Table of Contents
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 March 31, 2002 |
-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 May 6, 2002 was 1,029,267.
Table of Contents
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
Page | ||||||||
Part I. | Financial Information: | |||||||
Consolidated Balance Sheets - March 31, 2002 and June 30, 2001 | 3 | |||||||
Consolidated Statements of Operations - Three Months Ended March 31, 2002 and 2001 | 4 | |||||||
Consolidated Statements of Operations - Nine Months Ended March 31, 2002 and 2001 | 5 | |||||||
Consolidated Statements of Cash Flows - Nine Months Ended March 31, 2002 and 2001 | 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 | 14 | ||||||
Item 5. | Other Information | 14 | ||||||
Item 6. | Exhibits and Reports on Form 8-K | 14 | ||||||
Signatures | 14 |
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PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, | June 30, | |||||||||
2002 | 2001 | |||||||||
(Unaudited) | ||||||||||
ASSETS | ||||||||||
Current Assets: | ||||||||||
Cash and cash equivalents | $ | 3,369,824 | $ | 563,234 | ||||||
U.S. Treasury bills and notes-at fair value | 20,989,864 | 9,926,527 | ||||||||
Accounts and notes receivable, less allowance for doubtful accounts of $674,818 at March 31, 2002 and $691,283 at June 30, 2001 | 4,384,927 | 3,870,559 | ||||||||
Receivable from the sale of securities | 2,669,007 | — | ||||||||
Income taxes receivable | — | 1,645,253 | ||||||||
Inventories | 681,165 | 874,446 | ||||||||
Deferred income taxes | 632,000 | 944,000 | ||||||||
Prepaid expenses and other current assets | 1,436,925 | 2,387,804 | ||||||||
Total current assets | 34,163,712 | 20,211,823 | ||||||||
Notes Receivable | 783,364 | 594,891 | ||||||||
Property and Equipment: | ||||||||||
Machinery and equipment | 49,134,187 | 42,581,045 | ||||||||
Land, buildings and improvements | 18,897,142 | 17,034,166 | ||||||||
68,031,329 | 59,615,211 | |||||||||
Less accumulated depreciation and amortization | 32,905,213 | 30,349,635 | ||||||||
35,126,116 | 29,265,576 | |||||||||
Collection Routes and Contracts, less accumulated amortization of$6,884,526 at March 31, 2002 and $5,111,973 at June 30, 2001 | 2,507,773 | 4,700,326 | ||||||||
Other Assets: | ||||||||||
U.S. Treasury notes-at fair value | 3,962,087 | — | ||||||||
Non-appropriated funds (Industrial Revenue Bonds) | 230,110 | 1,962,598 | ||||||||
Deferred charges and other assets | 680,883 | 680,969 | ||||||||
Deferred income taxes | 1,894,200 | 231,000 | ||||||||
Investments available for sale-at fair value | 980,150 | 4,871,810 | ||||||||
Other equity investments-at cost | 6,911,684 | 8,474,155 | ||||||||
14,659,114 | 16,220,532 | |||||||||
$ | 87,240,079 | $ | 70,993,148 | |||||||
LIABILITIES AND SHAREOWNERS’ EQUITY | ||||||||||
Current Liabilities: | ||||||||||
Accounts payable | $ | 3,363,403 | $ | 4,498,515 | ||||||
Other accrued liabilities | 2,016,844 | 1,852,487 | ||||||||
Accrued payroll and related employee benefits | 2,250,181 | 1,572,553 | ||||||||
Income taxes payable | 6,444,400 | — | ||||||||
Total current liabilities | 14,074,828 | 7,923,555 | ||||||||
Industrial Revenue Bond | 6,000,000 | 6,000,000 | ||||||||
20,074,828 | 13,923,555 | |||||||||
Shareowners’ Equity: | ||||||||||
Common stock, no par value, 5,000,000 shares authorized; shares issued and outstanding at March 31, 2002 and June 30, 2001 - 1,029,267 | 4,576,050 | 4,576,050 | ||||||||
Retained earnings | 60,974,476 | 50,143,924 | ||||||||
Accumulated other comprehensive income | 1,614,725 | 2,349,619 | ||||||||
67,165,251 | 57,069,593 | |||||||||
$ | 87,240,079 | $ | 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 | |||||||||
March 31, | |||||||||
2002 | 2001 | ||||||||
Revenues: | |||||||||
Sales | $ | 13,096,952 | $ | 13,796,256 | |||||
Vocational school revenues | 1,640,385 | 1,355,629 | |||||||
14,737,337 | 15,151,885 | ||||||||
Operating Costs and Expenses: | |||||||||
Cost of sales | 11,006,455 | 11,797,246 | |||||||
Vocational school expenses | 1,185,749 | 1,006,100 | |||||||
Depreciation and amortization | 2,040,500 | 1,769,138 | |||||||
General and administrative | 1,938,195 | 2,239,955 | |||||||
16,170,899 | 16,812,439 | ||||||||
(1,433,562 | ) | (1,660,554 | ) | ||||||
Other income and expense: | |||||||||
Investment and other income | 19,004,926 | 567,248 | |||||||
Interest expense | (41,884 | ) | (68,437 | ) | |||||
18,963,042 | 498,811 | ||||||||
Income (loss) before income taxes | 17,529,480 | (1,161,743 | ) | ||||||
Provision (benefit) for income taxes | 6,409,000 | (366,000 | ) | ||||||
Net Income (Loss) | $ | 11,120,480 | $ | (795,743 | ) | ||||
Net Income (Loss) Per Share — Basic and Diluted | $ | 10.80 | $ | (0.77 | ) | ||||
Average shares outstanding — Basic | 1,029,267 | 1,030,217 | |||||||
Average shares outstanding — Diluted | 1,029,267 | 1,030,217 |
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)
Nine Months Ended | |||||||||
March 31, | |||||||||
2002 | 2001 | ||||||||
Revenues: | |||||||||
Sales | $ | 43,273,309 | $ | 40,515,460 | |||||
Vocational school revenues | 4,506,405 | 3,766,908 | |||||||
47,779,714 | 44,282,368 | ||||||||
Operating Costs and Expenses: | |||||||||
Cost of sales | 34,248,378 | 35,464,862 | |||||||
Vocational school expenses | 3,436,793 | 2,944,938 | |||||||
Depreciation and amortization | 5,465,877 | 5,310,079 | |||||||
General and administrative | 6,173,516 | 6,169,305 | |||||||
49,324,564 | 49,889,184 | ||||||||
(1,544,850 | ) | (5,606,816 | ) | ||||||
Other income and expense: | |||||||||
Investment and other income | 20,409,313 | 1,523,832 | |||||||
Interest expense | (147,645 | ) | (241,975 | ) | |||||
20,261,668 | 1,281,857 | ||||||||
Income (loss) before income taxes | 18,716,818 | (4,324,959 | ) | ||||||
Provision (benefit) for income taxes | 6,857,000 | (1,365,000 | ) | ||||||
Net Income (Loss) | $ | 11,859,818 | $ | (2,959,959 | ) | ||||
Net Income (Loss) Per Share — Basic and Diluted | $ | 11.52 | $ | (2.86 | ) | ||||
Average shares outstanding — Basic | 1,029,267 | 1,036,447 | |||||||
Average shares outstanding — Diluted | 1,029,267 | 1,036,447 |
The accompanying notes are an integral part of these consolidated financial statements.
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SCOPE INDUSTRIES AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | ||||||||||
March 31, | ||||||||||
2002 | 2001 | |||||||||
Cash Flows from Operating Activities: | ||||||||||
Net income (loss) | $ | 11,859,818 | $ | (2,959,959 | ) | |||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||||
Depreciation and amortization | 3,693,324 | 3,537,522 | ||||||||
Amortization of contracts and routes | 1,772,553 | 1,772,557 | ||||||||
Gains on investments available for sale | (21,030,871 | ) | (352,159 | ) | ||||||
(Gains) losses on sale of property and equipment | (568,351 | ) | 92,362 | |||||||
Losses on other equity investments | 1,562,471 | — | ||||||||
Deferred income taxes | (77,200 | ) | (632,770 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts and notes receivable | (702,841 | ) | 86,004 | |||||||
Inventories | 193,281 | (171,715 | ) | |||||||
Prepaid expenses and other current assets | 950,879 | 525,409 | ||||||||
Accounts payable and accrued liabilities | (293,127 | ) | (815,988 | ) | ||||||
Income taxes | 8,089,653 | (317,980 | ) | |||||||
Tax benefit applied to purchase of routes and contracts | 420,000 | 420,000 | ||||||||
Other assets | 86 | 20,500 | ||||||||
Net cash flows from operating activities | 5,869,675 | 1,203,783 | ||||||||
Cash Flows from Investing Activities: | ||||||||||
Purchase of U.S. Treasury bills and notes | (29,025,424 | ) | (15,397,746 | ) | ||||||
Maturities of U.S. Treasury bills | 14,000,000 | 22,098,841 | ||||||||
Purchase of property and equipment | (9,994,454 | ) | (5,506,922 | ) | ||||||
Proceeds from disposition of property and equipment | 1,008,941 | 128,676 | ||||||||
Purchase of investments available for sale | — | (159,009 | ) | |||||||
Proceeds from disposition of investments available for sale | 20,244,631 | 625,640 | ||||||||
Purchase of other equity investments | — | (2,000,000 | ) | |||||||
Non-appropriated bond fund proceeds held by Trustee | 1,732,488 | 1,050,075 | ||||||||
Net cash flows (used in) from investing activities | (2,033,818 | ) | 839,555 | |||||||
Cash Flows from Financing Activities: | ||||||||||
Cash dividends to shareowners | (1,029,267 | ) | (1,029,567 | ) | ||||||
Proceeds from stock options exercised | — | 105,600 | ||||||||
Repurchases of common stock | — | (1,478,469 | ) | |||||||
Net cash flows used in financing activities | (1,029,267 | ) | (2,402,436 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 2,806,590 | (359,098 | ) | |||||||
Cash and cash equivalents at beginning of period | 563,234 | 4,045,582 | ||||||||
Cash and cash equivalents at end of period | $ | 3,369,824 | $ | 3,686,484 | ||||||
Supplemental Disclosures: | ||||||||||
Cash paid during the nine months for: | ||||||||||
Interest | $ | 96,024 | $ | 188,594 | ||||||
Income taxes | $ | 136,323 | $ | 129,272 |
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)
March 31, 2002
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 the 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 and Notes
March 31, | June 30, | |||||||
Treasury Bills and Notes | 2002 | 2001 | ||||||
At adjusted cost which approximates fair value | $ | 20,989,864 | $ | 9,926,527 | ||||
At par value | 21,008,000 | 10,000,000 | ||||||
Treasury Notes Long Term | ||||||||
At adjusted cost which approximates fair value | $ | 3,962,087 | $ | — | ||||
At par value | 4,000,000 | — |
Treasury Notes mature in September 2003 and February 2004.
Note 3. Inventories
Inventories consist of the following:
March 31, | June 30, | |||||||
2002 | 2001 | |||||||
Finished products | $ | 240,308 | $ | 368,348 | ||||
Raw materials | 262,582 | 356,425 | ||||||
Operating supplies | 178,275 | 149,673 | ||||||
$ | 681,165 | $ | 874,446 | |||||
Note 4. Investments
Equity securities available for sale —During the current quarter the Company sold a significant portion of its common stock holdings in OSI Systems, Inc. in the open market realizing a gain of approximately $20,300,000. The gains are included in Investment and other income. A receivable balance of $2,669,007 due from our broker from the stock sale of OSI Systems, Inc. was collected in April.
Other equity securities —As part of the Company’s continuing review and evaluation of its non-publicly traded equity securities portfolio, the Company recorded in the current quarter a loss of approximately $1,300,000 on one of its investments to reflect management’s estimate of its realizable value. Other losses recorded during current quarter relate to the equity method of accounting for one of the investments.
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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2002
(continued)
Note 4. Investments (continued)
Investments consist of the following:
Gross Unrealized Gains | ||||||||||||
Before Provision For | ||||||||||||
Cost | Income Taxes | Fair Value | ||||||||||
At March 31, 2002: | ||||||||||||
Equity securities — available for sale | $ | 362,420 | $ | 617,730 | $ | 980,150 | (a) | |||||
Other equity securities | 6,911,684 | 6,911,684 | (b) | |||||||||
At June 30, 2001: | ||||||||||||
Equity securities — available for sale | $ | 2,245,187 | $ | 2,626,623 | $ | 4,871,810 | (a) | |||||
Other equity securities | 8,474,155 | 8,474,155 | (b) |
(a) | Fair values for “Equity securities” available for sale are based upon quoted market prices, where available, at the reporting date. | ||
(b) | The Company holds shares and warrants in Chromagen, Inc., shares in Stamet, Inc., MetaProbe, Inc. and Myricom, Inc. that are classified as “Other equity securities”. The shares and warrants are not publicly traded and are carried at cost or adjusted cost reflected by the equity method of accounting. No quoted market prices are available for these securities. |
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. At March 31, 2002, the Bond Trustee held non-appropriated funds of $230,110 that are restricted for construction of the new plant. At March 31, 2002, the Company was in compliance with all financial covenants under the debt agreement.
Note 6. Comprehensive income (loss)
Nine Months Ended | ||||||||
March 31, | ||||||||
2002 | 2001 | |||||||
Comprehensive income (loss) consist of the following: | ||||||||
Net income (loss) | $ | 11,859,818 | $ | (2,959,959 | ) | |||
Unrealized holding gains (losses) arising during the period, net of income taxes | 12,756,940 | (2,896,196 | ) | |||||
Reclassify gains realized and included in net income, net of income taxes | (13,491,833 | ) | (228,904 | ) | ||||
Other comprehensive (loss) | (734,893 | ) | (3,125,100 | ) | ||||
Comprehensive income (loss) | $ | 11,124,925 | $ | (6,085,059 | ) | |||
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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2002
(continued)
Note 7. Income Taxes
For the nine month period ended March 31, 2002, the effective rate for income taxes is 37% of the income before taxes and for the comparable nine 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
Nine Months Ended | ||||||||
March 31, | ||||||||
Revenues: | 2002 | 2001 | ||||||
Waste Material Recycling | $ | 42,915,935 | $ | 40,152,802 | ||||
Vocational School Group | 4,506,405 | 3,766,908 | ||||||
Other | 357,374 | 362,658 | ||||||
$ | 47,779,714 | $ | 44,282,368 | |||||
Income (loss) before income taxes: | ||||||||
Waste Material Recycling operating income (loss) | $ | 3,597,369 | $ | (225,227 | ) | |||
Vocational School Group operating income | 895,897 | 651,469 | ||||||
Other operating income | 135,400 | 136,247 | ||||||
General and administrative expenses | (6,173,516 | ) | (6,169,305 | ) | ||||
Other income and expense | 20,261,668 | 1,281,857 | ||||||
$ | 18,716,818 | $ | (4,324,959 | ) | ||||
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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 and 2001:
The Company realized net income of $11,120,480, or $10.80 per share, for the third quarter ended March 31, 2002, compared to the previous year’s third quarter net loss of $(795,743), or $(0.77) per share. Total company revenues for the quarter ended March 31, 2002 were $14,737,337 compared to $15,151,885 for the comparable quarter last year. The 3% decrease in revenues for the current third quarter over the prior year’s comparable quarter was attributable to the Waste Material Recycling segment. Other income and expense for the current quarter was $18,963,042 compared to $498,811 for the comparable quarter last year. The increase resulted from the gains on sales of marketable equity investments.
Waste Material Recyclingsegment sales for the current quarter decreased approximately $661,200 or 5% over the comparable quarter last year. The decrease was due to a 2% decrease in the average selling prices combined with a 2% decrease in sales volume of recycled dried bakery products. The average price of corn for the current quarter was approximately $1.93 per bushel compared to $1.95 per bushel for the comparable quarter last year. The average price of corn for the month of April 2002 decreased to $1.89 per bushel. The Waste Material Recycling segment generated increased operating profit in the current quarter against an operating loss in the comparable quarter last year due primarily to reduced raw material costs and improved production efficiencies from new capital equipment.
Vocational School Grouprevenues increased 21% from the comparable quarter last year due 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 opened in January 2002.
General and administrative expensesfor the Company decreased (13%) for the quarter ended March 31, 2002, as compared to the prior year quarter. The decrease over last year is due to lower salaries and wages resulting from reduced head count and cost reduction programs partially offset by increases in employee health benefit costs, workers’ compensation insurance, auto, property and liability insurance and professional services.
Investment and other incomefor the three months ended March 31, 2002, was $19,004,926 compared to $567,248 for the comparable quarter last year. Included in investment and other income were pre-tax gains of approximately $20,300,000 from the sale of investment securities. In connection with the ongoing review of its portfolio of equity investments (non-publicly traded companies), the Company recorded a write down of approximately $1,300,000 against one of its investments to the estimated current realizable value. Interest income of $77,000 from U.S. Treasury bills and notes comprised most of the remainder of investment income in the current quarter compared to $481,200 for the comparable quarter last year. The reduction in interest income was due to lower interest rates and a smaller interest bearing investment portfolio. Offsetting investment and other income were losses recognized on an investment accounted for by the equity method of accounting.
Interest expensefor the three months ended March 31, 2002, was $41,884 compared to $68,437 for the comparable quarter last year. The interest is related to the Industrial Revenue Bond financing which 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 (1.45% at March 31, 2002).
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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS
Nine Months Ended March 31, 2002 and 2001:
The Company realized net income of $11,859,818, or $11.52 per share, for the nine months ended March 31, 2002, compared to the previous year’s nine months net loss of $(2,959,959), or $(2.86) per share. Total company revenues for the nine months ended March 31, 2002 were $47,779,714 compared to $44,282,368 for the comparable period last year. The 8% increase in revenues for the current nine months over the prior year’s comparable period was attributable to both the Waste Material Recycling and Beauty School segments. Other income and expense for the nine months was $20,261,668 compared to $1,281,857 for the comparable period last year, the increase from the sales of marketable equity investments.
Waste Material Recyclingsegment sales for the current nine months increased $2,763,133 or 7% over the comparable nine months last year. The increase was due to an 8% increase in the average selling price on slightly higher sales volume of recycled dried bakery products. The increase in price is 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 nine months was approximately $1.93 per bushel compared to $1.80 per bushel for the comparable nine months last year. The average price of corn for the month of April 2002 decreased to $1.89 per bushel. The Waste Material Recycling segment generated operating profit in the current nine months against an operating loss in the comparable nine months last year due to higher average selling prices, reduced raw material costs and improved production efficiencies from new capital equipment.
Vocational School Grouprevenues increased 20% from the comparable nine months last year due to increased enrollment at the schools. The Vocational School Group had operating income for both the current nine months and the comparable nine months last year. A new school near Las Vegas, Nevada opened in January 2002.
General and administrative expensesfor the Company remained relatively even for the nine months ended March 31, 2002, as compared to the prior year nine months. Excluding the impact of reduced salaries and wages due to head count reduction and the cost reduction programs last year, General and administrative expenses on a comparable basis would have shown an increase for the current nine months. The increase the result of higher costs related to employee health benefits, workers’ compensation insurance, auto, property and liability insurance and professional services.
Investment and other incomefor the nine months ended March 31, 2002, was $20,409,313 compared to $1,523,832 for the comparable nine months last year. Included in investment and other income for the current nine months were gains of approximately $21,081,000 from the sale of investment securities and a net gain of approximately $581,000 from the sales of idle property and equipment no longer being utilized in the Waste Material Recycling operations. Interest income of approximately $292,000 from U.S. Treasury bills and notes comprised most of the remainder of investment income in the current nine months compared to $1,157,000 for the comparable nine months last year. The reduction in interest income was due to lower interest rates and a smaller interest bearing investment portfolio. In connection with its ongoing review of its portfolio of equity investments in non-publicly traded companies, the Company recorded a write down of approximately $1,300,000 against one of its investments to an estimated current realizable value. Offsetting the above investment and other income were losses recognized on an investment accounted for by the equity method of accounting.
Interest expensefor the nine months ended March 31, 2002, was $147,645 compared to $241,975 for the comparable nine months last year. The interest is related to the Industrial Revenue Bond financing which 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 (1.45% at March 31, 2002).
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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
We have used our cash to fund our capital expenses and for working capital. We funded our cash requirements from proceeds from the sale of investments, operations, the utilization of unappropriated funds from the IRB and sale of non-utilized property. During the current nine months we expended $9,994,454 for capital projects within the Waste Material Recycling segment. Our working capital ratio of 2.4 to 1 at March 31, 2002 decreased 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 increase in Income taxes payable arising from the gain on the sale of marketable investment securities. Capital expenditures for fiscal 2002 approximating $11,000,000 are planned for the Waste Material Recycling segment. The Company believes that the combination of cash on hand, Treasury bills and notes, 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 2003. This does not preclude the Company from reviewing additional financing options that could be beneficial to the Company.
In January 2002, the Company entered into a Three Million Dollar ($3,000,000) Unsecured Revolving Line of Credit with its bank to provide the Company additional future liquidity. The Line of Credit is for one year with no fees and borrowings under the agreement bear interest at the lower of LIBOR plus 2.00% or the bank’s prime rate minus 0.25%; interest to be paid monthly. The agreement contains customary affirmative and negative covenants requiring the maintenance of specific consolidated leverage ratios and a minimum net worth. The Company has not drawn upon the line.
COMPANY RISKS
Market risk: The Company is exposed to certain market risks that are inherent in its Waste Material Recycling business segment. This segment is sensitive to the commodity pricing of Number 2 Yellow Corn, Central Illinois, which is the major competitor to our finished products as our customers can use corn as a direct substitute. Our raw material acquisition costs are also sensitive to the pricing of corn as some of our contracts with bakeries are tied to the price of corn. Corn has a 20-year average price of approximately $2.44 per bushel, whereas the past four years the average price of corn per bushel has been as follows: fiscal 2001: $1.80, fiscal 2000: $1.90, fiscal 1999: $2.01, fiscal 1998: $2.23, versus the nine month year-to-date of $1.93. Corn pricing has been low relative to the 20-year average because of record corn crops being harvested. The Vocational school segment is sensitive to the general economy and to government educational funding programs on both the Federal and state level.
Investment risk: The Company is also at risk with its investment portfolio, as market fluctuations impact the Company due to the market pricing of the securities at the end of each period. The Company has reduced its exposure this current quarter with the sale of a substantial portion of the stock that it held. Within the non-publicly traded portfolio of equity securities the Company is at risk as these investments are early development start-up companies. The Company reviews these investments quarterly and makes determinations regarding its valuation. This current quarter the Company wrote down approximately $1,300,000 of its investment in a company in this portfolio
Interest rate risk:The risk exposure to changes in interest rates both on investments and debt impacts Investment and other income. U.S. Treasury bills and notes are recorded as current (maturity of less than one year) and long-term in the balance sheet at fair value. The Company manages its interest income by having most of the investment in secure short-term U.S. Treasury bills and notes to take advantage of changes in upward interest rate movement. This strategy has also impacted us negatively with the recent decrease in interest rates. The low interest rates these past nine months, while reducing interest income has benefited the Company with lower interest rates on its debt.
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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
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.
In 2001, the Financial Standards Accounting Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) and becomes effective for the Company’s fiscal year starting July 1, 2002. The statement retains the previous cash flow test for impairment and broadens the presentation of discontinued operations. The adoption of SFAS No. 144 is not expected 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.
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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 nine months ended March 31, 2002.
Item 5.Other Information.
On January 4, 2002, the Company paid a regular dividend of $1.00 per share on 1,029,267 outstanding shares of common stock.
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, 2002.
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: April 13, 2002 | /s/ Eric M. Iwafuchi |
Eric M. Iwafuchi, Vice President, Chief Financial Officer and Secretary |
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