<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 January 31, 1998
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 March 6, 1998, the registrant had 4,613,478 shares of its Capital
Stock, $1.00 par value, issued and outstanding.
This report contains a total of 10 pages.
<PAGE> 2
PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
January 31, April 30,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,853 $ 2,859
Marketable securities 400 670
Accounts receivable 388 582
Inventories 1,712 1,284
Prepaid expenses 1,443 1,303
Deferred income taxes 410 410
Property held for sale 125 530
----------- -----------
Total Current Assets 7,331 7,638
Property and Equipment, net 18,327 18,012
Deferred Income Taxes 1,898 1,898
Other, Primarily Cash Surrender Value
of Life Insurance 2,004 1,902
----------- -----------
Total Assets $ 29,560 $ 29,450
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 493 $ 474
Accrued expenses 5,163 5,944
----------- -----------
Total Current Liabilities 5,656 6,418
----------- -----------
Deferred Management Compensation 3,372 3,425
----------- -----------
Long-term Liabilities 260 354
----------- -----------
Commitments and Contingencies (Note 4) -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized 12,000,000;
issued and outstanding 4,601,000 and 4,589,000
4,601 4,589
Additional paid-in capital 5,655 5,596
Retained earnings 10,016 9,068
----------- -----------
Total Shareholders' Equity 20,272 19,253
----------- -----------
Total Liabilities and Shareholders' Equity
$ 29,560 $ 29,450
=========== ===========
</TABLE>
<PAGE> 3
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------------ -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 8,490 $ 7,869 $ 37,145 $ 35,799
Cost of sales 7,595 7,204 26,834 25,822
-------- -------- -------- --------
Gross profit 895 665 10,311 9,977
Selling and administrative
expense 2,782 2,640 9,370 10,479
-------- -------- -------- --------
Operating income (loss) (1,887) (1,975) 941 (502)
Other income 34 295 43 794
-------- -------- -------- --------
Income (loss) before income
taxes (1,853) (1,680) 984 292
Income tax (benefit) (631) (28) 36 29
-------- -------- -------- --------
Net income (loss) $ (1,222) $ (1,652) $ 948 $ 263
======== ======== ======== ========
Basic earnings (loss) per share
(Note 5) $ (0.27) $ (0.36) $ 0.21 $ 0.06
======== ======== ======== ========
Diluted earnings (loss) per
share (Note 5) $ (0.27) $ (0.36) $ 0.20 $ 0.06
======== ======== ======== ========
</TABLE>
<PAGE> 4
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 1,752 $ 199
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,261) (2,376)
Proceeds from sale of property and equipment 358 2,159
Reduction (investment) in marketable securities 270 (385)
Other - net (102) (143)
----------- -----------
Net cash used in investing activities (1,735) (745)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 71 34
Principal payments on capitalized leases (94) --
------- -------
Net cash provided by (used in)financing activities (23) 34
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS: (6) (512)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 2,859 1,827
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 2,853 $ 1,315
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes refunded (paid) $ (66) $ 1,612
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
</TABLE>
The Company reclassified $795 of property to Assets Held For Sale during the
third quarter 1997 and entered into two capital leases totaling $493.
<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>
January 31, April 30,
1998 1997
----------- ---------
<S> <C> <C>
Finished goods $ 1,773 $ 1,577
Raw materials 549 317
LIFO Reserve (610) (610)
------- -------
Inventories $ 1,712 $ 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
The Company adopted the Financial Accounting Standards Board Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, for the
period ended January 31, 1998. 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 is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
is computed by dividing net income by the sum of the weighted average number of
common shares outstanding for the period plus the assumed exercise of all
diluted securities. The only diluted securities the Company has outstanding are
stock options issued to the Company's Board of Directors, management and
employees.
<PAGE> 6
The weighted average number of shares used to calculate Basic Earnings Per
Share was 4,594,000 and 4,574,000 for the three month periods ended January 31,
1998 and 1997, respectively. Diluted Earnings Per Share were the same as Basic
Earnings Per Share. Excluded from the Diluted Earnings Per Share computation
were 228,000 and 40,000 options in the three month periods ended January 31,
1998 and 1997, respectively. These options were excluded from the Diluted
Earnings Per Share computation because they were antidilutive.
The weighted average number of shares used to calculate Basic Earnings Per
Share was 4,592,000 and 4,571,000 for the nine month periods ended January 31,
1998 and 1997, respectively. The weighted average number of shares used to
calculate Diluted Earnings Per Share were 4,745,000 for the nine month period
ended January 31, 1998, and 4,682,000 for the nine month period ended January
31, 1997. The effect of diluted securities which consisted wholly of stock
options in increasing the weighted average shares outstanding was 153,000 and
111,000 shares for the nine month periods ended January 31, 1998 and 1997,
respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
QUARTER ENDED JANUARY 31, 1998 ("1998 THIRD QUARTER") COMPARED TO THE QUARTER
ENDED JANUARY 31, 1997 ("1997 THIRD QUARTER")
Net sales during the 1998 Third Quarter increased by $621 or 7.9% which
consisted of same shop (shops open one year or more) sales increases of $531 or
7.1% compared to the 1997 Third Quarter. The remaining increase in sales is due
to a increase in sales from new shops opened since the 1997 Third Quarter
partially offset by the loss of sales from shops closed since the 1997 Third
Quarter. The increase in sales resulted primarily from new products (including
the Company's new Europaint(R) and Euroclear(R)) offered to customers and
improvements in shop operations.
Gross profit dollars in the 1998 Third Quarter increased by $230 compared to
the 1997 Third Quarter due mainly to the increase in sales discussed above.
Gross profit margins increased from 8.5% to 10.5% 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(R).
Selling and administrative expense increased by $142 which represents a
decrease of 0.7% of sales in the 1998 Third Quarter compared to the 1997 Third
Quarter. Advertising expense decreased $106 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
increased a net of $248 primarily as a result of the loss of income from
subleases on properties sold, payroll costs associated with the expansion of the
real estate department and payroll costs associated with the establishment of a
sales force to sell to fleet accounts.
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 $34 in the 1998 Third Quarter and $49 in the 1997 Third
Quarter. During the 1997 Third Quarter, the Company sold 3 properties for a net
gain of $246 compared to no property sales in the 1998 Third Quarter.
<PAGE> 7
In the 1998 Third Quarter the Company recognized a federal income tax
benefit due to the operating loss for the quarter. The amount of the benefit was
limited by the income tax provisions recorded in the prior two quarters. No
federal income tax benefit or provision was recorded for the 1997 Third Quarter
due to the Company having a financial net operating loss carryforward. Due to
income allocation and state income tax laws, the Company had an income tax
benefit for the 1998 and 1997 Third Quarter in some states for which the Company
benefited $77 and $28, respectively.
NINE MONTHS ENDED JANUARY 31, 1998 ("FIRST NINE MONTHS OF FISCAL 1998") COMPARED
TO THE NINE MONTHS ENDED JANUARY 31, 1997 ("FIRST NINE MONTHS OF FISCAL 1997" OR
"PRIOR YEAR PERIOD")
Net sales for the First Nine Months of Fiscal 1998 increased by $1,346 or
3.8% compared to the Prior Year Period which consisted of same shop (shops open
one year or more) sales increases of $1,755 or 5.2% compared to the Prior Year
Period and $815 in sales from shops open less than one year, partially offset by
$1,224 less sales from shops closed during the past year. The increase in sales
resulted primarily from increased new products offered to customers (including
the Company's new Europaint(R) and Euroclear(R)) and improvements in shop
operations.
Gross profit dollars in the First Nine Months of Fiscal 1998 increased by
$334 compared to the First Nine Months of Fiscal 1997 due mainly to the increase
in sales discussed above. Gross profit margins remained relatively the same
between the First Nine Months of Fiscal 1998 and 1997.
Selling and administrative expense decreased by $1,109 or 4.1% of sales
compared to the prior year period. Advertising expense accounted for $1,044 of
the decrease due to 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 $65.
Other income consists of gains from sales of excess real estate and interest
income. During the First Nine Months of Fiscal 1998, the Company sold 2
properties for a net loss of $72 compared to a net gain of $665 from the sale of
13 properties in the Prior Year Period. Net interest income (generated from the
investment of cash in short-term instruments) was $115 in the First Nine Months
of Fiscal 1998 compared to $129 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
fully offset the Company's financial federal tax provision for the First Nine
Months of Fiscal 1998 and 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 Nine Months of Fiscal 1998 and 1997 for which the Company provided
$36 and $29, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are based upon its seasonal working capital
needs and capital requirements for capitalized additions and improvements and
expansion. The first and second quarters and occasionally the fourth quarter
have positive cash flow from operations while the third and occasionally the
fourth quarters are net users of cash.
<PAGE> 8
As of January 31, 1998, the Company had current assets of $7,331 and current
liabilities of $5,656 for a net working capital position of $1,675. The Company
has no long-term debt except for its deferred management compensation plan
(which is largely funded through the cash surrender value of various life
insurance policies the company maintains) and 2 capital leases. During the
fiscal year ending April 30, 1998 ("Fiscal 1998") the Company has opened 7 new
shops and plans to open 3 to 5 additional new shops and perform various
improvements for an estimated total cost of $3.3 million. During Fiscal 1998 the
Company closed 10 shops of which 8 shops were closed permanently and 2 shops
were closed temporarily for the winter season. At the current time the Company
has no plans to close any additional shops.
In the First Nine Months, the Company had capitalized expenditures of $2,261
(which are included in the $3.3 million of cash requirements described in the
previous paragraph) which were financed largely through cash flow from
operations. The Company expects that future cash flow from operations will be
enhanced by these capital additions.
During the First Nine Months, net cash provided by operations increased
$1,553 over the amount provided in the nine months ended January 31, 1997. The
increase in cash flow resulted from improvements from earnings before interest,
taxes and depreciation ($1,787) partially offset by the use of cash to finance
other working capital components
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 $1,746. 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 for the remainder of
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.
<PAGE> 9
"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(R) the impact of advertising
and promotional activities, the potential adverse effects of certain litigation
and the impact of the Company's union negotiations
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data , Article 5 is filed herein.
(b) The Registrant was not required to file any Current Reports on Form 8-K
during the quarter ended January 31, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EARL SCHEIB, INC.
Registrant
March 13, 1998 /s/ Daniel A. Seigel
- -------------- -----------------------------------------------
Dated Daniel A. Seigel, President and
Chief Executive Officer
March 13, 1998 /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> JAN-31-1998
<CASH> 2,853
<SECURITIES> 400
<RECEIVABLES> 388
<ALLOWANCES> 0
<INVENTORY> 1,712
<CURRENT-ASSETS> 7,331
<PP&E> 31,143
<DEPRECIATION> 12,816
<TOTAL-ASSETS> 29,560
<CURRENT-LIABILITIES> 5,656
<BONDS> 0
0
0
<COMMON> 4,601
<OTHER-SE> 15,671
<TOTAL-LIABILITY-AND-EQUITY> 29,560
<SALES> 8,490
<TOTAL-REVENUES> 8,490
<CGS> 7,595
<TOTAL-COSTS> 7,595
<OTHER-EXPENSES> 2,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,853)
<INCOME-TAX> (631)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,222)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
