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, 1996 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 preceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 25, 1996 - -------------------------- ------------------------------- Common Stock, no par value 1,189,465 2 SCOPE INDUSTRIES AND SUBSIDIARIES INDEX PAGE ---- Part I. Financial Information: Consolidated Balance Sheets - September 30, 1996 and June 30, 1996 3 Consolidated Statements of Income - Three Months Ended September 30, 1996 and 1995 4 Consolidated Statements of Cash Flows - Three Months Ended September 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 7 Part II. Other Information: Item 2. Increases and Decreases in Outstanding Securities and Indebtedness 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Item 5. Other Information 9 Item 6. Exhibits and Reports on Form 8-K 9 Signatures 10 -2- 3 PART I. FINANCIAL INFORMATION SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30 JUNE 30 1996 1996 ------------ ------------ (UNAUDITED) (AUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $10,611,476 $ 1,721,939 Treasury bills (par value $8,500,000 at September 30, 1996 and $5,035,000 at June 30, 1996) 8,345,674 4,973,377 Accounts and notes receivable, less allowance for doubtful accounts of $149,196 at September 30, 1996 and $149,180 at June 30, 1996 5,444,953 5,173,445 Inventories 524,289 531,637 Prepaid expenses and other current assets 592,410 531,639 ----------- ----------- TOTAL CURRENT ASSETS 25,518,802 12,932,037 ----------- ----------- NOTES RECEIVABLE 1,147,991 1,154,378 ----------- ----------- PROPERTY AND EQUIPMENT: Machinery and equipment 22,496,744 22,160,240 Land, buildings and improvements 9,687,448 9,743,940 ----------- ----------- 32,184,192 31,904,180 Less accumulated depreciation and amortization 21,168,346 20,867,899 ----------- ----------- 11,015,846 11,036,281 ----------- ----------- OTHER ASSETS: Deferred charges and other assets 117,310 130,930 Investments available for sale-at fair value 21,177,858 29,647,443 Investments held to maturity-at cost 633,426 633,426 ----------- ----------- 21,928,594 30,411,799 ----------- ----------- $59,611,233 $55,534,495 =========== =========== LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES: Bank overdraft $ 250,686 Accounts payable $ 957,883 1,410,953 Other accrued liabilities 1,266,757 1,447,406 Accrued payroll and related employee benefits 975,447 1,069,429 Income taxes payable 3,854,782 467,983 ----------- ----------- TOTAL CURRENT LIABILITIES 7,054,869 4,646,457 ----------- ----------- DEFERRED INCOME TAXES 1,400,000 2,750,000 ----------- ----------- 8,454,869 7,396,457 ----------- ----------- SHAREOWNERS' EQUITY: Common stock, no par value, 5,000,000 shares authorized; shares issued and outstanding September 30, 1996 1,189,665 June 30, 1996 1,202,565 3,921,287 3,921,287 Retained earnings 38,328,440 29,848,744 Net unrealized gain on investments 8,906,637 14,368,007 ----------- ----------- 51,156,364 48,138,038 ----------- ----------- $59,611,233 $55,534,495 =========== =========== The accompanying notes are an integral part of these statements. -3- 4 SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------ 1996 1995 ------------ ----------- REVENUES: Sales $ 8,692,500 $5,684,076 Vocational school revenues 1,089,248 1,186,105 ---------- ---------- 9,781,748 6,870,181 ---------- ---------- OPERATING COSTS AND EXPENSES: Cost of sales 4,411,164 3,438,161 Vocational school operating expenses 881,062 883,351 Depreciation and amortization 522,024 525,106 General and administrative 1,050,640 1,222,818 ---------- ---------- 6,864,890 6,069,436 ---------- ---------- 2,916,858 800,745 Investment and other income 9,905,910 735,628 ---------- ---------- Income before income taxes 12,822,768 1,536,373 Provision for income taxes 3,565,000 450,000 ---------- ---------- NET INCOME $9,257,768 $1,086,373 ========== ========== NET INCOME PER SHARE $ 7.72 $ 0.87 ========== ========== Weighted average number of shares outstanding 1,199,140 1,242,134 The accompanying notes are an integral part of these statements. -4- 5 SCOPE INDUSTRIES AND SUBSDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------ 1996 1995 ----------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,257,768 $ 1,086,373 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 522,024 525,106 Gains on sales of investments (9,435,635) (482,347) Gains on sales of equipment (1,309) (2,718) Deferred income taxes (170,000) (20,000) Changes in operating assets and liabilities: Accounts and notes receivable (265,121) 126,264 Inventories 7,348 (111,008) Prepaid expenses and other current assets (60,771) 109,881 Bank overdraft (250,686) 170,884 Accounts payable and accrued liabilities (727,701) 474,991 Income taxes payable 3,386,799 414,350 Other assets 13,620 10,195 ----------- ----------- Net cash flows from operating activities 2,276,336 2,301,971 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of U.S. Treasury bills (5,157,297) (3,743,562) Maturities of U.S. Treasury bills 1,785,000 1,290,000 Purchase of property and equipment (513,780) (562,386) Disposition of property and equipment 13,500 285,178 Purchase of investments (2,900,536) (573,000) Disposition of investments 14,164,386 1,865,307 Purchase of long-term note receivable (152,000) ----------- ----------- Net cash flows from (used in)investing activities 7,391,273 (1,590,463) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends to shareowners (297,667) Repurchases of common stock (480,405) (316,625) ----------- ----------- Net cash used in financing activities (778,072) (316,625) ----------- ----------- Net increase in cash and cash equivalents 8,889,537 394,883 Cash and cash equivalents at beginning of period 1,721,939 242,794 ----------- ----------- Cash and cash equivalents at end of period $10,611,476 $ 637,677 =========== =========== The accompanying notes are an integral part of these statements. -5- 6 SCOPE INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1996 1. In the opinion of the Registrant, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly Scope Industries' financial position as of September 30, 1996 and June 30, 1996, and the results of its operations for the three months ended September 30, 1996 and 1995. The accounting policies followed by the Registrant are set forth in Note 1 of its financial statements in the 1996 Scope Industries Annual Report which is incorporated by reference on Form 10-K. 2. Quarterly results of operations are not necessarily indicative of the results to be expected for the full year. 3. Inventories consisted of the following: September 30 June 30 1996 1996 ---- ---- Finished products $184,529 $184,520 Raw materials 156,609 144,853 Operating supplies 183,151 202,264 -------- -------- $524,289 $531,637 ======== ======== 4. During the three month period ended September 30, 1996, investment gains of $9,435,635 were recognized and included as income. Unrealized investment holding gains, (excluded from income but reported, net of income taxes, as a separate component of shareowners' equity) decreased by $5,461,370 to $8,906,637 at September 30, 1996 from $14,368,007 at June 30, 1996. During the three month period ended September 30, 1995, investment gains of $482,347 were recognized and included as income. Unrealized investment holding gains, (excluded from income but reported, net of income taxes as a separate component of shareowners' equity) were $10,471,832 at September 30, 1995. Net Unrealized Gains (Losses) Before Provision Cost For Income Taxes Fair Value ---- ---------------- ---------- At September 30, 1996: ---------------------- Investments held to maturity $ 633,426 $ (32,013) $ 601,413 Investments available for sale 9,921,221 11,256,637 21,177,858 At June 30, 1996: ----------------- Investments held to maturity $ 633,426 $ (29,826) $ 603,600 Investments available for sale 11,749,436 17,898,007 29,647,443 -6- 7 SCOPE INDUSTRIES AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS For the quarter ended September 30, 1996, net income was $9,257,768 or $7.72 per share compared to $1,086,373 or $0.87 per share for the same quarter last year. Total operating revenues for the quarter ended September 30, 1996 were 42% greater than the revenues for the same quarter last year. The Waste Material Recycling segment sales increased 53% and the Vocational School Group experienced an 8% decline in sales and revenues from last year's comparable quarter. Waste Material Recycling segment sales increased because of higher prices received for animal feed products during the current quarter. Production volume for the current quarter was constant with the volume in last year's first quarter. Operating costs for the Waste Material Recycling segment increased compared to the same quarter of last year but the increase was at a lesser rate than the revenue gain. Vocational School group operating costs were at the same level as the costs for the prior year's comparable quarter. General and Administrative expenses declined 14% compared to the same quarter last year. Legal expenses were lower in the current quarter than they were in the first quarter last year. During this year's first quarter, the Waste Material Recycling segment operated profitably and the Vocational School Group business operated at a loss. Higher margins on animal feed product sales for the Waste Material Recycling segment were achieved primarily because sales prices were substantially higher than prices in the comparable quarter last year. Commodity prices for competing animal feed ingredients were dramatically higher during the current period which caused greater demand for the Company's available Dried Bakery Product. The Company's operating earnings increased 264% in the current quarter over the comparable prior year quarter. Investment and other income for the three months ended September 30, 1996 was $9,905,910 compared to $735,628 for the same three months last year. This income included net gains from sales of investments of $9,435,635 in the current period and $482,347 in the year earlier period. FINANCIAL POSITION Working Capital was $18,463,933 at September 30, 1996. It was $8,285,580 at June 30, 1996. The working capital ratio at September 30, 1996 was 3.6 and at June 30, 1996 was 2.8. During the first quarter ended September 30, 1996, the Company sold investment securities available for sale whose aggregate proceeds totaled $14,164,386. The securities disposed of had been held for periods ranging from one to fourteen years with a majority having been held over ten years. The sales of investments and the resulting gain recognition for the quarter ended September 30, 1996 were a major factor in the decrease in unrealized investment holding gains. Unrealized investment holding gains, net of income taxes were $8,906,637 at September 30, 1996 and were $14,368,007 at June 30, 1996. -7- 8 SCOPE INDUSTRIES AND SUBSIDIARES MANAGEMENT'S DISCUSSION AND ANAYLSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) Investments are accounted for under Statement of Financial Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in Debt and Equity Securities". At September 30, 1996, investments include $11,256,637 in unrealized gains based on fair values that exceed adjusted costs for certain securities. Shareowners' equity under the provisions of SFAS 115 reflects $8,906,637 net unrealized gain on investments after a provision for deferred income taxes. In accordance with SFAS 115, the unrealized holding gains are exclued from earnings. TAXES The provision for income taxes for the quarter ended September 30, 1996 is $3,565,000 and represents an effective rate of 27.8% for federal and state income taxes. Valuation allowances have been eliminated for those deferred tax assets that can be realized on certain investment gains being recognized during the quarter. Recognizing the deferred tax benefit during the quarter reduces the provision for income taxes to an effective tax rate that is lower than the statutory federal income tax rate. For the first quarter of prior fiscal year, the income tax provision was $450,000 and the effective tax rate was 29.3%. -8- 9 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, 1996, were as follows: Common Stock No Par Value ------------ Shares outstanding June 30, 1996 1,202,565 Shares purchased and retired during the three months (12,900) --------- Shares outstanding September 30, 1996 1,189,665 --------- A corporate resolution requires the retirement of all reacquisitions of common stock. During the three months ended September 30, 1996, the Registrant purchased and retired 12,900 shares of common stock at a cost of $480,405. Item 4. Submission of Matters to a Vote of Security Holders. At the annual meeting of shareowners held on October 22, 1996 with 1,190,665 shares entitled to vote, five directors were elected to serve for the ensuing year and until their successors have been elected and qualified. VOTES VOTES ABSTAINED DIRECTORS FOR WITHHELD FROM VOTING TOTAL --------- ----- -------- ----------- ------ Robert Henigson 1,092,730 13,000 300 1,106,030 Meyer Luskin 1,092,730 13,000 300 1,106,030 William H. Mannon 1,092,730 13,000 300 1,106,030 Franklin Redlich 1,092,730 13,000 300 1,106,030 Paul D. Saltman 1,092,730 13,000 300 1,106,030 Item 5. Other Information. On October 22, 1996 the Registrant's board of directors declared a regular dividend of $0.70 per share and an extra dividend of $0.30 per share payable on January 6, 1997 to shareowners of record at December 2, 1996. 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, 1996. -9- 10 PART II. OTHER INFORMATION SCOPE INDUSTRIES AND SUBSIDIARIES (CONTINUED) 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 and accepting responsibility as the signatory. SCOPE INDUSTRIES (Registrant) DATE: November 8, 1996 /s/ John J. Crowley -------------------- ----------------------------------- John J. Crowley, Vice President and Chief Financial Officer -10-