-----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, R8mkcDc6I/flIQc0FDGlvlmPfmB5/C7JcH0NBvTm5jXSd6e+YwnnPfNGrgxLtwUD JgtPTZh0KaDSL1rlvhX+dg== 0000950148-97-002396.txt : 19970924 0000950148-97-002396.hdr.sgml : 19970924 ACCESSION NUMBER: 0000950148-97-002396 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970923 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOPE INDUSTRIES CENTRAL INDEX KEY: 0000087864 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [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: 97683911 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 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended Commission File June 30, 1997 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 Blvd., Ste.310, Santa Monica, CA 90401 - --------------------------------------- ---------- (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: Name of each exchange on Title of each class which registered - -------------------------- ----------------------- Common Stock, No Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---------------- (Title of Class) 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. Yes[ X ]No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of 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] The aggregate market value of the voting stock of Registrant held by nonaffiliates of Registrant on September 5, 1997 computed by reference to the closing sales price of such shares on such date was $19,918,371. At September 5, 1997, 1,136,352 shares of the Registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into which document incorporated ------------ Document - -------- Annual Report to Shareowners for the fiscal year ended June 30, 1997 Parts I, II, and IV Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 1997 Parts III and IV
2 TABLE OF CONTENTS FORM 10-K ANNUAL REPORT For the Fiscal Year Ended June 30, 1997 SCOPE INDUSTRIES
PART I PAGE Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 6 Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 8. Financial Statements and Supplementary Data 6 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 7 PART III Item 10. Directors and Executive Officers of the Registrant 7 Item 11. Executive Compensation 7 Item 12. Security Ownership of Certain Beneficial Owners and Management 7 Item 13. Certain Relationships and Related Transactions 7 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 8 Signatures 10
2 3 PART I Item 1. BUSINESS General 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 operate principally in two business segments. Waste Material Recycling Segment In this business, the Registrant owns and operates plants under the name of Dext Company in Los Angeles and San Jose, California; Baltimore, Maryland; Chicago, Illinois; Dallas, Texas; and Denver, Colorado. It also operates depots in California and New Jersey for the collection and transshipment of waste bakery materials to its processing plants. The Registrant's principal customers are dairies, feed lots, pet food manufacturers and poultry farms. The Registrant also owns and operates a plant in Vernon, California, in which bakery waste material is processed and converted into edible bread crumbs. The principal customers are pre-packaged and restaurant supply food processors. This business depends 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. This segment contributed between 81% and 84% of the sales and revenues of the Registrant for 1997, 1996 and 1995. The Waste Material Recycling segment has operated profitably for the three most recent fiscal years. Capital expenditures for the Waste Material Recycling segment were $1,087,597 for fiscal 1997. Capital spending for this segment represented 84% of the Registrant's total capital expenditures for 1997. In 1996 and 1995, capital expenditures for this segment were $1,776,232 and $1,541,817, respectively. Capital expenditures for expansion and modernization of existing bakery waste material recycling operations are expected to continue. Cash flows from operations and liquid instrument holdings are expected to be adequate to meet fiscal 1998 capital expenditure needs. The selling price of recycled bakery waste material is affected by fluctuating commodity prices, particularly corn. Feed commodity prices and the Registrant's average unit selling prices were approximately 3% lower in fiscal 1997 than they were in the prior fiscal year. Although average prices for the current year were nearly consistent with last year, the variation during this fiscal year was substantial. Prices for recycled bakery waste material at the end of the year were considerably lower than the price levels enjoyed during the fiscal year's first quarter. Tonnage volume for fiscal 1997 was about 2% above the prior year. 3 4 Item 1. BUSINESS. (Continued) Vocational School Group Segment Scope Beauty Enterprises, Inc., doing business as Marinello Schools of Beauty, is comprised of 13 beauty schools in which cosmetology and manicuring are taught. The schools are located in southern California and Nevada. In its vocational beauty schools, the Registrant enrolls students who pay a tuition. 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 between 15% and 17% of the Registrant's total revenues for the past three years. The segment earned $70,092 in operating income for the 1997 fiscal year and $79,496 in the year earlier. The segment incurred an operating loss of $629,144 for the fiscal year 1995. Other Business The Registrant owns various oil and gas royalty and working interests. Oil and gas revenues represented 2% or less of total sales and revenues in 1997, 1996 and 1995. 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 land. The Registrant also owns and manages various marketable securities, U.S. Treasury Bills and other short-term investments. Investment income consists primarily of dividends, interest income and gains or losses on marketable securities. At June 30, 1997, the Registrant held $24,000,000 par value in U.S. Treasury Bills maturing in less than one year. In fiscal 1997, interest income from Treasury obligations amounted to $1,047,481. Net gains from sale of securities of $17,313,454 and $132,698 were recognized in 1997 and 1995, respectively. A net loss of $87,802 was recognized in 1996. The gains and losses were from sales of marketable securities and from recognized losses on securities whose decline in value was deemed to be other than temporary of $245,000 and $749,900 in 1997 and 1996, 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. 4 5 Item 1. BUSINESS (Continued) Employees The Registrant (including its subsidiaries) employs approximately 200 persons. Item 2. PROPERTIES Principal properties owned by the Registrant are listed below:
Principal Operation Location Function --------- -------- -------- Waste Material Los Angeles, CA Processing Plant Recycling San Jose, CA Processing Plant Vernon, CA Processing Plant Lodi, CA Collection Depot Chicago, IL Processing Plant Denver, CO Processing Plant Baltimore, MD Processing Plant Secaucus, NJ Collection Depot Dallas, TX Processing Plant Unimproved Land Somis, CA Riverside, CA
Twelve beauty schools in southern California and one school in Nevada operate in leased properties. One collection depot for the Waste Material Recycling segment and the corporate administrative office operate in leased premises. No lease has a material effect on the Registrant's operations. For additional lease information, Note 5 to the Financial Statements in the 1997 Annual Report to Shareowners, Page 12, is hereby incorporated by reference. Item 3. LEGAL PROCEEDINGS A former subsidiary of the Registrant has been designated as a potentially responsible party by the Environmental Protection Agency with respect to the cleanup of hazardous wastes at a site in southern California. The Registrant and its counsel are currently unable to predict the outcome of this matter, but believe that its ultimate resolution will not have a materially adverse effect on its consolidated financial statements. There are no other material pending legal proceedings against the Registrant, any of its subsidiaries or any of their property other than routine litigation incidental to the business, as noted in the 1997 Annual Report to Shareowners, Note 6 on page 12 which is hereby incorporated by reference. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended June 30, 1997, no matters were submitted to a vote of the Shareowners of the Registrant, either through the solicitation of proxies, or otherwise. 5 6 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 inside back cover of the Registrant's 1997 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 August 7, 1997, based on a listing of the Registrant's Transfer Agent, was 99. Reference is made to the information regarding the frequency and amount of dividends declared during the past two years with respect to the Registrant's common stock set forth on Page 2 of the Registrant's 1997 Annual Report to Shareowners and, by reference, such information is incorporated herein. The Registrant announced to shareholders on July 14, 1997, its offer to repurchase up to 200,000 shares within a price range from $48 to $52 per share. At the expiration of the offer on August 31, 1997, the Registrant repurchased and retired 32,313 shares of its common stock at a cost of $52 or a total cost of $1,680,276. 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 1997 Annual Report to Shareowners and, by reference, such financial data is incorporated herein. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 3 and 4 of the Registrant's 1997 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, 1997 are incorporated herein by reference: Consolidated Balance Sheets - June 30, 1997 and 1996 Consolidated Statements of Income - Years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Shareowners' Equity - Years ended June 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 6 7 Unaudited Quarterly Financial Data shown on Page 2 of the Registrant's 1997 Annual Report to Shareowners for the years ended June 30, 1997 and 1996 is incorporated herein by reference. 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, 1997. 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 28, 1997, which was filed with the Securities and Exchange Commission on September 11, 1997 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.) except that shareholdings shown for Robert Henigson, a director and beneficial owner of more than 5% of the Corporation's shares, should be 63,100 shares rather than 63,800 shares (5.4% of outstanding common stock rather than 5.5% of outstanding stock). Shareholdings for all directors and executive officers as a group should therefore be shown as 770,796 shares rather than 771,496 shares. Footnote (4) to the tables on pages 2 and 3 of the Proxy Statement, which list the shareholdings of beneficial owners of more than 5% of the Corporation's shares and the shareholdings of directors and executive officers of the Corporation, is not correct and should be disregarded. 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, 1997 are listed below:
Business Experience Name, Age and Position During Past Five Years - ---------------------- ---------------------- Meyer Luskin, 71 Chairman, President and Chief Chairman of the Board Executive Officer since 1961; President and Chief Executive responsible primarily for the Officer formation of overall corporate policy and operations of the main business segments. F. Duane Turney, 50 Chief Operating Officer of Vocational President of Subsidiary School Group segment since July 1991; (Scope Beauty Enterprises, Inc.) responsible for operations of beauty schools.
7 8
John J. Crowley, 64 Vice President-Finance and Chief Vice President-Finance and Financial Officer since 1987; Chief Financial Officer responsible primarily for the overall corporate accounting and financial policies and procedures and a variety of treasury functions. Mr. Crowley is a Certified Public Accountant. Eleanor R. Smith, 65 Controller since 1974, Assistant Secretary and Controller Secretary, 1978-1986, Secretary and Chief Accounting Officer since 1986; responsible for financial reporting and record 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 1997 Annual Report to Share- owners, on Pages 5 through 16 and the inside backcover 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, 1997 and 1996 Consolidated Statements of Income for the years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Shareowners' Equity for the years ended June 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (2) Indepedent Auditors' Report on Schedule (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) No reports on Form 8-K were filed by the Registrant for the period covered by this report. 8 9 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (c) Exhibits: (3) The Bylaws of the Registrant, as amended; and the restated Articles of Incorporation of the Registrant filed as Exhibits (3.1) and (3.2) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 are incorporated by reference. (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 (21) Subsidiaries of Registrant (22) Proxy Statement for the Annual Meeting of Shareowners to be held on October 28, 1997 which was filed with the Securities and Exchange Commission on September 11, 1997 and by refer- ence 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.) except that shareholdings shown for Robert Henigson, a director and beneficial owner of more than 5% of the Corporation's shares, should be 63,100 shares rather than 63,800 shares (5.4% of outstanding common stock rather than 5.5% of outstanding stock). Shareholdings for all directors and executive officers as a group should therefore be shown as 770,796 shares rather than 771,496 shares. Footnote(4) to the tables on pages 2 and 3 of the Proxy Statement, which list the shareholdings of beneficial owners of more than 5% of the Corporation's shares and the shareholdings of directors and executive officers of the Corporation, is not is not correct and should be disregarded. (23) Independent Auditors' Consent (27) Financial Data Schedule 9 10 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/ John J. Crowley 09-18-97 ---------------------------- ----------------- John J. Crowley 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 09-18-97 - -------------------------- ---------- Meyer Luskin President, Chief Executive Officer and Director /s/ John J. Crowley Vice President-Finance 09-18-97 - -------------------------- ---------- John J. Crowley Chief Financial Officer (Principal Financial Officer) /s/ Eleanor R. Smith Secretary and Controller 09-18-97 - -------------------------- ---------- Eleanor R. Smith (Principal Accounting Officer) /s/ Robert Henigson Director 09-18-97 - -------------------------- ---------- Robert Henigson /s/ William H. Mannon Director 09-18-97 - -------------------------- ---------- William H. Mannon /s/ Franklin Redlich Director 09-18-97 - -------------------------- ---------- Franklin Redlich /s/ Paul D. Saltman, Ph.D. Director 09-18-97 - -------------------------- ---------- Paul D. Saltman, Ph.D.
10 11 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, 1997 and 1996, and for each of the three years in the period ended June 30, 1997, and have issued our report thereon dated August 21, 1997; such financial statements and report are included in your 1997 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 on 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 21, 1997 12 SCOPE INDUSTRIES AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS JUNE 30, 1997
ADDITIONS BALANCE CHARGED AT (CREDITED) CHARGED BALANCE BEGINNING TO COSTS TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ----------- --------- -------- -------- ---------- --------- YEAR ENDED JUNE 30, 1997: Allowance for doubtful accounts - accounts receivable $149,180 $ 13,139 $ 0 $ 3,152(a) $159,167 Valuation Allowances - notes receivable $700,000 $ 0 $ 0 $700,000(b) $ 0 YEAR ENDED JUNE 30, 1996: Allowance for doubtful accounts - accounts receivable $298,834 $ 16,908 $ 0 $166,562(a) $149,180 Valuation allowances - notes receivable $700,000 $ 0 $ 0 $ 0 $700,000 YEAR ENDED JUNE 30, 1995: Allowance for doubtful accounts - $324,671 $118,459 $ 0 $144,296(a) $298,834 accounts receivable Valuation allowances - notes receivable $700,000 $ 0 $ 0 $ 0 $700,000
(a) Uncollectible accounts charged against allowance, net of bad debt recoveries. (b) Valuation allowance credit - note collected in full. EX-13 2 EXHIBIT 13 1 SCOPE INDUSTRIES 1997 60TH ANNUAL REPORT LOGO 2 Financial Highlights - -----------------------
For the years ended June 30, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Operating sales and revenues $30,273,913 $30,223,457 $22,974,144 Investment and other income 20,569,303 812,196 1,018,495 Net income $18,992,773 $ 3,972,548 $ 1,441,093 Net income per share* $ 15.94 $ 3.23 $ 1.15 Equity per share at end of year $ 49.33 $ 40.03 $ 32.38 Shares outstanding at end of year 1,168,665 1,202,565 1,244,865 * Based on weighted average number of shares outstanding.
Five-Year Review -- Selected Financial Data - ----------------------------------------------------
For the years ended June 30, 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- OPERATIONS Operating Sales and Revenues $30,273,913 $30,223,457 $22,974,144 $23,332,933 $ 20,720,898 Operating Cost and Expenses: Cost of sales and operating expenses 19,177,617 18,217,591 16,261,918 16,556,054 17,099,128 Depreciation and amortization 2,112,959 2,117,706 2,234,177 2,250,183 2,338,019 General and administrative 3,759,867 4,367,808 3,905,451 4,982,828 4,156,623 ----------- ----------- ----------- ------------ ----------- 25,050,443 24,703,105 22,401,546 23,789,065 23,593,770 ----------- ----------- ----------- ------------ ----------- 5,223,470 5,520,352 572,598 (456,132) (2,872,872) Investment and other income (loss) 20,569,303 812,196 1,018,495 2,055,702 (9,086,521) ----------- ----------- ----------- ------------ ----------- Income (loss) before income taxes 25,792,773 6,332,548 1,591,093 1,599,570 (11,959,393) Provision (benefit) for income taxes 6,800,000 2,360,000 150,000 35,000 (550,000) ----------- ----------- ----------- ------------ ----------- Net income (loss) $18,992,773 $ 3,972,548 $ 1,441,093 $ 1,564,570 $(11,409,393) =========== =========== =========== ============ =========== Net income (loss) per share $ 15.94 $ 3.23 $ 1.15 $ 1.24 $ (8.77) =========== =========== =========== ============ =========== Weighted average number of shares outstanding 1,191,469 1,231,270 1,255,101 1,266,105 1,301,592 =========== =========== =========== ============ =========== FINANCIAL PERFORMANCE Net income (loss) as a percent of revenues 62.74% 13.14% 6.27% 6.71% -55.06% Cash dividend per share $ 1.25 $ 0.50 $ 0.35 $ 0.30 $ 0.60 Capital expenditures $ 1,298,935 $ 2,255,436 $ 2,208,936 $ 2,630,917 $ 2,057,424 FINANCIAL POSITION Total assets $61,484,033 $55,534,495 $43,068,278 $34,218,320 $ 33,245,959 Shareowners' equity $57,649,645 $48,138,038 $40,303,613 $31,194,624 $ 30,359,528 Equity per share at end of year $ 49.33 $ 40.03 $ 32.38 $ 24.73 $ 23.81
3 President's Report - -------------------- - -------------------------------------------------------------------------------- To Our Shareholders: The refrain of an old (very old) tune keeps coming to mind as we try to summarize this past year. It goes, "It seems to me I've heard that song before -- it's from an old familiar score". Well, once again we report to you on an extraordinary year. Our earnings for fiscal 1997 were $18,992,773, or $15.94 per share. So why and what made this year so exceptional. At the year's beginning, our equity was $48,138,038, or $40.03 per share, and our market price per share was $37.00. At year end we had earned 39.5% after taxes on our equity, and our per share earnings were 43% of our starting market price. Obviously such results were not derived from our everyday business activities. The overwhelming portion of these earnings was created by our investment transactions. In fact, included in the year's earnings was $17,313,454 of profits from security sales. The primary contributor to our investment gains came from the sale of our long term holding of Imperial Bancorp and secondarily from the sale of our Mesa, Inc. securities. Although investment gains were by far the dominant source of our earnings, we shouldn't overlook that Dext Company, our food waste recycling business, had another excellent year. A significant development, not manifested on our income statement, was the substantial appreciation of our Lone Star Industries, Inc. stock and warrants; their appreciation is reflected on our balance sheet via our equity value. Certainly, there is no assurance of future price levels, but the highly improved financial and operational status of Lone Star Industries, Inc. does mean our investment has increased value. Another important development has been the continuation of the rapid growth of revenue and profits of OSI Systems, Inc. -- formerly named Opto Sensors, Inc. We own a minority but significant interest in this opto electronics company which is emphasizing better security inspection systems for the airline and institutional structures industry. However, the year wasn't all positive. We wrote off almost all of our original investment in Stamet, Incorporated -- a private company with a novel and patented method of pumping solids. Subsequently, we made an additional investment in Stamet, Incorporated with the hope of keeping the Company alive until its potential can emerge. We were also disappointed when Marinello Schools of Beauty -- our entry in the private vocational school industry -- reported only a slight improvement over the prior year. An additional negative has been the decline in commodity feed prices as compared to last year. Since the selling price of the animal feed supplement, generated by our recycling waste food, so closely tracks corn prices it's clear that Dext Company's earnings for at least the first half will be less than last year's similar period. We take pleasure in thanking all of our customers, vendors and shareowners for their support and trust. We particularly wish to express our thanks and respect for those hard working and dedicated employees who are trying to give us their best. 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 - --------------------------------------------------------------------------------------------------------- 1997 Operating sales and revenues $9,781,748 $7,046,661 $6,602,673 $6,842,831 $30,273,913 Gross profit 3,974,844 1,845,915 1,455,702 1,743,894 9,020,355 Net income $9,257,768 $4,928,086 $3,768,095 $1,038,824 $18,992,773 ---------- ---------- ---------- ---------- ----------- Net income per share* $ 7.72 $ 4.11 $ 3.15 $ 0.88 $ 15.94 ========== ========== ========== ========== =========== 1996 Operating sales and revenues $6,870,181 $7,527,740 $7,050,020 $8,775,516 $30,223,457 Gross profit 2,041,403 2,426,511 2,291,443 3,200,317 9,959,674 Net income $1,086,373 $ 886,017 $ 943,963 $1,056,195 $ 3,972,548 ---------- ---------- ---------- ---------- ----------- Net income per share* $ 0.87 $ 0.72 $ 0.76 $ 0.87 $ 3.23 ========== ========== ========== ========== ===========
*Per share amounts are based upon the weighted average number of shares outstanding. Market Price Range - ------------------------ Scope Industries Common Stock
1997 1996 --------------------- --------------------- High Low High Low - ------------------------------------------------------------------------------------------------------ 1st Quarter $43.00 $37.00 $29.00 $25.00 2nd Quarter 50.25 39.50 32.50 28.63 3rd Quarter 50.25 41.00 42.00 32.00 4th Quarter 54.00 47.00 38.50 33.75
Cash dividends of $1.25 and $0.50 per share were paid during the years ended June 30, 1997 and 1996, respectively. There were 99 shareowners of record of common stock at August 7, 1997. 2 - 5 Management's Discussion and Analysis of Operations and Financial Condition - ----------------------------------------- - -------------------------------------------------------------------------------- Operating Results -- 1997 compared with 1996 Total revenues were consistent for fiscal years 1997 and 1996. Waste Material Recycling sales for 1997 were 1% below 1996 sales. Vocational School Group revenues for 1997 were 1% above 1996 revenues. Waste Material Recycling sales represented 83% of 1997 Company revenues compared to 84% of 1996 revenues. From 1996 to 1997, tonnage increased 2% and average sales prices for dried bakery product sold dropped 3%. The Vocational School Group revenues represented 15% of the Company's revenues in both years. Waste Material Recycling operating costs were 4% higher per ton produced in 1997 than in the prior year. Operating costs for the Vocational School Group were up 2% in 1997 over the prior year. The Company's 1996 operating results were difficult to replicate. Although the 1997 operating results of the two business segments were slightly below the 1996 numbers, the current year compares favorably to the several years preceding 1996. For Waste Material Recycling operations, lower commodity prices dictated much lower selling prices of Dried Bakery Product over the second half of the 1997 fiscal year. Efficiencies that were gained in 1996 have remained in place and have allowed continued profitability. General and administrative expenses were 14% lower this year than in the prior year. Legal expenses were substantially lower in 1997 than they were in 1996. In fiscal 1997, investment and other income was $20,569,303 as compared to $812,196 in 1996. Net investment gains of $17,313,454 were realized in the current year. Long-term stock holdings in Imperial Bancorp and in Mesa, Inc. were sold during the year. The appreciation realized on those investments and the subsequent interest earned on the proceeds caused the unusual increase in the current year's investment and other income. Unrealized holding gains on investments, net of deferred income taxes, are $7,997,484 at June 30, 1997 and were $14,368,007 at June 30, 1996. These unrealized gains are not reflected in current income. Previous unrealized gains on Imperial Bancorp and Mesa, Inc. are no longer included since those gains were realized during the year. Unrealized gains on long-term equity holdings in Lone Star Industries, Inc. increased during the year. Provisions for income taxes are 26% of 1997 pre-tax income and 37% of 1996 pre-tax income. The 1997 effective tax rate is lower than the statutory income tax rate due to the 1997 utilization of deferred tax assets that arose from charges against income in prior years that had reduced investment carrying values but for which no tax benefit was then recognized. The recognition in the current year of the tax benefits of those prior year charges reduced the 1997 income tax provision. Net income for fiscal 1997 is $18,992,773 or $15.94 per share. For 1996 net income was $3,972,548 or $3.23 per share. Operating Results -- 1996 compared with 1995 Revenues were 32% higher in fiscal 1996 compared to 1995. Waste Material Recycling sales represented 84% of Company revenues in 1996 compared to 81% in 1995. Waste Material Recycling sales for 1996 were up 36% over 1995. The increased revenue is attributable to substantially higher prices received for the Dried Bakery Product produced and sold during fiscal 1996. Commodity prices for competing animal feed ingredients increased dramatically during 1996 which caused higher demand for available Dried Bakery Product. Limited supplies of raw materials restricted the growth of production volume. Tonnage volume in the Waste Material Recycling operations for each of the two years is comparable. Vocational School Group revenues increased 13% from 1995. Continuing efforts toward upgrading the quality of instruction and of the physical facilities of the schools has had a positive effect in the Group's financial performance. Production costs for Waste Material Recycling operations increased 14% from 1995 to 1996, due primarily to increased costs for supplies of raw materials. Vocational School Group operating costs were 5% lower in 1996 than in the year prior. Two school locations were refurbished and modernized during 1996. General and administrative expenses increased 12% over 1995. Increased contributions to the Waste Material Recycling profit sharing retirement plan and increased legal expenses resulted in increased general and administrative expenses in 1996. 3 - 6 Management's Discussion and Analysis of Operations and Financial Condition -- Continued - --------------------------------------------------------- - -------------------------------------------------------------------------------- Investment and other income for 1996 is 20% below the amount recognized in the prior year. Included in the 1996 amount is a loss of $749,900 which was recognized on an investment whose decline in value was deemed to be other than temporary. Net unrealized holding gains on investments which are not reflected in current income, increased $9,390,352 during fiscal 1996. Cumulatively, the unrealized holding gains on investments, net of deferred income taxes, are $14,368,007 at June 30, 1996 compared to $8,507,655 at June 30, 1995. Provisions for income taxes are 37% of 1996 pre-tax income and 9% of 1995 pre-tax income. Tax net operating loss carryforwards were utilized to minimize 1995 taxes; tax net operating loss carryforwards have been exhausted and are not available in 1996. Net income for fiscal 1996 was $3,972,548 or $3.23 per share. For 1995 net income was $1,441,093 or $1.15 per share. Capital Expenses/Liquidity The Company's capital expenditures were $1,298,935 in 1997, $2,255,436 in 1996 and $2,208,936 in 1995. Capital spending for the Waste Material Recycling segment represented 84% of the Company's total capital expenditures in 1997, 79% in 1996 and 70% in 1995. Vehicle replacements and processing equipment automation and refurbishing are continuously being made to maintain efficient operations and provide for expected growth and expansion of the bakery recycling business. In the Vocational School Group, one school was remodeled this past year. Lease arrangement delays postponed plans to move and completely refurbish two schools in this past year. They are now scheduled to move and undergo complete remodeling within the next twelve months. Approximately $400,000 in capital improvements for the Vocational School Group has been budgeted for fiscal 1998. 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. Capital investments have been made without incurring any debt. The Company believes its cash flow from operations and liquid investment holdings will be sufficient to meet its capital expenditures and operating cash requirements in fiscal 1998. Shareowners' Equity At June 30, 1997, shareowners' equity includes net unrealized holding gains on investments totaling $7,997,484, net of deferred income taxes. At June 30, 1996, shareowners' equity included $14,368,007 of net unrealized holding gains on investments. The Company purchased and retired 40,900 shares (3.4%) of its common shares during the year at a cost of $1,836,686. Funds for the purchase of these shares were available from existing cash and from operating and investing cash flows. In July 1997 the Company announced to shareowners an offer to repurchase up to 200,000 shares within a price range from $48 to $52 per share. At the expiration of the offering on August 31, 1997, the Company repurchased and retired 32,313 shares of common stock at a cost of $52 each or a total cost of $1,680,276. 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. 4 - 7 Consolidated Statements of Income - -----------------------------------------
For the years ended June 30, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Operating Sales and Revenues: Sales $25,744,869 $25,755,479 $19,035,739 Vocational school revenues 4,529,044 4,467,978 3,938,405 ----------- ----------- ----------- 30,273,913 30,223,457 22,974,144 ----------- ----------- ----------- Operating Cost and Expenses: Cost of sales 15,736,357 14,854,410 12,745,613 Vocational school operating expenses 3,441,260 3,363,181 3,516,305 Depreciation and amortization 2,112,959 2,117,706 2,234,177 General and administrative (Note 7) 3,759,867 4,367,808 3,905,451 ----------- ----------- ----------- 25,050,443 24,703,105 22,401,546 ----------- ----------- ----------- 5,223,470 5,520,352 572,598 Investment and other income (Notes 3 & 4) 20,569,303 812,196 1,018,495 ----------- ----------- ----------- Income before income taxes 25,792,773 6,332,548 1,591,093 Provision for income taxes (Note 9) 6,800,000 2,360,000 150,000 ----------- ----------- ----------- Net Income $18,992,773 $ 3,972,548 $ 1,441,093 =========== =========== =========== Net Income Per Share $ 15.94 $ 3.23 $ 1.15 =========== =========== =========== Weighted average number of shares outstanding 1,191,469 1,231,270 1,255,101
The accompanying notes are an integral part of these statements. 5 - 8 Consolidated Balance Sheets - ---------------------------------
June 30, 1997 1996 - --------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 5,946,050 $ 1,721,939 Treasury bills (par value $24,000,000 in 1997 and $5,035,000 in 1996) (Note 2) 23,540,939 4,973,377 Accounts and notes receivable, less allowance for doubtful accounts of $159,167 in 1997 and $149,180 in 1996 (Note 3) 1,637,066 5,173,445 Inventories 584,401 531,637 Deferred income taxes (Note 9) 675,000 Prepaid expenses and other current assets 379,654 531,639 ----------- ----------- Total current assets 32,763,110 12,932,037 ----------- ----------- Notes Receivable (Note 3) 232,276 1,154,378 Property and Equipment: Machinery and equipment 22,551,992 22,160,240 Land, buildings and improvements 9,652,554 9,743,940 ----------- ----------- 32,204,546 31,904,180 Less accumulated depreciation and amortization 22,016,611 20,867,899 ----------- ----------- 10,187,935 11,036,281 ----------- ----------- Other Assets: Deferred charges and other assets 256,006 130,930 Investments available for sale at fair value (Cost $5,417,222 in 1997 and $11,749,436 in 1996) (Note 4) 15,539,706 29,647,443 Investments held to maturity at cost (Fair value $603,600 in 1996) (Note 4) 633,426 Other equity investments at cost (Note 4) 2,505,000 ----------- ----------- 18,300,712 30,411,799 ----------- ----------- $61,484,033 $55,534,495 =========== =========== LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Bank overdraft $ 250,686 Accounts payable $ 1,104,205 1,410,953 Other accrued liabilities 1,255,321 1,447,406 Accrued payroll and related employee benefits 940,631 1,069,429 Income taxes payable 534,231 467,983 ----------- ----------- Total current liabilities 3,834,388 4,646,457 Deferred Income Taxes (Note 9) 2,750,000 ----------- ----------- 3,834,388 7,396,457 ----------- ----------- Commitments and Contingent Liabilities (Notes 5 & 6) Shareowners' Equity (Note 8): Common stock, no par value, 5,000,000 shares authorized; shares issued and outstanding: 1997 -- 1,168,665; 1996 -- 1,202,565 4,138,462 3,921,287 Retained earnings 45,513,699 29,848,744 Net unrealized gain on investments available for sale, net of income taxes of $2,125,000 in 1997 and $3,530,000 in 1996 7,997,484 14,368,007 ----------- ----------- 57,649,645 48,138,038 ----------- ----------- $61,484,033 $55,534,495 =========== ===========
The accompanying notes are an integral part of these statements. 6 - 9 Consolidated Statements of Cash Flows - ----------------------------------------------
For the years ended June 30, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $ 18,992,773 $ 3,972,548 $ 1,441,093 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 2,112,959 2,117,706 2,234,177 (Gains) losses on investments available for sale (17,313,454) 87,802 (132,698) Gains on sale of equipment (8,324) (45,374) (48,663) Deferred income taxes (2,195,000) (515,000) (265,000) Provision for doubtful accounts receivable 13,139 16,908 118,459 Changes in operating assets and liabilities: Accounts and notes receivable 1,945,342 (383,567) (170,389) Inventories (52,764) (108,460) (11,202) Prepaid expenses and other current assets 151,985 577,467 (402,903) Accounts payable and accrued liabilities (627,631) 1,417,705 (19,261) Income taxes payable 66,248 275,147 125,681 Other assets 49,924 (17,864) (113,066) ------------ ----------- ----------- Net cash flows from operating activities 3,135,197 7,395,018 2,756,228 ------------ ----------- ----------- Cash Flows From Investing Activities: Purchase of U.S. Treasury bills (30,602,562) (9,619,494) (4,272,507) Maturities or dispositions of U.S. Treasury bills 12,035,000 6,905,000 4,495,159 Purchase of property and equipment (1,298,935) (2,255,436) (2,208,936) Disposition of property and equipment 42,646 415,897 996,316 Purchase of long-term notes receivable (230,000) Purchase of investments available for sale (3,223,689) (2,168,781) (2,766,719) Purchase of investments held to maturity (3,000) Disposition of investments available for sale 27,497,783 2,556,476 2,189,066 Disposition of investments held to maturity 290,000 232,000 ------------ ----------- ----------- Net cash flows from (used in) investing activities 4,450,243 (4,106,338) (1,338,621) ------------ ----------- ----------- Cash Flows From Financing Activities: Dividends to shareowners (1,491,132) (616,782) (439,089) Repurchases of common stock (1,836,686) (1,381,693) (400,670) Change in bank overdraft (250,686) 188,940 (365,451) Proceeds from stock options exercised 217,175 ------------ ----------- ----------- Net cash used in financing activities (3,361,329) (1,809,535) (1,205,210) ------------ ----------- ----------- Net increase in cash and cash equivalents 4,224,111 1,479,145 212,397 Cash and cash equivalents at beginning of year 1,721,939 242,794 30,397 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 5,946,050 $ 1,721,939 $ 242,794 ============ =========== =========== Supplemental Disclosures: Cash paid during the year for: Interest $ 301 $ 4,333 $ 4,853 Income taxes $ 8,928,751 $ 2,577,438 $ 289,321 Non Cash Investing Transaction: Acquired stock of OSI Systems, Inc. (formerly Opto Sensors, Inc.) in exchange for cancellation of a loan by the exercise of warrants issued as a condition of the loan $ 2,500,000
The accompanying notes are an integral part of these statements. 7 - 10 Consolidated Statements of Shareowners' Equity - --------------------------------------------------------
Net Unrealized Common Stock Gain on ------------------------ Investments Number of Retained Available For the years ended June 30, 1997, 1996 and 1995. Shares Amount Earnings for Sale - -------------------------------------------------------------------------------------------------------------- Balance July 1, 1994 1,261,436 $3,921,287 $ 27,273,337 -- Net income 1,441,093 Cash dividends on common stock, $0.35 per share (439,089) Cash purchase of common stock and subsequent retirement (16,571) (400,670) Net unrealized gain on investments available for sale $ 8,507,655 ---------- ---------- -------------- ------------ Balance June 30, 1995 1,244,865 3,921,287 27,874,671 8,507,655 Net income 3,972,548 Cash dividends on common stock, $0.50 per share (616,782) Cash purchase of common stock and subsequent retirement (42,300) (1,381,693) Net unrealized gain on investments available for sale 5,860,352 ---------- ---------- -------------- ------------ Balance June 30, 1996 1,202,565 3,921,287 29,848,744 14,368,007 Net income 18,992,773 Cash dividends on common stock, $1.25 per share (1,491,132) Cash purchase of common stock and subsequent retirement (40,900) (1,836,686) Proceeds from stock options exercised 7,000 217,175 Net unrealized gain on investments available for sale (6,370,523) ---------- ---------- -------------- ------------ Balance June 30, 1997 1,168,665 $4,138,462 $ 45,513,699 $ 7,997,484 ========== ========== ============ ============
The accompanying notes are an integral part of these statements. 8 - 11 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 intercompany accounts and transactions are eliminated. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these 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, net of income taxes, 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. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", on July 1, 1994. The cumulative effect as of July 1, 1994 of adopting SFAS No. 115 increased shareholders' equity by $5,730,365. There was no effect on 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 for principal assets are 20 years for buildings, 10 years, but not exceeding the lease terms, for leasehold improvements and 7 years for machinery and equipment. Revenue Recognition: Sales are recorded at contract prices as deliveries are made. Tuition revenue is recognized as course hours are completed by students. Provisions for losses on student accounts and loans receivable are determined on the basis of loss experience and assessment of prospective risk. Resulting adjustments to the allowance for losses are made. 9 - 12 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- 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 carryforwards 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. Net Income Per Share: Net income per common share is based on the weighted average number of common shares and common share equivalents outstanding during the year. There is no significant difference between primary and fully diluted net income per share. Recently Issued Accounting Pronouncements: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". This statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company does not expect that the statement will have a material effect on the Company's consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". These statements are effective for financial statements issued for periods beginning after December 15, 1997. The Company has not yet analyzed the impact of adopting these statements. - -------------------------------------------------------------------------------- NOTE 2: All U.S. Treasury bills are purchased with maturities Treasury of one year or less. The cost is adjusted to reflect Bills interest earned as it accrues. The adjusted cost approximates the fair value of the bills. The Company has classified its Treasury bills as:
June 30, 1997 1996 --------------------------------------------------------------------------- Held-to-maturity $22,591,800 $4,973,377 Available-for-sale 949,139 ----------- ---------- $23,540,939 $4,973,377 =========== ==========
- -------------------------------------------------------------------------------- NOTE 3: Components of notes receivable are as follows: Notes Receivable
June 30, 1997 1996 --------------------------------------------------------------------------- Loan to OSI Systems, Inc. (formerly Opto Sensors, Inc.) $ 0 $ 2,500,000 Loan to Simcala, Inc. (formerly SiMETCO, Inc.) 0 950,000 Others 308,494 242,217 Less amounts classified as current (76,218) (2,537,839) -------- ----------- $232,276 $ 1,154,378 ======== ===========
10 -- 13 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- In April 1990, the Company loaned OSI Systems, Inc. $2,500,000. As a condition of the loan, the Company received a promissory note and warrants to purchase 1,250,000 shares of preferred stock of OSI Systems, Inc. In November 1996 the Company exercised its warrants to purchase 1,250,000 shares of preferred stock of OSI Systems, Inc. for $2,500,000. The note for $2,500,000 was canceled and preferred stock was issued to the Company in exchange. Subsequently, the preferred stock held by the Company was converted to common stock of OSI Systems, Inc. At June 30, 1997, the Company held approximately 30% of the common stock of OSI Systems, Inc. Interest income of $99,063, $249,740 and $247,711 in 1997, 1996 and 1995, respectively, was earned on the note. No dividends were received on the preferred or common shares. The Company's loan to SiMETCO, Inc. of $1,650,000 was in default from March 1993 until February 1995. In 1993 and 1994 the Company recorded provisions of $700,000 that recognized the potential reduction in realizable value of the note. In February 1995, a bankruptcy reorganization was effected whereby Simcala, Inc. became the successor to the business and operations of SiMETCO. A new promissory note was issued to the Company by Simcala, Inc. in the principal amount of $2,106,255 in exchange for the SiMETCO note. No income or increased value was recorded in conjunction with the exchange. It was not practicable to estimate the fair value of the new note. In April 1997 Simcala made an early and full repayment of the note. A gain of $1,156,255 was recognized as a result of the note repayment. Interest income of $182,051, $242,594 and $97,638 was earned on the Simcala note in 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- NOTE 4: Included in Investment and Other Income are Investments recognized gains and losses on investment securities. Net gains of $17,313,454 and $132,698 were recognized in 1997 and 1995, respectively. A net loss of $87,802 was recognized in 1996. Gross recognized gains and gross recognized losses were $17,558,454 and $245,000, respectively, for 1997, $697,589 and $785,391, respectively, for 1996 and $178,710 and $46,012, respectively, for 1995. Recognized gains and losses are from sales of investments and from recognized losses of $245,000 and $749,900 in 1997 and 1996, respectively, on securities whose decline in value was deemed to be other than temporary. At June 30, 1997 investments were as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------------------------- Available-for-sale securities Corporate debt securities(1)(2) Due after three but within eight years $ 633,426 $ $ (25,631) $ 607,795 Equity securities 4,783,796 10,148,115 14,931,911 ----------- ----------- ----------- ----------- $ 5,417,222 $10,148,115 $ (25,631) $15,539,706 Other equity securities $ 2,505,000 $ 2,505,000
11 14 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- At June 30, 1996 investments were as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------------------------- Held-to-maturity securities Corporate debt securities(1) Due after four but within nine years $ 633,426 $ (29,826) $ 603,600 Available-for-sale securities Corporate debt securities Due after one but within four years $ 573,000 $ 27,000 $ $ 600,000 Equity securities 11,176,436 17,871,607 (600) 29,047,443 ----------- ----------- ----------- ----------- $11,749,436 $17,898,607 $ (600) $29,647,443
------------------------------------- (1) Fixed maturity investments having an aggregate cost of $250,316 at June 30, 1997 and $633,426 at June 30, 1996 are held in trust by the State Treasurer of California as security for the Company's potential obligations as a self-insurer of its California Workers' Compensation liabilities. (2) A portion of the fixed maturity investments previously held in trust by the State Treasurer of California were released to the Company in June 1997. As a result, the Company has reclassified the fixed maturity investments to available-for-sale securities at June 30, 1997. 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 under long-term leases. Future minimum rental payments required Leases under non-cancelable operating leases having lease terms in excess of one year are:
For the years ending June 30, ------------------------------------------------------------------------- 1998 $ 446,109 1999 459,109 2000 422,509 2001 354,780 2002 328,612 Thereafter 1,047,941 ---------- Total minimum lease payments $3,059,060 ==========
Total rental expense under operating leases was $729,196 in 1997, $735,557 in 1996 and $781,661 in 1995. 12 15 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 6: A former subsidiary of the Company has been Contingent designated as a potentially responsible party (PRP) by the Liabilities Environmental Protection Agency (EPA) with respect to the cleanup of hazardous wastes at a site in southern California. The Company believes it has valid defenses and intends to vigorously defend itself. The Company and its counsel are currently unable to predict the outcome of this matter, but the Company believes that its ultimate resolution will not have a materially adverse effect on its consolidated financial statements. In the normal course of business, the Company and certain of its subsidiaries are defendants in various other lawsuits. After consultation with counsel, management is of the opinion that these other various lawsuits, individually or in the aggregate, will not have a materially adverse effect on the consolidated financial statements. - -------------------------------------------------------------------------------- NOTE 7: The Company maintains two non-qualified retirement Retirement plans for certain key employees. The Company contributions Plans to the plans are based on matching voluntary employee savings contributions and on a profit sharing plan formula after certain minimum earnings levels are reached by the Company. For the years ended June 30, 1997, 1996 and 1995 the defined contribution plan expenses were $541,716, $507,298 and $175,973, respectively. The Company has a Defined Benefit Pension Plan. The amounts involved are not significant to the Company's operations. - -------------------------------------------------------------------------------- NOTE 8: Under the Company's 1992 Stock Option Plan the Stock Company can grant to key employees options to purchase the Options Company's common stock at not less than the fair market value of such shares on the date such option is granted, except that if the employee owns shares of the Company representing more than 10% of its total voting power, then the price shall not be less than 110% of the fair market value of such shares on the date such option is granted. No option may be granted under the 1992 Stock Option Plan after December 31, 2001. Options to purchase shares expire five years after the date of grant and become exercisable on a cumulative basis at 25% each year, commencing with the second year. Stock option activity under this plan and a previous plan was as follows:
Weighted Weighted Number Average Average of Exercise Options Exercise Shares Price Exercisable Price ------------------------------------------------------------------------------ Outstanding at June 30, 1994......... 16,140 $35.52 Granted............................ 9,000 26.22 Expired............................ (7,140) 41.54 Canceled........................... (2,000) 29.75 ------ Outstanding at June 30, 1995......... 16,000 28.32 5,250 $31.03 Granted............................ 9,000 33.07 ------ Outstanding at June 30, 1996......... 25,000 30.03 9,250 29.86 Exercised.......................... (7,000) 31.03 ------ Outstanding at June 30, 1997......... 18,000 29.64 6,750 28.50
13 -- 16 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- At June 30, 1997 option prices for shares under option ranged from $25.37 to $35.20 per share and the weighted average remaining contractual life of options outstanding is three years. 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 Statement of Accounting Standards (SFAS) No. 123 had been used, the expense relating to the stock options would have been $13,673 in 1997 and $6,836 in 1996. Pro forma net income would have been $18,979,100 in 1997 and $3,965,712 in 1996. Pro forma earnings per share for 1997 would have been $15.93 rather than the $15.94 reported earnings per share. 1996 pro forma earnings per share would have been $3.22 compared to reported earnings per share of $3.23. The fair value of the options granted in January 1996 was estimated using the Black-Scholes model with the following assumptions: Risk-free interest rate 6.2% Dividend yield 1.5% Stock price Expected life 5 years volatility 10.9%
- -------------------------------------------------------------------------------- NOTE 9: The components of the provision for income taxes are: Income Taxes
For the years ended June 30, 1997 1996 1995 ------------------------------------------------------------------------------ Current: Federal $ 7,795,000 $2,275,000 $ 265,000 State 1,200,000 600,000 150,000 ----------- ---------- --------- 8,995,000 2,875,000 415,000 ----------- ---------- --------- Deferred: Federal (1,745,000) (465,000) (265,000) State (450,000) (50,000) ----------- ---------- --------- (2,195,000) (515,000) (265,000) ----------- ---------- --------- Total provision $ 6,800,000 $2,360,000 $ 150,000 =========== ========== =========
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, 1997 1996 1995 ------------------------------------------------------------------------------ U.S. Federal statutory income tax $ 9,027,471 $2,153,066 $ 540,971 Benefits from loss carryforwards (403,100) (419,914) Expenses not currently deductible 557,751 162,728 State income taxes, net of Federal tax benefit 606,000 363,000 99,000 Reduction of deferred tax asset valuation allowance (2,884,342) (515,000) (265,000) Other 50,871 204,283 32,215 ----------- ---------- --------- Total provision $ 6,800,000 $2,360,000 $ 150,000 =========== ========== =========
14 -- 17 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- The major components of the deferred tax assets and liabilities are:
June 30, 1997 1996 ---------------------------------------------------------------------------- Depreciation $ (390,796) $ (377,906) Income not currently taxable (31,782) (30,496) Unrealized gain on investments (2,125,000) (3,530,000) Other (137,422) (13,105) ----------- ----------- Total deferred income tax liabilities (2,685,000) (3,951,507) ----------- ----------- Expenses not currently deductible 1,847,960 1,006,510 Recognized losses not currently deductible 1,687,040 3,079,339 ----------- ----------- Total deferred income tax assets 3,535,000 4,085,849 ----------- ----------- Valuation allowance (2,884,342) ----------- ----------- Net deferred income tax asset (liability) $ 850,000 ($2,750,000) =========== ===========
- -------------------------------------------------------------------------------- NOTE 10: The Company's current operations are conducted Business through two primary business segments. Segment Data Waste Material Recycling The Company owns and operates plants in Los Angeles, and San Jose, CA; Baltimore, MD; Chicago, IL; Dallas, TX; and Denver, CO, 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 a plant in Vernon, CA in which bakery waste material is processed and converted into edible bread crumbs. 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 thirteen beauty schools in California and Nevada in which cosmetology and manicuring are taught. The Company enrolls students who pay a 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. 15 -- 18 Notes to Consolidated Financial Statements - -------------------------------------------------- - --------------------------------------------------------------------------------
For the years ended June 30, 1997 1996 1995 -------------------------------------------------------------------------------- Operating Sales and Revenues: Waste Material Recycling $25,107,197 $25,438,070 $18,663,645 Vocational School Group 4,529,044 4,467,978 3,938,406 Other 637,672 317,409 372,093 ----------- ----------- ----------- $30,273,913 $30,223,457 $22,974,144 =========== =========== =========== Operating Income (Loss) before Income Taxes: Waste Material Recycling $ 6,306,850 $ 6,526,681 $ 2,012,890 Vocational School Group 70,092 79,496 (629,144) Other 406,963 (24,239) 65,760 ----------- ----------- ----------- 6,783,905 6,581,938 1,449,506 Corporate expenses (1,560,435) (1,061,586) (876,908) Investment and other income 20,569,303 812,196 1,018,495 ----------- ----------- ----------- Income before income taxes $25,792,773 $ 6,332,548 $ 1,591,093 =========== =========== ===========
One customer represented 17%, 13% and 10% of product revenues for the Waste Material Recycling segment for the years ended 1997, 1996 and 1995 respectively. Another customer represented 2%, 8% and 11% of the segment's revenues for those respective years. The loss of these customers would not have a material adverse effect on the Company since the commodity product is readily marketable.
For the years ended June 30, 1997 1996 1995 -------------------------------------------------------------------------------- Identifiable Assets: Waste Material Recycling $10,630,867 $12,627,828 $12,451,700 Vocational School Group 1,722,024 1,607,828 1,373,802 Other 140,597 87,759 115,458 Corporate 48,990,545 41,211,080 29,127,318 ----------- ----------- ----------- $61,484,033 $55,534,495 $43,068,278 =========== =========== =========== Depreciation and Amortization: Waste Material Recycling $ 1,866,195 $ 1,850,022 $ 1,940,206 Vocational School Group 181,501 196,463 214,512 Other 53,165 58,535 66,141 Corporate 12,098 12,686 13,318 ----------- ----------- ----------- $ 2,112,959 $ 2,117,706 $ 2,234,177 =========== =========== =========== Capital Expenditures: Waste Material Recycling $ 1,087,597 $ 1,776,232 $ 1,541,817 Vocational School Group 88,112 430,426 659,512 Other 121,431 30,374 Corporate 1,795 18,404 7,607 ----------- ----------- ----------- $ 1,298,935 $ 2,255,436 $ 2,208,936 =========== =========== ===========
16 -- 19 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, 1997 and 1996, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended June 30, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments in fiscal 1995. /s/ Deloitee & Touche LLP Los Angeles, California August 21, 1997 Corporate Information - -------------------------- Directors Officers Independent Auditors Robert Henigson Meyer Luskin Deloitte & Touche LLP Investor Chairman, President and Los Angeles, California Executive Officer Meyer Luskin Transfer Agent and Registrar William H. Mannon John J. Crowley ChaseMellon Shareholders Retired Officer of Vice President and Chief Services, L.L.C. Scope Industries Financial Officer Los Angeles, California Franklin Redlich Eleanor R. Smith Securities Listed Retired Secretary and Controller American Stock Exchange Paul D. Saltman, Ph.D. Professor of Biology University of California at San Diego 20 1997 LOGO 233 WILSHIRE BOULEVARD, SUITE 310 SANTA MONICA, CA 90401 EX-21 3 EXHIBIT 21 1 EXHIBIT 21 SCOPE INDUSTRIES AND SUBSIDIARIES SUBSIDIARIES OF REGISTRANT As of June 30, 1997 The wholly owned subsidiaries of the Registrant are as follows:
Jurisdiction of 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 Name Incorporation ---- ------------- Dext Company of Illinois Illinois Dext Company of New Jersey, Inc. New Jersey Dext Company of Maryland Maryland Dext Company of Texas Texas Dext Company of Arizona Arizona Dext Company of Colorado Colorado 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 4 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 33-47053 of Scope Industries on Form S-8 of our reports dated August 21, 1997, appearing in and incorporated by reference in this Annual Report on Form 10-K of Scope Industries for the year ended June 30, 1997. /s/ Deloitte & Touche LLP Los Angeles, California September 18, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 5,946,050 18,044,706 1,796,233 159,167 584,401 32,763,110 32,204,546 22,016,611 61,484,033 3,834,388 0 0 0 4,138,462 53,511,183 61,484,033 25,744,869 30,273,913 15,736,357 25,050,443 0 0 0 25,792,773 6,800,000 18,992,773 0 0 0 18,992,773 15.94 15.94
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