<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
<TABLE>
<S> <C>
For the Quarter Ended Commission File
September 30, 1998 Number 1-3552
</TABLE>
SCOPE INDUSTRIES
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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
</TABLE>
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.
<TABLE>
<S> <C>
Class Outstanding at October 27, 1998
Common Stock, no par value 1,117,567
</TABLE>
<PAGE> 2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information:
Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998 3
Consolidated Statements of Income -
Three Months Ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Three Months Ended
September 30, 1998 and 1997 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
1998 1998
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 440,660 $ 755,904
Treasury bills available for sale-at
fair value 41,921,037 43,024,640
Accounts and notes receivable, less allowance
for doubtful accounts of $207,318 at September
30, 1998 and $205,318 at June 30, 1998 1,571,379 1,618,150
Inventories 752,986 662,399
Deferred income taxes 700,000 700,000
Prepaid expenses and other current assets 1,164,727 459,465
----------- -----------
TOTAL CURRENT ASSETS 46,550,789 47,220,558
----------- -----------
NOTES RECEIVABLE 1,060,365 897,829
----------- -----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 23,782,656 23,407,396
Land, buildings and improvements 10,670,526 10,581,881
----------- -----------
34,453,182 33,989,277
Less accumulated depreciation and amortization 23,790,931 23,304,941
----------- -----------
10,662,251 10,684,336
----------- -----------
OTHER ASSETS:
Deferred charges and other assets 407,435 244,590
Investments available for sale-at fair value 13,364,262 17,326,799
Other equity investments-at cost 2,006,002 2,006,002
----------- -----------
15,777,699 19,577,391
----------- -----------
$74,051,104 $78,380,114
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Bank Overdraft $ 276,195 $
Accounts payable 1,012,605 1,050,796
Other accrued liabilities 1,412,875 1,359,136
Accrued payroll and related employee benefits 530,785 705,604
Income taxes payable 440,181 475,506
----------- -----------
TOTAL CURRENT LIABILITIES 3,672,641 3,591,042
----------- -----------
DEFERRED INCOME TAXES 2,110,000 3,635,000
----------- -----------
5,782,641 7,226,042
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares
authorized; shares issued and outstanding
September 30, 1998 1,118,067
June 30, 1998 1,122,842 4,138,462 4,138,462
Retained earnings 57,305,399 57,635,588
Net unrealized gain on investments 6,824,602 9,380,022
----------- -----------
68,268,463 71,154,072
----------- -----------
$74,051,104 $78,380,114
=========== ===========
</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
-----------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Sales $ 4,027,175 $ 5,357,564
Vocational school revenues 1,124,205 1,137,241
----------- -----------
5,151,380 6,494,805
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 3,437,590 3,687,645
Vocational school expenses 897,473 901,160
Depreciation and amortization 510,067 519,577
General and administrative 940,960 1,086,475
----------- -----------
5,786,090 6,194,857
----------- -----------
(634,710) 299,948
Investment and other income 684,362 429,867
----------- -----------
Income before income taxes 49,652 729,815
Provision for income taxes 45,000 315,000
----------- -----------
NET INCOME $ 4,652 $ 414,815
=========== ===========
NET INCOME PER SHARE - BASIC $ 0.00 $ 0.36
NET INCOME PER SHARE - DILUTED $ 0.00 $ 0.35
Average shares outstanding - Basic 1,120,111 1,160,587
Dilutive effect of stock options 10,391 8,368
----------- -----------
Average shares outstanding - Diluted 1,130,502 1,168,954
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,652 $ 414,815
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 510,067 519,577
Gains on investments available for sale (7,942)
(Gains) losses on sale of equipment (41,251) 18,046
Deferred income taxes (50,000) (45,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 39,235 26,054
Inventories (90,587) (67,931)
Prepaid expenses and other current assets (705,262) (77,111)
Accounts payable and accrued liabilities (159,271) (615,159)
Income taxes payable (35,325) (27,463)
Other assets 22,155 10,063
------------ ------------
Net cash flows (used in) from operating activities (513,529) 155,891
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (8,896,397) (8,181,827)
Maturities of U.S. Treasury bills 10,000,000 6,750,000
Purchase of property and equipment (635,213) (282,893)
Disposition of property and equipment 188,482 53,798
Purchase of investments available for sale (108,924) (60,147)
Purchase of other equity investments (1,001,000)
Disposition of investments available for sale 48,983
Purchase of long-term note receivable
and other investment (340,000) (428,800)
------------ ------------
Net cash flows from (used in) investing activities 256,931 (3,150,869)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock (334,841) (1,680,276)
Change in bank overdraft 276,195 55,489
------------ ------------
Net cash used in financing activities (58,646) (1,624,787)
------------ ------------
Net decrease in cash
and cash equivalents (315,244) (4,619,765)
Cash and cash equivalents at beginning
of period 755,904 5,946,050
------------ ------------
Cash and cash equivalents at end of period $ 440,660 $ 1,326,285
============ ============
</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, 1998
1. The accompanying interim consolidated financial statements of Scope
Industries are unaudited. The consolidated financial statements reflect
all adjustments (consisting of only normal recurring accruals) which
are, in the opinion of management, necessary for the fair presentation
of the financial position as of September 30, 1998 and June 30, 1998,
and the results of its operations and cash flows for the three months
ended September 30, 1998 and 1997. The accounting policies followed by
the Company are set forth in Note 1 of its financial statements in its
1998 Annual Report which is incorporated by reference on Form 10-K. The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.
2. Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
Other comprehensive income for the Company is comprised of changes in
unrealized holding gains or losses on investments available for sale,
net of taxes and when combined with net income, results in comprehensive
net income. Comprehensive income disclosure is presented in Note 6.
3. Treasury bills consisted of the following:
<TABLE>
<CAPTION>
September 30 June 30
1998 1998
---- ----
<S> <C> <C>
At adjusted cost which approximates
fair value $41,921,037 $43,024,640
At par value 43,000,000 44,250,000
</TABLE>
4. Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30 June 30
1998 1998
---- ----
<S> <C> <C>
Finished products $ 288,452 $ 276,320
Raw materials 276,010 207,862
Operating supplies 188,524 178,217
----------- ----------
$ 752,986 $ 662,399
=========== ==========
</TABLE>
-6-
<PAGE> 7
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
(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, 1998:
Investments available
for sale $ 3,139,659 $10,224,603 $13,364,262
Other equity investments 2,006,002 2,006,002(a)
At June 30, 1998:
Investments available
for sale $ 3,071,776 $14,255,023 $17,326,799
Other equity investments 2,006,002 2,006,002(a)
</TABLE>
(a) No quoted prices are available for these securities
6. Comprehensive income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
September 30
-------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 4,652 $ 414,815
Unrealized holding (losses) gains
arising during the period,
net of income taxes (2,552,478) 2,597,760
Reclassify gains realized and
included in net income,
net of income taxes (2,942)
----------- -----------
Other comprehensive (loss) income (2,555,420) 2,597,760
----------- -----------
Comprehensive (loss) income $(2,550,768) $ 3,012,575
=========== ===========
</TABLE>
7. The provision for income taxes for the three months ended September 30,
1998 is 90.6% of the income before taxes. The determination of the
provision for income taxes considers certain permanent differences
between taxable income and income as reported using generally accepted
accounting methods. Those differences sometimes cause distortions in the
relationships between income before income taxes and the provision for
income taxes. For the three month period ended September 30, 1997 the
effective rate for income taxes was 43.2%.
-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, 1998, net income was down 98.9% from
the first quarter of last year. Net income in the current quarter was $4,652
which, on a per share basis was $0.00. Last year's first quarter net income was
$414,815 or $0.35 per share. Total operating revenues for this year's first
quarter were 20.7% less than the revenues for the same quarter last year. Waste
Material Recycling segment sales for the current quarter fell 24.3% from last
year's first quarter revenues. Unit selling prices were for the second year in a
row, dramatically below the comparable year earlier prices due to steadily
dropping 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 17.0% below last year's first
quarter average price. Tonnage sold in the current quarter was 8.8% below last
year's first quarter. Vocational School Group revenues this quarter were 1.1%
below the comparable quarter last year. Operating costs for the Waste Material
Recycling segment were 7.0% lower in the current quarter than for the same
quarter last year. Waste Material Recycling operations were not profitable for
the quarter. The Waste Material Recycling segment had completed 23 consecutive
profitable quarters prior to experiencing a loss for this year's first quarter,
highlighting the impact of lower selling prices. The Vocational School Group
operations reported small losses in both the current quarter and the comparable
quarter last year. Consolidated operations for the first quarter of the current
year resulted in a loss as opposed to earnings for the first quarter of last
year.
Investment and other income for the three months ended September 30, 1998 was
59.2% higher than for the same three months last year. Interest income from US
Treasury bills comprised most of the investment income for both quarterly
periods.
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". Changes in
unrealized gains or losses on investments available for sale are included as
other comprehensive income and when combined with net income, results in
comprehensive income. During the quarter ended September 30, 1998, unrealized
holding gains, net of income taxes, decreased from $9,380,022 to $6,824,602
(loss of $2,555,420). This other comprehensive income (loss), together with the
net income for the quarter of $4,652 resulted in comprehensive income (loss) for
the quarter of $2,550,768. Comprehensive income for the quarter ended September
30, 1997 was $3,012,575.
-8-
<PAGE> 9
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
FINANCIAL CONDITION
Working Capital was $42,878,148 at September 30, 1998. It was $43,629,516 at
June 30, 1998. The working capital ratio at September 30, 1998 was 12.7 and was
13.1 at June 30, 1998.
TAXES
The provision for income taxes for the three month period ended September 30,
1998 is $45,000. This provision for income taxes is 90.6% of income before
taxes. Certain permanent differences between taxable income and the income
determined by using generally accepted accounting methods, cause an unusual
relationship between income before income taxes and the provision for income
taxes. For the first three months of the prior fiscal year, the income tax
provision was 43.2% of the reported income before income taxes.
YEAR 2000
The Company has undertaken a review of its computer systems and computer
applications to identify those which could be affected by "Year 2000" problems.
Based on the review and associated testing, the Company believes that its
financial data and reporting systems are "Year 2000" ready. The Company also
believes its operating systems will not have serious concerns in this regard and
are capable of operating in alternative modes that could circumvent "Year 2000"
problems. The Company is continuing to review and test its systems and to
monitor vendors and service providers to determine what impact may result from
the "Year 2000" issue and if action or additional planning is needed. Risks
exist that could severely effect the Company's ongoing business should serious
failures or interruptions occur in services from utilities, banks, government
agencies, government Student Aid funding programs, securities markets or others.
Expenses incurred to date to correct "Year 2000" problems have not been material
and it is anticipated that no significant additional costs will be incurred with
regard to "Year 2000" issues.
FORWARD LOOKING STATEMENTS
Forward looking statements included in this Management's Discussion and Analysis
of Operations and Financial Condition and included elsewhere in this quarterly
report, are subject to risks and uncertainties that could affect actual future
results. Although the Company believes that the expectations reflected in such
forward looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Potential risk and uncertainties include,
but are not limited to, general business conditions, unusual volatility in
equity and interest rate markets and in competing commodity markets, disruptions
in the availability or pricing or raw materials, transportation difficulties,
changing governmental educational aid policies, or disruption of operations due
to unavailability of fuels or from acts of God.
-9-
<PAGE> 10
PART II. OTHER INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
Item 2. Increases and Decreases in Outstanding Securities and Indebtedness.
Increases and decreases in outstanding equity securities in the three months
ending September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Common Stock
No Par Value
------------
<S> <C>
Shares outstanding June 30, 1998 1,122,842
Shares purchased and retired
during the three months (4,775)
----------
Shares outstanding September 30, 1998 1,118,067
==========
</TABLE>
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the three months ended September 30, 1998, the Company purchased
and retired 4,775 shares of common stock at a cost of $334,841.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of shareowners held on October 27, 1998 with 1,120,967
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 1,106,301 15 1,106,316
Meyer Luskin 1,106,301 15 1,106,316
William H. Mannon 1,106,301 15 1,106,316
Franklin Redlich 1,106,301 15 1,106,316
Paul D. Saltman 1,106,251 50 15 1,106,316
</TABLE>
Item 5. Other Information.
On October 27, 1998 the Company's board of directors declared a regular dividend
of $1.00 per share payable on January 5, 1998 to shareowners of record at
November 30, 1998.
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, 1998.
-10-
<PAGE> 11
PART II. OTHER INFORMATION (CONTINUED)
SCOPE INDUSTRIES AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company 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 12, 1998 /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 CONSOLIDATED
BALANCE SHEET AT SEPTEMBER 30, 1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 440,660
<SECURITIES> 13,364,262
<RECEIVABLES> 1,778,697
<ALLOWANCES> 207,318
<INVENTORY> 752,986
<CURRENT-ASSETS> 46,550,789
<PP&E> 34,453,182
<DEPRECIATION> 23,790,930
<TOTAL-ASSETS> 74,051,104
<CURRENT-LIABILITIES> 3,672,641
<BONDS> 0
0
0
<COMMON> 4,138,462
<OTHER-SE> 64,130,001
<TOTAL-LIABILITY-AND-EQUITY> 74,051,104
<SALES> 4,027,175
<TOTAL-REVENUES> 5,151,380
<CGS> 3,437,590
<TOTAL-COSTS> 5,786,090
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 49,652
<INCOME-TAX> 45,000
<INCOME-CONTINUING> 4,652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,652
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
