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, 1996 Number 1-3552 SCOPE INDUSTRIES ---------------- (Exact name of Registrant as specified in its charter) California 95-1240976 - ------------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 233 Wilshire Blvd., Ste.310, Santa Monica, CA 90401 - --------------------------------------------- ----- (Address of principal executive office) (ZIP Code) Registrant's telephone number, including area code (310) 458-1574 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - -------------------------- ----------------------- Common Stock, No Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---------------- (Title of Class) Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) ----- The aggregate market value of the voting stock of Registrant held by nonaffiliates of Registrant on August 30, 1996 computed by reference to the closing sales price of such shares on such date was $16,411,941. At August 30, 1996, 1,190,665 shares of the Registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K into which document incorporated ------------ Document - -------- Annual Report to Shareowners for the fiscal year ended June 30, 1996 Parts I, II, and IV Proxy Statement for the Annual Meeting of Shareholders to be held October 22, 1996 Parts III and IV 2 TABLE OF CONTENTS FORM 10-K ANNUAL REPORT For the Fiscal Year Ended June 30, 1996 SCOPE INDUSTRIES PART I PAGE Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 6 Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 8. Financial Statements and Supplementary Data 6 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 7 PART III Item 10. Directors and Executive Officers of the Registrant 7 Item 11. Executive Compensation 7 Item 12. Security Ownership of Certain Beneficial Owners and Management 7 Item 13. Certain Relationships and Related Transactions 7 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 8 Signatures 10 2 3 PART I Item 1. BUSINESS General The Registrant was organized in 1938 and incorporated in the State of California on February 8, 1938. The term "Registrant" for purposes of this Item 1 includes the subsidiaries of the Registrant, unless the content discloses otherwise. The Registrant and its subsidiaries operate principally in two business segments. Waste Material Recycling Segment In this business, the Registrant owns and operates plants under the name of Dext Company in Los Angeles and San Jose, California; Baltimore, Maryland; Chicago, Illinois; Dallas, Texas; and Denver, Colorado. It also operates depots in 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 80% and 84% of the sales and revenues of the Registrant for 1996, 1995 and 1994. The Waste Material Recycling segment has operated profitably for the three most recent fiscal years. Capital expenditures for the Waste Material Recycling segment were $1,776,232 for fiscal 1996. Capital spending for this segment represented 79% of the Registrant's total capital expenditures for 1996 In 1995 and 1994, capital expenditures for this segment were $1,541,817 and $2,305,760 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 1997 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 35% higher in fiscal 1996 than they were in the prior year. Tonnage volume for fiscal 1996 was constant with the prior year. The higher sales prices in 1996 contributed to the increased profits. 3 4 Item 1. BUSINESS. (Continued) Vocational School Group Segment Scope Beauty Enterprises, Inc., doing business as Marinello Schools of Beauty, is comprised of 13 beauty schools in which cosmetology and manicuring are taught. The schools are located in southern California and Nevada. In its vocational beauty schools, the Registrant enrolls students who pay a tuition. Vocational programs and Federal grants and loan programs are also utilized for the students' tuition. In addition, members of the public patronize the schools for hair styling and other cosmetological services which are performed by students. There usually are competitive schools available to the public near each of the Registrant's schools. This segment has contributed between 15% and 17% of the Registrant's total revenues for the past three years. The segment earned $79,496 in operating income for the 1996 fiscal year. The segment incurred operating losses of $629,144 and $604,407 for the fiscal years 1995 and 1994 respectively. Other Business The Registrant owns various oil and gas royalty and working interests. Oil and gas revenues represented between 1% and 2% of total sales and revenues in 1996, 1995 and 1994. 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, 1996, the Registrant held $5,035,000 par value in U.S. Treasury Bills maturing in less than one year. In fiscal 1996, interest income from Treasury obligations amounted to $240,276. Net gains from sale of securities of $132,698 and $1,619,311 were recognized in 1995 and 1994 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 $749,900 and $160,000 in 1996 and 1994, 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 costing approximately $400,000 was completed in fiscal 1996. 4 5 Item 1. BUSINESS (Continued) Employees The Registrant (including its subsidiaries) employs approximately 190 persons. Item 2. PROPERTIES Principal properties owned by the Registrant are listed below: Principal Operation Location Function --------- -------- -------- Waste Material Los Angeles, CA Processing Plant Recycling San Jose, CA Processing Plant Vernon, CA Processing Plant Lodi, CA Collection Depot Chicago, IL Processing Plant Denver, CO Processing Plant Baltimore, MD Processing Plant Secaucus, NJ Collection Depot Dallas, TX Processing Plant Unimproved Land Somis, CA Riverside, CA Twelve beauty schools in southern California and one school in Nevada operate in leased properties. One collection depot for the Waste Material Recycling segment and the corporate administrative office operate in leased premises. No lease has a material effect on the Registrant's operations. For additional lease information, Note 4 to the Financial Statements in the 1996 Annual Report to Shareowners, Page 13, 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 1996 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, 1996, no matters were submitted to a vote of the Shareowners of the Registrant, either through the solicitation of proxies, or otherwise. 5 6 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Reference is made to the information with respect to the principal market on which the Registrant's common stock is being traded, and the high and low sales prices for each quarterly period for the last two fiscal years set forth on Page 3 and inside back cover of the Registrant's 1996 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 2, 1996, based on a listing of the Registrant's Transfer Agent, was 109. 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 1996 Annual Report to Shareowners and, by reference, such information is incorporated herein. On September 9, 1996 a special cash dividend of $0.25 per share was paid to shareowners. 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 1996 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 1996 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, 1996 are incorporated herein by reference: Consolidated Balance Sheets - June 30, 1996 and 1995 Consolidated Statements of Income - Years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Shareowners' Equity - Years ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Unaudited Quarterly Financial Data shown on Page 3 of the Registrant's 1996 Annual Report to Shareowners for the years ended June 30, 1996 and 1995 is incorporated herein by reference. 6 7 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Registrant did not change accountants and there were no disagreements on any matters involving accounting principles or financial statement disclosures during the two-year period ended June 30, 1996. 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 22, 1996, which was filed with the Securities and Exchange Commission on September 10, 1996 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, 1996 are listed below: Business Experience Name, Age and Position During Past Five Years - ---------------------- ---------------------- Meyer Luskin, 70 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, 49 Chief Operating Officer of Vocational President of Subsidiary School Group segment since July 1991; (Scope Beauty Enterprises, Inc.) responsible for operations of beauty schools. John J. Crowley, 63 Vice President-Finance and Chief Vice President-Finance and Financial Officer since 1987; Chief Financial Officer responsible primarily for the overall corporate accounting and financial policies and procedures and a variety of treasury functions. Mr. Crowley is a Certified Public Accountant. 7 8 Eleanor R. Smith, 64 Controller since 1974, Assistant Secretary and Controller Secretary, 1978-1986, Secretary and Chief Accounting Officer since 1986; responsible for financial reporting and record keeping, internal controls, systems and procedures, as well as corporate secretarial functions. Officers are elected by the Board of Directors and serve for a one-year period and until their successors are elected. No officers have employment contracts with the Registrant. There are no family relationships among any of the Registrant's directors and officers. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) The following financial statements of the Registrant, together with the Independent Auditors' Report, included as part of the Registrant's 1996 Annual Report to Shareowners, 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, 1996 and 1995 Consolidated Statements of Income for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Shareowners' Equity for the years ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (2) Indepedent Auditors' Report on Schedule (3) Financial Statement Schedule Schedule II: Valuation and Qualifying Accounts All other schedules have been omitted as they are not applicable, not material or the required information is given in the financial statements or notes thereto. (b) No reports on Form 8-K were filed by the Registrant for the period covered by this report. (c) Exhibits: (3) The Bylaws of the Registrant, as amended; and the restated Articles of Incorporation of the Registrant filed as Exhibits (3.1) and (3.2) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 are incorporated herein by reference. 8 9 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (10) Material Contracts: 1992 Stock Option Plan, reference is made to Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-47053), and by reference such information is incorporated herein. (13) Annual Report to Shareowners (21) Subsidiaries of Registrant (23) Proxy Statement for the Annual Meeting of Shareowners to be held on October 22, 1996 which was filed with the Securities and Exchange Commission on September 10, 1996 and by reference such information is incorporated herein. (24) Independent Auditors' Consent (27) Financial Data Schedule 9 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOPE INDUSTRIES BY /s/ John J. Crowley 09-24-96 ----------------------- ---------- John J. Crowley Date Vice President-Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Meyer Luskin Chairman of the Board 09-24-96 - ------------------------- President, Chief Executive ---------- Meyer Luskin Officer and Director /s/ John J. Crowley Vice President-Finance 09-24-96 - ------------------------- Chief Financial Officer ---------- John J. Crowley (Principal Financial Officer) /s/ Eleanor R. Smith Secretary and Controller 09-24-96 - ------------------------- (Principal Accounting Officer) ---------- Eleanor R. Smith /s/ Richard L. Fruin, Jr. Director 09-24-96 - ------------------------- ---------- Richard L. Fruin, Jr. /s/ William H. Mannon Director 09-24-96 - ------------------------- ---------- William H. Mannon /s/ Franklin Redlich Director 09-24-96 - ------------------------- ---------- Franklin Redlich /s/ Paul D. Saltman, Ph.D. Director 09-24-96 - ------------------------- ---------- Paul D. Saltman, Ph.D. 10 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, 1996 and 1995, and for each of the three years in the period ended June 30, 1996, and have issued our report thereon dated August 23, 1996; such financial statements and report are included in your 1996 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 23, 1996 11 12 SCOPE INDUSTRIES AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS JUNE 30, 1996 Additions Balance Charged at to Costs Charged Balance Beginning and to Other Deductions at End Description of Period Expenses Accounts (a) of Period ----------- --------- -------- -------- --- --------- YEAR ENDED JUNE 30, 1996: Allowance for doubtful accounts - $298,834 $16,908 $0 $166,562 $149,180 accounts receivable Valuation allowances - notes receivable 700,000 0 0 0 700,000 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 (a) Uncollectible accounts charged against allowance, net of bad debt recoveries. -12-