<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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 December 1, 1998, the registrant had 4,803,311 shares of its
Capital Stock, $1.00 par value, issued and 4,358,682 shares outstanding.
This report contains a total of 10 pages.
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PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
October 31, April 30,
ASSETS 1998 1998
- ------ ------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 852 $ 4,203
Marketable securities 208 --
Accounts receivable 748 627
Inventories 1,801 1,251
Prepaid expenses 1,730 1,568
Deferred income taxes 714 714
Property held for sale -- 25
------------- -------------
Total Current Assets 6,053 8,388
Property and Equipment, net 20,043 19,375
Deferred Income Taxes 1,877 1,877
Other, Primarily Cash Surrender Value
of Life Insurance 1,949 1,846
------------- -------------
Total Assets $ 29,922 $ 31,486
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 527 $ 964
Accrued expenses 5,724 6,503
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Total Current Liabilities 6,251 7,467
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Deferred Management Compensation 3,365 3,363
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Long-term Liabilities 181 221
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Commitments and Contingencies (Note 4) -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized
12,000,000; 4,803,000 issued and
4,359,000 outstanding at October 31,
1998, and 4,782,000 issued and
4,659,000 outstanding at April 30, 1988
4,803 4,782
Additional paid-in capital 6,706 6,598
Retained earnings 11,725 10,132
Treasury shares (3,109) (1,077)
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Total Shareholders' Equity 20,125 20,435
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Total Liabilities and Shareholders' Equity
$ 29,922 $ 31,486
============= =============
</TABLE>
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
October 31, October 31
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 14,765 $ 13,900 $ 30,668 $ 28,655
Cost of sales 10,306 9,602 21,029 19,239
---------- ---------- ---------- ----------
Gross profit 4,459 4,298 9,639 9,416
Selling and administrative
expense 3,482 3,216 7,046 6,588
---------- ---------- ---------- ----------
Operating income 977 1,082 2,593 2,828
Other income (expense) (20) 37 (15) 9
---------- ---------- ---------- ----------
Income before income taxes 957 1,119 2,578 2,837
Income tax expense 370 410 985 667
---------- ---------- ---------- ----------
Net income $ 587 $ 709 $ 1,593 $ 2,170
========== ========== ========== ==========
Basic earnings per share (Note 5)
$ 0.13 $ 0.15 $ 0.35 $ 0.47
========== ========== ========== ==========
Diluted earnings per share (Note 5) $ 0.13 $ 0.15 $ 0.35 $ 0.46
========== ========== ========== ==========
</TABLE>
<PAGE> 4
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 964 $ 3,503
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,036) (1,583)
Proceeds from sale of property and equipment 49 358
(Investment) in marketable securities (208) (765)
Other - net (103) (54)
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Net cash used in investing activities (2,298) (2,044)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 92 7
Purchase of treasury stock (2,032) --
Principal payments on capital leases (77) (64)
---------- ----------
Net cash used in financing activities (2,017) (57)
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,351) 1,402
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 4,203 2,859
---------- ----------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 852 $ 4,261
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid 799 $ 47
========== ==========
</TABLE>
Supplemental Disclosure of Noncash Investing and Financing Activities:
During the six months ended October 31, 1998, the Company entered into one
capital lease in the amount of $62.
<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, 1998, ("Fiscal 1998") and the notes
thereto included in the Company's Form 10-K.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, April 30,
1998 1998
------------ ------------
<S> <C> <C>
Finished goods $ 1,861 $ 1,497
Raw materials 506 320
LIFO Reserve (566) (566)
------------ ------------
Inventories $ 1,801 $ 1,251
============ ============
</TABLE>
NOTE 3. INCOME TAXES
In the first quarter of the fiscal year ended April 30, 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.
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. SFAS No.
128 requires the Company to present basic and diluted earnings per share on the
face of the income statement.
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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 4,430,000 and 4,591,000 for the three month periods and 4,545,000
and 4,590,000 for the six month periods ended October 31, 1998 and 1997,
respectively. The weighted average number of shares used to calculate diluted
earnings per share was 4,440,000 and 4,835,000 for the three month periods and
4,589,000 and 4,744,000 for the six month periods ended October 31, 1998 and
1997, respectively. The effect of dilutive securities which consisted wholly of
stock options in increasing the weighted average shares outstanding was 10,000
and 244,000 shares for the quarter and 44,000 and 154,000 shares for the six
month periods ended October 31, 1998 and 1997, respectively.
NOTE 6. SEGMENT INFORMATION
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
operate and their major customers. The Company operates in only one segment,
auto painting and related services.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
(Dollars in thousands)
QUARTER ENDED OCTOBER 31, 1998 ("SECOND QUARTER OF 1999") COMPARED TO THE
QUARTER ENDED OCTOBER 31, 1997 ("SECOND QUARTER OF 1998")
Net sales for the Second Quarter of 1999 increased by $865 or 6.2%
compared to the Second Quarter of 1998. This increase consisted of same shop
(shops open one year or more) sales increases of $174 or 1.3%. The remaining
increase in sales is due to sales from 12 new shops opened since the Second
Quarter of 1998 partially offset by the loss of sales from 2 shops closed since
the Second Quarter of 1998. The increase in total sales resulted primarily from
the added car volume at new shops.
Gross profit dollars in the Second Quarter of 1999 increased by $161
compared to the Second Quarter of 1998 due mainly to the increase in sales
discussed above. Gross profit margins decreased from 30.9% to 30.2% due
primarily to higher material costs related to the Company's new Europaint(R).
Selling and administrative expense increased by $266 in the Second
Quarter of 1999 compared to the Second Quarter of 1998. Selling and
administrative expenses increased as a percent of sales by 0.5%. The increase in
selling and administrative expense is mainly due to additional personnel and
related expenses associated with the expansion of the Company's real estate
department and the establishment of an outside fleet sales department.
<PAGE> 7
Other income consists of gains from sales of excess real estate and net
interest income or expense. Net interest expense (interest expense on capital
leases partially offset by interest income generated from the investment of cash
in short-term investments) was $32 in the Second Quarter of 1999 compared to net
interest income of $45 in the Second Quarter of 1998. During the Second Quarter
of 1999, the Company sold one property for a net gain of $12 compared to the
sale of one property in the Second Quarter of 1998 for a net loss of $8.
The Company provided for both state and federal taxes at statutory rates
in both the Second Quarter of 1999 and 1998. The Company provided $370 in the
Second Quarter of 1999 and $410 in the Second Quarter of 1998.
SIX MONTHS ENDED OCTOBER 31, 1998 ("FIRST SIX MONTHS OF 1999") COMPARED TO THE
SIX MONTHS ENDED OCTOBER 31, 1997 ("FIRST SIX MONTHS OF 1998") OR "PRIOR YEAR
PERIOD")
Net sales for the First Six Months of 1999 increased by $2,013 or 7.0%
compared to the Prior Year Period which consisted of same shop (shops open one
year or more) sales increases of $783 or 2.8% compared to the Prior Year Period.
The remaining increase in sales is due to sales from 12 new shops opened since
the First Six Months of 1998 partially offset by the loss of sales from 2 shops
closed since the First Six Months of 1998. The increase in sales resulted
primarily from higher car volume at both new shops and same shops partially
offset by a lower ticket average during the first quarter of the year.
Gross profit dollars in the First Six Months of 1999 increased by $223
compared to the First Six Months of 1998 due mainly to the increase in sales
discussed above. Gross profit margins decreased slightly in the First Six Months
of 1999 compared to the Prior Year Period from 32.9% to 31.4% of sales as a
result of the additional costs associated with the Company's new Europaint(R)
and lower ticket averages in the first part of the quarter ended July 31, 1998,
compared to the ticket average in the quarter ended July 31, 1997.
Selling and administrative expense increased by $458 compared to the
prior year period. The majority of the increase was due to additional personnel
and related expenses associated with the expansion of the Company's real estate
department and the establishment of an outside fleet sales department.
Other income consists of gains or losses from sales of excess real
estate and net interest income or expense. During the First Six Months of 1999,
the Company sold 1 property for a net gain of $12 compared to a net loss of $72
from the sale of 2 properties in the Prior Year Period. Net interest expense
(interest expense on capital leases partially offset from the interest
generated from investment of cash in short-term instruments) was $27 in the
First Six Months of 1999 compared to net interest income of $81 in the Prior
Year Period.
Federal income taxes were provided at the statutory rates for the First
Six Months of 1999. Due to net operating loss carryforwards from fiscal 1996,
federal income taxes were provided for the First Six Months of 1998 at a lower
rate than the statutory rate.
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. 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 October 31, 1998, the Company had current assets of $6,053 and
current liabilities of $6,251 for a net working capital deficit of $198. The
Company as of October 31, 1998, had no long-term debt except for its deferred
management compensation plan and three capital leases. During the fiscal year
ending April 30, 1999 ("Fiscal 1999") the Company plans to open up to 20 new
shops (depending upon the availability of locations) and perform various
improvements for an estimated cost of $3.4 million.
In the First Six Months of 1999, the Company had capitalized
expenditures of $2,036 (which are included in the $3.4 million of cash
requirements described in the previous paragraph) which were financed through
cash flow from operations. The Company expects that future cash flow from
operations will be enhanced by these capital additions.
During the First Six Months of 1999, net cash provided by operations
decreased $2,539 compared to the First Six Months of 1998. The decrease in cash
flow from operations resulted from an increase in cash outlays for income taxes
between the two six month periods of approximately $752, a decrease in accounts
payable and other liabilities of approximately $1,076 and an increase in current
assets of approximately $668. The increase in current assets is partially due to
an increase in accounts receivable resulting from the expansion of our outside
sales program to companies which operate fleets of vehicles.
In Fiscal 1998 the Board of Directors announced that it had authorized
the repurchase of up to 500,000 shares of the Company's capital stock which was
approximately 11% of the Company's common stock outstanding. In the First Six
Months of 1999 the Company purchased 321,500 shares at a total purchase price of
$2,031,500. The average price paid per share was $6.32.
The Company has 72 parcels of unencumbered real estate, including the
Company's headquarters and paint factory. In addition, the Company owns
insurance policies on several employees which have a combined cash surrender
value of $1,732. It is management's intention to borrow against the cash
surrender value of these life insurance policies to fund its working capital
needs. In addition, management is in discussions with banks to obtain a line of
credit. It is anticipated that both the draw down on the cash surrender value of
the life insurance policies and the draw on the line of credit are for seasonal
purposes only and will be repaid from future cash flow from operations.
Management believes that internally generated funds in addition to the
sources of financing discussed above will be more than adequate to satisfy its
anticipated cash requirements for the remainder of Fiscal 1999.
INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE
As discussed in the Company's Annual Report on Form 10-K, the Company
has completed most of its Year 2000 conversion and is proceeding with the
conversion of some minor subsystems. The Company anticipates that these
conversions will be completed by the end 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 the Company is relying upon representations
made by its software and hardware vendors most of whom are large well known
international companies.
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; however, there can be no assurances that the systems
of third parties on which the Company relies will be timely converted or that
any such failure to convert by another company would not have a material adverse
effect on the Company.
<PAGE> 9
During the First Six Months of Fiscal 1999, Year 2000 costs were not
material and it is anticipated that future Year 2000 issues should not have a
material impact on the Company's business, operations or financial condition.
"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 year 2000 hardships, the impact of the
Company's new Europaint(R), the impact of advertising and promotional
activities, the profitability of new stores, the potential adverse effects of
certain litigation and the impact of the Company's new outside sales force.
<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 did not file any Current Reports on Form 8-K
during the quarter ended October 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
December 11, 1998 /s/ Christian K. Bement
- ----------------- ---------------------------------------------
Dated Christian K. Bement, President and
Chief Executive Officer
December 11, 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-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 852
<SECURITIES> 208
<RECEIVABLES> 748
<ALLOWANCES> 0
<INVENTORY> 1,801
<CURRENT-ASSETS> 6,053
<PP&E> 34,686
<DEPRECIATION> 14,643
<TOTAL-ASSETS> 29,922
<CURRENT-LIABILITIES> 6,251
<BONDS> 0
0
0
<COMMON> 4,803
<OTHER-SE> 15,322
<TOTAL-LIABILITY-AND-EQUITY> 29,922
<SALES> 14,765
<TOTAL-REVENUES> 14,765
<CGS> 10,306
<TOTAL-COSTS> 10,306
<OTHER-EXPENSES> 3,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 957
<INCOME-TAX> 370
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 587
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
