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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 September 30, 2001 |
-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 (State or other jurisdiction of incorporation or organization) | 95-1240976 (I.R.S. Employer 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
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.
[X] Yes [ ] No
The number of shares of registrant’s common stock outstanding at October 31, 2001 was 1,029,267.
Table of Contents
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
Page | ||||||||
Part I. Financial Information: | ||||||||
Consolidated Balance Sheets - September 30, 2001 and June 30, 2001 | 3 | |||||||
Consolidated Statements of Operations - Three Months Ended September 30, 2001 and 2000 | 4 | |||||||
Consolidated Statements of Cash Flows - Three Months Ended September 30, 2001 and 2000 | 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 |
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
September 30, | June 30, | |||||||||
2001 | 2001 | |||||||||
(Unaudited) | ||||||||||
ASSETS | ||||||||||
Current Assets: | ||||||||||
Cash and cash equivalents | $ | 4,174,015 | $ | 563,234 | ||||||
Treasury bills available for sale-at fair value | 4,976,328 | 9,926,527 | ||||||||
Accounts and notes receivable, less allowance for doubtful accounts of $696,142 at September 30, 2001 and $691,283 at June 30, 2001 | 5,622,487 | 3,870,559 | ||||||||
Income taxes receivable | 1,535,976 | 1,645,253 | ||||||||
Inventories | 924,770 | 874,446 | ||||||||
Deferred income taxes | — | 944,000 | ||||||||
Prepaid expenses and other current assets | 2,527,911 | 2,387,804 | ||||||||
Total current assets | 19,761,487 | 20,211,823 | ||||||||
Notes Receivable | 920,996 | 594,891 | ||||||||
Property and Equipment: | ||||||||||
Machinery and equipment | 46,093,925 | 42,581,045 | ||||||||
Land, buildings and improvements | 16,869,526 | 17,034,166 | ||||||||
62,963,451 | 59,615,211 | |||||||||
Less accumulated depreciation and amortization | 30,736,304 | 30,349,635 | ||||||||
32,227,147 | 29,265,576 | |||||||||
Collection Routes and Contracts, less accumulated amortization of$5,702,825 at September 30, 2001 and $5,111,973 at June 30, 2001 | 3,969,474 | 4,700,326 | ||||||||
Other Assets: | ||||||||||
Non-appropriated funds (Industrial Revenue Bonds) | 227,968 | 1,962,598 | ||||||||
Deferred charges and other assets | 647,756 | 680,969 | ||||||||
Deferred income taxes | — | 231,000 | ||||||||
Investments available for sale-at fair value | 8,326,709 | 4,871,810 | ||||||||
Other equity investments-at cost | 8,415,403 | 8,474,155 | ||||||||
17,617,836 | 16,220,532 | |||||||||
$ | 74,496,940 | $ | 70,993,148 | |||||||
LIABILITIES AND SHAREOWNERS’ EQUITY | ||||||||||
Current Liabilities: | ||||||||||
Accounts payable | $ | 3,947,833 | $ | 4,498,515 | ||||||
Other accrued liabilities | 1,683,442 | 1,852,487 | ||||||||
Accrued payroll and related employee benefits | 1,905,564 | 1,572,553 | ||||||||
Total current liabilities | 7,536,839 | 7,923,555 | ||||||||
Industrial Revenue Bond | 6,000,000 | 6,000,000 | ||||||||
Deferred Income Taxes | 524,000 | — | ||||||||
14,060,839 | 13,923,555 | |||||||||
Shareowners’ Equity: | ||||||||||
Common stock, no par value, 5,000,000 shares authorized, shares issued and outstanding at September 30, 2001 - 1,029,267 and June 30, 2001 - 1,029,267 | 4,576,050 | 4,576,050 | ||||||||
Retained earnings | 51,065,831 | 50,143,924 | ||||||||
Accumulated other comprehensive income | 4,794,220 | 2,349,619 | ||||||||
60,436,101 | 57,069,593 | |||||||||
$ | 74,496,940 | $ | 70,993,148 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | |||||||||
September 30, | |||||||||
2001 | 2000 | ||||||||
Revenues: | |||||||||
Sales | $ | 15,286,496 | $ | 13,013,019 | |||||
Vocational school revenues | 1,397,477 | 1,204,570 | |||||||
16,683,973 | 14,217,589 | ||||||||
Operating Costs and Expenses: | |||||||||
Cost of sales | 11,649,231 | 11,407,587 | |||||||
Vocational school expenses | 1,123,097 | 1,009,062 | |||||||
Depreciation and amortization | 1,691,567 | 1,766,650 | |||||||
General and administrative | 1,979,192 | 1,951,941 | |||||||
16,443,087 | 16,135,240 | ||||||||
240,886 | (1,917,651 | ) | |||||||
Other income and expense: | |||||||||
Investment and other income | 1,282,222 | 479,954 | |||||||
Interest expense | (55,201 | ) | (85,014 | ) | |||||
1,227,021 | 394,940 | ||||||||
Income (loss) before income taxes | 1,467,907 | (1,522,711 | ) | ||||||
Provision (benefit) for income taxes | 546,000 | (484,000 | ) | ||||||
Net Income (Loss) | $ | 921,907 | $ | (1,038,711 | ) | ||||
Net Income (Loss) Per Share — Basic and Diluted | $ | 0.90 | $ | (0.99 | ) | ||||
Average shares outstanding — Basic | 1,029,267 | 1,045,367 | |||||||
Average shares outstanding — Diluted | 1,029,267 | 1,045,367 |
The accompanying notes are an integral part of these consolidated financial statements.
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SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||||||
September 30, | ||||||||||
2001 | 2000 | |||||||||
Cash Flows from Operating Activities: | ||||||||||
Net income (loss) | $ | 921,907 | $ | (1,038,711 | ) | |||||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||
Depreciation and amortization | 1,100,715 | 1,175,798 | ||||||||
Amortization of contracts and routes | 590,852 | 590,853 | ||||||||
Gains on investments available for sale | (649,147 | ) | (49,287 | ) | ||||||
(Gains) losses on sale of property and equipment | (546,993 | ) | 8,817 | |||||||
Deferred income taxes | 301,000 | (317,770 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts and notes receivable | (1,751,928 | ) | 186,509 | |||||||
Inventories | (50,324 | ) | (252,391 | ) | ||||||
Prepaid expenses and other current assets | (140,107 | ) | 70,814 | |||||||
Accounts payable and accrued liabilities | (385,469 | ) | (1,412,701 | ) | ||||||
Income taxes receivable | 109,277 | (382,215 | ) | |||||||
Tax benefit applied to purchase of routes and contracts | 140,000 | 140,000 | ||||||||
Other assets | (235,384 | ) | 42,720 | |||||||
Net cash flows (used in) from operating activities | (595,601 | ) | (1,237,564 | ) | ||||||
Cash Flows from Investing Activities: | ||||||||||
Purchase of U.S. Treasury bills | (2,049,801 | ) | (5,112,647 | ) | ||||||
Maturities of U.S. Treasury bills | 7,000,000 | 8,100,000 | ||||||||
Purchase of property and equipment | (4,161,074 | ) | (1,478,824 | ) | ||||||
Proceeds from disposition of property and equipment | 645,781 | 3,000 | ||||||||
Purchase of investments available for sale | — | (32,063 | ) | |||||||
Proceeds from disposition of investments available for sale | 1,036,846 | 56,485 | ||||||||
Non-appropriated bond fund proceeds held by Trustee | 1,734,630 | 272,198 | ||||||||
Net cash flows from (used in) investing activities | 4,206,382 | 1,808,849 | ||||||||
Cash Flows from Financing Activities: | ||||||||||
Repurchases of common stock | — | (1,162,082 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 3,610,781 | (590,797 | ) | |||||||
Cash and cash equivalents at beginning of period | 563,234 | 4,045,582 | ||||||||
Cash and cash equivalents at end of period | $ | 4,174,015 | $ | 3,454,785 | ||||||
Supplemental Disclosures: | ||||||||||
Cash paid during the quarter for: | ||||||||||
Interest | $ | 39,995 | $ | 61,525 | ||||||
Income taxes | $ | 21,966 | $ | 75,985 |
The accompanying notes are an integral part of these consolidated financial statements.
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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2001
Note 1. Basis of Financial Statement Preparation
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, 2001. The accompanying financial information includes all subsidiaries on a consolidated basis and all normal recurring adjustments that 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. However, these results are not necessarily indicative of results for a full fiscal year. Certain prior year balances have been reclassified to conform to current period presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Note 2. Treasury Bills
Treasury bills consisted of the following:
September 30, | June 30, | |||||||
2001 | 2001 | |||||||
At adjusted cost which approximates fair value | $ | 4,976,328 | $ | 9,926,527 | ||||
At par value | 5,000,000 | 10,000,000 |
Note 3. Inventories
Inventories consisted of the following:
September 30, | June 30, | |||||||
2001 | 2001 | |||||||
Finished products | $ | 376,861 | $ | 368,348 | ||||
Raw materials | 373,402 | 356,425 | ||||||
Operating supplies | 174,507 | 149,673 | ||||||
$ | 924,770 | $ | 874,446 | |||||
Note 4. Investments
Investments consisted of the following:
Gross Unrealized Gains | ||||||||||||
Before Provision For | ||||||||||||
Cost | Income Taxes | Fair Value | ||||||||||
At September 30, 2001: | ||||||||||||
Equity securities — available for sale | $ | 1,857,489 | $ | 6,469,220 | $ | 8,326,709 | ||||||
Other equity securities | 8,415,403 | 8,415,403 | (a) | |||||||||
At June 30, 2001: | ||||||||||||
Equity securities — available for sale | $ | 2,245,187 | $ | 2,626,623 | $ | 4,871,810 | ||||||
Other equity securities | 8,474,155 | 8,474,155 | (a) |
(a) | No quoted market prices are available for these securities. |
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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2001
(continued)
Note 5. Industrial Revenue Bond
In fiscal 2000, the Company issued $6,000,000 in tax exempt Industrial Revenue Bonds (“IRB”) for the new plant in Georgia currently under construction. At September 30, 2001, the Bond Trustee held non-appropriated funds of $227,968 that are restricted for construction of the new plant. At September 30, 2001, the Company was in compliance with all financial covenants under the debt agreement.
Note 6. Comprehensive income
Three Months Ended | ||||||||
September 30, | ||||||||
2001 | 2000 | |||||||
Comprehensive income consisted of the following: | ||||||||
Net income (loss) | $ | 921,907 | $ | (1,038,711 | ) | |||
Unrealized holding gains arising during the period, net of income taxes | 2,880,349 | 1,868,886 | ||||||
Reclassify gains realized and included in net income, net of income taxes | (435,750 | ) | (31,861 | ) | ||||
Other comprehensive income | 2,444,599 | 1,837,025 | ||||||
Comprehensive income | $ | 3,366,506 | $ | 798,314 | ||||
Note 7. Income Taxes
For the three month period ended September 30, 2001, the effective rate for income taxes is 37% of the income before taxes and for the comparable three-month period last year the effective rate for income tax benefit is 32% of the loss before taxes. The determination of the income tax or benefit for income tax considers certain permanent differences between taxable income or loss and income or loss as reported using accounting methods generally accepted in the United States of America. Those differences sometimes cause distortions in the relationships between income or loss before income taxes and the provision or benefit for income taxes.
Note 8. Business Segment Information
Three Months Ended | ||||||||
September 30, | ||||||||
2001 | 2000 | |||||||
Revenues: | ||||||||
Waste Material Recycling | $ | 15,130,769 | $ | 12,885,961 | ||||
Vocational School Group | 1,397,477 | 1,204,570 | ||||||
Other | 155,727 | 127,058 | ||||||
$ | 16,683,973 | $ | 14,217,589 | |||||
Operating Income (Loss) before Income Taxes: | ||||||||
Waste Material Recycling | $ | 1,921,723 | $ | (190,315 | ) | |||
Vocational School Group | 219,089 | 138,015 | ||||||
Other | 79,266 | 86,590 | ||||||
General and administrative expenses | (1,979,192 | ) | (1,951,941 | ) | ||||
Other income and expense | 1,227,021 | 394,940 | ||||||
$ | 1,467,907 | $ | (1,522,711 | ) | ||||
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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company had net income of $921,907, or $0.90 per share, for the quarter ended September 30, 2001, compared to the previous year’s first quarter net loss of $1,038,711, or $0.99 per share. Total company revenues for the first quarter ended September 30, 2001 were $16,683,973 compared to $14,217,589 for the comparable quarter last year. The 17% increase in revenues for the current first quarter over the prior year’s comparable quarter was attributable to both the Waste Material Recycling and Beauty School segments.
Waste Material Recyclingsegment sales for the current quarter increased $2,244,808 or 17% over the comparable quarter last year. The increase was due primarily to a 15% increase in the average selling prices on slightly higher sales volume of recycled dried bakery products. The increase is primarily attributed to the volatility in the commodity market due to early reductions in the estimated volume of future corn crops compared to record corn crops produced during the past three years. The average price of corn for the current quarter was approximately $1.95 per bushel compared to $1.53 per bushel for the comparable quarter last year and $1.80 per bushel for the quarter ended June 30, 2001. The average price of corn for the month of October 2001 dropped to $1.84 per bushel. The Waste Material Recycling segment generated operating profit in the current quarter versus an operating loss in the comparable quarter last year due primarily to higher average selling prices, reduced raw material costs and improved production efficiencies from new capital equipment.
Vocational School Grouprevenues increased 16% from the comparable quarter last year due primarily to increased enrollment at the schools. The Vocational School Group had operating income for both the current quarter and the comparable quarter last year. A new school near Las Vegas, Nevada is scheduled to open in December 2001.
General and administrative expensesfor the Company increased slightly (1%) for the quarter ended September 30, 2001, as compared to the prior year quarter. The increase is due primarily to the increases in employee health benefit costs, workers’ compensation insurance and auto, property and liability insurance.
Investment and other incomefor the three months ended September 30, 2001, was $1,282,222 compared to $479,954 for the comparable quarter last year. Included in investment and other income were gains of $649,147 from the sale of investment securities and a gain of $554,669 from the sale of idle property no longer being utilized in the Waste Material Recycling operations. Interest income of $120,838 from U.S. Treasury bills comprised most of the remainder of investment income in the current quarter compared to $405,601 for the comparable quarter last year. The reduction in interest income was primarily due to lower interest rates and a smaller investment portfolio. Offsetting the above investment and other income were losses on the disposition of equipment and losses recognized on an investment accounted for by the equity method of accounting.
Interest expense,which is included in Investment and other income, for the three months ended September 30, 2001, was $55,201 compared to $85,014 for the comparable quarter last year. The interest is primarily related to the Industrial Revenue Bond financing, (includes both interest and amortization of bond financing costs). Interest on the bonds is paid monthly and varies weekly based upon the tax-exempt interest rate in the bond market, (2.45% at September 30, 2001).
LIQUIDITY AND CAPITAL RESOURCES
We have used our cash principally to fund our capital expenses and for working capital. We funded our cash requirements principally from cash flows from our operations, utilization of unappropriated funds from the IRB and proceeds from the sale of investments. During the current quarter we expended $3,259,528 for capital projects primarily within the Waste Material Recycling segment. Our working capital ratio of 2.6 to 1 at September 30, 2001 did not change when compared to the June 30, 2001 ratio of 2.6 to 1. The change in components of working capital is mainly attributed to the reduction in accounts payable and other current liabilities offset by the increase in accounts receivables. Capital expenditures for fiscal 2002 approximating $6,000,000 to $9,000,000
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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
are planned primarily for the Waste Material Recycling segment. The Company believes that the combination of cash on hand, Treasury bills, investments available for sale and cash flow expected to be generated from operations will be sufficient to fund planned investments and working capital requirements through fiscal 2002.
TAXES
For the three month period ended September 30, 2001, the effective rate for income taxes is approximately 37% of pre-tax income compared to a effective income tax benefit rate of 32% of pre-tax loss for the comparable quarter last year. The determination of the provision or benefit for income taxes considers certain permanent differences between taxable income and income as reported using accounting methods generally accepted in the United States of America. Those differences sometimes cause distortions in the relationships between income before income taxes and the provision for income taxes.
NEW ACCOUNTING STANDARDS
Effective July 1, 2001, the Company early adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The statement establishes accounting and reporting standards for goodwill and other intangible assets. The early adoption of SFAS No. 142 did not have a material impact on the Company’s financial statements.
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 of raw materials, transportation difficulties, changing governmental educational aid policies, or disruption of operations due to unavailability of fuels or from acts of God.
[THIS SPACE LEFT INTENTIONALLY BLANK]
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PART II. OTHER INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
Item 2.Increases and Decreases in Outstanding Securities and Indebtedness.
There were no changes in the outstanding Common Stock of the Company during the three months ended September 30, 2001.
Item 4.Submission of Matters to a Vote of Security Holders.
At the annual meeting of shareowners held on October 23, 2001, with 1,029,267 shares entitled to vote, 996,759 shares or 97% of those entitled to vote elected five directors to serve for the ensuing year and until their successors have been elected and qualified.
Directors | Votes For | Votes Abstained | Total | |||||||||
Babette Heimbuch | 996,259 | 500 | 996,759 | |||||||||
Robert Henigson | 996,259 | 500 | 996,759 | |||||||||
Meyer Luskin | 996,259 | 500 | 996,759 | |||||||||
William H. Mannon | 996,259 | 500 | 996,759 | |||||||||
Franklin Redlich | 996,259 | 500 | 996,759 |
Item 5.Other Information.
On October 23, 2001, the Company’s board of directors declared a regular dividend of $1.00 per share payable on January 4, 2002, to shareowners of record at November 23, 2001.
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, 2001. |
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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: November 14, 2001 | By: | /s/ Eric M. Iwafuchi |
Eric M. Iwafuchi, Vice President and Chief Financial Officer |
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