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