<PAGE> 1
SCOPE
INDUSTRIES
2000
63RD
ANNUAL
REPORT
LOGO
<PAGE> 2
Financial Highlights
<TABLE>
<CAPTION>
For the years ended June 30, 2000 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating sales and revenues $60,368,396 $31,045,072 $25,045,272
Investment and other income 14,919,445 3,129,181 25,344,817
Net income (loss) $ 6,053,735 $ (842,555) $16,063,797
Net income (loss) per share -- Basic $ 5.51 $ (0.75) $ 14.10
Net income (loss) per share -- Diluted $ 5.50 $ (0.75) $ 13.98
Average shares outstanding -- Basic 1,098,521 1,116,958 1,139,276
Average shares outstanding -- Diluted 1,100,602 1,126,454 1,148,645
</TABLE>
Five-Year Review -- Selected Financial Data
<TABLE>
<CAPTION>
For the years ended June 30, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Operating Sales and Revenues $60,368,396 $31,045,072 $25,045,272 $30,273,913 $30,223,457
----------- ----------- ----------- ----------- -----------
Operating Cost and Expenses:
Cost of sales and operating expenses 49,850,683 26,738,078 18,065,034 19,177,617 18,217,591
Depreciation and amortization 6,584,603 3,094,198 2,024,722 2,112,959 2,117,706
General and administrative 9,353,820 5,434,532 4,056,536 3,759,867 4,367,808
----------- ----------- ----------- ----------- -----------
65,789,106 35,266,808 24,146,292 25,050,443 24,703,105
----------- ----------- ----------- ----------- -----------
(5,420,710) (4,221,736) 898,980 5,223,470 5,520,352
Investment and other income 14,919,445 3,129,181 25,344,817 20,569,303 812,196
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 9,498,735 (1,092,555) 26,243,797 25,792,773 6,332,548
Provision (benefit) for income taxes 3,445,000 (250,000) 10,180,000 6,800,000 2,360,000
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 6,053,735 $ (842,555) $16,063,797 $18,992,773 $ 3,972,548
----------- ----------- ----------- ----------- -----------
Net income (loss) per share -- Basic $ 5.51 $ (0.75) $ 14.10 $ 16.03 $ 3.23
Net income (loss) per
share -- Diluted $ 5.50 $ (0.75) $ 13.98 $ 15.94 $ 3.23
FINANCIAL PERFORMANCE
Net income (loss) as a percent of
revenues 10.03% (2.71)% 64.14% 62.74% 13.14%
Cash dividend per share $ 1.00 $ 1.00 $ 1.25 $ 1.25 $ .50
Capital expenditures $ 6,439,654 $ 4,155,834 $ 2,649,478 $ 1,298,935 $ 2,255,436
FINANCIAL POSITION
Total assets $82,782,033 $72,457,006 $78,380,114 $61,484,033 $55,534,495
Shareowners' equity $66,442,847 $63,615,728 $71,154,072 $57,649,645 $48,138,038
Equity per share at end of year $ 62.63 $ 57.08 $ 63.37 $ 49.33 $ 40.03
Shares outstanding at end of year 1,060,867 1,114,467 1,122,842 1,168,665 1,202,565
</TABLE>
<PAGE> 3
President's Report to the Shareholders
--------------------------------------------------------------------------------
This past year typified the concept of "yin and yang", "sweet and sour",
or, being dramatic, "the agony and the ecstasy". Which do you want first, the
good news or the bad? Let's start with the good, put the bad in the middle, and
hope to have something good at the end.
During our third quarter the price of our OSI Systems, Inc. (OSIS) stock
had a sudden and extremely large rise in price. We hadn't planned to sell any of
our OSIS holdings, but the exceptional spike of its market price mandated that
we review our expectations and goals for OSIS and ourselves. The decision was to
sell a significant portion of our OSIS investment and to retain about one
million shares. Our gain from this transaction was over $10 million.
Then in the fourth quarter we recognized an increased demand for Emission
Reduction Credits (ERC). These ERC were created when we voluntarily installed
emission reduction equipment in our Los Angeles recycling plant. We agreed to
sell our ERC; the gain from this non-recurring and extraordinary event was over
$3.7 million. These two unexpected events -- the sale of some of our OSIS and
the ERC -- resulted in a gain that not only offset our operating losses but also
yielded a net profit of over $6 million or $5.50 per share.
What is bad news for us is good news for most other people. The extremely
low price for corn (and feed grade fat) hurt us, since the selling price of our
feed product must compete with corn. Obviously those people, who are buying corn
and the subsequent beneficiaries of lower feed prices, are delighted with the
farmer's (and our) plight.
The average sales price of our feed product this year was slightly less
than last year -- which had equaled a 26 year low. Consequently, we recorded a
significant loss from our waste food recycling business. We are intently
endeavoring to lower our costs so we could post a modest profit at these
historically low sales prices. It's our belief that the service we provide
should allow for some earnings; however, we aren't in total control of our
costs. We must be competitive in personnel compensation, pay the market price
for fuel, electricity, trucks, insurance, etc., and be responsive to our
competition for raw material. There are efficiencies and reductions to be
effected, but they can't all be done now. We need time to build efficient plants
to replace old and costly plants; time for our people to continue to learn how
to become ever more productive; and, above all, time to educate our raw material
suppliers to the realities of today's market. Yes, we have been doing all that
is in the preceding sentence; however, there is still more to do and time must
be served. Our costs will decrease per ton in the new fiscal year, but we can't
control the price of corn.
Marinello Schools of Beauty expects an improved year. This past year
witnessed the closing of our most profitable school -- because of a
redevelopment plan for the site -- and substantial costs for relocation of this
school.
Your management is optimistic about our future with the realization that
the reward and satisfaction will only be achieved by a consistent application of
thoughtful hard work. It's not our intent to rely on an increase in feed prices
to "bail us out".
As always, we thank and appreciate the cooperation of our customers and
vendors. To our shareowners -- thank you for your trust and support. To all of
our hard working, dedicated, and loyal employees -- many, many, thanks.
Finally, we welcome a new director to our board of directors, Ms. Babette
Heimbuch. Ms. Heimbuch is the President and Chief Executive Officer of First
Federal Bank of California and its holding company FirstFed Financial Corp. We
are privileged to have a person with the competency, experience, and integrity
of Ms. Babette Heimbuch join our board of directors.
Respectfully yours,
/s/ Meyer Luskin
Meyer Luskin
Chairman of the Board,
President and Chief Executive Officer
1
_
<PAGE> 4
Unaudited Quarterly Financial Data
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Operating sales and revenue $15,049,596 $15,267,232 $14,030,734 $16,020,834 $60,368,396
Gross profit 1,442,593 1,716,635 1,083,915 2,049,987 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
----------- ----------- ----------- ----------- -----------
1999
Operating sales and revenue $ 5,151,380 $ 5,143,504 $ 5,191,741 $15,558,447 $31,045,072
Gross profit 309,661 32,372 285,753 639,596 1,267,382
Net income (loss) $ 4,652 $ (238,084) $ (108,936) $ (500,187) $ (842,555)
----------- ----------- ----------- ----------- -----------
Net income (loss) per share $ 0.00 $ (0.21) $ (0.10) $ (0.45) $ (0.75)
----------- ----------- ----------- ----------- -----------
</TABLE>
Market Price Range
Scope Industries Common Stock
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------
High Low High Low
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $67.00 $60.25 $77.00 $67.25
2nd Quarter $61.50 $43.75 $70.38 $64.00
3rd Quarter $53.00 $38.75 $69.75 $62.00
4th Quarter $49.00 $41.00 $71.00 $64.00
</TABLE>
Cash dividends of $1.00 were paid during each of the years ended June 30,
2000 and 1999, respectively.
There were 79 shareowners of record of common stock at July 31, 2000.
2
_
<PAGE> 5
Management's Discussion and Analysis of
Results of Operations and Financial Condition
------------------------------------------------------
--------------------------------------------------------------------------------
Review of Consolidated Results of Operations --
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 2000 and the last quarter of 1999 are included as part
of the Waste Material Recycling segment of the Company.
Total revenues for 2000 were 94% higher than 1999 year revenues, primarily
due to the acquisition of IPC. Waste Material Recycling sales for 2000 were 110%
above 1999 sales. Vocational School Group revenues for 2000 were 5% above 1999
revenues. Waste Material Recycling sales represented 91% of 2000 Company
revenues compared to 84% of 1999 revenues. Dried bakery product sales tonnage
increased 118% from 1999 to 2000 and average prices dropped 2% for the
comparable periods. The Vocational School Group revenues represented 8% of the
Company's 2000 revenues compared to 16% in 1999. Waste Material Recycling
operating costs were 4% lower per ton produced in 2000 than in the prior year,
due primarily to tighter cost controls on expenses and raw material purchases.
During the last quarter of 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 3% in 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 by $3.49 million in
2000 and general and administrative expenses were 72% higher in the current year
than last year.
Selling prices for the Waste Material Recycling product were at
historically low levels throughout 2000. As mentioned above, the average selling
prices for the current year were 2% below the already low average prices that
prevailed during 1999. (2000 average selling prices were 22% lower than 1998
average selling prices.) 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 377% in 2000, over the prior year. In
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 $14,919,445 compared to $3,129,181 in
1999. Also included in Investment and other income are net investment losses of
$423,800 in fiscal 2000 and of $288,957 in 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 2000 was 36% of pre-tax income. As a
result of the loss incurred in 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.
Prior Year Review 1999 compared with 1998
Total revenues for 1999 were 24% higher than the prior year revenues,
primarily due to the acquisition of IPC in April 1999. Waste Material Recycling
sales for 1999 were 30% higher than 1998 sales. However, if IPC sales were not
included in the 1999 period, the Waste Material Recycling sales would have
decreased by 20% from the prior year. Vocational School Group revenues for 1999
were 5% above 1998 revenues. Waste Material Recycling sales represented 84% of
1999 Company revenues compared to 80% of 1998 revenues. From 1998 to 1999, dried
bakery product sales tonnage increased 62% and average sales prices dropped 21%
for the comparable periods. The Vocational School Group revenues represented 16%
of the Company's revenues in 1999 compared to 18% in 1998. Waste Material
Recycling operating costs were 8% lower per ton produced in 1999 than in the
prior year, primarily due to cost control of expenses and raw material
purchases. Operating costs for
3
_
<PAGE> 6
the Vocational School Group were up slightly in 1999 over 1998. With the
acquisition of IPC, depreciation and amortization expense increased by $1.06
million in 1999 and general and administrative expenses were 34% higher in 1999
than 1998.
The Company's 1999 operating results compare poorly to the prior year
operating results. Lower selling prices prevailed throughout 1999 for the Waste
Material Recycling operations. The low selling prices (21% decrease from 1998
and 36% decrease from 1997 when compared to 1999) are dictated by competing
commodities, especially corn, that are themselves at historic lows due to an
over abundance of the commodity. Such low prices made for reduced or
non-existent margins for this segment. The Vocational School Group improved its
operating margin, which resulted in an operating profit in the current year
compared to an operating loss in the previous year. General and administrative
expenses for 1999 were 34% higher than 1998 expenses primarily due to the
acquisition of IPC.
In 1999, investment and other income was $3,129,181 compared to $25,344,817
in 1998. In 1999, net investment losses were $288,957 compared to net investment
gains of $23,290,926 in 1998. In 1998, long-term stockholdings in Lone Star
Industries, Inc. were sold and a portion of the stockholdings in OSI Systems,
Inc. was sold in that company's initial public offering. The appreciation
realized on those investments and the subsequent interest earned on the proceeds
from their disposition has resulted in unusually large income amounts being
recognized in 1998.
Accumulated unrealized holding gains on investments, net of deferred income
taxes, were $4,405,695 at June 30, 1999 and $9,380,022 at June 30, 1998. These
unrealized gains are not reflected in net income. Unrealized gains on long-term
equity holdings in OSI Systems, Inc. comprise the major portion of the
unrealized gains at June 30, 1999 and 1998.
Income tax benefits were 23% of the pre-tax loss in 1999, and the provision
for income taxes was 39% of 1998 pre-tax income.
The net loss for 1999 was $842,555 or $0.75 loss per share. Net income for
1998 was $16,063,797 or $13.98 per share -- diluted.
Liquidity and Capital Resources
We have used our cash this fiscal year principally to fund capital
improvements, retire common stock, acquire raw material sources and for general
working capital requirements. We funded our cash requirements through cash flows
from operations, borrowings from the issuance of industrial revenue bonds, sale
of Emission Reduction Credits and the proceeds from the sale of investments.
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 in 2000 were $6,439,654, $4,155,834 in 1999
and $2,649,478 in 1998. Capital spending for the Waste Material Recycling
segment represented 94% of the Company's total capital expenditures in 2000, 94%
in 1999 and 71% in 1998. A new bakery waste recycling facility is to be
constructed 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, the Company's only long-term
indebtedness at June 30, 2000. The Company decided to finance this project due
to the availability of the low interest rate bonds. The average interest rate
during June, the month the bonds were outstanding, was approximately 4.45%. The
new facility near Chicago was completed and placed into operation during the
first half of this fiscal year, replacing two facilities that had serviced the
same geographic area. Vehicle replacements, processing equipment automation and
refurbishing are continuously being made to maintain efficient operations and
reduce the cost of producing product for the bakery recycling business. In the
Vocational School Group, a school was relocated to a new facility during 2000
due to loss of its lease. Another school relocation with new facilities is
planned for the fiscal year 2001. 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 2001 without incurring additional debt.
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
4
_
<PAGE> 7
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, 2000 or June 30, 1999. 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, 2000, shareowners' equity includes net accumulated unrealized
holding gains on investments totaling $5,092,935, net of deferred income taxes.
At June 30, 1999, shareowners' equity included $4,405,695 of net accumulated
unrealized holding gains on investments.
For the year ended June 30, 2000 the Company purchased and retired a total
of 64,700 of its shares (6%) at a cost of $3,114,139. 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 or through new borrowings during the ensuing year. This does not
preclude, however, the consideration of opportunities that may present
themselves in the future that could require the Company to seek additional
capital.
New Accounting Standards:
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". This SAB summarizes the SEC's view in applying generally accepted
accounting principles to revenue recognition in financial statements. This SAB
is effective for all registrants during the fourth quarter of calendar 2000. The
Company adopted SAB No. 101 in this year's financial statements, and its
adoption did not have a material impact on the Company's financial statements.
The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which will be
effective for our fiscal year 2001. The statement establishes accounting and
reporting standards for derivatives instruments, including certain derivative
instruments imbedded 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 Company has completed its
analysis of SFAS No. 133 and has determined that its adoption will not have a
material impact on the Company's financial statements.
Forward Looking Information: Certain Cautionary
Statements
Certain statements included in this Management's Discussion and Analysis of
Operations and Financial Condition and included elsewhere in this Annual Report
that are not related to historical results are forward looking statements.
Actual results may differ materially from those stated or implied in the
forward-looking statements. Although the Company believes that the expectations
reflected in such forward looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Potential risk and
uncertainties include, but are not limited to, general business conditions,
unusual volatility in equity and interest rate markets and in competing
commodity markets, disruptions in the availability or pricing of raw materials,
transportation difficulties, changing governmental educational aid policies, or
disruption of operations due to unavailability of fuels or from acts of God.
5
_
<PAGE> 8
Independent Auditors' Report
--------------------------------------------------------------------------------
Board of Directors and Shareowners
Scope Industries
Santa Monica, California
We have audited the accompanying consolidated balance sheets of Scope
Industries and subsidiaries as of June 30, 2000 and 1999, 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,
2000. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Los Angeles, California
August 28, 2000
6
_
<PAGE> 9
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the years ended June 30, 2000 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Sales and Revenues:
Sales $55,320,172 $26,227,133 $20,448,167
Vocational school revenues 5,048,224 4,817,939 4,597,105
----------- ----------- -----------
60,368,396 31,045,072 25,045,272
----------- ----------- -----------
Operating Costs and Expenses:
Cost of sales 46,100,188 23,109,969 14,536,956
Vocational school operating expenses 3,750,495 3,628,109 3,528,078
Depreciation and amortization 6,584,603 3,094,198 2,024,722
General and administrative 9,353,820 5,434,532 4,056,536
----------- ----------- -----------
65,789,106 35,266,808 24,146,292
----------- ----------- -----------
(5,420,710) (4,221,736) 898,980
Investment and other income 14,919,445 3,129,181 25,344,817
----------- ----------- -----------
Income (loss) before income taxes 9,498,735 (1,092,555) 26,243,797
Provision (benefit) for income taxes 3,445,000 (250,000) 10,180,000
----------- ----------- -----------
Net Income (Loss) $ 6,053,735 $ (842,555) $16,063,797
----------- ----------- -----------
Net Income (Loss) Per Share -- Basic $ 5.51 $ (0.75) $ 14.10
Net Income (Loss) Per Share -- Diluted $ 5.50 $ (0.75) $ 13.98
Average shares outstanding -- Basic 1,098,521 1,116,958 1,139,276
Dilutive effect of stock options 2,081 9,496 9,369
----------- ----------- -----------
Average shares outstanding -- Diluted 1,100,602 1,126,454 1,148,645
</TABLE>
The accompanying notes are an integral part of these statements.
7
_
<PAGE> 10
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,045,582 $ 3,667,818
Treasury bills (par value $19,100,000 in 2000 and
$15,000,000 in 1999) 18,840,593 14,852,203
Accounts and notes receivable, less allowance for doubtful
accounts of $645,903 at June 30, 2000 and $484,885 at June
30, 1999 4,581,022 4,234,753
Inventories 680,332 999,755
Deferred income taxes 1,297,500 955,000
Prepaid expenses and other current assets 1,576,237 1,411,455
----------- -----------
Total current assets 31,021,266 26,120,984
----------- -----------
Notes Receivable 659,374 1,103,816
----------- -----------
Property and Equipment:
Machinery and equipment 37,611,946 34,069,755
Land, buildings and improvements 16,045,836 14,208,280
----------- -----------
53,657,782 48,278,035
Less accumulated depreciation and amortization 27,531,392 23,793,405
----------- -----------
26,126,390 24,484,630
----------- -----------
Collection Routes and Contracts, less accumulated
amortization of $2,748,557
at June 30, 2000 and $539,427 at June 30, 1999 7,623,736 9,775,762
----------- -----------
Other Assets:
Non-appropriated funds (Industrial Revenue Bond) 5,440,677 --
Deferred charges and other assets 646,613 501,351
Investments available for sale at fair value 9,252,975 8,464,461
Other equity investments-at cost 2,011,002 2,006,002
----------- -----------
17,351,267 10,971,814
----------- -----------
$82,782,033 $72,457,006
----------- -----------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 5,052,389 $ 3,917,443
Other accrued liabilities 1,926,295 2,338,505
Accrued payroll and related employee benefits 1,367,722 1,005,685
Income taxes payable 317,980 251,485
----------- -----------
Total current liabilities 8,664,386 7,513,118
Industrial Revenue Bond 5,800,000 --
Deferred Income Taxes 1,874,800 1,328,160
----------- -----------
16,339,186 8,841,278
----------- -----------
Commitments and Contingent Liabilities
Shareowners' Equity:
Common stock, no par value, 5,000,000 shares authorized;
shares issued and outstanding at June 30,
2000 -- 1,060,867; June 30, 1999 -- 1,114,467 4,470,450 4,161,300
Retained earnings 56,879,462 55,048,733
Accumulated other comprehensive income 5,092,935 4,405,695
----------- -----------
66,442,847 63,615,728
----------- -----------
$82,782,033 $72,457,006
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
8
_
<PAGE> 11
Consolidated Statements of Cash Flows
----------------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 2000 1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 6,053,735 $ (842,555) $ 16,063,797
Adjustments to reconcile net income (loss) to net cash
flows from (used in) operating activities:
Depreciation and amortization 4,375,473 2,554,771 2,024,722
Amortization of contracts and routes 2,209,130 539,427 --
(Gain) on sale of Emission Reduction Credits (3,727,000) -- --
(Gains) losses on investments available for sale (10,186,300) 288,957 (23,290,926)
(Gains) losses on sale of property and equipment 259,013 (1,050,779) (9,261)
Tax deferrals and deferred tax asset 59,140 (435,000) 1,035,000
Provision for doubtful accounts receivable 174,120 188,658 116,298
Changes in operating assets and liabilities:
Accounts and notes receivable (304,745) (170,596) (140,080)
Inventories 319,423 338,216 (77,998)
Prepaid expenses and other current assets (164,782) (831,222) (79,811)
Accounts payable and accrued liabilities 884,770 (645,261) (184,621)
Income taxes payable 66,495 (224,021) (58,725)
Tax benefit applied to purchase of routes and contracts 560,000 140,000 --
Other assets (145,260) 9,262 (163,585)
------------ ------------ ------------
Net cash flows from (used in) operating activities 433,212 (140,143) (4,765,190)
------------ ------------ ------------
Cash Flows From Investing Activities:
Purchase of U.S. Treasury bills (31,088,390) (19,802,061) (48,733,701)
Maturities of U.S. Treasury bills 27,100,000 47,974,498 29,250,000
Purchase of property and equipment (6,439,654) (4,155,834) (2,508,358)
Proceeds from disposition of property and equipment 163,407 1,541,866 137,616
Proceeds from sale of Emission Reduction Credits 3,727,000 -- --
Purchase of routes and contracts (617,104) -- --
Issuance of long-term notes receivable (200,000) (669,500) (763,975)
Purchase of investments available for sale (815,405) (319,046) (338,702)
Purchase of other equity investments -- -- (2,001,002)
Disposition of investments available for sale 11,469,231 718,100 28,475,074
Acquisition of International Processing Corporation, net of
cash acquired -- (20,514,504) --
Non-appropriated bond proceeds held by Trustee (5,440,677) -- --
------------ ------------ ------------
Net cash flows (used in) from investing activities (2,141,592) 4,773,519 3,516,952
------------ ------------ ------------
Cash Flows From Financing Activities:
Dividends to shareowners (1,108,867) (1,117,967) (1,414,687)
Proceeds from stock options exercised 309,150 22,838 --
Repurchases of common stock (3,114,139) (626,333) (2,527,221)
Proceeds from Industrial Revenue Bond financing 6,000,000 -- --
------------ ------------ ------------
Net cash from (used in) financing activities 2,086,144 (1,721,462) (3,941,908)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 377,764 2,911,914 (5,190,146)
Cash and cash equivalents at beginning of year 3,667,818 755,904 5,946,050
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,045,582 $ 3,667,818 $ 755,904
------------ ------------ ------------
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 6,340 $ 9,053 $ 4,323
Income Taxes $ 3,032,650 $ 425,194 $ 9,203,725
Non Cash Investing Transactions:
Acquired Preferred stock of Stamet, Inc. in exchange for
cancellation of a note receivable $ 428,800
Reacquired land and buildings through foreclosure
proceedings in exchange for cancellation of a note
receivable $ 141,120
</TABLE>
The accompanying notes are an integral part of these statements.
9
_
<PAGE> 12
Consolidated Statements of Shareowners' Equity
<TABLE>
<CAPTION>
Common Stock Accumulated
----------------------- Other
Number of Retained Comprehensive
For the years ended June 30, 2000, 1999 and 1998 Shares Amount Earnings Income(1)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance July 1, 1997 1,168,665 $4,138,462 $45,513,699 $ 7,997,484
Net income 16,063,797
Cash dividends on common stock, $1.25 per share (1,414,687)
Cash purchase of common stock and subsequent
retirement (45,823) (2,527,221)
Net unrealized gain on investments available for
sale 1,382,538
---------- ---------- ----------- -----------
Balance June 30, 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
---------- ---------- ------------ ------------
</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, 2000 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 6,053,735 $ (842,555) $16,063,797
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on investments available for
sale 687,240 (4,974,327) 1,382,538
----------- ----------- -----------
Comprehensive income (loss) $ 6,740,975 $(5,816,882) $17,446,335
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
10
__
<PAGE> 13
Notes to Consolidated Financial Statements
--------------------------------------------------
--------------------------------------------------------------------------------
NOTE 1: Principles of Consolidation:
Summary of The consolidated financial statements include the
Significant accounts of Scope Industries and its subsidiaries (the
Accounting Company), all of which are wholly owned. All significant
Policies inter-company account balances and transactions have been
eliminated.
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 debt securities and equity securities
with readily determinable market values are classified
into categories based on the Company's intent. Investments
held to maturity, which the Company has the positive
intent and ability to hold to maturity, are carried at
cost. Investments available for sale are carried at
estimated fair value. Unrealized holding gains and losses
are excluded from earnings and reported in other
comprehensive income as a separate component of
shareowners' equity until realized. For all investment
securities, unrealized losses that are other than
temporary are recognized in net income. Realized gains and
losses are determined on the specific identification
method and are reflected in net 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.
Revenue Recognition:
In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial
11
__
<PAGE> 14
Notes to Consolidated Financial Statements
--------------------------------------------------
--------------------------------------------------------------------------------
Statements". This SAB summarizes the SEC's view in
applying accounting principles generally accepted in the
United States of America to revenue recognition in
financial statements. This SAB is effective for all
registrants during the fourth quarter of calendar 2000.
The Company has adopted SAB No. 101 this year and its
adoption did not have a material impact on the Company's
financial statements.
Sales are recorded at contract prices as deliveries
are made. Tuition revenue is recognized as students
complete course hours. Provisions for losses on student
accounts and loans receivable are determined on the basis
of loss experience and assessment of prospective risk.
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.
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.
Business Segments and Related Information:
The Company reports its business segment information
in accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS
No. 131 establishes standards for reporting information
about operating segments and requires reporting for
selected information about operating segments in financial
statements. It also establishes standards for related
disclosures about products and services, geographic areas,
and major customers.
New Accounting Standards:
The Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will be
effective for our 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 Company has completed its
analysis of SFAS No. 133 and has determined that its
adoption will not have a material impact on the Company's
financial statements.
--------------------------------------------------------------------------------
12
__
<PAGE> 15
Notes to Consolidated Financial Statements
--------------------------------------------------
--------------------------------------------------------------------------------
NOTE 2: On April 4, 1999, the Company, through its wholly
Acquisition owned subsidiary Scope Products, Inc., purchased the
bakery waste recycling business known as International
Processing Corporation. The purchase consisted of
manufacturing facilities located in Georgia, Illinois,
Indiana, Kansas, New Jersey, North Carolina, Ohio and
Texas. The purchase was funded with cash and liquid
securities on hand. The fair values of assets and
liabilities acquired are presented below for supplemental
cash flow disclosure:
<TABLE>
<S> <C>
Current assets, net of cash acquired $ 3,187,492
Property and equipment 12,690,319
Collection routes and contracts 10,455,189
Other assets 46,022
Liabilities (4,791,358)
Deferred tax liabilities, net of deferred tax benefits (1,073,160)
-----------
Purchase price, net of cash acquired $20,514,504
-----------
</TABLE>
The acquisition has been accounted for using the
purchase method for business combinations. The results of
the operations of the acquired business have been included
in the consolidated financial statements since the date of
the acquisition.
--------------------------------------------------------------------------------
NOTE 3: All U.S. Treasury bills are purchased with maturities
Treasury Bills 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: Included in Investment and other income are
Investments and recognized gains and losses on investment securities. A
Other Income net loss of $288,957 was recognized in 1999. Net gains of
$10,186,300 and $23,290,926 were recognized in 2000 and
1998, respectively. Gross recognized gains and gross
recognized losses were $10,613,672 and $427,372,
respectively, for 2000, $13,691 and $302,648,
respectively, for 1999, and $23,290,926 and $0,
respectively, for 1998. Recognized losses of $423,800 and
$299,215 in 2000 and 1999, respectively, are from
recognized losses on securities whose decline in value was
deemed to be other than temporary. Also included in
Investment and other income in 2000 is a gain of
$3,727,000 from the sale of certain Emission Reduction
Credits.
At June 30, 2000, investments were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale securities
Equity securities $2,340,040 $6,912,935 $9,252,975
Other equity securities(1) $2,011,002 $2,011,002
</TABLE>
13
__
<PAGE> 16
Notes to Consolidated Financial Statements
--------------------------------------------------
--------------------------------------------------------------------------------
At June 30, 1999, investments were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale securities
Equity securities $2,383,766 $6,080,695 $8,464,461
Other equity securities(1) $2,006,002 $2,006,002
</TABLE>
(1) The Company holds shares and warrants in Chromagen,
Inc. that are classified as "other equities" and
valued at cost. The shares and warrants are not
publicly traded.
Fair values for investments available-for-sale are
based on quoted market prices, where available, at the
reporting date. Other equity securities are carried at
cost. No quoted market prices are available for these
securities.
--------------------------------------------------------------------------------
NOTE 5: The Company occupies certain facilities and operates
Leases 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,
------------------------------------------------------------------------
<S> <C>
2001 $1,286,826
2002 1,039,662
2003 964,594
2004 870,742
2005 673,715
Thereafter 933,693
----------
Total minimum lease payments $5,769,232
----------
</TABLE>
Total rental expense under operating leases was
$1,271,332 in 2000, $1,186,796 in 1999, and $691,183 in
1998.
--------------------------------------------------------------------------------
14
__
<PAGE> 17
Notes to Consolidated Financial Statements
--------------------------------------------------
--------------------------------------------------------------------------------
NOTE 6: In June 2000, the Company issued $6,000,000 in tax
Industrial exempt Industrial Revenue Bonds through the Gainesville
Revenue and Hall County Development Authority, in the State of
Bond Georgia. Interest on the bonds, (4.9% at June 30, 2000),
varies weekly based upon the tax exempt interest rate in
the current bond market. 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, 2000, the Company was in compliance
with all financial covenants under the debt agreement. The
bonds have a mandatory redemption amount every year until
2021; the first 4 years call for redemption of $200,000
per year payable starting on March 2001 and $300,000 for
the following 6 years. The Company, at its option, may
retire the bonds at any time. The current portion of
long-term debt is included in Accounts payable at
year-end. At June 30, 2000, the Bond Trustee holds
non-appropriated funds of approximately $5.4 million that
are restricted for construction of the new plant.
--------------------------------------------------------------------------------
NOTE 7: In the normal course of business, the Company and
Contingent certain of its subsidiaries are defendants in various
Liabilities 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: The Company maintains retirement and pension plans
Retirement Plans for certain eligible employees. The Company 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, 2000, 1999, and 1998
the defined contribution plan expenses were $221,190,
$180,138, and $282,157, respectively.
The Company has two Defined Benefit Pension Plans
that are fully funded. The amounts involved are not
significant to the Company's operations. 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 2000 was $36,946.
--------------------------------------------------------------------------------
NOTE 9: Under the Company's 1992 Stock Option Plan the
Stock Options 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.
15
__
<PAGE> 18
Notes to Consolidated Financial Statements
--------------------------------------------------
--------------------------------------------------------------------------------
Stock option activity under this plan was as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number Exercise Options Exercise
of Shares Price Exercisable Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1997 18,000 29.64 6,750 28.50
Outstanding at June 30, 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
</TABLE>
At June 30, 2000, option prices for shares under
option were $33.60 per share and the weighted average
remaining contractual life of options outstanding is less
than one year. There are 25,000 shares 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 had been used,
the expense relating to the stock options would have been
$6,836 in fiscal year 2000 and $13,673 for each of the
fiscal years ended in 1999 and 1998. Pro forma net income
(loss) would have been $6,046,899 in 2000, $(856,228) in
1999 and $16,050,124 in 1998. Pro forma diluted earnings
(loss) per share in 2000, 1999, and 1998 would have been
$5.49, $(0.77) and $13.97, respectively, rather than the
$5.50, $(0.75) and $13.98 reported earnings (loss) per
share.
--------------------------------------------------------------------------------
NOTE 10: The components of the provision for income taxes are:
Income Taxes
<TABLE>
<CAPTION>
For the years ended June 30, 2000 1999 1998
---------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $3,143,545 $ 99,839 $ 8,035,000
State 242,315 85,161 1,110,000
---------- --------- -----------
3,385,860 185,000 9,145,000
---------- --------- -----------
Deferred:
Federal 60,405 (404,839) 915,000
State (1,265) (30,161) 120,000
---------- --------- -----------
59,140 (435,000) 1,035,000
---------- --------- -----------
Total provision $3,445,000 $(250,000) $10,180,000
---------- --------- -----------
</TABLE>
16
__
<PAGE> 19
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, 2000 1999 1998
---------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory income tax $3,229,500 $(371,469) $ 9,185,329
State income taxes, net of Federal
tax benefit 160,800 36,300 775,000
Taxes on income not recognized on
books 115,400 88,609 173,250
Other (60,700) (3,440) 46,421
---------- --------- -----------
Total provision $3,445,000 $(250,000) $10,180,000
---------- --------- -----------
</TABLE>
The major components of the deferred income tax
assets and liabilities are:
<TABLE>
<CAPTION>
June 30, 2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ (664,000) $(1,505,000)
Income not currently taxable (442,000) (470,000)
Unrealized gain on investments (1,738,000) (1,675,000)
Other (594,600) (108,160)
----------- -----------
Total deferred income tax
liabilities (3,438,600) (3,758,160)
----------- -----------
Expenses not currently deductible 2,146,900 2,500,000
Recognized losses not currently deductible 714,400 885,000
----------- -----------
Total deferred income tax assets 2,861,300 3,385,000
----------- -----------
Net deferred income tax liability $ (577,300) $ (373,160)
----------- -----------
</TABLE>
In addition to the recognized deferred income tax
benefits and liabilities, an additional unrecognized
income tax benefit of approximately $4.0 million is
available to the Company in subsequent operating periods
resulting from tax deductions for goodwill amortization of
approximately $11.9 million. In subsequent periods, the
income tax benefit realized from 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 goodwill
amortization will be available ratably over the next
eleven years.
17
__
<PAGE> 20
Notes to Consolidated Financial Statements
--------------------------------------------------
--------------------------------------------------------------------------------
NOTE 11: Other comprehensive (loss) income consists of:
Other
Comprehensive
Income
<TABLE>
<CAPTION>
Amount Income Tax Amount
Before (Expense) Net of
Taxes Benefit Taxes
-----------------------------------------------------------------------------
<S> <C> <C> <C>
For the year ended June 30, 2000
Unrealized holding gains arising
during the year $ 11,018,540 $ (3,710,205) $ 7,308,335
Less: 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)
Less: Reclassification adjustment 288,957 (101,135) 187,822
------------ ------------ ------------
Other comprehensive loss $ (8,174,327) $ 3,200,000 $ (4,974,327)
For the year ended June 30, 1998
Unrealized holding gains arising
during the year $ 27,423,464 $(11,321,061) $ 16,102,403
Less: Reclassification adjustment (23,290,926) 8,571,061 (14,719,865)
------------ ------------ ------------
Other comprehensive income $ 4,132,538 $ (2,750,000) $ 1,382,538
</TABLE>
--------------------------------------------------------------------------------
NOTE 12: The Company's current operations are conducted
Business through two primary business segments.
Segment Waste Material Recycling
Data 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 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. The Company enrolls 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, which are performed by the
students.
<TABLE>
<CAPTION>
For the years ended June 30, 2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Sales and Revenues:
Waste Material Recycling $54,680,690 $25,995,604 $20,011,672
Vocational School Group 5,048,224 4,817,939 4,597,105
Other 639,482 231,529 436,495
----------- ----------- -----------
$60,368,396 $31,045,072 $25,045,272
----------- ----------- -----------
</TABLE>
18
__
<PAGE> 21
Notes to Consolidated Financial Statements
--------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income (Loss) before
Income Taxes:
Waste Material Recycling $(3,923,532) $(2,687,279) $ 2,327,681
Vocational School Group (22,466) 53,635 (52,893)
Other 141,939 (97,586) 263,780
----------- ----------- -----------
(3,804,059) (2,731,230) 2,538,568
Corporate expenses (1,616,651) (1,490,506) (1,639,588)
Investment and other income 14,919,445 3,129,181 25,344,817
----------- ----------- -----------
Income (loss) before income taxes $ 9,498,735 $(1,092,555) $26,243,797
----------- ----------- -----------
</TABLE>
One customer represented 18%, 19% and 17% of product
revenues for the Waste Material Recycling segment for the
years ended 2000, 1999 and 1998, respectively. The loss of
this customer or any other single customer would not have
a material adverse effect on the Company since the
commodity product is readily marketable.
<TABLE>
<S> <C> <C> <C>
Identifiable Assets:
Waste Material Recycling $42,685,714 $38,197,182 $10,740,401
Vocational School Group 1,711,413 1,698,573 1,774,759
Other 367,560 506,849 605,789
Corporate 38,017,346 32,054,402 65,259,165
----------- ----------- -----------
$82,782,033 $72,457,006 $78,380,114
----------- ----------- -----------
Depreciation and Amortization:
Waste Material Recycling $ 6,203,305 $ 2,739,645 $ 1,781,467
Vocational School Group 214,583 208,055 181,141
Other 139,289 135,564 50,345
Corporate 27,426 10,934 11,769
----------- ----------- -----------
$ 6,584,603 $ 3,094,198 $ 2,024,722
----------- ----------- -----------
Capital Expenditures:
Waste Material Recycling $ 6,069,997 $ 3,889,838 $ 1,872,305
Vocational School Group 226,041 225,033 72,433
Other -- 36,624 558,997
Corporate 143,616 4,339 145,743
----------- ----------- -----------
$ 6,439,654 $ 4,155,834 $ 2,649,478
----------- ----------- -----------
</TABLE>
19
__
<PAGE> 22
Corporate Information
--------------------------
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 Registrar
Eric M. Iwafuchi Computershare Investor
Robert Henigson Vice President and Chief Services
Investor Financial Officer Denver, Colorado
Meyer Luskin Eleanor R. Smith Securities Listed
Secretary and Controller American Stock Exchange
William H. Mannon
Retired Officer of
Scope Industries
Franklin Redlich
Retired
2000
[SCOPE LOGO]
233 WILSHIRE BOULEVARD, SUITE 310
SANTA MONICA, CA 90401
