10-Q 1 v72368e10-q.txt FORM 10-Q 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 March 31, 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 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 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 05, 2001 was 1,029,567. 2 SCOPE INDUSTRIES AND SUBSIDIARIES INDEX

2 3 PART I. FINANCIAL INFORMATION SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. 3 4 SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 4 5 SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 5 6 SCOPE INDUSTRIES AND SUBSDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 6 7 SCOPE INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 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, 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 to the current period presentation. Note 2. Treasury Bills Treasury bills consisted of the following:

Note 3. Inventories Inventories consisted of the following:

Note 4. Investments Investments consisted of the following:

The Company entered into an equity investment agreement with an early development stage bio-technical company. The agreement called for an investment of $2,000,000 by March 31, 2001, with an additional $1,000,000 to be invested before June 30, 2001. The Company will receive common stock for its investment. Investments consisted of the following:

(a) No quoted prices are available for these securities. 7 8 SCOPE INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2001 (continued) Note 5. Industrial Revenue Bond In June 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. Partial redemption of the IRB principal is not scheduled until March 1, 2003. Interest is paid monthly on the outstanding principal. At March 31, 2001, the Bond Trustee held non-appropriated funds of $4,390,602 that are restricted for construction of the new plant. At March 31, 2001, the Company was in compliance with all financial covenants under the debt agreement. Note 6. Comprehensive (loss) income

Note 7. Income Taxes For the nine month period ended March 31, 2001 the effective rate for income tax benefit is approximately 32% of the loss. The effective rate for income taxes for the comparable nine month period last year was approximately 37% of the income. 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

8 9 SCOPE INDUSTRIES AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Three Months Ended March 31, 2001 and 2000: The Company incurred a net loss of $795,743, or $0.77 per share, for the third quarter compared to the previous year's third quarter net income of $5,624,040 or $5.14 per share diluted. The income earned last year was from the sale of investments that resulted in Other income of $10,362,321 compared to the current quarter Other income of $498,811. Revenues for the third quarter ended March 31, 2001 were $13,986,432 compared to $14,030,734 for the comparable quarter last year. The decrease in revenues for the current quarter compared to the prior year's comparable period is primarily attributable to the Waste Material Recycling segment offset by an increase in Vocational School Group revenues. Waste Material Recycling segment sales for the current quarter decreased slightly from the comparable quarter last year. The decrease was due primarily to a reduction in the average selling price of recycled dried bakery products. Sales tonnage increased 8% during the current quarter compared to the comparable period last year. The average selling price for recycled dried bakery products was 6% lower than last year's comparable quarter partially offset by an increase of 7% 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. Record corn crops the past few years have negatively depressed selling prices of corn and our dried bakery products. Cost reduction programs helped lower current quarter operating costs for the Waste Material Recycling segment 1% from the comparable quarter last year in spite of significant increases in electrical, 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 increased $109,010 or 9% from the comparable quarter last year due primarily to a slight increase in enrollment at the schools. Operating expenses, primarily higher rents and salaries, for the current quarter were up 8% 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 increased 6% for the quarter ended March 31, 2001, as compared to the comparable prior year quarter due primarily to increased insurance costs for employee benefits. Nine Months Ended March 31, 2001 and 2000: The Company incurred a net loss of $2,959,959, or $2.86 per share for the nine months ended March 31, 2001, compared to the previous year's comparable period net income of $4,148,715, or $3.74 per share diluted. Total revenues for the nine months ended March 31, 2001 were $40,876,257 compared to $44,347,562 for the comparable period last year. The decrease in revenues for the nine months of $3,471,305 or 8% from the prior year's comparable period was primarily attributable to the Waste Material Recycling segment. Waste Material Recycling segment sales for the current nine months decreased $3,305,769 or 8% from the comparable period last year. The decrease was due primarily to a reduction in the average selling price and higher delivery transportation costs. The average selling price for recycled dried bakery products and sales volume for the current nine months were both 7% lower than last year's comparable period. The decreases in average selling price can be attributed to the record corn crops the past two years as corn can serve as a direct substitute for our product. Cost reduction programs have helped lower operating costs for the Waste Material Recycling segment by 2% from the comparable period last year in spite of increased electrical and natural gas costs, diesel fuel and increased depreciation and amortization expenses. The Waste Material Recycling segment failed to generate profits in both the current nine months and the comparable period last year due primarily to lower selling prices. 9 10 SCOPE INDUSTRIES AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Vocational School Group revenues for the current nine months decreased slightly from the comparable nine months last year due primarily to decreased enrollment at the schools during the first six months of the year. Operating expenses for the current nine months were up slightly from the comparable period last year. The Vocational School Group operated at a profit for the current nine months and for the comparable period last year. General and administrative expenses for the Company decreased 12% for the nine month period ended March 31, 2001, as compared to the comparable prior year nine month period, primarily due to the elimination of redundant functions after the acquisition of International Processing Corporation. Investment and other income for the nine months ended March 31, 2001, was $1,523,832 compared to $11,050,370 for the comparable period last year when investments were sold realizing a gain of $10,613,671 during the period. Interest income from U.S. Treasury bills and interest bearing money market accounts comprised most of the investment income for both periods excluding the realized gains. Interest expense for the nine months ended March 31, 2001, of $241,975 is primarily due to the Industrial Revenue Bond financing, (includes both interest and amortization of bond financing costs). Interest on the bonds is paid monthly and the interest rate (3.7% at March 31, 2001), varies weekly based upon the tax-exempt interest rate in the current bond market. The Company had no outstanding debt during the first nine months of the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company used cash principally to purchase investments, fund capital expenditures and working capital. The Company funds cash requirements principally from cash flows from our operations and proceeds from the sale of investments. Working Capital was $16,880,697 at March 31, 2001, and was $22,556,880 at June 30, 2000. Our working capital ratio at March 31, 2001, was 3.3 to 1 compared to 3.7 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 the Company's common stock, investments and the purchases of property and equipment. The Company paid a cash dividend of $1.00 per share, totaling $1,029,567 on January 4, 2001. 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 nine months ended March 31, 2001, 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. For the comparable nine month period last year the provision for income taxes was 37% of pre-tax income. 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. 10 11 SCOPE INDUSTRIES AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) 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. 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. Increases and decreases in outstanding equity securities in the nine months ending March 31, 2001, were as follows:

A corporate resolution requires the retirement of all reacquisitions of common stock. During the nine months ended March 31, 2001, the Company purchased and retired 33,300 shares of common stock at a cost of $1,478,469. 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, 2001. 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: May 09, 2001 /s/ Eric M. Iwafuchi ---------------------------------- Eric M. Iwafuchi, Vice President and Chief Financial Officer 12

SCOPE INDUSTRIES 10-Q