<PAGE> 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
<TABLE>
<S> <C>
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
--------------
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Name of each exchange on
Title of each class which registered
- ------------------------ ------------------------
Common Stock, No Par Value American Stock Exchange
</TABLE>
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
<TABLE>
<CAPTION>
Part of Form 10-K
into which document
incorporated
-------------------
<S> <C>
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
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
SCOPE INDUSTRIES
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
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
</TABLE>
2
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Principal
Operation Location Function
--------- -------- --------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Business Experience
Name, Age and Position During Past Five Years
- ---------------------- ----------------------
<S> <C>
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.
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C>
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.
</TABLE>
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
<PAGE> 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
<PAGE> 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
<TABLE>
<S> <C>
BY s/b John J. Crowley 09-25-95
-------------------------- ------------
John J. Crowley Date
Vice President-Finance and
Chief Financial Officer
</TABLE>
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:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
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.
</TABLE>
10
<PAGE> 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
<PAGE> 12
SCOPE INDUSTRIES AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
JUNE 30, 1995
<TABLE>
<CAPTION>
Additions
Balance Charged
at (Credited) Charged Balance
Beginning to Costs to Other Deductions at End
Description of Period Expenses Accounts (a) of Period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(a) Uncollectible accounts charged against allowance, net of bad debt
recoveries.
12
<PAGE> 1
SCOPE
INDUSTRIES
1995
58TH
ANNUAL
REPORT
LOGO
<PAGE> 2
Financial Highlights
- --------------------
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
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.
</TABLE>
<PAGE> 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
<PAGE> 4
Five-Year Review -- Selected Financial Data
- -------------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
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
</TABLE>
2
<PAGE> 5
Unaudited Quarterly Financial Data
- ----------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
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.
</TABLE>
Market Price Range
- ------------------
Scope Industries Common Stock
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
High Low High Low
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 8
Consolidated Statements of Operations
- -------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
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
</TABLE>
The accompanying notes are an integral part of these statements
6
<PAGE> 9
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
June 30, 1995 1994
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
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
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements
7
<PAGE> 10
Consolidated Statements of Cash Flows
- -------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
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
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 11
Consolidated Statements of Shareowners' Equity
- ----------------------------------------------
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
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
---------- ---------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of this statement
9
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
June 30, 1995 1994
<S> <C> <C>
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
---------- ----------
</TABLE>
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
<PAGE> 14
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
At June 30, 1995 investments were as follows:
<TABLE>
<CAPTION>
Non-current
<S> <C>
-------------------------------------------------------------------------
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)
</TABLE>
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:
<TABLE>
<CAPTION>
For the years ending June 30,
<S> <C>
-------------------------------------------------------------------------
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
----------
</TABLE>
Total rental expense under operating leases was
$781,661 in 1995, $828,583 in 1994 and $764,275 in 1993.
12
<PAGE> 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
<PAGE> 16
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
Stock option activity under this plan and a previous
plan was as follows:
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993
<S> <C> <C> <C>
-------------------------------------------------------------------------------
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 -- --
</TABLE>
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:
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993
<S> <C> <C> <C>
------------------------------------------------------------------------------
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)
--------- ------- ---------
</TABLE>
Reconciliation of the provision (benefit) for income
taxes computed at the U.S. Federal statutory income tax
rate to the reported provision is:
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993
<S> <C> <C> <C>
-------------------------------------------------------------------------------
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)
--------- --------- -----------
</TABLE>
14
<PAGE> 17
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
The major components of the deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
June 30, 1995 1994
<S> <C> <C>
-----------------------------------------------------------------------------
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 $ --
----------- -----------
</TABLE>
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
<PAGE> 18
Notes to Consolidated Financial Statements
- ------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993
<S> <C> <C> <C>
--------------------------------------------------------------------------------
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)
----------- ------------ ------------
</TABLE>
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.
<TABLE>
<CAPTION>
For the years ended June 30, 1995 1994 1993
<S> <C> <C> <C>
--------------------------------------------------------------------------------
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
----------- ----------- -----------
</TABLE>
16
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
---- -------------
<S> <C>
Scope Products, Inc. California
Lacos Land Company Nevada
Scope Properties, Inc. California
Scope Energy Resources, Inc. Nevada
Scope Beauty Enterprises, Inc. California
</TABLE>
Wholly owned by Scope Products, Inc. a subsidiary of the Registrant:
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
---- -------------
<S> <C>
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
</TABLE>
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.
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 242,794
<SECURITIES> 21,656,014
<RECEIVABLES> 2,555,600
<ALLOWANCES> 298,834
<INVENTORY> 423,177
<CURRENT-ASSETS> 6,290,726
<PP&E> 31,434,563
<DEPRECIATION> 20,210,689
<TOTAL-ASSETS> 43,068,278
<CURRENT-LIABILITIES> 2,764,665
<BONDS> 0
<COMMON> 3,921,287
0
0
<OTHER-SE> 36,382,326
<TOTAL-LIABILITY-AND-EQUITY> 43,068,278
<SALES> 19,035,739
<TOTAL-REVENUES> 22,974,144
<CGS> 12,745,613
<TOTAL-COSTS> 22,401,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,591,093
<INCOME-TAX> 150,000
<INCOME-CONTINUING> 1,441,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,441,093
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
