<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, 2000
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.
(Exact name of registrant as specified in its charter)
Delaware 95-1759002
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8737 Wilshire Boulevard
Beverly Hills, California 90211-2795
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 652-4880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of March 6, 2000, the registrant had 4,803,311 shares of its Capital
Stock, $1.00 par value issued and 4,358,682 shares outstanding.
This report contains a total of 10 pages.
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PART I-FINANCIAL INFORMATION
EARL SCHEIB, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Unaudited
---------
JANUARY 31, APRIL 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 619 $ 1,265
Accounts receivable, less allowances of $150 and $164
at January 31, 2000 and April 30, 1999, respectively 184 218
Inventories 1,849 1,701
Prepaid expenses and other current assets 1,895 2,040
Deferred income taxes 753 753
Property held for sale -- 339
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Total Current Assets 5,300 6,316
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Property and Equipment, net 20,109 21,089
Deferred Income Taxes 2,157 2,157
Other, Primarily Cash Surrender Value
Of Life Insurance 2,396 2,299
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Total Assets $ 29,962 $ 31,861
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 500 $ --
Accounts payable 917 940
Accrued expenses:
Payroll and related taxes 1,416 1,780
Insurance 1,153 1,139
Interest 858 504
Other 1,344 1,756
Income taxes payable 1,031 1,789
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Total Current Liabilities 7,219 7,908
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Deferred Management Compensation 3,320 3,298
Long-term Liabilities 1,932 2,016
Commitments and Contingencies -- --
Shareholders' Equity:
Capital stock $1 par - shares authorized 12,000,000;
4,803,311 issued and 4,358,682 outstanding 4,803 4,803
Additional paid-in capital 6,756 6,756
Retained earnings 9,040 10,188
Treasury shares (3,108) (3,108)
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Total Shareholders' Equity 17,491 18,639
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Total Liabilities and Shareholders' Equity $ 29,962 $ 31,861
========= ==========
</TABLE>
The accompanying Notes are an integral part of
these condensed consolidated balance sheets.
2
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
---------------------------- --------------------------
2000 1999 2000 1999
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 10,516 $ 9,895 $ 41,903 $ 40,563
Cost of sales 9,334 8,568 31,743 29,557
----------- ----------- ----------- -----------
Gross profit 1,182 1,327 10,160 11,006
Selling, general & administrative expenses 3,126 3,055 10,556 10,101
expenses
Shop Closing Expense 306 40 315 80
----------- ----------- ----------- -----------
Operating income (loss) (2,250) (1,768) (711) 825
Other income (expense), net (173) (191) (415) (206)
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,423) (1,959) (1,126) 619
Provision (benefit) for income taxes (470) (766) 22 219
------------ ------------ ----------- -----------
Net income (loss) $ (1,953) $ (1,193) $ (1,148) $ 400
============ ============ ============ ===========
Basic earnings (loss) per share $ (0.45) $ (0.27) $ (0.26) $ 0.09
============ ============ ============ ===========
Diluted earnings (loss) per share $ (0.45) $ (0.27) $ (0.26) $ 0.09
============ ============ ============ ===========
</TABLE>
The accompanying Notes are an integral part of these condensed
consolidated financial statements.
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EARL SCHEIB, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
-------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 578 $ 34
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,921) (3,369)
Proceeds from disposal of property and equipment 413 57
Other, net (94) (175)
----------- -----------
Net cash used in investing activities (1,602) (3,487)
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CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings from an insurance company -- 1,670
Proceeds from bank loan 500 --
Proceeds from exercise of stock options -- 92
Purchase of treasury stock -- (2,032)
Principal payments on capitalized leases (122) (115)
----------- -----------
Net cash provided by (used in) financing activities 378 (385)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (646) (3,838)
Cash and Cash Equivalents, at Beginning of the Period 1,265 4,203
---------- ----------
Cash and Cash Equivalents, at End of the Period $ 619 $ 365
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 790 $ 915
========= =========
</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.
The accompanying Notes are an integral part of these condensed consolidated
financial statements.
4
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EARL SCHEIB, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by Earl
Scheib, Inc. (the "Company") without audit, in accordance with generally
accepted accounting principles. Pursuant to the rules and regulations of the
Securities and Exchange Commission, certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted or condensed. It
is management's belief that the disclosures made are adequate to make the
information presented not misleading and reflect all significant adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of financial position and results of operations for the periods
presented. The results of operations for the periods presented should not be
considered as necessarily indicative of operations for the full year due to the
seasonality of the Company's business. It is recommended that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended April 30, 1999 ("Fiscal 1999").
Certain prior period amounts have been reclassified to conform with the
current year presentation.
NOTE 2. INVENTORIES
Inventories consist of the following:
UNAUDITED
JANUARY 31, APRIL 30,
2000 1999
----------- -----------
Paint and related supplies $ 1,886 $ 1,810
Raw materials 483 411
LIFO reserve (520) (520)
--------- ----------
Total inventories $ 1,849 $ 1,701
========= ==========
NOTE 3. INCOME TAXES
In the First Quarter of the fiscal year ended April 30, 1997 ("Fiscal
1997"), the Company received federal income tax refunds of $1,696 resulting from
the application of net operating loss carrybacks. Approximately $448 of the tax
refunds relate to the benefit of carrying back net operating losses to periods
for which the tax rates exceeded the current federal income tax rate. The $448
refund relating to the difference in federal tax rates is currently deferred on
the Company's consolidated balance sheet.
In February 1999, the Company received a Notice of Disallowance from the
Internal Revenue Service ("IRS") disallowing the refund from the net operating
loss carryback received in Fiscal 1997. The Company has appealed the IRS's
position. The refund of the net operating loss, and substantially all of the
interest through January 31, 2000 relating to the disallowance, are accrued in
the Company's consolidated financial statements. If the Company does not sustain
its tax position with the IRS, the net operating loss carryforward would be
available to offset federal income taxes in future years.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company is involved in several legal proceedings and claims as well as
environmental matters, some of which arise in the ordinary course of its
business. Management believes that the amount of ultimate liability with respect
to these legal matters should not materially affect the Company's consolidated
financial statements.
NOTE 5. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
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issuance of common stock that then shared in the earnings of the Company. The
only potential dilutive securities are outstanding stock options issued to the
Company's Board of Directors, management and employees.
The weighted average number of shares used to calculate basic earnings per
share was 4,359,000 for both of the three-month periods and 4,359,000 and
4,483,000 for nine -month periods ended January 31, 2000 and 1999, respectively.
The weighted average number of shares used to calculate diluted earnings per
share was 4,359,000 for both of the three-month periods and 4,359,000 and
4,581,000 for the nine-month periods ended January 31, 2000 and 1999,
respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
QUARTER ENDED JANUARY 31, 2000 ("THIRD QUARTER OF FISCAL 2000") COMPARED TO THE
QUARTER ENDED JANUARY 31, 1999 ("THIRD QUARTER OF FISCAL 1999").
Net sales for the Third Quarter of Fiscal 2000 increased by $621, or 6.3%,
compared to the Third Quarter of Fiscal 1999. This increase consisted of sales
from 14 new shops opened since the Third Quarter of Fiscal 1999 ($728) and an
increase in same shop (shops open one year or more) sales of $265, or 2.8%,
partially offset by the loss of sales from 12 shops closed since the Third
Quarter of Fiscal 1999 ($372). The increase in total sales resulted from
additional car volume, partially offset by a lower ticket average during the
Third Quarter of Fiscal 2000.
Gross profit dollars in the Third Quarter of Fiscal 2000 decreased by $145
compared to the Third Quarter of Fiscal 1999 and gross profit margins decreased
from 13.4% to 11.2% of sales due primarily to higher material costs and a lower
ticket average during the Third Quarter of Fiscal 2000.
Selling, general and administrative expenses increased by $71, but decreased
by 1.2% of sales in the Third Quarter of Fiscal 2000 compared to the Third
Quarter of Fiscal 1999. The increase in selling, general and administrative
expense is mainly due to additional workers compensation insurance expense of
$350 relating to claims from periods prior to August 1998.
In the Third Quarter of Fiscal 2000, the Company closed nine paint shops
and, as a result, incurred $306 in shop closing expense.
Other income/expense consists of gains or losses from sales of excess real
estate and net interest income or expense. Net interest expense was $112 in the
Third Quarter of Fiscal 2000 compared to $190 in the Third Quarter of Fiscal
1999. Net interest expense in the Third Quarter of Fiscal 2000 relates primarily
to interest accrued on the Internal Revenue Service's disallowance of a net
operating loss carryback (which has been appealed by the Company) and interest
accrued on life insurance loans. The Third Quarter of Fiscal 2000 also included
the write-off of $102 for un-utilized software.
In the Third Quarters of Fiscal 2000 and 1999 the Company recognized a
federal income tax benefit due to the operating loss for the quarter. In the
Third Quarter of Fiscal 1999 the income tax benefit was provided at the
Company's effective tax rate. The amount of benefit for the Third Quarter of
Fiscal 2000 was limited to the income tax provision recorded in the prior two
quarters since realization is not assured.
NINE MONTHS ENDED JANUARY 31, 2000 ("FIRST NINE MONTHS OF FISCAL 2000") COMPARED
TO THE NINE MONTHS ENDED JANUARY 31, 1999 ("FIRST NINE MONTHS OF FISCAL 1999" OR
"PRIOR YEAR PERIOD").
Net sales for the First Nine Months of Fiscal 2000 increased by $1,340, or
3.3%, compared to the Prior Year Period. This increase consisted of sales from
14 new shops opened since the Prior Year Period ($2,586), partially offset by
the loss of sales from 12 shops closed since the end of the Prior Year Period
($292), and a decrease in same shop sales of $954, or 2.4%. The increase in
sales resulted primarily from additional car volume, partially offset by a lower
ticket average.
Gross profit dollars in the First Nine Months of Fiscal 2000 decreased by
$846 compared to the First Nine Months of Fiscal 1999, and gross profit margins
decreased in the First Nine Months of Fiscal 2000 compared to the Prior Year
Period from 27.1% to 24.2%. This was due primarily to the decrease in same shop
sales, higher material costs, a decrease in the ticket average and higher
expenses associated with new shop expansion.
6
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Selling, general and administrative expense increased by $455, or 0.3%, of
sales compared to the Prior Year Period. The majority of the increase was due to
expenses associated with the 401(k) program, increased advertising expenses
and additional workers compensation insurance expense relating to claims from
periods prior to August 1998.
In the First Nine Months of Fiscal 2000, the Company closed 11 paint shops
and, as a result, incurred $315 in shop closing expense.
Other income/expense consists of gains or losses from sales of excess real
estate and net interest income or expense. During the First Nine Months of
Fiscal 2000, the Company sold one property for a net gain of $47 compared to a
net gain of $11 in the Prior Year Period. Net interest expense was $360 in the
First Nine Months of Fiscal 2000 compared to net interest expense of $217 in the
Prior Year Period. Net interest expense in the First Nine Months of Fiscal 2000
relates primarily to interest accrued on the Internal Revenue Service's
disallowance of a net operating loss carryback (which has been appealed by the
Company) and interest accrued on life insurance loans. The First Nine Months of
Fiscal 2000 also included the write-off of $102 for un-utilized software.
In the First Nine Months of Fiscal 1999, the Company provided for income
taxes at an effective rate of 35.4%. No federal tax benefit was recognized for
the First Nine Months of Fiscal 2000 since realization is not assured.
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 January 31, 2000, the Company had current assets of $5,300 and current
liabilities of $7,219, for a net working capital deficit of $1,919. During the
First Nine Months of Fiscal 2000, net cash provided by operations was $578
compared to $34 in the Prior Year Period. In the First Nine Months of Fiscal
2000, the Company had capitalized expenditures of $1,921, which are included in
the $2.5 million of cash requirements described in the paragraph below, financed
primarily through cash flow from operations. The Company expects that future
cash flow from operations will be enhanced by these capital additions.
The Company's long-term financial obligations consist of its deferred
management compensation plan, loans against various life insurance policies, a
bank loan secured by a long-term receivable, and three minor capital leases.
During the fiscal year ending April 30, 2000 ("Fiscal 2000"), the Company plans
to open up to 8 new shops (depending upon the availability of locations),
perform various capital improvements and expand its fleet and commercial
coatings business for an estimated cost of $2.5 million.
In Fiscal 1998, the Board of Directors announced that it had authorized the
repurchase of up to 500,000 shares which is approximately 11% of the Company's
common stock outstanding. The share purchase plan authorizes the Company to make
purchases from time to time in the open market or through privately negotiated
transactions and that the purchases be dependent on market conditions and
availability of shares. No shares were purchased in the First Nine Months of
Fiscal 2000. To date, the Company has purchased a total of 321,000 shares under
this plan at a cost of $2,031. The Company currently has no plans to repurchase
additional shares.
In February 1999, the Company received a Notice of Disallowance from the
Internal Revenue Service ("IRS") disallowing a refund from a net operating loss
carryback received in Fiscal 1997. The amount of the 1997 refund was $1,696. The
Company is protesting the IRS's position. The refund of the net operating loss,
and substantially all of the interest through January 31, 2000 relating to the
disallowance, are accrued in the Company's consolidated financial statements. If
the Company does not sustain its tax position with the IRS, the net operating
loss carryforward would be available to offset federal income taxes in future
years.
In Fiscal 1999, the Company entered into an agreement with a bank for a
two-year $4,000 unsecured line of credit. The Company is exposed to interest
rate risk under this line of credit as borrowings bear interest at the bank's
prime rate or LIBOR, as defined. As of January 31, 2000, the Company borrowed
$500 under the line of credit with interest at the bank's prime rate which was
8.5% at January 31, 2000. The Company has 70 parcels of unencumbered real
estate, including the Company's headquarters and paint factory, which could be
either sold or used as security to obtain additional financing. The Company
believes that it has the liquidity and capital resources to meet its cash needs
for the immediate future.
7
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INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE
The Company completed its Year 2000 conversion as of December 31, 1999, and
has not encountered any substantial problems regarding Year 2000 issues. The
Company received representations from major suppliers, financial institutions,
insurers and others with whom it conducts business indicating they believed they
currently were or would 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 have been correctly converted or that any
future failure by another company would not have an adverse effect on the
Company's systems. During the First Nine Months of Fiscal 2000, Year 2000
compliance costs were not material and future Year 2000 issues are not
anticipated.
The above discussion regarding costs and risks is based on the Company's
best current estimates given information that is currently available to it, and
is subject to change.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The Statements which are not historical facts contained in this Form 10-Q
are forward looking statements that involve risks and uncertainties, including,
but not limited to, the effect of weather, the effect of economic conditions,
the impact of competitive products, services and pricing, capacity and supply
constraints or difficulties, changes in laws and regulations applicable to the
Company, the impact of Year 2000 hardships, the impact of the Company's new
Euro-Paint(R) the impact of advertising and promotional activities, the impact
of the Company's expansion or closing of shops, the effect of new product
roll-out, fleet operations, and commercial coatings business, the potential
adverse effects of certain litigation and the impact of various tax positions
taken by the Company.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data , Article 5 is filed herein.
(b) Exhibit 10 Amended Supplemental Terms Letter dated March 10, 2000
between Registrant and City National Bank is filed herein.
(c) The Registrant was not required to file any Current Reports on Form 8-K
during the quarter ended January 31, 2000.
8
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EARL SCHEIB, INC.
Registrant
March 15, 2000 /s/ Christian K. Bement
- -------------- -----------------------------------------
Dated Christian K. Bement, President and
Chief Executive Officer
March 15, 2000 /s/ Charles E. Barrantes
- -------------- -----------------------------------------
Dated Charles E. Barrantes, Vice President and
Chief Financial Officer
9
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EXHIBIT 10
[CITY NATIONAL BANK LOGO]
Westside Commercial Banking Center
400 N. Roxbury Drive
Beverly Hills, CA 90210
(310) 888-6125
AMENDED SUPPLEMENTAL TERMS LETTER
MARCH 10, 2000
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
MARCH 10, 2000 SUPERSEDES THE SUPPLEMENTAL TERMS LETTER DATED JULY 31, 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.
March 10, 2000
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
$16,200,000.00 from January 30, 2000 through July 30, 2000, and
$17,500,000 from July 31, 2000 through January 31, 2001;
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 $1,500,000.00 from January
30, 2000 through July 30, 2000, and $2,100,000 from July 31, 2000
through January 31, 2001;
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.
<PAGE> 3
Mr. Christian K. Bement
Earl Scheib, Inc.
March 10, 2000
Page 3
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.
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
<PAGE> 4
Mr. Christian K. Bement
Earl Scheib, Inc.
March 10, 2000
Page 4
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.
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.
March 10, 2000
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 JANUARY 30, 2000.
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 _______ DAY OF
_______________, 2000.
EARL SCHEIB, INC.
By:
----------------------------------------------
Title: Christian K. Bement, President
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