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: June 30, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-2572
STEEL CITY PRODUCTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 55-0437067
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
2751 CENTERVILLE ROAD, SUITE 3131, WILMINGTON, DELAWARE
-------------------------------------------------------
19808
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(Address of principal executive offices)
(Zip Code)
(817) 416-0717
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed from 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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ----
As of August 1, 2002, 3,238,061 shares of the Registrant's Common
Stock, $0.01 par value per share were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL CITY PRODUCTS, INC. AND SUBSIDIARY
<Table>
Condensed Consolidated Balance Sheets at June 30, 2002
and December 31, 2001...................................................... 3
Condensed Consolidated Statements of Operations for the three month
periods ended June 30, 2002 and June 30, 2001.............................. 4
Condensed Consolidated Statements of Operations for the six month
periods ended June 30, 2002 and June 30, 2001.............................. 5
Condensed Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2002 and June 30, 2001.............................. 6
Notes to Condensed Consolidated Financial Statements....................... 7
</Table>
2
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
June 30, December 31,
2002 2001
---- ----
(Unaudited)
-----------
ASSETS
Current assets:
Cash ........................................................................... $ 194 $ 263
Trade accounts receivable, less allowance of $670 and $191, respectively ....... 3,269 1,963
Inventories .................................................................... 4,302 3,533
Deferred tax asset ............................................................. 170 170
Other .......................................................................... 60 91
-------- --------
Total current assets ................................................. 7,995 6,020
-------- --------
Property and equipment, at cost ..................................................... 1,322 1,315
Less accumulated depreciation .................................................. (1,034) (988)
-------- --------
288 327
Deferred tax asset .................................................................. 388 630
Other assets ........................................................................ 156 157
-------- --------
$ 8,827 $ 7,134
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ............................................................... $ 5,213 $ 4,323
Accrued compensation ........................................................... 342 324
Current maturities of long-term obligations .................................... 84 83
Other .......................................................................... 156 150
-------- --------
Total current liabilities ............................................ 5,795 4,860
-------- --------
Long-term obligations:
Long-term debt ................................................................. 3,352 2,535
Long-term debt, related party .................................................. 500 500
Other long-term obligations .................................................... 58 100
-------- --------
3,910 3,135
-------- --------
Commitments and contingencies ....................................................... -- --
Stockholders' deficiency:
Preferred stock, par value $0.01 per share; authorized 5,000,000 shares,
issued 1,938,526 shares; liquidation preference $10,135 ................... 19 19
Common stock, par value $0.01 per share; authorized 5,000,000 shares,
issued 3,238,061 shares ................................................... 32 32
Additional paid-in capital ..................................................... 43,824 43,824
Deficit ........................................................................ (34,957) (35,422)
Advances to Sterling Construction Company, Inc. ................................ (9,795) (9,313)
Treasury stock, at cost, 207 common shares ..................................... (1) (1)
-------- --------
Total stockholders' deficiency .................................. (878) (861)
-------- --------
$ 8,827 $ 7,134
======== ========
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Three months Three months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Sales ..................................................................... $ 6,858 $ 5,833
Interest income ........................................................... 52 98
Other income .............................................................. 15 15
----------- -----------
6,925 5,946
Cost of goods sold, including occupancy and buying expenses ............... 5,457 4,672
Operating, selling and administrative expenses ............................ 1,002 1,018
Provision for doubtful accounts ........................................... 50 8
Interest expense .......................................................... 72 102
----------- -----------
Income before income taxes ................................................ 344 146
Income tax expense ........................................................ 123 3
----------- -----------
Net income ................................................................ 221 143
Effect of Series A Preferred Stock dividends .............................. (253) (253)
----------- -----------
Net loss attributable to common stockholders .............................. $ (32) $ (110)
=========== ===========
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ...................................... $ (0.01) $ (0.03)
=========== ===========
Weighted average number of shares outstanding used in
computing per share amounts .......................................... 3,238,061 3,238,061
=========== ===========
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Six months Six months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Sales ..................................................................... $ 13,406 $ 11,204
Interest income ........................................................... 95 189
Other income .............................................................. 202 233
----------- -----------
13,703 11,626
Cost of goods sold, including occupancy and buying expenses ............... 10,715 9,142
Operating, selling and administrative expenses ............................ 2,063 2,126
Provision for doubtful accounts ........................................... 75 11
Interest expense .......................................................... 136 198
----------- -----------
Income before income taxes ................................................ 714 149
Income tax expense ........................................................ 249 25
----------- -----------
Net income ................................................................ 465 124
Effect of Series A Preferred Stock dividends .............................. (506) (506)
----------- -----------
Net loss attributable to common stockholders .............................. $ (41) $ (382)
=========== ===========
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ...................................... $ (0.01) $ (0.12)
=========== ===========
Weighted average number of shares outstanding used in
computing per share amounts .......................................... 3,238,061 3,238,061
=========== ===========
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Six months Six months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Cash flows from operating activities:
Net income .................................................................. $ 465 $ 124
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization ............................................ 70 77
Deferred tax expense ..................................................... 242 --
Other changes in operating assets and liabilities:
Accounts receivable ...................................................... (1,306) (1,115)
Inventories .............................................................. (769) (822)
Accounts payable ......................................................... 890 1,390
Other .................................................................... 52 95
------- -------
Net cash used in operating activities ............................................. (356) (251)
------- -------
Cash flows from investing activities:
Additions to property and equipment ......................................... (7) (75)
------- -------
Cash flows from financing activities:
Net borrowings under revolving credit agreement ............................. 817 863
Borrowings under long-term credit agreements ................................ -- 46
Principal payments on long-term obligations ................................. (41) (38)
Net increase in advances to Sterling ........................................ (482) (382)
------- -------
Net cash provided by financing activities ......................................... 294 489
------- -------
Net (decrease) increase in cash ................................................... (69) 163
Cash at beginning of period ....................................................... 263 47
------- -------
Cash at end of period ............................................................. $ 194 $ 210
======= =======
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements
6
STEEL CITY PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002
1. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods presented. All adjustments made are of a normal recurring
nature.
While the Company believes that the disclosures presented herein are
adequate to make the information not misleading, it is suggested that these
unaudited condensed consolidated financial statements be read in conjunction
with the audited financial statements for the transition period ended December
31, 2001 ("fiscal 2001") as filed in the Company's Annual Report on Form 10-K.
In November 2001, the Company elected to change its fiscal year end
from the last day in February to December 31, and filed its Transition Report on
Form 10-K for the transition period ended December 31, 2001. For a more
meaningful comparison, prior year results presented herein reflect the use of
the new fiscal year periods. Operating results for the three and six months
ended June 30, 2002 and 2001 are not necessarily indicative of the results that
may be expected for the full year.
2. CHANGE IN METHOD OF ACCOUNTING
Effective March 1, 2001, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities".
These standards require the Company to recognize all derivatives as either
assets or liabilities at fair value in its balance sheet. The accounting for
changes in the fair value of a derivative depends on the use of the derivative.
There was no effect on the financial statements upon adoption of these
new standards on March 1, 2001.
3. NEW ACCOUNTING PRONOUNCEMENTS
During June 2001, the Financial Accounting Standards Board issued two
new accounting standards, SFAS No. 141 "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangibles".
SFAS No. 141 eliminates the pooling of interests method of accounting
for business combinations initiated prior to July 2001. SFAS No. 142, which
became effective January 1, 2002, discontinued the requirement for amortization
of goodwill and indefinite-lived intangible assets, and instead requires an
annual review for the impairment of those assets. Impairment is to be examined
more frequently if certain indicators appear. Intangible assets with a
determinable life will continue to be amortized. The Company completed its
initial assessment during the second quarter of fiscal 2002 and does not believe
goodwill of $128,000 has been impaired. Prior to adoption of SFAS No. 142,
amortization of goodwill was $1,600 per quarter.
4. SEGMENT INFORMATION
The Company's historical business has been the distribution of
automotive related accessories. The distribution of pet supplies was added as a
product line in fiscal 1996, and in fiscal 2001, the Company began to distribute
lawn and garden accessories. The Company therefore operates in three operating
segments, automotive products, ("Auto"), non-food pet products, ("Pet") and lawn
and garden products ("Lawn"). Maarten Hemsley, the Company's Chief Financial
Officer and Terry Allan, its President and Chief Executive Officer, review the
operating profitability of each segment and its working capital needs to
7
allocate financial resources. The Pet segment assets and the Lawn segment assets
consist solely of their respective inventories, since other assets utilized in
those segments cannot be accurately segregated. Therefore, the reported assets
for the Auto segment include accounts receivable and other assets applicable to
Pet and Lawn.
<Table>
<Caption>
THREE MONTHS ENDED
June 30, 2002: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Sales $4,352 $1,417 $1,089 $6,858
Operating profit (loss) 195 211 81 (123) 364
Interest (income) (52) (52)
Interest expense 5 67 72
------
Income before tax $ 344
======
Segment assets $6,606 $615 $782 $824 $8,827
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
June 30, 2001: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Sales $4,705 $634 $494 $5,833
Operating profit (loss) 232 99 22 (203) 150
Interest (income) (98) (98)
Interest expense 4 98 102
------
Income before tax $ 146
======
Segment assets $7,431 $325 $444 $161 $8,361
</Table>
<Table>
<Caption>
SIX MONTHS ENDED
June 30, 2002: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Sales $8,446 $3,053 $1,907 $13,406
Operating profit (loss) 365 506 154 (270) 755
Interest (income) (95) (95)
Interest expense 11 125 136
-------
Income before tax $ 714
=======
Segment assets $6,606 $615 $782 $824 $ 8,827
</Table>
<Table>
<Caption>
SIX MONTHS ENDED
June 30, 2001; Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Sales $8,895 $1,349 $960 $11,204
Operating profit (loss) 189 235 56 (322) 158
Interest (income) (189) (189)
Interest expense 9 189 198
-------
Income before tax $ 149
=======
Segment assets $7,431 $325 $444 $161 $ 8,361
</Table>
5. BORROWING ARRANGEMENT
In July 2001, the Company replaced its existing line of credit with
financing from an institutional lender (the "Revolver"). The Revolver originally
was for a term of two years in the amount of $4.5 million, subject to a
borrowing base. The Revolver initially carried an interest rate equal to prime
plus 1%. Due to concerns stemming from the bankruptcy filing of Ames Department
Stores, a significant customer of SCPI, in August 2001, the Revolver was amended
to shorten the term of the line and increase the interest rate to prime plus
1.5%. Upon satisfaction to the lender of SCPI's ability to maintain sales and
profitability levels, the Revolver was again amended in December 2001 to provide
for a line of $5.0 million, subject to a borrowing base, and to extend the term
to May 31, 2003. At June 30, 2002, the outstanding balance on the Revolver was
$3.4 million and the effective rate of interest was 6.25%. The Revolver is
secured by the assets of SCPI and is subject to the maintenance of certain
financial covenants. At June 30, 2002, the Company was in compliance with its
financial covenants. Although the Revolver has an expiration date of
8
May 2003, the Company has received a commitment letter from the institutional
lender extending the expiration date of the Revolver to August 31, 2003;
therefore, the Revolver is presented as a long-term obligation of the Company.
In December 2001, in conjunction with the December 2001 amendment to
the Revolver and to improve the Company's working capital position through the
purchase of additional inventory, SCPI's parent Sterling Construction Company,
Inc. ("Sterling") advanced $500,000 under a subordinated promissory note (the
"Subordinated Sterling Note"). The Subordinated Sterling Note matures in a
single installment in December 2004, and bears interest at 12% per annum,
payable monthly.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Steel City Products, Inc. ("SCPI", or the "Company") is a special,
limited purpose, majority-owned subsidiary of Sterling Construction Company,
Inc. ("Sterling"). Through Sterling's ownership of SCPI, primarily in the form
of preferred stock, Sterling retains substantially all the value of SCPI, and
receives substantially all of the benefit of operations through its entitlement
to dividends on the preferred stock. Sterling's ownership of SCPI is designed to
facilitate the preservation and utilization of SCPI's and Sterling's net
operating tax loss carry-forwards that amounted to approximately $161 million at
December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
In addition to cash derived from operations, SCPI's liquidity and
financing requirements are determined principally by the working capital needed
to support its level of business, together with the need for capital
expenditures and the cash required to repay its debt. SCPI's working capital
needs fluctuate primarily due to the amounts of inventory it carries which can
change seasonally, the size and timeliness of payment of receivables from its
customers and the amount of credit extended to SCPI by its suppliers.
Until March 2002, SCPI participated in a cash concentration system with
Sterling. Beginning in March 2002, cash is transferred to Sterling as needed to
pay corporate expenses. Cash transferred is reflected as an addition to advances
made to Sterling. Such advances bear interest at a rate sufficient to reimburse
the Company for interest paid on its revolving line of credit.
At June 30, 2002, SCPI's debt consisted primarily of revolving debt
(the "Revolver") of approximately $3.4 million, with unused availability under
the borrowing base of approximately $480,000. The Revolver has a maximum
availability of $5.0 million and carries an interest rate of prime plus 1.5%
(effective rate of 6.25%). The Revolver is secured by the assets of SCPI and is
subject to the maintenance of certain financial covenants. The term of the
Revolver expires in May 2003. The Company has received a commitment letter
extending the expiration date of the Revolver to August 31, 2003. Management
does not currently anticipate any difficulty in extending or replacing the
Revolver on acceptable terms thereafter.
In December 2001, in conjunction with a December 2001 amendment to the
Revolver and in order to strengthen SCPI's working capital position through the
purchase of additional inventory, Sterling funded SCPI $500,000 through a
subordinated promissory note (the "Subordinated Sterling Loan'). The
Subordinated Sterling Loan, which is repayable in a single installment in
December 2004, bears interest at 12% per annum, payable monthly.
Management believes that in addition to expected cash flow from
operations, the Revolver and the Subordinated Sterling Loan will provide
adequate funding for SCPI's working capital, debt service and capital
expenditure requirements, including seasonal fluctuations, for at least the next
twelve months, assuming no material deterioration in current sales levels or
gross profit margin.
9
STOCKHOLDERS' DEFICIENCY
Through June 30, 2002, the Company had not declared or paid Series A
Preferred Stock dividends totaling approximately $7.4 million, for the period
from August 1994. Any such dividends would be payable to Sterling. Dividends
declared and paid in earlier years were used by Sterling in reduction of
intercompany debt owed by Sterling to the Company. Accordingly, if such
dividends were declared and paid by the Company, the effect would be a decrease
in the intercompany loans owed by Sterling to the Company to approximately $2.3
million.
As a result of the Sterling Transaction completed in July 2001,
Sterling has significant positive net worth arising from its investment in
Sterling Houston Holdings ("SHH"), but covenants under SHH's bank facility
currently limit upstreaming of operating cash flow by SHH to Sterling, so that
Sterling is not currently able to fund any repayment of loans owed by it to the
Company. Accordingly, Sterling and the Company have not agreed repayment terms
for such loans; and generally accepted accounting principles require the Company
to record advances to Sterling as a component of stockholders' equity (thereby
creating a deficiency) until such time as formal repayment terms are agreed.
If outstanding Series A Preferred dividends at June 30, 2002 had been
declared and paid to Sterling and applied in reduction of the intercompany loan,
and payment terms on the balance of such loan had been agreed, the effect would
have been to reclassify the remaining loan amount of approximately $2.3 million
as an asset, rather than a reduction in stockholders' equity, with the result
that the Company's stockholders' equity would have been reported at a positive
level of approximately $1.5 million.
CASH FLOWS
Net cash used in operations increased by $105,000 in the six months
ended June 30, 2002 compared with the six months ended June 30, 2001. The
increase was due primarily to increases in accounts receivable and decreases in
vendor payables, partially offset by higher operating profits.
Cash provided by financing activities decreased in the current year
period by $195,000, mostly as a result of increases in advances to the parent
company.
FORWARD LOOKING STATEMENTS
From time to time the information provided by the Company or statements
made by its employees may contain so-called "forward-looking" information that
involves risks and uncertainties. In particular, statements contained in this
Item 2 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are not historical facts (including, but not
limited to statements concerning anticipated sales, profit levels, customers and
cash flows) are forward-looking statements. The Company's actual future results
may differ significantly from those stated in any forward-looking statements.
Factors that may cause such differences include, but are not limited to the
factors discussed above as well as the accuracy of the Company's internal
estimates of revenue and operating expense levels. Each of these factors and
others are discussed from time to time in the Company's Securities and Exchange
Commission filings.
CERTIFICATION
This Form 10-Q has been certified by Terrance W. Allan, Chief Executive Officer
of the Company, and by Maarten D. Hemsley, Chief Financial Officer of the
Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections
(a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is
attached as Exhibit 99.1.
MATERIAL CHANGES IN FINANCIAL CONDITION
As of June 30, 2002, there had been no material changes in the
Company's financial condition from December 31, 2001, other than those caused by
seasonal fluctuations as discussed in Item 7 of the
10
Company's Transition Report on Form 10-K for fiscal 2001. The terms of the
Revolver provide for its expiration in May 2003, however the Company received a
commitment letter, which extended the expiration date of the Revolver to August
31, 2003. Therefore, the Revolver continues to be presented as a long-term
liability of the Company.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Operations include the results of SCPI's operating division, Steel City
Products, a distributor of automotive parts and accessories, non-food pet
supplies, and lawn and garden products, headquartered in McKeesport,
Pennsylvania.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
Auto segment
Sales of automotive accessories decreased by $353,000 in the second
quarter of the current year compared with sales in the same period last year.
Sales to existing customers decreased by $457,000, principally as a result of
credit restrictions on automotive shipment to Ames Department Stores, a
significant customer, which filed for bankruptcy in August 2001. Reduced sales
to this customer alone accounted for $500,000 of the decrease in sales, which
was offset in part by increased sales to other existing customers due to
expansion of product lines and larger orders in the current year. Sales to new
automotive customers totaled $104,000 in the second quarter.
Gross profit in the second quarter of fiscal 2002 was $908,000, or
20.9% of sales, compared with $896,000, or 19.1% of sales. Despite the lower
sales volume, higher margins generated by changes in product mix in the second
quarter resulted in an overall increase in gross profits.
Operating profit for the automotive segment decreased from the prior
year by approximately $37,000, due to an increase in bad debt expense to provide
additional reserves for the 2001 bankruptcy filing of Ames.
Pet segment
Sales of non-food pet supplies in the second quarter were $1.4 million,
an increase of $783,000 compared with the second quarter of the prior year,
principally due to sales of pet products to Ames as debtor-in-possession and to
increased sales to existing customers.
Gross profit was $365,000, an increase of $148,000 compared with the
second quarter of the prior year, due to the higher sales volume and changes in
the product mix. The pet supply segment reported operating profit in the second
quarter of $211,000, compared with an operating profit of $99,000 in the prior
year; the increase was due primarily to the higher sales and margin levels.
Lawn segment
SCPI began the distribution of lawn and garden products in November
2000. Sales in the second quarter of fiscal 2002 totaled $1.1 million, an
increase of $595,000 compared with the second quarter of the prior year, which
was during the segment's first shipping season. The increase was due to sales of
additional products to existing customers, and to sales to new customers.
Gross profit was $128,000, or 11.8% of sales, compared with $46,000, or
9.3% of sales in the prior year second quarter. The increase was due to higher
margins on additional product lines and to the higher sales volume.
The Lawn segment reported an operating profit of $81,000 for the second
quarter, an increase of $59,000 compared with the prior year.
11
Corporate
Corporate expenses decreased by approximately $80,000 compared with the
second quarter of the prior year, principally due to higher fees related to the
revolving line of credit and to the higher management fees in the second quarter
of the prior year.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
Auto segment
Sales of automotive accessories decreased by approximately $448,000 in
the first six months of the current year compared with the same period last
year. Sales to existing customers decreased by $633,000, principally as a result
of credit restrictions on automotive shipments to Ames, which filed for
bankruptcy in August 2001. The decreased sales to Ames in the first six months
totaled approximately $950,000, which was offset partly by increased sales to
existing customers, which have purchased additional product lines, or added
locations serviced by the Company. Sales to new customers for the first six
months of the current fiscal year increased by $185,000 compared with the same
period last year.
Despite the lower sales volume, an increase in gross margins resulted
in an overall improvement in gross profit to $1.7 million in the first half of
fiscal 2002, or 20.2% of sales, from $1.5 million in the first half of fiscal
2001, or 17.1% of sales.
Operating profit for the automotive segment increased by $176,000
compared with the first six months of the prior year due principally to
increased margins. The increase in margin was offset by additional bad debt
expense to provide additional reserves for the 2001 bankruptcy filing of Ames.
Pet segment
Sales of non-food pet supplies in the first six months of fiscal 2002
were $3.0 million, an increase of approximately $1.7 million compared with the
first six months of the prior year, due to sales of pet products to Ames, as
debtor-in-possession.
Gross profit improved by $336,000 as a result of the higher sales
volumes.
The pet segment reported an operating profit of $506,000 for the first
six months of the current year, an increase of $271,000 compared with the same
period in the prior year. The increase was due to the higher gross profit;
offset somewhat by higher expenses related to the increased sales volume.
Lawn segment
SCPI began the distribution of lawn and garden products in November
2000. Sales for the first six months of fiscal 2002 totaled $1.9 million, an
increase of approximately $947,000 compared with the same period in the prior
year, which was during the segment's first shipping season. The increase was due
to increased sales of additional products to existing customers of $719,000.
Sales to new customers increased from the prior year by approximately $228,000.
Gross profit was $193,000, or 10.1% of sales, compared with gross
profit in the prior year period of $84,000, or 8.8% of sales. The increase was
due principally to the increased sales volume, combined with higher margins on
certain product lines.
The lawn segment reported an operating profit of $154,000 for the first
six months of the current fiscal year, compared with $56,000 in the prior year
period.
12
Corporate
Corporate expenses decreased by approximately $52,000 compared with the
first six months of the prior year, principally due to higher fees related to
the revolving line of credit incurred in the prior year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
SCPI is exposed to certain market risks from transactions that are
entered into during the normal course of business. The Company's policies do not
permit active trading, or speculation in, derivative financial instruments. The
Company's primary market risk exposure relates to interest rate risk. SCPI
manages its interest rate risk by attempting to balance its exposure between
fixed and variable rates while attempting to minimize its interest costs.
A change in the interest rate of 1% would have changed interest expense
by approximately $13,000 for the six months ended June 30, 2002.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings outstanding against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter for which this report is filed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.2 Third Amendment to the Revolving Credit Agreement
dated June 27, 2002 between Steel City Products, Inc.
and National City Bank of Pennsylvania
*99.1 Certification of Terrance W. Allan, Chief Executive
Officer, and Maarten D. Hemsley, Chief Financial
Officer
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
- ----------
* filed herewith
14
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.
Date: August 9, 2002 By: /s/ Terrance W. Allan
------------------------
Terrance W. Allan
Chief Executive Officer
Date: August 9, 2002 By: /s/ Maarten D. Hemsley
-------------------------
Maarten D. Hemsley
Chief Financial Officer
15
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.2 Third Amendment to the Revolving Credit Agreement dated June 27, 2002 between Steel
City Products, Inc. and National City Bank of Pennsylvania
*99.1 Certification of Terrance W. Allan, Chief Executive Officer, and Maarten D. Hemsley,
Chief Financial Officer
</Table>
- ---------
* filed herewith