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, 2003
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
-------------------------------------------------------------
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of August 1, 2003, 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
Condensed Consolidated Balance Sheets at June 30, 2003
and December 31, 2002 .......................................................... 3
Condensed Consolidated Statements of Operations for the three month
periods ended June 30, 2003 and June 30, 2002 .................................. 4
Condensed Consolidated Statements of Operations for the six month
periods ended June 30, 2003 and June 30, 2002 .................................. 5
Condensed Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2003 and June 30, 2002 .................................. 6
Notes to Condensed Consolidated Financial Statements ........................... 7
2
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
June 30, December 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash ................................................................... $ 317 $ 296
Trade accounts receivable, less allowance of $823 and $841,
respectively ........................................................... 2,980 2,156
Inventories ............................................................ 4,035 3,141
Deferred tax asset ..................................................... 170 170
Other .................................................................. 95 102
-------- --------
Total current assets ......................................... 7,597 5,865
Property and equipment, at cost ............................................. 1,423 1,416
Less accumulated depreciation .......................................... (1,133) (1,088)
-------- --------
290 328
Deferred tax asset .......................................................... 418 557
Other assets ................................................................ 134 156
-------- --------
$ 8,439 $ 6,906
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ....................................................... $ 4,560 $ 4,120
Accrued compensation ................................................... 274 383
Current maturities of long-term obligations ............................ 42 77
Short-term promissory note, related party .............................. 250 --
Other .................................................................. 81 159
-------- --------
Total current liabilities .................................... 5,207 4,739
Long-term obligations:
Long-term debt ......................................................... 3,646 2,617
Long-term debt, related party .......................................... 500 500
Other long-term obligations ............................................ 47 57
-------- --------
4,193 3,174
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 ................................................................ (34,729) (35,004)
Advances to Sterling Construction Company, Inc. ........................ (10,106) (9,877)
Treasury stock, at cost, 207 common shares ............................. (1) (1)
-------- --------
Total stockholders' deficiency ............................... (961) (1,007)
-------- --------
$ 8,439 $ 6,906
======== ========
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)
Three months Three months
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------
Sales .................................................. $ 5,453 $ 6,858
Interest income ........................................ 59 52
Other income ........................................... -- 15
----------- -----------
5,512 6,925
Cost of goods sold, including occupancy, buying and
warehouse expenses ..................................... 4,605 5,700
Selling and administrative expenses .................... 664 759
Provision for doubtful accounts ........................ (2) 50
Interest expense ....................................... 83 72
----------- -----------
Income before income taxes ............................. 162 344
Current state income tax expense ....................... 5 --
Deferred tax expense ................................... 55 123
----------- -----------
Total income tax expense .......................... 60 123
----------- -----------
Net income ............................................. 102 221
Effect of Series A Preferred Stock dividends ........... (253) (253)
----------- -----------
Net loss attributable to common stockholders ........... $ (151) $ (32)
=========== ===========
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ................... $ (0.05) $ --
=========== ===========
Weighted average number of shares outstanding used in
computing per share amounts ....................... 3,238,061 3,238,061
=========== ===========
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)
Six months Six months
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------
Sales .................................................. $ 11,472 $ 13,406
Interest income ........................................ 110 95
Other income ........................................... 158 202
----------- -----------
11,740 13,703
Cost of goods sold, including occupancy, buying and
warehouse expenses ..................................... 9,764 11,200
Selling and administrative expenses .................... 1,399 1,578
Provision for doubtful accounts ........................ 11 75
Interest expense ....................................... 157 136
----------- -----------
Income before income taxes ............................. 409 714
Current state income tax (benefit) expense ............. (5) 7
Deferred tax expense ................................... 139 242
----------- -----------
Total income tax expense .......................... 134 249
----------- -----------
Net income ............................................. 275 465
Effect of Series A Preferred Stock dividends ........... (503) (506)
----------- -----------
Net loss attributable to common stockholders ........... $ (228) $ (41)
=========== ===========
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ................... $ (0.07) $ (0.01)
=========== ===========
Weighted average number of shares outstanding used in
computing per share amounts ....................... 3,238,061 3,238,061
=========== ===========
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)
Six months Six months
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------
Cash flows from operating activities:
Net income ....................................... $ 275 $ 465
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization ................. 69 70
Tax expense ................................... 139 242
Other changes in operating assets and liabilities:
Accounts receivable ........................... (824) (1,306)
Inventories ................................... (894) (769)
Accounts payable .............................. 440 890
Other ......................................... (183) 52
------- -------
Net cash used in operating activities .................. (978) (356)
------- -------
Cash flows from investing activities:
Additions to property and equipment .............. (6) (7)
------- -------
Cash flows from financing activities:
Net borrowings under revolving credit ............ 1,029 817
agreement
Net increase in advances to Sterling
Construction Company, Inc. ....................... (229) (482)
Borrowings under short-term notes ................ 250 --
Principal payments on long-term obligations ...... (45) (41)
------- -------
Net cash provided by financing activities ............. 1,005 294
------- -------
Net increase (decrease) in cash ........................ 21 (69)
Cash at beginning of period ............................ 296 263
------- -------
Cash at end of period .................................. $ 317 $ 194
======= =======
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, 2003
1. INTERIM FINANCIAL STATEMENTS
Business Activities
Steel City Products, Inc. ("SCPI" or "the Company") is a wholesale
distributor of automotive accessories, non-food pet supplies and lawn and garden
products, operating under the trade name "Steel City Products"), selling mainly
to supermarket retailers, drug stores, discount retail chains and hardware and
automotive specialty stores, based principally in the Northeastern United
States. SCPI is a majority-owned subsidiary of Sterling Construction Company,
Inc. ("Sterling").
Interim Financial Statements
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the 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. Significant estimates
included in the Company's financial statements include the allowance for
doubtful accounts and estimates for the use of the Company's net operating loss
carryforwards. In the opinion of management, all adjustments necessary to
present fairly the financial position, results of operations and cash flows for
the interim periods presented have been included. 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 fiscal year ended December 31,
2002 ("Fiscal 2002") as filed in the Company's Annual Report on Form 10-K.
Certain prior year's balances have been reclassified to conform to the
current year presentation. Specifically, warehouse expenses are now included as
a component of cost of goods sold rather than as selling and administrative
expense as in prior reporting periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, which addresses the consolidation of variable
interest entities in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's expected residual returns,
or both, as a result of ownership, contractual or other financial interests in
the entity. FIN No. 46 was effective upon issuance for certain disclosure
requirements and for variable interest entities created after January 1, 2003,
and in the first fiscal year or interim period beginning after June 15, 2003 for
all other variable interest entities. The Company does not expect any impact on
its financial position, results of operations or cash flows from adoption of FIN
No. 46.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities", which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts. SFAS No. 149 will be effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The provisions of SFAS No. 149 are to be applied
prospectively. The Company does not believe SFAS No. 149 will have an impact on
its financial statements.
7
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its financial
position certain financial instruments with characteristics of both liabilities
and equity. In accordance with this standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. SFAS
No. 150 is effective for all financial instruments entered into on or modified
after May 31, 2003. For existing financial instruments, SFAS No. 150 is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not expect any impact on its financial position, results
of operations or cash flows from adoption of SFAS No. 150.
3. PREFERRED STOCK DIVIDENDS
Through June 30, 2003, the Company had not declared or paid Series A
Preferred Stock dividends totaling approximately $9.0 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
$1.1 million.
4. GOODWILL AND OTHER ASSETS
Other assets include goodwill associated with the acquisition of Steel
City Products in 1969, which had been amortized over 40 years until the complete
adoption of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and
other Intangibles". The unamortized carrying value at June 30, 2003 and December
31, 2002 is approximately $127,000. Accumulated amortization at June 30, 2003
and December 31, 2002 is approximately $128,000. In accordance with the
provisions of SFAS No. 142, goodwill is no longer being amortized. In accordance
with SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets",
the Company performed impairment testing in the second and fourth quarter of
fiscal 2002. There were no impairment losses related to goodwill due to the
application of SFAS No. 142 in fiscal 2002, nor were there any indications of
impairment in the first six months of fiscal 2003.
5. STOCK BASED COMPENSATION:
Until January 1, 2003, the Company accounted for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations.
In recent years, stock-based compensation in the form of options granted
to employees of SCPI were options to purchase stock of SCPI's parent, Sterling.
No stock-based employee compensation cost is reflected in net income, as all
options granted under the Sterling stock option plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation (dollars in thousands, except per share data).
Three months Three months
ended ended
June 30, 2003 June 30, 2002
------------- -------------
Net loss, as reported ................. $ (151) $ (32)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ............ (1) (3)
------ ------
Proforma net loss ..................... $ (152) $ (35)
8
Three months Three months
ended ended
June 30, 2003 June 30, 2002
------------- -------------
Basic and diluted net loss per share:
As reported ........................... $(0.05) $(0.00)
Proforma .............................. $(0.05) $(0.01)
Six months ended Six months ended
June 30, 2003 June 30, 2002
------------- -------------
Net loss, as reported ................. $ (228) $ (41)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ............ (2) (6)
------ ------
Proforma net loss ..................... $ (230) $ (47)
Basic and diluted net loss per share:
As reported ........................... $(0.07) $(0.01)
Proforma .............................. $(0.07) $(0.01)
Effective January 1, 2003, the Company adopted FASB No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure" which amends FASB
Statement No. 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The Company will transition utilizing the prospective method for
options granted after January 1, 2003. The Company does not believe the adoption
of SFAS No. 148 will have a material effect on its financial position or results
of operations.
No Sterling options have been granted to employees of the Company to date
in fiscal 2003.
6. SEGMENT INFORMATION
The Company operates in three 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 Chief
Executive Officer and President, review the operating profitability and working
capital needs of each segment to 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.
THREE MONTHS ENDED
June 30, 2003: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales ................. $3,401 $703 $1,349 $5,453
Operating profit .......... 70 151 57 (92) 186
Interest expense (net) .... 9 15 24
--
Income before tax ......... $ 162
======
Segment assets ............ $6,233 $296 $1,057 $853 $8,439
THREE MONTHS ENDED
June 30, 2002: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales ................. $4,352 $1,417 $1,089 $6,858
Operating profit .......... 195 211 81 (123) 364
Interest expense (net) .... 5 15 20
--
Income before tax ......... $ 344
======
Segment assets ............ $6,606 $ 615 $ 782 $824 $8,827
9
SIX MONTHS ENDED
June 30, 2003: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales ................. $7,046 $1,473 $2,953 $11,472
Operating profit .......... 159 319 166 (188) 456
Interest expense (net) .... 17 30 47
--
Income before tax ......... $ 409
=======
Segment assets ............ $6,233 $ 296 $1,057 $853 $ 8,439
SIX MONTHS ENDED
June 30,2002: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales ................. $8,446 $3,053 $1,907 $13,406
Operating profit .......... 365 506 154 (270) 755
Interest expense (net) .... 11 30 41
--
Income before tax ......... $ 714
=======
Segment assets ............ $6,606 $ 615 $ 782 $824 $ 8,827
7. BORROWING ARRANGEMENT
In July 2001, the Company replaced its existing line of credit with
financing from an institutional lender (the "Revolver"). The Revolver 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 in August 2001, the
Revolver was amended to shorten the term of the line and increase the interest
rate to the prime rate plus 1.5%. Upon satisfaction to the lender of SCPI's
ability to obtain new customers and 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. In
fiscal 2002, further amendments to the Revolver were made to extend the maturity
date to May 31, 2004 and to remove a restriction on the calculation of the
borrowing base. At June 30, 2003, the outstanding balance on the Revolver was
$3.6 million. The rate of interest on the Revolver at June 30, 2003 was the
prime rate plus 1.5% (effective rate of 5.75%). The Revolver is secured by the
assets of SCPI and is subject to the maintenance of certain financial covenants.
After June 30, 2003, the Revolver was amended to extend its expiration to
December 31, 2004 and to reduce the interest rate to prime plus 1%. The Company
received a waiver of its covenants from the lender for the trailing twelve month
period ended June 30, 2003.
At June 30, 2003, the borrowing base under the Revolver was approximately
$3.7 million.
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.
In January 2003 in order to further improve the Company's working capital
position, certain members of SCPI's management and others loaned the Company an
aggregate of $250,000 under short-term promissory notes maturing in July 2003.
The notes bear interest at 10% per annum, payable monthly. The notes may be
repaid after March 31, 2003 but prior to maturity as long as the Company is in
compliance with the Revolver's financial covenants and excess availability of at
least $100,000 remains under the line of credit after repayment of the notes.
The notes were extended to mature December 31, 2003.
10
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 $110 million at
December 31, 2002.
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.
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, 2003, SCPI's debt consisted primarily of revolving debt (the
"Revolver") of approximately $3.6 million, with unused availability under the
borrowing base of approximately $100,000. The Revolver has a maximum
availability of $5.0 million and carries an interest rate of prime plus 1.5%
(effective rate of 5.75%) until July 2003 when the rate was reduced by 0.5%. The
Revolver is secured by the assets of SCPI and is subject to the maintenance of
certain financial covenants. Following an amendment in July 2003, the Revolver
expires on December 31, 2004.
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.
In January 2003 in order to further improve the Company's working capital
position, certain members of SCPI's management and others loaned the Company an
aggregate of $250,000 under short-term promissory notes that mature in July
2003. The notes bear interest at 10% per annum, payable monthly. The notes may
be repaid after March 31, 2003 but prior to maturity as long as the Company is
in compliance with the Revolver's financial covenants and excess availability of
at least $100,000 remains under the line of credit after repayment of the notes.
The notes were extended beyond the maturity date of July 2003 and have not yet
been repaid.
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.
STOCKHOLDERS' DEFICIENCY
Through June 30, 2003, the Company had not declared or paid Series A
Preferred Stock dividends totaling approximately $9.0 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
11
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 $1.1
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, 2003 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 $1.1 million
as an asset, rather than a reduction in stockholders' equity, with the result
that the Company's stockholders' equity at June 30, 2003 would have been
reported at a positive level of approximately $107,000.
CASH FLOWS
Net cash used by operations increased by $622,000 in the six months ended
June 30, 2003 compared with the six months ended June 30, 2002. The increase was
due to higher inventories, reductions in vendor payables, due to reduced vendor
credit and reductions in other accrued expenses offset by reductions in accounts
receivables.
Cash provided by financing activities increased in the current year period
by $711,000, mostly as a result of higher borrowing on the Revolver; borrowings
from a $250,000 short-term note to fund the increased levels of receivables and
inventory and to a decrease in advances to Sterling in the current year.
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); such certification is attached as Exhibit 32.0.
MATERIAL CHANGES IN FINANCIAL CONDITION
As of June 30, 2003, there had been no material changes in the Company's
financial condition from December 31, 2002, other than those caused by seasonal
fluctuations as discussed in Item 7 of the Company's Annual Report on Form 10-K
for fiscal 2002.
12
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Operations include the results of SCPI's operating division, Steel City
Products, a distributor of automotive accessories, non-food pet supplies, and
lawn and garden products, headquartered in McKeesport, Pennsylvania.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
Automotive segment
Sales of automotive accessories decreased by $951,000 in the second
quarter of the current year compared with sales in the same period last year.
Much of the decrease was attributable to the liquidation of Ames Department
Stores, a significant customer in July 2002; sales to Ames in the second quarter
of fiscal 2002 totaled $559,000. In addition, rainy weather throughout the
quarter slowed the purchase of automotive cleaners and waxes. Certain other
customers have changed purchasing practices and are now buying more products
directly from manufacturers.
Gross profit in the second quarter of fiscal 2003 was $536,000, or
15.8% of sales, compared with $724,000, or 16.6% of sales in the prior year. The
decrease of $188,000 was due principally to the reduced sales volumes, offset by
reduced buying, occupancy and warehouse expenses, including fewer overtime
hours, of $45,000.
Operating profit for the automotive segment decreased from the prior
year by approximately $125,000, due primarily to lower sales and margins.
Pet segment
Sales of pet supplies in the second quarter were $703,000, a decrease
of $714,000 compared with the second quarter of the prior year, due principally
to the liquidation in July 2002 of Ames Department Stores. Sales to Ames of pet
supplies in the second quarter of the prior year totaled approximately $673,000.
Gross profit was $210,000, or 29.9% of sales, compared with $317,000,
or 22.4% of sales in the second quarter of the prior year. Sales in the prior
year attributable to Ames were lower margin business than the current year
product mix; in addition due to the loss of the Ames business, operating
expenses were lower in the current year.
The pet segment reported operating profit in the second quarter of
$151,000, a decrease of $60,000 compared with last year, principally due to the
loss of the Ames business.
Lawn segment
Sales of lawn and garden products increased from the second quarter of
the prior year by $260,000, due principally to sales to new customers and
despite rainy and cold weather during much of the second quarter. The Lawn
segment began operations in November 2000.
Gross profit was $102,000, or 7.6% of sales compared with $116,000 or
10.7% of sales in the second quarter of last year. The lawn segment reported an
operating profit of $57,000 in the second quarter, compared with $81,000 last
year.
13
Corporate
Corporate expenses decreased by approximately $31,000 compared with the
second quarter of the prior year, due to lower management fees to the parent
company in the current year. The lower management fees were offset in part by
higher office and accounting expenses.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
Automotive segment
Sales of automotive accessories decreased by $1.4 million in the first six
months of the current fiscal year compared with the same period last year. Much
of the decrease was attributable to the liquidation of Ames Department Stores
and to certain customers having changed purchasing practices and buying more
product directly from manufacturers. Rainy weather throughout much of the second
quarter slowed sales of automotive products, especially cleaners and wax
products.
Gross profit for the first six months of fiscal 2003 was $1.0 million, or
15.0% of sales, compared with $1.3 million, or 15.9% of sales in the prior year.
The decrease of $287,000 was due principally to the reduced sales volumes,
offset somewhat be reduced buying, occupancy and warehouse expenses of $67,000.
Operating profit for the automotive segment decreased from the prior year
by approximately $206,000, due primarily to lower sales and margins.
Pet segment
Sales of pet supplies in the first six months of fiscal 2003 were $1.5
million, a decrease of $1.6 million compared with the first six months of the
prior year, due principally to the liquidation in July 2002 of Ames Department
Stores.
Gross profit was $420,000, or 28.5% of sales, compared with $699,000, or
22.9% of sales in the first half of the prior year. Some of the decrease in
sales volume from Ames was mitigated through margins earned on current product
mix and to lower operating expenses resulting from the loss of the Ames business
in July 2002.
The pet segment reported operating profit in the six months of $319,000, a
decrease of $187,000 compared with last year, principally due to the loss of the
Ames business.
Lawn segment
Sales of lawn and garden products increased from the prior year by $1.0
million, due to increased sales to existing customers of $493,000 and sales to
new customers of $553,000, despite poor weather during the second quarter which
hampered sales. The Lawn segment began operations in November 2000.
For the first six months, lawn segment gross profit was $231,000, or 7.8%
of sales compared with $161,000 or 8.4% of sales last year. The lawn segment
reported an operating profit of $166,000 in the first six months, compared with
$154,000 in the first six months of the prior year.
Corporate
Corporate expenses decreased by approximately $81,000 compared with the
first six months of the prior year, due to higher accounting and legal fees in
the prior year, and to lower management fees to the parent company in the
current year, offset in the current year in part by higher office expenses.
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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 interest rates of 1% would have changed interest expense by
approximately $27,000 for the six months ended June 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures are adequate and effective
in timely alerting them to material information relating to the Company required
to be included in the Company's periodic filings with the SEC.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date the Company carried out its evaluation.
15
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
*31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief
Executive Officer
*31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief
Financial Officer
*32.0 Section 1350 Certification of the Chief Executive Officer
and Chief Financial Officer
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
- ----------
* filed herewith
16
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 10, 2003 By: /s/ Terrance W. Allan
------------------------
Terrance W. Allan
Chief Executive Officer
Date: August 10, 2003 By: /s/ Maarten D. Hemsley
-------------------------
Maarten D. Hemsley
Chief Financial Officer
17