1
SCOPE
INDUSTRIES
1999
62ND
ANNUAL
REPORT
[SCOPE LOGO]
2
Financial Highlights
- -----------------------
For the years ended June 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Operating sales and revenues $31,045,072 $25,045,272 $30,273,913
Investment and other income 3,129,181 25,344,817 20,569,303
Net (loss) income $ (842,555) $16,063,797 $18,992,773
Net (loss) income per share -- Basic $ (0.75) $ 14.10 $ 16.03
Net income per share -- Diluted $ 13.98 $ 15.94
Average shares outstanding -- Basic 1,116,958 1,139,276 1,184,957
Average shares outstanding -- Diluted 1,126,454 1,148,645 1,191,469
Five-Year Review -- Selected Financial Data
- ----------------------------------------------------
For the years ended June 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
OPERATIONS
Operating Sales and Revenues $31,045,072 $25,045,272 $30,273,913 $30,223,457 $22,974,144
Operating Cost and Expenses:
Cost of sales and operating expenses 26,738,078 18,065,034 19,177,617 18,217,591 16,261,918
Depreciation and amortization 3,094,198 2,024,722 2,112,959 2,117,706 2,234,177
General and administrative 5,434,532 4,056,536 3,759,867 4,367,808 3,905,451
----------- ----------- ----------- ----------- -----------
35,266,808 24,146,292 25,050,443 24,703,105 22,401,546
----------- ----------- ----------- ----------- -----------
(4,221,736) 898,980 5,223,470 5,520,352 572,598
Investment and other income 3,129,181 25,344,817 20,569,303 812,196 1,018,495
----------- ----------- ----------- ----------- -----------
(Loss) income before income taxes (1,092,555) 26,243,797 25,792,773 6,332,548 1,591,093
(Benefit) provision for income taxes (250,000) 10,180,000 6,800,000 2,360,000 150,000
----------- ----------- ----------- ----------- -----------
Net (loss) income $ (842,555) $16,063,797 $18,992,773 $ 3,972,548 $ 1,441,093
=========== =========== =========== =========== ===========
Net (loss) income per share -- Basic $ (0.75) $ 14.10 $ 16.03 $ 3.23 $ 1.15
Net income per share -- Diluted $ 13.98 $ 15.94 $ 3.23 $ 1.15
FINANCIAL PERFORMANCE
Net (loss) income as a percent of
revenues (2.71)% 64.14% 62.74% 13.14% 6.27%
Cash dividend per share $ 1.00 $ 1.25 $ 1.25 $ 0.50 $ 0.35
Capital expenditures $ 4,155,834 $ 2,649,478 $ 1,298,935 $ 2,255,436 $ 2,208,936
FINANCIAL POSITION
Total assets $72,457,006 $78,380,114 $61,484,033 $55,534,495 $43,068,278
Shareowners' equity $63,615,728 $71,154,072 $57,649,645 $48,138,038 $40,303,613
Equity per share at end of year $ 57.08 $ 63.37 $ 49.33 $ 40.03 $ 32.38
Shares outstanding at end of year 1,114,467 1,122,842 1,168,665 1,202,565 1,244,865
3
President's Report to the Shareholders
- --------------------------------------------------------------------------------
In last year's "President's Report to the Shareholders", the hypothetical
shareholder asked management what it was going to do with its significant cash
position. Management's answer was, "Either we'll acquire a company in the
recycling business, or, at a time and price we believe appropriate, make other
investments, or . . . both." Well on April 4, 1999 we acquired the shares of
International Processing Corporation and International Transportation Services,
Inc., commonly called IPC, for $20.5 million, after certain adjustments. Also as
was pointed out last year, we've sold essentially all of our public investment
securities except holdings in OSI Systems, Inc. so the big gains in 1998 and
1997 haven't been repeated.
IPC is engaged in the recycling of bakery, snack, and other food
wastes -- the very same business as Dext Company. IPC operates dehydration and
processing facilities at Carteret, New Jersey; Lake City, Georgia; Conley,
Georgia; Terre Haute, Indiana; Mt. Pleasant, Texas; Kansas City, Kansas; and it
operates blending and grinding plants at Fairfield, Ohio; Bedford Park,
Illinois; and Durham, North Carolina.
The primary problem that our recycling business must resolve is how to
generate some earnings even at extremely low sales prices. During this past
year -- and currently -- we have experienced a major decline in commodity feed
prices; thus operating at a loss. The alternative to our product is corn and
some animal grade fat. Corn prices until a few weeks ago, were in a range where
it has only been once before in the past 26 years. So, we are paying today's
cost of doing business, ie. labor, fuel, power, trucking costs, insurance, etc.
and selling into the depressed prices of the early 1970's. If corn prices remain
at these extremely low levels, profit expectations are nil for the new fiscal
year. There has been a price improvement these past few weeks, but we believe
it's too soon to believe that this improvement is the precursor of a sustained
rally in feed prices. Our goal is to bring our total costs to a level where we
can operate profitably at unusually low selling prices.
Our costs have been severely negatively impacted this past year and for at
least the first quarter of this new year by a non-recurring event in Chicago.
Due to a unique set of conditions we had to close our existing Chicago plant
early in this fiscal year. We are building a new -- and we expect a highly
efficient -- plant in Cook County, Illinois to replace the closed plant, but it
won't be operational until the end of the new first quarter. The cost of
continuing to service our waste food sources (our raw material) and not being
able to process and sell the finished product has resulted in large losses. This
condition will continue through the first quarter of the new year; thereafter,
we expect the start-up of our new plant. We are budgeting substantial capital
expenditures over the next two years in order to significantly improve
productivity of our newly acquired facilities. In addition, we shall continue to
be receptive to opportunities for further expansion and/or acquisitions in the
food waste recycling industry.
Marinello Schools of Beauty recorded a significant improvement in earnings
over the prior year. A new school was opened in Eagle Rock, California and the
school in Santa Fe Springs, California was closed.
With the deepest of regret we report that Dr. Paul Saltman, a shareowner
since 1957 and a Director since 1969, passed away on August 27, 1999. Paul was a
most dear friend, a source of constant and unwavering support and optimism, and
a powerful force for excellence and integrity. We shall always miss him.
We wish to thank our customers and our vendors for their cooperation. We
always appreciate the support and goodwill of our shareowners. Last year 98% of
you voted to reelect management -- we don't think it could get any better.
Finally, we wish to welcome all of our new employees and to thank all of our
good people for their extra efforts.
Respectfully yours,
/S/ Meyer Luskin
Meyer Luskin
Chairman of the Board,
President and Chief Executive Officer
1
4
Unaudited Quarterly Financial Data
- ------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------
1999
Operating sales and revenues $5,151,380 $5,143,504 $5,191,741 $15,558,447 $31,045,072
Gross profit 309,661 32,372 285,753 639,596 1,267,382
Net (loss) income $ 4,652 $ (238,084) $ (108,936) $ (500,187) $ (842,555)
========== ========== ========== =========== ===========
Net (loss) income per share $ 0.00 $ (0.21) $ (0.10) $ (0.45) $ (0.75)
========== ========== ========== =========== ===========
1998
Operating sales and revenues $6,494,805 $6,864,916 $5,845,456 $ 5,840,095 $25,045,272
Gross profit 1,395,180 1,496,176 1,052,695 1,047,675 4,991,726
Net income $ 414,815 $3,201,820 $5,352,012 $ 7,095,150 $16,063,797
========== ========== ========== =========== ===========
Net income per share -- Diluted $ 0.35 $ 2.80 $ 4.69 $ 6.25 $ 13.98
========== ========== ========== =========== ===========
Market Price Range
- -----------------------
Scope Industries Common Stock
1999 1998
-------------------- --------------------
High Low High Low
- ---------------------------------------------------------------------------------------------------
1st Quarter $77.00 $67.25 $60.44 $50.00
2nd Quarter 70.38 64.00 67.00 58.25
3rd Quarter 69.75 62.00 66.00 59.50
4th Quarter 71.00 64.00 70.50 62.50
Cash dividends of $1.00 and $1.25 per share were paid during each of the
years ended June 30, 1999 and 1998, respectively.
There were 80 shareowners of record of common stock at July 31, 1999.
2
5
Management's Discussion and Analysis of
Operations and Financial Condition
- -----------------------------------------
- --------------------------------------------------------------------------------
Operating Results -- 1999 compared with 1998
The Company, on April 4, 1999, acquired International Processing
Corporation and International Transportation Service, Inc. (collectively known
as "IPC"). Activities for IPC's operations for the period from the acquisition
to June 30, 1999 are included as part of the Waste Material Recycling segment of
the Company. Total revenues for the fiscal year 1999 were 24% higher than 1998
fiscal year revenues. Waste Material Recycling sales for 1999 were 30% above
1998 sales. However if IPC sales were not included in the 1999 period, the Waste
Material Recycling sales would have decreased by 20% from the prior year.
Vocational School Group revenues for 1999 were 5% above 1998 revenues. Waste
material Recycling sales represented 84% of 1999 Company revenues compared to
80% of 1998 revenues. Dried bakery product sales tonnage increased 62% from 1998
to 1999 and average prices dropped 21% for the comparable periods. The
Vocational School Group revenues represented 16% of the Company's 1999 revenues
compared to 18% in 1998. Waste Material Recycling operating costs were 8% lower
per ton produced in 1999 than in the prior year. Operating costs for the
Vocational School Group were up 3% in 1999 over the prior year. As a result of
the acquisition of IPC, depreciation and amortization charges were increased by
$1.06 million in 1999 and general and administrative expenses were 34% higher in
the current year than last year.
Selling prices for the Waste Material Recycling product were at
historically low levels throughout fiscal 1999. As mentioned above, the average
selling prices for the current year were 21% below the already low average
prices that prevailed during fiscal 1998. (1999 average selling prices were 36%
lower than 1997 average selling prices.) The low selling prices are dictated by
competing commodities, mainly corn, which are themselves at historic lows. Such
low prices make for reduced or non-existent margins between costs and sales
prices for this business segment. The Vocational School Group improved its
operating margin which resulted in an operating profit in the current year
compared to an operating loss in the previous year.
In fiscal 1999, investment and other income was $3,129,181 compared to
$25,344,817 in 1998. Included in investment and other income are net investment
losses of $288,957 in 1999 and net investment gains of $23,290,926 in 1998.
Fiscal 1999 resulted in a net loss of $842,555 or $0.75 loss per share. For
fiscal 1998 net income was $16,063,797 or $13.98 per share -- diluted.
As a result of the loss incurred in fiscal 1999, an income tax benefit of
23% of the pre-tax loss is expected through utilization of available tax loss
carrybacks and loss carryforwards. In fiscal 1998, the provision for income
taxes was 39% of that year's pre-tax income.
Accumulated unrealized holding gains on investments, net of deferred income
taxes were $4,405,695 at June 30, 1999 and $9,380,022 at June 30, 1998.
Unrealized gains on long-term equity holdings in OSI Systems, Inc. comprise the
major portion of the unrealized gains at June 30, 1999 and at June 30, 1998.
These unrealized gains are not reflected in net income or loss. Changes in the
unrealized gains are reported as Other Comprehensive Income or Loss as set forth
in Statement of Financial Accounting Standards No. 130.
Operating Results -- 1998 compared with 1997
Total revenues for fiscal year 1998 were 17% below the year earlier
revenues. Waste Material Recycling sales for 1998 were 20% below 1997 sales.
Vocational School Group revenues for 1998 were 2% above 1997 revenues. Waste
Material Recycling sales represented 80% of 1998 Company revenues compared to
83% of 1997 revenues. From 1997 to 1998, dried bakery product sales tonnage
decreased 2% and average sales prices dropped 19%. The Vocational School Group
revenues represented 18% of the Company's revenues in 1998 compared to 15% in
1997. Waste Material Recycling operating costs were 6% lower per ton produced in
1998 than in the year earlier. Operating costs for the Vocational School Group
were up 3% in 1998 over 1997.
The Company's 1998 operating results compare poorly to 1997 operating
results. For Waste Material Recycling operations, lower selling prices prevailed
throughout fiscal 1998. The lower selling prices were dictated by lower prices
for competing commodities, especially corn. Corn as well as several other animal
feed commodity prices have continued trending lower into the beginning of fiscal
1999. Although operating costs were reduced, including amounts paid for raw
materials, margins were lower for this business segment in 1998 than they were
in 1997. The Vocational School Group experienced a small reduction in its
operating margin and a loss for 1998 compared to a nominal profit for 1997.
General and administrative expenses for 1998 were 8% higher than 1997 expenses.
1997 expenses were unusually low due to legal expense credits received in that
period.
In fiscal 1998, investment and other income was $25,344,817 compared to
$20,569,303 in 1997. In 1998, net investment gains realized were $23,290,926
compared to $17,313,454 in 1997. During the current year, long-term
stockholdings in Lone Star Industries, Inc. were sold and a portion of the
stockholdings in OSI Systems, Inc. was sold in that company's initial public
offering. Holdings of Imperial Bancorp and Mesa, Inc. were sold during fiscal
1997. The appreciation realized on those investments and the subsequent interest
earned on the proceeds from their disposition has resulted in unusually large
income amounts being recognized in 1998 and 1997.
Unrealized holding gains on investments, net of deferred income taxes, were
$9,380,022 at June 30, 1998 and
3
6
$7,997,484 at June 30, 1997. These unrealized gains are not reflected in net
income. Unrealized gains on long-term equity holdings in OSI Systems, Inc.
comprise the major portion of the unrealized gains at June 30, 1998.
Provisions for income taxes are 39% of 1998 pre-tax income and 26% of 1997
pre-tax income. The 1997 effective tax rate is lower than the statutory income
tax rate due to the 1997 utilization of deferred tax assets that arose from
charges against income in prior years that had reduced investment carrying
values but for which no tax benefit was then recognized.
Net income for fiscal 1998 is $16,063,797 or $13.98 per share -- diluted.
For 1997 net income was $18,992,773 or $15.94 per share -- diluted.
Capital Expenses/Liquidity
The Company purchased the IPC bakery waste recycling business in April
1999. The purchase price included cash payments of $20,514,504, net of cash
acquired. The purchase was funded with cash and liquid securities on hand. The
Company's capital expenditures in 1999 were $4,155,834, $2,649,478 in 1998 and
$1,298,935 in 1997. Capital spending for the Waste Material Recycling segment
represented 94% of the Company's total capital expenditures in 1999, 71% in 1998
and 84% in 1997. A new bakery waste recycling facility is under construction
near Chicago, IL. The new facility, which is now nearly completed, will replace
the closed facility which had serviced the same geographic area. Vehicle
replacements and processing equipment automation and refurbishing are
continuously being made to maintain efficient operations and provide for
expected growth and expansion of the bakery recycling business. In addition to
such ongoing capital improvements, $4 to $5 million in capital spending for a
new bakery waste recycling facility is planned. Construction on the planned new
facility is expected to commence in the summer of 2000. In the Vocational School
Group, one school was remodeled and another was relocated to a new facility
during fiscal 1999. Another school relocation with all new facilities is planned
for the fiscal year 2000. A direct relationship between school improvements and
increased enrollment has been evident in past school refurbishing projects.
Positive returns on the planned investments are expected. 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 2000
without incurring debt.
Shareowners' Equity
At June 30, 1999, shareowners equity includes net accumulated unrealized
holding gains on investments totaling $4,405,695, net of deferred income taxes.
At June 30, 1998, shareowners equity included $9,380,022 of net accumulated
unrealized holding gains on investments.
For the year ended June 30, 1999 the Company purchased and retired a total
of 9,275 of its shares (0.8%) at a cost of $626,333. Funds for the purchase of
these shares were available from existing cash and from operating and investing
cash flows.
The Company does not contemplate raising capital by issuing additional
common shares or through new borrowings during the ensuing year. This does not
preclude, however, the consideration of opportunities that may present
themselves in the future that could require the Company to seek additional
capital.
Year 2000
The Company has undertaken a review of its computer systems and
applications to identify those which could be affected by Year 2000 problems.
Based upon the review and associated testing, the Company believes that most of
its financial data and reporting systems are Year 2000 ready. Financial data and
reporting systems acquired in the IPC purchase are in the process of being
replaced or transferred to systems that are Year 2000 compliant. The systems
conversion and upgrade is expected to be completed by December 1999 and it is
anticipated that the additional costs incurred with regard to Year 2000 issues
will not exceed $200,000. All estimated costs have been budgeted and are
expected to be funded through cash flows from operations. Expenses incurred to
date relating to Year 2000 compliance issues have been less than $50,000.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Basic concerns for Year 2000
center on the public and private utilities which are required to run the
recycling facilities and fuel for the hauling equipment that pick-up and deliver
the products. Interruption of supplier operations due to Year 2000 issues could
affect Company operations. Due to the general uncertainty of the Year 2000
readiness of third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Company's results of operations, liquidity or financial
condition.
The Company is in the process of developing contingency plans for its
businesses in light of outside factors that may be impacted by Year 2000. The
Company believes that its operating systems will not have serious concerns in
this regard and are capable of operating in alternative modes that could
circumvent the Year 2000 problems.
Forward Looking Statements
Forward looking statements included in this Management's Discussion and
Analysis of Operations and Financial Condition and included elsewhere in this
Annual Report, are subject to risks and uncertainties that could affect actual
future results. Although the Company believes that the expectations reflected in
such forward looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Potential risk and uncertainties
include, but are not limited to, general business conditions, unusual volatility
in equity and interest rate markets and in competing commodity markets,
disruptions in the availability or pricing of raw materials, transportation
difficulties, changing governmental educational aid policies, or disruption of
operations due to unavailability of fuels or from acts of God.
4
7
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, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income, shareowners'
equity, and cash flows for each of the three years in the period ended June 30,
1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999 in conformity with generally accepted accounting principles.
Los Angeles, California
/s/ DELOITTE & TOUCHE
August 30, 1999
5
8
Consolidated Statements of Operations
- ---------------------------------------------
For the years ended June 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Operating Sales and Revenues:
Sales $26,227,133 $20,448,167 $25,744,869
Vocational school revenues 4,817,939 4,597,105 4,529,044
----------- ----------- -----------
31,045,072 25,045,272 30,273,913
----------- ----------- -----------
Operating Cost and Expenses:
Cost of sales 23,109,969 14,536,956 15,736,357
Vocational school operating expenses 3,628,109 3,528,078 3,441,260
Depreciation and amortization 3,094,198 2,024,722 2,112,959
General and administrative 5,434,532 4,056,536 3,759,867
----------- ----------- -----------
35,266,808 24,146,292 25,050,443
----------- ----------- -----------
(4,221,736) 898,980 5,223,470
Investment and other income 3,129,181 25,344,817 20,569,303
----------- ----------- -----------
(Loss) income before income taxes (1,092,555) 26,243,797 25,792,773
(Benefit) provision for income taxes (250,000) 10,180,000 6,800,000
----------- ----------- -----------
Net (Loss) Income $ (842,555) $16,063,797 $18,992,773
=========== =========== ===========
Net (Loss) Income Per Share -- Basic $ (0.75) $ 14.10 $ 16.03
Net Income Per Share -- Diluted $ 13.98 $ 15.94
Average shares outstanding -- Basic 1,116,958 1,139,276 1,184,957
Dilutive effect of stock options 9,496 9,369 6,512
----------- ----------- -----------
Average shares outstanding -- Diluted 1,126,454 1,148,645 1,191,469
The accompanying notes are an integral part of these statements.
6
9
Consolidated Balance Sheets
- ---------------------------------
June 30, 1999 1998
- ----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,667,818 $ 755,904
Treasury bills (par value $15,000,000 in 1999 and
$44,250,000 in 1998) 14,852,203 43,024,640
Accounts and notes receivable, less allowance for doubtful
accounts
of $484,885 in 1999 and $205,318 in 1998 4,234,753 1,618,150
Inventories 999,755 662,399
Deferred income taxes 955,000 700,000
Prepaid expenses and other current assets 1,411,455 459,465
----------- -----------
Total current assets 26,120,984 47,220,558
----------- -----------
Notes Receivable 1,103,816 897,829
Property and Equipment:
Machinery and equipment 34,069,755 23,407,396
Land, buildings and improvements 14,208,280 10,581,881
----------- -----------
48,278,035 33,989,277
Less accumulated depreciation and amortization 23,793,405 23,304,941
----------- -----------
24,484,630 10,684,336
----------- -----------
Collection Routes and Contracts, less accumulated
amortization
of $539,427 at June 30, 1999 9,775,762
Other Assets:
Deferred charges and other assets 501,351 244,590
Investments available for sale at fair value (Cost
$2,383,766 in 1999, and $3,071,776 in 1998) 8,464,461 17,326,799
Other equity investments at cost 2,006,002 2,006,002
----------- -----------
10,971,814 19,577,391
----------- -----------
$72,457,006 $78,380,114
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 3,917,443 $ 1,050,796
Other accrued liabilities 2,338,505 1,359,136
Accrued payroll and related employee benefits 1,005,685 705,604
Income taxes payable 251,485 475,506
----------- -----------
Total current liabilities 7,513,118 3,591,042
Deferred Income Taxes 1,328,160 3,635,000
----------- -----------
8,841,278 7,226,042
----------- -----------
Commitments and Contingent Liabilities
Shareowners' Equity:
Common stock, no par value, 5,000,000 shares authorized;
shares issued and outstanding: 1999 -- 1,114,467;
1998 -- 1,122,842 4,161,300 4,138,462
Retained earnings 55,048,733 57,635,588
Accumulated other comprehensive income 4,405,695 9,380,022
----------- -----------
63,615,728 71,154,072
----------- -----------
$72,457,006 $78,380,114
=========== ===========
The accompanying notes are an integral part of these statements.
7
10
Consolidated Statements of Cash Flows
- ----------------------------------------------
For the years ended June 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net (loss) income $ (842,555) $16,063,797 $18,992,773
Adjustments to reconcile net (loss) income to net cash
flows (used in) from operating activities:
Depreciation and amortization 2,554,771 2,024,722 2,112,959
Amortization of contracts and routes 539,427
(Gains) losses on investments available for sale 288,957 (23,290,926) (17,313,454)
Gains on sale of property and equipment (1,050,779) (9,261) (8,324)
Tax deferrals and deferred tax asset (435,000) 1,035,000 (2,195,000)
Provision for doubtful accounts receivable 188,658 116,298 13,139
Changes in operating assets and liabilities:
Accounts and notes receivable (170,596) (140,080) 1,945,342
Inventories 338,216 (77,998) (52,764)
Prepaid expenses and other current assets (831,222) (79,811) 151,985
Accounts payable and accrued liabilities (645,261) (184,621) (627,631)
Income taxes payable (224,021) (58,725) 66,248
Other assets 9,262 (163,585) 49,924
------------ ----------- -----------
Net cash flows (used in) from operating activities (280,143) (4,765,190) 3,135,197
------------ ----------- -----------
Cash Flows From Investing Activities:
Purchase of U.S. Treasury bills (19,802,061) (48,733,701) (30,602,562)
Maturities of U.S. Treasury bills 47,974,498 29,250,000 12,035,000
Purchase of property and equipment (4,155,834) (2,508,358) (1,298,935)
Disposition of property and equipment 1,541,866 137,616 42,646
Purchase of long-term notes receivable (669,500) (763,975)
Purchase of investments available for sale (319,046) (338,702) (3,223,689)
Purchase of other equity investments (2,001,002)
Disposition of investments available for sale 718,100 28,475,074 27,497,783
Acquisition of International Processing Corporation, net of
cash acquired (20,514,504)
Tax benefit applied to purchase of routes and contracts 140,000
------------ ----------- -----------
Net cash flows from investing activities 4,913,519 3,516,952 4,450,243
------------ ----------- -----------
Cash Flows From Financing Activities:
Dividends to shareowners (1,117,967) (1,414,687) (1,491,132)
Repurchases of common stock (626,333) (2,527,221) (1,836,686)
Other 22,838 (33,511)
------------ ----------- -----------
Net cash used in financing activities (1,721,462) (3,941,908) (3,361,329)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 2,911,914 (5,190,146) 4,224,111
Cash and cash equivalents at beginning of year 755,904 5,946,050 1,721,939
------------ ----------- -----------
Cash and cash equivalents at end of year $ 3,667,818 $ 755,904 $ 5,946,050
============ =========== ===========
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 9,053 $ 4,323 $ 301
Income taxes $ 425,194 $ 9,203,725 $ 8,928,751
Non Cash Investing Transactions:
Reacquired land and buildings through foreclosure
proceedings in exchange for cancellation of a note
receivable $ 141,120
Acquired stock of OSI Systems, Inc. (formerly Opto
Sensors, Inc.) in exchange for cancellation of a loan
by the exercise of warrants issued as a condition of
the loan $ 2,500,000
The accompanying notes are an integral part of these statements.
8
11
Consolidated Statements of Shareowners' Equity
- --------------------------------------------------------
Common Stock Accumulated
----------------------- Other
Number of Retained Comprehensive
For the years ended June 30, 1999, 1998 and 1997. Shares Amount Earnings Income(1)
- -----------------------------------------------------------------------------------------------------------
Balance July 1, 1996 1,202,565 $3,921,287 $29,848,744 $14,368,007
Net income 18,992,773
Cash dividends on common stock, $1.25 per share (1,491,132)
Cash purchase of common stock and subsequent
retirement (40,900) (1,836,686)
Proceeds from stock options exercised 7,000 217,175
Net unrealized loss on investments available for
sale (6,370,523)
---------- ---------- ----------- -----------
Balance June 30, 1997 1,168,665 4,138,462 45,513,699 7,997,484
Net income 16,063,797
Cash dividends on common stock, $1.25 per share (1,414,687)
Cash purchase of common stock and subsequent
retirement (45,823) (2,527,221)
Net unrealized gain on investments available for
sale 1,382,538
---------- ---------- ----------- -----------
Balance June 30, 1998 1,122,842 4,138,462 57,635,588 9,380,022
Net loss (842,555)
Cash dividends on common stock, $1.00 per share (1,117,967)
Cash purchase of common stock and subsequent
retirement (9,275) (626,333)
Proceeds from stock options exercised 900 22,838
Net unrealized loss on investments available for
sale (4,974,327)
---------- ---------- ----------- -----------
Balance June 30, 1999 1,114,467 $4,161,300 $55,048,733 $ 4,405,695
========== ========== =========== ===========
(1) Accumulated Other Comprehensive Income is comprised entirely of net
unrealized gains on investments available for sale.
Consolidated Statements of Comprehensive Income
- -----------------------------------------------------------
For the years ended June 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Net (loss) income $ (842,555) $16,063,797 $18,992,773
Other comprehensive (loss) income:
Net unrealized (loss) gain on investments available for
sale (4,974,327) 1,382,538 (6,370,523)
----------- ----------- -----------
Comprehensive (loss) income: $(5,816,882) $17,446,335 $12,622,250
=========== =========== ===========
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:
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 in other
comprehensive income as a separate component of
shareowners' equity until realized. For all investment
securities, unrealized losses that are other than
temporary are recognized in net income. Realized gains and
losses are determined on the specific identification
method and are reflected in net income.
Inventories:
Inventories consist of manufactured finished goods
and purchased goods, portions of which are consumed in the
various operating activities and portions of which are
sold to customers. Inventories are stated at the lower of
cost or market, cost being determined on a first-in,
first-out basis.
Property and Equipment:
Property and equipment are stated at cost.
Depreciation is provided generally on the straight-line
method over the estimated useful lives of the assets.
Service lives for property and equipment are 20 years for
buildings, 10 years, but not exceeding the lease terms,
for leasehold improvements, 3 to 7 years for machinery and
equipment.
Collection Routes and Contracts:
Collection routes, raw material contracts and
restrictive covenants are stated at cost and are amortized
over 3 to 5 years using the straight line method.
Revenue Recognition:
Sales are recorded at contract prices as deliveries
are made. Tuition revenue is recognized as course hours
are completed by students. Provisions for losses on
student accounts and loans receivable are determined on
the basis of loss experience and assessment of prospective
risk. Resulting adjustments are made to the allowance for
losses.
Income Taxes:
The Company files a consolidated Federal income tax
return. The Company provides for income taxes using the
asset and liability method under which deferred income
taxes are recognized for the estimated future tax effects
attributable to temporary differences and carryforwards
that result from events that have been
10
13
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
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:
Basic net income per common share is computed using
the weighted average number of common shares outstanding
during the period. Diluted net income per common share
reflects the incremental shares issuable upon the assumed
exercise of dilutive stock options.
Comprehensive Income:
The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income"
at the beginning of fiscal 1999. The Company's only
significant type of other comprehensive income has been
the fluctuations in unrealized gains or losses on
investments.
Disclosures about Segments of an Enterprise and Related
Information:
The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", at the
beginning of fiscal 1999. SFAS No. 131 establishes
standards for reporting information about operating
segments and requires reporting for selected information
about operating segments in financial statements. It also
establishes standards for related disclosures about
products and services, geographic areas, and major
customers.
Accounting for Derivative Instruments and Hedging
Activities:
The Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivatives
instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities.
The statement requires that the Company recognize all
derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. As
amended by SFAS No. 137, this statement is effective for
all fiscal quarters of fiscal years beginning after June
15, 2000. Management is in the process of determining the
effects on the Company's financial statements.
- --------------------------------------------------------------------------------
NOTE 2: On April 4, 1999, the Company, through its wholly
owned subsidiary Scope Products, Inc., purchased the
Acquisition bakery waste recycling business known as International
Processing Corporation. The purchase consisted of
manufacturing facilities located in Georgia, Illinois,
Indiana, Kansas, New Jersey, North Carolina, Ohio and
Texas. The purchase was funded with cash and liquid
securities on hand. The fair values of assets and
liabilities acquired are presented below for supplemental
cash flow disclosure:
Current assets, net of cash acquired $ 3,187,492
Property, plant and equipment 12,690,319
Collection routes and contracts 10,455,189
Other assets 46,022
Liabilities (4,791,358)
Deferred tax liabilities, net of deferred tax benefits (1,073,160)
-----------
Purchase price, net of cash acquired $20,514,504
===========
11
14
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
The acquisition has been accounted for using the
purchase method for business combinations. The results of
the operations of the acquired business have been included
in the consolidated financial statements since the date of
the acquisition.
- --------------------------------------------------------------------------------
NOTE 3: All U.S. Treasury bills are purchased with maturities
of one year or less. The cost is adjusted to reflect
Treasury interest earned as it accrues. The adjusted cost
Bills approximates the fair value of the bills. The Company has
classified its Treasury bills as available-for-sale
securities.
- --------------------------------------------------------------------------------
NOTE 4: Included in Investment and Other Income are
recognized gains and losses on investment securities. A
Investments net loss of $288,957 was recognized in 1999. Net gains of
$23,290,926 and $17,313,454 were recognized in 1998 and
1997 respectively. Gross recognized gains and gross
recognized losses were $13,691 and $302,648, respectively
for 1999, $23,290,926 and $ 0, respectively for 1998, and
$17,558,454 and $245,000, respectively for 1997.
Recognized gains and losses are from sales of investments
and from recognized losses of $299,215 and $245,000 in
1999 and 1997 respectively, on securities whose decline in
value was deemed to be other than temporary.
At June 30, 1999 investments were as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------------
Available-for-sale securities
Equity securities $2,383,766 $6,080,695 $8,464,461
Other equity securities (1) $2,006,002 $2,006,002
At June 30, 1998 investments were as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------
Available-for-sale securities
Corporate debt securities(2)
Due after two but within
seven years $ 633,426 $ $ (4,745) $ 628,681
Equity securities 2,438,350 14,307,346 (47,578) 16,698,118
---------- ----------- -------- -----------
$3,071,776 $14,307,346 $(52,323) $17,326,799
Other equity securities(1) $2,006,002 $ 2,006,002
-------------------------------------
(1) The Company holds shares and warrants in Chromagen,
Inc. which are classified as "other equities" and
valued at cost. The shares and warrants are not
publicly traded.
(2) Fixed maturity investments having an aggregate cost of
$250,316 at June 30, 1998 were 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.
Fair values for investments available-for-sale are
based on quoted market prices, where available, at the
reporting date. Other equity securities are carried at
cost. No quoted market prices are available for these
securities.
12
15
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5: The Company occupies certain facilities and operates
a portion of its transportation equipment under long-term
Leases leases. Future minimum rental payments required under
non-cancelable operating leases having lease terms in
excess of one year are:
For the years ending June 30,
------------------------------------------------------------------------
2000 $1,630,396
2001 1,179,019
2002 952,512
2003 771,782
2004 736,950
Thereafter 1,772,768
----------
Total minimum lease payments $7,043,427
==========
Total rental expense under operating leases was
$1,186,796 in 1999, $691,183 in 1998, and $729,196 in
1997.
- --------------------------------------------------------------------------------
NOTE 6: In the normal course of business, the Company and
certain of its subsidiaries are defendants in various
Contingent lawsuits. After consultation with counsel, management is
Liabilities of the opinion that these various lawsuits, individually
or in the aggregate, will not have a materially adverse
effect on the consolidated financial statements.
- --------------------------------------------------------------------------------
NOTE 7: The Company maintains retirement and pension plans
for certain eligible employees. The Company contributions
Retirement to the plans are based on matching voluntary employee
Plans contributions and on a profit sharing plan formula after
certain minimum earnings levels are reached by the
Company. For the years ended June 30, 1999, 1998, and 1997
the defined contribution plan expenses were $180,138,
$282,157, and $541,716, respectively.
The Company has two Defined Benefit Pension Plans
which are fully funded. The amounts involved are not
significant to the Company's operations.
- --------------------------------------------------------------------------------
NOTE 8: 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.
13
16
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
Stock option activity under this plan was as follows:
Weighted Weighted
Average Average
Number Exercise Options Exercise
of Shares Price Exercisable Price
--------------------------------------------------------------------------------------
Outstanding at June 30, 1996 25,000 30.03 9,250 29.86
Exercised (7,000) 31.03
-----------
Outstanding at June 30, 1997 18,000 29.64 6,750 28.50
Outstanding at June 30, 1998 18,000 29.64 11,250 28.96
Exercised (900) 25.38
-----------
Outstanding at June 30, 1999 17,100 29.87 14,850 29.38
At June 30, 1999 option prices for shares under
option ranged from $25.37 to $35.20 per share and the
weighted average remaining contractual life of options
outstanding is one year. There are 25,000 shares available
for future grant.
No expense has been charged to income relating to
stock options. If the fair value method of accounting for
stock options prescribed by SFAS No. 123 had been used,
the expense relating to the stock options would have been
$13,673 for each of the fiscal years ended in 1999, 1998
and 1997. Pro forma net (loss) or income would have been
($856,228) in 1999, $16,050,124 in 1998 and $18,979,100 in
1997. Pro forma (loss) or diluted earnings per share in
1999, 1998 and 1997 would have been ($0.77), $13.97 and
$15.93, respectively, rather than the ($0.75), $13.98, and
$15.94 reported (loss) or earnings per share.
The fair value of options that were granted in
January 1996, was estimated using the Black-Scholes option
pricing model with the following assumptions:
Risk-free interest
rate 6.2% Dividend yield 1.5%
Stock price
Expected life 5 years volatility 10.9%
- --------------------------------------------------------------------------------
NOTE 9: The components of the provision for income taxes are:
Income
Taxes
For the years ended June 30, 1999 1998 1997
-----------------------------------------------------------------------------
Current:
Federal $ 99,839 $ 8,035,000 $ 7,795,000
State 85,161 1,110,000 1,200,000
--------- ----------- -----------
185,000 9,145,000 8,995,000
--------- ----------- -----------
Deferred:
Federal (404,839) 915,000 (1,745,000)
State (30,161) 120,000 (450,000)
--------- ----------- -----------
(435,000) 1,035,000 (2,195,000)
--------- ----------- -----------
Total provision $(250,000) $10,180,000 $ 6,800,000
========= =========== ===========
14
17
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
Reconciliation of the provision for income taxes
computed at the U.S. Federal statutory income tax rate to
the reported provision is:
For the years ended June 30, 1999 1998 1997
-----------------------------------------------------------------------------
U.S. Federal statutory income tax $(371,469) $ 9,185,329 $ 9,027,471
State income taxes, net of Federal tax
benefit 36,300 775,000 606,000
Taxes on income not recognized on
books 88,609 173,250 73,038
Reduction of deferred tax asset
valuation allowance (2,884,342)
Other (3,440) 46,421 (22,167)
--------- ----------- -----------
Total provision $(250,000) $10,180,000 $ 6,800,000
========= =========== ===========
The major components of the deferred tax assets and
liabilities are:
June 30, 1999 1998
---------------------------------------------------------------------------
Depreciation $(1,505,000) $ (326,944)
Income not currently taxable (470,000) (41,706)
Unrealized gain on investments (1,675,000) (4,875,000)
Other (108,160) (181,350)
----------- -----------
Total deferred income tax liabilities (3,758,160) (5,425,000)
----------- -----------
Expenses not currently deductible 2,500,000 2,110,000
Recognized losses not currently deductible 885,000 380,000
----------- -----------
Total deferred income tax assets 3,385,000 2,490,000
----------- -----------
Net deferred income tax liability $ (373,160) $(2,935,000)
=========== ===========
In addition to the recognized deferred income tax
benefits and liabilities, an additional unrecognized
income tax benefit of approximately $4.5 million is
available to the Company in subsequent operating periods
resulting from tax deductions for goodwill amortization of
approximately $13.0 million. In subsequent periods, the
income tax benefit realized from goodwill amortization
will first reduce the carrying value of collection routes
and contracts until fully amortized, and secondly will
reduce income tax expense. The deduction for goodwill
amortization will be available ratably over the next
twelve years.
15
18
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 10: Other comprehensive (loss) income consists of:
Other
Comprehensive
Income
Amount Income Tax Amount
Before (Expense) Net of
Taxes Benefit Taxes
-----------------------------------------------------------------------------
For the year ended June 30,1999
Unrealized holding losses arising
during the year $ (8,463,284) $ 3,301,135 $ (5,162,149)
Less: Reclassification adjustment 288,957 (101,135) 187,822
------------ ------------ ------------
Other comprehensive loss $ (8,174,327) $ 3,200,000 $ (4,974,327)
For the year ended June 30,1998
Unrealized holding gains arising
during the year $ 27,423,464 $(11,321,061) $ 16,102,403
Less: Reclassification adjustment (23,290,926) 8,571,061 (14,719,865)
------------ ------------ ------------
Other comprehensive income $ 4,132,538 $ (2,750,000) $ 1,382,538
For the year ended June 30,1997
Unrealized holding gains arising
during the year $ 9,537,931 $ (4,966,351) $ 4,571,580
Less: Reclassification adjustment (17,313,454) 6,371,351 (10,942,103)
------------ ------------ ------------
Other comprehensive loss $ (7,775,523) $ 1,405,000 $ (6,370,523)
- --------------------------------------------------------------------------------
NOTE 11: The Company's current operations are conducted
through two primary business segments.
Business
Segment Waste Material Recycling
Data The Company owns and operates 15 plants nationwide 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 one plant 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.
For the years ended June 30, 1999 1998 1997
-----------------------------------------------------------------------------
Operating Sales and Revenues:
Waste Material Recycling $25,995,604 $20,011,672 $25,107,197
Vocational School Group 4,817,939 4,597,105 4,529,044
Other 231,529 436,495 637,672
----------- ----------- -----------
$31,045,072 $25,045,272 $30,273,913
=========== =========== ===========
16
19
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
For the years ended June 30, 1999 1998 1997
-----------------------------------------------------------------------------
Operating (Loss) Income before
Income Taxes:
Waste Material Recycling $(2,687,279) $ 2,327,681 $ 6,653,776
Vocational School Group 53,635 (52,893) 85,693
Other (97,586) 263,780 534,033
----------- ----------- -----------
(2,731,230) 2,538,568 7,273,502
Corporate expenses (1,490,506) (1,500,227) (1,560,435)
Investment and other income 3,129,181 25,205,456 20,079,706
----------- ----------- -----------
(Loss) income before income taxes $(1,092,555) $26,243,797 $25,792,773
=========== =========== ===========
One customer represented 19%, 19% and 17% of product
revenues for the Waste Material Recycling segment for the
years ended 1999, 1998 and 1997 respectively. The loss of
this customer or any other single customer would not have
a material adverse effect on the Company since the
commodity product is readily marketable.
Identifiable Assets:
Waste Material Recycling $38,197,182 $10,740,401 $10,630,867
Vocational School Group 1,698,573 1,774,759 1,722,024
Other 506,849 605,789 140,597
Corporate 32,054,402 65,259,165 48,990,545
----------- ----------- -----------
$72,457,006 $78,380,114 $61,484,033
=========== =========== ===========
Depreciation and Amortization:
Waste Material Recycling $ 2,739,645 $ 1,781,467 $ 1,866,195
Vocational School Group 208,055 181,141 181,501
Other 135,564 50,345 53,165
Corporate 10,934 11,769 12,098
----------- ----------- -----------
$ 3,094,198 $ 2,024,722 $ 2,112,959
=========== =========== ===========
Capital Expenditures:
Waste Material Recycling $ 3,889,838 $ 1,872,305 $ 1,087,597
Vocational School Group 225,033 72,433 88,112
Other 36,624 558,997 121,431
Corporate 4,339 145,743 1,795
----------- ----------- -----------
$ 4,155,834 $ 2,649,478 $ 1,298,935
=========== =========== ===========
17
20
Corporate Information
- --------------------------
Directors Officers Independent Auditors
Robert Henigson Meyer Luskin Deloitte & Touche LLP
Investor Chairman, President and Los Angeles, California
Chief Executive Officer
Meyer Luskin Transfer Agent and Registrar
John J. Crowley American Securities Transfer
William H. Mannon Vice President and Chief & Trust, Inc.
Retired Officer of Financial Officer Denver, Colorado
Scope Industries
Eleanor R. Smith Securities Listed
Franklin Redlich Secretary and Controller American Stock Exchange
Retired
1999
[SCOPE LOGO]
233 WILSHIRE BOULEVARD, SUITE 310
SANTA MONICA, CA 90401