<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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)
Delaware 95-1759002
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8737 Wilshire Boulevard
Beverly Hills, California 90211-2795
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 652-4880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of December 6, 1999, the registrant had 4,803,311 shares of its Capital
Stock, $1.00 par value issued and 4,358,682 shares outstanding.
This report contains a total of 9 pages.
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PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
----------
OCT. 31, APRIL 30,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,029 $ 1,265
Accounts receivable, less allowances of $196 and $164
at October 31 and April 30, 1999, respectively 182 218
Inventories 1,823 1,701
Prepaid expenses and other current assets 2,016 2,040
Deferred income taxes 753 753
Property held for sale 0 339
--------- --------
Total Current Assets 6,803 6,316
--------- --------
Property and Equipment, net 20,746 21,089
Deferred Income Taxes 2,157 2,157
Other, Primarily Cash Surrender Value
Of Life Insurance 2,354 2,299
--------- --------
Total Assets $ 32,060 $ 31,861
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 711 $ 940
Accrued expenses:
Payroll and related taxes 1,485 1,780
Insurance 818 1,139
Interest 728 504
Other 1,690 1,756
Income taxes payable 1,931 1,789
--------- --------
Total Current Liabilities 7,363 7,908
--------- --------
Deferred Management Compensation 3,295 3,298
Long-term Liabilities 1,959 2,016
Commitments and Contingencies -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized 12,000,000;
4,803,311 issued and 4,358,682 outstanding 4,803 4,803
Additional paid-in capital 6,756 6,756
Retained earnings 10,992 10,188
Treasury shares (3,108) (3,108)
--------- --------
Total Shareholders' Equity 19,443 18,639
--------- --------
Total Liabilities and Shareholders' Equity $ 32,060 $ 31,861
========= ========
</TABLE>
The accompanying Notes are an integral part of
these condensed consolidated balance sheets.
2
<PAGE> 3
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 15,628 $ 14,765 $ 31,387 $ 30,668
Cost of sales 11,068 10,306 22,418 21,029
----------- ----------- ----------- -----------
Gross profit 4,560 4,459 8,969 9,639
Selling, general& administrative
expenses 3,697 3,482 7,430 7,046
----------- ----------- ----------- -----------
Operating income 863 977 1,539 2,593
Other income (expense), net (123) (20) (242) (15)
------------ ------------ ------------ ------------
Income before income taxes 740 957 1,297 2,578
Provision for income taxes 280 370 492 985
----------- ----------- ----------- -----------
Net income $ 460 $ 587 $ 805 $ 1,593
=========== =========== =========== ===========
Basic earnings per share $ 0.11 $ 0.13 $ 0.18 $ 0.35
=========== =========== =========== ===========
Diluted earnings per share $ 0.11 $ 0.13 $ 0.18 $ 0.35
=========== =========== =========== ===========
</TABLE>
The accompanying Notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE> 4
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 1,925 $ 964
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,367) (2,036)
Proceeds from disposal of property and equipment 345 49
Investment in marketable securities -- (208)
Other, net (58) (103)
--------- ---------
Net cash used in investing activities (1,080) (2,298)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 92
Purchase of treasury stock -- (2,032)
Principal payments on capitalized leases (81) (77)
--------- ---------
Net cash used in financing activities (81) (2,017)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 764 (3,351)
Cash and Cash Equivalents, at Beginning of the Period 1,265 4,203
--------- ---------
Cash and Cash Equivalents, at End of the Period $ 2,029 $ 852
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 355 $ 799
========= =========
</TABLE>
Supplemental disclosure of noncash investing and financing activities: During
the six months ended October 31, 1998, the Company entered into one capital
lease in the amount of $62.
The accompanying Notes are an integral part of
these condensed consolidated financial statements.
4
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EARL SCHEIB, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by Earl
Scheib, Inc. (the "Company") without audit, in accordance with generally
accepted accounting principles. Pursuant to the rules and regulations of the
Securities and Exchange Commission, certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted or condensed. It
is management's belief that the disclosures made are adequate to make the
information presented not misleading and reflect all significant adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of financial position and results of operations for the periods
presented. The results of operations for the periods presented should not be
considered as necessarily indicative of operations for the full year due to the
seasonality of the Company's business. It is recommended that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended April 30, 1999 ("Fiscal 1999").
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
UNAUDITED
OCTOBER 31, APRIL 30,
1999 1999
--------- ----------
<S> <C> <C>
Paint and related supplies $ 1,898 $ 1,810
Raw materials 445 411
LIFO reserve (520) (520)
--------- ----------
Total inventories $ 1,823 $ 1,701
========= ==========
</TABLE>
NOTE 3. INCOME TAXES
In the First Quarter of the fiscal year ended April 30, 1997 ("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 consolidated balance sheet.
In February 1999, the Company received a Notice of Disallowance from the
Internal Revenue Service ("IRS") disallowing the refund from the net operating
loss carryback received in Fiscal 1997. The Company has appealed the IRS's
position. The refund of the net operating loss, and substantially all of the
interest through October 31, 1999 relating to the disallowance, are accrued in
the Company's First Six Months of Fiscal 2000 consolidated financial statements.
If the Company does not sustain its tax position with the IRS, the net operating
loss carryforward would be used to offset federal income taxes in future years.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company is involved in several legal proceedings and claims as well as
environmental matters, some of which arise in the ordinary course of its
business. Management believes that the amount of ultimate liability with respect
to these legal matters should not materially affect the Company's consolidated
financial statements.
NOTE 5. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net
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 Company. The
only potential dilutive securities are outstanding stock options issued to the
Company's Board of Directors, management and employees.
5
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The weighted average number of shares used to calculate basic earnings per
share was 4,359,000 and 4,430,000 for the three-month periods and 4,359,000 and
4,545,000 for the six-month periods ended October 31, 1999 and 1998,
respectively. The weighted average number of shares used to calculate diluted
earnings per share was 4,359,000 and 4,440,000 for the three-month periods and
4,359,000 and 4,589,000 for the six-month periods ended October 31, 1999 and
1998, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
QUARTER ENDED OCTOBER 31, 1999 ("SECOND QUARTER OF FISCAL 2000") COMPARED TO THE
QUARTER ENDED OCTOBER 31, 1998 ("SECOND QUARTER OF FISCAL 1999").
Net sales for the Second Quarter of Fiscal 2000 increased by $863 or 5.8%
compared to the Second Quarter of Fiscal 1999. This increase consisted of sales
from 19 new shops opened since the Second Quarter of Fiscal 1999 ($1,483),
partially offset by the loss of sales from 6 shops closed since the Second
Quarter of Fiscal 1999 ($435) and a decrease in same shop (shops open one year
or more) sales of $185, or 1.3%. The increase in total sales resulted from added
car volume, partially offset by a lower ticket average during the Second Quarter
of Fiscal 2000.
Gross profit dollars in the Second Quarter of Fiscal 2000 increased by $101
compared to the Second Quarter of Fiscal 1999 due mainly to the increase in
sales discussed above. Gross profit margins decreased from 30.2% to 29.2% due
primarily to the lower ticket average and higher material costs related to the
Company's new Euro-Paint(R).
Selling, general and administrative expenses increased by $215 or 0.1% of
sales in the Second Quarter of Fiscal 2000 compared to the Second Quarter of
Fiscal 1999. The increase in selling, general and administrative expense is
mainly due to additional advertising expenses.
Other income consists of gains or losses from sales of excess real estate
and net interest income or expense. Net interest expense was $123 in the Second
Quarter of Fiscal 2000 compared to $32 in the Second Quarter of Fiscal 1999. The
increase in net interest expense in the Second Quarter of Fiscal 2000 relates
primarily to interest accrued on the Internal Revenue Service's disallowance of
a net operating loss carryback (which has been appealed by the Company) and
interest accrued on life insurance loans.
In the Second Quarter of Fiscal 2000 and 1999, the Company provided for
income taxes at the statutory rates.
SIX MONTHS ENDED OCTOBER 31, 1999 ("FIRST SIX MONTHS OF FISCAL 2000") COMPARED
TO THE SIX MONTHS ENDED OCTOBER 31, 1998 ("FIRST SIX MONTHS OF FISCAL 1999" OR
"PRIOR YEAR PERIOD").
Net sales for the First Six Months of Fiscal 2000 increased by $719 or 2.3%
compared to the Prior Year Period. This increase consisted of sales from 19 new
shops opened since the Prior Year Period ($2,898), partially offset by the loss
of sales from 6 shops closed since the end of the Prior Year Period ($960) and a
decrease in same shop (shops open one year or more) sales of $1,219, or 4.1%.
The increase in sales resulted primarily from higher car volume, partially
offset by a lower ticket average.
Gross profit dollars in the First Six Months of Fiscal 2000 decreased $670
compared to the First Six Months of Fiscal 1999 and gross profit margins
decreased in the First Six Months of Fiscal 2000 compared to the Prior Year
Period from 31.4% to 28.6%. due primarily to the decrease in same shop sales,
the decrease in the ticket average, higher material costs and higher expenses
associated with new shop expansion.
Selling, general and administrative expense increased by $384 or 0.7% of sales
compared to the Prior Year Period. The majority of the increase was due to
expenses associated with the 401(k) program and increased advertising expenses.
Other income consists of gains or losses from sales of excess real estate and
net interest income or expense. During the First Six Months of Fiscal 2000, the
Company sold one property for a net gain of $6 compared to a net gain of $12 in
the Prior Year Period. Net interest expense was $248 in the First Six Months of
Fiscal 2000 compared to net interest expense of $27 in the Prior Year Period.
The increase in net interest expense in the First Six Months of Fiscal 2000
relates primarily to interest accrued on the Internal Revenue Service's
disallowance of a net operating loss carryback (which has been appealed by the
Company) and interest accrued on life insurance loans.
6
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are based upon its seasonal working capital
needs and capital requirements for new shops, replacements 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 October 31, 1999, the Company had current assets of $6,803 and current
liabilities of $7,363 for a net working capital deficit of $560. During the
First Six Months of Fiscal 2000, net cash provided by operations was $1,925
compared to $964 in the Prior Year Period. In the First Six Months of Fiscal
2000, the Company had capitalized expenditures of $1,367, which are included in
the $2.3 million of cash requirements described in the paragraph below, financed
through cash flow from operations. The Company expects that future cash flow
from operations will be enhanced by these capital additions.
The Company's long-term financial obligations consist of its deferred
management compensation plan, loans against various life insurance policies, a
bank loan secured by a long-term receivable, and three minor capital leases.
During the fiscal year ending April 30, 2000 ("Fiscal 2000"), the Company plans
to open up to 10 new shops (depending upon the availability of locations),
perform various capital improvements and expand its fleet and commercial
coatings business for an estimated cost of $2.3 million.
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 be dependent on market conditions and
availability of shares. No shares were purchased in the First Six Months of
Fiscal 2000. To date, the Company has purchased a total of 321,000 shares under
this plan at a cost of $2,031. The Company currently has no plans to repurchase
additional shares.
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 through October 31, 1999 relating to the
disallowance, are accrued in the Company's First Six Months of Fiscal 2000
consolidated financial statements. If the Company does not sustain its tax
position with the IRS, the net operating loss carryforward would be used to
offset federal income taxes in future years.
In Fiscal 1999, the Company entered into an agreement with a bank for a
two-year $4,000 unsecured line of credit. The Company is exposed to interest
rate risk under this line of credit as borrowings bear interest at the bank's
prime rate or LIBOR, as defined. As of October 31, 1999, there were no
borrowings under the line of credit; however, it is anticipated that the Company
will draw on the line of credit during Fiscal 2000. The Company has 71 parcels
of unencumbered real estate, including the Company's headquarters and paint
factory, which could be either sold or used as security to obtain additional
financing. The Company believes that it has the liquidity and capital resources
to meet its cash needs for the immediate future.
INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE
As discussed in the Company's Fiscal 1999 Annual Report on Form 10-K, the
Company has completed most of its Year 2000 conversion and is proceeding with
the conversion of some minor subsystems. The Company expects that these
conversions will be completed by December 31, 1999. At that time the Company
believes that its systems will be Year 2000 compliant; however, in this regard,
the Company is relying upon representations made by its software and hardware
vendors, most of whom are large well known international companies.
The Company has been in communication with major suppliers, financial
institutions, 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 calendar 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.
7
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During the First Six Months of Fiscal 2000, Year 2000 compliance costs were
not material and it is anticipated that future Year 2000 issues will not have a
material impact on the Company's business, operations or financial condition.
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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
The Statements which are not historical facts contained in this Form 10-Q
are forward looking statements that involve risks and uncertainties, including,
but not limited to, the effect of weather, the effect of economic conditions,
the impact of competitive products, services and pricing, capacity and supply
constraints or difficulties, changes in laws and regulations applicable to the
Company, the impact of Year 2000 hardships, the impact of the Company's new
Euro-Paint(R) the impact of advertising and promotional activities, the impact
of the Company's expansion or closing of shops, the profitability of new stores,
the effect of new product roll-out and fleet operations, the potential adverse
effects of certain litigation and the impact of various tax positions taken by
the Company.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data , Article 5 is filed herein.
(b) The Registrant was not required to file any Current Reports on Form 8-K
during the quarter ended October 31, 1999.
8
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EARL SCHEIB, INC.
Registrant
December 13, 1999 /s/ Christian K. Bement
- ----------------- -----------------------------------------
Dated Christian K. Bement, President and
Chief Executive Officer
December 13, 1999 /s/ Charles E. Barrantes
- ----------------- -----------------------------------------
Dated Charles E. Barrantes, Vice President and
Chief Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 2,029
<SECURITIES> 0
<RECEIVABLES> 182
<ALLOWANCES> 0
<INVENTORY> 1,823
<CURRENT-ASSETS> 6,803
<PP&E> 38,160
<DEPRECIATION> 17,414
<TOTAL-ASSETS> 32,060
<CURRENT-LIABILITIES> 7,363
<BONDS> 0
0
0
<COMMON> 4,803
<OTHER-SE> 14,640
<TOTAL-LIABILITY-AND-EQUITY> 32,060
<SALES> 31,387
<TOTAL-REVENUES> 31,387
<CGS> 22,418
<TOTAL-COSTS> 22,418
<OTHER-EXPENSES> 7,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,297
<INCOME-TAX> 492
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 805
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</TABLE>
