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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
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)
<TABLE>
<S> <C>
DELAWARE 95-1759002
(STATE OR OTHER JURISDICTION OF INCORPORATION
OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
8737 WILSHIRE BOULEVARD BEVERLY HILLS,
CALIFORNIA 90211-2795
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 652-4880
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
CAPITAL STOCK, $1.00 PAR VALUE AMERICAN STOCK EXCHANGE
</TABLE>
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 16, 1999 the registrant had 4,358,682 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 $20,158,904
(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 Stockholders for the fiscal
year ended April 30, 1999 are incorporated into Part II by reference.
Portions of the registrant's Proxy Statement dated July 29, 1999 for use at
the registrant's annual meeting of stockholders 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, 1999, the Company operated a chain of 174 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 are paid by either cash or credit cards with the exception
of the Company's fleet and trade 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 145 cities throughout the United
States with 54 shops in California
In November, 1994, 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. Mr. Seigel resigned as President
and Chief Executive Officer effective December 31, 1998. Christian Bement, the
Company's Chief Operating Officer since February, 1995, was elected President
and Chief Executive Officer on January 1, 1999. Additionally, Philip Wm.
Colburn, a board member since 1992, was elected Chairman of the Board on January
1, 1999, replacing Donald Scheib who agreed to remain as a director until the
1999 Annual Meeting of Shareholders.
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 the remainder 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.
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During the latter part of the fiscal year ended April 30, 1997 ("fiscal
1997"), the Company began an aggressive new shop expansion campaign with the
initial objective to expand in existing markets where the Company felt that it
underserved the market. Penetration in these markets will enable the Company to
open new shops without significantly increasing overhead expenses. During fiscal
1997, the Company opened 5 new shops.
During the fiscal year ended April 30, 1998 ("fiscal 1998"), the Company
opened 12 new shops. 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.
During fiscal 1998, the Company implemented an extensive Division Manager
training program. This program is designed to attract and train individuals from
outside the industry 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.
During the fiscal year ended April 30, 1999 ("fiscal 1999"), Daniel Seigel
resigned as President and Chief Executive Officer and Christian Bement was
elected to those positions. Additionally, after the end of fiscal 1999, on May
3, 1999, the Company's Chief Financial Officer, John Branch, resigned from his
position. The Company has hired Charles Barrantes as Chief Financial Officer
effective August 2, 1999.
During fiscal 1999, the Company began operations in 19 new shops. These
shops are located in California, Arizona, Texas, Indiana, Illinois, Virginia,
Washington and Michigan. All of these new shops provide the Company with greater
penetration into these existing markets. The Company hopes by continuing to
increase shop concentration and market penetration, in some instances doubling
the number of shops in a market, it will be able to achieve economies of scale
and improve the Company's overall performance in these areas.
SERVICES
The Company currently offers primarily 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. 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 a 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 20%
of the Company's sales during fiscal 1999, 21% in fiscal 1998 and 22% in fiscal
1997.
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 extremely 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 formulation used by the
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Company's competitors and is commonly used by many European luxury car
manufacturers. EuroPaint(R) was rated best in a blind test conducted by an
independent laboratory against the best paints used in popular production auto
painting. 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 offers a product called 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.
Over the past few fiscal years, 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
effect which can only be achieved by the use of pearlescent pigments.
Pearlescent colors are 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 fourth quarter of fiscal 1998, the Company started up a fleet
sales department. The department currently consists of approximately 10 sales
people dedicated to developing multi-vehicle fleet accounts in designated
geographical regions. These accounts range from smaller neighborhood businesses
to large municipal, state, federal and national accounts. During fiscal 1999,
fleet sales totalled $1,432,000 versus $185,000 in the fourth quarter of fiscal
1998 (the only quarter of fiscal 1998 that fleet sales was operating).
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.
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 for the months of November, December, January and
February are usually 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 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
body shops. Both types of competitors generally price their services much higher
than those charged by the Company.
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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 compete effectively. The Company expects that its new shop
expansion, developing fleet sales, ongoing shop renovations and technological
improvements, operational restructuring and improved training programs along
with new products will enable it to continue it to be an effective competitor.
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, change formulations
in order to comply with changing environmental regulations, 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, 1999 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 waste product produced.
EMPLOYEES
At April 30, 1999, the Company employed approximately 1,172 employees, of
which 346 were sales, administrative, management or executive personnel and 826
were production personnel. Production employees are represented by the
International Brotherhood of Teamsters under a collective bargaining agreement
which 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 and software products, 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 old information systems.
Starting in late fiscal 1997 and proceeding during most of fiscal 1999, the
Company has been undergoing an accelerated installation of new systems. At the
end of fiscal 1998, the majority of these systems had been operating for over
nine months. During fiscal 1999, the Company installed new systems in its
accounting department and a credit system to support its new fleet business. The
Company believes that the majority, if
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not all of its systems, are 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 estimated cost to address year 2000 issues has not,
to date, and is not expected to have a material impact on the Company's
business, operations or financial condition.
The Company has been in communications with major suppliers, financial
institutions, insurers 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 currently are or will be
year 2000 compliant prior to the end of 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 above discussion regarding costs and risks is based on the Company's
best current estimate given information that is currently available to it, and
is subject to change.
ITEM 2. PROPERTIES
The Company owns the land and buildings occupied by 69 of the Company's
operating shops as of April 30, 1999. The remaining 105 of the Company's 174
shops were leased from outside third parties. The 174 shops are located in 145
cities in 31 states. In fiscal 1999, the Company began operations in 19 new
shops and ceased operations in 6 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 a month to month tenancy to 15 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 as well as umbrella
earthquake coverage for its shops and other real estate interests.
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 approximately $175,000. These costs consist
of construction of improvements, 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.
As of April 30, 1999, the Company had 2 parcels of real estate for sale.
Both properties sold during the first quarter of fiscal 2000 for a net of
$342,888. The properties had a net book value at April 30, 1999, of
approximately $338,875 which are shown in the financial statements as Property
held for sale. The gain on the sale of these properties was $4,013 and will be
recognized in the first quarter of fiscal 2000.
The Company owns its corporate offices, 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
manufac-
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tures and warehouses paint and related products used by the shops (and
warehouses other necessary supplies) in this facility until needed by the
Company's shops. This facility occupies approximately 30,600 square feet.
The Company believes its operating properties are in good operating
condition.
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,
1999 ("1999 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 1999 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 1999 Annual Report
is not deemed filed as a part of this Report.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
"Market Information" appearing on page 15 of the 1999 Annual Report is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" appearing on page 14 of the 1999 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 2 through 4 of the 1999 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appearing on pages 5
through 13 of the 1999 Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company, effective April 20, 1999, dismissed Deloitte & Touche, LLP,
independent auditors, as its principal independent accountant. The dismissal was
recommended by the Audit Committee of the Board of Directors.
Deloitte & Touche, LLP's report on the Company's financial statements for
either of the past two years did not contain an adverse opinion or disclaimer of
opinion, nor was the report qualified or modified as to uncertainty, audit scope
or accounting principles.
Effective April 22, 1999, following the recommendation of the Audit
Committee, the Company engaged Arthur Andersen, LLP, independent public
accountants, as its new principal independent accountant to audit the Company's
financial statements. The Company did not consult Arthur Andersen, LLP during
its two most recent fiscal years with regard to any of the matters described in
Item 304(a)(2) of Regulation S-K.
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PART III
ITEMS 10., 12., 13. AND 14.
The information required by these items is contained in the Company's
definitive Proxy Statement dated July 29, 1999 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.
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 5 through 13 of the 1999 Annual
Report, are filed as part of this Report on Form 10-K:
For the Fiscal Years Ended April 30, 1999, 1998 and 1997:
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Balance Sheets as of April 30, 1999 and 1998
Consolidated Statements of Cash Flows
Report of Independent Public Accountants
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
The Exhibits required to be filed hereunder are indexed on page E-1.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on April 23, 1999 disclosing
a change in its certifying accountant.
"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 impact
of various tax positions taken by the Company.
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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.
Date: July 29, 1999 By /s/ CHRISTIAN K. BEMENT
------------------------------------
Christian K. Bement
President
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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<C> <S> <C>
By /s/ CHRISTIAN K. BEMENT President and Director July 29, 1999
------------------------------------------------- [Chief Executive Officer]
Christian K. Bement
By /s/ PHILIP WM. COLBURN Chairman of the Board of July 29, 1999
------------------------------------------------- Directors
Philip Wm. Colburn
By /s/ DANIEL A. SEIGEL Director July 29, 1999
-------------------------------------------------
Daniel A. Seigel
By /s/ DONALD R. SCHEIB Director July 29, 1999
-------------------------------------------------
Donald R. Scheib
By /s/ ALEXANDER L. KYMAN Director July 29, 1999
-------------------------------------------------
Alexander L. Kyman
By /s/ STUART D. BUCHALTER Director July 29, 1999
-------------------------------------------------
Stuart D. Buchalter
By /s/ DAVID EISENBERG Director July 29, 1999
-------------------------------------------------
David Eisenberg
By /s/ JOHN K. MINNIHAN Vice President -- Finance July 29, 1999
------------------------------------------------- [Principal Financial and
John K. Minnihan Accounting Officer]
</TABLE>
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EXHIBIT INDEX
<TABLE>
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SEQUENTIAL
EXHIBIT NO. 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(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) Amended Supplemental Terms Letter dated April 29, 1999
between City National Bank and Registrant...................
13 1999 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..............................
23.1 Consent of Current Independent Auditors.....................
23.2 Consent of Prior Independent Auditors.......................
99.1 Report of Prior Independent Auditors........................
27.1 Financial Data Schedule.....................................
</TABLE>
E-1
<PAGE> 11
EARL SCHEIB INC. AND SUBSIDIARIES
AVAILABILITY OF EXHIBITS
------------------------
The Company will furnish upon
request copies of the exhibits
indicated on page E-1 of the Form
10-K at a cost of 25c per page,
which is the reasonable cost to
the Company in fulfilling the
request.
<PAGE> 1
EXHIBIT 10(m)
[CITY NATIONAL BANK LETTERHEAD]
AMENDED SUPPLEMENTAL TERMS LETTER
APRIL 29, 1999
Earl Scheib, Inc.
8737 Wilshire Blvd.
Beverly Hills, CA 90211
Attention: Mr. Christian K. Bement
RE: REVOLVING NOTE DATED JANUARY 29, 1999, IN THE ORIGINAL PRINCIPAL
SUM OF $4,000,000.00 ("NOTE") EXECUTED BY EARL SCHEIB, INC.
("BORROWER") IN FAVOR OF CITY NATIONAL BANK ("CNB").
Dear Mr. Bement:
Reference is made to the above mentioned Note. This letter is to confirm
that the following additional terms and conditions will apply to the Note.
Capitalized terms not defined in this letter have the meanings given them in the
Note. This letter is hereby incorporated into the Note (this letter and the
Note, collectively, the "Note"). THIS AMENDED SUPPLEMENTAL TERMS LETTER DATED
APRIL 29, 1999 SUPERSEDES THE SUPPLEMENTAL TERMS LETTER DATED JANUARY 29, 1999.
A. ADDITIONAL EVENTS OF DEFAULT.
The following shall constitute additional Events of Default under the
Note:
1. Failure of Borrower to furnish CNB, within the times specified, the
following statements:
1.1 Within forty-five (45) days after the end of each of the first
three quarterly accounting periods of each fiscal year, a
financial statement consisting of not less than a balance sheet,
income statement, reconciliation of net worth and statement of
cash flows, prepared in accordance with generally accepted
accounting principles consistently applied, which financial
statement may be internally prepared;
<PAGE> 2
Mr. Christian K. Bement
Earl Scheib, Inc.
April 29, 1999
Page 2
1.2 Within ninety (90) days after the close of each fiscal year, a
copy of the annual audit report for such year for Borrower and
the Subsidiaries including therein a balance sheet, income
statement, reconciliation of net worth and statement of cash
flows, with notes thereto, the balance sheet, income statement
and statement of cash flows to be audited by a certified public
accountant reasonably acceptable to CNB, and certified by such
accountants to have been prepared in accordance with generally
accepted accounting principles consistently applied and
accompanied by Borrower's certification as to whether any event
has occurred which constitutes an Event of Default, and if so,
stating the facts with respect thereto; and
1.3 Such additional information, reports and/or statements as CNB
may, from time to time, reasonably request;
2. Failure of Borrower to maintain, on a consolidated basis, the following:
2.1 Tangible Net Worth plus Subordinated Debt of not less than
$18,000,000.00;
2.2 A ratio of Total Senior Liabilities to Tangible Net Worth plus
Subordinated Debt of not more than 1 to 1 at all times;
2.3 Cash Flow from operations of not less than $2,800,000.00;
3. Failure of Borrower to pay and discharge all material taxes,
assessments, governmental charges and real and personal property taxes
prior to the date upon which penalties are attached unless the same are
being contested in good faith by borrower in appropriate proceedings;
4. Failure of Borrower to maintain or cause to be maintained for its
benefit in full force and effect the existing levels of insurance for
its business, including, without limitation, fire, public liability,
property damage, business interruption and extra expense and worker's
compensation and issued by an insurance company, reasonably acceptable
to CNB, and such failure to maintain is not cured within 30 days of
borrower's receipt of notice of cancellation of such policies;
5. Borrower creates, incurs, assumes or permits to exist any indebtedness,
except indebtedness to CNB and trade debt incurred in the ordinary
course of business, without CNB's prior written consent, except for (i)
equipment leases, (ii) purchase money debt and obligations under capital
leases in an aggregate amount not to exceed $325,000, and (iii) loans
secured by the cash surrender value of life insurance policies totaling
$1,690,000 and two notes from Firstar Bank Wisconsin totaling $225,000
and secured by a receivable from the state of Wisconsin related to
PECFA.
6. Borrower assumes, guarantees, or otherwise becomes liable for the
material obligation of any person or entity, except contingent
liabilities in favor of CNB, without CNB's prior written consent; or
<PAGE> 3
Mr. Christian K. Bement
Earl Scheib, Inc.
April 29, 1999
Page 3
7. Borrower mortgages, pledges, hypothecates, grants or contracts to grant
any security interest of any kind in any of its property or assets to
anyone, except CNB, without CNB's prior written consent, except for (i)
mechanics, materialmen's, landlord's, warehousemen's and carriers' liens
and other similar liens arising in the ordinary course of business with
respect to obligations which are not delinquent or are being contested
in good faith by appropriate proceedings, (ii) liens consisting of
pledges or deposits to secure obligations under real estate leases
permitted hereunder, (iii) liens relating to obligations under capital
leases permitted hereunder and liens securing any equipment or operating
leases, and (iv) liens, if they constitute such, of any true lease and
consignment UCC filings; or
8. Borrower makes or commits to make expenditures for capital assets
(including capitalized lease expenditures) of more than $5,500,000.00 in
the aggregate for Borrower and all Subsidiaries in any fiscal year,
without CNB's prior written consent.
B. DEFINITIONS.
For purposes of the Note, the following terms have the following
meanings:
"CASH FLOW FROM OPERATIONS" shall be determined on a consolidated basis
for Borrower and the Subsidiaries and shall mean the sum of (a) net income
earned over the twelve month period ending on the date of determination, plus
(b) amortization of intangible assets, plus (c) interest expense, plus (d)
depreciation expensed during the twelve month period ending on the date of
determination.
"SUBORDINATED DEBT" shall mean indebtedness of Borrower or any
Subsidiary, the repayment of principal and interest of which is subordinated to
CNB, on terms satisfactory to CNB.
"SUBSIDIARY" shall mean any corporation, the majority of whose voting
shares are at any time owned, directly or indirectly by Borrower and/or by one
or more Subsidiaries.
"TANGIBLE NET WORTH" shall mean the total of all assets appearing on a
balance sheet prepared in accordance with generally accepted accounting
principles consistently applied for Borrower and the Subsidiaries on a
consolidated basis, minus (a) all intangible assets, including, without
limitation, any accounts receivable converted to notes receivable, unamortized
debt discount, affiliate, employee and officer receivables or advances,
goodwill, research and development costs, patents, trademarks, the excess of
purchase price over underlying values of acquired companies, any covenants not
to compete, deferred charges, copyrights, franchises and appraisal surplus;
minus (b) all obligations which are required by generally accepted accounting
principles consistently applied to be reflected as a liability on the
consolidated balance sheet of Borrower and the Subsidiaries; minus, (c) the
amount, if any, at which shares of stock of a non-wholly owned Subsidiary appear
on the asset side of Borrower's consolidated balance sheet, as determined in
accordance with generally accepted accounting principles consistently applied;
minus (d) minority interests; and minus (e) deferred income and reserves not
otherwise reflected as a liability on the consolidated balance sheet of Borrower
and the Subsidiaries.
<PAGE> 4
Mr. Christian K. Bement
Earl Scheib, Inc.
April 29, 1999
Page 4
"TOTAL SENIOR LIABILITIES" shall mean, as of any date of determination,
the amount of all obligations that should be reflected as a liability on a
consolidated balance sheet of Borrower and the Subsidiaries prepared in
accordance with generally accepted accounting principles consistently applied,
less Subordinated Debt.
C. ADDITIONAL TERMS AND CONDITIONS.
The following additional terms and conditions shall also apply to the
Note:
1. FEES. Borrower shall pay to CNB a non-refundable fee equal to $15,000.00
[3/8% of the original principal amount of the Note], due and payable in
full upon execution of this letter and the Note, and upon any subsequent
renewal. (FEE PAID IN FULL AS OF FEBRUARY 8, 1999)
2. ENVIRONMENTAL INDEMNIFICATION. Due to the environmentally sensitive
nature of the industry in which Borrower is principally engaged and upon
which CNB will rely as its primary source of repayment, and in
consideration of CNB extending credit to Borrower, Borrower has agreed
to indemnify CNB against any claims that may arise as a result of
Borrower's business activities that are environmental in nature and for
which CNB may be named as a liable party.
Borrower agrees that it shall indemnify and hold harmless CNB, its
parent company, subsidiaries and all of their respective directors,
officers, employees, agents, successors, attorneys, and assigns from and
against any loss, damage, cost, expense, or liability directly or
indirectly arising out of or attributable to the use, generation,
manufacture, production, storage, release, threatened release,
discharge, disposal, or presence of a hazardous substance on, under, or
about Borrower's property or operations or property leased to Borrower,
including but not limited to attorneys' fees (including the reasonable
estimate of the allocated cost of in-house counsel and staff). For these
purposes, the term "hazardous substances" means any substance which is
or becomes designated as "hazardous" or "toxic" under any Federal,
state, or local law. This indemnity shall survive repayment of
Borrower's obligations to CNB.
3. YEAR 2000 COMPLIANCE. Borrower represents and warrants as follows:
3.1 Borrower has adopted a plan, appropriate to its business or
industry, to insure that its computer software is Year 2000
Compliant. For the purpose of this letter, "Year 2000 Compliant"
means that dates occurring on and after January 1, 2000 will be
recognized correctly by such software and not misinterpreted as a
date occurring prior to January 1, 2000.
3.2 Borrower has or intends to develop an action plan to deal with
significant disruption in its business which might be anticipated
in the event of foreseen or unforeseen failures of its computer
systems or its production and manufacturing equipment to be Year
2000 Compliant.
<PAGE> 5
Mr. Christian K. Bement
Earl Scheib, Inc.
April 29, 1999
Page 5
Except for documents and instruments specifically referenced herein or
in the Note, this letter and the Note constitute the entire agreement of the
parties hereto and supersedes any prior or contemporaneous oral or written
agreements, understandings, representations, warranties and negotiations, if
any, which are merged into this letter and the Note. If you agree to accept the
terms of this letter and the Note, please sign the enclosed acknowledgement copy
of this letter, as well as the enclosed Note, and return them to me on or before
April 30, 1999.
THIS AMENDED SUPPLEMENTAL TERMS LETTER IS IN EFFECTIVE AS OF APRIL 29, 1999.
Sincerely,
CITY NATIONAL BANK, a national
banking association
By: /s/ MIRIAM K. SCHNEIDER
----------------------------------------
Miriam K. Schneider, Vice President
ACCEPTED AND AGREED TO THIS 29TH DAY OF
APRIL, 1999.
EARL SCHEIB, INC.
By: /s/ CHRISTIAN K. BEMENT
----------------------------------------
Title: Christian K. Bement, President
<PAGE> 1
[EARL SCHEIB LOGO]
<PAGE> 2
To Our Shareholders:
Sales for the fiscal year ended April 30, 1999 were $55 million, an
increase of 8.2% from prior year sales. During Fiscal 1999, nineteen new shops
became operational and six existing shops were closed, resulting in a year end
operating total of 174 Earl Scheib paint shops. Same shop sales (shops open more
than one year) increased by 3.1% last year. Despite this growth, earnings were
only slightly better than break-even. One of the chief reasons for this poor
earnings performance was that the year was burdened by approximately $900,000 of
expenses that we believe are mostly non-recurring, including an additional
reserve for workers' compensation claims and legal costs for defending against a
lawsuit which has since been settled. Largely as a result of these expenses, net
income for Fiscal 1999 fell to $56,000 compared to net income of $1,064,000 last
year.
Other expenses incurred in Fiscal 1999 include the costs of opening new
shops and the investment in the growth of our fleet department. We are already
beginning to see benefits from these necessary investments in our future. Our
fleet department consists of a separate sales force to concentrate on obtaining
business from states and municipalities, corporations with multiple vehicles and
automotive dealers. This new department accounted for $1.4 million of sales in
Fiscal 1999 and we anticipate nearly doubling those sales in Fiscal 2000.
Earl Scheib is a very sales-driven company. We mean by this that there is
a great deal of leverage in obtaining additional sales. Once we have passed the
break-even point at each shop, the profit from additional sales is quite high.
Our growth must come from increases in same shop sales as well as from the
addition of new shops and greater fleet business. It is very important that we
find the means to ignite increases in our same shop sales. We currently are
reviewing our entire advertising program, including the message contained in our
ads and to whom these ads are directed.
We intend to continue our new shop expansion during Fiscal 2000. Shops
will be opened in markets where we now have a successful presence. This strategy
provides us with the advantage of increasing our market penetration, while
obtaining lower per-shop advertising and supervisory costs.
We are also interested in pursuing the acquisition of profitable chains of
auto painting shops anywhere in the United States. We have explored a few
acquisition opportunities during this past year, but have been unsuccessful in
negotiating a price that would make economic sense for us. We will continue
these efforts.
Increasing the quality of our product is a continuing priority. We believe
that the paint we use is the best in the industry. This belief has been
substantiated by independent testing laboratories. We have a significant
advantage in being the only chain of car painting shops in the United States
that manufactures its own paint in its own factory. Having our own paint factory
gives us excellent control over the quality and cost of our paint as well as
helps us control our inventory levels. Concrete evidence that our paint has
substantially improved from the past is the fact that we reduced the percentage
of warranty work by over 66% since 1995.
In early Fiscal 2000, we are going to initiate a new program that will
offer a line of quality paints to industrial users at very competitive prices.
We have the capacity in our existing facility to undertake this new enterprise.
We believe that this venture has potential for increased sales and profits.
The Human Resource part of our business is extremely important. We have
over 200 employees in our company who meet the public every day in an attempt to
sign up sales. How these employees interact with the public and represent Earl
Scheib is crucial to our success. Hiring the "right" people, and then training
them effectively, has a huge impact on our bottom line. Our manager compensation
packages contain modest salaries with the opportunity for substantial bonuses
based on performance. Attracting the best managers, as well as production
employees, during this period of full employment, has been one of our highest
priorities and challenges.
Before closing, we would like to thank two people for the years that they
have spent with the Company. Don Scheib, after more than 39 years with the
Company, including several years as CEO and Chairman, is retiring from the Board
of Directors effective August 31, 1999. Dan Seigel led the Company during some
difficult transition years. He resigned as President and CEO on January 1, 1999,
but will continue to serve on our Board of Directors. We are pleased to inform
you that Mr. David Eisenberg has joined Earl Scheib as a member of the Board of
Directors and that Mr. Charles Barrantes has recently joined the Company as
Vice-President and Chief Financial Officer.
While the company has regained a level of profitability from the losses
incurred during fiscal years 1995 and 1996 we are far from satisfied with our
performance and believe that we can and will do much better. The first two
months of Fiscal 2000 have begun slowly, with same shop sales dropping 3.8%
below last year. We believe that the new programs that have been put in place
will reverse this trend soon and that the year as a whole will be a substantial
improvement from last year.
Sincerely,
/s/ Philip W. colburn
Philip W. Colburn
Chairman of the Board
/s/ Christian K. Bement
Christian K. Bement
President and Chief Executive Officer
<PAGE> 3
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,
-------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $55,013 100.0% $50,839 100.0% $48,348 100.0 %
Cost of sales 40,668 73.9 37,048 72.9 34,543 71.4
- ------------------------------------------------------------------------------------------------------------------
Gross profit 14,345 26.1 13,791 27.1 13,805 28.6
Selling, general and administrative expense 13,947 25.4 12,770 25.1 13,708 28.4
- ------------------------------------------------------------------------------------------------------------------
Operating income 398 0.7 1,021 2.0 97 0.2
Other income (expense) (316) (0.6) 112 .2 1,050 2.2
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 82 0.1 1,133 2.2 1,147 2.4
Provision for income taxes 26 -- 69 .1 45 0.1
- ------------------------------------------------------------------------------------------------------------------
Net income $ 56 0.1% $ 1,064 2.1% $ 1,102 2.3 %
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------
FISCAL YEAR ENDED APRIL 30, 1999 ("FISCAL 1999") COMPARED TO FISCAL YEAR ENDED
APRIL 30, 1998 ("FISCAL 1998")
- ------------------------------------------------------------
Total sales for Fiscal 1999 increased $4,174 or 8.2% from Fiscal 1998.
This increase resulted from a $1,560 or 3.1% same shop increase plus $2,614 in
sales from new shops, net of closed shops. Fleet sales, which are included
above, increased to $1,432 from $185 in Fiscal 1998 as this was the first full
year of fleet operations. Management believes that the same shop sales and car
volume increases resulted from new product offerings including the Company's
EuroPaint(R), improvements in shop operations, the impact of the new sales force
to corporate fleet accounts and improved quality of services.
Cost of sales increased as a percentage of sales from 72.9% in Fiscal 1998
to 73.9% in Fiscal 1999. The 1% increase in cost of sales is largely due to
increased material cost of the new EuroPaint(R) and associated components.
Selling, general and administrative expense increased by $1,177 or 0.3% of
sales in Fiscal 1999 compared to fiscal 1998. These increases resulted from
expansion of the new fleet outside sales force and installation of an accounts
receivable system to service credit sales, expansion of the real estate
department, increased insurance expenses and increased legal fees, partially
offset by a reduction in advertising expense.
Other income (expense) consists of gains from sales of excess real estate
and net interest expense. Net interest expense was $327 in Fiscal 1999, due
primarily to the accrual of interest relating to the potential disallowance of
the carry back of a net operating loss and interest on life insurance policy
loans, compared to interest income of $79 (primarily from investments in
short-term paper) 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 1999 and 1998 was
offset by the net operating loss carryforwards for state income tax purposes.
The Company provided $4 and $53 in taxes in Fiscal 1999 and 1998, respectively,
for taxes in those states which were not offset by net operating loss
carryforwards.
- ------------------------------------------------------------
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 are 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
2
<PAGE> 4
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.
- ------------------------------------------------------------
Liquidity and Capital Resources
- ------------------------------------------------------------
The Company's cash requirements are based upon its seasonal working capital
needs and its capital requirements for new shops and capitalized additions and
improvements. 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.
As of April 30, 1999, the Company had current assets of $6,316 and current
liabilities of $7,908 for a net working capital deficit of $1,592. The Company's
long-term financial obligations consist of its deferred compensation plan, loans
against various life insurance polices, a bank loan secured by a long-term
receivable and three minor capital leases. For the fiscal year ending April 30,
2000 ("Fiscal 2000") the Company plans on opening up to 15 new shops (depending
upon the availability of locations) and performing various fixed asset
improvements at an estimated cost of $3,200.
During Fiscal 1999, the Company had capitalized expenditures of $5,054
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.
In February 1999, the Company received a Notice of Disallowance from the
Internal Revenue Service ("IRS") disallowing a refund from a net operating loss
carryback received in Fiscal 1997. The amount of the 1997 refund was $1,696. The
Company is protesting the IRS's position. The refund of the net operating loss,
and substantially all of the interest relating to the disallowance, are accrued
in the Company's Fiscal 1999 financial statements. If the Company does not
sustain its tax position with the IRS, the net operating loss carryforward could
be used to offset income taxes in future years.
During Fiscal 1999, the Company borrowed $1,684 against the cash surrender
value of various life insurance policies. In February 1999, the Company entered
into an agreement with a bank for a two-year $4,000 unsecured line of credit. It
is anticipated that the Company will draw on the line of credit during Fiscal
2000.
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. During Fiscal 1999, the
Company purchased 321,000 shares at a cost of $2,031.
Historically, a major source of cash flow for the Company is from
operations. Net cash provided by operating activities for Fiscal 1999 declined
by $1,569 compared to Fiscal 1998. The decrease is mainly due to a reduction in
operating income.
The Company has 72 parcels of non-encumbered property, including the
Company's headquarters and paint factory, which could be either sold or used as
security to obtain outside financing.
- ------------------------------------------------------------
Recent Accounting Pronouncements
- ------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in general purpose financial statements.
The Statement is effective for fiscal years beginning after December 15, 1997.
The Company did not have operations or transactions during Fiscal 1999, 1998 or
1997 that would give rise to elements of comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 redefines the way publicly
held companies report information about segments. The Statement is effective for
fiscal years beginning after December 15, 1997. The Company operates in only one
segment, auto painting and related services. All of its locations are in the
United States with 54 of the 174 locations open at April 30, 1999 in California.
In February 1998, the FASB issued Statement of Financial Accounting
Standard No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement which is effective for financial
periods ending after December 15, 1998, requires full disclosure of all pensions
plans and other postretirement benefit plans. The
3
<PAGE> 5
Company currently discloses any pensions or other postretirement benefit plans.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for financial periods beginning after June 15,
1999, addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Company has not historically or does not currently hold any derivative
instruments or participate in any hedging activities.
- ------------------------------------------------------------
Year 2000
- ------------------------------------------------------------
Many computer systems and software products, 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 1999,
the Company has been undergoing an accelerated installation of new systems. At
the end of Fiscal 1998, the majority of these systems had been operating for
over nine months. During Fiscal 1999, the Company installed new systems in its
accounting department and a credit system to support its new fleet business. The
Company believes that the majority, if not all of its systems, are 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 estimated cost to address Year 2000 issues has not, to date, and
is not expected to have a material impact on the Company's business, operations
or financial condition.
The Company has been in communications with major suppliers, financial
institutions, insurers 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 currently are or will be
Year 2000 compliant prior to the end of 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 above discussion regarding costs and risks is based on the Company's
best current estimates given information that is currently available to it, and
is subject to change.
4
<PAGE> 6
Earl Scheib, Inc.
Consolidated Statements of Operations
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $55,013 $50,839 $48,348
Cost of sales 40,668 37,048 34,543
- ---------------------------------------------------------------------------------------------
Gross profit 14,345 13,791 13,805
Selling, general and administrative expense 13,947 12,770 13,708
- ---------------------------------------------------------------------------------------------
Operating income 398 1,021 97
Other income (expense) (316) 112 1,050
- ---------------------------------------------------------------------------------------------
Income before income taxes 82 1,133 1,147
Provision for income taxes 26 69 45
- ---------------------------------------------------------------------------------------------
Net income $ 56 $ 1,064 $ 1,102
- ---------------------------------------------------------------------------------------------
Earnings per share
Basic $ 0.01 $ 0.23 $ 0.24
Diluted $ 0.01 $ 0.22 $ 0.23
- ---------------------------------------------------------------------------------------------
</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, 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
Net income for the year -- -- -- 56 -- 56
Stock issued under stock option plan 21,000 21 158 -- -- 179
Treasury stock acquired (321,000) -- -- -- (2,031) (2,031)
- -------------------------------------------------------------------------------------------------------------------
Balance April 30, 1999 4,359,000 $4,803 $6,756 $10,188 $(3,108) $18,639
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 7
Earl Scheib, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
APRIL 30,
------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,265 $ 4,203
Accounts receivable, less allowances of $164 in 1999 and
$51 in 1998 218 258
Inventories 1,701 1,251
Prepaid expenses 1,626 1,568
Deferred income taxes 753 714
Property held for sale 339 25
Other current assets 414 223
- --------------------------------------------------------------------------------
Total current assets 6,316 8,242
Property and equipment, less accumulated depreciation and
amortization 21,089 19,375
Deferred income taxes 2,157 1,877
Other, primarily cash surrender value of life insurance 2,299 1,992
- --------------------------------------------------------------------------------
$31,861 $31,486
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Accounts payable $ 940 $ 964
Current portion of capital leases 158 134
Accrued expenses:
Payroll and related taxes 1,780 2,005
Insurance 1,139 813
Interest 504 110
Advertising 485 442
Other 1,113 921
Income taxes payable 1,789 2,078
- --------------------------------------------------------------------------------
Total current liabilities 7,908 7,467
Deferred management compensation 3,298 3,363
Long-term debt 2,016 221
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY
Capital stock $1 par -- shares authorized 12,000,000; 4,803 4,782
4,803,000 issued and 4,359,000 outstanding at April 30,
1999;
4,782,000 issued and 4,659,000 outstanding at April 30,
1998
Additional paid-in capital 6,756 6,598
Retained earnings 10,188 10,132
Treasury stock (3,108) (1,077)
- --------------------------------------------------------------------------------
Total shareholders' equity 18,639 20,435
- --------------------------------------------------------------------------------
$31,861 $31,486
- --------------------------------------------------------------------------------
</TABLE>
The accompanying Notes are an integral part of these Consolidated Balance
Sheets.
6
<PAGE> 8
Earl Scheib, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 56 $ 1,064 $ 1,102
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on disposals of property and equipment (6) (33) (675)
Change in allowances for doubtful accounts 113 -- --
Write-down of property and equipment 127 159 --
Depreciation and amortization 2,918 2,323 1,881
Changes in operating assets and liabilities
Deferred income taxes (319) (283) --
Deferred management compensation (65) (87) (384)
Accounts receivable (74) (45) (149)
Inventories (450) 33 105
Prepaid expenses (58) (265) 69
Other assets (447) 56 (140)
Accounts payable (24) 490 (1,288)
Accrued expenses 530 458 932
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,301 3,870 1,453
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,054) (3,870) (3,080)
Proceeds from disposals of property and equipment 49 563 2,708
Reduction (investment) in marketable securities -- 670 (134)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,005) (2,637) (506)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on capitalized leases (154) (128) (10)
Stock options exercised 92 239 95
Proceeds from life insurance loans 1,684 -- --
Proceeds from bank loan 175 -- --
Purchase of treasury stock (2,031) -- --
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (234) 111 85
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,938) 1,344 1,032
Cash and Cash Equivalents, at beginning of year 4,203 2,859 1,827
- ---------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of year $ 1,265 $ 4,203 $ 2,859
- ---------------------------------------------------------------------------------------------------
Supplemental cash flow disclosure
Income taxes (paid) refunded $ (609) $ (75) $ 1,609
- ---------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of noncash investing and financing activities.
In Fiscal 1999, the Company entered into one capital lease totaling $62. 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 and as payment
of payroll taxes related to the exercise of the stock options. In Fiscal 1997
the Company sold two properties for $253, the proceeds of which were included in
accounts receivable. Additionally, the Company entered into two capital leases
totaling $493.
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
7
<PAGE> 9
Earl Scheib, Inc.
Notes to Consolidated Financial Statements
(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. At April 30,
1999, 1998 and 1997 the Company operated 174, 163 and 158 shops, respectively.
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,
----------------
1999 1998
- ------------------------------------------------------
<S> <C> <C>
Paint and supplies $1,810 $1,497
Materials 411 320
LIFO reserve (520) (566)
----------------
Total inventories $1,701 $1,251
----------------
</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. 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: 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.
The weighted average number of shares used to calculate basic earnings per
share was 4,452, 4,605, and 4,575 for the years ended April 30, 1999, 1998 and
1997, respectively. The weighted average number of shares used to calculate
diluted earnings per share was 4,532, 4,762, and 4,693 for the years ended April
30, 1999, 1998, and 1997, respectively. The effect of dilutive securities
increased the weighted average shares outstanding by 80, 157, and 118 shares for
the years ended April 30, 1999, 1998 and 1997, respectively.
8
<PAGE> 10
Earl Scheib, Inc.
Notes to Consolidated Financial Statements (Continued)
(In thousands except per share data)
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Standards ("SFAS") No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in general
purpose financial statements. The Statement is effective for fiscal years
beginning after December 15, 1997. The Company did not have operations or
transactions during Fiscal 1999, 1998 or 1997 that would give rise to elements
of comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 redefines the way publicly
held companies report information about segments. The Statement is effective for
fiscal years beginning after December 15, 1997. The Company operates in only one
segment, auto painting and related services. All of its locations are in the
United States, with 54 of the 174 locations open at April 30, 1999 in
California.
In February 1998, the FASB issued Statement of Financial Accounting
Standard No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement which is effective for financial
periods ending after December 15, 1998, requires full disclosure of all pensions
plans and other postretirement benefit plans. See Note 6 for the Company's
disclosures related to pensions and other benefits.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for financial periods beginning after June 15,
1999, addresses the accounting for derivative instruments including certain
derivative instruments embedded in other contracts, and hedging activities. The
Company has not historically or does not currently hold any derivative
instruments or participate in any hedging activities.
RECLASSIFICATION: Certain reclassifications have been made to prior year
financial statements to conform to the current year presentation.
2. Taxes on Income
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------
1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 314 $ 299 $--
State 63 53 45
----------------------
377 352 45
----------------------
Deferred (351) (283) --
----------------------
Total $ 26 $ 69 $45
----------------------
</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,
-----------------------
1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory
tax rate 34.0% 34.0% 34.0%
State taxes, net of federal
benefit 3.9 3.1 2.6
Federal net operating loss (0.0) (29.0) (32.7)
Other (5.5) (2.0) --
-----------------------
Total 32.4% 6.1% 3.9%
-----------------------
</TABLE>
At April 30, 1999, net current deferred income tax assets and net
long-term deferred income tax assets are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------
1999 1998
- ------------------------------------------------------
<S> <C> <C>
Deferred income tax assets-current:
Alternative Minimum Tax Credit $ 221 $ 300
Accrued insurance 302 283
Accrued payroll and vacation 39 38
Accrued medical insurance 103 --
Other 88 93
----------------
$ 753 $ 714
----------------
Deferred income tax assets
(liabilities)-long term:
Net operating loss $ 967 $1,098
Deferred compensation 1,252 1,143
Depreciation (29) (153)
Other 38 (168)
Valuation allowance (71) (43)
----------------
$2,157 $1,877
----------------
</TABLE>
In 1999 and 1998 the Company had deferred income tax assets, net of
valuation allowance, of $2,910 and $2,591, respectively. 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.
9
<PAGE> 11
Earl Scheib, Inc.
Notes to Consolidated Financial Statements (Continued)
(In thousands except per share data)
- --------------------------------------------------------------------------------
3. Property and Equipment
Property and equipment including their estimated useful lives consist of the
following:
<TABLE>
<CAPTION>
APRIL 30,
------------------ ESTIMATED
1999 1998 USEFUL LIFE
- ----------------------------------------------------------
<S> <C> <C> <C>
Land $ 5,171 $ 5,339
Buildings and
building
improvements 9,319 9,567 8-33 years
Machinery and
equipment 10,614 9,117 3-10 years
Automotive equipment 142 142 2-4 years
Office furniture and
equipment 3,123 2,605 3-10 years
Leasehold
improvements 8,491 6,013 Life of Lease
------------------
36,860 32,783
Less accumulated
depreciation and
amortization 15,771 13,408
------------------
Net property and
equipment $21,089 $19,375
------------------
</TABLE>
4. Leases
The Company leases approximately 60% 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 1999, 1998 and 1997 was $3,658, $2,995
and $2,651, respectively. Following is a schedule, by year, of the future
minimum operating lease commitments as of April 30, 1999.
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30:
- ------------------------------------------------------
<S> <C>
2000 $ 3,647
2001 3,310
2002 2,688
2003 2,034
2004 1,218
Thereafter 2,417
-------
Total minimum lease payments $15,314
-------
</TABLE>
5. Stock Options
The Company has two nonqualified stock option plans. One plan allows for the
granting of up to 150 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 900 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. 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.
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, 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
Granted 514 $5.00 - $ 8.63 $5.34
Exercised (21) $4.50 - $ 7.00 $4.54
Canceled (359) $5.00 - $ 8.75 $7.37
---------------------------------
Outstanding at
April 30, 1999 1,112 $4.50 - $11.23 $6.22
---------------------------------
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
------------------
1999 1998 1997
- -------------------------------------------------------
<S> <C> <C> <C>
Shares exercisable 590 682 749
Shares available for grant at
end of year 307 61 164
------------------
</TABLE>
10
<PAGE> 12
Earl Scheib, Inc.
Notes to Consolidated Financial Statements (Continued)
(In thousands except per share data)
- --------------------------------------------------------------------------------
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 1999 LIFE PRICE
---------------------------------------------------
<S> <C> <C> <C>
$4.50 - $ 5.50 675 8.6 $5.25
$5.51 - $ 6.50 100 3.8 $6.19
$6.51 - $11.23 337 6.5 $8.17
-----------
1,112
-----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
- -----------------------------------------
WEIGHTED
EXERCISABLE AT AVERAGE
RANGE OF APRIL 30, EXERCISE
EXERCISE PRICE 1999 PRICE
- -----------------------------------------
<S> <C> <C>
$4.50 - $ 5.50 197 $5.17
$5.51 - $ 6.50 100 $6.19
$6.51 - $11.23 293 $8.26
-------------
590
-------------
</TABLE>
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 (loss) and earnings (loss) per
share indicated below:
<TABLE>
<CAPTION>
APRIL 30,
--------------------------
1999 1998 1997
- -----------------------------------------------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 56 $1,064 $1,102
Pro forma (453) 493 864
Net income (loss) per
common share:
As reported:
Basic $ 0.01 $ 0.23 $ 0.24
Diluted 0.01 0.22 0.23
Pro forma:
Basic (.10) 0.11 0.18
Diluted (.10) 0.10 0.18
</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 5.07%, 5.86% and 6.77% for fiscal 1999, 1998 and 1997, respectively; an
expected life of 10 years; expected volatility of 34.1%, 32.6% and 32.8% in
fiscal 1999, 1998 and 1997, respectively, and no expected dividend. The
weighted-average fair value of the options issued by the Company in fiscal 1999,
1998 and 1997 was $2.97, $4.90 and $4.25, respectively.
6. Deferred Management Compensation
In 1987, the Company 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 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 1999, 1998 and 1997 was $173, $180 and $358,
respectively.
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.0% for fiscal 1999, 1998 and 1997. 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>
APRIL 30,
-----------------
1999 1998
<S> <C> <C>
- --------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of
year............................... 2,952 2,986
Service cost......................... 41 43
Interest cost........................ 191 196
Actuarial (gain) loss................ (34) 45
Benefits paid........................ (283) (318)
-----------------
Benefit obligation at end of year.... 2,867 2,952
Change in plan assets
Fair value of plan assets............ -- --
Funded status........................ (2,867) (2,952)
Unrecognized prior service cost...... 540 599
Unrecognized (gain) loss............. 140 106
-----------------
Net amount recognized................ (2,187) (2,247)
Amounts recognized in the statement
of financial position consist of:
Accrued benefit liability............ (2,867) (2,952)
Intangible assets.................... 680 705
-----------------
Net amount recognized................ (2,187) (2,247)
</TABLE>
11
<PAGE> 13
Earl Scheib, Inc.
Notes to Consolidated Financial Statements (Continued)
(In thousands except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------
1999 1998 1997
<S> <C> <C> <C>
- --------------------------------------------------------
Weighted-average assumptions
Discount rate................. 7% 7% 7%
Components of net periodic
benefit cost
Service cost.................. 41 43 92
Interest cost................. 191 196 262
Amortization of prior service
costs....................... (59) (59) 4
------------------------
Net periodic benefit cost..... 173 180 358
</TABLE>
The Company entered into whole life insurance contracts, to partially fund
its obligations under the Plan. The Company was not obligated to enter into
these contracts and is not required to use policy proceeds to pay for the Plan.
As of April 30, 1999 and 1998, these contracts had cash surrender values of
$1,780 and $1,642, respectively.
401(K) PLAN
In 1999, the Company established a 401(k) Plan covering substantially all
employees. Employees may elect to participate in the 401(k) Plan, provided that
they meet certain eligibility requirements. Voluntary employee contributions are
limited to 15 percent (up to a maximum of $10,000) of compensation. Subject to
the vesting schedule, Company contributions, equal to 50 percent of the first 4
percent of employee contributions are distributed ("matched") at the end of each
calendar year to participants then employed. As of April 30, 1999 the Company
accrued contributions of $31.
7. Long-term Debt
<TABLE>
<CAPTION>
APRIL 30,
-------------
1999 1998
<S> <C> <C>
- -----------------------------------------------------
Loans against life insurance policy
cash surrender value................ $1,684 $ --
Note payable to bank.................. 226 --
Capital leases........................ 106 221
-------------
$2,016 $221
====== ====
</TABLE>
Loans against life insurance policy cash surrender values bear interest at
a variable rate (currently 7%) with interest payable annually. The principal is
not due until such time as the policies are surrendered. Management does not
expect to pay these loans in Fiscal 2000.
The note payable to a bank is secured by a long-term receivable from a
state agency. Interest, at prime rate (8% as of April 30, 1999), and principal
are payable upon demand.
Capital lease obligations relate to the purchase of computer equipment and
bear interest at 3.54% to 11.5%. The long-term portion of the principal is due
in Fiscal 2001.
The Company has an agreement with a bank for a two-year $4,000 unsecured
line of credit. At April 30, 1999 no balance was outstanding.
8. 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 $2,194 in standby letters
of credit at April 30, 1999. 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 as well as
environmental matters 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> 14
Report of Independent Public Accountants
"To the Shareholders of Earl Scheib, Inc.:
"We have audited the accompanying consolidated
balance sheet of Earl Scheib, Inc. (a Delaware
corporation) and subsidiaries as of April 30, 1999,
and the related consolidated statement of operations,
shareholders' equity and cash flow for the year then
ended. 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 audit.
"We conducted our audit in accordance with generally
accepted auditing standards. Those 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 audit provides a
reasonable basis for our opinion.
"In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Earl Scheib, Inc. and
subsidiaries as of April 30, 1999, and the results of
its operations and its cash flow for the year then
ended in conformity with generally accepted
accounting principles."
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
July 27, 1999
13
<PAGE> 15
Earl Scheib, Inc.
Selected Financial Data
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $55,013 $50,839 $48,348 $43,981 $47,288
Net income (loss) 56 1,064 1,102 895 (5,553)
Per share:
Earnings -- Basic 0.01 0.23 0.24 0.20 (1.22)
Earnings -- Diluted 0.01 0.22 0.23 0.19 (1.22)
Cash dividends declared -- -- -- -- --
FINANCIAL POSITION
Property and equipment, net $21,089 $19,375 $18,012 $18,040 $14,868
Total assets 31,861 31,486 29,450 28,510 29,502
Long-term liabilities 5,314 3,584 3,779 3,809 3,600
Shareholders' equity 18,639 20,435 19,253 18,056 17,161
Number of shops at the end of the year 174 163 158 160 164
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Selected Quarterly Financial Data (Unaudited)
The following table sets forth unaudited operating data for each of the
specified quarters of fiscal years 1999 and 1998. 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, 1999
Revenues $15,903 $14,765 $ 9,895 $14,450
Gross profit 5,180 4,459 1,287 3,419
Net income (loss) 1,006 587 (1,193) (344)
Basic earnings (loss) per share 0.22 0.13 (0.27) (0.08)
Diluted earnings (loss) per share 0.21 0.13 (0.27) (0.08)
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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(Notes to selected quarterly financial data)
The variation in net income and earnings per share between the fourth
quarter of fiscal 1999 and the fourth quarter of fiscal 1998 is due to (1) a
decrease in same shop sales in the fiscal 1999 fourth quarter, (2) an increase
in legal fees due to defense and settlement of litigation and (3) significantly
higher workers compensation accruals compared to the prior period.
14
<PAGE> 16
Earl Scheib, Inc.
- --------------------------------------------------------------------------------
Market Information
Earl Scheib, Inc. is listed and traded on the America Stock Exchange under the
ticker symbol "ESH". As of April 30, 1999, there were approximately 251 holders
of record of the Company's stock according to records maintained by the Companys
transfer agent. The high and low sales prices of the stock for each of the
fiscal quarters of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------
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 $9 1/4 $7 $6 $6 1/2 $7 9/16 $9 3/8 $9 1/4 $9 5/8
Low 6 3/ 4 3/ 4 3/ 4 3/ 5 1/ 6 5/1 7 1/ 8 1/
- --------------------------------------------------------------------------------------------------
</TABLE>
No dividends were paid in either fiscal 1999 or 1998.
"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, the potential adverse effects of
certain litigation and the impact of various tax positions taken by the Company.
15
<PAGE> 17
Directors and Executive Officers
Directors
Philip W. Colburn
Chairman of the Board
Christian K. Bement
President and Chief Executive Officer
of the Company
Stuart D. Buchalter
Of Counsel
Buchalter, Nemer, Fields & Younger
David Eisenberg
Chief Executive Officer
Let's Talk Cellular & Wireless
Alexander L. Kyman
Business and Financial Consultant
Donald R. Scheib
Retired
Daniel A. Seigel
Business Consultant
Executive Officers
Christian K. Bement
President and Chief Executive Officer
James E. Smith
Vice President Shop Operations
David I. Sunkin
Vice President and General Counsel,
Secretary
Registrar and Transfer Agent
Continental Stock Transfer & Trust Co.
New York, NY
Corporate Counsel
Buchalter, Nemer, Fields & Younger
A Professional Corporation
Los Angeles, California
Auditors
Arthur Andersen LLP
Los Angeles, California
Major Facilities
Corporate Office
8737 Wilshire Boulevard
Beverly Hills, California 90211-2795
Manufacturing and Warehousing
Earl Scheib Automotive Paint Finishes, Inc.
1940 East Trafficway
Springfield, Missouri 65802-2297
Annual Meeting of Shareholders
The annual meeting of Earl Scheib, Inc. will be held at 10:00 AM (PDT) on
Thursday, September 2, 1999, at the Hotel Nikko, 465 So. La Cienega Blvd., Los
Angeles, CA 90048. All Shareholders are cordially invited to attend.
Shareholders of record on July 16, 1999, are entitled to vote. This annual
report has been prepared by management for the information of the Shareholders
and employees of the Company and is not intended to be used in connection with
any sale, offer to sell, or solicitation of an offer to purchase any securities
of the Company.
Form 10-K
A copy of the Companys Annual Report to the Securities and Exchange Commission
on Form 10-K may be obtained at no cost upon written request to:
Corporate Secretary
Earl Scheib, Inc.
8737 Wilshire Boulevard
Beverly Hills, California 90211-2795
Stock Listing
Earl Scheib, Inc. is listed and traded on the American Stock Exchange (Symbol:
"ESH").
16
<PAGE> 1
EXHIBIT 22
Subsidiaries of Registrant
Earl Scheib of Arizona, Inc.
an Arizona corporation
Earl Scheib of Arkansas, Inc.
an Arkansas corporation
Earl Scheib of California, Inc.
a California corporation
Earl Scheib of Colorado, Inc.
a Colorado corporation
Earl Scheib of Connecticut, Inc.
a Connecticut corporation
Earl Scheib of D.C., Inc.
a District of Columbia corporation
Earl Scheib of Hawaii, Inc.
a Hawaii corporation
Earl Scheib of Illinois, Inc.
an Illinois corporation
Earl Scheib of Indiana, Inc.
an Indiana corporation
Earl Scheib of Kansas, Inc.
a Kansas corporation
Earl Scheib of Kentucky, Inc.
a Kentucky corporation
Earl Scheib of Louisiana, Inc.
a Louisiana corporation
Earl Scheib of Maryland, Inc.
a Maryland corporation
Earl Scheib of Michigan, Inc.
a Michigan corporation
<PAGE> 2
Earl Scheib of Missouri, Inc.
a Missouri corporation
Earl Scheib of Nebraska, Inc.
a Nebraska corporation
Earl Scheib of Nevada, Inc.
a Nevada corporation
Earl Scheib of New Jersey, Inc.
a New Jersey corporation
Earl Scheib of New Mexico, Inc.
a New Mexico corporation
Earl Scheib of New York, Inc.
a New York corporation
Earl Scheib of North Carolina, Inc.
a North Carolina corporation
Earl Scheib of Ohio, Inc.
an Ohio corporation
Earl Scheib of Oklahoma, Inc.
an Oklahoma corporation
Earl Scheib of Oregon, Inc.
an Oregon corporation
Earl Scheib of Pennsylvania, Inc.
a Pennsylvania corporation
Earl Scheib of South Carolina, Inc.
a South Carolina corporation
Earl Scheib of Tennessee, Inc.
a Tennessee corporation
Earl Scheib of Texas, Inc.
a Texas corporation
Earl Scheib of Utah, Inc.
a Utah corporation
<PAGE> 3
Earl Scheib of Virginia, Inc.
a Virginia corporation
Earl Scheib of Washington, Inc.
a Washington corporation
Earl Scheib of West Virginia, Inc.
a West Virginia corporation
Earl Scheib, International
a California corporation
Earl Scheib Paint and Supply Co.
a California corporation
Earl Scheib Realty Co.
a California corporation
Earl Scheib Automotive Paint Finishes, Inc.
a Missouri corporation
Precision Coatings, Inc.
a Missouri Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Earl Scheib, Inc.
As independent public accountants, we hereby consent to the incorporation of
our report dated July 27, 1999, included in Earl Scheib, Inc.'s Annual Report
to the Shareholders in this Form 10-K for year ended April 30, 1999, into the
Company's previously filed Registration Statements File Number 33-63327,
33-87123, 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. on
Form S-8, Post-Effective Amendment No. 2 to Registration Statement No. 33-72933
of Earl Scheib, Inc. on Form S-8, and Registration No. 33-87126 of Earl Scheib,
Inc. on Form S-3.
/s/ Arthur Andersen LLP
- -----------------------------------
Los Angeles, California
July 27, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-63327, 33-87123, 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. on Form S-8, Post-Effective Amendment No. 2 to Registration
Statement No. 33-72933 of Earl Scheib, Inc. on Form S-8, and Registration
Statement No. 33-87126 of Earl Scheib, Inc. on Form S-3 of our report dated July
10, 1998, included in this Annual Report on Form 10-K of Earl Scheib, Inc., for
the year ended April 30, 1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
July 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<CASH> 1,265,000
<SECURITIES> 0
<RECEIVABLES> 218,000
<ALLOWANCES> 0
<INVENTORY> 1,701,000
<CURRENT-ASSETS> 6,316,000
<PP&E> 36,860,000
<DEPRECIATION> 15,771,000
<TOTAL-ASSETS> 31,861,000
<CURRENT-LIABILITIES> 7,908,000
<BONDS> 0
0
0
<COMMON> 4,803,000
<OTHER-SE> 13,836,000
<TOTAL-LIABILITY-AND-EQUITY> 31,861,000
<SALES> 55,013,000
<TOTAL-REVENUES> 55,013,000
<CGS> 40,668,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 82,000
<INCOME-TAX> 26,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,000
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Earl Scheib, Inc.
We have audited the accompanying consolidated balance sheet of Earl Scheib,
Inc. (the "Company") and subsidiaries as of April 30, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended April 30, 1998 and 1997. 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. Those 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 the results of their operations and their cash flows
for the years ended April 30, 1998 and 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
July 27, 1999
