<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 July 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 executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 652-4880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of September 7, 1999, the registrant had 4,803,311 shares of its
Capital Stock, $1.00 par value issued and 4,358,682 shares outstanding.
This report contains a total of 9 pages.
<PAGE> 2
PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 1999
--------- ----------
Unaudited
---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,090 $ 1,265
Accounts receivable, less allowances of $164 at
July 31, and April 30, 1999 287 218
Inventories 2,203 1,701
Prepaid expenses and other current assets 2,196 2,040
Deferred income taxes 753 753
Property held for sale 0 339
--------- --------
Total Current Assets 6,529 6,316
--------- --------
Property and Equipment, net 21,129 21,089
Deferred Income Taxes 2,157 2,157
Other, Primarily Cash Surrender Value
of Life Insurance 2,313 2,299
--------- --------
Total Assets $ 32,128 $ 31,861
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,155 $ 940
Accrued expenses:
Payroll and related taxes 1,676 1,780
Insurance 1,076 1,139
Other 2,008 2,260
Income taxes payable 1,968 1,789
--------- --------
Total Current Liabilities 7,883 7,908
--------- --------
Deferred Management Compensation 3,270 3,298
Long-term Liabilities 1,991 2,016
Commitments and Contingencies -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized
12,000,000; 4,803,311 issued and 4,358,682
outstanding at July 31, 1999 and April 30,
1999 4,803 4,803
Additional paid-in capital 6,756 6,756
Retained earnings 10,533 10,188
Treasury shares (3,108) (3,108)
--------- --------
Total Shareholders' Equity 18,984 18,639
--------- --------
Total Liabilities and Shareholders' Equity $ 32,128 $ 31,861
========= ========
</TABLE>
The accompanying Notes are an integral part of these
condensed consolidated balance sheets.
2
<PAGE> 3
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 15,759 $ 15,903
Cost of sales 11,350 10,723
-------- --------
Gross profit 4,409 5,180
Selling, general & administrative expenses 3,733 3,564
-------- --------
Operating income 676 1,616
Other income (expense), net (119) 5
-------- --------
Income before income taxes 557 1,621
Provision for income taxes 212 615
-------- --------
Net income $ 345 $ 1,006
======== ========
Basic earnings per share $ 0.08 $ 0.22
======== ========
Diluted earnings per share $ 0.08 $ 0.21
======== ========
</TABLE>
The accompanying Notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 488 $ 449
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (968) (919)
Proceeds from disposals of property and equipment 345 5
Investment in marketable securities -- (208)
Other, net -- (53)
------- -------
Net cash used in investing activities (623) (1,175)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 2
Purchase of treasury stock -- (110)
Principal payments on capitalized leases (40) (34)
------- -------
Net cash used in financing activities (40) (142)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (175) (868)
Cash and Cash Equivalents, at Beginning of the Period 1,265 4,203
------- -------
Cash and Cash Equivalents, at End of the Period $ 1,090 $ 3,335
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 31 $ 307
======= =======
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During the three months ended July 31, 1998, the Company entered into one
capital lease in the amount of $47.
The accompanying Notes are an integral part of these condensed consolidated
financial statements.
4
<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 significant adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of financial position
and results of operations for the periods presented. The results of operations
for the periods presented should not be considered as necessarily indicative of
operations for the full year due to the seasonality of the Company's business.
It is recommended that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended April
30, 1999 ("Fiscal 1999").
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
UNAUDITED
JULY 31, APRIL 30,
1999 1999
--------- ----------
<S> <C> <C>
Paint and related supplies $ 2,153 $ 1,810
Raw materials 570 411
LIFO reserve (520) (520)
--------- ----------
Total inventories $ 2,203 $ 1,701
========= ==========
</TABLE>
NOTE 3. INCOME TAXES
In the first quarter of the fiscal year ended April 30, 1997 ("Fiscal
1997"), the Company received federal income tax refunds of $1,696 resulting from
the application of net operating loss carrybacks. Approximately $448 of the tax
refunds relate to the benefit of carrying back net operating losses to periods
for which the tax rates exceeded the current federal income tax rate. The $448
refund relating to the difference in federal tax rates is currently deferred on
the Company's consolidated balance sheet.
In February 1999, the Company received a Notice of Disallowance from the
Internal Revenue Service ("IRS") disallowing a refund from a net operating loss
carryback received in Fiscal 1997. The amount of the 1997 refund was $1,696. The
Company is protesting the IRS's position. The refund of the net operating loss,
and substantially all of the interest through July 31, 1999 relating to the
disallowance, are accrued in the Company's First Quarter of Fiscal 2000
consolidated financial statements. If the Company does not sustain its tax
position with the IRS, the net operating loss carryforward could be used to
offset federal income taxes in future years.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company is involved in several legal proceedings and claims as well as
environmental matters, some of which arise in the ordinary course of its
business. Management believes that the amount of ultimate liability with respect
to these legal matters should not materially affect the Company's consolidated
financial statements.
NOTE 5. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing
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 potential dilutive securities are outstanding stock options issued to the
Company's Board of Directors, management and employees.
5
<PAGE> 6
The weighted average number of shares used to calculate basic earnings per
share was 4,359,000 and 4,659,000 for the quarters ended July 31, 1999 and 1998,
respectively. The weighted average number of shares used to calculate diluted
earnings per share was 4,360,000 and 4,777,000 for the quarters ended July 31,
1999 and 1998, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
QUARTER ENDED JULY 31, 1999 ("FIRST QUARTER OF FISCAL 2000") COMPARED TO THE
QUARTER ENDED JULY 31, 1998 ("FIRST QUARTER OF 1999")
Net sales for the First Quarter of Fiscal 2000 decreased by $144 or 0.9%
compared to the First Quarter of 1999. This decrease consisted of same shop
(shops open one year or more) sales decreases of $1,034, or 6.7%, partially
offset by the sales from an additional net 11 shops (20 new shops opened less 9
shops closed since the First Quarter of 1999). The decrease in same shop sales
in the First Quarter of Fiscal 2000 consisted of lower car volume, partially
offset by a higher average invoice price.
Gross profit dollars in the First Quarter of Fiscal 2000 decreased by $771
compared to the First Quarter of 1999 due mainly to the decrease in sales
discussed above. Gross profit margins decreased from 32.6% to 28.0% due
primarily to the reduction in same shop sales, higher material costs related to
the Company's new Euro-Paint(R) and higher depreciation and other expenses
related to new shop expansion.
Selling, general and administrative expense increased by $169 in the First
Quarter of Fiscal 2000 compared to the First Quarter of 1999. The dollar
increase is mainly due to increased insurance expense and administrative
expenses associated with the expanded fleet department and new shop expansion.
Other income consists of gains or losses from sales of excess real estate
and net interest income or expense. Net interest expense was $125 in the First
Quarter of Fiscal 2000 compared to a $5 net interest income in the First Quarter
of 1999. The increase in net interest expense in the First Quarter of 2000
relates primarily to interest accrued on the potential disallowance of a net
operating loss carryback and interest accrued on the life insurance loans.
In the First Quarter of Fiscal 2000 and 1999, the Company provided for
income taxes at the statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are based upon its seasonal working capital
needs and capital requirements for new shops, replacements and improvements. The
first and second quarters, and occasionally the fourth quarter, usually have
positive cash flow from operations, while the third and occasionally the fourth
quarters are net users of cash.
As of July 31, 1999, the Company had current assets of $6,529 and current
liabilities of $7,883 for a net working capital deficit of $1,354. During the
First Quarter of Fiscal 2000, net cash provided by operations was $488, slightly
better than the First Quarter of 1999.
In the First Quarter of Fiscal 2000, the Company had capitalized
expenditures of $968, which are included in the $3.2 million of cash
requirements described in the paragraph below, financed through cash flow from
operations. The Company expects that future cash flow from operations will be
enhanced by these capital additions.
The Company's long-term financial obligations consist of its deferred
management loan with a midwest bank compensation plan, loans against various
life insurance policies, a loan with a midwest bank secured by a long-term
receivable, and three minor capital leases. During the fiscal year ending April
30, 2000 ("Fiscal 2000"), the Company plans to open up to 15 new shops
(depending upon the availability of locations) and perform various capital
improvements for an estimated cost of $3.2 million.
In February 1999, the Company received a Notice of Disallowance from the
Internal Revenue Service ("IRS") disallowing a refund from a net operating loss
carryback received in Fiscal 1997. The amount of the 1997 refund was $1,696. The
Company is protesting the IRS's position. The refund of the net operating loss,
and substantially all of the interest through July 31, 1999 relating
6
<PAGE> 7
to the disallowance, are accrued in the Company's First Quarter of Fiscal 2000
consolidated financial statements. If the Company does not sustain its tax
position with the IRS, the net operating loss carryforward could be used to
offset federal income taxes in future years.
In Fiscal 1998, the Board of Directors announced that it had authorized the
repurchase of up to 500,000 shares which is approximately 11% of the Company's
common stock outstanding. The share purchase plan authorizes the Company to make
purchases from time to time in the open market or through privately negotiated
transactions and that the purchases will be dependent on market conditions and
availability of shares. No shares were purchased in the First Quarter of Fiscal
2000. To date, the Company has purchased a total of 321,000 shares at a cost of
$2,031. The Company currently has no plans to repurchase additional shares
In Fiscal 1999, the Company entered into an agreement with its primary bank
for a two-year $4,000 unsecured line of credit. The Company is exposed to
interest rate risk under this line of credit as borrowings bear interest at the
bank's prime rate or LIBOR, as defined. As of July 31, 1999, there were no
borrowings under the line of credit; however, it is anticipated that the Company
will draw on the line of credit during Fiscal 2000.
The Company has 71 parcels of unencumbered real estate, including the
Company's headquarters and paint factory, which could be either sold or used as
security to obtain outside financing. The Company believes that it has the
liquidity and capital resources to meet its cash needs for the immediate future.
INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE
As discussed in the Company's Fiscal 1999 Annual Report on Form 10-K, the
Company has completed most of its Year 2000 conversion and is proceeding with
the conversion of some minor subsystems. The Company anticipates that these
conversions will be completed by December 31, 1999. At that time the Company
believes that its systems will be Year 2000 compliant; however, in this regard,
the Company is relying upon representations made by its software and hardware
vendors most of whom are large well known international companies.
The Company has been in communication with major suppliers, financial
institutions, insurers and others with whom it conducts business to determine
that they will be Year 2000 compliant. The Company has received representations
from these outside parties indicating they believe they currently are or will be
Year 2000 compliant prior to the end of calendar 1999. There can be no
assurance, however, that the systems of third parties on which the Company's
systems rely will be timely converted or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.
During the First Quarter of Fiscal 2000, Year 2000 costs were not material
and it is anticipated that future Year 2000 issues will not have a material
impact on the Company's business, operations or financial condition.
The above discussion regarding costs and risks is based on the Company's
best current estimates given information that is currently available to it, and
is subject to change.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The Statements which are not historical facts contained in this Form 10-Q
are forward looking statements that involve risks and uncertainties, including,
but not limited to, the effect of weather, the effect of economic conditions,
the impact of competitive products, services and pricing, capacity and supply
constraints or difficulties, changes in laws and regulations applicable to the
Company, the impact of Year 2000 hardships, the impact of the Company's new
Euro-Paint(R) the impact of advertising and promotional activities, the impact
of the Company's expansion, new product roll-out and fleet sales, the potential
adverse effects of certain litigation and the impact of various tax positions
taken by the Company.
7
<PAGE> 8
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On September 2, 1999, the Registrant held its Annual Meeting of
Shareholders. The only matters to be voted on were the election of directors and
the appointment of the Registrant's independent auditors.
(a) Election of directors:
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST ABSTAIN
------- --------- ---------- ---------
<S> <C> <C> <C>
Christian K. Bement 4,051,271 50,032 0
Stuart D. Buchalter 4,048,291 53,012 0
Philip Wm. Colburn 4,051,291 50,012 0
David Eisenberg 4,051,291 50,012 0
Alexander L. Kyman 4,051,291 50,012 0
Daniel A. Seigel 3,992,741 108,562 0
</TABLE>
(b) Ratification of the appointment of Arthur Andersen, LLP as the
Registrant's independent auditors for the fiscal year ended April 30,
1999:
FOR AGAINST ABSTAIN
--------- ------- -------
4,036,951 63,720 632
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data , Article 5 is filed herein.
(b) Exhibit 10 Amended Supplemental Terms Letters dated July 31, 1999
between Registrant and City National Bank, Article 5 is filed herein.
(c) The Registrant was not required to file any Current Reports on Form 8-K
during the quarter ended July 31, 1999.
8
<PAGE> 9
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
September 13, 1999 /s/ Christian K. Bement
- ------------------ ----------------------------------------
Dated Christian K. Bement, President and
Chief Executive Officer
September 13, 1999 /s/ Charles E. Barrantes
- ------------------ ----------------------------------------
Dated Charles E. Barrantes, Vice President and
Chief Financial Officer
9
<PAGE> 1
EXHIBIT 10
[LOGO] CITY NATIONAL BANK
Westside Commercial Banking Center
400 N. Roxbury Drive
Beverly Hills, CA 90210
(310) 888-6125
AMENDED SUPPLEMENTAL TERMS LETTER
JULY 31, 1999
Earl Scheib, Inc.
8737 Wilshire Blvd.
Beverly Hills, CA 90211
Attention: Mr. Christian K. Bement
RE: REVOLVING NOTE DATED JANUARY 29, 1999, IN THE ORIGINAL
PRINCIPAL SUM OF $4,000,000.00 ("NOTE") EXECUTED BY EARL
SCHEIB, INC. ("BORROWER") IN FAVOR OF CITY NATIONAL BANK
("CNB").
Dear Mr. Bement:
Reference is made to the above mentioned Note. This letter is to
confirm that the following additional terms and conditions will apply to the
Note. Capitalized terms not defined in this letter have the meanings given them
in the Note. This letter is hereby incorporated into the Note (this letter and
the Note, collectively, the "Note"). THIS AMENDED SUPPLEMENTAL TERMS LETTER
DATED JULY 31, 1999 SUPERSEDES THE SUPPLEMENTAL TERMS LETTER DATED APRIL 29,
1999.
A. ADDITIONAL EVENTS OF DEFAULT.
The following shall constitute additional Events of Default under the
Note:
1. Failure of Borrower to furnish CNB, within the times specified, the
following statements:
1.1 Within forty-five (45) days after the end of each of the first
three quarterly accounting periods of each fiscal year, a
financial statement consisting of not less than a balance
sheet, income statement, reconciliation of net worth and
statement of cash flows, prepared in accordance with generally
accepted accounting principles consistently applied, which
financial statement may be internally prepared;
<PAGE> 2
Mr. Christian K. Bement
Earl Scheib, Inc.
July 31, 1999
Page 2
1.2 Within ninety (90) days after the close of each fiscal year,
a copy of the annual audit report for such year for Borrower and
the Subsidiaries including therein a balance sheet, income
statement, reconciliation of net worth and statement of cash
flows, with notes thereto, the balance sheet, income statement
and statement of cash flows to be audited by a certified public
accountant reasonably acceptable to CNB, and certified by such
accountants to have been prepared in accordance with generally
accepted accounting principles consistently applied and
accompanied by Borrower's certification as to whether any event
has occurred which constitutes an Event of Default, and if so,
stating the facts with respect thereto; and
1.3 Such additional information, reports and/or statements as CNB
may, from time to time, reasonably request;
2. Failure of Borrower to maintain, on a consolidated basis, the
following:
2.1 Tangible Net Worth plus Subordinated Debt of not less than
$18,000,000.00;
2.2 A ratio of Total Senior Liabilities to Tangible Net Worth plus
Subordinated Debt of not more than 1 to 1 at all times;
2.3 Cash Flow from operations of not less than $2,100,000.00;
3. Failure of Borrower to pay and discharge all material taxes,
assessments, governmental charges and real and personal property taxes
prior to the date upon which penalties are attached unless the same are
being contested in good faith by borrower in appropriate proceedings;
4. Failure of Borrower to maintain or cause to be maintained for its
benefit in full force and effect the existing levels of insurance for
its business, including, without limitation, fire, public liability,
property damage, business interruption and extra expense and worker's
compensation and issued by an insurance company, reasonably acceptable
to CNB, and such failure to maintain is not cured within 30 days of
borrower's receipt of notice of cancellation of such policies;
5. Borrower creates, incurs, assumes or permits to exist any indebtedness,
except indebtedness to CNB and trade debt incurred in the ordinary
course of business, without CNB's prior written consent, except for (i)
equipment leases, (ii) purchase money debt and obligations under
capital leases in an aggregate amount not to exceed $325,000, and (iii)
loans secured by the cash surrender value of life insurance policies
totaling $1,690,000 and two notes from Firstar Bank Wisconsin totaling
$225,000 and secured by a receivable from the state of Wisconsin
related to PECFA.
6. Borrower assumes, guarantees, or otherwise becomes liable for the
material obligation of any person or entity, except contingent
liabilities in favor of CNB, without CNB's prior written consent; or
<PAGE> 3
Mr. Christian K. Bement
Earl Scheib, Inc.
July 31, 1999
Page 3
7. Borrower mortgages, pledges, hypothecates, grants or contracts to grant
any security interest of any kind in any of its property or assets to
anyone, except CNB, without CNB's prior written consent, except for (i)
mechanics, materialmen's, landlord's, warehousemen's and carriers'
liens and other similar liens arising in the ordinary course of
business with respect to obligations which are not delinquent or are
being contested in good faith by appropriate proceedings, (ii) liens
consisting of pledges or deposits to secure obligations under real
estate leases permitted hereunder, (iii) liens relating to obligations
under capital leases permitted hereunder and liens securing any
equipment or operating leases, and (iv) liens, if they constitute such,
of any true lease and consignment UCC filings; or
8. Borrower makes or commits to make expenditures for capital assets
(including capitalized lease expenditures) of more than $5,500,000.00
in the aggregate for Borrower and all Subsidiaries in any fiscal year,
without CNB's prior written consent.
B. DEFINITIONS.
For purposes of the Note, the following terms have the following
meanings:
"CASH FLOW FROM OPERATIONS" shall be determined on a consolidated basis
for Borrower and the Subsidiaries and shall mean the sum of (a) net income
earned over the twelve month period ending on the date of determination, plus
(b) amortization of intangible assets, plus (c) interest expense, plus (d)
depreciation expensed during the twelve month period ending on the date of
determination.
"SUBORDINATED DEBT" shall mean indebtedness of Borrower or any
Subsidiary, the repayment of principal and interest of which is subordinated to
CNB, on terms satisfactory to CNB.
"SUBSIDIARY" shall mean any corporation, the majority of whose voting
shares are at any time owned, directly or indirectly by Borrower and/or by one
or more Subsidiaries.
"TANGIBLE NET WORTH" shall mean the total of all assets appearing on a
balance sheet prepared in accordance with generally accepted accounting
principles consistently applied for Borrower and the Subsidiaries on a
consolidated basis, minus (a) all intangible assets, including, without
limitation, any accounts receivable converted to notes receivable, unamortized
debt discount, affiliate, employee and officer receivables or advances,
goodwill, research and development costs, patents, trademarks, the excess of
purchase price over underlying values of acquired companies, any covenants not
to compete, deferred charges (does not include deferred income taxes),
copyrights, franchises and appraisal surplus; minus (b) all obligations which
are required by generally accepted accounting principles consistently applied to
be reflected as a liability on the consolidated balance sheet of Borrower and
the Subsidiaries; minus, (c) the amount, if any, at which shares of stock of a
non-wholly owned Subsidiary appear on the asset side of Borrower's consolidated
balance sheet, as determined in accordance with generally accepted accounting
principles consistently applied; minus (d) minority interests; and minus (e)
deferred income and reserves not otherwise reflected as a liability on the
consolidated balance sheet of Borrower and the Subsidiaries.
<PAGE> 4
Mr. Christian K. Bement
Earl Scheib, Inc.
July 31, 1999
Page 4
"TOTAL SENIOR LIABILITIES" shall mean, as of any date of determination,
the amount of all obligations that should be reflected as a liability on a
consolidated balance sheet of Borrower and the Subsidiaries prepared in
accordance with generally accepted accounting principles consistently applied,
less Subordinated Debt.
C. ADDITIONAL TERMS AND CONDITIONS.
The following additional terms and conditions shall also apply to the
Note:
1. FEES. Borrower shall pay to CNB a non-refundable fee equal to $15,000.00
[3/8% of the original principal amount of the Note], 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 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.
3. YEAR 2000 COMPLIANCE. Borrower represents and warrants as follows:
3.1 Borrower has adopted a plan, appropriate to its business or
industry, to insure that its computer software is Year 2000
Compliant. For the purpose of this letter, "Year 2000 Compliant"
means that dates occurring on and after January 1, 2000 will be
recognized correctly by such software and not misinterpreted as a
date occurring prior to January 1, 2000.
3.2 Borrower has or intends to develop an action plan to deal with
significant disruption in its business which might be anticipated
in the event of foreseen or unforeseen failures of its computer
systems or its production and manufacturing equipment to be Year
2000 Compliant.
<PAGE> 5
Mr. Christian K. Bement
Earl Scheib, Inc.
July 31, 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.
THIS AMENDED SUPPLEMENTAL TERMS LETTER IS EFFECTIVE AS OF JULY 31, 1999.
Sincerely,
CITY NATIONAL BANK, a national
banking association
By: __________________________________________________
Scott Kelley, Senior Vice President
By: __________________________________________________
May T. Poole, Vice President
ACCEPTED AND AGREED TO THIS 31ST DAY OF
JULY, 1999.
EARL SCHEIB, INC.
By: ______________________________________
Title: Christian K. Bement, President
<TABLE> <S> <C>
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