<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
For the Fiscal Year Ended Commission File
June 30, 1997 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 5, 1997 computed by reference to the
closing sales price of such shares on such date was $19,918,371.
At September 5, 1997, 1,136,352 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Part of Form 10-K
into which document
incorporated
------------
Document
- --------
<S> <C>
Annual Report to Shareowners for the
fiscal year ended June 30, 1997 Parts I, II, and IV
Proxy Statement for the Annual Meeting of
Shareholders to be held October 28, 1997 Parts III and IV
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended June 30, 1997
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
California and New Jersey 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 84% of the sales and revenues of the
Registrant for 1997, 1996 and 1995. The Waste Material Recycling segment has
operated profitably for the three most recent fiscal years.
Capital expenditures for the Waste Material Recycling segment were $1,087,597
for fiscal 1997. Capital spending for this segment represented 84% of the
Registrant's total capital expenditures for 1997. In 1996 and 1995, capital
expenditures for this segment were $1,776,232 and $1,541,817, respectively.
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 1998 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 3% lower in fiscal 1997 than they
were in the prior fiscal year. Although average prices for the current year were
nearly consistent with last year, the variation during this fiscal year was
substantial. Prices for recycled bakery waste material at the end of the year
were considerably lower than the price levels enjoyed during the fiscal year's
first quarter. Tonnage volume for fiscal 1997 was about 2% above the prior year.
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 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 15% and 17% of the Registrant's total
revenues for the past three years. The segment earned $70,092 in operating
income for the 1997 fiscal year and $79,496 in the year earlier. The segment
incurred an operating loss of $629,144 for the fiscal year 1995.
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 1997, 1996
and 1995.
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, 1997, the Registrant held
$24,000,000 par value in U.S. Treasury Bills maturing in less than one year. In
fiscal 1997, interest income from Treasury obligations amounted to $1,047,481.
Net gains from sale of securities of $17,313,454 and $132,698 were recognized in
1997 and 1995, respectively. A net loss of $87,802 was recognized in 1996. 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 $245,000 and $749,900 in 1997 and 1996, 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.
4
<PAGE> 5
Item 1. BUSINESS (Continued)
Employees
The Registrant (including its subsidiaries) employs approximately 200 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 5 to the Financial Statements in the 1997 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. The Registrant and
its counsel are currently unable to predict the outcome of this matter, but
believe that its ultimate resolution will not have a materially adverse effect
on its consolidated financial statements.
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 1997 Annual Report to Shareowners,
Note 6 on page 12 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, 1997, 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
2 and inside back cover of the Registrant's 1997 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 7,
1997, based on a listing of the Registrant's Transfer Agent, was 99.
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 2 of the Registrant's 1997 Annual Report to
Shareowners and, by reference, such information is incorporated herein.
The Registrant announced to shareholders on July 14, 1997, its offer to
repurchase up to 200,000 shares within a price range from $48 to $52 per share.
At the expiration of the offer on August 31, 1997, the Registrant repurchased
and retired 32,313 shares of its common stock at a cost of $52 or a total cost
of $1,680,276.
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 1997 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 1997
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, 1997 are incorporated herein by reference:
Consolidated Balance Sheets - June 30, 1997 and 1996
Consolidated Statements of Income - Years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Shareowners' Equity - Years ended June 30, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
6
<PAGE> 7
Unaudited Quarterly Financial Data shown on Page 2 of the Registrant's 1997
Annual Report to Shareowners for the years ended June 30, 1997 and 1996 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, 1997.
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 28, 1997, which was filed with the Securities and Exchange
Commission on September 11, 1997 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.) except
that shareholdings shown for Robert Henigson, a director and beneficial owner of
more than 5% of the Corporation's shares, should be 63,100 shares rather than
63,800 shares (5.4% of outstanding common stock rather than 5.5% of outstanding
stock). Shareholdings for all directors and executive officers as a group should
therefore be shown as 770,796 shares rather than 771,496 shares. Footnote (4) to
the tables on pages 2 and 3 of the Proxy Statement, which list the shareholdings
of beneficial owners of more than 5% of the Corporation's shares and the
shareholdings of directors and executive officers of the Corporation, is not
correct and should be disregarded.
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, 1997 are listed below:
<TABLE>
<CAPTION>
Business Experience
Name, Age and Position During Past Five Years
- ---------------------- ----------------------
<S> <C>
Meyer Luskin, 71 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, 50 Chief Operating Officer of Vocational
President of Subsidiary School Group segment since July 1991;
(Scope Beauty Enterprises, Inc.) responsible for operations of beauty
schools.
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C>
John J. Crowley, 64 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, 65 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 1997 Annual Report to Share- owners, on Pages 5
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, 1997 and 1996
Consolidated Statements of Income for
the years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995
Consolidated Statements of Shareowners' Equity
for the years ended June 30, 1997, 1996 and 1995
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.
8
<PAGE> 9
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
(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.
(13) Annual Report to Shareowners
(21) Subsidiaries of Registrant
(22) Proxy Statement for the Annual Meeting of Shareowners to be
held on October 28, 1997 which was filed with the Securities
and Exchange Commission on September 11, 1997 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.) except that
shareholdings shown for Robert Henigson, a director and
beneficial owner of more than 5% of the Corporation's shares,
should be 63,100 shares rather than 63,800 shares (5.4% of
outstanding common stock rather than 5.5% of outstanding
stock). Shareholdings for all directors and executive officers
as a group should therefore be shown as 770,796 shares rather
than 771,496 shares. Footnote(4) to the tables on pages 2 and
3 of the Proxy Statement, which list the shareholdings of
beneficial owners of more than 5% of the Corporation's shares
and the shareholdings of directors and executive officers of
the Corporation, is not is not correct and should be
disregarded.
(23) 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
BY /s/ John J. Crowley 09-18-97
---------------------------- -----------------
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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Meyer Luskin Chairman of the Board 09-18-97
- -------------------------- ----------
Meyer Luskin President, Chief Executive
Officer and Director
/s/ John J. Crowley Vice President-Finance 09-18-97
- -------------------------- ----------
John J. Crowley Chief Financial Officer
(Principal Financial Officer)
/s/ Eleanor R. Smith Secretary and Controller 09-18-97
- -------------------------- ----------
Eleanor R. Smith (Principal Accounting Officer)
/s/ Robert Henigson Director 09-18-97
- -------------------------- ----------
Robert Henigson
/s/ William H. Mannon Director 09-18-97
- -------------------------- ----------
William H. Mannon
/s/ Franklin Redlich Director 09-18-97
- -------------------------- ----------
Franklin Redlich
/s/ Paul D. Saltman, Ph.D. Director 09-18-97
- -------------------------- ----------
Paul D. Saltman, Ph.D.
</TABLE>
10
<PAGE> 11
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, 1997 and 1996, and for each of the three years in
the period ended June 30, 1997, and have issued our report thereon dated August
21, 1997; such financial statements and report are included in your 1997 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 21, 1997
<PAGE> 12
SCOPE INDUSTRIES AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
JUNE 30, 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED
AT (CREDITED) CHARGED BALANCE
BEGINNING TO COSTS TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts -
accounts receivable $149,180 $ 13,139 $ 0 $ 3,152(a) $159,167
Valuation Allowances -
notes receivable $700,000 $ 0 $ 0 $700,000(b) $ 0
YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts -
accounts receivable $298,834 $ 16,908 $ 0 $166,562(a) $149,180
Valuation allowances -
notes receivable $700,000 $ 0 $ 0 $ 0 $700,000
YEAR ENDED JUNE 30, 1995:
Allowance for doubtful accounts - $324,671 $118,459 $ 0 $144,296(a) $298,834
accounts receivable
Valuation allowances -
notes receivable $700,000 $ 0 $ 0 $ 0 $700,000
</TABLE>
(a) Uncollectible accounts charged against allowance, net of bad debt
recoveries.
(b) Valuation allowance credit - note collected in full.
<PAGE> 1
SCOPE
INDUSTRIES
1997
60TH
ANNUAL
REPORT
LOGO
<PAGE> 2
Financial Highlights
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<TABLE>
<CAPTION>
For the years ended June 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating sales and revenues $30,273,913 $30,223,457 $22,974,144
Investment and other income 20,569,303 812,196 1,018,495
Net income $18,992,773 $ 3,972,548 $ 1,441,093
Net income per share* $ 15.94 $ 3.23 $ 1.15
Equity per share at end of year $ 49.33 $ 40.03 $ 32.38
Shares outstanding at end of year 1,168,665 1,202,565 1,244,865
* Based on weighted average number of shares outstanding.
</TABLE>
Five-Year Review -- Selected Financial Data
- ----------------------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Operating Sales and Revenues $30,273,913 $30,223,457 $22,974,144 $23,332,933 $ 20,720,898
Operating Cost and Expenses:
Cost of sales and operating
expenses 19,177,617 18,217,591 16,261,918 16,556,054 17,099,128
Depreciation and amortization 2,112,959 2,117,706 2,234,177 2,250,183 2,338,019
General and administrative 3,759,867 4,367,808 3,905,451 4,982,828 4,156,623
----------- ----------- ----------- ------------ -----------
25,050,443 24,703,105 22,401,546 23,789,065 23,593,770
----------- ----------- ----------- ------------ -----------
5,223,470 5,520,352 572,598 (456,132) (2,872,872)
Investment and other income (loss) 20,569,303 812,196 1,018,495 2,055,702 (9,086,521)
----------- ----------- ----------- ------------ -----------
Income (loss) before income taxes 25,792,773 6,332,548 1,591,093 1,599,570 (11,959,393)
Provision (benefit) for income
taxes 6,800,000 2,360,000 150,000 35,000 (550,000)
----------- ----------- ----------- ------------ -----------
Net income (loss) $18,992,773 $ 3,972,548 $ 1,441,093 $ 1,564,570 $(11,409,393)
=========== =========== =========== ============ ===========
Net income (loss) per share $ 15.94 $ 3.23 $ 1.15 $ 1.24 $ (8.77)
=========== =========== =========== ============ ===========
Weighted average number of shares
outstanding 1,191,469 1,231,270 1,255,101 1,266,105 1,301,592
=========== =========== =========== ============ ===========
FINANCIAL PERFORMANCE
Net income (loss) as a percent of
revenues 62.74% 13.14% 6.27% 6.71% -55.06%
Cash dividend per share $ 1.25 $ 0.50 $ 0.35 $ 0.30 $ 0.60
Capital expenditures $ 1,298,935 $ 2,255,436 $ 2,208,936 $ 2,630,917 $ 2,057,424
FINANCIAL POSITION
Total assets $61,484,033 $55,534,495 $43,068,278 $34,218,320 $ 33,245,959
Shareowners' equity $57,649,645 $48,138,038 $40,303,613 $31,194,624 $ 30,359,528
Equity per share at end of year $ 49.33 $ 40.03 $ 32.38 $ 24.73 $ 23.81
</TABLE>
<PAGE> 3
President's Report
- --------------------
- --------------------------------------------------------------------------------
To Our Shareholders:
The refrain of an old (very old) tune keeps coming to mind as we try to
summarize this past year. It goes, "It seems to me I've heard that song
before -- it's from an old familiar score". Well, once again we report to you on
an extraordinary year. Our earnings for fiscal 1997 were $18,992,773, or $15.94
per share.
So why and what made this year so exceptional. At the year's beginning, our
equity was $48,138,038, or $40.03 per share, and our market price per share was
$37.00. At year end we had earned 39.5% after taxes on our equity, and our per
share earnings were 43% of our starting market price.
Obviously such results were not derived from our everyday business
activities. The overwhelming portion of these earnings was created by our
investment transactions. In fact, included in the year's earnings was
$17,313,454 of profits from security sales. The primary contributor to our
investment gains came from the sale of our long term holding of Imperial Bancorp
and secondarily from the sale of our Mesa, Inc. securities.
Although investment gains were by far the dominant source of our earnings,
we shouldn't overlook that Dext Company, our food waste recycling business, had
another excellent year. A significant development, not manifested on our income
statement, was the substantial appreciation of our Lone Star Industries, Inc.
stock and warrants; their appreciation is reflected on our balance sheet via our
equity value. Certainly, there is no assurance of future price levels, but the
highly improved financial and operational status of Lone Star Industries, Inc.
does mean our investment has increased value.
Another important development has been the continuation of the rapid growth
of revenue and profits of OSI Systems, Inc. -- formerly named Opto Sensors, Inc.
We own a minority but significant interest in this opto electronics company
which is emphasizing better security inspection systems for the airline and
institutional structures industry.
However, the year wasn't all positive. We wrote off almost all of our
original investment in Stamet, Incorporated -- a private company with a novel
and patented method of pumping solids. Subsequently, we made an additional
investment in Stamet, Incorporated with the hope of keeping the Company alive
until its potential can emerge. We were also disappointed when Marinello Schools
of Beauty -- our entry in the private vocational school industry -- reported
only a slight improvement over the prior year. An additional negative has been
the decline in commodity feed prices as compared to last year. Since the selling
price of the animal feed supplement, generated by our recycling waste food, so
closely tracks corn prices it's clear that Dext Company's earnings for at least
the first half will be less than last year's similar period.
We take pleasure in thanking all of our customers, vendors and shareowners
for their support and trust. We particularly wish to express our thanks and
respect for those hard working and dedicated employees who are trying to give us
their best.
Respectfully yours,
/s/ Meyer Luskin
Meyer Luskin
Chairman of the Board
President and Chief Executive Officer
1
<PAGE> 4
Unaudited Quarterly Financial Data
- ------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Operating sales and revenues $9,781,748 $7,046,661 $6,602,673 $6,842,831 $30,273,913
Gross profit 3,974,844 1,845,915 1,455,702 1,743,894 9,020,355
Net income $9,257,768 $4,928,086 $3,768,095 $1,038,824 $18,992,773
---------- ---------- ---------- ---------- -----------
Net income per share* $ 7.72 $ 4.11 $ 3.15 $ 0.88 $ 15.94
========== ========== ========== ========== ===========
1996
Operating sales and revenues $6,870,181 $7,527,740 $7,050,020 $8,775,516 $30,223,457
Gross profit 2,041,403 2,426,511 2,291,443 3,200,317 9,959,674
Net income $1,086,373 $ 886,017 $ 943,963 $1,056,195 $ 3,972,548
---------- ---------- ---------- ---------- -----------
Net income per share* $ 0.87 $ 0.72 $ 0.76 $ 0.87 $ 3.23
========== ========== ========== ========== ===========
</TABLE>
*Per share amounts are based upon the weighted average number of shares
outstanding.
Market Price Range
- ------------------------
Scope Industries Common Stock
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
High Low High Low
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $43.00 $37.00 $29.00 $25.00
2nd Quarter 50.25 39.50 32.50 28.63
3rd Quarter 50.25 41.00 42.00 32.00
4th Quarter 54.00 47.00 38.50 33.75
</TABLE>
Cash dividends of $1.25 and $0.50 per share were paid during the years
ended June 30, 1997 and 1996, respectively.
There were 99 shareowners of record of common stock at August 7, 1997.
2
-
<PAGE> 5
Management's Discussion and Analysis of
Operations and Financial Condition
- -----------------------------------------
- --------------------------------------------------------------------------------
Operating Results -- 1997 compared with 1996
Total revenues were consistent for fiscal years 1997 and 1996. Waste
Material Recycling sales for 1997 were 1% below 1996 sales. Vocational School
Group revenues for 1997 were 1% above 1996 revenues. Waste Material Recycling
sales represented 83% of 1997 Company revenues compared to 84% of 1996 revenues.
From 1996 to 1997, tonnage increased 2% and average sales prices for dried
bakery product sold dropped 3%. The Vocational School Group revenues represented
15% of the Company's revenues in both years. Waste Material Recycling operating
costs were 4% higher per ton produced in 1997 than in the prior year. Operating
costs for the Vocational School Group were up 2% in 1997 over the prior year.
The Company's 1996 operating results were difficult to replicate. Although
the 1997 operating results of the two business segments were slightly below the
1996 numbers, the current year compares favorably to the several years preceding
1996. For Waste Material Recycling operations, lower commodity prices dictated
much lower selling prices of Dried Bakery Product over the second half of the
1997 fiscal year. Efficiencies that were gained in 1996 have remained in place
and have allowed continued profitability. General and administrative expenses
were 14% lower this year than in the prior year. Legal expenses were
substantially lower in 1997 than they were in 1996.
In fiscal 1997, investment and other income was $20,569,303 as compared to
$812,196 in 1996. Net investment gains of $17,313,454 were realized in the
current year. Long-term stock holdings in Imperial Bancorp and in Mesa, Inc.
were sold during the year. The appreciation realized on those investments and
the subsequent interest earned on the proceeds caused the unusual increase in
the current year's investment and other income.
Unrealized holding gains on investments, net of deferred income taxes, are
$7,997,484 at June 30, 1997 and were $14,368,007 at June 30, 1996. These
unrealized gains are not reflected in current income. Previous unrealized gains
on Imperial Bancorp and Mesa, Inc. are no longer included since those gains were
realized during the year. Unrealized gains on long-term equity holdings in Lone
Star Industries, Inc. increased during the year.
Provisions for income taxes are 26% of 1997 pre-tax income and 37% of 1996
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. The recognition in the
current year of the tax benefits of those prior year charges reduced the 1997
income tax provision.
Net income for fiscal 1997 is $18,992,773 or $15.94 per share. For 1996 net
income was $3,972,548 or $3.23 per share.
Operating Results -- 1996 compared with 1995
Revenues were 32% higher in fiscal 1996 compared to 1995. Waste Material
Recycling sales represented 84% of Company revenues in 1996 compared to 81% in
1995. Waste Material Recycling sales for 1996 were up 36% over 1995. The
increased revenue is attributable to substantially higher prices received for
the Dried Bakery Product produced and sold during fiscal 1996. Commodity prices
for competing animal feed ingredients increased dramatically during 1996 which
caused higher demand for available Dried Bakery Product. Limited supplies of raw
materials restricted the growth of production volume. Tonnage volume in the
Waste Material Recycling operations for each of the two years is comparable.
Vocational School Group revenues increased 13% from 1995. Continuing efforts
toward upgrading the quality of instruction and of the physical facilities of
the schools has had a positive effect in the Group's financial performance.
Production costs for Waste Material Recycling operations increased 14% from
1995 to 1996, due primarily to increased costs for supplies of raw materials.
Vocational School Group operating costs were 5% lower in 1996 than in the year
prior. Two school locations were refurbished and modernized during 1996. General
and administrative expenses increased 12% over 1995. Increased contributions to
the Waste Material Recycling profit sharing retirement plan and increased legal
expenses resulted in increased general and administrative expenses in 1996.
3
-
<PAGE> 6
Management's Discussion and Analysis of
Operations and Financial Condition -- Continued
- ---------------------------------------------------------
- --------------------------------------------------------------------------------
Investment and other income for 1996 is 20% below the amount recognized in
the prior year. Included in the 1996 amount is a loss of $749,900 which was
recognized on an investment whose decline in value was deemed to be other than
temporary. Net unrealized holding gains on investments which are not reflected
in current income, increased $9,390,352 during fiscal 1996. Cumulatively, the
unrealized holding gains on investments, net of deferred income taxes, are
$14,368,007 at June 30, 1996 compared to $8,507,655 at June 30, 1995. Provisions
for income taxes are 37% of 1996 pre-tax income and 9% of 1995 pre-tax income.
Tax net operating loss carryforwards were utilized to minimize 1995 taxes; tax
net operating loss carryforwards have been exhausted and are not available in
1996.
Net income for fiscal 1996 was $3,972,548 or $3.23 per share. For 1995 net
income was $1,441,093 or $1.15 per share.
Capital Expenses/Liquidity
The Company's capital expenditures were $1,298,935 in 1997, $2,255,436 in
1996 and $2,208,936 in 1995. Capital spending for the Waste Material Recycling
segment represented 84% of the Company's total capital expenditures in 1997, 79%
in 1996 and 70% in 1995. 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 the Vocational School Group, one school was remodeled this past
year. Lease arrangement delays postponed plans to move and completely refurbish
two schools in this past year. They are now scheduled to move and undergo
complete remodeling within the next twelve months. Approximately $400,000 in
capital improvements for the Vocational School Group has been budgeted for
fiscal 1998. 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. 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 1998.
Shareowners' Equity
At June 30, 1997, shareowners' equity includes net unrealized holding gains
on investments totaling $7,997,484, net of deferred income taxes. At June 30,
1996, shareowners' equity included $14,368,007 of net unrealized holding gains
on investments.
The Company purchased and retired 40,900 shares (3.4%) of its common shares
during the year at a cost of $1,836,686. Funds for the purchase of these shares
were available from existing cash and from operating and investing cash flows.
In July 1997 the Company announced to shareowners an offer to repurchase up to
200,000 shares within a price range from $48 to $52 per share. At the expiration
of the offering on August 31, 1997, the Company repurchased and retired 32,313
shares of common stock at a cost of $52 each or a total cost of $1,680,276.
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.
4
-
<PAGE> 7
Consolidated Statements of Income
- -----------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Sales and Revenues:
Sales $25,744,869 $25,755,479 $19,035,739
Vocational school revenues 4,529,044 4,467,978 3,938,405
----------- ----------- -----------
30,273,913 30,223,457 22,974,144
----------- ----------- -----------
Operating Cost and Expenses:
Cost of sales 15,736,357 14,854,410 12,745,613
Vocational school operating expenses 3,441,260 3,363,181 3,516,305
Depreciation and amortization 2,112,959 2,117,706 2,234,177
General and administrative (Note 7) 3,759,867 4,367,808 3,905,451
----------- ----------- -----------
25,050,443 24,703,105 22,401,546
----------- ----------- -----------
5,223,470 5,520,352 572,598
Investment and other income (Notes 3 & 4) 20,569,303 812,196 1,018,495
----------- ----------- -----------
Income before income taxes 25,792,773 6,332,548 1,591,093
Provision for income taxes (Note 9) 6,800,000 2,360,000 150,000
----------- ----------- -----------
Net Income $18,992,773 $ 3,972,548 $ 1,441,093
=========== =========== ===========
Net Income Per Share $ 15.94 $ 3.23 $ 1.15
=========== =========== ===========
Weighted average number of shares outstanding 1,191,469 1,231,270 1,255,101
</TABLE>
The accompanying notes are an integral part of these statements.
5
-
<PAGE> 8
Consolidated Balance Sheets
- ---------------------------------
<TABLE>
<CAPTION>
June 30, 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,946,050 $ 1,721,939
Treasury bills (par value $24,000,000 in 1997 and $5,035,000 in 1996)
(Note 2) 23,540,939 4,973,377
Accounts and notes receivable, less allowance for doubtful accounts of
$159,167 in 1997 and $149,180 in 1996 (Note 3) 1,637,066 5,173,445
Inventories 584,401 531,637
Deferred income taxes (Note 9) 675,000
Prepaid expenses and other current assets 379,654 531,639
----------- -----------
Total current assets 32,763,110 12,932,037
----------- -----------
Notes Receivable (Note 3) 232,276 1,154,378
Property and Equipment:
Machinery and equipment 22,551,992 22,160,240
Land, buildings and improvements 9,652,554 9,743,940
----------- -----------
32,204,546 31,904,180
Less accumulated depreciation and amortization 22,016,611 20,867,899
----------- -----------
10,187,935 11,036,281
----------- -----------
Other Assets:
Deferred charges and other assets 256,006 130,930
Investments available for sale at fair value (Cost $5,417,222 in 1997
and $11,749,436 in 1996) (Note 4) 15,539,706 29,647,443
Investments held to maturity at cost (Fair value $603,600 in 1996)
(Note 4) 633,426
Other equity investments at cost (Note 4) 2,505,000
----------- -----------
18,300,712 30,411,799
----------- -----------
$61,484,033 $55,534,495
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Bank overdraft $ 250,686
Accounts payable $ 1,104,205 1,410,953
Other accrued liabilities 1,255,321 1,447,406
Accrued payroll and related employee benefits 940,631 1,069,429
Income taxes payable 534,231 467,983
----------- -----------
Total current liabilities 3,834,388 4,646,457
Deferred Income Taxes (Note 9) 2,750,000
----------- -----------
3,834,388 7,396,457
----------- -----------
Commitments and Contingent Liabilities (Notes 5 & 6)
Shareowners' Equity (Note 8):
Common stock, no par value, 5,000,000 shares authorized; shares issued
and outstanding: 1997 -- 1,168,665; 1996 -- 1,202,565 4,138,462 3,921,287
Retained earnings 45,513,699 29,848,744
Net unrealized gain on investments available for sale, net of income
taxes of $2,125,000 in 1997 and $3,530,000 in 1996 7,997,484 14,368,007
----------- -----------
57,649,645 48,138,038
----------- -----------
$61,484,033 $55,534,495
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
-
<PAGE> 9
Consolidated Statements of Cash Flows
- ----------------------------------------------
<TABLE>
<CAPTION>
For the years ended June 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 18,992,773 $ 3,972,548 $ 1,441,093
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization 2,112,959 2,117,706 2,234,177
(Gains) losses on investments available for sale (17,313,454) 87,802 (132,698)
Gains on sale of equipment (8,324) (45,374) (48,663)
Deferred income taxes (2,195,000) (515,000) (265,000)
Provision for doubtful accounts receivable 13,139 16,908 118,459
Changes in operating assets and liabilities:
Accounts and notes receivable 1,945,342 (383,567) (170,389)
Inventories (52,764) (108,460) (11,202)
Prepaid expenses and other current assets 151,985 577,467 (402,903)
Accounts payable and accrued liabilities (627,631) 1,417,705 (19,261)
Income taxes payable 66,248 275,147 125,681
Other assets 49,924 (17,864) (113,066)
------------ ----------- -----------
Net cash flows from operating activities 3,135,197 7,395,018 2,756,228
------------ ----------- -----------
Cash Flows From Investing Activities:
Purchase of U.S. Treasury bills (30,602,562) (9,619,494) (4,272,507)
Maturities or dispositions of U.S. Treasury bills 12,035,000 6,905,000 4,495,159
Purchase of property and equipment (1,298,935) (2,255,436) (2,208,936)
Disposition of property and equipment 42,646 415,897 996,316
Purchase of long-term notes receivable (230,000)
Purchase of investments available for sale (3,223,689) (2,168,781) (2,766,719)
Purchase of investments held to maturity (3,000)
Disposition of investments available for sale 27,497,783 2,556,476 2,189,066
Disposition of investments held to maturity 290,000 232,000
------------ ----------- -----------
Net cash flows from (used in) investing activities 4,450,243 (4,106,338) (1,338,621)
------------ ----------- -----------
Cash Flows From Financing Activities:
Dividends to shareowners (1,491,132) (616,782) (439,089)
Repurchases of common stock (1,836,686) (1,381,693) (400,670)
Change in bank overdraft (250,686) 188,940 (365,451)
Proceeds from stock options exercised 217,175
------------ ----------- -----------
Net cash used in financing activities (3,361,329) (1,809,535) (1,205,210)
------------ ----------- -----------
Net increase in cash and cash equivalents 4,224,111 1,479,145 212,397
Cash and cash equivalents at beginning of year 1,721,939 242,794 30,397
------------ ----------- -----------
Cash and cash equivalents at end of year $ 5,946,050 $ 1,721,939 $ 242,794
============ =========== ===========
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 301 $ 4,333 $ 4,853
Income taxes $ 8,928,751 $ 2,577,438 $ 289,321
Non Cash Investing Transaction:
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
</TABLE>
The accompanying notes are an integral part of these statements.
7
-
<PAGE> 10
Consolidated Statements of Shareowners' Equity
- --------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Gain on
------------------------ Investments
Number of Retained Available
For the years ended June 30, 1997, 1996 and 1995. Shares Amount Earnings for Sale
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance July 1, 1994 1,261,436 $3,921,287 $ 27,273,337 --
Net income 1,441,093
Cash dividends on common stock, $0.35 per share (439,089)
Cash purchase of common stock and subsequent
retirement (16,571) (400,670)
Net unrealized gain on investments available
for sale $ 8,507,655
---------- ---------- -------------- ------------
Balance June 30, 1995 1,244,865 3,921,287 27,874,671 8,507,655
Net income 3,972,548
Cash dividends on common stock, $0.50 per share (616,782)
Cash purchase of common stock and subsequent
retirement (42,300) (1,381,693)
Net unrealized gain on investments available
for sale 5,860,352
---------- ---------- -------------- ------------
Balance June 30, 1996 1,202,565 3,921,287 29,848,744 14,368,007
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 gain on investments available
for sale (6,370,523)
---------- ---------- -------------- ------------
Balance June 30, 1997 1,168,665 $4,138,462 $ 45,513,699 $ 7,997,484
========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
8
-
<PAGE> 11
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1: Principles of Consolidation:
Summary of The consolidated financial statements include the
Significant accounts of Scope Industries and its subsidiaries (the
Accounting Company), all of which are wholly owned. All significant
Policies intercompany accounts and transactions are eliminated.
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, net of income
taxes, as a separate component of shareowners' equity
until realized. For all investment securities, unrealized
losses that are other than temporary are recognized in net
income. Realized gains and losses are determined on the
specific identification method and are reflected in net
income.
The Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", on
July 1, 1994. The cumulative effect as of July 1, 1994 of
adopting SFAS No. 115 increased shareholders' equity by
$5,730,365. There was no effect on net income.
Inventories:
Inventories consist of manufactured finished goods
and purchased goods, portions of which are consumed in the
various operating activities and portions of which are
sold to customers. Inventories are stated at the lower of
cost or market, cost being determined on a first-in,
first-out basis.
Property and Equipment:
Property and equipment are stated at cost.
Depreciation is provided generally on the straight-line
method over the estimated useful lives of the assets.
Service lives for principal assets are 20 years for
buildings, 10 years, but not exceeding the lease terms,
for leasehold improvements and 7 years for machinery and
equipment.
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 to the allowance for losses
are made.
9
-
<PAGE> 12
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
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 recognized either
in the financial statements or the income tax returns, but
not both. The measurement of current and deferred income
tax liabilities and assets is based on provisions of
enacted tax laws. Valuation allowances are recognized if,
based on the weight of available evidence, it is more
likely than not that some portion of the deferred tax
assets will not be realized.
Net Income Per Share:
Net income per common share is based on the weighted
average number of common shares and common share
equivalents outstanding during the year. There is no
significant difference between primary and fully diluted
net income per share.
Recently Issued Accounting Pronouncements:
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share". This statement is
effective for financial statements issued for periods
ending after December 15, 1997, including interim periods.
The Company does not expect that the statement will have a
material effect on the Company's consolidated financial
statements.
In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". These statements are
effective for financial statements issued for periods
beginning after December 15, 1997. The Company has not yet
analyzed the impact of adopting these statements.
- --------------------------------------------------------------------------------
NOTE 2: All U.S. Treasury bills are purchased with maturities
Treasury of one year or less. The cost is adjusted to reflect
Bills interest earned as it accrues. The adjusted cost
approximates the fair value of the bills. The Company has
classified its Treasury bills as:
<TABLE>
<CAPTION>
June 30, 1997 1996
---------------------------------------------------------------------------
<S> <C> <C>
Held-to-maturity $22,591,800 $4,973,377
Available-for-sale 949,139
----------- ----------
$23,540,939 $4,973,377
=========== ==========
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3: Components of notes receivable are as follows:
Notes
Receivable
<TABLE>
<CAPTION>
June 30, 1997 1996
---------------------------------------------------------------------------
<S> <C> <C>
Loan to OSI Systems, Inc. (formerly Opto Sensors,
Inc.) $ 0 $ 2,500,000
Loan to Simcala, Inc. (formerly SiMETCO, Inc.) 0 950,000
Others 308,494 242,217
Less amounts classified as current (76,218) (2,537,839)
-------- -----------
$232,276 $ 1,154,378
======== ===========
</TABLE>
10
--
<PAGE> 13
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
In April 1990, the Company loaned OSI Systems, Inc.
$2,500,000. As a condition of the loan, the Company
received a promissory note and warrants to purchase
1,250,000 shares of preferred stock of OSI Systems, Inc.
In November 1996 the Company exercised its warrants to
purchase 1,250,000 shares of preferred stock of OSI
Systems, Inc. for $2,500,000. The note for $2,500,000 was
canceled and preferred stock was issued to the Company in
exchange. Subsequently, the preferred stock held by the
Company was converted to common stock of OSI Systems, Inc.
At June 30, 1997, the Company held approximately 30% of
the common stock of OSI Systems, Inc. Interest income of
$99,063, $249,740 and $247,711 in 1997, 1996 and 1995,
respectively, was earned on the note. No dividends were
received on the preferred or common shares.
The Company's loan to SiMETCO, Inc. of $1,650,000 was
in default from March 1993 until February 1995. In 1993
and 1994 the Company recorded provisions of $700,000 that
recognized the potential reduction in realizable value of
the note. In February 1995, a bankruptcy reorganization
was effected whereby Simcala, Inc. became the successor to
the business and operations of SiMETCO. A new promissory
note was issued to the Company by Simcala, Inc. in the
principal amount of $2,106,255 in exchange for the SiMETCO
note. No income or increased value was recorded in
conjunction with the exchange. It was not practicable to
estimate the fair value of the new note. In April 1997
Simcala made an early and full repayment of the note. A
gain of $1,156,255 was recognized as a result of the note
repayment. Interest income of $182,051, $242,594 and
$97,638 was earned on the Simcala note in 1997, 1996 and
1995, respectively.
- --------------------------------------------------------------------------------
NOTE 4: Included in Investment and Other Income are
Investments recognized gains and losses on investment securities. Net
gains of $17,313,454 and $132,698 were recognized in 1997
and 1995, respectively. A net loss of $87,802 was
recognized in 1996. Gross recognized gains and gross
recognized losses were $17,558,454 and $245,000,
respectively, for 1997, $697,589 and $785,391,
respectively, for 1996 and $178,710 and $46,012,
respectively, for 1995. Recognized gains and losses are
from sales of investments and from recognized losses of
$245,000 and $749,900 in 1997 and 1996, respectively, on
securities whose decline in value was deemed to be other
than temporary.
At June 30, 1997 investments were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale securities
Corporate debt
securities(1)(2)
Due after three but within
eight years $ 633,426 $ $ (25,631) $ 607,795
Equity securities 4,783,796 10,148,115 14,931,911
----------- ----------- ----------- -----------
$ 5,417,222 $10,148,115 $ (25,631) $15,539,706
Other equity securities $ 2,505,000 $ 2,505,000
</TABLE>
11
<PAGE> 14
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
At June 30, 1996 investments were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity securities
Corporate debt securities(1)
Due after four but within
nine years $ 633,426 $ (29,826) $ 603,600
Available-for-sale securities
Corporate debt securities
Due after one but within
four years $ 573,000 $ 27,000 $ $ 600,000
Equity securities 11,176,436 17,871,607 (600) 29,047,443
----------- ----------- ----------- -----------
$11,749,436 $17,898,607 $ (600) $29,647,443
</TABLE>
-------------------------------------
(1) Fixed maturity investments having an aggregate cost of
$250,316 at June 30, 1997 and $633,426 at June 30,
1996 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.
(2) A portion of the fixed maturity investments previously
held in trust by the State Treasurer of California
were released to the Company in June 1997. As a
result, the Company has reclassified the fixed
maturity investments to available-for-sale securities
at June 30, 1997.
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.
- --------------------------------------------------------------------------------
NOTE 5: 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>
1998 $ 446,109
1999 459,109
2000 422,509
2001 354,780
2002 328,612
Thereafter 1,047,941
----------
Total minimum lease payments $3,059,060
==========
</TABLE>
Total rental expense under operating leases was
$729,196 in 1997, $735,557 in 1996 and $781,661 in 1995.
12
<PAGE> 15
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 6: A former subsidiary of the Company has been
Contingent designated as a potentially responsible party (PRP) by the
Liabilities Environmental Protection Agency (EPA) with respect to the
cleanup of hazardous wastes at a site in southern
California. The Company believes it has valid defenses and
intends to vigorously defend itself. The Company and its
counsel are currently unable to predict the outcome of
this matter, but the Company believes that its ultimate
resolution will not have a materially adverse effect on
its consolidated financial statements.
In 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 7: The Company maintains two non-qualified retirement
Retirement plans for certain key employees. The Company contributions
Plans to the plans are based on matching voluntary employee
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, 1997, 1996 and 1995
the defined contribution plan expenses were $541,716,
$507,298 and $175,973, respectively.
The Company has a Defined Benefit Pension Plan. The
amounts involved are not significant to the Company's
operations.
- --------------------------------------------------------------------------------
NOTE 8: Under the Company's 1992 Stock Option Plan the
Stock Company can grant to key employees options to purchase the
Options Company's common stock at not less than the fair market
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.
Stock option activity under this plan and a previous
plan was as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
of Exercise Options Exercise
Shares Price Exercisable Price
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994......... 16,140 $35.52
Granted............................ 9,000 26.22
Expired............................ (7,140) 41.54
Canceled........................... (2,000) 29.75
------
Outstanding at June 30, 1995......... 16,000 28.32 5,250 $31.03
Granted............................ 9,000 33.07
------
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
</TABLE>
13
--
<PAGE> 16
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
At June 30, 1997 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 three years. 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 Statement of Accounting
Standards (SFAS) No. 123 had been used, the expense
relating to the stock options would have been $13,673 in
1997 and $6,836 in 1996. Pro forma net income would have
been $18,979,100 in 1997 and $3,965,712 in 1996. Pro forma
earnings per share for 1997 would have been $15.93 rather
than the $15.94 reported earnings per share. 1996 pro
forma earnings per share would have been $3.22 compared to
reported earnings per share of $3.23.
The fair value of the options granted in January 1996
was estimated using the Black-Scholes model with the
following assumptions:
<TABLE>
<S> <C> <C> <C>
Risk-free interest
rate 6.2% Dividend yield 1.5%
Stock price
Expected life 5 years volatility 10.9%
</TABLE>
- --------------------------------------------------------------------------------
NOTE 9: The components of the provision for income taxes are:
Income
Taxes
<TABLE>
<CAPTION>
For the years ended June 30, 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 7,795,000 $2,275,000 $ 265,000
State 1,200,000 600,000 150,000
----------- ---------- ---------
8,995,000 2,875,000 415,000
----------- ---------- ---------
Deferred:
Federal (1,745,000) (465,000) (265,000)
State (450,000) (50,000)
----------- ---------- ---------
(2,195,000) (515,000) (265,000)
----------- ---------- ---------
Total provision $ 6,800,000 $2,360,000 $ 150,000
=========== ========== =========
</TABLE>
Reconciliation of the provision 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, 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory income tax $ 9,027,471 $2,153,066 $ 540,971
Benefits from loss carryforwards (403,100) (419,914)
Expenses not currently deductible 557,751 162,728
State income taxes, net of Federal
tax benefit 606,000 363,000 99,000
Reduction of deferred tax asset
valuation allowance (2,884,342) (515,000) (265,000)
Other 50,871 204,283 32,215
----------- ---------- ---------
Total provision $ 6,800,000 $2,360,000 $ 150,000
=========== ========== =========
</TABLE>
14
--
<PAGE> 17
Notes to Consolidated Financial Statements
- --------------------------------------------------
- --------------------------------------------------------------------------------
The major components of the deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
June 30, 1997 1996
----------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ (390,796) $ (377,906)
Income not currently taxable (31,782) (30,496)
Unrealized gain on investments (2,125,000) (3,530,000)
Other (137,422) (13,105)
----------- -----------
Total deferred income tax liabilities (2,685,000) (3,951,507)
----------- -----------
Expenses not currently deductible 1,847,960 1,006,510
Recognized losses not currently deductible 1,687,040 3,079,339
----------- -----------
Total deferred income tax assets 3,535,000 4,085,849
----------- -----------
Valuation allowance (2,884,342)
----------- -----------
Net deferred income tax asset (liability) $ 850,000 ($2,750,000)
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
NOTE 10: The Company's current operations are conducted
Business through two primary business segments.
Segment
Data Waste Material Recycling
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, 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Sales and Revenues:
Waste Material Recycling $25,107,197 $25,438,070 $18,663,645
Vocational School Group 4,529,044 4,467,978 3,938,406
Other 637,672 317,409 372,093
----------- ----------- -----------
$30,273,913 $30,223,457 $22,974,144
=========== =========== ===========
Operating Income (Loss) before
Income Taxes:
Waste Material Recycling $ 6,306,850 $ 6,526,681 $ 2,012,890
Vocational School Group 70,092 79,496 (629,144)
Other 406,963 (24,239) 65,760
----------- ----------- -----------
6,783,905 6,581,938 1,449,506
Corporate expenses (1,560,435) (1,061,586) (876,908)
Investment and other income 20,569,303 812,196 1,018,495
----------- ----------- -----------
Income before income taxes $25,792,773 $ 6,332,548 $ 1,591,093
=========== =========== ===========
</TABLE>
One customer represented 17%, 13% and 10% of product
revenues for the Waste Material Recycling segment for the
years ended 1997, 1996 and 1995 respectively. Another
customer represented 2%, 8% and 11% of the segment's
revenues for those respective years. The loss of these
customers would not have a material adverse effect on the
Company since the commodity product is readily marketable.
<TABLE>
<CAPTION>
For the years ended June 30, 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Identifiable Assets:
Waste Material Recycling $10,630,867 $12,627,828 $12,451,700
Vocational School Group 1,722,024 1,607,828 1,373,802
Other 140,597 87,759 115,458
Corporate 48,990,545 41,211,080 29,127,318
----------- ----------- -----------
$61,484,033 $55,534,495 $43,068,278
=========== =========== ===========
Depreciation and Amortization:
Waste Material Recycling $ 1,866,195 $ 1,850,022 $ 1,940,206
Vocational School Group 181,501 196,463 214,512
Other 53,165 58,535 66,141
Corporate 12,098 12,686 13,318
----------- ----------- -----------
$ 2,112,959 $ 2,117,706 $ 2,234,177
=========== =========== ===========
Capital Expenditures:
Waste Material Recycling $ 1,087,597 $ 1,776,232 $ 1,541,817
Vocational School Group 88,112 430,426 659,512
Other 121,431 30,374
Corporate 1,795 18,404 7,607
----------- ----------- -----------
$ 1,298,935 $ 2,255,436 $ 2,208,936
=========== =========== ===========
</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, 1997 and 1996, and the related
consolidated statements of income, shareowners' equity, and cash flows for each
of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997 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/ Deloitee & Touche LLP
Los Angeles, California
August 21, 1997
Corporate Information
- --------------------------
Directors Officers Independent Auditors
Robert Henigson Meyer Luskin Deloitte & Touche LLP
Investor Chairman, President and Los Angeles, California
Executive Officer
Meyer Luskin
Transfer Agent and Registrar
William H. Mannon John J. Crowley ChaseMellon Shareholders
Retired Officer of Vice President and Chief Services, L.L.C.
Scope Industries Financial Officer Los Angeles, California
Franklin Redlich Eleanor R. Smith Securities Listed
Retired Secretary and Controller American Stock Exchange
Paul D. Saltman, Ph.D.
Professor of Biology
University of California at
San Diego
<PAGE> 20
1997
LOGO
233 WILSHIRE BOULEVARD, SUITE 310
SANTA MONICA, CA 90401
<PAGE> 1
EXHIBIT 21
SCOPE INDUSTRIES AND SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
As of June 30, 1997
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 subsidiaries.
<PAGE> 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 21, 1997,
appearing in and incorporated by reference in this Annual Report on Form 10-K of
Scope Industries for the year ended June 30, 1997.
/s/ Deloitte & Touche LLP
Los Angeles, California
September 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 5,946,050
<SECURITIES> 18,044,706
<RECEIVABLES> 1,796,233
<ALLOWANCES> 159,167
<INVENTORY> 584,401
<CURRENT-ASSETS> 32,763,110
<PP&E> 32,204,546
<DEPRECIATION> 22,016,611
<TOTAL-ASSETS> 61,484,033
<CURRENT-LIABILITIES> 3,834,388
<BONDS> 0
0
0
<COMMON> 4,138,462
<OTHER-SE> 53,511,183
<TOTAL-LIABILITY-AND-EQUITY> 61,484,033
<SALES> 25,744,869
<TOTAL-REVENUES> 30,273,913
<CGS> 15,736,357
<TOTAL-COSTS> 25,050,443
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 25,792,773
<INCOME-TAX> 6,800,000
<INCOME-CONTINUING> 18,992,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,992,773
<EPS-PRIMARY> 15.94
<EPS-DILUTED> 15.94
</TABLE>
