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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, 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 November 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 September 30, 2003
and December 31, 2002.............................................. 3
Condensed Consolidated Statements of Operations for the three month
periods ended September 30, 2003 and September 30, 2002............ 4
Condensed Consolidated Statements of Operations for the nine month
periods ended September 30, 2003 and September 30, 2002............ 5
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2003 and September 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)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash ................................................................... $ 144 $ 296
Trade accounts receivable, less allowance of $978 and $841,
respectively ......................................................... 2,581 2,156
Inventories ............................................................ 4,021 3,141
Deferred tax asset ..................................................... 170 170
Other .................................................................. 70 102
-------- --------
Total current assets ......................................... 6,986 5,865
Property and equipment, at cost ............................................. 1,425 1,416
Less accumulated depreciation .......................................... (1,157) (1,088)
-------- --------
268 328
Deferred tax asset .......................................................... 423 557
Other assets ................................................................ 133 156
-------- --------
$ 7,810 $ 6,906
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ....................................................... $ 4,296 $ 4,120
Accrued compensation ................................................... 318 383
Current maturities of long-term obligations ............................ 26 77
Short-term promissory note, related parties ............................ 250 --
Other .................................................................. 52 159
-------- --------
Total current liabilities .................................... 4,942 4,739
Long-term obligations:
Long-term debt ......................................................... 3,327 2,617
Long-term debt, related party .......................................... 500 500
Other long-term obligations ............................................ 41 57
-------- --------
3,868 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 ................................................................ (34,757) (35,004)
Advances to Sterling Construction Company, Inc. ........................ (10,117) (9,877)
Treasury stock, at cost, 207 common shares ............................. (1) (1)
-------- --------
Total stockholders' deficiency ............................... (1,000) (1,007)
-------- --------
$ 7,810 $ 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
September 30, September 30,
2003 2002
----------- -----------
Sales .................................................. $ 4,746 $ 5,062
Interest income ........................................ 47 56
Other income ........................................... 146 40
----------- -----------
4,939 5,158
Cost of goods sold, including occupancy, buying and
warehouse expenses ................................ 4,072 4,297
Selling and administrative expenses .................... 661 764
Provision for doubtful accounts ........................ 152 131
Interest expense ....................................... 70 75
----------- -----------
Loss before income taxes ............................... (16) (109)
Current state income tax expense ....................... 17 9
Deferred tax benefit ................................... (5) (37)
----------- -----------
Total income tax expense (benefit) ................ 12 (28)
----------- -----------
Net loss ............................................... (28) (81)
Effect of Series A Preferred Stock dividends ........... (255) (252)
----------- -----------
Net loss attributable to common stockholders ........... $ (283) $ (333)
=========== ===========
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ................... $ (0.09) $ (0.10)
=========== ===========
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,
2003 2002
------------- -------------
Sales .................................................. $ 16,218 $ 18,468
Interest income ........................................ 157 151
Other income ........................................... 304 242
----------- -----------
16,679 18,861
Cost of goods sold, including occupancy, buying and
warehouse expenses ................................ 13,836 15,497
Selling and administrative expenses .................... 2,059 2,342
Provision for doubtful accounts ........................ 164 206
Interest expense ....................................... 227 211
----------- -----------
Income before income taxes ............................. 393 605
Current state income tax expense ....................... 12 16
Deferred tax expense ................................... 134 205
----------- -----------
Total income tax expense .......................... 146 221
----------- -----------
Net income ............................................. 247 384
Effect of Series A Preferred Stock dividends ........... (758) (758)
----------- -----------
Net loss attributable to common stockholders ........... $ (511) $ (374)
=========== ===========
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ................... $ (0.16) $ (0.12)
=========== ===========
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,
2003 2002
------------- -------------
Cash flows from operating activities:
Net income ....................................... $ 247 $ 384
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization ................. 94 103
Tax expense ................................... 134 205
Other changes in operating assets and liabilities:
Accounts receivable ........................... (425) (715)
Inventories ................................... (880) (779)
Accounts payable .............................. 176 216
Accrued compensation and other ................ (142) (57)
------- -------
Net cash used in operating activities .................. (796) (643)
------- -------
Cash flows from investing activities:
Additions to property and equipment .............. (9) (14)
------- -------
Cash flows from financing activities:
Net borrowings under revolving credit agreement .. 710 1,061
Deferred loan costs .............................. -- (10)
Net increase in advances to Sterling
Construction Company, Inc. ....................... (240) (516)
Borrowings under short-term notes ................ 250 --
Principal payments on long-term obligations ...... (67) (62)
------- -------
Net cash provided by financing activities .............. 653 473
------- -------
Net decrease in cash ................................... (152) (184)
Cash at beginning of period ............................ 296 263
------- -------
Cash at end of period .................................. $ 144 $ 79
======= =======
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, 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 items 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 31, 2003,
and in the first fiscal year or interim period beginning after December 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 was effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The
7
provisions of SFAS No. 149 are to be applied prospectively. Adoption of SFAS No.
149 has not had a impact on the Company's financial statements.
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. There is no impact on the Company's financial position, results of
operations or cash flows from adoption of SFAS No. 150.
3. PREFERRED STOCK DIVIDENDS
Through September 30, 2003, the Company had not declared or paid Series A
Preferred Stock dividends totaling approximately $9.3 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
$824,000.
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 nine 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).
8
Three months Three months
ended ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss, as reported $ (283) $ (333)
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 $ (284) $ (336)
Basic and diluted net loss per share:
As reported $(0.09) $(0.10)
Proforma $(0.09) $(0.10)
Nine months ended Nine months ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss, as reported $(511) $(374)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (3) (9)
----- -----
Proforma net loss $(514) $(383)
Basic and diluted net loss per share:
As reported $(0.16) $(0.12)
Proforma $(0.16) $(0.12)
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 to Lawn.
THREE MONTHS ENDED
- ------------------
September 30, 2003: Auto Pet Lawn Corporate Total
------ ----- ------ ----------- -------
Net sales $3,549 $774 $423 $4,746
Operating (loss)/profit (143) 167 50 (67) 7
Interest expense (net) 8 15 23
------
Loss before tax $ (16)
======
Segment assets $5,753 $390 $903 $764 $7,810
9
THREE MONTHS ENDED
- ------------------
September 30, 2002: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales $ 3,857 $ 873 $ 332 $ 5,062
Operating (loss)/profit (26) 154 (21) (197) (90)
Interest expense (net) 4 15 19
--------
Loss before tax $ (109)
========
Segment assets $ 6,171 $ 512 $ 708 $ 802 $ 8,193
NINE MONTHS ENDED
- -----------------
September 30, 2003: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales $ 10,595 $ 2,247 $ 3,376 $ 16,218
Operating profit/(loss) 16 486 216 (254) 463
Interest expense (net) 25 45 70
--------
Income before tax $ 393
========
Segment assets $ 5,753 $ 390 $ 903 $ 764 $ 7,810
NINE MONTHS ENDED
- -----------------
September 30, 2002: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales $ 12,303 $ 3,926 $ 2,239 $ 18,468
Operating profit/(loss) 339 660 133 (467) 665
Interest expense (net) 15 45 60
--------
Income before tax $ 605
========
Segment assets $ 6,171 $ 512 $ 708 $ 802 $ 8,193
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 a significant customer, 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 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 September 30, 2003, the outstanding balance on the
Revolver was $3.3 million and the borrowing base was approximately $3.4 million.
The rate of interest on the Revolver at September 30, 2003 was the prime rate
plus 1.0% (effective rate of 5.50%). The Revolver is secured by the assets of
SCPI and is subject to the maintenance of certain financial covenants. At June
30, 2003 and September 30, 2003, the Company breached its financial covenants
under the Revolver. However, the Company expects to maintain its covenants in
the future.
After June 30, 2003, the parties agreed to amend the Revolver to extend
its expiration to December 31, 2004, to reduce the interest rate to prime plus
1% and to waive the maintenance of its covenant restrictions for the trailing
twelve-month period ended June 30, 2003. After September 30, 2003, it was
further agreed to waive the covenant restriction for the trailing twelve month
period ended September 30, 2003 and the two agreements were consolidated into
one amendment.
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-
10
term promissory notes initially 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.
8. SUBSEQUENT EVENT
In October 2003, the Board of Directors of the Company approved a 1 for
300,000 reverse split of the Company's common stock and deregistration of the
common stock as a listed equity security. The transaction was approved by
Sterling, the Company's majority stockholder. Holders of less than one share as
a result of the reverse stock split are entitled to receive cash in lieu of
fractional shares at the rate of $0.0168 per pre-split share (one point six
eight cents).
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.
Since March 2002, cash has been 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 offset the
interest rate incurred by the Company on its revolving line of credit.
At September 30, 2003, SCPI's debt consisted primarily of revolving debt
(the "Revolver") of approximately $3.3 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 1.0%
(current effective rate of 5.50%). The Revolver is secured by the assets of SCPI
and is subject to the maintenance of certain financial covenants. Following an
amendment agreed to 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 initially matured
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
11
$100,000 remains under the line of credit after repayment of the notes. The
maturity date of the notes has been extended to December 31, 2003.
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, 2003, the Company had not declared or paid Series A
Preferred Stock dividends totaling approximately $9.3 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
$824,000.
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 to 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, 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 $824,000 as
an asset, rather than a reduction in stockholders' equity, with the result that
the Company's stockholders' deficiency at September 30, 2003 would have improved
from a deficiency of $1.0 million to a deficiency of $175,000.
CASH FLOWS
Net cash used by operations increased by $153,000 in the nine months ended
September 30, 2003 compared with the nine months ended September 30, 2002. The
increase was due to higher inventories, reductions in 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 $180,000, mostly as a result of borrowings from a $250,000 short-term note to
fund the increased levels of working capital and to a decrease in the amount of
advances to Sterling during the current year compared with the prior 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.
12
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 September 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.
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 SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2002
Automotive segment
Sales of automotive accessories decreased by $308,000 in the third quarter
of the current year compared with sales in the same period last year. Most of
the decrease was attributable to the liquidation of a significant customer, Ames
Department Stores, in July 2002; sales to Ames in the third quarter of fiscal
2002 totaled $285,000.
Gross profit in the third quarter of fiscal 2003 was $446,000, or 12.6% of
sales, compared with $524,000, or 13.6% of sales in the prior year. The decrease
of $78,000 was due principally to the reduced sales volumes, offset by reduced
buying, occupancy and warehouse expenses, including fewer overtime hours, of
$21,000.
Operating profit for the automotive segment decreased from the prior year
by approximately $117,000, due primarily to the lower sales and margins.
Pet segment
Sales of pet supplies in the third quarter were $774,000, a decrease of
$99,000 compared with the third quarter of the prior year, due principally to
the liquidation in July 2002 of Ames. Sales to Ames of pet supplies in the third
quarter of the prior year totaled approximately $171,000. Offsetting the loss of
Ames were increased sales to existing customers that opened new locations.
Gross profit was $212,000, or 27.4% of sales, compared with $232,000, or
26.6% of sales in the third quarter of the prior year. Sales in the prior year
attributable to Ames were generally at lower margins 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 third quarter of
$167,000, an increase of $14,000 compared with the prior year, resulting from
the improved margins and lower operating expenses offsetting the effect of lower
sales.
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Lawn segment
Sales of lawn and garden products increased from the third quarter of the
prior year by $91,000, due principally to sales to new customers, despite the
bankruptcy filing of one customer during the third quarter.
Gross profit was $17,000, or 4.0% of sales compared with $11,000 or 3.3%
of sales in the third quarter of last year. The lawn segment reported an
operating profit of $50,000 in the third quarter, compared with a loss of
$21,000 last year.
Corporate
Corporate expenses decreased by approximately $131,000 compared with the
third quarter of the prior year, due to lower management fees to the parent
company in the current year.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002
Automotive segment
Sales of automotive accessories decreased by $1.7 million in the first
nine 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 products 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 nine months of fiscal 2003 was $1.5 million, or
14.2% of sales, compared with $1.9 million, or 15.2% of sales in the prior year.
The decrease of $365,000 was due principally to the reduced sales volume offset
somewhat by reduced buying, occupancy and warehouse expenses of $88,000.
Operating profit for the automotive segment decreased from the prior year
by approximately $323,000, due primarily to the lower sales and margins.
Pet segment
Sales of pet supplies in the first nine months of fiscal 2003 were $2.2
million, a decrease of $1.7 million compared with the first nine months of the
prior year, due principally to the liquidation in July 2002 of Ames.
Gross profit was $632,000, or 28.1% of sales, compared with $931,000, or
23.7% of sales in the first nine months of the prior year. The improved margin
reflected the fact that lower margins were earned on Ames business in the prior
year period, and lower operating expenses resulting from the loss of the Ames
business, which was labor-intensive.
The pet segment reported operating profits in the nine months of $486,000,
a decrease of $174,000 compared with the prior year, principally due to the loss
of the Ames business.
Lawn segment
Sales of lawn and garden products increased from the prior year by $1.1
million, due to increased sales to existing customers of $235,000 and sales to
new customers of $900,000, despite poor weather during the second quarter that
hampered sales. The Lawn segment began operations in November 2000.
For the first nine months, lawn segment gross profit was $248,000, or 7.3%
of sales compared with $172,000 or 7.7% of sales last year. The lawn segment
reported an operating profit of $216,000 in the
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first nine months, compared with $133,000 in the first nine months of the prior
year, due to the increased sales level.
Corporate
Corporate expenses decreased by approximately $212,000 compared with the
first nine 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.
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 $37,000 for the nine months ended September 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.
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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
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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 10, 2003 By: /s/ Terrance W. Allan
------------------------
Terrance W. Allan
Chief Executive Officer
Date: November 10, 2003 By: /s/ Maarten D. Hemsley
-------------------------
Maarten D. Hemsley
Chief Financial Officer
17