-----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, JJIZPMFikM7CvK7g5tBeOEZLVlcxrQB2YYrBed0GL36e/VVevYRLMfC+w1vlN6e/ fU5Usu858I1GskhtKvfTQQ== 0000950148-98-002223.txt : 19980924 0000950148-98-002223.hdr.sgml : 19980924 ACCESSION NUMBER: 0000950148-98-002223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980923 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-K SEC ACT: SEC FILE NUMBER: 001-03552 FILM NUMBER: 98713519 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-K 1 FORM 10-K 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, 1998 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 11, 1998 computed by reference to the closing sales price of such shares on such date was $24,405,323. At September 11, 1998, 1,118,067 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, 1998 Parts I, II, and IV Proxy Statement for the Annual Meeting of Shareholders to be held October 27, 1998 Parts III and IV 2 TABLE OF CONTENTS FORM 10-K ANNUAL REPORT For the Fiscal Year Ended June 30, 1998 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 bread crumbs for human consumption. 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 80% and 84% of the sales and revenues of the Registrant for 1998, 1997 and 1996. The Waste Material Recycling segment has operated profitably for the three most recent fiscal years. Capital expenditures for the Waste Material Recycling segment were $1,872,305 for fiscal 1998. Capital spending for this segment represented 71% of the Registrant's total capital expenditures for 1998. In 1997 and 1996, capital expenditures for this segment were $1,087,597 and $1,776,232, respectively. Capital expenditures for expansion and modernization of existing bakery waste material recycling operations are expected to continue. A new bakery waste recycling facility is being planned for the Chicago area and, when completed, will replace the existing Chicago facility. Cash flows from operations and liquid instrument holdings are expected to be adequate to meet fiscal 1999 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 19% lower in fiscal 1998 than they were in the prior fiscal year. Tonnage volume for fiscal 1998 was about 2% below the prior year. The lower selling prices caused profit margins to be substantially reduced for this business segment in 1998. 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 September 1998, two school locations are being combined and another school is relocating to a new, larger and more attractive facility. 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 18% of the Registrant's total revenues for the past three years. In fiscal 1998 the segment incurred an operating loss of $52,893. The segment earned $85,693 and $127,229 in operating income for fiscal years 1997 and 1996, respectively. 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 1998, 1997 and 1996. 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, 1998, the Registrant held $44,250,000 par value in U.S. Treasury Bills maturing in less than one year. In fiscal 1998, interest income from Treasury obligations amounted to $1,616,585. Net gains from sale of securities of $23,290,926 and $17,313,454 were recognized in 1998 and 1997, 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 Hodgkins, IL 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 4 to the Financial Statements in the 1998 Annual Report to Shareowners, page 12, is hereby incorporated by reference. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings against the Registrant, any of its subsidiaries or any of their property, and none other than routine litigation incidental to the business, as noted in the 1998 Annual Report to Shareowners, Note 5 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, 1998, 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 1998 Annual Report to Shareowners and, by reference, such information is incorporated herein. The number of holders of record of the Registrant's common stock as of July 31, 1998, based on a listing of the Registrant's Transfer Agent, was 84. Reference is made to the information regarding the dividends declared during the past two years with respect to the Registrant's common stock set forth on page 2 of the Registrant's 1998 Annual Report to Shareowners and, by reference, such information is incorporated herein. Dividends per share were paid in September 1996 ($0.25), January 1997 ($1.00), January 1998 ($1.00) and June 1998 ($0.25). 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 1998 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 1998 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, 1998 are incorporated herein by reference: Consolidated Balance Sheets - June 30, 1998 and 1997 Consolidated Statements of Income - Years ended June 30, 1998, 1997 and 1996 Consolidated Statements of Cash Flows - Years ended June 30, 1998, 1997 and 1996 Consolidated Statements of Shareowners' Equity - Years ended June 30, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 6 7 Unaudited Quarterly Financial Data shown on page 2 of the Registrant's 1998 Annual Report to Shareowners for the years ended June 30, 1998 and 1997 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, 1998. 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 27, 1998, which was filed with the Securities and Exchange Commission on September 11, 1998 and, by such reference, said Proxy Statement is incorporated herein in response to the information called for by Part III (ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11. EXECUTIVE COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) The following additional information is furnished in response to Item 10: Executive Officers of the Registrant The name, age, position and business experience of each of the executive officers of the Registrant as of June 30, 1998 are listed below:
Business Experience Name, Age and Position During Past Five Years - ---------------------- ---------------------- Meyer Luskin, 72 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, 51 Chief Operating Officer of Vocational President of Subsidiary School Group segment since July 1991; (Scope Beauty Enterprises, Inc.) responsible for operations of beauty schools. John J. Crowley, 65 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.
7 8 Eleanor R. Smith, 66 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 1998 Annual Report to Share-owners, on pages 5 through 16 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, 1998 and 1997 Consolidated Statements of Income for the years ended June 30, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 Consolidated Statements of Shareowners' Equity for the years ended June 30, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) Independent 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 27, 1998 which was filed with the Securities and Exchange Commission on September 11, 1998 and by reference such information is incorporated herein in response to the information called for by Part III (ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11, EXECUTIVE COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) (23) Independent Auditors' Consent (27) Financial Data Schedule 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 09-18-98 ------------------------- -------- 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 09-18-98 - ----------------------- President, Chief Executive ---------- Meyer Luskin Officer and Director /s/ John J. Crowley Vice President-Finance 09-18-98 - ----------------------- Chief Financial Officer ---------- John J. Crowley (Principal Financial Officer) /s/ Eleanor R. Smith Secretary and Controller 09-18-98 - ----------------------- (Principal Accounting Officer) ---------- Eleanor R. Smith /s/ Robert Henigson Director 09-18-98 - ----------------------- ---------- Robert Henigson /s/ William H. Mannon Director 09-18-98 - ----------------------- ---------- William H. Mannon /s/ Franklin Redlich Director 09-18-98 - ----------------------- ---------- Franklin Redlich /s/ Paul D. Saltman, Ph.D. Director 09-18-98 - ----------------------- ---------- 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, 1998 and 1997, and for each of the three years in the period ended June 30, 1998, and have issued our report thereon dated August 21, 1998; such financial statements and report are included in the 1998 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, 1998 11 12 SCOPE INDUSTRIES AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS JUNE 30, 1998
ADDITIONS BALANCE AT CHARGED CHARGED BALANCE BEGINNING TO COSTS TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD YEAR ENDED JUNE 30, 1998: Allowance for doubtful accounts - accounts receivable $159,167 $116,298 $ 0 $ 70,147 (a) $205,318 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
(a) Uncollectible accounts charged against allowance, net of bad debt recoveries. (b) Valuation allowance credit - note collected in full. 12 EX-13 2 EXHIBIT 13 1 EXHIBIT 13 SCOPE INDUSTRIES 1998 61ST ANNUAL REPORT SCOPE INDUSTRIES LOGO 2 Financial Highlights - -----------------------
For the years ended June 30, 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Operating sales and revenues $25,045,272 $30,273,913 $30,223,457 Investment and other income 25,344,817 20,569,303 812,196 Net income $16,063,797 $18,992,773 $ 3,972,548 Net income per share -- Basic $ 14.10 $ 16.03 $ 3.23 Net income per share -- Diluted $ 13.98 $ 15.94 $ 3.23 Average shares outstanding -- Basic 1,139,276 1,184,957 1,228,934 Average shares outstanding -- Diluted 1,148,645 1,191,469 1,231,270
Five-Year Review -- Selected Financial Data - ----------------------------------------------------
For the years ended June 30, 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- OPERATIONS Operating Sales and Revenues $25,045,272 $30,273,913 $30,223,457 $22,974,144 $23,332,933 Operating Cost and Expenses: Cost of sales and operating expenses 18,065,034 19,177,617 18,217,591 16,261,918 16,556,054 Depreciation and amortization 2,024,722 2,112,959 2,117,706 2,234,177 2,250,183 General and administrative 4,056,536 3,759,867 4,367,808 3,905,451 4,982,828 ----------- ----------- ----------- ----------- ----------- 24,146,292 25,050,443 24,703,105 22,401,546 23,789,065 ----------- ----------- ----------- ----------- ----------- 898,980 5,223,470 5,520,352 572,598 (456,132) Investment and other income 25,344,817 20,569,303 812,196 1,018,495 2,055,702 ----------- ----------- ----------- ----------- ----------- Income before income taxes 26,243,797 25,792,773 6,332,548 1,591,093 1,599,570 Provision for income taxes 10,180,000 6,800,000 2,360,000 150,000 35,000 ----------- ----------- ----------- ----------- ----------- Net income $16,063,797 $18,992,773 $ 3,972,548 $ 1,441,093 $ 1,564,570 =========== =========== =========== =========== =========== Net income per share -- Basic $ 14.10 $ 16.03 $ 3.23 $ 1.15 $ 1.24 Net income per share -- Diluted $ 13.98 $ 15.94 $ 3.23 $ 1.15 $ 1.24 FINANCIAL PERFORMANCE Net income as a percent of revenues 64.14% 62.74% 13.14% 6.27% 6.71% Cash dividend per share $ 1.25 $ 1.25 $ 0.50 $ 0.35 $ 0.30 Capital expenditures $ 2,649,478 $ 1,298,935 $ 2,255,436 $ 2,208,936 $ 2,630,917 FINANCIAL POSITION Total assets $78,380,114 $61,484,033 $55,534,495 $43,068,278 $34,218,320 Shareowners' equity $71,154,072 $57,649,645 $48,138,038 $40,303,613 $31,194,624 Equity per share at end of year $ 63.37 $ 49.33 $ 40.03 $ 32.38 $ 24.73 Shares outstanding at end of year 1,122,842 1,168,665 1,202,565 1,244,865 1,261,436
3 President's Report to the Shareholders - -------------------------------------------------------------------------------- Shareholder (SHH): Well, what are you going to do for me today? ----- Management (MGT): Frankly, I don't know and I'm not sure what you can expect. SHH: What do you mean! . . . . you earned $13.98 per share this year and $15.94 the year before, what's the problem. MGT: As I tried to explain in my previous reports, the overwhelming majority of our net income came from investment gains. However, by this year end we had essentially sold all of our public investment securities, except for our holdings in OSI Systems, Inc. (OSI). SHH: Are you telling me that since you sold all of our public investment securities, except for OSI, and because you put the sales proceeds in Treasury Bills, there's nothing left to sell -- so no more big gains. Didn't you buy something after all those sales? What about Dext, OSI, Marinello and our other assets! MGT: Good questions and I'll take them in order, Dext first. Dext Company -- The sales price of the animal feed ingredient we manufacture from recycled waste food continues to decline. It declined 19% in fiscal 1998 and about 10% more in the first five weeks of this new fiscal year. There's little profit to be earned when costs decline about 7% and sales prices drop nearly 30%. Based on corn futures prices the earnings outlook for Dext is dismal for this year. However, what's expected currently for feed commodity prices could be surprisingly different three months from now. OSI -- It's our present intention to hold our shares. As long as the Company's growth prospects and management continue to be special, we'll hold our position. Marinello Schools of Beauty -- Enrollment at cosmetology schools tends to decline during periods of strong economic growth and very low unemployment. Consequently Marinello reported a small loss for fiscal 1998. We are trying to improve our profitability by being more efficient and by closing those schools which have major enrollment problems. Thus, we have closed our school in Buena Park, CA, and expect to close the one in Santa Fe Springs, CA, at month end; however, we shall open a school in Eagle Rock, CA. Real Estate -- We are trying to sell our parcels of raw land in Riverside and Somis, CA. A sale of these properties would result in a significant gain but nowhere near the size of our securities transactions over the last two years. Chromagen, Inc., -- During this fiscal year we have invested two million dollars in a private biotechnology company in La Jolla, CA, called Chromagen, Inc. It's too early to form any judgment as to the wisdom of our action. Oil and Gas -- We have a 5% working interest in a gas discovery in Eddy County, NM, and a varied minority working interest in an oil waterflood project in Lea County, NM. We have disposed of all our other oil and gas interests. Investment Thinking and Cash -- Our thinking was affected by a) the belief that the investment environment was overly enthusiastic in its evaluations - and still is, and b) the contrasting long term views regarding our recycling business. Do we merge or sell to a competitor, or do we make a major acquisition. We reported recognized gains of over $40,000,000 from securities we sold over the past two years. Our invested capital for the securities was about $13,000,000. To make a significant investment we have to believe that the investment idea is as compelling as the ones that created the excellent investment gains. SHH: You haven't told me what you're going to do with your cash. MGT: Either we'll acquire a company in the recycling business, or, at a time and price we believe appropriate, make other investments, or . . . . both. 1 _ 4 SHH: So what do I do? MGT: We don't know. We have done all that we can and should do. We have disclosed and explained the facts. Now we wish to thank you, our customers, vendors, and employees for your support and trust. Respectfully yours, /s/ MEYER LUSKIN Meyer Luskin Chairman of the Board, President and Chief Executive Officer Unaudited Quarterly Financial Data - ------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------------------------- 1998 Operating sales and revenues $6,494,805 $6,864,916 $5,845,456 $5,840,095 $25,045,272 Gross profit 1,395,180 1,496,176 1,052,695 1,047,675 4,991,726 Net income $ 414,815 $3,201,820 $5,352,012 $7,095,150 $16,063,797 ========== ========== ========== ========== =========== Net income per share -- Diluted $ 0.35 $ 2.80 $ 4.69 $ 6.25 $ 13.98 ========== ========== ========== ========== =========== 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 -- Diluted $ 7.72 $ 4.11 $ 3.15 $ 0.88 $ 15.94 ========== ========== ========== ========== ===========
Market Price Range - ------------------------ Scope Industries Common Stock
1998 1997 -------------------- -------------------- High Low High Low - --------------------------------------------------------------------------------------------------- 1st Quarter $60.44 $50.00 $43.00 $37.00 2nd Quarter 67.00 58.25 50.25 39.50 3rd Quarter 66.00 59.50 50.25 41.00 4th Quarter 70.50 62.50 54.00 47.00
Cash dividends of $1.25 per share were paid during the years ended June 30, 1998 and 1997, respectively. There were 84 shareowners of record of common stock at July 31, 1998. 2 _ 5 Management's Discussion and Analysis of Operations and Financial Condition - ----------------------------------------- - -------------------------------------------------------------------------------- Operating Results -- 1998 compared with 1997 Total revenues for fiscal year 1998 were 17% below the year earlier revenues. Waste Material Recycling sales for 1998 were 20% below 1997 sales. Vocational School Group revenues for 1998 were 2% above 1997 revenues. Waste Material Recycling sales represented 80% of 1998 Company revenues compared to 83% of 1997 revenues. From 1997 to 1998, dried bakery product sales tonnage decreased 2% and average sales prices dropped 19%. The Vocational School Group revenues represented 18% of the Company's revenues in 1998 compared to 15% in 1997. Waste Material Recycling operating costs were 6% lower per ton produced in 1998 than in the prior year. Operating costs for the Vocational School Group were up 3% in 1998 over the prior year. The Company's 1998 operating results compare poorly to 1997 operating results. For Waste Material Recycling operations, lower selling prices prevailed throughout the year. The lower selling prices were dictated by lower prices for competing commodities, especially corn. Corn as well as several other animal feed commodity prices have continued trending lower into the beginning of this next fiscal year. Although operating costs were reduced, including amounts paid for raw materials, margins were lower for this business segment in the current year than they were in the prior year. The Vocational School Group experienced a small reduction in its operating margin and a loss for the current year compared to a nominal profit for the prior year. General and administrative expenses were 8% higher in the current year than 1997 expenses. 1997 expenses were unusually low due to legal expense credits received in that period. In fiscal 1998, investment and other income was $25,344,817 compared to $20,569,303 in 1997. In 1998, net investment gains realized were $23,290,926 compared to $17,313,454 in 1997. During the current year, long-term stockholdings in Lone Star Industries, Inc. were sold and a portion of the stockholdings in OSI Systems, Inc. was sold in that company's initial public offering. Holdings of Imperial Bancorp and Mesa, Inc. were sold during the prior year. The appreciation realized on those investments and the subsequent interest earned on the proceeds from their disposition has resulted in unusually large income amounts being recognized in 1998 and 1997. Unrealized holding gains on investments, net of deferred income taxes, were $9,380,022 at June 30, 1998 and $7,997,484 at June 30, 1997. These unrealized gains are not reflected in current income. Unrealized gains on long-term equity holdings in OSI Systems, Inc. comprise the major portion of the unrealized gains at June 30, 1998. Provisions for income taxes are 39% of 1998 pre-tax income and 26% of 1997 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. Net income for fiscal 1998 is $16,063,797 or $13.98 per share -- diluted. For 1997 net income was $18,992,773 or $15.94 per share -- diluted. 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, 1997 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 remained in place and aided in sustaining profitability. General and administrative expenses were 14% lower in 1997 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 1997. Long-term stockholdings in Imperial Bancorp and in Mesa, Inc. were sold during the year. The appreciation realized on those investments and the subsequent 3 _ 6 interest earned on the proceeds caused the unusual increase in investment and other income in 1997. Unrealized holding gains on investments, net of deferred income taxes, were $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. Provisions for income taxes were 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 of the tax benefits in 1997 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. Capital Expenses/Liquidity The Company's capital expenditures were $2,649,478 in 1998, $1,298,935 in 1997 and $2,255,436 in 1996. Capital spending for the Waste Material Recycling segment represented 71% of the Company's total capital expenditures in 1998, 84% in 1997 and 79% in 1996. 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. A new bakery waste recycling facility is being planned for the Chicago area and when completed will replace the existing Chicago facility. In the Vocational School Group, one school is currently being remodeled and another is being replaced with a new facility and location. Another school relocation with all new facilities is planned for the 1999 fiscal year. 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. Approximately $3,300,000 in capital improvements is budgeted for fiscal 1999. 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 1999 without incurring debt. Shareowners' Equity At June 30, 1998, shareowners equity includes net unrealized holding gains on investments totaling $9,380,022, net of deferred income taxes. At June 30, 1997, shareowners equity included $7,997,484 of net unrealized holding gains on investments. During August 1997, the Company offered to purchase up to 200,000 shares of its own stock for retirement. As a result of the offer, 32,313 shares were tendered, purchased and retired by the Company. For the year ended June 30, 1998 the Company purchased and retired a total of 45,823 of its shares (3.9%) at a cost of $2,527,221. Funds for the purchase of these shares were available from existing cash and from operating and investing cash flows. The Company does not contemplate raising capital by issuing additional common shares or through new borrowings during the ensuing year. This does not preclude, however, the consideration of opportunities that may present themselves in the future that could require the Company to seek additional capital. Year 2000 The Company has undertaken a review of its computer systems and computer applications to identify those which could be affected by "Year 2000" problems. Based on the review and associated testing, the Company believes that its financial data and reporting systems are "Year 2000" ready. The Company also believes its operating systems will not have serious concerns in this regard and are capable of operating in alternative modes that could circumvent "Year 2000" problems. The Company is continuing to review and test its systems and to monitor vendors and service providers to determine what impact may result from the "Year 2000" issue and if action or additional planning is needed. Risks exist that could severely affect the Company's ongoing business should serious failures or interruptions occur in services from utilities, banks, government agencies, government Student Aid funding programs, securities markets or others. Expenses incurred to date to correct "Year 2000" problems have not been material and it is anticipated that no significant additional costs will be incurred with regard to "Year 2000" issues. Forward Looking Statements Forward looking statements included in this Management's Discussion and Analysis of Operations and Financial Condition and included elsewhere in this Annual Report, are subject to risks and uncertainties that could affect actual future results. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Potential risk and uncertainties include, but are not limited to, general business conditions, unusual volatility in equity and interest rate markets and in competing commodity markets, disruptions in the availability or pricing of raw materials, transportation difficulties, changing governmental educational aid policies, or disruption of operations due to unavailability of fuels or from acts of God. 4 _ 7 Consolidated Statements of Income - -----------------------------------------
For the years ended June 30, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Operating Sales and Revenues: Sales $20,448,167 $25,744,869 $25,755,479 Vocational school revenues 4,597,105 4,529,044 4,467,978 ----------- ----------- ----------- 25,045,272 30,273,913 30,223,457 ----------- ----------- ----------- Operating Cost and Expenses: Cost of sales 14,536,956 15,736,357 14,854,410 Vocational school operating expenses 3,528,078 3,441,260 3,363,181 Depreciation and amortization 2,024,722 2,112,959 2,117,706 General and administrative 4,056,536 3,759,867 4,367,808 ----------- ----------- ----------- 24,146,292 25,050,443 24,703,105 ----------- ----------- ----------- 898,980 5,223,470 5,520,352 Investment and other income 25,344,817 20,569,303 812,196 ----------- ----------- ----------- Income before income taxes 26,243,797 25,792,773 6,332,548 Provision for income taxes 10,180,000 6,800,000 2,360,000 ----------- ----------- ----------- Net Income $16,063,797 $18,992,773 $ 3,972,548 =========== =========== =========== Net Income Per Share -- Basic $ 14.10 $ 16.03 $ 3.23 Net Income Per Share -- Diluted $ 13.98 $ 15.94 $ 3.23 Average shares outstanding -- Basic 1,139,276 1,184,957 1,228,934 Dilutive effect of stock options 9,369 6,512 2,336 ----------- ----------- ----------- Average shares outstanding -- Diluted 1,148,645 1,191,469 1,231,270
The accompanying notes are an integral part of these statements. 5 _ 8 Consolidated Balance Sheets - ---------------------------------
June 30, 1998 1997 - ---------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 755,904 $ 5,946,050 Treasury bills (par value $44,250,000 in 1998 and $24,000,000 in 1997) 43,024,640 23,540,939 Accounts and notes receivable, less allowance for doubtful accounts of $205,318 in 1998 and $159,167 in 1997 1,618,150 1,637,066 Inventories 662,399 584,401 Deferred income taxes 700,000 675,000 Prepaid expenses and other current assets 459,465 379,654 ----------- ----------- Total current assets 47,220,558 32,763,110 ----------- ----------- Notes Receivable 897,829 232,276 Property and Equipment: Machinery and equipment 23,407,396 22,551,992 Land, buildings and improvements 10,581,881 9,652,554 ----------- ----------- 33,989,277 32,204,546 Less accumulated depreciation and amortization 23,304,941 22,016,611 ----------- ----------- 10,684,336 10,187,935 ----------- ----------- Other Assets: Deferred charges and other assets 244,590 256,006 Investments available for sale at fair value (Cost $3,071,776 in 1998 and $5,417,222 in 1997) 17,326,799 15,539,706 Other equity investments at cost 2,006,002 2,505,000 ----------- ----------- 19,577,391 18,300,712 ----------- ----------- $78,380,114 $61,484,033 =========== =========== LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Accounts payable $ 1,050,796 $ 1,104,205 Other accrued liabilities 1,359,136 1,255,321 Accrued payroll and related employee benefits 705,604 940,631 Income taxes payable 475,506 534,231 ----------- ----------- Total current liabilities 3,591,042 3,834,388 Deferred Income Taxes 3,635,000 ----------- ----------- 7,226,042 3,834,388 ----------- ----------- Commitments and Contingent Liabilities Shareowners' Equity: Common stock, no par value, 5,000,000 shares authorized; shares issued and outstanding: 1998 -- 1,122,842; 1997 -- 1,168,665 4,138,462 4,138,462 Retained earnings 57,635,588 45,513,699 Net unrealized gain on investments available for sale, net of income taxes of $4,875,000 in 1998 and $2,125,000 in 1997 9,380,022 7,997,484 ----------- ----------- 71,154,072 57,649,645 ----------- ----------- $78,380,114 $61,484,033 =========== ===========
The accompanying notes are an integral part of these statements. 6 _ 9 Consolidated Statements of Cash Flows - ----------------------------------------------
For the years ended June 30, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $ 16,063,797 $ 18,992,773 $ 3,972,548 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 2,024,722 2,112,959 2,117,706 (Gains) losses on investments available for sale (23,290,926) (17,313,454) 87,802 Gains on sale of equipment (9,261) (8,324) (45,374) Deferred income taxes 1,035,000 (2,195,000) (515,000) Provision for doubtful accounts receivable 116,298 13,139 16,908 Changes in operating assets and liabilities: Accounts and notes receivable (140,080) 1,945,342 (383,567) Inventories (77,998) (52,764) (108,460) Prepaid expenses and other current assets (79,811) 151,985 577,467 Accounts payable and accrued liabilities (184,621) (627,631) 1,417,705 Income taxes payable (58,725) 66,248 275,147 Other assets (163,585) 49,924 (17,864) ------------ ------------ ----------- Net cash flows (used in) from operating activities (4,765,190) 3,135,197 7,395,018 ------------ ------------ ----------- Cash Flows From Investing Activities: Purchase of U.S. Treasury bills (48,733,701) (30,602,562) (9,619,494) Maturities of U.S. Treasury bills 29,250,000 12,035,000 6,905,000 Purchase of property and equipment (2,508,358) (1,298,935) (2,255,436) Disposition of property and equipment 137,616 42,646 415,897 Purchase of long-term notes receivable (763,975) (230,000) Purchase of investments available for sale (338,702) (3,223,689) (2,168,781) Purchase of other equity investments (2,001,002) Disposition of investments available for sale 28,475,074 27,497,783 2,556,476 Disposition of investments held to maturity 290,000 ------------ ------------ ----------- Net cash flows from (used in) investing activities 3,516,952 4,450,243 (4,106,338) ------------ ------------ ----------- Cash Flows From Financing Activities: Dividends to shareowners (1,414,687) (1,491,132) (616,782) Repurchases of common stock (2,527,221) (1,836,686) (1,381,693) Change in bank overdraft (250,686) 188,940 Proceeds from stock options exercised 217,175 ------------ ------------ ----------- Net cash used in financing activities (3,941,908) (3,361,329) (1,809,535) ------------ ------------ ----------- Net (decrease) increase in cash and cash equivalents (5,190,146) 4,224,111 1,479,145 Cash and cash equivalents at beginning of year 5,946,050 1,721,939 242,794 ------------ ------------ ----------- Cash and cash equivalents at end of year $ 755,904 $ 5,946,050 $ 1,721,939 ============ ============ =========== Supplemental Disclosures: Cash paid during the year for: Interest $ 4,323 $ 301 $ 4,333 Income taxes $ 9,203,725 $ 8,928,751 $ 2,577,438 Non Cash Investing Transactions: Reacquired land and buildings through foreclosure proceedings in exchange for cancellation of a note receivable $ 141,120 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, 1998, 1997 and 1996. Shares Amount Earnings for Sale - ------------------------------------------------------------------------------------------------------------ Balance July 1, 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 Net income 16,063,797 Cash dividends on common stock, $1.25 per share (1,414,687) Cash purchase of common stock and subsequent retirement (45,823) (2,527,221) Net unrealized gain on investments available for sale 1,382,538 ---------- ---------- ----------- ------------ Balance June 30, 1998 1,122,842 $4,138,462 $57,635,588 $ 9,380,022 ========== ========== =========== ============
The accompanying notes are an integral part of these statements. 8 _ 11 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 1: Principles of Consolidation: The consolidated financial statements include the Summary of accounts of Scope Industries and its subsidiaries (the Significant Company), all of which are wholly owned. All significant Accounting intercompany accounts and transactions are eliminated. Policies 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. 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. 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 9 _ 12 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- 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: During fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". This statement requires presentation of both basic and diluted net income per share and restatement of all prior period net income per share data presented. Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the incremental shares issuable upon the assumed exercise of dilutive stock options. Recently Issued Accounting Pronouncements: 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 become effective for financial statements issued for periods beginning after December 15, 1997. The Company will adopt SFAS No. 130 in fiscal 1999 and expects that fluctuations in unrealized gains or losses on investments will be its only significant type of other comprehensive income. The Company will adopt SFAS No. 131 in fiscal 1999. The Company has historically reported financial and descriptive information for its two operating segments therefore the adoption of this SFAS will have no material effect on consolidated financial position, results of operations or cash flows. - -------------------------------------------------------------------------------- NOTE 2: All U.S. Treasury bills are purchased with maturities of one year or less. The cost is adjusted to reflect Treasury interest earned as it accrues. The adjusted cost Bills approximates the fair value of the bills. The Company has classified its Treasury bills as:
June 30, 1998 1997 -------------------------------------------------------------------------- Available-for-sale $43,024,640 $ 949,139 Held-to-maturity 22,591,800 ----------- ----------- $43,024,640 $23,540,939 =========== ===========
- -------------------------------------------------------------------------------- NOTE 3: Included in Investment and Other Income are recognized gains and losses on investment securities. Net Investments gains of $23,290,926 and $17,313,454 were recognized in 1998 and 1997 respectively. A net loss of $87,802 was recognized in 1996. Gross recognized gains and gross recognized losses were $23,290,926 and $0, respectively for 1998, $17,558,454 and $245,000, respectively for 1997 and $697,589 and $785,391, respectively for 1996. 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. 10 __ 13 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- At June 30, 1998 investments were as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------------------------------- Available-for-sale securities Corporate debt securities(1) Due after two but within seven years $ 633,426 $ $ (4,745) $ 628,681 Equity securities 2,438,350 14,307,346 (47,578) 16,698,118 ----------- ----------- ----------- ----------- $ 3,071,776 $14,307,346 $ (52,323) $17,326,799 Other equity securities(2) $ 2,006,002 $ 2,006,002
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) 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(3) $ 2,505,000 $ 2,505,000
--------------------- (1) Fixed maturity investments having an aggregate cost of $250,316 at June 30, 1998 and at June 30, 1997 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) At June 30, 1998, the Company held shares and warrants in Chromagen, Inc. which were classified as "other equity securities" and valued at cost. The shares and warrants are not publicly traded. (3) At June 30, 1997, the Company held shares in OSI Systems, Inc. (OSI) which were classified as "other equity securities" and valued at cost. The shares were not publicly traded. An initial public offering of OSI shares took place in October 1997. The Company sold 227,097 of its OSI shares through the offering and recognized a pre-tax gain of $2,513,593 on the sale. Subsequent to the public offering, the Company's remaining shares of OSI have been classified as "available for sale securities" and valued at estimated fair value. 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. 11 __ 14 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 4: The Company occupies certain facilities under Leases long-term leases. Future minimum rental payments required under non-cancelable operating leases having lease terms in excess of one year are:
For the years ending June 30, ------------------------------------------------------------------------ 1999 $ 472,309 2000 435,309 2001 363,180 2002 337,012 2003 267,440 Thereafter 967,000 ---------- Total minimum lease payments $2,842,250 ==========
Total rental expense under operating leases was $691,183 in 1998, $729,196 in 1997, and $735,557 in 1996. - -------------------------------------------------------------------------------- NOTE 5: In the normal course of business, the Company and certain of its subsidiaries are defendants in various Contingent lawsuits. After consultation with counsel, management is Liabilities of the opinion that these various lawsuits, individually or in the aggregate, will not have a materially adverse effect on the consolidated financial statements. - -------------------------------------------------------------------------------- NOTE 6: The Company maintains two non-qualified retirement plans for certain key employees. The Company contributions Retirement to the plans are based on matching voluntary employee Plans 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, 1998, 1997, and 1996 the defined contribution plan expenses were $282,157, $541,716, and $507,298, respectively. The Company has a Defined Benefit Pension Plan. The amounts involved are not significant to the Company's operations. - -------------------------------------------------------------------------------- NOTE 7: Under the Company's 1992 Stock Option Plan the Company can grant to key employees options to purchase the Stock Company's common stock at not less than the fair market Options 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. 12 __ 15 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- Stock option activity under this plan was as follows:
Weighted Weighted Average Average Number Exercise Options Exercise of Shares Price Exercisable Price -------------------------------------------------------------------------------------- Outstanding at June 30, 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 Outstanding at June 30, 1998 18,000 29.64 11,250 28.96
At June 30, 1998 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 two 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 SFAS No. 123 had been used, the expense relating to the stock options would have been $13,673 in 1998, $13,673 in 1997 and $6,836 in 1996. Pro forma net income would have been $16,050,124 in 1998, $18,979,100 in 1997 and $3,965,712 in 1996. Pro forma earnings per share -- diluted in 1998, 1997 and 1996 would have been $13.97, $15.93 and $3.22, respectively, rather than the $13.98, $15.94 and $3.23 reported earnings per share -- diluted. The fair value of the options granted in January 1996 was estimated using the Black-Scholes option pricing 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 8: The components of the provision for income taxes are: Income Taxes
For the years ended June 30, 1998 1997 1996 --------------------------------------------------------------------------- Current: Federal $ 8,035,000 $7,795,000 $ 2,275,000 State 1,110,000 1,200,000 600,000 ----------- ---------- ----------- 9,145,000 8,995,000 2,875,000 ----------- ---------- ----------- Deferred: Federal 915,000 (1,745,000) (465,000) State 120,000 (450,000) (50,000) ----------- ---------- ----------- 1,035,000 (2,195,000) (515,000) ----------- ---------- ----------- Total provision $10,180,000 $6,800,000 $ 2,360,000 =========== ========== ===========
13 __ 16 Notes to Consolidated Financial Statements - -------------------------------------------------- - -------------------------------------------------------------------------------- Reconciliation of the provision for income taxes computed at the U.S. Federal statutory income tax rate to the reported provision is:
For the years ended June 30, 1998 1997 1996 --------------------------------------------------------------------------- U.S. Federal statutory income tax $ 9,185,329 $9,027,471 $ 2,153,066 Benefits from loss carryforwards (403,100) Expenses not currently deductible 557,751 State income taxes, net of Federal tax benefit 775,000 606,000 363,000 Reduction of deferred tax asset valuation allowance (2,884,342) (515,000) Other 219,671 50,871 204,283 ----------- ---------- ----------- Total provision $10,180,000 $6,800,000 $ 2,360,000 =========== ========== ===========
The major components of the deferred tax assets and liabilities are:
June 30, 1998 1997 -------------------------------------------------------------------------- Depreciation $ (326,944) $ (390,796) Income not currently taxable (41,706) (31,782) Unrealized gain on investments (4,875,000) (2,125,000) Other (181,350) (137,422) ----------- ----------- Total deferred income tax liabilities (5,425,000) (2,685,000) ----------- ----------- Expenses not currently deductible 2,110,000 1,847,960 Recognized losses not currently deductible 380,000 1,687,040 ----------- ----------- Total deferred income tax assets 2,490,000 3,535,000 ----------- ----------- Net deferred income tax (liability) asset $(2,935,000) $ 850,000 =========== ===========
- -------------------------------------------------------------------------------- NOTE 9: The Company's current operations are conducted through two primary business segments. Business Waste Material Recycling Segment The Company owns and operates plants in Los Angeles, Data 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. 14 __ 17 Notes to Consolidated Financial Statements - -------------------------------------------------- - --------------------------------------------------------------------------------
For the years ended June 30, 1998 1997 1996 ----------------------------------------------------------------------------- Operating Sales and Revenues: Waste Material Recycling $20,011,672 $25,107,197 $25,438,070 Vocational School Group 4,597,105 4,529,044 4,467,978 Other 436,495 637,672 317,409 ----------- ----------- ----------- $25,045,272 $30,273,913 $30,223,457 =========== =========== =========== Operating Income (Loss) before Income Taxes: Waste Material Recycling $ 2,327,681 $ 6,653,776 $ 6,490,304 Vocational School Group (52,893) 85,693 127,229 Other 263,780 534,033 (93,994) ----------- ----------- ----------- 2,538,568 7,273,502 6,523,539 Corporate expenses (1,500,227) (1,560,435) (1,061,586) Investment income 25,205,456 20,079,706 870,595 ----------- ----------- ----------- Income before income taxes $26,243,797 $25,792,773 $ 6,332,548 =========== =========== ===========
One customer represented 19%, 17% and 13% of product revenues for the Waste Material Recycling segment for the years ended 1998, 1997 and 1996 respectively. The loss of this customer or any other single customer would not have a material adverse effect on the Company since the commodity product is readily marketable.
For the years ended June 30, 1998 1997 1996 ----------------------------------------------------------------------------- Identifiable Assets: Waste Material Recycling $10,740,401 $10,630,867 $12,627,828 Vocational School Group 1,774,759 1,722,024 1,607,828 Other 605,789 140,597 87,759 Corporate 65,259,165 48,990,545 41,211,080 ----------- ----------- ----------- $78,380,114 $61,484,033 $55,534,495 =========== =========== =========== Depreciation and Amortization: Waste Material Recycling $ 1,781,467 $ 1,866,195 $ 1,850,022 Vocational School Group 181,141 181,501 196,463 Other 50,345 53,165 58,535 Corporate 11,769 12,098 12,686 ----------- ----------- ----------- $ 2,024,722 $ 2,112,959 $ 2,117,706 =========== =========== =========== Capital Expenditures: Waste Material Recycling $ 1,872,305 $ 1,087,597 $ 1,776,232 Vocational School Group 72,433 88,112 430,426 Other 558,997 121,431 30,374 Corporate 145,743 1,795 18,404 ----------- ----------- ----------- $ 2,649,478 $ 1,298,935 $ 2,255,436 =========== =========== ===========
15 __ 18 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, 1998 and 1997, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Los Angeles, California August 21, 1998 19 Corporate Information - -------------------------- Directors Officers Independent Auditors Robert Henigson Meyer Luskin Deloitte & Touche LLP Investor Chairman, President and Los Angeles, California Chief Executive Officer Meyer Luskin Transfer Agent and John J. Crowley Registrar William H. Mannon Vice President and American Securities Retired Officer of Chief Financial Officer Transfer & Trust, Inc. Scope Industries Denver, Colorado Eleanor R. Smith Franklin Redlich Secretary and Controller Securities Listed Retired American Stock Exchange Paul D. Saltman, Ph.D. Professor of Biology University of California at San Diego 20 1998 SCOPE INDUSTRIES 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, 1998 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 ReConserve, Inc. Illinois
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, 1998, appearing in and incorporated by reference in this Annual Report on Form 10-K of Scope Industries for the year ended June 30, 1998. /s/ Deloitte & Touche LLP Los Angeles, California September 21, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 755,904 19,332,801 1,823,468 205,318 662,399 47,220,556 33,989,277 23,304,941 78,380,114 3,591,042 0 0 0 4,138,462 67,015,610 78,380,114 20,448,167 25,045,272 14,536,956 24,146,292 0 0 0 26,243,797 10,180,000 16,063,797 0 0 0 16,063,797 14.10 13.98
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