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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: May 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-2572
STEEL CITY PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 55-0437067
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(State of Incorporation) (I.R.S. Employer Identification No.)
2751 CENTERVILLE ROAD, SUITE 3131, WILMINGTON, DELAWARE
19808
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(Address of principal executive offices)
(Zip Code)
(817) 416-0717
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(Registrant's telephone number, including area code)
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(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
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As of July 16, 2001, 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
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL CITY PRODUCTS, INC. AND SUBSIDIARY
<Table>
Condensed Consolidated Balance Sheets at May 31, 2001
and February 28, 2001.................................................... 3
Condensed Consolidated Statements of Operations for the three month
periods ended May 31, 2001 and May 31, 2000.............................. 4
Condensed Consolidated Statements of Cash Flows for the three month
periods ended May 31, 2001 and May 31, 2000............................... 5
Notes to Condensed Consolidated Financial Statements...................... 6
</Table>
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STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
May 31, February 28,
2001 2001
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ASSETS
Current assets:
Cash ............................................................................. $ 116 $ 83
Trade accounts receivable, less allowance of $199 and $191, respectively ......... 3,256 2,591
Inventories ...................................................................... 4,471 4,151
Other ............................................................................ 134 66
Total current assets ................................................... 7,977 6,891
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Property and equipment, at cost ....................................................... 1,286 1,286
Less accumulated depreciation .................................................... (926) (901)
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360 385
Other assets .......................................................................... 161 162
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$ 8,498 $ 7,438
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ................................................................. $ 5,088 $ 4,389
Accrued compensation ............................................................. 256 356
Current maturities of long-term obligations ...................................... 79 77
Other ............................................................................ 43 108
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Total current liabilities .............................................. 5,466 4,930
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Long-term obligations:
Long-term debt ................................................................... 4,054 3,464
Other long-term obligations ...................................................... 149 169
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4,203 3,633
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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 $0.01 per share; authorized 5,000,000 shares,
issued 3,238,061 shares ..................................................... 32 32
Additional paid-in capital ....................................................... 43,824 43,824
Deficit .......................................................................... (35,990) (36,016)
Advances to Oakhurst Company, Inc. ............................................... (9,055) (8,983)
Treasury stock, at cost, 207 common shares ....................................... (1) (1)
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Total stockholders' deficiency ......................................... (1,171) (1,125)
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$ 8,498 $ 7,438
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The accompanying notes are an integral part of these condensed consolidated
financial statements
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STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months Three months
Ended Ended
May 31, 2001 May 31, 2000
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Sales ................................................................. $ 5,719 $ 5,745
Other income .......................................................... 114 121
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5,833 5,866
Cost of goods sold, including occupancy and buying expenses ........... 4,705 4,502
Operating, selling and administrative expenses ........................ 988 995
Provision for doubtful accounts ....................................... 8 13
Interest expense ...................................................... 104 101
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Income before income taxes ............................................ 28 255
Income tax expense .................................................... 3 2
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Net income ............................................................ 25 253
Effect of Series A Preferred Stock dividends .......................... (255) (253)
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Net loss attributable to common stockholders .......................... $ (230) $ --
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Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends .................................. $ (.07) $ --
=========== ===========
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
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STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Three months Three months
Ended Ended
May 31, 2001 May 31, 2000
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Cash flows from operating activities:
Net income ............................................................... $ 25 $ 253
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities:
Depreciation and amortization ......................................... 32 33
Other changes in operating assets and liabilities:
Accounts receivable ................................................... (665) 55
Inventories ........................................................... (320) 350
Accounts payable ...................................................... 699 (376)
Other ................................................................. (218) (226)
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Net cash (used in) provided by operating activities ............................ (447) 89
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Cash flows from investing activities:
Additions to property and equipment ...................................... -- (9)
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Cash flows from financing activities:
Net borrowings under revolving credit volving credit agreement ........... 590 55
Net increase in advances to Oakhurst ..................................... (72) (123)
Principal payments on long-term obligations .............................. (18) (15)
Deferred loan costs ...................................................... (20) --
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Net cash provided by (used in) financing
activities ..................................................................... 480 (83)
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Net increase (decrease) in cash ................................................ 33 (3)
Cash at beginning of period .................................................... 83 7
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Cash at end of period .......................................................... $ 116 $ 4
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The accompanying notes are an integral part of these condensed consolidated
financial statements
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STEEL CITY PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2001
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 fiscal year ended February 28,
2001 ("fiscal 2001") as filed in the Company's Annual Report on Form 10-K.
Operating results for the three months ended May 31, 2001 and 2000 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
becomes effective March 1, 2002, discontinues 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 is currently
evaluating the impact the adoption of these statements will have on its
financial statements.
4. SEGMENT INFORMATION
The Company's historical business has been the distribution of
automotive related accessories. The distribution of pet supplies was added as a
product line in fiscal 1996, and in fiscal 2001, the Company began to distribute
lawn and garden accessories. The Company operates in three operating segments,
automotive products, ("Auto"), non-food pet products, ("Pet") and lawn and
garden products ("Lawn"). Maarten Hemsley, the Chief Financial Officer of the
Company, reviews the operating profitability of each segment and its working
capital needs to allocate financial resources. The non-food pet operating
segment assets and the lawn and garden segment assets consists solely of their
respective inventories.
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Three months ended May
31, 2001: Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales $4,597 $681 $441 $5,719
Operating profit 131 76 8 (83) 132
Interest expense 104
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Income before tax $ 28
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Segment assets $7,470 $380 $466 $182 $8,498
Three months ended May
31, 2000; Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales $5,117 $628 -- $5,745
Operating profit 313 75 -- (32) 356
Interest expense 101
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Income before tax $ 255
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Segment assets $7,045 $305 -- $153 $7,503
5. BORROWING ARRANGEMENT
In July 2001, the Company completed a refinancing of its existing $4.5
million revolving line of credit. The new two-year revolving line of credit (the
"New Revolver") provides for a maximum line of $5.0 million and carries interest
at a rate of prime plus 1%. The New Revolver is subject to a borrowing base,
secured by the accounts receivable, inventory and other assets of SCPI.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Steel City Products, Inc. ("SCPI") is a special, limited purpose,
majority-owned subsidiary of Oakhurst Company, Inc. ("Oakhurst"). SCPI is
expected to concentrate on its historical distribution business, while any
future growth and expansion opportunities are expected to be pursued by one or
more subsidiaries of Oakhurst. Through Oakhurst's ownership of SCPI, primarily
in the form of preferred stock, Oakhurst retains substantially all the value of
SCPI, and receives substantially all of the benefit of operations through
dividends on the preferred stock. Oakhurst's ownership of SCPI is designed to
facilitate the preservation and utilization of SCPI's and Oakhurst's net
operating tax loss carry-forwards that amount to approximately $167 million.
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 to which from time to time SCPI grants extended payment terms for
their seasonal inventory builds, and the amount of credit extended to SCPI by
its suppliers. SCPI participates in a cash concentration system with Oakhurst.
Available cash that is transferred to Oakhurst is reflected as an addition to
advances made to Oakhurst.
At May 31, 2001, SCPI's debt consisted primarily of revolving debt of
approximately $4.1 million, with availability on the revolver of approximately
$400,000. The revolving debt agreement was replaced in July 2001 with a new
revolving line of credit from a new lender (the "New Revolver"). The New
Revolver has a two-year term, expiring in July 2003, and provides for a maximum
facility of $5.0 million, subject to a borrowing base.
Management believes that the New Revolver will provide adequate funding
for SCPI's working capital requirements for at least the next twelve months,
assuming no material deterioration in current sales levels or gross profit
margin.
CASH FLOWS
Net cash used by operations increased by $536,000 in the three months
ended May 31, 2001 compared with the three months ended May 31, 2000. The
increase was due to higher receivables and inventory levels offset by an
increase in vendor payables.
Cash provided by financing activities increased in the current year
period by $563,000, mostly as a result of higher borrowing on the revolving line
of credit in the current year to fund the increased levels of receivables and
inventory.
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
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factors and others are discussed from time to time in the Company's Securities
and Exchange Commission filings.
MATERIAL CHANGES IN FINANCIAL CONDITION
As of May 31, 2001, there had been no material changes in the Company's
financial condition from February 28, 2001, discussed in Item 7 of the Company's
Annual Report on Form 10-K for fiscal 2001
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Operations include the results of SCPI's operating division, Steel City
Products, a distributor of automotive parts and accessories, non-food pet
supplies, and lawn and garden products, headquartered in McKeesport,
Pennsylvania.
THREE MONTHS ENDED MAY 31, 2001 COMPARED WITH THREE MONTHS ENDED MAY 31, 2000
Automotive segment
Sales of automotive accessories decreased by $520,000 in the first
quarter of the current year compared with sales in the same period last year.
Sales to existing customers decreased by $670,000, principally as a result of
customers that are purchasing product directly from the manufacturer, that have
downsized their automotive departments, or are facing increased competition from
discount chains. Offsetting some of this decrease were sales to new automotive
customers of $150,000 in the first quarter.
Gross profit in the first quarter of fiscal 2002 was $780,000, or 16.9%
of sales, compared with $1.0 million, or 20.4% of sales. The decrease of
$264,000 was due to the lower sales volume, combined with lower margins
attributed to a shift in the Company's customer base.
Operating profit for the automotive segment decreased from the prior
year by approximately $182,000, due primarily to lower margins earned, offset by
a reduction in salary expense and fewer sales subject to broker commissions.
Pet segment
Sales of non-food pet supplies in the first quarter were $681,000, an
increase of $53,000 compared with the first quarter of the prior year, due to
increased sales to existing customers.
Gross profit was $200,000, essentially equal to gross profit in the
first quarter last year. The pet supply segment reported operating profit in the
first quarter of $76,000, approximately the same as in the first quarter of the
prior year.
Lawn and garden segment
SCPI began the distribution of lawn and garden products in the third
quarter of fiscal 2001. Sales in the first quarter of fiscal 2002 totaled
$441,000.
Gross profit was $33,000, or 7.5% of sales due to additional costs
associated with starting up this division. The lawn and garden segment reported
an operating profit of $8,000 in the first quarter.
Corporate
Corporate expenses increased by approximately $51,000 compared with the
first quarter of the prior year, due to higher management fees and fees related
to the revolving line of credit.
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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 the interest rate of 1% would have changed interest expense
by approximately $12,000 for the three months ended May 31, 2001.
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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
*10.1 Revolving Credit Agreement dated July 13, 2001
between Steel City Products, Inc. and National City
Bank of Pennsylvania
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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* 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: August 14, 2001 By: /s/ Bernard H. Frank
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Bernard H. Frank
Chief Executive Officer
Date: August 14, 2001 By: /s/ Maarten D. Hemsley
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Maarten D. Hemsley
Chief Financial Officer
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INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
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*10.1 Revolving Credit Agreement dated July 13, 2001
between Steel City Products, Inc. and National City
Bank of Pennsylvania
</Table>
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* filed herewith
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