<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
December 31, 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
--------------
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 January 27, 1997
- -------------------------- --------------------------------
Common Stock, no par value 1,193,465
<PAGE> 2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information:
Consolidated Balance Sheets -
December 31, 1996 and June 30, 1996 3
Consolidated Statements of Income -
Three Months Ended
December 31, 1996 and 1995 4
Consolidated Statements of Income -
Six Months Ended
December 31, 1996 and 1995 5
Consolidated Statements of Cash Flow -
Six Months Ended
December 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
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 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1996 1996
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,420,875 $ 1,721,939
Treasury bills (par value $25,250,000 at
December 31, 1996 and $5,035,000 at
June 30, 1996) 24,393,441 4,973,377
Accounts and notes receivable, less allowance
for doubtful accounts of $149,196 at December
31, 1996 and $149,180 at June 30, 1996 1,464,773 5,173,445
Inventories 532,095 531,637
Prepaid expenses and other current assets 569,340 531,639
----------- -----------
TOTAL CURRENT ASSETS 28,380,524 12,932,037
----------- -----------
NOTES RECEIVABLE 1,137,752 1,154,378
----------- -----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 22,650,586 22,160,240
Land, buildings and improvements 9,711,409 9,743,940
----------- -----------
32,361,995 31,904,180
Less accumulated depreciation
and amortization 21,518,199 20,867,899
----------- -----------
10,843,796 11,036,281
----------- -----------
OTHER ASSETS:
Deferred charges and other assets 103,669 130,930
Investments available for sale-at fair value 19,104,595 29,647,443
Investments held to maturity-at cost 633,426 633,426
----------- -----------
19,841,690 30,411,799
----------- -----------
$60,203,762 $55,534,495
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ $ 250,686
Accounts payable 824,757 1,410,953
Other accrued liabilities 2,464,999 1,447,406
Accrued payroll and related
employee benefits 1,063,632 1,069,429
Income taxes payable 2,836,229 467,983
----------- -----------
TOTAL CURRENT LIABILITIES 7,189,617 4,646,457
----------- -----------
DEFERRED INCOME TAXES 460,000 2,750,000
----------- -----------
7,649,617 7,396,457
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares
authorized; shares issued and outstanding
December 31, 1996 1,193,465
June 30, 1996 1,202,565 4,040,287 3,921,287
Retained earnings 42,055,079 29,848,744
Net unrealized gain on investments 6,458,779 14,368,007
----------- -----------
52,554,145 48,138,038
----------- -----------
$60,203,762 $55,534,495
=========== ===========
</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
DECEMBER 31
-----------------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Sales $ 5,854,334 $ 6,327,743
Vocational school revenues 1,192,327 1,199,997
----------- -----------
7,046,661 7,527,740
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 3,854,176 3,736,452
Vocational school expenses 830,813 848,017
Depreciation and amortization 526,811 535,719
General and administrative 947,082 1,160,740
----------- -----------
6,158,882 6,280,928
----------- -----------
887,779 1,246,812
Investment and other income 6,565,307 169,205
----------- -----------
Income before income taxes 7,453,086 1,416,017
Provision for income taxes 2,525,000 530,000
----------- -----------
NET INCOME $ 4,928,086 $ 886,017
=========== ===========
INCOME PER SHARE $ 4.11 $ 0.72
=========== ===========
Weighted average number of shares
outstanding 1,198,989 1,234,775
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
-----------------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Sales $14,546,834 $12,011,819
Vocational school revenues 2,281,575 2,386,102
----------- -----------
16,828,409 14,397,921
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 8,265,340 7,174,613
Vocational school expenses 1,711,875 1,731,368
Depreciation and amortization 1,048,835 1,060,825
General and administrative 1,997,722 2,383,558
----------- -----------
13,023,772 12,350,364
----------- -----------
3,804,637 2,047,557
Investment and other income 16,471,217 904,833
----------- -----------
Income before income taxes 20,275,854 2,952,390
Provision for income taxes 6,090,000 980,000
----------- -----------
NET INCOME $14,185,854 $ 1,972,390
=========== ===========
NET INCOME PER SHARE $ 11.83 $ 1.59
=========== ===========
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 1.25 $ 0.50
Weighted average number of shares
outstanding 1,199,109 1,239,064
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE> 6
SCOPE INDUSTRIES AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
-----------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $14,185,854 $ 1,972,390
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 1,048,835 1,060,825
Gains on sales of investments (15,418,655) (73,984)
Gains on sales of equipment (10,655) (20,814)
Deferred income taxes (235,000) (210,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 1,225,298 (171,226)
Inventories (458) 90,387
Bank overdraft (250,686) 282,770
Prepaid expenses and other current assets (37,701) 200,021
Accounts payable and accrued liabilities 425,600 1,263,243
Income taxes payable 2,368,246 266,400
Other assets 27,261 (17,189)
----------- -----------
Net cash flows from operating activities 3,327,939 4,642,823
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (24,955,064) (6,287,750)
Maturities of U.S. Treasury bills 5,535,000 3,830,000
Purchase of property and equipment (868,541) (1,123,612)
Disposition of property and equipment 22,846 386,241
Purchase of long-term notes receivable (230,000)
Purchase of investments available for sale (3,153,342) (1,742,044)
Proceeds from sale of investments available for sale 21,650,617 2,071,511
----------- -----------
Net cash flows used in investing activities (1,768,484) (3,095,654)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to shareowners (1,491,132) (616,783)
Repurchases of common stock (488,387) (348,375)
Proceeds from stock options exercised 119,000
----------- -----------
Net cash flows used in financing activities (1,860,519) (965,158)
----------- -----------
Net change in cash and cash equivalents (301,064) 582,011
Cash and cash equivalents at beginning
of period 1,721,939 242,794
----------- -----------
Cash and cash equivalents at end of period $ 1,420,875 $ 824,805
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE> 7
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1996
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 Scope Industries'
financial position as of December 31, 1996 and June 30, 1996, and the
results of its operations for the three and six months ended December 31,
1996 and 1995. The accounting policies followed by the Registrant are set
forth in Note 1 of its financial statements in the 1996 Scope Industries
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. Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31 June 30
1996 1996
-------- --------
<S> <C> <C>
Finished products $185,423 $184,520
Raw materials 120,894 144,853
Operating supplies 225,778 202,264
-------- --------
$532,095 $531,637
======== ========
</TABLE>
4. During the six month period ended December 31, 1996, gains on sale of
investments of $15,418,655 were recognized and included as income.
Unrealized gains on investments available for sale, (excluded from income
but reported, net of income taxes, as a separate component of shareowners'
equity) decreased by $7,909,228 to $6,458,779 at December 31, 1996 from
$14,368,007 at June 30, 1996.
During the six month period ended December 31, 1995, gains on sale of
investments of $342,652 were recognized and included as income. Unrealized
gains on investments available for sale, (excluded from income but
reported, net of income taxes as a separate component of shareowners'
equity) were $10,811,974 at December 31, 1995.
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
Before Provision
Cost For Income Taxes Fair Value
---- ---------------- ----------
<S> <C> <C> <C>
At December 31, 1996:
Investments held to
maturity $ 633,426 $ (19,338) $ 614,088
Investments available
for sale 11,170,815 7,933,780 19,104,595
At June 30, 1996:
Investments held to
maturity $ 633,426 $ (29,826) $ 603,600
Investments available
for sale 11,749,436 17,898,007 29,647,443
</TABLE>
-7-
<PAGE> 8
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net income for the second quarter ended December 31, 1996 was $4,928,086 or
$4.11 per share compared to $886,017 or $0.72 per share for the same quarter
last year. Total operating revenues for the second quarter were 6.4% less than
the revenues for the same quarter last year. Waste Material Recycling segment
sales for the current quarter fell 8.6% from last year's second quarter
revenues. Both unit selling prices and total tonnage were below those in last
year's second quarter. Operating costs for the Waste Material Recycling segment
increased 3.8% compared to the same quarter last year. The segment's lower sales
revenues and higher costs caused current quarter margins to shrink compared to
both the previous quarter and the comparable quarter last year. Operations for
the quarter were profitable in the Waste Material Recycling segment and the
Vocational School Group segment.
Investment and other income for the quarter ended December 31, 1996 was
$6,565,307 compared to $169,205 for the same three months last year. The
investment income included gains of $5,983,020 from sales of investments during
the current period compared to losses of $139,695 from investment sales in the
prior year's second quarter.
For the six months ended December 31, 1996, net income was $14,185,854 or $11.83
per share. Last year net income was $1,972,390 or $1.59 per share for the
comparable six months. Revenues for the six months ended December 31, 1996 were
16.9% above revenues for the comparable six months last year. The increased
revenue in the current six month period is a result of higher product prices in
this year's first quarter. Corn prices were sharply higher during the first
quarter of this year and the Company's Dried Bakery Product sold at higher
prices as a direct result. Corn prices fell sharply in the second quarter. The
Company's second quarter revenues reflected the corn price drop and were below
last year as commented on in the opening paragraph of this discussion. The Waste
Material Recycling segment and the Vocational School Group segment operated
profitably during the current and the previous year's six months periods ending
December 31.
Investment and other income for the six months ended December 31, 1996 was
$16,471,217. It was $904,833 for the comparable six months last year. Gains on
investments sold were $15,418,655 for the current six months and were $342,652
in the comparable period last year.
-8-
<PAGE> 9
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL POSITION
Working Capital was $21,190,907 at December 31, 1996. It was $8,285,580 at June
30, 1996. The working capital ratio at December 31, 1996 was 3.9 and at June 30,
1996 was 2.8.
During the six months ended December 31, 1996, the Company sold investment
securities whose aggregate proceeds totaled $21,650,617. The securities disposed
of had been held for periods ranging from one to fourteen years with a majority
having been held over ten years. The sales of investments and the resulting gain
recognition for the six month period resulted in a decrease in the unrealized
gain on investments available for sale. Unrealized investment gain on
investments available for sale, net of deferred income taxes, was $6,458,779 at
December 31, 1996 and was $14,368,007 at June 30, 1996.
Investments are accounted for under Statement of Accounting Standards No. 115
(SFAS 115) "Accounting for Certain Investments in Debt and Equity Securities".
At December 31, 1996, investments include $7,933,780 in unrealized gains based
on fair values that exceed adjusted costs for investments available for sale.
Shareowners' equity under the provisions of SFAS 115 reflects $6,458,779 net
unrealized gain on investments after a provision for deferred taxes. In
accordance with SFAS 115, the unrealized holding gains are excluded from
earnings.
TAXES
The provision for income taxes for the six month period ended December 31, 1996
is $6,090,000 and represents an effective rate of 30.0% for federal and state
income taxes. Valuation reserves have been eliminated for those deferred tax
assets that can be realized on certain investment gains being recognized during
the period. Recognizing the deferred tax benefit during the period reduces the
provision for income taxes to an effective rate that is lower than the statuary
federal income tax rate. For the first six months of the prior fiscal year, the
income tax provision was $980,000 and the effective tax rate was 33.2%.
-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 six months
ending December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Common Stock
No Par Value
------------
<S> <C>
Shares outstanding June 30, 1996 1,202,565
Incentive stock options exercised 4,000
Shares purchased and retired
during the six months (13,100)
---------
Shares outstanding December 31, 1996 1,193,465
=========
</TABLE>
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the six months ended December 31, 1996, the Registrant purchased
and retired 13,100 shares of common stock at a cost of $488,387.
Item 5. Other Information.
On October 22, 1996 the Registrant's board of directors declared a regular
annual dividend of $0.70 per share and an extra dividend of $0.30 per share
payable on January 6, 1997 to shareowners of record at December 2, 1996.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits - None
(B) No Form 8-K was filed for the quarter ended December 31, 1996.
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: February 11, 1996 /s/ John J. Crowley
--------------------- ---------------------------------
John J. Crowley, Vice President
and Chief Financial Officer
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE QUARTER ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,420,875
<SECURITIES> 19,738,021
<RECEIVABLES> 1,464,773
<ALLOWANCES> 149,196
<INVENTORY> 532,095
<CURRENT-ASSETS> 28,380,524
<PP&E> 32,361,995
<DEPRECIATION> 21,518,199
<TOTAL-ASSETS> 60,203,762
<CURRENT-LIABILITIES> 7,189,617
<BONDS> 0
0
0
<COMMON> 4,040,287
<OTHER-SE> 48,513,858
<TOTAL-LIABILITY-AND-EQUITY> 60,203,762
<SALES> 5,854,334
<TOTAL-REVENUES> 7,046,661
<CGS> 3,854,176
<TOTAL-COSTS> 6,158,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,453,086
<INCOME-TAX> 2,525,000
<INCOME-CONTINUING> 4,928,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,928,086
<EPS-PRIMARY> 4.11
<EPS-DILUTED> 4.11
</TABLE>
