Earl Scheib Announces Its Fourth Quarter and Fiscal Year 2008 Operating Results

SHERMAN OAKS, Calif.--(BUSINESS WIRE)--Earl Scheib, Inc. (Pink Sheets: ESHB) reported its results for the fourth quarter and fiscal year ended April 30, 2008.

Net sales for the fiscal year ended April 30, 2008 (“fiscal 2008”) were $43,028,000, as compared to $46,215,000 in the fiscal year ended April 30, 2007 (“fiscal 2007), a decrease of 6.9%, resulting primarily from a decrease in car volume. There was one additional sales day in fiscal 2008 and two fewer retail paint shops in operation. On a same-day basis, same-shop sales decreased by 6.2%. Combined sales in the Company’s fleet and truck center and commercial coatings operations decreased by $140,000 or 4.5% in fiscal 2008 from fiscal 2007. In fiscal 2008 the Company opened shops in Florida. However, it was a struggle almost from the start as the car painting economy in Florida, as elsewhere in the nation, was not as anticipated. Florida sales for the fiscal year were $158,000. The Florida shops never reached profitable operations and were shut down in January 2008.

The operating loss for fiscal 2008 was $2,857,000, compared to an operating loss of $1,732,000 in fiscal 2007. Gross margins decreased by 1.6% in fiscal 2008 compared to fiscal 2007, while selling, general and administrative expenses increased by 1.2% of sales in fiscal 2008. The decrease in profit resulted primarily from lower car volume, and not being able to reduce costs and expenses proportionally to the decrease in sales. In fiscal 2008, selling, general and administrative expense included a $138,000 non-cash charge for impairment of fixed assets in five shops compared to $29,000 in fiscal 2007.

Interest expense decreased by $146,000 in fiscal 2008 compared to fiscal 2007 due primarily to a reduction in financing costs for the Company’s credit facility. The Company recorded a gain of $275,000 from proceeds of life insurance in fiscal 2008 resulting from the death of a former retired Company executive upon whose life the Company held an insurance policy, originally purchased in conjunction with the Company’s deferred compensation plan.

In accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” the Company recorded a non-cash charge of $530,000 to adjust the valuation allowance against its deferred income tax assets, which is included under provision for income taxes. The establishment of a valuation allowance does not have any impact on cash, nor does an allowance preclude use of loss carry forwards or other deferred tax assets in the future.

Overall, the net loss for fiscal 2008 was $3,240,000, or $0.81 per diluted share, compared to a net loss of $1,999,000, or $0.46 per diluted share for fiscal 2007.

In fiscal 2008, the Company changed its method of accounting for inventories from the LIFO to the FIFO method. The Company believes this change is preferable as the FIFO method better reflects the current value of inventories on the consolidated balance sheet, provides uniformity across the Company’s operations with respect to the method of inventory accounting, and reduces the complexity and costs in accounting for inventories. In accordance with Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” the Company applied the change by retrospectively restating prior years’ financial statements. The effect was to increase beginning retained earnings, as of May 1, 2006, by $632,000 and to decrease cost of goods sold by $44,000 in fiscal 2007. This is more fully explained in the notes to the financial statements.

Net sales in the fourth quarter of fiscal 2008 were $10,846,000, a decrease of 10.4% from the fourth quarter of fiscal 2007, due primarily to a decrease in car volume. There was one additional selling day in the 2008 fourth quarter and three fewer retail paint shops in operation. On a same day basis, same shop sales were down by 10.1% in the fourth quarter of fiscal 2008.

Operating income for the fourth quarter of fiscal 2008 was $319,000 compared with an operating loss of $633,000 in the 2007 quarter. While fourth quarter 2008 sales declined by $1,259,000, the Company was able to reduce cost of sales by $1,583,000 with gross margins increasing by 5.3% of sales over the 2007 quarter. The cost savings were reflected in materials, direct labor, indirect labor and decreases in workers compensation and medical insurance expense. Selling, general and administrative expenses in the fourth quarter 2008 were reduced by $628,000 from the 2007 quarter; primarily a reduction in salaries and advertising expense. The Company determined that in the current economic climate, it was unable to recoup advertising costs.

Chris Bement, Chief Executive Officer and President, stated: “Our industry is challenged as never before as consumers respond to the unrelenting increase in the price of gasoline, the weak economy, the sub-prime housing loan melt down, higher consumer interest rates, and the escalating loss of jobs, especially in California, which is our major market. Since the Company is a low-cost provider of auto paint services, a large segment of our customers tend to be in the lower economic income group and, we believe, have been disproportionately affected, which is a major cause of our decrease in car volume.

“We have increased our price points, since we believe that the middle to upper economic income market can absorb measured price increases for our services, and we continue to expand our spot painting and minor collision repair services. It should be noted that even with the aforementioned price increases we are still the low-price leader in our market.

“In March 2008, we announced that the Board of Directors retained the investment banking firm of Wedbush Morgan Securities Inc. to begin a process to explore strategic alternatives to enhance stockholder value and to act as our exclusive financial advisor in assisting management and the Board of Directors in this process. That process is continuing.

“Subsequent to April 30, 2008, our bank amended the Company’s credit facility line. The $2,655,000 letter of credit facility, secured by certain Company-owned real estate, remains in place and the net worth covenant was eliminated in its entirety.

“It has been a difficult year for our Company and challenges remain, but we believe that the expense reductions we initiated in the fourth quarter of fiscal 2008 will continue and will position us on a profitable path once the economy turns around. We will continue to make investments in our core business and improve execution at the shop level.”

Earl Scheib, Inc., founded in 1937, is a nationwide operator of 97 auto paint and body shops located in approximately 90 cities throughout the United States. In addition, through a wholly-owned subsidiary, Earl Scheib, Inc. manufactures paint coating systems that are used not only by its paint and body shops, but are also sold to original equipment manufacturers and used by architectural construction firms. For more information, visit Earl Scheib on the web at www.earlscheib.com.

"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 document, other documents publicly available and in filings with the U.S. 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.

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 impact of continuing operating losses, the impact of the Company’s cost-cutting measures, the success of the Company’s exploration of strategic alternatives, the impact of the point-of-sale computer system, 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 new shops, new business initiatives or growth opportunities, new product rollout, Quality Fleet & Truck Centers and commercial coatings business, the potential adverse effects of certain litigation, financing, insurance or lending constraints, and the impact of various tax positions taken by the Company. The Company undertakes no obligation to correct or update any forward-looking statements whether as a result of new information, future events or otherwise.

Earl Scheib, Inc.
Consolidated Statements of Operations
(Thousands, except per share data)
		Three Months ended								Fiscal Year ended
		April 30,								April 30,
		2008				2007				2008				2007
						Restated								Restated
Net Sales		$	10,846			$	12,105			$	43,028			$	46,215
Cost of Sales			8,091				9,674				34,700				36,490
Gross Margin			2,755				2,431				8,328				9,725
Selling, General & Administrative Expense			2,436				3,064				11,185				11,457
Operating Income (Loss)			319				(633	)			(2,857	)			(1,732	)
Proceeds From life Insurance			0				0				275				0
Gain on Disposal of Property			24				95				16				110
Interest Income (Expense), net			(34	)			0				(64	)			(132	)
Income (Loss) Before Income Tax			309				(538	)			(2,630	)			(1,754	)
Provision for Income Taxes			580				195				610				245
Net Loss		$	(271	)		$	(733	)		$	(3,240	)		$	(1,999	)
Loss Per Share:
Basic		$	(0.07	)		$	(0.18	)		$	(0.81	)		$	(0.46	)
Diluted			(0.07	)			(0.18	)			(0.81	)			(0.46	)
Average Shares Outstanding:
Basic			4,009				4,100				4,005				4,325
Diluted			4,009				4,100				4,005				4,325
The 2007 balances presented above have been restated to reflect the change from the LIFO to the FIFO method of inventory accounting.

Earl Scheib, Inc.
Consolidated Balance Sheets
(In thousands)
	April 30,				April 30,
Assets	2008				2007
					Restated
Current assets:
Cash and cash equivalents	$	2,111			$	3,000
Accounts receivable, less allowances of $76 in 2008 and $45 in 2007		539				590
Inventories		2,489				2,374
Prepaid expenses, including advertising costs of $0 in 2008 and $158 in 2007		1,405				1,589
Deferred income taxes		-				1,428
Other current assets		176				197
Total current assets		6,720				9,178
Property, plant and equipment		7,104				7,893
Deferred income taxes		1,139				241
Other, including cash surrender value of life insurance of $2,798 in 2008 and $3,027 in 2007		3,002				3,232
	$	17,965			$	20,544
Liabilities
Current liabilities:
Accounts payable	$	998			$	953
Accrued expenses:
Payroll and related taxes		1,368				1,345
Insurance		2,879				2,760
Interest		106				94
Advertising		55				315
Legal and professional		-				86
Other		1,250				1,082
Total current liabilities		6,656				6,635
Deferred management compensation		2,242				2,435
Long-term debt and obligations		2,440				1,683
Shareholders' Equity
Capital stock $1 par - 12,000 shares authorized; 4,808 issued; 4,009 and 4,001 outstanding in 2008 and 2007, respectively		4,808				4,808
Additional paid-in capital		6,921				6,844
Retained earnings (accumulated deficit)		(1,543	)			1,732
Treasury stock, at cost (799 and 807 shares in 2008 and 2007, respectively)		(3,559	)			(3,593	)
Total shareholders' equity		6,627				9,791
	$	17,965			$	20,544
The 2007 balances presented above have been restated to reflect the change from the LIFO to the FIFO method of inventory accounting.

Earl Scheib, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
	Fiscal Year ended
	April 30,
	2008				2007
					Restated
Net Cash Used in Operating Activities	$	(1,618	)		$	(1,004	)
Cash Flows From Investing Activities:
Capital expenditures		(404	)			(869	)
Purchase of treasury stock		-				(750	)
Proceeds from retiree insurance policy		368				-
Proceeds from disposal of property and equipment		9				20
Net cash used in investing activities		(27	)			(1,599	)
Cash Flows From Financing Activities:
Proceeds from life insurance loans		985				-
Debt reduction from life insurance proceeds		(229	)			-
Net cash used in investing activities		756				-
Net decrease in cash and cash equivalents		(889	)			(2,603	)
Cash and cash equivalents, at beginning of the period		3,000				5,603
Cash and cash equivalents, at end of the period	$	2,111			$	3,000
The 2007 balances presented above have been restated to reflect the change from the LIFO to the FIFO method of inventory accounting.