<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4822
EARL SCHEIB, INC.
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(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 (Zip Code)
executive offices)
Registrant's telephone number, including area code: (310) 652-4880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of March 17, 1995 the registrant had 4,563,228 shares of its Capital
Stock, $1.00 par value, issued and outstanding.
This report contains a total of pages.
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PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
---------
January 31, April 30,
1995 1994
---------- ---------
(000's omitted)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 3,445 $ 4,288
RESTRICTED CASH (Note 2) 1,000 -
MARKETABLE SECURITIES - 1,648
INCOME TAXES REFUNDABLE 700 1,169
ACCOUNTS RECEIVABLE 326 760
INVENTORIES (NOTE 1) 1,977 1,623
PREPAID EXPENSES 1,624 1,816
DEFERRED INCOME TAXES 1,067 1,067
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TOTAL CURRENT ASSETS 10,139 12,371
PROPERTY AND EQUIPMENT - NET 14,573 19,409
ASSETS HELD FOR SALE (NOTE 6) 4,457
OTHER, PRIMARILY CASH SURRENDER VALUE
OF LIFE INSURANCE 2,644 2,346
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$ 31,813 $ 34,126
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 644 $ 1,079
ACCRUED EXPENSES 4,956 6,872
-------- --------
TOTAL CURRENT LIABILITIES 5,600 7,951
DEFERRED MANAGEMENT COMPENSATION 3,435 3,046
DEFERRED POSTRETIREMENT MEDICAL BENEFITS 480 438
COMMITMENTS AND CONTINGENCIES (NOTES 3,4,5 and 6)
STOCKHOLDERS' EQUITY:
CAPITAL STOCK $1 PAR - SHARES AUTHORIZED
12,000; ISSUED AND OUTSTANDING 4,563; 4,563 4,563
RESERVED FOR STOCK OPTIONS 1,000 (Note 7)
ADDITIONAL PAID-IN CAPITAL 5,504 5,504
RETAINED EARNINGS 12,231 12,624
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TOTAL STOCKHOLDERS' EQUITY 22,298 22,691
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$ 31,813 $ 34,126
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</TABLE>
2
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
---------
THREE MONTHS ENDED JANUARY 31,
------------------------------
1995 1994
---- ----
(000's omitted except for
per share and dividends)
<S> <C> <C>
Net Sales $ 7,582 $ 7,462
Cost of sales 7,595 7,989
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Gross Loss ( 13) (527)
Selling and administrative expense 2,770 2,862
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Operating Loss (2,783) (3,389)
Interest income 95 81
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Loss Before Income Tax Benefit (2,688) (3,308)
Income tax benefit ( 920) (1,141)
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Net Loss $ (1,768) $ (2,167)
-------- --------
-------- --------
Net Loss Per Share $ (.39) $ ( .48)
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-------- --------
Cash Dividends Per Share - $ -
-------- --------
-------- --------
Shares Outstanding 4,563 4,563
-------- --------
-------- --------
</TABLE>
3
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
---------
NINE MONTHS ENDED JANUARY 31,
-----------------------------
1995 1994
---- ----
(000's omitted except for
per share and dividends)
<S> <C> <C>
Net Sales $ 38,320 $ 35,814
Cost of sales 29,669 28,356
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Gross Profit 8,651 7,458
Selling and administrative expense 9,517 9,858
-------- --------
Operating Loss ( 866) (2,400)
Gain on sale of real properties 109 -
Interest income 250 228
-------- --------
Loss Before Income Tax Benefit ( 507) (2,172)
Income tax benefit ( 114) ( 687)
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Net Loss $ (393) $( 1,485)
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-------- --------
Net Loss Per Share $ (.09) $( .33)
-------- --------
-------- --------
Cash Dividends Per Share $ - $ .09
-------- --------
-------- --------
Shares Outstanding 4,563 4,563
-------- --------
-------- --------
</TABLE>
4
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Unaudited
NINE MONTHS ENDED JANUARY 31,
-----------------------------
1995 1994
---- ----
(000's omitted)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used by operating activities $ ( 756) $ (1,101)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction (investment) in marketable
securities 1,648 ( 362)
Capital expenditures ( 306) ( 955)
Increase in cash surrender value
of life insurance ( 319) ( 389)
Proceeds from sales of properties 393 60
Other - net 21 14
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Net cash provided by (used in) investing
activities 1,437 (1,632)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid - ( 411)
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NET INCREASE(DECREASE) IN CASH AND
CASH EQUIVALENTS 157 (3,144)
Cash and Cash Equivalents at beginning of year 4,288 5,358
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Cash and Cash Equivalents at end of period $ 4,445 $ 2,214
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid during the period $ 539 $ 229
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</TABLE>
The Company reclassified $524,000 in net book value for certain closed
paint center properties to Assets Held For Sale during the nine month period
ended January 31, 1995.
5
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EARL SCHEIB, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The information furnished in this report reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results of operations for the interim periods presented. Results for the three
and nine month periods ended January 31, 1995 are not necessarily indicative of
a full year's operations, due in part to the seasonality of the Company's
sales.
NOTE 1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, April 30,
1995 1994
---------- ----------
<S> <C> <C>
Finished goods $1,543,000 $1,407,000
Raw materials 434,000 216,000
---------- ----------
$1,977,000 $1,623,000
---------- ----------
---------- ----------
</TABLE>
NOTE 2. RESTRICTED CASH
In October 1994 the Company entered into a loan agreement with its bank
which required the Company to pledge a $1,000,000 money market account to the
bank as collateral for the bank's renewal of a letter of credit facility, under
which the bank renewed the issuance of approximately $4,737,000 in stand-by
letters of credit in favor of the Company's workers compensation insurance
carrier to secure the unfunded portion of estimated deferred insurance premiums.
Use of this money market account was restricted through August 31, 1995. The
loan agreement required the Company to maintain certain financial covenants
including minimum working capital, cash and cash equivalent balances, debt to
equity and tangible net worth ratios, as of January 31, 1995 the Company
complied with such covenants.
In February 1995 the Company entered into a new loan agreement with a
different bank to refinance the letter of credit facility without any pledge of
collateral. The new loan agreement requires the Company to maintain certain
financial covenants similar, however less restrictive, to those required by the
prior bank loan.
NOTE 3. LITIGATION
The Company is one of several parties which entered into a consent decree
with the United States Environmental Protection Agency ("USEPA") to clean-up a
Superfund Landfill site. The Company's insurance carrier, which is insuring the
Company in this matter under a reservation of rights, has reserved $455,000
under the terms of the Company's insurance coverage towards the cost of clean-up
at the site. The Company has accrued an additional $397,000 liability with
respect to this matter.
The Company is one of several defendants in a lawsuit filed by a
municipality which operated a landfill from the 1930's to the 1980's. The
Company was one of thousands of individuals and businesses which disposed of
refuse in the municipality's landfill in the normal course of business. The
USEPA has identified the landfill as a Superfund site. The Company's insurance
carrier is providing defense for the Company in this litigation under a
reservations of rights. The Company is also one of several hundred potential
defendants in three Ohio landfills. The Company has responded to information
requests from the United States and State of Ohio Environmental Protection
Agencies. The Company is currently unable to determine the ultimate cost of
these matters at this time.
6
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The Company is involved in several other legal proceedings, claims and
liabilities, including federal and state Occupational Safety and Health
Administration matters and environmental matters, which arise in the ordinary
course of its business. In the opinion of management, the amount of ultimate
liability with respect to these actions should not materially affect the
financial position of the Company.
NOTE 4. COMMITMENTS
The Estate of Earl A. Scheib ("Estate"), which is the owner of 1,304,384
shares of the capital stock of the Company ("Shares"), obtained a loan
("Original Loan") in the principal amount of $3,500,000 from a bank ("Original
Bank") pursuant to a Credit Agreement ("Credit Agreement") to fund state and
federal tax payments. The Estate executed a Stock Pledge Agreement ("Stock
Pledge Agreement") with the Original Bank whereby the Estate pledged the Shares
to such bank to secure the Original Loan. In the event of a default under the
Credit Agreement and a foreclosure under the Stock Pledge Agreement, a change in
control of the Company could result. As part of the transaction, the Company
executed agreements with the Original Bank and with Estate whereby such bank had
the right to "put" the Original Loan to the Company pursuant to a Put, Call and
Registration Rights Agreement ("Original Put Agreement") upon a default in the
Credit Agreement which included, among other things, a failure by the Company to
maintain certain financial covenants including working capital, and cash and
cash equivalent balances at fiscal quarter measurement dates, or should the
value of the collateral pledged to the bank drop to $3.50 per share or less.
Since the Credit Agreement is secured by a pledge of the Shares, if the Company
acquired the Original Loan it also acquired the Shares as Security. The Company
received a fee of $18,750 from the Estate during each quarter the Original Loan
was outstanding. In addition, as further security, the Estate granted the
Company a lien on a parcel of real property owned by the Estate which is under a
contract for sale at a purchase price of $3,650,000.
On November 16, 1994 the Original Bank notified the Company that it was
exercising its "put" rights under the Put Agreement. Under the terms of the
Original Put Agreement, the Company would have been obligated to purchase the
Original Loan from the Original Bank on or before March 2, 1995 by payment of
the amount then outstanding under the Credit Agreement ($3,564,871) as of
November 16, 1994 plus accrued interest up to and through the date the Company
would have purchased the Original Loan). On December 8, 1994 the Estate and the
Original Bank entered into an agreement whereby the Original Bank revoked the
exercise of its "put" and extended the term of the Credit Agreement, the
Original Put Agreement and the Stock Pledge Agreement for one additional year
subject to satisfaction of two items: (i) the Estate would make a principal
reduction payment in the amount of approximately $500,000 on or before January
13, 1995 and (ii) the Company would pledge an interest bearing account in the
amount of $1,500,000 to the Original Bank to secure its contingent obligation
under the Original Put Agreement. On December 30, 1994 the Estate paid down the
Original Loan to $3,000,000.
On January 19, 1995, the Estate obtained a new loan ("New Loan") from a new
bank ("New Bank") for $3,000,000 such amount being funded on February 16, 1995.
The proceeds from the New Loan were used to pay off the Original Loan. On
February 16, 1995, the Company executed a new Put Agreement ("New Put
Agreement") in favor of the New Bank whose terms are substantially identical to
the Original Put Agreement. However, the New Put Agreement does not require the
Company to pledge any collateral in favor of the New Bank. The terms of the New
Loan require the Estate to make a principal reduction payment in the amount of
$1,000,000 on or before December 31, 1995 and to pay the remainder due under the
New Loan on or before December 31, 1996.
7
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NOTE 5. CHANGE IN MANAGEMENT
In November 1994 the Company's board of directors ("Board") elected
Daniel A. Seigel as the Company's president and chief executive officer. The
Board amended the Company's bylaws to increase the number of directors to no
fewer than five nor more than seven. The Board subsequently appointed
Mr. Seigel to the Board and named Donald R. Scheib as chairman of the Board.
NOTE 6. RESTRUCTURING
The Company closed 83 non-profitable paint centers during the nine month
period ended January 31, 1995 and is continuing to evaluate its auto paint
center operations and management with the intent to reduce operating costs,
restructure management and focus resources on profitable operations. The
Company expects to complete this analysis by the end of the Company's fourth
quarter ending April 30, 1995. Certain of the paint centers closed are
company-owned real properties and will be offered for sale. Property held for
sale represents the Company owned paint centers which were closed as of
January 31, 1995. Since the analysis is not yet completed the Company is
currently unable to determine the ultimate net cost of restructuring or the
effect on cash flow.
NOTE 7. STOCK OPTIONS
In August 1994 the Company's Stockholders approved two non-qualified stock
option plans: one plan allows for the granting of up to 100,000 shares of the
Company's capital stock to non-employee directors of the Company and a second
plan allows for the granting of up to 300,000 shares of the Company's capital
stock to certain full-time employees of the Company. 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. Options vest 50% two
years after the date of grant, 75% three years after the date of grant and 100%
four years after the date of grant.
In November 1994, the Company granted a stock option for 400,000 shares of
the Company's capital stock to Daniel A. Seigel, subject to approval of the
Company's Stockholders. The options were granted at fair market value or
higher and are exercisable 50% on November 15, 1995 and an additional 12 1/2%
on each of February 15, 1996; May 15, 1996; August 15, 1996 and November 1,
1996. The exercise price ranges from $5.00 to $7.00 per share depending upon
the time period during which the options are exercised.
<TABLE>
<CAPTION>
Number Option Price
Granted and Outstanding of Shares Per Share
- - ----------------------- --------- ---------
<S> <C> <C>
Employee Plan 174,500 $4.50
Director Plan 30,000 $4.50-$5.375
Daniel Seigel 400,000 $5.00-$7.00
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company assesses liquidity based upon its ability to provide adequate
sources of funds to meet foreseeable cash requirements. The Company expects to
provide sufficient funds from internal operations to meet its need for operating
cash in the coming year. Due to the seasonal nature of its business, excess
cash is generated during the first and second quarters which is expected to
sustain operations during the winter season.
The Company owns a substantial number of its real properties, including its
corporate office and its manufacturing and warehousing facility. These real
properties are free of debt and could be used as a source of additional funds if
needed at a future date. The Company currently has listed for sale certain
auto paint centers. Additional properties will be listed for sale as a result
of the restructuring and closing of locations mentioned above. See Notes 2, 4
and 6 regarding the Company's commitments in regards to restricted cash, the
Estate of Earl A. Scheib bank loan and restructuring.
The Company used $756,000 in cash flow for operating activities during the
nine month period ended January 31, 1995 compared with $1,101,000 in the 1994
period. The $345,000 improvement between this year's cash flow and last year's
cash flow for operating activities resulted primarily from a $1,092,000
decrease in the net loss, a $533,000 increase in receipt of income taxes
refundable, a $246,000 decrease in accounts receivable and a $222,000 decrease
in prepaids, less a $866,000 decrease in accounts payable, a $404,000 decrease
in accrued insurance and a $478,000 decrease in cash from all other operating
activities.
Investing activities in the nine month period ended January 31, 1995
included $306,000 in capital expenditures and a $319,000 increase in the cash
surrender value of life insurance used to fund the Company's deferred
compensation plan, less a $1,648,000 reduction in marketable securities,
$393,000 in proceeds from sales of property and equipment. In the 1994 period,
investing activities included capital expenditures of $955,000, investment in
marketable securities of $362,000 and a $389,000 increase in the cash surrender
value of life insurance.
In December 1993 the Company suspended payment of cash dividends. As a
result, there were no financing activities during the nine month period ended
January 31, 1995 compared with dividend payments of $441,000 in the 1994 period.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
The Company's sales are seasonal in nature because of weather conditions in
many areas, and a proportionally greater share of the Company's sales and
earnings have historically occurred in the first half of its fiscal year.
Prolonged or extremely adverse weather conditions could have a negative impact
on the Company's sales and earnings.
At the end of the third quarter ended January 31, 1995 ("1995 Quarter") the
Company operated 165 auto paint centers compared with 258 centers in the 1994
quarter, a reduction of 93 centers. Most of the centers were closed due to
unprofitable operations.
Total sales during the 1995 Quarter increased by $120,000 or 2 percent over
the prior year quarter, but on a comparable paint center basis, sales increased
9
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by 19 percent. The total number of cars painted during the 1995 Quarter
increased by 1 percent over the 1994 quarter but on a comparable paint center
basis, car volume increased by 18 percent. The increases were primarily the
result of price discounting of the Company's paint services The Company
intends to continue a program of promotional pricing of its services.
Total sales during the nine month period ended January 31, 1995 increased
by $2,506,000 or 7 percent over the 1994 period, but on a comparable paint
center basis, sales increased by 18 percent. The total number of cars painted
in the 1995 period increased by 5 percent over the 1994 period but on a
comparable paint center basis, car volume increased by 16 percent.
Gross profit margins during the 1995 Quarter increased by 7 percent of
sales over the 1994 quarter due primarily to the $631,000 or 10% of sales
decrease in overhead expense resulting from the closing of 47 centers during the
1995 Quarter. Material costs increased by $138,000 or 2 percent of sales over
the 1994 quarter due to the higher cost of paint formulations and increases in
raw material prices. Direct labor costs increased by $99,000 or 1 percent of
sales over the 1994 quarter due to additional labor required on the high volume
of the more labor intensive premium paint service sales and additional labor
required by the reformulated paints.
Gross profit margins during the nine month period ended January 31, 1995
increased by 2 percent of sales over the 1994 period. Material costs increased
by $734,000 or 1 percent of sales and direct labor costs increased by
$1,173,000 or 2 percent of sales. Overhead expenses decreased by $595,000 or
5 percent of sales due primarily to the closure of 83 centers during the 1995
period.
During the 1995 Quarter and nine month period ended January 31, 1995
selling and administrative expense decreased $92,000 or 2 percent of sales and
$341,000 or 3 percent of sales, respectively, due primarily to the closure of
centers during the periods.
During the nine month period ended January 31, 1995 the Company realized a
pre-tax gain of $109,000 from the sale of two parcels of undeveloped land. The
Company currently has certain auto paint center real properties listed for
sale. The difference in the effective income tax rate of 22 percent in the nine
month period ended January 31, 1995 and the 32 percent rate in the 1994 period
is due to state income taxes.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 3. Litigation appearing on pages 6 and 7
in Part I is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Registrant files as Exhibit 10-(a) Material
Contract, copies of an Agreement for Issuance of
Letters of Credit entered into between the
Registrant and Registrant's bank on February 16,
1995 and Exhibit 10-(b) Put Agreement.
(b) The Registrant has not filed any Current Reports
on Form 8-K during the quarter ended January 31,
1995.
10
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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
March 17, 1995 /s/ Daniel A. Seigel
- - -------------- ----------------------------------
Dated Daniel A. Seigel, President
March 17, 1995 /s/ John K. Minnihan
- - -------------- ----------------------------------------
Dated John K. Minnihan, Vice President Finance
11
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EXHIBIT 10(a)
AGREEMENT FOR ISSUANCE OF LETTERS OF CREDIT
This Agreement for Issuance of Letters of Credit ("Agreement") is entered
into as of February 16, 1995, by and between EARL SCHEIB, INC., a Delaware
corporation ("Borrower") and CITY NATIONAL BANK, a national banking association
("CNB").
1. DEFINITIONS. For purposes of this Agreement, the following terms shall
have the following meanings:
1.1 "CURRENT ASSETS" shall be determined on a consolidated basis for
Borrower and the Subsidiaries in accordance with generally accepted accounting
principles, consistently applied, excluding, however, from the determination of
Current Assets, loans to stockholders, amounts due from Subsidiaries or
affiliates, deferred costs (except deferred income tax assets), and other
intangible assets;
1.2 "CURRENT LIABILITIES" shall be determined on a consolidated basis for
Borrower and the Subsidiaries in accordance with generally accepted accounting
principles, consistently applied, and shall include without limitation (a) all
payments on subordinated debt required to be made within one (1) year after the
date on which the determination is made; and (b) all indebtedness payable to
stockholders, affiliates, Subsidiaries or officers regardless of maturity,
unless such indebtedness shall have been subordinated, on terms satisfactory to
CNB;
1.3 "ESTATE LOAN" shall mean that certain Term Loan made by CNB to The
Estate of Earl A. Scheib in the original principal amount of $3,000,000.00 on
January 19, 1995;
1.4 "MARKETABLE SECURITIES" shall mean margin stock as defined in
Regulation U of the Federal Reserve Board, and securities issued by the United
States government, federal agencies, any state or territory, and state agencies,
subdivisions or municipalities;
1.5 "PUT AGREEMENT" shall mean that certain Put Agreement by and between
CNB and Borrower dated of even date herewith, governing CNB's right to put the
Estate Loan to Borrower;
1.6 "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;
1.7 "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, unamortized debt discount, affiliate 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 (except deferred income tax assets), 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 consoli-
1
<PAGE>
dated 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; and
1.8 "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.
2. LETTER OF CREDIT FACILITY. CNB shall, at the request of Borrower, at any
time up to, but not including, August 1, 1995, and upon the terms and conditions
set forth herein, issue standby letters of credit ("Letters of Credit") for the
account of Borrower. The aggregate face amount of outstanding Letters of Credit
together with unpaid reimbursement obligations shall not at any time exceed Five
Million Dollars ($5,000,000.00).
2.1 ISSUANCE OF LETTERS OF CREDIT. Letters of Credit shall be issued in
accordance with an Irrevocable Standby Letter of Credit Application and Letter
of Credit Agreement incorporated herein by this reference, as it may exist from
time to time, subject to the terms of this Agreement in the event of any
conflict herewith. Letters of Credit shall be issued on the normal
documentation used by CNB from time to time in accordance with the Uniform
Customs and Practices for Documentary Credits (1993 Revision) International
Chamber of Commerce Publication No. 500. CNB's current letter of credit
documentation is attached hereto as Exhibit "A." Unless CNB otherwise agrees in
writing, no Letter of Credit may expire after October 31, 1995. Published CNB
fees and charges, as they may be changed from time to time, shall apply to the
issuance of Letters of Credit. CNB's current schedule of applicable fees and
charges is attached hereto as Exhibit "B."
2.2 REIMBURSEMENT. Borrower shall immediately reimburse CNB for any
drawing on a Letter of Credit. In the event Borrower does not immediately
reimburse CNB for such drawing, the unreimbursed portion shall bear interest at
a rate equal to the Prime Rate of CNB, as it exists from time to time, plus one
and one-half percent (1.5%) per year, computed on a basis of a 360 day year. In
the event CNB exercises its rights and remedies under Section 4 below, Borrower
shall pay CNB cash in the aggregate face amount of the outstanding Letters of
Credit, to be held as cash collateral for Borrower's obligation to reimburse CNB
upon the funding of such Letters of Credit.
3. CONDITIONS TO ISSUANCE OF LETTERS OF CREDIT. The obligations of CNB to
issue any Letter of Credit hereunder shall be subject to the fulfillment of each
of the following conditions to CNB's satisfaction:
3.1 CNB shall have received an Irrevocable Standby Letter of Credit
Application and Letter of Credit Agreement, duly executed and delivered by
Borrower, in the form customarily used by CNB and in form and substance
acceptable to CNB;
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3.2 The Letter of Credit shall not cause the total of all outstanding
Letters of Credit to exceed Five Million Dollars ($5,000,000.00); and
3.3 The Borrower shall not be in default on any obligation of Borrower to
CNB, including this Agreement.
4. EVENTS OF DEFAULT. The occurrence of any of the following with respect to
Borrower shall constitute an "Event of Default" hereunder:
4.1 Failure to make any payment of any reimbursement obligation under this
Agreement;
4.2 Filing of a petition by or against any of such parties under any
provision of the BANKRUPTCY CODE;
4.3 Appointment of a receiver or an assignee for the benefit of creditors;
4.4 Commencement of dissolution or liquidation proceedings or the
disqualification (under any applicable law or regulation) of Borrower;
4.5 Revocation of any guaranty, or any guaranty becomes unenforceable;
4.6 Any financial statement provided by Borrower to CNB is false or
materially misleading;
4.7 Any material default in the payment or performance of any obligation,
or any material default under any provision of any contract or instrument
pursuant to which Borrower has incurred any obligation for borrowed money, any
purchase obligation or any other liability of any kind to any person or entity,
including CNB;
4.8 Any sale or transfer of all or a substantial part of the assets of
Borrower other than in the ordinary course of business;
4.9 Any violation, breach or default under this Agreement, any
Application, letter agreement, guaranty, security agreement, deed of trust,
subordination agreement or any other contract or instrument executed in
connection with this Agreement;
4.10 Failure of Borrower to furnish CNB, within the times specified, the
following statements:
4.10.1 Within forty-five (45) days after the end of each quarterly
accounting period of each fiscal year, a financial statement consisting of not
less than a balance sheet, and income statement, reconciliation of net worth and
statement of cash flows, with notes thereto, prepared in accordance with
generally accepted accounting principles consistently applied, which financial
statement may be internally prepared;
3
<PAGE>
4.10.2 Within ninety (90) days after the close of Borrower's fiscal
year, a copy of the annual financial statements for such year for Borrower and
the Subsidiaries, as filed with the Securities and Exchange Commission ("SEC"),
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 and certified by Borrower's
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
4.10.3 Such additional information, SEC filings, reports and/or
statements as CNB may, from time to time, reasonably request;
4.11 Failure of Borrower to maintain the following, so long as the Put
Agreement is in effect:
4.11.1 Tangible Net Worth of not less than $20,000,000.00, measured
as of the end of each fiscal quarter;
4.11.2 A ratio of Total Senior Liabilities to Tangible Net Worth of
not more than 0.7 to 1, measured as of the end of each fiscal quarter;
4.11.3 A ratio of Current Assets to Current Liabilities of not less
than 1.25 to 1, measured as of the end of each fiscal quarter; and
4.11.4 Minimum liquidity, consisting of unencumbered cash and cash
equivalents and Marketable Securities held in Borrower's name, of not less than
(a) $2,500,000.00 through July 30, 1995, and (b) the outstanding principal
balance on the Estate Loan, measured as of the end of each fiscal quarter
thereafter;
4.12 Borrower shall create, incur, assume or permit to exist any debt,
except debt to CNB and trade debt incurred in the ordinary course of business,
in excess of $100,000.00, without CNB's prior written consent, so long as the
Put Agreement is in effect; or
4.13 The Put Agreement shall become unenforceable for any reason, or the
Borrower shall attempt to disavow, revoke or attempt to terminate the Put
Agreement.
5. CNB'S REMEDIES. Upon the occurrence of any uncured Event of Default, CNB
may, at its option, (a) declare the outstanding principal and accrued interest
owed under the Note immediately due and payable; (b) terminate this Agreement as
to any future liability or obligation of CNB, but without affecting the
obligations owing by Borrower to CNB; and/or (c) exercise its rights and
remedies under this Agreement, the Note, any guaranties executed in favor of CNB
guaranteeing the Note or this Agreement, any agreement executed in connection
with the issuance of any Letter of Credit, any security agreement or deed of
trust securing the Note or this Agreement, and any or all of its rights and
remedies under applicable law.
4
<PAGE>
6. BANKING RELATIONSHIP. During the term of this Agreement, Borrower shall
maintain substantially all of its commercial banking business with CNB,
including maintenance of Borrower's primary depository accounts and issuance and
negotiation of Letters of Credit.
7. MISCELLANEOUS. Borrower agrees to pay all costs and expenses, including
reasonable attorneys' fees expended or incurred by CNB (or allocable to CNB's
in-house counsel) in connection with the enforcement of this Agreement or the
collection of any sums due hereunder and irrespective of whether suit is filed.
8. 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 of 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.
9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
10. NOTICE. Any notice required or permitted to be given under this Agreement
or any of the documents related hereto shall be given in writing and shall be
deemed to have been given when deposited in the United States mail certified
return receipt requested, with first-class postage prepaid and properly
addressed. For the purposes hereof, the addresses of the parties hereto shall,
until further notice given as herein provided, be as follows:
"CNB" City National Bank
Head Office
400 N. Roxbury Drive, Suite 300
Beverly Hills, California 90210
Attention: David Nelson, Vice President
5
<PAGE>
copy to: City National Bank
Legal Department
400 N. Roxbury Drive, Suite 500
Beverly Hills, California 90210
Attention: Colette Flannick Hebert, Managing Counsel
"Company" Earl Scheib, Inc.
8737 Wilshire Boulevard
Beverly Hills, California 90211
Attention: John K. Minnihan, Vice President Finance
copy to: Buchalter, Nemer, Fields & Younger
601 S. Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: David Sunkin, Esq.
11. APPLICABLE LAW. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and interpreted and constructed in
accordance with the laws of the State of California.
12. ARBITRATION.
12.1 At the request of CNB or Company any dispute, claim or controversy of
any kind (whether in contract or tort, statutory or common law, legal or
equitable) now existing or hereafter arising between CNB and Company, and in any
way arising out of, pertaining to or in connection with this Agreement, and/or
any renewals, extensions, or amendments thereto shall be resolved through final
and binding arbitration administered by the American Arbitration Association
("AAA") in accordance with the California Arbitration Act (California Code of
Civil Procedure, Section 1280 et. seq.) and the then existing Commercial Rules
of the AAA. Judgment upon any award rendered by the arbitrator(s) may be
entered in any state or federal court having jurisdiction thereof.
12.2 The provisions of California Code of Civil Procedure Section 1283.05
or its successor section(s) are incorporated herein and made a part of this
Agreement. Depositions may be taken and discovery may be obtained in any
arbitration under this Agreement in accordance with said section(s).
12.3 The arbitrator(s) shall determine which is the prevailing party and
shall include in the award that party's reasonable attorney's fees and costs
(including allocated costs of in-house legal counsel). Each party agrees to
keep all controversies and claims and the arbitration proceedings strictly
confidential, except for disclosures of information required in the ordinary
course of business of the parties or by applicable law or regulation, and for
disclosure of the status and outcome of the proceedings to Estate.
6
<PAGE>
13. ENTIRE AGREEMENT AND AMENDMENTS. This written Agreement is intended by CNB
and Company as a final expression of their agreement and is intended as a
complete statement of the terms and conditions of their agreement on the subject
dealt with herein. This Agreement may be amended only in a writing signed by
Company and CNB.
"Borrower" EARL SCHEIB, INC., a
Delaware corporation
By: /s/ DANIEL A. SEIGEL
------------------------------------
DANIEL A. SEIGEL, President
"CNB" CITY NATIONAL BANK, a national
banking association
By: /s/ DAVID NELSON
------------------------------------
DAVID NELSON, Vice President
7
<PAGE>
EXHIBIT 10(b)
PUT AGREEMENT
This Put Agreement ("Agreement") is entered into as of this 16th day of
February, 1995, by and between CITY NATIONAL BANK, a national banking
association ("CNB") and EARL SCHEIB, INC., a Delaware corporation ("Company").
1. RECITALS.
1.1 CNB has been requested to extend credit in the amount of $3,000,000.00
to The Estate of Earl A. Scheib ("Estate") upon the terms and conditions set
forth in that certain Term Note of even date herewith between Estate and CNB
("Estate Note"), a copy of which is attached hereto as Exhibit "A." By its
execution of this Agreement, Company acknowledges and agrees to the form and
content of the Estate Note.
1.2 As a condition to such extension of credit to Estate, CNB requires
that Company, upon demand as provided herein, purchase from CNB the Estate Note
and any security agreements taken in connection therewith.
1.3 Company and CNB have entered into this Agreement to provide CNB with
the assurances that CNB requires as set forth in Section 1.2.
2. AGREEMENT.
2.1 CNB, upon the occurrence of any of the following, may make demand upon
Company to purchase from CNB the Estate Note and any security agreements taken
in connection therewith:
2.1.1 Any monetary default by Estate under the Estate Note;
2.1.2 Failure of Company to cure any default under that certain
Agreement for Issuance of Letters of Credit by and between Company and CNB,
dated of even date herewith; provided, however, that Company shall be given a
thirty (30) day period in which to cure any default under Section 4.11 of said
Agreement;
2.1.3 Failure of Estate to meet any margin call under the Estate
Note; or
2.1.4 Maturity of the Estate Note, and nonpayment of the
obligation then due and payable by the Estate.
2.2 So long as CNB has not previously foreclosed its security interest in
the collateral pledged to CNB pursuant to any security agreement between CNB and
the Estate, Company, within sixty (60) days of the receipt of demand from CNB,
shall purchase from CNB the Estate Note and any security agreements taken in
connection therewith; provided, however, that
1
<PAGE>
in connection with any demand under Section 2.1.2 above, triggered by a default
by Company under Section 4.11 of the Agreement for Issuance of Letters of
Credit, Company shall be given only thirty (30) days' notice. CNB shall assign
to Company all of CNB's right, title and interest in and to the Estate Note and
Company shall assume CNB's then remaining obligations under the Estate Note and
replace CNB as the lender under the Estate Note.
2.3 Said purchase shall be for an amount equal to the principal and
interest outstanding on the Estate Note plus any interest accruing on the
obligation from date of demand to date of payment, such principal not to exceed
THREE MILLION DOLLARS ($3,000,000.00).
2.4 The purchase of the Estate Note and any security agreements taken in
connection therewith shall be without recourse and without any representations
or warranties on the part of CNB except as to the due authorization of the
persons acting on CNB's behalf and as to the amount of debt at the time of the
purchase as carried on CNB's books and records.
2.5 This Agreement shall apply and be in full force and effect whether or
not Estate is under any legal restraint from making payment on the Estate Note.
The obligation of Company to purchase the Estate Note hereunder, following
notice from CNB, shall be totally unconditional.
3. TERMINATION OF AGREEMENT. This Agreement shall terminate by mutual written
agreement of the parties or payment in full of the Estate Note.
4. ARBITRATION.
4.1 At the request of CNB or Company any dispute, claim or controversy of
any kind (whether in contract or tort, statutory or common law, legal or
equitable) now existing or hereafter arising between CNB and Company, and in any
way arising out of, pertaining to or in connection with this Agreement, and/or
any renewals, extensions, or amendments thereto shall be resolved through final
and binding arbitration administered by the American Arbitration Association
("AAA") in accordance with the California Arbitration Act (California Code of
Civil Procedure, Section 1280 et. seq.) and the then existing Commercial Rules
of the AAA. Judgment upon any award rendered by the arbitrator(s) may be
entered in any state or federal court having jurisdiction thereof.
4.2 The provisions of California Code of Civil Procedure Section 1283.05
or its successor section(s) are incorporated herein and made a part of this
Agreement. Depositions may be taken and discovery may be obtained in any
arbitration under this Agreement in accordance with said section(s).
4.3 The arbitrator(s) shall determine which is the prevailing party and
shall include in the award that party's reasonable attorney's fees and costs
(including allocated costs of in-house legal counsel). Each party agrees to
keep all controversies and claims and the arbitration proceedings strictly
confidential, except for disclosures of information required in the ordinary
course of business of the parties or by applicable law or regulation, and for
disclosure of the status and outcome of the proceedings to Estate.
2
<PAGE>
5. MISCELLANEOUS.
5.1 The amount of the Company's liability hereunder and under any other
agreement now or at any time hereafter in force between Company and CNB, shall
be cumulative and not alternative. The obligations hereunder are independent of
the obligations of Estate except as set forth above, and a separate action or
actions, including arbitration proceedings, may be brought and prosecuted
against Company whether action is brought against Estate or Estate is joined in
any such action or actions.
5.2 Company authorizes CNB, without notice or demand and without affecting
its liability hereunder, from time to time to: (a) renew, compromise, extend,
accelerate or otherwise change the time for payment of, or otherwise change the
terms of Estate's indebtedness, or any part thereof, including increase or
decrease of the rate of interest thereon; (b) take and hold security, without
consent of Company, for the payment of amounts owed by Estate; and (c) apply
such security and direct the order of manner of sale thereof as CNB in its
discretion may determine. Notwithstanding the foregoing, CNB shall (y) provide
Company with written notice of any written change which CNB and the Estate make
to the terms of the Estate Note, within ten (10) days of any such change, and
(z) not increase the principal amount available to the Estate without Company's
prior written consent.
5.3 Subject to the provisions of Section 2, Company waives any right to
require CNB to: (a) proceed against Estate; (b) proceed against or exhaust any
security held from Estate; or (c) pursue any other remedy in CNB's power
whatsoever, including but not limited to direct collection efforts from the
Estate under the Estate Note. Company waives any defense arising by reason of
any disability or other defense of Estate or by reason of the cessation from any
cause whatsoever of the liability of Estate. Until the purchase price specified
in Section 2.3 has been paid in full to CNB, Company shall have no right to
enforce the Estate Note and any security agreement taken in connection
therewith, and waives any right to enforce any remedy which CNB now has or may
hereafter have against Estate, and waives any benefit of any right to
participate in any security now or hereafter held by CNB. Without limiting the
generality of the foregoing, Company specifically waives and relinquishes as
against CNB any defense or benefit otherwise available to it should CNB make an
election of remedies as against Estate (and irrespective of the circumstances or
manner in which or whereby such election is made) which does not materially
destroy or impair Company's rights or rights to proceed against Estate under the
Estate Note and any security agreements taken in connection therewith. Company
assumes the responsibility for being and keeping itself informed of the
financial condition of Estate and of all other circumstances bearing upon the
risk of nonpayment of Estate's indebtedness to CNB which diligent inquiry would
reveal, and agrees that CNB shall have no duty to advise Company of information
known to it regarding such condition or circumstance.
5.4 Company shall reimburse CNB for all costs and expenses connected with
the enforcement of this Agreement incurred after its effective date, including
but not limited to, reasonable attorneys' fees and expenses (which counsel may
be CNB employees), expended or incurred by CNB (or allocable to CNB's in-house
counsel) in collecting any sum which becomes due CNB hereunder, or in the
protection, perfection, preservation or enforcement of any and all rights of
CNB, including, without limitation, the fees and costs incurred in any out-of-
court workout or a bankruptcy or reorganization proceeding.
3
<PAGE>
5.5 This Agreement and the rights and obligations of the parties hereunder
shall be governed by and interpreted and constructed in accordance with the laws
of the State of California.
5.6 Any notice required or permitted to be given under this Agreement or
any of the documents related hereto shall be given in writing and shall be
deemed to have been given when deposited in the United States mail certified
return receipt requested, with first-class postage prepaid and properly
addressed. For the purposes hereof, the addresses of the parties hereto shall,
until further notice given as herein provided, be as follows:
"CNB" City National Bank
Head Office
400 N. Roxbury Drive, Suite 300
Beverly Hills, California 90210
Attention: David Nelson, Vice President
copy to: City National Bank
Legal Department
400 N. Roxbury Drive, Suite 500
Beverly Hills, California 90210
Attention: Colette Flannick Hebert, Managing Counsel
"Company" Earl Scheib, Inc.
8737 Wilshire Boulevard
Beverly Hills, California 90211
Attention: John K. Minnihan, Vice President Finance
copy to: Buchalter, Nemer, Fields & Younger
601 S. Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: David Sunkin, Esq.
5.7 The provisions of this Agreement are hereby made applicable to and
shall inure to the benefit of CNB's successors and assigns and Company's
successors and assigns.
4
<PAGE>
5.8 This written Agreement is intended by CNB and Company as a final
expression of their agreement and is intended as a complete statement of the
terms and conditions of their agreement on the subject dealt with herein. This
Agreement may be amended only in a writing signed by Company and CNB.
"COMPANY" EARL SCHEIB, INC., a Delaware
corporation
By:
-------------------------------------------------
DANIEL A. SEIGEL, President
"CNB" CITY NATIONAL BANK, a national banking
association
By:
--------------------------------------------------
DAVID NELSON, Vice President
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 2 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-START> MAY-01-1994
<PERIOD-END> JAN-31-1995
<CASH> 3,445
<SECURITIES> 0
<RECEIVABLES> 326
<ALLOWANCES> 0
<INVENTORY> 1,977
<CURRENT-ASSETS> 10,139
<PP&E> 25,508
<DEPRECIATION> 10,935
<TOTAL-ASSETS> 31,813
<CURRENT-LIABILITIES> 5,600
<BONDS> 0
<COMMON> 4,563
0
0
<OTHER-SE> 17,735
<TOTAL-LIABILITY-AND-EQUITY> 31,813
<SALES> 38,320
<TOTAL-REVENUES> 38,320
<CGS> 29,669
<TOTAL-COSTS> 29,669
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (507)
<INCOME-TAX> (114)
<INCOME-CONTINUING> (393)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (393)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
