-----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, HvqphFDKAIAfpMs6ZE3apFqOTqxJOzlWYcj/r6uxrbQkiUGDB7PzqImFkmm1JdW4 frlHM3AGYN6DRofelvgiMA== 0000950148-99-002120.txt : 19990928 0000950148-99-002120.hdr.sgml : 19990928 ACCESSION NUMBER: 0000950148-99-002120 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990927 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: SEC FILE NUMBER: 001-03552 FILM NUMBER: 99717815 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 FORM 10-K405 (06/30/1999) 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, 1999 Number 1-3552 SCOPE INDUSTRIES (Exact name of Registrant as specified in its charter) California 95-1240976 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 233 Wilshire Blvd., Ste.310, Santa Monica, CA 90401 - ---------------------------------------------- ----------- (Address of principal executive office) (ZIP Code) Registrant's telephone number, including area code (310) 458-1574 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - -------------------------- ------------------------ Common Stock, No Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---------------- (Title of Class) Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) ----- The aggregate market value of the voting stock of Registrant held by nonaffiliates of Registrant on September 15, 1999 computed by reference to the closing sales price of such shares on such date was $21,372,541. At September 15, 1998, 1,114,267 shares of the Registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K into which document Document incorporated - -------- -------------------- Annual Report to Shareowners for the fiscal year ended June 30, 1999 Parts I, II, and IV Proxy Statement for the Annual Meeting of Shareholders to be held October 26, 1999 Parts III and IV 2 TABLE OF CONTENTS FORM 10-K ANNUAL REPORT For the Fiscal Year Ended June 30, 1999 SCOPE INDUSTRIES PART I PAGE Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 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 7 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 11 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 operates plants for the collection and processing of waste bakery materials into food supplement for animals. In April, 1999, the Registrant acquired the bakery waste recycling business known as International Processing Corporation (IPC). The manufacturing facilities acquired in the IPC purchase, together with the manufacturing facilities already owned and operated by the Registrant under the name of Dext company, has resulted in the Registrant currently operating 15 plants in which animal food supplement is produced. The Registrant's principal customers are dairies, feed lots, pet food manufacturers and poultry farms. The Registrant also owns and operates a plant in Vernon, California, in which bakery waste material is processed and converted into bread crumbs for human consumption. The principal customers are pre-packaged and restaurant supply food processors. This business depends upon the Registrant's ability to secure surplus and waste material, which it does under contract with bakeries and snack food manufacturers. The competition for securing the waste and surplus material is widespread and intensive. This segment contributed 84%, 80% and 83% of the sales and revenues of the Registrant for 1999, 1998 and 1997, respectively. The Waste Material Recycling segment operated profitably for the 1997 and 1998 fiscal years but in fiscal 1999 the segment operated at a loss. Capital expenditures for the Waste Material Recycling segment were $3,889,838 for fiscal 1999. Capital spending for this segment represented 94% of the Registrant's total capital expenditures for 1999. In 1998 and 1997, capital expenditures for this segment were $1,872,305 and $1,087,597, respectively. Capital expenditures for expansion and modernization of existing bakery waste material recycling operations are expected to continue. A new bakery waste recycling facility is being completed in the Chicago area and will replace the former facility that operated in Chicago. Cash flows from operations and liquid instrument holdings are expected to be adequate to meet fiscal 2000 capital expenditure needs. The selling price of recycled bakery waste material is affected by fluctuating commodity prices, particularly corn. Feed commodity prices and the Registrant's average unit selling prices were approximately 21% lower in fiscal 1999 than they were in the prior fiscal year. Tonnage volume for fiscal 1999 was 62% above the prior year, due to the addition of operations of the acquired IPC facilities for the three month period subsequent to the acquisition which is included in the current fiscal year. 3 4 Item 1. BUSINESS. (Continued) Vocational School Group Segment Scope Beauty Enterprises, Inc., doing business as Marinello Schools of Beauty, is comprised of 12 beauty schools in which cosmetology and manicuring are taught. The schools are located in southern California and Nevada. During the past fiscal year, two school locations were combined and another school was relocated to a new, larger and more attractive facility. In its vocational beauty schools, the Registrant enrolls students who pay a tuition. Vocational programs and Federal grants are also utilized for the students' tuition. In addition, members of the public patronize the schools for hair styling and other cosmetological services, which are performed by students. There usually are competitive schools available to the public near each of the Registrant's schools. This segment has contributed 15%, 18% and 15% of the Registrant's total revneues for the past three years. In fiscal 1999 the segment's operating income before income taxes was $53,635. In fiscal 1998 the segment incurred an operating loss of $52,893 and in fiscal 1997 the segment earned $85,693. Other Business The Registrant owns various oil and gas royalty and working interests. Oil and gas revenues represented 2% or less of total sales and revenues in 1999, 1998 and 1997. 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 interest income and gains or losses on marketable securities. At June 30, 1999 and June 30, 1998, the Registrant held $15,000,000 and $44,250,000 par value respectively, in U.S. Treasury Bills maturing in less than one year. In fiscal 1999, interest income from Treasury obligations amounted to $1,733,642. Net gains from sale of securities of $23,290,926 and $17,313,454 were recognized in 1998 and 1997, respectively. A net loss of $288,957 was recognized in 1999. 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 $299,215 and $245,000 in 1999 and 1997, 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. Air pollution control equipment was installed at the Hodgkins, IL recycling facility in fiscal 1999 costing approximately $775,000. 4 5 Item 1. BUSINESS (Continued) Employees The Registrant (including its subsidiaries) employs approximately 475 persons. Item 2. PROPERTIES Principal properties owned by the Registrant are listed below: Location Function -------- -------- Waste Material Recycling Segment: Los Angeles, CA Processing Plant San Jose, CA Processing Plant Vernon, CA Processing Plant Lodi, CA Collection Depot Denver, CO Processing Plant Conley, GA Processing Plant Lake City, GA Processing Plant Hodgkins, IL Processing Plant Kansas City, KS Processing Plant Baltimore, MD Processing Plant Secaucus, NJ Collection Depot Dallas, TX Processing Plant Mt. Pleasant, TX Processing Plant Unimproved Land: Somis, CA Riverside, CA Principal properties leased by the Registrant are: Location Function -------- -------- Waste Material Recycling Segment: Fresno, CA Collection Depot Chicago, IL Processing Plant Terre Haute, IN Processing Plant Carteret, NJ Processing Plant Durham, NC Processing Plant Cincinnati, OH Processing Plant Vocation School Group Segment: Eleven Southern Beauty Schools California Locations Las Vegas, NV Beauty School Administrative Offices: Santa Monica, CA Tucker, GA For additional lease information, Note 5 to the Financial Statements in the 1999 Annual Report to Shareowners, page 13, is hereby incorporated by reference. 5 6 Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings against the Registrant, any of its subsidiaries or any of their property, and none other than routine litigation incidental to the business, as noted in the 1999 Annual Report to Shareowners, Note 6 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, 1999 no matters were submitted to a vote of the Shareowners of the Registrant, either through the solicitation of proxies, or otherwise. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Reference is made to the information with respect to the principal market on which the Registrant's common stock is being traded, and the high and low sales prices for each quarterly period for the last two fiscal years set forth on page 2 and outside back cover of the Registrant's 1999 Annual Report to Shareowners and, by reference, such information is incorporated herein. The number of holders of record of the Registrant's common stock as of July 31, 1999, based on a listing of the Registrant's Transfer Agent, was 80. Reference is made to the information regarding the dividends declared during the past two years with respect to the Registrant's common stock set forth on page 2 of the Registrant's 1999 Annual Report to Shareowners and, by reference, such information is incorporated herein. Dividends per share were paid in January 1998 ($1.00), June 1998 ($0.25) and January 1999 ($1.00). Item 6. SELECTED FINANCIAL DATA Reference is made to the financial data with respect to the Registrant set forth on the inside front cover of the Registrant's 1999 Annual Report to Shareowners and, by reference, such financial data is incorporated herein. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 3 and 4 of the Registrant's 1999 Annual Report to Shareowners and, by reference, such information is incorporated herein. 6 7 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, 1999 are incorporated herein by reference: Consolidated Balance Sheets - June 30, 1999 and 1998 Consolidated Statements of Operations - Years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - Years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Shareowners' Equity - Years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income - Year ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Unaudited Quarterly Financial Data shown on page 2 of the Registrant's 1999 Annual Report to Shareowners for the years ended June 30, 1999 and 1998 is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Registrant did not change accountants and there were no disagreements on any matters involving accounting principles or financial statement disclosures during the two-year period ended June 30, 1999. 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 26, 1999, which was filed with the Securities and Exchange Commission on September 20, 1999 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, 1999 are listed below: Business Experience Name, Age and Position During Past Five Years - ---------------------- -------------------------- Meyer Luskin, 73 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. 7 8 Robert E. McMullen, 53 Chief Operating Officer of Waste President of Subsidiary Material Recylcing Segment since (Scope Products, Inc.) April 1999; responsible for opera- tions of waste material recycling business. From February 1997 to April 1999, he was President of International Processing Corporation, a wholly owned subsidiary of Darling International Inc. From March 1982 to February 1997, he served in various management positions of International Processing Corporation and its predessor companies. F. Duane Turney, 52 Chief Operating Officer of Vocational President of Subsidiary School Group segment since July 1991; (Scope Beauty Enterprises, Inc.) responsible for operations of beauty schools. John J. Crowley, 66 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. Eleanor R. Smith, 67 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 1999 Annual Report to Share- owners, on pages 5 through 17 thereof, are incorporated by reference and filed herewith as part of Item 8 of this report: 8 9 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) Independent Auditors' Report Consolidated Balance Sheets at June 30, 1999 and 1998 Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Shareowners' Equity for the years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income for the years ended June 30, 1999, 1998 and 1997 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) The Registrant filed the following current report on Form 8-K during the quarter ended June 30, 1999. (1) Current Report on Form 8-K filed on April 16, 1999 including information regarding the acquisition on April 4, 1999 of International Processing Corporation and International Transportation, Inc. An amendment on Form 8-K/A was filed on June 18, 1999 which included financial statements of the acquired entities and pro forma financial statements reflecting a combination of the Registrant's and the acquired entitites financial statements as though the combination had occured on July 1, 1997. (c) Exhibits: (3) The Bylaws of the Registrant, as amended; and the restated Articles of Incorporation of the Registrant filed as Exhibits (3.1) and (3.2) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 are incorporated by reference. (10) Material Contracts: 1992 Stock Option Plan, reference is made to Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-47053), and by reference such information is incorporated herein. 9 10 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (13) Annual Report to Shareowners (21) Subsidiaries of Registrant (22) Proxy Statement for the Annual Meeting of Shareowners to be held on October 26, 1999 which was filed with the Securities and Exchange Commission on September 20, 1999 and by refer- ence such information is incorporated herein in response to the information called for by Part III (ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11, EXECUTIVE COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) (23) Independent Auditors' Consent (27) Financial Data Schedule 10 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOPE INDUSTRIES BY /s/ John J. Crowley 09/27/99 --------------------------- ---------- John J. Crowley Date Vice President-Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Meyer Luskin Chairman of the Board 09/27/99 - ------------------------- President, Chief Executive ----------- Meyer Luskin Officer and Director /s/ John J. Crowley Vice President-Finance 09/27/99 - ------------------------- Chief Financial Officer ----------- John J. Crowley (Principal Financial Officer) /s/ Eleanor R. Smith Secretary and Controller 09/27/99 - ------------------------- (Principal Accounting Officer) ----------- Eleanor R. Smith /s/ Robert Henigson Director 09/27/99 - ------------------------- ----------- Robert Henigson /s/ William H. Mannon Director 09/27/99 - ------------------------- ----------- William H. Mannon /s/ Franklin Redlich Director 09/27/99 - ------------------------- ----------- Franklin Redlich 11 12 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, 1999 and 1998, and for each of the three years in the period ended June 30, 1999, and have issued our report thereon dated August 30, 1999; such financial statements and report are included in the 1999 Annual Report to Shareowners and are incorporated herein by reference. Our audits also included the financial statement schedule of Scope Industries and subsidiaries, listed in Item 14(a)(3). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Los Angeles, California August 30, 1999 13 SCOPE INDUSTRIES AND SUBSIDIARIES SCHEUDLE II--VALUATION AND QUALIFYING ACCOUNTS JUNE 30, 1999
ADDITIONS BALANCE AT CHARGED CHARGED BALANCE BEGINNING TO COSTS TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ----------- --------- -------- -------- ---------- --------- YEAR ENDED JUNE 30, 1999: Allowance for doubtful accounts - accounts receivable $205,318 $188,658 $194,987 (a) $104,078 (b) $484,885 YEAR ENDED JUNE 30, 1998: Allowance for doubtful accounts - accounts receivable $159,167 $116,298 $ 0 $ 70,147 (b) $205,318 YEAR ENDED JUNE 30, 1997: Allowance for doubtful accounts - accounts receivable $149,180 $ 13,139 $ 0 $ 3,152 (b) $159,167 Valuation allowances- notes receivable $700,000 $ 0 $ 0 $700,000(c) $ 0
(a) Valuation allowances received upon acquisition of International Processing Corporation. (b) Uncollectible accounts charged against allowance, net of bad debt recoveries. (c) Valuation allowance credit - note collected in full. 13 EX-13 2 EXHIBIT 13 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 EX-21 3 EXHIBIT 21 1 EXHIBIT 21 SCOPE INDUSTRIES AND SUBSIDIARIES SUBSIDIARIES OF REGISTRANT As of June 30, 1999 The wholly owned subsidiaries of the Registrant are as follows: Jurisdiction of Name Incorporation ---- ------------- Scope Products, Inc. California Lacos Land Company Nevada Scope Properties, Inc. California Scope Energy Resources, Inc. Nevada Scope Beauty Enterprises, Inc. California Wholly owned by Scope Products, Inc., a subsidiary of the Registrant: Jurisdiction of Name Incorporation ---- ------------- Dext Company of Illinois Illinois Dext Company of New Jersey, Inc. New Jersey Dext Company of Maryland Maryland Dext Company of Texas Texas Dext Company of Arizona Arizona Dext Company of Colorado Colorado Topnotch Foods, Inc. California ReConserve, Inc. Illinois ReConserve, Inc. Georgia International Processing Corporation Georgia International Transportation Service, Inc. Delaware Wholly owned by International Transportation Service, Inc, a subsidiary of Scope Products, Inc., a subsidiary of the Registrant: Jurisdiction of Name Incorporation ---- ------------- Food By Product Recycling, Inc. Illinois All of the subsidiaries described above are included in the consolidated financial statements hereto annexed. Separate financial statements are not filed for any of the subsidiaries. EX-23 4 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 33-47053 of Scope Industries on Form S-8 of our reports dated August 30, 1999, appearing in and incorporated by reference in this Annual Report on Form 10-K of Scope Industries for the year ended June 30, 1999. /s/ Deloitte & Touche LLP Los Angeles, California September 24, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 3,667,818 10,470,463 4,719,638 484,885 999,755 26,120,984 48,278,035 23,793,405 72,457,006 7,513,118 0 0 0 4,161,300 59,454,428 72,457,006 26,227,133 31,045,072 23,109,969 35,266,808 0 0 0 (1,092,555) (250,000) (842,555) 0 0 0 (842,555) (0.75) (0.75)
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