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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, 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
(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 November 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
Condensed Consolidated Balance Sheets at September 30, 2002
and December 31, 2001........................................................ 3
Condensed Consolidated Statements of Operations for the three month
periods ended September 30, 2002 and September 30, 2001... ............... 4
Condensed Consolidated Statements of Operations for the nine month
periods ended September 30, 2002 and September 30, 2001...................... 5
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2002 and September 30, 2001...................... 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)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash ................................................... $ 79 $ 263
Trade accounts receivable, less allowance of $796 and
$588, respectively ..................................... 2,678 1,963
Inventories ............................................ 4,312 3,533
Deferred tax asset ..................................... 170 170
Other .................................................. 101 91
-------- --------
Total current assets .............................. 7,340 6,020
-------- --------
Property and equipment, at cost ............................. 1,329 1,315
Less accumulated depreciation .......................... (1,057) (988)
-------- --------
272 327
Deferred tax asset .......................................... 425 630
Other assets ................................................ 156 157
-------- --------
$ 8,193 $ 7,134
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ....................................... $ 4,539 $ 4,323
Accrued compensation ................................... 323 324
Current maturities of long-term obligations ............ 84 83
Other .................................................. 107 130
-------- --------
Total current liabilities .................... 5,053 4,860
-------- --------
Long-term obligations:
Long-term debt ......................................... 3,596 2,535
Long-term debt, related party .......................... 500 500
Other long-term obligations ............................ 37 100
-------- --------
4,133 3,135
-------- --------
Commitments and contingencies (See Note 4) .................. -- --
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 ................................................ (35,038) (35,422)
Advances to Sterling Construction Company, Inc. ........ (9,829) (9,313)
Treasury stock, at cost, 207 common .................... (1) (1)
-------- --------
Total stockholders' deficiency .................... (993) (861)
-------- --------
$ 8,193 $ 7,134
======== ========
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
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
Sales ....................................................... $ 5,062 $ 4,938
Interest income ............................................. 56 76
Other income ................................................ 40 85
----------- -----------
5,158 5,099
Cost of goods sold, including occupancy and buying expenses . 4,089 3,976
Operating, selling and administrative expenses .............. 972 880
Provision for doubtful accounts ............................. 131 461
Interest expense ............................................ 75 81
----------- -----------
Loss before income taxes .................................... (109) (299)
Income tax (benefit) expense ................................ (28) 1
----------- -----------
Net loss .................................................... (81) (300)
Effect of Series A Preferred Stock dividends ................ (252) (253)
----------- -----------
Net loss attributable to common stockholders ................ $ (333) $ (553)
=========== ===========
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ......................... $ (0.10) $ (0.17)
=========== ===========
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)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
Sales ....................................................... $ 18,468 $ 16,142
Interest income ............................................. 151 264
Other income ................................................ 242 318
----------- -----------
18,861 16,724
Cost of goods sold, including occupancy and buying expenses . 14,804 13,118
Operating, selling and administrative expenses .............. 3,035 3,005
Provision for doubtful accounts ............................. 206 472
Interest expense ............................................ 211 279
----------- -----------
Income (loss) before income taxes ........................... 605 (150)
Income tax expense .......................................... 221 26
----------- -----------
Net income .................................................. 384 (176)
Effect of Series A Preferred Stock dividends ................ (758) (759)
----------- -----------
Net loss attributable to common stockholders ................ $ (374) $ (935)
=========== ===========
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ......................... $ (0.12) $ (0.29)
=========== ===========
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)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income .......................................... $ 384 $ (176)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization .................. 103 125
Deferred tax expense ........................... 205 --
Other changes in operating assets and liabilities:
Accounts receivable ............................ (715) (544)
Inventories .................................... (779) (223)
Accounts payable ............................... 216 1,423
Other .......................................... (57) 191
------- -------
Net cash (used in) provided by operating activities ...... (643) 796
------- -------
Cash flows from investing activities:
Additions to property and equipment ................. (14) (77)
------- -------
Cash flows from financing activities:
Net borrowings under revolving credit agreement ..... 1,061 213
Borrowings under long-term credit agreements ........ -- 46
Principal payments on long-term obligations ......... (62) (56)
Deferred loan costs ................................. (10) (86)
Net increase in advances to Sterling ................ (516) (516)
------- -------
Net cash provided by (used in) financing activities ...... 473 (399)
------- -------
Net (decrease) increase in cash .......................... (184) 320
Cash at beginning of period .............................. 263 47
------- -------
Cash at end of period .................................... $ 79 $ 367
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
STEEL CITY PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 nine months ended
September 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.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses implementation issues related
to SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". This standard was adopted by the Company
on January 1, 2002 and did not have an impact on its consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FAS Statement No. 13, and Technical Corrections
("SFAS 145"). This statement rescinds
7
the requirement in SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, that material gains and losses on the extinguishment of debt be treated as
extraordinary items. The statement also amends SFAS No. 13, Accounting for
Leases, to eliminate an inconsistency between the accounting for sale-leaseback
transactions and the accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. Finally the
standard makes a number of technical corrections to other standards. The
provisions of the statement relating to the rescission of SFAS 4 are effective
for fiscal years beginning after May 15, 2002. Provisions of the statement
relating to the amendment of SFAS 13 are effective for transactions occurring
after May 15, 2002 and the other provisions of the statement are effective for
financial statements issued on or after May 15, 2002. The Company has reviewed
SFAS 145 and its adoption is not expected to have a material effect on its
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities ("SFAS 146"). SFAS 146 applies to costs associated with an exit
activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. SFAS 146
will require a Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. SFAS 146
supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring), and requires liabilities
associated with exit and disposal activities to be expensed as incurred and can
be measured at fair value. SFAS 146 is effective for exit or disposal activities
of the Company that are initiated after December 31, 2002. The Company does not
expect that the adoption of SFAS 146 will have a material effect on its
consolidated financial statements.
4. PREFERRED STOCK DIVIDENDS
Through September 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 $2.4
million.
5. SEGMENT INFORMATION
The Company 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 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
September 30, 2002: Auto Pet Lawn Corporate Total
------- ------- ------- --------- -------
Sales $ 3,857 $ 873 $ 332 $ 5,062
Operating profit/(loss) (26) 154 (21) (197) (90)
Interest income 56 56
Interest expense (4) (71) (75)
-------
Pre-tax loss $ (109)
=======
Segment assets $ 6,171 $ 512 $ 708 $ 802 $ 8,193
8
THREE MONTHS ENDED
September 30, 2001: Auto Pet Lawn Corporate Total
------- ------- ------- --------- -------
Sales $4,127 $640 $171 $ 4,938
Operating profit/(loss) (250) 116 (32) (128) (294)
Interest income 76 76
Interest expense (5) (76) (81)
------
Pre-tax loss $ (299)
======
Segment assets $5,983 $353 $390 $550 $ 7,276
NINE MONTHS ENDED
September 30, 2002: Auto Pet Lawn Corporate Total
------- ------- ------- --------- -------
Sales $12,303 $3,926 $2,239 $18,468
Operating profit/(loss) 339 660 133 (467) 665
Interest income 151 151
Interest expense (15) (196) (211)
-------
Income before tax $ 605
=======
Segment assets $6,171 $512 $708 $802 $ 8,193
NINE MONTHS ENDED
September 30, 2001: Auto Pet Lawn Corporate Total
------- ------- ------- --------- -------
Sales $13,022 $1,989 $1,131 $16,142
Operating profit/(loss) (62) 352 24 (449) (135)
Interest income 264 264
Interest expense (13) (266) (279)
-------
Loss before tax $ (150)
=======
Segment assets $5,983 $353 $390 $550 $ 7,276
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 September 30, 2002, the outstanding balance on the Revolver
was $3.6 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 September 30, 2002, the Company was in compliance with
its financial covenants. In August 2002, the term of the Revolver was extended
to August 31, 2003. The Company has received a commitment letter from the
institutional lender extending the expiration date of the Revolver to May 2004
and removing a limitation on its borrowing base.
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.
9
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 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 September 30, 2002, SCPI's debt consisted primarily of revolving debt
(the "Revolver") of approximately $3.6 million. 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 August 2003. The Company has received a commitment letter
extending the expiration date of the Revolver to May 2004 and which removes a
limitation on the availability of its borrowing base. 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 Note"). The
Subordinated Sterling Note, 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.
STOCKHOLDERS' DEFICIENCY
Through September 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 $2.4
million.
10
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 September 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 $2.4 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 $1.1 million.
CASH FLOWS
Net cash used in operations increased by $1.4 million in the nine months
ended September 30, 2002 compared with the nine months ended September 30, 2001.
The increase was due primarily to increases in accounts receivable and
inventories, partially offset by higher operating profits and increases in
accounts payable.
Cash provided by financing activities increased in the current year period
by $872,000, mostly as a result of increases in borrowing under the Revolver to
finance the working capital requirements.
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 September 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 Company's Transition Report
on Form 10-K for fiscal 2001. The terms of the Revolver provide for its
expiration in August 2003, however the Company received a commitment letter,
which extends the expiration date of the Revolver to May 2004 and which removed
a limitation on the availability of borrowing. The Revolver continues to be
presented as a long-term liability of the Company.
11
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. In July 2002, Ames Department Stores ("Ames"), a significant
customer of SCPI, filed for liquidation under Chapter 7 of the Bankruptcy Code.
The Company had been shipping to Ames, as debtor-in-possession, under restricted
credit terms.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2001
Auto segment
Sales of automotive accessories decreased by $270,000 in the third quarter
of the current year compared with sales in the same period last year. Sales to
existing customers decreased by $356,000, principally as a result of credit
restrictions on automotive shipments to Ames Department Stores, which filed for
bankruptcy in August 2001 and converted the Chapter 11 proceeding into
liquidation under Chapter 7 in July 2002. Reduced sales to this customer alone
accounted for $440,000 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
$86,000 in the third quarter.
Gross profit for the automotive segment in the third quarter of fiscal 2002
was $689,000, or 17.8% of sales, compared with $760,000, or 18.4% in the prior
year period. The reduction in gross profit was primarily the result of the lower
sales volumes.
The automotive segment reported an operating loss of $26,000 for the
quarter, compared with a loss in the third quarter of the prior year of
$250,000. In the prior year the Company reserved approximately $460,000 related
to Ames Chapter 11 filing, whereas in the third quarter of the current year a
reserve of $131,000 was made upon Ames's Chapter 7 filing. Excluding the bad
debt reserves attributable to Ames, the automotive segment reported an operating
profit of $105,000 in the current year period, compared with an operating profit
of $210,000 in the third quarter of the prior year, a decrease of $105,000. The
decrease was related to the lower sales levels and reduced margins on certain
product lines.
Pet segment
Sales of non-food pet supplies in the third quarter were $872,000, an
increase of $232,000 compared with the third quarter of the prior year,
principally due to sales of pet products to Ames prior to its liquidation, and
to increased sales to existing customers.
Gross profit was $259,000 (29.7%), compared with $208,000 (32.5%) in the
third 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 third
quarter of $153,000, compared with an operating profit of $117,000 in the prior
year; the increase was due primarily to the higher sales.
Lawn segment
SCPI began the distribution of lawn and garden products in November 2000.
Shipments of lawn and garden products are seasonal, with slower sales in the
summer months. Sales in the third quarter of fiscal 2002 totaled $332,000, an
increase of $161,000 compared with the third quarter of the prior year. The
increase was due to sales of additional products to existing customers, and
sales to new customers.
Gross profit was $24,000, or 7.2% of sales, compared with a loss in the
prior year of $8,000. The improvement was due to the higher sales volume.
12
The Lawn segment reported an operating loss of $21,000 for the third
quarter, compared with a loss of $32,000 in the prior year.
Corporate
Corporate expenses increased by approximately $84,000 compared with the
third quarter of the prior year, principally due to higher management fees and
reduced interest income.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2001
Auto segment
Sales of automotive accessories decreased by approximately $719,000 in the
first nine months of the current year compared with the same period last year.
Sales to existing customers decreased by $989,000, principally as a result of
credit restrictions on automotive shipments to Ames, which led to a reduction of
approximately $1.3 million in sales to this customer. This was offset partly by
increased sales to existing customers, which purchased additional product lines,
or added locations serviced by the Company. Sales to new customers for the first
nine months of the current fiscal year were $270,000.
Despite the lower sales volume, an increase in gross margins resulted in an
overall improvement in gross profit to $2.4 million in the first nine months of
fiscal 2002, or 19.4% of sales, from $2.3 million in the first nine months of
fiscal 2001, or 17.5% of sales.
Operating profit for the automotive segment increased by $401,000 compared
with the first nine months of the prior year due principally to the higher bad
debt expense in the prior year of $460,000 related to the bankruptcy filing of
Ames.
Pet segment
Sales of non-food pet supplies in the first nine months of fiscal 2002 were
$3.9 million, an increase of approximately $1.9 million compared with the first
nine months of the prior year, due to sales of pet products to Ames prior to
that customer's liquidation in July 2002.
Gross profit improved by $387,000 as a result of the higher sales volumes.
The pet segment reported an operating profit of $660,000 for the first nine
months of the current year, an increase of $307,000 compared with the same
period in the prior year. The increase was due to the higher gross profit;
offset somewhat by higher operating 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 nine months of fiscal 2002 totaled $2.2 million, an increase
of approximately $1.1 million compared with the same period in the prior year,
which was during the segment's first shipping season. The increase was due
principally to sales of additional products to existing customers of $862,000.
Sales to new customers were approximately $246,000.
Gross profit was $217,000, or 9.7% of sales, compared with gross profit in
the prior year period of $76,000, or 6.7% 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 $133,000 for the first
nine months of the current fiscal year, compared with $24,000 in the prior year
period.
13
Corporate
Corporate expenses increased by approximately $52,000 compared with the
first nine months of the prior year, principally due to lower interest income,
offset somewhat by lower interest expense.
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 $29,000 for the nine months ended September 30, 2002.
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.
14
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
*10.3 Fourth Amendment to the Revolving Credit Agreement dated
September 24, 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) Form 8-K filed August 23, 2002.
- ---------------
* filed herewith
15
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: November 11, 2002 By: /s/ Terrance W. Allan
------------------------------------
Terrance W. Allan
Chief Executive Officer
Date: November 11, 2002 By: /s/ Maarten D. Hemsley
------------------------------------
Maarten D. Hemsley
Chief Financial Officer
16
Section 302 Certifications for the Signatures
CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-Q
I, Terrance W. Allan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Steel City
Products, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"), and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's Board of Directors (or persons
performing the equivalent function);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002
By: /s/ Terrance W. Allan
------------------------------------
Chief Executive Officer
17
CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-Q
I, Maarten D. Hemsley, certify that
1. I have reviewed this quarterly report on Form 10-Q of Steel City
Products, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"), and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's Board of Directors (or persons
performing the equivalent function);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002
By: /s/ Maarten D. Hemsley
------------------------------------
Chief Financial Officer
18
Index to Exhibits
Exhibit No. Description
- ----------- -----------
10.3 Fourth Amendment to the Revolving Credit Agreement dated
September 24, 2002 between Steel City Products, Inc. and
National City Bank of Pennsylvania
99.1 Certification of Terrance W. Allen, Chief Executive
Officer, and Maarten D. Hemsley, Chief Financial Officer