<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File
September 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
--------------
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 preceeding 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 24, 1997
- -------------------------- -------------------------------
Common Stock, no par value 1,133,352
<PAGE> 2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information:
Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997 3
Consolidated Statements of Income -
Three Months Ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Three Months Ended
September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Results of Operations and
Financial Condition 8
Part II. Other Information:
Item 2. Increases and Decreases in
Outstanding Securities and
Indebtedness 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1997 1997
------------ -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,326,285 $ 5,946,050
Treasury bills (par value $25,500,000 at
September 30, 1997 and $24,000,000 at
June 30, 1997) 24,972,766 23,540,939
Accounts and notes receivable, less allowance
for doubtful accounts of $173,769 at September
30, 1997 and $159,167 at June 30, 1997 1,557,456 1,637,066
Inventories 652,332 584,401
Deferred income taxes 720,000 675,000
Prepaid expenses and other current assets 456,765 379,654
----------- -----------
TOTAL CURRENT ASSETS 29,685,604 32,763,110
----------- -----------
NOTES RECEIVABLE 714,632 232,276
----------- -----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 22,574,139 22,551,992
Land, buildings and improvements 9,644,109 9,652,554
----------- -----------
32,218,248 32,204,546
Less accumulated depreciation and amortization 22,338,841 22,016,611
----------- -----------
9,879,407 10,187,935
----------- -----------
OTHER ASSETS:
Deferred charges and other assets 70,943 256,006
Investments available for sale-at fair value 19,697,613 15,539,706
Other equity investments-at cost 3,506,000 2,505,000
----------- -----------
23,274,556 18,300,712
----------- -----------
$63,554,199 $61,484,033
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 55,489 $
Accounts payable 767,472 1,104,205
Other accrued liabilities 1,098,532 1,255,321
Accrued payroll and related employee benefits 818,994 940,631
Income taxes payable 506,768 534,231
----------- -----------
TOTAL CURRENT LIABILITIES 3,247,255 3,834,388
----------- -----------
DEFERRED INCOME TAXES 1,325,000
----------- -----------
4,572,255 3,834,388
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares
authorized; shares issued and outstanding
September 30, 1997 1,136,352
June 30, 1997 1,168,665 4,138,462 4,138,462
Retained earnings 44,248,238 45,513,699
Net unrealized gain on investments 10,595,244 7,997,484
----------- -----------
58,981,944 57,649,645
----------- -----------
$63,554,199 $61,484,033
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE> 4
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Sales $ 5,357,564 $ 8,692,500
Vocational school revenues 1,137,241 1,089,248
----------- -----------
6,494,805 9,781,748
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 3,687,645 4,411,164
Vocational school expenses 901,160 881,062
Depreciation and amortization 519,577 522,024
General and administrative 1,086,475 1,050,640
----------- -----------
6,194,857 6,864,890
----------- -----------
299,948 2,916,858
Investment and other income 429,867 9,905,910
----------- -----------
Income before income taxes 729,815 12,822,768
Provision for income taxes 315,000 3,565,000
----------- -----------
NET INCOME $ 414,815 $ 9,257,768
=========== ===========
NET INCOME PER SHARE $ 0.35 $ 7.72
=========== ===========
Weighted average number of shares
outstanding 1,168,954 1,199,140
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
SCOPE INDUSTRIES AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 414,815 $ 9,257,768
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 519,577 522,024
Gains on investments available for sale (9,435,635)
Losses (Gains) on sale of equipment 18,046 (1,309)
Deferred income taxes (45,000) (170,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 26,054 (265,121)
Inventories (67,931) 7,348
Prepaid expenses and other current assets (77,111) (60,771)
Accounts payable and accrued liabilities (615,159) (727,701)
Income taxes payable (27,463) 3,386,799
Other 10,063 13,620
----------- -----------
Net cash flows from operating activities 155,891 2,527,022
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (8,181,827) (5,157,297)
Maturities of U.S. Treasury bills 6,750,000 1,785,000
Purchase of property and equipment (282,893) (513,780)
Disposition of property and equipment 53,798 13,500
Purchase of investments available for sale (60,147) (2,900,536)
Purchase of other equity investments (1,001,000)
Disposition of investments available for sale 14,164,386
Purchase of long-term note receivable (428,800)
----------- -----------
Net cash flows (used in) from investing
activities (3,150,869) 7,391,273
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to shareowners (297,667)
Repurchases of common stock (1,680,276) (480,405)
Change in bank overdraft 55,489 (250,686)
----------- -----------
Net cash used in financing activities (1,624,787) (1,028,758)
----------- -----------
Net (decrease) increase in cash
and cash equivalents (4,619,765) 8,889,537
Cash and cash equivalents at beginning
of period 5,946,050 1,721,939
----------- -----------
Cash and cash equivalents at end of period $ 1,326,285 $10,611,476
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE> 6
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
1. In the opinion of the Registrant, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the
Company's financial position as of September 30, 1997 and June 30, 1997,
and the results of its operations for the three months ended September
30, 1997 and 1996. The accounting policies followed by the Company are
set forth in Note 1 of its financial statements in its 1997 Annual
Report which is incorporated by reference on Form 10-K.
2. Quarterly results of operations are not necessarily indicative of the
results to be expected for the full year.
3. Treasury bills consisted of the following: (at adjusted cost which
approximates fair value)
<TABLE>
<CAPTION>
September 30 June 30
1997 1997
------------ -----------
<S> <C> <C>
Held to maturity $16,116,565 $22,591,800
Available for sale 8,856,201 949,139
----------- -----------
$24,972,766 $23,540,939
=========== ===========
</TABLE>
4. Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30 June 30
1997 1997
------------ -----------
<S> <C> <C>
Finished products $ 349,139 $ 255,850
Raw materials 138,063 134,968
Operating supplies 165,130 193,583
----------- -----------
$ 652,332 $ 584,401
=========== ============
</TABLE>
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<PAGE> 7
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
(CONTINUED)
5. Investments consisted of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gains Before
Provision For
Cost Income Taxes Fair Value
---- ------------ ----------
<S> <C> <C> <C>
At September 30, 1997:
Investments available
for sale $5,477,369 $14,220,244 $19,697,613
Other equity investments 3,506,000 3,506,000(a)(b)
At June 30, 1997:
Investments available
for sale $5,417,222 $10,122,484 $15,539,706
Other equity investments 2,505,000 2,505,000(a)
</TABLE>
(a) No quoted prices are available for these securities.
(b) At September 30, 1997 the Registrant held 1,875,000 shares of
OSI Systems, Inc. common stock which, in the financial
statements, have been valued at their cost of $2,500,000. In
October 1997, an initial public offering of OSI Systems, Inc.
common stock occured. Included in the public offering were
227,097 shares sold by the Registrant. Proceeds of $2,821,173
were received from the sale of those shares and a pre-tax gain
of $2,518,378 resulted from the October 1997 transaction. The
Registrant, as a condition of participating in the initial
public offering, has agreed to refrain from disposing of any of
its remaining 1,647,903 shares for a six month period following
the public offering. Financial statements, when issued by the
Registrant for periods subsequent to the October 1997 public
offering will classify OSI Systems, Inc. holdings as
available-for-sale investments whose valuation will be at fair
value.
6. During the three month period ended September 30, 1997, there were no
investment gains or losses recognized in the determination of income.
Unrealized investment holding gains (excluded from income but reported,
net of income taxes, as a separate component of shareowners' equity)
increased by $2,597,760 to $10,595,244 at September 30, 1997 from
$7,997,484 at June 30, 1997.
During the three months ended September 30, 1996, investment gains of
$9,435,635 were recognized and included as income. Unrealized investment
holding gains, (excluded from income but reported, net of income taxes,
as a separate component of shareowners' equity) decreased by $5,461,370
to $8,906,637 at September 30, 1996 from $14,368,007 at June 30, 1996.
7. The provision for income taxes for the three months ended September 30,
1997 represents an effective rate 43.2% for federal and state income
taxes. For the three month period ended September 30, 1996 the
effective rate for income taxes was 27.8%. In the 1996 period, deferred
tax benefits were recognized, which reduced the provision for income
taxes to an effective rate that was lower the statutory federal income
tax rate.
-7-
<PAGE> 8
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the first quarter ended September 30, 1997, net income was down 95.5% from
the first quarter of last year. Net income in the current quarter was $414,815
or $0.35 per share compared to $9,257,768 or $7.72 per share for the first
quarter of last fiscal year. Last year's results included $9,435,635 in net
gains before income taxes from sales of investments. Total operating revenues
for this year's first quarter were 33.6% less than the revenues for the same
quarter last year. Waste Material Recycling segment sales for the current
quarter fell 39.2% from last year's first quarter revenues. Unit selling prices
were dramatically below last year's prices due to the much lower price levels
for corn and other animal feed commodities which recycled bakery waste material
prices must compete with. The average price received for materials sold in this
year's first quarter was 38.1% below last year's first quarter average price.
Tonnage sold in the current quarter was 2.9% below last year's first quarter.
Vocational School Group revenues this quarter were 4.4% above the comparable
quarter last year. Operating costs for the Waste Material Recycling segment were
16.4% lower in the current quarter than for the same quarter last year.
Operations for the quarter were profitable in the Waste Material Recycling
segment. However, the segment's sales revenue decline was greater than the
reduction in costs which caused current quarter margins to shrink compared to
the comparable quarter last year. The Vocational School Group operations
reported small losses in both the current quarter and the comparable quarter
last year. Consolidated operating earnings for the first quarter of the current
year were 89.7% below the operating earnings in the first quarter last year.
Investment and other income for the three months ended September 30, 1997 was
$429,867 compared to $9,905,910 for the same three months last year. Last year's
income included $9,435,635 in net gains from sales of investments. No investment
sales occurred in the current three month period.
FINANCIAL POSITION
Working Capital was $26,438,349 at September 30, 1997. It was $28,928,722 at
June 30, 1997. The working capital ratio at September 30, 1997 was 9.1 and was
8.5 at June 30, 1997.
During the first quarter ended September 30, 1997, the net unrealized
appreciation on investment securities held as available for sale increased by
$4,097,760 (from $10,122,484 to $14,220,244). No securities were sold during the
period. Shareowners' equity at September 30, 1997 reflects $10,595,244 for net
unrealized gains on investments after a provision for deferred taxes. The
unrealized holding gains are excluded from earnings.
At September 30, 1997, the Registrant held 1,875,000 common shares of OSI
Systems, Inc., which in the financial statements, are classified as Other Equity
Investments and are valued at their cost of $2,500,000. In
-8-
<PAGE> 9
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
October 1997, an initial public offering of OSI Systems, Inc. common
stock occurred. Proceeds of $2,821,173 were received from the sale of 227,097
shares which were included in the public offering. A pre-tax gain of $2,518,378
resulted from the October 1997 transaction. The Registrant, as a condition of
participating in the public offering, has agreed to refrain from disposing of
any of its remaining 1,647,903 shares for a six month period following the
public offering. Financial statements, when issued by the Registrant for periods
subsequent to the October 1997 public offering, will classify OSI Systems, Inc.
holdings as available-for-sale investments whose valuation will be at fair
value.
TAXES
The provision for income taxes for the three month period ended September 30,
1997 is $315,000 and represents an effective rate of 43.2% for federal and state
income taxes. For the first three months of the prior fiscal year, the income
tax provision was $3,565,000 and the effective tax rate was 27.8%. In the 1996
period, deferred tax benefits were recognized, which reduced the provision for
income taxes to an effective rate that is lower than the statuary federal income
tax rate.
FORWARD LOOKING STATEMENTS
Forward looking statements included in the Management's Discussion and Analysis
of Results of Operations and Financial Condition and elsewhere in this
quarterly report are subject to risks and uncertainties that could affect
actual future results. Potential risks and uncertainties include, but are not
limited to, general business conditions, unusual volatility in equity and
interest rate markets, disruptions in the availability or pricing of raw
materials, transportation difficulties, changing government educational aid
policies, or disruption of operations from acts of God.
-9-
<PAGE> 10
SCOPE INDUSTRIES AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 2. Increases and Decreases in Outstanding Securities and Indebtedness.
Increases and decreases in outstanding equity securities in the three months
ending September 30, 1997 were as follows:
<TABLE>
<CAPTION>
Common Stock
No Par Value
------------
<S> <C>
Shares outstanding June 30, 1997 1,168,665
Shares purchased and retired
during the three months (32,313)
---------
Shares outstanding September 30, 1997 1,136,352
=========
</TABLE>
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the three months ended September 30, 1997, the Registrant
purchased and retired 32,313 shares of common stock at a cost of $1,680,276.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of shareowners held on October 28, 1997 with 1,168,665
shares entitled to vote, five directors were elected to serve for the ensuing
year and until their successors have been elected and qualified.
<TABLE>
<CAPTION>
VOTES VOTES ABSTAINED
DIRECTORS FOR WITHHELD FROM VOTING TOTAL
--------- --- -------- ----------- -----
<S> <C> <C> <C> <C>
Robert Henigson 1,127,717 1,127,717
Meyer Luskin 1,127,717 1,127,717
William H. Mannon 1,127,717 1,127,717
Franklin Redlich 1,127,717 1,127,717
Paul D. Saltman 1,121,917 5,800 1,127,717
</TABLE>
Item 5. Other Information.
On October 28, 1997 the Registrant's board of directors declared a regular
dividend of $1.00 per share payable on January 5, 1998 to shareowners of record
at December 1, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits - None
(B) No Form 8-K was filed for the quarter ended September 30, 1997.
-10-
<PAGE> 11
PART II. OTHER INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and accepting responsibility as the
signatory.
SCOPE INDUSTRIES
(Registrant)
DATE: November 13, 1997 /s/ John J. Crowley
----------------------- -------------------------------------
John J. Crowley, Vice President
and Chief Financial Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,326,285
<SECURITIES> 23,203,613
<RECEIVABLES> 1,731,225
<ALLOWANCES> 173,769
<INVENTORY> 652,332
<CURRENT-ASSETS> 29,685,604
<PP&E> 32,218,248
<DEPRECIATION> 22,338,841
<TOTAL-ASSETS> 63,554,199
<CURRENT-LIABILITIES> 3,247,255
<BONDS> 0
0
0
<COMMON> 4,138,462
<OTHER-SE> 54,843,482
<TOTAL-LIABILITY-AND-EQUITY> 63,554,199
<SALES> 5,357,564
<TOTAL-REVENUES> 6,494,805
<CGS> 3,687,645
<TOTAL-COSTS> 6,194,857
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 729,815
<INCOME-TAX> 315,000
<INCOME-CONTINUING> 414,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 414,815
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
