<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
March 31, 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 April 21, 1997
- -------------------------- -----------------------------
Common Stock, no par value 1,166,865
<PAGE> 2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Part I. Financial Information:
Consolidated Balance Sheets -
March 31, 1997 and June 30, 1996 3
Consolidated Statements of Income -
Three Months Ended
March 31, 1997 and 1996 4
Consolidated Statements of Income -
Nine Months Ended
March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Nine Months Ended
March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Results of Operations and
Financial Condition 9
Part II. Other Information:
Item 2. Increases and Decreases in
Outstanding Securities and
Indebtedness 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
1997 1996
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,077,906 $ 1,721,939
Treasury bills (par value $27,000,000 at
March 31, 1997 and $5,035,000 at
June 30, 1996) held to maturity investments 26,262,276 4,973,377
Accounts and notes receivable, less allowance
for doubtful accounts of $149,196 at March
31, 1997 and $149,180 at June 30, 1996 1,626,649 5,173,445
Inventories 561,001 531,637
Prepaid expenses and other current assets 421,078 531,639
----------- -----------
TOTAL CURRENT ASSETS 30,948,910 12,932,037
----------- -----------
NOTES RECEIVABLE 1,028,564 1,154,378
----------- -----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 22,714,852 22,160,240
Land, buildings and improvements 9,720,689 9,743,940
----------- -----------
32,435,541 31,904,180
Less accumulated depreciation
and amortization 21,901,111 20,867,899
----------- -----------
10,534,430 11,036,281
----------- -----------
OTHER ASSETS:
Deferred charges and other assets 91,378 130,930
Investments available for sale-at fair value 15,260,064 29,647,443
Investments held to maturity-at cost 633,426 633,426
----------- -----------
15,984,868 30,411,799
----------- -----------
$58,496,772 $55,534,495
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 90,822 $ 250,686
Accounts payable 652,537 1,410,953
Other accrued liabilities 1,247,337 1,447,406
Accrued payroll and related
employee benefits 1,098,386 1,069,429
Income taxes payable 1,711,572 467,983
----------- -----------
TOTAL CURRENT LIABILITIES 4,800,654 4,646,457
----------- -----------
DEFERRED INCOME TAXES 80,000 2,750,000
----------- -----------
4,880,654 7,396,457
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares
authorized; shares issued and outstanding
March 31, 1997 1,166,865
June 30, 1996 1,202,565 4,040,287 3,921,287
Retained earnings 44,534,018 29,848,744
Net unrealized gain on investments 5,041,813 14,368,007
----------- -----------
53,616,118 48,138,038
----------- -----------
$58,496,772 $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
MARCH 31
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Sales $ 5,473,282 $ 5,913,408
Vocational school revenues 1,129,391 1,136,612
----------- -----------
6,602,673 7,050,020
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 3,740,035 3,383,687
Vocational school expenses 882,964 847,414
Depreciation and amortization 533,618 544,520
General and administrative 879,965 1,042,498
----------- -----------
6,036,582 5,818,119
----------- -----------
566,091 1,231,901
Investment and other income 2,562,004 322,062
----------- -----------
Income before income taxes 3,128,095 1,553,963
Provision (benefit) for income taxes (640,000) 610,000
----------- -----------
NET INCOME $ 3,768,095 $ 943,963
=========== ===========
NET INCOME PER SHARE $ 3.15 $ 0.76
=========== ===========
Weighted average number of shares
outstanding 1,194,653 1,236,173
</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>
NINE MONTHS ENDED
MARCH 31
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Sales $20,020,116 $17,925,227
Vocational school revenues 3,410,966 3,522,714
----------- -----------
23,431,082 21,447,941
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 12,005,375 10,558,300
Vocational school expenses 2,594,839 2,578,782
Depreciation and amortization 1,582,453 1,605,345
General and administrative 2,877,687 3,426,056
----------- -----------
19,060,354 18,168,483
----------- -----------
4,370,728 3,279,458
Investment and other income 19,033,221 1,226,895
----------- -----------
Income before income taxes 23,403,949 4,506,353
Provision for income taxes 5,450,000 1,590,000
----------- -----------
NET INCOME $17,953,949 $ 2,916,353
=========== ===========
NET INCOME PER SHARE $ 15.00 $ 2.36
=========== ===========
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 1.25 $ 0.50
Weighted average number of shares
outstanding 1,197,199 1,237,805
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE> 6
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $17,953,949 $ 2,916,353
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 1,582,453 1,605,345
Gains on investments available for sale (17,309,726) (89,052)
Gains on sale of equipment (3,952) (47,470)
Deferred income taxes (2,115,000) (295,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 1,172,610 238,707
Inventories (29,364) (54,880)
Prepaid expenses and other current assets 110,561 221,073
Accounts payable and accrued liabilities (929,528) 1,032,426
Income taxes payable 1,243,589 762,549
Other assets 39,552 (15,730)
----------- -----------
Net cash flows from operating activities 1,715,144 6,274,321
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (29,323,899) (8,104,279)
Maturities of U.S. Treasury bills 8,035,000 5,370,000
Purchase of property and equipment (1,099,496) (1,499,150)
Disposition of property and equipment 22,846 412,897
Purchase of long-term notes receivable (230,000)
Purchase of investments available for sale (3,181,872) (1,805,371)
Disposition of investments available for sale 27,497,783 2,350,916
----------- -----------
Net cash flows from (used in) investing
activities 1,950,362 (3,504,987)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to shareowners (1,491,132) (616,783)
Repurchases of common stock (1,777,543) (388,240)
Proceeds from stock options exercised 119,000
Change in bank overdraft (159,864) 37,021
----------- -----------
Net cash flows used in financing activities (3,309,539) (968,002)
----------- -----------
Net change in cash and cash equivalents 355,967 1,801,332
Cash and cash equivalents at beginning
of period 1,721,939 242,794
----------- -----------
Cash and cash equivalents at end of period $ 2,077,906 $ 2,044,126
=========== ===========
Noncash investing transaction:
Purchased for investment the preferred stock of
Opto Sensors, Inc. in exchange for cancellation
of the loan to that company through exercise
of warrants held as a condition of the loan $ 2,500,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE> 7
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
1. The accompanying unaudited consolidated financial statements contain
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the Company's financial position as of March 31, 1997
and June 30, 1996, and the results of its operations for the three and
nine months ended March 31, 1997 and 1996. The accounting policies
followed by the Company are set forth in Note 1 of its financial
statements in its 1996 Annual Report which is incorporated by reference
on Form 10-K.
2. As of July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123). As provided for in the standard, the Company will not adopt
the recognition provisions and will provide the pro forma net income
earnings per share disclosures required by the standard in its 1997
annual financial statements.
3. Quarterly results of operations are not necessarily indicative of the
results to be expected for the full year.
4. Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31 June 30
1997 1996
---------- ----------
<S> <C> <C>
Finished products $ 242,925 $ 184,520
Raw materials 114,522 144,853
Operating supplies 203,554 202,264
---------- ----------
$ 561,001 $ 531,637
========== ==========
</TABLE>
5. During the nine month period ended March 31, 1997, gains on sale of
investments of $17,309,726 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 $9,326,194 to $5,041,813 at March 31,
1997 from $14,368,007 at June 30, 1996.
During the nine month period ended March 31, 1996, gains on sale of
investments of $357,718 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 $12,529,296 at March 31, 1996.
-7-
<PAGE> 8
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
Before Provision
Cost For Income Taxes Fair Value
----------- ---------------- -----------
<S> <C> <C> <C>
At March 31, 1997:
------------------
Investments held to
maturity $ 633,426 $ (31,370) $ 602,056
Investments available
for sale 7,243,251 8,016,813 15,260,064
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>
6. The provision for income taxes for the nine months ended March 31, 1997
represents an effective rate of 23.3% for federal and state income
taxes. Valuation reserves have been eliminated for those deferred tax
assets that can be realized as a result of investment gains being
recognized during the nine month 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 nine months of the prior fiscal year, the income tax
provision resulted in an effective rate of 35.3%.
-8-
<PAGE> 9
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net income for the third quarter ended March 31, 1997 increased 299% from the
third quarter last year to $3,768,095 or $3.15 per share. Net income was
$943,963 or $0.76 per share for the third quarter last year. Total operating
revenues for the third quarter were 6.3% less than the revenues for the same
quarter last year. Waste Material Recycling segment sales for the current
quarter fell 9.3% from last year's third quarter revenues. Tonnage volume in
this year's third quarter was 13.1% greater than tonnage for the same quarter
last year. Unit selling prices were 20.5% below prices in last year's third
quarter. Commodity prices for corn and other grains in the third quarter just
ended were substantially below the prices that prevailed last year. Waste
Material Recycling segment unit pricing closely follows these commodity prices.
Vocational School Group revenues this quarter were about equal to the comparable
quarter last year. Operating costs for the Waste Material Recycling segment
increased 9.4% compared to the same quarter last year. The segment's lower sales
revenues and higher costs caused current quarter margins to shrink compared to
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 March 31, 1997 was $2,562,004
compared to $322,062 for the same three months last year. The investment income
included gains of $1,891,071 from sales of investments during the current period
and $15,068 in gains from investment sales in the prior year's third quarter.
For the nine months ended March 31, 1997, net income was $17,953,949 or $15.00
per share. Last year net income was $2,916,353 or $2.36 per share for the
comparable nine months. Revenues for the nine months ended March 31, 1997 were
9.2% above revenues for the comparable nine months last year. The increased
revenue in the current nine 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 dramatically in this year's second
and third quarters. The Company's second and third quarter revenues reflect the
corn price drop. The Waste Material Recycling segment and the Vocational School
Group segment operated profitably during the current and the previous year's
nine months periods ended March 31.
Investment and other income for the nine months ended March 31, 1997 was
$19,033,221. This includes gains of $17,309,726 from sales of investments.
Investment and other income was $1,226,895 including $357,718 of investment
gains for the comparable nine months last year.
-9-
<PAGE> 10
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL POSITION
Working Capital was $26,148,256 at March 31, 1997. It was $8,285,580 at June 30,
1996. The working capital ratio at March 31, 1997 was 6.4 and at June 30, 1996
was 2.8.
During the nine months ended March 31, 1997, the Company sold investment
securities whose aggregate proceeds totaled $27,497,783. The long term
investment positions in Imperial Bancorp and Mesa, Inc. have been liquidated.
The sales of investments and the resulting gain recognition for the nine month
period caused a decrease in the unrealized investment holding gains. At March
31, 1997, investments include $8,016,813 in unrealized gains based on fair
values that exceed adjusted costs for investment securities. At June 30, 1996,
the unrealized gains were $17,898,007. Shareowners' equity at March 31, 1997
reflects $5,041,813 for net unrealized gains on investments after a provision
for deferred taxes. The unrealized holding gains are excluded from earnings.
TAXES
The provision for income taxes for the nine month period ended March 31, 1997 is
$5,450,000 and represents an effective rate of 23.3% for federal and state
income taxes. Valuation reserves have been eliminated for those deferred tax
assets that can be realized as a result of investment gains being recognized
during the nine month 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 nine months of the
prior fiscal year, the income tax provision was $1,590,000 and the effective tax
rate was 35.3%.
-10-
<PAGE> 11
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 nine months
ending March 31, 1997 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 nine months (39,700)
---------
Shares outstanding March 31, 1997 1,166,865
=========
</TABLE>
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the nine months ended March 31, 1997, the Registrant purchased and
retired 39,700 shares of common stock at a cost of $1,777,543.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits - None
(B) No Form 8-K was filed for the quarter ended March 31, 1997.
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: May 9, 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 MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,077,906
<SECURITIES> 15,984,868
<RECEIVABLES> 1,775,845
<ALLOWANCES> 149,196
<INVENTORY> 561,001
<CURRENT-ASSETS> 30,949,910
<PP&E> 32,435,541
<DEPRECIATION> 21,901,111
<TOTAL-ASSETS> 58,496,772
<CURRENT-LIABILITIES> 4,800,654
<BONDS> 0
0
0
<COMMON> 4,040,287
<OTHER-SE> 49,575,831
<TOTAL-LIABILITY-AND-EQUITY> 58,496,772
<SALES> 5,473,282
<TOTAL-REVENUES> 6,602,673
<CGS> 3,740,035
<TOTAL-COSTS> 6,036,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,128,095
<INCOME-TAX> (640,000)
<INCOME-CONTINUING> 3,768,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,768,095
<EPS-PRIMARY> 3.15
<EPS-DILUTED> 3.15
</TABLE>
