<PAGE> 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 November 30, 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)
---------------------------------------------------------------------------
(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 January 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
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
STEEL CITY PRODUCTS, INC.
<TABLE>
<S> <C>
Balance sheets at November 30, 1995 (unaudited)
and February 28, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of operations for the three months ended November 30, 1995
and the thirteen weeks ended November 26, 1994 (unaudited) . . . . . . . . . . . . . . . . . 4
Statements of operations for the nine months ended November 30, 1995
and the thirty-nine weeks ended November 26, 1994 (unaudited) . . . . . . . . . . . . . . . . 5
Statement of stockholders' equity for the nine months
ended November 30, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Statements of cash flows for the nine months ended November 30, 1995
and the thirty-nine weeks ended November 26, 1994 (unaudited) . . . . . . . . . . . . . . . . 7
Notes to financial statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
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STEEL CITY PRODUCTS, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
ASSETS November 30, February 28,
1995 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 63 $ 29
Trade accounts receivable, less allowance of $406 and $194, respectively... 2,825 4,030
Advances to Oakhurst Company, Inc.......................................... 2,286 1,066
Notes receivable - Oakhurst Company, Inc................................... 1,700 675
Inventories................................................................ 4,451 6,371
Deferred tax asset......................................................... 124 348
Other...................................................................... 121 162
----------- ------------
Total current assets............................................. 11,570 12,681
----------- ------------
Property and equipment, at cost.............................................. 1,991 2,096
Less accumulated depreciation.............................................. (712) (807)
----------- ------------
1,279 1,289
----------- ------------
Deferred tax asset........................................................... 1,801 3,267
Notes receivable - Oakhurst Company, Inc., long-term portion................. - 1,531
Other assets................................................................. 201 272
----------- ------------
2,002 5,070
----------- ------------
$ 14,851 $ 19,040
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 3,486 $ 5,677
Accrued compensation....................................................... 418 550
Term loan, current......................................................... 1,814 585
Current maturities of long-term obligations................................ 32 6
Net obligation of discontinued business segment-current portion............ 558 505
Other...................................................................... 84 76
----------- ------------
Total current liabilities........................................ 6,392 7,399
----------- ------------
Long-term obligations:
Net obligation of discontinued business segment............................ 637 985
Long-term debt............................................................. - 1,660
Other long-term obligations................................................ 109 73
----------- ------------
746 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)................................... (36,161) (34,951)
Treasury stock, at cost, 207 common shares................................. (1) (1)
----------- ------------
Total stockholders' equity....................................... 7,713 8,923
----------- ------------
$ 14,851 $ 19,040
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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STEEL CITY PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Thirteen Weeks
Ended Ended
November 30, November 26,
1995 1994
------------ -------------
<S> <C> <C>
Sales...................................................... $ 5,958 $ 5,576
Other income............................................... 62 288
---------- ----------
6,020 5,864
---------- ----------
Cost of goods sold, including occupancy and
buying expenses.......................................... 4,880 4,470
Operating, selling and administrative expenses............. 1,060 945
Provision for doubtful accounts............................ 10 -
Interest expense........................................... 67 85
---------- ----------
6,017 5,500
---------- ----------
Income from continuing operations before income taxes...... 3 364
Income taxes:
Current tax (benefit) expense..................... (29) 12
Deferred tax expense.............................. 1,539 186
---------- ----------
Income (loss) from continuing operations................... (1,507) 166
Income from discontinued operations (net of
$12 income tax expense).................................. - 24
---------- ----------
Net (loss) income.......................................... (1,507) 190
Effect of Series A Preferred Stock dividends............... (253) (253)
---------- ----------
Net loss attributable to common stockholders............... $ (1,760) $ (63)
========== ==========
Per share amounts:
Loss from continuing operations
after preferred stock dividends........................ $ (0.54) $ (0.03)
Income from discontinued operations...................... - 0.01
---------- ----------
Net loss attributable to common stockholders
after preferred stock dividends........................ $ (0.54) $ (0.02)
========== ==========
Weighted average number of common shares outstanding
used in computing per share amounts...................... 3,238,061 3,137,316
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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STEEL CITY PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Thirty-nine Weeks
Ended Ended
November 30, November 26,
1995 1994
----------- -----------------
<S> <C> <C>
Sales...................................................... $ 20,871 $ 21,380
Other income............................................... 281 558
---------- ----------
21,152 21,938
---------- ----------
Cost of goods sold, including occupancy and
buying expenses.......................................... 16,798 17,057
Operating, selling and administrative expenses............. 3,445 3,347
Provision for doubtful accounts............................ 267 (15)
Interest expense........................................... 214 160
---------- ----------
20,724 20,549
---------- ----------
Income from continuing operations before income taxes...... 428 1,389
Income taxes:
Current tax (benefit) expense..................... (52) 82
Deferred tax expense..................................... 1,690 460
---------- ----------
Income (loss) from continuing operations................... (1,210) 847
Income from discontinued operations (net of
$46 income tax expense).................................. - 90
---------- ----------
Net (loss) income.......................................... (1,210) 937
Effect of Series A Preferred Stock dividends............... (759) (759)
---------- ----------
Net (loss) income attributable to common stockholders...... $ (1,969) $ 178
========== ==========
Per share amounts:
Income (loss) from continuing operations
after preferred stock dividends........................ $ (0.61) $ 0.03
Income from discontinued operations...................... - 0.03
---------- ----------
Net (loss) income attributable to common stockholders
after preferred stock dividends........................ $ (0.61) $ 0.06
========== ==========
Weighted average number of common shares outstanding
used in computing per share amounts...................... 3,238,061 3,186,318
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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STEEL CITY PRODUCTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED NOVEMBER 30, 1995
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Retained Treasury Stock
-------------------- -------------------- Paid-in Earnings ---------------
shares par value shares par value Capital (Deficit) shares cost
--------- --------- --------- --------- ---------- --------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, February 28, 1995................. 1,938,526 $19 3,238,061 $32 $43,824 ($34,951) 207 ($1)
Net loss for the period..................... (1,210)
--------- --- --------- --- ------- -------- --- ---
Balances, November 30, 1995................. 1,938,526 $19 3,238,061 $32 $43,824 ($36,161) 207 ($1)
========= === ========= === ======= ======== === ===
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 7
STEEL CITY PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Thirty-nine Weeks
Ended Ended
November 30, November 26,
1995 1994
-------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations.............................. $ (1,210) $ 847
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation and amortization.................................... 150 141
Loss on retirement of asset...................................... 26 -
Deferred tax expense............................................. 1,690 491
Other changes in operating assets and liabilities:
Accounts receivable.............................................. 1,205 467
Inventories...................................................... 1,920 221
Accounts payable................................................. (2,191) (767)
Other............................................................ (83) 391
------------- -------------
Net cash provided by operating activities of:
Continuing operations................................................. 1,507 1,791
Discontinued operations............................................... (295) (116)
------------- -------------
Net cash provided by operating activities................................ 1,212 1,675
------------- -------------
Cash flows from investing activities:
Advances to Oakhurst Company, Inc..................................... (1,220) (1,694)
Collection of note receivable, Oakhurst Company, Inc.................. 506 -
Additions to property and equipment................................... (86) (284)
Other................................................................. 67 3
------------- -------------
Net cash used in investing activities.................................... (733) (1,975)
------------- -------------
Cash flows from financing activities:
Exercise of warrants.................................................. - 30
Proceeds from long-term borrowings.................................... - 2,560
Principal payments on long-term obligations and term loan............. (445) (220)
Series A Preferred Stock dividends paid to Oakhurst Company, Inc...... - (2,765)
------------- -------------
Net cash used in financing activities.................................... (445) (395)
------------- -------------
Net increase (decrease) in cash and cash equivalents..................... 34 (695)
Cash and cash equivalents at beginning of period......................... 29 775
------------- -------------
Cash and cash equivalents at end of period............................... $ 63 $ 80
============= =============
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations of $76 were incurred when the Company entered
into three leases for new computer and warehouse equipment.
The accompanying notes are an integral part of these financial statements.
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<PAGE> 8
STEEL CITY PRODUCTS, INC.
NINE MONTHS ENDED NOVEMBER 30, 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 $1.4 million of
undeclared dividends in arrears were outstanding as of November 30, 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. Bankruptcy Code. SCPI included a provision of
$150,000 in its current year second quarter results related to the balances due
from Jamesway.
4. DEFERRED TAX ASSET
As of December 31, 1994, SCPI had, for tax reporting purposes, net
operating tax loss carryforwards of approximately $146 million which expire in
the years 2001 through 2005. Under SFAS 109, SCPI is required to recognize
currently the estimated realizable value of the future benefit of its net
operating tax loss carryforwards along with other tax benefits. At February
28, 1995, SCPI had a remaining deferred tax asset of $50.3 million less a
valuation allowance of $46.7 million. The amount of the valuation allowance
was determined by, among other things, management's estimate of SCPI's ability
to utilize the net operating tax loss carryforwards prior to their expiration
based on the then current market conditions and trends. Subsequent
fluctuations in market conditions and trends warrant periodic management
reviews of the recorded valuation allowance to determine if an increase or
decrease in such allowance would be appropriate.
During the current fiscal year, SCPI has begun to experience
significant changes in its customer base. In October 1995, SCPI lost one of
its largest customers to bankruptcy, and was informed by another of its
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<PAGE> 9
largest customers that it had decided to change its source of supply, with such
change expected to be phased in over the next several months. SCPI has not yet
identified replacement customers sufficient to offset the lost business.
Management is currently determining the impact of this lost business on SCPI's
future levels of revenues, and is evaluating future customer and product
opportunities to project whether, and if so when, SCPI may expect a return to
its historical levels of sales. Management is also undertaking a strategic
evaluation of SCPI's operations to determine how they may be restructured to
reflect the current level of SCPI's sales.
While these analysis are expected to be completed during the fourth
quarter of the current fiscal year, management's initial estimate of the
current impact of these events on the deferred tax asset valuation allowance
resulted in an increase of $1.5 million in such allowance with a corresponding
charge to deferred tax expense in the third quarter of the current fiscal year.
If future profit levels exceed current expectations, the consequent reduction
in the valuation allowance would result in a corresponding deferred tax benefit
in future results of operations to the extent of the aforementioned charge to
deferred tax expense.
As of November 30, 1995, SCPI is required to earn approximately $5.7
million of pre-tax income primarily through fiscal 2007 to realize the net
recorded tax benefit, as adjusted.
5. LONG-TERM DEBT AND LINE OF CREDIT
In August 1994, SCPI obtained a four year 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.
The Oakhurst Credit Agreement was amended during the third quarter of
the current fiscal year to reflect an acquisition by Oakhurst that occurred in
the latter part of fiscal 1995. The amendment to the Oakhurst Credit Agreement
provides for maximum borrowings of $4 million, subject to a borrowing base that
is calculated according to the level of the subsidiaries' accounts receivable,
and eliminated 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 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 November 30, 1995, Oakhurst did not meet the amended consolidated
net worth covenant, 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 Term Loan and
on borrowings under the Oakhurst Credit Agreement by 1.25% and 1%,
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 for financing 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.
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<PAGE> 10
6. 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 full amount of the Oakhurst Notes has been presented as a
current asset until the Term Loan is refinanced.
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<PAGE> 11
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 financial
statements.
Liquidity and Capital Resources
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 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").
In August 1994, SCPI obtained a four year 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 the capital stock of Oakhurst's subsidiaries,
including SCPI. The Term Loan provides for monthly repayments beginning in
fiscal 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 November 30, 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 nine months ended November 30, 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. The Oakhurst
Credit Agreement was amended during the third quarter of the current fiscal
year, primarily to reflect a third Oakhurst acquisition that occurred in the
latter part of fiscal 1995. The amendment to the Oakhurst Credit Agreement
provides for maximum borrowings of $4 million, subject to a borrowing base that
is calculated according to the level of the subsidiaries' accounts receivable,
and eliminated all of the financial covenants except for certain amended
subsidiary and consolidated net worth requirements. The Term Loan was also
amended to reflect the 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 November 30, 1995, Oakhurst did not meet the amended consolidated
net worth covenant 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,
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<PAGE> 12
1996, and to increase the interest rates on the Term Loan and borrowings under
the Oakhurst Credit Agreement by 1.25% and 1%, respectively, effective February
28, 1996. Accordingly, the Term Loan has been presented as a current
liability until replacement financing is finalized.
The Oakhurst Notes provide for interest at a fixed rate of 9.25%, and
quarterly repayments over four years beginning in fiscal 1995. 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 a 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 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 for new financing 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 expects that Oakhurst and SCPI will
secure a letter of commitment on and close such refinancing prior to February
29, 1996 to replace the existing bank financing.
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.
THE CREDITOR NOTES
The creditor notes that were issued in connection with the 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, nor does it expect to meet the fiscal 1996
threshold. The Creditor Notes were discounted using an imputed interest rate of
7.5% and are included in the net obligation of the discontinued business
segment.
SIGNIFICANT EVENTS AND 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.
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<PAGE> 13
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 until the second quarter of the current fiscal year,
when management curtailed the level of credit allowed to Jamesway after
becoming aware that it was experiencing new financial difficulties. In October
1995, Jamesway again filed for protection under the U.S. Bankruptcy Code. SCPI
included a provision of $150,000 in its second quarter results in relation to
the balances due from Jamesway. The non-collection of this receivable will not
have a significant effect on SCPI's working capital. In the seven-month period
of March through September 1995, when sales to Jamesway ended, SCPI's sales to
this customer were approximately $3.9 million.
During the third quarter of the current fiscal year, another of SCPI's
largest customers, Forest City Auto Parts, Inc. ("Forest City"), informed SCPI
that it had decided to change its source of supply. Although such change did
not impact the third quarter sales levels, it is expected to be phased in over
the next several months. In the nine month period ending November 30, 1995,
sales to Forest City were approximately $4.3 million.
In its efforts to help 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, and is actively exploring the feasibility of new product
lines. During the current year second quarter, SCPI added two new large
customers (NHD and Ames), but the level of sales to these customers is
currently not sufficient to offset the loss of the Jamesway and Forest City
business. Without further customer additions, sales levels in fiscal 1997 are
expected to decrease by about 25% from the expected current year sales levels.
In anticipation of such sales reduction, management has taken immediate steps
to reduce its inventory levels and to eliminate certain operating expenses and
overheads.
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 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.
SCPI adopted SFAS 109 effective as of the beginning of 1994, when it
recognized a deferred tax asset, net of a valuation allowance, and recorded a
corresponding increase in additional paid-in-capital. The accounting treatment
to increase additional paid-in-capital results from SCPI's quasi-reorganization
accounting in fiscal 1990. The amount of the valuation allowance was
determined by, among other things, management's estimate of the Company's
ability to utilize the net operating tax loss carryforwards prior to their
expiration based on market conditions at that time. Management performs
periodic reviews of the valuation allowance based on the then current market
conditions and trends to determine if an increase or decrease in its estimate
of the recorded valuation allowance would be appropriate. At February 28,
1995, SCPI had a remaining deferred tax asset of $3.6 million, net of the
valuation allowance.
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<PAGE> 14
Because of certain recent events and trends that have affected the
Company's sales and profit levels (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Significant Events and
Trends"), management is currently determining the impact of these changes on
SCPI's future levels of revenues, and is evaluating future customer and product
opportunities to project whether, and if so when, SCPI may expect a return to
its historical levels of sales. Management is also undertaking a strategic
evaluation of SCPI's operations to determine how they may be restructured to
reflect the current level of SCPI's sales.
While these analyses are expected to be completed during the fourth
quarter of the current fiscal year, management's initial estimate of the
current impact of these events on the deferred tax asset valuation allowance
resulted in an increase of $1.5 million in such allowance with a corresponding
charge to deferred tax expense in the third quarter of the current fiscal year.
If future profit levels exceed current expectations, the consequent reduction
in the valuation allowance would result in a corresponding deferred tax benefit
in future results of operations to the extent of the aforementioned charge to
deferred tax expense.
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 nine-month
period, there were two fewer days than in the prior year period, but the effect
of this on results of operations was not material.
Three months ended November 30, 1995 compared with thirteen weeks ended
November 26, 1994
Sales increased by $382,000 in the current year third quarter when
compared to the prior year third quarter. New customers added since the prior
year accounted for $910,000 during the quarter and sales increases to existing
customers were $322,000. Sales to Jamesway represented an increase of $150,000
over the prior year, but sales to this customer ended in September 1995, and
the remaining sales increases to existing customers resulted from expanded
sales efforts. Sales decreases aggregating $850,000 resulted from lower sales
to customers that are facing increasing competitive pressures, have downsized
or eliminated their automotive departments, or that have filed bankruptcy, and
to two customers that have changed their source of supply.
Other income decreased by $226,000 compared with the prior year third
quarter, in which SCPI recovered $175,000 that had been placed into escrow as a
part of SCPI's predecessor's 1989 bankruptcy proceeding. The remaining
decrease is largely attributable to lower interest income earned on the
Oakhurst Notes during the current year third quarter.
Although sales increased, there was a decrease in gross profit of
$28,000 compared with the prior year because of a gross margin reduction of
approximately 2%. A portion of the decrease in gross margin resulted from
higher freight costs, and because fewer purchase discounts were earned from
suppliers, while more sales discounts were allowed to customers. In addition,
average prices to many of SCPI's customers were lower, but the effect of this
was partially offset by changes in the product mix sold to two customers, which
produced increases in gross margin.
Operating, selling and administrative expenses increased over the
prior year third quarter by $115,000. Increased operating and selling expenses
resulted from efforts to increase sales levels, together with expenses
necessary to support the higher sales volume in the current year third quarter,
but this was partially offset by lower administrative expense, reduced profit
sharing contributions, and lower corporate overhead expense and executive
salaries.
Interest expense reflected a decrease over the prior year third
quarter of $18,000, but this savings was entirely offset by lower interest
earned on the Oakhurst Notes.
Although there was a loss from continuing operations in the current
year third quarter, compared with
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<PAGE> 15
income in the prior year, income tax expense increased by $1.7 million because
of a charge to deferred tax expense of $1.5 million that resulted from an
increase in the valuation allowance of the deferred tax asset.
Nine months ended November 30, 1995 compared with thirty-nine weeks ended
November 26, 1994
Compared with the prior year, sales decreased by 2.4%, or $509,000.
Sales increases aggregating $2.9 million resulted primarily from the addition
of several new customers, together with higher sales to several customers,
including Jamesway, but sales to this customer ended in September 1995. These
sales increases were offset by decreases of $3.4 million, with over half of the
reduction attributable to SCPI's smaller customers and to reduced sales in the
Northeast market. These reduced sales resulted from intense competitive
pressures on those customers, and reduced sales of spring product lines due to
a rainy spring season. 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.
Other income decreased by approximately $275,000 compared with the
prior year period, in which SCPI recovered $175,000 that had been placed into
escrow as a part of SCPI's predecessor's 1989 bankruptcy proceeding. There
were decreases of about $51,000 of auto show revenues, but this was partially
offset by decreased corresponding expenses. Interest income earned on the
Oakhurst Notes increased over the prior year, but this interest is offset by
interest expense paid in connection with the Term Loan.
Gross profit decreased by $250,000 compared with the prior year, due
to the sales reduction combined with lower gross margins. This resulted from
higher freight costs, and because fewer purchase discounts were earned from
suppliers, while more sales discounts were allowed to customers. In addition,
lower average prices were charged to many of SCPI's customers.
Operating, selling and administrative expenses increased by $98,000.
Higher operating and selling expenses resulted from efforts to increase sales
levels, but this was partially offset by lower administrative expense, reduced
profit sharing contributions, and lower corporate overhead expense and
executive salaries.
There was an increase in the provision for doubtful accounts of
$282,000 when compared with the prior year. The provision was increased by
$150,000 in connection with the balances due from Jamesway and by $132,000 to
provide for the bankruptcies of four of SCPI's small customers that occurred
during the current year.
Interest expense reflected an increase over the prior year of $54,000,
primarily resulting from interest in connection with the Term Loan. However,
interest on the term loan is offset by interest earned on the Oakhurst Notes.
Although there was a loss from continuing operations in the current
year third quarter, compared with income in the prior year, income tax expense
increased by $1.1 million because of a charge to deferred tax expense of $1.5
million that resulted from an increase in the valuation allowance of the
deferred tax asset.
-15-
<PAGE> 16
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
10.1 Letter agreement dated January 3, 1996 between SCPI
and Integra Bank Pittsburgh amending the Credit
Agreement, dated August 1, 1994 between SCPI and
Integra - filed as exhibit #10.17 to Oakhurst's
Registration Statement on Form S-1, file number
#333-00173, filed on January 12, 1996.
10.2 Letter agreement dated January 3, 1996 between
Oakhurst and Integra Bank Pittsburgh amending
the Credit Agreement, dated August 1, 1994 between
Oakhurst and Integra - filed as exhibit #10.16 to
Oakhurst's Registration Statement on Form S-1, file
number #333-00173, filed on January 12, 1996.
27. Financial Data Schedule (EDGAR transmission only)
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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<PAGE> 17
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 18, 1996 By: /s/ Bernard H. Frank
------------------------------------
Bernard H. Frank
Chief Executive Officer
Date: January 18, 1996 By: /s/ Mark Auerbach
------------------------------------
Mark Auerbach
Chief Financial Officer
-17-
<PAGE> 18
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
10.1 Letter agreement dated January 3, 1996 between SCPI and
Integra Bank Pittsburgh amending the Credit Agreement, dated
August 1, 1994 between SCPI and Integra - filed as exhibit
#10.17 to Oakhurst's Registration Statement on Form S-1,
file number #333-00173, filed on January 12, 1996.
10.2 Letter agreement dated January 3, 1996 between Oakhurst and
Integra Bank Pittsburgh amending the Credit Agreement, dated
August 1, 1994 between Oakhurst and Integra - filed as exhibit
#10.16 to Oakhurst's Registration Statement on Form S-1, file
number #333-00173, filed on January 12, 1996.
27. Financial Data Schedule (EDGAR transmission only)
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