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 2 SCOPE INDUSTRIES AND SUBSIDIARIES INDEX PAGE ---- 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 -2- 3 PART I. FINANCIAL INFORMATION SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31 JUNE 30 1999 1998 ----------- ----------- (UNAUDITED) 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 =========== =========== The accompanying notes are an integral part of these statements. -3- 4 SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MARCH 31 -------- 1999 1998 ----------- ----------- 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 The accompanying notes are an integral part of these statements. -4- 5 SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) NINE MONTHS ENDED MARCH 31 -------- 1999 1998 ------------ ------------ 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 The accompanying notes are an integral part of these statements. -5- 6 SCOPE INDUSTRIES AND SUBSDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED MARCH 31 -------- 1999 1998 ------------ ------------ 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 ============ ============ The accompanying notes are an integral part of these statements. -6- 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: March 31 June 30 1999 1998 ----------- ----------- At adjusted cost which approximates fair value $29,440,915 $43,024,640 At par value 29,750,000 44,250,000 4. Inventories consisted of the following: March 31 June 30 1999 1998 -------- -------- Finished products $203,400 $276,320 Raw materials 248,016 207,862 Operating supplies 178,790 178,217 -------- -------- $630,206 $662,399 ======== ======== -7- 8 SCOPE INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1999 (CONTINUED) 5. Investments consisted of the following: Net Unrealized Gains Before Provision For Cost Income Taxes Fair Value ----------- ----------- ----------- 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) (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: Nine Months Ended March 31 -------- 1999 1998 ------------ ------------ 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 ============ ============ 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- 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- 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- 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- 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- 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: Common Stock No Par Value ---------- 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 ========== 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-