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: August 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.
(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
--------------
(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 October 1, 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
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 August 31, 2001
and February 28, 2001 ............................................................... 3
Condensed Consolidated Statements of Operations for the three month periods
ended August 31, 2001 and August 31, 2000 ........................................... 4
Condensed Consolidated Statements of Operations for the six month
periods ended August 31, 2001 and August 31, 2000 ................................... 5
Condensed Consolidated Statements of Cash Flows for the six month
periods ended August 31, 2001 and August 31, 2000 ................................... 6
Notes to Condensed Consolidated Financial Statements ................................ 7
</Table>
2
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
August 31, February 28,
2001 2001
------------- -------------
ASSETS
Current assets:
Cash ........................................................................... $ 63 $ 83
Trade accounts receivable, less allowance of $586 and $191, respectively ....... 2,407 2,591
Inventories .................................................................... 4,331 4,151
Other .......................................................................... 117 66
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Total current assets ................................................. 6,918 6,891
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Property and equipment, at cost ..................................................... 1,292 1,286
Less accumulated depreciation .................................................. (952) (901)
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340 385
Other assets ........................................................................ 159 162
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$ 7,417 $ 7,438
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ............................................................... $ 5,193 $ 4,389
Accrued compensation ........................................................... 247 356
Current maturities of long-term obligations .................................... 81 77
Revolving line of credit ....................................................... 3,328 --
Other .......................................................................... 108 95
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Total current liabilities ............................................ 8,944 4,930
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Long-term obligations:
Long-term debt ................................................................. 3,464 --
Other long-term obligations .................................................... 128 169
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128 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 $0.01 per share; authorized 5,000,000 shares,
issued 3,238,061 shares ................................................... 32 32
Additional paid-in capital ..................................................... 43,824 43,824
Deficit ........................................................................ (36,195) (36,016)
Advances to Oakhurst Company, Inc. ............................................. (9,334) (8,983)
Treasury stock, at cost, 207 common shares ..................................... (1) (1)
------------- -------------
Total stockholders' deficiency ....................................... (1,655) (1,125)
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$ 7,417 $ 7,438
============= =============
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Three months Three months
Ended Ended
August 31, 2001 August 31, 2000
--------------- ---------------
Sales ................................................................ $ 5,263 $ 5,285
Other income ......................................................... 172 360
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5,435 5,645
Cost of goods sold, including occupancy and buying expenses .......... 4,150 4,238
Operating, selling and administrative expenses ....................... 933 974
Provision for doubtful accounts ...................................... 461 17
Interest expense ..................................................... 94 117
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(Loss)/income before income taxes .................................... (203) 299
Income tax expense ................................................... 1 --
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Net income ........................................................... (204) 299
Effect of Series A Preferred Stock dividends ......................... (255) (255)
------------- -------------
Net loss attributable to common stockholders ......................... $ (459) $ 44
============= =============
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ................................. $ (0.14) $ 0.01
============= =============
Weighted average number of shares outstanding used in
computing per share amounts ..................................... 3,238,061 3,238,061
============= =============
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Six months Six months
Ended Ended
August 31, 2001 August 31, 2000
--------------- ---------------
Sales ........................................................... $ 10,982 $ 11,030
Other income .................................................... 286 482
------------- -------------
11,268 11,512
Cost of goods sold, including occupancy and buying expenses ..... 8,856 8,740
Operating, selling and administrative expenses .................. 1,920 1,970
Provision for doubtful accounts ................................. 469 30
Interest expense ................................................ 198 218
------------- -------------
(Loss)/income before income taxes ............................... (175) 554
Income tax expense .............................................. 4 2
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Net income ...................................................... (179) 552
Effect of Series A Preferred Stock dividends .................... (510) (508)
------------- -------------
Net loss attributable to common stockholders .................... $ (689) $ 44
============= =============
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends ............................ $ (0.21) $ 0.01
============= =============
Weighted average number of shares outstanding used in
computing per share amounts ................................ 3,238,061 3,238,061
============= =============
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
STEEL CITY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Six months Six months
Ended Ended
August 31, 2001 August 31, 2000
--------------- ---------------
Cash flows from operating activities:
Net (loss) income .................................... $ (179) $ 552
Adjustments to reconcile net income to net
cash (used in)/provided by operating
activities:
Depreciation and amortization ..................... 80 69
Bad debt expense ............................... 469 30
Other changes in operating assets and liabilities:
Accounts receivable ............................... (360) (417)
Inventories ....................................... (180) 720
Accounts payable .................................. 804 (1,382)
Other ............................................. (42) (288)
--------------- ---------------
Net cash provided by (used in) operating
activities ................................................. 592 (716)
--------------- ---------------
Cash flows from investing activities:
Additions to property and equipment .................. (6) (46)
--------------- ---------------
Cash flows from financing activities:
Net (repayments) borrowings under revolving
credit agreement ..................................... (136) 1,032
Net increase in advances to Oakhurst ................. (351) (75)
Principal payments on long-term obligations .......... (38) (8)
Deferred loan costs .................................. (81) (31)
--------------- ---------------
Net cash (used in) provided by financing
activities ................................................. (606) 918
--------------- ---------------
Net (decrease) increase in cash ............................ (20) 156
Cash at beginning of period ................................ 83 7
--------------- ---------------
Cash at end of period ...................................... $ 63 $ 163
=============== ===============
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
STEEL CITY PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 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 and six months ended August 31, 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
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.
7
<Table>
<Caption>
Three months ended
August 31, 2001: Auto Pet Lawn Corporate Total
------------ ------------ ------------ ------------ ------------
Net sales $ 4,341 $ 636 $ 286 $ 5,263
Operating profit (191) 149 (11) (56) (109)
Interest expense 94
------------
Income before tax $ (203)
============
Segment assets $ 6,416 $ 365 $ 412 $ 224 $ 7,417
</Table>
<Table>
<Caption>
Three months ended
August 31, 2000; Auto Pet Lawn Corporate Total
------------ ------------ ------------ ------------ ------------
Net sales $ 4,700 $ 585 -- $ 5,285
Operating profit 214 84 -- 118 416
Interest expense 117
------------
Income before tax $ 299
============
Segment assets $ 7,279 $ 320 -- $ 165 $ 7,764
</Table>
<Table>
<Caption>
Six months ended August
31, 2001: Auto Pet Lawn Corporate Total
------------ ------------ ------------ ------------ ------------
Net sales $ 8,938 $ 1,318 $ 726 $ 10,982
Operating profit (60) 225 (3) (139) 23
Interest expense 198
------------
Income before tax $ (175)
============
Segment assets $ 6,416 $ 365 $ 412 $ 224 $ 7,417
</Table>
<Table>
<Caption>
Six months ended August
31, 2000; Auto Pet Lawn Corporate Total
------------ ------------ ------------ ------------ ------------
Net sales $ 9,817 $ 1,213 -- $ 11,030
Operating profit 527 158 -- 87 772
Interest expense 218
------------
Income before tax $ 554
============
Segment assets $ 7,279 $ 320 -- $ 165 $ 7,764
</Table>
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
"Revolver") provided for a maximum line of $5.0 million and carried interest at
a rate of prime plus 1%. The Revolver is subject to a borrowing base, secured by
the accounts receivable, inventory and other assets of SCPI.
Due to the bankruptcy filing of a significant customer in August 2001,
SCPI defaulted on the terms of the Revolver. In order to cure the default, in
September 2001 SCPI and its lender amended the Revolver to reduce the maximum
line to $3.75 million and increase the interest rate to prime plus 1.5%. The
maturity date of the loan was accelerated to April 1, 2002 and compliance under
certain financial covenants was waived for the second quarter. SCPI paid a fee
of $7,500 in connection with the restructuring.
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
8
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 August 31, 2001, SCPI's debt consisted primarily of revolving debt
of approximately $3.3 million, with availability on the Revolver of
approximately $400,000. The revolving debt agreement was entered into in July
2001. Due to the bankruptcy filing of a significant customer of SCPI in August,
which created a default under the terms of the Revolver at SCPI, the Revolver
was amended in September 2001 to reduce the maximum borrowing level, increase
the interest rate and accelerate the term.
Management believes that the Revolver will provide adequate funding for
SCPI's working capital requirements assuming no material deterioration in
current sales levels or gross profit margin.
CASH FLOWS
Net cash provided by operations increased by $1.3 million in the six
months ended August 31, 2001 compared with the six months ended August 31, 2000.
The increase was due primarily to higher vendor payables.
Cash used in financing activities increased in the current year period
by $1.5 million, mostly as a result of a reduction in the Revolver in the
current year to meet the terms of the line of credit.
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.
MATERIAL CHANGES IN FINANCIAL CONDITION
As of August 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. As discussed above, a
significant customer of Company filed for bankruptcy in August 2001, and as a
result, the Company's lender under its Revolver amended the credit agreement in
September 2001. Provisions of the amendment included the acceleration of the
term of the Revolver to expire in April 2002.
9
As a result, the Revolver is presented as a short-term liability, and thus,
working capital for the six months ended August 31, 2001, is negative.
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 AUGUST 31, 2001 COMPARED WITH THREE MONTHS ENDED AUGUST 31,
2000
Automotive segment
Sales of automotive accessories decreased by $360,000 in the second
quarter of the current year compared with sales in the same period last year.
Sales to existing customers decreased by $559,000, principally as a result of
the Chapter 11 bankruptcy filing in August 2001 of a significant customer.
Reduced sales to this customer alone accounted for $310,000 of the decrease in
sales. Offsetting some of this decrease were sales to new automotive customers
of $199,000 in the second quarter.
Gross profit in the second quarter of fiscal 2002 was $852,000, or
19.6% of sales, compared with $866,000, or 18.4% of sales. The decrease of
$14,000 was due to the lower sales volume, but offset by higher margins due to
promotions during the Company's summer road show.
Operating profit for the automotive segment decreased from the prior
year by approximately $405,000, due to an increase in bad debt expense to
provide for the bankruptcy filing of a significant customer.
Pet segment
Sales of non-food pet supplies in the second quarter were $636,000, an
increase of $52,000 compared with the second quarter of the prior year, due to
increased sales to existing customers.
Gross profit was $247,000, an increase of $65,000 compared with the
second quarter of the prior year, due to higher margins earned on certain
products, as well as the higher sales volume. The pet supply segment reported
operating profit in the second quarter of $149,000.
Lawn and garden segment
SCPI began the distribution of lawn and garden products in the third
quarter of fiscal 2001. Sales in the second quarter of fiscal 2002 totaled
$286,000.
Gross profit was $14,000, or 5.0% of sales due to additional costs
associated with starting up this division. The lawn and garden segment reported
an operating loss of $11,000 in the second quarter.
Corporate
Corporate expenses increased by approximately $150,000 compared with
the second quarter of the prior year, principally due to higher fees related to
the revolving line of credit and to the expiration in the second quarter last
year of certain notes related to a 1991 restructuring which management
determined would ultimately not be payable.
10
SIX MONTHS ENDED AUGUST 31, 2001 COMPARED WITH SIX MONTHS ENDED AUGUST 31, 2000
Automotive segment
Sales of automotive accessories decreased by approximately $880,000 in
the first six months of the current year compared with sales in the same period
last year. Sales to existing customers decreased by $1.2 million, 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. In addition, in August 2001 a
significant customer of the Company filed for bankruptcy protection. Reduced
sales to this customer totaled approximately $600,000 for the six months
compared with sales to the same customer last year. Offsetting some of this
decrease were sales to new automotive customers of $320,000 in the first six
months.
Gross profit in the first half of fiscal 2002 was $1.6 million, or
18.3% of sales, compared with $1.9 million, or 19.5% of sales. The decrease of
$279,000 was due to the lower sales volume, combined with lower margins
attributed to a shift in the Company's customer base which were not offset by
summer promotions.
Operating profit for the automotive segment decreased from the prior
year by approximately $586,000, due primarily to lower margins earned and to the
increase in bad debt expense due to the bankruptcy filing of a significant
customer.
Pet segment
Sales of non-food pet supplies in the first six months were $1.3
million, an increase of approximately $100,000 compared with the first six
months of the prior year, due to increased sales to existing customers.
Gross profit was $447,000, an increase of $68,000 compared with the
first six months of the prior year due to the higher revenues and higher margins
on certain products in the second quarter. The pet supply segment reported
operating profit in the first half of $225,000, compared with a profit of
$158,000 in the first six months 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 six months of fiscal 2002 totaled
$727,000.
Gross profit was $47,000, or 7.0% of sales due to additional costs
associated with starting up this division. The lawn and garden segment reported
an operating loss of $3,000 in the first six months.
Corporate
Corporate expenses increased by approximately $220,000 compared with
the first six months of the prior year, principally due to higher fees related
to the revolving line of credit and to the expiration in the second quarter last
year of certain notes related to a 1991 restructuring which management
determined would ultimately not be payable.
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 $9,000 for the six months ended August 31, 2001.
11
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 Amendment to the Revolving Credit Agreement dated
September 12, 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.
----------
* filed herewith
12
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: October 5, 2001 By: /s/ Bernard H. Frank
------------------------------
Bernard H. Frank
Chief Executive Officer
Date: October 5, 2001 By: /s/ Maarten D. Hemsley
------------------------------
Maarten D. Hemsley
Chief Financial Officer
13
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.1 Amendment to the Revolving Credit Agreement dated September
12, 2001 between Steel City Products, Inc. and National City
Bank of Pennsylvania
</Table>