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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(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, 1998
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
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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. [ ]
As of July 15, 1998 the registrant had 4,660,182 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 $33,203,797
(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, 1998 are incorporated into Part II by reference.
Portions of the registrant's Proxy Statement dated July 27, 1998 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 over 60 years in the
automobile paint and repair 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, 1998, the Company operated a chain of 163 automobile
production paint and body shops which specialize in affordably priced repainting
of automobiles and performing body repairs other than major collision repair,
frame straightening, or axle work. The Company also offers the replacement of
certain 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 with the exception
of the Company's fleet sales which may be made upon credit terms.
The Company's shops operate under the name of the New Earl Scheib Paint and
Body Shop. The Company's shops are located in 140 cities throughout the United
States with 52 shops in California.
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
consolidation of three officer positions into one Chief Operating Officer
position held by Chris Bement.
During the fiscal year ended April 30, 1995, ("fiscal 1995") the Company
implemented a comprehensive restructuring plan 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.
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
Shop Format (the "New Shop Format"). Conversion to a New Shop Format included
new paint and graphics, new exterior signage, a new customer information center,
the installation of a "dust" wall to separate the vehicle preparation area from
the vehicle detail and delivery area, and the installation of a new Infrared
Quartz Finish Drying System to dry the paint on the car. New Shop Format
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 the New Shop Format.
The cost of converting shops to the New Shop Format 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 resulting in the Company's 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.
During the latter part of the fiscal year ended April 30, 1997 ("fiscal
1997"), the Company began a shop expansion campaign with the initial objective
to expand in existing strong markets. Penetration in these
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markets will enable the Company to open new shops without significantly
increasing overhead expenses. In each new shop, the Company utilizes state of
the industry paint booths and enclosed dryers which further improves 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 other areas.
During fiscal 1997, the Company opened 5 new shops, located in California,
Washington, Oregon and Missouri.
During the fiscal year ended April 30, 1998 ("fiscal 1998"), the Company
opened 13 new shops. These new shops are located in California, Washington,
Utah, Pennsylvania, Hawaii and New Mexico. Toward the end of fiscal 1998, the
Company increased the size of its real estate department to accomplish
additional new shop openings during the fiscal year ending 1999. New shops
incorporate much of the New Shop Format but also include other improvements,
where feasible, such as the installation of state of the industry cross-draft or
semi-downdraft paint booths with combination fully enclosed dryers, the
separation of the production process into three distinct areas, vehicle
preparation, masking and detail to further improve quality; and the installation
of exterior graphics to emphasize the Company's core business and attractive
prices.
The Company intends to open approximately 15-20 new shops in fiscal 1999.
During fiscal 1998, the Company implemented an extensive Division Manager
training program. This program is designed to attract and train individuals for
eventual promotion to a Division Manager position. The program is considered a
"fast track" program which involves a 4 to 12 month training program. The
Company hopes that this program will result in stronger field management
resulting in improved sales and profitability while providing quality and
service to the Company's customers.
SERVICES
The Company currently offers three paint packages which range in price
based upon the color of the paint, number of coats of paint applied, 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 EuroClear(R) clear coat for an additional cost.
The Company paints vehicles on a production line basis. After any bodywork,
the vehicle is sanded to prepare the surface for paint adhesion. Removal of
scratches, chips, rust and peeling also occurs at this time for an extra charge.
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 and sprinklered spray booth. The vehicle
is then dried in either a semi-enclosed or fully enclosed Infrared Quartz Finish
Drying System. This 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 as well as extra sanding and
preparation mentioned above. All body and fender work performed is incidental to
the painting process. Such body and fender work accounted for approximately 21%
of the Company's sales during fiscal 1998, 22% in fiscal 1997 and 25% in 1996.
During fiscal 1997, the Company began the manufacture and distribution of a
new EuroPaint(R) coating system. EuroPaint(R) is a true two (2) component
acrylic polyurethane coating which offers superior quality and performance.
EuroPaint(R) is characterized by having high gloss and distinctness 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 many of the paint formulations used by the Company's competitors and
similar to paint formulations commonly used by many European luxury car
manufacturers.
During fiscal 1998, the Company engaged PRA (Paint Research Associates
Laboratories Incorporated), a respected independent paint testing and research
company to perform blind tests of EuroPaint(R). The test
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results showed that EuroPaint(R) was rated "best" against the best paints used
in popular production auto painting.
PRA's tests showed that EuroPaint(R) outperformed its competitors' paint by
a substantial margin. The paint test measured gloss (the ability of paint to
reflect light), distinctiveness of image (which represents the ability of the
painted surface to reflect images like a mirror) and the ability of the paint to
resist harmful chemicals and UV rays.
The Company also introduced EuroClear(R). EuroClear(R) is an option which
offers customers a true and separate clear coat with the same superior quality
and performance properties offered by EuroPaint(R). EuroClear(R) enhances and
intensifies the high gloss and distinctiveness of image of EuroPaint(R)
providing a very deep gloss look characteristic of basecoat/clearcoat (two
stage) paint systems.
During Fiscal 1997 and 1998, the Company's color offering was expanded to
include a new, unique line of colors which capture the glamour and allure of
pearlescence. Such 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 systems, which offer
customers a unique production shop product.
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.
FLEET SERVICE
During the second half of fiscal 1998, the Company started up a fleet sales
department. The department consists of approximately 10 sales people dedicated
to developing multi-vehicle fleet accounts. These accounts range from smaller
neighborhood businesses to large municipal and national accounts. To date, the
Company has painted vehicles for a number of small and large fleets including
U.S. Airways, COIT Carpet Cleaners, Roto-Rooter and the United States Postal
Service, among others. The Company anticipates that fleet sales will be a
growing percentage of total sales and provide sales during the Company's
historically slower months.
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. Prices for raw materials have remained fairly steady
over the last few years.
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 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 Christmas holidays, sales and earnings for the months of November, December,
January and February are usually much 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 and
last quarter 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
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body shops. Both types of competitors generally price their services much 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 new shop
expansion, developing fleet sales, ongoing shop renovations and technological
improvements and improved training programs along with new products will enable
it to compete more effectively than it currently does.
TRADEMARKS
The Company's success is dependent upon, among other things, its name. The
Company relies primarily on a combination of the protections provided in
applicable copyright, trademark and trade secret laws. The Company owns various
trademarks but believes that Earl Scheib(R), EuroPaint(R), and EuroClear(R) are
material to the business of the Company.
RESEARCH AND DEVELOPMENT
The Company is engaged in certain research and development to continue 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(R) and EuroClear(R), UV Supergloss and 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, 1998 were
not a significant percentage of sales.
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, 1998, the Company employed approximately 1,161 employees, of
whom 365 were sales, administrative, management or executive personnel and 796
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, 1997 and extends
through September 15, 2001. None of the Company's executive, administrative,
shop management or clerical personnel are represented by a union. Management
believes its employee relations are good.
YEAR 2000 COMPLIANCE
Many computer systems, as well as certain hardware and equipment containing
date sensitive data, were structured to utilize a two-digit date field meaning
that they may not be able to properly recognize dates in the year 2000. This
could result in significant system and equipment failures. Beginning in fiscal
1997 the Company began a process of evaluating its as well as its critical
vendors systems to identify potential year 2000 issues and implement solutions.
It was decided that the best approach would be to replace the majority of the
Company's legacy information systems.
Starting in late fiscal 1997 and proceeding during most of fiscal 1998 the
Company has been undergoing an accelerated installation of new systems. At the
end of fiscal 1998, the majority of these systems had been
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operating for over nine months. The Company is in the final stages of installing
new systems at its factory and warehouse, in its accounting department and a
credit system to support its new fleet business. It is anticipated that all of
these systems will be installed and operating by the middle of fiscal 1999. At
that time the Company believes that the majority if not all of its systems will
be year 2000 compliant; however, in this regard it is relying upon
representations made by its software and hardware vendors most of whom are large
well known international companies. In performing this significant technology
transformation the Company has relied upon both internal and external resources.
The Company has been in communication with major suppliers, financial
institutions and others with whom it conducts business to determine that they
will be year 2000 compliant. The Company has received representations from these
outside parties indicating they believe they will be year 2000 compliant prior
to the end of fiscal 1999. There can be no assurance, however, that the systems
of third parties on which the Company's systems rely will be timely converted or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems.
The estimated cost to address year 2000 issues is not expected to have a
material impact on the Company's business, operations or financial condition.
ITEM 2. PROPERTIES
The Company owns the land and buildings occupied by 70 of the Company's
operating shops as of April 30, 1998. These properties are debt free. The
remaining 93 of the Company's 163 shops were leased from outside third parties.
The 163 shops are located in 140 cities in 31 states. In fiscal 1998 the Company
opened 13 shops and closed 8 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 less than 1 to 12 years. All of the leases, with two exceptions, 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
maintains fire and liability insurance but 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 or
retail establishments. 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 $125,000. 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 approximately 3,500 square feet to 7,000 square feet and existing
shops ranging in size from approximately 3,500 square feet to approximately
12,000 square feet.
The Company owns its corporate office, 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 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.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain 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,
1998 ("1998 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 1998 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 1998 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 1998 Annual Report is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" appearing on page 14 of the 1998 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 5 of the 1998 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appearing on pages 6
through 12 of the 1998 Annual Report are incorporated herein by reference.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEMS 10., 11., 12., 13. AND 14.
The information required by these items is contained in the Company's
definitive Proxy Statement dated July 27, 1998 which relates to election of the
Company's directors and which was filed within 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.
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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 6 through 13 of the 1998 Annual
Report, are filed as part of this Report on Form 10-K:
For the Fiscal Years Ended April 30, 1998, 1997 and 1996:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Consolidated Balance Sheets as of April 30, 1998 and 1997
Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
The Exhibits required to be filed hereunder are indexed on pages 9
through 10.
(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 Year 2000 hardships, the
impact of the Company's EuroPaint(R), the impact of advertising and promotional
activities, the impact of the Company's expansion and fleet sales and the
potential adverse effects of certain litigation.
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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.
By /s/ DANIEL A. SEIGEL
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Daniel A. Seigel
President
Date: July 27, 1998
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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President and Director July 27, 1998
By /s/ DANIEL A. SEIGEL [Chief Executive Officer]
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Daniel A. Seigel
Chairman of the Board of July 27, 1998
By /s/ DONALD R. SCHEIB Directors
- -----------------------------------------------------
Donald R. Scheib
By /s/ ALEXANDER L. KYMAN Director July 27, 1998
- -----------------------------------------------------
Alexander L. Kyman
By /s/ ROBERT L. SPENCER Director July 27, 1998
- -----------------------------------------------------
Robert L. Spencer
By /s/ PHILIP WM. COLBURN Director July 27, 1998
- -----------------------------------------------------
Philip Wm. Colburn
By /s/ STUART D. BUCHALTER Director July 27, 1998
- -----------------------------------------------------
Stuart D. Buchalter
Executive Vice President and July 27, 1998
By /s/ CHRISTIAN K. BEMENT Director
- -----------------------------------------------------
Christian K. Bement
Senior Vice President and Chief July 27, 1998
By /s/ JOHN D. BRANCH Financial Officer [Principal
- ----------------------------------------------------- Financial and Accounting
John D. Branch Officer]
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EXHIBIT INDEX
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EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
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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) 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(k) 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(l) 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............................
10(m) Employment Agreement dated as of March 25, 1996 between
Registrant and John Branch filed as Exhibit 10(n) to the
Registrant's 1996 Form 10-K and hereby incorporated herein
by reference................................................
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EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
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13 1998 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 1991 Annual Report on Form 10-K and hereby
incorporated herein by reference............................
24 Consent of 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
9 through 10 of the Form 10-K at a cost of 25c per page, which is the reasonable
cost to the Company in fulfilling the request.
11
<PAGE> 1
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.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 50,839 100.0% $ 48,348 100.0% $ 43,981 100.0%
Cost of sales 37,048 72.9 34,543 71.4 33,069 75.2
- -------------------------------------------------------------------------------------------------------------------
Gross profit 13,791 27.1 13,805 28.6 10,912 24.8
Selling, general and administrative expense 12,770 25.1 13,708 28.4 12,333 28.0
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,021 2.0 97 0.2 (1,421) (3.2)
Other income 112 .2 1,050 2.2 2,401 5.4
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,133 2.2 1,147 2.4 980 2.2
Provision for income taxes 69 .1 45 0.1 85 0.2
- -------------------------------------------------------------------------------------------------------------------
Net income $ 1,064 2.1% $ 1,102 2.3% $ 895 2.0%
===================================================================================================================
</TABLE>
FISCAL YEAR ENDED APRIL 30, 1998 ("FISCAL 1998") COMPARED TO FISCAL YEAR ENDED
APRIL 30, 1997 ("FISCAL 1997")
Total sales for Fiscal 1998 increased $2,491 or 5.2% from Fiscal 1997. This
increase resulted from a $2,765 or 6.0% same shop increase less $274 from net
shop closures. Management believes that the same shop sales increase resulted
from new product offerings including the Company's recent introduction of
EuroPaint(R), improvements in shop operations, the impact of our new sales force
to corporate fleet accounts and improved quality of our services.
Cost of sales increased as a percentage of sales from 71.4% in Fiscal
1997 to 72.9% in Fiscal 1998. In dollars, cost of sales for Fiscal 1998
increased $2,505 or 7.3% from Fiscal 1997. The increase in cost of sales is
largely due to the increase in material cost of our new EuroPaint(R) and
associated components compared to the cost of the old paint.
Selling, general and administrative expense decreased by $938 or 3.3%
of sales in Fiscal 1998 compared to fiscal 1997. Advertising expense decreased
by $819 (which represents 87.3% of the decrease in selling, general and
administrative expense between Fiscal 1998 and Fiscal 1997). Decreases in
insurance expense due mainly to lower group medical insurance, decreases in the
expense of the accounting department due to our new management information
system and lower telecommunication costs due to renegotiated contracts accounted
for $517 of the decrease (which represents 55.1% of the decrease in selling,
general and administrative expense between Fiscal 1998 and Fiscal 1997). These
decreases were partially offset by one time costs to install the new management
information system, the expense of our new outside sales force, expansion of our
real estate department, cost of living salary increases for support staff and
the expense of a new program to hire and develop individuals from outside the
Company who have the potential of becoming future Division Managers for the
Company.
Other income consists of gains from the sale of excess real estate and
interest income. During Fiscal 1998, the Company sold three properties for a net
gain of $33 compared to a net gain of $893 from the sale of 21 properties in
Fiscal 1997. Interest income net of interest expense, generated from the
investment of cash in short-term instruments, was lower in Fiscal 1998 than in
Fiscal 1997, $79 and $157, respectively. This decrease in interest income
resulted mainly from lower yields in Fiscal 1998.
The majority of the Company's Fiscal 1998 and all of the Company's
Fiscal 1997 federal income tax provisions were offset by net operating loss
carryforwards from past years. Due to income allocation and state income tax
laws, only part of the Company's income before taxes in Fiscal 1998 and 1997 was
offset by the net operating loss carryforwards for state income tax purposes.
The Company provided $53 and $45 in taxes in Fiscal 1998 and 1997, respectively,
for taxes in those states which were not offset by net operating loss
carryforwards.
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(R),
improvements in shop operations and in the quality of our services.
4
<PAGE> 2
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 (which represents 48.5% of the increase in selling, general and
administrative expense 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 (which represents 20.2% of the increase
in selling, general and administrative expense 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 carryforwards 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 laws, the Company did have income
tax liabilities in some states for which it provided $45.
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 new
shops and capitalized additions and improvements.
As of April 30, 1998, the Company had current assets of $8,388 and
current liabilities of $7,467 for a net working capital position of $921. The
Company's long-term financial obligations consist of its deferred compensation
plan and two minor capital leases. During the fiscal year ending April 30, 1999
("Fiscal 1999") 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 $3,400.
In Fiscal 1998 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 share 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 1998, cash provided by operations was $3,814, an
improvement of $2,221 or 139% compared to $1,593 in cash flow provided from
operations in Fiscal 1997.
The Company has 73 parcels of nonencumbered property, including the
Company's headquarters and paint factory, which could be either sold or 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
$1,642. 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 plans to currently seek outside financing.
Management believes that internally generated funds should be more than
adequate to satisfy the Company's anticipated cash requirements for operations,
share repurchases and projected capital expenditures through Fiscal 1999.
5
<PAGE> 3
EARL SCHEIB, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 50,839 $ 48,348 $ 43,981
Cost of sales 37,048 34,543 33,069
- --------------------------------------------------------------------------------
Gross profit 13,791 13,805 10,912
Selling, general and administrative expense 12,770 13,708 12,333
- --------------------------------------------------------------------------------
Operating income (loss) 1,021 97 (1,421)
Other income 112 1,050 2,401
- --------------------------------------------------------------------------------
Income before income taxes 1,133 1,147 980
Provision for income taxes (Note 2) 69 45 85
- --------------------------------------------------------------------------------
Net income $ 1,064 $ 1,102 $ 895
================================================================================
Earnings per share (Note 1)
Basic $ 0.23 $ 0.24 $ 0.20
Diluted $ 0.22 $ 0.23 $ 0.19
================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
CAPITAL STOCK, $1 PAR
----------------------- ADDITIONAL
SHARES PAID-IN RETAINED TREASURY
OUTSTANDING AMOUNT CAPITAL EARNINGS STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance May 1, 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
Net income for the year -- -- -- 1,064 -- 1,064
Stock issued under stock option plan 193,000 193 1,002 -- -- 1,195
Treasury stock acquired (123,000) -- -- -- (1,077) (1,077)
- ---------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1998 4,659,000 $4,782 $6,598 $10,132 $ (1,077) $20,435
===========================================================================================================================
</TABLE>
See the accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 4
EARL SCHEIB, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
APRIL 30,
-------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,203 $ 2,859
Marketable securities -- 670
Accounts receivable 627 582
Inventories 1,251 1,284
Prepaid expenses 1,568 1,303
Deferred income taxes (Note 2) 714 410
Property held for sale 25 530
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 8,388 7,638
Property and equipment, less accumulated depreciation and amortization (Note 3) 19,375 18,012
Deferred income taxes (Note 2) 1,877 1,898
Other, primarily cash surrender value of life insurance (Note 6) 1,846 1,902
- ---------------------------------------------------------------------------------------------------------------------------
$31,486 $29,450
===========================================================================================================================
LIABILITIES
Current liabilities:
Accounts payable $ 964 $ 474
Accrued expenses:
Income taxes (Note 2) 2,078 1,792
Insurance 813 990
Payroll 1,530 1,518
Other 2,082 1,644
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,467 6,418
Deferred management compensation (Note 6) 3,363 3,425
Capitalized leases (Note 4) 221 354
Commitments and contingencies (Notes 4, 6 and 7) -- --
SHAREHOLDERS' EQUITY
Capital stock $1 par -- shares authorized 12,000,000; 4,782 4,589
4,782,000 issued and 4,659,000 outstanding at April 30, 1998 and 4,589,000
issued and outstanding at April 30, 1997 (Note 5)
Additional paid-in capital 6,598 5,596
Retained earnings 10,132 9,068
Treasury stock (1,077) --
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,435 19,253
- ---------------------------------------------------------------------------------------------------------------------------
$31,486 $29,450
===========================================================================================================================
</TABLE>
See the accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 5
EARL SCHEIB, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,064 $ 1,102 $ 895
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on disposals of property and equipment (33) (675) (1,948)
Write-down of property and equipment 159 -- --
Depreciation 2,323 1,881 1,319
Deferred income taxes (283) -- (220)
Deferred management compensation (87) (384) 209
Changes in operating assets and liabilities
Refundable income taxes -- -- 990
Accounts receivable (45) (149) 6
Inventories 33 105 23
Prepaid expenses (265) 69 (14)
Accounts payable 490 (1,288) 135
Accrued expenses 458 932 (2,231)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,814 1,593 (836)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,870) (3,080) (5,155)
Proceeds from disposals of property and equipment 563 2,708 5,158
Reduction (investment) in marketable securities 670 (134) (536)
Other assets 56 (140) (221)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,581) (646) (754)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capitalized leases (128) (10) --
Stock options exercised 239 95 --
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 111 85 --
- -------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,344 1,032 (1,590)
Cash and Cash Equivalents, at beginning of year 2,859 1,827 3,417
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of year $ 4,203 $ 2,859 $ 1,827
=============================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Income taxes (paid) refunded $ (75) $ 1,609 $ (51)
=============================================================================================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES.
In fiscal 1998 the Company received $1,077 in treasury stock as payment for the
exercise price of certain stock options exercised during the year ($956) and as
payment of payroll taxes related to the exercise of the stock options ($121).
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.
8
<PAGE> 6
EARL SCHEIB, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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 and businesses.
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 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, 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,
-------------------
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Finished goods $1,497 $1,577
Raw materials 320 317
LIFO reserve (566) (610)
-------------------
Total inventories $1,251 $1,284
===================
</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. The carrying value of deferred income
tax assets is determined based upon an evaluation of whether the realization of
such assets is more likely than not.
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 5.
IMPAIRMENT OF LONG-LIVED ASSETS: 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.
REVENUE RECOGNITION: The Company recognizes sales when the work is completed and
the customer accepts delivery of the
vehicle.
EARNINGS PER SHARE: The Company adopted the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
Per Share. SFAS No. 128 requires the Company to present basic and diluted
earnings per share on the face of the income statement.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
only dilutive securities the Company has outstanding are stock options issued to
the Company's Board of Directors, management and employees. SFAS No. 128
requires restatement of all prior period earnings per share data presented.
The weighted average number of shares used to calculate basic earnings
per share was 4,605,000, 4,575,000 and 4,568,000 for the years ended April 30,
1998, 1997 and 1996, respectively. The weighted average number of shares used to
calculate diluted earnings per share was 4,762,000, 4,693,000 and 4,647,000 for
the years ended April 30, 1998, 1997 and 1996, respectively. The effect of
dilutive securities which consisted wholly of stock options in increasing the
weighted average shares outstanding was 157,000, 118,000 and 79,000 shares for
the years ended April 30, 1998, 1997 and 1996, respectively.
PROSPECTIVE ACCOUNTING CHANGES: SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", is effective for fiscal years beginning
after December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services, and geographical areas
in which they
9
<PAGE> 7
operate and their major customers. The Company does not expect adoption of SFAS
131 to have an impact on its financial position or results of operations. The
Company has not yet determined the impact upon future financial statement
disclosures.
RECLASSIFICATION: Certain reclassifications have been made in the year ended
April 30, 1997 ("fiscal 1997") and the year ended April 30, 1996 ("fiscal 1996")
amounts to conform to the year ended April 30, 1998 ("fiscal 1998")
presentation.
2. Taxes on Income
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 299 $ -- $ 220
State 53 45 85
-------------------------
352 45 305
Deferred (283) -- (220)
-------------------------
Total $ 69 $45 $ 85
=========================
</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,
-------------------------
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. Federal
statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of
federal benefit 3.1 2.6 5.7
Federal net operating loss (29.0) (32.7) (26.9)
Other (2.0) -- (4.1)
-------------------------
Total 6.1% 3.9% 8.7%
=========================
</TABLE>
At April 30, 1998, net current deferred income tax assets and net
long-term deferred income tax assets are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Deferred income tax assets-current:
Alternative Minimum Tax Credit $ 300 $ --
Accrued insurance 283 304
Accrued payroll and vacation 38 67
Other 93 39
-------------------
$ 714 $ 410
===================
Deferred income tax assets
(liabilities)-long term:
Net operating loss $ 1,098 $ 1,395
Deferred compensation 1,143 1,273
Depreciation (153) (194)
Other (168) (204)
Valuation allowance (43) (372)
-------------------
$ 1,877 $ 1,898
===================
</TABLE>
In 1998 and 1997 the Company had deferred income tax assets, net of
valuation allowance, of $2,591 and $2,308, respectively. 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 income tax asset, then one or more properties could be sold for a gain
to realize the income tax asset. Accordingly, it is management's opinion that it
is more likely than not that the net deferred income tax asset will be realized.
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 $448 refund relating to the difference
in federal tax rates is currently deferred on the Company's balance sheet.
3. Property and Equipment
Property and equipment including their estimated useful lives consist of the
following:
<TABLE>
<CAPTION>
APRIL 30,
----------------- ESTIMATED
1998 1997 USEFUL LIFE
- ----------------------------------------------------------
<S> <C> <C> <C>
Land $ 5,339 $ 5,339
Buildings and building
improvements 9,567 9,269 8-33 years
Machinery and equipment 9,117 7,698 3-10 years
Automotive equipment 142 198 2-4 years
Office furniture and
equipment 2,605 2,294 3-10 years
Life of
Leasehold improvements 6,013 4,746 Lease
-----------------
32,783 29,544
Less accumulated
depreciation and
amortization 13,408 11,532
-----------------
Net property and
equipment $19,375 $18,012
=================
</TABLE>
4. 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, 1998, the current and
long-term portions of these agreements were $134 and $221, respectively.
The Company leases approximately 57% 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 1998, 1997 and 1996 was $2,995,
$2,651 and $2,260, respectively. Following is a schedule, by year, of the future
minimum lease commitments as of April 30, 1998.
10
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30:
- ---------------------------------------
<S> <C>
1999 $ 2,848
2000 2,594
2001 2,196
2002 1,612
2003 969
Thereafter 974
-------
Total minimum lease payments $11,193
=======
</TABLE>
5. Stock Options
(Number of shares and options in thousands)
In August of 1994 the Company's stockholders approved two nonqualified stock
option plans. One plan allows for the granting of up to 100 shares of the
Company's capital stock to nonemployee 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 plans 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 chief executive officer and chief operating officer.
In November of 1994, the Company granted a stock option for 400 shares
of the Company's capital stock to the Company's 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 which is included in selling, general and
administrative expense in the fiscal 1996 consolidated statement 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>
WEIGHTED
NUMBER AVERAGE
OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
- -----------------------------------------------------------
<S> <C> <C> <C>
Outstanding at
May 1, 1995 915 $4.50 - $12.35 $6.54
Granted 191 $5.13 - $ 9.00 $7.00
Exercised -- $ -- --
Canceled (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
Canceled (83) $4.50 - $11.23 $6.51
-----------------------------------
Outstanding at
April 30, 1997 1,069 $4.50 - $11.23 $6.67
Granted 150 $8.75 $8.75
Exercised (193) $4.50 - $7.875 $6.17
Canceled (48) $4.50 - $7.875 $6.93
-----------------------------------
Outstanding at
April 30,1998 978 $4.50 - $11.23 $7.07
===================================
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
-----------------------
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Shares exercisable 682 749 387
Shares available for grant at
end of year 61 164 253
=======================
</TABLE>
The following table summarizes information about stock options
outstanding:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ---------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE
EXERCISE AT APRIL 30, REMAINING EXERCISE
PRICE 1998 LIFE PRICE
- ---------------------------------------------------------
<S> <C> <C> <C>
$4.50-$ 5.50 197 6.6 $5.13
$5.50-$ 6.50 300 2.6 $6.31
$6.50-$11.23 481 8.2 $8.34
---------
978
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
- ------------------------------------------------------------
WEIGHTED
RANGE OF EXERCISABLE AT AVERAGE EXERCISE
EXERCISE PRICE APRIL 30, 1998 PRICE
- ------------------------------------------------------------
<S> <C> <C>
$4.50-$ 5.50 163 $5.20
$5.50-$ 6.50 283 $6.33
$6.50-$11.23 236 $8.38
----------
682
==========
</TABLE>
11
<PAGE> 9
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 a pro forma net income and earnings per share indicated
below:
<TABLE>
<CAPTION>
APRIL 30,
-----------------------------
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $1,064 $1,102 $ 895
Pro forma 493 864 895
Net income per
common share:
As reported:
Basic $ 0.23 $ 0.24 $0.20
Diluted 0.22 0.23 0.19
Pro forma:
Basic 0.11 0.18 0.20
Diluted 0.10 0.18 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
No. 123 compensation was determined by using the Black-Scholes option-pricing
model and the following assumptions: a weighted average risk-free interest rate
of 5.86%, 6.77% and 7.91% for fiscal 1998, 1997 and 1996, respectively; an
expected life of 10 years; expected volatility of 32.6%, 32.8% and 52.9% in
fiscal 1998, 1997 and 1996, respectively, and no expected dividend. The
weighted-average fair value of the options issued by the Company in fiscal 1998,
1997 and 1996 was $4.90, $4.25 and $4.33, respectively.
6. Deferred Management Compensation
The Company in 1987 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 1998, 1997 and 1996 was $181,
$358 and $329, respectively.
The discount rate used in determining the actuarial present value of
the projected benefit obligation was 7.0% for fiscal 1998, 1997 and 1996. Due to
the compensation agreements having predetermined fixed dollar amounts of
benefits, no rates of increase in future compensation were used. The table below
sets forth the funded status and amounts recognized in the Company's
consolidated financial statements for the supplemental compensation plan:
<TABLE>
<CAPTION>
AS OF APRIL 30,
-------------------
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ -- $ --
Nonvested benefit obligation (2,952) (2,986)
-------------------
Accumulated benefit obligation (2,952) (2,986)
Projected benefit obligation (2,952) (2,986)
Plan assets at fair value -- --
-------------------
Projected benefit obligation in
excess of plan assets (2,952) (2,986)
Unrecognized net gains (106) (100)
Unrecognized net transition obligation -- --
Unrecognized prior service cost (599) (658)
-------------------
Accrued pension obligations $(3,657) $(3,744)
===================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED APRIL 30,
--------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Net pension expense
was comprised of:
Service cost $ 40 $ 92 $ 98
Interest cost 200 262 249
Return on plan assets -- -- --
Net amortization and
deferral (59) 4 (18)
--------------------------
Net periodic pension
expense $ 181 $ 358 $ 329
==========================
</TABLE>
The Company entered into whole life insurance contracts, to meet its
obligations under the Plan. As of April 30, 1998 and 1997, these contracts had
cash surrender values of $1,642 and $1,683, respectively. The Company was not
obligated to enter into these contracts and is not required to use the proceeds
to pay for the Plan.
7. 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 $4,689 in standby letters
of credit at April 30, 1998. 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.
12
<PAGE> 10
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Earl Scheib, Inc.
We have audited the accompanying consolidated balance sheets of Earl Scheib,
Inc. (the "Company") and subsidiaries as of April 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended April 30, 1998. 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.
We conducted our audits in accordance with generally accepted auditing
standards. These 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended April 30, 1998 in
conformity with generally accepted accounting principles.
Los Angeles, California
July 10, 1998
<PAGE> 11
EARL SCHEIB, INC.
SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $ 50,839 $ 48,348 $ 43,981 $ 47,288 $ 48,492
Net income (loss) 1,064 1,102 895 (5,553) (1,827)
Per share:
Earnings - Basic 0.23 0.24 0.20 (1.22) (0.40)
Earnings - Diluted 0.22 0.23 0.19 (1.22) (0.40)
Cash dividends declared -- -- -- -- 0.09
FINANCIAL POSITION
Property and equipment, net $ 19,375 $ 18,012 $ 18,040 $ 14,868 $ 19,409
Total assets 31,486 29,450 28,510 29,502 34,126
Long-term liabilities 3,584 3,779 3,809 3,600 3,484
Shareholders' equity 20,435 19,253 18,056 17,161 22,691
Number of shops at the end of the year 163 158 160 164 248
====================================================================================================
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth unaudited operating data for each of the
specified quarters of fiscal years 1998 and 1997. This quarterly information has
been prepared on the same basis as the annual consolidated financial statements
and, in the opinion of management, contains all adjustments necessary to state
fairly the information set forth herein.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
For the Fiscal Year Ended April 30, 1998
Revenues $14,755 $13,900 $ 8,490 $13,694
Gross profit 5,118 4,298 895 3,480
Net income (loss) 1,461 709 (1,222) 116
Basic earnings (loss) per share 0.32 0.15 (0.27) 0.03
Diluted earnings (loss) per share 0.31 0.15 (0.27) 0.02
For the Fiscal Year Ended April 30, 1997
Revenues $14,640 $13,290 $ 7,869 $12,549
Gross profit 5,271 4,041 665 3,828
Net income (loss) 1,623 292 (1,652) 839
Basic earnings (loss) per share 0.36 0.06 (0.36) 0.18
Diluted earnings (loss) per share 0.34 0.06 (0.36) 0.18
=====================================================================================
</TABLE>
Earnings per share for the first two quarters of fiscal 1998 and the
four quarters of fiscal 1997 differ from amounts previously reported due to the
adoption of SFAS No. 128.
14
<PAGE> 12
EARL SCHEIB, INC.
(Notes to selected quarterly financial data)
The variation in net income and earnings per share between the fourth
quarter of fiscal 1998 and the fourth quarter of fiscal 1997 is due to (1) a
decrease of approximately 1.6% in the average ticket price due to an increased
emphasis on car volume, (2) an increase in material costs due mainly to the
company's new EuroPaint(R), (3) an increase in legal fees due to the settlement
of two legal actions, (4) increased costs associated with the Company's new
fleet operation, expanded real estate department and new Division Manager
training program (5) costs associated with the opening of six new shops in
fiscal 1998 compared to one new shop in fiscal 1997 and (6) significantly higher
worker's compensation accruals compared to the prior year. These additional
expenses were partially offset by savings in the accounting and management
information systems departments and health insurance costs.
MARKET INFORMATION
Earl Scheib, Inc. is listed and traded on the American Stock Exchange under the
ticker symbol "ESH." As of April 30, 1998, there were approximately 262 holders
of record 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 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
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 $ 7 9/16 $ 9 3/8 $ 9 1/4 $ 9 5/8 $ 8 1/4 $ 8 13/16 $ 7 1/4 $ 7 3/8
Low 5 1/2 6 5/16 7 1/4 8 1/8 6 1/2 6 3/4 6 1/8 5 11/16
==========================================================================================================
</TABLE>
No dividends were paid in either fiscal 1998 or 1997.
"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 Year 2000 hardships, the impact of the Company's new
EuroPaint(R), the impact of advertising and promotional activities, the impact
of the Company's expansion and fleet sales and the potential adverse effects of
certain litigation.
15
<PAGE> 1
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 10, 1998, incorporated by
reference in this Annual Report on Form 10-K of Earl Scheib, Inc., for the year
ended April 30, 1998.
Los Angeles, California
July 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 4,203,000
<SECURITIES> 0
<RECEIVABLES> 627,000
<ALLOWANCES> 0
<INVENTORY> 1,251,000
<CURRENT-ASSETS> 8,388,000
<PP&E> 32,783,000
<DEPRECIATION> 13,408,000
<TOTAL-ASSETS> 31,486,000
<CURRENT-LIABILITIES> 7,467,000
<BONDS> 0
0
0
<COMMON> 4,782,000
<OTHER-SE> 15,653,000
<TOTAL-LIABILITY-AND-EQUITY> 31,486,000
<SALES> 50,839,000
<TOTAL-REVENUES> 50,839,000
<CGS> 37,048,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,133,000
<INCOME-TAX> 69,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,064,000
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
