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
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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.
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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
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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
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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.
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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
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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.
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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.
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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