1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1995
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 55-0437067
- --------------------------- ----------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
1001 SANTERRE DRIVE, GRAND PRAIRIE, TEXAS
75050
-----------------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 660-4499
----------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year, if changed since
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 Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
and Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes X No
--- ---
As of September 1, 1995, 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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EXPLANATORY NOTE
This Form 10-Q/A amends Part One, Items 1 and 7; Part Two, Item 6; and the
Company's accompanying financial data schedule of the Company's Form 10-Q for
the quarterly period ended August 31, 1995 that was filed on October 16, 1995.
This Form 10-Q/A reflects changes in the Company's and the Company's parent's
bank financing which occured on January 8, 1996.
Accordingly, this Form 10-Q/A contains a revised Balance Sheet at August 13,
1995, and a revised Financial Data Schedule, both of which reflect
reclassifications of long-term assets and long-term obligations to current
assets and current liabilities, respectively. The Form 10-Q/A also includes
revised footnotes to the financial statements, and Management's Discussion and
Analysis of Financial Condition, with changes to the Liquidity and Capital
Resources section and to the Financing and Line of Credit Section.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
STEEL CITY PRODUCTS, INC.
Balance sheets at August 31, 1995 (unaudited)
and February 28, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of operations for the three months ended August 31, 1995
and the thirteen weeks ended August 27, 1994 (unaudited) . . . . . . . . . . . 5
Statements of operations for the six months ended August 31, 1995
and the twenty-six weeks ended August 27, 1994 (unaudited) . . . . . . . . . . . 6
Statement of stockholders' equity for the six months
ended August 31, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of cash flows for the six months ended August 31, 1995
and the twenty-six weeks ended August 27, 1994 (unaudited) . . . . . . . . . . . 8
Notes to financial statements (unaudited) . . . . . . . . . . . . . . . . . . . . 9
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STEEL CITY PRODUCTS, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
ASSETS August 31, February 28,
1995 1995
------------- ---------------
(Unaudited)
Current assets:
Cash and cash equivalents.......................................................... $ 4 $ 29
Trade accounts receivable, less allowance of $421 and $194, respectively........... 3,339 4,030
Advances to Oakhurst Company, Inc.................................................. 1,558 1,066
Notes receivable - Oakhurst Company, Inc........................................... 1,869 675
Inventories........................................................................ 5,579 6,371
Deferred tax asset................................................................. 177 348
Other.............................................................................. 141 162
------------- ---------------
Total current assets............................................. 12,667 12,681
------------- ---------------
Property and equipment, at cost........................................................ 1,948 2,096
Less accumulated depreciation...................................................... (676) (807)
------------- ---------------
1,272 1,289
------------- ---------------
Deferred tax asset..................................................................... 3,287 3,267
Notes receivable - Oakhurst Company, Inc., long-term portion........................... - 1,531
Other assets........................................................................... 290 272
------------- ---------------
3,557 5,070
------------- ---------------
$ 17,516 $ 19,040
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 4,540 $ 5,677
Accrued compensation............................................................... 368 550
Term loan, current ................................................................ 1,962 585
Current maturities of long-term obligations........................................ 22 6
Net obligation of discontinued business segment-current portion.................... 536 505
Other.............................................................................. 79 76
------------- ---------------
Total current liabilities........................................ 7,507 7,399
------------- ---------------
Long-term obligations:
Net obligation of discontinued business segment.................................... 680 985
Long-term debt..................................................................... - 1,660
Other long-term obligations........................................................ 109 73
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789 2,718
------------- ---------------
Commitments and contingencies..........................................................
Stockholders' equity:
Preferred stock, par value $0.01 per share; authorized
5,000,000 shares, issued 1,938,526 shares;
liquidation preference $5.2282 per share........................................ 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 (Reorganized on August 26, 1989)........................................... (34,654) (34,951)
Treasury stock, at cost, 207 common shares......................................... (1) (1)
------------- ---------------
Total stockholders' equity....................................... 9,220 8,923
------------- ---------------
$ 17,516 $ 19,040
============= ===============
The accompanying notes are an integral part of these financial statements.
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STEEL CITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Three Months Thirteen Weeks
Ended Ended
August 31, August 27,
1995 1994
-------------- ----------------
Sales...................................................... $ 7,078 $ 7,330
Other income............................................... 138 239
----------------- -----------------
7,216 7,569
----------------- -----------------
Cost of goods sold, including occupancy and
buying expenses.......................................... 5,655 5,774
Operating, selling and administrative expenses............. 1,218 1,188
Provision for doubtful accounts............................ 201 -
Interest expense........................................... 72 44
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7,146 7,006
----------------- -----------------
Income from continuing operations before income taxes...... 70 563
Income taxes............................................... (16) 149
----------------- -----------------
Income from continuing operations.......................... 86 414
Income from discontinued operations (net of
$34 income tax expense).................................. - 66
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Net income................................................. 86 480
Effect of Series A Preferred Stock dividends............... (253) (253)
----------------- -----------------
Net income (loss) attributable to common stockholders...... $ (167) $ 227
================= =================
Per share amounts:
Income (loss) from continuing operations
after preferred stock dividends........................ $ (0.05) $ 0.05
Income from discontinued operations...................... - 0.02
----------------- -----------------
Net income (loss) attributable to common stockholders
after preferred stock dividends........................ $ (0.05) $ 0.07
================= =================
Weighted average number of common shares outstanding
used in computing per share amounts...................... 3,238,061 3,170,375
================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
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STEEL CITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Six Months Twenty-six Weeks
Ended Ended
August 31, August 27,
1995 1994
---------------- ----------------
Sales........................................................ $ 14,914 $ 15,804
Other income................................................. 219 271
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15,133 16,075
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Cost of goods sold, including occupancy and
buying expenses............................................ 11,919 12,587
Operating, selling and administrative expenses............... 2,385 2,388
Provision for doubtful accounts.............................. 257 -
Interest expense............................................. 147 75
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14,708 15,050
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Income from continuing operations before income taxes........ 425 1,025
Income taxes................................................. 128 344
--------------- ----------------
Income from continuing operations............................ 297 681
Income from discontinued operations (net of
$34 income tax expense).................................... - 66
--------------- ----------------
Net income................................................... 297 747
Effect of Series A Preferred Stock dividends................. (506) (506)
--------------- ----------------
Net income (loss) attributable to common stockholders........ $ (209) $ 241
=============== ================
Per share amounts:
Income (loss) from continuing operations
after preferred stock dividends.......................... $ (0.06) $ 0.06
Income from discontinued operations........................ - 0.02
--------------- ----------------
Net income (loss) attributable to common stockholders
after preferred stock dividends.......................... $ (0.06) $ 0.08
=============== ================
Weighted average number of common shares outstanding
used in computing per share amounts........................ 3,238,061 3,170,216
=============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
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STEEL CITY PRODUCTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED AUGUST 31, 1995
(Dollars in thousands)
(Unaudited)
Preferred Stock Common Stock Additional Retained Treasury
-------------------- ------------------- Paid-in Earnings ----------------
shares par value shares par value Capital (Deficit) shares cost
------- --------- ------ --------- ---------- ---------- ------ ------
Balances, February 28, 1995.............. 1,938,526 $19 3,238,061 $32 $43,824 ($34,951) 207 ($1)
Net income for the period................ 297
----------- ------- ----------- ----- ---------- ---------- ------ ------
Balances, August 31, 1995................ 1,938,526 $19 3,238,061 $32 $43,824 ($34,654) 207 ($1)
=========== ======= =========== ===== ========== ========== ====== ======
The accompanying notes are an integral part of these financial statements.
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STEEL CITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Six Months Twenty-six Weeks
Ended Ended
August 31, August 27,
1995 1994
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Cash flows from operating activities:
Income from continuing operations........................................................ $ 297 $ 681
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation................................................................. 96 85
Loss on retirement of asset.................................................. 10 -
Deferred tax expense......................................................... 151 308
Other changes in operating assets and liabilities:
Accounts receivable.......................................................... 691 (69)
Inventories.................................................................. 792 314
Accounts payable............................................................. (1,137) (59)
Other........................................................................ (178) 223
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Net cash provided by operating activities of:
Continuing operations.................................................................... 722 1,483
Discontinued operations.................................................................. (274) (286)
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Net cash provided by operating activities................................................... 448 1,197
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Cash flows from investing activities:
Advances to Oakhurst Company, Inc........................................................ (492) (1,456)
Collection of note receivable, Oakhurst Company, Inc..................................... 337 -
Additions to property and equipment...................................................... (27) (238)
Other.................................................................................... 2 3
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Net cash used in investing activities....................................................... (180) (1,691)
------------ --------------
Cash flows from financing activities:
Exercise of warrants..................................................................... - 6
Proceeds from long-term borrowings....................................................... - 2,560
Principal payments on long-term obligations.............................................. (293) (75)
Series A Preferred Stock dividends paid to Oakhurst Company, Inc......................... - (2,765)
------------ --------------
Net cash used in financing activities....................................................... (293) (274)
------------ --------------
Net decrease in cash and cash equivalents................................................... (25) (768)
Cash and cash equivalents at beginning of period............................................ 29 775
------------ --------------
Cash and cash equivalents at end of period.................................................. $ 4 $ 7
============ ==============
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations of $62 were incurred when the Company entered into
three leases for new computer and warehouse equipment.
The accompanying notes are an integral part of these consolidated financial
statements.
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STEEL CITY PRODUCTS, INC.
SIX MONTHS ENDED AUGUST 31, 1995
NOTES TO FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited 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 financial statements be read in conjunction with the audited
financial statements for the fiscal year ended February 28, 1995 ("fiscal
1995") as filed in the Company's Annual Report on Form 10-K.
2. CORPORATE REORGANIZATION
In accordance with a merger transaction in July 1991, Steel City
Products, Inc. ("SCPI") issued to Oakhurst Company, Inc. ("Oakhurst") (formerly
Oakhurst Capital, Inc.) shares of its common stock and Series A Preferred Stock
so that the aggregate fair market value of such stock owned by Oakhurst totaled
approximately 90% of the aggregate fair market value of SCPI. Accordingly,
Oakhurst controls approximately 90% of the outstanding voting power of SCPI.
Under the merger transaction, SCPI is required for a period of five
years following the merger to issue to Oakhurst (or cancel) such number of
shares of Series A Preferred Stock and/or common stock as shall be necessary,
in accordance with periodic determinations, to maintain Oakhurst's aggregate
stock ownership of SCPI at 90%. In accordance with a revaluation of the
Company as of February 27, 1994 completed in May 1994 reflecting a decrease in
the valuation to $10.1 million, the number of Series A Preferred shares
outstanding were reduced to 1,938,526. A revaluation of the Company as of
February 28, 1995 has not yet been completed.
The Series A Preferred Stock carries a dividend rate of $0.5228 per
share and has a redemption price and liquidation preference of $5.2282 per
share plus any accumulated dividends in arrears. Approximately $1.1 million of
undeclared dividends in arrears were outstanding as of August 31, 1995.
3. PROVISION FOR DOUBTFUL ACCOUNTS
During the second quarter of the current fiscal year, management
curtailed the level of credit allowed to Jamesway Corporation ("Jamesway"), one
of SCPI's largest customers, after becoming aware that Jamesway was
experiencing new financial difficulties. Although Jamesway had emerged from
bankruptcy as recently as January 1995, in October, 1995 it again filed for
protection under the U. S. Bankrupcy Code. SCPI included a provision of
$150,000 in its second quarter results in relation to the balances due from
Jamesway.
4. LONG-TERM DEBT AND LINE OF CREDIT
In August 1994, SCPI obtained a term loan in the amount of $2,560,000
(the "Term Loan"), issued in connection with an acquisition by Oakhurst. The
Term Loan is secured by a mortgage on SCPI's real estate, is guaranteed by
Oakhurst and its subsidiaries, supported by a pledge of the capital stock of
Oakhurst's subsidiaries. The Term Loan provides for monthly repayments
beginning in September 1994 and bears interest at a fixed rate of 9.25%.
In August 1994, Oakhurst entered into a two year revolving credit
agreement (the "Oakhurst Credit Agreement") that, until its amendment, carried
a floating interest rate of prime plus 1% and provided for maximum borrowings
of $3 million. The Oakhurst Credit Agreement allows Oakhurst to make advances
to its subsidiaries, including SCPI. The Term Loan and the Oakhurst Credit
Agreement are cross-collateralized, and contain various financial covenants.
As of the end of the second quarter of the current fiscal year, August
31, 1995, SCPI and Oakhurst were in the process of finalizing replacement
covenants with the bank, to reflect an acquisition by Oakhurst that was
completed in the latter part of fiscal 1995, and received waivers in respect of
the existing covenants as to which the companies were not in compliance at the
end of the second quarter.
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The Oakhurst Credit Agreement was amended during the third quarter of
the current fiscal year to provide for maximum borrowings of $4 million,
subject to the borrowing base that is calculated according to the level of the
subsidiaries' accounts receivable, and to eliminate of all of the financial
covenants, except for certain amended subsidiary and consolidated net worth
requirements. The Term Loan was also amended to reflect such revised covenants.
Borrowings under the Oakhurst Credit Agreement bear interest at prime
plus 1.5%, and are secured by the accounts receivable, inventory and capital
stock of Oakhurst's subsidiaries, including SCPI.
At the end of the third quarter of the current fiscal year, November
30, 1995, Oakhurst did not meet the consolidated net worth covenant, as
amended, and requested a modification of such covenant. The modification was
granted by the bank on January 3, 1996, in exchange for Oakhurst's and SCPI's
agreement to accelerate the maturity date of the Term Loan to July 31, 1996,
and to increase the interest rates on borrowings under the Oakhurst Credit
Agreement and the Term Loan by 1% and 1.25%, respectively, effective February
28, 1996. Accordingly, the Term Loan has been presented as a current liability
until replacement financing is finalized.
In December 1995, Oakhurst initiated negotiations with several lenders
to obtain replacement financing and on January 8, 1996 accepted a letter of
intent from an institutional lender which is expected to provide a significant
increase in the level of financing available to Oakhurst and its subsidiaries
based upon essentially similar collateral as provided under the existing bank
financing. Management expects that Oakhurst and SCPI will obtain a letter of
commitment on and close such refinancing prior to February 29, 1996.
5. Notes Receivable - Oakhurst Company, Inc.
Prior to fiscal 1996, SCPI advanced to Oakhurst $2,700,000 (the
"Oakhurst Notes") from its available funds to facilitate acquisitions by
Oakhurst of all the capital stock of H&H Distributors, d/b/a Harry Survis
("H&H") and of Dowling's Fleet Service, Co., Inc. ("Dowling's"). The Oakhurst
Notes bear interest at 9.25% and were repayable quarterly through 1998. In
consideration for SCPI's agreement to the acceleration of the maturity of the
Term Loan, Oakhurst agreed in January 1996 to accelerate the maturity dates of
the Oakhurst Notes to July 31, 1996, or until such time that a refinancing of
the Term Loan occurs, when the agreement allows a similar refinancing of the
Oakhurst Notes with essentially like terms as the refinanced Term Loan.
Accordingly, the long-term portion of the Oakhurst Notes has been presented as
a current asset until the Term Loan is refinanced.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's analysis of the significant factors that
have influenced Steel City Products Inc.'s ("SCPI") financial position and
results of operations during the periods included in the accompanying
consolidated financial statements.
Liquidity and Capital Resources
SCPI is a special, limited purpose, majority-owned subsidiary of
Oakhurst Company, Inc. ("Oakhurst") (formerly Oakhurst Capital, Inc.). SCPI is
expected to concentrate on its historical line of 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 net operating loss
carryforwards which at December 31, 1994 amounted to approximately $148
million.
Financing and Line of Credit
Prior to fiscal 1996, SCPI advanced to Oakhurst $2,700,000 (the
"Oakhurst Notes") from its available funds to facilitate acquisitions by
Oakhurst of all the capital stock of H&H Distributors, d/b/a Harry Survis
("H&H") and of Dowling's Fleet Service, Co., Inc. ("Dowling's"). The Oakhurst
Notes bear interest at 9.25% and were repayable quarterly through 1998.
In August 1994, SCPI obtained a four year new term loan in the amount
of $2,560,000 (the "Term Loan") secured by a mortgage on its real estate and by
pledges of the Oakhurst Notes and by the capital stock of Oakhurst's
subsidiaries, including SCPI. The Term Loan provides for monthly repayments
beginning in September 1995 and bears interest at a fixed rate of 9.25%. The
proceeds of the Term Loan together with SCPI's available funds were used to
fund part of the aforementioned advance to Oakhurst and to satisfy outstanding
preferred dividends to Oakhurst of approximately $2.8 million.
Repayments of the Term Loan are expected to be made from SCPI's
operating cash flow and from loan repayments by Oakhurst on the Oakhurst Notes.
Through August 31, 1995, Oakhurst had made all payments required under the note
agreements.
Pursuant to a two-year Bank Revolving Oakhurst Credit Agreement dated
August 1, 1994 (the "Oakhurst Credit Agreement"), Oakhurst is permitted to make
advances to its subsidiaries, including SCPI, for working capital purposes and
other requirements. During the six months ended August 31, 1995, no advances
were made by Oakhurst to SCPI.
The Term Loan and the Oakhurst Credit Agreement are cross-
collateralized, and contain various financial covenants. At the end of the
current year second quarter, August 31, 1995, SCPI and Oakhurst were in the
process of finalizing replacement covenants with the bank, to reflect a further
acquisition by Oakhurst that was completed in the latter part of fiscal 1995,
and received waivers in respect of the existing covenants as to which the
companies were not in compliance at the end of the second quarter.
The Oakhurst Credit Agreement was amended during the current year
third quarter to provide for maximum borrowings of $4 million, subject to a
borrowing base that is calculated according to the level of the subsidiaries'
accounts receivable, and to eliminate all of the financial covenants except for
certain amended subsidiary and consolidated net worth requirements. The Term
Loan was also amended to reflect such revised covenants. Borrowings under the
amended Oakhurst Credit Agreement bear interest at prime plus 1.5%, and are
secured by the accounts receivable, inventory and capital stock of Oakhurst's
subsidiaries, including SCPI.
At the end of the current year third quarter, November 30, 1995,
Oakhurst did not meet the consolidated net worth covenant, as amended, and
requested a modification of such covenant. The modification was granted by the
bank on January 3, 1996 in exchange for Oakhurst's and SCPI's agreement to
accelerate the maturity date of the Term Loan to July 31, 1996, and to increase
the interest rates on the Oakhurst Credit Agreement and on the Term Loan by 1%
and 1.25%, respectively, effective February 28, 1996. Accordingly, the Term
Loan has been presented as a current liability until replacement financing is
finalized.
In consideration for SCPI's agreement to the acceleration of the Term
Loan, Oakhurst agreed in January 1996 to accelerate the maturity dates of the
Oakhurst Notes to July 31, 1996, or until such time that a refinancing of the
Term Loan occurs, when the agreement allows a similar refinancing of the
Oakhurst Notes with essentially like terms as the refinanced Term Loan. As a
result, the full amount of the Oakhurst Notes has been presented as a current
asset until replacement financing of the Term Loan is complete.
In December 1995, Oakhurst initiated negotiations with several lenders
to obtain replacement financing and on January 8, 1996 accepted a letter of
intent from an institutional lender which is expected to provide a
significant increase in the level of financing available to Oakhurst and its
subsidiaries based upon essentially similar collateral as provided under the
existing bank financing.
The availability of funding to SCPI pursuant to the Oakhurst Credit
Agreement replaced SCPI's own bank revolving credit agreement, which expired by
its terms in fiscal 1995. Management believes that the availability of
borrowings under the Oakhurst Credit Agreement is currently sufficient for
SCPI's seasonal working capital needs, and that Oakhurst & SCPI will secure a
commitment letter on and close the proposed refinancing before February 29,
1996 to replace the existing bank financing.
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SCPI participates in a cash concentration system together with
Oakhurst and it subsidiaries. Available cash that has been transferred to
Oakhurst has been reflected as an addition to the advances to Oakhurst and
bears interest at prime rate.
In anticipation of higher sales volume in the early spring and summer,
Steel City Products carries higher inventories beginning in February. As is
customary in the industry, many suppliers allow extended payment terms for such
inventory build-ups and, in turn, Steel City Products grants extended payment
terms to many of its customers to facilitate their inventory buildup in the
spring.
SIGNIFICANT EVENTS
During the second quarter of the current fiscal year, management
curtailed the level of credit allowed to Jamesway Corporation ("Jamesway"), one
of SCPI's largest customers, after becoming aware that Jamesway was
experiencing new financial difficulties. Although Jamesway had emerged from
bankruptcy as recently as January 1995, on October 6, 1995 it announced that it
is again considering filing for bankruptcy protection. Pending a further
announcement by Jamesway, SCPI suspended shipments to this customer in October
1995, and included a provision of $150,000 in its second quarter results, in
relation to the balance due from Jamesway. The non-collection of this
receivable will not have a significant immediate effect on SCPI's working
capital, but if, as expected, Jamesway closes all its stores, SCPI would suffer
a significant reduction in its sales levels until replacement business could be
developed. In the seven-month period of March through September 1995, SCPI's
sales to Jamesway were about $4 million. Although SCPI recently added two new
large customers (NHD and Ames), the level of sales to such customers is
currently not sufficient to offset the loss of the Jamesway business.
In expectation of the loss of Jamesway's business, in October 1995
SCPI took steps the reduce its inventory levels and to eliminate certain
operating costs and overheads.
THE CREDITOR NOTES
The creditor notes that were issued in connection with bankruptcy of
Retail Acquisition Corp., (the "Creditor Notes") are payable in six equal
annual installments through July 1998, subject to a prepayment provision
whereby if defined cash flow exceeds $900,000, $1,000,000 and $1,100,000 in
each of fiscal 1995, 1996 and 1997, respectively, holders of the Creditor Notes
may tender for prepayment a portion thereof in the amount of the excess defined
cash flow, but not to exceed approximately $400,000 per annum. SCPI did not
meet such prepayment criteria in fiscal 1995. The Creditor Notes have been
discounted using an imputed interest rate of 7.5% and are included in the net
obligation of the discontinued business segment.
TAX LOSS CARRYFORWARDS
At December 31, 1994, SCPI had net operating loss carryforwards (the
"Tax Benefits") of approximately $148 million, which expire in the years 2001
through 2005. A change in control of SCPI or Oakhurst in any three-year period
exceeding 50% may lead to the loss of the majority of the Tax Benefits. In
order to reduce the likelihood of such a change of control occurring, SCPI's
and Oakhurst's Certificates of Incorporation include restrictions on the
registration of transfers of stock resulting in, or increasing, individual
holdings exceeding 4.5% of each company's common stock.
Since the regulations governing the Tax Benefits are highly complex
and may be changed from time to time, and since SCPI's and Oakhurst's attempts
to reduce the likelihood of a change of control occurring may not be
successful, management is unable to determine the likelihood of the continued
availability of the Tax Benefits. However, management believes that the Tax
Benefits are currently available in full and intends to take all appropriate
steps to help ensure that they remain available. Should the Tax Benefits
become
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unavailable to SCPI or Oakhurst, most future income of SCPI and any
consolidated affiliate would not be shielded from federal taxation, thus
reducing funds otherwise available for corporate purposes. In these
circumstances, SCPI would be required to record a significant reduction in the
book value of its deferred tax asset.
The operations of SCPI, while historically profitable, do not at
present enable SCPI to take full advantage of the Tax Benefits. Managements of
SCPI and Oakhurst have been actively exploring growth and acquisition
opportunities in order to increase the level of profits. During fiscal 1994
and 1995, Oakhurst made three such acquisitions; the new subsidiaries are
expected to be profitable and, pursuant to a tax sharing agreement with SCPI,
Oakhurst will pay SCPI 20% of any tax savings realized as a result of the use
of SCPI's tax loss carryforwards.
RESULTS OF OPERATIONS
Continuing operations include the results of SCPI's operating
division, Steel City Products, a distributor of automotive parts and
accessories based in Pittsburgh, Pennsylvania. In the current year three-month
and six-month periods, there were one and two fewer days than in the prior year
periods, respectively; the effect of this on results of operations was not
material.
SIGNIFICANT TRENDS
SCPI's customers are continually affected by changes in the retail
environment, including the recent competitive pressures facing regional mass
merchandisers and the growing influence of automotive specialty chains. These
have led to fluctuations in the level of business that Steel City Products
enjoys with individual customers. In recent years, SCPI has lost some
significant customers and has suffered reductions in business as certain
customers have closed stores in the face of competition, have been forced into
bankruptcy, or have reduced their automotive merchandise selection.
Furthermore, some customers have changed their buying practices to acquire
certain merchandise direct from manufacturers rather than through distributors
such as SCPI.
In July 1993, SCPI's two then-largest customers filed for bankruptcy
protection. One of these customers closed all its stores in December 1993; the
other, Jamesway Corporation ("Jamesway") reorganized and emerged from Chapter
11 in January 1995. Jamesway continued to be one of SCPI's largest customers
throughout this period, but in October 1995, Jamesway announced that it is
again considering filing for bankruptcy protection. If, as expected, Jamesway
closes all its stores, SCPI will suffer a significant reduction in its sales
levels until replacement business could be developed. In the seven-month
period of March through September 1995, SCPI's sales to Jamesway were about $4
million.
In its efforts to offset these trends, SCPI strengthened its sales
team to help identify new customers and better serve existing customers,
expanded its product offerings to certain customers and enlarged the territory
that it serves. In the current year, SCPI has begun offering "hard parts" such
as brake rotors. During the current year second quarter, SCPI added two new
large customers (NHD and Ames), but the level of sales to such customers is
currently not sufficient to offset the loss of the Jamesway business.
Three months ended August 31, 1995 compared with thirteen weeks ended August
27, 1994
Compared with the prior year second quarter, sales decreased by 3.4%,
or $252,000. There were decreases in sales aggregating $1.8 million; $1.5
million of the decrease resulted from lower sales to customers that are facing
increasing competitive pressures, have downsized or eliminated their automotive
departments, or have filed bankruptcy, and $350,000 of the sales decrease was
attributable to two customers that have changed their source of supply. The
decrease was largely offset by increases in sales of $1.6 million, of which new
customers added since the prior year accounted for $1 million. Sales to
Jamesway represented an increase of $220,000 over the prior year, but sales to
this customer were suspended in October 1995.
Gross profit decreased by $133,000 compared with the prior year due in
part to the sales reduction along with a decrease of about 1% in gross margin.
The decreased margin resulted from slightly lower average
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prices to many of SCPI's customers.
Operating, selling and administrative expenses increased over the
prior year second quarter by $30,000, offsetting a reduction realized in the
current year first quarter. Increased selling expenses were partially offset
by lower corporate overhead expense and executive salaries.
There was an increase in the provision for doubtful accounts of
$201,000 compared with the prior year second quarter relating primarily to the
announcement by Jamesway that it may file for bankruptcy protection.
Interest expense reflected an increase over the prior year of $28,000,
but this was offset by interest earned on the Oakhurst Notes.
Six months ended August 31, 1995 compared with twenty-six weeks ended August
27, 1994
Compared with the prior year, sales decreased by 5.6%, or $890,000.
Sales increases aggregating $2.1 resulted primarily from the addition of
several new customers, together with higher sales to several customers,
including Jamesway, but sales to this customer, which represented 22.5% of
total sales in the first half of the current year, were suspended in October
1995. These sales increases were offset by decreases of $3 million, with over
half of the reduction attributed to SCPI's small customer base and to reduced
sales in the Northeast market, resulting from intense competitive pressures
being faced by those customers, along with reduced sales of spring product
lines due to a rainy spring season in the Northeast. The remainder of the
decrease resulted from lower sales to customers that have downsized or
eliminated their automotive departments, have filed bankruptcy, or that have
changed their source of supply.
Gross profit decreased by $222,000 compared with the prior year due
primarily to the sales reduction.
Operating, selling and administrative expenses were essentially at the
same level as last year as lower corporate overhead expense and executive
salaries were offset by higher selling expenses.
There was an increase in the provision for doubtful accounts of
$257,000 when compared with the prior year. The provision was increased by
$150,000 in connection with the balances due from Jamesway and by $107,000 for
the bankruptcies of three of SCPI's small customers that occurred during the
current year.
Interest expense reflected an increase over the prior year of $45,000,
but this was offset by interest earned on the Oakhurst Notes.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
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
27. Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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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.
STEEL CITY PRODUCTS, INC.
Date: January 10, 1996 By: /s/ Bernard H. Frank
-----------------------------------
Bernard H. Frank
Chief Executive Officer
Date: January 10, 1996 By: /s/ Mark Auerbach
-----------------------------------
Mark Auerbach
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
No. Description
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27. Financial Data Schedule