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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-4822
EARL SCHEIB, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-1759002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8737 WILSHIRE BOULEVARD
BEVERLY HILLS, CALIFORNIA 90211-2795
(Address of principal 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, 2000, 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, except for stock amounts)
<TABLE>
<CAPTION>
UNAUDITED
-----------
OCTOBER 31, APRIL 30,
2000 2000
----------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,047 $ 602
Accounts receivable, less allowances of $92
at October 31, and $51 at April 30, 2000 326 227
Inventories 2,069 1,934
Prepaid expenses and other current assets 2,226 2,514
Deferred income taxes 892 892
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Total Current Assets 7,560 6,169
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Property, plant and equipment, less accumulated
depreciation and amortization 18,435 19,530
Deferred income taxes 1,719 1,719
Other, primarily cash surrender value
of life insurance 2,235 2,197
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Total Assets $ 29,949 $ 29,615
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 886 $ 1,190
Current portion of long-term debt and obligations 243 326
Accrued expenses:
Payroll and related taxes 1,592 1,501
Insurance 1,829 1,451
Interest 994 800
Advertising 522 461
Other 1,108 1,268
Income taxes payable 1,023 1,160
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Total Current Liabilities 8,197 8,157
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Deferred management compensation 3,220 3,215
Long-term debt and obligations, net of current portion 1,683 1,683
Commitments and contingencies -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized 12,000,000;
4,803,000 issued and 4,359,000 outstanding 4,803 4,803
Additional paid-in capital 6,756 6,756
Retained earnings 8,398 8,109
Treasury shares (3,108) (3,108)
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Total Shareholders' Equity 16,849 16,560
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Total Liabilities and Shareholders' Equity $ 29,949 $ 29,615
======== ========
</TABLE>
The accompanying Notes are an integral part of these condensed consolidated
balance sheets.
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
---------------------------- --------------------------
2000 1999 2000 1999
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 14,788 $ 15,628 $ 30,324 $ 31,387
Cost of sales 11,315 11,067 22,499 22,409
----------- ----------- ----------- -----------
Gross profit 3,473 4,561 7,825 8,978
Selling, general & administrative expense 3,604 3,697 7,405 7,430
Shop closing expense 57 1 62 9
----------- ----------- ----------- -----------
Operating income (loss) (188) 863 358 1,539
Other expense (138) (123) (57) (242)
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Income (loss) before income taxes (326) 740 301 1,297
Provision (benefit) for income taxes (9) 280 12 492
------------ ----------- ----------- -----------
Net income (loss) $ (317) $ 460 $ 289 $ 805
============ =========== =========== ===========
Basic earnings (loss) per share $ (0.07) $ 0.11 $ 0.07 $ 0.18
============ =========== =========== ===========
Diluted earnings (loss) per share $ (0.07) $ 0.11 $ 0.07 $ 0.18
============ =========== =========== ===========
</TABLE>
The accompanying Notes are an integral part of these condensed consolidated
financial statements.
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
------------------------
2000 1999
------------- ----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,758 $ 1,867
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (853) (1,367)
Proceeds from disposals of property, plant and equipment 623 345
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Net cash used in investing activities (230) (1,022)
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NET CASH USED BY FINANCING ACTIVITIES:
Principal payments on long-term debt and obligations (83) (81)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 1,445 764
Cash and Cash Equivalents, at Beginning of the Period 602 1,265
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Cash and Cash Equivalents, at End of the Period $ 2,047 $ 2,029
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid (refunded) $ (284) $ 355
Interest paid 32 27
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</TABLE>
The accompanying Notes are an integral part of these condensed consolidated
financial statements.
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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, 2000.
Certain reclassifications have been made to the prior period financial
statements to conform to the current year presentation.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
UNAUDITED
OCTOBER 31, APRIL 30,
2000 2000
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<S> <C> <C>
Paint and related supplies $ 1,942 $ 1,929
Raw materials 629 507
LIFO reserve (502) (502)
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Total inventories $ 2,069 $ 1,934
========= ==========
</TABLE>
NOTE 3. INCOME TAXES
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 during the year ended April 30, 1997. The amount of the 1997
refund was $1,845. The Company is protesting the IRS's position. The potential
for the disallowance of the refund and substantially all of the interest through
October 31, 2000 relating to the disallowance, are accrued in the Company's
consolidated financial statements. If the Company does not sustain its tax
position with the IRS, the net operating loss carryforward would be available to
offset federal income taxes in future years.
NOTE 4. UNSECURED LINE OF CREDIT FACILITY
In January 1999, the Company entered into an agreement with a bank for a
two-year $4,000 credit facility consisting of an unsecured revolving line of
credit. Effective November 30, 2000, this credit facility was revised to extend
through August 31, 2001 and to consist of two separate lines of credit; a
revolving line for $2,000 and a non-revolving line for $1,500. There are no
financial covenants to be maintained during the term of this revised facility,
but the Company is exposed to interest rate risk under the lines of credit as
borrowings will bear interest at the bank's prime rate.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a lawsuit filed in Los Angeles, California in
March 2000. The lawsuit essentially alleges that the Company, in California,
failed to pay overtime benefits to shop managers and assistant managers and made
unlawful deductions from the compensation of certain managers and assistant
managers. The applicable law provides for up to a four-year statute of
limitations and the plaintiff is seeking class certification in this case. In
June 2000, after oral arguments, the Court denied plaintiff's motion for a
court-issued precertification notice to the potential class and stated it will
require plaintiff to move for class certification. This decision has been
appealed by the plaintiff. The Company intends to vigorously defend against this
entire action, but at this point the ultimate outcome of this matter cannot be
determined with certainty.
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The Company is involved in several other legal proceedings and claims which
arise in the ordinary course of its business.
Management believes that the ultimate liability with respect to these legal
matters should not materially affect the Company's financial position.
NOTE 6. EARNINGS PER SHARE
The weighted average number of shares used to calculate basic earnings per
share and diluted earnings per share was 4,359,000 for each of the periods
presented.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
QUARTER ENDED OCTOBER 31, 2000 ("SECOND QUARTER OF FISCAL 2001") COMPARED TO THE
QUARTER ENDED OCTOBER 31, 1999 ("SECOND QUARTER OF FISCAL 2000").
Net sales for the Second Quarter of Fiscal 2001 decreased by $840, or 5.4%,
compared to the Second Quarter of Fiscal 2000. This was primarily due to the
decrease in same shop (shops open one year or more) sales of $591, or 4.0%, and
the loss of sales from a net 12 shops closed since the Second Quarter of Fiscal
2000 ($471), partially offset by a higher ticket average during the Second
Quarter of Fiscal 2001 compared to the Second Quarter of Fiscal 2000.
Gross profit decreased by $1,088 in absolute dollars in the Second Quarter
of Fiscal 2001 from the Second Quarter of Fiscal 2000 and the gross profit
margin percentage decreased by 5.7%. The decreases were primarily due to the
adverse effect of the reduction in sales and increased costs of materials,
supplies, insurance and rent.
Selling, general and administrative expenses decreased by $93 in absolute
dollars in the Second Quarter of Fiscal 2001 from the Second Quarter of Fiscal
2000, but increased as a percentage of net sales by 0.7% due to lower net sales.
The decrease in absolute dollars was due to administrative cost reductions which
more than offset the increased expenses related to the start up of the Company's
initial fleet and truck center and its commercial coatings business.
Other income (expense) is primarily comprised of gains or losses from the
sales of real estate and net interest expense. The net gain in the Second
Quarter of Fiscal 2001 was $45 versus no gain in the Second Quarter of Fiscal
2000. Net interest expense was $115 in the Second Quarter of Fiscal 2001, as
compared to $123 in the Second Quarter of Fiscal 2000, and relates primarily to
the accrual of interest on the IRS's disallowance of a net operating loss
carryback (which has been appealed by the Company, as discussed in Note 3 to the
Condensed Consolidated Financial Statements) and life insurance loans. In the
Second Quarter of Fiscal 2001, the Company wrote-off $68 in un-utilizable
factory MIS equipment.
No federal income tax benefit was recognized by the Company for its
operating loss in the Second Quarter of Fiscal 2001. Due to income allocation
and state income tax laws, only part of the Company's income before taxes in the
Second Quarter of Fiscal 2001 was offset by the net operating loss carryforward
for state income tax purposes. The Company recorded a tax benefit of $9 during
the Second Quarter of Fiscal 2001 for taxes in those states which were not
offset by the net operating loss carryforward.
SIX MONTHS ENDED OCTOBER 31, 2000 ("FIRST SIX MONTHS OF FISCAL 2001") COMPARED
TO THE SIX MONTHS ENDED OCTOBER 31, 1999 ("FIRST SIX MONTHS OF FISCAL 2000" OR
"PRIOR YEAR PERIOD").
Net sales for the First Six Months of Fiscal 2001 decreased by $1,063, or
3.4%, compared to the First Six Months of Fiscal 2000. This was primarily due to
the decrease in same shop (shops open one year or more) sales of $697, or 2.3%,
and the loss of sales from a net 9 shops closed since the First Six Months of
Fiscal 2000 ($610), partially offset by a higher ticket average during the First
Six Months of Fiscal 2001 compared to the First Six Months of Fiscal 2000.
Gross Profit decreased by $1,153 in absolute dollars in the First Six months
of Fiscal 2001 from the First Six Months of Fiscal 2000 and the gross profit
margin percentage decreased by 2.8%. The decreases were primarily due to the
adverse effect of the reduction in sales and increased costs of materials,
supplies, insurance and rent.
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Selling, general and administrative expenses decreased by $25 in absolute
dollars in the First Six Months of Fiscal 2001 from the Prior Year Period, but
increased as a percentage of net sales by 0.7% due to lower sales. The decrease
in absolute dollars was due to administrative cost reductions which more than
offset the increased expenses related to the start up of the Company's initial
fleet and truck center and its commercial coatings business.
Other income (expense) is primarily comprised of gains or losses from the
sales of real estate and net interest expense. The net gain in the First Six
Months of Fiscal 2001 was $231 versus $6 in the Prior Year Period. Net interest
expense was $220 in the First Six Months of Fiscal 2001, as compared to $248 in
the First Six Months of Fiscal 2000, and relates primarily to the accrual of
interest on the IRS's disallowance of a net operating loss carryback (which has
been appealed by the Company, as discussed in Note 3 to the Condensed
Consolidated Financial Statements) and life insurance loans. In the First Six
Months of Fiscal 2001, the Company wrote-off $68 in un-utilizable factory MIS
equipment.
The federal income tax provision was offset by the utilization of the net
operating loss carryforward available from the prior year. Due to income
allocation and state income tax laws, only part of the Company's income before
taxes in the First Six Months of Fiscal 2001 was offset by the net operating
loss carryforward for state income tax purposes. The Company provided $12 in
taxes during the First Six Months of Fiscal 2001 for taxes in those states which
were not offset by the net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are based upon its seasonal working capital
needs and capital requirements for new shops, fleet and truck centers and for
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 October 31, 2000, the Company had current assets of $7,560 and current
liabilities of $8,197 for a net working capital deficit of $637. During the
First Six Months of Fiscal 2001, net cash provided by operating activities was
$1,758 compared with $1,867 in the Prior Year Period. In the First Six Months of
Fiscal 2001, the Company had capitalized expenditures of $853, financed
primarily 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 and loans against various life insurance policies.
During the fiscal year ending April 30, 2001 ("Fiscal 2001"), the Company plans
to open one new shop and two additional large (15,000 to 20,000 square feet)
fleet and truck centers, and perform various capital improvements for an
estimated cost of $1.4 million.
In February 1999, the Company received a Notice of Disallowance from the IRS
disallowing a refund from a net operating loss carryback received during the
year ended April 30, 1997. The amount of the 1997 refund was $1,845. The Company
is protesting the IRS's position. The potential for the disallowance of the
refund and substantially all of the interest through October 31, 2000 relating
to the disallowance, are accrued in the Company's consolidated financial
statements. If the Company does not sustain its tax position with the IRS, the
net operating loss carryforward would be available to offset federal income
taxes in future years.
In January 1999, the Company entered into an agreement with a bank for a
two-year $4,000 credit facility consisting of an unsecured revolving line of
credit. Effective November 30, 2000, this credit facility was revised to extend
through August 31, 2001 and to consist of two separate lines of credit; a
revolving line for $2,000 and a non-revolving line for $1,500. There are no
financial covenants to be maintained during the term of this revised facility,
but the Company is exposed to interest rate risk under the lines of credit as
borrowings will bear interest at the bank's prime rate.
The Company currently owns 65 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 met its cash needs for the foreseeable
future.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Statements which are not historical facts contained in this Quarterly
Report on 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
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competitive products, services and pricing, capacity and supply constraints or
difficulties, changes in laws and regulations applicable to the Company, the
impact of advertising and promotional activities, the impact of the Company's
expansion or closing of shops, new product roll-out, fleet painting operations
and commercial coatings business, the potential adverse effects of certain
litigation and the impact of various tax positions taken by the Company.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant was notified at the end of September 2000 by a beneficial
owner of 241,400 shares of common stock (as disclosed in the Proxy Statement for
the Annual Meeting of Shareholders held on August 25, 2000) that it attempted to
withhold its votes from certain nominee directors, but such voting instruction
was not received by the Company's Transfer Agent and, therefore, not reflected
in the certified tabulation. The outcome of the election of directors would not
have been affected in any event.
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, 2000.
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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 14, 2000 /s/ Christian K. Bement
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Dated Christian K. Bement, President and
Chief Executive Officer
DECEMBER 14, 2000 /s/ Charles E. Barrantes
----------------- --------------------------
Dated Charles E. Barrantes, Vice President and
Chief Financial Officer
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