Last month, after a careful analysis of the cost of complying with Sarbanes-Oxley, Earl Scheib Inc. withdrew from the American Stock Exchange, taking a step many small, publicly held companies have considered in recent years but few have made. The Sherman Oaks-based operator of auto paint and collision shops has struggled for 10 years to turn around its fortunes, and the cost of compliance with Sarbanes-Oxley threatened to further delay the return to profitability that now lies in striking distance. Through the years, Christian K. Bement, Earl Scheib’s president and CEO has had to close about 70 underperforming stores, upgrade its paint supplies and retrain managers and workers, all to erase the stigma of poor quality that has dogged the company for years. The turnaround appears to be working. The long history of quality problems Bement lightheartedly acknowledges that the joke for years was that Scheib would paint your windows and tires for free is slowly fading from the public eye, and the company has reported same store sales increases in 22 of the last 24 months. After losing nearly $5 million in fiscal 2001, Earl Scheib reported a loss of just $89,000 in the first three quarters of fiscal 2005, and with the fourth quarter historically being among the company’s best, is likely to end the year in the black. So after considering a number of different options Bement moved the company’s listing to the pink sheets, where Earl Scheib would not be subject to Sarbanes-Oxley requirements. Then he held his breath. Would there be a panic among investors worried that they might not be able to divest their shares? Would there be a selloff? Would the share price tank? So far at least, those fears appear ill-founded. Since the move, shares in Earl Scheib have been trading between $3.11 and $3.20, not far from the stock price during the most recent year on the American Stock Exchange, when the company’s shares traded between $3.91 and $2.55. Question: What led to the decision to delist from AMEX? Answer: We’re a company that has about $50 million in sales, so it’s a small company. Our accountants, and I talked to several of them to find out what is it going to cost me to put in the systems to comply with Sarbanes-Oxley, and the estimate was anything between $1.2 million to $1.5 million, so obviously that was a wakeup call for me. For us to generate $1.5 million we have to have additional sales of about $5 million. That’s a 10 percent sales increase. The $1.3 million is a one-time shot to set up all the controls. As soon as I de-list, and you know it’s really a misnomer, it’s really we re-listed to another board, now we don’t have to file 10Qs anymore and we don’t have to file 10Ks and all of that is saving us between $300,000 and $350,000 a year in ongoing costs. Q: Did you consider other options besides moving to the pink sheets? A: I looked around and said maybe I ought to sell the company. But we didn’t get enough money for the company, I thought. The most we got is four bucks a share. The real estate alone is worth $4.80 a share so that didn’t make any sense. So then I thought we take it private. When I talked to the major shareholders they weren’t going to sell for anything less than $5 a share. So that didn’t work out. I don’t have the kind of cash to buy the company outright. There was one other option, and that was stay public but go on the pink sheets. I get the best of both worlds. The requirement for you not to be subject to Sarbanes-Oxley is you have to have fewer than 300 shareholders. I’m still a publicly-traded company and since I’m not really followed by any analysts and since there isn’t that much trading going on in my stock, having me go from the American Exchange to the pink sheets really isn’t that much of a difference. Q: How did shareholders take the news? A: What we did was we put out a press release saying we have made application to the SEC you have to get permission which is automatic if you have less than 300 shareholders and you haven’t been a bad boy so to speak. When I sent out the notification, an 8K to all the shareholders and the public, I did mention the fact that I will continue, even though I’m not required to legally, to provide quarterly financials and annual audited financials, and I will continue to have a board of directors and continue the corporate governance improvements that we have made, meaning outside directors. So we did that. We wanted to assure the shareholders that things are not going to be any different. I got calls from shareholders very concerned, ‘Gee, what am I going to do with this stock?’ And I explained to them, number one, you go on pinksheet.com, you put in new letters which are ESHB, and our stock appears there and you can trade there. And here’s the money that I’m not going to be spending that I would have had to spend and here’s the money I’m going to be saving right away from my current costs. In addition I told them I am going to spend $1.1 million in the implementation of a state of the art, point of sale system developed by PeopleSoft which will make our company operate better. We’re going to get a payback on that within 18 months. So when I described all that, suddenly the shareholders were very enthused. It wasn’t just a knee-jerk reaction of I don’t want to follow Sarbanes-Oxley. It was very deliberate, and I think we did a good job in communicating it. Q: Was it that simple? A: What I was afraid of was there was going to be a panic sell on behalf of one of the funds where now they felt they couldn’t trade it, and if they put enough shares on the market they could crater the stock. And sure enough the stock went down to $2.20 from $3.15 (the day after the switch to pink sheets) on just 200 shares traded (out of 4.4 million outstanding) and that craters the stock. What happened was the individual who put this 200 shares up for sale did not put up a price. Someone came up and said I’ll pay $2.20, and the sale went through. Well, the very next day 31,000 shares traded and brought the stock up to $3.10 and it’s now at $3.15. Yesterday we traded 13,000 shares and, in the past when we traded 13,000 shares or 31,000 shares, any kind of number like that, it would crater the stock. The stock would go down at least 15 points, 20 points. But it hasn’t done anything like that. So I’m very optimistic. Q: How is the company faring financially? A: The third quarter is our worst quarter. You lose money because of West and Midwest winters and we’ve had some really bad rains. But even with that third quarter, which ends the end of January, in our operating income we lost $89,000. When you compare that to the total year, fiscal ’04, we lost $1.9 million. In fiscal,’03, we lost $3.4 million in operating income for the total year. So the fourth quarter is a good quarter, it’s our second best quarter, I can’t comment on the results, but I can point to past years where the fourth quarter has been profitable. So when we come out with the fourth quarter, I anticipate it will be better than the comparisons we have right now. Q: What are your plans for the future? A: If I were to do one additional car per day per store, that would be roughly 500 more cars a week in 107 stores. My ticket average is $450. With my ticket average it comes to an annual sales increase of around $12 million and after we hit our nut, 60 percent goes to the bottom line. If I only took 50 percent, $6 million would be additional operating profits. That’s our goal. Q: How has the effort to improve quality progressed? A: When I got here we had repaints of 24 percent, so every fourth vehicle had to be redone. And whenever you do that, it costs you more. Now we’re down to about 4 percent. And that is almost like a subjective matter. If a customer doesn’t like the paint job we just redo it. We don’t argue with the customer because we think it’s more important that when they go back to their neighborhoods, that they feel that they were dealt with properly. Q: You’ve said you are once again looking at expansion opportunities. Why are you considering new stores after closing so many? A: We made a mistake when we first got here. I thought the solution was put in more stores, and we can do more advertising and I get the synergies. Well it didn’t work that way. In retrospect I should have first fixed the mouse trap. So we closed about 70 stores in all areas where we had one or two stores or in markets where we just weren’t doing well and in areas where there was snow, concentrating in areas where we could operate 12 months a year, and we kept the big volume stores in the East and the Midwest. So we’ve now gotten to a point where we’re cooking now. We have same store sales increases. We reduced administrative costs in the last two years by $1.3 million. And I think I have improved management out in the field. But I think that a company that doesn’t grow I think sooner or later will die, and I think we need to grow. We’ve now gotten a much better operation and it makes sense for us to grow in areas where we already have market penetration. I’m not going to be aggressive. I would say in the next 12 months, if we can open three stores that would be great. Q: When you joined the company you expected to stay for about three years, but it’s now been 10. How do you feel about that? A: It’s been a struggle, but the last two years have been fun because we’re now getting there. And as we improve our operation, one of the things I will be looking at is to see if there is a similar business we can acquire. I don’t think it’s going to be in the auto paint business, but a similar auto after-market business in our market areas where we can get the synergies in supervision and marketing and admin costs. Right now we want to just stick to our knitting, but in fiscal ’07 I’d like to start looking for some potential acquisitions. Christian K. Bement Title: President, CEO, Earl Scheib Inc. Education: Bachelor’s degree from University of San Francisco, 1967; law degree from Western College of Law, 1977 Career Turning-Point: Assignment to lead the integration of acquired companies while at Thrifty Corp. Personal: Married to Jean Brooks-Bement, one son Most Admired Person: The late Ralph Woolpert, an ex-Teamster official who later joined Thrifty as vice president in charge of labor relations. “He taught me a lot about people negotiations and life in general.”