1
SCOPE
INDUSTRIES
1996
59TH
ANNUAL
REPORT
LOGO
2
Financial Highlights
- -----------------------
For the years ended June 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Operating sales and revenues $30,223,457 $22,974,144 $23,332,933
Investment and other income 812,196 1,018,495 2,055,702
Net income $ 3,972,548 $ 1,441,093 $ 1,564,570
Net income per share* $ 3.23 $ 1.15 $ 1.24
Equity per share at end of year $ 40.03 $ 32.38 $ 24.73
Shares outstanding at end of year 1,202,565 1,244,865 1,261,436
* Based on weighted average number of shares outstanding.
3
President's Report
- --------------------
- --------------------------------------------------------------------------------
To Our Shareholders:
It's my recollection that the bible speaks of seven lean years and seven
fat years. Well, we have had a good number of lean years with our food waste
recycling business and now we have gone through one fat year. Yes, you say, but
how many more fat years to come -- and if I could truly answer that one, I could
answer all your other questions.
Nature and humanity have shown us facets of their being -- not unbeknown to
us -- but in a combination that has made us fat this year and unfortunately made
others lean. Unusual amounts of rain at unusual times, flood, drought, growing
populations, growing demand by emerging economies and their growing masses for
more than a grain or rice diet -- they want pork, beef, chicken. Thus, while
less corn is grown, more is demanded. One couldn't find a better recipe for
increasing prices.
This year we witnessed an all time high in the price of corn and
consequently in the price of the animal feed ingredient we produce from the
recycling of waste food. Our tonnage volume was the same as last year but rising
prices caused a 36% increase in sales. Since the increased sales prices were
primarily due to factors beyond our control, it wouldn't be illogical to
conclude that the exceptional profits being reported were not due to our
brilliance. Most of your employees, and particularly your managers, are hard
workers, and some of them worked more intensively than usual this past year.
However, though a rising tide lifts all boats, if you've worked hard and smart
on your boat, it will go much further and stay afloat much longer.
Our investments in people and facilities during these past lean years
undoubtedly enabled us to efficiently pick-up, process, and sell our product.
Therefore, our people and management policies have enabled us to fully
capitalize on these uniquely favorable conditions. Obviously when selling prices
are high we shall do well; however, it's the rate of earnings on our capital
when prices are in the low to mid range that most concerns your management.
Marinello Schools of Beauty, our participant in the vocational school
industry, reported a much improved year as revenues went up and costs were down.
Marinello faces some short term problems but the long term outlook is
optimistic. Short term, we face the reduction and tightening of governmental
expenditure for vocational education; the uncertainty of proposed changes in the
state laws and regulations pertaining to beauty schools; the rapid change in the
demographics of current and future location considerations. Long term gives us
the benefits of school competitors closing their operations because of the short
term problems; the increasing difficulties to those considering entering the
industry; a more dedicated student; greater reliance on the market place rather
than government; better site locations per rental dollar.
As to the future, we have never indulged in future forecasts or earnings
predictions but we don't expect that these historically high prices will persist
beyond this new fiscal year. Further, it appears that the new first half should
be quite good. Our waste food recycling group should enjoy excellent sales
prices; returns from our investment portfolio should be substantial; and our
general and administrative expenses should be reduced as various legal and other
matters are resolved and curtailed.
We are both sad and elated to report the resignation of our Director,
Richard L. Fruin, Jr. Sad because Richard has been an outstanding member of our
Board, and I will surely miss his steady hand and wise counsel. Elated, because
Richard accepted the appointment as a Judge in the Superior Court of Los Angeles
County -- a responsibility and task for which he is eminently suited and one
that he has desired. Society's gain is not our total loss, for a better society
is truly our end game.
The other aspect of Judge Fruin's required resignation is that the new
member joining our Board will be Robert Henigson. Mr. Henigson was a member of
our Board from 1969 to 1987. It's a pleasure to welcome back this superb man.
We thank our customers, vendors, employees, and shareowners for their
efforts and trust.
Respectfully yours,
/s/ MEYER LUSKIN
- -----------------------
Meyer Luskin
Chairman of the Board
President and Chief Executive Officer
4
Five-Year Review -- Selected Financial Data
- ----------------------------------------------------
For the years ended June 30, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
OPERATIONS
Operating Sales and Revenues $30,223,457 $22,974,144 $23,332,933 $ 20,720,898 $20,766,909
Operating Cost and Expenses:
Cost of sales and operating
expenses 18,217,591 16,261,918 16,556,054 17,099,128 16,897,583
Depreciation and amortization 2,117,706 2,234,177 2,250,183 2,338,019 2,548,140
General and administrative 4,367,808 3,905,451 4,982,828 4,156,623 4,121,150
----------- ----------- ----------- ------------ -----------
24,703,105 22,401,546 23,789,065 23,593,770 23,566,873
----------- ----------- ----------- ------------ -----------
5,520,352 572,598 (456,132) (2,872,872) (2,799,964)
Investment and other income (loss) 812,196 1,018,495 2,055,702 (9,086,521) 1,571,744
----------- ----------- ----------- ------------ -----------
Income (loss) before income taxes 6,332,548 1,591,093 1,599,570 (11,959,393) (1,228,220)
Provision (benefit) for income
taxes 2,360,000 150,000 35,000 (550,000) (550,000)
----------- ----------- ----------- ------------ -----------
Net income (loss) $ 3,972,548 $ 1,441,093 $ 1,564,570 $(11,409,393) $ (678,220)
----------- ----------- ----------- ------------ -----------
Net income (loss) per share $ 3.23 $ 1.15 $ 1.24 $ (8.77) $ (0.51)
----------- ----------- ----------- ------------ -----------
Weighted average number of shares
outstanding 1,231,270 1,255,101 1,266,105 1,301,592 1,329,015
----------- ----------- ----------- ------------ -----------
FINANCIAL PERFORMANCE
Net income (loss) as a percent of
revenues 13.14% 6.27% 6.71% -55.06% -3.27%
Cash dividend per share $ 0.50 $ 0.35 $ 0.30 $ 0.60 $ 0.60
Capital expenditures $ 2,255,436 $ 2,208,936 $ 2,630,917 $ 2,057,424 $ 2,399,166
FINANCIAL POSITION
Total assets $55,534,495 $43,068,278 $34,218,320 $ 33,245,959 $44,310,193
Shareowners' equity $48,138,038 $40,303,613 $31,194,624 $ 30,359,528 $40,297,847
Equity per share at end of year $ 40.03 $ 32.38 $ 24.73 $ 23.81 $ 30.62
Shares outstanding at end of year 1,202,565 1,244,865 1,261,436 1,274,961 1,315,961
2
5
Unaudited Quarterly Financial Data
- ------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------
1996
Operating sales and revenues $6,870,181 $7,527,740 $7,050,020 $8,775,516 $30,223,457
Gross profit 2,041,403 2,426,511 2,291,443 3,200,317 9,959,674
Net income $1,086,373 $ 886,017 $ 943,963 $1,056,195 $ 3,972,548
---------- ---------- ---------- ---------- -----------
Net income per share* $ 0.87 $ 0.72 $ 0.76 $ 0.87 $ 3.23
---------- ---------- ---------- ---------- -----------
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
---------- ---------- ---------- ---------- -----------
* Per share amounts are based upon the weighted average number of shares outstanding.
Market Price Range
- -----------------------
Scope Industries Common Stock
1996 1995
----------------- -----------------
High Low High Low
- ------------------------------------------------------------------------------------------------------
1st Quarter $29.00 $25.13 $26.00 $25.13
2nd Quarter 32.50 28.63 25.63 23.38
3rd Quarter 42.00 32.00 24.88 23.13
4th Quarter 38.50 33.75 25.13 23.38
Cash dividends of 50c and 35c per share were paid during the years ended
June 30, 1996 and 1995 respectively.
There were 109 shareowners of record of common stock at August 2, 1996.
3
6
Management's Discussion and Analysis of
Operations and Financial Condition
- -----------------------------------------
- --------------------------------------------------------------------------------
Operating Results -- 1996 compared with 1995
Revenues were 31.6% higher in fiscal year 1996 compared to 1995. Waste
Material Recycling sales represented 84% of Company revenues in 1996 compared to
81% in 1995. Waste Material Recycling sales were up 36.3% over the prior year.
The increased revenue is attributable to substantially higher prices received
for the Dried Bakery Product produced and sold during the current year.
Commodity prices for competing animal feed ingredients have increased
dramatically during this period which has caused higher demand for available
Dried Bakery Product. Limited supplies of raw materials have restricted the
growth of production volume. Tonnage volume in the Waste Material Recycling
operations for the current year is constant with the prior year. Vocational
School Group revenues increased 13.4% from the prior year. Continuing efforts
towards upgrading the quality of instruction and of the physical facilities of
the schools has had a positive effect in the Group's financial performance.
Production costs for Waste Material Recycling operations increased 13.6%
over last year, due primarily to increased costs for supplies of raw materials.
Vocational School Group operating costs were 4.6% lower in the current year than
in the prior year. Two school locations were refurbished and modernized during
the year. Two other school locations are scheduled to move to new facilities
next year. General and administrative expenses increased 11.8% over last year.
Increased contributions to the Waste Material Recycling profit sharing
retirement plan and increased legal expenses resulted in increased general and
administrative expenses in the current year.
Investment and other income for the current year is 20.3% below the amount
recognized in the prior year. Included in the current year's net investment
amount is a loss of $749,900 which was recognized on an investment whose decline
in value was deemed to be other than temporary. Net unrealized holding gains on
investments which are not reflected in current income, increased $9,390,352
during the year. Cumulatively, the unrealized holding gains on investments, net
of deferred income taxes, are $14,368,007 at June 30, 1996 compared to
$8,507,655 at June 30, 1995. Provisions for income taxes are 37% of 1996 pre-tax
income and 9% of 1995 pre-tax income. Tax net operating loss carryforwards were
utilized to minimize 1995 taxes; tax net operating loss carryforwards have been
exhausted and are not available in 1996.
Net income for fiscal 1996 is $3,972,548 or $3.23 per share. For 1995 net
income was $1,441,093 or $1.15 per share.
Operating Results -- 1995 compared with 1994
Revenues during fiscal 1995 were 1.5% lower than 1994 revenues. Both the
Waste Material Recycling and the Vocational School operations experienced a
small decrease in their revenues from those reported in the year prior. In both
1995 and 1994 Waste Material Recycling represented about 81% of total revenues
and Vocational Schools about 17%. In 1995, tonnage volume for Waste Material
Recycling increased 5.9% over the previous year and was the fourth consecutive
year of increased tonnage volume for this business segment. Average unit prices
for the Dried Bakery Product sold during fiscal 1995 were 6.6% below the prior
year's average prices. Competing commodity prices were weaker in 1995 than in
1994 causing 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 in 1995 than 1994 by 3.5%. During the 1995
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 1995 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 one year to the other.
Reduced legal expense was the major factor in achieving the lower costs.
4
7
Management's Discussion and Analysis of
Operations and Financial Condition -- Continued
- ---------------------------------------------------------
- --------------------------------------------------------------------------------
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.
Capital Expenses/Liquidity
The Company's capital expenditures were $2,255,436 in 1996, $2,208,936 in
1995 and $2,630,917 in 1994. Capital spending for the Waste Material Recycling
segment represented 79% of the Company's total capital expenditures for 1996,
70% in 1995 and 88% of the 1994 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 was
completed in 1996. Growth and expansion of our bakery recycling business is
expected to continue. In 1995 and 1996, four of the beauty school facilities
were refurbished or were moved to new locations. Each was completely furnished
with new fixtures and attractive equipment. Within the next twelve months, two
other schools are scheduled to move to new locations. Capital spending for the
school improvements has totaled over $1,000,000 for 1995 and 1996 and another
$350,000 is budgeted for fiscal 1997. A direct relationship between the school
improvements and increased enrollments is evident. Positive returns on these
investments is occurring. 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 1997.
The Company's working capital was $8,285,580 at June 30, 1996 and was
$3,526,061 at June 30, 1995. The current ratio was 2.8 at June 30, 1996 and was
2.3 a year earlier. Working capital in 1996 reflects a $2,500,000 note from Opto
Sensors, Inc. as due in 1997. That note was not classified as a current asset
for 1995.
Shareowners' Equity
At June 30, 1996, shareowners' equity includes net unrealized holding gains
on investments totaling $14,368,007, net of deferred income taxes. At June 30,
1995, shareowners' equity included $8,507,655 of net unrealized holding gains on
investments.
The Company purchased and retired 42,300 shares (3.4%) of its common stock
during the year at a cost of $1,381,693. 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 Income
- -----------------------------------------
For the years ended June 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Operating Sales and Revenues:
Sales $25,755,479 $19,035,739 $19,252,752
Vocational school revenues 4,467,978 3,938,405 4,080,181
----------- ----------- -----------
30,223,457 22,974,144 23,332,933
----------- ----------- -----------
Operating Cost and Expenses:
Cost of sales 14,854,410 12,745,613 12,773,147
Vocational school operating expenses 3,363,181 3,516,305 3,782,907
Depreciation and amortization 2,117,706 2,234,177 2,250,183
General and administrative (Note 6) 4,367,808 3,905,451 4,982,828
----------- ----------- -----------
24,703,105 22,401,546 23,789,065
----------- ----------- -----------
5,520,352 572,598 (456,132)
Investment and other income (Notes 2 & 3) 812,196 1,018,495 2,055,702
----------- ----------- -----------
Income before income taxes 6,332,548 1,591,093 1,599,570
Provision for income taxes (Note 8) 2,360,000 150,000 35,000
----------- ----------- -----------
Net Income $ 3,972,548 $ 1,441,093 $ 1,564,570
----------- ----------- -----------
Net Income Per Share $ 3.23 $ 1.15 $ 1.24
----------- ----------- -----------
Weighted average number of shares outstanding 1,231,270 1,255,101 1,266,105
The accompanying notes are an integral part of these statements.
6
9
Consolidated Balance Sheets
- ---------------------------------
June 30, 1996 1995
- ---------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,721,939 $ 242,794
Treasury bills (par value $5,035,000 in 1996 and $2,290,000 in 1995) 4,973,377 2,258,883
Accounts and notes receivable, less allowance for doubtful accounts
of $149,180 in 1996 and $298,834 in 1995 (Note 2) 5,173,445 2,256,766
Inventories 531,637 423,177
Prepaid expenses and other current assets 531,639 1,109,106
----------- -----------
Total current assets 12,932,037 6,290,726
----------- -----------
Notes Receivable (Note 2) 1,154,378 3,474,398
Property and Equipment:
Machinery and equipment 22,160,240 21,162,104
Land, buildings and improvements 9,743,940 10,272,459
----------- -----------
31,904,180 31,434,563
Less accumulated depreciation and amortization 20,867,899 20,210,689
----------- -----------
11,036,281 11,223,874
----------- -----------
Other Assets:
Deferred charges and other assets 130,930 423,266
Investments available for sale at fair value (Cost $11,749,436
in 1996 and $12,224,934 in 1995) (Note 3) 29,647,443 20,732,589
Investments held to maturity at cost (Fair value $603,600
in 1996 and $883,475 in 1995) (Note 3) 633,426 923,425
----------- -----------
30,411,799 22,079,280
----------- -----------
$55,534,495 $43,068,278
----------- -----------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Bank overdraft $ 250,686 $ 61,746
Accounts payable 1,410,953 899,372
Other accrued liabilities 1,447,406 1,196,004
Accrued payroll and related employee benefits 1,069,429 414,707
Income taxes payable 467,983 192,836
----------- -----------
Total current liabilities 4,646,457 2,764,665
Deferred Income Taxes (Note 8) 2,750,000
----------- -----------
7,396,457 2,764,665
----------- -----------
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: 1996 -- 1,202,565; 1995 -- 1,244,865 3,921,287 3,921,287
Retained earnings 29,848,744 27,874,671
Net unrealized gain on investments available for sale, net
of income taxes of $3,530,000 in 1996 and none in 1995 14,368,007 8,507,655
----------- -----------
48,138,038 40,303,613
----------- -----------
$55,534,495 $43,068,278
----------- -----------
The accompanying notes are an integral part of these statements.
7
10
Consolidated Statements of Cash Flows
- ----------------------------------------------
For the years ended June 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 3,972,548 $ 1,441,093 $ 1,564,570
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 2,117,706 2,234,177 2,250,183
Losses (gains) on investments available for sale 87,802 (132,698)
Gains on sale of non-current investments (1,619,311)
Gains on sale of equipment (45,374) (48,663) (20,875)
Deferred income taxes (515,000) (265,000)
Provision for doubtful accounts receivable 16,908 118,459 159,598
Provision for loss on note receivable 250,000
Changes in operating assets and liabilities:
Accounts and notes receivable (383,567) (170,389) (113,001)
Inventories (108,460) (11,202) 88,857
Prepaid expenses and other current assets 577,467 (402,903) (203,531)
Accounts payable and accrued liabilities 1,417,705 (19,261) (267,862)
Income taxes payable 275,147 125,681 7,930
Other assets (17,864) (113,066)
----------- ------------ ------------
Net cash flows from operating activities 7,395,018 2,756,228 2,096,558
----------- ------------ ------------
Cash Flows From Investing Activities:
Purchase of U.S.Treasury bills (9,619,494) (4,272,507) (5,489,619)
Maturities or dispositions of U.S.Treasury bills 6,905,000 4,495,159 5,000,000
Purchase of property and equipment (2,255,436) (2,208,936) (2,630,917)
Disposition of property and equipment 415,897 996,316 74,700
Purchase of long-term notes receivable (230,000)
Purchase of investments available for sale (2,168,781) (2,766,719)
Purchase of investments held to maturity (3,000)
Purchase of non-current investments (4,220,391)
Disposition of investments available for sale 2,556,476 2,189,066
Disposition of investments held to maturity 290,000 232,000
Disposition of non-current investments 5,001,175
----------- ------------ ------------
Net cash flows used in investing activities (4,106,338) (1,338,621) (2,265,052)
----------- ------------ ------------
Cash Flows From Financing Activities:
Dividends to shareowners (616,782) (439,089) (379,029)
Repurchases of common stock (1,381,693) (400,670) (350,445)
Change in bank overdraft 188,940 (365,451) 427,197
----------- ------------ ------------
Net cash used in financing activities (1,809,535) (1,205,210) (302,277)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,479,145 212,397 (470,771)
Cash and cash equivalents at beginning of year 242,794 30,397 501,168
----------- ------------ ------------
Cash and cash equivalents at end of year $ 1,721,939 $ 242,794 $ 30,397
----------- ------------ ------------
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 4,333 $ 4,853 $ 8,960
Income taxes $ 2,577,438 $ 289,321 $ 27,110
The accompanying notes are an integral part of these statements.
8
11
Consolidated Statements of Shareowners' Equity
- --------------------------------------------------------
Net
Unrealized
Common Stock Gain on
------------------------ Investments
For the years ended June 30, 1996, 1995 and Number of Retained Available
1994. Shares Amount Earnings for Sale
- ---------------------------------------------------------------------------------------------------------
Balance July 1, 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 investments available
for sale $ 8,507,655
---------- ---------- -------------- ------------
Balance June 30, 1995 1,244,865 3,921,287 27,874,671 8,507,655
Net income 3,972,548
Cash dividends on common stock, $0.50 per share (616,782)
Cash purchase of common stock and subsequent
retirement (42,300) (1,381,693)
Net unrealized gain on investments available
for sale 5,860,352
---------- ---------- -------------- ------------
Balance June 30, 1996 1,202,565 $3,921,287 $ 29,848,744 $ 14,368,007
---------- ---------- ------------- ------------
The accompanying notes are an integral part of these statements.
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 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:
The Company adopted the provisions of Statement of
Financial Accounting Standards No. 115 (SFAS 115),
Accounting for Certain Investments in Debt and Equity
Securities, on July 1, 1994. 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.
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.
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. The Company provides for income taxes using the
asset and liability method under which deferred
10
13
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
income taxes are recognized for the estimated future tax
effects attributable to temporary differences and
carryforwards that result from events that have been
recognized either in the financial statements or the
income tax returns, but not both. The measurement of
current and deferred income tax liabilities and assets is
based on provisions of enacted tax laws. Valuation
allowances are recognized if, based on the weight of
available evidence, it is more likely than not that some
portion of the deferred tax assets will not be realized.
Net Income Per Share:
Net income per common share is based on the weighted
average number of common shares and common share
equivalents outstanding during the year. There is no
significant difference between primary and fully diluted
net income per share.
- --------------------------------------------------------------------------------
NOTE 2: Components of notes receivable are as follows:
Notes
Receivable
June 30, 1996 1995
---------------------------------------------------------------------------
Loan to Opto Sensors, Inc. $2,500,000 $2,500,000
Loan to Simcala, Inc. (formerly SiMETCO, Inc.) 950,000 950,000
Others 242,217 200,247
Less amounts classified as current (2,537,839) (175,849)
---------- ----------
$1,154,378 $3,474,398
---------- ----------
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
$249,740, $247,711 and $191,181 in 1996, 1995 and 1994,
respectively, was earned on this note. The Company's chief
executive officer is a member of Opto Sensors' board of
directors.
The Company's loan to SiMETCO, Inc. of $1,650,000 was
in default from March 1993 until February 1995. In 1993
and 1994 the Company recorded provisions of $700,000 that
recognized the potential reduction in realizable value of
the note. In February 1995, a bankruptcy reorganization
was effected whereby Simcala, Inc. became the successor to
the business and operations of SiMETCO. A new promissory
note 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 recorded in
conjunction with the exchange. It was not practicable to
estimate the fair value of the new note. 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 $242,594 and $97,638 was
earned on the Simcala note in 1996 and 1995 respectively.
Principal installments are due beginning in February 1997
and conclude in February 2001.
11
14
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3: Included in Investment and Other Income are
recognized gains and losses on marketable securities. A
Investments net loss of $87,802 was recognized in 1996. Net gains of
$132,698 and $1,619,311 were recognized in 1995 and 1994,
respectively. Gross recognized gains and gross recognized
losses for 1996 were $697,589 and $785,391, respectively.
Recognized gains and losses are from sales of investments
and from recognized losses of $749,900 and $160,000 in
1996 and 1994 respectively, on securities whose decline in
value was deemed to be other than temporary.
At June 30, 1996 investments were as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
Held-to-maturity
securities
Corporate debt
securities(1)
Due after four but
within nine years $ 633,426 $ (29,826) $ 603,600
Available-for-sale
securities
Equity securities $11,176,436 $17,871,607 $ (600) $29,047,443
Corporate debt
securities
Due after one but
within four years 573,000 27,000 600,000
----------- ----------- ---------- -----------
$11,749,436 $17,898,607 $ (600) $29,647,443
At June 30, 1995 investments were as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
Held-to-maturity
securities
Corporate debt
securities(1)
Due after four but
within nine years $ 923,425 $ (39,950) $ 883,475
Available-for-sale
securities
Equity securities $12,224,934 $ 8,741,970 $ (234,315) $20,732,589
-------------------------------------
(1) Fixed maturity investments having an aggregate cost of
$633,426 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.
12
15
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
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,
-------------------------------------------------------------------------
1997 $ 478,325
1998 425,406
1999 402,406
2000 365,406
2001 283,948
Thereafter 1,229,918
----------
Total minimum lease payments $3,185,409
----------
Total rental expense under operating leases was
$735,557 in 1996, $781,661 in 1995 and $828,583 in 1994.
- --------------------------------------------------------------------------------
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 statements. 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. In accord
with the settlement, the Company has installed and
operates certain pollution control equipment.
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, 1996, 1995 and 1994
the defined contribution plan expenses were $507,298,
$175,973 and $127,200, 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
13
16
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
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, 1996 option
prices for shares under option ranged from $25.37 to
$35.20 per share.
Stock option activity under this plan and a previous
plan was as follows:
For the years ended June 30, 1996 1995 1994
--------------------------------------------------------------------------------
Shares:
Granted 9,000 9,000 --
Exercised -- -- --
Expired -- 9,140 8,000
Outstanding at end of year 25,000 16,000 16,140
Exercisable at end of year 9,250 5,250 11,640
Available for grant at end of
year 25,000 34,000 41,000
Option price range per share:
When granted $32.00/35.20 $25.37/27.91 --
- --------------------------------------------------------------------------------
NOTE 8: The components of the provision for income taxes are:
Income
Taxes
For the years ended June 30, 1996 1995 1994
------------------------------------------------------------------------------
Current:
Federal $2,275,000 $ 265,000
State 600,000 150,000 $ 35,000
---------- ---------- ----------
2,875,000 415,000 35,000
---------- ---------- ----------
Deferred:
Federal (465,000) (265,000)
State (50,000)
---------- ---------- ----------
(515,000) (265,000)
---------- ---------- ----------
Total provision $2,360,000 $ 150,000 $ 35,000
---------- ---------- ----------
Reconciliation of the provision for income taxes
computed at the U.S. Federal statutory income tax rate to
the reported provision is:
For the years ended June 30, 1996 1995 1994
------------------------------------------------------------------------------
U.S. Federal statutory income tax $2,153,066 $ 540,971 $ 543,854
Benefits from loss carryforwards (403,100) (419,914) (863,222)
Expenses not currently deductible 557,751 162,728 304,870
State income taxes, net of Federal
tax benefit 363,000 99,000 23,100
Reduction of deferred tax asset
valuation allowance (515,000) (265,000)
Other 204,283 32,215 26,398
---------- ---------- ----------
Total provision $2,360,000 $ 150,000 $ 35,000
---------- ---------- ----------
14
17
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
The major components of the deferred tax assets and
liabilities are:
For the years ended June 30, 1996 1995
----------------------------------------------------------------------------
Depreciation $ (377,906) $ (347,355)
Income not currently taxable (30,496)
Unrealized gain on investments (3,530,000)
Other (13,105) (21,635)
----------- -----------
Total deferred income tax liabilities (3,951,507) (368,990)
----------- -----------
Expenses not currently deductible 1,006,510 793,239
Recognized losses not currently deductible 3,079,339 3,093,947
Tax benefit carryforwards 146,146
----------- -----------
Total deferred income tax assets 4,085,849 4,033,332
----------- -----------
Valuation allowance (2,884,342) (3,399,342)
----------- -----------
Net deferred income tax (liability) asset $(2,750,000) $ 265,000
----------- -----------
- --------------------------------------------------------------------------------
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.
15
18
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
For the years ended June 30, 1996 1995 1994
--------------------------------------------------------------------------------
Operating Sales and Revenues:
Waste Material Recycling $25,438,070 $ 18,663,645 $ 18,695,118
Vocational School Group 4,467,978 3,938,406 4,080,181
Other 317,409 372,093 557,634
----------- ------------ ------------
$30,223,457 $ 22,974,144 $ 23,332,933
----------- ------------ ------------
Operating Income (Loss) before
Income Taxes:
Waste Material Recycling $ 6,526,681 $ 2,012,890 $ 705,136
Vocational School Group 79,496 (629,144) (604,407)
Other (24,239) 65,760 218,348
----------- ------------ ------------
6,581,938 1,449,506 319,077
Corporate expenses (1,061,586) (876,908) (775,209)
Investment and other income 812,196 1,018,495 2,055,702
----------- ------------ ------------
Income before income taxes $ 6,332,548 $ 1,591,093 $ 1,599,570
----------- ------------ ------------
One customer represented 13%, 10% and 6% of product
revenues for the Waste Material Recycling segment for the
years ended 1996, 1995 and 1994 respectively. Another
customer represented 8%, 11% and 12% of the segment's
revenues for those respective years.
Identifiable Assets:
Waste Material Recycling $12,627,828 $12,451,700 $13,664,356
Vocational School Group 1,607,828 1,373,802 1,020,963
Other 87,759 115,458 176,056
Corporate 41,211,080 29,127,318 19,356,945
----------- ----------- -----------
$55,534,495 $43,068,278 $34,218,320
----------- ----------- -----------
Depreciation and Amortization
Waste Material Recycling $ 1,850,022 $ 1,940,206 $ 1,970,438
Vocational School Group 196,463 214,512 179,796
Other 58,535 66,141 77,268
Corporate 12,686 13,318 22,681
----------- ----------- -----------
$ 2,117,706 $ 2,234,177 $ 2,250,183
----------- ----------- -----------
Capital Expenditures:
Waste Material Recycling $ 1,776,232 $ 1,541,817 $ 2,305,760
Vocational School Group 430,426 659,512 279,692
Other 30,374 36,158
Corporate 18,404 7,607 9,307
----------- ----------- -----------
$ 2,255,436 $ 2,208,936 $ 2,630,917
----------- ----------- -----------
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, 1996 and 1995, and the related
consolidated statements of income, shareowners' equity, and cash flows for each
of the three years in the period ended June 30, 1996. 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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996 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.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 23, 1996
Corporate Information
- --------------------------
Directors Officers Independent Auditors
Robert Henigson Meyer Luskin Deloitte & Touche LLP
Investor Chairman, President and Chief Los Angeles, California
Executive Officer
Meyer Luskin Transfer Agent and Registrar
John J. Crowley ChaseMellon Shareholders
William H. Mannon Vice President and Chief Services, L.L.C.
Retired Officer of Financial Officer Los Angeles, California
Scope Industries
Eleanor R. Smith Securities Listed
Franklin Redlich Secretary and Controller American Stock Exchange
Retired
Paul D. Saltman, Ph.D.
Professor of Biology
University of California at
San Diego