refunded (paid) $ (47) $ 1,625
======= =======
</TABLE>
<PAGE> 5
EARL SCHEIB, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements have been prepared by Earl Scheib,
Inc. (the "Company") without audit, in accordance with generally accepted
accounting principles. Pursuant to the rules and regulations of the Securities
and Exchange Commission, certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted or condensed. It is
management's belief that the disclosures made are adequate to make the
information presented not misleading and reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
financial position and results of operations for the periods presented. The
results of operations for the periods presented should not be considered as
necessarily indicative of operations for the full year due to the seasonality of
the Company's business. It is recommended that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements for the year ended April 30, 1997 ("Fiscal 1997") and the notes
thereto included in the Company's Form 10-K.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, April 30,
1997 1997
----------- ---------
<S> <C> <C>
Finished goods $ 1,731 $ 1,577
Raw materials 549 317
LIFO reserve (610) (610)
------- -------
Total inventories $ 1,670 $ 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. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings and claims some of which
arise in the ordinary course of its business. Management believes that the
amount of ultimate liability with respect to these legal matters should not
materially affect the Company's financial statements.
NOTE 5. EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of
shares of common stock outstanding and common stock equivalents when dilutive
(using the modified treasury stock method). The weighted average number of
shares used to compute earnings per share for the quarters ended October 31,
1997 and 1996 were 4,824,000 and 4,741,000, respectively. The weighted average
number of shares used to compute earnings per share for the six months ended
October 31, 1997 and 1996 were 4,722,000 and 4,741,000, respectively. Fully
diluted amounts for each period do not differ materially from amounts presented
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
QUARTER ENDED OCTOBER 31, 1997 ("1998 SECOND QUARTER") COMPARED TO THE QUARTER
ENDED OCTOBER 31, 1996 ("1997 SECOND QUARTER")
Net sales during the 1998 Second Quarter increased by $610 or 4.6% which
consisted of same shop (shops open one year or more) sales increases of $463 or
3.6% compared to the 1997 Second Quarter. The increase in sales resulted
primarily from new products (including the Company's new Europaint(TM) and
Euroclear(TM)) offered to customers and improvements in shop operations.
Gross profit dollars in the 1998 Second Quarter increased by $257
compared to the 1997 Second Quarter due mainly to the increase in sales
discussed above. Gross profit margins increased from 30.4% to 30.9% due to
increased sales volumes spreading fixed costs over a larger number of sales
dollars, partially offset by the additional costs associated with the Company's
new Europaint(TM).
Selling and administrative expense decreased by $580 or 5.5% of sales in
the 1998 Second Quarter compared to the 1997 Second Quarter. Advertising expense
accounted for $460 of the decrease due, in part, to the discontinuance of
advertising to introduce the New Earl Scheib Shop format and insourcing of the
advertising department, while other selling and administrative expenses
decreased a net of $120 primarily as a result of lower insurance expenses.
Other income consists of gains from sales of excess real estate and
interest income. Net interest income (generated from the investment of cash in
short-term investments) was $45 in the 1998 Second Quarter and $37 in the 1997
Second Quarter.
In the fiscal year ended April 30, 1996 ("Fiscal 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 Fiscal 1996 net
operating loss carryforward were available to more than offset the Company's
financial federal tax provision for the 1997 Second Quarter. Income taxes were
provided at the Company's effective tax rate for the 1998 Second Quarter. Due to
income allocation and state income tax laws, the Company did have income tax
liabilities for the 1997 Second Quarter in some states for which the Company
provided $26.
SIX MONTHS ENDED OCTOBER 31, 1997 ("FIRST SIX MONTHS OF FISCAL 1998") COMPARED
TO THE SIX MONTHS ENDED OCTOBER 31, 1996 ("FIRST SIX MONTHS OF FISCAL 1997" OR
"PRIOR YEAR PERIOD")
Net sales for the First Six Months of Fiscal 1998 increased by $725 or
2.6% compared to the Prior Year Period which consisted of same shop (shops open
one year or more) sales increases of $731 or 2.8% compared to the Prior Year
Period, partially offset by 1 less shop in the First Six Months of Fiscal 1998
compared to the Prior Year Period. The increase in sales resulted primarily from
increased new products offered to customers (including the Company's new
Europaint(TM) and Euroclear(TM)) and improvements in shop operations.
<PAGE> 7
Gross profit dollars in the First Six Months of Fiscal 1998 increased by
$104 compared to the First Six Months of Fiscal 1997 due mainly to the increase
in sales discussed above. Gross profit margins decreased slightly from 33.3% to
32.9% of sales in the First Six Months of Fiscal 1998 compared to the Prior Year
Period as a result of the additional costs associated with the Company's new
Europaint(TM) partially offset by increased sales volumes spreading fixed costs
over a larger number of sales dollars.
Selling and administrative expense decreased by $1,251 or 5.1% of sales
compared to the prior year period. Advertising expense accounted for $938 of the
decrease due to the discontinuance of image advertising to introduce the New
Earl Scheib Shop format which ran in the first and second quarters of Fiscal
1997 and the insourcing of the majority of the Company's advertising work in the
third quarter of Fiscal 1997. Other selling and administrative expenses
decreased a net of $313 primarily as a result of the discontinuance of certain
incentive programs at the field level implemented in the first and second
quarters of Fiscal 1997 and decreases in the cost of various types of insurance
in the First Six Months of Fiscal 1998.
Other income consists of gains from sales of excess real estate and
interest income. During the First Six Months of Fiscal 1998, the Company sold 2
properties for a net loss of $72 compared to a net gain of $419 from the sale of
10 properties in the Prior Year Period. Net interest income (generated from the
investment of cash in short-term instruments) was $81 in the First Six Months of
Fiscal 1998 compared to $80 in the Prior Year Period.
In Fiscal 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 Fiscal 1996 net operating loss carryforward
were available to partially offset the Company's financial federal tax provision
for the First Six Months of Fiscal 1998 and fully offset the Company's financial
federal tax provision for the Prior Year Period. Due to income allocation and
state income tax laws, the Company had income tax liabilities in some states in
the First Six Months of Fiscal 1997 for which the Company provided $57.
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 generate positive cash flow from operations while the third and
occasionally the fourth quarters are usually net users of cash) and its capital
requirements for improvements to existing shops and for expansion.
As of October 31, 1997, the Company had current assets of $9,708 and
current liabilities of $6,711 for a net working capital position of $2,997. 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 owned by the Company and two capital leases. During the
fiscal year ending April 30, 1998 ("Fiscal 1998") the Company plans to open up
to 12 to 14 new shops (depending upon the availability of locations) and perform
various capital improvements to the Company's other shops and factory for an
estimated total cost of $2.8 million.
In the First Six Months of Fiscal 1998, the Company had capitalized
expenditures of $1,583 (which are included in the $2.8 million of cash
requirements described in the previous paragraph) which were financed largely
through cash flow from operations and the sale of two shops, which generated net
cash proceeds of $358. The Company expects that future cash flow from operations
will be enhanced by these capital additions.
<PAGE> 8
During the First Six Months of Fiscal 1998, net cash provided by
operations was $3,503, a 26.0% or $722 increase in net cash provided by
operations in the Prior Year Period. The increase in cash provided from
operations resulted mainly from the increase in earnings before depreciation of
$499.
The other major source of cash flow for the Company has been the sale of
excess real estate. The Company has 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
$1,712. If necessary, the Company could either borrow against 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.
LABOR NEGOTIATIONS
The Company's collective bargaining agreement (the "Agreement") with the
International Brotherhood of Teamsters ("the Teamsters" or the "Union") expired
September 15, 1997. Prior to this period and up through the date of this report,
the Company has been in negotiations with the Union. A new Agreement has not
been finalized and management does not know when an Agreement with the Teamsters
will be finalized and approved by the Union. Company employees have continued to
work since the expiration of the collective bargaining agreement. At this time,
management of the Company does not know what the ultimate outcome of the
negotiation with the Union will be.
"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 Company's new Europaint(TM) the
impact of advertising and promotional activities, the potential adverse effects
of certain litigation and the impact of the Company's negotiations with the
Union.
<PAGE> 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On September 5, 1997, the Registrant held its Annual Meeting of
Shareholders. The only matter to be voted on was the election of directors. All
nominees were elected as follows:
<TABLE>
<CAPTION>
Nominee For Against Abstain
------- --------- ------- -------
<S> <C> <C> <C>
Christian K. Bement 3,860,047 11,095 0
Stuart D. Buchalter 3,864,067 7,075 0
Philip Wm. Colburn 3,863,847 7,295 0
Alexander L. Kyman 3,863,847 7,295 0
Donald R. Scheib 3,864,067 7,075 0
Daniel A. Seigel 3,860,047 11,095 0
Robert L. Spencer 3,859,847 11,295 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data, Article 5 is filed herein.
(b) The Registrant was not required to file any Current Reports on Form
8-K during the quarter ended October 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
December 9, 1997 /s/ Daniel A. Seigel
- ---------------- ---------------------------------------------
Dated Daniel A. Seigel, President and
Chief Executive Officer
December 9, 1997 /s/ John D. Branch
- ---------------- ---------------------------------------------
Dated John D. Branch, Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 4,271
<SECURITIES> 1,435
<RECEIVABLES> 371
<ALLOWANCES> 0
<INVENTORY> 1,670
<CURRENT-ASSETS> 9,708
<PP&E> 30,694
<DEPRECIATION> 12,407
<TOTAL-ASSETS> 31,824
<CURRENT-LIABILITIES> 6,711
<BONDS> 0
0
0
<COMMON> 4,591
<OTHER-SE> 16,839
<TOTAL-LIABILITY-AND-EQUITY> 31,824
<SALES> 13,900
<TOTAL-REVENUES> 13,900
<CGS> 9,602
<TOTAL-COSTS> 9,602
<OTHER-EXPENSES> 3,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,119
<INCOME-TAX> 410
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 709
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
