-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Agj2c3ts2s8/o/ESyOt2unf3h0kxtOc6qv+o+cXVnNXf7fJ7bXSmMlaDMMfya2Lv zVt8LK/duShkGlKNIo0lJg== /in/edgar/work/0000950148-00-002021/0000950148-00-002021.txt : 20000927 0000950148-00-002021.hdr.sgml : 20000927 ACCESSION NUMBER: 0000950148-00-002021 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000925 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOPE INDUSTRIES CENTRAL INDEX KEY: 0000087864 STANDARD INDUSTRIAL CLASSIFICATION: [2040 ] IRS NUMBER: 951240976 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03552 FILM NUMBER: 728373 BUSINESS ADDRESS: STREET 1: 233 WILSHIRE BLVD STE 310 CITY: SANTA MONICA STATE: CA ZIP: 90401 BUSINESS PHONE: 3104581574 MAIL ADDRESS: STREET 1: 233 WILSHIRE BLVD STE 310 CITY: SANTA MONICA STATE: CA ZIP: 90401 10-K405 1 v65452e10-k405.txt FORM 10-K ITEM 405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 -OR- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission file number 1-3552 SCOPE INDUSTRIES (Exact name of Registrant as specified in its charter) CALIFORNIA 95-1240976 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 233 WILSHIRE BOULEVARD, SUITE 310 SANTA MONICA, CALIFORNIA 90401-1206 (Address of principal executive office, zip code) (Registrant's telephone number, including area code) (310) 458-1574 Securities registered pursuant to Section 12(b) of the Act TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ No par value Common Stock American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X} Aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 8, 2000, computed by reference to the closing sales price of such shares on such date was $16,566,215. The number of shares of registrant's common stock outstanding as of September 8, 2000 was 1,042,867. DOCUMENTS INCORPORATED BY REFERENCE:
Part of Form 10-K into which Document Document incorporated - -------------------------------------------------------------------- ---------------------------- Annual Report to Shareowners for the fiscal year ended June 30, 2000 Parts I, II, and IV Proxy Statement for the Annual Meeting of Shareholders to be held October 17, 2000 Parts III and IV
2 TABLE OF CONTENTS FORM 10-K ANNUAL REPORT For the Fiscal Year Ended June 30, 2000 SCOPE INDUSTRIES
PART I Page ---- Item 1. Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 7 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 7 Item 8. Financial Statements and Supplementary Data 7 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 8 PART III Item 10. Directors and Executive Officers of the Registrant 8 Item 11. Executive Compensation 8 Item 12. Security Ownership of Certain Beneficial Owners and Management 8 Item 13. Certain Relationships and Related Transactions 8 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 9 Signatures 11
3 PART I ITEM 1. BUSINESS Except for the historical information contained in this Annual Report on Form 10-K, the information contained herein constitutes forward looking information within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including, in particular statements about the Company's plans, strategies, and prospects. These statements, which may include words such as "may," "will," "expect," "believe," "intend," "plan," "anticipate," "estimate" or similar words, are based on the Company's current beliefs, expectations and assumptions as reflected therein, and are reasonable. The Company's actual results and financial performance may prove to be very different from what the Company might have predicted on the date of this Annual Report on Form 10-K. Some of the risks and uncertainties that might cause such differences are discussed below and others are discussed under the heading "Risk Factors." GENERAL DEVELOPMENT AND DESCRIPTION OF BUSINESS The Registrant was organized in 1938 and incorporated in the State of California on February 8, 1938. The term "Registrant" for purposes of this Item 1 includes the subsidiaries of the Registrant, unless the content discloses otherwise. The Registrant and its subsidiaries have organized its business into principally two business segments: (1) Waste Material Recycling and (2) Beauty Schools. OPERATING SEGMENTS Waste Material Recycling Segment In this business, the Registrant operates plants for the collection and processing of bakery waste materials into food supplement for animals. The Registrant currently operates 14 manufacturing facilities throughout the United States under the name of Dext Company, International Processing Corporation ("IPC") and ReConserve, Inc. in which animal food supplement is produced. Principal customers are dairies, feed lots, pet food manufacturers and poultry farms. The Registrant also owns and operates a plant in Vernon, California, where bakery waste material is processed and converted into breadcrumbs for human consumption. The principal customers are pre-packaged and restaurant supply food processors. This business segment is dependent upon the Registrant's ability to secure surplus and waste material, which it does under contract with bakeries and snack food manufacturers. The competition for securing the waste and surplus material is widespread and intensive. During fiscal 2000, the Registrant purchased raw material contracts from a competitor in the Chicago area that significantly increased the raw material supply helping to reduce processing cost by increasing the efficiency of the new Chicago plant. The selling price of recycled bakery waste material is affected by fluctuating commodity prices, primarily corn. Corn commodity prices and the Registrant's average unit selling prices were approximately 6% and 2% lower in fiscal 2000 respectively, than they were in the prior fiscal year. Sales tonnage volume for fiscal 2000 increased 118% above the prior year, due primarily to the full year operations of the IPC facilities compared to only the three-month period subsequent to its acquisition last year. The Waste Material Recycling segment contributed 91%, 84% and 80% of the sales and revenues of the Registrant for fiscal years 2000, 1999 and 1998, respectively. The Waste Material Recycling segment operated profitability for fiscal year 1998 but in fiscal 1999 and 2000 the segment operated at a loss. Capital expenditures for the Waste Material Recycling segment were $6,069,997 and represented 94% of the Registrant's total capital expenditures for fiscal 2000. In fiscal 1999 and 1998, capital expenditures for the Waste Material Recycling segment was $3,889,838, (94%) and $1,872,305, (71%), respectively, of those fiscal years. A new manufacturing facility near Chicago was constructed during fiscal 1999 and 2000; the new plant became operational during the second fiscal quarter of this year and replaced two former facilities that previously operated in the Chicago area. A new bakery waste recycling facility is to be constructed in Georgia and is being partly financed through the issuance of $6,000,000 in Gainesville 4 ITEM 1. BUSINESS. (CONTINUED) and Hall County Development Authority, State of Georgia tax exempt Industrial Revenue Bonds. Capital expenditures for expansion and modernization of existing bakery waste material recycling operations are expected to continue for the next few years. Cash flows from operations, remaining proceeds from the industrial revenue bond financing and liquid instrument holdings are expected to be sufficient to meet fiscal 2001 capital expenditures and operating cash requirement needs without incurring additional debt. Vocational School Group Segment Scope Beauty Enterprises, Inc., doing business as Marinello Schools of Beauty, is comprised of 12 vocational beauty schools where cosmetology and manicuring are taught. The schools are located in southern California and Nevada. At its vocational beauty schools, the Registrant enrolls students who pay tuition to learn to become cosmetologist or manicurist. Vocational programs and Federal grants are also utilized for the students' tuition. In addition, members of the public patronize the schools for hair styling and other cosmetological services, which are performed by students. There usually are competitive schools available to the public near each of the Registrant's schools. This segment has contributed 8%, 16% and 18% of the Registrant's total revenues for the past three years. In fiscal 2000 and 1998 the segment incurred an operating loss before income tax benefit of $22,466 and $52,893, respectively, and in fiscal 1999 the segments operating income before taxes was $53,635. Other Business The Registrant owns various oil and gas royalty and working interests. Oil and gas revenues represent 2% or less of total sales and revenues in fiscal years 2000, 1999 and 1998. The Registrant owns various real estate, including 207 acres of land in Somis, Ventura County, California, purchased in 1979. Various options are being considered for the use or sale of the real estate. The Registrant also owns and manages various marketable securities, U.S. Treasury Bills and other short-term investments. Investment income consists primarily of interest income and gains or losses on the sale of marketable securities. At June 30, 2000 and June 30, 1999, the Registrant held $19,100,000 and $15,000,000 par value respectively, in U.S. Treasury Bills maturing in less than one year. In fiscal 2000, 1999 and 1998, interest income from Treasury obligations amounted to $732,177, $1,733,642 and $1,616,585, respectively. Net gains from the sale of securities of $10,186,300 and $23,290,926 were recognized in fiscals 2000 and 1998, respectively. A net loss of $288,957 was recognized in fiscal 1999. In fiscal 2000, the Registrant sold all of its excess Emission Reduction Credits realizing a gain of $3,727,000. The Registrant recognized losses on securities whose decline in value was deemed to be other than temporary of $423,800 and $299,215 in fiscals 2000 and 1999, respectively. Impact of Environmental Protection Measures Certain of the Registrant's activities are affected by federal, state and/or local air and water pollution control regulations. Compliance with these regulations has required the purchase and installation of pollution abatement equipment and adjustment of production procedures. The Registrant has followed a policy of regular expenditures to assure compliance with such regulations. Air pollution control equipment to be installed at the soon to be constructed production facility in Georgia is estimated will cost approximately $1.5 million. 5 ITEM 1. BUSINESS. (CONTINUED) Risk Factors The market value of Bakery Waste Material recycled into animal food supplement products is directly tied to commodity prices, primarily corn and some animal grade fat items that are alternatives to our finished product. As such, the sales price of our product is directly correlated by the selling prices of the related commodity items. Historically, over the last 20 years corn prices have averaged $2.52 per bushel. The past two years has seen the price of corn at its lowest level in over 11 years. In fiscal 1999 the corn price averaged $2.02 per bushel and fiscal 2000 corn prices averaged $1.90 per bushel due to record harvest of corn. Currently, this next year is forecasted to produce another record corn crop for the American farmers. The average price per bushel of corn for the month of August 2000 was $1.49. State government legislates requirements for licensing of beauticians and manicurists who are trained at our beauty schools. Federal and state government through its educational assistance programs provide much of the money that enables the students to obtain the training. Should the federal or state government change its directions towards licensing requirements or reduce its student educational assistance programs the beauty schools would be severely impacted financially. Employees The Registrant (including its subsidiaries) employs approximately 433 individuals. 6 ITEM 2. PROPERTIES Principal properties owned by the Registrant are listed below:
Location Function -------- -------- Waste Material Recycling Segment: Los Angeles, CA Processing Plant San Jose, CA Processing Plant Vernon, CA Processing Plant Lodi, CA Collection Depot Denver, CO Processing Plant Conley, GA Processing Plant Lake City, GA Processing Plant Hodgkins, IL Processing Plant Kansas City, KS Processing Plant Baltimore, MD Processing Plant Secaucus, NJ Collection Depot Dallas, TX Processing Plant Mt. Pleasant, TX Processing Plant Flowery Branch, GA Processing Plant (to be constructed) Unimproved Land: Somis, CA Riverside, CA
Principal properties leased by the Registrant are:
Location Function -------- -------- Waste Material Recycling Segment: Fresno, CA Collection Depot Terre Haute, IN Processing Plant Carteret, NJ Processing Plant Durham, NC Processing Plant Fairfield, OH Processing Plant Vocation School Group Segment: Eleven Southern California Locations Beauty Schools Las Vegas, Nevada Location Beauty School Administrative Offices: Santa Monica, CA Tucker, GA
For additional lease information, Note 5 to the Financial Statements in the 2000 Annual Report to Shareowners, page 14, is hereby incorporated by reference. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings against the Registrant, any of its subsidiaries or any of their property, and none other than routine litigation incidental to the business, as noted in the 2000 Annual Report to Shareowners, Note 7 on page 15, which is hereby incorporated by reference. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended June 30, 2000 no matters were submitted to a vote of the Shareowners of the Registrant, either through the solicitation of proxies, or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Reference is made to the information with respect to the principal market on which the Registrant's common stock is being traded, and the high and low sales prices for each quarterly period for the last two fiscal years set forth on page 2 and outside back cover of the Registrant's 2000 Annual Report to Shareowners and, by reference, such information is incorporated herein. The number of holders of record of the Registrant's common stock as of July 31, 2000, based on a listing of the Registrant's Transfer Agent, was 79. Reference is made to the information regarding the dividends declared during the past two years with respect to the Registrant's common stock set forth on page 2 of the Registrant's 2000 Annual Report to Shareowners and, by reference, such information is incorporated herein. Dividends per share were paid in January 2000 ($1.00), and January 1999 ($1.00). ITEM 6. SELECTED FINANCIAL DATA Reference is made to the financial data with respect to the Registrant set forth on the inside front cover of the Registrant's 2000 Annual Report to Shareowners and, by reference, such financial data is incorporated herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 3 to 5 of the Registrant's 2000 Annual Report to Shareowners and, by reference, such information is incorporated herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Registrant and its subsidiaries included in its Annual Report to Shareowners for the year ended June 30, 2000 are incorporated herein by reference: Consolidated Balance Sheets - June 30, 2000 and 1999. Consolidated Statements of Operations - Years ended June 30, 2000, 1999 and 1998. Consolidated Statements of Cash Flows - Years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Shareowners' Equity - Years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Comprehensive Income - Year ended June 30, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Unaudited Quarterly Financial Data shown on page 2 of the Registrant's 2000 Annual Report to Shareowners for the years ended June 30, 2000 and 1999 is incorporated herein by reference. 8 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Registrant did not change accountants and there were no disagreements on any matters involving accounting principles or financial statement disclosures during the two-year period ended June 30, 2000. PART III Reference is made to the definitive Proxy Statement pursuant to Regulation 14A, which involves the election of directors at the Annual Meeting of Shareowners to be held on October 17, 2000, which was filed with the Securities and Exchange Commission on September 12, 2000 and, by such reference, said Proxy Statement is incorporated herein in response to the information called for by Part III (ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11. EXECUTIVE COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) The following additional information is furnished in response to Item 10: Executive Officers of the Registrant The name, age, position and business experience of each of the executive officers of the Registrant as of June 30, 2000 are listed below:
Name, Age and Position Business Experience During Past Five Years - ---------------------- ------------------------------------------ Meyer Luskin, 74 Chairman, President and Chief Executive Officer since Chairman of the Board, President 1961; responsible primarily for the formation of overall and Chief Executive Officer corporate policy and oversight of the main business segments. Robert E. McMullen, 54 Chief Operating Officer of Waste Material Recycling President of Subsidiary Segment since April 1999, responsible for the operations (Scope Products, Inc.) of waste material recycling business. From February 1997 to April 1999, he was President of International Processing Corporation, a wholly owned subsidiary of Darling International, Inc. From March 1982 to February 1997, he served in various management positions of International Processing Corporation and its predecessor companies. F. Duane Turney, 53 Chief Operating Officer of Vocational School Group President of Subsidiary segment since July 1991, responsible for the operations (Scope Beauty Enterprises, Inc.) of beauty schools. Eric M. Iwafuchi, 55 Vice President-Finance and Chief Financial Officer since Vice President-Finance and November, 1999; responsible primarily for the overall Chief Financial Officer corporate accounting and financial policies and procedures and a variety of treasury functions. From 1987 to 1999, he was Vice President and Chief Financial Officer of Concept Enterprises, Inc., a manufacturer, importer and distributor of consumer electronic products. Mr. Iwafuchi is a Certified Public Accountant.
9 Eleanor R. Smith, 68 Controller since 1974, Assistant Secretary, 1978 - 1986, Secretary, Controller Secretary since 1986, responsible for financial reporting and Chief Accounting Officer and recording keeping, internal controls, systems and procedures, as well as corporate secretarial functions.
Officers are elected by the Board of Directors and serve for a one-year period and until their successors are elected. No officers have employment contracts with the Registrant. There are no family relationships among any of the Registrant's directors and officers. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) The following financial statements of the Registrant, together with the Independent Auditors' Report, included as part of the Registrant's 2000 Annual Report to Shareowners, on pages 6 through 19 thereof, are incorporated by reference and filed herewith as part of Item 8 of this report: Independent Auditors' Report. Consolidated Balance Sheets at June 30, 2000 and 1999. Consolidated Statements of Operations for the years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Shareowners' Equity for the years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Comprehensive Income for the years ended June 30, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (2) Independent Auditors' Report on Schedules (3) Financial Statement Schedule Schedule II: Valuation and Qualifying Accounts All other schedules have been omitted as they are not applicable, not material or the required information is given in the financial statements or notes thereto. (b) Registrant did not file any reports on Form 8-K during the fourth quarter ended June 30, 2000. (c) Exhibits: (3.1) Registrant's Restated Articles of Incorporation that was Exhibit No. 3.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 is incorporated herein by this reference. (3.2) Registrant's By-laws as amended, is being filed as Exhibit 3.2 with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. (10) Material Contracts: 1992 Stock Option Plan, reference is made to Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-47053), and by reference such information is incorporated herein. (13) Annual Report to Shareowners 10 (21) Subsidiaries of Registrant (22) Proxy Statement for the Annual Meeting of Shareowners to be held on October 17, 2000, which was filed with the Securities and Exchange Commission on September 12, 2000, and by reference such information is incorporated herein in response to the information called for by Part III (ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11, EXECUTIVE COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) (23) Independent Auditors' Consent (27) Financial Data Schedule 11 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOPE INDUSTRIES By /s/ Eric M. Iwafuchi September 22, 2000 ---------------------- ------------------ Eric M. Iwafuchi Date Vice President-Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date /s/ Meyer Luskin Chairman of the Board, President, September 22, 2000 - --------------------------- Chief Executive Officer and --------------------- Meyer Luskin Director /s/ Eric M. Iwafuchi Vice President-Finance and September 22, 2000 - --------------------------- Chief Financial Officer --------------------- Eric M. Iwafuchi (Principal Financial Officer) /s/ Eleanor R. Smith Secretary and Controller September 22, 2000 - --------------------------- (Principal Accounting Officer) --------------------- Eleanor R. Smith /s/ Babette Heimbuch Director September 22, 2000 - --------------------------- --------------------- Babette Heimbuch /s/ Robert Henigson Director September 22, 2000 - --------------------------- --------------------- Robert Henigson /s/ William H. Mannon Director September 22, 2000 - --------------------------- --------------------- William H. Mannon /s/ Franklin Redlich Director September 22, 2000 - --------------------------- --------------------- Franklin Redlich
12 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareowners Scope Industries Santa Monica, California We have audited the consolidated financial statements of Scope Industries and subsidiaries as of June 30, 2000 and 1999, and for each of the three years in the period ended June 30, 2000, and have issued our report thereon dated August 28, 2000; such financial statements and report are included in the 2000 Annual Report to Shareowners and are incorporated herein by reference. Our audits also included the financial statement schedule of Scope Industries and subsidiaries, listed in Item 14 (a) (3). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based upon our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Los Angeles, California August 28, 2000 13 SCOPE INDUSTRIES AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS JUNE 30, 2000
Balance at Charged to Charged to Balance at Beginning Cost Other End of Description of Period Expenses Accounts Deductions Period Year Ended June 30, 2000: Allowance for doubtful accounts- Accounts receivable $484,885 $174,120 $ 0 $ 13,102(b) $645,903 Year Ended June 30, 1999: Allowance for doubtful accounts- Accounts receivable $205,318 $188,658 $194,987(a) $104,078(b) $484,885 Year Ended June 30, 1998: Allowance for doubtful accounts- Accounts receivable $159,167 $116,297 $ 0 $ 70,147(b) $205,318
(a) Valuation allowances received upon the acquisition of International Processing Corporation. (b) Uncollectable accounts charged against allowance, net. EX-3.2 2 v65452ex3-2.txt EXHIBIT 3.2 1 EXHIBIT 3.2 SCOPE INDUSTRIES BYLAWS (AS AMENDED TO APRIL 26, 2000) ARTICLE I MEETINGS OF SHAREHOLDERS SECTION 1. Place of Meetings Meetings of the shareholders of the Corporation shall he held at the principal office of the Corporation, or at any place within or without the State of California which may be designated either by the Board of Directors, or by the written consent of all shareholders entitled to vote thereat, given either before or after the meeting and filed with the Secretary of the Corporation. The Board of Directors is hereby authorized from time to time to designate the place for any meeting of the shareholders. SECTION 2. Annual Meetings (As amended May 27, 1975) The regular annual meeting of the shareholders shall be held on the fourth Tuesday in October of each and every year at 2:00 o'clock P.M. of said day, commencing in 1975: provided, however, that should said day fall upon a legal holiday, then said annual meeting of the shareholders shall be held at the same time and place on the next day thereafter ensuing which is not a legal holiday; and provided further, that should said annual meeting for any reason not be held at the time aforesaid, the same may be held at any time thereafter which may be designated by the Board of Directors. Said meeting shall be called by notice of the time and place thereof being addressed to each shareholder entitled to vote at his post office address as it appears upon the books of the Corporation, and if it does not so appear, then at the principal office of the Corporation, and deposited in the United States post office in the County in which the principal office of the 2 Corporation is situated, postage thereon prepaid, at least ten (10) days preceding the date of said meeting. No other notice of said meeting need be given. At said regular annual meeting the directors of this Corporation shall be elected to serve for the ensuing year and until their successors are elected and qualified. SECTION 3. Special Meetings (As amended March 28, 1955) Special meetings of shareholders for any purpose or purposes, unless otherwise prescribed by statute, may be called at any time by the President or Vice President, or by the Board of Directors, or by any two members thereof, or by one or more shareholders holding not less than one-tenth of the voting power of the Corporation. Except in special cases where other express provision is made by statute, notice of such special meetings, stating the time, place and in general terms the purpose or purposes thereof, shall be delivered or mailed to each shareholder at his post office address as the same appears on the books of the Corporation, and if it does not so appear, then at the principal office of the corporation, such notice to be so delivered or mailed, postage thereon prepaid, at least ten (10) days preceding the day of each such meeting. Except in cases where other express provision is made by statute, no other notice of such meetings need be given. SECTION 4. Voting and Proxies (As amended October 29, 1957) At each meeting of shareholders, every shareholder shall have the right to vote in person or by proxy the number of shares standing in his own name on the stock records of the Corporation on the day three (3) days prior to the meeting, or, if some other day is fixed by the Board of Directors for the determination of shareholders of record, then on such other day. All proxies shall be in writing executed by the person or persons in whose names the shares represented thereby stands on the books of the Corporation or by his duly authorized attorney. In case any meeting of shareholders shall have been for any cause adjourned, the same proxy shall be valid and may be used at such adjourned meeting. SECTION 5. Quorum. 3 At any meeting of the shareholders, the holders of a majority of the shares of the Corporation entitled to vote must be represented in person or by proxy in writing, and the holders of such majority of the shares entitled to vote, when so represented, shall constitute a quorum for any and all purposes, including the election of directors; provided that the shareholders present at a duly called meeting at which a quorum is present may continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 6. Adjournment Any shareholders' meeting, annual or special, whether or not a quorum in present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum no other business may be transacted at any such meeting. When any shareholders' meeting, either annual or special, is adjourned for thirty (30) days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Save, as aforesaid, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which such adjournment is taken. SECTION 7. Waiver of Notice Notice of any meeting of shareholders shall not be required to be given to any shareholder who shall sign in writing either before, during or after the meeting, a waiver of notice thereof and consent thereto; provided that any such waiver and consent shall be made a part of the records of the meeting. SECTION 8. Proof of Notice An entry of the service of notice of each meeting of the shareholders, given in the manner above provided, shall be made in the minutes of the proceedings of the shareholders, and such entry, if read and approved at a subsequent meeting of the shareholders, shall be conclusive on the question of such service. 4 ARTICLE II BOARD OF DIRECTORS SECTION 1. Powers (Amended October 27, 1987) Subject to any limitation in the Articles of Incorporation or these Bylaws and to any provision of the California Corporations Code requiring shareholder authorization or approval, the business and affairs of this Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board of Directors may make a loan of money to, or guaranty the obligation of, any officer of this Corporation or any of its subsidiaries who is not a Director of this Corporation provided only that the Board of Directors shall have determined that such a loan or guaranty may reasonably be expected to benefit the Corporation. SECTION 2. Election of Directors The Directors shall be elected annually at the annual meeting of the shareholders, or if for any cause said annual meeting be not duly held, then at such other meeting of the shareholders as may be called for that purpose by the President or Vice President or any two directors. Each director shall continue in office until after the next election of directors and until his successor shall have been elected and qualified in his stead, or until he shall have resigned or been removed, and his resignation or removal shall have become effective. If at any time the number of directors shall be increased, the additional directors shall be elected either by the shareholders at an annual meeting or at a special meeting called for that purpose, or such additional directors may be elected by the directors then in office to hold office until their successors are elected and qualified. SECTION 3. Vacancies Whenever any vacancy occurs in the office of director, except vacancies caused by removal of directors pursuant to Section 310 of the Civil Code of the State of California, such vacancy shall be filled by a majority of the remaining directors, though less than a quorum, or by 5 the sole remaining director, if there be but one, and the person so elected shall hold office until his successor is elected and qualified. When one or more of the directors shall give notice of his or their resignation to the Board, effective at a future date, the Board shall have the power to fill such vacancy or vacancies to take effect when such resignation shall become effective. Each director so appointed shall hold office during the remainder of the term of office of the resigning director or directors, or until their successors are appointed and qualified. SECTION 4. Place of Meetings Meetings of the Board of Directors may be held at the principal office of the Corporation, or at any place, either within or without the State of California, which shall from time to time be designated by resolution of the Board of Directors or by written consent of all members of the Board. SECTION 5. Annual Meeting Immediately following each annual meeting of shareholders at which directors shall have been elected, the Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of any other business. No notice of such meeting need be given. If such meeting is not held for any reason, the same may be held at any other time upon the notice hereinafter provided for special meetings of the Board. SECTION 6. Regular Meetings Regular meetings of the Board of Directors shall be held at such times as the Board of Directors shall from time to time determine by resolution, and no notice of regular meetings need be given except that a notice of the adoption of such resolution fixing the times for regular meetings shall be given to each director in the manner hereinafter provided for giving notices of special meetings of the Board of Directors. SECTION 7. Special Meetings Special meetings of the Board of Directors for any purpose or purposes, unless otherwise prescribed by statute, may be held at any time upon the order of the President or Vice President, of upon the order of any two or more of the directors. 6 Notice of the time and place of special meetings shall be mailed or telegraphed to each director, addressed to him at his last place of business or residence, if known, and if not known, at the principal office of the corporation, or shall be left at such place, or delivered personally. In case such notice is mailed or telegraphed it shall be deposited in the post office or delivered to the telegraph company in the city in which the principal office of the Corporation is located at least forty-eight (48) hours prior to the time of the holding of the meeting. In case such notice is left or delivered as above provided, it shall be so left or delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. Such mailing, telegraphing, leaving or delivery, as above specified, shall constitute due, legal and personal notice to such director. Whenever any director has been absent from any special meeting of the Board of Directors, an entry in the minutes to the affect that said notice has been left at said last known place of business or residence, or had been deposited in the United States post office in said city, addressed to said director as aforesaid, or that notification had been given him by telegraph as above provided, shall constitute conclusive evidence that due notice of such special meeting had been given to such director, as required by law and the Bylaws of this Corporation. Notice of any meeting of the Board of Directors shall not be required to be given to any director who shall sign in writing, either before, during or after the meeting, a waiver of notice thereof and consent thereto; provided that any such waiver and consent shall be made a part of the records of the meeting. SECTION 8. Quorum and Manner of Acting A majority of the whole number of Directors shall constitute a quorum for the transaction of business and every act or decision of a majority of the Directors present at a meeting at which a quorum is present, made or done when duly assembled, shall be valid as the act of the Board of Directors: but a majority of those present at the time and place of any meeting, although less than a quorum, may adjourn the same from time to time, or from day to day, without further notice, until a quorum shall attend, and when a quorum shall attend, any business may be transacted 7 which might have been transacted at the meeting had the same been held on the day on which the same was originally appointed or called. SECTION 9. Executive and Other Committees (Added May 27, 1953) The Board of Directors may appoint an Executive Committee of such Board, and may delegate to such committee any of the powers and authority of the Board of Directors, except the power to declare dividends and to adopt, amend, and repeal the Bylaws. Such Executive Committee shall be composed of members of the Board of Directors and shall act only in the intervals between meetings of the Board of Directors, and shall be subject at all times to the control of the Board of Directors. The Board or Directors may create and appoint other committees, composed of such persons, whether directors or not, as the directors may designate, with such power and authority as the directors may determine, consistent with the provisions and limitations provided by law. SECTION 10. Number of Directors (Amended October 28, 1980 and October 26, 1999) The number of directors of the Corporation shall not be less than three nor more than five. The exact number of directors shall be fixed from time to time within the limits specified in this Section 10, by a Bylaw or amendment thereof duly adopted by the shareholders or by the Board of Directors. SECTION 10a. Exact Number of Directors (Amended April 26, 2000) The number of directors of this Corporation shall be five until changed by a Bylaw or amendment thereof duly adopted by the shareholders or by the Board of Directors amending this Section 10-a. SECTION 11. Action Taken Without a Meeting (Added February 7, 1962) Any action required or permitted to be taken by the Board of Directors under any provision of the California General Corporation Law may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the some force and affect as a unanimous vote of such 8 Directors. Any certificate or other document filed under any provision of the California General Corporation Law which relates to action so taken shall state that the action was taken by unanimous written consent of the Board of Directors without a meeting, and that the Bylaws authorize the Directors to so act, and such statement shall be prima facie evidence of such authority. ARTICLE III (As amended November 24, 1954) OFFICERS SECTION 1. Number, Qualification, Compensation and Tenure of Office (a) The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, a Secretary, a Treasurer and such other officers as may be appointed in accordance with the provisions of Section 2 of this Article III. The officers of the Corporation shall be elected by, and hold office at the pleasure of, the Board of Directors. (b) The Chairman of the Board and President shall be a member at the Board of Directors. Any other officer may but need not be a member of the Board of Directors. One person may hold the office and perform the duties of any two officers, except those of President and Vice President, and President and Secretary. (c) The officers of the Corporation shall be elected by the Board of Directors annually, or at such other times as the Board of Directors may deem advisable. (d) The Vice Presidents may, at the discretion of the Board of Directors, include a Senior Vice President and an Executive Vice President. (e) The compensation of the Chairman of the Board and of the President of this Corporation shall be fixed from time to time by the Board of Directors. The compensation of the other officers of the Corporation may be fixed from time to time by the President of the Corporation, subject to the right of the Board of Directors in its discretion to fix, and from time to time to change, the compensation of any officer of the Corporation. 9 SECTION 2. Subordinate Officers The Board of Directors may from time to time appoint such subordinate officers or agents as it may deem necessary, including one or more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, and shall fix their compensation and tenure of office. Each subordinate officer or agent shall have such authority and perform such duties as may be provided by law or by these Bylaws or as the Board of Directors may from time to time determine. The Board of Directors may delegate to any officer the power to appoint and to prescribe the authority and duties of any such subordinate officer or agent. SECTION 3. Removal and Resignation: Filling of Vacancies (a) Any officer may be removed either with or without cause by the Board of Directors at any regular or special meeting thereof, or by any officer upon whom such power of removal may have been conferred by the Board of Directors. (b) Any officer may resign at any time by giving written notice to the Board of Directors or to the President of the corporation. Any such resignation shall take effect at the time of the receipt of such notice or at any later time specified therein; and unless otherwise specified in such notice, the acceptance of such resignation shall not be necessary to make it effective. (c) A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the Bylaws for regular appointments to such office. SECTION 4. Chairman of the Board The Chairman of the Board may be designated the Chief Executive Officer of the Corporation by the Board of Directors, and while acting as such he shall, subject to the control of the Board of Directors, have general supervision, direction and management of the business and affairs of the Corporation. He shall, if present, preside at all meetings of the Board of Directors and shall exercise and perform such other powers and duties as may from time to time be designated by the Board of Directors or prescribed by the Bylaws. 10 SECTION 5. President The President may be designated the Chief Executive Officer of the Corporation by the Board of Directors and while acting as such he shall have general supervision, direction and management of the business and affairs of the corporation, subject to the control of the Board of Directors and subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such officer. The President shall preside at all meetings of the shareholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall be a member ex officio of all standing committees and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. SECTION 6. Vice President The Vice President, including the Senior Vice President and Executive Vice President, if there be such officers, shall have such powers and perform such duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws, including the power of supervision, direction and management of any departments, divisions or branches of the business and affairs of the Corporation. In the absence or disability of the President, the duties of the President shall be performed by such Vice President of the Corporation as may be selected by the President if he is able to make such selection and if not, then by such Vice President as shall be selected by the Board of Directors. The Vice President so selected shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. 11 SECTION 7. Secretary The Secretary shall keep or cause to be kept a full and complete record of the meetings and proceedings of the Board of Directors and the shareholders. He shall keep or cause to be kept the share and transfer books of the corporation in such manner as to show at any time the names of the shareholders and their addresses, the number and class of shares held by each, and the number and date of certificates issued for the same. The Secretary shall give or cause to be given notice of all of the meetings of the shareholders and of the Board of Directors required by law or by these Bylaws to be given; he shall keep the seal of the Corporation and affix the name or cause it to be affixed to all duly executed instruments which may require it; and he shall have such other powers and perform such other duties as are usually vested in the office of Secretary of a corporation and as may be prescribed by the Board of Directors. SECTION 8. Treasurer The Treasurer shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books to be kept for that purpose, and shall have general supervision of the funds of the Corporation. He shall perform such other duties as are usually performed by the treasurer of a corporation and as may be prescribed by the Board of Directors. SECTION 9. Assistants Any Assistant Vice President, Assistant Secretary or Assistant Treasurer may respectively exercise any of the powers of a Vice President or of the secretary or of the Treasurer, respectively, subject to the directions of the Board of Directors, and shall perform such other duties as are prescribed by the Board of Directors. 12 ARTICLE IV SHARES AND CERTIFICATES FOR SHARES SECTION 1. When Issued Certificates for shares of the Corporation shall be issued when fully paid up, and may be issued prior to full payment under such restrictions as the Board of Directors may deem proper. SECTION 2. Form of Certificate The certificates shall be in such form and device as shall be provided by the Board of Directors and shall fully comply with all applicable provisions of the Civil Code of California. The certificates shall be signed by the President or a Vice President, and by the Secretary or an Assistant secretary, if there be one, or by such other officers as may be authorized by the Board of Directors and permitted to do so by law, and the seal of the Corporation shall be affixed thereto. SECTION 3. Cancellation and Lost Certificates No new certificate shall be issued until the former certificate for the shares represented thereby shall have been surrendered and cancelled, except in the case of lost or destroyed certificates, and in that case the Board of Directors may require, prior to the issuance of a certificate or certificates in lieu thereof, the deposit with the Secretary of a bond satisfactory to the Board of Directors, indemnifying the Corporation and all persons against loss in consequence of the issuance of such new certificate or certificates. SECTION 4. Transfer of Shares Shares of the Corporation may be transferred by endorsement of the signature of the owner, his agent, attorney or legal representative, and the delivery of the certificate: but such transfer is not valid, except as to the parties thereto, until the same is so entered upon the books of the Corporation as to show the names of the parties by whom and to whom transferred, the number of the certificate, and the number or designation of the shares and the date of the transfer, and until the old certificates are surrendered and cancelled. The transferee in any transfer of 13 shares shall be deemed to have full notice of and to consent to the Bylaws of the Corporation to the same extent as if had signed a written assent thereto. SECTION 5. Rules and Regulations Concerning Issuance of Shares The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates. The Board of Directors of this Corporation may, subject to the consent and control of the Commissioner of Corporations of the State of California, and to the provisions of the general corporation law, dispose of the shares of this corporation, in such amounts and at such times as shall be determined by the Board of Directors, and in the discretion of the Board of Directors accept in full or part payment therefore such property, services or other considerations and at such valuations as the Board of Directors may determine. ARTICLE V AMENDMENTS SECTION 1. Power at Shareholders Bylaws may be adopted, amended or repealed either at a meeting by the vote of shareholders entitled to exercise a majority of the voting power, or by the written assent of such shareholders. SECTION 2. Power of Directors Subject to the right of shareholders to adopt, amend or repeal bylaw, bylaws other than a bylaw or amendment thereof changing the authorized number of directors may be adopted, amended or repealed by the Board of Directors. 14 ELEANOR R. SMITH does hereby certify and declare that she is Secretary of Scope Industries, a California corporation: that the foregoing constitutes a true and correct copy of the Bylaws of Scope Industries, as amended to date: and that said Bylaws are now in force and effect. DATED: September 22, 2000 /s/ Eleanor R. Smith --------------------------- Eleanor R. Smith, Secretary EX-13 3 v65452ex13.txt ANNUAL REPORT 1 SCOPE INDUSTRIES 2000 63RD ANNUAL REPORT LOGO 2 Financial Highlights
For the years ended June 30, 2000 1999 1998 - --------------------------------------------------------------------------------------------------- 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
Five-Year Review -- Selected Financial Data
For the years ended June 30, 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- 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
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 _ 4 Unaudited Quarterly Financial Data
First Second Third Fourth Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------------------------- 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) ----------- ----------- ----------- ----------- -----------
Market Price Range Scope Industries Common Stock
2000 1999 -------------------- -------------------- High Low High Low - --------------------------------------------------------------------------------------------------- 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
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 _ 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 _ 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 _ 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 _ 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 _ 9 Consolidated Statements of Operations
For the years ended June 30, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- 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
The accompanying notes are an integral part of these statements. 7 _ 10 Consolidated Balance Sheets
June 30, 2000 1999 - ---------------------------------------------------------------------------------------- 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 ----------- -----------
The accompanying notes are an integral part of these statements. 8 _ 11 Consolidated Statements of Cash Flows - ----------------------------------------------
For the years ended June 30, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------- 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
The accompanying notes are an integral part of these statements. 9 _ 12 Consolidated Statements of Shareowners' Equity
Common Stock Accumulated ----------------------- Other Number of Retained Comprehensive For the years ended June 30, 2000, 1999 and 1998 Shares Amount Earnings Income(1) - ---------------------------------------------------------------------------------------------------------- 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 ---------- ---------- ------------ ------------
(1) Accumulated Other Comprehensive Income is comprised entirely of net unrealized gains on investments available for sale. Consolidated Statements of Comprehensive Income
For the years ended June 30, 2000 1999 1998 - --------------------------------------------------------------------------------------------------- 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 ----------- ----------- -----------
The accompanying notes are an integral part of these statements. 10 __ 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 __ 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 __ 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: 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 -----------
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:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------------------- 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
13 __ 16 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- At June 30, 1999, investments were as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------------------- 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
(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:
For the years ending June 30, ------------------------------------------------------------------------ 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 ----------
Total rental expense under operating leases was $1,271,332 in 2000, $1,186,796 in 1999, and $691,183 in 1998. - -------------------------------------------------------------------------------- 14 __ 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 __ 18 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- Stock option activity under this plan was as follows:
Weighted Weighted Average Average Number Exercise Options Exercise of Shares Price Exercisable Price -------------------------------------------------------------------------------------- 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
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
For the years ended June 30, 2000 1999 1998 --------------------------------------------------------------------------- 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 ---------- --------- -----------
16 __ 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:
For the years ended June 30, 2000 1999 1998 --------------------------------------------------------------------------- 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 ---------- --------- -----------
The major components of the deferred income tax assets and liabilities are:
June 30, 2000 1999 -------------------------------------------------------------------------- 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) ----------- -----------
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 __ 20 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 11: Other comprehensive (loss) income consists of: Other Comprehensive Income
Amount Income Tax Amount Before (Expense) Net of Taxes Benefit Taxes ----------------------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- 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.
For the years ended June 30, 2000 1999 1998 ----------------------------------------------------------------------------- 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 ----------- ----------- -----------
18 __ 21 Notes to Consolidated Financial Statements - -------------------------------------------------- - --------------------------------------------------------------------------------
For the years ended June 30, 2000 1999 1998 ----------------------------------------------------------------------------- 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 ----------- ----------- -----------
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. 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 ----------- ----------- -----------
19 __ 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 EX-21 4 v65452ex21.txt EXHIBIT 21 1 EXHIBIT 21 SCOPE INDUSTRIES AND SUBSIDIARIES SUBSIDIARIES OF REGISTRANT As of June 30, 2000 The wholly owned subsidiaries of the Registrant are as follows:
Jurisdiction Of Company Name Incorporation ------------ ------------- Scope Products, Inc. California Lacos Land Company Nevada Scope Properties, Inc. California Scope Energy Resources, Inc. Nevada Scope Beauty Enterprises, Inc. California
Wholly owned by Scope Products, Inc., a subsidiary of the Registrant:
Jurisdiction Of Company Name Incorporation ------------ ------------- Dext Company of Arizona Arizona Dext Company of Colorado Colorado Dext Company of Illinois Illinois Dext Company of Maryland Maryland Dext Company of New Jersey, Inc. New Jersey Dext Company of Texas Texas International Processing Corporation Georgia International Transportation Service, Inc. Delaware ReConserve, Inc. Illinois ReConserve, Inc. Georgia Topnotch Foods, Inc. California
All of the subsidiaries described above are included in the consolidated financial statements hereto annexed. Separate financial statements are not filed for any of the subsidiaries. EX-23 5 v65452ex23.txt EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 33-470530 of Scope Industries on Form S-8 of our reports dated August 28, 2000, appearing in and incorporated by reference in this Annual Report on Form 10-K of Scope Industries for the year ended June 30, 2000. /s/ Deloitte & Touche LLP Los Angeles, California August 28, 2000 EX-27 6 v65452ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2000 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-2000 JUL-01-1999 JUN-30-2000 4,045,582 9,252,975 5,226,925 (645,903) 680,332 31,021,266 53,657,782 27,531,392 82,782,033 8,664,386 5,800,000 0 0 4,470,450 55,972,397 82,782,033 55,320,172 60,368,396 46,100,188 65,789,106 0 0 0 9,498,735 3,445,000 6,053,735 0 0 0 6,053,735 $5.51 $5.50
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