1
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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number: 0-2572
STEEL CITY PRODUCTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 55-0437067
------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
1001 SANTERRE DRIVE, GRAND PRAIRIE, TEXAS
75050
--------------------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 660-4499
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------------------------------
(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
----- -----
At July 1, 1996, 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
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
STEEL CITY PRODUCTS, INC.
Balance Sheets at May 31, 1996 (unaudited)
and February 29, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 3
Statements of Operations for the three month periods ended
May 31, 1996 and May 31, 1995 (unaudited) . . . . . . . . . . . . . . . . . .. . 4
Statement of Stockholders' Equity for the three months
ended May 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . .. . 5
Statements of Cash Flows for the three month periods ended
May 31, 1996 and May 31, 1995 (unaudited) . . . . . . . . . . . . . . . . . .. . 6
Notes to financial statements (unaudited) . . . . . . . . . . . . . . . . . . .. . 7
-2-
3
STEEL CITY PRODUCTS, INC.
BALANCE SHEETS
(Dollar amounts in thousands, except share data)
<Caption
ASSETS MAY 31, FEBRUARY 29,
1996 1996
----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents..................................................... $ 2 $ 3
Trade accounts receivable, less allowance of $302 and $419, respectively...... 3,096 2,512
Advances to Oakhurst Company, Inc............................................. 4,468 2,051
Notes receivable - Oakhurst Company, Inc...................................... 257 249
Inventories................................................................... 3,427 4,493
Deferred tax asset............................................................ 75 75
Other......................................................................... 171 287
-------- --------
Total current assets......................... 11,496 9,670
-------- --------
Property and equipment, at cost................................................. 1,998 1,998
Less accumulated depreciation................................................. (802) (752)
-------- --------
1,196 1,246
-------- --------
Deferred tax asset, less valuation allowance of $48,300......................... 2,018 2,018
Notes receivable - Oakhurst Company, Inc., long-term portion.................... 1,216 1,282
Other assets.................................................................... 378 315
-------- --------
3,612 3,615
-------- --------
$ 16,304 $ 14,531
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 3,380 $ 3,650
Accrued compensation.......................................................... 245 272
Current maturities of long-term obligations................................... 276 260
Net obligation of discontinued business segment-current portion............... 482 465
Due to affiliate.............................................................. 148 97
Other......................................................................... 54 175
-------- --------
Total current liabilities.................... 4,585 4,919
-------- --------
Long-term obligations:
Net obligation of discontinued business segment............................... 678 678
Long-term debt................................................................ 3,571 1,428
Other long-term obligations................................................... 103 110
-------- --------
4,352 2,216
-------- --------
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 $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 (Reorganized on August 26, 1989)...................................... (36,507) (36,478)
Treasury stock, at cost, 207 common shares.................................... (1) (1)
-------- --------
Total stockholders' equity................... 7,367 7,396
-------- --------
$ 16,304 $ 14,531
======== ========
The accompanying notes are an integral part of these financial statements.
-3-
4
STEEL CITY PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MAY 31, MAY 31,
1996 1995
------------ ------------
Sales................................. $ 5,096 $ 7,836
Other income.......................... 102 80
--------- ----------
5,198 7,916
--------- ----------
Cost of goods sold, including
occupancy and buying expenses....... 4,162 6,264
Operating, selling and administrative
expenses............................ 998 1,167
Provision for doubtful accounts....... 20 56
Interest expense...................... 112 75
--------- ---------
5,292 7,562
--------- ---------
Net (loss) income before income taxes
and undistributed earnings of
investment in affiliate............. (94) 354
Income tax expense.................... - (143)
Undistributed earnings of investment in
affiliate........................... 65 -
--------- ---------
Net (loss) income .................... (29) 211
Effect of Series A Preferred Stock
dividends........................... (253) (253)
--------- ---------
Net loss attributable to common
stockholders........................ $ (282) $ (42)
========= =========
Net loss per share attributable to
common stockholders after preferred
stock dividends..................... $ (0.09) $ (0.01)
========= =========
Weighted average number of shares
outstanding used in computing
per share amount.................... 3,238,061 3,238,061
========= =========
The accompanying notes are an integral part of these financial statements.
-4-
5
STEEL CITY PRODUCTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MAY 31, 1996
(DOLLARS IN THOUSANDS)
(Unaudited)
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK
------------------- ----------------------- PAID-IN EARNINGS ----------------
SHARES PAR VALUE SHARES PAR VALUE CAPITAL (DEFICIT) SHARES COST
------ --------- ------ --------- ------- --------- --------- ----
Balances, February 29, 1996............ 1,938,526 $19 3,238,061 $32 $43,824 ($36,478) 207 ($1)
Net loss for the period................ (29)
--------- --- --------- --- ------- -------- --- ----
Balances, May 31, 1996................. 1,938,526 $19 3,238,061 $32 $43,824 ($36,507) 207 ($1)
========= === ========= === ======= ======== === ====
The accompanying notes are an integral part of these financial statements.
-5-
6
STEEL CITY PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(Unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MAY 31, MAY 31,
1996 1995
----------- --------------
Cash flows from operating activities:
Net (loss) income....................................... $ (29) $ 211
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization...................... 74 48
Deferred tax expense............................... - 110
Undistributed earnings of investment in affiliate.. (65) -
Other changes in operating assets and liabilities:
Accounts receivable................................ (584) (42)
Inventories........................................ 1,066 575
Accounts payable................................... (270) 342
Other.............................................. 123 126
----------- --------------
Net cash provided by operating activities of:
Continuing operations................................... 315 1,370
Discontinued operations................................. 17 21
----------- --------------
Net cash provided by operating activities.................. 332 1,391
----------- --------------
Cash flows from investing activities:
Advances to Oakhurst Company, Inc....................... (2,417) (1,240)
Collection of note receivable, Oakhurst Company, Inc.... 58 168
Additions to property and equipment..................... - (62)
Other................................................... - (20)
----------- --------------
Net cash used in investing activities...................... (2,359) (1,154)
----------- --------------
Cash flows from financing activities:
Net borrowings under revolving credit agreement......... 2,368 -
Proceeds from long-term borrowings...................... 1,500 -
Proceeds from issuance of capital leases................ - 58
Principal payments on long-term obligations............. (1,716) (145)
Deferred loan costs..................................... (126) -
----------- --------------
Net cash provided by (used in) financing activities........ 2,026 (87)
----------- --------------
Net (decrease) increase in cash and cash equivalents....... (1) 150
Cash and cash equivalents at beginning of period........... 3 29
----------- --------------
Cash and cash equivalents at end of period................. $ 2 $ 179
=========== ==============
The accompanying notes are an integral part of these financial statements.
-6-
7
STEEL CITY PRODUCTS, INC.
THREE MONTHS ENDED MAY 31, 1996
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 29, 1996 ("fiscal
1996") as filed in the Company's Annual Report on Form 10-K.
2. LONG-TERM OBLIGATIONS AND LINE OF CREDIT
At February 29, 1996, Steel City Products, Inc. ("SCPI") had a term
loan (the "Term Loan") with an outstanding balance of approximately $1.7
million, which was secured by a mortgage on SCPI's real estate, guaranteed by
its parent, Oakhurst Company, Inc. ("Oakhurst") and Oakhurst's subsidiaries,
and supported by a pledge of the capital stock of Oakhurst's subsidiaries. At
that date, Oakhurst had borrowings of $3.8 million outstanding under a
revolving credit agreement.
On March 28, 1996, Oakhurst obtained replacement financing from an
institutional lender that provides for a total facility for Oakhurst and its
subsidiaries of $9.5 million, comprised of a new SCPI term loan of $1.5 million
(the "Fixed Asset Loan") and a maximum revolving credit facility of $8 million
(the "Revolver") (collectively, the "Credit Facility"). The amounts
outstanding under the Term Loan and the prior Oakhurst revolving credit
agreement were repaid with part of the proceeds of the refinancing. The Credit
Facility requires separate loans to be made directly to Oakhurst's
subsidiaries, including SCPI. The initial funding of the Revolver resulted in
a loan to SCPI of approximately $2.1 million. SCPI immediately advanced these
funds to Oakhurst to enable it to repay a portion of the amounts outstanding
under the previous revolving debt. The advance bears interest at the same rate
as the Credit Facility. In connection with the new financing, Oakhurst and its
subsidiaries incurred loan costs and fees of approximately $250,000, of which
$126,000 was attributable to SCPI.
Borrowings under the Credit Facility bear interest at the higher of
the Citibank N.A. base rate plus 1.5%, or $5,000 per month, and borrowings
under the Revolver are subject to a borrowing base that is calculated according
to defined levels of Oakhurst's subsidiaries' accounts receivable and
inventories. The Credit Facility contains financial covenants, including among
others, the maintenance of defined subsidiary and consolidated tangible net
worth levels and consolidated current ratio, and limitations on annual cash
dividends.
The Fixed Asset Loan provides for twenty-four monthly principal and
interest payments based on a five year amortization schedule, with the
remaining principal balance due on April 1, 1998. The Fixed Asset Loan permits
prepayment without penalty, and contains a provision for the release of SCPI's
building as collateral on the Credit Facility in the event of a refinancing of
the Fixed Asset Loan, subject to a right of first refusal by the current lender
to refinance the Fixed Asset Loan on the same terms as offered by a new lender.
SCPI participates in a cash concentration system together with the
other subsidiaries of Oakhurst. SCPI's available cash that is transferred to
Oakhurst is reflected as an addition to the advances to Oakhurst.
-7-
8
3. RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". This statement is effective beginning in the
current fiscal year. The new standard defines a fair value method of
accounting for stock options and similar equity instruments. Pursuant to the
new standard, companies are encouraged, but not required, to adopt the fair
value method of accounting for employee stock-based transactions. Companies
are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," but would be required to disclose in a note to the
financial statements pro forma net income and earnings per share as if the
company had applied the new method of accounting.
In the first quarter, the Company elected not to adopt the fair value
method of accounting for employee stock-based transactions and will continue
to account for such transactions under the provisions of APBO No. 25.
-8-
9
ITEM 7. 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 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 and Oakhurst's net
operating tax loss carryforwards which amount to approximately $149 million.
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 also receives cash
payments pursuant to two notes receivable from Oakhurst, and from time to time,
repayments of advances to Oakhurst. 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 together with
all the subsidiaries of Oakhurst. Available cash that is transferred to
Oakhurst is reflected as an addition to the advances to Oakhurst.
At May 31, 1996, SCPI's debt primarily consisted of a term loan of
approximately $1.5 million secured by a mortgage on SCPI's real estate, and
notes payable with outstanding principal balances aggregating approximately
$1.1 million that were issued in connection with the settlement of certain
contingent liabilities related to SCPI's former retail division. SCPI also has
revolving debt of approximately $2.4 million (see below) which was borrowed
primarily to repay prior revolving debt of Oakhurst, and which is offset
entirely by advances receivable from Oakhurst that bear interest at the same
rate as the revolving debt.
Oakhurst and its subsidiaries, including SCPI, have available
financing under a revolving credit facility (the "Revolver") from an
institutional lender up to a maximum of $8 million, subject to defined levels
of the subsidiaries' accounts receivable and inventories. Management believes
that the Revolver will provide adequate funding for SCPI's foreseeable working
capital requirements.
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 7 - "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 May 31, 1996, there had been no material changes in the
Company's financial condition from February 29, 1996, discussed in Item 7 of
the Company's Annual Report on Form 10-K for fiscal 1996.
-9-
10
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 based in
Pittsburgh, Pennsylvania.
THREE MONTHS ENDED MAY 31, 1996 COMPARED WITH THREE MONTHS ENDED MAY 31, 1995
When compared to the first quarter of the prior year, sales decreased
by approximately $2.7 million as a result of the loss of two of SCPI's largest
customers during the prior year. One customer was lost in October 1995 due to
its bankruptcy, while the other changed its source of supply in January 1996.
Sales to these two customers in the prior year first quarter were $3.6 million
in the aggregate. These lost sales were only partially offset by the addition
of new customers during the latter part of the prior year and in the first
quarter of the current year. Sales to new customers in the first quarter of
the current year were approximately $1.1 million.
In the current year, management expects sales to be lower than in
fiscal 1996. As part of a strategic evaluation of the business, SCPI has
reduced expenses so as to mitigate negative cash flow from operations while new
customers and product lines are sought. In the first quarter of the current
year, cash flow from operations was positive, despite the lower sales levels,
but there can be no assurance that SCPI can obtain a sufficient number of new
customers or sufficient levels of new business to return sales and profits to
historical levels.
Other income increased by $22,000 over the first quarter of the prior
year, due to intercompany interest income. However, this gain is offset by
higher interest expense.
Gross profits decreased by $638,000 in the first quarter compared with
the first quarter of the prior year, in relation to the loss of sales to two
major customers previously discussed. Profits derived from new customers were
entirely offset by reduced profits earned on existing customer business, due to
lower gross margins. The lower gross margins resulted primarily from changes
in existing customer product mixes.
Operating, selling and administrative expenses decreased by $169,000
when compared to the prior year first quarter. After excluding royalty
expense, which is offset by investment income, the expense decrease was
approximately $220,000, and resulted principally from management's efforts to
reduce SCPI's expenses and work force in reaction to the lower levels of sales.
-10-
11
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 were filed during the quarter for which
this report is filed.
-11-
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.
STEEL CITY PRODUCTS, INC.
Date: July 12, 1996 By: /s/ BERNARD H. FRANK
----------------------------
Bernard H. Frank
Chief Executive Officer
Date: July 12, 1996 By: /s/ MARK AUERBACH
----------------------------
Mark Auerbach
Chief Financial Officer
-12-
13
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27. Financial Data Schedule