<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 July 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 September 4, 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
---------
July 31, April 30,
ASSETS 1998 1998
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,335 $ 4,203
Marketable securities 208 --
Accounts receivable 752 627
Inventories 1,886 1,251
Prepaid expenses 1,623 1,568
Deferred income taxes 714 714
Property held for sale 25 25
-------- --------
Total Current Assets 8,543 8,388
Property and Equipment, net 19,674 19,375
Deferred Income Taxes 1,877 1,877
Other, Primarily Cash Surrender Value
of Life Insurance 1,899 1,846
-------- --------
Total Assets $ 31,993 $ 31,486
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 605 $ 964
Accrued expenses 6,452 6,503
-------- --------
Total Current Liabilities 7,057 7,467
-------- --------
Deferred Management Compensation 3,350 3,363
-------- --------
Long-term Liabilities 216 221
-------- --------
Commitments and Contingencies (Note 4) -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized
12,000,000; 4,783,000 issued and
4,644,000 outstanding at July 31, 1998,
and 4,782,000 issued and 4,659,000
outstanding at April 30, 1998 4,783 4,782
Additional paid-in capital 6,636 6,598
Retained earnings 11,138 10,132
Treasury shares (1,187) (1,077)
-------- --------
Total Shareholders' Equity 21,370 20,435
-------- --------
Total Liabilities and Shareholders' Equity $ 31,993 $ 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
--------------------------
July 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $ 15,903 $ 14,755
Cost of sales 10,723 9,637
-------- --------
Gross profit 5,180 5,118
Selling and administrative expense 3,564 3,372
-------- --------
Operating income 1,616 1,746
Other income (expense) 5 (28)
-------- --------
Income before income taxes 1,621 1,718
Income tax 615 257
-------- --------
Net income $ 1,006 $ 1,461
======== ========
Basic earnings per share (Note 5) $ 0.22 $ 0.32
======== ========
Diluted earnings per share (Note 5) $ 0.21 $ 0.31
======== ========
</TABLE>
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
-------------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 449 $ 1,860
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (919) (768)
Proceeds from sale of property and equipment 5 358
(Investment) in marketable securities (208) (2,491)
Other - net (53) (15)
------- -------
Net cash used in investing activities (1,175) (2,916)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2 7
Purchase of treasury stock (110) --
Principal payments on capital leases (34) (27)
------- -------
Net cash used in financing activities (142) (20)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS: (868) (1,076)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 4,203 2,859
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 3,335 $ 1,783
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 307 $ 35
======= =======
</TABLE>
Supplemental Disclosure of Noncash Investing and Financing Activities:
During the three months ended July 31, 1998, the Company entered into one
capital lease in the amount of $47.
<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>
July 31, April 30,
1998 1998
-------- ---------
<S> <C> <C>
Finished goods $1,889 $1,497
Raw materials 563 320
LIFO Reserve (566) (566)
------ ------
Inventories $1,886 $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 4,659,000 and 4,590,000 for the three month periods ended July 31,
1998 and 1997, respectively. The weighted average number of shares used to
calculate diluted earnings per share was 4,777,000 and 4,653,000 for the three
month periods. The effect of dilutive securities which consisted wholly of stock
options in increasing the weighted average shares outstanding was 118,000 and
63,000 shares for the quarters ended July 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 JULY 31, 1998 ("FIRST QUARTER OF 1999") COMPARED TO THE QUARTER
ENDED JULY 31, 1997 ("FIRST QUARTER OF 1998")
Net sales for the First Quarter of 1999 increased by $1,148 or 7.8%
compared to the First Quarter of 1998. This increase consisted of same shop
(shops open one year or more) sales increases of $609 or 4.3%. The remaining
increase in sales is due to sales from ten new shops opened since the First
Quarter of 1998 partially offset by the loss of sales from seven shops closed
since the First Quarter of 1998. The increase in sales resulted primarily from
higher car volume partially offset by a lower average invoice price.
Gross profit dollars in the First Quarter of 1999 increased by $62 compared
to the First Quarter of 1998 due mainly to the increase in sales discussed
above. Gross profit margins decreased from 34.7% to 32.6% due primarily to a
lower average sales price resulting from an aggressive sales promotion in the
first part of the quarter, higher material costs related to the Company's new
Europaint(TM) and higher depreciation charges related to the remodeling of the
Company's shops to the New Earl Scheib format.
Selling and administrative expense increased by $192 in the First Quarter
of 1999 compared to the First Quarter of 1998; however, as a percent of sales
selling and administrative expenses decreased by 0.5%. The dollar 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 partially
offset by reduction in the accounting and management information systems areas.
<PAGE> 7
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 $5 in the First Quarter of 1999 and $36 in the First
Quarter of 1998. During the First Quarter of 1998, the Company sold one property
for a net loss of $64 compared to no property sales in the First Quarter of
1999.
In the fiscal year ended April 30, 1997, the Company did not utilize
its entire net operating loss carryforward as a tax benefit for financial
reporting purposes. Accordingly, tax benefits from the 1996 net operating loss
carryforward were available to partially offset the Company's financial federal
tax provision for the First Quarter of 1998. The First Quarter of 1999 was fully
taxable for federal income tax purposes. State income taxes were provided in
both quarters.
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.
As of July 31, 1998, the Company had current assets of $8,543 and
current liabilities of $7,057 for a net working capital position of $1,486. 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 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 Quarter of 1999, the Company had capitalized expenditures
of $919 (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 Quarter of 1999, net cash provided by operations
decreased $1,411 compared to the First Quarter of 1998. The decrease in cash
flow from operations resulted from an increase in federal income taxes between
the two quarters ($455), a decrease in accounts payable and other liabilities
($584) and an increase in current assets ($155). 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. From May 1, 1998
through September 4, 1998, the Company has purchased 321,500 shares at a total
purchase price of $2,031,500. The average price paid per share was $6.32. The
Company purchased 16,000 shares at a purchase price of $110,000 in the First
Quarter of 1999.
The Company has 73 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 $1,687. If
necessary, the Company could either borrow against or liquidate these policies.
<PAGE> 8
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 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, 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 assurance that the systems
of third parties on which the Company rely will be timely converted or that any
such failure to convert by another company would not have an adverse effect on
the Company.
During the First Quarter of 1999, Year 2000 costs were not material and
it is anticipated that future Year 2000 issues will 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 potential adverse effects of certain litigation and the impact of the
Company's new outside sales force.
<PAGE> 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On September 4, 1998, the Registrant held its Annual Meeting of
Shareholders. The only matters to be voted on were the election of directors and
an amendment to the Registrant's 1994 Performance Employee Stock Option Plan.
(a) Election of directors:
<TABLE>
<CAPTION>
Nominee For Against Abstain
------- --- ------- -------
<S> <C> <C> <C>
Christian K. Bement 4,265,312 28,858 0
Stuart D. Buchalter 4,275,682 9,488 0
Philip Wm. Colburn 4,276,182 8,988 0
Alexander L. Kyman 4,277,182 7,988 0
Donald R. Scheib 4,275,182 9,988 0
Daniel A. Seigel 4,276,954 8,216 0
</TABLE>
(b) Approve amendment to the 1994 Performance Employee Stock Option
Plan:
<TABLE>
<CAPTION>
For Against Abstain Not Voted
--- ------- ------- ---------
<S> <C> <C> <C>
1,838,062 1,562,977 10,636 873,495
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data , Article 5 is filed herein.
(b) The Registrant was not required to file any Current Reports on
Form 8-K during the quarter ended July 31, 1998.
<PAGE> 10
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
September 11, 1998 /s/ Daniel A. Seigel
- ------------------ --------------------------------------------
Dated Daniel A. Seigel, President and
Chief Executive Officer
September 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> JUL-31-1998
<CASH> 3,335
<SECURITIES> 208
<RECEIVABLES> 752
<ALLOWANCES> 0
<INVENTORY> 1,886
<CURRENT-ASSETS> 8,543
<PP&E> 33,723
<DEPRECIATION> 14,049
<TOTAL-ASSETS> 31,993
<CURRENT-LIABILITIES> 7,057
<BONDS> 0
0
0
<COMMON> 4,783
<OTHER-SE> 16,587
<TOTAL-LIABILITY-AND-EQUITY> 31,993
<SALES> 15,903
<TOTAL-REVENUES> 15,903
<CGS> 10,723
<TOTAL-COSTS> 10,723
<OTHER-EXPENSES> 3,564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,621
<INCOME-TAX> 615
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,006
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
