1
SCOPE
INDUSTRIES
1995
58TH
ANNUAL
REPORT
LOGO
2
Financial Highlights
- --------------------
For the years ended June 30, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
Operating sales and revenues $22,974,144 $23,332,933 $ 20,720,898
Investment and other income (loss) 1,018,495 2,055,702 (9,086,521)
Net income (loss) $ 1,441,093 $ 1,564,570 $(11,409,393)
Net income (loss) per share* $ 1.15 $ 1.24 $ (8.77)
Equity per share at end of year $ 32.38 $ 24.73 $ 23.81
Shares outstanding at end of year 1,244,865 1,261,436 1,274,961
* Based on weighted average number of shares outstanding.
3
President's Report
- ------------------
- --------------------------------------------------------------------------------
To Our Shareholders:
Our earnings per share this 1995 fiscal year as compared to last year are,
we believe, a good example of that old adage "things ain't what they seem to
be". That is, for 1994 we reported earnings per share of $1.24 and this past
year our earnings per share were $1.15, yet we believe that this year was
essentially a better one for the Company. Our reasoning for the theme we're
presenting, and if you don't care for the adage above you can choose, "you can't
always believe what you see" -- is as follows.
The previous year -- 1994 -- net income was $1,564,570; however, a
component of net income was "investment and other income" which was $2,055,702,
thus all the operating groups had a combined loss of about a half million
dollars. On the other hand, in 1995 our "investment and other income" was
$1,018,495 and net income was $1,441,093, so the operating groups had net income
of over $400,000 and the positive difference between 1994 and 1995 for our
operating groups was approximately $900,000. We believe that the substantial
improvement by our operating companies is a much healthier and more meaningful
result than the conditions in 1994. Furthermore, in 1995 we did have significant
gains in the market value of our investments -- $2,777,290 -- but since they
were not recognized (we didn't sell the securities) we didn't report that gain
in our earnings. Nevertheless, such increases add to our true net worth.
Another important development in 1995 for the Waste Material Recycling
Group was the increase in tonnage of about 6% without increasing costs. Thus,
despite an overall selling price decrease we maintained revenues while sharply
increasing profits. This development enhances our competitive stance and bodes
well as feed prices improve. Last but probably first in long term significance
to our Waste Material Recycling Group -- the Dext Companies -- was the
realignment and strengthening of our management structure. This change was
caused by something many organizations experience and all dread -- the discovery
that a respected and most trusted key executive has been involved in fraud and
defalcation.
We terminated for cause the chief operating officer of the Dext Companies
at the end of the first fiscal quarter, and our insurer accepted our claim of
defalcation by the discharged officer, and has reimbursed us per our insurance
policy. To recover for other losses caused us by him, we have commenced a civil
action now pending. The time and money expended in this situation has been
significant, but since his termination we believe that management's more
concentrated focus, improved communication, and heightened morale are
contributing to a more cost effective operation. Consequently, our improved
operations being coupled with higher animal feed prices, projects a
significantly better profit picture for 1996.
In our Vocational School Group -- Marinello Schools of Beauty -- we
instituted a major policy change in our enrollment program and continued with
school site relocations and facility upgrading. The major changes in our
enrollment policy, the closing of some schools, and the costs of school
relocations were the principal causes of the Vocational School Group's
substantial loss in 1995. However, now we are realizing the benefits of our new
enrollment policy, the better school locations, and the improved morale of staff
and students. We expect a very substantial improvement in earnings from
Marinello for this new year.
We wish to thank our customers and vendors for their business and services,
our employees for their efforts and dedication, and our shareholders for their
trust and support.
Respectfully yours,
/s/ MEYER LUSKIN
- -------------------------------------
Meyer Luskin
Chairman of the Board
President and Chief Executive Officer
1
4
Five-Year Review -- Selected Financial Data
- -------------------------------------------
For the years ended June 30, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
OPERATIONS
Operating Sales and Revenues $22,974,144 $23,332,933 $ 20,720,898 $20,766,909 $15,998,796
Operating Cost and Expenses:
Cost of sales and operating
expenses 16,261,918 16,556,054 17,099,128 16,897,583 13,389,672
Depreciation and amortization 2,234,177 2,250,183 2,338,019 2,548,140 2,393,379
General and administrative 3,905,451 4,982,828 5,256,623 4,326,150 2,962,392
Changes in provision for litigation (1,100,000) (205,000) (1,763,211)
----------- ----------- ------------ ----------- -----------
22,401,546 23,789,065 23,593,770 23,566,873 16,982,232
----------- ----------- ------------ ----------- -----------
572,598 (456,132) (2,872,872) (2,799,964) (983,436)
Other Income (Expense):
Investment and other income (loss) 1,023,348 2,064,662 (9,081,021) 1,483,490 2,315,319
Interest credit (expense) (4,853) (8,960) (5,500) 88,254 315,990
----------- ----------- ------------ ----------- -----------
Income (loss) before taxes 1,591,093 1,599,570 (11,959,393) (1,228,220) 1,647,873
Provision (benefit) for income
taxes 150,000 35,000 (550,000) (550,000) 50,000
----------- ----------- ------------ ----------- -----------
Net income (loss) $ 1,441,093 $ 1,564,570 $(11,409,393) $ (678,220) $ 1,597,873
----------- ----------- ------------ ----------- -----------
Net income (loss) per share $ 1.15 $ 1.24 $ (8.77) $ (0.51) $ 1.19
----------- ----------- ------------ ----------- -----------
Weighted average number of shares
outstanding 1,255,101 1,266,105 1,301,592 1,329,015 1,344,692
----------- ----------- ------------ ----------- -----------
FINANCIAL PERFORMANCE
Net income (loss) as a percent of
revenues 6.27% 6.71% -55.06% -3.27% 9.99%
Cash dividend per share $ 0.35 $ 0.30 $ 0.60 $ 0.60 $ 0.60
Capital expenditures $ 2,208,936 $ 2,630,917 $ 2,057,424 $ 2,399,166 $ 2,976,452
FINANCIAL POSITION
Total assets $43,068,278 $34,218,320 $ 33,245,959 $44,310,193 $49,833,049
Shareowners' equity $40,303,613 $31,194,624 $ 30,359,528 $40,297,847 $45,885,513
Equity per share at end of year $ 32.38 $ 24.73 $ 23.81 $ 30.62 $ 34.28
Shares outstanding at end of year 1,244,865 1,261,436 1,274,961 1,315,961 1,338,561
2
5
Unaudited Quarterly Financial Data
- ----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------
1995:
Operating sales and revenues $5,818,424 $5,735,985 $5,536,479 $5,883,256 $22,974,144
Gross profit 1,245,938 1,119,339 928,413 1,299,341 4,593,031
Net income $ 299,370 $ 241,378 $ 284,821 $ 615,524 $ 1,441,093
---------- ---------- ---------- ---------- -----------
Net income per share* $ 0.24 $ 0.19 $ 0.23 $ 0.49 $ 1.15
---------- ---------- ---------- ---------- -----------
1994:
Operating sales and revenues $5,818,026 $5,737,262 $5,719,172 $6,058,473 $23,332,933
Gross profit 1,046,847 1,065,592 1,171,484 1,358,185 4,642,108
Net income (loss) $ (184,876) $ 668,187 $ 208,948 $ 872,311 $ 1,564,570
---------- ---------- ---------- ---------- -----------
Net income (loss) per share* $ (0.15) $ 0.53 $ 0.17 $ 0.69 $ 1.24
---------- ---------- ---------- ---------- -----------
* Per share amounts are based upon the weighted average number of shares outstanding.
Market Price Range
- ------------------
Scope Industries Common Stock
1995 1994
----------------- -----------------
High Low High Low
- ------------------------------------------------------------------------------------------------------
1st Quarter $26.00 $25.13 $27.25 $24.75
2nd Quarter 25.63 23.38 25.13 24.00
3rd Quarter 24.88 23.13 26.38 24.50
4th Quarter 25.13 23.38 26.25 25.50
Cash dividends of 35c and 30c per share were paid during the years ended
June 30, 1995 and 1994 respectively.
There were 118 shareowners of record of common stock at August 21, 1995.
3
6
Management's Discussion and Analysis of
Operations and Financial Condition
- ---------------------------------------
- --------------------------------------------------------------------------------
Operating Results -- 1995 compared with 1994
Revenues during fiscal 1995 were 1.5% lower than last year. Both the Waste
Material Recycling and the Vocational School operations experienced a small
decrease in their revenues from those reported last year. In both 1995 and 1994
Waste Material Recycling represented about 81% of total revenues and Vocational
Schools about 17%. Tonnage volume for Waste Material Recycling increased 5.9%
over last year and is the fourth consecutive year of increased tonnage volume
for this business segment. Average unit prices for the Dried Bakery Product sold
during the year were 6.6% below last year's average prices. Competing commodity
prices were weaker this year than last and dictated the lower prices received
for the tonnage sold. The tonnage increase was offset by the lower average price
received. In the Vocational School Group, revenues were lower than last year by
3.5%. During the year, two school locations were closed and several unprofitable
school district programs were dropped. By year end, the reduction in student
population caused by these changes had been replaced by increased enrollments in
the remaining thirteen school locations.
Production costs for the Waste Material Recycling operations remained
constant for the two years despite the increased tonnage in 1995. Vocational
School operating costs were 7.0% lower in the current year than in the prior
year, due in part to the closing of two locations. As the leases at three older
locations expired during the 1995 year and another expired during the previous
year, modernized and improved facilities were created in new school locations.
Two other school locations are scheduled to move into new facilities next year.
General and Administrative costs declined 21.6% from last year. Reduced legal
expense was the major factor in achieving the lower costs.
Investment and other income was $1,018,495 in 1995 and was $2,055,702 in
1994. The recognized gains from sale of investments were $1,486,613 lower in
1995 than in 1994. However, unrecognized gains which are not reflected in
earnings, increased by $2,777,290. Federal tax net operating loss carryforwards
were utilized to minimize current tax obligations in both years.
Net income for 1995 was $1,441,093 or $1.15 per share. For 1994 net income
was $1,564,570 or $1.24 per share.
Operating Results -- 1994 compared with 1993
Revenues during fiscal 1994 were 12.6% above those for 1993. The increased
revenues were primarily a result of higher sales prices for recycled bakery
products. Competing commodity prices rose during 1994 and allowed recycled
bakery product to command a higher unit price. Unit prices for recycled bakery
product in 1994 were 13.0% above the average prices for the year before. Tonnage
of recycled bakery product sold was 2.5% above the prior year's volume. As a
result, 1994 revenues for that business segment were 16.7% above 1993 revenues.
Vocational School Group revenues for the 1994 fiscal year were 1% below 1993
revenues. Student enrollment counts during fiscal 1994 were above the 1993 level
but more of the students attended on a part time basis.
Production costs for the bakery recycling operations in 1994 were 5.9%
lower than in the prior year. Bulk handling of raw materials provided
efficiencies at collection points and other transportation and production
efficiencies contributed to the overall lower costs for the Waste Material
Recycling segment. Operating costs in the Vocational Schools Group increased
8.8% over the prior year's level. Added costs were incurred for advertising and
for instructional quality improvement. General and Administrative costs were
5.2% lower in 1994 compared to the year before as some of the burdensome legal
costs the Company had incurred over the past few years began to abate. The
reduced legal costs were partially offset by a higher provision for doubtful
accounts in 1994.
Net gains from the sales of investments and redemptions of bonds held were
$1,779,311 in 1994 compared to $315,405 in 1993. These gains were reduced by
losses of $160,000 and $10,143,784 for each year, respectively, recognized on
certain securities due to declines in value which were deemed to be "other than
temporary". Lone Star Industries, Inc. and Mesa, Inc. holdings accounted for
nearly all of the 1993 recognized losses. The net investment and other income or
loss, including the recognized gains and losses on investments, was a gain of
$2,055,702 in 1994 compared to a loss of $9,086,521 in 1993. A Federal
4
7
Management's Discussion and Analysis of
Operations and Financial Condition -- Continued
- -----------------------------------------------
- --------------------------------------------------------------------------------
tax net operating loss carryforward was utilized to minimize 1994 tax
obligations. Net tax benefits of $550,000 were recognized for 1993.
Net income for 1994 was $1,564,570 or earnings of $1.24 per share. For 1993
a net loss of $11,409,393 or a loss of $8.77 per share was reported.
Capital Expenses/Liquidity
The Company's capital expenditures were $2,208,936 in 1995, $2,630,917 in
1994 and $2,057,424 in 1993. Capital spending for the Waste Material Recycling
segment represented 70% of the Company's total capital expenditures for 1995 and
over 85% of the 1994 and 1993 capital expenditures. Trailer sized containers
which compact the raw waste bakery product and make material collection handling
and transportation more efficient have been an important method of controlling
costs and establishing better long term relationships with raw material
suppliers. These containers together with bulk handling transportation vehicles
make up the largest share of the capital equipment purchases. The refurbishing
of a major component of processing equipment at the Los Angeles recycling
facility was completed during 1994. Installation of air pollution control
equipment at the Baltimore recycling facility was begun in 1995 and is expected
to be completed in early 1996. That project has been budgeted for capital
expenditures of $800,000. Growth and expansion of our bakery recycling business
is expected to continue. In 1994 and 1995, four of the beauty school facilities
were moved to new locations and were completely furnished with new fixtures and
attractive equipment. Within the next twelve months two other school locations
are scheduled to be remodeled as the leases expire. Capital spending for these
improvements has totaled nearly $800,000 thus far and another $375,000 is
budgeted for fiscal 1996. 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 1996.
The Company's working capital was $3,526,061 at June 30, 1995 and was
$5,192,642 at June 30, 1994. The current ratio was 2.3 at June 30, 1995 and was
2.7 a year earlier. Working capital in 1994 reflected a $2,500,000 note from
Opto Sensors, Inc. as due currently but whose maturity has since been extended
and is not classified as a current asset for 1995.
The $1,650,000 note receivable from SiMETCO, Inc. for the loan made in
1992, which was in default, was exchanged for a note executed by Simcala, Inc.,
with a principal amount of $2,106,255. Simcala has become the successor to the
business and the facilities formerly operated by SiMETCO. The Simcala note is
collateralized. Interest payments are current and principal installments are
scheduled to begin in 1997 and conclude in 2001.
Shareowners' Equity
At June 30, 1995, shareowners' equity reflects net unrealized holding gains
on investments totaling $8,507,655 as a result of the adoption of a change in
accounting for investments. Prior period financial statements have not been
restated to reflect the change in accounting principle.
The Company purchased and retired 16,571 shares (1.3%) of its common stock
during the year at a cost of $400,670. 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 by 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.
5
8
Consolidated Statements of Operations
- -------------------------------------
For the years ended June 30, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
Operating Sales and Revenues:
Sales $19,035,739 $19,252,752 $ 16,594,197
Vocational school revenues 3,938,405 4,080,181 4,126,701
----------- ----------- ------------
22,974,144 23,332,933 20,720,898
----------- ----------- ------------
Operating Cost and Expenses:
Cost of sales 12,745,613 12,773,147 13,622,289
Vocational school operating expenses 3,516,305 3,782,907 3,476,839
Depreciation and amortization 2,234,177 2,250,183 2,338,019
General and administrative 3,905,451 4,982,828 5,256,623
Changes in provision for litigation (Note 5) (1,100,000)
----------- ----------- ------------
22,401,546 23,789,065 23,593,770
----------- ----------- ------------
572,598 (456,132) (2,872,872)
Investment and other income (loss) (Note 3) 1,018,495 2,055,702 (9,086,521)
----------- ----------- ------------
Income (loss) before income taxes 1,591,093 1,599,570 (11,959,393)
Provision (benefit) for income taxes (Note 8) 150,000 35,000 (550,000)
----------- ----------- ------------
Net Income (Loss) $ 1,441,093 $ 1,564,570 $(11,409,393)
----------- ----------- ------------
Net Income (Loss) Per Share $ 1.15 $ 1.24 $ (8.77)
----------- ----------- ------------
Weighted average number of shares outstanding 1,255,101 1,266,105 1,301,592
The accompanying notes are an integral part of these statements
6
9
Consolidated Balance Sheets
- ---------------------------
June 30, 1995 1994
- ---------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 242,794 $ 30,397
Treasury bills (par value $2,290,000 in 1995 and $2,500,000 in 1994) 2,258,883 2,481,535
Accounts and notes receivable, less allowance for doubtful accounts
of $298,834 in 1995 and $324,671 in 1994 (Note 2) 2,256,766 4,586,228
Inventories 423,177 411,975
Prepaid expenses and other current assets (Note 3) 1,109,106 706,203
----------- -----------
Total current assets 6,290,726 8,216,338
----------- -----------
Notes Receivable (Note 2) 3,474,398 1,093,006
Property and Equipment:
Machinery and equipment 21,162,104 22,362,097
Land, buildings and improvements 10,272,459 9,818,056
----------- -----------
31,434,563 32,180,153
Less accumulated depreciation and amortization 20,210,689 20,042,985
----------- -----------
11,223,874 12,137,168
----------- -----------
Other Assets:
Deferred charges and other assets (Note 8) 423,266 104,800
Investments (Note 3) 21,656,014 12,667,008
----------- -----------
22,079,280 12,771,808
----------- -----------
$43,068,278 $34,218,320
----------- -----------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Bank overdraft $ 61,746 $ 427,197
Accounts payable 899,372 1,034,695
Other accrued liabilities 1,196,004 1,124,502
Accrued payroll and related employee benefits 414,707 370,147
Income taxes payable 192,836 67,155
----------- -----------
Total current liabilities 2,764,665 3,023,696
----------- -----------
Commitments and Contingent Liabilities (Notes 4 & 5)
Shareowners' Equity (Note 7):
Common stock, no par value, 5,000,000 shares authorized; shares issued
and outstanding: 1995 -- 1,244,865; 1994 -- 1,261,436 3,921,287 3,921,287
Retained earnings 27,874,671 27,273,337
Net unrealized gain on investments (Note 3) 8,507,655
----------- -----------
40,303,613 31,194,624
----------- -----------
$43,068,278 $34,218,320
----------- -----------
The accompanying notes are an integral part of these statements
7
10
Consolidated Statements of Cash Flows
- -------------------------------------
For the years ended June 30, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income (loss) $ 1,441,093 $ 1,564,570 $(11,409,393)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization 2,234,177 2,250,183 2,338,019
(Gains) losses on marketable securities (132,698) (1,619,311) 9,828,379
(Gains) losses on sale of equipment (48,663) (20,875) 111,454
Deferred income taxes (265,000) (296,160)
Provision for doubtful accounts receivable 118,459 159,598 (5,162)
Provision for loss on note receivable 250,000 450,000
Changes in operating assets and liabilities:
Accounts and notes receivable (170,389) (113,001) 176,945
Inventories (11,202) 88,857 25,729
Prepaid expenses and other current assets (402,903) (203,531) (51,954)
Accounts payable and accrued liabilities (19,261) (267,862) (728,823)
Income taxes payable, net of refundable taxes 125,681 7,930 374,068
----------- ------------ ------------
Net cash flows from operating activities 2,869,294 2,096,558 813,102
----------- ------------ ------------
Cash Flows From Investing Activities:
Purchase of U.S. Treasury bills (4,272,507) (5,489,619) (7,757,130)
Maturities or dispositions of U.S. Treasury bills 4,495,159 5,000,000 8,995,360
Purchase of property and equipment (2,208,936) (2,630,917) (2,057,424)
Disposition of property and equipment 996,316 74,700 233,248
Purchase of long-term notes receivable (1,690,000)
Purchase of non-current investments (2,769,719) (4,220,391) (809,762)
Disposition of non-current investments 2,421,066 5,001,175 3,624,606
Other assets (113,066) (230,000)
----------- ------------ ------------
Net cash flows (used in) from investing activities (1,451,687) (2,265,052) 308,898
----------- ------------ ------------
Cash Flows From Financing Activities:
Dividends to shareowners (439,089) (379,029) (785,617)
Repurchases of common stock (400,670) (350,445) (1,154,826)
Change in bank overdraft (365,451) 427,197
----------- ------------ ------------
Net cash used in financing activities (1,205,210) (302,277) (1,940,443)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 212,397 (470,771) (818,443)
Cash and cash equivalents at beginning of year 30,397 501,168 1,319,611
----------- ------------ ------------
Cash and cash equivalents at end of year $ 242,794 $ 30,397 $ 501,168
----------- ------------ ------------
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 4,853 $ 8,960 $ 5,500
Income taxes $ 289,321 $ 27,110 $ 30,431
The accompanying notes are an integral part of these statements.
8
11
Consolidated Statements of Shareowners' Equity
- ----------------------------------------------
Net Unrealized
Common Stock Gain (Loss) on
------------------------ Non-Current
Number of Marketable Retained
For the years ended June 30, 1995, 1994, 1993 Shares Amount Securities Earnings
- ---------------------------------------------------------------------------------------------------------
Balance July 1, 1992 1,315,961 $3,921,287 $ (3,411,517) $ 39,788,077
Net loss (11,409,393)
Cash dividends on common stock, $0.60 per share (785,617)
Cash purchase of common stock and subsequent
retirement (41,000) (1,154,826)
Net unrealized loss on non-current marketable
securities 3,411,517
---------- ---------- -------------- ------------
Balance June 30, 1993 1,274,961 3,921,287 -- 26,438,241
Net income 1,564,570
Cash dividends on common stock, $0.30 per share (379,029)
Cash purchase of common stock and subsequent
retirement (13,525) (350,445)
---------- ---------- -------------- ------------
Balance June 30, 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 non-current marketable
securities 8,507,655
---------- ---------- -------------- ------------
Balance June 30, 1995 1,244,865 $3,921,287 $ 8,507,655 $ 27,874,671
---------- ---------- ------------- ------------
The accompanying notes are an integral part of this statement
9
12
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
Cash Equivalents:
The Company considers all liquid debt instruments to
be cash equivalents if the securities mature within 90
days of acquisition.
Investments:
On July 1, 1994, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 115
(SFAS 115), Accounting for Certain Investments in Debt and
Equity Securities. SFAS 115 requires that investments in
debt securities and marketable equity securities be
designated as trading, held-to-maturity or
available-for-sale. Trading securities are reported at
fair value, with changes in fair value included in
earnings. Available-for-sale securities are reported at
fair value, with net unrealized gains and losses included
as a separate component of shareowners' equity.
Held-to-maturity debt securities are reported at amortized
cost. In accordance with SFAS 115, prior period financial
statements have not been restated to reflect the change in
accounting principle. The cumulative effect as of July 1,
1994 of adopting SFAS 115 increased shareholders' equity
by $5,730,365. There was no effect on net income. For all
investment securities, unrealized losses that are other
than temporary are recognized in earnings. Realized gains
and losses are determined on the specific identification
method and are reflected in earnings.
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.
Revenue Recognition:
Sales are recorded at contract prices as deliveries
are made. Tuition revenue is recognized as course hours
are completed by students.
Income Taxes:
The Company files a consolidated Federal income tax
return. Effective July 1, 1993 the Company adopted
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which requires that deferred
income taxes be provided for the temporary differences
between the financial and tax bases of the Company's
assets and liabilities, including the effect of enacted
tax rate changes. Adoption of the standard had no material
effect on the financial statements or the recorded income
tax expense in 1994, the year of the accounting change.
10
13
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
Net Income (Loss) Per Share:
Net income (loss) 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 (loss) per share.
- --------------------------------------------------------------------------------
NOTE 2: Components of notes receivable are as follows:
June 30, 1995 1994
Notes ---------------------------------------------------------------------------
Receivable Loan to Opto Sensors, Inc. $2,500,000 $2,500,000
Loan to Simcala, Inc. (formerly SiMETCO, Inc.) 950,000 950,000
Others 200,247 354,420
Less amounts classified as current (175,849) (2,711,414)
---------- ----------
$3,474,398 $1,093,006
---------- ----------
In January 1995 the Company extended the maturity
date for the $2,500,000 principal outstanding on the loan
to Opto Sensors, Inc. to April 1997. Under terms of the
promissory note, Opto Sensors pays the Company interest at
a rate of one and one-half percent above the prime rate
established by Bank of America. Interest is payable
quarterly. As a condition of the loan, the Company
received warrants to purchase 1,250,000 shares of
preferred stock of Opto Sensors. Interest income of
$247,711, $191,181, and $187,500 in 1995, 1994 and 1993,
respectively, was earned on this note.
On July 2, 1992 the Company loaned SiMETCO, Inc.
$1,650,000. The note was in default from March 1993 until
February 1995. Provisions totaling $700,000 were made in
1993 and 1994 that reduced income and recognized the
potential reduction in realizable value of the note. In
February 1995 a bankruptcy reorganization was effected
whereby Simcala, Inc. has become the successor to the
business and operations of SiMETCO. A new promissory note
has been 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 assigned to the
Simcala note received in the exchange. The new note is
collateralized by substantially all of Simcala's property
and equipment. Interest is payable quarterly at a rate of
three percent above the prime rate as established by Bank
of America. Interest income of $97,638 was earned on the
Simcala note in 1995. Principal installments are due
beginning in February 1997 and conclude in February 2001.
- --------------------------------------------------------------------------------
NOTE 3: Included in Investment and Other Income (Loss) are
recognized gains and losses on marketable securities. Net
Investments gains of $132,698 and $1,619,311 were recognized in 1995
and 1994, respectively. Net losses of $9,828,379 were
recognized in 1993. Gross recognized gains and gross
recognized losses for 1995 were $178,710 and $46,012,
respectively. Recognized gains and losses are from sales
of investments and from recognized losses of $160,000 and
$10,143,784 in 1994 and 1993, respectively, on securities
whose decline in value was deemed to be other than
temporary.
11
14
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
At June 30, 1995 investments were as follows:
Non-current
-------------------------------------------------------------------------
Held-to-maturity securities
(Cost $923,425; Fair value $883,475) $ 923,425
Available-for-sale securities
(Cost $12,224,934; Fair value $20,732,589) 20,732,589
-----------
$21,656,014
-----------
Gross unrealized losses -- Held-to-maturity securities $ (39,950)
Gross unrealized gains -- Available-for-sale securities 8,741,970
Gross unrealized losses -- Available-for-sale securities (234,315)
In accordance with SFAS 115, prior period financial
statements have not been restated to reflect the change in
accounting principle. The cumulative effect as of July 1,
1994 of adopting SFAS 115 increased shareholders' equity
by $5,730,365. For the year ended June 30, 1995, net
unrealized holding gains on investments increased by
$2,777,290 to become $8,507,655. Shareowners' equity was
increased by $8,507,655 at June 30, 1995; there was no
effect on net income.
Certain fixed maturity investments, having an
aggregate cost of $633,425 and a fair value of $612,976 at
June 30, 1995 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.
A deposit held by a bank and evidenced by a
certificate of deposit in the amount of $306,784 which
matures in February 1996, has been pledged as collateral
for potential Company obligations that a surety bond
issuer has guaranteed.
- --------------------------------------------------------------------------------
NOTE 4: 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,
-------------------------------------------------------------------------
1996 $ 423,177
1997 428,798
1998 395,106
1999 372,106
2000 312,456
Thereafter 1,076,181
----------
Total minimum lease payments $3,007,824
----------
Total rental expense under operating leases was
$781,661 in 1995, $828,583 in 1994 and $764,275 in 1993.
12
15
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5: A former subsidiary of the Company has been
designated as a potentially responsible party (PRP) by the
Contingent Environmental Protection Agency (EPA) with respect to the
Liabilities 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 condition. In a separate
matter, the Company and the EPA have settled a dispute
regarding claimed violations of the Clean Air Act at one
of the Company's bakery recycling facilities. The Company
has agreed to install and operate certain pollution
control equipment which will require a capital expenditure
of $800,000.
During 1993, settlements, claim dismissals and
settlement discussions on several claims, where charges
had been made to earnings in prior years, indicated that
reductions of $1,100,000 in amounts previously provided
were appropriate.
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 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, 1995, 1994 and 1993
the defined contribution plan expenses were $175,973,
$127,200, and $113,935, 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. At June 30, 1995 option
prices for shares under option ranged from $25.37 to
$32.73 per share.
13
16
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
Stock option activity under this plan and a previous
plan was as follows:
For the years ended June 30, 1995 1994 1993
-------------------------------------------------------------------------------
Shares:
Granted 9,000 -- --
Exercised -- -- --
Expired 9,140 8,000 8,000
Outstanding at end of year 16,000 16,140 24,140
Exercisable at end of year 5,250 11,640 15,604
Available for grant at end of year 34,000 41,000 41,000
Option price range per share:
When granted $25.37/27.91 -- --
In addition to the stock options described above,
other options to purchase 30,000 shares had been granted
to a former key employee. During fiscal 1995, after the
option holder's employment by the Company terminated, the
options expired and were cancelled.
- --------------------------------------------------------------------------------
NOTE 8: The components of the provision (benefit) for income
taxes are:
For the years ended June 30, 1995 1994 1993
------------------------------------------------------------------------------
Income Current:
Taxes Federal $ 265,000 $(273,840)
State 150,000 $35,000 20,000
--------- ------- ---------
415,000 35,000 (253,840)
--------- ------- ---------
Deferred:
Federal (265,000) (296,160)
State
--------- ------- ---------
(265,000) (296,160)
--------- ------- ---------
Total provision (benefit) $ 150,000 $35,000 $(550,000)
--------- ------- ---------
Reconciliation of the provision (benefit) for income
taxes computed at the U.S. Federal statutory income tax
rate to the reported provision is:
For the years ended June 30, 1995 1994 1993
-------------------------------------------------------------------------------
U.S. Federal statutory income tax $ 540,971 $ 543,854 $(4,066,194)
Benefits from loss carryforwards (419,914) (863,222)
Expenses not currently deductible 162,728 304,870
State income taxes, net of
Federal tax benefit 99,000 23,100 20,000
Reduction of deferred tax asset
valuation allowance (265,000)
Losses for which no tax benefits
were recognized 3,496,194
Other 32,215 26,398
--------- --------- -----------
Total provision (benefit) $ 150,000 $ 35,000 $ (550,000)
--------- --------- -----------
14
17
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
The major components of the deferred tax assets and
liabilities are:
June 30, 1995 1994
-----------------------------------------------------------------------------
Depreciation $ (347,355) $ (361,387)
Other (21,635) (35,082)
----------- -----------
Total deferred tax liabilities (368,990) (396,469)
----------- -----------
Expenses not currently deductible 793,239 673,824
Recognized losses not currently deductible 3,093,947 3,203,768
Tax benefit carryforwards 146,146 626,340
----------- -----------
Total deferred tax assets 4,033,332 4,503,932
----------- -----------
Valuation allowance (3,399,342) (4,107,463)
----------- -----------
Net deferred income tax asset $ 265,000 $ --
----------- -----------
At June 30, 1995, a deferred tax asset of $265,000 is
included in the amount captioned on the accompanying
balance sheet as Deferred charges and other assets.
For financial reporting purposes, the Company has
substantial capital loss carryforwards available to offset
future financial statement capital gains.
- --------------------------------------------------------------------------------
NOTE 9: The Company's current operations are conducted
through two primary business segments.
Business
Segment Waste Material Recycling
Data 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, 1995 1994 1993
--------------------------------------------------------------------------------
Operating Sales and Revenues:
Waste Material Recycling $18,663,645 $ 18,695,118 $ 16,023,812
Vocational School Group 3,938,406 4,080,181 4,126,701
Other 372,093 557,634 570,385
----------- ------------ ------------
$22,974,144 $ 23,332,933 $ 20,720,898
----------- ------------ ------------
Operating Income (Loss) before
Income Taxes:
Waste Material Recycling $ 2,012,890 $ 705,136 $ (2,364,097)
Vocational School Group (629,144) (604,407) (105,839)
Other 65,760 218,348 (76,798)
----------- ------------ ------------
1,449,506 319,077 (2,546,734)
Corporate expenses (876,908) (775,202) (1,426,138)
Litigation provision changes 1,100,000
Investment & other income (loss) 1,018,495 2,055,695 (9,086,521)
----------- ------------ ------------
Income (loss) before taxes $ 1,591,093 $ 1,599,570 $(11,959,393)
----------- ------------ ------------
One customer represented 11% and 12% of product
revenues for the Waste Material Recycling segment for the
years ended 1995 and 1994 respectively. No single customer
contributed 10% or more of any segment's revenues for the
year ended 1993.
For the years ended June 30, 1995 1994 1993
--------------------------------------------------------------------------------
Identifiable Assets:
Waste Material Recycling $12,451,700 $13,664,356 $13,138,235
Vocational School Group 1,373,802 1,020,963 892,343
Other 115,458 176,056 211,623
Corporate 29,127,318 19,356,945 19,003,758
----------- ----------- -----------
$43,068,278 $34,218,320 $33,245,959
----------- ----------- -----------
Depreciation and Amortization
Waste Material Recycling $ 1,940,206 $ 1,970,438 $ 1,937,620
Vocational School Group 214,512 179,796 167,158
Other 66,141 77,268 197,495
Corporate 13,318 22,681 35,746
----------- ----------- -----------
$ 2,234,177 $ 2,250,183 $ 2,338,019
----------- ----------- -----------
Capital Expenditures:
Waste Material Recycling $ 1,541,817 $ 2,305,760 $ 1,910,615
Vocational School Group 659,512 279,692 96,620
Other 36,158 45,188
Corporate 7,607 9,307 5,001
----------- ----------- -----------
$ 2,208,936 $ 2,630,917 $ 2,057,424
----------- ----------- -----------
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, 1995 and 1994, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended June 30, 1995. 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, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1995 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/ Deloitte & Touche LLP
- --------------------------
Deloitte & Touche LLP
Los Angeles, California
August 23, 1995
Corporate Information
- ---------------------
Directors Officers Independent Auditors
Richard L. Fruin, Jr. Meyer Luskin Deloitte & Touche LLP
Partner Chairman, President and Los Angleles, California
Arter & Hadden Chief Executive Officer
Transfer Agent and Registrar
Meyer Luskin John J. Crowley First Interstate Bank, Ltd.
Vice President and Chief Los Angeles, California
William H. Mannon Financial Officer
Retired Officer of Securities Listed
Scope Industries Eleanor R. Smith American Stock Exchange
Secretary and Controller
Franklin Redlich
Retired
Paul D. Saltman, Ph.D.
Professor of Biology
University of California
at San Diego