<PAGE> 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 September 30, 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 preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of registrant's common stock outstanding at October 31,
2000 was 1,032,567.
<PAGE> 2
SCOPE INDUSTRIES AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information:
Consolidated Balance Sheets -
September 30, 2000 and June 30, 2000 3
Consolidated Statements of Operations -
Three Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Three Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
Part II. Other Information:
Item 2. Increases and Decreases in Outstanding Securities
and Indebtedness 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5 Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,454,785 $ 4,045,582
Treasury bills available for sale-at fair value 15,853,240 18,840,593
Accounts and notes receivable, less allowance for
doubtful accounts of $702,651 at September 30, 2000
and $645,903 at June 30, 2000 4,433,701 4,581,022
Inventories 932,723 680,332
Deferred income taxes 1,615,270 1,297,500
Prepaid expenses and other current assets 1,569,658 1,576,237
----------- -----------
Total current assets 27,859,377 31,021,266
----------- -----------
Notes Receivable 620,186 659,374
----------- -----------
Property and Equipment:
Machinery and equipment 39,059,120 37,611,946
Land, buildings and improvements 16,052,687 16,045,836
----------- -----------
55,111,807 53,657,782
Less accumulated depreciation and amortization 28,694,908 27,531,392
----------- -----------
26,416,899 26,126,390
----------- -----------
Collection Routes and Contracts, less accumulated
amortization of $3,339,410 at September 30, 2000 and
$2,748,557 at June 30, 2000 6,892,883 7,623,736
----------- -----------
Other Assets:
Non-appropriated funds (Industrial Revenue Bonds) 5,168,479 5,440,677
Deferred charges and other assets 603,893 646,613
Investments available for sale-at fair value 12,114,865 9,252,975
Other equity investments-at cost 2,011,002 2,011,002
----------- -----------
19,898,239 17,351,267
----------- -----------
$81,687,584 $82,782,033
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 3,763,670 $ 5,052,389
Other accrued liabilities 1,873,902 1,926,295
Accrued payroll and related employee benefits 1,296,133 1,367,722
Income taxes payable -- 317,980
----------- -----------
Total current liabilities 6,933,705 8,664,386
Industrial Revenue Bond 5,800,000 5,800,000
Deferred Income Taxes 2,874,800 1,874,800
----------- -----------
15,608,505 16,339,186
----------- -----------
SHAREOWNERS' EQUITY:
Common stock, no par value, 5,000,000 shares authorized,
shares issued and outstanding at September 30, 2000 -
1,034,867 and June 30, 2000 - 1,060,867 4,470,450 4,470,450
Retained earnings 54,678,669 56,879,462
Accumulated other comprehensive income 6,929,960 5,092,935
----------- -----------
66,079,079 66,442,847
----------- ----------
$81,687,584 $82,782,033
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Sales $ 11,919,431 $ 13,765,678
Vocational school revenues 1,204,570 1,283,918
------------ ------------
13,124,001 15,049,596
------------ ------------
Operating Costs and Expenses:
Cost of sales 10,313,999 11,559,689
Vocational school expenses 1,009,062 1,076,516
Depreciation and amortization 1,766,650 1,541,628
General and administrative 1,897,399 2,302,897
------------ ------------
14,987,110 16,480,730
------------ ------------
(1,863,109) (1,431,134)
------------ ------------
Other income and expense:
Investment and other income 479,954 342,060
Interest expense (139,556) (727)
------------ ------------
340,398 341,333
------------ ------------
Loss before income taxes (1,522,711) (1,089,801)
Benefit for income taxes (484,000) (350,000)
------------ ------------
Net Loss $ (1,038,711) $ (739,801)
============ ============
Net Loss Per Share - Basic and Diluted $ (0.99) $ (0.66)
Average shares outstanding - Basic 1,045,367 1,114,592
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
SCOPE INDUSTRIES AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,038,711) $ (739,801)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 1,175,798 1,009,569
Amortization of contracts and routes 590,853 532,059
Gains on investments available for sale (49,287) --
Losses on sale of equipment 8,817 3,887
Deferred income taxes (317,770) (220,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 186,509 3,071
Inventories (252,391) (109,635)
Prepaid expenses and other current assets 70,814 (244,608)
Accounts payable and accrued liabilities (1,412,701) 839,116
Income taxes payable (382,215) 26,605
Tax benefit applied to purchase of routes and contracts 140,000 140,000
Other assets 42,720 52,689
----------- -----------
Net cash flows (used in) from operating activities (1,237,564) 1,292,952
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. Treasury bills (5,112,647) (8,077,061)
Maturities of U.S. Treasury bills 8,100,000 8,750,000
Purchase of property and equipment (1,478,824) (2,014,628)
Proceeds from disposition of property and equipment 3,700 --
Purchase of investments available for sale (32,063) --
Proceeds from disposition of investments available for sale 56,485 --
Non-appropriated bond fund proceeds held by Trustee 272,198 --
----------- -----------
Net cash flows from (used in) investing activities 1,808,849 (1,341,689)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised -- 213,150
Repurchases of common stock (1,162,082) (320,705)
----------- -----------
Net cash used in financing activities (1,162,082) (107,555)
----------- -----------
Net decrease in cash and cash equivalents (590,797) (156,292)
Cash and cash equivalents at beginning of period 4,045,582 3,667,818
----------- -----------
Cash and cash equivalents at end of period $ 3,454,785 $ 3,511,526
=========== ===========
Supplemental Disclosures:
Cash paid during the quarter for:
Interest $ 61,525 $ --
Income taxes $ 75,985 $ 8,395
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 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.
Note 2. Treasury Bills
Treasury bills consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- --------
<S> <C> <C>
At adjusted cost which approximates fair value $15,853,240 $18,840,593
At par value 16,000,000 19,100,000
</TABLE>
Note 3. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- --------
<S> <C> <C>
Finished products $303,380 $252,264
Raw materials 429,436 278,303
Operating supplies 199,907 149,765
-------- --------
$932,723 $680,332
======== ========
</TABLE>
Note 4 Investments
Investments consisted of the following:
<TABLE>
<CAPTION>
Gross Unrealized Gains
Before Provision For
Cost Income Taxes Fair Value
---- ------------ ----------
<S> <C> <C> <C>
At September 30, 2000:
----------------------
Investments available for sale $ 2,364,905 $ 9,749,960 $12,114,865
Other equity investments 2,011,002 -- 2,011,002(a)
At June 30, 2000:
-----------------
Investments available for sale $ 2,340,040 $ 6,912,935 $ 9,252,975
Other equity investments 2,011,002 -- 2,011,002(a)
</TABLE>
(a) No quoted prices are available for these securities.
6
<PAGE> 7
SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 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 September 30, 2000. At September 30, 2000, the Bond Trustee held
non-appropriated funds of $5,168,479 that are restricted for construction of the
new plant. At September 30, 2000, the Company was in compliance with all
financial covenants under the debt agreement.
Note 6. Comprehensive income (loss)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
2000 1999
------------ ----------
<S> <C> <C>
Comprehensive income (loss) consisted of the following:
Net loss $(1,038,711) $ (739,801)
----------- -----------
Unrealized holding gains (losses) arising during the
period, net of income taxes 1,868,886 (1,378,360)
Reclassify gains realized and included in net income,
net of income taxes (31,861) --
----------- -----------
Other comprehensive income (loss) 1,837,025 (1,378,360)
----------- -----------
Comprehensive income (loss) $ 798,314 $(2,118,161)
=========== ===========
</TABLE>
Note 7. Income Taxes
For the three month period ended September 30, 2000 and the comparable
three-month period last year the effective rate for income tax benefit is 32% of
the loss before taxes. The determination of the 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
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Waste Material Recycling $ 11,792,373 $ 13,642,328
Vocational School Group 1,204,570 1,283,918
Other 127,058 123,350
------------ ------------
$ 13,124,001 $ 15,049,596
(Loss) Income before Income Taxes:
Waste Material Recycling $ (1,212,095) $ (634,380)
Vocational School Group (41,887) (85,489)
Corporate expenses (658,086) (670,695)
Other 389,357 300,763
------------ ------------
$ (1,522,711) $ (1,089,801)
============ ============
</TABLE>
7
<PAGE> 8
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 $1,038,711, or $0.99 per share, for the
quarter ended September 30, 2000, compared to the previous year's first quarter
net loss of $739,801, or $0.66 per share. Total company revenues for the first
quarter ended September 30, 2000 were $13,124,001 compared to $15,049,596 for
the comparable quarter last year. The 13% decrease in revenues for the current
first quarter over the prior year's comparable quarter was primarily
attributable to the Waste Material Recycling segment.
Waste Material Recycling segment sales for the current quarter decreased
$1,849,955 or 14% over the comparable quarter 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 8% below last year's comparable quarter and sales volume
decreased 3% from the comparable period last year. The average selling price for
recycled dried bakery products for the current quarter was also 21% lower than
the previous quarter ended June 30, 2000. The decrease is attributed to the
record corn crop over the past two years as corn is a direct substitute for our
product. The average price of corn this quarter over comparable quarters was at
its lowest selling price since 1987. The average price of corn for the current
quarter was approximately $1.53 per bushel, the price of corn per bushel for the
comparable quarter last year was $1.77, and the quarter ended June 30, 2000, was
$2.02 per bushel. Current quarter operating costs for the Waste Material
Recycling segment decreased 13% from the comparable quarter last year and was
partially offset by increased 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 6% from the comparable quarter last
year due primarily to decreased enrollment at the schools partially offset by
lower operating expenses. The Vocational School Group operated at a loss for
both the current quarter and the comparable quarter last year.
General and administrative expenses for the Company decreased 18% for the
quarter ended September 30, 2000, as compared to the comparable prior year
quarter, primarily due to the elimination of redundant functions after the
acquisition of International Processing Corporation.
Investment and other income for the three months ended September 30, 2000, was
$137,894 or a 40% increase over the comparable quarter last year due primarily
to higher interest rates and larger interest bearing investment securities
balances. Interest income from U.S. Treasury bills comprised most of the
investment income for both quarterly periods.
Interest expense for the three months ended September 30, 2000, of $139,556 is
primarily due to the Industrial Revenue Bond financing, (includes both interest
and amortization of bond financing costs). Interest on the bonds, (5.7% at
September 30, 2000), varies weekly based upon the tax-exempt interest rate in
the current bond market. The Company had no debt during the first quarter of the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
We have used our cash principally to acquire businesses and fund our capital
expenses 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 $20,925,672 at September 30, 2000, and was $22,356,880 at
June 30, 2000. Our working capital ratio at September 30, 2000, was 4.0 to 1
compared to 3.6 to 1 at June 30, 2000. The reduction in working capital is
mainly attributed to the reduction in accounts payable and other current
liabilities, purchase of treasury stock and purchases of property and equipment
from June 30, 2000 and the sale of Treasury bills to finance the payments.
Capital expenditures approximating $7,000,000 to $9,000,000, primarily for Waste
Material Recycling facilities and equipment are planned for fiscal 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.
8
<PAGE> 9
SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
TAXES
For the three months ended September 30, 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.
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.
9
<PAGE> 10
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 three months
ending September 30, 2000 were as follows:
<TABLE>
<CAPTION>
Common Stock
No Par Value
------------
<S> <C>
Shares outstanding June 30, 2000 1,060,867
Shares purchased and retired during the three months (26,000)
----------
Shares outstanding September 30, 2000 1,034,867
==========
</TABLE>
A corporate resolution requires the retirement of all reacquisitions of common
stock. During the three months ended September 30, 2000, the Company purchased
and retired 26,000 shares of common stock at a cost of $1,162,082.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of shareowners held on October 17, 2000, with 1,042,867
shares entitled to vote, 997,703 shares or 96% of those entitled to vote
elected five directors to serve for the ensuing year and until their successors
have been elected and qualified.
<TABLE>
<CAPTION>
Directors Votes For Votes Abstained Total
------------------ --------- --------------- -------
<S> <C> <C> <C>
Babette Heimbuch 997,702 1 997,703
Robert Henigson 997,702 1 997,703
Meyer Luskin 997,702 1 997,703
William H. Mannon 997,702 1 997,703
Franklin Redlich 997,702 1 997,703
</TABLE>
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 September 30, 2000.
10
<PAGE> 11
PART II. OTHER INFORMATION (CONTINUED)
SCOPE INDUSTRIES AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCOPE INDUSTRIES
(Registrant)
Dated: November 10, 2000 /s/ Eric M. Iwafuchi
-----------------------------------
Eric M. Iwafuchi, Vice President
and Chief Financial Officer
11
