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 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- 3 PART I. FINANCIAL INFORMATION SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30 JUNE 30 1999 1999 ------------ --------- (Unaudited) 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 =========== =========== The accompanying notes are an integral part of these statements. -3- 4 SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------ 1999 1998 ------------ ------------ 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 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 ------------- 1999 1998 ------------ ------------- 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 ============ ============ The accompanying notes are an integral part of these statements. -5- 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: September 30 June 30 1999 1999 ------------ ----------- At adjusted cost which approximates fair value $14,179,264 $14,852,203 At par value 14,350,000 15,000,000 3. Inventories consisted of the following: September 30 June 30 1999 1999 ------------ ----------- Finished products $ 346,603 $ 205,872 Raw materials 604,266 615,510 Operating supplies 158,521 178,373 ----------- --------- $ 1,109,390 $ 999,755 =========== =========== 4. Investments consisted of the following: Net Unrealized Gains Before Provision For Cost Income Taxes Fair Value ---------- ------------- ------------- 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) (a) No quoted prices are available for these securities. -6- 7 SCOPE INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1999 (CONTINUED) 5. Comprehensive income consisted of the following: Three Months Ended September 30 ----------------- 1999 1998 ----------- ----------- 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) =========== =========== 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: Three Months Ended September 30 ----------------------------------- 1999 1998 ----------- ---------- 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 ============ ========== -7- 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- 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- 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: Common Stock No Par Value ------------ 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 ========= 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. VOTES VOTES DIRECTORS FOR AGAINST TOTAL ----------------- --------- ------- --------- 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 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- 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-