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 not guarantees of performance. 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 Company was organized and incorporated in the State of California on February 8, 1938. The term “Company” for purposes of this Item 1 includes the subsidiaries of the Company, unless the content discloses otherwise. The Company 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 segment, the Company operates plants for the collection and processing of bakery waste materials into a food supplement for animals. The Company currently operates 13 manufacturing facilities throughout the United States under the names of Dext Company, International Processing Corporation (“IPC”); Recycle to Conserve and ReConserve in which animal food supplement is produced. Principal customers are dairies, feed lots, pet food manufacturers and poultry farms. The Company also owns and operates a plant in Vernon, California under the name Topnotch Foods, where bakery waste material is processed and converted into edible breadcrumbs for human consumption. The principal customers are pre-packaged and restaurant supply food processors. The waste material recycling segment is dependent upon the Company’s ability to secure surplus and waste material, which it does under long-term contracts with bakeries and snack food manufacturers. The competition for securing the waste and surplus material is widespread and intensive.
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 selling price of our product is directly correlated to the selling prices of the related commodity items. The corn commodity prices and the Company’s average unit selling prices were approximately 7% and 6% higher in fiscal 2002 respectively, than they were in the prior fiscal year while sales tonnage volume for fiscal 2002 decreased slightly from the prior year. Historically, over the last 22 years corn prices have averaged $2.47 per bushel. Corn prices averaged $1.94, $1.80 and $1.90 during fiscal 2002, 2001 and 2000, respectively, reaching a low of $1.49 during August of 2000. Corn prices for the month of July and August 2002 averaged $2.21 and $2.50 per bushel. The increasing corn prices reflect the Department of Agriculture August 2002 reduced estimate of the current corn crop because of the Midwest drought.
The Waste Material Recycling segment contributed 90%, 91% and 84% of the sales and revenues of the Company for fiscal years 2002, 2001 and 2000, respectively. The Waste Material Recycling segment operated at a loss for fiscal years 2002, 2001 and 2000 after considering allocation of corporate general and administrative overhead expenses.
Capital expenditures for the Waste Material Recycling segment were $12,144,370 and represented 97% of the Company’s total capital expenditures for fiscal 2002. In fiscal 2001 and 2000, capital expenditures for the Waste Material Recycling segment was $9,429,531, (99%) and $6,069,997, (94%), respectively. A new bakery waste recycling facility in Georgia became operational in January of this fiscal year and is partly financed through the issuance in fiscal 2000 of $6,000,000 in tax exempt
Item 1. Business. (continued)
Industrial Revenue Bonds. The new plant near Atlanta, Georgia replaced two existing plants, one of the plants was sold during the fiscal year and the other is currently for sale. In fiscal 2002, the Company sold waste material recycling facilities in New Jersey and Georgia that were no longer being used by the business realizing gains from the sale of $624,353. A manufacturing facility near Chicago was completed and placed into operation during fiscal 2000; the new plant replaced two former facilities that previously operated in the Chicago area.
Capital expenditures for expansion and modernization of existing bakery waste material recycling operations are expected to continue for the next few years. The Company plans to build two new plants within the next two fiscal years. One plant will replace two facilities that are operating within the same geographical area and the other will replace a old plant that is being leased and the lease is expiring. Cash flows from operations, proceeds from the sale of investments and liquid instrument holdings are expected to be sufficient to meet fiscal 2003 and 2004 capital expenditures and operating cash requirement needs without incurring additional debt. However, the Company is considering issuing tax-exempt Industrial Revenue Bonds for both of the new plant constructions. The Company would also consider other types of financing that would be beneficial to the Company’s financial position.
Vocational School Group Segment
Scope Beauty Enterprises, Inc., doing business as Marinello Schools of Beauty, is comprised of 13 vocational beauty schools where cosmetology and manicuring are taught. The schools are located in southern California and Nevada. At its vocational beauty schools, the Company 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 that are performed by students. There usually are competitive schools available to the public near each of the Company’s schools.
This segment has contributed 9%, 8% and 15% of the Company’s total revenues for the past three years. In fiscal 2002 the segment was profitable and in fiscals 2001 and 2000 the segment operated at a loss after considering allocation of corporate general and administrative overhead expenses.
Capital expenditures for the Beauty schools are not material, in fiscal 2002, 2001 and 2000 capital spending was $409,542, $76,672 and $226,041, respectively. Capital spending for the Beauty schools is primarily for leasehold improvements on new and existing school locations.
Other Business
The Company owns various oil and gas royalty and working interests. Oil and gas revenues represent 1% or less of total sales and revenues in fiscal years 2002, 2001, and 2000.
In fiscal 2001, Company sold property in Riverside, California and Phoenix, Arizona that was not being used by the Company realizing gains from the sales of $768,640. The Company owns 207 acres of unimproved real estate in Ventura County, California, that the Company has decided to sell. The Company also owns and manages various marketable and non-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, 2002 and June 30, 2001, the Company held $14,508,000 and $10,000,000 par value respectively, in U.S. Treasury Bills maturing in less than one year and held $4,000,000 in long-term U.S. Treasury Notes at June 30, 2002. In fiscal 2002, 2001 and 2000, interest income from Treasury and Money Market obligations amounted to $458,959, $1,373,832, and $1,048,544, respectively. Net gains from the sale of securities of $21,080,990, $352,160 and $10,610,100 were recognized in fiscals 2002, 2001 and 2000, respectively. The Company recognized losses on securities whose decline in value was deemed to be other than temporary of $1,343,430 and $423,800 in fiscals 2002 and 2000, respectively, and recognized losses of $409,425 and $116,847 based upon the equity method of accounting for an investment in 2002 and 2001. In fiscal 2001, the Company recognized a loss from impairment of assets of $1,021,832 related to the closure of two plants that were
Item 1. Business. (continued)
being replaced by the new plant in Georgia. In fiscal 2000, the Company sold its excess Emission Reduction Credits realizing a gain of $3,727,000.
Impact of Environmental Protection Measures
Certain of the Company’s activities are affected by federal, state and/or local air and water pollution control regulations. Compliance with the regulations has required the purchase and installation of pollution abatement equipment and adjustment of production procedures. The Company has followed a policy of regular expenditures to assure compliance with such regulations. Air pollution control equipment installed during fiscal 2002 at two production facilities cost approximately $2,250,000 to exceed current air quality standards. Air pollution equipment installed in production facilities in fiscal 2001 and fiscal 2000 cost approximately $750,000 each year.
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 to the selling prices of the related commodity items. Historically, over the last 22 years corn prices have averaged $2.47 per bushel. The past three fiscal years has seen the price of corn at its lowest level since 1987 when corn averaged $1.55 per bushel. In fiscal 2000 the corn price averaged $1.90 per bushel, fiscal 2001 corn prices averaged $1.80 per bushel and fiscal 2002 corn prices averaged $1.94 per bushel due to record harvests of corn. In August 2002, the coming year’s forecast for the American corn crop was further reduced by the Agricultural Department due to continued hot weather and little moisture during the early planting stages in the “corn-belt” of the Midwest. As a result, the average price of a bushel of corn has been increasing based upon speculation that there could be a shortage in the corn crop compared to record crops in the prior four years. The average price per bushel of corn for the months of July and August 2002 was $2.21 and $2.50, respectively. Increasing corn prices will not only be reflected in the sales price of our finished product but we are also impacted from our raw material sources as many of the contracts we hold with the bakeries are based upon a sliding scale with the price of corn being the determining factor.
We are subject to environmental and safety laws and regulations governing air quality emissions standards with requirements varying between the different states in which we do business. From time to time, we have been notified of violations of environmental regulations. We attempt to correct these violations promptly without any material impact on our operations. In addition, we may be required to incur significant additional costs to comply with environmental laws and regulations in the future. These costs, and any future violations or liability under environmental laws or regulations, could have an adverse effect on our business, financial condition and results of operations.
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 Company (including its subsidiaries) employs approximately 380 individuals, all of whom are located in the United States. Only one of our subsidiaries is subject to collective bargaining arrangements, and we believe that our relationships with our employees are satisfactory.
Item 2.
Item 2. Properties
Principal properties owned by the Company 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
Hodgkins, IL
Processing Plant
Kansas City, KS
Processing Plant
Baltimore, MD
Processing Plant
Dallas, TX
Processing Plant
Mt. Pleasant, TX
Processing Plant
Flowery Branch, GA
Processing Plant
Available for Sale:
Lake City, GA
Processing Plant
Unimproved Land:
Somis, CA
Available for Sale
Dallas, TX
Future Plant Site
Principal properties leased by the Company are:
Location
Function
Waste Material Recycling Segment:
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
Two Las Vegas Area, Nevada Locations
Beauty Schools
Executive and Administrative Office:
Santa Monica, CA
Our plants are equipped with machinery, most of which is owned and is in part developed by us to meet the special requirements for recycling bakery waste material. We believe that our existing properties are in good condition and suitable for the conduct of our business. At the end of fiscal 2002, we were productively utilizing the vast majority of the space in our facilities, while actively disposing of facilities determined to be in excess.
The Company occupies certain facilities and operates a portion of its transportation equipment under long-term leases. Future minimum rental payments required under non-cancelable operating leases having lease terms in excess of one year are:
Item 3.
Item 3. Legal Proceedings
There are no material pending legal proceedings against the Company, any of its subsidiaries or any of their property, and none other than routine litigation incidental to the business. 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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended June 30, 2002, no matters were submitted to a vote of the Shareowners of the Company, either through the solicitation of proxies, or otherwise.
PART II
Item 5.
Item 5. Market for the Company’s Common Stock and Related Stockholder Matters
Reference is made to the information with respect to the principal market on which the Company’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 Company’s 2002 Annual Report to Shareowners and, by reference, such information is incorporated herein.
The number of holders of record of the Company’s common stock as of August 30, 2002, based on a listing of the Company’s Transfer Agent, was 72.
Reference is made to the information regarding the dividends declared during the past two years with respect to the Company’s common stock set forth on page 2 of the Company’s 2002 Annual Report to Shareowners and, by reference, such information is incorporated herein. Dividends of $1.00 per share were paid in January 2002 and January 2001.
Item 6.
Item 6. Selected Financial Data
Reference is made to the financial data with respect to the Company set forth on the inside front cover of the Company’s 2002 Annual Report to Shareowners and, by reference, such financial data is incorporated herein.
Item 7.
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 Company’s 2002 Annual Report to Shareowners and, by reference, such information is incorporated herein.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
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 Company’s 2002 Annual Report to Shareowners and, by reference, such information is incorporated herein.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the Company and its subsidiaries included in its Annual Report to Shareowners for the year ended June 30, 2002 are incorporated herein by reference:
Consolidated Balance Sheets - June 30, 2002 and 2001
Consolidated Statements of Operations - Years ended June 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years ended June 30, 2002, 2001 and 2000
Item 8. Financial Statements and Supplementary Data (continued)
Consolidated Statements of Shareowners’ Equity - Years ended June 30, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income - Year ended June 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Unaudited Quarterly Financial Data shown on page 2 of the Company’s 2002 Annual Report to Shareowners for the years ended June 30, 2002 and 2001 is incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
The Company 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, 2002.
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 22, 2002, which was filed with the Securities and Exchange Commission on September 13, 2002 and, by such reference, said Proxy Statement is incorporated herein in response to the information called for by Part III (ITEM 10.
ITEM 11. EXECUTIVE COMPENSATION; ITEM 12.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
The following documents are filed as part of this report:
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued)
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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:
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, 2002 and 2001, and for each of the three years in the period ended June 30, 2002, and have issued our report thereon dated August 30, 2002; such financial statements and report are included in the 2002 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 30, 2002
SCOPE INDUSTRIES AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
JUNE 30, 2002
(a)
Reduction to the allowance and uncollectable accounts charged to the allowance, net.