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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

Commission file number 1-4822

EARL SCHEIB, INC.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12 (g) of the Act: None

        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 at least the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ý

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o    No ý

        As of October 31, 2003 the aggregate market value of the common equity held by non-affiliates of the Registrant was $11,607,000 (approximately, based upon the closing price of the Capital Stock on the American Stock Exchange on such date).

        As of July 14, 2004, the Registrant had 4,379,682 shares of its Capital Stock, $1.00 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        None.

PART I

ITEM 1. Business

General

        Earl Scheib, Inc., a Delaware corporation, and its subsidiaries (collectively referred to as the "Company") is celebrating 67 years in the automobile paint and repair business as the successor to a business founded as a sole proprietorship by Earl A. Scheib in 1937. The Company's principal executive offices are located at 15206 Ventura Boulevard, Suite 200, Sherman Oaks, California, 91403. The Company maintains personnel, systems, advertising, legal, real estate and accounting functions at its principal executive offices. See ITEM 2. "Properties."

        The Company operates in the automobile paint and repair industry. At April 30, 2004, the Company operated a chain of 113 retail production paint and body shops which specialize in affordably priced repainting of automobiles and performing body repairs, other than major collision repair, frame straightening (in most instances) or axle work. The Company operates one large industrial painting and collision center (the "Fleet Center") dedicated to large fleet vehicles and other over-sized equipment (see "Fleet Service"). The Company also offers the replacement of certain car body parts using new, used and aftermarket parts, glass replacement, as well as factory style pin-striping, molding and vinyl top replacement. The majority of the Company's sales are paid by either cash or credit cards with the exception of the Company's fleet and trade sales, which are made primarily on credit terms.

        The Company's retail shops operate under the name of the New Earl Scheib Paint and Body Shop. The Fleet Center operates under the name Quality Fleet & Truck Centers. The Company's shops are currently located in approximately 100 cities throughout 23 states in the United States and the District of Columbia, with 50 shops and the Fleet Center in California.

        During the fiscal year ended April 30, 1999 ("fiscal 1999"), the Company, as part of its shop expansion plan, opened 19 new shops located in California, Arizona, Texas, Indiana, Illinois, Virginia, Washington and Michigan. All of these new shops provided the Company with greater penetration into these existing markets. With this expansion, the Company had hoped to improve its overall performance in these markets.

        During the fiscal year ended April 30, 2000 ("fiscal 2000"), the Company opened 8 new shops and closed 12 shops. During fiscal 2000, the Company began to evaluate for possible closure shops located in single markets, shops that were under-performing and shops that did not possess suitable sales growth potential. Furthermore, in fiscal 2000, the Company decided to focus additional sales growth on the larger fleet centers discussed under the heading "Fleet Service."

        During the fiscal year ended April 30, 2001 ("fiscal 2001"), the Company continued to evaluate its shop operations. As a result, the Company closed 12 shops and opened one shop. Additionally, in the fourth quarter of fiscal 2001, the Company's Board of Directors approved a restructuring plan (the "Plan") which resulted in the eventual closing of approximately 40 shops over the subsequent three fiscal years, generally as lease obligations expire. The Company hoped that by exiting certain markets where operations had suffered and where seasonal weather adversely impacts operating results and growth opportunities, and concentrating its efforts in historically profitable areas, it would improve its performance. Primarily as a result of this Plan, the Company's fiscal 2001 results included restructuring and impairment of fixed assets charges totaling $1,887,000. As a result of the reliance on estimates and potential changing conditions for shop closures after one year and as mandated by certain accounting rules, the Company believes that further Plan related charges against its financial results are possible during future fiscal years in which the shops actually close.

        In the fiscal year ended April 30, 2002 ("fiscal 2002"), the Company began implementing the Plan. Pursuant to the Plan, the Company closed 27 shops, which included six shops where the Company

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negotiated early terminations to longer term leases. The Company owned the real estate and the improvements in 14 of the closed shops and generated net proceeds of $4,037,000 from the sale of these real estate assets.

        In the fiscal year ended April 30, 2003 ("fiscal 2003"), the Company continued to execute the Plan. The Company closed nine shops and opened one shop, the former fleet center in Los Angeles (see "Fleet Service"). The Company owned the real estate and the improvements on one of the closed shops and generated proceeds of $410,000 from its sale. In addition, the Company sold the real estate and improvements of one shop that was closed in fiscal 2002, an inactive location, and another shop in which the location was leased back for two years, for aggregate net proceeds of $1,526,000.

        In the first quarter of the fiscal year ended April 30, 2004 ("fiscal 2004"), the Company announced publicly that it had retained the services of an investment banking firm as its exclusive financial advisor with respect to the evaluation, report and recommendation to the Board of Directors of strategic options designed to maximize shareholder value. See Note 8 to the Consolidated Financial Statements.

        During fiscal 2004, the Company continued to execute the Plan and closed 11 shops.

Subsequent Event

        In May 2004, after the close of fiscal 2004, the Company announced it had executed a Letter of Intent for the sale of all of the Company's issued and outstanding shares to Elden Holding Group, LLC, for $15 million plus assumption of certain transaction and related costs and expenses. The transaction is subject to various conditions and contingencies, including the execution of a definitive agreement, completion of due diligence, all requisite regulatory approvals and approval by the Company's stockholders.

Services

        The Company currently offers primarily three paint packages which vary in price based upon the color of the paint, number of coats of paint applied, additional services and length of warranty provided in each package. Customers may also purchase options to the paint packages such as UV Supergloss, pearlescent paint colors and Euroclear® clear coat for an additional cost.

        The Company paints vehicles on a production line basis. The vehicle is sanded to prepare the surface for paint adhesion. Removal of scratches, chips, rust and peeling also occurs at this time for an extra charge. The vehicle is then air-blown using a high pressured air hose to remove excess dust. The exposed chrome and glass areas are masked and the vehicle is spray painted in a dust-free, enclosed, fully filtered and sprinklered spray booth. In the Company's two higher-priced paint packages, the vehicle is then dried in either a semi-enclosed or fully enclosed Infrared Quartz Finish Drying System. This drying process dries the paint by quartz infrared waves, increasing the metal temperature just enough to heat the paint such that the paint on the vehicle dries from the inside to the outside. The quartz heat tubes utilize high intensity electromagnetic waves to heat the metal and are controlled by infrared sensors and computer aided temperature controls. Finally, the vehicle is detailed, which involves removing the masking paper and tape, removing any overspray and reinstalling any accessories removed during the painting process.

        In connection with its painting operations, the Company also performs, for an additional cost, body repair work as well as extra sanding and preparation mentioned above. All bodywork performed is incidental to the painting process. Body work accounted for approximately 21% of the Company's sales during fiscal 2004, 20% in fiscal 2003 and 22% in fiscal 2002.

        The Company manufactures and distributes its proprietary EuroPaint® coating system. EuroPaint® is a two component acrylic polyurethane coating which offers superior quality and performance. EuroPaint® is characterized by having extremely high gloss and distinctness of image, outstanding

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exterior durability and exceptional chemical resistance. This type of paint is generally considered the highest quality aftermarket paint and far superior to many of the paint formulations used by the Company's competitors, and is commonly used by many European luxury car manufacturers. EuroPaint® was rated best in a blind test conducted, in fiscal 1997, by an independent laboratory against the best paints used in popular production auto painting. The test measured gloss (the ability of paint to reflect light), distinctiveness of image (which represents the ability of the painted surface to reflect images like a mirror) and the ability of the paint to resist harmful chemicals and UV rays.

        The Company offers a companion product called EuroClear®. EuroClear® is an option which provides customers a true and separate clear coat with the same superior quality and performance properties offered by EuroPaint®. EuroClear® enhances and intensifies the high gloss and distinctiveness of image of EuroPaint® providing a very deep gloss look characteristic of basecoat/clearcoat (two stage) paint systems. The Company also offers an internally developed product called UV Supergloss. This product is sold as an additive for two of the Company's paint packages. The UV Supergloss provides the car with a brighter shine and is designed to protect the paint from the harmful effects of ultraviolet rays.

        The Company also provides a line of colors that capture the glamour and allure of pearlescence. Such colors offer an iridescence and lustre creating a visual effect that can only be achieved by the use of pearlescent pigments. Pearlescent colors are two- and three-stage color systems, which offer customers a unique production shop product.

Commercial Coatings

        During fiscal 2000, the Company, through its wholly owned subsidiary, Precision Coatings, Inc. ("PCI"), established the foundation for the commercial sales of Company-manufactured industrial coatings. The Company believes that it can leverage the extra capacity at its manufacturing facility by manufacturing and selling coating systems, similar to the paints it currently produces for its retail automotive needs, to small to mid-sized original equipment manufacturers. The Company also believes with its competitive pricing that eventually it will be able to compete effectively with existing manufacturers in this niche market.

        PCI, in fiscal 2001, finalized the product line and began marketing and selling its products. PCI recorded sales of $649,000 in fiscal 2004, $456,000 in fiscal 2003 and $383,000 in fiscal 2002. While it appears that entry into the commercial coatings business may be slower than it had expected, the Company remains hopeful that it will be able to improve PCI's performance. In that regard, the Company, during fiscal 2002, decided to narrow PCI's target markets to those near its manufacturing and distribution facility in Springfield, Missouri. The Company hopes that its ability to service regional customers, while reducing PCI's costs, will enable PCI to establish a strong foundation from which it may grow over time.

Fleet Service

        The Company generates fleet sales primarily from two separate sources. Local shop managers and Division Managers, may, from time to time, market the Company's services to fleet accounts. These accounts range from smaller neighborhood businesses to large municipal, state and federal governmental agencies, and national companies. These accounts are generally serviced by the Company's retail shops.

        The Company's second source of fleet sales is through the Company's "Quality Fleet and Truck Centers" division ("QFTC"). The current QFTC Fleet Center in Gardena, California is an approximately 25,000 square foot, industrial facility dedicated to painting and collision repair work for large fleets and oversized vehicles, and "rolling" equipment, such as trucks, cabs, trailers, buses, recreational vehicles and airport equipment. The first center, located near downtown Los Angeles,

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opened at the end of the first quarter of fiscal 2001 and recorded sales of $708,000 in fiscal 2001, which resulted in an operating loss of $426,000. The Company opened the Fleet Center in July 2001, and the two facilities recorded sales of $1,669,000 in fiscal 2002, which resulted in an operating loss of $959,000. During fiscal 2003, the QFTC operation recorded sales of $1,663,000 and incurred an operating loss of $379,000. During fiscal 2003, the Company closed the Los Angeles QFTC center and converted it to a retail shop. That retail shop was closed in fiscal 2004. During fiscal 2004, the Fleet Center in Gardena recorded sales of $1,646,000 and incurred an operating loss of $552,000.

        QFTC employs sales people whose function is to land fleet accounts in the target markets described above. Unsatisfied with QFTC's performance, the Company in fiscal 2002 retained the services of a consulting firm which helped revise QFTC's previous marketing and human resources strategies. The Company hopes that by continuing to implement these revised marketing and human resources strategies at the Fleet center in Gardena, California (which has better physical capacity) it will be successful, which would enable the Company to grow the QFTC concept. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussions of provisions for impairment of fixed assets recorded for the QFTC operation.

        Total Company-wide fleet sales were $3,043,000 in fiscal 2004, $3,534,000 in fiscal 2003, and $3,972,000 in fiscal 2002.

Raw Materials

        Most of the raw materials used by the Company in manufacturing its paint, including silicones, resins and pigments, are available from a number of sources. A majority of such raw materials are provided to the Company by a variety of wholesale chemical companies, including DuPont, Sherwin-Williams and Akzo-Nobel. The Company has not encountered any major difficulty in obtaining adequate supplies of its major raw materials and does not expect to encounter any such difficulty in the foreseeable future.

        By manufacturing its own paint and paint-related products, including primers and sealers, the Company is better able to ensure the quality of its products, to comply with environmental regulations and to control product availability and cost. However, if necessary, automobile paint can be obtained from other wholesale manufacturers.

Seasonality

        The Company's sales are seasonal in nature. Because of weather conditions and Christmas holidays, sales for the months of November, December, January and February are usually lower than the sales in the remaining months of the year. As a result, a proportionately greater share of the Company's sales and earnings have historically occurred in the first half of its fiscal year.

Competition

        The retail automobile painting business is highly competitive and fragmented. The Company competes not only with nationally and regionally based companies and franchisees engaged in production style automobile painting utilizing techniques similar to its own, but also with thousands of individual automobile paint and body shops. Most of the Company's competitors generally price their services much higher than those charged by the Company.

        In the field of non-franchised production line automobile painting, the Company believes that it is substantially larger than any of its competitors and that its experience, and the reasonable prices of its services, will enable it to continue to compete effectively. The Company expects that the combination of its superior name recognition, its shop restructuring plan discussed under the "General" heading

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above, its efforts to improve Company-wide fleet sales, ongoing shop renovations and technological improvements, and training programs enable it to continue to be an effective competitor.

Trademarks

        Among other things, the Company's success depends on its name. The Company relies primarily on a combination of the protections provided in applicable copyright, trademark and trade secret laws. The Company owns various trademarks but believes that Earl Scheib®, Europaint®, and Euroclear® are material to the business of the Company.

Research and Development

        The Company, primarily through its manufacturing facility, is engaged in research and development to continue to improve its existing paint products, update product lines, change formulations in order to comply with changing environmental regulations, and develop new products which can be introduced to the shops without significant cost or training such as the Europaint® and Euroclear®, UV Supergloss and new colors. The Company constantly reviews new products and techniques developed by its suppliers and others in its industry and related industries for their applicability to the Company's operations. Although the Company's research and development costs are increasing to accomplish these objectives, such expenditures during the three years ended April 30, 2004 were not a material percentage of sales.

Compliance With Environmental Regulations

        The Company's automobile painting and paint manufacturing operations are subject to federal, state and local environmental regulations in many of the areas in which it operates. The Company believes its operations substantially comply with existing regulations in those geographic areas in which it now operates. The Company, since it manufactures its own products, has the ability to modify and/or develop paint and paint-related product formulations to reasonably ensure continued compliance with new and changing environmental regulations. In addition, since the Company primarily paints vehicles in its own Company manufactured paints, there is generally little waste product produced.

Employees

        At April 30, 2004, the Company employed approximately 844 employees, of which 212 were sales, administrative, management or executive personnel and 632 were production personnel. Production employees are represented by the International Brotherhood of Teamsters under a collective bargaining agreement which extends through September 15, 2005. None of the Company's executive, administrative, shop management or clerical personnel are represented by a union. Management believes its employee and labor relations are good.

Financial Information about Segments and Geographic Areas

        For financial reporting purposes, the Company operates in a single business segment and in a single geographic area.

Company Website and Information

        The Company's website address is www.earlscheib.com. The Company makes available, free of charge, either on its website or through a link from its website to the Securities and Exchange Commission website, its Code of Ethics, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. These reports can be found under the "Corporate Info.—SEC Filings" section of the Company's home

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page. The information contained in the Company's website is not incorporated by reference into this Annual Report on Form 10-K.

ITEM 2. Properties

        The Company owns the land and buildings occupied by 42 of the Company's operating shops as of April 30, 2004. The remaining 71 of the Company's 113 operating shops, at April 30, 2004, are leased from third parties. The 113 retail shops and one Fleet Center (which is leased) are located in approximately 100 cities in 23 states and the District of Columbia. Fifty of the Company's retail shops and its one Fleet Center are located in California. In fiscal 2004, the Company ceased operations in 11 shops (see "General").

        Leases for shop premises vary as to their terms, rental provisions, expiration dates and the existence of renewal options. The number of years remaining on leases for the Company's shops (excluding unexercised options) range from month to month tenancies to approximately 10 years. All of the leases, with two exceptions, have fixed rentals with no additional rents based upon shop sales. Many leases also require the Company to pay all or a portion of the real estate taxes, insurance charges and maintenance expenses relating to the leased premises. The Company maintains fire and liability insurance as well as limited umbrella earthquake coverage for its shops and other real estate interests.

        The Company historically secured sites for new shops by a variety of methods, including lease, purchase, assignment or sublease of existing facilities, build-to-suit leases, or purchase and development of sites that may be owned by the Company or sold and leased back by the Company under sale-and-leaseback arrangements. In many cases, the Company was able to lease or sublease existing buildings that have been previously used for other purposes, such as automobile repair shops or retail establishments. These sites must be suitable for the Company's use, at a lease rate that is within the Company's guidelines and without the need for substantial expenditures to convert the facilities to the Company's needs. In connection with the opening of new shops, the Company generally makes capital investments and incurs expenditures (excluding expenditures to purchase land, buildings or leasehold interest) of approximately $175,000. These costs consist of construction of improvements, paint and supply inventories, fixtures, equipment, signs and pre-opening expense. The Company does not intend to open any new retail locations during the fiscal year ending April 30, 2005 ("fiscal 2005"), but may open replacement shops for existing shops that may close as a result of expired leases. The Company does not intend to open any new QFTC fleet center locations during fiscal 2005. In connection with the opening of any future QFTC fleet center location, the Company expects expenses and capital investments (excluding expenditures to purchase land, buildings or leasehold interest) to be approximately $300,000 to $400,000. These costs consist of construction of improvements, paint and supply inventories, fixtures, equipment, signs and pre-opening expense. The Company primarily secures sites for its QFTC operation using the same methods described for retail shops.

        The majority of the Company's stores is in stand-alone sites on main streets with adjacent parking facilities. Store hours are generally from 7:30 a.m. to 6:00 p.m. Monday through Friday and 8:00 a.m. to 12:00 p.m. on Saturday. The Company's shops are generally 7,000 square feet with most shops ranging from approximately 4,000 square feet to 9,000 square feet and one as large as approximately 20,000 square feet.

        The Company owns a manufacturing and warehousing facility in Springfield, Missouri. The Company manufactures and warehouses paint and related products and warehouses other necessary supplies used by the shops in this facility until needed by the Company's shops. This facility occupies approximately 31,600 square feet.

        In July 2001, the Company sold the real property underlying its former corporate headquarters for net proceeds of $1,913,000. The Company currently occupies corporate offices in Sherman Oaks, California under a 10-year lease.

        The Company believes its operating properties are in good operating condition.

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ITEM 3. Legal Proceedings

        The Company is a defendant in a lawsuit filed in Superior Court 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 plaintiff subsequently added certain directors and officers as defendants (the "Individual Defendants") for whom the Company has provided indemnity. 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 tendered this claim to its insurance carrier seeking coverage, which was denied. The Company then submitted the insurance matter to binding arbitration, which was held in September 2001. In October 2001, the arbitrator ruled that the insurance carrier has a duty to advance the Company's defense costs in this case and ordered the carrier to reimburse the Company for its past and future defense costs, less the applicable deductible. The arbitrator was not asked to, nor did, rule on whether the numbers of claims made, or any of them, are indemnifiable under the applicable policy and reserved jurisdiction to resolve that dispute at a later date. The policy has an aggregate limit of liability of $3,000,000, all of which, as of April 30, 2004, was available for the cost of defense of this claim less reimbursements made to the Company to date, by the insurance carrier. In February 2002, the Court sustained the demurrer of the Individual Defendants to all causes of action pleaded against them. A final judgment dismissing all claims against the Individual Defendants was entered on March 27, 2002. On May 23, 2002, the plaintiff filed and served a Notice of Appeal against the Individual Defendants. On June 5, 2002, the trial judge in the underlying action against the Company issued an Order which stays further action in the case until the appeal is resolved.

        On April 2, 2003, the Court of Appeals unanimously affirmed the dismissal on the demurrer of the Individual Defendants. On May 16, 2003, the plaintiff filed and served a Petition for Review with the California Supreme Court. On July 23, 2003, the California Supreme Court granted the Petition for Review and will review the Court of Appeals decision. As of the date of this Annual Report on Form 10-K, a hearing date had not been scheduled by the Court.

        The Company is involved in certain other legal proceedings and claims arising in the ordinary course of its business. Management currently believes that the final disposition of such matters should not have a material adverse effect on the Company's operations and/or financial position.

ITEM 4. Submission of Matters to a Vote of Security Holders.

        Not applicable.

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PART II

ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Earl Scheib, Inc. is listed and traded on the American Stock Exchange under the ticker symbol "ESH." As of April 30, 2004, there were 231 stockholders of record of the Company's stock according to records maintained by the Company's transfer agent. The approximate number of beneficial stockholders was 850 at April 30, 2004. The high and low sales prices of the stock for each of the quarters of fiscal 2004 and fiscal 2003 are as follows:

        No dividends were paid in either fiscal 2004 or fiscal 2003, and the Company does not expect to pay any dividends in the foreseeable future.

ITEM 6. Selected Financial Data

        The following selected Results of Operations data for each of the three years in the period ended April 30, 2004 and the Balance Sheet data as of April 30, 2004 and 2003 are derived from the audited Financial Statements included elsewhere herein. The selected Results of Operations data for the years ended April 30, 2001 and 2000 and the Balance Sheet data as of April 30, 2001 and 2000 were derived from audited Financial Statements, which are not included in this Form 10-K. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, included elsewhere in this Form 10-K.

(Dollars in thousands, except per share data)

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Selected Quarterly Financial Data (Unaudited)

        The following table sets forth unaudited operating data for each of the specified quarters of Fiscal 2004 and 2003. 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 earnings per share between the fourth quarter of Fiscal 2004 and the fourth quarter of Fiscal 2003 is primarily due to the interest benefit of $1,272 recorded in Fiscal 2004 related to the settlement of a dispute with the Internal Revenue Service. See Note 2 to the Consolidated Financial Statements.

ITEM 7. 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.

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Fiscal Year Ended April 30, 2004 ("Fiscal 2004") compared to Fiscal Year Ended April 30, 2003 ("Fiscal 2003")

        Net sales for Fiscal 2004 were $47,839, an increase of $604, or 1.3%, from Fiscal 2003 despite the loss of sales of $2,554 resulting from a weighted-average 11 fewer retail shops in Fiscal 2004 than in Fiscal 2003. However, this loss of sales was more than offset by a 7.1% in same-shop (shops open one year or more) sales increase of $2,982 and from an increase of $176 in combined sales from the Company's fleet and truck center and commercial coatings operations.

        The gross profit margin percentage increased to 20.7% in Fiscal 2004 from 18.9% in Fiscal 2003. The increase in gross margin percentage was primarily due to the increased net sales and the overall reductions in components of costs of sales, partially offset by increased insurance expenses.

        The provision for impairment of fixed assets of $231 in Fiscal 2004 was recorded to write-down the carrying value of fixed assets in the fleet and truck center in Gardena, California to its estimated net recoverable value. The provision in Fiscal 2003 of $169 was for three shops.

        Selling, general and administrative expenses decreased by $680 in absolute dollars and as a percentage of sales in Fiscal 2004 from Fiscal 2003 due primarily to overall reductions in administrative expenses, partially offset by shop exit and fixed asset disposal costs (related to the closing of 11 shops in Fiscal 2004); which were $348 higher than Fiscal 2003 when eight shops were closed.

        Interest expense was $679 in Fiscal 2004, as compared to $458 in Fiscal 2003, and relates primarily to life insurance loans, financing for letters of credit requirements and, for Fiscal 2004, the amortization of deferred financing costs related to the Company's secured credit facility (see Note 7 to the Consolidated Financial Statements). This amortization totaled $268 in Fiscal 2004.

        During the fourth quarter of Fiscal 2004, the Company settled its dispute with the Internal Revenue Service ("IRS") regarding the disallowance, and related interest thereon, by the IRS of a net operating loss carryback refund received by the Company during the year ended April 30, 1997 (see Note 2 to the Consolidated Financial Statements). The settlement, which was paid in April 2004, resulted in a benefit of $1,272 for the excess of previously accrued interest expense.

        During Fiscal 2003, the Company recorded interest income of $164 on refunds of federal income taxes paid for fiscal years 1999 and 1998. In addition, the Company recorded a benefit of $425 for the excess of previously accrued interest expense over that required at February 24, 2003 by the IRS regarding the disallowance of a net operating loss carryback refund received during fiscal 1997 (see above).

        During Fiscal 2003, the Company sold four parcels of real estate and disposed of other fixed assets for a pretax gain of $1,479.

        The Company did not recognize any federal or state income tax benefit for its operating loss in Fiscal 2004 and 2003. Due to income allocation and state income tax laws, only a portion of the Company" state income taxes in Fiscal 2004 and 2003 were offset by the operating loss; therefore, the Company provided $84 and $105, respectively, for state income taxes during these years.

Fiscal Year Ended April 30, 2003 ("Fiscal 2003") compared to Fiscal Year Ended April 30, 2002 ("Fiscal 2002")

        Net sales for Fiscal 2003 decreased by $4,891, or 9.4%, compared to Fiscal 2002. This was due primarily to the loss of sales from a weighted average16 fewer retail shops since Fiscal 2002 ($4,347), a decrease in same-shop sales (shops still open one year or more) of $611, or 1.3%, partially offset by increased sales from the Company's fleet and truck center and commercial coatings operations ($67). The Company closed the operations of its fleet and truck center in Los Angeles during Fiscal 2003.

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        The gross profit margin percentage decreased to 18.9% for Fiscal 2003 from 21.9% during Fiscal 2002. The decrease in gross margin percentage was primarily due to increased insurance expense and, despite the overall reduction in the other components of cost of sales, the adverse effect of cost reductions that were not proportionate to the decrease in net sales.

        Selling, general and administrative expenses decreased by $1,960 in absolute dollars in Fiscal 2003 from Fiscal 2002, and as a percentage of net sales to 25.9% from 27.2%, due to overall reductions in administrative expenses, partially offset by increased professional fees of $420.

        The provision for impairment of fixed assets of $169 in Fiscal 2003 was recorded to write-down the carrying value of fixed assets in three shops (including the former fleet and truck center in Los Angeles) to their net recoverable value. The provision for Fiscal 2002 was $183, also for three shops.

        During Fiscal 2003, the Company sold four parcels of real estate and disposed of other fixed assets for a pretax gain of $1,479. During Fiscal 2002, pursuant to the restructuring plan, the Company sold 15 parcels of real estate (including its corporate office building) and disposed of other fixed assets for a pretax gain of $4,088. Interest expense was $458 in Fiscal 2003, as compared to $434 in Fiscal 2002, and relates primarily to the accrual of interest on the IRS's disallowance of a net operating loss carryback received during fiscal 1997 (see above) and life insurance loans. During Fiscal 2003, the Company recorded interest income of $164, on refunds of federal income taxes paid for fiscal years 1999 and 1998. In addition, the Company recorded a benefit of $425 for the excess of previously accrued interest expense over that required at February 24, 2003 by the IRS (see above).

        The Company did not recognize any federal or state income tax benefit for its operating loss in Fiscal 2003. Due to income allocation and state income tax laws, the Company provided $105 in state income taxes during Fiscal 2003. The Company provided for federal and state income taxes at an effective rate of 38% during Fiscal 2002.

Liquidity and Capital Resources

        The Company's cash requirements are based upon its seasonal working capital needs and capital requirements for new shops, if any, and for additions and improvements. Historically, the first and second quarters and, occasionally, the fourth quarter of a fiscal year usually have positive cash flow from operations, while the third and, occasionally, the fourth quarters are net users of cash.

        As of April 30, 2004, the Company had current assets of $8,293 and current liabilities of $6,511 for a net working capital of $1,782. During Fiscal 2004, net cash used in operating activities was $1,669, compared with $354 net cash used in Fiscal 2003, and capitalized expenditures were $212 in Fiscal 2004. The Company expects that future cash flow from operations will be enhanced by these capital additions. During the year ending April 30, 2005, the Company plans to perform various capital improvements for an estimated cost of approximately $240.

        The Company's long-term financial obligations consist of its deferred management compensation plan and loans against various life insurance policies. The Company has no specific assets dedicated to its deferred compensation plan (the "Plan), but has entered into life insurance contracts on behalf of certain participants to partially fund its obligations under the Plan. Obligations under the Plan are generally payable over a 15-year period after the participant attains age 65 and has been employed by the Company for at least 10 years. The Company expects to satisfy these obligations by utilizing the accumulated cash values in the insurance contracts (net of the related loans), by cash to be received through the death benefits in these insurance contracts and from cash to be provided in its operating, financing and investing activities. Accumulated cash values under the insurance contracts and the related loan and accrued interest balances at April 30, 2004 totaled $2,598, $1,683 and $110, respectively, compared to $2,433, $1,683 and $124, respectively, at April 30, 2003.

11

        The Company believes that the death benefits under the life insurance contracts, along with the accumulated net cash values and cash to be provided from its operating, financing and investing activities, should be adequate to meet its obligations under the Plan. At April 30, 2004 and 2003, the face value of the life insurance policies totaled $5,096 and $4,954, respectively.

        The loans and related accrued interest (each of which is against a specific life insurance contract) would become immediately payable upon the death of the covered Plan participant. In that event, the Company intends to satisfy this liability from the proceeds received from the life insurance contract death benefit. The proceeds not utilized to repay the loan and accrued interest would be available to satisfy the benefit obligations under the Plan. Assuming that all covered participants had died and the Company then repaid the related loans and accrued interest at April 30, 2004, the proceeds from the death benefits that would be available to satisfy the undiscounted Plan obligations of $3,574 (generally payable over 15 years) totaled $3,303.

        The Company arranges for the issuance of standby letters of credit to the benefit of its insurance carriers primarily for the unfunded portion of estimated workers compensation liabilities over different policy years. At April 30, 2004, this arrangement was made with a financial institution pursuant to its secured line and letters of credit facility with the Company. During Fiscal 2003, this arrangement was made with one of the Company's banks and required the Company to purchase certificates of deposit totaling $1,378 at April 30, 2003 to secure 59% of the standby letters of credit issued. See Note 8 to the Consolidated Financial Statements.

        As of April 31, 2004, the Company owned 44 parcels of real estate, including the Company's paint factory and warehouse, which secure the Company's revolving line and letter of credit facility. See Note 7 to the Consolidated Financial Statements. The Company believes that it has, or has the ability to have, the liquidity and capital resources necessary to meet its cash needs for the foreseeable future.

        During the fourth quarter of Fiscal 2003, the Company engaged an investment banking firm as its exclusive financial advisor with respect to the evaluation, report and recommendation to the Board of Directors of strategic options designed to maximize shareholder value. In May 2004, after the close of Fiscal 2004, the Company announced it had executed a Letter of Intent for the sale of all of the Company's issued and outstanding shares to Elden Holding Group, LLC, for $15 million plus assumption of certain transaction and related costs and expenses. The transaction is subject to various conditions and contingencies, including the execution of a definitive agreement, completion of due diligence, all requisite regulatory approvals and approval by the Company's stockholders.

        As of April 30, 2004, the Company had recorded deferred income tax assets totaling $1,941, which realization would require a significant increase from Fiscal 2004 taxable income to approximately $5,708. The Company believes, however, that because of the relatively long 20-year expiration period of its federal net operating loss carryforward, combined with its ability to devise tax-planning strategies involving the sales of owned real estate, or the likelihood of the consummation of a transaction, or both; it is more likely than not that the deferred income tax assets will be realized. See Note 2 in the Notes to the Consolidated Financial Statements for further discussion of the Company's income taxes and the components of the deferred income tax assets.

Inflation

        Inflation has not had a significant impact on the Company's results of operations for the three fiscal years ended April 30, 2004.

Recent Accounting Pronouncements

        In December, 2003, the Financial Accounting Standards Board revised Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revision of the statement requires additional disclosures about pension

12

plans and other postretirement benefit plans; however, it does not change the measurement or recognition of SFAS No. 87 and SFAS No. 106. The annual disclosure requirements were effective for Fiscal 2004 and the interim period disclosure requirements will be effective beginning in the Company's first quarter of the fiscal year ending April 30, 2005.

Critical Accounting Policies

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates and judgments, including those related to its most critical accounting policies, on an ongoing basis. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

        The Company's significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements. The Company believes its critical accounting policies to be in the area of risk management, specifically workers compensation, which records the uninsured or deductible portion of the liability based on estimates of the development of incurred claims; and in the provision for impairment to long-lived assets, which is based on the estimate of future cash flows for the operating unit. Changing conditions and the use of different assumptions in deriving these estimates could have a material effect on reported financial results.

        The estimate of the Company's workers compensation deductible liability is performed by its risk management department, based on claims incurred as of the date of the balance sheet and is reviewed by senior management. The estimate for this liability is established upon analysis of historical data, discussions with third-party insurance carriers and brokers, and estimates provided by the Company's workers compensation third party administrators and professional consultants. The estimates are subject to a high degree of variability. On at least an annual basis, the claims are actuarially reviewed. Sources for the variability are numerous and include, but are not limited to, severity and frequency of claims, future economic conditions, court decisions and legislative actions. The Company's workers compensation liability estimates anticipate no change in the benefit structure, but statutory changes could have an impact on the estimated liability.

        Because of the seasonality of its business, the Company reviews its long-lived assets for impairment annually as part of the fiscal year end procedures, unless there are events or changes in circumstances that indicate there is a significant question as to whether the respective carrying amounts are recoverable. The most significant long-lived asset is the economic unit of the individual retail paint and body shop. An evaluation is performed annually on all shops operating for at least a year and an impairment write-down is generally recognized if a shop's estimated undiscounted future cash flows are less than its carrying amount. The Company primarily uses historical performance in determining its estimate of the undiscounted future cash flows; but future cash flows are influenced by, among other factors, changes in competition, marketing strategy, human resources and general market conditions. These factors could affect the amount, if any, of the impairment provision recognized.

        Changing conditions and the use of different assumptions in deriving the estimates described above could have a material effect on the reported financial results.

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

        As of April 30, 2004, the Company had no significant exposure to the market risks related to changes in currency exchange rates, commodity prices and equity values. The Company could be exposed to interest rate risk under its credit facility with a financial institution since any cash borrowings will bear interest at the financial institution's prime rate, plus four percent (see Note 7 to the Consolidated Financial Statements).

ITEM 8. Financial Statements and Supplementary Data

        Index to Financial Statements:

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

        Not applicable.

ITEM 9A. Controls and Procedures

        The Company's Chief Executive Officer, Christian K. Bement, and Chief Financial Officer, Charles E. Barrantes, with the participation of the Company's management carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.

        Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

        There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the period covered by this report that have materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B. Other Information.

        Not applicable.

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PART III

ITEM 10. Directors and Executive Officers of the Company

        The following table sets forth the principal occupation or employment and principal business of the employer, if any, of each director of the Company, as well as his age, business experience, other directorships held by him and the period during which he has served as director of the Company:

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THE BOARD OF DIRECTORS

Meetings, Organizations and Remuneration

        During fiscal 2004, the Board of Directors met seven times and took action by unanimous written consent five times. Each director attended at least 75% of all applicable Board and committee meetings. The Board has determined that all directors, except Mr. Bement, meet the "independence" requirements of the American Stock Exchange ("AMEX") and the United States Securities and Exchange Commission ("SEC").

        For their services on the Board during fiscal 2004, all non-employee directors were paid $9,000 as a retainer, payable in equal monthly cash installments of $750, which includes compensation for all regular, special and committee meetings. In addition, in March 2004, all of the non-employee directors who were members of the Board in September 2003 were paid an additional cash retainer of $6,120. Mr. Smiland was paid an additional $10,000 in cash for his services as Chairman of the Board and granted an option to purchase 20,000 shares of Company Common Stock during fiscal 2004, and Mr. Burra was paid an additional $1,500 in cash for his services as Chairman of the Audit Committee during fiscal 2004.

        Effective March 1, 2004, the Board approved a change in director compensation. For all future fiscal years, non-employee directors, except Mr. Smiland, will be paid an annual retainer of $18,000 which includes compensation for all regular, special and committee meetings. $9,000 of this retainer will be payable in equal monthly cash installments of $750, and $9,000 will be payable promptly after the Company's Annual Meeting of Stockholders in shares of Company Common Stock based on its closing price on the date of the Annual Meeting (or if the Annual Meeting is not held on a business day, on the business day immediately preceding the Annual Meeting). Mr. Smiland, as the Chairman of the Board, will receive an annual cash retainer of $40,000 and the Chairman of the Audit Committee will receive an additional annual cash retainer of $9,000.

Audit Committee

        The Audit Committee has adopted a written charter pursuant to which, among other things, it (i) has the authority to retain or replace a firm of independent certified public accountants to conduct the annual audit of the Company's financial statements; (ii) reviews with such accounting firm the scope and results of the annual audit; (iii) reviews the adequacy of the Company's system of internal accounting controls, the quality of the Company's accounting principles and judgments made in connection with the preparation of the financial statements, and the clarity and adequacy of the Company's disclosures in the financial statements with management and such independent accountants; (iv) reviews fees charged by the independent accountants for professional services; (v) reviews pronouncements as to accounting standards for their applicability to the Company; (vi) reviews with management and such independent accountants the Company's annual and quarterly financial statements prior to the filing of its Form 10-K or Form 10-Q, respectively; (vii) establishes procedures for handling complaints regarding accounting, internal accounting controls, and auditing matters, including procedures for confidential anonymous submission of concerns by employees regarding accounting and auditing matters; and (viii) reviews and discusses with management and the independent accountants the adequacy and effectiveness of the Company's legal, regulatory and ethical compliance programs.

        The Company's independent public accountants are invited to attend meetings of the Audit Committee and certain members of management may also be invited to attend. The Audit Committee consists of three non-employee directors, Messrs. James P. Burra, who acts as Chairman, Salvatore J. Zizza and Robert M. Smiland. The Committee met four (4) times during fiscal 2004.

16

        Each member of the Audit Committee meets the "independence" requirements of AMEX and the SEC. The Board has determined that each member of the Audit Committee is financially literate, knowledgeable and qualified to review financial statements. The Board of Directors has determined that James P. Burra qualifies as an "audit committee financial expert" within the meaning of the SEC rules.

Compensation Committee

        The Compensation Committee reviews and approves all salary arrangements and other compensation for officers of the Company. The Compensation Committee consists of three non-employee directors, Messrs. Salvatore J. Zizza, who acts as Chairman, Allan E. Buch and Robert M. Smiland. The Compensation Committee met one (1) time during fiscal 2004.

Compensation Committee Interlocks and Insider Participation

        No member of the Compensation Committee was an officer or employee of the Company or any of its subsidiaries during the fiscal year or any prior fiscal year. None of the executive officers of the Company has served on the Board of Directors or on the compensation committee of any other entity, any of whose officers served either on the Board of Directors or on the Compensation Committee of the Company.

Nominating Function

        The Nominating function is performed by the independent directors, and such directors are responsible for the following: identifying individuals qualified to be candidates for the Board of Directors consistent with criteria established by the Board; developing and reviewing background information for candidates; evaluating individuals suggested by share owners; and making recommendations to the Board regarding such candidates. The policies and procedures governing the nominating function were adopted by a formal resolution of the Board.

Executive Officers of the Company

        The executive officers of the Company, their ages and their positions are set forth below.

        Mr. Bement became President and Chief Executive Officer on January 1, 1999 and Interim Chairman on December 13, 2002. Mr. Bement previously served the Company as its Executive Vice President and Chief Operating Officer since February 1995 and became a director in 1997. Prior thereto and for over 25 years, Mr. Bement served in various senior executive positions at Thrifty Corporation, most recently, from 1990-1994, as Executive Vice President. Mr. Bement serves on the Board of Directors of Sun Healthcare Group (NASDAQ), a provider of long-term specialty healthcare services in the United States.

        Mr. Barrantes became Vice President and Chief Financial Officer of the Company in August 1999. From July 1998 through July 1999, he was Vice President, Chief Financial Officer and Secretary of Medical Device Alliance Inc., a medical device company. Prior to that, Mr. Barrantes was Vice President and Chief Financial Officer in 1997 of Whittaker Corporation, a NYSE-listed diversified

17

company involved in the aerospace, defense electronics and global networking industries; and, in 1996-1997, Executive Vice President, Chief Financial Officer and Secretary of Thompson PBE, Inc., a NASDAQ company that distributed paint and related supplies to the collision repair industry.

        Mr. Sunkin has served as Vice President and General Counsel and Secretary since November 1995. Mr. Sunkin is the Company's Chief Legal Officer handling the Company's various legal matters. Mr. Sunkin also supervises and manages the Company's real estate, corporate human resources/employee benefits and risk management departments and handles various strategic matters and planning for the Company. Prior to that, Mr. Sunkin was an Associate in the Business Practices Group of the law firm Buchalter, Nemer, Fields & Younger, P.C.

        Mr. Smith has served as Vice President—Shop Operations since December 1995. Prior to that and for more than 10 years, Mr. Smith served the Company in various operational capacities.

        Mr. Minnihan has served as Vice President—Finance since April 1996. Prior to that and for more than 10 years, Mr. Minnihan served as the Company's Chief Financial Officer.

Code of Ethics

        The Company has adopted a Code of Ethics applicable to the principal executive officer and senior financial executives, including the chief financial officer and the controller, of the Company, as well as all employees and directors of the Company. The Code of Ethics has been filed as an Exhibit to this Annual Report on Form 10-K and is available on EDGAR database of the SEC at www.sec.gov.

Section 16(a) Beneficial Ownership Reporting Compliance

        Under federal securities laws and rules of the SEC, directors and executive officers of the Company, as well as persons holding more than 10% of the Company's outstanding shares of Common Stock, are required to file reports showing their initial ownership of the Company's Common Stock and any subsequent changes in that ownership with the SEC and the AMEX by certain specified due dates. Based solely on the Company's review of copies of such reports furnished to the Company and written representations that no other reports were required to be filed, during Fiscal 2004, all such reports that were required were filed on a timely basis.

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ITEM 11. Executive Compensation

        The following tables and narrative text discuss the compensation paid in fiscal 2004 and the two prior fiscal years to the Company's Chief Executive Officer and the Company's other executive officers whose disclosure of compensation is required pursuant to the rules of the Securities and Exchange Commission (the "Named Executives").

SUMMARY COMPENSATION TABLE

(1)

Messrs. Bement, Barrantes and Sunkin are each entitled to termination benefits under certain circumstances. In addition, Messrs. Bement, Barrantes and Sunkin are entitled to supplemental termination benefits and other compensation in the event of a "change in control" of the Company, as described in the Earl Scheib, Inc. Modified Executive Retention and Incentive Plan discussed under the heading "Employment Agreements and Change in Control Arrangements."

(2)

The amounts shown in this column for Fiscal 2004 are as follows: Mr. Bement $5,458 as matching contribution by the Company under the Earl Scheib, Inc. Employee Savings Plan ("401-K") and $2,548 as premium for Long Term Disability ("LTD") benefits; Mr. Barrantes $827 as Company matching contribution to his 401-K Plan and $1,796 as premium for LTD benefits; Mr. Sunkin $2,100 as Company matching contribution to his 401-K Plan, $2,340 as premium for LTD benefits and $1,495 for the payment of Life Insurance premium; Mr. Smith $2,888 as Company matching contribution to his 401-K Plan, $1,506 as premium for LTD benefits, $1,000 for the payment of Life Insurance premium, $1,534 for payment of Supplemental Employee Retirement Plan ("SERP") premium for the benefit of Mr. Smith, $4,800 as an automobile allowance and $920 which reflects the estimated fair market value of a vehicle transferred by the Company to Mr. Smith during Fiscal 2004; and Mr. Minnihan $2,682 as Company matching contribution to his 401-K Plan, $3,000 for the payment of Life Insurance premium, $1,390 as premium for LTD benefits and $4,808 for payment of SERP premium for the benefit of Mr. Minnihan.

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Equity Compensation Plan Information

        The following table sets forth the number and weighted-average exercise prices of securities to be issued upon the exercise of outstanding options, warrants and rights, and the number of securities remaining available for future issuance under equity compensation plans, at April 30, 2004. See Note 5 to the Consolidated Financial Statements for further information.

(1)

Shares issuable pursuant to outstanding options under the Earl Scheib, Inc. 1994 Performance Employee Stock Option Plan, the Earl Scheib, Inc. 1994 Board of Directors Stock Option Plan and the Earl Scheib, Inc. 1995 Stock Option Agreement Plan.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

        The following table sets forth below information with respect to previously granted options which were exercised (if any) or which remain outstanding for the Named Executives.

(1)

Value based upon $3.15 closing price per share of Common Stock on April 30, 2004.

(2)

Includes 5,000 and 17,000 options that expired on June 27, 2004 for Messrs. Smith and Minnihan, respectively.

Employment Agreements and Change in Control Arrangements

        All of the Company's employees, including its Named Executives, are employed on an at-will basis by the Company. Messrs. Bement, Barrantes and Sunkin are entitled to severance benefits if they are terminated for reasons other than "just cause," as defined in their agreements with the Company.

        In fiscal 2003, the Committee recommended and the Board of Directors ratified and approved the adoption of the Earl Scheib, Inc. Modified Executive Retention and Incentive Plan (the "Incentive Plan") to align the interest of certain members of Company management with the interests of the stockholders in light of the Company's review of strategic alternatives to maximize stockholder value. The Committee, which engaged the services of independent legal experts to assist with the design, negotiation and preparation of the Incentive Plan, concluded that providing certain executives with specific incentives and protections was appropriate in light of the significant additional work to be

20

performed by these executives, these executives importance to the review of strategic alternatives and the uncertainties surrounding the review process. The Incentive Plan covers Messrs. Bement, Barrantes and Sunkin. Under the Incentive Plan, these executives will be entitled to a supplemental severance payment upon the termination of their employment in certain circumstances following a change in control of the Company. In addition, these executives will be entitled to a change in control transaction bonus if they remain employed by the Company until such a change in control or if their employment is terminated in certain circumstances.

Report of the Compensation Committee of the Board of Directors on Executive

        The Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") is responsible for administering the executive compensation plans and programs of the Company including the 1994 Performance Employee Stock Option Plan and for making recommendations to the Board of Directors regarding the compensation and benefits provided to the Chief Executive Officer and the other executive officers. Each member of the Compensation Committee, whose names are set forth below this report, is an independent director of the Company.

Compensation Policies

        The Company's executive compensation programs are designed to:

1.

Motivate executive officers to enhance the Company's performance for the benefit of its stockholders.



2.

Reward executives for superior individual contributions to the achievement of the Company's business and strategic objectives.



3.

Align the interests of the Company's executive officers and key employees with the interests of its stockholders through equity and performance based compensation programs.

        For fiscal 2004, the key elements of the compensation program for executive management were base salary, cash bonuses and stock option grants. The Compensation Committee reevaluates executive compensation periodically to institute compensation packages which relate in part to overall Company performance and the strategic direction of the Company and are similar to compensation packages awarded to similar positions and functions in the industry. The Compensation Committee has previously retained an independent executive compensation consulting firm and management compensation attorneys to evaluate the competitive position and structure of the Company's executive compensation plans and programs. The Committee does not follow these principles mechanically, but uses experience and judgment in determining compensation for each executive officer.

Base Salary

        Base salary levels generally are determined on the Compensation Committee's assessment of prevailing levels among similarly sized and situated publicly-held companies. The Compensation Committee also considers other factors, including the Company's financial performance, the depth of the duties and functions of each of the Named Executives, the individual executive's performance for the year, other benefits available to the Named Executives and the recommendations of the Company's Chief Executive Officer. The base salary is deemed to have been appropriate by the Compensation Committee in view of the value of stock options granted and the prior and expected contributions of the Named Executives to the Company's development.

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Annual Performance Bonus Plan

        The Company has, in the past, utilized an annual performance bonus plan entitled Management By Objectives ("MBO"). Under the MBO, annual incentives are established for the Named Executives and certain key employees of the Company. The actual award is based on Company performance and individual performance, and may be greater or less than the target annual incentive. If the Company does not meet a threshold level of performance, no awards may be granted with the exception of discretionary annual bonuses discussed below. Generally, an individual's target award is calculated by assigning various weights to objective performance criteria such as sales increases, profit growth and individual objectives. Payments made under this Plan are earned and made in the fiscal year following the fiscal year in which the performance occurred. During fiscal 2002, the Committee elected not to utilize the MBO. The Committee determined that in light of the Company's multi-year financial and operational restructuring and overall strategic direction, the MBO program was not the best method for aligning the interests of the stockholders with that of the Company's employees.

Discretionary Bonuses

        Discretionary bonuses may be granted by the Company to executive officers for exceptional individual performance.

Earl Scheib, Inc. Modified Executive Retention and Incentive Plan

        In fiscal 2003, the Committee recommended and the Board of Directors ratified and approved the adoption of the Earl Scheib, Inc. Modified Executive Retention and Incentive Plan (the "Incentive Plan") to align the interests of certain members of Company management with the interests of the stockholders in light of the Company's review of strategic alternatives to maximize stockholder value. The Committee, which engaged the services of independent legal experts to assist with the design and preparation of the Incentive Plan, concluded that providing certain executives with specific incentives and protections was appropriate in light of the significant additional work to be performed by these executives, these executives importance to the review of strategic alternatives and the uncertainties surrounding the review process. The Incentive Plan covers Messrs. Bement, Barrantes and Sunkin. Under the Incentive Plan, these executives will be entitled to a severance payment upon the termination of their employment in certain circumstances following a change in control of the Company. In addition, these executives will be entitled to a change in control transaction bonus if they remain employed by the Company until such a change in control or if their employment is terminated in certain circumstances.

Equity Based Plans

        Stock options provide executives with the opportunity to buy and maintain an equity interest in the Company and to share in the appreciation of the value of the Company's stock. Stock options only have value if the stock price appreciates in value from the date the options are granted.

        In 1994, the stockholders adopted, and amended in 1996, the Earl Scheib, Inc. 1994 Performance Employee Stock Option Plan (the "1994 Performance Plan"). The 1994 Performance Plan was adopted to better align the interests of the Company's management and employees with those of the stockholders. Options will be granted to key employees who have made and are expected to continue to make valuable contributions to the Company. Options are typically granted at fair market value or higher on the date of grant and typically vest over a two and one-half to four year period.

        In addition, the stockholders, in 1994, adopted the Earl Scheib, Inc. 1994 Board of Directors Stock Option Plan (the "1994 Directors Option Plan") to provide an equity based incentive to the Company's non-employee directors. The 1994 Directors Option Plan provides that each independent director shall be eligible for an initial grant of options to purchase 10,000 shares of Common Stock at the fair market

22

value on the date of grant and vest over a four year period. In 1996, the stockholders approved an amendment to the 1994 Directors Option Plan to further link the interests of the directors with those of the stockholders. The 1996 Amendment encourages ownership in the Company by providing the directors an opportunity to receive a grant of an additional option to purchase four times the number of shares of Company Common Stock the director purchases on the open market (up to a maximum of an option to purchase 10,000 shares).

        Both plans will terminate in August 2004, and no more option grants will be allowed after the termination of the plans. Options previously granted terminate 10 years following the date of grant. The Committee intends to review and approve new option plans, subject to stockholder approval, to govern the period after August 2004.

Compensation of the Chief Executive Officer

        Mr. Bement was elected President and Chief Executive Officer on January 1, 1999. Mr. Bement previously served the Company as its Executive Vice President and Chief Operating Officer at an annual salary of $170,000. As a result of Mr. Bement's promotion and increase in duties and responsibilities, the Committee increased his salary to $220,000 and granted him stock options to purchase up to an additional 100,000 shares of Common Stock. The Compensation Committee considered compensation packages provided for similar positions in similar industries in arriving at Mr. Bement's compensation package. All of the options were granted at the closing price of the Common Stock on the American Stock Exchange on the date of Mr. Bement's election and vested over a 30-month period. Mr. Bement has historically participated in the MBO to the same extent as the prior CEO which allowed Mr. Bement to earn up to 50% of his salary, as bonus, if the Company meets certain financial performance targets. In March 2002, Mr. Bement forfeited an option to purchase 100,000 shares of Company Common Stock granted him in Fiscal 1995.

        Mr. Bement was paid a bonus of $48,000 during Fiscal 2003 pursuant to the terms of the Earl Scheib, Inc. Modified Executive Retention and Incentive Plan described above.

        Mr. Bement serves the Company in an "at-will" capacity pursuant to an Employment Agreement which provides for termination benefits under certain circumstances including a "change in control" of the Company.

Salvatore J. Zizza, Chairman
Allan E. Buch
Robert M. Smiland

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Performance Graph

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG EARL SCHEIB INC., THE AMEX MARKET VALUE (U.S. & FOREIGN) INDEX
AND A PEER GROUP

*

$100 invested on 4/30/99 in stock or index—including reinvestment of dividends. Fiscal year ending April 30.

        The Peer Group is constructed using the Core Data Auto Parts Index and includes the following companies, but from which the Company has been excluded but is a member:

        Advanced Engine Technologies, Aftermarket Technology Corp, American Axle & Mfg Hldgs Inc., Amerigon Inc., Arvinmerito Inc., Borg Warner Inc., Champion Parts Inc., Clarcor Inc., Collins & Aikman Corp. New, Collins Inds Inc., Dana Corp., Decoma International Inc., Delphi Corp., Diamond Powersports Inc., Eaton Corp., Edelbrock Corp., Edelbrock Corp., Federal-Mogul Corp., Gentex Corp., Impco Technologies, Intelligent Mtr. Cars Group, Johnson Controls, Lear Corp., Miller Inds. Inc., Modine Mfg. Co., Orbital Engine Corp., Puradyn Filter, R&B Inc., Sports Resorts Int'l., Standard Mtr. Prods., Stoneridge Inc., Strattec Sec. Corp., Superior Industries, Tenneco Automotive, Transpro, Visteon Corp., Wabtec Corp., Wescast Inds. Inc. and Williams Controls.

24

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The following table indicates the number of shares of the Company's Common Stock beneficially owned as of June 30, 2004, by (i) all persons known to the Company who own more than 5% thereof, (ii) all directors of the Company, (iii) each of the Named Executives and (iv) all directors and executive officers of the Company as a group:

*

Indicates ownership of less than 1% of the Company's Common Stock based on 4,379,682 shares issued and outstanding on June 30, 2004.

(a)

Except as noted below, each of such beneficial owners exercises sole voting and investment power over all shares shown. Amounts include shares owned outright plus shares that could be acquired on or before August 29, 2004.

25

(b)

According to a Securities and Exchange Commission Schedule 13G, dated February 6, 2004. Dimensional Fund Advisors, Inc. ("Dimensional"), an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies, trusts and accounts are the "Funds". In its role as investment adviser or manager, Dimensional possesses voting and/or investment power over the securities of the Company that are owned by the Funds and may be deemed to be the beneficial owner of the shares of the Company held by the Funds. All securities are owned by the Funds. Dimensional disclaims beneficial ownership of such securities.

(c)

According to a Securities and Exchange Commission Schedule 13D, dated June 22, 2004, Gabelli Funds, Inc. and its affiliates hold all such shares for the benefit of their clients. Gabelli Funds, Inc. claims beneficial ownership of all 1,678,260 shares, except for 9,460 shares owned by Mario J. Gabelli as an individual.

(d)

According to a Securities and Exchange Commission Form 4 dated October 7, 2003.

(e)

According to a Securities and Exchange Commission Schedule 13D, dated August 20, 2002.

(f)

According to a Securities and Exchange Commission Schedule 13G dated February 13, 2001.

(g)

Includes 28,250 shares owned outright and 200,000 shares that may be acquired upon the exercise of employee stock options that are presently exercisable.

(h)

Includes 4,750 shares owned outright and 15,000 shares that may be acquired upon the exercise of directors' stock options that are presently exercisable.

(i)

Includes 7,250 shares owned outright and 15,000 shares that may be acquired upon the exercise of directors' stock options that are presently exercisable.

(j)

All 56,666 shares may be acquired upon the exercise of employee stock options that are presently exercisable.

(k)

Includes 1,500 shares owned outright, 150 shares held as a custodian for Mr. Sunkin's minor child, and 56,666 shares that may be acquired upon the exercise of employee stock options that are presently exercisable.

(l)

Includes 9,000 shares owned outright and 24,333 shares that may be acquired upon the exercise of employee stock options that are presently exercisable.

(m)

Includes 747 shares owned outright and 17,333 shares that may be acquired upon the exercise of employee stock options that are presently exercisable.

ITEM 13. Certain Relationships and Related Transactions.

        None.

26

ITEM 14. Principal Accountant Fees and Services

        The following table sets forth the aggregate fees billed to the Company by its principal accounting firm, Ernst & Young LLP, during Fiscal 2004 and Fiscal 2003.

        Audit Fees include services related to the annual audit of the Company's consolidated financial statements to be included in Form 10-K and the quarterly reviews of the Company's consolidated financial statements to be included in Form 10-Q.

        Audit Related Fees primarily include services for accounting consultations.

        Tax fees include services for federal and state income tax compliance, consultation and planning.

        The Audit Committee administers the Company's engagement of Ernst & Young LLP ("E&Y") and pre-approves all audit and permitted non-audit services to be performed by E&Y on a case by case basis. In approving non-audit services, the Audit Committee considers whether the engagement could compromise the independence of E&Y, and whether for reasons of efficiency, convenience or otherwise it is in the best interest of the Company to engage its independent auditor to perform the services. The Audit Committee has determined that performance by E&Y of the non-audit services related to the fees on the table did not affect their independence.

        Prior to engagement, the Audit Committee pre-approves all independent auditor services. The fees are budgeted and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically during the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original pre-approval categories. In those instances, the Audit Committee requires specific pre-approval before engaging the independent auditor.

        The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

27

PART IV

ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

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

        Written and oral statements made by the Company that are not historic in nature are "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. All statements which address operating performance, events, developments or strategies that the Company expects or anticipates in the future are forward-looking statements; including statements about the Company's expectations regarding the completion of the proposed transaction with Elden Holding Group, LLC.

        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 risks and uncertainties that may impact the forward-looking statements: the fact that a definitive agreement regarding the proposed transaction has not been agreed upon or signed, the need to satisfy preconditions prior to the closing of an acquisition by Elden Holding Group, LLC, 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, new product rollout and Quality Fleet & Truck Centers, commercial coatings business, the potential adverse effects of certain litigation, financing, insurance or lending constraints, the impact of various tax positions taken by the Company and the risk that the identification or consummation of any particular transaction or strategic outcome is not assured.

28

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

29

Earl Scheib, Inc. and Subsidiaries

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

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

F-1

Earl Scheib, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

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

F-2

Earl Scheib, Inc. and Subsidiaries

Consolidated Statements of Shareholders' Equity

(Dollars in thousands, except share data)

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

F-3

Earl Scheib, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

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

F-4

Earl Scheib, Inc.

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

1.    Summary of Significant Accounting Policies

        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, 2004, 2003, and 2002, the Company operated 113, 124 and 132 retail paint and body repair shops, respectively, and operated one large fleet center at April 30, 2004 and 2003, and two large fleet centers in 2002.

        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 accounting principles generally accepted in the United States 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. The most significant of these is the uninsured or deductible portion of the workers compensation liability, which is based on estimates of the development of incurred claims.

        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 original 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.

        Accounts Receivable:    Write-offs of accounts receivable totaled $43, $83, and $89; while provisions for doubtful accounts totaled $72, $81, and $116 for the years ended April 30, 2004, 2003 and 2002, respectively. Recoveries in the years ended April 30, 2004, 2003 and 2002 were $6, $1, and $22, respectively.

        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:

        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.

F-5

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

        Advertising:    Advertising costs are expensed as incurred, except that costs related to the placement of Company information in the yellow pages are capitalized as prepaid expenses and amortized over the applicable directory period, generally one year. Advertising costs expensed during the years ended April 30, 2004, 2003 and 2002 totaled $3,241, $3,376 and $3,628, respectively; and costs capitalized at April 30, 2004 and 2003 totaled $393 and $444, respectively.

        Pre-opening 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:    At April 30, 2004, the Company had two stock-based employee compensation plans, which are described in Note 5. The Company accounts for its employee stock plan under the intrinsic value method prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and as amended by SFAS No. 148, "Accounting for Stock Based Compensation—Transaction and Disclosure, an amendment of FASB Statement No. 123."

        SFAS No. 123, and as amended by SFAS No. 148, permits companies to recognize, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Because the Company's stock-based compensation plans have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, management believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from the plan. Therefore, as permitted, the Company applies the existing accounting rules under APB No. 25 and provides pro forma net loss and pro forma loss per share disclosures for stock-based awards made during the year as if the fair value method defined in SFAS No. 123, as amended, had been applied. Net income (loss) and net income (loss) per share for each of the three

F-6

years ended April 30, 2004, 2003 and 2002 would have changed to the following pro forma amounts (in thousands, except per share data):