<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
-OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file 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 Boulevard, Suite 310
Santa Monica, California 90401-1206
(Address of principal executive office, zip code)
(Registrant's telephone number, including area code) (310) 458-1574
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
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.
[X] Yes [ ] No
The number of shares of registrant's common stock outstanding at January 31,
2000 was 1,094,867.
<PAGE> 2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
PAGE
----
Part I. Financial Information:
Consolidated Balance Sheets -
December 31, 1999 and June 30, 1999 3
Consolidated Statements of Operations -
Three Months Ended
December 31, 1999 and 1998 4
Consolidated Statements of Operations -
Six Months Ended
December 31, 1999 and 1998 5
Consolidated Statements of Cash Flows -
Six Months Ended
December 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Part II. Other Information:
Item 2. Increases and Decreases in Outstanding Securities
and Indebtedness 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,877,134 $ 3,667,818
Treasury bills available for sale-at fair value 11,986,682 14,852,203
Accounts and notes receivable, less allowance
for doubtful accounts of $578,620 at December 31, 1999
and $484,885 at June 30, 1999 4,303,164 4,234,753
Inventories 645,794 999,755
Deferred income taxes 965,000 955,000
Prepaid expenses and other current assets 1,899,505 1,411,455
----------- -----------
TOTAL CURRENT ASSETS 23,677,279 26,120,984
----------- -----------
NOTES RECEIVABLE 574,070 1,103,816
PROPERTY AND EQUIPMENT:
Machinery and equipment 36,148,859 34,069,755
Land, buildings and improvements 15,418,668 14,208,280
----------- -----------
51,567,527 48,278,035
Less accumulated depreciation and amortization 25,796,474 23,793,405
----------- -----------
25,771,053 24,484,630
----------- -----------
COLLECTION ROUTES AND CONTRACTS, less accumulated
amortization of $1,594,813 at December 31, 1999 and
$539,427 at June 30, 1999 8,440,376 9,775,762
OTHER ASSETS:
Deferred charges and other assets 400,741 501,351
Investments available for sale-at fair value 9,362,536 8,464,461
Other equity investments-at cost 2,434,802 2,006,002
----------- -----------
12,198,079 10,971,814
----------- -----------
$70,660,857 $72,457,006
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 742,968 $ --
Accounts payable 3,235,24 3,917,443
Other accrued liabilities 3,133,580 2,338,505
Accrued payroll and related employee benefits 1,740,376 1,005,685
Income taxes payable 247,340 251,485
----------- -----------
TOTAL CURRENT LIABILITIES 9,099,513 7,513,118
DEFERRED INCOME TAXES 1,087,160 1,328,160
----------- -----------
10,186,673 8,841,278
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares
authorized; shares issued and outstanding at
December 31, 1999 - 1,097,867 and
June 30, 1999 - 1,114,467 4,374,450 4,161,300
Retained earnings 51,109,130 55,048,733
Accumulated other comprehensive income 4,990,604 4,405,695
----------- -----------
60,474,184 63,615,728
----------- -----------
$70,660,857 $72,457,006
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Sales $ 14,019,768 $ 3,964,808
Vocational school revenues 1,247,464 1,178,696
------------ ------------
15,267,232 5,143,504
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 11,626,853 3,693,832
Vocational school expenses 840,317 899,990
Depreciation and amortization 1,604,772 520,522
General and administrative 2,622,682 960,053
------------ ------------
16,694,624 6,074,397
------------ ------------
(1,427,392) (930,893)
Investment and other income 341,868 607,809
------------ ------------
(Loss) before income taxes (1,085,524) (323,084)
Income tax benefit (350,000) (85,000)
------------ ------------
NET LOSS $ (735,524) $ (238,084)
============ ============
NET LOSS PER SHARE - BASIC $ (0.66) $ (0.21)
Average shares outstanding 1,109,792 1,117,242
Cash dividends declared per share $ 1.00 $ 1.00
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 5
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
REVENUES:
Sales $ 27,785,446 $ 7,991,983
Vocational school revenues 2,531,382 2,302,901
------------ ------------
30,316,828 10,294,884
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 23,186,542 7,131,422
Vocational school expenses 1,916,833 1,797,463
Depreciation and amortization 3,146,400 1,030,589
General and administrative 4,925,579 1,901,013
------------ -----------
33,175,354 11,860,487
------------ -----------
(2,858,526) (1,565,603)
Investment and other income 683,201 1,292,171
------------ -----------
(Loss) before income taxes (2,175,325) (273,432)
Income tax benefit (700,000) (40,000)
------------ -----------
NET LOSS $ (1,475,325) $ (233,432)
============ ============
NET LOSS PER SHARE - BASIC $ (1.33) $ (0.21)
Average shares outstanding 1,111,453 1,118,763
Cash dividends declared per share $ 1.00 $ 1.00
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
SCOPE INDUSTRIES AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
-------------------------------
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,475,325) $ (233,432)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 2,091,014 1,030,589
Amortization of contracts and routes 1,055,386 --
Gains on investments available for sale (8,201) (10,258)
(Gains) losses on sale of equipment 20,175 (45,534)
Deferred income taxes
(405,054) (145,000)
Changes in operating assets and liabilities:
Accounts and notes receivable (68,411) 179,061
Inventories 353,961 92,405
Prepaid expenses and other current assets (488,050) (685,893)
Accounts payable and accrued liabilities 847,572 847,568
Income taxes payable (4,145) (288,075)
Other assets 100,610 (6,532)
----------- ----------
Net cash flows from operating activities 2, 019,532 734,899
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (12,134,479 (16,988,633)
Maturities of U.S. Treasury bills 15,000,000 19,000,000
Purchase of property and equipment (3,404,448) (1,112,700)
Disposition of property and equipment 6,836 193,492
Purchase of investments available for sale (59,965) (319,049)
Disposition from sale of investments available for sale 10,000 718,100
Purchase of long-term note receivable
and other investment -- (340,000)
Tax benefit applied to purchase of routes and contracts 280,000 --
----------- -----------
Net cash flows (used in) from investing activities (302,056) 1,151,210
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to shareowners (1,108,867) (1,117,967)
Proceeds from stock options exercised 213,150 22,838
Repurchases of common stock (1,355,411) (506,539)
Change in bank overdraft 742,968 --
----------- -----------
Net cash used in financing activities (1,508,160) (1,601,668)
----------- -----------
Net in cash and cash equivalents 209,316 284,441
Cash and cash equivalents at beginning of period 3,667,818 755,904
------------ ------------
Cash and cash equivalents at end of period $ 3,877,134 $ 1,040,345
============ ============
Noncash investing transaction: Acquired preferred stock of
Stamet, Inc. in exchange for cancellation of a $428,800 loan
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE> 7
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
1. The accompanying consolidated financial information of Scope Industries and
its subsidiaries ("Scope" or "the Company") should be read in conjunction
with the Notes to the Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K to the Securities and Exchange
Commission for the year ended June 30, 1999. The accompanying financial
information includes all subsidiaries on a consolidated basis and all
normal recurring adjustments which are considered necessary by the
Company's management for a fair presentation of the financial position,
results of operations and cash flows for the periods presented. The
operating results for the quarter and six months ended December 31, 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. However, these results are not
necessarily indicative of results for a full fiscal year.
The preparation of 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
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Treasury bills consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- -----------
<S> <C> <C>
At adjusted cost which approximates fair value $11,986,682 $14,852,203
At par value 12,100,000 15,000,000
</TABLE>
3. Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- -----------
<S> <C> <C>
Finished products $ 285,385 $ 205,872
Raw materials 220,957 615,510
Operating supplies 139,452 178,373
----------- -----------
$ 645,794 $ 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 December 31, 1999:
--------------------
Investments available for sale $2,441,932 $6,920,604 $9,362,536
Other equity investments 2,434,802 2,434,802(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)
(a) No quoted prices are available for these securities.
</TABLE>
7
<PAGE> 8
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
(CONTINUED)
5. Comprehensive income consisted of the following:
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net (loss) $(1,475,325) $ (233,432)
Unrealized holding gains (losses) arising
during the period, net of income taxes 590,322 (2,159,416)
Reclassify gains realized and included in
net income, net of income taxes (5,413) (5,258)
----------- -----------
Other comprehensive income (loss) 584,909 (2,164,674)
----------- -----------
Comprehensive (loss) $ (890,416) $(2,398,106)
============ ===========
</TABLE>
6. For the six month period ended December 31, 1999 the effective rate for
income taxes benefit is 32%. The benefit for income taxes for the six
months ended December 31, 1998 was 15% of the loss before taxes. The
determination of the benefit 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 provision or benefit for income taxes.
7. Business segment information:
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Revenues:
Waste Material Recycling $ 27,527,483 $ 7,870,770
Vocational School Group 2,531,382 2,302,901
Other 257,963 121,213
----------- -----------
$ 30,316,828 $10,294,884
============ ===========
(Loss) Income before Income Taxes:
Waste Material Recycling $ (1,618,542) $ (748,859)
Vocational School Group 26,677 (9,402)
Corporate expenses (1,374,159) (789,216)
Other 790,699 1,274,045
------------ -----------
$ (2,175,325) $(273,432)
============ ===========
</TABLE>
8
<PAGE> 9
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Results for the quarter and six months ended December 31, 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 second quarter
ended December 31, 1999, a net loss of $735,524 was incurred compared to the
previous year's second quarter net loss of $238,084. The current second quarter
loss per share was $0.66 compared to the previous year's second quarter net loss
per share of $0.21. Total company revenues for the second quarter ended December
31, 1999 were $15,267,232 compared to $5,143,504 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 197%.
Waste Material Recycling segment sales for the current quarter increased 254%
over the comparable quarter last year. The average price received for recycled
dried bakery products sold in this year's second quarter was 9% above last
year's second quarter average price. This is the first quarter in three years
where there was an increase in the selling prices for recycled dried bakery
products. For the first six months of the current year the average selling price
for recycled dried bakery product is 2% below the comparable period last year.
Current quarter operating costs for the Waste Material Recycling segment
increased 215% from the comparable quarter last year. The Company's total
depreciation and amortization expenses and its general and administrative
expenses increased 208% and 173% respectively for the quarter ended December 31,
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. Waste Material
Recycling segment operations failed to generate profits in either the current
quarter or the comparable quarter last year due primarily to lower selling
prices.
Vocational School Group revenues increased 6% from the comparable quarter last
year due primarily to increased enrollment. Operations of the Vocational School
Group for the current quarter and comparable quarter last year were profitable.
One school facility has been relocated to a new leased facility following the
lease expiration of its former site.
For the six months ended December 31, 1999, the Company incurred a net loss of
$1,475,325 or $1.33 loss per share. For the comparable six months in the prior
year, the net loss was $233,432 or $0.21 loss per share. Revenues for the six
months ended December 31, 1999 were 194% higher than the comparable six months
last year. The Waste Material Recycling segment increased 248% from the
comparable quarter last year. The Company's total depreciation and amortization
expenses and its general and administrative expenses increased 205% and 159%
respectively for the six months ended December 31, 1999 compared to the
comparable period last year. The increased sales and costs stem from the added
investment and operational activity of the Waste Material Recycling segment
since its acquisition of IPC. Waste Material Recycling segment operations failed
to generate profits in current six months or the comparable period last year.
Vocational School Group revenues increased 10% from the comparable six month
period last year. The Vocational School Group segment operated profitably during
the comparable six months of the prior year. The school facility whose lease was
terminated relocated into a new leased facility and is operational.
Investment and other income for the three months and six months ended December
31, 1999 was 44% and 47% lower than investment and other income for the quarter
and six months ended December 31, 1998. Interest income from U.S. Treasury bills
comprised most of the investment income for both quarterly periods. The decrease
is attributable to the selling of Treasury bills to finance the purchase of
International Processing Corporation in April 1999.
As a result of the loss incurred in the three months and six months ended
December 31, 1999, an income tax benefit of 32% of the pre-tax loss is expected
through utilization of available tax loss carrybacks and loss carryforwards.
9
<PAGE> 10
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
FINANCIAL POSITION
Working Capital was $14,577,766 at December 31, 1999. It was $18,607,866 at June
30, 1999. The working capital ratio at December 31, 1999 was 2.6 and was 3.5 at
June 30, 1999. Capital expenditures approximating $6 million 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 six month period ended December 31, 1999 the effective rate for income
tax benefits is 32%. The benefit for income taxes for the six months ended
December 31, 1998 was 15% of the loss 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
With the arrival of year 2000, the Company has not encountered any "Y2K"
problems in its computer systems. The company will continue to review its
systems and applications in the event they are subsequently affected by "Y2K"
problems. 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 any "Y2K" problems. The company will continue to review and
monitor vendors and service providers to determine what if any action may be
required as the result of any "Y2K" issues. It is anticipated that no
significant additional costs will be incurred with regard to "Y2K" issues.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition that are not related to historical
results are forward looking statements. Actual results may differ materially
from those stated or implied in the forward looking statements. Further, certain
forward looking statements are based upon assumptions of future events which may
not prove to be accurate. 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.
10
<PAGE> 11
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 six months
ending December 31, 1999 were as follows:
Common Stock
No Par Value
------------
Shares outstanding June 30, 1999 1,114,467
Stock options exercised 8,100
Shares purchased and retired during the six months (24,700)
---------
Shares outstanding December 31, 1999 1,097,867
=========
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the six months ended December 31, 1999, the Company purchased and
retired 24,700 shares of common stock at a cost of $1,355,411.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits - None
(B) No Form 8-K was filed for the quarter ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCOPE INDUSTRIES
(Registrant)
Dated: February 11, 2000 /s/ Eric M. Iwafuchi
-------------------------------------
Eric M. Iwafuchi, 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 DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,877,134
<SECURITIES> 9,362,536
<RECEIVABLES> 4,881,784
<ALLOWANCES> 578,620
<INVENTORY> 645,794
<CURRENT-ASSETS> 23,677,279
<PP&E> 51,567,527
<DEPRECIATION> 25,796,474
<TOTAL-ASSETS> 79,660,857
<CURRENT-LIABILITIES> 9,099,513
<BONDS> 0
0
0
<COMMON> 4,374,450
<OTHER-SE> 56,099,734
<TOTAL-LIABILITY-AND-EQUITY> 70,660,857
<SALES> 14,019,768
<TOTAL-REVENUES> 15,267,232
<CGS> 11,626,853
<TOTAL-COSTS> 16,694,624
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,085,524)
<INCOME-TAX> (350,000)
<INCOME-CONTINUING> (735,524)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (735,524)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
