-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UYWus0b54AGk1QLanPBmOfVqCExxH8UgMUcofKdD2bmTdqP5ypH8Z4VCx7yFP2D4 TIaEpHnB4L4xavOUaqbfTA== 0000950148-95-000621.txt : 19951002 0000950148-95-000621.hdr.sgml : 19951002 ACCESSION NUMBER: 0000950148-95-000621 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950926 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOPE INDUSTRIES CENTRAL INDEX KEY: 0000087864 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 951240976 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03552 FILM NUMBER: 95576121 BUSINESS ADDRESS: STREET 1: 233 WILSHIRE BLVD STE 310 CITY: SANTA MONICA STATE: CA ZIP: 90401 BUSINESS PHONE: 3104581574 MAIL ADDRESS: STREET 1: 233 WILSHIRE BLVD STE 310 CITY: SANTA MONICA STATE: CA ZIP: 90401 10-K405 1 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended Commission File June 30, 1995 Number 1-3552 SCOPE INDUSTRIES ---------------- (Exact name of Registrant as specified in its charter) California 95-1240976 - ------------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 233 Wilshire Blvd., Ste.310, Santa Monica, CA 90401 - --------------------------------------------- ----- (Address of principal executive office) (ZIP Code) Registrant's telephone number, including area code (310) 458-1574 --------------
Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------------ ------------------------ Common Stock, No Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None ---------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.(X) --- The aggregate market value of the voting stock of Registrant held by nonaffiliates of Registrant on August 31, 1995 computed by reference to the closing sales price of such shares on such date was $15,525,885. At August 31, 1995, 1,244,565 shares of the Registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into which document incorporated ------------------- Document - -------- Annual Report to Shareowners for the fiscal year ended June 30, 1995 Parts I, II, and IV Proxy Statement for the Annual Meeting of Shareholders to be held October 24, 1995 Parts III and IV
2 TABLE OF CONTENTS FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 1995 SCOPE INDUSTRIES
PART I PAGE Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 6 Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 8. Financial Statements and Supplementary Data 6 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 7 PART III Item 10. Directors and Executive Officers of the Registrant 7 Item 11. Executive Compensation 7 Item 12. Security Ownership of Certain Beneficial Owners and Management 7 Item 13. Certain Relationships and Related Transactions 7 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 8 Signatures 10
2 3 PART I ITEM 1. BUSINESS General The Registrant was organized in 1938 and incorporated in the State of California on February 8, 1938. The term "Registrant" for purposes of this Item 1 includes the subsidiaries of the Registrant, unless the content discloses otherwise. The Registrant and its subsidiaries operate principally in two business segments. Waste Material Recycling Segment In this business, the Registrant owns and operates plants under the name of Dext Company in Los Angeles and San Jose, California; Baltimore, Maryland; Chicago, Illinois; Dallas, Texas; and Denver, Colorado. It also operates depots in various states for the collection and transshipment of waste bakery materials to its processing plants. The Registrant's principal customers are dairies, feed lots, pet food manufacturers and poultry farms. The Registrant also owns and operates a plant in Vernon, California in which bakery waste material is processed and converted into edible bread crumbs. The principal customers are pre-packaged and restaurant supply food processors. This business depends upon the Registrant's ability to secure surplus and waste material, which it does under contract with bakeries and snack food manufacturers. The competition for securing the waste and surplus material is widespread and intensive. This segment contributed between 81% and 77% of the sales and revenues of the Registrant for 1995, 1994 and 1993. The Waste Material Recycling segment operated profitably for fiscal 1995 and 1994. During 1993, the Waste Material Recycling segment operated at a loss. Capital expenditures for the Waste Material Recycling segment were $1,541,817 for fiscal 1995. Capital spending for this segment represented 70% of the Registrant's total capital expenditures for 1995 and over 85% of the 1994 and 1993 capital expenditures. Capital expenditures for expansion and modernization of existing bakery waste material recycling operations are expected to continue. Cash flows from operations and liquid instrument holdings are expected to be adequate to meet fiscal 1996 capital expenditure needs. The selling price of recycled bakery waste material is affected by fluctuating commodity prices, particularly corn. Feed commodity prices and the Registrant's average unit selling prices were lower in fiscal 1995 than they were in the prior year. Higher volumes and lower unit costs had an offsetting effect on the lower prices. As a result, profits were improved. 3 4 ITEM 1. BUSINESS (CONTINUED) Vocational School Group Segment Scope Beauty Enterprises, Inc., doing business as Marinello Schools of Beauty is comprised of 13 beauty schools in which cosmetology and manicuring are taught. The schools are located in southern California and Nevada. In its vocational beauty schools, the Registrant enrolls students who pay a tuition. Vocational programs and Federal grants and loan programs are also utilized for the students' tuition. In addition, members of the public patronize the schools for hair styling and other cosmetological services which are performed by students. There usually are competitive schools available to the public near each of the Registrant's schools. This segment has contributed between 17% and 20% of the total revenues for the past three years. The segment incurred operating losses of $629,144, $604,407 and $105,839 for the fiscal years 1995, 1994 and 1993 respectively. Other Business The Registrant owns various oil and gas royalty and working interests. Oil and gas revenues represented 1.5%, 2.2% and 2.5% of total sales and revenues in 1995, 1994 and 1993, respectively. The Registrant owns various real estate, including 207 acres of land in Somis, Ventura County, California purchased in 1979. Various options are being considered for the use or sale of the land. The Registrant also owns and manages various marketable securities, U.S. Treasury Bills and other short-term investments. Investment income consists primarily of dividends, interest income and gains or losses on marketable securities. At June 30, 1995, the Registrant held $2,290,000 par value in U.S. Treasury Bills maturing in less than one year. In fiscal 1995, interest income from Treasury obligations amounted to $87,295. Net gains from sale of securities of $132,698 and $1,619,311 were recognized in 1995 and 1994 respectively. A net loss of $9,828,379 was recognized in 1993. The gains and losses were from sales of marketable securities and from recognized losses on securities whose decline in value was deemed to be other than temporary of $160,000 and $10,143,784 in 1994 and 1993, respectively. Impact of Environmental Protection Measures Certain of the Registrant's activities are affected by federal, state and/or local air and water pollution control regulations. Compliance with these regulations has required the purchase and installation of pollution abatement equipment and adjustment of production procedures. The Registrant has followed a policy of regular expenditures to assure compliance with such regulations. Installation of air pollution control equipment at the Baltimore recycling facility will require an expenditure of $800,000 in fiscal 1996. 4 5 ITEM 1. BUSINESS (CONTINUED) Employees The Registrant (including its subsidiaries) employs approximately 198 persons. ITEM 2. PROPERTIES Principal properties owned by the Registrant are listed below:
Principal Operation Location Function --------- -------- -------- Waste Material Los Angeles, CA Processing Plant Recycling San Jose, CA Processing Plant Vernon, CA Processing Plant Lodi, CA Collection Depot Chicago, IL Processing Plant Denver, CO Processing Plant Baltimore, MD Processing Plant Secaucus, NJ Collection Depot Dallas, TX Processing Plant Unimproved Land Somis, CA Riverside, CA
Twelve beauty schools in southern California and one school in Nevada operate in leased properties. One collection depot for the Waste Material Recycling segment and the corporate administrative office operate in leased premises. No lease has a material effect on the Registrant's operations. For additional lease information, Note 4 to the Financial Statements in the 1995 Annual Report to Shareowners, Page 12, is hereby incorporated by reference. ITEM 3. LEGAL PROCEEDINGS A former subsidiary of the Registrant has been designated as a potentially responsible party by the Environmental Protection Agency with respect to the cleanup of hazardous wastes at a site in southern California. During 1993, settlements, claim dismissals and settlement discussions on several claims, where charges had been made to earnings in prior years, indicated that a reduction of $1,100,000 in amounts previously provided was appropriate. There are no other material pending legal proceedings against the Registrant, any of its subsidiaries or any of their property other than routine litigation incidental to the business, as noted in the 1995 Annual Report to Shareowners, Note 5 on page 13 which is hereby incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended June 30, 1995, no matters were submitted to a vote of the Shareowners of the Registrant, either through the solicitation of proxies, or otherwise. 5 6 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Reference is made to the information with respect to the principal market on which the Registrant's common stock is being traded, and the high and low sales prices for each quarterly period for the last two fiscal years set forth on Page 3 and inside back cover of the Registrant's 1995 Annual Report to Shareowners and, by reference, such information is incorporated herein. The number of holders of record of the Registrant's common stock as of August 31, 1995, based on a listing of the Registrant's Transfer Agent, was 118. Reference is made to the information regarding the frequency and amount of dividends declared during the past two years with respect to the Registrant's common stock set forth on Page 3 of the Registrant's 1995 Annual Report to Shareowners and, by reference, such information is incorporated herein. ITEM 6. SELECTED FINANCIAL DATA Reference is made to the financial data with respect to the Registrant set forth on page 2 of the Registrant's 1995 Annual Report to shareowners and, by reference, such financial data is incorporated herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 4 and 5 of the Registrant's 1995 Annual Report to Shareowners and, by reference, such information is incorporated herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Registrant and its subsidiaries included in its Annual Report to Shareowners for the year ended June 30, 1995 are incorporated herein by reference: Consolidated Balance Sheets - June 30, 1995 and 1994 Consolidated Statements of Operations - Years ended June 30, 1995, 1994 and 1993 Consolidated Statements of Cash Flows - Years ended June 30, 1995, 1994 and 1993 Consolidated Statements of Shareowners' Equity - Years ended June 30, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Unaudited Quarterly Financial Data shown on Page 3 of the Registrant's 1995 Annual Report to Shareowners for the years ended June 30, 1995 and 1994 is incorporated herein by reference. 6 7 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Registrant did not change accountants and there were no disagreements on any matters involving accounting principles or financial statement disclosures during the two-year period ended June 30, 1995. PART III Reference is made to the definitive Proxy Statement pursuant to Regulation 14A, which involves the election of directors at the Annual Meeting of Shareowners to be held on October 24, 1995, which was filed with the Securities and Exchange Commission on September 8, 1995 and, by such reference, said Proxy Statement is incorporated herein in response to the information called for by Part III (ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11. EXECUTIVE COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) The following additional information is furnished in response to Item 10: Executive Officers of the Registrant The name, age, position and business experience of each of the executive officers of the Registrant as of June 30, 1995 are listed below:
Business Experience Name, Age and Position During Past Five Years - ---------------------- ---------------------- Meyer Luskin, 69 Chairman, President and Chief Chairman of the Board Executive Officer since 1961; President and Chief Executive responsible primarily for the Officer formation of overall corporate policy and operations of the main business segments. F. Duane Turney, 48 Chief Operating Officer of Vocational President of Subsidiary School Group segment since July 1991; (Scope Beauty Enterprises, Inc.) responsible for operations of beauty schools. From October 1990 until June 1991, Mr. Turney was a consultant. From January 1986 through September 1990 he was President and Chief Operating Officer of Two Bucks Trading Company, Inc., a chain of retail specialty stores. John J. Crowley, 62 Vice President-Finance and Chief Vice President-Finance and Financial Officer since 1987; Chief Financial Officer responsible primarily for the overall corporate accounting and financial policies and procedures and a variety of treasury functions. Mr. Crowley is a Certified Public Accountant.
7 8 Eleanor R. Smith, 63 Controller since 1974, Assistant Secretary and Controller Secretary, 1978-1986, Secretary and Chief Accounting Officer since 1986; responsible for financial reporting and record keeping, internal controls, systems and procedures, as well as corporate secretarial functions.
Officers are elected by the Board of Directors and serve for a one-year period and until their successors are elected. No officers have employment contracts with the Registrant. There are no family relationships among any of the Registrant's directors and officers. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) The following financial statements of the Registrant, together with the Independent Auditors' Report, included as part of the Registrant's 1995 Annual Report to Share- owners, on Pages 6 through 16 and the inside backcover thereof, are incorporated by reference and filed herewith as part of Item 8 of this report: Independent Auditors' Report Consolidated Balance Sheets at June 30, 1995 and 1994 Consolidated Statements of Operations for the years ended June 30, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1994 and 1993 Consolidated Statements of Shareowners' Equity for the years ended June 30, 1995, 1994 and 1993 Notes to Consolidated Financial Statements (2) Indepedent Auditors' Report on Schedule (3) Financial Statement Schedule Schedule II: Valuation and Qualifying Accounts All other schedules have been omitted as they are not applicable, not material or the required information is given in the financial statements or notes thereto. (b) No reports on Form 8-K were filed by the Registrant for the period covered by this report. (c) Exhibits: (3) The Bylaws of the Registrant, as amended; and the restated Articles of Incorporation of the Registrant filed as Exhibits (3.1) and (3.2) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 are incorporated herein by reference. 8 9 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (10) Material Contracts: 1992 Stock Option Plan, reference is made to Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-47053), and by reference such information is incorporated herein. (13) Annual Report to Shareowners (21) Subsidiaries of Registrant (23) Proxy Statement for the Annual Meeting of Shareowners to be held on October 24, 1995 which was filed with the Securities and Exchange Commission on September 8, 1995 and by reference such information is incorporated herein. (24) Independent Auditors' Consent (27) Financial Data Schedule 9 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOPE INDUSTRIES BY s/b John J. Crowley 09-25-95 -------------------------- ------------ John J. Crowley Date Vice President-Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date s/b Meyer Luskin Chairman of the Board 09-25-95 - -------------------------- President, Chief Executive --------------- Meyer Luskin Officer and Director s/b John J. Crowley Vice President-Finance 09-25-95 - -------------------------- Chief Financial Officer --------------- John J. Crowley (Principal Financial Officer) s/b Eleanor R. Smith Secretary and Controller 09-25-95 - -------------------------- (Principal Accounting Officer) -------------- Eleanor R. Smith s/b Richard L. Fruin, Jr. Director 09-25-95 - -------------------------- -------------- Richard L. Fruin, Jr. s/b William H. Mannon Director 09-25-95 - -------------------------- -------------- William H. Mannon s/b Franklin Redlich Director 09-25-95 - --------------------------- -------------- Franklin Redlich s/b Paul D. Saltman, Ph.D. Director 09-25-95 - --------------------------- --------------- Paul D. Saltman, Ph.D.
10 11 DELOITTE & TOUCHE LLP 1000 WILSHIRE BLVD. 12TH FLOOR LOS ANGELES, CA 90017 (213) 688-0800 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareowners Scope Industries Santa Monica, California We have audited the consolidated financial statements of Scope Industries and subsidiaries as of June 30, 1995 and 1994, and for each of the three years in the period ended June 30, 1995, and have issued our report thereon dated August 23, 1995, such financial statements and report are included in your 1995 Annual Report to Shareowners and are incorporated herein by reference. Our audits also included the financial statement schedule of Scope Industries and subsidiaries, listed in Item 14(a)(3). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. s/b Deloitte & Touche LLP Los Angeles, California August 23, 1995 11 12 SCOPE INDUSTRIES AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS JUNE 30, 1995
Additions Balance Charged at (Credited) Charged Balance Beginning to Costs to Other Deductions at End Description of Period Expenses Accounts (a) of Period ----------- --------- -------- -------- ---------- --------- Year Ended June 30, 1995: Allowance for doubtful accounts - accounts receivable $324,671 $118,459 $0 $144,296 $298,834 Valuation Allowances - notes receivable $700,000 $0 $0 $0 $700,000 Year Ended June 30, 1994: Allowance for doubtful accounts - accounts receivable $235,296 $159,598 $0 $70,223 $324,671 Valuation allowances - notes receivable $450,000 $250,000 $0 $0 $700,000 Year Ended June 30, 1993: Allowance for doubtful accounts - $251,722 ($5,162) $0 $11,264 $235,296 accounts receivable Valuation allowances - notes receivable $0 $450,000 $0 $0 $450,000
(a) Uncollectible accounts charged against allowance, net of bad debt recoveries. 12 EX-13 2 ANNUAL REPORT TO SHAREOWNERS 1 SCOPE INDUSTRIES 1995 58TH ANNUAL REPORT LOGO 2 Financial Highlights - --------------------
For the years ended June 30, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Operating sales and revenues $22,974,144 $23,332,933 $ 20,720,898 Investment and other income (loss) 1,018,495 2,055,702 (9,086,521) Net income (loss) $ 1,441,093 $ 1,564,570 $(11,409,393) Net income (loss) per share* $ 1.15 $ 1.24 $ (8.77) Equity per share at end of year $ 32.38 $ 24.73 $ 23.81 Shares outstanding at end of year 1,244,865 1,261,436 1,274,961 * Based on weighted average number of shares outstanding.
3 President's Report - ------------------ - -------------------------------------------------------------------------------- To Our Shareholders: Our earnings per share this 1995 fiscal year as compared to last year are, we believe, a good example of that old adage "things ain't what they seem to be". That is, for 1994 we reported earnings per share of $1.24 and this past year our earnings per share were $1.15, yet we believe that this year was essentially a better one for the Company. Our reasoning for the theme we're presenting, and if you don't care for the adage above you can choose, "you can't always believe what you see" -- is as follows. The previous year -- 1994 -- net income was $1,564,570; however, a component of net income was "investment and other income" which was $2,055,702, thus all the operating groups had a combined loss of about a half million dollars. On the other hand, in 1995 our "investment and other income" was $1,018,495 and net income was $1,441,093, so the operating groups had net income of over $400,000 and the positive difference between 1994 and 1995 for our operating groups was approximately $900,000. We believe that the substantial improvement by our operating companies is a much healthier and more meaningful result than the conditions in 1994. Furthermore, in 1995 we did have significant gains in the market value of our investments -- $2,777,290 -- but since they were not recognized (we didn't sell the securities) we didn't report that gain in our earnings. Nevertheless, such increases add to our true net worth. Another important development in 1995 for the Waste Material Recycling Group was the increase in tonnage of about 6% without increasing costs. Thus, despite an overall selling price decrease we maintained revenues while sharply increasing profits. This development enhances our competitive stance and bodes well as feed prices improve. Last but probably first in long term significance to our Waste Material Recycling Group -- the Dext Companies -- was the realignment and strengthening of our management structure. This change was caused by something many organizations experience and all dread -- the discovery that a respected and most trusted key executive has been involved in fraud and defalcation. We terminated for cause the chief operating officer of the Dext Companies at the end of the first fiscal quarter, and our insurer accepted our claim of defalcation by the discharged officer, and has reimbursed us per our insurance policy. To recover for other losses caused us by him, we have commenced a civil action now pending. The time and money expended in this situation has been significant, but since his termination we believe that management's more concentrated focus, improved communication, and heightened morale are contributing to a more cost effective operation. Consequently, our improved operations being coupled with higher animal feed prices, projects a significantly better profit picture for 1996. In our Vocational School Group -- Marinello Schools of Beauty -- we instituted a major policy change in our enrollment program and continued with school site relocations and facility upgrading. The major changes in our enrollment policy, the closing of some schools, and the costs of school relocations were the principal causes of the Vocational School Group's substantial loss in 1995. However, now we are realizing the benefits of our new enrollment policy, the better school locations, and the improved morale of staff and students. We expect a very substantial improvement in earnings from Marinello for this new year. We wish to thank our customers and vendors for their business and services, our employees for their efforts and dedication, and our shareholders for their trust and support. Respectfully yours, /s/ MEYER LUSKIN - ------------------------------------- Meyer Luskin Chairman of the Board President and Chief Executive Officer 1 4 Five-Year Review -- Selected Financial Data - -------------------------------------------
For the years ended June 30, 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------- OPERATIONS Operating Sales and Revenues $22,974,144 $23,332,933 $ 20,720,898 $20,766,909 $15,998,796 Operating Cost and Expenses: Cost of sales and operating expenses 16,261,918 16,556,054 17,099,128 16,897,583 13,389,672 Depreciation and amortization 2,234,177 2,250,183 2,338,019 2,548,140 2,393,379 General and administrative 3,905,451 4,982,828 5,256,623 4,326,150 2,962,392 Changes in provision for litigation (1,100,000) (205,000) (1,763,211) ----------- ----------- ------------ ----------- ----------- 22,401,546 23,789,065 23,593,770 23,566,873 16,982,232 ----------- ----------- ------------ ----------- ----------- 572,598 (456,132) (2,872,872) (2,799,964) (983,436) Other Income (Expense): Investment and other income (loss) 1,023,348 2,064,662 (9,081,021) 1,483,490 2,315,319 Interest credit (expense) (4,853) (8,960) (5,500) 88,254 315,990 ----------- ----------- ------------ ----------- ----------- Income (loss) before taxes 1,591,093 1,599,570 (11,959,393) (1,228,220) 1,647,873 Provision (benefit) for income taxes 150,000 35,000 (550,000) (550,000) 50,000 ----------- ----------- ------------ ----------- ----------- Net income (loss) $ 1,441,093 $ 1,564,570 $(11,409,393) $ (678,220) $ 1,597,873 ----------- ----------- ------------ ----------- ----------- Net income (loss) per share $ 1.15 $ 1.24 $ (8.77) $ (0.51) $ 1.19 ----------- ----------- ------------ ----------- ----------- Weighted average number of shares outstanding 1,255,101 1,266,105 1,301,592 1,329,015 1,344,692 ----------- ----------- ------------ ----------- ----------- FINANCIAL PERFORMANCE Net income (loss) as a percent of revenues 6.27% 6.71% -55.06% -3.27% 9.99% Cash dividend per share $ 0.35 $ 0.30 $ 0.60 $ 0.60 $ 0.60 Capital expenditures $ 2,208,936 $ 2,630,917 $ 2,057,424 $ 2,399,166 $ 2,976,452 FINANCIAL POSITION Total assets $43,068,278 $34,218,320 $ 33,245,959 $44,310,193 $49,833,049 Shareowners' equity $40,303,613 $31,194,624 $ 30,359,528 $40,297,847 $45,885,513 Equity per share at end of year $ 32.38 $ 24.73 $ 23.81 $ 30.62 $ 34.28 Shares outstanding at end of year 1,244,865 1,261,436 1,274,961 1,315,961 1,338,561
2 5 Unaudited Quarterly Financial Data - ----------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter Year - --------------------------------------------------------------------------------------------------------- 1995: Operating sales and revenues $5,818,424 $5,735,985 $5,536,479 $5,883,256 $22,974,144 Gross profit 1,245,938 1,119,339 928,413 1,299,341 4,593,031 Net income $ 299,370 $ 241,378 $ 284,821 $ 615,524 $ 1,441,093 ---------- ---------- ---------- ---------- ----------- Net income per share* $ 0.24 $ 0.19 $ 0.23 $ 0.49 $ 1.15 ---------- ---------- ---------- ---------- ----------- 1994: Operating sales and revenues $5,818,026 $5,737,262 $5,719,172 $6,058,473 $23,332,933 Gross profit 1,046,847 1,065,592 1,171,484 1,358,185 4,642,108 Net income (loss) $ (184,876) $ 668,187 $ 208,948 $ 872,311 $ 1,564,570 ---------- ---------- ---------- ---------- ----------- Net income (loss) per share* $ (0.15) $ 0.53 $ 0.17 $ 0.69 $ 1.24 ---------- ---------- ---------- ---------- ----------- * Per share amounts are based upon the weighted average number of shares outstanding.
Market Price Range - ------------------ Scope Industries Common Stock
1995 1994 ----------------- ----------------- High Low High Low - ------------------------------------------------------------------------------------------------------ 1st Quarter $26.00 $25.13 $27.25 $24.75 2nd Quarter 25.63 23.38 25.13 24.00 3rd Quarter 24.88 23.13 26.38 24.50 4th Quarter 25.13 23.38 26.25 25.50
Cash dividends of 35c and 30c per share were paid during the years ended June 30, 1995 and 1994 respectively. There were 118 shareowners of record of common stock at August 21, 1995. 3 6 Management's Discussion and Analysis of Operations and Financial Condition - --------------------------------------- - -------------------------------------------------------------------------------- Operating Results -- 1995 compared with 1994 Revenues during fiscal 1995 were 1.5% lower than last year. Both the Waste Material Recycling and the Vocational School operations experienced a small decrease in their revenues from those reported last year. In both 1995 and 1994 Waste Material Recycling represented about 81% of total revenues and Vocational Schools about 17%. Tonnage volume for Waste Material Recycling increased 5.9% over last year and is the fourth consecutive year of increased tonnage volume for this business segment. Average unit prices for the Dried Bakery Product sold during the year were 6.6% below last year's average prices. Competing commodity prices were weaker this year than last and dictated the lower prices received for the tonnage sold. The tonnage increase was offset by the lower average price received. In the Vocational School Group, revenues were lower than last year by 3.5%. During the year, two school locations were closed and several unprofitable school district programs were dropped. By year end, the reduction in student population caused by these changes had been replaced by increased enrollments in the remaining thirteen school locations. Production costs for the Waste Material Recycling operations remained constant for the two years despite the increased tonnage in 1995. Vocational School operating costs were 7.0% lower in the current year than in the prior year, due in part to the closing of two locations. As the leases at three older locations expired during the 1995 year and another expired during the previous year, modernized and improved facilities were created in new school locations. Two other school locations are scheduled to move into new facilities next year. General and Administrative costs declined 21.6% from last year. Reduced legal expense was the major factor in achieving the lower costs. Investment and other income was $1,018,495 in 1995 and was $2,055,702 in 1994. The recognized gains from sale of investments were $1,486,613 lower in 1995 than in 1994. However, unrecognized gains which are not reflected in earnings, increased by $2,777,290. Federal tax net operating loss carryforwards were utilized to minimize current tax obligations in both years. Net income for 1995 was $1,441,093 or $1.15 per share. For 1994 net income was $1,564,570 or $1.24 per share. Operating Results -- 1994 compared with 1993 Revenues during fiscal 1994 were 12.6% above those for 1993. The increased revenues were primarily a result of higher sales prices for recycled bakery products. Competing commodity prices rose during 1994 and allowed recycled bakery product to command a higher unit price. Unit prices for recycled bakery product in 1994 were 13.0% above the average prices for the year before. Tonnage of recycled bakery product sold was 2.5% above the prior year's volume. As a result, 1994 revenues for that business segment were 16.7% above 1993 revenues. Vocational School Group revenues for the 1994 fiscal year were 1% below 1993 revenues. Student enrollment counts during fiscal 1994 were above the 1993 level but more of the students attended on a part time basis. Production costs for the bakery recycling operations in 1994 were 5.9% lower than in the prior year. Bulk handling of raw materials provided efficiencies at collection points and other transportation and production efficiencies contributed to the overall lower costs for the Waste Material Recycling segment. Operating costs in the Vocational Schools Group increased 8.8% over the prior year's level. Added costs were incurred for advertising and for instructional quality improvement. General and Administrative costs were 5.2% lower in 1994 compared to the year before as some of the burdensome legal costs the Company had incurred over the past few years began to abate. The reduced legal costs were partially offset by a higher provision for doubtful accounts in 1994. Net gains from the sales of investments and redemptions of bonds held were $1,779,311 in 1994 compared to $315,405 in 1993. These gains were reduced by losses of $160,000 and $10,143,784 for each year, respectively, recognized on certain securities due to declines in value which were deemed to be "other than temporary". Lone Star Industries, Inc. and Mesa, Inc. holdings accounted for nearly all of the 1993 recognized losses. The net investment and other income or loss, including the recognized gains and losses on investments, was a gain of $2,055,702 in 1994 compared to a loss of $9,086,521 in 1993. A Federal 4 7 Management's Discussion and Analysis of Operations and Financial Condition -- Continued - ----------------------------------------------- - -------------------------------------------------------------------------------- tax net operating loss carryforward was utilized to minimize 1994 tax obligations. Net tax benefits of $550,000 were recognized for 1993. Net income for 1994 was $1,564,570 or earnings of $1.24 per share. For 1993 a net loss of $11,409,393 or a loss of $8.77 per share was reported. Capital Expenses/Liquidity The Company's capital expenditures were $2,208,936 in 1995, $2,630,917 in 1994 and $2,057,424 in 1993. Capital spending for the Waste Material Recycling segment represented 70% of the Company's total capital expenditures for 1995 and over 85% of the 1994 and 1993 capital expenditures. Trailer sized containers which compact the raw waste bakery product and make material collection handling and transportation more efficient have been an important method of controlling costs and establishing better long term relationships with raw material suppliers. These containers together with bulk handling transportation vehicles make up the largest share of the capital equipment purchases. The refurbishing of a major component of processing equipment at the Los Angeles recycling facility was completed during 1994. Installation of air pollution control equipment at the Baltimore recycling facility was begun in 1995 and is expected to be completed in early 1996. That project has been budgeted for capital expenditures of $800,000. Growth and expansion of our bakery recycling business is expected to continue. In 1994 and 1995, four of the beauty school facilities were moved to new locations and were completely furnished with new fixtures and attractive equipment. Within the next twelve months two other school locations are scheduled to be remodeled as the leases expire. Capital spending for these improvements has totaled nearly $800,000 thus far and another $375,000 is budgeted for fiscal 1996. Capital investments have been made without incurring any debt. The Company believes its cash flow from operations and liquid investment holdings will be sufficient to meet its capital expenditures and operating cash requirements in fiscal 1996. The Company's working capital was $3,526,061 at June 30, 1995 and was $5,192,642 at June 30, 1994. The current ratio was 2.3 at June 30, 1995 and was 2.7 a year earlier. Working capital in 1994 reflected a $2,500,000 note from Opto Sensors, Inc. as due currently but whose maturity has since been extended and is not classified as a current asset for 1995. The $1,650,000 note receivable from SiMETCO, Inc. for the loan made in 1992, which was in default, was exchanged for a note executed by Simcala, Inc., with a principal amount of $2,106,255. Simcala has become the successor to the business and the facilities formerly operated by SiMETCO. The Simcala note is collateralized. Interest payments are current and principal installments are scheduled to begin in 1997 and conclude in 2001. Shareowners' Equity At June 30, 1995, shareowners' equity reflects net unrealized holding gains on investments totaling $8,507,655 as a result of the adoption of a change in accounting for investments. Prior period financial statements have not been restated to reflect the change in accounting principle. The Company purchased and retired 16,571 shares (1.3%) of its common stock during the year at a cost of $400,670. Funds for the purchase of these shares were available from existing cash and from operating and investing cash flows. The Company does not contemplate raising capital by issuing additional common shares or by new borrowings during the ensuing year. This does not preclude, however, the consideration of opportunities that may present themselves in the future that could require the Company to seek additional capital. 5 8 Consolidated Statements of Operations - -------------------------------------
For the years ended June 30, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Operating Sales and Revenues: Sales $19,035,739 $19,252,752 $ 16,594,197 Vocational school revenues 3,938,405 4,080,181 4,126,701 ----------- ----------- ------------ 22,974,144 23,332,933 20,720,898 ----------- ----------- ------------ Operating Cost and Expenses: Cost of sales 12,745,613 12,773,147 13,622,289 Vocational school operating expenses 3,516,305 3,782,907 3,476,839 Depreciation and amortization 2,234,177 2,250,183 2,338,019 General and administrative 3,905,451 4,982,828 5,256,623 Changes in provision for litigation (Note 5) (1,100,000) ----------- ----------- ------------ 22,401,546 23,789,065 23,593,770 ----------- ----------- ------------ 572,598 (456,132) (2,872,872) Investment and other income (loss) (Note 3) 1,018,495 2,055,702 (9,086,521) ----------- ----------- ------------ Income (loss) before income taxes 1,591,093 1,599,570 (11,959,393) Provision (benefit) for income taxes (Note 8) 150,000 35,000 (550,000) ----------- ----------- ------------ Net Income (Loss) $ 1,441,093 $ 1,564,570 $(11,409,393) ----------- ----------- ------------ Net Income (Loss) Per Share $ 1.15 $ 1.24 $ (8.77) ----------- ----------- ------------ Weighted average number of shares outstanding 1,255,101 1,266,105 1,301,592
The accompanying notes are an integral part of these statements 6 9 Consolidated Balance Sheets - ---------------------------
June 30, 1995 1994 - --------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 242,794 $ 30,397 Treasury bills (par value $2,290,000 in 1995 and $2,500,000 in 1994) 2,258,883 2,481,535 Accounts and notes receivable, less allowance for doubtful accounts of $298,834 in 1995 and $324,671 in 1994 (Note 2) 2,256,766 4,586,228 Inventories 423,177 411,975 Prepaid expenses and other current assets (Note 3) 1,109,106 706,203 ----------- ----------- Total current assets 6,290,726 8,216,338 ----------- ----------- Notes Receivable (Note 2) 3,474,398 1,093,006 Property and Equipment: Machinery and equipment 21,162,104 22,362,097 Land, buildings and improvements 10,272,459 9,818,056 ----------- ----------- 31,434,563 32,180,153 Less accumulated depreciation and amortization 20,210,689 20,042,985 ----------- ----------- 11,223,874 12,137,168 ----------- ----------- Other Assets: Deferred charges and other assets (Note 8) 423,266 104,800 Investments (Note 3) 21,656,014 12,667,008 ----------- ----------- 22,079,280 12,771,808 ----------- ----------- $43,068,278 $34,218,320 ----------- ----------- LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Bank overdraft $ 61,746 $ 427,197 Accounts payable 899,372 1,034,695 Other accrued liabilities 1,196,004 1,124,502 Accrued payroll and related employee benefits 414,707 370,147 Income taxes payable 192,836 67,155 ----------- ----------- Total current liabilities 2,764,665 3,023,696 ----------- ----------- Commitments and Contingent Liabilities (Notes 4 & 5) Shareowners' Equity (Note 7): Common stock, no par value, 5,000,000 shares authorized; shares issued and outstanding: 1995 -- 1,244,865; 1994 -- 1,261,436 3,921,287 3,921,287 Retained earnings 27,874,671 27,273,337 Net unrealized gain on investments (Note 3) 8,507,655 ----------- ----------- 40,303,613 31,194,624 ----------- ----------- $43,068,278 $34,218,320 ----------- -----------
The accompanying notes are an integral part of these statements 7 10 Consolidated Statements of Cash Flows - -------------------------------------
For the years ended June 30, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income (loss) $ 1,441,093 $ 1,564,570 $(11,409,393) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 2,234,177 2,250,183 2,338,019 (Gains) losses on marketable securities (132,698) (1,619,311) 9,828,379 (Gains) losses on sale of equipment (48,663) (20,875) 111,454 Deferred income taxes (265,000) (296,160) Provision for doubtful accounts receivable 118,459 159,598 (5,162) Provision for loss on note receivable 250,000 450,000 Changes in operating assets and liabilities: Accounts and notes receivable (170,389) (113,001) 176,945 Inventories (11,202) 88,857 25,729 Prepaid expenses and other current assets (402,903) (203,531) (51,954) Accounts payable and accrued liabilities (19,261) (267,862) (728,823) Income taxes payable, net of refundable taxes 125,681 7,930 374,068 ----------- ------------ ------------ Net cash flows from operating activities 2,869,294 2,096,558 813,102 ----------- ------------ ------------ Cash Flows From Investing Activities: Purchase of U.S. Treasury bills (4,272,507) (5,489,619) (7,757,130) Maturities or dispositions of U.S. Treasury bills 4,495,159 5,000,000 8,995,360 Purchase of property and equipment (2,208,936) (2,630,917) (2,057,424) Disposition of property and equipment 996,316 74,700 233,248 Purchase of long-term notes receivable (1,690,000) Purchase of non-current investments (2,769,719) (4,220,391) (809,762) Disposition of non-current investments 2,421,066 5,001,175 3,624,606 Other assets (113,066) (230,000) ----------- ------------ ------------ Net cash flows (used in) from investing activities (1,451,687) (2,265,052) 308,898 ----------- ------------ ------------ Cash Flows From Financing Activities: Dividends to shareowners (439,089) (379,029) (785,617) Repurchases of common stock (400,670) (350,445) (1,154,826) Change in bank overdraft (365,451) 427,197 ----------- ------------ ------------ Net cash used in financing activities (1,205,210) (302,277) (1,940,443) ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 212,397 (470,771) (818,443) Cash and cash equivalents at beginning of year 30,397 501,168 1,319,611 ----------- ------------ ------------ Cash and cash equivalents at end of year $ 242,794 $ 30,397 $ 501,168 ----------- ------------ ------------ Supplemental Disclosures: Cash paid during the year for: Interest $ 4,853 $ 8,960 $ 5,500 Income taxes $ 289,321 $ 27,110 $ 30,431
The accompanying notes are an integral part of these statements. 8 11 Consolidated Statements of Shareowners' Equity - ----------------------------------------------
Net Unrealized Common Stock Gain (Loss) on ------------------------ Non-Current Number of Marketable Retained For the years ended June 30, 1995, 1994, 1993 Shares Amount Securities Earnings - --------------------------------------------------------------------------------------------------------- Balance July 1, 1992 1,315,961 $3,921,287 $ (3,411,517) $ 39,788,077 Net loss (11,409,393) Cash dividends on common stock, $0.60 per share (785,617) Cash purchase of common stock and subsequent retirement (41,000) (1,154,826) Net unrealized loss on non-current marketable securities 3,411,517 ---------- ---------- -------------- ------------ Balance June 30, 1993 1,274,961 3,921,287 -- 26,438,241 Net income 1,564,570 Cash dividends on common stock, $0.30 per share (379,029) Cash purchase of common stock and subsequent retirement (13,525) (350,445) ---------- ---------- -------------- ------------ Balance June 30, 1994 1,261,436 3,921,287 -- 27,273,337 Net income 1,441,093 Cash dividends on common stock, $0.35 per share (439,089) Cash purchase of common stock and subsequent retirement (16,571) (400,670) Net unrealized gain on non-current marketable securities 8,507,655 ---------- ---------- -------------- ------------ Balance June 30, 1995 1,244,865 $3,921,287 $ 8,507,655 $ 27,874,671 ---------- ---------- ------------- ------------
The accompanying notes are an integral part of this statement 9 12 Notes to Consolidated Financial Statements - ------------------------------------------ - -------------------------------------------------------------------------------- NOTE 1: Principles of Consolidation: The consolidated financial statements include the Summary of accounts of Scope Industries and its subsidiaries (the Significant Company), all of which are wholly owned. All significant Accounting intercompany accounts and transactions are eliminated. Policies Cash Equivalents: The Company considers all liquid debt instruments to be cash equivalents if the securities mature within 90 days of acquisition. Investments: On July 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities. SFAS 115 requires that investments in debt securities and marketable equity securities be designated as trading, held-to-maturity or available-for-sale. Trading securities are reported at fair value, with changes in fair value included in earnings. Available-for-sale securities are reported at fair value, with net unrealized gains and losses included as a separate component of shareowners' equity. Held-to-maturity debt securities are reported at amortized cost. In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of July 1, 1994 of adopting SFAS 115 increased shareholders' equity by $5,730,365. There was no effect on net income. For all investment securities, unrealized losses that are other than temporary are recognized in earnings. Realized gains and losses are determined on the specific identification method and are reflected in earnings. Inventories: Inventories consist of manufactured finished goods and purchased goods, portions of which are consumed in the various operating activities and portions of which are sold to customers. Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Property and Equipment: Property and equipment are stated at cost. Depreciation is provided generally on the straight-line method over the estimated useful lives of the assets. Revenue Recognition: Sales are recorded at contract prices as deliveries are made. Tuition revenue is recognized as course hours are completed by students. Income Taxes: The Company files a consolidated Federal income tax return. Effective July 1, 1993 the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires that deferred income taxes be provided for the temporary differences between the financial and tax bases of the Company's assets and liabilities, including the effect of enacted tax rate changes. Adoption of the standard had no material effect on the financial statements or the recorded income tax expense in 1994, the year of the accounting change. 10 13 Notes to Consolidated Financial Statements - ------------------------------------------ - -------------------------------------------------------------------------------- Net Income (Loss) Per Share: Net income (loss) per common share is based on the weighted average number of common shares and common share equivalents outstanding during the year. There is no significant difference between primary and fully diluted net income (loss) per share. - -------------------------------------------------------------------------------- NOTE 2: Components of notes receivable are as follows:
June 30, 1995 1994 Notes --------------------------------------------------------------------------- Receivable Loan to Opto Sensors, Inc. $2,500,000 $2,500,000 Loan to Simcala, Inc. (formerly SiMETCO, Inc.) 950,000 950,000 Others 200,247 354,420 Less amounts classified as current (175,849) (2,711,414) ---------- ---------- $3,474,398 $1,093,006 ---------- ----------
In January 1995 the Company extended the maturity date for the $2,500,000 principal outstanding on the loan to Opto Sensors, Inc. to April 1997. Under terms of the promissory note, Opto Sensors pays the Company interest at a rate of one and one-half percent above the prime rate established by Bank of America. Interest is payable quarterly. As a condition of the loan, the Company received warrants to purchase 1,250,000 shares of preferred stock of Opto Sensors. Interest income of $247,711, $191,181, and $187,500 in 1995, 1994 and 1993, respectively, was earned on this note. On July 2, 1992 the Company loaned SiMETCO, Inc. $1,650,000. The note was in default from March 1993 until February 1995. Provisions totaling $700,000 were made in 1993 and 1994 that reduced income and recognized the potential reduction in realizable value of the note. In February 1995 a bankruptcy reorganization was effected whereby Simcala, Inc. has become the successor to the business and operations of SiMETCO. A new promissory note has been issued to the Company by Simcala, Inc. in the principal amount of $2,106,255 in exchange for the SiMETCO note. No income or increased value was assigned to the Simcala note received in the exchange. The new note is collateralized by substantially all of Simcala's property and equipment. Interest is payable quarterly at a rate of three percent above the prime rate as established by Bank of America. Interest income of $97,638 was earned on the Simcala note in 1995. Principal installments are due beginning in February 1997 and conclude in February 2001. - -------------------------------------------------------------------------------- NOTE 3: Included in Investment and Other Income (Loss) are recognized gains and losses on marketable securities. Net Investments gains of $132,698 and $1,619,311 were recognized in 1995 and 1994, respectively. Net losses of $9,828,379 were recognized in 1993. Gross recognized gains and gross recognized losses for 1995 were $178,710 and $46,012, respectively. Recognized gains and losses are from sales of investments and from recognized losses of $160,000 and $10,143,784 in 1994 and 1993, respectively, on securities whose decline in value was deemed to be other than temporary. 11 14 Notes to Consolidated Financial Statements - ------------------------------------------ - -------------------------------------------------------------------------------- At June 30, 1995 investments were as follows:
Non-current ------------------------------------------------------------------------- Held-to-maturity securities (Cost $923,425; Fair value $883,475) $ 923,425 Available-for-sale securities (Cost $12,224,934; Fair value $20,732,589) 20,732,589 ----------- $21,656,014 ----------- Gross unrealized losses -- Held-to-maturity securities $ (39,950) Gross unrealized gains -- Available-for-sale securities 8,741,970 Gross unrealized losses -- Available-for-sale securities (234,315)
In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of July 1, 1994 of adopting SFAS 115 increased shareholders' equity by $5,730,365. For the year ended June 30, 1995, net unrealized holding gains on investments increased by $2,777,290 to become $8,507,655. Shareowners' equity was increased by $8,507,655 at June 30, 1995; there was no effect on net income. Certain fixed maturity investments, having an aggregate cost of $633,425 and a fair value of $612,976 at June 30, 1995 are held in trust by the State Treasurer of California as security for the Company's potential obligations as a self-insurer of its California Workers' Compensation liabilities. A deposit held by a bank and evidenced by a certificate of deposit in the amount of $306,784 which matures in February 1996, has been pledged as collateral for potential Company obligations that a surety bond issuer has guaranteed. - -------------------------------------------------------------------------------- NOTE 4: The Company occupies certain facilities under long-term leases. Future minimum rental payments required Leases under non-cancelable operating leases having lease terms in excess of one year are:
For the years ending June 30, ------------------------------------------------------------------------- 1996 $ 423,177 1997 428,798 1998 395,106 1999 372,106 2000 312,456 Thereafter 1,076,181 ---------- Total minimum lease payments $3,007,824 ----------
Total rental expense under operating leases was $781,661 in 1995, $828,583 in 1994 and $764,275 in 1993. 12 15 Notes to Consolidated Financial Statements - ------------------------------------------ - -------------------------------------------------------------------------------- NOTE 5: A former subsidiary of the Company has been designated as a potentially responsible party (PRP) by the Contingent Environmental Protection Agency (EPA) with respect to the Liabilities cleanup of hazardous wastes at a site in southern California. The Company believes it has valid defenses and intends to vigorously defend itself. The Company and its counsel are currently unable to predict the outcome of this matter, but the Company believes that its ultimate resolution will not have a materially adverse effect on its consolidated financial condition. In a separate matter, the Company and the EPA have settled a dispute regarding claimed violations of the Clean Air Act at one of the Company's bakery recycling facilities. The Company has agreed to install and operate certain pollution control equipment which will require a capital expenditure of $800,000. During 1993, settlements, claim dismissals and settlement discussions on several claims, where charges had been made to earnings in prior years, indicated that reductions of $1,100,000 in amounts previously provided were appropriate. In the normal course of business, the Company and certain of its subsidiaries are defendants in various other lawsuits. After consultation with counsel, management is of the opinion that these other various lawsuits, individually or in the aggregate will not have a materially adverse effect on the consolidated financial statements. - -------------------------------------------------------------------------------- NOTE 6: The Company maintains two non-qualified retirement plans for certain key employees. The Company contributions Retirement to the plans are based on matching voluntary employee Plans savings contributions and on a profit sharing plan formula after certain minimum earnings levels are reached by the Company. For the years ended June 30, 1995, 1994 and 1993 the defined contribution plan expenses were $175,973, $127,200, and $113,935, respectively. The Company has a Defined Benefit Pension Plan. The amounts involved are not significant to the Company's operations. - -------------------------------------------------------------------------------- NOTE 7: Under the Company's 1992 Stock Option Plan the Company can grant to key employees options to purchase the Stock Company's common stock at not less than the fair market Options value of such shares on the date such option is granted, except that if the employee owns shares of the Company representing more than 10% of its total voting power, then the price shall not be less than 110% of the fair market value of such shares on the date such option is granted. No option may be granted under the 1992 Stock Option Plan after December 31, 2001. Options to purchase shares expire five years after the date of grant and become exercisable on a cumulative basis at 25% each year, commencing with the second year. At June 30, 1995 option prices for shares under option ranged from $25.37 to $32.73 per share. 13 16 Notes to Consolidated Financial Statements - ------------------------------------------ - -------------------------------------------------------------------------------- Stock option activity under this plan and a previous plan was as follows:
For the years ended June 30, 1995 1994 1993 ------------------------------------------------------------------------------- Shares: Granted 9,000 -- -- Exercised -- -- -- Expired 9,140 8,000 8,000 Outstanding at end of year 16,000 16,140 24,140 Exercisable at end of year 5,250 11,640 15,604 Available for grant at end of year 34,000 41,000 41,000 Option price range per share: When granted $25.37/27.91 -- --
In addition to the stock options described above, other options to purchase 30,000 shares had been granted to a former key employee. During fiscal 1995, after the option holder's employment by the Company terminated, the options expired and were cancelled. - -------------------------------------------------------------------------------- NOTE 8: The components of the provision (benefit) for income taxes are:
For the years ended June 30, 1995 1994 1993 ------------------------------------------------------------------------------ Income Current: Taxes Federal $ 265,000 $(273,840) State 150,000 $35,000 20,000 --------- ------- --------- 415,000 35,000 (253,840) --------- ------- --------- Deferred: Federal (265,000) (296,160) State --------- ------- --------- (265,000) (296,160) --------- ------- --------- Total provision (benefit) $ 150,000 $35,000 $(550,000) --------- ------- ---------
Reconciliation of the provision (benefit) for income taxes computed at the U.S. Federal statutory income tax rate to the reported provision is:
For the years ended June 30, 1995 1994 1993 ------------------------------------------------------------------------------- U.S. Federal statutory income tax $ 540,971 $ 543,854 $(4,066,194) Benefits from loss carryforwards (419,914) (863,222) Expenses not currently deductible 162,728 304,870 State income taxes, net of Federal tax benefit 99,000 23,100 20,000 Reduction of deferred tax asset valuation allowance (265,000) Losses for which no tax benefits were recognized 3,496,194 Other 32,215 26,398 --------- --------- ----------- Total provision (benefit) $ 150,000 $ 35,000 $ (550,000) --------- --------- -----------
14 17 Notes to Consolidated Financial Statements - ------------------------------------------ - -------------------------------------------------------------------------------- The major components of the deferred tax assets and liabilities are:
June 30, 1995 1994 ----------------------------------------------------------------------------- Depreciation $ (347,355) $ (361,387) Other (21,635) (35,082) ----------- ----------- Total deferred tax liabilities (368,990) (396,469) ----------- ----------- Expenses not currently deductible 793,239 673,824 Recognized losses not currently deductible 3,093,947 3,203,768 Tax benefit carryforwards 146,146 626,340 ----------- ----------- Total deferred tax assets 4,033,332 4,503,932 ----------- ----------- Valuation allowance (3,399,342) (4,107,463) ----------- ----------- Net deferred income tax asset $ 265,000 $ -- ----------- -----------
At June 30, 1995, a deferred tax asset of $265,000 is included in the amount captioned on the accompanying balance sheet as Deferred charges and other assets. For financial reporting purposes, the Company has substantial capital loss carryforwards available to offset future financial statement capital gains. - -------------------------------------------------------------------------------- NOTE 9: The Company's current operations are conducted through two primary business segments. Business Segment Waste Material Recycling Data The Company owns and operates plants in Los Angeles, and San Jose, CA; Baltimore, MD; Chicago, IL; Dallas, TX; and Denver, CO, in which bakery and snack food waste material is processed and converted into food supplement for animals. The principal customers are dairies, feed lots, pet food manufacturers and poultry farms. The Company also owns and operates a plant in Vernon, CA in which bakery waste material is processed and converted into edible bread crumbs. The principal customers are pre-packaged and restaurant supply food processors. This business depends upon the Company's ability to secure the surplus and waste material, which it does under contracts with bakeries and snack food manufacturers. Vocational School Group The Company owns and operates thirteen beauty schools in California and Nevada in which cosmetology and manicuring are taught. The Company enrolls students who pay a tuition. Vocational programs and Federal grants and loan programs are also utilized for the students' tuition. In addition, the public patronizes the schools for hair styling and other cosmetology services, which are performed by the students. 15 18 Notes to Consolidated Financial Statements - ------------------------------------------ - --------------------------------------------------------------------------------
For the years ended June 30, 1995 1994 1993 -------------------------------------------------------------------------------- Operating Sales and Revenues: Waste Material Recycling $18,663,645 $ 18,695,118 $ 16,023,812 Vocational School Group 3,938,406 4,080,181 4,126,701 Other 372,093 557,634 570,385 ----------- ------------ ------------ $22,974,144 $ 23,332,933 $ 20,720,898 ----------- ------------ ------------ Operating Income (Loss) before Income Taxes: Waste Material Recycling $ 2,012,890 $ 705,136 $ (2,364,097) Vocational School Group (629,144) (604,407) (105,839) Other 65,760 218,348 (76,798) ----------- ------------ ------------ 1,449,506 319,077 (2,546,734) Corporate expenses (876,908) (775,202) (1,426,138) Litigation provision changes 1,100,000 Investment & other income (loss) 1,018,495 2,055,695 (9,086,521) ----------- ------------ ------------ Income (loss) before taxes $ 1,591,093 $ 1,599,570 $(11,959,393) ----------- ------------ ------------
One customer represented 11% and 12% of product revenues for the Waste Material Recycling segment for the years ended 1995 and 1994 respectively. No single customer contributed 10% or more of any segment's revenues for the year ended 1993.
For the years ended June 30, 1995 1994 1993 -------------------------------------------------------------------------------- Identifiable Assets: Waste Material Recycling $12,451,700 $13,664,356 $13,138,235 Vocational School Group 1,373,802 1,020,963 892,343 Other 115,458 176,056 211,623 Corporate 29,127,318 19,356,945 19,003,758 ----------- ----------- ----------- $43,068,278 $34,218,320 $33,245,959 ----------- ----------- ----------- Depreciation and Amortization Waste Material Recycling $ 1,940,206 $ 1,970,438 $ 1,937,620 Vocational School Group 214,512 179,796 167,158 Other 66,141 77,268 197,495 Corporate 13,318 22,681 35,746 ----------- ----------- ----------- $ 2,234,177 $ 2,250,183 $ 2,338,019 ----------- ----------- ----------- Capital Expenditures: Waste Material Recycling $ 1,541,817 $ 2,305,760 $ 1,910,615 Vocational School Group 659,512 279,692 96,620 Other 36,158 45,188 Corporate 7,607 9,307 5,001 ----------- ----------- ----------- $ 2,208,936 $ 2,630,917 $ 2,057,424 ----------- ----------- -----------
16 19 Independent Auditors' Report - ---------------------------- - -------------------------------------------------------------------------------- Board of Directors and Shareowners Scope Industries Santa Monica, California We have audited the accompanying consolidated balance sheets of Scope Industries and subsidiaries as of June 30, 1995 and 1994, and the related consolidated statements of operations, shareowners' equity, and cash flows for each of the three years in the period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Scope Industries and subsidiaries as of June 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments in fiscal 1995. /s/ Deloitte & Touche LLP - -------------------------- Deloitte & Touche LLP Los Angeles, California August 23, 1995 Corporate Information - --------------------- Directors Officers Independent Auditors Richard L. Fruin, Jr. Meyer Luskin Deloitte & Touche LLP Partner Chairman, President and Los Angleles, California Arter & Hadden Chief Executive Officer Transfer Agent and Registrar Meyer Luskin John J. Crowley First Interstate Bank, Ltd. Vice President and Chief Los Angeles, California William H. Mannon Financial Officer Retired Officer of Securities Listed Scope Industries Eleanor R. Smith American Stock Exchange Secretary and Controller Franklin Redlich Retired Paul D. Saltman, Ph.D. Professor of Biology University of California at San Diego EX-21 3 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 SCOPE INDUSTRIES AND SUBSIDIARIES SUBSIDIARIES OF REGISTRANT As of June 30, 1995 The wholly-owned subsidiaries of the Registrant are as follows:
Jurisdiction of Name Incorporation ---- ------------- Scope Products, Inc. California Lacos Land Company Nevada Scope Properties, Inc. California Scope Energy Resources, Inc. Nevada Scope Beauty Enterprises, Inc. California
Wholly owned by Scope Products, Inc. a subsidiary of the Registrant:
Jurisdiction of Name Incorporation ---- ------------- Dext Company of Illinois Illinois Dext Company of New Jersey, Inc. New Jersey Dext Company of Maryland Maryland Dext Company of Texas Texas Dext Company of Arizona Arizona Dext Company of Colorado Colorado Topnotch Foods, Inc. California
All of the subsidiaries described above are included in the consolidated financial statements hereto annexed. Separate financial statements are not filed for any of the subsidiares. EX-24 4 AUDITORS CONSENT 1 EXHIBIT 24 DELOITTE & TOUCHE LLP 1000 WILSHIRE BLVD. 12TH FLOOR LOS ANGELES, CA 90017 (213) 688-0800 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-47053 of Scope Industries on Form S-8 of our reports dated August 23, 1995, appearing in and incorporated by reference in this Annual Report on Form 10-K of Scope Industries for the year ended June 30, 1995. s/b Deloitte & Touche LLP Los Angeles, California September 25, 1995 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT JUNE 30, 1995 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS YEAR JUN-30-1995 JUL-01-1994 JUN-30-1995 242,794 21,656,014 2,555,600 298,834 423,177 6,290,726 31,434,563 20,210,689 43,068,278 2,764,665 0 3,921,287 0 0 36,382,326 43,068,278 19,035,739 22,974,144 12,745,613 22,401,546 0 0 0 1,591,093 150,000 1,441,093 0 0 0 1,441,093 1.15 1.15
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