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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-2572
STEEL CITY PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 55-0437067
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(State of Incorporation) (I.R.S. Employer
Identification No.)
2751 CENTERVILLE ROAD, SUITE 3131, WILMINGTON, DELAWARE
19808
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(Address of principal executive offices)
(Zip Code)
(817) 416-0717
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(Registrant's telephone number, including area code)
3513 CONCORD PIKE, SUITE 3527, WILMINGTON, DELAWARE
19803
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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
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At July 1, 1999, 3,238,061 shares of the Registrant's Common Stock, $0.01
par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED FINANCIAL STATEMENTS
STEEL CITY PRODUCTS, INC.
Condensed Balance Sheets at May 31, 1999
and February 28, 1999 ...................................................3
Condensed Statements of Operations for the three month periods ended
May 31, 1999 and May 31, 1998 ............................................4
Condensed Statements of Cash Flows for the three month periods ended
May 31, 1999 and May 31, 1998 ............................................5
Notes to Condensed Financial Statements ...................................6
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STEEL CITY PRODUCTS, INC.
CONDENSED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS MAY 31, FEBRUARY 28,
1999 1999
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Current assets:
Cash .......................................................................... $ 2 $ 2
Trade accounts receivable, less allowance of $213 and $244, respectively ...... 2,413 2,173
Notes receivable - Oakhurst Company, Inc. ..................................... 643 328
Inventories ................................................................... 4,211 3,947
Other ......................................................................... 144 82
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Total current assets .............................................. 7,413 6,532
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Property and equipment, at cost ..................................................... 1,129 1,128
Less accumulated depreciation ................................................. (736) (710)
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393 418
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Notes receivable - Oakhurst Company, Inc., long-term portion ........................ -- 393
Advances to Oakhurst Company, Inc ................................................... 7,242 7,086
Other assets ........................................................................ 909 856
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8,151 8,335
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$ 15,957 $ 15,285
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 4,802 $ 3,935
Accrued compensation .......................................................... 285 354
Current maturities of long-term obligations ................................... 213 214
Due to affiliate .............................................................. 700 643
Other ......................................................................... 97 129
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Total current liabilities ......................................... 6,097 5,275
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Long-term obligations:
Long-term debt ................................................................ 2,438 2,786
Other long-term obligations ................................................... 227 243
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2,665 3,029
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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 $0.01 per share; authorized
5,000,000 shares; issued 3,238,061 shares .................................. 32 32
Additional paid-in capital .................................................... 43,824 43,824
Deficit (Reorganized on August 26, 1989) ...................................... (36,679) (36,893)
Treasury stock, at cost, 207 common shares .................................... (1) (1)
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Total stockholders' equity ........................................ 7,195 6,981
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$ 15,957 $ 15,285
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The accompanying notes are an integral part
of these condensed financial statements.
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STEEL CITY PRODUCTS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MAY 31, MAY 31,
1999 1998
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Sales ........................................................... $ 5,625 $ 4,855
Other income .................................................... 94 110
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5,719 4,965
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Cost of goods sold, including occupancy and
buying expenses .............................................. 4,456 3,943
Operating, selling and administrative expenses .................. 1,003 964
Provision for doubtful accounts ................................. 21 (5)
Interest expense ................................................ 78 81
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5,558 4,983
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Net income (loss) before undistributed earnings of
investment in affiliate and income tax expense ............... 161 (18)
Undistributed earnings of investment in affiliate ............... 55 52
Income tax expense .............................................. (2) (5)
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Net income ...................................................... 214 29
Effect of Series A Preferred Stock dividends .................... (255) (253)
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Net loss attributable to common stockholders .................... $ (41) $ (224)
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Basic and diluted net loss per share attributable to common
stockholders after preferred stock dividends ................. $ (0.01) $ (0.07)
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Weighted average number of shares outstanding used in
computing basic and diluted per share amounts ................ 3,238,061 3,238,061
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The accompanying notes are an integral part
of these condensed financial statements.
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STEEL CITY PRODUCTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MAY 31, MAY 31,
1999 1998
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Cash flows from operating activities:
Net income ........................................................ $ 214 $ 29
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .................................. 40 27
Undistributed earnings of investment in affiliate .............. (55) (52)
Other changes in operating assets and liabilities:
Accounts receivable ............................................ (240) (183)
Inventories .................................................... (264) 741
Accounts payable ............................................... 867 (363)
Other .......................................................... (69) (1)
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Net cash provided by operating activities of:
Continuing operations ............................................. 493 198
Discontinued operations ........................................... -- 6
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Net cash provided by operating activities ............................ 493 204
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Cash flows from investing activities:
Advances to Oakhurst Company, Inc ................................. (156) (1,136)
Collection of note receivable, Oakhurst Company, Inc. ............. 78 70
Additions to property and equipment ............................... (1) (17)
Other ............................................................. -- (1)
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Net cash used in investing activities ................................ (79) (1,084)
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Cash flows from financing activities:
Net (repayments) borrowings under revolving credit agreement ...... (348) 908
Principal payments on long-term obligations ....................... (17) (7)
Deferred loan costs ............................................... (49) (20)
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Net cash (used in) provided by financing activities .................. (414) 881
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Net increase in cash ................................................. -- 1
Cash at beginning of period .......................................... 2 1
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Cash at end of period ................................................ $ 2 $ 2
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The accompanying notes are an integral part
of these condensed financial statements.
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STEEL CITY PRODUCTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 1999
1. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
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 financial statements be read in conjunction with the audited
financial statements for the fiscal year ended February 28, 1999 ("fiscal 1999")
as filed in the Company's Annual Report on Form 10-K.
Operating results for the three months ended May 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
February 29, 2000.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities" which is
presently required to be adopted in years beginning after June 15, 1999. SCPI
does not anticipate that the adoption of SFAS No. 133 will have a significant
effect on its financial position or results of operations.
3. CHANGE IN ACCOUNTING PRINCIPLE
In the fourth quarter of fiscal 1999, SCPI elected to change its method
of inventory valuation from the last-in, first-out, (LIFO) method to the
first-in, first-out (FIFO) method. As no change in the LIFO reserve was made
during the first three quarters of fiscal 1999, there was no effect on the May
31, 1998 condensed statement of operations or cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Steel City Products, Inc. ("SCPI") is a special, limited purpose,
majority-owned subsidiary of Oakhurst Company, Inc. ("Oakhurst"). SCPI is
expected to concentrate on its historical distribution business, while any
future growth and expansion opportunities are expected to be pursued by one or
more subsidiaries of Oakhurst. Through Oakhurst's ownership of SCPI, primarily
in the form of preferred stock, Oakhurst retains substantially all the value of
SCPI, and receives substantially all of the benefit of operations through
dividends on the preferred stock. Oakhurst's ownership of SCPI is designed to
facilitate the preservation and utilization of SCPI's and Oakhurst's net
operating tax loss carry-forwards which amount to approximately $154 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 also receives cash
payments pursuant to a note receivable from Oakhurst, and from time to time,
repayments of advances to Oakhurst. Interest is charged to Oakhurst on advances
made up to the amount of SCPI's outstanding revolving debt balance. 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 another subsidiary of Oakhurst. Available cash that is
transferred to Oakhurst is reflected as an addition to the advances to Oakhurst.
At May 31, 1999, SCPI's debt consisted primarily of revolving debt of
approximately $2.4 million which is offset entirely by advances receivable from
Oakhurst that bear interest at the same rate as the revolving debt; capital
lease obligations incurred for the purchase of computer and warehouse equipment;
a low-interest subordinated loan incurred for leasehold improvements; and notes
payable that were issued in connection with the settlement of certain contingent
liabilities related to SCPI's former retail division.
Oakhurst and certain of its subsidiaries, including SCPI, have
available financing under a revolving credit facility (the "Revolver") from an
institutional lender up to a maximum of $7 million, subject to a borrowing base
that is calculated according to defined levels of the subsidiaries' accounts
receivable and inventories. At May 31, 1999, the aggregate borrowing base under
the Revolver was $5.6 million. In March 1999, the Revolver was extended to April
2000 and was amended to (i) increase certain borrowing rate percentages at SCPI,
(ii) increase the interest rate to Citibank N.A. base rate plus 2% and (iii)
amend the financial covenants to include a minimum level of Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA"). The Revolver provides
for subsequent renewal terms of one year each upon payment of a renewal fee of
0.5% of the entire line, unless terminated as provided for in the agreement.
Management believes that the Revolver will provide adequate funding for SCPI's
working capital requirements for at least the next twelve months, assuming no
material deterioration in current sales levels or gross profit margin, and
continuation of normal levels of supplier credit.
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YEAR 2000 ISSUE
The Year 2000 issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
use of computer programs which have been written using two digits, rather than
four, to define the applicable year of business transactions.
In fiscal 1999, SCPI acquired a new, integrated, Year 2000 compliant
computer system to completely replace its old information technology system. The
Company is in the process of implementing the system which is now expected to be
completed in September, 1999. There were no critical noninformation technology
systems identified which are not Year 2000 compliant. The Company's Year 2000
plan also includes contacting its major suppliers and other significant third
parties with which it does business to obtain their assurance of Year 2000
compliance. This phase of the Company's Year 2000 plan is expected to be
completed in July, 1999.
Including the cost of the new computer system, which will significantly
enhance its information systems, SCPI has spent to date approximately $220,000
on the Year 2000 issue and believes that the remaining potential cost related to
the Year 2000 issue will be less than $25,000.
Based on correspondence with its customers and suppliers, SCPI believes
that only minor and temporary interruptions in service may be experienced by
itself, its customers or its suppliers regarding Year 2000 issues. In the worst
case, SCPI would be able to continue to conduct its business through the use of
manual systems.
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 May 31, 1999, there had been no material changes in the Company's
financial condition from February 28, 1999, discussed in Item 7 of the Company's
Annual Report on Form 10-K for fiscal 1999.
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 and of non-food pet
supplies, headquartered in McKeesport, Pennsylvania.
THREE MONTHS ENDED MAY 31, 1999 COMPARED WITH THREE MONTHS ENDED MAY 31, 1998
Sales in the first quarter of the current year increased by $770,000
compared with the first quarter of the prior year. Sales to existing automotive
customers increased by $384,000 due primarily to the addition of new stores
through an acquisition by one major customer. Sales to new automotive customers
totaled $231,000 for the quarter.
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Sales of non-food pet products totaled $562,000, an increase of
$155,000 compared with the first quarter of the prior year, due primarily to
increased sales to existing customers.
Gross profits increased by $257,000 in the first quarter of the current
year compared with the first quarter of the prior year, due to the higher sales
volume combined with higher margins earned on automotive products. Some of the
increase in gross profits was offset by an increase of $22,000 in buying and
occupancy expenses, resulting mainly from higher depreciation expense, in turn,
due to the purchase of equipment in fiscal 1999 and to increased warehouse
expenses resulting from the higher sales volume.
Operating, selling and administrative expenses reflected an increase of
$53,000 in the first quarter compared with the prior year. Operating expenses
were higher by $16,000 due to additional overtime needed to fill orders
promptly. This increase was offset by $13,000 from lower selling expenses as a
result of reduced sales staff levels. Administrative expenses increased by
$49,000 due mainly to additional expenses related to the implementation of the
new computer system.
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 of, 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending 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
27. Financial Data Schedule
(b) No reports on Form 8-K were 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: July 8, 1999 By: /s/ Bernard H. Frank
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Bernard H. Frank
Chief Executive Officer
Date: July 8, 1999 By: /s/ Maarten D. Hemsley
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Maarten D. Hemsley
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
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27 Financial Data Schedule