<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 January 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
------------------------- ----------
(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 8, 1999, the registrant had 4,803,311 shares of its Capital
Stock, $1.00 par value, issued and 4,358,682 outstanding.
This report contains a total of 10 pages.
<PAGE> 2
PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
-----------
January 31, April 30,
ASSETS 1999 1998
----------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 365 $ 4,203
Accounts receivable 632 627
Inventories 1,856 1,251
Prepaid expenses 1,673 1,568
Deferred income taxes 714 714
Property held for sale -- 25
-------- --------
Total Current Assets 5,240 8,388
-------- --------
Property and Equipment, net 20,561 19,375
Deferred Income Taxes 1,877 1,877
Other, Primarily Cash Surrender Value
of Life Insurance 2,021 1,846
-------- --------
Total Assets $ 29,699 $ 31,486
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 697 $ 964
Accrued expenses 4,903 6,503
-------- --------
Total Current Liabilities 5,600 7,467
-------- --------
Deferred Management Compensation 3,356 3,363
-------- --------
Long-term Liabilities 1,811 221
-------- --------
Commitments and Contingencies (Note 4) -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized
12,000,000; 4,803,000 issued and
4,359,000 outstanding at January 31,
1999; 4,782,000 issued and 4,659,000
outstanding at April 30, 1988
4,803 4,782
Additional paid-in capital 6,706 6,598
Retained earnings 10,532 10,132
Treasury shares (3,109) (1,077)
-------- --------
Total Shareholders' Equity 18,932 20,435
-------- --------
Total Liabilities and Shareholders' Equity
$ 29,699 $ 31,486
======== ========
</TABLE>
<PAGE> 3
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
January 31, January 31,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 9,895 $ 8,490 $ 40,563 $ 37,145
Cost of sales 8,608 7,595 29,637 26,834
-------- -------- -------- --------
Gross profit 1,287 895 10,926 10,311
Selling and administrative
expense 3,055 2,782 10,101 9,370
-------- -------- -------- --------
Operating income (loss) (1,768) (1,887) 825 941
Other income (expense) (Note 3) (191) 34 (206) 43
-------- -------- -------- --------
Income (loss) before income taxes (1,959) (1,853) 619 984
Income tax expense (benefit) (766) (631) 219 36
-------- -------- -------- --------
Net income (loss) $ (1,193) $ (1,222) $ 400 $ 948
======== ======== ======== ========
Basic earnings (loss) per share
(Note 5) $ (0.27) $ (0.27) $ 0.09 $ 0.21
======== ======== ======== ========
Diluted earnings (loss) per
share (Note 5) $ (0.27) $ (0.27) $ 0.09 $ 0.20
======== ======== ======== ========
</TABLE>
<PAGE> 4
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 34 $ 1,752
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,369) (2,261)
Proceeds from sale of property and equipment 57 358
Reduction in marketable securities -- 270
Other - net (175) (102)
------- -------
Net cash used in investing activities (3,487) (1,735)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings from an insurance company 1,670
Proceeds from exercise of stock options 92 71
Purchase of treasury stock (2,032) --
Principal payments on capital leases (115) (94)
------- -------
Net cash used in financing activities (385) (23)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,838) (6)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 4,203 2,859
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 365 $ 2,853
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid $ 915 $ 66
======= =======
</TABLE>
Supplemental Disclosure of Noncash Investing and Financing Activities:
During the nine month period ended January 31, 1999, the Company entered into
one capital lease in the amount of $62.
<PAGE> 5
EARL SCHEIB, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements have been prepared by Earl Scheib, Inc.
(the "Company") without audit, in accordance with generally accepted accounting
principles. Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted or condensed. It is management's belief
that the disclosures made are adequate to make the information presented not
misleading and reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of financial position and results
of operations for the periods presented. The results of operations for the
periods presented should not be considered as necessarily indicative of
operations for the full year due to the seasonality of the Company's business.
It is recommended that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements for the year ended
April 30, 1998, ("Fiscal 1998") and the notes thereto included in the Company's
Form 10-K.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, April 30,
1999 1998
------------ ----------
<S> <C> <C>
Finished goods $ 1,997 $ 1,497
Raw materials 425 320
LIFO Reserve (566) (566)
------- -------
Inventories $ 1,856 $ 1,251
======= =======
</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 balance sheet.
In February of 1999 the Company received a Notice of Disallowance
from the Internal Revenue Service disallowing the refund from the net operating
loss carryback received in Fiscal 1997. The Company is currently evaluating its
position; however, due to the increased probability that the filing position for
the net operating loss will be substantially disallowed, the Company accrued in
the quarter ended January 31, 1999, the estimated interest payable on the
disallowance of the net operating loss carryback. Accordingly, in the quarter
ended January 31, 1999, the Company accrued $214 of interest relating to the
potential disallowance of its net operating loss carryback.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings and claims some of which arise
in the ordinary course of its business. Management currently believes that the
amount of ultimate liability with respect to these legal matters should not
materially affect the Company's financial statements.
<PAGE> 6
NOTE 5. EARNINGS PER SHARE
The Company adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. SFAS No.
128 requires the Company to present basic and diluted earnings per share on the
face of the income statement.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
only dilutive securities the Company has outstanding are stock options issued to
the Company's Board of Directors, management and employees. SFAS No. 128
requires restatement of all prior period earnings per share data presented.
The weighted average number of shares used to calculate basic earnings
per share was 4,359,000 and 4,594,000 for the three month periods and 4,483,000
and 4,592,000 for the nine month periods ended January 31, 1999 and 1998,
respectively. The weighted average number of shares used to calculate diluted
earnings per share was 4,359,000 and 4,594,000 for the three month periods and
4,581,000 and 4,745,000 for the nine month periods ended January 31, 1999 and
1998, respectively. Dilutive securities, which consisted wholly of stock
options, had no impact upon weighted average shares outstanding for the quarter.
The effect of the dilutive securities, which consisted wholly of stock options,
was to increase the weighted average number of shares outstanding by 98,000 and
153,000 shares for the nine month periods ended January 31, 1999 and 1998,
respectively.
NOTE 6. SEGMENT INFORMATION
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information", is effective for fiscal years beginning after December 15, 1997.
SFAS 131 requires that public companies report certain information about
operating segments, products, services and geographical areas in which they
operate and their major customers. The Company operates in only one segment,
auto painting and related services.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
QUARTER ENDED JANUARY 31, 1999 ("1999 THIRD QUARTER") COMPARED TO THE QUARTER
ENDED JANUARY 31, 1998 ("1998 THIRD QUARTER")
Net sales during the 1999 Third Quarter increased by $1,405 or 16.5% which
consisted of same shop (shops open one year or more) sales increases of $819 or
9.8% compared to the 1998 Third Quarter. The remaining increase in sales is due
to sales from new shops opened since the end of the 1998 Third Quarter (14
shops) partially offset by the loss of sales from shops closed since the end of
the 1998 Third Quarter (5 shops). The increase in sales resulted primarily from
additional car volume (due in part to our fleet department) at same shops.
Gross profit dollars in the 1999 Third Quarter increased by $392 compared
to the 1998 Third Quarter due mainly to the increase in sales discussed above.
Gross profit margins increased from 10.5% to 13.0% due to increased sales
volumes spreading fixed costs over a larger number of sales dollars.
<PAGE> 7
Selling and administrative expense increased by $273 which represents a
decrease of 1.9% of sales in the 1999 Third Quarter compared to the 1998 Third
Quarter. The decrease in selling and administrative expense is mainly due to
sales increasing faster than selling and administrative expenses. The dollar
increase in selling and administrative expense between the two quarters is due
to additional personnel and related expenses associated with the expansion of
the Company's real estate department and the establishment of an outside sales
department to sell the Company's services to commercial fleet accounts.
Other income consists of gains from sales of excess real estate and net
interest expense. Net interest expense was $191 in the 1999 Third Quarter, due
primarily to the accrual of interest relating to the potential disallowance of
the carrying back of a net operating loss, compared to interest income of $34
(primarily from investments in short-term paper) in the 1998 Third Quarter.
In the 1999 and 1998 Third Quarters the Company recognized a federal
income tax benefit due to the operating loss for the quarter. In the 1999 Third
Quarter the income tax benefit was provided at the Company's effective tax rate.
The amount of the benefit for the 1998 Third Quarter was limited by the income
tax provisions recorded in the prior two quarters.
NINE MONTHS ENDED JANUARY 31, 1999 ("FIRST NINE MONTHS OF FISCAL 1999") COMPARED
TO THE NINE MONTHS ENDED JANUARY 31, 1998 ("FIRST NINE MONTHS OF FISCAL 1998" OR
"PRIOR YEAR PERIOD")
Net sales for the First Nine Months of Fiscal 1999 increased by $3,418 or
9.2% compared to the Prior Year Period which consisted of same shop (shops open
one year or more) sales increases of $1,602 or 4.4% compared to the Prior Year
Period. The remaining increase in sales is due to sales from new shops opened
since the end of the 1998 Third Quarter (14 shops) partially offset by the loss
of sales from shops closed since the end of the 1998 Third Quarter (5 shops).
The increase in sales resulted primarily from additional car volume (due in part
to our fleet department) at same shops.
Gross profit dollars in the First Nine Months of Fiscal 1999 increased
by $615 compared to the First Nine Months of Fiscal 1998 due mainly to the
increase in sales discussed above. Gross profit margins decreased in the First
Nine Months of Fiscal 1999 to 26.9% from 27.8% in the First Nine Months of
Fiscal 1998. The decrease in gross margins is largely attributable to a lower
ticket average in the first 8 weeks of the quarter ending July 31, 1998.
Selling and administrative expense for the First Nine Months of Fiscal 1999
increased by $731 which represented a decrease of 0.3% of sales compared to the
prior year period. Selling and administrative expenses increased primarily from
payroll costs and travel costs associated with the expansion of the real estate
department and the establishment of an outside sales department to sell the
Company's services to commercial fleet accounts, legal expenses and shop
expansion.
Other income consists of gains or losses from sales of excess real estate
and net interest income or expense. During the First Nine Months of Fiscal 1999,
the Company sold 1 property for a net gain of $11 compared to a net loss of $72
from the sale of 2 properties in the Prior Year Period. Net interest expense was
$217 in the First Nine Months of Fiscal 1999 (due primarily to the accrual of
interest relating to the potential disallowance of a net operating loss
carryback) compared to net interest income (generated from the investment of
cash in short-term instruments) of $115 in the First Nine Months of Fiscal 1998.
In the First Nine Month Periods for Fiscal 1999 and 1998 the Company provided
for income taxes at statutory rates.
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are based upon its seasonal working capital
needs and capital requirements for capitalized additions and improvements and
expansion. The first and second quarters and occasionally the fourth quarter
have historically been positive cash flow from operations while the third and
occasionally the fourth quarters are net users of cash.
As of January 31, 1999, the Company had current assets of $5,240 and
current liabilities of $5,600 for a net working capital deficit of $360. The
Company's long-term debt consists of its deferred management compensation plan,
borrowings against the cash surrender value of its life insurance contracts and
2 capital leases. During the First Nine Months of Fiscal 1999 the Company opened
8 new shops and during the remaining three months of Fiscal 1999 plans to open
10 to 12 additional new shops and perform various improvements for an estimated
total cost of $5.5 million.
In the First Nine Months, the Company had capitalized expenditures of
$3,369 (which are included in the $5.5 million of cash requirements for Fiscal
1999 described in the previous paragraph) which were financed largely through
cash flow from operations. The Company expects that future cash flow from
operations will be enhanced by these capital additions.
Net cash provided by operating activities for the nine months ended January
31, 1999 declined by $1,718 compared to the same period last year. The decrease
is mainly due to operations being fully taxable in fiscal 1999 versus fiscal
1998 and the Company in fiscal 1999 relying on a line of credit to meet its
working capital needs compared to fiscal 1998 where the Company retained a large
amount of cash. During the First Nine Months, EBITDA (EBITDA is defined as
income from operations plus depreciation and amortization) increased from $2,627
for First Nine Months of Fiscal 1998 to $2,864 for the First Nine Months of
Fiscal 1999 which was a 9.0% increase in EBITDA over the prior year period.
Management believes that this increase in EBITDA is largely attributable to its
efforts over the previous year which include improvements in its current
operations as well as the expansion of its operations. Management believes that
EBITDA are measures commonly used by analysts and investors. Accordingly, this
information has been presented to permit a more complete analysis. However,
EBITDA as reported may not be comparable to similarly titled measures used by
other companies. EBITDA should not be considered a substitute for net income or
cash flow data prepared in accordance with general accepted accounting
principles or as a measure of profitability or liquidity.
In February of 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 refund was $1,696. The
Company is currently evaluating its tax position. The refund of the net
operating loss and substantially all of the interest relating to the
disallowance are accrued in the Company's January financial statements. If the
Company does not sustain its tax position with the IRS, the net operating loss
carryforward could be used to offset income taxes in the current and future
years.
During the third quarter of Fiscal 1999 management borrowed $1,670
against the cash surrender value of various life insurance policies. In
February, the Company entered into an agreement with a bank for a two year
$4,000,000 unsecured line of credit. It is anticipated that the Company will
draw on the line of credit during the third and early part of the fourth quarter
and repay the line towards the end of the fourth quarter; however, additional
draws on the line of credit may occur as a result of the disallowance of the
Company's net operating loss carryback. The Company owns 75 parcels of
unencumbered real estate, including the Company's headquarters and paint
factory, which could be either sold or used as collateral for additional outside
financing.
<PAGE> 9
Management currently believes that internally generated funds and the
$4,000,000 line of credit should be adequate to satisfy its anticipated cash
requirements for the remainder of Fiscal 1999.
"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 hardship, the impact of the Company's new
Euro-Paint(R) the impact of advertising and promotional activities, the impact
of the Company's expansion and fleet sales, the potential adverse effects of
certain litigation and the impact of various tax positions taken by the Company.
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule, Article 5 is filed herein.
Exhibit 10 Material Contracts, Article 5 is filed herein
(b) The Registrant filed a Current Report on Form 8-K dated December 11,
1998, disclosing the election of Christian K. Bement as President
and Chief Executive Officer of the Company effective January 1, 1999
during the quarter ended January 31, 1999.
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 13, 1999 /s/ Christian K. Bement
- -------------- ----------------------------------------
Dated Christian K. Bement, President and
Chief Executive Officer
March 13, 1999 /s/ John D. Branch
- -------------- ----------------------------------------
Dated John D. Branch, Senior Vice
President and Chief Financial
Officer
<PAGE> 1
EXHIBIT 10.1
SUPPLEMENTAL TERMS LETTER
JANUARY 29, 1999
Earl Scheib, Inc.
8737 Wilshire Blvd.
Beverly Hills, CA 90211
Attention: Mr. John Branch
RE: REVOLVING NOTE DATED JANUARY 29, 1999, IN THE ORIGINAL PRINCIPAL SUM
OF $4,000,000.00 ("NOTE") EXECUTED BY EARL SCHEIB, INC. ("BORROWER")
IN FAVOR OF CITY NATIONAL BANK ("CNB").
Dear Mr. Branch:
This is to confirm that CNB will extend the credit facility more
completely described in the enclosed Note, subject to the additional terms and
conditions set forth herein. Reference is made to the above mentioned Note.
This letter is to confirm that the following additional terms and conditions
will apply to the Note. Capitalized terms not defined in this letter have the
meanings given them in the Note. This letter is hereby incorporated into the
Note (this letter and the Note, collectively, the "Note").
A. ADDITIONAL EVENTS OF DEFAULT.
The following shall constitute additional Events of Default under the Note:
1. Failure of Borrower to furnish CNB, within the times specified, the
following statements:
1.1 Within forty-five (45) days after the end of each of the first three
quarterly accounting periods of each fiscal year, a financial
statement consisting of not less than a balance sheet, income
statement, reconciliation of net worth and statement of cash flows,
prepared in accordance with generally accepted accounting principles
consistently applied, which financial statement may be internally
prepared;
1.2 Within ninety (90) days after the close of each fiscal year, a copy of
the annual audit report for such year for Borrower and the
Subsidiaries including therein a balance sheet, income statement,
reconciliation of net worth and statement of cash flows, with notes
thereto, the balance sheet, income statement and statement of cash
flows to be audited by a certified public accountant reasonably
acceptable to CNB, and certified by such accountants to have been
prepared in accordance with generally accepted accounting principles
consistently applied and accompanied by Borrower's certification as to
whether any event has occurred which constitutes an Event of Default,
and if so, stating the facts with respect thereto; and
1.3 Such additional information, reports and/or statements as CNB may,
from time to time, reasonably request;
<PAGE> 2
Mr. John D. Branch
Earl Scheib, Inc.
January 29, 1999
Page 2
2. Failure of Borrower to maintain, on a consolidated basis, the following:
2.1 Tangible Net Worth plus Subordinated Debt of not less than
$18,000,000;
2.2 A ratio of Total Senior Liabilities to Tangible Net Worth plus
Subordinated Debt of not more than 1 to 1 at all times;
2.3 Cash Flow from operations of not less than $3,000,000.00 through
1/31/99 and of not less than $3,300,000.00 thereafter;
3. Failure of Borrower to pay and discharge all material taxes, assessments,
governmental charges and real and personal property taxes prior to the
date upon which penalties are attached unless the same are being contested
in good faith by borrower in appropriate proceedings;
4. Failure of Borrower to maintain or cause to be maintained for its benefit
in full force and effect the existing levels of insurance for its
business, including, without limitation, fire, public liability, property
damage, business interruption and extra expense and worker's compensation
and issued by an insurance company, reasonably acceptable to CNB, and such
failure to maintain is not cured within 30 days of borrower's receipt of
notice of cancellation of such policies;
5. Borrower creates, incurs, assumes or permits to exist any indebtedness,
except indebtedness to CNB and trade debt incurred in the ordinary course
of business, without CNB's prior written consent, except for (i) equipment
leases, (ii) purchase money debt and obligations under capital leases in
an aggregate amount not to exceed $325,000, and (iii) loans secured by the
cash surrender value of life insurance policies totaling $1,690,000 and
two notes from Firstar Bank Wisconsin totaling $225,000 and secured by a
receivable from the state of Wisconsin related to PECFA.
6. Borrower assumes, guarantees, or otherwise becomes liable for the material
obligation of any person or entity, except contingent liabilities in favor
of CNB, without CNB's prior written consent; or
7. Borrower mortgages, pledges, hypothecates, grants or contracts to grant
any security interest of any kind in any of its property or assets to
anyone, except CNB, without CNB's prior written consent, except for (i)
mechanics, materialmen's, landlord's, warehousemen's and carriers' liens
and other similar liens arising in the ordinary course of business with
respect to obligations which are not delinquent or are being contested in
good faith by appropriate proceedings, (ii) liens consisting of pledges or
deposits to secure obligations under real estate leases permitted
hereunder, (iii) liens relating to obligations under capital leases
permitted hereunder and liens securing any equipment or operating leases,
and (iv) liens, if they constitute such, of any true lease and consignment
UCC filings; or
8. Borrower makes or commits to make expenditures for capital assets
(including capitalized lease expenditures) of more than $5,500,000.00 in
the aggregate for Borrower and all Subsidiaries in any fiscal year,
without CNB's prior written consent.
<PAGE> 3
Mr. John D. Branch
Earl Scheib, Inc.
January 29, 1999
Page 3
B. DEFINITIONS.
For purposes of the Note, the following terms have the following meanings:
"CASH FLOW FROM OPERATIONS" shall be determined on a consolidated basis
for Borrower and the Subsidiaries and shall mean the sum of (a) net income
earned over the twelve months period ending on the date of determination, plus
(b) amortization of intangible assets, plus (c) interest expense, plus (d)
depreciation expensed during the twelve month period ending on the date of
determination.
"SUBORDINATED DEBT" shall mean indebtedness of Borrower or any Subsidiary,
the repayment of principal and interest of which is subordinated to CNB, on
terms satisfactory to CNB.
"SUBSIDIARY" shall mean any corporation, the majority of whose voting
shares are at any time owned, directly or indirectly by Borrower and/or by one
or more Subsidiaries.
TANGIBLE NET WORTH" shall mean the total of all assets appearing on a
balance sheet prepared in accordance with generally accepted accounting
principles consistently applied for Borrower and the Subsidiaries on a
consolidated basis, minus (a) all intangible assets, including, without
limitation, any accounts receivable converted to notes receivable, unamortized
debt discount, affiliate, employee and officer receivables or advances,
goodwill, research and development costs, patents, trademarks, the excess of
purchase price over underlying values of acquired companies, any covenants not
to compete, deferred charges, copyrights, franchises and appraisal surplus;
minus (b) all obligations which are required by generally accepted accounting
principles consistently applied to be reflected as a liability on the
consolidated balance sheet of Borrower and the Subsidiaries; minus, (c) the
amount, if any, at which shares of stock of a non-wholly owned Subsidiary appear
on the asset side of Borrower's consolidated balance sheet, as determined in
accordance with generally accepted accounting principles consistently applied;
minus (d) minority interests; and minus (e) deferred income and reserves not
otherwise reflected as a liability on the consolidated balance sheet of Borrower
and the Subsidiaries.
"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.
<PAGE> 4
Mr. John D. Branch
Earl Scheib, Inc.
January 29, 1999
Page 4
C. ADDITIONAL TERMS AND CONDITIONS
The following additional terms and conditions shall also apply to the Note:
1. FEES. Borrower shall pay to CNB a non-refundable fee equal to $15,000.00
[3/8% of the original principal amount of the Note], due and payable in
full upon execution of this letter and the Note, and upon any subsequent
renewal.
2. ENVIRONMENTAL INDEMNIFICATION. Due to the environmentally sensitive nature
of the industry in which Borrower is principally engaged and upon which
CNB will rely as its primary source of repayment, and in consideration of
CNB extending credit to Borrower, Borrower has agreed to indemnify CNB
against any claims that may arise as a result of Borrower's business
activities that are environmental in nature and for which CNB may be named
as a liable party.
Borrower agrees that it shall indemnify and hold harmless CNB, its parent
company, subsidiaries and all of their respective directors, officers,
employees, agents, successors, attorneys, and assigns from and against any
loss, damage, cost, expense, or liability directly or indirectly arising
out of or attributable to the use, generation, manufacture, production,
storage, release, threatened release, discharge, disposal, or presence of a
hazardous substance on, under, or about Borrower's property or operations
or property leased to Borrower, including but not limited to attorneys'
fees (including the reasonable estimate of the allocated cost of in-house
counsel and staff). For these purposes, the term "hazardous substances"
means any substance which is or becomes designated as "hazardous" or
"toxic" under any Federal, state, or local law. This indemnity shall
survive repayment of Borrower's obligations to CNB.
3. YEAR 2000 COMPLIANCE. Borrower represents and warrants as follows:
3.1 Borrower has adopted a plan, appropriate to its business or industry,
to insure that its computer software is Year 2000 Compliant. For the
purpose of this letter, "Year 2000 Compliant" means that dates
occurring on and after January 1, 2000 will be recognized correctly
by such software and not misinterpreted as a date occurring prior to
January 1, 2000.
3.2 Borrower has or intends to develop an action plan to deal with
significant disruption in its business which might be anticipated in
the event of foreseen or unforeseen failures of its computer systems
or its production and manufacturing equipment to be Year 2000
Compliant.
<PAGE> 5
Mr. John D. Branch
Earl Scheib, Inc.
January 29, 1999
Page 5
Except for documents and instruments specifically referenced herein or in
the Note, this letter and the Note constitute the entire agreement of the
parties hereto and supersedes any prior or contemporaneous oral or written
agreements, understandings, representations, warranties and negotiations, if
any, which are merged into this letter and the Note. If you agree to accept the
terms of this letter and the Note, please sign the enclosed acknowledgement
copy of this letter, as well as the enclosed Note, and return them to me on or
before February 8, 1999.
Sincerely,
CITY NATIONAL BANK, a national
banking association
By:
--------------------------------------------
Miriam K. Schneider, Vice President
ACCEPTED AND AGREED TO THIS 29TH DAY OF
JANUARY, 1999.
EARL SCHEIB, INC.
By: /s/ JOHN D. BRANCH
----------------------------------------
Title: John D. Branch, Chief Financial Officer
<PAGE> 6
REVOLVING NOTE
(LIBOR and/or Prime)
$4,000,000.00 Beverly Hills, California
January 29, 1999
519812/32498
On January 31, 2001 ("Termination Date"), EARL SCHEIB, INC., a Delaware
corporation ("Borrower"), promises to pay to the order of CITY NATIONAL BANK, a
national banking association ("CNB"), at its office in this city, in United
States Dollars and in immediately available funds, the principal sum of FOUR
MILLION AND 00/100 DOLLARS ($4,000,000.00) ("Revolving Credit Commitment") or
so much thereof as may be advanced and then outstanding, plus interest on the
unpaid balance, until fully repaid, at a rate computed on the basis of a
360-day year, actual days elapsed, at the rates, times and in accordance with
the terms set forth below.
As provided herein, the principal of this Note may be borrowed, repaid and
reborrowed from time to time prior to the Termination Date, provided at the
time of any borrowing no Event of Default (as hereinafter defined) exists, and
provided further that the total borrowings outstanding at any one time shall
not exceed the Revolving Credit Commitment. Each borrowing and repayment shall
be noted in the books and records of CNB. The excess of borrowings over
repayments shall evidence the principal balance due hereon from time to time
and at any time. Borrowings hereunder shall be conclusively presumed to have
been made to or for the benefit of Borrower when made as noted in such books
and records, absent manifest error.
For purposes of this Note, the following definitions shall apply:
"BUSINESS DAY" means a day that CNB's Head Office is open and conducts a
substantial portion of its business.
"EUROCURRENCY RESERVE REQUIREMENT" means the aggregate (without
duplication) of the rates (expressed as a decimal) of reserves (including,
without limitation, any basic, marginal, supplemental, or emergency reserves)
that are required to be maintained by banks during the Interest period under
any regulations of the Board of Governors of the Federal Reserve System, or any
other governmental authority having jurisdiction with respect thereto,
applicable to funding based on so-called "Eurocurrency Liabilities", including
Regulation D (12 CFR 204).
"INTEREST PERIOD" means the period commencing on the date a LIBOR Loan is
made (including the date a Prime Loan is converted to a LIBOR Loan, or a LIBOR
Loan is renewed as a LIBOR Loan, which, in the latter case, shall be the last
day of the expiring Interest Period) and ending one (1), two (2), three (3) or
six (6) months thereafter, as selected by the Borrower; provided, however, (a)
any Interest Period that would end on a day not a Business Day, shall extend to
the next Business Day; and (b) no Interest Period may extend beyond the
Termination Date.
"LIBOR BASE RATE" means the British Banker's Association definition of the
London InterBank Offered Rates as made available by Telerate Monitor on Telerate
Screen 3750, or such other information service available to CNB, for the
applicable Interest Period for the LIBOR Loan selected by Borrower and as quoted
by CNB on the Business Day Borrower requests a LIBOR Loan.
1
<PAGE> 7
"LIBOR INTEREST RATE" means the rate per year (rounded upward to the next
one-sixteenth (1/16th) of one percent (0.0625%), if necessary) determined by
CNB to be the quotient of (a) the LIBOR Base Rate divided by (b) one minus the
Eurocurrency Reserve Requirement for the Interest Period; which is expressed by
the following formula:
LIBOR Base Rate
------------------------------------
1 - Eurocurrency Reserve Requirement
"LIBOR LOAN" means any Loan tied to the LIBOR Interest Rate.
"LOAN(S)" means the principal balance outstanding on this Note, and any
LIBOR Loan and/or any Prime Loan made hereunder, as the case may be.
"PRIME LOAN" means any Loan tied to the Prime Rate. A Loan hereunder shall
be a Prime Loan any time it is not a LIBOR Loan.
"PRIME RATE" means the rate most recently announced by CNB at its
principal office in Beverly Hills, California, as its "Prime Rate." Any change
in the interest rate resulting from a change in the Prime Rate shall be
effective on the day on which each change in the Prime Rate is announced by CNB.
1. INTEREST ON LOANS. Each Loan shall bear interest from disbursement until
due (whether at stated maturity, by acceleration or otherwise) at a rate equal
to, at Borrower's option, either (a) for a LIBOR Loan, the LIBOR Interest Rate
plus TWO AND FOUR TENTHS OF ONE PERCENT (2.40%) per annum, or (b) for a Prime
Loan, the fluctuating Prime Rate per annum. Interest on the Loans shall accrue
daily and be payable (a) if a Prime Loan, monthly, in arrears, on the last day
of each month, commencing on the first such date following disbursement; (b) if
a LIBOR Loan, (i) at the same time as interest payments are due on the Prime
Loans, (ii) on the last day of each Interest Period, and (iii) upon any
prepayment of any LIBOR Loan (to the extent accrued on the amount prepaid);
(c) on the date a Prime Loan is converted to a LIBOR Loan; and (d) at the
Termination Date. Anything herein to the contrary notwithstanding, all
principal and interest remaining unpaid on the Termination Date shall be
immediately due and payable.
2. PROCEDURE FOR LIBOR LOANS. Borrower may request that a Loan be a LIBOR
Loan, if herein allowed (including conversion of a Prime Loan to a LIBOR Loan,
or a continuation of a LIBOR Loan as a LIBOR Loan upon the expiration of the
Interest Period). Borrower's request shall be irrevocable, shall be made to
CNB, orally or in writing or using the form "Notice of Borrowing/Interest
Selection" form attached hereto as Exhibit "A", no earlier than two (2)
Business Days before and no later than 1:00 p.m. Pacific Time on the date the
LIBOR Loan is to be made, and shall specify the Interest Period, the amount of
the LIBOR Loan, and such other information as CNB requests. If Borrower fails
to select a LIBOR Loan in accordance herewith, the Loan shall be a Prime Loan,
and any LIBOR Loan shall be deemed a Prime Loan upon expiration of the Interest
Period.
3. AVAILABILITY OF LIBOR LOANS. Notwithstanding anything herein to the
contrary, each LIBOR Loan must be in the minimum amount of $250,000.00 and
increments of $100,000.00. Borrower may not have more than five (5) LIBOR Loans
outstanding at any one time under the Revolving Credit Commitment. Borrower may
have Prime Loans and LIBOR Loans outstanding simultaneously.
2
<PAGE> 8
4. PREPAYMENT OF PRINCIPAL. Borrower may prepay the principal amount
outstanding on a Prime Loan at any time and in any amount without a prepayment
fee. Borrower may not make a partial principal prepayment on a LIBOR Loan.
Borrower may prepay the full outstanding principal balance on a LIBOR Loan
prior to the end of the Interest Period, provided, however, that such
prepayment is accompanied by a fee ("LIBOR Prepayment Fee") equal to the
amount, if any, by which (a) the additional interest which would have been
earned by CNB had the LIBOR Loan not been prepaid exceeds (b) the interest
which would have been recoverable by CNB by placing the amount of the LIBOR
Loan on deposit in the LIBOR market for a period starting on the date on which
it was prepaid and ending on the last day of the applicable Interest Period.
CNB's calculation of the LIBOR Prepayment Fee shall be conclusive absent
manifest error.
5. SUSPENSION OF LIBOR LOANS. In the event CNB, on any Business Day, is
unable to determine the LIBOR Base Rate applicable for a new, continued, or
converted LIBOR Loan for any reason, or any law, regulation, or governmental
order, rule or determination, makes it unlawful for CNB to make a LIBOR Loan,
Borrower's right to select LIBOR Loans shall be suspended until CNB is again
able to determine the LIBOR Base Rate or make LIBOR Loans, as the case may be.
During such suspension, new Loans, outstanding Prime Loans and LIBOR Loans
whose Interest Periods terminate may only be Prime Loans.
The occurrence of any of the following with respect to any Borrower or
guarantor of this Note constitute an "Event of Default" hereunder:
1. Failure to make any payment of principal or interest when due under this
Note;
2. Filing of a petition by any of such parties under any provision of the
Bankruptcy Code, or a petition against Borrower is filed under the
Bankruptcy Code and such petition is not dismissed within sixty (60)
calendar days of the date of the filing thereof;
3. Appointment of a receiver or an assignee for the benefit of creditors;
4. Commencement of dissolution or liquidation proceedings or the
disqualification (under any applicable law or regulation) of any of such
parties which is a corporation, partnership, joint venture or any other
type of entity and such disqualification is not cured within sixty (60)
days;
5. Revocation of any guaranty of this Note, or any guaranty of this Note
becomes unenforceable as to any future advances under this Note;
6. Any financial statement provided by any of such parties to CNB is false or
materially misleading;
7. Any material default in the payment or performance of any obligation in
excess of $100,000.00, or any material default under any provision of any
material contract or instrument pursuant to which any of such parties has
incurred any obligation in excess of $100,000.00 for borrowed money, any
purchase obligation or any other liability of any kind to any person or
entity, including CNB;
3
<PAGE> 9
8. Any sale or transfer of all or a substantial part of the assets of any of
such parties other than in the ordinary course of business; or
9. Any material violation, breach or default under this Note, any letter
agreement, guaranty, security agreement, deed of trust, subordination
agreement or any other contract or instrument executed in connection with
this Note or securing this Note and the same has not been cured within
thirty (30) days after notice is delivered to Borrower.
Upon the occurrence of any Event of Default, CNB, at its option, may
declare all sums of principal and interest outstanding hereunder to be
immediately due and payable without presentment, demand, protest or notice of
dishonor, all of which are expressly waived by Borrower, and CNB shall have no
obligation to make any further advances hereunder. Borrower agrees to pay all
costs and expenses, including reasonably attorneys' fees, expended or incurred
by CNB (or allocable to CNB's in-house counsel) in connection with the
enforcement of this Note or the collection of any sums due hereunder and
irrespective of whether suit is filed.
Upon the occurrence of any Event of Default (and without constituting a
waiver of the Event of Default), and until the Event of Default has been cured,
the outstanding principal (and interest, to the extent permitted by law) shall
bear additional interest at a fluctuating rate equal to five percent (5%) per
annum higher than the interest rate as determined above; provided, however, for
purposes hereof, a LIBOR Loan shall be treated as a Prime Loan upon the
termination of the Interest Period.
This Note and all matters related hereto shall be governed by the laws of
the State of California. If this Note is executed by more than one Borrower,
all obligations are joint and several.
EARL SCHEIB, INC., a Delaware
corporation
By: /s/ JOHN D. BRANCH
-----------------------------
John D. Branch, Senior VP/CFO
4
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<PERIOD-START> MAY-01-1998
<PERIOD-END> JAN-31-1999
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0
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