<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File
September 30, 1999 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 preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1999
- -------------------------- -------------------------------
Common Stock, no par value 1,115,367
<PAGE> 2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
PAGE
----
Part I. Financial Information:
Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999 3
Consolidated Statements of Operations -
Three Months Ended
September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Three Months Ended
September 30, 1999 and 1998 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
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1999 1999
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,511,526 $ 3,667,818
Treasury bills available for sale-at
fair value 14,179,264 14,852,203
Accounts and notes receivable, less allowance
for doubtful accounts of $602,936 at
September 30, 1999 and $484,885
at June 30, 1999 4,342,141 4,234,753
Inventories 1,109,390 999,755
Deferred income taxes 965,000 955,000
Prepaid expenses and other current assets 1,656,063 1,411,455
----------- -----------
TOTAL CURRENT ASSETS 25,763,384 26,120,984
----------- -----------
NOTES RECEIVABLE 993,357 1,103,816
----------- -----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 34,727,862 34,069,755
Land, buildings and improvements 15,558,143 14,208,280
----------- -----------
50,286,005 48,278,035
Less accumulated depreciation and amortization 24,800,203 23,793,405
----------- -----------
25,485,802 24,484,630
----------- -----------
COLLECTION ROUTES AND CONTRACTS, less accumulated
amortization of $1,071,486 at September 30,
1999 and $539,427 at June 30, 1999 9,103,703 9,775,762
----------- -----------
OTHER ASSETS:
Deferred charges and other assets 448,662 501,351
Investments available for sale-at fair value 6,361,101 8,464,461
Other equity investments-at cost 2,006,002 2,006,002
----------- -----------
8,815,765 10,971,814
----------- -----------
$70,162,011 $72,457,006
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Bank Overdraft $ 1,288,730 $
Accounts payable 3,460,300 3,917,443
Other accrued liabilities 2,124,569 2,338,505
Accrued payroll and related employee benefits 1,227,150 1,005,685
Income taxes payable 278,090 251,485
----------- -----------
TOTAL CURRENT LIABILITIES 8,378,839 7,513,118
----------- -----------
DEFERRED INCOME TAXES 393,160 1,328,160
----------- -----------
8,771,999 8,841,278
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares
authorized; shares issued and outstanding
September 30, 1999 1,117,367
June 30, 1999 1,114,467 4,374,450 4,161,300
Retained earnings 53,988,227 55,048,733
Accumulated other comprehensive income 3,027,335 4,405,695
----------- -----------
61,390,012 63,615,728
----------- -----------
$70,162,011 $72,457,006
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE> 4
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Sales $ 13,765,678 $ 4,027,175
Vocational school revenues 1,283,918 1,124,205
------------ ------------
15,049,596 5,151,380
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 11,559,689 3,437,590
Vocational school expenses 1,076,516 897,473
Depreciation and amortization 1,541,628 510,067
General and administrative 2,302,897 940,960
------------ -----------
16,480,730 5,786,090
------------ -----------
(1,431,134) (634,710)
Investment and other income 341,333 684,362
------------ ------------
(Loss)income before income taxes (1,089,801) 49,652
(Benefit) provision for income taxes (350,000) 45,000
------------ ------------
NET (LOSS) INCOME $ (739,801) $ 4,652
============ ============
NET (LOSS) INCOME PER SHARE - BASIC AND DILUTED $ (0.66) $ 0.00
Average shares outstanding - Basic 1,114,592 1,120,111
Dilutive effect of stock options 4,307 10,391
------------ ------------
Average shares outstanding - Diluted 1,118,899 1,130,502
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
SCOPE INDUSTRIES AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (739,801) $ 4,652
Adjustments to reconcile net (loss) income to net
cash flows from operating activities:
Depreciation and amortization 1,009,569 510,067
Amortization of contracts and routes 532,059
Gains on investments available for sale (7,942)
(Gains) losses on sale of equipment 3,887 (41,251)
Deferred income taxes (80,000) (50,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 3,071 39,235
Inventories (109,635) (90,587)
Prepaid expenses and other current assets (244,608) (705,262)
Accounts payable and accrued liabilities (449,614) (159,271)
Income taxes payable 26,605 (35,325)
Other assets 52,689 22,155
------------ ------------
Net cash flows from (used in) operating activities 4,222 (513,529)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (8,077,061) (8,896,397)
Maturities of U.S. Treasury bills 8,750,000 10,000,000
Purchase of property and equipment (2,014,628) (635,213)
Disposition of property and equipment 188,482
Purchase of investments available for sale (108,924)
Disposition of investments available for sale 48,983
Purchase of long-term note receivable
and other investment (340,000)
------------ ------------
Net cash flows (used in) from investing activities (1,341,689) 256,931
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 213,150
Repurchases of common stock (320,705) (334,841)
Change in bank overdraft 1,288,730 276,195
------------ ------------
Net cash from (used in) financing activities 1,181,175 (58,646)
------------ ------------
Net decrease in cash and cash equivalents (156,292) (315,244)
Cash and cash equivalents at beginning
of period 3,667,818 755,904
------------ ------------
Cash and cash equivalents at end of period $ 3,511,526 $ 440,660
============ ============
</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, 1999
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, 1999 and June 30, 1999, and the results of its
operations and cash flows for the three months ended September 30, 1999 and
1998. The accounting policies followed by the Company are set forth in Note 1
of its financial statements in its 1999 Annual Report which is incorporated
by reference on Form 10-K. The operating results for the quarter ended
September 30, 1999 include revenues and expenses of International Processing
Corporation and International Transportation Service, Inc. (collectively
known as "IPC"). The Company acquired IPC on April 4, 1999. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
2. Treasury bills consisted of the following:
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
------------ -----------
<S> <C> <C>
At adjusted cost which approximates
fair value $14,179,264 $14,852,203
At par value 14,350,000 15,000,000
</TABLE>
3. Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
------------ -----------
<S> <C> <C>
Finished products $ 346,603 $ 205,872
Raw materials 604,266 615,510
Operating supplies 158,521 178,373
----------- ---------
$ 1,109,390 $ 999,755
=========== ===========
</TABLE>
4. 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, 1999:
- ----------------------
Investments available
for sale $2,383,766 $ 3,977,335 $ 6,361,101
Other equity investments 2,006,002 2,006,002 (a)
At June 30, 1999:
- -----------------
Investments available
for sale $2,383,766 $ 6,080,695 $ 8,464,461
Other equity investments 2,006,002 2,006,002 (a)
</TABLE>
(a) No quoted prices are available for these securities.
-6-
<PAGE> 7
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
(CONTINUED)
5. Comprehensive income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------
1999 1998
----------- -----------
<S> <C> <C>
Net (loss) income $ (739,801) $ 4,652
Unrealized holding losses
arising during the period,
net of income taxes (1,378,360) (2,552,478)
Reclassify gains realized and
included in net income,
net of income taxes (2,942)
----------- ----------
Other comprehensive loss (1,378,360) (2,555,420)
----------- ----------
Comprehensive loss $(2,118,161) $(2,550,768)
=========== ===========
</TABLE>
6. For the three month period ended September 30, 1999 the effective rate for
income taxes benefit is 32.1%. The provision for income taxes for the three
months ended September 30, 1998 was 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.
7. Business segment information:
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Revenues:
Waste Material Recycling $13,642,328 $3,957,509
Vocational School Group 1,283,918 1,124,205
Other 123,350 69,666
----------- ----------
$15,049,596 $5,151,380
=========== ==========
(Loss) Income before Income Taxes:
Waste Material Recycling ($634,380) ($212,077)
Vocational School Group (85,498) (26,994)
Corporate expenses (670,686) (378,615)
Other 300,763 667,338
------------ ----------
$(1,089,801) $ 49,652
============ ==========
</TABLE>
-7-
<PAGE> 8
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Results for the quarter ended September 30, 1999 include the acquired operations
of International Processing Corporation and International Transportation
Service, Inc. (collectively known as "IPC"). The Company acquired IPC on April
4, 1999. Activities for IPC's operations are included as part of the Waste
Material Recycling segment of the Company. For the first quarter ended September
30, 1999, a net loss of $739,801 was incurred. For the previous year's first
quarter, net income was $4,652. The current first quarter loss per share was
$0.66. For the first quarter of the prior fiscal year the per share net income
was $0.00. Total company revenues for the first quarter ended September 30, 1999
were $15,049,596 compared to $5,151,380 for the comparable quarter last year.
The increase in revenues for the current year's first quarter over the prior
year's comparable quarter was 192%.
Waste material recycling segment sales for the current quarter increased 245%.
The average price received for recycled dried bakery products sold in this
year's first quarter was 12% below last year's first quarter average price. This
is the third consecutive year of comparative first quarter declining selling
prices for recycled dried bakery products. Current quarter operating costs for
the Waste Material Recycling segment increased 237% from the comparable quarter
last year. The Company's total depreciation and amortization expenses and its
general and administrative expenses increased 202% and 145% respectively for the
quarter ended September 30, 1999 compared to the comparable year earlier
quarter. The increased sales and costs stem from the added investment and
operational activity of the Waste Material Recycling segment since its
acquisition of IPC. A new bakery waste recycling facility serving the Chicago,
Illinois area was completed and put into service during the quarter. The new
facility replaces two former processing facilities and is expected to improve
efficiencies and processing capacities. Waste Material Recycling segment
operations failed to generate profits in either the current quarter or the
comparable quarter last year.
Vocational School Group revenues increased 14% from the comparable quarter last
year. Operations of the Vocational School Group reflected losses for both the
current quarter and the comparable quarter last year. One school facility is in
the process of relocating due to a lease expiration.
Investment and other income for the three months ended September 30, 1999 was
50% lower than investment and other income for the quarter ended September 30,
1998. Interest income from U.S. Treasury bills comprised most of the investment
income for both quarterly periods.
As a result of the loss incurred in the current quarter, an income tax benefit
of 32% of the pre-tax loss is expected through utilization of available tax loss
carrybacks and loss carry forwards.
-8-
<PAGE> 9
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
FINANCIAL POSITION
Working Capital was $17,384,545 at September 30, 1999. It was $18,607,866 at
June 30, 1999. The working capital ratio at September 30, 1999 was 3.1 and was
3.5 at June 30, 1999. Capital expenditures approximating $6 to $7 million,
primarily for Waste Material Recycling facilities and equipment, are planned for
calendar year 2000. Borrowing for a portion of the spending is likely and
various financing arrangements are currently under consideration.
TAXES
For the three month period ended September 30, 1999 the effective rate for
income taxes benefit is 32%. The provision for income taxes for the three months
ended September 30, 1998 was 91% of the income before taxes. The determination
of the provision or benefit 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.
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" compliant. 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 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 been less than
$150,000. 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 or 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, 1999 were as follows:
<TABLE>
<CAPTION>
Common Stock
No Par Value
------------
<S> <C>
Shares outstanding June 30, 1999 1,114,467
Stock options exercised 8,100
Shares purchased and retired
during the three months (5,200)
---------
Shares outstanding September 30, 1999 1,117,367
=========
</TABLE>
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the three months ended September 30, 1999, the Company purchased
and retired 5,200 shares of common stock at a cost of $320,705.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of shareowners held on October 26, 1999 with 1,114,267
shares entitled to vote, four directors were elected to serve for the ensuing
year and until their successors have been elected and qualified.
<TABLE>
<CAPTION>
VOTES VOTES
DIRECTORS FOR AGAINST TOTAL
----------------- --------- ------- ---------
<S> <C> <C> <C>
Robert Henigson 1,092,839 500 1,093,339
Meyer Luskin 1,092,839 500 1,093,339
William H. Mannon 1,092,839 500 1,093,339
Franklin Redlich 1,092,839 500 1,093,339
</TABLE>
The shareowners also voted to amend the Company's Bylaws to provide that the
number of directors be no less than three, nor more than five and that the exact
number be four unless changed by the shareowners or the Board of Directors.
1,073,950 shares were voted for and 8,900 shares voted against the amendment.
Item 5. Other Information.
On October 26, 1999 the Company's board of directors declared a regular dividend
of $1.00 per share payable on January 5, 2000 to shareowners of record at
November 26, 1999.
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, 1999.
-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, 1999 /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, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,511,526
<SECURITIES> 6,361,101
<RECEIVABLES> 4,945,077
<ALLOWANCES> 602,936
<INVENTORY> 1,109,390
<CURRENT-ASSETS> 25,763,384
<PP&E> 50,286,005
<DEPRECIATION> 24,800,203
<TOTAL-ASSETS> 70,162,011
<CURRENT-LIABILITIES> 8,378,839
<BONDS> 0
0
0
<COMMON> 4,374,450
<OTHER-SE> 57,015,562
<TOTAL-LIABILITY-AND-EQUITY> 70,162,011
<SALES> 13,765,678
<TOTAL-REVENUES> 15,049,596
<CGS> 11,559,689
<TOTAL-COSTS> 16,480,730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,089,801)
<INCOME-TAX> (350,000)
<INCOME-CONTINUING> (739,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (739,801)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
