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Financial Highlights
For the years ended June 30, | 2003 | 2002 | 2001 | |||||||||
Operating sales and revenues | $ | 81,377,652 | $ | 63,197,939 | $ | 59,685,994 | ||||||
Investment and other income, net | 666,434 | 19,920,009 | 611,686 | |||||||||
Net income (loss) | $ | 3,181,267 | $ | 11,085,017 | $ | (4,173,681 | ) | |||||
Net income (loss) per share — Basic & Diluted | $ | 3.12 | $ | 10.77 | $ | (4.03 | ) | |||||
Average shares outstanding — Basic & Diluted | 1,019,334 | 1,029,267 | 1,034,821 |
Five-Year Review — Selected Financial Data
For the years ended June 30, | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
OPERATIONS | |||||||||||||||||||||
Operating Sales and Revenues | $ | 81,377,652 | $ | 63,197,939 | $ | 59,685,994 | $ | 63,908,394 | $ | 32,064,621 | |||||||||||
Operating Cost and Expenses: | |||||||||||||||||||||
Cost of sales and operating expenses | 58,187,162 | 50,060,257 | 50,709,560 | 53,390,681 | 27,757,627 | ||||||||||||||||
Depreciation and amortization | 9,285,938 | 7,475,790 | 7,117,708 | 6,584,603 | 3,094,198 | ||||||||||||||||
General and administrative | 9,301,719 | 8,358,884 | 8,619,093 | 9,330,107 | 5,434,532 | ||||||||||||||||
76,774,819 | 65,894,931 | 66,446,361 | 69,305,391 | 36,286,357 | |||||||||||||||||
4,602,833 | (2,696,992 | ) | (6,760,367 | ) | (5,396,997 | ) | (4,221,736 | ) | |||||||||||||
Investment and other income, net | 666,434 | 19,920,009 | 611,686 | 14,895,732 | 3,129,181 | ||||||||||||||||
Income (loss) before income taxes | 5,269,267 | 17,223,017 | (6,148,681 | ) | 9,498,735 | (1,092,555 | ) | ||||||||||||||
Provision (benefit) for income taxes | 2,088,000 | 6,138,000 | (1,975,000 | ) | 3,445,000 | (250,000 | ) | ||||||||||||||
Net income (loss) | $ | 3,181,267 | $ | 11,085,017 | $ | (4,173,681 | ) | $ | 6,053,735 | $ | (842,555 | ) | |||||||||
Net income (loss) per share — Basic | $ | 3.12 | $ | 10.77 | $ | (4.03 | ) | $ | 5.51 | $ | (0.75 | ) | |||||||||
Net income (loss) per share — Diluted | $ | 3.12 | $ | 10.77 | $ | (4.03 | ) | $ | 5.50 | $ | (0.75 | ) | |||||||||
FINANCIAL PERFORMANCE | |||||||||||||||||||||
Net income (loss) as a percent of revenues | 3.91% | 17.54% | (6.99 | )% | 9.47% | (2.63 | )% | ||||||||||||||
Cash dividend per share | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | |||||||||||
Capital expenditures | $ | 10,175,623 | $ | 12,562,888 | $ | 9,646,010 | $ | 6,439,654 | $ | 4,155,834 | |||||||||||
FINANCIAL POSITION | |||||||||||||||||||||
Total assets | $ | 79,213,184 | $ | 80,735,469 | $ | 70,993,148 | $ | 82,782,033 | $ | 72,457,006 | |||||||||||
Shareowners’ equity | $ | 65,754,217 | $ | 65,093,039 | $ | 57,069,593 | $ | 66,442,847 | $ | 63,615,728 | |||||||||||
Equity per share at end of year | $ | 65.84 | $ | 63.24 | $ | 55.45 | $ | 62.63 | $ | 57.08 | |||||||||||
Shares outstanding at end of year | 998,691 | 1,029,267 | 1,029,267 | 1,060,867 | 1,114,467 |
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President’s Report to the Shareowners
My summary of this year — Progress, Validation, and Frustration. The progress is demonstrated by this year’s operational earnings being over $4.6 million in comparison to each of the four preceding years when we had operational losses which ranged from $2.7 to $6.7 million. These positive operational earnings are the validation of our decision to upgrade our people and facilities, buy two recycling plants in California, and to increase the tuition price of Marinello. In addition, the increased sales prices for our recycled products were a substantial contribution to our net income. Our state of frustration stems from all the problems we have encountered in our endeavor to build a new recycling plant in New Jersey. This frustration also included the many difficulties we had to overcome to start construction of a new Dallas plant. This new Dallas plant will replace the old and highly inefficient plants in Mt. Pleasant and Dallas, Texas. If we’re able to proceed on schedule, we should be operating the new Dallas plant in the third quarter of this new fiscal year. The closing of the two old facilities and their replacement with the new plant will produce a significant increase in earnings for our Texas operations. Our expectation regarding the projected new facility in New Jersey is to start construction before the end of this calendar year.
It’s satisfying and encouraging to see our decisions being validated, but the progress would not have occurred without the intensive and concerted effort of our people and a great deal of your money. However, the over-riding concern that is always suspended over our enterprise is the volatility of corn prices. Of course, we welcome the upward gyration of the market; feel comfortable in the middle price range; but it’s the sudden and severe down plunges that derail the engine of progress. We believe that our investment in people and facilities shall result in a better than average return — if we accept a long-term view. This forecast is based on our belief that we have the flexibility and ability to adjust to different pricing scenarios; again realizing that major adjustments are not overnight developments. In other words, our expectations for doing well can suddenly be reversed by a sharp price drop in the corn market despite all of our improvements; however, given some time we can recover and prosper.
Let us go from the general to the specific. Energy, raw material, insurance, and healthcare costs were significantly higher. These increased costs were more than offset by higher sales prices and volume, and transportation and processing efficiencies. The annual average corn price in fiscal 2003 was $2.37 per bushel, versus $1.94 for fiscal 2002. As of this writing, the price is $2.06 per bushel.
Our proprietary vocational business, Marinello Schools of Beauty, had an excellent year as volume and earnings increased substantially. As always we look forward to this new fiscal year and our confidence is high because we believe that our human resources are better than ever.
Our thanks to our customers and vendors, to our dedicated employees, and to our shareowners for your support and trust.
Respectfully yours,
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Unaudited Quarterly Financial Data
First | Second | Third | Fourth | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Year | ||||||||||||||||
2003 | ||||||||||||||||||||
Operating sales and revenue | $ | 21,037,727 | $ | 21,095,613 | $ | 19,855,958 | $ | 19,388,354 | $ | 81,377,652 | ||||||||||
Gross profit | 4,290,482 | 4,119,878 | 3,623,974 | 3,424,653 | 15,458,987 | |||||||||||||||
Net income | $ | 812,327 | $ | 1,398,885 | $ | 615,507 | $ | 354,548 | $ | 3,181,267 | ||||||||||
Net income per share — Diluted | $ | 0.79 | $ | 1.37 | $ | 0.60 | $ | 0.36 | $ | 3.12 | ||||||||||
2002 | ||||||||||||||||||||
Operating sales and revenue | $ | 16,683,973 | $ | 16,358,404 | $ | 14,737,337 | $ | 15,418,225 | $ | 63,197,939 | ||||||||||
Gross profit | 2,824,269 | 2,508,148 | 1,108,820 | 1,598,557 | 8,039,794 | |||||||||||||||
Net income (loss) | $ | 921,907 | $ | (182,569 | ) | $ | 11,120,480 | $ | (774,801 | ) | $ | 11,085,017 | ||||||||
Net income (loss) per share — Diluted | $ | 0.90 | $ | (0.18 | ) | $ | 10.80 | $ | (0.75 | ) | $ | 10.77 | ||||||||
Market Price Range
Scope Industries Common Stock
2003 | 2002 | |||||||||||||||
High | Low | High | Low | |||||||||||||
1st Quarter | $ | 64.00 | $ | 57.50 | $ | 52.00 | $ | 41.00 | ||||||||
2nd Quarter | $ | 87.50 | $ | 62.50 | $ | 59.00 | $ | 45.25 | ||||||||
3rd Quarter | $ | 88.50 | $ | 70.50 | $ | 64.75 | $ | 53.00 | ||||||||
4th Quarter | $ | 88.75 | $ | 71.50 | $ | 67.50 | $ | 60.50 |
Cash dividends of $1.00 were paid during each of the years ended June 30, 2003 and 2002, respectively.
There were 70 shareowners of record of common stock at August 29, 2003.
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Management’s Discussion and Analysis of
Waste Recycling Segment
Vocational School Segment
Critical Accounting Policies
Review of Consolidated Results of Operations —
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Prior Year Review: 2002 compared with 2001
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Liquidity and Capital Resources
Cash Flows from Operating Activities
Cash Flows from in Investing Activities
Cash Flows from Financing Activities
The Company believes its cash flow from operations, cash on hand and liquid investment holdings will be sufficient to meet its capital expenditures and operating cash requirements in fiscal 2004. However, the Company is in process of obtaining tax-exempt Industrial Revenue Bond financing of $5,000,000 in the state of New Jersey to help finance the construction of the new facility within New Jersey. The Company will also apply in the state of Texas for a $5,000,000 Industrial Revenue Bond financing for the new facility being built in the state of Texas.
Trends and Uncertainties
The Company invests from time to time in companies that are in the early stages of development and include these investments on the balance sheets in Other equity investments. The shares are not publicly traded and the Company values these investments at cost, adjusted cost reflecting managements estimated value of other than temporary losses, or reflected by the equity method of accounting. Unrealized losses from these investments were $992,646, $1,752,855 and $116,847 in fiscal 2003, 2002 and 2001, respectively. There is no certainty that the
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Quantitative and Qualitative Disclosures
Shareowners’ Equity
New Accounting Standards
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Controls and Procedures
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Independent Auditors’ Report
We have audited the accompanying consolidated balance sheets of Scope Industries and subsidiaries (“the Company”) as of June 30, 2003 and 2002 and the related consolidated statements of operations, comprehensive income, shareowners’ equity, and cash flows for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
Los Angeles, California
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Consolidated Statements of Operations
For the years ended June 30, | 2003 | 2002 | 2001 | ||||||||||
Operating Sales and Revenues: | |||||||||||||
Sales | $ | 74,269,604 | $ | 57,020,985 | $ | 54,578,070 | |||||||
Vocational school revenues | 7,108,048 | 6,176,954 | 5,107,924 | ||||||||||
81,377,652 | 63,197,939 | 59,685,994 | |||||||||||
Operating Costs and Expenses: | |||||||||||||
Cost of sales | 53,398,568 | 45,473,517 | 46,749,815 | ||||||||||
Vocational school expenses | 4,788,594 | 4,586,740 | 3,959,745 | ||||||||||
Depreciation and amortization | 9,285,938 | 7,475,790 | 7,117,708 | ||||||||||
General and administrative | 9,301,719 | 8,358,884 | 8,619,093 | ||||||||||
76,774,819 | 65,894,931 | 66,446,361 | |||||||||||
4,602,833 | (2,696,992 | ) | (6,760,367 | ) | |||||||||
Investment and other income, net | 666,434 | 19,920,009 | 611,686 | ||||||||||
Income (loss) before income taxes | 5,269,267 | 17,223,017 | (6,148,681 | ) | |||||||||
Provision (benefit) for income taxes | 2,088,000 | 6,138,000 | (1,975,000 | ) | |||||||||
Net Income (Loss) | $ | 3,181,267 | $ | 11,085,017 | $ | (4,173,681 | ) | ||||||
Net Income (Loss) Per Share — Basic & Diluted | $ | 3.12 | $ | 10.77 | $ | (4.03 | ) | ||||||
Average shares outstanding — Basic & Diluted | 1,019,334 | 1,029,267 | 1,034,821 |
The accompanying notes are an integral part of these consolidated statements.
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Consolidated Balance Sheets
June 30, | 2003 | 2002 | |||||||
ASSETS | |||||||||
Current Assets: | |||||||||
Cash and cash equivalents | $ | 7,132,957 | $ | 7,023,393 | |||||
Treasury securities (par value $6,506,000 at June 30, 2003 and $14,508,000 at June 30, 2002) | 6,495,054 | 14,522,074 | |||||||
Accounts and notes receivable, less allowance for doubtful accounts of $525,540 at June 30, 2003 and $646,285 at June 30, 2002 | 5,049,924 | 4,319,091 | |||||||
Inventories | 853,613 | 792,561 | |||||||
Deferred income taxes | 737,000 | 827,000 | |||||||
Prepaid expenses and other current assets | 1,570,669 | 1,415,388 | |||||||
Total current assets | 21,839,217 | 28,899,507 | |||||||
Notes Receivable | 553,794 | 753,217 | |||||||
Assets Held for Sale (net) | 805,480 | — | |||||||
Property and Equipment: | |||||||||
Machinery and equipment | 59,243,580 | 49,162,282 | |||||||
Land, buildings and improvements | 20,604,736 | 20,627,439 | |||||||
79,848,316 | 69,789,721 | ||||||||
Less accumulated depreciation and amortization | 39,636,554 | 33,705,132 | |||||||
40,211,762 | 36,084,589 | ||||||||
Collection Routes and Contracts,less accumulated amortization of $9,093,007 at June 30, 2003 and $7,433,705 at June 30, 2002. | 554,286 | 1,818,588 | |||||||
Other Assets: | |||||||||
Long-term Treasury notes (par value $4,000,000 at June 30, 2002) | — | 3,968,148 | |||||||
Deferred charges and other assets | 346,617 | 460,348 | |||||||
Deferred income taxes | 648,000 | 926,000 | |||||||
Investments available for sale at fair value | 8,076,728 | 1,053,652 | |||||||
Other equity investments | 6,177,300 | 6,771,420 | |||||||
15,248,654 | 13,179,568 | ||||||||
$ | 79,213,184 | $ | 80,735,469 | ||||||
LIABILITIES AND SHAREOWNERS’ EQUITY | |||||||||
Current Liabilities: | |||||||||
Accounts payable | $ | 5,313,767 | $ | 5,337,862 | |||||
Current portion of Industrial Revenue Bond | — | 600,000 | |||||||
Other accrued liabilities | 1,973,554 | 2,344,802 | |||||||
Accrued payroll and related employee benefits | 1,171,646 | 1,187,766 | |||||||
Income taxes payable | — | 772,000 | |||||||
Total current liabilities | 8,458,967 | 10,242,430 | |||||||
Long term debt | 5,000,000 | 5,400,000 | |||||||
13,458,967 | 15,642,430 | ||||||||
Commitments and Contingent Liabilities | |||||||||
Shareowners’ Equity: | |||||||||
Common stock, no par value, 5,000,000 shares authorized, shares issued and outstanding at June 30, 2003 — 998,691 and at June 30, 2002 — 1,029,267 | 4,576,050 | 4,576,050 | |||||||
Retained earnings | 60,241,067 | 60,199,674 | |||||||
Accumulated other comprehensive income | 937,100 | 317,315 | |||||||
65,754,217 | 65,093,039 | ||||||||
$ | 79,213,184 | $ | 80,735,469 | ||||||
The accompanying notes are an integral part of these consolidated statements.
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Consolidated Statements of Cash Flows
For the years ended June 30, | 2003 | 2002 | 2001 | ||||||||||
Cash Flows From Operating Activities: | |||||||||||||
Net income (loss) | $ | 3,181,267 | $ | 11,085,017 | $ | (4,173,681 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | |||||||||||||
Depreciation and amortization | 7,626,636 | 5,154,052 | 4,754,299 | ||||||||||
Amortization of routes and contracts | 1,659,302 | 2,321,738 | 2,363,409 | ||||||||||
(Gain) on sale of investments | — | (21,080,990 | ) | (352,160 | ) | ||||||||
(Gain) on sale of property and equipment | (1,175,178 | ) | (448,469 | ) | (210,428 | ) | |||||||
Loss on impairment of assets | — | — | 1,021,832 | ||||||||||
Unrealized loss equity investments | 992,646 | 1,752,855 | — | ||||||||||
Deferred income taxes | 19,475 | (477,000 | ) | (208,000 | ) | ||||||||
Changes in operating assets and liabilities: | |||||||||||||
Accounts and notes receivable | (531,410 | ) | (606,858 | ) | 774,946 | ||||||||
Inventories | (61,052 | ) | 81,885 | (194,114 | ) | ||||||||
Prepaid expenses and other current assets | (155,281 | ) | 972,416 | (811,567 | ) | ||||||||
Accounts payable and accrued liabilities | (411,463 | ) | 946,875 | (222,851 | ) | ||||||||
Income taxes receivable or payable | (772,000 | ) | 2,417,253 | (1,963,233 | ) | ||||||||
Tax benefit applied to purchase of routes and contracts | 365,000 | 560,000 | 560,000 | ||||||||||
Other assets | 156,311 | 220,621 | 81,191 | ||||||||||
Net cash flows from operating activities | 10,894,253 | 2,899,395 | 1,419,643 | ||||||||||
Cash Flows From Investing Activities: | |||||||||||||
Purchase of U.S. Treasury securities | (22,270,660 | ) | (29,063,695 | ) | (21,421,504 | ) | |||||||
Maturities of U.S. Treasury securities | 34,265,828 | 20,500,000 | 30,335,570 | ||||||||||
Purchase of property and equipment | (10,175,623 | ) | (12,562,888 | ) | (9,646,010 | ) | |||||||
Proceeds from disposition of property and equipment | 1,488,932 | 1,038,292 | 941,121 | ||||||||||
Purchase of business | (3,500,000 | ) | — | — | |||||||||
Purchase of investments available for sale | (6,054,766 | ) | (195,427 | ) | (178,629 | ) | |||||||
Purchase of other equity investments | (398,526 | ) | — | (6,580,000 | ) | ||||||||
Proceeds from disposition of investments available for sale | — | 22,911,151 | 625,639 | ||||||||||
Non-appropriated bond proceeds held by Trustee | — | 1,962,598 | 3,478,079 | ||||||||||
Net cash flows (used in) from investing activities | (6,644,815 | ) | 4,590,031 | (2,445,734 | ) | ||||||||
Cash Flows From Financing Activities: | |||||||||||||
Dividends to shareowners | (1,023,167 | ) | (1,029,267 | ) | (1,029,567 | ) | |||||||
Proceeds from stock options exercised | — | — | 105,600 | ||||||||||
Repurchases of common stock | (2,116,707 | ) | — | (1,532,290 | ) | ||||||||
Proceeds from bank borrowings | 7,400,000 | — | — | ||||||||||
Repayment of bank borrowings | (2,400,000 | ) | — | — | |||||||||
Redemption of Industrial Revenue Bonds | (6,000,000 | ) | — | ||||||||||
Net cash (used in) financing activities | (4,139,874 | ) | (1,029,267 | ) | (2,456,257 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 109,564 | 6,460,159 | (3,482,348 | ) | |||||||||
Cash and cash equivalents at beginning of year | 7,023,393 | 563,234 | 4,045,582 | ||||||||||
Cash and cash equivalents at end of year | $ | 7,132,957 | $ | 7,023,393 | $ | 563,234 | |||||||
Supplemental Disclosures: | |||||||||||||
Cash paid during the year for: | |||||||||||||
Interest | $ | 198,806 | $ | 195,277 | $ | 300,088 | |||||||
Income taxes | $ | 2,772,255 | $ | 3,631,336 | $ | 120,768 |
The accompanying notes are an integral part of these consolidated statements.
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Consolidated Statements of Shareowners’ Equity
Common Stock | Accumulated | |||||||||||||||
Other | ||||||||||||||||
Number of | Retained | Comprehensive | ||||||||||||||
For the years ended June 30, 2003, 2002 and 2001 | Shares | Amount | Earnings | Income(1) | ||||||||||||
Balance July 1, 2000 | 1,060,867 | $ | 4,470,450 | $ | 56,879,462 | $ | 5,092,935 | |||||||||
Net (loss) | (4,173,681 | ) | ||||||||||||||
Cash dividends on common stock, $1.00 per share | (1,029,567 | ) | ||||||||||||||
Cash purchase of common stock and subsequent retirement | (34,600 | ) | (1,532,290 | ) | ||||||||||||
Proceeds from stock options exercised | 3,000 | 105,600 | ||||||||||||||
Net unrealized (loss) on investments available for sale | (2,743,316 | ) | ||||||||||||||
Balance June 30, 2001 | 1,029,267 | 4,576,050 | 50,143,924 | 2,349,619 | ||||||||||||
Net income | 11,085,017 | |||||||||||||||
Cash dividends on common stock, $1.00 per share | (1,029,267 | ) | ||||||||||||||
Net unrealized (loss) on investments available for sale | (2,032,304 | ) | ||||||||||||||
Balance June 30, 2002 | 1,029,267 | 4,576,050 | 60,199,674 | 317,315 | ||||||||||||
Net income | 3,181,267 | |||||||||||||||
Cash dividends on common stock, $1.00 per share | (1,023,167 | ) | ||||||||||||||
Cash purchase of common stock and subsequent retirement | (30,576 | ) | (2,116,707 | ) | ||||||||||||
Net unrealized gain on investments available for sale | 619,785 | |||||||||||||||
Balance June 30, 2003 | 998,691 | $ | 4,576,050 | $ | 60,241,067 | $ | 937,100 | |||||||||
(1) | Accumulated Other Comprehensive Income is comprised entirely of net unrealized gains (losses) on investments available for sale. |
Consolidated Statements of Comprehensive Income
For the years ended June 30, | 2003 | 2002 | 2001 | |||||||||
Net income (loss) | $ | 3,181,267 | $ | 11,085,017 | $ | (4,173,681 | ) | |||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Net unrealized gain (loss) on investments available for sale | 619,785 | (2,032,304 | ) | (2,743,316 | ) | |||||||
Comprehensive income (loss) | $ | 3,801,052 | $ | 9,052,713 | $ | (6,916,997 | ) | |||||
The accompanying notes are an integral part of these consolidated statements.
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NOTE 1:
Summary of
Principles of Consolidation:
Use of Estimates:
Cash Equivalents and Short-term Investments:
Fair Value of Financial Instruments:
Investments:
Inventories:
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Assets Held for Sale:
Property and Equipment:
Collection Routes and Contracts:
Amortization expense for the three years ended June 30, 2003, 2002 and 2001 was approximately $1,659,302, $2,321,738 and $2,363,409, respectively. Amortization expense for the next five years is estimated to be $205,700, $205,700, $35,700, $35,700 and $35,700.
Self-Insurance Reserves:
Revenue Recognition:
Comprehensive Income:
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Income Taxes:
Stock-Based Compensation:
Year Ended June 30, | 2003 | 2002 | 2001 | |||||||||||
Net income (loss) as reported | $ | 3,181,267 | $ | 11,085,017 | $ | (4,173,681 | ) | |||||||
Deduct: Total stock-based employee compensation expense determined under a fair value based method for all awards, net of related tax effects | (60,400 | ) | (81,653 | ) | (93,808 | ) | ||||||||
Pro forma net income (loss) | $ | 3,120,867 | $ | 11,003,364 | $ | (4,267,489 | ) | |||||||
Net income (loss) per share: | ||||||||||||||
Basic and diluted — as reported | $ | 3.12 | $ | 10.77 | $ | (4.03 | ) | |||||||
Basic and diluted — pro forma | $ | 3.06 | $ | 10.69 | $ | (4.12 | ) |
Per Share Information:
Derivative Instruments and Hedging Activities:
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became effective for fiscal year 2001. The statement establishes accounting and reporting standards for derivatives instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The statement requires that the Company recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The statement also requires that changes in the derivative’s fair value be recognized in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 did not have an impact on the Company’s consolidated financial statements.
New Accounting Standards:
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Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to the accompanying consolidated financial statements. The adoption of SFAS 148 did not have an impact on the Company’s consolidated financial statements.
NOTE 2
Purchase of
On July 1, 2002, the Company, through its wholly owned subsidiary Scope Products, Inc., purchased the bakery waste recycling plant assets, raw material routes and non-compete contracts of two processing facilities in California. The transaction was accounted for as a purchase of a business. The purchase price was allocated as follows:
Plant equipment | $ | 2,697,420 | ||
Collection routes and contracts | 760,000 | |||
Other assets | 42,580 | |||
Purchase price | $ | 3,500,000 | ||
The results of operation of the new plants since July 1, 2002 are included in the accompanying consolidated statements of operations. Had the Company purchased the plants on July 1, 2001, waste material recycling revenues for the year ended June 30, 2002, would have increased by approximately $7,400,000 and the operating income would have decreased by approximately $239,000.
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In connection with the purchase described above, the Company also entered into a operating lease for the two plant facilities with an option to purchase them at a later date for $2,250,000. |
NOTE 3:
Asset
In fiscal 2001, the Company recorded asset impairments of $1,021,832 related to the closure and selling of two processing plants in fiscal 2002. The two plants were replaced by a new manufacturing facility placed into service in fiscal 2002. The assets written off were not utilized at the new plant and were scrapped. The charge for for impairment is reflected in Investment and other income.
NOTE 4:
Treasury
Treasury bills and notes with maturity due date of less than one year are classified as current while those with maturity dates longer than one year are classified as long-term. The cost is adjusted to reflect interest earned as it accrues and reduce interest premiums as the securities mature. The adjusted cost approximates the fair value of the bills and notes. The Company classified its Treasury bills and notes as available for sale securities.
NOTE 5:
Investment and
Included in Investment and other income are interest income, recognized gains on sales of investment securities, unrealized losses on investments, gains or losses on disposition of assets, loss from impairment of assets, interest expense and miscellaneous income or expenses. Unrealized losses on securities whose decline in value was deemed to be other than temporary were $353,847, $1,343,430 and $423,800 in fiscal years 2003, 2002 and 2001, respectively. A loss of $638,800, $409,425 and $116,847 was recognized based upon the equity method of accounting for an investment in fiscal 2003, 2002 and 2001, respectively.
For the years ended June 30, | 2003 | 2002 | 2001 | ||||||||||
Investment and other income was comprised of: | |||||||||||||
Interest income | $ | 508,998 | $ | 458,960 | $ | 1,373,832 | |||||||
Gain on sales of marketable securities | — | 21,080,990 | 352,160 | ||||||||||
Unrealized (losses) in investments | (353,846 | ) | (1,343,430 | ) | — | ||||||||
Equity (loss) in investment | (638,800 | ) | (409,425 | ) | (116,847 | ) | |||||||
(Loss) from impairment of assets | — | — | (1,021,832 | ) | |||||||||
Gain on disposition of assets | 1,175,178 | 448,469 | 210,428 | ||||||||||
Interest expense | (198,806 | ) | (190,403 | ) | (310,340 | ) | |||||||
Misc. (expense)/income, net | 173,710 | (125,152 | ) | 124,285 | |||||||||
Investment and other income, net | $ | 666,434 | $ | 19,920,009 | $ | 611,686 | |||||||
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At June 30, 2003 investments were as follows: |
Gross | Gross | ||||||||||||||||
Unrealized | Unrealized | Fair | |||||||||||||||
Cost | Gains | Losses | Value | ||||||||||||||
Available-for-sale securities | |||||||||||||||||
–Equity securities(1) | $ | 612,613 | $ | 1,448,887 | $ | — | $ | 2,061,500 | |||||||||
–Short-term tax exempt mutual fund(2) | 6,000,000 | 15,228 | — | 6,015,228 | |||||||||||||
Other equity securities(3) | $ | 6,177,300 | — | — | $ | 6,177,300 |
At June 30, 2002 investments were as follows: |
Gross | Gross | ||||||||||||||||
Unrealized | Unrealized | Fair | |||||||||||||||
Cost | Gains | Losses | Value | ||||||||||||||
Available-for-sale securities | |||||||||||||||||
–Equity securities(1) | $ | 557,845 | $495,807 | $ | — | $ | 1,053,652 | ||||||||||
Other equity securities(3) | $ | 6,771,420 | — | — | $ | 6,771,420 |
(1) | Fair values for “Equity securities” investments available-for-sale are based on quoted market prices, where available, at the reporting date. | |
(2) | The investment in the short-term tax-exempt mutual fund is pledged to the bank as collateral for the long-term bank debt of $5,000,000. Interest earned from the fund is paid to the Company. Fair value is based upon quoted market price at the reporting date. | |
(3) | At June 30, 2003, the Company held shares and warrants in Chromagen, Inc., shares in Stamet, Inc., MetaProbe, Inc., Myricom, Inc. and Hull Technologies, Inc. and at June 30, 2002 the Company held shares and warrants in the same companies except for Hull Technologies, Inc. The shares and warrants are not publicly traded and are carried at cost or adjusted cost, reflecting the equity method of accounting for investments or management’s estimated value reflecting other than temporary losses. No quoted market prices are available for these securities. |
NOTE 6:
Leases
The Company occupies certain facilities and operates a portion of its transportation equipment under long-term leases. Future minimum rental payments required under non-cancelable operating leases having lease terms in excess of one year are:
For the years ending June 30, | |||||
2004 | $ | 1,093,600 | |||
2005 | 912,300 | ||||
2006 | 722,200 | ||||
2007 | 641,700 | ||||
2008 | 422,200 | ||||
Thereafter | 988,900 | ||||
Total minimum lease payments | $ | 4,780,900 | |||
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Total rental expense under operating leases was $1,450,765 in 2003, $1,193,872 in 2002 and $1,234,432 in 2001. |
NOTE 7:
Debt
In June 2002, the Company issued a Notice of Redemption for its $6,000,000 outstanding tax-exempt Industrial Revenue Bonds (“IRB”), the redemption date being August 1, 2002. Federal regulations require a company to meet certain criteria during a specified period of time in order for the bonds to maintain its tax-exempt status. One of the criteria is that each bond issuance has certain capital spending limitations within a specific time before and after the issuance date. The Company determined that it would exceed the capital spending limitations before the time limitation expired and would be in jeopardy of losing the tax-exempt status. There were no prepayment penalties associated with early retirement of the bonds.
NOTE 8:
Contingent
In the normal course of business, the Company and certain of its subsidiaries are defendants in various lawsuits. After consultation with counsel, management is of the opinion that these various lawsuits, individually or in the aggregate, will not have a materially adverse effect on the consolidated financial statements.
In the fourth quarter of 2002, the Company purchased its workers compensation and auto insurance policy with a high deductible on a retrospective basis. The insurance company required the Company to post a deposit based upon actuarial estimates of the Company’s expected costs related to claims occurring during the policy term. The policy is retrospective for four years after the initial expiration date. At June 30, 2003, the balance on deposit at the insurance company |
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is approximately $440,200. Management of the Company believes that the amount on deposit will be sufficient to pay any claims that occurred under the insured policy period. | |
The Company, in certain states, is self-insured for its workers’ compensation liability. In the current year, the Company was required to issue three standby letters of credit totaling $1,100,000, under its short-term line of credit. The standby letters of credit guarantee payment to the state workers’ compensation self-insurance funds in the event the Company defaulted on its payments for insurance claims in those states. The new states where the Company elected to self-insure workers’ compensation are Georgia, Illinois and Maryland. The Company has previously been self-insured in California. | |
The balance in the reserve for self-insured workers’ compensation was approximately $615,800 and $764,000 at June 30, 2003 and 2002, respectively. Management of the Company believes that the reserves are adequate based upon information currently available; however, there can be no assurance that final costs related to these matters will not exceed current estimates. The Company believes that any additional liability relative to such claims would not likely have a material adverse effect on the Company’s financial position. |
NOTE 9:
Retirement
The Company maintains an executive savings and profit sharing defined contribution plans for certain eligible employees. The Company’s contributions to the plans are based on matching voluntary employee contributions and on a profit sharing plan formula after certain minimum earnings levels are reached by the Company. For the years ended June 30, 2003, 2002 and 2001 the defined contribution plan expenses were $220,050, $227,614, and $227,665, respectively. The Company also sponsors a 401(k) plan for all eligible employees of the Company and contributes a certain percentage for every dollar that the employee contributes to their 401(k) account. Company contributions to the 401(k) plan for fiscal years 2003, 2002 and 2001 were $65,799, $53,913 and $80,957, respectively.
The Company had two Defined Benefit Pension Plans (“DBPP”) that were terminated in fiscal 2001. Employees under one plan received a lump sum cash distribution for the value of their benefits. Certain employees in the other plan with benefits less than $5,000 received lump sum distribution and the DBPP purchased a fully funded monthly annuity from an insurance company for the employees whose benefits exceed $5,000. The difference between the assets within the DBPP and the termination liability at June 30, 2001 was an expense of approximately $274,000 and is reflected in cost of sales and general and administrative expenses in the consolidated statements of operations. |
NOTE 10:
Stock
Under the Company’s 1992 Stock Option Plan the (“1992 Plan”) that expired on January 1, 2002, the Company granted to key employees options to purchase the Company’s common stock at not less than the fair market value of such shares on the date such option is granted. Options to purchase shares expire five years after the date of grant.
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Stock option activity under the 1992 Plan was as follows:
Weighted | Weighted | ||||||||||||||||
Average | Average | ||||||||||||||||
Number | Exercise | Options | Exercise | ||||||||||||||
of Shares | Price | Exercisable | Price | ||||||||||||||
Outstanding at June 30, 2000 | 6,000 | $33.60 | �� | 6,000 | $33.60 | ||||||||||||
Exercised | (3,000 | ) | $35.20 | ||||||||||||||
Expired | (3,000 | ) | |||||||||||||||
Outstanding at June 30, 2001 | — |
Scope Products, Inc. (“SPI”), is a wholly owned subsidiary of the Company and has its own Incentive and Non-Qualified Stock Option Plan (“SPI Plan”) for key employees of the Company. The plan may award grants in the form of incentive stock options or non-qualified stock options. Grants are made at the discretion of the Board of Directors. The options vest ratably over a seven-year period, beginning with 15% after the first year and 15% each year until the final year when the last 10% vests. The options expire seven years after date of grant. The Board of Directors determines the option price that it believes is equal to the fair market value of the SPI common stock. The Company has reserved one million shares (10%) of SPI common stock for issuance pursuant to options granted under the plan. | |
Stock option activity under the SPI Plan was as follows: |
Weighted | Weighted | ||||||||||||||||
Average | Average | ||||||||||||||||
Number | Exercise | Options | Exercise | ||||||||||||||
of Shares | Price | Exercisable | Price | ||||||||||||||
Outstanding at June 30, 2000 | 757,500 | $5.00 | |||||||||||||||
Granted | 5,000 | $5.00 | |||||||||||||||
Terminated | (45,000 | ) | $5.00 | ||||||||||||||
Outstanding at June 30, 2001 | 717,500 | $5.00 | 210,375 | $5.00 | |||||||||||||
Granted | 70,000 | $5.00 | |||||||||||||||
Terminated | (2,500 | ) | $5.00 | ||||||||||||||
Outstanding at June 30, 2002 | 785,000 | $5.00 | 317,250 | $5.00 | |||||||||||||
Granted | 20,000 | $6.00 | |||||||||||||||
Terminated | (35,000 | ) | $5.00 | ||||||||||||||
Outstanding at June 30, 2003 | 770,000 | $5.03 | 416,250 | $5.00 |
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NOTE 11:
Income Taxes
The components of the provision (benefit) for income taxes are:
For the years ended June 30, | 2003 | 2002 | 2001 | ||||||||||
Current: | |||||||||||||
Federal | $ | 1,901,000 | $ | 5,173,000 | $ | (2,247,000 | ) | ||||||
State | 207,000 | 488,000 | 64,000 | ||||||||||
2,108,000 | 5,661,000 | (2,183,000 | ) | ||||||||||
Deferred: | |||||||||||||
Federal | (48,000 | ) | 457,000 | 193,000 | |||||||||
State | 28,000 | 20,000 | 15,000 | ||||||||||
(20,000 | ) | 477,000 | 208,000 | ||||||||||
Total provision (benefit) | $ | 2,088,000 | $ | 6,138,000 | $ | (1,975,000 | ) | ||||||
Reconciliation of the provision (benefit) for income taxes computed at the U.S. Federal statutory income tax rate to the reported provision is: |
For the years ended June 30, | 2003 | 2002 | 2001 | ||||||||||
U.S. Federal statutory income tax | $ | 1,792,000 | $ | 5,856,000 | $ | (2,091,000 | ) | ||||||
State income taxes, net of Federal tax benefit | 155,100 | 335,000 | 52,100 | ||||||||||
Taxes on income not recognized on books | 49,000 | 73,000 | 99,000 | ||||||||||
Other | 91,900 | (126,000 | ) | (35,100 | ) | ||||||||
Total provision (benefit) | $ | 2,088,000 | $ | 6,138,000 | $ | (1,975,000 | ) | ||||||
The major components of the deferred income tax assets and liabilities are:
At June 30, | 2003 | 2002 | |||||||
Depreciation | $ | (82,000 | ) | $ | (504,000 | ) | |||
Income not currently taxable | (859,000 | ) | (475,000 | ) | |||||
Unrealized gain on investments | (523,000 | ) | (177,000 | ) | |||||
Other | (25,000 | ) | — | ||||||
Total deferred income tax liabilities | (1,489,000 | ) | (1,156,000 | ) | |||||
Expenses not currently deductible | 1,242,000 | 1,537,000 | |||||||
Recognized losses not currently deductible | 1,632,000 | 1,269,000 | |||||||
Other | — | 103,000 | |||||||
Total deferred income tax assets | 2,874,000 | 2,909,000 | |||||||
Net deferred income tax asset | $ | 1,385,000 | $ | 1,753,000 | |||||
In addition to the recognized deferred income tax benefits and liabilities, an additional unrecognized income tax benefit of approximately $3.0 million is available to the Company in subsequent operating periods resulting from tax deductions for tax goodwill amortization of approximately $8.7 million. The income tax benefit realized from tax goodwill amortization first reduced the carrying value of collection routes and contracts until the routes and contracts were fully amortized in 2003. The future tax goodwill amortization will be used to reduce income tax expense. The deduction for tax goodwill amortization will be available ratably over the next eight years.
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NOTE 12:
Other
Other comprehensive income (loss) consists of:
Amount | Income Tax | Amount | ||||||||||
Before | (Expense) | Net of | ||||||||||
Taxes | Benefit | Taxes | ||||||||||
For the year ended June 30, 2003 | ||||||||||||
Unrealized holding gains arising during the year | $ | 968,310 | $ | (348,525 | ) | $ | 619,785 | |||||
Reclassification adjustment | — | — | — | |||||||||
Other comprehensive income | $ | 968,310 | $ | (348,525 | ) | $ | 619,785 | |||||
For the year ended June 30, 2002 | ||||||||||||
Unrealized holding gains arising during the year | $ | 18,947,685 | $ | (7,488,000 | ) | $ | 11,459,685 | |||||
Reclassification adjustment | (21,080,989 | ) | 7,589,000 | (13,491,989 | ) | |||||||
Other comprehensive loss | $ | (2,133,304 | ) | $ | 101,000 | $ | (2,032,304 | ) | ||||
For the year ended June 30, 2001 | ||||||||||||
Unrealized holding losses arising during the year | $ | (3,934,156 | ) | $ | 1,419,744 | $ | (2,514,412 | ) | ||||
Reclassification adjustment | (352,160 | ) | 123,256 | (228,904 | ) | |||||||
Other comprehensive loss | $ | (4,286,316 | ) | $ | 1,543,000 | $ | (2,734,316 | ) | ||||
NOTE 13:
Business
The Company’s current operations are conducted through two primary business segments.
Waste Material Recycling
Vocational School Group
The Company owns and operates 13 beauty schools in California and Nevada in which cosmetology and manicuring are taught to students who pay tuition. Vocational programs and Federal grants and loan programs are also utilized for the students’ tuition. In addition, the public patronizes the schools for hair styling and other cosmetology services that are performed by the students under supervision of the instructors. |
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For the years ended June 30, | 2003 | 2002 | 2001 | |||||||||
Operating Sales and Revenues: | ||||||||||||
Waste Material Recycling | $ | 73,902,649 | $ | 56,584,988 | $ | 54,112,493 | ||||||
Vocational School Group | 7,108,048 | 6,176,954 | 5,107,924 | |||||||||
Other | 366,955 | 435,997 | 465,577 | |||||||||
$ | 81,377,652 | $ | 63,197,939 | $ | 59,685,994 | |||||||
For the years ended June 30, | 2003 | 2002 | 2001 | |||||||||
Income (Loss) before Income Taxes: | ||||||||||||
Waste Material Recycling | $ | 11,760,873 | $ | 4,208,040 | $ | 782,758 | ||||||
Vocational School Group | 2,085,920 | 1,355,086 | 921,550 | |||||||||
Other | 57,759 | 98,766 | 154,418 | |||||||||
13,904,552 | 5,661,892 | 1,858,726 | ||||||||||
General & Administrative | (9,301,719 | ) | (8,358,884 | ) | (8,619,093 | ) | ||||||
Investment and other income | 666,434 | 19,920,009 | 611,686 | |||||||||
Income (loss) before income taxes | $ | 5,269,267 | $ | 17,223,017 | $ | (6,148,681 | ) | |||||
Identifiable Assets: | ||||||||||||
Waste Material Recycling | $ | 46,273,238 | $ | 41,836,087 | $ | 39,584,111 | ||||||
Vocational School Group | 2,153,147 | 1,753,515 | 1,618,016 | |||||||||
Other | 5,497 | 105,820 | 228,270 | |||||||||
Corporate | 30,781,302 | 37,040,047 | 29,562,751 | |||||||||
$ | 79,213,184 | $ | 80,735,469 | $ | 70,993,148 | |||||||
Depreciation and Amortization: | ||||||||||||
Waste Material Recycling | $ | 8,877,172 | $ | 7,076,367 | $ | 6,717,493 | ||||||
Vocational School Group | 233,531 | 235,128 | 226,664 | |||||||||
Other | 100,323 | 122,451 | 139,289 | |||||||||
Corporate | 74,912 | 41,844 | 34,262 | |||||||||
$ | 9,285,938 | $ | 7,475,790 | $ | 7,117,708 | |||||||
Capital Expenditures: | ||||||||||||
Waste Material Recycling | $ | 10,099,378 | $ | 12,144,370 | $ | 9,429,531 | ||||||
Vocational School Group | 76,245 | 409,542 | 76,672 | |||||||||
Other | — | — | — | |||||||||
Corporate | — | 8,976 | 139,807 | |||||||||
$ | 10,175,623 | $ | 12,562,888 | $ | 9,646,010 | |||||||
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Corporate Information
Directors Babette Heimbuch Chairman & CEO First Federal Bank Of California Robert Henigson Investor Meyer Luskin William H. Mannon Retired Officer of Scope Industries Franklin Redlich Retired | Officers Meyer Luskin Chairman, President and Chief Executive Officer Eric M. Iwafuchi Vice President, Chief Financial Officer and Secretary Rudy Alvarez Controller | Independent Auditors Deloitte & Touche LLP Los Angeles, California Transfer Agent and Registrar Computershare Investor Services Denver, Colorado Securities Listed American Stock Exchange |
2003
233 Wilshire Boulevard, Suite 310