<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, 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 April 23, 1999
- -------------------------- -----------------------------
Common Stock, no par value 1,114,467
<PAGE> 2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I Financial Information:
Consolidated Balance Sheets -
March 31, 1999 and June 30, 1998 3
Consolidated Statements of Operations -
Three Months Ended
March 31, 1999 and 1998 4
Consolidated Statements of Operations -
Nine Months Ended
March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows -
Nine Months Ended
March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Results of Operations and
Financial Condition 10
Part II. Other Information:
Item 2. Increases and Decreases in
Outstanding Securities and
Indebtedness 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,956,773 $ 755,904
Treasury bills available for sale-at
fair value 29,440,915 43,024,640
Accounts and notes receivable, less allowance
for doubtful accounts of $199,814 at March 31,
1999 and $205,318 at June 30, 1998 1,885,966 1,618,150
Inventories 630,206 662,399
Deferred income taxes 700,000 700,000
Prepaid expenses and other current assets 973,003 459,465
----------- -----------
TOTAL CURRENT ASSETS 44,586,863 47,220,558
----------- -----------
NOTES RECEIVABLE 592,585 897,829
----------- -----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 24,418,216 23,407,396
Land, buildings and improvements 11,312,672 10,581,881
----------- -----------
35,730,888 33,989,277
Less accumulated depreciation and amortization 24,491,573 23,304,941
----------- -----------
11,239,315 10,684,336
----------- -----------
OTHER ASSETS:
Deferred charges and other assets 559,853 244,590
Investments available for sale-at fair value 8,754,454 17,326,799
Other equity investments-at cost 2,006,002 2,006,002
----------- -----------
11,320,309 19,577,391
----------- -----------
$67,739,072 $78,380,114
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,060,917 $ 1,050,796
Other accrued liabilities 1,457,687 1,359,136
Accrued payroll and related employee benefits 668,813 705,604
Income taxes payable 209,962 475,506
----------- -----------
TOTAL CURRENT LIABILITIES 3,397,379 3,591,042
----------- -----------
DEFERRED INCOME TAXES 435,000 3,635,000
----------- -----------
3,832,379 7,226,042
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares
authorized; shares issued and outstanding
March 31, 1999 1,114,467
June 30, 1998 1,122,842 4,161,300 4,138,462
Retained earnings 55,548,920 57,635,588
Net unrealized gain on investments 4,196,473 9,380,022
----------- -----------
63,906,693 71,154,072
----------- -----------
$67,739,072 $78,380,114
=========== ===========
</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
MARCH 31
--------
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Sales $ 3,943,935 $ 4,709,027
Vocational school revenues 1,247,806 1,136,429
----------- -----------
5,191,741 5,845,456
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 3,462,219 3,433,989
Vocational school expenses 947,341 868,334
Depreciation and amortization 501,034 498,676
General and administrative 948,257 1,023,830
----------- -----------
5,858,851 5,824,829
----------- -----------
(667,110) 20,627
Investment and other income 543,174 8,791,385
----------- -----------
Income (loss) before income taxes (123,936) 8,812,012
Provision (benefit) for income taxes (15,000) 3,460,000
----------- -----------
NET INCOME (LOSS) $ (108,936) $ 5,352,012
=========== ===========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.10) $ 4.73
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.10) $ 4.69
Average shares outstanding - Basic 1,115,517 1,132,002
Dilutive effect of stock options 9,242 9,324
----------- -----------
Average shares outstanding - Diluted 1,124,759 1,141,326
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
--------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Sales $ 11,935,918 $ 15,775,574
Vocational school revenues 3,550,707 3,429,603
------------ ------------
15,486,625 19,205,177
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 10,593,641 11,098,539
Vocational school expenses 2,744,804 2,654,003
Depreciation and amortization 1,531,623 1,534,372
General and administrative 2,849,270 3,090,113
------------ ------------
17,719,338 18,377,027
------------ ------------
(2,232,713) 828,150
Investment and other income 1,835,345 13,805,497
------------ ------------
Income (loss) before income taxes (397,368) 14,633,647
Provision (benefit) for income taxes (55,000) 5,665,000
------------ ------------
NET INCOME (LOSS) $ (342,368) $ 8,968,647
============ ============
NET INCOME (LOSS) PER SHARE - BASIC $ (0.31) $ 7.84
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.30) $ 7.78
Average shares outstanding - Basic 1,117,705 1,143,706
Dilutive effect of stock options 9,491 9,093
------------ ------------
Average shares outstanding - Diluted 1,127,196 1,152,799
Cash dividends declared per share $ 1.00 $ 1.00
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE> 6
SCOPE INDUSTRIES AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
--------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (342,368) $ 8,968,647
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization 1,531,623 1,534,372
Gains on investments available for sale (10,258) (12,432,382)
Gains on sale of equipment (55,034) (4,055)
Deferred income taxes (200,000) 30,000
Changes in operating assets and liabilities:
Accounts and notes receivable 192,428 (1,388,859)
Inventories 32,193 117,274
Prepaid expenses and other current assets (513,538) (11,285)
Accounts payable and accrued liabilities 71,881 (328,144)
Income taxes payable (265,544) 2,671,279
Other assets (95,263) 16,750
------------ ------------
Net cash flows from (used in) operating activities 346,120 (826,403)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (17,416,275) (32,056,859)
Maturities of U.S. Treasury bills 31,000,000 23,000,000
Purchase of property and equipment (2,234,560) (1,891,716)
Disposition of property and equipment 202,992 116,068
Purchase of long-term notes receivable (375,000) (658,800)
Purchase of investments available for sale (319,046) (334,702)
Purchase of other equity investments (1,001,000)
Proceeds from sale of investments available for sale 718,100 15,367,847
------------ ------------
Net cash flows from investing activities 11,576,211 2,540,838
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to shareowners (1,117,967) (1,133,352)
Repurchases of common stock (626,333) (2,042,335)
Proceeds from stock options exercised 22,838
------------ ------------
Net cash used in financing activities (1,721,462) (3,175,687)
------------ ------------
Net change in cash and cash equivalents 10,200,869 (1,461,252)
Cash and cash equivalents at beginning
of period 755,904 5,946,050
------------ ------------
Cash and cash equivalents at end of period $ 10,956,773 $ 4,484,798
============ ============
</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, 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 March 31, 1999 and June 30, 1998, and the results
of its operations and cash flows for the three and nine months ended March
31, 1999 and 1998. 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>
March 31 June 30
1999 1998
----------- -----------
<S> <C> <C>
At adjusted cost which approximates
fair value $29,440,915 $43,024,640
At par value 29,750,000 44,250,000
</TABLE>
4. Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31 June 30
1999 1998
-------- --------
<S> <C> <C>
Finished products $203,400 $276,320
Raw materials 248,016 207,862
Operating supplies 178,790 178,217
-------- --------
$630,206 $662,399
======== ========
</TABLE>
-7-
<PAGE> 8
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
(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 March 31, 1999:
Investments available
for sale $ 2,682,981 $ 6,071,473 $ 8,754,454
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.
Gains of $10,258 and $12,432,382 from sales of investments were included in
the determination of the respective loss and net income for the nine month
period ended March 31, 1999 and 1998.
6. Comprehensive income consisted of the following:
<TABLE>
<CAPTION>
Nine Months Ended
March 31
--------
1999 1998
------------ ------------
<S> <C> <C>
Net (loss) income $ (342,368) $ 8,968,647
Unrealized holding (losses) gains
arising during the period,
net of income taxes (5,178,286) 17,658,758
Reclassify gains realized and
included in net income,
net of income taxes (5,263) (7,722,382)
------------ ------------
Other comprehensive (loss) income (5,183,549) 9,936,376
------------ ------------
Comprehensive (loss) income $ (5,525,917) $ 18,905,023
============ ============
</TABLE>
7. The benefit for income taxes for the nine months ended March 31, 1999 is
13.8% of the loss before taxes. The determination of the benefit or
provision for income taxes considers certain permanent differences between
taxable income or loss and income or loss as reported using generally
accepted accounting methods. Those differences sometimes cause distortions
in the relationships between income or loss before income taxes and the
benefit or provision for income taxes. For the nine month period ended
March 31, 1998 the effective rate for income taxes was 38.7%.
-8-
<PAGE> 9
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
(CONTINUED
8. Subsequent to March 31, 1999, the Company, through its wholly owned
subsidiary Scope Products, Inc., completed the purchase of the bakery waste
recycling business known as International Processing Corporation. The
purchase was effective as of April 4, 1999 and consists of manufacturing
facilities located in Georgia, Illinois, Indiana, Kansas, New Jersey, North
Carolina, Ohio and Texas. The purchase price of $22,000,000 was paid in
cash and was funded with cash and liquid securities on hand.
-9-
<PAGE> 10
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company's third fiscal quarter ended March 31, 1999 resulted in a net loss
of $108,936 which is a $0.10 loss per share-diluted. For the third quarter last
year, net income was $5,352,012, which was $4.69 per share-diluted. Total
operating revenues for this year's third quarter were 11% below the revenues for
the same quarter last year. Waste Material Recycling segment revenues in the
current quarter dropped 16% from last year's third quarter revenues. The
segment's reduced revenues were a result of unit selling prices falling 20% from
the year earlier average price level. Selling prices of Dried Bakery Product
closely track corn prices as they are competitive feed commodities. Cash corn
prices during the quarter ending March 1999 averaged 80% of year earlier prices.
Tonnage volume in this year's third quarter was 10% above the tonnage for the
same quarter last year. Operating costs for the Waste Material Recycling segment
were unchanged from the costs of the same quarter last year. Vocational School
Group revenues this quarter were 10% above the revenues for the comparable
quarter last year. The Group's operating costs for the quarter were 9% higher in
the current quarter than in the comparable last year.
Investment and other income for the quarter ended March 31, 1999 was $543,174
compared to $8,791,385 for the same three months last year. Investment income
for the current quarter is comprised primarily of interest income. The year
earlier quarter included gains of $8,304,221 from sales of investments.
For the nine months ended March 31, 1999, the Company incurred a net loss of
$342,368 or $0.30 loss per share-diluted. Last year's comparable nine months'
net income was $8,968,647 or $7.78 per share-diluted. Revenues for the nine
months ended March 31, 1999 were 19% below the revenues for the comparable nine
months last year. Lower corn prices prevailing for the current year have caused
unit selling prices of Dried Bakery Product to be 21% below last year's average
selling price for the comparable nine months. Although volume of Dried Bakery
Product shipped has increased for the current nine month period compared to the
prior year's comparable period, the lower unit prices have caused revenues to
decline. The Waste Material Recycling segment operated at a loss for the current
nine months compared to operating profitably in the comparable period last year.
The Vocational Schools Group segment operated with a small net profit for the
current nine month period compared to a small net loss for the comparable nine
month period last year.
Investment and other income for the nine months ended March 31, 1999 was
$1,835,345. Investment and other income was $13,805,497 including $12,432,382 of
investment gains for the comparable nine months last year.
-10-
<PAGE> 11
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
FINANCIAL POSITION
Working Capital was $41,189,484 at March 31, 1999. It was $43,629,516 at June
30, 1998. The working capital ratio at March 31, 1999 and at June 30, 1998 was
13.1.
At March 31, 1999, investments include $6,071,473 in unrealized gains based on
fair values that exceed adjusted costs for certain securities. Nearly all of
this unrealized gain is represented by the Company's holdings in OSI Systems,
Inc. The Company, as a result of its investment in OSI Systems, Inc. in 1990, is
OSI's largest single shareholder although not a controlling shareholder.
Shareowners' equity reflects $4,196,473 net unrealized gain on investments after
a provision for deferred taxes. The unrealized holding gains are excluded from
earnings.
TAXES
The benefit for income tax credits for the nine month period ended March 31,
1999 is $55,000. For the first nine months of the prior fiscal year, the income
tax provision was $5,665,000 and the effective tax rate was 38.7%.
SUBSEQUENT EVENT
The Company completed the purchase of the waste recycling business known as
International Processing Corporation, effective April 4, 1999. The purchase made
through Scope Products, Inc., a wholly owned subsidiary of the Company, consists
of manufacturing facilities located in Georgia, Illinois, Indiana, Kansas, New
Jersey, North Carolina, Ohio and Texas. The purchase price of $22,000,000 was
paid in cash and was funded with cash and liquid securities on hand. The Company
intends to operate the acquired business as an expansion of its Waste Material
Recycling segment.
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. However, as a result
of the acquisition of International Processing Corporation in April 1999, the
readiness review has resumed and will be ongoing as financial and data
processing systems from that business are integrated. The systems assessment and
any remediation or replacement that may be necessary is expected to be completed
before the end of 1999. The Company believes that its operating systems will not
have serious concerns with regard to "Year 2000" problems. Should disruptions
occur due to "Year 2000" problems, the Company believes it
-11-
<PAGE> 12
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
(Year 2000 continued)
would be capable of operating in alternative modes that could circumvent "Year
2000" problems. Review and testing of operating systems is ongoing. Vendors and
service providers are being monitored 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. 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 the Management's Discussion and Analysis
of Results of Operations and Financial Condition and elsewhere in this quarterly
report are subject to risks and uncertainties that could affect actual future
results. Potential risks and uncertainties include, but are not limited to,
general business conditions, unusual volatility in equity and interest rate
markets, disruptions in the availability or pricing of raw materials,
transportation difficulties, changing government educational aid policies, or
disruption of operations from acts of God.
-12-
<PAGE> 13
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 nine months
ending March 31, 1999 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 nine months (9,275)
Shares issued for stock options
exercised 900
----------
Shares outstanding March 31, 1999 1,114,467
==========
</TABLE>
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the nine months ended March 31, 1999, the Company purchased and
retired 9,275 shares of common stock at a cost of $626,333.
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, 1999 .
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: May 12, 1999 /s/ John J. Crowley
- ------------------ ------------------------------------
John J. Crowley, Vice President
and Chief Financial Officer
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATI0NS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 10,956,773
<SECURITIES> 29,440,915
<RECEIVABLES> 2,085,780
<ALLOWANCES> 199,814
<INVENTORY> 630,206
<CURRENT-ASSETS> 44,586,863
<PP&E> 35,730,888
<DEPRECIATION> 24,491,573
<TOTAL-ASSETS> 67,739,072
<CURRENT-LIABILITIES> 3,397,379
<BONDS> 0
0
0
<COMMON> 4,161,300
<OTHER-SE> 59,745,393
<TOTAL-LIABILITY-AND-EQUITY> 67,739,072
<SALES> 11,935,918
<TOTAL-REVENUES> 15,486,625
<CGS> 10,593,641
<TOTAL-COSTS> 17,719,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (397,368)
<INCOME-TAX> (55,000)
<INCOME-CONTINUING> (342,368)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (342,368)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.30)
</TABLE>
