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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
June 30, 1999 Number 1-3552
SCOPE INDUSTRIES
(Exact name of Registrant as specified in its charter)
California 95-1240976
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
233 Wilshire Blvd., Ste.310, Santa Monica, CA 90401
- ---------------------------------------------- -----------
(Address of principal executive office) (ZIP Code)
Registrant's telephone number, including area code (310) 458-1574
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, No Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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(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)
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The aggregate market value of the voting stock of Registrant held by
nonaffiliates of Registrant on September 15, 1999 computed by reference to the
closing sales price of such shares on such date was $21,372,541.
At September 15, 1998, 1,114,267 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
into which document
Document incorporated
- -------- --------------------
Annual Report to Shareowners for the
fiscal year ended June 30, 1999 Parts I, II, and IV
Proxy Statement for the Annual Meeting of
Shareholders to be held October 26, 1999 Parts III and IV
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended June 30, 1999
SCOPE INDUSTRIES
PART I PAGE
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 7
PART III
Item 10. Directors and Executive Officers of the Registrant 7
Item 11. Executive Compensation 7
Item 12. Security Ownership of Certain Beneficial Owners
and Management 7
Item 13. Certain Relationships and Related Transactions 7
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 8
Signatures 11
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PART I
Item 1. BUSINESS
General
The Registrant was organized in 1938 and incorporated in the State of California
on February 8, 1938. The term "Registrant" for purposes of this Item 1 includes
the subsidiaries of the Registrant, unless the content discloses otherwise.
The Registrant and its subsidiaries operate principally in two business
segments.
Waste Material Recycling Segment
In this business, the Registrant operates plants for the collection and
processing of waste bakery materials into food supplement for animals. In April,
1999, the Registrant acquired the bakery waste recycling business known as
International Processing Corporation (IPC). The manufacturing facilities
acquired in the IPC purchase, together with the manufacturing facilities already
owned and operated by the Registrant under the name of Dext company, has
resulted in the Registrant currently operating 15 plants in which animal food
supplement is produced. The Registrant's principal customers are dairies, feed
lots, pet food manufacturers and poultry farms. The Registrant also owns and
operates a plant in Vernon, California, in which bakery waste material is
processed and converted into bread crumbs for human consumption. The principal
customers are pre-packaged and restaurant supply food processors. This business
depends upon the Registrant's ability to secure surplus and waste material,
which it does under contract with bakeries and snack food manufacturers. The
competition for securing the waste and surplus material is widespread and
intensive.
This segment contributed 84%, 80% and 83% of the sales and revenues of the
Registrant for 1999, 1998 and 1997, respectively. The Waste Material Recycling
segment operated profitably for the 1997 and 1998 fiscal years but in fiscal
1999 the segment operated at a loss.
Capital expenditures for the Waste Material Recycling segment were $3,889,838
for fiscal 1999. Capital spending for this segment represented 94% of the
Registrant's total capital expenditures for 1999. In 1998 and 1997, capital
expenditures for this segment were $1,872,305 and $1,087,597, respectively.
Capital expenditures for expansion and modernization of existing bakery waste
material recycling operations are expected to continue. A new bakery waste
recycling facility is being completed in the Chicago area and will replace the
former facility that operated in Chicago. Cash flows from operations and liquid
instrument holdings are expected to be adequate to meet fiscal 2000 capital
expenditure needs.
The selling price of recycled bakery waste material is affected by fluctuating
commodity prices, particularly corn. Feed commodity prices and the Registrant's
average unit selling prices were approximately 21% lower in fiscal 1999 than
they were in the prior fiscal year. Tonnage volume for fiscal 1999 was 62% above
the prior year, due to the addition of operations of the acquired IPC facilities
for the three month period subsequent to the acquisition which is included in
the current fiscal year.
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Item 1. BUSINESS. (Continued)
Vocational School Group Segment
Scope Beauty Enterprises, Inc., doing business as Marinello Schools of Beauty,
is comprised of 12 beauty schools in which cosmetology and manicuring are
taught. The schools are located in southern California and Nevada. During the
past fiscal year, two school locations were combined and another school was
relocated to a new, larger and more attractive facility. In its vocational
beauty schools, the Registrant enrolls students who pay a tuition. Vocational
programs and Federal grants are also utilized for the students' tuition. In
addition, members of the public patronize the schools for hair styling and other
cosmetological services, which are performed by students. There usually are
competitive schools available to the public near each of the Registrant's
schools.
This segment has contributed 15%, 18% and 15% of the Registrant's total revneues
for the past three years. In fiscal 1999 the segment's operating income before
income taxes was $53,635. In fiscal 1998 the segment incurred an operating loss
of $52,893 and in fiscal 1997 the segment earned $85,693.
Other Business
The Registrant owns various oil and gas royalty and working interests. Oil and
gas revenues represented 2% or less of total sales and revenues in 1999, 1998
and 1997.
The Registrant owns various real estate, including 207 acres of land in Somis,
Ventura County, California, purchased in 1979. Various options are being
considered for the use or sale of the land. The Registrant also owns and manages
various marketable securities, U.S. Treasury Bills and other short-term
investments.
Investment income consists primarily of interest income and gains or losses on
marketable securities. At June 30, 1999 and June 30, 1998, the Registrant held
$15,000,000 and $44,250,000 par value respectively, in U.S. Treasury Bills
maturing in less than one year. In fiscal 1999, interest income from Treasury
obligations amounted to $1,733,642.
Net gains from sale of securities of $23,290,926 and $17,313,454 were recognized
in 1998 and 1997, respectively. A net loss of $288,957 was recognized in 1999.
The gains and losses were from sales of marketable securities and from
recognized losses on securities whose decline in value was deemed to be other
than temporary of $299,215 and $245,000 in 1999 and 1997, respectively.
Impact of Environmental Protection Measures
Certain of the Registrant's activities are affected by federal, state and/or
local air and water pollution control regulations. Compliance with these
regulations has required the purchase and installation of pollution abatement
equipment and adjustment of production procedures. The Registrant has followed a
policy of regular expenditures to assure compliance with such regulations. Air
pollution control equipment was installed at the Hodgkins, IL recycling facility
in fiscal 1999 costing approximately $775,000.
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Item 1. BUSINESS (Continued)
Employees
The Registrant (including its subsidiaries) employs approximately 475 persons.
Item 2. PROPERTIES
Principal properties owned by the Registrant are listed below:
Location Function
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Waste Material Recycling Segment:
Los Angeles, CA Processing Plant
San Jose, CA Processing Plant
Vernon, CA Processing Plant
Lodi, CA Collection Depot
Denver, CO Processing Plant
Conley, GA Processing Plant
Lake City, GA Processing Plant
Hodgkins, IL Processing Plant
Kansas City, KS Processing Plant
Baltimore, MD Processing Plant
Secaucus, NJ Collection Depot
Dallas, TX Processing Plant
Mt. Pleasant, TX Processing Plant
Unimproved Land:
Somis, CA
Riverside, CA
Principal properties leased by the Registrant are:
Location Function
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Waste Material Recycling Segment:
Fresno, CA Collection Depot
Chicago, IL Processing Plant
Terre Haute, IN Processing Plant
Carteret, NJ Processing Plant
Durham, NC Processing Plant
Cincinnati, OH Processing Plant
Vocation School Group Segment:
Eleven Southern Beauty Schools
California Locations
Las Vegas, NV Beauty School
Administrative Offices:
Santa Monica, CA
Tucker, GA
For additional lease information, Note 5 to the Financial Statements in the 1999
Annual Report to Shareowners, page 13, is hereby incorporated by reference.
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Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Registrant, any of
its subsidiaries or any of their property, and none other than routine
litigation incidental to the business, as noted in the 1999 Annual Report to
Shareowners, Note 6 on page 13, which is hereby incorporated by reference.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended June 30, 1999 no matters were
submitted to a vote of the Shareowners of the Registrant, either through the
solicitation of proxies, or otherwise.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Reference is made to the information with respect to the principal market on
which the Registrant's common stock is being traded, and the high and low sales
prices for each quarterly period for the last two fiscal years set forth on page
2 and outside back cover of the Registrant's 1999 Annual Report to Shareowners
and, by reference, such information is incorporated herein.
The number of holders of record of the Registrant's common stock as of July 31,
1999, based on a listing of the Registrant's Transfer Agent, was 80.
Reference is made to the information regarding the dividends declared during the
past two years with respect to the Registrant's common stock set forth on page 2
of the Registrant's 1999 Annual Report to Shareowners and, by reference, such
information is incorporated herein. Dividends per share were paid in January
1998 ($1.00), June 1998 ($0.25) and January 1999 ($1.00).
Item 6. SELECTED FINANCIAL DATA
Reference is made to the financial data with respect to the Registrant set forth
on the inside front cover of the Registrant's 1999 Annual Report to Shareowners
and, by reference, such financial data is incorporated herein.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth on pages 3 and 4 of the Registrant's 1999
Annual Report to Shareowners and, by reference, such information is incorporated
herein.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Registrant and its
subsidiaries included in its Annual Report to Shareowners for the year ended
June 30, 1999 are incorporated herein by reference:
Consolidated Balance Sheets - June 30, 1999 and 1998
Consolidated Statements of Operations - Years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Shareowners' Equity - Years ended June 30, 1999, 1998
and 1997
Consolidated Statements of Comprehensive Income - Year ended June 30,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
Unaudited Quarterly Financial Data shown on page 2 of the Registrant's 1999
Annual Report to Shareowners for the years ended June 30, 1999 and 1998 is
incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Registrant did not change accountants and there were no disagreements on any
matters involving accounting principles or financial statement disclosures
during the two-year period ended June 30, 1999.
PART III
Reference is made to the definitive Proxy Statement pursuant to Regulation 14A,
which involves the election of directors at the Annual Meeting of Shareowners to
be held on October 26, 1999, which was filed with the Securities and Exchange
Commission on September 20, 1999 and, by such reference, said Proxy Statement is
incorporated herein in response to the information called for by Part III (ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11. EXECUTIVE
COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.)
The following additional information is furnished in response to Item 10:
Executive Officers of the Registrant
The name, age, position and business experience of each of the executive
officers of the Registrant as of June 30, 1999 are listed below:
Business Experience
Name, Age and Position During Past Five Years
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Meyer Luskin, 73 Chairman, President and Chief
Chairman of the Board Executive Officer since 1961;
President and Chief Executive responsible primarily for the
Officer formation of overall corporate
policy and operations of the main
business segments.
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Robert E. McMullen, 53 Chief Operating Officer of Waste
President of Subsidiary Material Recylcing Segment since
(Scope Products, Inc.) April 1999; responsible for opera-
tions of waste material recycling business.
From February 1997 to April 1999, he was
President of International Processing
Corporation, a wholly owned subsidiary of
Darling International Inc. From March 1982 to
February 1997, he served in various
management positions of International
Processing Corporation and its predessor
companies.
F. Duane Turney, 52 Chief Operating Officer of Vocational
President of Subsidiary School Group segment since July 1991;
(Scope Beauty Enterprises, Inc.) responsible for operations of beauty
schools.
John J. Crowley, 66 Vice President-Finance and Chief
Vice President-Finance and Financial Officer since 1987;
Chief Financial Officer responsible primarily for the overall
corporate accounting and financial
policies and procedures and a variety
of treasury functions. Mr. Crowley
is a Certified Public Accountant.
Eleanor R. Smith, 67 Controller since 1974, Assistant
Secretary and Controller Secretary, 1978-1986, Secretary
and Chief Accounting Officer since 1986; responsible for financial
reporting and record keeping,
internal controls, systems and
procedures, as well as corporate
secretarial functions.
Officers are elected by the Board of Directors and serve for a one-year period
and until their successors are elected. No officers have employment contracts
with the Registrant. There are no family relationships among any of the
Registrant's directors and officers.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The following financial statements of the Registrant, together with
the Independent Auditors' Report, included as part of the Registrant's
1999 Annual Report to Share- owners, on pages 5 through 17 thereof,
are incorporated by reference and filed herewith as part of Item 8 of
this report:
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Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
Independent Auditors' Report
Consolidated Balance Sheets at June 30, 1999 and 1998
Consolidated Statements of Operations for the years
ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997
Consolidated Statements of Shareowners' Equity for the
years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the years
ended June 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Indepedent Auditors' Report on Schedule
(3) Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules have been omitted as they are not applicable, not
material or the required information is given in the financial
statements or notes thereto.
(b) The Registrant filed the following current report on Form 8-K during the
quarter ended June 30, 1999.
(1) Current Report on Form 8-K filed on April 16, 1999
including information regarding the acquisition
on April 4, 1999 of International Processing
Corporation and International Transportation, Inc.
An amendment on Form 8-K/A was filed on June 18,
1999 which included financial statements of the
acquired entities and pro forma financial statements
reflecting a combination of the Registrant's and the
acquired entitites financial statements as though the
combination had occured on July 1, 1997.
(c) Exhibits:
(3) The Bylaws of the Registrant, as amended; and the restated Articles of
Incorporation of the Registrant filed as Exhibits (3.1) and (3.2) to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1989 are
incorporated by reference.
(10) Material Contracts:
1992 Stock Option Plan, reference is made to Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8 (File No.
33-47053), and by reference such information is
incorporated herein.
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Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
(13) Annual Report to Shareowners
(21) Subsidiaries of Registrant
(22) Proxy Statement for the Annual Meeting of Shareowners to be
held on October 26, 1999 which was filed with the Securities
and Exchange Commission on September 20, 1999 and by refer-
ence such information is incorporated herein in response to
the information called for by Part III (ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11, EXECUTIVE
COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; AND ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.)
(23) Independent Auditors' Consent
(27) Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SCOPE INDUSTRIES
BY /s/ John J. Crowley 09/27/99
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John J. Crowley Date
Vice President-Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ Meyer Luskin Chairman of the Board 09/27/99
- ------------------------- President, Chief Executive -----------
Meyer Luskin Officer and Director
/s/ John J. Crowley Vice President-Finance 09/27/99
- ------------------------- Chief Financial Officer -----------
John J. Crowley (Principal Financial Officer)
/s/ Eleanor R. Smith Secretary and Controller 09/27/99
- ------------------------- (Principal Accounting Officer) -----------
Eleanor R. Smith
/s/ Robert Henigson Director 09/27/99
- ------------------------- -----------
Robert Henigson
/s/ William H. Mannon Director 09/27/99
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William H. Mannon
/s/ Franklin Redlich Director 09/27/99
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Franklin Redlich
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INDEPENDENT AUDITORS' REPORT
Board of Directors and
Shareowners
Scope Industries
Santa Monica, California
We have audited the consolidated financial statements of Scope Industries and
subsidiaries as of June 30, 1999 and 1998, and for each of the three years in
the period ended June 30, 1999, and have issued our report thereon dated August
30, 1999; such financial statements and report are included in the 1999 Annual
Report to Shareowners and are incorporated herein by reference. Our audits also
included the financial statement schedule of Scope Industries and subsidiaries,
listed in Item 14(a)(3). This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Los Angeles, California
August 30, 1999
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SCOPE INDUSTRIES AND SUBSIDIARIES
SCHEUDLE II--VALUATION AND QUALIFYING ACCOUNTS
JUNE 30, 1999
ADDITIONS
BALANCE
AT CHARGED CHARGED BALANCE
BEGINNING TO COSTS TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
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YEAR ENDED JUNE 30, 1999:
Allowance for doubtful accounts -
accounts receivable $205,318 $188,658 $194,987 (a) $104,078 (b) $484,885
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts -
accounts receivable $159,167 $116,298 $ 0 $ 70,147 (b) $205,318
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts -
accounts receivable $149,180 $ 13,139 $ 0 $ 3,152 (b) $159,167
Valuation allowances-
notes receivable $700,000 $ 0 $ 0 $700,000(c) $ 0
(a) Valuation allowances received upon acquisition of International Processing
Corporation.
(b) Uncollectible accounts charged against allowance, net of bad debt
recoveries.
(c) Valuation allowance credit - note collected in full.
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