1
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 December 31, 2000
-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 95-1240976
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of registrant's common stock outstanding at January 31,
2001 was 1,027,867.
2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
PAGE
----
Part I Financial Information:
Consolidated Balance Sheets -
December 31, 2000 and June 30, 2000 3
Consolidated Statements of Operations -
Three Months Ended December 31, 2000 and 1999 4
Consolidated Statements of Operations -
Six Months Ended December 31, 2000 and 1999 5
Consolidated Statements of Cash Flows -
Six Months Ended December 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Part II. Other Information:
Item 2. Increases and Decreases in Outstanding Securities
and Indebtedness 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
2
3
PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2000 2000
------------ --------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,351,033 $ 4,045,582
Treasury bills available for sale-at fair value 13,055,253 18,840,593
Accounts and notes receivable, less allowance for
doubtful accounts of $668,705 at December 31, 2000
and $645,903 at June 30, 2000 4,677,148 4,581,022
Inventories 696,534 680,332
Deferred income taxes 1,880,270 1,297,500
Prepaid expenses and other current assets 1,384,643 1,576,237
----------- -----------
Total current assets 27,044,881 31,021,266
----------- -----------
Notes Receivable 596,857 659,374
----------- -----------
Property and Equipment:
Machinery and equipment 41,117,752 37,611,946
Land, buildings and improvements 16,097,962 16,045,836
----------- -----------
57,215,714 53,657,782
Less accumulated depreciation and amortization 29,705,694 27,531,392
----------- -----------
27,510,020 26,126,390
----------- -----------
Collection Routes and Contracts, less accumulated
amortization of $3,930,257 at December 31, 2000 and
$2,748,557 at June 30, 2000 6,162,031 7,623,736
----------- -----------
Other Assets:
Non-appropriated funds (Industrial Revenue Bonds) 4,892,391 5,440,677
Deferred charges and other assets 637,757 646,613
Investments available for sale-at fair value 7,790,011 9,252,975
Other equity investments-at cost 3,011,002 2,011,002
----------- -----------
16,331,161 17,351,267
----------- -----------
$77,644,950 $82,782,033
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 5,610,517 $ 5,052,389
Other accrued liabilities 2,867,300 1,926,295
Accrued payroll and related employee benefits 1,293,638 1,367,722
Income taxes payable -- 317,980
----------- -----------
Total current liabilities 9,771,455 8,664,386
Industrial Revenue Bond 5,800,000 5,800,000
Deferred Income Taxes 1,307,800 1,874,800
----------- -----------
16,879,255 16,339,186
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares authorized,
shares issued and outstanding at December 31, 2000 -
1,028,567 and June 30, 2000 - 1,060,867 4,470,450 4,470,450
Retained earnings 52,250,084 56,879,462
Accumulated other comprehensive income 4,045,161 5,092,935
----------- -----------
60,765,695 66,442,847
----------- -----------
$77,644,950 $82,782,033
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
4
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
-------------------------------
2000 1999
------------ ------------
Revenues:
Sales $ 12,559,115 $ 14,019,768
Vocational school revenues 1,206,709 1,247,464
------------ ------------
13,765,824 15,267,232
------------ ------------
Operating Costs and Expenses:
Cost of sales 11,112,959 11,626,853
Vocational school expenses 929,776 840,317
Depreciation and amortization 1,774,291 1,604,772
General and administrative 2,031,951 2,622,682
------------ ------------
15,848,977 16,694,624
------------ ------------
(2,083,153) (1,427,392)
------------ ------------
Other income and expense:
Investment and other income 476,630 342,595
Interest expense (33,982) (727)
------------ ------------
442,648 341,868
------------ ------------
Loss before income taxes (1,640,505) (1,085,524)
Benefit for income taxes (515,000) (350,000)
------------ ------------
Net Loss $ (1,125,505) $ (735,524)
============ ============
Net Loss Per Share - Basic and Diluted $ (1.09) $ (0.66)
Average shares outstanding - Basic 1,031,392 1,109,792
Cash dividends declared per share $ 1.00 $ 1.00
The accompanying notes are an integral part of these consolidated
financial statements.
4
5
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
December 31,
-------------------------------
2000 1999
------------ ------------
Revenues:
Sales $ 24,478,546 $ 27,785,446
Vocational school revenues 2,411,279 2,531,382
------------ ------------
26,889,825 30,316,828
------------ ------------
Operating Costs and Expenses:
Cost of sales 21,426,958 23,186,542
Vocational school expenses 1,938,838 1,916,833
Depreciation and amortization 3,540,941 3,146,400
General and administrative 3,929,350 4,925,579
------------ ------------
30,836,087 33,175,354
------------ ------------
(3,946,262) (2,858,526)
------------ ------------
Other income and expense:
Investment and other income 956,584 684,351
Interest expense (173,538) (1,150)
------------ ------------
783,046 683,201
------------ ------------
Loss before income taxes (3,163,216) (2,175,325)
Benefit for income taxes (999,000) (700,000)
------------ ------------
Net Loss $ (2,164,216) $ (1,475,325)
============ ============
Net Loss Per Share - Basic and Diluted $ (2.08) $ (1.33)
Average shares outstanding - Basic 1,038,881 1,111,453
Cash dividends declared per share $ 1.00 $ 1.00
The accompanying notes are an integral part of these consolidated
financial statements.
5
6
SCOPE INDUSTRIES AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
December 31,
-------------------------------
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,164,216) $ (1,475,325)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 2,359,236 2,091,014
Amortization of contracts and routes 1,181,705 1,055,386
Gains on investments available for sale (49,287) (8,201)
Losses on sale of equipment 16,225 20,175
Deferred income taxes (425,000) (405,054)
Changes in operating assets and liabilities:
Accounts and notes receivable 203,426 (68,411)
Inventories (16,202) 353,961
Prepaid expenses and other current assets 191,594 (488,050)
Accounts payable and accrued liabilities 395,482 481,673
Income taxes payable (712,785) (4,145)
Tax benefit applied to purchase of routes and contracts 280,000 280,000
Other assets 8,857 100,610
------------ ------------
Net cash flows from operating activities 1,269,035 1,933,633
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (11,313,500) (12,134,479)
Maturities of U.S. Treasury bills 17,098,840 15,000,000
Purchase of property and equipment (3,779,091) (3,404,448)
Proceeds from disposition of property and equipment 20,000 6,836
Purchase of investments available for sale (159,009) (59,965)
Proceeds from disposition of investments available for sale 56,485 10,000
Purchase of other equity investments (1,000,000) --
Non-appropriated bond fund proceeds held by Trustee 548,286 --
------------ ------------
Net cash flows from (used in) investing activities 1,472,011 (582,056)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised -- 213,150
Repurchases of common stock (1,435,595) (1,355,411)
------------ ------------
Net cash used in financing activities (1,435,595) (1,142,261)
------------ ------------
Net increase in cash and cash equivalents 1,305,451 209,316
Cash and cash equivalents at beginning of period 4,045,582 3,667,818
------------ ------------
Cash and cash equivalents at end of period $ 5,351,033 $ 3,877,134
============ ============
Supplemental Disclosures:
Cash paid during the six months for:
Interest $ 133,897 $ 1,150
Income taxes $ 25,765 $ 44,145
The accompanying notes are an integral part of these consolidated
financial statements.
6
7
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2000
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, 2000. 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.
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.
Certain prior year balances have been reclassified to conform with the current
period presentation.
Note 2. Treasury Bills
Treasury bills consisted of the following:
December 31, June 30,
2000 2000
----------- -----------
At adjusted cost which approximates fair value $13,055,253 $18,840,593
At par value 13,237,000 19,100,000
Note 3. Inventories
Inventories consisted of the following:
December 31, June 30,
2000 2000
----------- -----------
Finished products $271,935 $252,264
Raw materials 231,407 278,303
Operating supplies 193,192 149,765
-------- --------
$696,534 $680,332
======== ========
Note 4. Investments
Investments consisted of the following:
Gross Unrealized Gains
Before Provision For
At December 31, 2000: Cost Income Taxes Fair Value
- -------------------- ---------- --------------------- ----------
Investments available for sale $2,491,850 $5,298,161 $7,790,011
Other equity investments 3,011,002 -- 3,011,002(a)
The Company entered into an equity investment agreement with an early
development stage bio-technical company. The agreement called for an initial
investment of $1,000,000 in December 2000, with an additional $2,000,000 to be
invested before June 30, 2001. The Company will receive common stock for its
investment.
Investments consisted of the following:
Gross Unrealized Gains
Before Provision For
At June 30, 2000: Cost Income Taxes Fair Value
- ----------------- ---------- --------------------- ----------
Investments available for sale $2,340,040 $6,912,935 $9,252,975
Other equity investments 2,011,002 -- 2,011,002(a)
(a) No quoted prices are available for these securities.
7
8
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2000
(continued)
Note 5. Industrial Revenue Bond
During fiscal 2000, the Company issued $6,000,000 in tax exempt Industrial
Revenue Bonds ("IRB") for the construction of a new plant to be built in
Georgia. The current portion, $200,000, of the IRB is included in accounts
payable at December 31, 2000. At December 31, 2000, the Bond Trustee held
non-appropriated funds of $4,892,391 that are restricted for construction of the
new plant. At December 31, 2000, the Company was in compliance with all
financial covenants under the debt agreement.
Note 6. Comprehensive (loss) income
Six Months Ended
December 31,
----------------------------
2000 1999
----------- ----------
Comprehensive (loss) consisted of the following:
Net loss $(2,164,216) $(1,475,325)
----------- -----------
Unrealized holding (losses) gains arising during the
period, net of income taxes (1,015,736) 590,322
Reclassify gains realized and included in net income,
net of income taxes (32,038) (5,413)
----------- -----------
Other comprehensive (loss) income (1,047,774) 584,909
----------- -----------
Comprehensive (loss) $(3,211,990) $ (890,416)
=========== ===========
Note 7. Income Taxes
For the six month period ended December 31, 2000 and the comparable six-month
period last year the effective rate for income tax benefit is 31% and 32%
respectively, of the loss before taxes. The determination of the benefit for
income taxes 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
Six Months Ended
December 31,
-------------------------------
2000 1999
------------ ------------
Revenues:
Waste Material Recycling $ 24,231,202 $ 27,527,483
Vocational School Group 2,411,279 2,531,382
Other 247,344 257,963
------------ ------------
$ 26,889,825 $ 30,316,828
============ ============
(Loss) Income before Income Taxes:
Waste Material Recycling $ (2,460,048) $ (1,618,542)
Vocational School Group (21,172) 26,677
Corporate expenses (1,406,080) (1,374,159)
Other 724,084 790,699
------------ ------------
$ (3,163,216) $ (2,175,325)
============ ============
8
9
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company incurred a net loss of $1,125,505, or $1.09 per share, for the
second quarter compared to the previous year's second quarter net loss of
$735,524, or $0.66 per share. Total revenues for the second quarter ended
December 31, 2000 were $13,765,824 compared to $15,267,232 for the comparable
quarter last year. The decrease in revenues for the current quarter of
$1,501,408 or 10% below the prior year's comparable period was primarily
attributable to the Waste Material Recycling segment.
Waste Material Recycling segment sales for the current quarter decreased
$1,446,326 or 10% from the comparable quarter last year. The decrease was due
primarily to a reduction in the average selling price of recycled dried bakery
products. The average selling price for recycled dried bakery products was 6%
lower than last year's comparable quarter partially offset by an increase of 1%
in sales volume from the comparable period last year. The average selling price
for the current quarter was also negatively impacted by higher delivery
transportation costs. Corn is used as a substitute for dried bakery products in
animal feed supplements and the average selling price of recycled dried bakery
products is directly correlated to the average price of corn in the commodities
markets. Corn prices are down because of record crops the past few years and are
selling at prices last seen in 1987. Cost reduction programs helped lower
current quarter operating costs for the Waste Material Recycling segment 4% from
the comparable quarter last year in spite of increased electrical and natural
gas costs and higher depreciation and amortization expenses. The Waste Material
Recycling segment failed to generate profits in both the current quarter and the
comparable quarter last year due primarily to lower selling prices.
Vocational School Group revenues decreased $40,755 or 3% from the comparable
quarter last year due primarily to decreased enrollment of 5% at the schools.
Operating expenses, primarily higher rents and salaries, for the current quarter
were up 11% from the comparable period last year and were partially offset by
lower general and administrative expenses. The Vocational School Group operated
at a profit for both the current quarter and for the comparable quarter last
year.
General and administrative expenses for the Company decreased 23% for the
quarter ended December 31, 2000, as compared to the comparable prior year
quarter, primarily due to the elimination of redundant functions after the
acquisition of International Processing Corporation.
The Company incurred a net loss of $2,164,216, or $2.08 per share for the six
months ended December 31, 2000, compared to the previous year's comparable
period net loss of $1,475,325, or $1.33 per share. Total revenues for the six
months ended December 31, 2000 were $26,889,825 compared to $30,316,828 for the
comparable period last year. The decrease in revenues for the six months of
$3,427,003 or 11% from the prior year's comparable periods was primarily
attributable to the Waste Material Recycling segment.
Waste Material Recycling segment sales for the current six months decreased
$3,296,281 or 12% from the comparable period last year. The decrease was due
primarily to a reduction in both the average selling price and sales volume of
recycled dried bakery products. The average selling price for recycled dried
bakery products was 3% lower than last year's comparable period. Sales volume
also was 3% below the comparable period last year. The decreases in average
selling price and sales volume can be attributed to the record corn crops the
past two years as corn can serve as a direct substitute for our product. The
average price of corn for the current six months ($1.73 per bushel) was at its
lowest selling price since 1987. Cost reduction programs have helped lower
operating costs for the Waste Material Recycling segment by 8% from the
comparable period last year in spite of increased electrical and natural gas
costs and increased depreciation and amortization expenses. The Waste Material
Recycling segment failed to generate profits in both the current six months and
the comparable period last year due primarily to lower selling prices.
Vocational School Group revenues for the current six months decreased 5% from
the comparable six months last year due primarily to decreased enrollment at the
schools. Operating expenses for the current six months were up slightly from the
comparable period last year partially offset by lower general and administrative
expenses for the current six months from the comparable period last year. The
Vocational School Group operated at a loss for the current six months but was
profitable for the comparable period last year.
9
10
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
General and administrative expenses for the Company decreased 20% for the six
month period ended December 31, 2000, as compared to the comparable prior year
six month period, primarily due to the elimination of redundant functions after
the acquisition of International Processing Corporation.
Investment and other income for the six months ended December 31, 2000, was
$956,584 or a 40% increase over the comparable period last year due primarily to
higher interest rates and larger interest bearing investment securities
balances. Interest income from U.S. Treasury bills and interest bearing money
market accounts comprised most of the investment income for both periods.
Interest expense for the six months ended December 31, 2000, of $173,538 is
primarily due to the Industrial Revenue Bond financing, (includes both interest
and amortization of bond financing costs). Interest on the bonds, (5.2% at
December 31, 2000), varies weekly based upon the tax-exempt interest rate in the
current bond market. The Company had no debt during the first six months of the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
We have used our cash principally to purchase investments, fund capital
expeditures and working capital. We fund our cash requirements principally from
cash flows from our operations and proceeds from the sale of investments.
Working Capital was $17,243,426 at December 31, 2000, and was $22,356,880 at
June 30, 2000. Our working capital ratio at December 31, 2000, was 2.8 to 1
compared to 3.6 to 1 at June 30, 2000. The reduction in working capital from
June 30, 2000 is mainly attributed to the sale of Treasury bills used to help
finance the purchase of treasury stock, investments and the purchases of
property and equipment. The Company declared a cash dividend of $1.00 per share
outstanding at November 24, 2000, payable on January 4, 2001. The liability for
the cash dividend is in accrued expenses at December 31, 2000. Capital
expenditures approximating $7,000,000 to $9,000,000, primarily for Waste
Material Recycling facilities and equipment are planned for calendar year 2001.
Management believes that the combination of cash on hand, Treasury bills,
investments available for sale, the non-appropriated funds (Industrial Revenue
Bond proceeds) and cash flow expected to be generated from its operations will
be sufficient to fund planned investments and working capital requirements
through fiscal 2001.
TAXES
For the six months ended December 31, 2000, an income tax benefit of 32% of the
pre-tax loss is expected through utilization of available tax loss carry backs
and loss carry forwards. 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, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. The statement requires that the Company recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The adoption of SFAS No. 133 did not have a
material impact on the Company's financial statements.
10
11
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
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 or raw
materials, transportation difficulties, changing governmental educational aid
policies, or disruption or operations due to unavailability of fuels or from
acts of God.
11
12
PART II. OTHER INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
Item 2. Increases and Decreases in Outstanding Securities and Indebtedness.
Decreases in outstanding equity securities in the six months ending December 31,
2000, were as follows:
Common Stock
No Par Value
------------
Shares outstanding June 30, 2000 1,060,867
Shares purchased and retired during the six months (32,300)
----------
Shares outstanding December 31, 2000 1,028,567
==========
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the six months ended December 31, 2000, the Company purchased and
retired 32,300 shares of common stock at a cost of $1,435,595.
Item 5. Other Information.
On October 17, 2000, the Company's Board of Directors declared a regular
dividend of $1.00 per share payable on January 4, 2001, to shareowners of record
at November 24, 2000.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits - None
(B) No Form 8-K was filed for the quarter ended December 31, 2000.
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: February 9, 2001 /s/ Eric M. Iwafuchi
--------------------------------------
Eric M. Iwafuchi, Vice President
and Chief Financial Officer
12