Prepared by MERRILL CORPORATION

Earl Scheib, Inc.

Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following table sets forth the Company's operating results for the periods indicated. Amounts are shown in thousands of dollars and as a percentage of sales.

	Year ended April 30,
	2001		2000		1999

Net sales	$	55,061		100.0	%	$	56,374		100.0	%	$	55,013		100.0	%
Cost of sales		42,890		77.9			42,671		75.7			40,539		73.7

Gross profit		12,171		22.1			13,703		24.3			14,474		26.3
Selling, general and administrative expense		14,806		26.9			15,256		27.2			14,076		25.6
Restructuring charges		645		1.2			—		—			—		—
Provision for impairment of fixed assets		1,242		2.2			65		—			—		—

Operating income (loss)		(4,522	)	(8.2	)		(1,618	)	(2.9	)		398		0.7
Other expense		(189	)	(.3	)		(417	)	(0.7	)		(316	)	(0.6	)

Income (loss) before income taxes		(4,711	)	(8.6	)		(2,035	)	(3.6	)		82		0.1
Provision for income taxes		63		0.1			44		0.1			26		—

Net income (loss)	$	(4,774	)	(8.7	)%	$	(2,079	)	(3.7	)%	$	56		0.1	%

Fiscal Year Ended April 30, 2001 ("Fiscal 2001") compared to Fiscal Year Ended April 30, 2000 ("Fiscal 2000")

Net sales for Fiscal 2001 decreased by $1,313, or 2.3%, compared to Fiscal 2000. This decrease consisted of reduced car volume from the closing of a net eleven shops during Fiscal 2001 and the decrease in same shop (shops open one year or more) sales of $1,053, or 2.0%, partially offset by a higher ticket average during Fiscal 2001 compared to Fiscal 2000.

The gross profit margin decreased as a percentage of net sales to 22.1% in Fiscal 2001 from 24.3% in Fiscal 2000. The decrease is primarily due to the adverse effect of the reduction in same shop sales, increased salaries and wages (primarily as a result of increased obligations under a collective bargaining agreement) and the impact of increased per unit manufacturing costs due to the lower car volume.

Selling general and administrative expenses decreased by $450 in absolute dollars in Fiscal 2001 from Fiscal 2000 and also decreased as a percentage of net sales. The decrease is primarily due to lower administrative costs, including reduced advertising expenses and costs from current year shop closures when compared to the prior fiscal year, partially offset by higher operating costs pertaining to the Company's initial fleet and truck center and the commercial coatings operations.

Restructuring charges of $645 relate to the planned closure of 25 shops during the year ending April 30, 2002 ("Fiscal 2002") pursuant to a three-year reorganization of the Company's retail paint and body business. The restructuring charges include a write down of $357 to the estimated net recoverable value of the fixed assets in these shops, but does not include any anticipated gains on the sales of Company-owned real estate.

The provision for impairment of $1,242 was recorded to write down the carrying value of fixed assets in 13 other retail shops to their estimated net recoverable value. Six of these shops are planned to be closed subsequent to April 30, 2002, pursuant to the three-year restructuring plan.

Other expense is primarily comprised of gains or losses from the sales of real estate and net interest expense. The net gain in Fiscal 2001 was $310 versus $134 in Fiscal 2000. Net interest expense was $431 in Fiscal 2001, as compared to $449 in Fiscal 2000, and relates primarily to the accrual of interest on the Internal Revenue Service's disallowance of a net operating loss carryback (which has been appealed by the Company—see "Liquidity and Capital Resources" for further discussion) and life insurance loans. Also, during Fiscal 2001, the Company wrote off $68 of costs for computer hardware that was not utilized. In Fiscal 2000, the Company wrote off $102 of costs for software that was not utilized.

No federal income tax benefit was recognized for the Fiscal 2001 or the Fiscal 2000 loss since the Company is currently providing a full valuation on such deferred tax assets as realization is not assured. Due to income allocation and state income tax laws, only part of the Company's state income taxes in Fiscal 2001 and 2000 were offset by net operating loss carryforwards. The Company provided $63 and $44 in taxes in Fiscal 2001 and 2000, respectively, for taxes in those states which were not offset by net operating loss carryforwards.

Fiscal Year Ended April 30, 2000 ("Fiscal 2000") compared to Fiscal Year Ended April 30, 1999 ("Fiscal 1999")

Net sales for Fiscal 2000 increased by $1,361, or 2.5%, compared to Fiscal 1999. This increase consisted of additional car volume from the opening of eight new shops during Fiscal 2000, partially offset by the decrease in same shop (shops open one year or more) sales of $1,141, or 2.2%, the loss of sales from twelve shops closed during Fiscal 2000 ($1,222), and a lower ticket average during Fiscal 2000 compared to Fiscal 1999.

The gross profit margin decreased as a percentage of net sales to 24.3% in Fiscal 2000 from 26.3% in Fiscal 1999. The decrease is primarily due to rising material costs, increased salaries and wages (primarily as a result of obligations under a collective bargaining agreement), higher rent requirements and the impact of greater car volume with a lower ticket average.

Selling general and administrative expenses increased by $1,245 in absolute dollars in Fiscal 2000 from Fiscal 1999, and also increased as a percentage of net sales by 1.6%. The increase is primarily due to costs for completed environmental remediation work performed in the state of Wisconsin ($134), a provision for the impairment of fixed assets in three shops ($65), additional reserve requirements for workers compensation claims filed in prior years ($427), higher advertising expenses ($310) and costs related to the closing of twelve shops in Fiscal 2000 ($215).

Other income (expense) is primarily comprised of gains or losses from the sales of real estate and net interest expense. The net gain in Fiscal 2000 was $134 versus $11 in Fiscal 1999. Net interest expense was $449 in Fiscal 2000, as compared to $327 in Fiscal 1999, and relates primarily to the accrual of interest on the Internal Revenue Service's disallowance of a net operating loss carryback (which has been appealed by the Company) and life insurance loans. Also, during Fiscal 2000, the Company wrote off $102 of costs for software that was not utilized.

No federal income tax benefit was recognized for the Fiscal 2000 loss since the Company is currently providing a full valuation on such deferred tax assets as realization is not assured. The majority of the Company's Fiscal 1999 federal income tax provision was offset by net operating loss carryforwards from past years. Due to income allocation and state income tax laws, only part of the Company's state income taxes in Fiscal 2000 and 1999 were offset by net operating loss carryforwards. The Company provided $44 and $26 in taxes in Fiscal 2000 and 1999, respectively, for taxes in those states which were not offset by net operating loss carryforwards.

The Company's cash requirements are based upon its seasonal working capital needs and its capital requirements for, primarily, new shops, if any, and capitalized additions and improvements. The first and second quarters and occasionally the fourth quarter usually have positive cash flow from operations, while usually the third and occasionally the fourth quarters have negative cash flow from operations.

As of April 30, 2001, the Company had current assets of $6,272 and current liabilities of $9,490, for a net working capital deficit of $3,218. During Fiscal 2001, net cash provided by operations was $732 compared to $980 in Fiscal 2000. In Fiscal 2001, the Company had capitalized expenditures of $1,209, financed primarily through cash flow from operations and the net proceeds from the sales of real estate. 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 and loans against various life insurance policies. During Fiscal 2002, the Company will open one new 20,000 square foot fleet and truck center, and perform various capital improvements for an estimated cost of $1,400.

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 during the year ended April 30, 1997. The amount of the 1997 refund was $1,845 and the IRS is also seeking penalties and interest on the amount of the refund. The Company is protesting the IRS's position. The potential amount of the disallowance, including all of the interest though April 30, 2001 (but excluding any penalties) relating to the disallowance, is accrued in the Company's consolidated financial statements. If the Company does not sustain its tax position, or any portion thereof, with the IRS, the net operating loss carryforward would be available to offset federal income taxes in certain prior and future years.

In January 1999, the Company entered into an agreement with a bank for a two-year $4,000 credit facility consisting of an unsecured revolving line of credit. Effective November 30, 2000, this credit facility was revised to extend through August 31, 2001 and to consist of two separate lines of credit; a revolving line for $2,000 and a non-revolving line for $1,500. There are no financial covenants to be maintained during the term of this revised facility, but the Company is exposed to interest rate risk under the lines of credit as borrowings will bear interest at the bank's prime rate. As of April 30, 2001, the Company had no balance outstanding under this credit facility.

The Company anticipates that any new credit arrangements with its bank (including any stand-by letters of credit required to be issued to secure the unfunded portion of estimated workers compensation insurance liabilities) will most likely be on terms less favorable than its existing arrangements.

As of April 30, 2001, the Company owns sixty-two 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. Pursuant to the restructuring plan of its retail paint and body business, the Company intends to close a total of forty-one shops over the next three years. Sixteen of these shops are located on parcels of real estate owned by the Company

which are intended to be sold. In July 2001, the Company sold its corporate office building for net proceeds of $1,913.

The Company believes that it has, or has the ability to have, the liquidity and capital resources necessary to meet its cash needs for at least the next twelve months.

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 though privately negotiated transactions and that the purchases be dependent on market conditions and availability of shares. No shares have been purchased since Fiscal 1999, and the Company does not intend to make any purchases in the foreseeable future. To date, the Company has purchased a total of 321,000 shares under this plan at a cost of $2,031.

"Safe Harbor" Statements Under the Private Securities Litigation Reform Act of 1995.

Certain written and oral statements made by the Company may be "forward looking statements" as defined under the Private Securities Litigation Reform Act of 1995, including statements made in this report and other filings with the Securities and Exchange Commission. Generally, the words "believe," "expect," "hope," "intend," "estimate," "anticipate," "plan," "will," "project," and similar expressions identify forward-looking statements which generally are not historical in nature. All statements which address operating performance, events, developments or strategies that the Company expects or anticipates in the future are forward-looking statements.

Forward-looking statements involve risks and uncertainties that could cause actual results or events to differ materially from the Company's past experience or current expectations. The following are some of the risk and uncertainties that may impact the forward-looking statements: the impact of the Company's retail paint and body shop closures and operational restructuring, the effect of weather, the effect of economic conditions, the impact of competitive products, services, pricing, capacity and supply constraints or difficulties, changes in laws and regulations applicable to the Company, the impact of advertising and promotional activities, the impact of the Company's expansion of its fleet services division, new product rollout and Quality Fleet and Truck Centers, commercial coatings business, the potential adverse effects of certain litigation, financing or lending constraints and the impact of various tax positions taken by the Company.

Earl Scheib, Inc.

Consolidated Statements of Operations
(Dollars in thousands, except per share data)

The accompanying Notes are an integral part of these Consolidated Financial Statements.

The accompanying Notes are an integral part of these Consolidated Balance Sheets.

The accompanying Notes are an integral part of these Consolidated Financial Statements.

Earl Scheib, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Nature of Business: Earl Scheib, Inc. and subsidiaries (the "Company") operate auto painting and auto body repair locations for both retail consumers and businesses. At April 30, 2001, 2000, and 1999, the Company operated 159, 170, and 174 retail paint and body repair shops, respectively, and operated one large fleet center at April 30, 2001.

Principles of Consolidation: The Company's consolidated financial statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents: All highly liquid investment instruments with terms of three months or less at the time of acquisition are considered to be cash equivalents while those having maturities in excess of three months are considered marketable securities.

Fair Value of Financial Instruments: The carrying value of financial assets and liabilities approximates fair value due to their short maturity.

Inventories: Inventories, which are composed of auto paint, shop supplies and materials, are stated at the lower of last-in, first-out (LIFO) cost or market. A summary of inventories is as follows:

	April 30,
	2001			2000

Paint and related supplies	$	1,912		$	1,929
Raw materials		592			507
LIFO reserve		(533	)		(502	)

Total inventories	$	1,971		$	1,934

Property, Plant and Equipment: Property, plant and equipment are recorded at cost and depreciated and amortized over their estimated useful lives or lease terms, whichever is less. Significant additions or improvements extending asset lives are capitalized; normal maintenance and repair costs are expensed as incurred. The Company uses the straight-line method in computing depreciation and amortization for financial reporting purposes and accelerated methods, with respect to certain assets, for income tax purposes.

Start-up Costs: Expenses associated with the opening of new auto paint shops and fleet centers are expensed as incurred.

Income Taxes: Deferred income taxes are provided at the statutory rates on the difference between the financial statement and tax basis of assets and liabilities and are classified in the consolidated balance sheet as current or long-term consistent with the classification of the related asset or liability giving rise to the deferred income taxes. The carrying value of deferred income tax assets is determined based upon an evaluation of whether the realization of such assets is more likely than not.

Stock-Based Compensation: The Company accounts for its stock option grants in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. Under the Company's current stock option plans, no stock options have been granted at a price which is less than the quoted market price of the underlying stock on the date of grant. Therefore, no compensation expense is recognized for the stock options granted (Note 5).

Impairment of Long-Lived Assets: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the Company determines an impairment of a long-lived asset has occurred, it will write down the asset to its estimated fair value, which is based on expected future cash flows. During the years ended April 30, 2001 and 2000, the Company provided $1,599, $357 of which is included in "restructuring charges" (Note 9), and $65 for the impairment of fixed assets in thirteen and three shops, respectively.

Revenue Recognition: The Company recognizes sales when the work is completed and the customer accepts delivery of the vehicle.

Accounts Receivable: Write-offs and provisions for doubtful accounts totaled $61, $141, $134 and $174, $28, $145 respectively, for the years ended April 30, 2001, 2000 and 1999.

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 the Company has outstanding are stock options issued to the Company's Board of Directors, management and employees.

The weighted-average number of shares used to calculate basic and diluted earnings (loss) per share was 4,359, 4,359, and 4,452 for the years ended April 30, 2001, 2000 and 1999, respectively. Options to purchase 996 and 1,062 shares were not included in the calculation of diluted earnings per share in Fiscal 2001 and 2000, respectively, because

the Company incurred net losses. 437 shares were not included in the calculation of diluted earnings per share in Fiscal 1999 because inclusion would be antidilutive.

Reclassification: Certain reclassifications have been made to prior year consolidated financial statements to conform to the current year presentation.

		Year Ended April 30,
		2001			2000			1999

Current:
	Federal	$	(258	)	$	(209	)	$	314
	State		63			(46	)		63

			(195	)		(255	)		377

Deferred			258			299			(351	)

	Total	$	63		$	44		$	26

Reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:

		Year Ended April 30,
		2001		2000		1999

Tax at U.S. federal statutory tax rate (benefit)		(34.0)	%	(34.0	)%	34.0	%
State taxes, net of federal benefit		1.3		2.1		3.9
Valuation reserve		34.0		34.0		—
Other		—		—		(5.5	)

	Total	1.3	%	2.1	%	32.4	%

At April 30, 2001, net current deferred income tax assets and net long-term deferred income tax assets are comprised of the following:

		April 30,
		2001			2000

Current deferred income tax assets:
	Alternative Minimum Tax Credit	$	221		$	221
	Accrued insurance		478			451
	Accrued payroll and vacation		97			87
	Accrue medical insurance		51			106
	Other		265			27

		$	1,112		$	892

Long-term deferred income tax assets (liabilities):
	Net operating loss	$	2,242		$	1,127
	Deferred compensation		1,200			1,221
	Depreciation		614			268
	Other		638			161
	Valuation allowance		(2,937	)		(1,058	)

		$	1,757		$	1,719

In Fiscal 2001 and Fiscal 2000, the Company had deferred income tax assets, net of valuation allowance, of $2,869 and $2,611, respectively. As of April 30, 2001, the Company owned 62 parcels of unencumbered properties, including its corporate office building (Note 3) and its manufacturing and warehouse facility. These properties were purchased a number of years ago. Should the Company's taxable income be insufficient in any one year to realize the deferred income tax asset, then one or more properties could be sold for a gain to realize the income tax asset. Accordingly, it is management's opinion that it is more likely than not that the net deferred income tax asset will be realized.

As of April 30, 2001, the Company had a net operating loss carryforward of approximately $3,500 available to offset future federal income taxes otherwise payable and which expires in twenty years.

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 during the year ended April 30, 1997. The amount of the 1997 refund was $1,845 and the IRS is also seeking penalties and interest on the amount of the refund. The Company is protesting the IRS's position. The potential amount of the disallowance, including all of the interest through April 30, 2001 (but excluding any penalties) relating to the disallowance, is accrued in the Company's consolidated financial statements. If the Company does not sustain its tax position, or any portion thereof, with the IRS, the net operating loss carryforward would be available to offset federal income taxes in certain prior and future years.

Property, plant and equipment, including their estimated useful lives, consist of the following:

	April 30,
	April 30,						Estimated Useful Life
	2001			2000			Estimated Useful Life

Land	$	4,786		$	5,097
Buildings and building improvements		8,535			9,163		8-33 years
Machinery and equipment		10,824			10,721		3-10 years
Automotive equipment		83			142		2-4 years
Office furniture and equipment		3,298			3,132		3-10 years
Leasehold improvements		8,982			8,964		Life of Lease

		36,508			37,219
Less: accumulated depreciation and amortization		(19,127	)		(17,624	)
Less: provision for impairment of fixed assets		(1,599	)		(65	)

Net property, plant and equipment	$	15,782		$	19,530

In July 2001, the Company sold its corporate office building for net proceeds of $1,913, resulting in a net gain of $1,779. The Company currently occupies the offices under a month-to-month lease until it is able to secure and relocate to a new location.

The Company leases approximately 63% of its locations. Management expects that in the normal course of business, excluding retail shops scheduled to be closed as part of the Company's restructuring plan (Note 9), such leases will be renewed or replaced by other leases. Certain lease agreements contain renewal and/or purchase options. Rent expense for Fiscal 2001, 2000 and 1999 was $4,204, $4,064 and $3,658, respectively. Following is a summary, by year, of the future minimum lease commitments as of April 30, 2001.

Year ending April 30:
2002	$	3,785
2003		2,964
2004		2,285
2005		1,945
2006		1,652
Thereafter		6,369

Total minimum lease payments	$	19,000

The Company has two nonqualified stock option plans. One plan allows for the granting of up to 150 shares of the Company's capital stock to nonemployee directors of the Company and the second plan allows for the granting of up to 900 shares of the Company's capital stock to certain employees of the Company. The plans allow for discretionary pricing and vesting periods. Besides the two plans discussed, the Company has made separate grants of stock options to its chief executive officer.

		Number of Shares		Option price per Share		Weighted Average Exercise Price

Outstanding at April 30,1998		978		$	4.50 - $11.23	$	7.07
	Granted	514		$	5.00 - $ 8.63	$	5.34
	Exercised	(21	)	$	4.50 - $ 7.00	$	4.54
	Canceled	(359	)	$	5.00 - $ 8.75	$	7.37

Outstanding at April 30, 1999		1,112		$	4.50 - $11.23	$	6.22
	Granted	156		$	3.50 - $ 4.75	$	4.20
	Exercised	—			—		—
	Canceled	(206	)	$	4.00 - $ 9.00	$	6.73

Outstanding at April 30, 2000		1,062		$	3.50 - $11.23	$	5.82
	Granted	16		$	4.00	$	4.00
	Exercised	—			—		—
	Canceled	(82	)	$	4.00 - $11.23	$	5.66

Outstanding at April 30, 2001		996		$	3.50 - $10.00	$	5.81

The following tables summarize information about stock options outstanding and exercisable:

Options Outstanding
Range of Exercise Price	Outstanding at April 30, 2001	Weighted Average Remaining Life	Weighted Average Exercise Price

$3.50 – $4.50	163	7.4	$	4.21
$4.51 – $5.50	589	6.8	$	5.33
$5.51 – $10.00	244	4.5	$	8.04

	996

Options Exercisable
Range of Exercise Price	Exercisable At April 30, 2001	Weighted Average Exercise Price

$3.50 – $6.50	525	$	5.27
$6.51 – $10.00	241	$	8.04

	766

The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", under which no compensation cost has been recognized. If the Company had elected to recognize compensation costs based on the fair value at the date of grant for awards in 2001, 2000 and 1999, consistent with the provisions of SFAS No. 123, net income (loss) and net income (loss) per share would have been reduced (increased) to the following pro forma amounts:

			April 30,
			2001			2000			1999

Net income (loss):
	As reported		$	(4,774	)	$	(2,079	)	$	56
	Pro forma			(5,386	)		(2,491	)		(453	)
Net income (loss) per Common share:
	As reported:
		Basic	$	(1.10	)	$	(0.48	)	$	0.01
		Diluted		(1.10	)		(0.48	)		0.01
	Pro forma:
		Basic	$	(1.24	)	$	(0.57	)	$	(0.10	)
		Diluted		(1.24	)		(0.57	)		(0.10	)

Because options vest over several years and additional options are granted each year, the effects on pro forma net income (loss) and related per share amounts

The fair market value of stock options granted for purposes of the SFAS No. 123 compensation was determined by using the Black-Scholes option-pricing model and the following assumptions: a weighted-average, risk-free interest rate of 5.04%, 6.37% and 5.07% for Fiscal 2001, 2000 and 1999, respectively; an expected life of 10 years; expected volatility of 66.1%, 62.7% and 34.1% in Fiscal 2001, 2000 and 1999, respectively, and no expected dividend. The weighted-average fair value of the options granted by the Company in Fiscal 2001, 2000 and 1999, was $1.93, $2.95 and $2.97, respectively.

In 1987, the Company adopted a nonqualified supplemental compensation plan (the "Plan") to provide benefits (including post retirement health care and death benefits) to certain employees who were officers or key employees of the Company prior to fiscal 1995 (admission to the Plan was discontinued at the beginning of fiscal 1995). Participants share in the cost of the Plan by deferring a portion of their annual compensation for that purpose. Deferred compensation expense under the Plan is comprised of the following:

	For The Year Ended April 30,
	2001			2000			1999

Weighted-average assumptions:
Discount rate		7³/4	%		7³/4	%		7	%
Components of net periodic benefit cost:
Service cost	$	45		$	45		$	41
Interest cost		200			200			191
Amortization of prior service costs		(59	)		(59	)		(59	)

Net periodic benefit cost	$	186		$	186		$	173

Due to the compensation agreements having predetermined fixed dollar amounts of benefits, no rates of increase in future compensation were used. The table below sets forth the funded status and amounts recognized in the Company's consolidated financial statements for the supplemental compensation plan:

	April 30
	2001			2000

Change in benefit obligation:
Benefit obligation at beginning of year	$	2,734		$	2,867
Service cost		45			45
Interest cost		200			200
Actuarial gain (loss)		30			(113	)
Benefits paid		(253	)		(265	)

Benefit obligation at end of year	$	2,756		$	2,734

Change in plan assets:
Fair value of plan assets		—			—
Funded status	$	(2,756	)	$	(2,734	)
Unrecognized prior service cost		(422	)		(481	)
Unrecognized gain		(236	)		(253	)

Accrued pension expense	$	(3,414	)	$	(3,468	)

The Company entered into whole life insurance contracts, to partially fund its obligations under the Plan. The Company was not obligated to enter into these contracts and is not required to use these policy proceeds to pay for the Plan. As of April 30, 2001 and 2000, these contracts had cash surrender values of $2,111 and $1,922, respectively, which the Company has borrowed against (Note 7).

In Fiscal 1999, the Company established a 401(k) Plan covering substantially all employees. Employees may elect to participate in the 401(k) Plan provided that they meet certain eligibility requirements. Voluntary employee contributions are limited to 15 percent (up to the maximum amount allowed by federal regulations) of compensation. Subject to the vesting schedule, Company contributions, equal to 50 percent of the first four percent of employee contributions, are distributed ("matched") at the end of each calendar year to participants then employed. During Fiscal 2001, 2000 and 1999, the Company contributed $104, $112 and $31, respectively.

Long term debt and obligations consist of loans against life insurance policy cash surrender values which bear interest at a variable rate (currently 5.0% to 7.87%) with interest payable annually. The principal is not due until such time as the policies may be surrendered by the Company.

The Company has an agreement with its bank to finance a letter of credit facility under which the bank has issued approximately $2,194 in standby letters of credit at April 30, 2001. The letters of credit are in favor of the Company's insurance carriers and secure the unfunded portion of the Company's estimated worker's compensation insurance liabilities.

The Company is a defendant in a lawsuit filed in Los Angeles, California in March 2000. The lawsuit essentially alleges that the Company, in California, failed to pay overtime benefits to shop managers and assistant managers and made unlawful deductions from the compensation of certain managers and assistant managers. The applicable law provides for up to a four-year statute of limitations for unpaid overtime and the plaintiff is seeking class certification in this case. The Company intends to vigorously defend against this action, but at this point the ultimate outcome of this matter cannot be determined with certainty. Unfavorable rulings and/or the cost of resolution of any unfavorable rulings cannot be determined at this time. The Company's insurance carriers have denied coverage of this lawsuit. The Company has tendered the denial to binding arbitration. As of July 11, 2001, the arbitration has not yet been scheduled for a hearing.

The Company is involved in certain legal proceedings and claims which arise in the ordinary course of its business. Management believes that the amount of ultimate liability with respect to these matters should not materially affect the Company's operations and/or financial position.

In February 2001, the Board of Directors approved a plan to restructure and reorganize the Company's retail paint and body business. This plan will be implemented over the next three years as lease obligations expire and will result in the closing of 41 retail shops located in primarily single-shop areas and in markets where seasonal weather adversely impacts operating results. The restructuring should result in a leaner infrastructure and allow the Company to concentrate its efforts in those geographic areas where it has historically been profitable.

During the year ended April 30, 2001, the Company recorded restructuring charges totaling $645 for the planned closure of 25 retail shops during the year ending April 30, 2002, including exit costs (shop closure costs and early termination of leases) totaling $288. Net sales generated by these 25 retail shops were $6,284, $6,724 and $7,343 for Fiscal 2001, 2000 and 1999, with net operating income of $23, $360 and $891, respectively.

Because of the reliance on estimates and potential changing conditions for the eight planned shop closures in each of the years ending April 30, 2003 and 2004, the Company believes that future charges to its results of operations are possible during the years in which the shops actually close.

We have audited the accompanying consolidated balance sheets of Earl Scheib, Inc. (a Delaware corporation) and subsidiaries as of April 30, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended April 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Earl Scheib, Inc. and subsidiaries as of April 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States.

Earl Scheib, Inc.

Selected Financial Data
(Dollars in thousands, except per share data)

The following table sets forth unaudited operating data for each of the specified quarters of Fiscal 2001 and 2000. This quarterly information has been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, contains all significant adjustments necessary to state fairly the information set forth herein.

The variation in net income and loss per share between the fourth quarter of Fiscal 2001 and the fourth quarter of Fiscal 2000 is primarily due to the provision for impairment of fixed assets ($1,242) and the restructuring charges ($645) resulting from the Board of Directors approved plan to restructure the Company's retail paint and body operations.

Earl Scheib, Inc. is listed and traded on the America Stock Exchange under the ticker symbol "ESH". As of April 30, 2001, there were 231 shareholders of record of the Company's stock according to records maintained by the Company's transfer agent. The approximate number of beneficial shareholders was 1,031. The high and low sales prices of the stock for each of the quarters of Fiscal 2001 and Fiscal 2000 are as follows:

		Capital Stock, $1 Par
		Capital Stock, $1 Par				Additional Paid-in Capital
		Shares Outstanding		Amount		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Total

Balance April 30, 1998		4,659,000		$	4,782	$	6,598	$	10,132		$	(1,077	)	$	20,435
	Net income	—			—		—		56			—			56
	Stock issued under stock option plan	21,000			21		158		—			—			179
	Treasury stock acquired	(321,000	)		—		—		—			(2,031	)		(2,031	)

Balance April 30, 1999		4,359,000			4,803		6,756		10,188			(3,108	)		18,639
	Net loss	—			—		—		(2,079	)		—			(2,079	)

Balance April 30, 2000		4,359,000			4,803		6,756		8,109			(3,108	)		16,560
	Net loss	—			—		—		(4,774	)		—			(4,774	)

Balance April 30, 2001		4,359,000		$	4,803	$	6,756	$	3,335		$	(3,108	)	$	11,786

				April 30,
				2001			2000


Assets
Current assets:
	Cash and cash equivalents			$	706		$	602
	Accounts receivable, less allowances of $62 in 2001 and $51 in 2000				319			227
	Inventories				1,971			1,934
	Prepaid expenses				1,915			1,953
	Deferred income taxes				1,112			892
	Property held for sale				59			70
	Other current assets				190			491

			Total current assets		6,272			6,169
Property, plant and equipment, net					15,782			19,530
Deferred income taxes					1,757			1,719
Other, primarily cash surrender value of life insurance					2,308			2,197

				$	26,119		$	29,615

Liabilities
Current liabilities:
	Accounts payable			$	1,274		$	1,190
	Current portion of long term-debt and obligations				—			326
	Accrued expenses:
		Payroll and related taxes			1,528			1,501
		Insurance			2,127			1,451
		Interest			1,070			800
		Advertising			401			461
		Other			1,585			1,268
	Income taxes payable				1,505			1,160

			Total current liabilities		9,490			8,157
Deferred management compensation					3,160			3,215
Long-term debt and obligations, net of current portion					1,683			1,683
Commitments and contingencies					—			—
Shareholders' Equity:
	Capital stock $1 par — shares authorized 12,000,000; 4,803,000 issued and 4,359,000 outstanding				4,803			4,803
	Additional paid-in capital				6,756			6,756
	Retained earnings				3,335			8,109
	Treasury stock (444,000 shares)				(3,108	)		(3,108	)

			Total shareholders' equity		11,786			16,560

				$	26,119		$	29,615

				Year ended April 30,
				2001			2000			1999

Cash flows from operating activities:
	Net income (loss)			$	(4,774	)	$	(2,079	)	$	56
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Gain on disposals of property and equipment			(140	)		300			121
		Depreciation and amortization			2,604			2,941			2,918
		Provision for impairment of fixed assets			1,242			65			—
		Write down of fixed assets included in restructuring charges			357			—			—
		Changes in operating assets and liabilities:
			Deferred income taxes		(258	)		299			(319	)
			Deferred management compensation		(55	)		(83	)		(65	)
			Accounts receivable		(92	)		(9	)		39
			Inventories		(37	)		(233	)		(450	)
			Prepaid expenses and other current assets		339			(404	)		(58	)
			Other assets		(111	)		102			(447	)
			Accounts payable		84			250			(24	)
			Accrued expenses and income taxes payable		1,573			(169	)		530

Net cash provided by operating activities					732			980			2,301

Cash flows from investing activities:
	Capital expenditures				(1,209	)		(2,027	)		(5,054	)
	Proceeds from disposals of property and equipment				905			549			49

Net cash used in investing activities					(304	)		(1,478	)		(5,005	)

Cash flows from financing activities:
	Principal payments on long-term debt and obligations				(104	)		(164	)		(154	)
	Stock options exercised				—			—			92
	Proceeds from (payments of) life insurance loans				—			(1	)		1,684
	Proceeds from (payments of) bank loan				(220	)		—			175
	Purchase of treasury stock				—			—			(2,031	)

Net cash provided by (used in) financing activities					(324	)		(165	)		(234	)

Net increase (decrease) in cash and cash equivalents					104			(663	)		(2,938	)
Cash and cash equivalents, at beginning of year					602			1,265			4,203

Cash and cash equivalents, at end of year				$	706		$	602		$	1,265

Supplemental cash flow disclosure:
Income taxes paid (refunded)				$	(265	)	$	510		$	609
Interest paid					194			131			64
Noncash financing activity — capital lease					—			—			62

		Year Ended April 30,
		2001			2000			1999		1998		1997

Results of Operations
Net sales		$	55,061		$	56,374		$	55,013	$	50,839	$	48,348
Net income (loss)			(4,774	)		(2,079	)		56		1,064		1,102
Per share:
	Earnings (loss) — Basic		(1.10	)		(0.48	)		0.01		0.23		0.24
	Earnings (loss) — Diluted		(1.10	)		(0.48	)		0.01		0.22		0.23
	Cash dividends declared		—			—			—		—		—
Financial position
Property, plant and equipment, net		$	15,782		$	19,530		$	21,089	$	19,375	$	18,012
Total assets			26,119			29,615			31,861		31,486		29,450
Long-term liabilities			4,843			4,898			5,314		3,584		3,779
Shareholders' equity			11,786			16,560			18,639		20,435		19,253
Number of retail shops at the end of the year			159			170			174		163		158

		First Quarter		Second Quarter			Third Quarter			Fourth Quarter

		(in thousands, except per share data)
For the Fiscal Year Ended April 30, 2001:
	Revenues	$	15,536	$	14,788		$	10,359		$	14,378
	Gross profit		4,352		3,473			982			3,364
	Net income (loss)		606		(317	)		(2,316	)		(2,747	)
	Basic earnings (loss) per share		0.14		(0.07	)		(0.53	)		(0.63	)
	Diluted earnings (loss) per share		0.14		(0.07	)		(0.53	)		(0.63	)
For the Fiscal Year Ended April 30, 2000:
	Revenues	$	15,759	$	15,628		$	10,516		$	14,471
	Gross profit		4,417		4,561			1,182			3,543
	Net income (loss)		345		460			(1,953	)		(931	)
	Basic earnings (loss) per share		0.08		0.11			(0.45	)		(0.21	)
	Diluted earnings (loss) per share		0.08		0.11			(0.45	)		(0.21	)


	2001								2000
	1st Qtr.		2nd Qtr.		3rd Qtr.		4th Qtr.		1st Qtr.		2nd Qtr.		3rd Qtr.		4th Qtr.

High	$	4.25	$	3.5	$	3.38	$	3.00	$	5.38	$	4.75	$	4.19	$	4.25
Low		2.75		2.69		2.00		1.90		4.25		2.75		2.75		2.75