<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 4, 1999
Scope Industries
----------------
(Exact Name of Registrant as Specified in its Charter)
California 1-3552 95-1240976
---------- ------ ----------
(State of Incorporation) (Commission (I.R.S. Employer
File Number) Identification Number)
233 Wilshire Blvd., Ste. 310, Santa Monica 90401
- ------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(310) 458-1574
(Registrant's telephone number, including area code)
Exhibit Index located at Page 21
1
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired
(i) Independent Auditors' Report
(ii) Combined Balance Sheets - January 2, 1999 and January 3, 1998
(audited) and April 3, 1999 (unaudited)
(iii) Combined Statements of Operations for the Years Ended January 2,
1999 and January 3, 1998 (audited), and for the Three Months
Ended April 3, 1999 (unaudited) and April 4, 1998 (unaudited)
(iv) Combined Statements of Stockholder's Equity for the Years Ended
January 2, 1999 and January 3, 1998 (audited), and for the Three
Months Ended April 3, 1999 (unaudited)
(v) Combined Statements of Cash Flows for the Years Ended January 2,
1999 and January 3, 1998 (audited), and for the Three Months
Ended April 3, 1999 (unaudited) and April 4, 1998 (unaudited)
(vi) Notes to Combined Financial Statements
(b) Pro Forma Financial Information
(i) Introduction
(ii) Unaudited Pro Forma Condensed Combined Balance Sheet-March 31,
1999
(iii) Unaudited Pro Forma Condensed Combined Statement of Operations
for the Nine Months Ended March 31, 1999
(iv) Unaudited Pro Forma Condensed Combined Statement of Operations
for the Year Ended June 30, 1998
(v) Notes to Unaudited Pro Forma Combined Financial Statements
(c) Exhibits
23 Independent Auditors' Consent
2
<PAGE> 3
Independent Auditors' Report
The Shareholder
International Processing Corporation and
International Transportation Service, Inc.:
We have audited the accompanying combined balance sheets of International
Processing Corporation and International Transportation Service, Inc. and
subsidiary as of January 2, 1999 and January 3, 1998, and the related combined
statements of operations, stockholder's equity, and cash flows for the years
then ended. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of International
Processing Corporation and International Transportation Service, Inc. and
subsidiary as of January 2, 1999, and January 3, 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Dallas, TX
February 19, 1999
3
<PAGE> 4
International Processing Corporation and
International Transportation Service, Inc.
Combined Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
January 2, January 3, April 3,
1999 1998 1999
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17 $ 46 $ 13
Notes and accounts receivable 2,490 3,193 2,392
Inventories (note 2) 647 477 684
Prepaid expenses 289 325 121
-------- -------- --------
Total current assets 3,443 4,041 3,210
Property, plant and equipment, net
(note 3) 13,343 14,071 13,646
Collection routes and contracts,
less accumulated amortization of
$2,091 at January 2, 1999 and
$1,032 at January 3, 1998 (note 7) 7,568 10,468 7,568
Goodwill-less accumulated amortization
of $715 at January 3, 1998 (note 7) -- 15,253 --
Other assets 46 80 46
-------- -------- --------
$ 24,400 $ 43,913 $ 24,470
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable, principally trade $ 2,559 $ 4,350 $ 3,198
Accrued expenses (note 4) 2,613 2,230 1,486
-------- -------- --------
Total current liabilities 5,172 6,580 4,684
Deferred income taxes (note 8) -- 143 --
Other noncurrent liabilities (note 6) 28 436 26
-------- -------- --------
Total liabilities 5,200 7,159 4,710
STOCKHOLDER'S EQUITY:
Common stock of IPC, $1.00 par value;
3,000,000 authorized; 1,750,000
shares issued and outstanding 1,750 1,750 1,750
Common stock of ITS, $100 par value;
500 shares authorized; 15 shares
issued and outstanding 2 2 2
Additional paid-in capital 34,667 34,154 35,001
Retained earnings (accumulated deficit) (17,219) 848 (16,993)
-------- -------- --------
Total stockholder's equity 19,200 36,754 19,760
-------- -------- --------
Commitment and contingencies (notes 5
and 11)
$ 24,400 $ 43,913 $ 24,470
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
4
<PAGE> 5
International Processing Corporation and
International Transportation Service, Inc.
Combined Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended Three Months Ended
---------------------------- -------------------------
January 2, January 3, April 3, April 4,
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 44,548 $ 54,329 $ 10,558 $ 12,415
COSTS AND EXPENSES
Cost of sales and operating
expenses 35,551 41,416 8,756 9,574
Selling, general and
administrative expenses 6,242 7,375 1,592 1,900
Impairment loss (note l(b)) 16,854 -- -- --
Depreciation and
amortization (note 3) 4,055 3,821 -- 991
-------- -------- -------- --------
62,702 52,612 10,348 12,465
-------- -------- -------- --------
Operating income (loss) (18,154) 1,717 210 (50)
OTHER INCOME (EXPENSE):
Interest income (expense) (2) (20) 2 --
Other, net (54) 46 14 --
-------- -------- -------- --------
(56) 26 16 (50)
INCOME (LOSS) BEFORE INCOME
TAXES (18,210) 1,743 226 (50)
Income tax expense (benefit) (143) 662 -- --
-------- -------- -------- --------
NET INCOME (LOSS) $(18,067) $ 1,081 $ 226 $ (50)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
5
<PAGE> 6
International Processing Corporation and
International Transportation Service, Inc.
Combined Statements of Stockholder's Equity
(In thousands)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Paid-In (Accumulated
Stock Capital Deficit) Total
-------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 28, 1996 $ 1,752 $ 36,138 $ (233) $ 37,657
Parent funding distributions -- (1,984) -- (1,984)
Net income -- -- 1,081 1,081
-------- -------- -------- --------
Balance at January 3, 1998 1,752 34,154 848 36,754
Parent funding contributions -- 513 -- 513
Net loss -- -- (18,067) (18,067)
-------- -------- -------- --------
Balance at January 2, 1999 1,752 34,667 (17,219) 19,200
Parent funding contributions
(unaudited) -- 334 -- 334
Net income (unaudited) -- -- 226 226
-------- -------- -------- --------
Balance at April 3, 1999
(unaudited) $ 1,752 $ 35,001 $(16,993) $ 19,760
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
6
<PAGE> 7
International Processing Corporation and
International Transportation Service, Inc.
Combined Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended Three Months Ended
------------------------- ----------------------------
January 2, January 3, April 3, April 4,
1999 1998 1999 1998
---------- --------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(18,067) $ 1,081 $ 226 $ (50)
Adjustment to reconcile earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 4,055 3,821 -- 989
Deferred income tax expense (benefit) (143) 311 -- --
Loss on disposal of fixed assets 5 17 -- 11
Impairment loss 16,854 -- -- --
Changes in assets and liabilities:
Notes and accounts receivable 703 229 134 (191)
Inventories and prepaid expenses (135) 272 131 (603)
Accounts payable and accrued expenses (1,406) (890) (473) (1,008)
Other 51 52 (3) (19)
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 1,917 4,893 15 (871)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of fixed assets 117 6 -- --
Capital expenditures (2,116) (2,094) (303) (731)
-------- -------- -------- --------
Net cash used in investing activities (1,999) (2,088) (303) (731)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Parent funding contributions (distributions) 513 (1,984) 334 1,808
Payments on long-term debt -- (485) -- --
Contract payments (460) (1,041) (50) (100)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 53 (3,510) 284 1,708
-------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents (29) (705) (4) 106
Cash and cash equivalents at beginning of year 46 751 17 47
-------- -------- -------- --------
Cash and cash equivalents at end of year $ 17 $ 46 $ 13 $ 153
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1 $ 35 $ -- $ --
======== ======== ======== ========
Income taxes, net of refunds $ 33 $ 18 $ -- $ --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
7
<PAGE> 8
International Processing Corporation and
International Transportation Service, Inc.
Notes to Combined Financial Statements
Fiscal Years Ended January 2, 1999 and January 3, 1998
and the Three Months Ending April 3, 1999 (Unaudited)
and April 4, 1998 (Unaudited)
(1) General
(a) Nature of Operations
International Processing Corporation, Inc. ("IPC") manufactures and
sells Dried Bakery Product, an animal-feed ingredient produced from
grain-based food by-products.
International Transportation Service, Inc. ("ITS") is a common carrier
primarily engaged in providing transportation services for IPC.
Food By-Products Recycling, Inc. ("FBR"), a wholly-owned subsidiary of
ITS, acquires raw materials in the Chicago, Illinois metro area. This
raw material is either sold to a third party or to its affiliate, IPC,
for processing.
IPC and ITS (collectively referred to as the "Companies") are both
wholly-owned subsidiaries of Darling International Inc. ("Darling"). All
of the outstanding common stock of the Companies was purchased by
Darling on August 29, 1996 for a total purchase price of $30 million.
(b) Summary of Significant Accounting Policies
Unaudited Interim Combined Financial Statements - The financial
statements as of April 3, 1999 and for the three month periods ended
April 3, 1999 and April 4, 1998, were prepared on the same basis as the
audited combined financial statements and, in the opinion of management,
include all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation of the financial position and results
of operations for these periods. Operating results for the interim
periods included herein are not necessarily indicative of the results
that may be expected for the entire year. The financial information
presented herein includes interim and annual operating results beginning
with the year ended January 3, 1998, the first full annual period
following the purchase of the Companies by Darling in August of 1996.
Basis of Presentation - The combined financial statements include the
accounts of the Companies and FBR. All significant intercompany balances
and transactions have been eliminated in the combination. Darling's
basis in the Companies has been "pushed down" in the preparation of the
combined financial statements.
Fiscal Year - The Companies have a 52/53 fiscal year ending on the
December 31. Fiscal years for the combined financial statements included
herein are for the 52 weeks ended January 2, 1999 ("Fiscal 1998") and
the 53 weeks ended January 3, 1998 ("Fiscal 1997").
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined by the first-in, first-out (FIFO) method.
8
<PAGE> 9
International Processing Corporation and
International Transportation Service, Inc.
Notes to Combined Financial Statements
Fiscal Years Ended January 2, 1999 and January 3, 1998
and the Three Months Ending April 3, 1999 (Unaudited)
and April 4, 1998 (Unaudited)
(Continued)
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost. Depreciation is computed by the straight-line method
over the estimated useful lives of assets: (1) Buildings and
improvements - 24 to 30 years; (2) Machinery and equipment - 3 to 8
years; and (3) Vehicles - 4 to 6 years. Maintenance and repairs are
charged to expense as incurred and expenditures for major renewals and
improvements are capitalized.
Collection Routes and Contacts - Collection routes, restrictive
covenants and consulting agreements are recorded at cost and are
amortized using the straight-line method over periods ranging from 3 to
15 years.
Goodwill - Represents the excess of the purchase price over fair value
of net assets acquired, and was amortized on a straight-line basis over
30 years. Annually, the Companies make an assessment to determine the
recoverability of this intangible asset. See Note 7 for discussion of
impairment loss recognized in Fiscal 1998.
Income Taxes - The Companies account for income taxes using the asset
and liability method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Statements of Cash Flows - The Companies consider all short-term highly
liquid instruments with an original maturity of three months or less, to
be cash equivalents.
Use of Estimates - The preparation of the combined financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the combined financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of - The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. See Note 7 for discussion of
impairment loss recognized in fiscal 1998.
9
<PAGE> 10
International Processing Corporation and
International Transportation Service, Inc.
Notes to Combined Financial Statements
Fiscal Years Ended January 2, 1999 and January 3, 1998
and the Three Months Ending April 3, 1999 (Unaudited)
and April 4, 1998 (Unaudited)
(Continued)
(2) Inventories
A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, April 3,
1999 1998 1999
---------- --------- --------
(Unaudited)
<S> <C> <C> <C>
Raw materials $451 $286 $368
Finished product 192 179 316
Supplies and other 4 12 --
---- ---- ----
$647 $477 $684
==== ==== ====
</TABLE>
(3) Property, Plant and Equipment
A summary of property, plant and equipment follows (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, April 3,
1999 1998 1999
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Land $ 635 $ 635 $ 635
Buildings and improvements 1,555 1,491 1,555
Machinery and equipment 14,117 11,584 14,117
Vehicles 2,546 2,537 2,546
Construction in process 375 1,033 678
-------- -------- --------
19,228 17,280 19,531
(5,885) (3,209) (5,885)
-------- -------- --------
$ 13,343 $ 14,071 $ 13,646
======== ======== ========
</TABLE>
No depreciation was taken for the three months ended April 3, 1999 due
to the assets having been restated in the fourth quarter of 1998 to
reflect their fair value (see note 7 "Impairment Loss")(unaudited).
(4) Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, April 3,
1999 1998 1999
-------- ---------- --------
(Unaudited)
<S> <C> <C> <C>
Insurance $ 292 $ 118 $ --
Compensation and benefits 668 779 539
Liabilities associated with
consulting and noncompete
agreements 450 510 300
Income taxes payable 381 414 --
Reserve for litigation matters
(note 11) 234 225 75
Other 588 184 572
------ ------ ------
$2,613 $2,230 $1,486
====== ====== ======
</TABLE>
10
<PAGE> 11
International Processing Corporation and
International Transportation Service, Inc.
Notes to Combined Financial Statements
Fiscal Years Ended January 2, 1999 and January 3, 1998
and the Three Months Ending April 3, 1999 (Unaudited)
and April 4, 1998 (Unaudited)
(Continued)
(5) Leases
The Company leases seven plants and storage locations, one office
location and a significant portion of its transportation equipment.
Leases are noncancellable and expire at various times through the year
2006. Minimum rental payments under noncancellable operating leases as
of January 2, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Period ending fiscal
--------------------
<S> <C>
1999 $ 919
2000 552
2001 535
2002 337
2003 269
Thereafter 739
------
$3,351
======
</TABLE>
Rental expense for the years ended January 2, 1999 and January 3, 1998
was $2,370,000 and $2,395,000, respectively.
(6) Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, April 3,
1999 1998 1999
---------- ---------- --------
(Unaudited)
<S> <C> <C> <C>
Liabilities associated with
consulting and noncompete
agreements $ -- $400 $ --
Other 28 36 26
---- ---- ----
$ 28 $436 $ 26
==== ==== ====
</TABLE>
(7) Impairment Loss
During the fourth quarter 1998, Darling made the decision to dispose of
the Companies as part of an effort to dispose of underperforming assets
and sought investment banker's assistance in selling the assets of IPC
and ITS. An offer, which was substantially below the then carrying
values of the assets, was identified (see note 12 "Disposition of
Assets"). Based upon this offer, the fair value of the Companies has
been determined to be $19.2 million and as a result an impairment loss
of $16.9 million has been recognized in Fiscal 1998. The impairment loss
includes a charge against unamortized goodwill of $14.7 million and a
charge against other intangibles of $2.2 million. Darling expects to
complete the sale of the Companies within one year.
11
<PAGE> 12
International Processing Corporation and
International Transportation Service, Inc.
Notes to Combined Financial Statements
Fiscal Years Ended January 2, 1999 and January 3, 1998
and the Three Months Ending April 3, 1999 (Unaudited)
and April 4, 1998 (Unaudited)
(Continued)
(8) Income Taxes
The Companies are included in the consolidated federal income tax return
of Darling. For purposes of the combined financial statements, income
taxes, are provided as if the Companies filed a separate federal income
tax return.
Income tax expense (benefit) attributable to income (loss) before income
taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, April 3, April 4,
1999 1998 1999 1998
---------- ---------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current:
Federal $ -- $ 322 $ -- $ --
State -- 29 -- --
Deferred:
Federal (132) 287 -- --
State (11) 24 -- --
----- ----- -------- --------
$(143) $ 662 $ -- $ --
===== ===== ======== ========
</TABLE>
Income tax expense (benefit) for the years ended January 2, 1999, and
January 3, 1998, and for the three months ended April 3, 1999 and April 4,
1998 differed from the amount computed by applying the Statutory U.S.
federal income tax rate (35%) to income (loss) before income taxes as a
result of the following (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, April 3, April 4,
1999 1998 1999 1998
---------- ---------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Computed "expected"
tax expense (benefit) $(6,500) $ 610 $ 82 $ (17)
State income taxes,
net of federal benefit (7) 35 -- --
Change in federal income
tax valuation
allowance 6,357 -- (88) --
Other, net 7 17 6 17
------- ------- ------- -------
$ (143) $ 662 $ -- $ --
======= ======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
12
<PAGE> 13
International Processing Corporation and
International Transportation Service, Inc.
Notes to Combined Financial Statements
Fiscal Years Ended January 2, 1999 and January 3, 1998
and the Three Months Ending April 3, 1999 (Unaudited)
and April 4, 1998 (Unaudited)
(Continued)
January 2, 1999 and January 3, 1998 and April 3, 1999 are presented below
(in thousands):
<TABLE>
<CAPTION>
January 2, January 3, April 3,
1999 1998 1999
---------- ---------- --------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 496 $ -- $ 2,362
Intangibles 5,935 -- 5,761
Accrued liabilities 281 118 153
Other 295 147 210
------- ------- -------
Total gross deferred tax assets 7,007 265 8,486
Less valuation allowance (6,902) -- (6,814)
------- ------- -------
Net deferred tax assets 105 265 1,672
------- ------- -------
Deferred tax liabilities:
Goodwill -- 268 --
Property, plant and equipment 105 140 1,672
------- ------- -------
Total gross deferred tax liabilities 105 408 1,672
------- ------- -------
$ -- $ 143 $ --
======= ======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Realization of deferred tax
assets is dependent upon the generation of future taxable income,
including reversal of taxable temporary differences, during the periods in
which those temporary differences become deductible. At January 2, 1999,
the Companies established a valuation allowance in order to reduce
deferred tax assets to an amount meeting the more likely than not
realization standard.
At January 2, 1999, the Companies had net operating loss carryforwards for
federal income tax purposes of approximately $1,300,000 which are
available to offset future federal taxable income through 2013.
(9) Employee Benefit Plans
The Companies maintain a 401(k) and Profit Sharing Plan (the "Plan") under
which substantially all employees, who are at least 21 years old and have
one year of service, are eligible to participate. Participants are
permitted to make contributions of their salary to the Plan on a pre-tax
salary reduction basis in accordance with the provisions of Section 401(k)
of the Internal Revenue Code of 1986, as amended. The Companies may match
contributions of participants at the discretion of management. The
participants' contribution vest immediately, while the Companies'
contributions vest gradually over six years. The Companies' total
contributions for the fiscal years ended January 2, 1999 and January 3,
1998 were $42,000 and $33,000, respectively.
13
<PAGE> 14
International Processing Corporation and
International Transportation Service, Inc.
Notes to Combined Financial Statements
Fiscal Years Ended January 2, 1999 and January 3, 1998
and the Three Months Ending April 3, 1999 (Unaudited)
and April 4, 1998 (Unaudited)
(Continued)
(10) Related Party Transactions
Transactions with Darling include utilization of cash management
services under which net cash balances or requirements of the Companies
are transferred to or provided by Darling daily.
Darling provides certain corporate general and administrative services
to the Companies, including legal, treasury and benefits administration,
among others, for which no costs have been charged or allocated.
Accordingly, the accompanying combined financial statements do not
necessarily reflect the results of operations, financial position and
cash flows of the Companies had they operated on a separate basis for
the periods presented.
(11) Commitments and Contingencies
The Companies are defendants or plaintiffs in various legal actions
which have arisen in the normal course of business. In the opinion of
management, the ultimate resolution of these matters will not have a
materially adverse effect on the Companies' combined financial position,
results of operations, or liquidity.
(12) Disposition of Assets (Unaudited)
Effective April 4, 1999, Darling sold all of the outstanding capital
stock of the Companies to Scope Products, Inc., a wholly-owned
subsidiary of Scope Industries. The sales price for the capital stock of
the companies was $21.5 million, with an additional $.5 million payment
for a non-compete covenant and transaction costs. The purchase price was
paid in cash and was determined by agreement between both parties. The
agreement provides for adjustments that may result in a reduction to the
sales price.
14
<PAGE> 15
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements have been prepared from the historical consolidated financial
statements of Scope Industries (the "Registrant") and International
Processing Corporation ("IPC") and International Transportation Service,
Inc. ("ITS"). Through a Stock Purchase Agreement (the "Agreement"),
Scope Industries acquired through its wholly-owned subsidiary Scope
Products, Inc. all of the outstanding shares of stock of IPC and ITS as
of April 4, 1999. The purchase price of the stock is $21,500,000 plus
transaction costs, in addition to $500,000 payment for a non-compete
covenant. A purchase price adjustment defined by the Agreement and
estimated to be $1,500,000 reduces the purchase price to approximately
$20,000,000. This acquisition will be accounted for under the purchase
method of accounting. The acquisition costs will be allocated among the
net assets of IPC and ITS based upon their estimated fair values.
The operations of IPC and ITS have been combined with Scope Industries
operations for the nine months ended March 31, 1999 and the twelve
months ended June 30, 1998. For the results of operations for the nine
month period ending March 31, 1999, the combined IPC's and ITS's
operating results for the immediate six month period preceding the
fiscal year period ending January 2, 1999 were combined with the three
month period ended April 3, 1999. For the results of operations for the
twelve month period ending June 30, 1998, IPC's and ITS's combined
operating results for the immediate six month period preceding the
fiscal year period ending January 3, 1998 were combined with the first
six month period ended July 4, 1998.
The unaudited pro forma condensed combined financial statements reflect
the adjustments necessary for their fair presentation in accordance with
generally accepted accounting principles. The unaudited pro forma
condensed combined operating statements give effect to the combination
as if it had occurred on July 1, 1997. The unaudited pro forma condensed
combined balance sheet gives effect to the combination as if it occurred
on March 31, 1999. The unaudited pro forma adjustments described in the
accompanying notes reflect preliminary estimates and assumptions that
management believes are reasonable under the circumstances.
The unaudited pro forma condensed combined financial data are not
necessarily indicative of what the financial position or results of the
operations would have been had the combination actually occurred on the
above mentioned dates. Additionally, they are not indicative of the
future results of operations or financial position.
Management is in the process of assessing and formulating its
integration plans; however, the unaudited pro forma financial
information does not include any synergy cost savings the combined
company is expected to realize. Based on the finalization of the
integration plan and other factors, the purchase accounting adjustments
presented in these unaudited pro forma condensed combined financial
statements may differ materially from the actual final adjustments.
The unaudited pro forma condensed combined statements should be read in
conjunction with Scope Industries historical consolidated financial
statements and notes thereto, which are included in Scope's Annual
Report on Form 10-K, along with the IPC and ITS financial statements for
the years ended January 2, 1999 and January 3, 1998 included herein.
15
<PAGE> 16
Scope Industries
Unaudited Pro Forma Condensed Combined
Balance Sheet
March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Scope IPC
Industries & ITS Pro Forma
March 31, April 3, Pro Forma Scope
1999 1999 Adjustments(1) Industries
---------- -------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term
marketable securities $ 40,398 $ 13 $(22,000)(2) $ 18,411
Notes and accounts receivable, net 1,886 2,392 1,500(2) 5,778
Inventories 630 684 -- 1,314
Prepaid expenses and other
assets 973 121 -- 1,094
Deferred income taxes 700 -- 357(2) 1,057
-------- -------- -------- --------
Total current assets 44,587 3,210 (20,143) 27,654
Property, plant and equipment,
less accumulated depreciation 11,239 13,646 (965)(2) 23,920
Collection routes and
contracts, less
accumulated amortization -- 7,568 2,379(2) 9,947
Investments available for
sale-at fair market value 8,754 -- -- 8,754
Other assets 3,159 46 425(2) 3,630
-------- -------- -------- --------
$ 67,739 $ 24,470 $(18,304) $ 73,905
======== ======== ======== ========
LIABILITIES AND SHAREOWNER'S
EQUITY
CURRENT LIABILITIES:
Accounts payable, principally
trade $ 1,061 $ 3,198 $ 26(2) $ 4,285
Accrued expenses 2,336 1,486 -- 3,822
-------- -------- -------- --------
Total current liabilities 3,397 4,684 26 8,107
Other noncurrent liabilities -- 26 -- 26
Deferred income taxes 435 -- 1,430(2) 1,865
-------- -------- -------- --------
Total liabilities 3,832 4,710 1,456 9,998
SHAREOWNER'S EQUITY
Common stock 4,161 1,752 (1,752)(3) 4,161
Additional paid-in capital -- 35,001 (35,001)(3) --
Retained earnings
(accumulated deficit) 55,549 (16,993) 16,993(3) 55,549
Net unrealized gain on
investments 4,197 -- -- 4,197
-------- -------- -------- --------
Total shareowner's equity 63,907 19,760 (19,760) 63,907
-------- -------- -------- --------
$ 67,739 $ 24,470 $(18,304) $ 73,905
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
16
<PAGE> 17
Scope Industries
Unaudited Pro Forma Condensed Combined
Statement Of Operations
For the Nine Months Ended March 31, 1999
(In thousands, except shares and per share data)
<TABLE>
<CAPTION>
Scope IPC
Industries & ITS Pro Forma
March 31, April 3, Pro Forma Scope
1999 1999 Adjustments(1) Industries
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 15,487 $ 30,736 $ -- $ 46,223
COSTS AND EXPENSES:
Cost of sales and operating
expenses 13,338 25,492 -- 38,830
Selling, general and
administrative expenses 2,849 4,385 -- 7,234
Impairment loss -- 16,854 -- 16,854(6)
Depreciation and amortization 1,532 2,050 1,210(4) 4,792
----------- ----------- ----------- -----------
17,719 48,781 1,210 67,710
----------- ----------- ----------- -----------
(2,232) (18,045) 1,210 (21,487)
Investment and other income 1,835 -- -- 1,835
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (397) (18,045) (1,210) (19,652)
Income tax benefit (55) (143) (851)(5) (1,049)
----------- ----------- ----------- -----------
NET LOSS $ (342) $ (17,902) $ (756) $ (18,603)
=========== =========== =========== ===========
LOSS PER COMMON SHARE:
Basic $ (.31) $ (16.64)(7)
Diluted $ (.30) $ (16.50)(7)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 1,117,705 1,117,705
Diluted 1,127,196 1,127,196
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
17
<PAGE> 18
Scope Industries
Unaudited Pro Forma Condensed Combined
Statement Of Operations
For the Year Ended June 30, 1998
(In thousands, except shares and per share data)
<TABLE>
<CAPTION>
Scope IPC
Industries & ITS Pro Forma
June 30, July 4, Pro Forma Scope
1998 1998 Adjustments(1) Industries
---------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 25,045 $ 51,572 $ -- $ 76,617
COSTS AND EXPENSES:
Cost of sales and operating
expenses 18,065 40,247 -- 58,312
Selling, general and
administrative expenses 4,056 6,896 -- 10,952
Depreciation and amortization 2,025 3,963 384(4) 6,372
---------- ---------- ---------- ----------
24,146 51,106 384 75,636
---------- ---------- ---------- ----------
899 466 (384) 981
Investment and other income 25,345 (40) -- 25,305
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES 26,244 426 (384) 26,286
Income tax expense (benefit) 10,180 -- (323)(5) 9,857
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 16,064 $ 426 $ (61) $ 16,429
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic $ 14.10 $ 14.42(7)
Diluted $ 13.98 $ 14.30(7)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 1,139,276 1,139,276
Diluted 1,148,645 1,148,645
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
18
<PAGE> 19
Scope Industries
Notes to Unaudited Pro Forma Condensed
Combined Financial Statements
March 31, 1999
(1) On April 4, 1999, the Registrant acquired 100% of the outstanding
capital stock of IPC and ITS for a net sales price of $20.0 million,
after a purchase price adjustment of approximately $1.5 million, plus
transaction costs. The purchase agreement provided for a purchase price
adjustment consisting of a dollar-for-dollar reduction in the purchase
price measured by the excess of liabilities minus current assets as of
the acquisition date. In addition to the $20.0 million, $.5 million was
paid for a non-compete covenant. The purchase price was paid in cash and
was determined by agreement between the Registrant and the stockholder
of IPC and ITS (the "Seller"). The Registrant funded the purchase
price with internally generated funds.
The unaudited pro forma adjustments in the unaudited pro forma condensed
combined statement of operations for the nine months ended March 31,
1999 and the year ended June 30, 1998 give effect to the acquisition of
IPC and ITS completed on April 4, 1999. The transactions are accounted
for using the purchase method for business combinations as if each had
occurred on July 1, 1997.
(2) To reflect the purchase transaction.
<TABLE>
<S> <C>
Purchase price of stock $20,000,000
Net assets acquired at historical amounts 19,760,000
-----------
Excess of purchase price over historical amounts $ 240,000
===========
The following reflects the purchase accounting adjustments
for the excess of purchase price over historical amounts
of net assets acquired:
Adjustment to fair value for collection routes
and contracts $ 2,379,000
Adjustment to fair value for property, plant
and equipment (965,000)
Net deferred tax liability (1,073,000)(a)
Transaction costs (101,000)
-----------
Total purchase accounting adjustments $ 240,000
===========
To reflect payment for non-compete covenant $ 500,000
===========
</TABLE>
(a) In addition to the recognized deferred income tax benefits and
liabilities, an additional unrecognized income tax benefit of
approximately $5.0 million is available to the Registrant in subsequent
operating periods resulting from the tax deductions for goodwill
amortization of approximately $13.2 million. In subsequent periods, the
income tax benefit realized from goodwill amortization will first reduce
the carrying value of collection routes and contracts until fully
amortized, and secondly reduce income tax expense. The tax deduction for
goodwill amortization will be available ratably over the next twelve
years approximately.
(3) To reflect the adjustment for the elimination of investment in IPC and
ITS upon closing of the transaction.
19
<PAGE> 20
Scope Industries
Notes to Unaudited Pro Forma Condensed
Combined Financial Statements
March 31, 1999
(Continued)
(4) To reflect adjustments to depreciation of property, plant, and equipment
using new fair values and asset lives, and to record amortization of
non- compete covenant over three years and collection routes and
contracts over five years as recorded in connection with the purchase
agreement.
<TABLE>
<CAPTION>
Nine months Twelve Months
----------- -------------
<S> <C> <C>
IPC and ITS historical:
Goodwill amortization $ 266,000 $ 532,000
Collection routes and contracts 383,000 767,000
Depreciation 1,401,000 2,665,000
----------- -----------
Pre-acquisition depreciation & amort 2,050,000 3,963,000
Unaudited pro forma:
Collection routes and contracts 1,492,000 1,989,000
Covenant amortization 125,000 167,000
Depreciation 1,643,000 2,191,000
----------- -----------
Post acquisition depreciation & amort 3,260,000 4,347,000
----------- -----------
Net pro forma adjustment $(1,210,000) $ (384,000)
=========== ===========
</TABLE>
(5) To reflect the computation of income taxes on unaudited pro forma net
income (loss) at the Registrant's estimated effective tax rate of 37.5%.
The Registrant has not recognized any income tax benefit from the
impairment loss incurred under prior ownership.
(6) Impairment loss incurred under prior ownership consisting primarily of
the unamortized carrying value of goodwill allocated by Darling as part
of their 1996 purchase of the Companies.
(7) Unaudited pro forma net income (loss) per common share is calculated by
dividing unaudited pro forma net income (loss) by the weighted average
common and common equivalent shares of the Registrant outstanding during
the periods.
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------ ----------- ------
<S> <C> <C>
23 Consent of KPMG LLP 23
</TABLE>
21
<PAGE> 22
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 hereunto duly authorized.
SCOPE INDUSTRIES
DATE: June 17, 1999 By /s/ John J. Crowley
--------------------------------------
John J. Crowley
Vice President and
Chief Financial Officer
22
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Shareholder
International Processing Corporation and
International Transportation Service, Inc.:
We consent to the incorporation by reference in the registration statement (No.
33-47053) on Form S-8 of Scope Industries of our report dated February 19, 1999,
with respect to the combined balance sheets of International Processing
Corporation and International Transportation Service, Inc. and subsidiary as of
January 2, 1999 and January 3, 1998, and the related combined statements of
operations, stockholder's equity, and cash flows for the years then ended, which
report appears in the Form 8-K of Scope Industries dated June 17, 1999.
KPMG LLP
Dallas, Texas
June 16, 1999
23
