SCOPE
INDUSTRIES
2002
65TH
ANNUAL
REPORT
[SCOPE LOGO]
Financial Highlights
<Table>
<Caption>
For the years ended June 30, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Operating sales and revenues $63,197,939 $59,685,994 $63,908,394
Investment and other income 19,920,009 611,686 14,895,732
Net income (loss) $11,085,017 $(4,173,681) $ 6,053,735
Net income (loss) per share -- Basic $ 10.77 $ (4.03) $ 5.51
Net income (loss) per share -- Diluted $ 10.77 $ (4.03) $ 5.50
Average shares outstanding -- Basic 1,029,267 1,034,821 1,098,521
Average shares outstanding -- Diluted 1,029,267 1,034,821 1,100,602
</Table>
Five-Year Review -- Selected Financial Data
<Table>
<Caption>
For the years ended June 30, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
OPERATIONS
Operating Sales and Revenues $63,197,939 $59,685,994 $63,908,394 $32,064,621 $25,045,272
----------- ----------- ----------- ----------- -----------
Operating Cost and Expenses:
Cost of sales and operating expenses 50,060,257 50,709,560 53,390,681 27,757,627 18,065,034
Depreciation and amortization 7,475,790 7,117,708 6,584,603 3,094,198 2,024,722
General and administrative 8,358,884 8,619,093 9,330,107 5,434,532 4,056,536
----------- ----------- ----------- ----------- -----------
65,894,931 66,446,361 69,305,391 36,286,357 24,146,292
----------- ----------- ----------- ----------- -----------
(2,696,992) (6,760,367) (5,396,997) (4,221,736) 898,980
Investment and other income 19,920,009 611,686 14,895,732 3,129,181 25,344,817
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 17,223,017 (6,148,681) 9,498,735 (1,092,555) 26,243,797
Provision (benefit) for income taxes 6,138,000 (1,975,000) 3,445,000 (250,000) 10,180,000
----------- ----------- ----------- ----------- -----------
Net income (loss) $11,085,017 $(4,173,681) $ 6,053,735 $ (842,555) $16,063,797
=========== =========== =========== =========== ===========
Net income (loss) per share -- Basic $ 10.77 $ (4.03) $ 5.51 $ (0.75) $ 14.10
Net income (loss) per
share -- Diluted $ 10.77 $ (4.03) $ 5.50 $ (0.75) $ 13.98
FINANCIAL PERFORMANCE
Net income (loss) as a percent of
revenues 17.54% (6.99)% 9.47% (2.63)% 64.14%
Cash dividend per share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.25
Capital expenditures $12,562,888 $ 9,646,010 $ 6,439,654 $ 4,155,834 $ 2,649,478
FINANCIAL POSITION
Total assets $80,735,469 $70,993,148 $82,782,033 $72,457,006 $78,380,114
Shareowners' equity $65,093,039 $57,069,593 $66,442,847 $63,615,728 $71,154,072
Equity per share at end of year $ 63.24 $ 55.45 $ 62.63 $ 57.08 $ 63.37
Shares outstanding at end of year 1,029,267 1,029,267 1,060,867 1,114,467 1,122,842
</Table>
President's Report to the Shareholders
- --------------------------------------------------------------------------------
It has been my practice, or a quirk, to characterize or summarize our past
year with a metaphorical phrase, or with a short sentence. However, none come to
mind and so the question must be asked, what's wanting -- the phrase or the
mind. Thus, we will march down the line noting the year's significant
developments point by point.
Undoubtedly, the most important event was the sale of most of our holdings
in OSI Systems, Inc. (OSI). This decision resulted in a profit of over $20
million. Our reasoning was not that we thought OSI's future was limited, quite
the contrary, we believe its future is better than ever. Our reason for the sale
was that we thought the market price (at the time of sale) had substantially
exceeded its then value. We continue to believe in OSI's management and future
and will consider reinvesting at the appropriate time. Not only didn't we get
caught in the "bubble" but we had a wonderful ride with OSI.
The largest project that we initiated has been completed, and it appears to
be a timely and successful one. This project was the building of a plant in the
Atlanta, Georgia area, double the normal size, to replace two old and
inefficient facilities. The new plant will produce a product with a
significantly lower unit cost and have capacity for far greater volume.
At our Los Angeles plant we replaced our thermal oxidizer, environmentally
necessary equipment, with a new and updated design resulting in significant
energy cost savings. It is our plan to further upgrade the Los Angeles facility
for additional energy savings and to improve our environmental compliance
position.
An important development during this past fiscal year was our decision to
build a new plant in Dallas, Texas. This new plant, which we plan to start
operating before the end of 2003, will greatly reduce our plant operating costs
and add substantial capacity. Furthermore, we are planning a new facility in New
Jersey to replace our existing plant in Carteret, New Jersey. Several sites are
being evaluated and we expect to close on one of them within ninety days.
Another development, which was finalized in July of this new fiscal year,
was the purchase of the assets and business of the California division of Feed
Commodities. Consequently, we are now operating plants in Stockton and Ontario,
California in addition to Los Angeles, and have closed our San Jose, California
plant and our depots in Fresno and Lodi, California.
An important evolvement of the food waste recycling business has been the
substantial increase in corn prices since our fiscal year-end. Certainly, we're
not making any forecast of future corn prices, but if the current range of
prices prevails during this new year we will have a major earnings increase.
Investment in more efficient equipment continues, in addition to training and
upgrading our most important asset -- our people, your employees. The negatives
at this time are the huge increases of insurance costs and the dwindling but
remaining raw material accounts that are overpriced.
Marinello Schools of Beauty had a much improved year with a significant
increase in earnings. A new school in Henderson, Nevada was opened and it
appears to be off to a good start. Our management is expecting another improved
year.
Our oil and gas income was steady; however, we're down to a few remaining
leases. The likelihood is that we shall either sell our remaining holdings or
accept the natural depletion of the existing producing wells. In either event
the overall impact will not be significant.
We wish to thank all of our customers, vendors and shareowners for their
support and trust, and, last but most, we thank our hard working and dedicated
employees.
Respectfully yours,
/s/ Meyer Luskin
Meyer Luskin
Chairman of the Board,
President and Chief Executive Officer
1
Unaudited Quarterly Financial Data
<Table>
<Caption>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------
2002
Operating sales and revenue $16,683,973 $16,358,404 $14,737,337 $15,418,225 $63,197,939
Gross profit 2,824,269 2,508,148 1,108,820 1,598,557 8,039,794
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 921,907 $ (182,569) $11,120,480 $ (774,801) $11,085,017
=========== =========== =========== =========== ===========
Net income (loss)
per share -- Diluted $ 0.90 $ (0.18) $ 10.80 $ (0.75) $ 10.77
=========== =========== =========== =========== ===========
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)
=========== =========== =========== =========== ===========
</Table>
Market Price Range
Scope Industries Common Stock
<Table>
<Caption>
2002 2001
-------------------- --------------------
High Low High Low
- ---------------------------------------------------------------------------------------------------
1st Quarter $52.00 $41.00 $55.00 $41.00
2nd Quarter $59.00 $45.25 $48.75 $39.50
3rd Quarter $64.75 $53.00 $45.00 $41.25
4th Quarter $67.50 $60.50 $42.45 $40.25
</Table>
Cash dividends of $1.00 were paid during each of the years ended June 30,
2002 and 2001, respectively.
There were 77 shareowners of record of common stock at August 31, 2002.
2
Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ------------------------------------------------------
- --------------------------------------------------------------------------------
Review of Consolidated Results of Operations --
Current Year Review: 2002 compared with 2001
The Company recorded net income of $11,085,017 in fiscal 2002 compared to a
net loss of $(4,173,681) in the prior year. The pre-tax loss before Investment
and other income was $(2,696,992) in fiscal 2002 compared to a pre-tax loss of
$(6,760,367) in the prior year. Investment and other income for fiscal 2002 was
$19,920,009 compared to income of $611,686 in the prior year. Net income per
share in fiscal 2002 was $10.77 compared to a net loss per share of $(4.03) per
share in the prior year.
Total revenues for fiscal 2002 were 6% higher than the prior year revenues
primarily due to higher average selling prices in the Waste Material Recycling
business segment and increased student enrollment in Vocational schools. Waste
Material Recycling operating cost decreased from the prior year due to lower raw
material costs and production efficiencies that were partially offset by
continued increases in employee insurance benefits, general liability, property
and fleet insurance costs. Waste Material Recycling sales of dried bakery
products represented 90% of fiscal 2002 and 91% of fiscal 2001 Company revenues.
Dried bakery product sales tonnage decreased slightly over the prior year but
was positively impacted by a 6% average increase in sales prices from the prior
year due primarily to higher average corn prices throughout fiscal 2002. Corn
prices have remained well below the 20-year average price of $2.41 per bushel,
averaging $1.94 in fiscal 2002 and $1.80 in fiscal 2001, as a result of
continued record corn crops. Waste Material Recycling production costs were 3%
lower per ton produced in fiscal 2002 than in the prior year in spite of
increased insurance costs. In fiscal 2002 the Vocational School segment revenues
increased 21% and represented 10% of the Company's revenues compared to 9% in
the prior year. The increase in revenues is primarily the result of increased
student enrollment at its schools. Vocational Schools were profitable in fiscal
2002 compared to a small loss in the prior year.
Depreciation and amortization increased $358,082, or 5% in fiscal 2002 over
the prior year due primarily to the increase in fixed assets acquired and placed
into service. General and administrative expenses in fiscal 2002 decreased
$260,209, or 3% from the prior year due primarily to cost control.
Investment and other income increased $19,308,323 in fiscal 2002, over the
prior year. In fiscal 2002, the Company sold the majority of its holdings of OSI
Systems Inc. securities for a gain of $21,080,990. In fiscal 2002, the Company
sold two vacant facilities for a net gain of $624,353 and in fiscal 2001 sold
property for a net gain of $768,640; both gains were partially offset by losses
on the disposition of various assets. Interest income decreased 67% in fiscal
2002 over the prior year primarily due to lower interest rates, offset by
interest expense from the Industrial Revenue Bond. Included in Investment and
other income are investment losses of $(409,425) in fiscal 2002 and $(116,847)
in fiscal 2001 from the equity method of accounting for an investment acquired
in 2001. The Company in fiscal 2002 had unrealized losses of $(1,343,430) on
securities whose decline in value was deemed to be other than temporary.
The provision for income taxes in fiscal 2002 was 36% of the pre-tax
income. 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.
Prior Year Review: 2001 compared with 2000
The Company recorded a net loss of $(4,173,681) in fiscal 2001 compared to
a net income of $6,053,735 in the prior year. The pre-tax loss before Investment
and other income was $(6,760,367) in fiscal 2001 compared to a pre-tax 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 a net income of $5.50 per fully diluted
share 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 the 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.
Corn prices have remained well below the 20-year average price of $2.44 per
bushel, averaging $1.80 in fiscal 2001 and $1.90 in fiscal 2000, as a result of
continued
3
record corn crops. Waste Material Recycling operating costs were 5% lower per
ton produced in fiscal 2001 than in the prior year in spite of increased energy
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 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% in fiscal 2001 over the prior year primarily due 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 some 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) reflected 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.
Liquidity and Capital Resources
We have used our cash 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 from sales of investment
securities, cash flows from operations, proceeds from the industrial revenue
bond and the proceeds from the maturing of U.S. Treasury securities.
The Company's capital expenditures were $12,562,888 in 2002 and $9,646,010
in 2001. Capital spending for the Waste Material Recycling segment represented
97% of the Company's total capital expenditures in 2002 and 98% in 2001. The new
bakery waste recycling facility near Atlanta, GA placed into operation this
current year was partly financed through the issuance of $6,000,000 in tax-
exempt Industrial Revenue Bonds ("IRB"), the Company's only indebtedness at June
30, 2002 and 2001. The Company financed 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 3.05% compared to 4.89% in the prior year. Vehicle
replacements, processing equipment automation and refurbishing are continuously
being made at all processing facilities to maintain efficient operations and
reduce the cost of production for the bakery recycling business.
In the Vocational School Group a new school facility in Nevada opened in
fiscal year 2002. A direct relationship between school improvements and
increased enrollment has been evident in past school refurbishing projects.
Although no assurances can be given, positive returns on the planned investments
are expected.
The Company believes its cash flow from operations, cash on hand and liquid
investment holdings will be sufficient to meet its capital expenditures and
operating cash requirements in fiscal 2003 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, 2002 or June 30,
2001. 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, 2002, shareowners' equity includes net accumulated unrealized
holding gains on investments, net of deferred income taxes totaling $317,315.
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. The
accumulated unrealized holding gains are primarily from our investment in OSI
Systems, Inc. common stock holdings. These unrealized
4
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.
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 in the future.
New Accounting Standards:
The Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") 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 Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and
Other Intangible Assets", which the Company adopted on July 1, 2001. The
statement establishes accounting and reporting standards for goodwill and other
intangible assets. The adoption of SFAS No. 142 did not have a material impact
on the Company's financial statements.
Events Subsequent to Year-End
Subsequent to fiscal year end June 30, 2002, the Company redeemed its
outstanding $6,000,000 Industrial Revenue Bonds due to restrictions on capital
spending requirements for maintaining its tax-exempt status. The Company
borrowed $5,400,000 from its bank on a 5-year note, collateralized by investment
assets, to help finance the redemption payment of the IRB. The Company also
borrowed $2,000,000 from its bank unsecured short-term credit line to help
finance the $3,500,000 purchase of certain assets and the routes and contracts
from a bakery waste material recycler with two plants in California.
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
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, 2002 and 2001, 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, 2002. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Scope Industries and
subsidiaries as of June 30, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2002, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Los Angeles, California
August 30, 2002
6
Consolidated Statements of Operations
<Table>
<Caption>
For the years ended June 30, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Operating Sales and Revenues:
Sales $57,020,985 $54,578,070 $58,860,170
Vocational school revenues 6,176,954 5,107,924 5,048,224
----------- ----------- -----------
63,197,939 59,685,994 63,908,394
----------- ----------- -----------
Operating Costs and Expenses:
Cost of sales 45,473,517 46,749,815 49,640,186
Vocational school expenses 4,586,740 3,959,745 3,750,495
Depreciation and amortization 7,475,790 7,117,708 6,584,603
General and administrative 8,358,884 8,619,093 9,330,107
----------- ----------- -----------
65,894,931 66,446,361 69,305,391
----------- ----------- -----------
(2,696,992) (6,760,367) (5,396,997)
Investment and other income 19,920,009 611,686 14,895,732
----------- ----------- -----------
Income (loss) before income taxes 17,223,017 (6,148,681) 9,498,735
Provision (benefit) for income taxes 6,138,000 (1,975,000) 3,445,000
----------- ----------- -----------
Net Income (Loss) $11,085,017 $(4,173,681) $ 6,053,735
=========== =========== ===========
Net Income (Loss) Per Share -- Basic $ 10.77 $ (4.03) $ 5.51
Net Income (Loss) Per Share -- Diluted $ 10.77 $ (4.03) $ 5.50
Average shares outstanding -- Basic 1,029,267 1,034,821 1,098,521
Dilutive effect of stock options -- -- 2,081
----------- ----------- -----------
Average shares outstanding -- Diluted 1,029,267 1,034,821 1,100,602
</Table>
The accompanying notes are an integral part of these consolidated statements.
7
Consolidated Balance Sheets
<Table>
<Caption>
June 30, 2002 2001
- ----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,023,393 $ 563,234
Treasury securities (par value $14,508,000 at June 30, 2002
and $10,000,000 at June 30, 2001) 14,522,074 9,926,527
Accounts and notes receivable, less allowance for doubtful
accounts of $646,285 at June 30, 2002 and $691,283 at June
30, 2001 4,319,091 3,870,559
Income taxes receivable -- 1,645,253
Inventories 792,561 874,446
Deferred income taxes 827,000 944,000
Prepaid expenses and other current assets 1,415,388 2,387,804
----------- -----------
Total current assets 28,899,507 20,211,823
----------- -----------
Notes Receivable 753,217 594,891
----------- -----------
Property and Equipment:
Machinery and equipment 49,162,282 42,581,045
Land, buildings and improvements 20,627,439 17,034,166
----------- -----------
69,789,721 59,615,211
Less accumulated depreciation and amortization 33,705,132 30,349,635
----------- -----------
36,084,589 29,265,576
----------- -----------
Collection Routes and Contracts, less accumulated
amortization of $7,433,705 at June 30, 2002 and $5,111,973
at June 30, 2001 1,818,588 4,700,326
----------- -----------
Other Assets:
Long-term Treasury notes (par value $4,000,000 at June 30,
2002) 3,968,148 --
Non-appropriated funds (Industrial Revenue Bond) -- 1,962,598
Deferred charges and other assets 460,348 680,969
Deferred income taxes 926,000 231,000
Investments available for sale at fair value 1,053,652 4,871,810
Other equity investments 6,771,420 8,474,155
----------- -----------
13,179,568 16,220,532
----------- -----------
$80,735,469 $70,993,148
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 5,337,862 $ 4,898,515
Current portion of Industrial Revenue Bond 600,000 --
Other accrued liabilities 2,344,802 1,852,487
Accrued payroll and related employee benefits 1,187,766 1,572,553
Income taxes payable 772,000 --
----------- -----------
Total current liabilities 10,242,430 7,923,555
Industrial Revenue Bond 5,400,000 6,000,000
----------- -----------
15,642,430 13,923,555
----------- -----------
Commitments and Contingent Liabilities
Shareowners' Equity:
Common stock, no par value, 5,000,000 shares authorized;
shares issued and outstanding at June 30, 2002 and June
30, 2001 -- 1,029,267 4,576,050 4,576,050
Retained earnings 60,199,674 50,143,924
Accumulated other comprehensive income 317,315 2,349,619
----------- -----------
65,093,039 57,069,593
----------- -----------
$80,735,469 $70,993,148
=========== ===========
</Table>
The accompanying notes are an integral part of these consolidated statements.
8
Consolidated Statements of Cash Flows
<Table>
<Caption>
For the years ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income (loss) $ 11,085,017 $ (4,173,681) $ 6,053,735
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Depreciation and amortization 5,154,052 4,754,299 4,375,473
Amortization of contracts and routes 2,321,738 2,363,409 2,209,130
(Gain) on sale of Emission Reduction Credits -- -- (3,727,000)
(Gain) on sale of investments (21,080,990) (352,160) (10,186,300)
(Gain) loss on sale of property and equipment (448,469) (210,428) 259,013
Loss on impairment of assets -- 1,021,832 --
Unrealized loss equity investments 1,752,855 -- --
Deferred income taxes (477,000) (208,000) (59,140)
Changes in operating assets and liabilities:
Accounts and notes receivable (606,858) 774,946 (130,625)
Inventories 81,885 (194,114) 319,423
Prepaid expenses and other current assets 972,416 (811,567) (164,782)
Accounts payable and accrued liabilities 946,875 (222,851) 884,770
Income taxes receivable or payable 2,417,253 (1,963,233) 66,495
Tax benefit applied to purchase of routes and contracts 560,000 560,000 560,000
Other assets 220,621 81,191 (26,980)
------------ ------------ ------------
Net cash flows from operating activities 2,899,395 1,419,643 433,212
------------ ------------ ------------
Cash Flows From Investing Activities:
Purchase of U.S. Treasury securities (29,063,695) (21,421,504) (31,088,390)
Maturities of U.S. Treasury securities 20,500,000 30,335,570 27,100,000
Purchase of property and equipment (12,562,888) (9,646,010) (6,439,654)
Proceeds from disposition of property and equipment 1,038,292 941,121 163,407
Proceeds from sale of Emission Reduction Credits -- -- 3,727,000
Purchases of routes and contracts -- -- (617,104)
Issuance of long-term notes receivable -- -- (200,000)
Purchase of investments available for sale (195,427) (178,629) (815,405)
Purchase of other equity investments -- (6,580,000) --
Proceeds from disposition of investments available for sale 22,911,151 625,639 11,469,231
Non-appropriated bond proceeds held by Trustee 1,962,598 3,478,079 (5,440,677)
------------ ------------ ------------
Net cash flows from (used in) investing activities 4,590,031 (2,445,734) (2,141,592)
------------ ------------ ------------
Cash Flows From Financing Activities:
Dividends to shareowners (1,029,267) (1,029,567) (1,108,867)
Proceeds from stock options exercised -- 105,600 309,150
Repurchases of common stock -- (1,532,290) (3,114,139)
Proceeds from Industrial Revenue Bond financing -- 6,000,000
------------ ------------ ------------
Net cash (used in) from financing activities (1,029,267) (2,456,257) 2,086,144
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,460,159 (3,482,348) 377,764
Cash and cash equivalents at beginning of year 563,234 4,045,582 3,667,818
------------ ------------ ------------
Cash and cash equivalents at end of year $ 7,023,393 $ 563,234 $ 4,045,582
============ ============ ============
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 195,277 $ 300,088 $ 6,340
Income taxes $ 3,631,336 $ 120,768 $ 3,032,650
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 consolidated statements.
9
Consolidated Statements of Shareowners' Equity
<Table>
<Caption>
Common Stock Accumulated
---------------------- Other
Number of Retained Comprehensive
For the years ended June 30, 2002, 2001 and 2000 Shares Amount Earnings Income(1)
- ---------------------------------------------------------------------------------------------------------
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
Net income 11,085,017
Cash dividends on common stock, $1.00 per share (1,029,267)
Net unrealized (loss) on investments available for
sale (2,032,304)
--------- ---------- ----------- -----------
Balance June 30, 2002 1,029,267 $4,576,050 $60,199,674 $ 317,315
========= ========== =========== ===========
</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, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Net income (loss) $11,085,017 $(4,173,681) $6,053,735
Other comprehensive (loss) income, net of tax:
Net unrealized (loss) gain on investments available for
sale (2,032,304) (2,743,316) 687,240
----------- ----------- ----------
Comprehensive income (loss) $ 9,052,713 $(6,916,997) $6,740,975
=========== =========== ==========
</Table>
The accompanying notes are an integral part of these consolidated statements.
10
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 accounts and transactions have been eliminated.
Certain prior year balances have been reclassified to conform to the current
period presentation.
Use of Estimates:
The preparation of consolidated 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reported periods in the
consolidated financial statements and accompanying notes. Actual results may
differ from those estimates calculated by management.
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 being
accounted for using the equity method with equity adjustments reflected in
Investment and other income
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
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 the 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 and separate and
combined state tax returns with its subsidiaries. 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 consolidated 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 ("FASB"), Statement of Financial Accounting
Standards ("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 Accounting Principles Board Opinion
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:
In June 1988, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", that became effective for fiscal year 2001.
The statement establishes accounting and reporting standards for derivatives
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
The statement requires that the Company recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. The statement also requires that changes in the derivative's fair value
be recognized in earnings unless specific hedge accounting criteria are met. The
adoption of SFAS No. 133 did not have a material impact on the Company's
consolidated financial statements.
New Accounting Standards:
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS 141 specifies the criteria that intangible
assets
12
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
acquired in a business combination must meet in order to be recognized and
reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for long-lived Assets to
be Disposed Of". The adoption of SFAS No. 142 on July 1, 2001 did not have a
material impact on the Company's consolidated financial statements. As of June
30, 2002, the Company has no assets classified as goodwill under these new
pronouncements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Asset," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121 it retains many of the fundamental
provisions of that statement. The statement is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS No. 144 on July 1, 2002
is not expected to have a material impact on the Company's consolidated
financial statements.
- --------------------------------------------------------------------------------
NOTE 2:
Asset
Impairment
Write-off
During the fourth quarter of 2001, the Company recorded asset impairments
of $1,021,832 related to the closure and sale of two processing plants in fiscal
2002. The two plants were replaced by a new manufacturing facility placed into
service in fiscal year 2002. The assets written off were not utilized at the new
plant and were scrapped. The charge for impairment is reflected in Investment
and other income.
- --------------------------------------------------------------------------------
NOTE 3:
Treasury
Bills and
Notes
All U.S. Treasury bills are purchased with maturities of one year or less.
Treasury notes maturities range from less than a year to two years. The cost is
adjusted to reflect interest earned as it accrues and reduce interest premiums
as the notes matures. The adjusted cost approximates the fair value of the bills
and notes. The Company classified its Treasury bills and notes as available for
sale securities classified as either current or long-term.
- --------------------------------------------------------------------------------
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 expenses. Unrealized losses on securities
whose decline in value was deemed to be other than temporary were $1,343,430 and
$423,800 in fiscals 2002 and 2000, respectively. A loss of $409,425 and $116,847
was recognized based upon the equity method of accounting for an investment in
fiscal 2002 and 2001, respectively. A loss of $1,021,832 was recognized on the
impairment of assets in fiscal 2001. A gain of $3,727,000 from the sale of
certain Emission Reduction Credits was recorded in fiscal 2000 and included
under Miscellaneous income.
13
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<Table>
<Caption>
For the years ended June 30, 2002 2001 2000
-----------------------------------------------------------------------------
Investment and other income was
comprised of:
Interest income $ 458,960 $ 1,373,832 $ 1,048,544
Gain on sales of marketable
securities 21,080,990 352,160 10,610,100
Unrealized (losses) in investments (1,343,430) -- (423,800)
Equity (loss) in investment (409,425) (116,847) --
(Loss) from impairment of assets -- (1,021,832) --
Gain (loss) on disposition of
assets 448,469 210,428 (259,013)
Interest expense (190,403) (310,340) (30,053)
Misc. income (expense), net (125,152) 124,285 3,949,954
----------- ----------- -----------
Investment and other income $19,920,009 $ 611,686 $14,895,732
=========== =========== ===========
</Table>
At June 30, 2002 investments were as follows:
<Table>
<Caption>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------
Available-for-sale securities
-Equity securities(1) $ 557,845 $495,807 $ -- $1,053,652
Other equity securities(2) $6,771,420 -- -- $6,771,420
</Table>
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 $2,626,623 $ -- $4,871,810
Other equity securities(2) $8,474,155 -- -- $8,474,155
</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, 2002 and 2001, the Company holds shares and warrants in
Chromagen, Inc., shares in Stamet, Inc., MetaProbe, Inc. 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, reflecting
the equity method of accounting for investments or management's estimated
value reflecting other than temporary losses. No quoted market prices are
available for these securities.
14
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,
---------------------------------------------------------
2003 $1,310,900
2004 988,700
2005 794,100
2006 658,900
2007 507,800
Thereafter 1,299,600
----------
Total minimum lease payments $5,560,000
==========
</Table>
Total rental expense under operating leases was $1,193,872 in 2002,
$1,234,432 in 2001, and $1,271,332 in 2000.
- --------------------------------------------------------------------------------
NOTE 6:
Debt
The Company has issued a Notice of Redemption for its $6,000,000
outstanding tax-exempt Industrial Revenue Bonds ("IRB"), the redemption date
being August 1, 2002. Federal regulations require a company to meet certain
criteria during a specified period of time in order for the bonds to maintain
its tax-exempt status. One of the criteria is that each bond issuance has
certain capital spending limitations within a specific time before and after the
issuance date. The Company has determined that it would exceed the capital
spending limitations before the time limitation expired and would then be in
jeopardy of losing the tax-exempt status. There are no prepayment penalties
associated with early retirement of the bonds.
The weighted average interest rate for the IRB was 3.1% in fiscal 2002 and
4.0% in fiscal 2001. The bonds are secured by a bank standby letter of credit
that is guaranteed by the Company, collateralized by the assets of the facility
and subject to certain restrictive covenants.
Subsequent to year-end the Company entered into a financing agreement with
its bank borrowing $5,400,000 to partially finance the redemption of the IRB and
accordingly this amount of the IRB is classified as long-term. The five-year
note is guaranteed by the Company and is collateralized by a $6,000,000
investment in a Short-term tax-exempt municipal fund. The note bears interest at
Prime minus 1.0% or LIBOR plus 1.125%, the Company elected a one-year LIBOR
contract (2.9%). Covenants require that the value of the mutual fund be at least
91% of the original principal. If the value falls below the 91% then the Company
would be required to either increase the principal in the mutual fund or reduce
the outstanding note balance. There are no prepayment penalties and the Company
guarantees the note.
In January 2002, the Company entered into $3,000,000 one-year line of
credit agreement with its bank. The line of credit is unsecured and bears
interest at either Prime minus 0.25% or LIBOR plus 2.0%. At June 30, 2002 there
were no outstanding borrowings against the line of credit.
15
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 contributions to the plans are based on matching
voluntary employee contributions and on a profit sharing plan formula after
certain minimum earnings levels are reached by the Company. For the years ended
June 30, 2002, 2001 and 2000 the defined contribution plan expenses were
$227,614, $227,665, and $221,190, 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 fiscal years 2002, 2001
and 2000 were $53,913, $80,957 and $36,946, respectively.
The Company has two Defined Benefit Pension Plans ("DBPP") that are being
terminated. Employees under one plan will receive a lump sum cash distribution
for the value of their benefits and in the other plan only certain employees
with benefits less than $5,000 will receive lump sum distribution. The DBPP
purchased a fully funded monthly annuity from an insurance company for the
employees whose benefits exceed $5,000. The difference between the assets within
the DBPP and the termination liability at June 30, 2001 was an expense of
approximately $274,000 and is reflected in cost of sales and general and
administrative expenses in the income statement.
- --------------------------------------------------------------------------------
NOTE 9:
Stock
Options
Under the Company's 1992 Stock Option Plan the ("1992 Plan") that expired
on January 1, 2002, the Company granted to key employees options to purchase the
Company's common stock at not less than the fair market value of such shares on
the date such option is granted, 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. 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. At June 30, 2002, there were no outstanding
options.
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 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>
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
16
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
"Accounting for Stock-Based Compensation" had been used, the expense relating to
the stock options would have been no expense in fiscals 2002 and 2001 and
expense of $6,836 in fiscal 2000. Pro forma net income would have been
$6,046,899 in fiscal 2000. Pro forma diluted earnings per share in fiscal 2000
would have been $5.49 rather than the $5.50 reported earnings 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 ("SPI Plan") for
key employees of the Company. The plan may award grants in the form of incentive
stock options or non-qualified stock options. Grants are made at the discretion
of the Board of Directors. The options vest ratably over a seven-year period,
beginning with 15% after the first year and 15% each year until the final year
when the last 10% vests. The options expire seven years after date of grant. The
Board of Directors determines the option price that it believes is equal to the
fair market value of the SPI common stock. The Company has reserved one million
shares (10%) of SPI common stock for issuance pursuant to options granted under
the plan.
Stock option activity under the SPI Plan was as follows:
<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
Granted 70,000 $5.00
Terminated (2,500) $5.00 0
---------
Outstanding at June 30, 2002 785,000 $5.00 317,250 $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 $125,653 in fiscal 2002, $138,198 in fiscal 2001 and $133,834 in fiscal
2000. Pro forma net income (loss) would have been $11,003,364 in fiscal 2002,
$(4,267,489) in fiscal 2001, and $5,968,440 in fiscal 2000. Pro forma diluted
earnings (loss) per share in fiscals 2002, 2001 and 2000 would have been $10.69,
$(4.12) and $5.42, respectively, rather than the $10.77, $(4.03) and $5.50
reported earnings (loss) per share.
17
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 10:
Income Taxes
The components of the provision (benefit) for income taxes are:
<Table>
<Caption>
For the years ended June 30, 2002 2001 2000
-----------------------------------------------------------------------------
Current:
Federal $5,173,000 $(2,247,000) $3,143,545
State 488,000 64,000 242,315
---------- ----------- ----------
5,661,000 (2,183,000) 3,385,860
---------- ----------- ----------
Deferred:
Federal 457,000 193,000 60,405
State 20,000 15,000 (1,265)
---------- ----------- ----------
477,000 208,000 59,140
---------- ----------- ----------
Total provision (benefit) $6,138,000 $(1,975,000) $3,445,000
========== =========== ==========
</Table>
Reconciliation of the provision (benefit) 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, 2002 2001 2000
-----------------------------------------------------------------------------
U.S. Federal statutory income tax $5,856,000 $(2,091,000) $3,229,500
State income taxes, net of Federal tax
benefit 335,000 52,100 160,800
Taxes on income not recognized on
books 73,000 99,000 115,400
Other (126,000) (35,100) (60,700)
---------- ----------- ----------
Total provision (benefit) $6,138,000 $(1,975,000) $3,445,000
========== =========== ==========
</Table>
The major components of the deferred income tax assets and liabilities are:
<Table>
<Caption>
At June 30, 2002 2001
---------------------------------------------------------------------------
Depreciation $ (504,000) $ (215,000)
Income not currently taxable (475,000) (748,000)
Unrealized gain on investments (177,000) (278,000)
Other 103,000 (30,000)
----------- -----------
Total deferred income tax liabilities (1,053,000) (1,271,000)
----------- -----------
Expenses not currently deductible 1,537,000 1,778,000
Recognized losses not currently deductible 1,269,000 668,000
----------- -----------
Total deferred income tax assets 2,806,000 2,446,000
----------- -----------
Net deferred income tax asset (liability) $ 1,753,000 $ 1,175,000
=========== ===========
</Table>
In addition to the recognized deferred income tax benefits and liabilities,
an additional unrecognized income tax benefit of approximately $3.3 million is
available to the Company in subsequent operating periods resulting from tax
deductions for tax goodwill amortization of approximately $9.7 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 nine years.
18
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,
2002
Unrealized holding gains
arising during the year $ 18,947,685 $(7,488,000) $ 11,459,685
Reclassification adjustment (21,080,989) 7,589,000 (13,491,989)
------------ ----------- ------------
Other comprehensive loss $ (2,133,304) $ 101,000 $ (2,032,304)
For the year ended June 30,
2001
Unrealized holding losses
arising during the year $ (3,934,156) $ 1,419,744 $ (2,514,412)
Reclassification adjustment (352,160) 123,256 (228,904)
------------ ----------- ------------
Other comprehensive loss $ (4,286,316) $ 1,543,000 $ (2,734,316)
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
</Table>
- --------------------------------------------------------------------------------
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 13 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 13 beauty schools in California and Nevada in
which cosmetology and manicuring are taught to students who pay tuition.
Vocational programs and Federal grants and loan programs are also utilized for
the students' tuition. In addition, the public patronizes the schools for hair
styling and other cosmetology services that are performed by the students under
supervision of the instructors.
<Table>
<Caption>
For the years ended June 30, 2002 2001 2000
---------------------------------------------------------------------------
Operating Sales and Revenues:
Waste Material Recycling $56,584,988 $54,112,493 $58,220,688
Vocational School Group 6,176,954 5,107,924 5,048,224
Other 435,997 465,577 639,482
----------- ----------- -----------
$63,197,939 $59,685,994 $63,908,394
=========== =========== ===========
</Table>
19
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
One customer represented 12%, 25% and 18% of product revenues for the Waste
Material Recycling segment for the years ended 2002, 2001 and 2000,
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.
<Table>
<Caption>
For the years ended June 30, 2002 2001 2000
-----------------------------------------------------------------------------
Income (Loss) before Income Taxes:
Waste Material Recycling $ 4,208,040 $ 782,758 $ 2,556,976
Vocational School Group 1,355,086 921,550 1,169,818
Other 98,766 154,418 206,316
----------- ----------- -----------
5,661,892 1,858,726 3,933,110
General & Administrative (8,358,884) (8,619,093) (9,330,107)
Investment and other income 19,920,009 611,686 14,895,732
----------- ----------- -----------
Income (loss) before income taxes $17,223,017 $(6,148,681) $ 9,498,735
=========== =========== ===========
Identifiable Assets:
Waste Material Recycling $41,836,087 $39,584,111 $42,685,714
Vocational School Group 1,753,515 1,618,016 1,711,413
Other 105,820 228,270 367,560
Corporate 37,040,047 29,562,751 38,017,346
----------- ----------- -----------
$80,735,469 $70,993,148 $82,782,033
=========== =========== ===========
Depreciation and Amortization:
Waste Material Recycling $ 7,076,367 $ 6,717,493 $ 6,203,305
Vocational School Group 235,128 226,664 214,583
Other 122,451 139,289 139,289
Corporate 41,844 34,262 27,426
----------- ----------- -----------
$ 7,475,790 $ 7,117,708 $ 6,584,603
=========== =========== ===========
Capital Expenditures:
Waste Material Recycling $12,144,370 $ 9,429,531 $ 6,069,997
Vocational School Group 409,542 76,672 226,041
Corporate 8,976 139,807 143,616
----------- ----------- -----------
$12,562,888 $ 9,646,010 $ 6,439,654
=========== =========== ===========
</Table>
- --------------------------------------------------------------------------------
NOTE 13:
Acquisitions
Significant Events Subsequent to Year-End
Subsequent to June 30, 2002 the Company purchased the assets and business
routes and contracts of two-bakery waste recycling facilities located in
California for $3,500,000. In connection with the acquisition the Company also
entered into a long-term lease with an option to purchase the two facilities at
a later date for $2,250,000.
Short-Term Line of Credit
In connection with the above acquisition the Company borrowed $2,000,000 on
its short-term bank line of credit to partially finance the acquisition. The
Company elected LIBOR (three month contract -- 1.86%) with interest payable
monthly.
20
Corporate Information
- --------------------------
<Table>
Directors Officers Independent Auditors
Babette Heimbuch Meyer Luskin Deloitte & Touche LLP
Chairman & 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, Chief Computershare Investor
Investor Financial Officer Services
and Secretary Denver, Colorado
Meyer Luskin
Rudy Alvarez Securities Listed
William H. Mannon Controller American Stock Exchange
Retired Officer of
Scope Industries
Franklin Redlich
Retired
</Table>
2002
[SCOPE LOGO]
233 WILSHIRE BOULEVARD, SUITE 310
SANTA MONICA, CA 90401