1 EXHIBIT 13 SCOPE INDUSTRIES 2001 64TH ANNUAL REPORT [SCOPE INDUSTRIES LOGO] 2 Financial Highlights <Table> <Caption> For the years ended June 30, 2001 2000 1999 --------------------------------------------------------------------------------------------------- Operating sales and revenues $59,685,994 $63,908,394 $32,064,621 Investment and other income 611,686 14,895,732 3,129,181 Net (loss) income $(4,173,681) $ 6,053,735 $ (842,555) Net (loss) income per share -- Basic $ (4.03) $ 5.51 $ (0.75) Net (loss) income per share -- Diluted $ (4.03) $ 5.50 $ (0.75) Average shares outstanding -- Basic 1,034,821 1,098,521 1,116,958 Average shares outstanding -- Diluted 1,034,821 1,100,602 1,126,454 </Table> Five-Year Review -- Selected Financial Data <Table> <Caption> For the years ended June 30, 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------------------------------- OPERATIONS Operating Sales and Revenues $59,685,994 $63,908,394 $32,064,621 $25,045,272 $30,273,913 ----------- ----------- ----------- ----------- ----------- Operating Cost and Expenses: Cost of sales and operating expenses 50,709,560 53,390,681 27,757,627 18,065,034 19,177,617 Depreciation and amortization 7,117,708 6,584,603 3,094,198 2,024,722 2,112,959 General and administrative 8,619,093 9,330,107 5,434,532 4,056,536 3,759,867 ----------- ----------- ----------- ----------- ----------- 66,446,361 69,305,391 36,286,357 24,146,292 25,050,443 ----------- ----------- ----------- ----------- ----------- (6,760,367) (5,396,997) (4,221,736) 898,980 5,223,470 Investment and other income 611,686 14,895,732 3,129,181 25,344,817 20,569,303 ----------- ----------- ----------- ----------- ----------- (Loss) income before income taxes (6,148,681) 9,498,735 (1,092,555) 26,243,797 25,792,773 (Benefit) provision for income taxes (1,975,000) 3,445,000 (250,000) 10,180,000 6,800,000 ----------- ----------- ----------- ----------- ----------- Net (loss) income $(4,173,681) $ 6,053,735 $ (842,555) $16,063,797 $18,992,773 ----------- ----------- ----------- ----------- ----------- Net (loss) income per share -- Basic $ (4.03) $ 5.51 $ (0.75) $ 14.10 $ 16.03 Net (loss) income per share -- Diluted $ (4.03) $ 5.50 $ (0.75) $ 13.98 $ 15.94 FINANCIAL PERFORMANCE Net (loss) income as a percent of revenues (6.99)% 9.47% (2.63)% 64.14% 62.74% Cash dividend per share $ 1.00 $ 1.00 $ 1.00 $ 1.25 $ 1.25 Capital expenditures $ 9,646,010 $ 6,439,654 $ 4,155,834 $ 2,649,478 $ 1,298,935 FINANCIAL POSITION Total assets $70,993,148 $82,782,033 $72,457,006 $78,380,114 $61,484,033 Shareowners' equity $57,069,593 $66,442,847 $63,615,728 $71,154,072 $57,649,645 Equity per share at end of year $ 55.45 $ 62.63 $ 57.08 $ 63.37 $ 49.33 Shares outstanding at end of year 1,029,267 1,060,867 1,114,467 1,122,842 1,168,665 </Table> 3 President's Report to the Shareholders -------------------------------------------------------------------------------- It's difficult to characterize this past fiscal year because it wasn't shaped by one dominant event or theme. Certainly it wasn't a good year by conventional earnings analysis, but if we don't look deeper we miss a valuable insight to our future. First of all, during this past year we had no major investment income. For the four previous years, the yearly average of "Investment and other income" was approximately $16 million. Recording non-operating earnings of approximately $64 million over a four-year span was for us most extraordinary. This year it was $611,686. Operationally, our results were depressed primarily because of continued lower feed commodity prices; in addition, we were subject to major increases in energy costs and insurance premiums. Depreciation and amortization increased $553,105 and we wrote off impaired assets of over $1 million. The reason for recognizing an asset impairment was the expected start-up of a new plant in Georgia during the new fiscal year and consequently, the closure of two existing plants in Georgia. We have committed ourselves to significantly reducing costs. To accomplish this goal our people had to become more productive and we had to provide them with more and better capital equipment. We reduced our general and administrative costs 7.6% compared to last year and the Waste Material Recycling operating costs 5% per ton. However, the major impact of these improvements will be in subsequent years. Thus, despite the negative of a reported loss, the year was positive in that we: completely rebuilt our plant at Terre Haute, Indiana, which accomplished our goal of substantially lowering unit costs; installed a new emissions control system at Baltimore which improved the air quality, reduced costs, and increased production rates; made major improvements in many collection and transportation facilities; substantially completed the new plant in Georgia; and finally achieved our operating expectations for the relatively new plant at Hodgkins, Illinois. We shall continue reducing our operating costs barring those unique events over which we have no control. Certainly we can't predict future commodity prices so we can't predict earnings. However, our improvements and my bias toward optimism make me believe that this new fiscal year will show a substantial improvement in our cash flow. Again, we thank our customers and vendors, our good and hard working people, and finally, our shareowners for their trust and support -- Thank You. Respectfully yours, /s/ Meyer Luskin Meyer Luskin Chairman of the Board, President and Chief Executive Officer 1 - 4 Unaudited Quarterly Financial Data <Table> <Caption> First Second Third Fourth Quarter Quarter Quarter Quarter Year ----------------------------------------------------------------------------------------------------- 2001 Operating sales and revenue $14,217,589 $14,912,894 $15,151,885 $15,403,626 $59,685,994 Gross profit 635,763 550,335 1,180,959 1,849,585 4,216,642 Net (loss) $(1,038,711) $(1,125,505) $ (795,743) $(1,213,722) $(4,173,681) ----------- ----------- ----------- ----------- ----------- Net (loss) per share -- Diluted $ (0.99) $ (1.09) $ (0.77) $ (1.18) $ (4.03) ----------- ----------- ----------- ----------- ----------- 2000 Operating sales and revenue $15,932,103 $16,162,501 $14,853,495 $16,960,295 $63,908,394 Gross profit 1,442,593 1,716,635 1,083,915 2,049,977 6,293,120 Net income (loss) $ (739,801) $ (735,524) $ 5,624,040 $ 1,905,020 $ 6,053,735 ----------- ----------- ----------- ----------- ----------- Net income (loss) per share -- Diluted $ (0.66) $ (0.66) $ 5.14 $ 1.76 $ 5.50 ----------- ----------- ----------- ----------- ----------- </Table> Market Price Range Scope Industries Common Stock <Table> <Caption> 2001 2000 -------------------- -------------------- High Low High Low --------------------------------------------------------------------------------------------------- 1st Quarter $55.00 $41.00 $67.00 $60.25 2nd Quarter $48.75 $39.50 $61.50 $43.75 3rd Quarter $45.00 $41.25 $53.00 $38.75 4th Quarter $42.45 $40.25 $49.00 $41.00 </Table> Cash dividends of $1.00 were paid during each of the years ended June 30, 2001 and 2000, respectively. There were 77 shareowners of record of common stock at August 31, 2001. 2 - 5 Management's Discussion and Analysis of Results of Operations and Financial Condition ------------------------------------------------------ -------------------------------------------------------------------------------- Review of Consolidated Results of Operations -- Current Year Review 2001 compared with 2000 The Company recorded a net loss of $4,173,681 in fiscal 2001 compared to net income of $6,053,735 in the prior year. The loss from operations before Investment and other income and tax benefit was $6,760,367 in fiscal 2001 compared to a loss of $5,396,997 in the prior year. Investment and other income for fiscal 2001 was $611,686 compared to income of $14,895,732 in the prior year. Net loss per share in fiscal 2001 was $4.03 compared to net income per share-diluted of $5.50 in the prior year. Total revenues for fiscal 2001 were (7%) lower than the prior year revenues primarily due to lower average selling prices in the Waste Material Recycling business segment. Vocational school revenues were up slightly (1%) over fiscal 2000 revenues. Negatively impacting the Waste Material Recycling segment operations this fiscal year were increased costs that included employee health insurance benefits, general liability and property and workers compensation insurance. Transportation expenses increased during the year due to higher diesel fuel and fleet insurance costs. Electrical and natural gas costs also increased due to higher utility rates this year compared to last year. In addition, the Company expensed approximately $274,000 in costs associated with the termination of two Defined Benefit Pension Plans. Waste Material Recycling sales of dried bakery products represented 91% of fiscal 2001 and 2000 Company revenues. Dried bakery product sales tonnage increased slightly over the prior year but was negatively impacted by an 8% average decrease in sales prices from the prior year due primarily to record low corn prices throughout fiscal 2001 as a result of continued record corn crops. Corn prices have remained well below the 20-year average price of $2.50 per bushel, averaging $1.80 in fiscal 2001 and $1.90 in fiscal 2000. Waste Material Recycling operating costs were 5% lower per ton produced in fiscal 2001 than in the prior year in spite of increased energy, insurance, and transportation costs. In fiscal 2001 the Vocational School segment revenues were up slightly and represented 9% of the Company's revenues compared to 8% in the prior year. Vocational School operating costs were also up slightly in fiscal 2001 over the prior year resulting in a small operating loss. Depreciation and amortization increased $553,105, or 8% in fiscal 2001 over the prior year due primarily to the increase in fixed assets acquired and placed into service. General and administrative expenses in fiscal 2001 decreased $711,014, or 8% from the prior year due primarily to the closing of the IPC administrative office in Georgia. Investment and other income decreased $14,284,046 in fiscal 2001 over the prior year. In fiscal 2001, the Company sold investment securities for a gain of $352,160 and vacant land for a gain of $768,640 that was offset by losses on the disposition of assets. A loss of $1,021,832 from impairment of long-term assets was recognized due to the planned closure and sale of two processing plants in the state of Georgia. Interest income increased 31% in fiscal 2001 over the prior year, offset by increased interest expense from the Industrial Revenue Bond. In fiscal 2000, the Company sold its Emission Reduction Credits for a gain of $3,727,000 and a portion of the stockholdings of OSI Systems, Inc. was sold at a gain resulting in total investment and other income of $14,895,732. Included in Investment and other income are net investment losses of $116,847 resulting from the equity method of accounting for an investment acquired in fiscal 2001. A net investment loss of $423,800 was recognized in fiscal 2000. As a result of the loss incurred in fiscal 2001, an income tax benefit of 32% of the pre-tax loss was utilized through the availability of tax loss carry-backs and loss carry-forwards. The provision for income taxes in fiscal 2000 was 36% of pre-tax income. Accumulated unrealized holding gains on investments, net of deferred income taxes, were $2,349,619 at June 30, 2001 and $5,092,935 at June 30, 2000. Unrealized gains on long-term equity holdings in OSI Systems, Inc. comprise the major portion of the unrealized gains at June 30, 2001 and at June 30, 2000. These unrealized gains are not reflected in net income or loss. Changes in the unrealized gains are reported as Other Comprehensive Income or Loss as set forth in Statement of Financial Accounting Standards No. 130. Prior Year Review 2000 compared with 1999 In April 1999, the Company acquired International Processing Corporation and International Transportation Service, Inc. (collectively known as "IPC"). IPC operating results for fiscal 2000 and the last quarter of fiscal 1999 are included as part of the Waste Material Recycling segment of the Company. Total revenues for fiscal 2000 were 99% higher than fiscal 1999 revenues, primarily due to the acquisition of IPC. Waste Material Recycling sales for fiscal 2000 were 116% above the prior year. Vocational School Group revenues for fiscal 2000 were 5% above revenues from the prior year. Waste Material Recycling sales represented 91% of fiscal 2000 Company revenues compared to 84% of the prior year revenues. Dried bakery product sales tonnage increased 118% in fiscal 2000 from the prior year and the average sales prices decreased 2% from the 3 - 6 comparable period. Corn prices have remained well below the 20-year average price of $2.50 per bushel, averaging $1.90 in fiscal 2000 compared to $2.01 in fiscal 1999, primarily due to record corn crops. The Vocational School Group revenues represented 8% of the Company's fiscal 2000 revenues compared to 15% in prior year, the decrease due to the acquisition of IPC additional revenue base. Waste Material Recycling operating costs were 4% lower per ton produced in fiscal 2000 than in the prior year, due primarily to tighter cost controls on expenses and raw material purchases. During the last quarter of fiscal 2000, the Company purchased raw material contracts from a competitor in the Chicago area for approximately $617,000. The purchase significantly increased the raw material supply and helped reduce processing cost by increasing the efficiency of the new Chicago plant. Operating costs for the Vocational School Group were up 6% in fiscal 2000 over the prior year primarily due to the relocation of schools after lease terminations. With the addition of IPC operations, depreciation and amortization expense increased $3,490,405 or 113% in fiscal 2000 over the prior year. General and administrative expenses increased $3,895,575 or 72% in fiscal 2000 over the prior year because of the IPC acquisition. Selling prices for the Waste Material Recycling product were at historically low levels throughout fiscal 2000. As mentioned above, the average selling prices for the current year were 2% below the already low average prices that prevailed during fiscal 1999. Competing commodities, mainly corn and some fats, that are themselves at historic lows due to an over abundance of the commodities, dictate low selling prices and reduced or non-existent margins for this business segment. Although operating costs were reduced, this was not enough to offset the decreased selling prices and the increase in depreciation and amortization and general and administrative expenses. Decreased operating margins for the Vocational School Group resulted in a small operating loss in the current year compared to income in the previous year. The decrease was due primarily to the relocation of one of its largest and most profitable schools resulting from the loss of its lease because of redevelopment plans for the site. Investment and other income increased $11,766,551 or 376% in fiscal 2000, over the prior year. In fiscal 2000, the Company sold its Emission Reduction Credits for a gain of $3,727,000 and a portion of the stockholdings of OSI Systems, Inc., was sold at a gain increasing investment and other income to $14,895,732 compared to $3,129,181 in fiscal 1999. Also included in Investment and other income are net investment losses of $423,800 in fiscal 2000 and of $299,215 in fiscal 1999. Net income for fiscal 2000 was $6,053,735 or $5.50 per share-diluted. Fiscal 1999 resulted in a net loss of $842,555 or $0.75 loss per share. The provision for income taxes in fiscal 2000 was 36% of pre-tax income. As a result of the loss incurred in fiscal 1999, an income tax benefit of 23% of the pre-tax loss was utilized through the availability of tax loss carry-backs and loss carry-forwards. Accumulated unrealized holding gains on investments, net of deferred income taxes, were $5,092,935 at June 30, 2000 and $4,405,695 at June 30, 1999. Unrealized gains on long-term equity holdings in OSI Systems, Inc. comprise the major portion of the unrealized gains at June 30, 2000 and at June 30, 1999. These unrealized gains are not reflected in net income or loss. Changes in the unrealized gains are reported as Other Comprehensive Income or Loss as set forth in Statement of Financial Accounting Standards No. 130. Liquidity and Capital Resources We have used our cash this fiscal year principally to fund capital improvements, pay cash dividends, retire common stock, acquire new investments and for general working capital requirements. We funded our cash requirements through cash flows from operations, proceeds from the industrial revenue bond and the proceeds from the maturing of U.S. treasury bills. The Company purchased raw material contracts from a competitor in the Chicago area for approximately $617,000 in April 2000. The purchase was funded from cash on hand. The Company purchased the IPC bakery waste recycling business in April 1999. The purchase price included cash payments of $20,514,504, net of cash acquired. The purchase was funded with cash and liquid securities on hand. The Company's capital expenditures were $6,439,654 in 2000 and $4,155,834 in 1999. Capital spending for the Waste Material Recycling segment represented 98% of the Company's total capital expenditures in 2001, 94% in 2000 and 94% in 1999. A new bakery waste recycling facility is under construction near Atlanta, GA and is being partly financed through the issuance of $6,000,000 in Gainesville and Hall County Development Authority, State of Georgia tax-exempt Industrial Revenue Bonds ("IRB"), the Company's only long-term indebtedness at June 30, 2001 and 2000. The Company decided to finance this project due to the availability of the low interest rate bonds. The effective interest rate during the current year for the IRB was approximately 4.89%. A new facility near Chicago was completed and placed into operation during fiscal year 2000, replacing two facilities that had serviced the same geographic area. Vehicle replacements, processing equipment automation and refurbishing are continuously being made at all processing facilities to maintain efficient operations and reduce the cost of product for the bakery recycling business. In the Vocational School Group a new school facility is under construction in Nevada and is scheduled to be operational in the second quarter of fiscal year 2002. A 4 - 7 school was relocated to a new facility during fiscal 2000 due to loss of its lease. A direct relationship between school improvements and increased enrollment has been evident in past school refurbishing projects. Positive returns on the planned investments are expected. The Company believes its cash flow from operations, remaining proceeds from the industrial revenue bond financing and liquid investment holdings will be sufficient to meet its capital expenditures and operating cash requirements in fiscal 2002 without incurring additional debt, however, the Company does not rule out financing options that would be beneficial to the Company. Quantitative and Qualitative Disclosures about Market Risk Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of interest expense we must pay with respect to our outstanding debt instrument. Our risk associated with fluctuating interest expense is limited, being closely tied to market rates for tax-exempt municipal bonds and the rating of the bank whose standby letter of credit secures the debt. Under our current policy, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We insure the safety and preservation of our invested principal funds by limiting market risk and reinvestment risk, investing primarily in government treasury bills and investment grade securities maturing between six months to one year. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments at June 30, 2001 or June 30, 2000. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest expense. Shareowners' Equity At June 30, 2001, shareowners' equity includes net accumulated unrealized holding gains on investments totaling $2,349,619, net of deferred income taxes. At June 30, 2000, shareowners' equity included $5,092,935 of net accumulated unrealized holding gains on investments. The accumulated unrealized holding gains are primarily from our investment in OSI Systems, Inc. common stock holdings. For the year ended June 30, 2001 the Company purchased and retired a total of 34,600 of its shares (3%) at a cost of $1,532,290. Funds for the purchase of these shares were available from existing cash and from operating and investing cash flows. The Company does not contemplate raising capital by issuing additional common shares during the ensuing year. New Accounting Standards: The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which 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 adoption of SFAS No. 133 did not have a material impact on the Company's financial statements. The Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", which establishes accounting and reporting standards to reflect only the purchase method of accounting when business combinations occur. The adoption of SFAS No. 141 will not have a material impact on the Company's financial statements. The Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets", which the Company will early adopt on July 1, 2001. The statement establishes accounting and reporting standards for goodwill and other intangible assets. The early adoption of SFAS No. 142 will not have a material impact on the Company's financial statements. Forward Looking Information: Certain Cautionary Statements Certain statements included in this Management's Discussion and Analysis of Operations and Financial Condition and included elsewhere in this Annual Report that are not related to historical results are forward looking statements. Actual results may differ materially from those stated or implied in the forward-looking statements. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Potential risk and uncertainties include, but are not limited to, general business conditions, unusual volatility in equity and interest rate markets and in competing commodity markets, disruptions in the availability or pricing of raw materials, transportation difficulties, changing governmental educational aid policies, or disruption of operations due to unavailability of fuels or from acts of God. 5 - 8 Independent Auditors' Report -------------------------------------------------------------------------------- Board of Directors and Shareowners Scope Industries Santa Monica, California We have audited the accompanying consolidated balance sheets of Scope Industries and subsidiaries ("the Company") as of June 30, 2001 and 2000, 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, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Scope Industries and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Los Angeles, California August 31, 2001 6 - 9 Consolidated Statements of Operations <Table> <Caption> For the years ended June 30, 2001 2000 1999 ----------------------------------------------------------------------------------------------------- Operating Sales and Revenues: Sales $54,578,070 $58,860,170 $27,246,682 Vocational school revenues 5,107,924 5,048,224 4,817,939 ----------- ----------- ----------- 59,685,994 63,908,394 32,064,621 ----------- ----------- ----------- Operating Costs and Expenses: Cost of sales 46,749,815 49,640,186 24,129,518 Vocational school expenses 3,959,745 3,750,495 3,628,109 Depreciation and amortization 7,117,708 6,584,603 3,094,198 General and administrative 8,619,093 9,330,107 5,434,532 ----------- ----------- ----------- 66,446,361 69,305,391 36,286,357 ----------- ----------- ----------- (6,760,367) (5,396,997) (4,221,736) Investment and other income 611,686 14,895,732 3,129,181 ----------- ----------- ----------- (Loss) income before income taxes (6,148,681) 9,498,735 (1,092,555) (Benefit) provision for income taxes (1,975,000) 3,445,000 (250,000) ----------- ----------- ----------- Net (Loss) income $(4,173,681) $ 6,053,735 $ (842,555) ----------- ----------- ----------- Net (Loss) Income Per Share -- Basic $ (4.03) $ 5.51 $ (0.75) Net (Loss) Income Per Share -- Diluted $ (4.03) $ 5.50 $ (0.75) Average shares outstanding -- Basic 1,034,821 1,098,521 1,116,958 Dilutive effect of stock options -- 2,081 9,496 ----------- ----------- ----------- Average shares outstanding -- Diluted 1,034,821 1,100,602 1,126,454 </Table> The accompanying notes are an integral part of these statements. 7 - 10 Consolidated Balance Sheets <Table> <Caption> June 30, 2001 2000 ---------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 563,234 $ 4,045,582 Treasury bills (par value $10,000,000 at June 30, 2001 and $19,100,000 at June 30, 2000) 9,926,527 18,840,593 Accounts and notes receivable, less allowance for doubtful accounts of $691,283 at June 30, 2001 and $645,903 at June 30, 2000 3,870,559 4,581,022 Income taxes receivable 1,645,253 -- Inventories 874,446 680,332 Deferred income taxes 944,000 1,297,500 Prepaid expenses and other current assets 2,387,804 1,576,237 ----------- ----------- Total current assets 20,211,823 31,021,266 ----------- ----------- Notes Receivable 594,891 659,374 ----------- ----------- Property and Equipment: Machinery and equipment 42,581,045 37,611,946 Land, buildings and improvements 17,034,166 16,045,836 ----------- ----------- 59,615,211 53,657,782 Less accumulated depreciation and amortization 30,349,635 27,531,392 ----------- ----------- 29,265,576 26,126,390 ----------- ----------- Collection Routes and Contracts, less accumulated amortization of $5,111,973 at June 30, 2001 and $2,748,557 at June 30, 2000 4,700,326 7,623,736 ----------- ----------- Other Assets: Non-appropriated funds (Industrial Revenue Bond) 1,962,598 5,440,677 Deferred charges and other assets 680,969 646,613 Deferred income taxes 231,000 -- Investments available for sale at fair value 4,871,810 9,252,975 Other equity investments 8,474,155 2,011,002 ----------- ----------- 16,220,532 17,351,267 ----------- ----------- $70,993,148 $82,782,033 ----------- ----------- LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Accounts payable $ 4,498,515 $ 4,852,389 Other accrued liabilities 1,852,487 1,926,295 Accrued payroll and related employee benefits 1,572,553 1,367,722 Income taxes payable -- 317,980 ----------- ----------- Total current liabilities 7,923,555 8,464,386 Industrial Revenue Bond 6,000,000 6,000,000 Deferred Income Taxes -- 1,874,800 ----------- ----------- 13,923,555 16,339,186 ----------- ----------- Commitments and Contingent Liabilities Shareowners' Equity: Common stock, no par value, 5,000,000 shares authorized; shares issued and outstanding at June 30, 2001 -- 1,029,267; June 30, 2000 -- 1,060,867 4,576,050 4,470,450 Retained earnings 50,143,924 56,879,462 Accumulated other comprehensive income 2,349,619 5,092,935 ----------- ----------- 57,069,593 66,442,847 ----------- ----------- $70,993,148 $82,782,033 ----------- ----------- </Table> The accompanying notes are an integral part of these statements. 8 - 11 Consolidated Statements of Cash Flows ---------------------------------------------- <Table> <Caption> For the years ended June 30, 2001 2000 1999 -------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net (loss) income $ (4,173,681) $ 6,053,735 $ (842,555) Adjustments to reconcile net (loss) income to net cash flows from (used in) operating activities: Depreciation and amortization 4,754,299 4,375,473 2,554,771 Amortization of contracts and routes 2,363,409 2,209,130 539,427 (Gain) on sale of Emission Reduction Credits -- (3,727,000) -- (Gains) losses on investments available for sale (352,160) (10,186,300) 288,957 Loss (gains) on sale of property and equipment 811,404 259,013 (1,050,779) Deferred income taxes (208,000) 59,140 (435,000) Provision for doubtful accounts receivable 155,144 174,120 188,658 Changes in operating assets and liabilities: Accounts and notes receivable 619,802 (304,745) (170,596) Inventories (194,114) 319,423 338,216 Prepaid expenses and other current assets (811,567) (164,782) (831,222) Accounts payable and accrued liabilities (222,851) 884,770 (645,261) Income taxes receivable or payable (1,963,233) 66,495 (224,021) Tax benefit applied to purchase of routes and contracts 560,000 560,000 140,000 Other assets 81,191 (145,260) 9,262 ------------ ------------ ------------ Net cash flows from (used in) operating activities 1,419,643 433,212 (140,143) ------------ ------------ ------------ Cash Flows From Investing Activities: Purchase of U.S. Treasury bills (21,421,504) (31,088,390) (19,802,061) Maturities of U.S. Treasury bills 30,335,570 27,100,000 47,974,498 Purchase of property and equipment (9,646,010) (6,439,654) (4,155,834) Proceeds from disposition of property and equipment 941,121 163,407 1,541,866 Proceeds from sale of Emission Reduction Credits -- 3,727,000 -- Purchases off routes and contracts -- (617,104) -- Issuance of long-term notes receivable -- (200,000) (669,500) Purchase of investments available for sale (178,629) (815,405) (319,046) Purchase of other equity investments (6,580,000) -- -- Proceeds from disposition of investments available for sale 625,639 11,469,231 718,100 Acquisition of International Processing Corp., net -- -- (20,514,504) Non-appropriated bond proceeds held by Trustee 3,478,079 (5,440,677) -- ------------ ------------ ------------ Net cash flows (used in) from investing activities (2,445,734) (2,141,592) 4,773,519 ------------ ------------ ------------ Cash Flows From Financing Activities: Dividends to shareowners (1,029,567) (1,108,867) (1,117,967) Proceeds from stock options exercised 105,600 309,150 22,838 Repurchases of common stock (1,532,290) (3,114,139) (626,333) Proceeds from Industrial Revenue Bond financing 6,000,000 ------------ ------------ ------------ Net cash (used in) from financing activities (2,456,257) 2,086,144 (1,721,462) ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (3,482,348) 377,764 2,911,914 Cash and cash equivalents at beginning of year 4,045,582 3,667,818 755,904 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 563,234 $ 4,045,582 $ 3,667,818 ------------ ------------ ------------ Supplemental Disclosures: Cash paid during the year for: Interest $ 300,088 $ 6,340 $ 9,053 Income taxes $ 120,768 $ 3,032,650 $ 425,194 Non Cash Investing Transactions: Acquired Preferred stock of Stamet, Inc. in exchange for cancellation of a note receivable $ 428,800 </Table> The accompanying notes are an integral part of these statements. 9 - 12 Consolidated Statements of Shareowners' Equity <Table> <Caption> Common Stock Accumulated ---------------------- Other Number of Retained Comprehensive For the years ended June 30, 2001, 2000 and 1999 Shares Amount Earnings Income(1) --------------------------------------------------------------------------------------------------------- Balance July 1, 1998 1,122,842 $4,138,462 $57,635,588 $ 9,380,022 Net (loss) (842,555) Cash dividends on common stock, $1.00 per share (1,117,967) Cash purchase of common stock and subsequent retirement (9,275) (626,333) Proceeds from stock options exercised 900 22,838 Net unrealized (loss) on investments available for sale (4,974,327) --------- ---------- ----------- ----------- Balance June 30, 1999 1,114,467 4,161,300 55,048,733 4,405,695 Net income 6,053,735 Cash dividends on common stock, $1.00 per share (1,108,867) Cash purchase of common stock and subsequent retirement (64,700) (3,114,139) Proceeds from stock options exercised 11,100 309,150 Net unrealized gain on investments available for sale 687,240 --------- ---------- ----------- ----------- Balance June 30, 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 --------- ---------- ----------- ------------ </Table> (1) Accumulated Other Comprehensive Income is comprised entirely of net unrealized gains on investments available for sale. Consolidated Statements of Comprehensive Income <Table> <Caption> For the years ended June 30, 2001 2000 1999 --------------------------------------------------------------------------------------------------- Net (loss) income $(4,173,681) $6,053,735 $ (842,555) Other comprehensive (loss) income, net of tax: Net unrealized (loss) gain on investments available for sale (2,743,316) 687,240 (4,974,327) ----------- ---------- ----------- Comprehensive (loss) income $(6,916,997) $6,740,975 $(5,816,882) ----------- ---------- ----------- </Table> The accompanying notes are an integral part of these statements. 10 __ 13 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- NOTE 1: Summary of Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Scope Industries and its subsidiaries (the Company), all of which are wholly owned. All significant inter-company account transactions have been eliminated. Certain prior year balances have been reclassified to conform to the current period presentation. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents and Short-term Investments: The Company considers all liquid debt instruments to be cash equivalents if the securities mature within 90 days of acquisition. Carrying amounts approximate fair value. Investments: Investments in equity securities with readily determinable market values are classified into categories based on the Company's intent. Investments available for sale are carried at estimated fair value based upon quoted market prices. Unrealized holding gains and losses are excluded from earnings and reported in Accumulated other comprehensive income as a separate component of shareowners' equity until realized. Unrealized losses that are other than temporary are recognized in Investment and other income. Realized gains and losses are determined on the specific identification method and are reflected in Investment and other income. Equity investments in companies in which ownership is at least 20%, but less than a majority of the voting stock, are accounted for using the equity method with equity adjustments reflected in Investment and other income. Equity investments where ownership is less than 20% for which quoted market prices are not available are carried at cost. Inventories: Inventories consist of manufactured finished goods and purchased goods, portions of which are consumed in the various operating activities and portions of which are sold to customers. Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Property and Equipment: Property and equipment are stated at cost. Depreciation is provided generally on the straight-line method over the estimated useful lives of the assets. Service lives are 20 years for buildings, 10 years, but not exceeding the lease terms, for leasehold improvements and 3 to 7 years for machinery and equipment. Collection Routes and Contracts: Collection routes, raw material contracts and restrictive covenants are stated at cost and are amortized over 3 to 5 years using the straight-line method. 11 __ 14 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- Revenue Recognition: Sales are recorded at contract prices as deliveries are made, shipping charges billed to customers are included within revenues and the related costs are included within Cost of sales. Tuition revenue is recognized as students complete course hours. Provisions for losses are determined on the basis of loss experience and assessment of prospective risks; resulting adjustments are made to the allowance for losses. Income Taxes: The Company files a consolidated federal income tax return. The Company provides for income taxes using the asset and liability method under which deferred income taxes are recognized for the estimated future tax effects attributable to temporary differences and carry-forwards that result from events that have been recognized either in the financial statements or the income tax returns, but not both. The measurement of current and deferred income tax liabilities and assets is based on provisions of enacted tax laws. Valuation allowances are recognized if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. Stock-Based Compensation: The Company has elected to adopt the disclosure only provisions of the Financial Accounting Standards Board, SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, the Company will continue to account for its stock-based compensation plans under the provisions of APB No. 25. Per Share Information: Basic net income or loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the incremental shares to be issued upon the assumed exercise of dilutive stock options. Derivative Instruments and Hedging Activities: The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is 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 a material impact on the Company's financial statements. New Accounting Standards: The Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", which establishes accounting and reporting standards to reflect only the purchase method of accounting when business combinations occur. The adoption of SFAS No. 141 will not have a material impact on the Company's financial statements. The Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets", which the Company will early adopt on July 1, 2001. 12 __ 15 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- The statement establishes accounting and reporting standards for goodwill and other intangible assets. The early adoption of SFAS No. 142 will not have a material impact on the Company's financial statements. -------------------------------------------------------------------------------- NOTE 2: Asset Impairment Write-Off During the fourth quarter of 2001, the Company recorded asset impairments of approximately $1,021,832 related primarily to the intended closure and sale of two processing plants in early fiscal 2002. The two plants will be replaced by the new manufacturing facility scheduled for completion before the end of calendar 2001 (see Note 6). The assets being written off will not be utilized at the new plant and will be scrapped. The charge for impairment is reflected in Investment and other income. -------------------------------------------------------------------------------- NOTE 3: Treasury Bills All U.S. Treasury bills are purchased with maturities of one year or less. The cost is adjusted to reflect interest earned as it accrues. The adjusted cost approximates the fair value of the bills. The Company has classified its Treasury bills as available-for-sale securities. -------------------------------------------------------------------------------- NOTE 4: Investment and Other Income 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 losses. Recognized losses on securities whose decline in value was deemed to be other than temporary were $423,800 and $299,215 in fiscals 2000 and 1999, respectively. A loss of $116,847 was recognized based upon the equity method of accounting for an investment acquired in fiscal 2001. A loss of $1,021,832 was recognized on the impairment of assets in fiscal 2001. A gain of $768,640 was realized on the sale of property in Riverside, California in fiscal 2001, offset by losses on disposed assets. A gain of $3,727,000 from the sale of certain Emission Reduction Credits was recorded in fiscal 2000. A gain of $1,050,779 was realized on the sale of property in Chicago, Illinois in fiscal 1999. <Table> <Caption> For the years ended June 30, 2001 2000 1999 ----------------------------------------------------------------------------- Investment and other income was comprised of: Interest income $ 1,373,832 $ 1,048,544 $1,962,585 Gain on sales of marketable securities 352,160 10,610,100 10,258 Unrealized (losses) in investments -- (423,800) (299,215) Equity (loss) in investment (116,847) -- -- (Loss) from impairment of assets (1,021,832) -- -- Gain (loss) on disposition of assets 210,428 (259,013) 1,050,779 Interest expense (310,340) (30,053) (9,052) Miscellaneous income 124,285 3,949,954 413,826 ----------- ----------- ---------- Investment and other income $ 611,686 $14,895,732 $3,129,181 ----------- ----------- ---------- </Table> 13 __ 16 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- At June 30, 2001 investments were as follows: <Table> <Caption> Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------------- Available-for-sale securities -Equity securities(1) $2,245,187 $2,626,621 $ -- $4,871,808 Other equity securities(2) $8,474,155 -- -- $8,474,155 </Table> At June 30, 2000 investments were as follows: <Table> <Caption> Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------------- Available-for-sale securities -Equity securities(1) $2,340,040 $6,912,935 $ -- $9,252,975 Other equity securities(2) $2,011,002 -- -- $2,011,002 </Table> ------------------------------------- (1) Fair values for "Equity securities" investments available-for-sale are based on quoted market prices, where available, at the reporting date. (2) At June 30, 2001, the Company holds shares and warrants in Chromagen, Inc., shares in Stamet, Inc., MetaProbe, LLC and Myricom, Inc. that are classified as "Other equity securities". The shares and warrants are not publicly traded and are carried at cost or adjusted cost reflected by the equity method of accounting. No quoted market prices are available for these securities. At June 30, 2000, the Company held investments in Chromagen, Inc. and Stamet, Inc. securities. 14 __ 17 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- NOTE 5: 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: <Table> <Caption> For the years ending June 30, ------------------------------------------------------------------------ 2002 $1,056,100 2003 942,890 2004 824,450 2005 617,360 2006 447,800 Thereafter 505,980 ---------- Total minimum lease payments $4,394,580 ---------- Total rental expense under operating leases was $1,234,432 in 2001, $1,271,332 in 2000, and $1,186,796 in 1999. </Table> -------------------------------------------------------------------------------- NOTE 6: Industrial Revenue Bond In fiscal 2000, the Company issued $6,000,000 in tax exempt Industrial Revenue Bonds ("IRB") through the Gainesville and Hall County Development Authority, in the State of Georgia. Interest on the bonds, (3.2% at June 30, 2001), varies weekly based upon the tax-exempt interest rate in the current bond market. In fiscal 2001 the weighted average interest rate for the IRB was 4.0%. The bonds are secured by a bank standby letter of credit that is guaranteed by the Company, collateralized by the assets of the facility to be constructed and subject to certain restrictive covenants. At June 30, 2001, the Company was in compliance with all financial covenants under the debt agreement. The bonds have a mandatory redemption beginning July 2003 through 2020, with the first 4 years redemption at $200,000 per year, then $300,000 the next six years. The Company, at its option, may retire all or a portion of the bonds at anytime without penalty. At June 30, 2001, the Bond Trustee held non-appropriated funds of $1,962,598 that are restricted for construction of the new plant. -------------------------------------------------------------------------------- NOTE 7: Contingent Liabilities 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. -------------------------------------------------------------------------------- NOTE 8: Retirement Plans The Company maintains retirement and pension plans for certain eligible employees. The Company's contribution 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, 2001, 2000 and 1999 the defined contribution plan expenses were $227,665, $221,190, and $180,138, respectively. The Company 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 fiscals 2001 and 2000 were $80,957 and $36,946, respectively. 15 __ 18 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- The Company has two Defined Benefit Pension Plans ("DBPP") that are being terminated. Employees will receive either a lump sum cash distribution or the DBPP will purchase a fully funded monthly annuity from an insurance company for the employee. The difference between the assets within the DBPP and the termination liability at June 30, 2001 is an expense of approximately $274,000 and is reflected in cost of sales and general and administrative expenses in the income statement. -------------------------------------------------------------------------------- NOTE 9: Stock Options Under the Company's 1992 Stock Option Plan ("1992 Plan") the Company can grant 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, except that if the employee owns shares of the Company representing more than 10% of its total voting power, then the price shall not be less than 110% of the fair market value of such shares on the date such option is granted. No option may be granted under the 1992 Stock Option Plan after December 31, 2001. Options to purchase shares expire five years after the date of grant and become exercisable on a cumulative basis at 25% each year, commencing with the second year. Stock option activity under the 1992 Plan was as follows: <Table> <Caption> Weighted Weighted Average Average Number Exercise Options Exercise of Shares Price Exercisable Price -------------------------------------------------------------------------------------- Outstanding at July 1, 1998 18,000 $29.64 11,250 $28.96 Exercised (900) $25.38 ----------- Outstanding at June 30, 1999 17,100 $29.87 14,850 $29.38 Exercised (11,100) $27.85 ----------- 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 -- </Table> At June 30, 2001, there were no outstanding options and there are 25,000 shares remaining available for future grant. No expense has been charged to income relating to stock options. If the fair value method of accounting for stock options prescribed by SFAS No. 123 "Accounting for Stock-Based Compensation" had been used, the expense relating to the stock options would have been no expense in fiscal 2001, $6,836 in fiscal 2000 and $13,673 for fiscal 1999. Pro forma net income (loss) would have been $6,046,899 in fiscal 2000 and $(856,228) in fiscal 1999. Pro forma diluted earnings (loss) per share in fiscals 2000 and 1999 would have been $5.49 and $(0.76), respectively, rather than the $5.50 and $(0.75) reported earnings (loss) per share. Scope Products, Inc. ("SPI"), is a wholly owned subsidiary of the Company and has its own Incentive and Non-Qualified Stock Option 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 16 __ 19 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- 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: <Table> <Caption> Weighted Weighted Average Average Number Exercise Options Exercise of Shares Price Exercisable Price -------------------------------------------------------------------------------------- Outstanding at June 30, 1999 -- Granted 757,500 $5.00 ----------- Outstanding at June 30, 2000 757,500 $5.00 0 Granted 5,000 $5.00 Terminated (45,000) $5.00 ----------- Outstanding at June 30, 2001 717,500 $5.00 210,375 $5.00 </Table> No expense has been charged to income relating to the SPI stock options granted. If the fair value method of accounting for stock options prescribed by SFAS No. 123 had been used, the expense relating to the stock options would have been $138,198 in fiscal 2001, $133,834 in fiscal 2000 and no expense in fiscal 1999. Pro forma net (loss) income would have been $(4,267,489) in fiscal 2001, and $5,968,440 in fiscal 2000. Pro forma diluted (loss) earnings per share in fiscals 2001 and 2000 would have been $(4.12) and $5.42, respectively, rather than the $(4.03) and $5.50 reported (loss) earnings per share. -------------------------------------------------------------------------------- NOTE 10: Income Taxes The components of the provision for income taxes are: <Table> <Caption> For the years ended June 30, 2001 2000 1999 --------------------------------------------------------------------------- Current: Federal $(2,247,000) $3,143,545 $ 99,839 State 64,000 242,315 85,161 ----------- ---------- --------- (2,183,000) 3,385,860 185,000 ----------- ---------- --------- Deferred: Federal 193,000 60,405 (404,839) State 15,000 (1,265) (30,161) ----------- ---------- --------- 208,000 59,140 (435,000) ----------- ---------- --------- Total provision $(1,975,000) $3,445,000 $(250,000) ----------- ---------- --------- </Table> 17 __ 20 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- Reconciliation of the provision for income taxes computed at the U.S. Federal statutory income tax rate to the reported provision is: <Table> <Caption> For the years ended June 30, 2001 2000 1999 --------------------------------------------------------------------------- U.S. Federal statutory income tax $(2,091,000) $3,229,500 $(371,469) State income taxes, net of Federal tax benefit 52,100 160,800 36,300 Taxes on income not recognized on books 99,000 115,400 88,609 Other (35,100) (60,700) (3,440) ----------- ---------- --------- Total provision $(1,975,000) $3,445,000 $(250,000) ----------- ---------- --------- </Table> The major components of the deferred income tax assets and liabilities are: <Table> <Caption> At June 30, 2001 2000 1999 --------------------------------------------------------------------------- Depreciation $ (215,000) $ (664,000) $(1,505,000) Income not currently taxable (748,000) (442,000) (470,000) Unrealized gain on investments (278,000) (1,738,000) (1,675,000) Other (30,000) (594,600) (108,160) ----------- ----------- ----------- Total deferred income tax liabilities (1,271,000) (3,438,600) (3,758,160) ----------- ----------- ----------- Expenses not currently deductible 1,778,000 2,146,900 2,500,000 Recognized losses not currently deductible 668,000 714,400 885,000 ----------- ----------- ----------- Total deferred income tax assets 2,446,000 2,861,300 3,385,000 ----------- ----------- ----------- Net deferred income tax asset (liability) $ 1,175,000 $ (577,300) $ (373,160) ----------- ----------- ----------- </Table> In addition to the recognized deferred income tax benefits and liabilities, an additional unrecognized income tax benefit of approximately $3.7 million is available to the Company in subsequent operating periods resulting from tax deductions for tax goodwill amortization of approximately $10.8 million. In subsequent periods, the income tax benefit realized from tax goodwill amortization will first reduce the carrying value of collection routes and contracts until fully amortized, and secondly will reduce income tax expense. The deduction for tax goodwill amortization will be available ratably over the next ten years. -------------------------------------------------------------------------------- 18 __ 21 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- NOTE 11: Other Comprehensive Income Other comprehensive (loss) income consists of: <Table> <Caption> Amount Income Tax Amount Before (Expense) Net of Taxes Benefit Taxes --------------------------------------------------------------------------- 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 $(2,743,316) For the year ended June 30, 2000 Unrealized holding gains arising during the year $ 11,018,540 $(3,710,205) $ 7,308,335 Reclassification adjustment (10,186,300) 3,565,205 (6,621,095) ------------ ----------- ----------- Other comprehensive income $ 832,240 $ (145,000) $ 687,240 For the year ended June 30, 1999 Unrealized holding losses arising during the year $ (8,463,284) $ 3,301,135 $(5,162,149) Reclassification adjustment 288,957 (101,135) 187,822 ------------ ----------- ----------- Other comprehensive loss $ (8,174,327) $ 3,200,000 $(4,974,327) </Table> 19 __ 22 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- NOTE 12: Business Segment Data The Company's current operations are conducted through two primary business segments. Waste Material Recycling The Company owns and operates 14 plants nationwide in which bakery and snack food waste material is processed and converted into food supplement for animals. The principal customers are dairies, feed lots, pet food manufacturers and poultry farms. The Company also owns and operates one plant in which bakery waste material is processed and converted into edible breadcrumbs. The principal customers are pre-packaged and restaurant supply food processors. This business segment depends upon the Company's ability to secure the surplus and waste material, which it does under contracts with bakeries and snack food manufacturers. Vocational School Group The Company owns and operates 12 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. <Table> <Caption> For the years ended June 30, 2001 2000 1999 --------------------------------------------------------------------------- Operating Sales and Revenues: Waste Material Recycling $54,112,493 $58,220,688 $27,015,153 Vocational School Group 5,107,924 5,048,224 4,817,939 Other 465,577 639,482 231,529 ----------- ----------- ----------- $59,685,994 $63,908,394 $32,064,621 ----------- ----------- ----------- </Table> One customer represented 25%, 18% and 19% of product revenues for the Waste Material Recycling segment for the years ended 2001, 2000 and 1999, respectively. The Company does not believe that the loss of this customer or any other single customer would have a material adverse effect on the Company since the commodity product is readily marketable. 20 __ 23 Notes to Consolidated Financial Statements -------------------------------------------------- -------------------------------------------------------------------------------- <Table> <Caption> For the years ended June 30, 2001 2000 1999 ----------------------------------------------------------------------------- Operating (Loss) Income before Income Taxes: Waste Material Recycling $(4,833,466) $(3,899,819) $(2,687,279) Vocational School Group (9,997) (22,466) 53,635 Other 78,850 141,939 (97,586) ----------- ----------- ----------- (4,764,613) (3,780,346) (2,731,230) Corporate expenses (1,995,754) (1,616,651) (1,490,506) Investment and other income 611,686 14,895,732 3,129,181 ----------- ----------- ----------- (Loss) income before income taxes $(6,148,681) $ 9,498,735 $(1,092,555) ----------- ----------- ----------- </Table> <Table> Identifiable Assets: Waste Material Recycling $39,584,111 $42,685,714 $38,197,182 Vocational School Group 1,618,016 1,711,413 1,698,573 Other 228,270 367,560 506,849 Corporate 29,562,751 38,017,346 32,054,402 ----------- ----------- ----------- $70,993,148 $82,782,033 $72,457,006 ----------- ----------- ----------- Depreciation and Amortization: Waste Material Recycling $ 6,717,493 $ 6,203,305 $ 2,739,645 Vocational School Group 226,664 214,583 208,055 Other 139,289 139,289 135,564 Corporate 34,262 27,426 10,934 ----------- ----------- ----------- $ 7,117,708 $ 6,584,603 $ 3,094,198 ----------- ----------- ----------- Capital Expenditures: Waste Material Recycling $ 9,429,531 $ 6,069,997 $ 3,889,838 Vocational School Group 76,672 226,041 225,033 Other -- -- 36,624 Corporate 139,807 143,616 4,339 ----------- ----------- ----------- $ 9,646,010 $ 6,439,654 $ 4,155,834 ----------- ----------- ----------- </Table> 24 Corporate Information -------------------------- <Table> Directors Officers Independent Auditors Babette Heimbuch Meyer Luskin Deloitte & Touche LLP President & CEO Chairman, President and Los Angeles, California First Federal Bank Chief Executive Officer Of California Transfer Agent and Eric M. Iwafuchi Registrar Robert Henigson Vice President and Chief Computershare Investor Investor Financial Officer Services Denver, Colorado Meyer Luskin Eleanor R. Smith Securities Listed Vice President, Secretary American Stock Exchange William H. Mannon and Controller Retired Officer of Scope Industries Franklin Redlich Retired </Table> 2001 [SCOPE INDUSTRIES LOGO] 233 WILSHIRE BOULEVARD, SUITE 310 SANTA MONICA, CA 90401