<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3513 CONCORD PIKE, SUITE 3527
WILMINGTON, DELAWARE 19803
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 478-9170
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
COMMON STOCK, $0.01 PAR VALUE PER SHARE NONE
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value at May 1, 1999 of the voting stock held by non-affiliates
of the registrant: $96,522
At May 1, 1999 the registrant had 3,238,061 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
BACKGROUND OF STEEL CITY PRODUCTS, INC.
Steel City Products, Inc. ("SCPI" or "the Company") was incorporated in
West Virginia in 1959, and in 1963 became known as Heck's, Inc. In 1969, the
"Steel City Products" automotive distribution business was acquired. The Company
was reincorporated in Delaware under the name Hallwood Industries Incorporated
in 1990, and in January 1993 the Company changed its name to Steel City
Products, Inc.
Prior to 1990, Heck's, Inc. operated a Retail Division consisting of a
chain of discount department stores. In September 1990, all of the assets of the
Retail Division were sold to Retail Acquisition Corp. ("RAC").
The operations of SCPI comprise the distribution of automotive parts
and accessories under the name "Steel City Products". In 1996, SCPI established
a division to distribute non-food pet supplies.
FORMATION OF OAKHURST COMPANY, INC.
Oakhurst Company, Inc. ("Oakhurst") was formed as part of a merger
transaction in 1991, in which SCPI became a majority-owned subsidiary of
Oakhurst. In accordance with the merger agreement, Oakhurst owns 10% of the
outstanding common stock of SCPI and all of the SCPI Series A Preferred Stock,
with the result that the aggregate fair market value of SCPI's common stock and
Series A Preferred Stock owned by Oakhurst is equal to approximately 90% of the
aggregate fair market value of all the issued and outstanding capital stock of
SCPI; consequently, Oakhurst owns 90% of the voting stock of SCPI.
Pursuant to the merger, SCPI became a special, limited purpose
subsidiary that concentrates on its historical distribution business, while any
future growth and expansion opportunities are expected to be pursued by Oakhurst
or its subsidiaries. Because Oakhurst's ownership of SCPI is primarily in the
form of preferred stock, Oakhurst retains the value of SCPI, and Oakhurst's
income from SCPI is determined by the Series A Preferred stock dividends.
Oakhurst's ownership of SCPI facilitates the preservation and utilization of
SCPI's and Oakhurst's net operating tax loss carry-forwards, which amount to
approximately $154 million at February 28, 1999.
OPERATIONS
SCPI primarily distributes automotive accessories. These products
include functional and decorative car and truck accessories (such as floor mats,
seat covers, mirrors, running boards, lights and wheel covers) car care products
(including waxes and paints) chemicals (such as antifreeze, windshield washer
fluid and motor oil) and car repair and maintenance items (including spark
plugs, windshield wipers, and air and oil filters). In fiscal 1997, SCPI
introduced non-food pet supplies to its merchandise selection. Although pet
supplies are not typical of SCPI's historical merchandise mix, management
determined that the availability of existing customers which sell both pet
supplies and automotive accessories, combined with SCPI's distribution expertise
and infrastructure, offered an opportunity to increase sales by opening a pet
supplies division. SCPI's operations were conducted from the same facility in
Pittsburgh until December 1997, when the building was sold, and SCPI's
operations were moved to a newer, leased facility in McKeesport, Pennsylvania.
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Certain of SCPI's business is performed on a service basis, which
involves visits by its sales personnel to customers' stores to count and
re-order merchandise; generally, these re-orders are transmitted electronically
to SCPI's offices in McKeesport. Certain customers electronically transmit their
orders to SCPI's headquarters. Because many orders are generated electronically
and are shipped within a few days of receipt, the size of SCPI's order backlog
is not relevant to an understanding of the business. Shipments are either made
directly to each of the customers' stores or are pre-packed for onward shipment
to stores by the retailers' own distribution centers. SCPI also provides price
ticketing and associated services to those of its customers who request such
services.
Sources of Supply
SCPI acquires its merchandise from a large number of suppliers, none of
which accounts for more than 15% of its revenues. Many of the products sold by
SCPI carry nationally-advertised brand names, but because of the diversity and
number of suppliers and products carried, the business is not generally
dependent on the continued availability of individual products or continued
dealings with existing supply sources. From time to time, market or seasonal
conditions may affect the availability of certain merchandise, but not to the
extent that the Company believes would materially impact its business.
SCPI generally carries in inventory only those products that its
customers have identified as necessary for their own merchandising needs, and
does not acquire significant quantities of other merchandise.
Seasonality
SCPI's automotive business is seasonal, being slower in the early
winter months than at other times of the year. In anticipation of higher sales
volume in the spring and summer, SCPI carries higher automotive inventories,
beginning in February. As is customary in the automotive aftermarket, many
suppliers allow extended payment terms for such inventory build-ups and in turn,
SCPI grants extended payment terms to many of its customers to facilitate their
inventory build-ups.
SCPI's pet supply business experiences different seasonal trends from
its automotive business, but the effect of this is not expected to be material
until this business more fully develops.
SCPI's needs for working capital are affected by these seasonal
fluctuations (see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources").
Customer Base
SCPI's customers include general merchandise retail chains, automotive
specialty stores, supermarket chains, hardware stores, variety stores and other
automotive accessory distributors. Most customers are based in the northeastern
United States, although stores operated by some customers are located outside of
that area. There are no foreign sales.
SCPI's customers are continually affected by changes in the retail
environment, including the competitive pressures facing regional mass
merchandisers and the growing influence of national automotive specialty chains.
These have led to fluctuations in the level of business that SCPI enjoys with
individual customers. 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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In its efforts to offset these trends, SCPI has added new customers,
expanded its product offerings to certain customers, enlarged the territory that
it serves and introduced new categories of products. These efforts have helped
to stabilize SCPI's customer base. As such, sales in fiscal 1999 increased
slightly from sales in fiscal 1998 and 1997. SCPI continues to pursue new
customer relationships that, if concluded, could increase sales in fiscal 2000;
however, there can be no assurance that such new business can be secured.
The following table shows sales to SCPI's customers that individually
accounted for more than 10% of sales during any of the latest three fiscal years
(dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
February 28, 1999 February 28, 1998 February 28, 1997
------------------ ---------------- -----------------
% of % of % of
Sales Sales Sales Sales Sales Sales
-------- ------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Ames $1,955 11% $2,178 12% $2,290 13%
</TABLE>
None of SCPI's business is based on government contracts, and there are
no long-term sales contracts with any customers.
Competition
Both the automotive parts and accessories distribution industry and the
non-food pet supply industry are highly competitive, with several similar
companies operating in SCPI's market place, and many of SCPI's suppliers also
offer their products directly to retailers. Management is unable to quantify
SCPI's relative size in the distribution industry or in relation to its
competitors. SCPI competes on the basis of the breadth of merchandise offered,
price, level of service, order fill rates and order turnaround times. Management
believes that SCPI's long history, good reputation, experienced management,
product selection, pricing, service levels and high order fill rates enable it
to compete favorably with other distributors.
Regulation
SCPI's management does not anticipate that existing or known pending
environmental legislation or other regulations will require major capital
expenditures or will affect its operations.
Employees
SCPI employs approximately 55 persons, of whom about 45 are employed in
the headquarters office and distribution facility in McKeesport. Most of the
others are field personnel. Senior executives, including Bernard H. Frank (a
founder of Steel City Products in 1947) have many years of service with SCPI and
some are employed under long-term contracts.
Warehouse and certain office employees of SCPI are represented by Local
636 of the International Brotherhood of Teamsters. SCPI believes that it has
experienced generally good labor relations, and no significant labor disputes
have affected its business in recent years. Renewal negotiations of the union
agreement have continued beyond its expiration in November 1995.
ITEM 2. PROPERTIES
SCPI has operated its business from a leased, 67,000 square-foot
building located in an industrial park in McKeesport, Pennsylvania since
December 1997.
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ITEM 3. 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
fourth quarter of the fiscal year ended February 28, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As a result of the merger transaction with Oakhurst in fiscal 1992 (see
Item 1, "Business - Formation of Oakhurst Company, Inc."), most of the Company's
value is vested in Oakhurst. As a result of the merger, the Company's stock
price fell below the NASDAQ minimum bid price of $1.00 per share and on July 14,
1992 the Company's common stock was removed from listing by NASDAQ.
The Company's stock trades on the OTC Bulletin Board under the symbol
"SCTP". The following table sets forth the high and low bid price for the
Company's stock for the last two fiscal years.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
Quarterly High Quarterly Low Quarterly High Quarterly Low
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Quarter 1 $0.03 $0.03 $0.08 $0.04
Quarter 2 $0.03 $0.03 $0.07 $0.03
Quarter 3 $0.02 $0.02 $0.06 $0.02
Quarter 4 $0.03 $0.03 $0.03 $0.03
</TABLE>
No common stock dividends were paid by SCPI during fiscal 1999, 1998 or
1997. Dividend payments are restricted by the covenants under the Company's line
of credit agreement.
Through its ownership of SCPI, primarily in the form of Series A
Preferred Stock, Oakhurst controls the Company and receives substantially all of
the benefit of the Company's operations through the right to receive preferred
stock dividends, which are required to be paid before any common stock dividends
may be paid.
There were approximately 3,800 holders of record of SCPI's common stock
on May 1, 1999.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and other data of Steel
City Products, Inc. and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
follows, and with the Financial Statements and related Notes.
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 1998 (a)(b) 1997 (a) 1996 (a) 1995 (a)
------------ ------------ ------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Sales ......................................... $ 18,092 $ 17,879 $ 18,031 $ 24,647 $ 27,335
============ ============ ============ ============ ============
Income (loss) income from continuing
operations before income taxes ......... $ 161 $ 1,395 $ (249) $ (255) $ 1,284
Current income tax (expense) benefit .......... (8) -- (9) 136 (87)
Deferred income tax expense (d) ............... (1,000) (1,093) (1,500) (339)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations ...... 153 395 (1,351) (1,619) 858
Income from discontinued operations (e) ....... -- -- -- 43 90
Series A Preferred Stock dividends (c) ........ (1,014) (1,014) (1,014) (1,016) (1,019)
------------ ------------ ------------ ------------ ------------
Net loss attributable
to common stockholders .............. $ (861) $ (619) $ (2,365) $ (2,592) $ (71)
============ ============ ============ ============ ============
BASIC AND DILUTED PER SHARE AMOUNTS:
Income (loss) from continuing operations
after preferred stock dividends ........ $ (0.27) $ (0.19) $ (0.73) $ (0.80) $ (0.06)
Income from discontinued operations (e) ....... -- -- -- 0.01 0.03
------------ ------------ ------------ ------------ ------------
Net loss attributable
to common stockholders ................. $ (0.27) $ (0.19) $ (0.73) $ (0.79) $ (0.03)
============ ============ ============ ============ ============
BALANCE SHEET STATISTICS:
Total assets .................................. $ 15,285 $ 14,421 $ 15,589 $ 14,919 $ 19,477
Long-term obligations ......................... $ 3,029 $ 2,132 $ 3,581 $ 2,216 $ 2,718
Series A Preferred Stock face value (c) ....... $ 10,135 $ 10,135 $ 10,135 $ 10,135 $ 10,135
</TABLE>
(a) In fiscal 1999, SCPI elected to change its method of inventory reporting
from LIFO to FIFO. The above data for fiscal 1998, 1997, 1996 and 1995 has
been restated to reflect this change as if it had occurred at the beginning
of fiscal 1995. See Note 1 to the Financial Statements.
(b) In fiscal 1998, SCPI sold its 88,000 square foot warehouse in Pittsburgh,
Pennsylvania for a gross sale price of approximately $2.8 million in cash.
SCPI recognized a pre-tax gain of approximately $1.8 million in connection
with the sale. See Note 4 to the Financial Statements.
(c) The Series A Preferred Stock has a dividend rate of $0.5228 per share and
is redeemable at SCPI's option at $5.2282 per share plus any cumulative
dividends in arrears. Through fiscal 1999, dividends of approximately $8.2
million have accumulated since the effective date of the merger; of this
amount, approximately $2.8 million and $786,000 were declared by the
Company's Board of Directors in fiscal 1995 and 1993, respectively, and
approximately $4.6 million of undeclared dividends in arrears are
outstanding as of February 28, 1999. In accordance with the merger
agreement with Oakhurst, a revaluation of the Company was completed as of
fiscal 1994 that resulted in a reduction in the number of Series A
Preferred shares outstanding. Revaluations required subsequent to fiscal
1994 have not yet been completed. Management expects that such
revaluations, when complete, will result in a cumulative decrease in the
valuation of SCPI, and that additional Series A Preferred shares
outstanding and related dividends may be canceled once such valuations are
complete. See Note 2 to the Financial Statements.
(d) Results for fiscal 1998, 1997 and 1996 include non-cash deferred tax
charges of $1 million, $ 1.2 million and $1.5 million, respectively,
relating primarily to increases in the Company's valuation allowance of its
deferred tax asset (see Note 7 to the Financial Statements).
(e) In fiscal 1991, SCPI sold its Retail Division to RAC as discussed in Note 8
to the Financial Statements. SCPI remained contingently liable for most
mortgage debt, and for many lease obligations of the Retail Division
following the sale. RAC was forced into bankruptcy in March 1991. RAC's
Reorganization Plan (the "RAC Plan") contained provision for releases in
favor of SCPI together with an injunction against further actions by
contingent creditors against SCPI. Accordingly, SCPI was released from
further liability except for payment of the Creditor Notes as further
described in Notes 5 and 8 to the Financial Statements.
The accompanying notes are an integral part of these financial statements
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SCPI is a special, limited purpose, majority-owned subsidiary of
Oakhurst. SCPI is expected to concentrate on its historical distribution
business, while any future growth and expansion opportunities are to be pursued
by Oakhurst or its subsidiaries. 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 at
February 28, 1999.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING AND LINE OF CREDIT
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. SCPI's working capital
needs fluctuate primarily in relation 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 build-ups and the amount of credit extended to SCPI
by its suppliers. At February 28, 1999, SCPI's debt primarily consisted of the
Creditor Notes (see below) and revolving debt of $2.8 million under a credit
agreement that is cross collateralized with Oakhurst, and is largely offset by
receivables from Oakhurst for advances made by SCPI that bear interest at the
same rate as the revolving debt.
In March 1996, Oakhurst obtained financing from an institutional lender
(replacing its then existing credit arrangement) that provided a total facility
for Oakhurst and its subsidiaries of $9.5 million, comprised of a 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 Credit
Facility requires that any loans 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.
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 certain restrictive financial and non-financial
covenants, including the maintenance of defined subsidiary tangible net worth
levels and consolidated current ratios, and limitations on common stock cash
dividends. The Credit Facility is secured by the accounts receivable,
inventories, and fixed assets of Oakhurst's subsidiaries.
In June 1997, Oakhurst and SCPI entered into an agreement with the
lender to amend the Credit Facility to reflect certain subsidiary dispositions
by Oakhurst. The agreement principally reduced the maximum amount available
under the Revolver to $7 million subject to a borrowing base, and amended
certain financial covenants, including the elimination of the consolidated
tangible net worth covenant. In September 1997, Oakhurst and its subsidiaries
reached an agreement to extend the Revolver beyond its initial two year term to
March 1999, and paid a fee of $35,000 in connection with the renewal. The Credit
Facility
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provides for subsequent automatic renewal terms of one year each upon payment of
a renewal fee of 0.5% of the entire line, unless earlier terminated as provided
for in the Agreement.
In part to substantially reduce its overall debt level, in December
1997 SCPI sold its 88,000 square foot warehouse in Pittsburgh, Pennsylvania for
a gross sales price of approximately $2.8 million in cash. Accordingly, in the
fourth quarter of fiscal 1998 SCPI recorded a pre-tax gain of approximately $1.8
million in connection with the sale. After repayment of the Fixed Asset Loan
secured by the property, the net proceeds of approximately $1.6 million were
used to cover the expenses of moving to newer, leased premises comprising
approximately 67,000 square feet, to make certain improvements to such premises,
to increase SCPI's levels of working capital and to reduce the Revolver.
In March 1999, the Credit Facility was renewed to April 2000 and
amended to increase certain borrowing base percentages, increase the interest
rate to Citibank N.A. base rate plus 2%, and amend the financial covenants to
include a minimum levels of Earnings before interest, taxes, depreciation and
amortization ("EBITDA").
At February 28, 1999, SCPI held a promissory note receivable from
Oakhurst (the "Oakhurst Note") (see Note 3 to the Consolidated Financial
Statements) that was issued in connection with acquisitions made by Oakhurst,
with a remaining balance of approximately $700,000. The Oakhurst Note bears
interest at the prime rate plus 1.5% and provides for eight quarterly
installments of principal and interest of $96,000 each through March 31, 2000.
In October 1998, SCPI obtained a low-interest loan from the
Redevelopment Authority of the City of McKeesport (the "Subordinated Loan"). The
Subordinated Loan, which is subordinated to the Credit Facility, was in the
amount of $98,000 and bears interest at the rate of 5% per annum. The loan is to
be repaid in monthly installments through October 2003.
The Creditor Notes were issued by SCPI in connection with the
bankruptcy of Retail Acquisition Corp., (the "Creditor Notes") (see Note 8 to
the financial statements). The Creditor Notes have been discounted using an
imputed interest rate of 7.5%.
Management believes that the Revolver will provide adequate funding for
SCPI's working capital requirements for the next twelve months assuming no
material deterioration in current sales or gross profit margins. At the present
time, Oakhurst's ability to repay advances from SCPI is dependent on the
operating results of one of Oakhurst's other subsidiaries and on financing
available to that subsidiary, and Oakhurst's continued ability to repay such
loans and advances will depend on an improvement in the results of operations of
such subsidiary.
CAPITAL EXPENDITURES AND YEAR 2000
The Company has no outstanding significant commitments for capital
expenditures.
In fiscal 1998, management undertook an extensive review and evaluation
of the Company's critical operating systems to determine whether they are year
2000 compliant. It was determined that the certain of the Company's current
software programs are not year 2000 compliant, and accordingly, management
developed a Year 2000 plan to address this issue. The Year 2000 Plan includes
the complete replacement of SCPI's current management information system with a
newer, integrated system that is year 2000 compliant. To date, the Company has
acquired and is in the process of implementing the new system which is expected
to be completed in June 1999. There were no critical non-information 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
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compliance. This phase of the Company's Year 2000 plan is also expected to be
completed by June 1999.
To date, the Company has spent approximately $210,000 on the Year 2000
compliance and believes that the remaining potential cost will be less than
$25,000. SCPI's new system is expected to provide other important operating
benefits as compared with its former system.
Although the Company has developed and expects to execute the plan
described above, due to inherent uncertainty and complexity involved with Year
2000 issues, there can be no assurance that the Company will address all of its
aspects. The Company has not established a contingency plan and currently does
not intend to create one given the nature of the Company's business.
The Company 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.
TAX LOSS CARRY-FORWARDS
At February 28, 1999, SCPI and Oakhurst had net operating tax loss
carry-forwards (the "Tax Benefits") of approximately $154 million, which expire
in the years 2001 through 2012, which shelter most of SCPI's income from federal
income taxes. 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 (see Note 7 to the financial statements).
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999 and 2000 SCPI has adopted or plans to adopt new
accounting pronouncements issued by the Financial Accounting Standards Board and
the American Institute of Certified Public Accountants. None of these
pronouncements are expected to have a significant impact on the Company's
financial position or results of operations. See Note 1 of the accompanying
Notes to the Financial Statements for further information.
FORWARD LOOKING STATEMENTS
From time to time the information provided by the Company or statements
made by its directors or employees may contain so-called "forward looking"
information that involves risks and uncertainties. In particular, statements
contained in Item 1 - "Business" and 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
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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.
RESULTS OF OPERATIONS
Results of 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, based in McKeesport, Pennsylvania.
Fiscal Year Ended February 28, 1999 Compared with Fiscal Year Ended February 28,
1998
Compared with the prior year, sales increased by $211,000. Sales to
existing automotive customers decreased by $718,000, primarily as a result of
bankruptcies, downsizing and competitive pressures encountered by certain of
SCPI's customers. This was partially offset by sales to new automotive customers
of approximately $458,000 and by sales of pet supplies.
Sales of non-food pet supplies were $2.0 million in fiscal 1999,
compared with $1.4 million in the prior year. Sales of pet supplies to new
customers accounted for approximately $473,000 of the increase.
Gross profits decreased by $181,000 in fiscal 1999 compared with the
prior year, due to a decrease in gross margin of 1.1% and an increase in buying
and occupancy expenses of $29,000. The decrease in gross margin was largely
attributable to several sales promotions during the second quarter of the
current year. The increase in buying and occupancy expenses resulted from costs
related to operating from rented facilities in the current year, while in the
prior year operations were conducted from an owned warehouse that was sold in
December 1997.
Operating, selling and administrative expenses decreased by $362,000
when compared with the prior year, resulting from lower management fees paid to
Oakhurst of $213,000, which included a non-recurring fee last year rendered in
connection with the sale of the building, lease negotiations, and the transfer
of SCPI's operations to a new facility in the prior year. There were also moving
expenses incurred last year and a reduction of $37,000 in general office expense
in the current year.
There was a decrease in the provision for doubtful accounts in the
current year of $112,000 compared to the prior year due to the bankruptcy of one
of the Company's customers last year.
Interest expense decreased by $106,000, primarily due to SCPI's
repayment of a term loan in December 1997.
Fiscal Year Ended February 28, 1998 Compared with Fiscal Year Ended February 28,
1997
Compared with the prior year, sales decreased by $152,000. Sales to
existing automotive customers decreased by $2.9 million, primarily as a result
of bankruptcies, downsizing and competitive pressures encountered by certain of
SCPI's customers. This was partially offset by sales to new automotive customers
of approximately $1.6 million and by sales of pet supplies.
Sales of non-food pet supplies were $1.4 million in fiscal 1998,
compared with $157,000 in the prior year; sales of pet supplies first began in
the second quarter of the prior year.
Notwithstanding the net decrease in sales, gross profits increased by
$136,000 in fiscal 1998 compared with the prior year. The effect of the lower
levels of sales was offset by a slight improvement in gross margin, together
with reductions in buying and occupancy expenses.
-10-
<PAGE> 12
Operating, selling and administrative expenses increased by $199,000
when compared with the prior year, resulting from non-recurring fees of $132,000
paid to Oakhurst for its management services rendered in connection with the
sale of the building, lease negotiations, and the transfer of SCPI's operations
to the new facility. There were also moving expenses of approximately $90,000.
In fiscal 1998, SCPI sold its owned real estate for a cash sale price
of approximately $2.8 million. The net gain resulting from the sale was
approximately $1.8 million.
Compared with the prior year, there was an increase in the provision
for doubtful accounts of $168,000, related to the bankruptcies and liquidations
of certain of the Company's customers, whereas the prior year reflected a net
recovery on a previously reserved doubtful account.
ITEM 7(A). 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report....................................................... F-1
Balance Sheets: February 28, 1999 and February 28, 1998............................ F-2
Statements of Operations for the fiscal years ended
February 28, 1999, February 28, 1998 and February 28, 1997...................... F-3
Statements of Stockholders' Equity for the fiscal years ended
February 28, 1999, February 28, 1998 and February 28, 1997 ..................... F-4
Statements of Cash Flows for the fiscal years ended
February 28, 1999, February 28, 1998 and February 28, 1997 .................... F-5
Notes to Financial Statements...................................................... F-6
Financial Statement Schedules for the fiscal years ended February 28,
1999, February 28, 1998 and February 28, 1997:
Schedule II - Valuation and Qualifying Accounts................................ F-14
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-11-
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The by-laws of the Company currently provide for such number of
directors (but no less than five) as is determined from time to time by the
Board of Directors. In December 1998 the Board voted to increase the number of
directors from six to seven. The following table lists the names and ages (at
May 1, 1999) of the directors, and the year in which each was first elected a
director of the Company or its predecessor.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE
- ---- --- --------
<S> <C> <C>
John D. Abernathy 62 1996
Terrance W. Allan 45 1993
Mark Auerbach 61 1996
Robert M. Davies 48 1989
Bernard H. Frank 78 1993
Maarten D. Hemsley 49 1998
Joel S. Lever 47 1996
</TABLE>
BUSINESS HISTORY OF DIRECTORS
Messrs. Frank and Allan have been executives of the Company for more
than the last five years. Mr. Frank is a founder of the business and has been
associated with it for almost 50 years. For more than the last five years, Mr.
Frank has been Chief Executive Officer and in May 1994, he was elected Executive
Vice President of the Company's parent, Oakhurst Company, Inc. ("Oakhurst"). Mr.
Allan has been with the Company since 1987 and was elected Executive Vice
President in January 1993.
Mr. Abernathy. Mr. Abernathy has been Executive Director of Patton
Boggs, LLP, a Washington DC law firm, since January 1995. From March 1991 to
February 1994 he was the Managing Director of Summit, Solomon & Feldesman, a New
York City law firm and from July 1983 until June 1990, Mr. Abernathy was
Chairman and Chief Executive Partner of BDO Seidman, a public accounting firm.
Mr. Abernathy is a director of Barringer Technologies, Inc., a manufacturer of
high sensitivity analytical instruments for chemical sensing and also serves as
a director of Oakhurst. Mr. Abernothy is a certified public accountant.
Mr. Auerbach. Mr. Auerbach was Chairman, President and Chief
Executive Officer of Oakhurst from December 1995 to May 1997 and was Chief
Financial Officer of the Company and of Oakhurst from December 1995 to December
1998. He has also been Senior Vice President and Chief Financial Officer since
April 1993 of Central Lewmar, L.P., a fine paper merchant. From September 1992
until April 1993, he was a partner of Marron Capital, L.P., an investment
banking company. Prior to that, he was President, Chief Executive Officer and
Chairman of the Board of Implant Technology, Inc., a manufacturer of artificial
hip systems, from 1990 to 1992. He is a director of Pharmaceutical Resources,
Inc., a generic drug manufacturer and continues to serve as a director of
Oakhurst. Mr. Auerbach is a certified public accountant.
Mr. Davies. Mr. Davies has been Chairman and Chief Executive Officer
of Oakhurst since May 1997 and was its President from May 1997 to January 1999.
Mr. Davies was a Vice President of Wexford Capital Corporation, which acts as
the investment manager to several private investment funds from 1994 to March
1997. From November 1995 to March 1997 Mr. Davies also served as Executive Vice
President of Wexford Management LLC, a private investment management company.
From September 1993 to May 1994 he was a Managing Director of Steinhardt
Enterprises, Inc., an investment banking company, and from 1987 to August 1993,
he was Executive Vice President of The Hallwood Group Incorporated, a merchant
banking firm. Mr. Davies serves as a director of Industrial Acoustics Company,
Inc., a New
-12-
<PAGE> 14
York based engineered products group specializing in noise control products and
systems, and of Maxicare Health Plan, Inc., a health maintenance organization
based in California. Mr. Davies is also a managing director of Menai Capital,
L.L.C., a financial consultancy firm.
Mr. Hemsley. Mr. Hemsley was re-elected to the Board of Directors of
the Company and of Oakhurst in December 1998. He had been an employee of SCPI or
Oakhurst for many years prior to 1995. In December 1995, he resigned his
positions with SCPI and Oakhurst and served as a consultant to SCPI and Oakhurst
through his wholly-owned company, Bryanston Management, Ltd. Mr. Hemsley
currently serves as President, Chief Operating Officer and Chief Financial
Officer of Oakhurst and is Chief Financial Officer of SCPI. Mr. Hemsley has been
President of Bryanston Management, Ltd., a financial consultancy firm, since
1993. He serves as a director of Industrial Acoustics Company, Inc., a New York
based engineered products group specializing in noise control products and
systems. Mr. Hemsley also serves as a managing director of Menai Capital,
L.L.C., which provides financial and investment consultancy services primarily
to corporations, including Oakhurst's wholly-owned subsidiary, Oakhurst
Technology, Inc.
Mr. Lever. Mr. Lever has been associated with the law firm of
Kurzman & Eisenberg or its predecessor since 1980, and became a member of the
firm in 1984. Mr. Lever specializes in transactional business matters with
particular emphasis on fine arts publishing, distribution and investment, and
the sale and acquisition of commercial real estate entities. Prior to 1980, Mr.
Lever was an Assistant District Attorney for Kings County, New York. Mr. Lever
is also a director of Oakhurst, as well as a director of several private
companies.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities ("Insiders") to file reports
of ownership and certain changes in ownership with the Securities and Exchange
Commission and to furnish the Company with copies of those reports.
Based solely on a review of those reports and amendments thereto
furnished to the Company during its most recent fiscal year or written
representations by Insiders that no Forms 5 were required to be filed, the
Company believes that during the fiscal year ended February 28, 1999 all Section
16(a) filing requirements applicable to the Company's Insiders were satisfied.
ITEM 11. EXECUTIVE COMPENSATION.
This item contains information about compensation, stock options
grants and employment arrangements and other information concerning certain of
the executive officers and the directors of the Company.
-13-
<PAGE> 15
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation the Company paid or
accrued for services rendered in the Company's 1999, 1998 and 1997 fiscal years
by the Chief Executive Officer and the only other executive officer of the
Company whose compensation exceeded $100,000 in fiscal 1999 and who was serving
at the end of the 1999 fiscal year.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
------------------------------------------ -----------------------------------------
Other
Annual Securities All
Compen- Underlying Other
Name and Principal Salary Bonus sation Options** Compensation
Position Year ($) ($) ($)* (#) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bernard H. Frank (1) 1999 110,000 6,250 -- -- 13,908,(2)
Chairman & Chief Executive Officer 1998 50,050 7,364 -- -- 13,908
1997 50,243 16,000 -- 68,327 13,908
Terrance W. Allan 1999 115,001 -- -- -- --
Executive Vice President 1998 115,001 15,000 -- -- --
1997 126,490 14,000 -- 24,333 --
</TABLE>
- -----------------
* Excludes perquisites and other personal benefits if the aggregate
amount of such items of compensation was less than the lesser of either
$50,000 or 10% of the total annual salary and bonus of the named
executive officer.
** These options relate to shares of Oakhurst Company, Inc. ("Oakhurst"),
not the Company.
(1) Mr. Frank, who is also Executive Vice President of Oakhurst, and Mr.
Allan are compensated only by the Company except with respect to stock
options and stock awards.
(2) This amount consists of $6,504, $5,508 and $1,896 that Mr. Frank
received under three substantially identical agreements amended in 1987
in consideration of the waiver by Mr. Frank of his bankruptcy claims
for annuity rights in the Company's predecessor's bankruptcy.
COMPENSATION AGREEMENTS
Mr. Frank. In fiscal 1997, in light of the Company's financial
performance, Mr. Frank voluntarily reduced his annual salary by 50%. In February
1998, Mr. Frank's annual base salary was set by agreement at $50,000; he was
granted participation in a deferred compensation program commencing March 1,
1998 providing for the payment to him of $5,000 per month for twenty-four months
to compensate him for the portion of his salary voluntarily foregone by him; and
commencing March 1, 1998, Mr. Frank was made eligible to participate in a bonus
program pursuant to which the Compensation Committee of the Board of Directors
in its discretion and after reviewing the Company's performance and cash
position may grant to him on a quarterly basis a bonus not to exceed $25,000 in
the aggregate in any one fiscal year. In fiscal 1999, Mr. Frank was paid $6,250
in respect of this bonus plan.
Mr. Frank also receives compensation of $13,908 per year, in the
aggregate, under three substantially identical agreements amended in 1987 in
consideration of the waiver by Mr. Frank of his bankruptcy claims for annuity
rights in the Company's predecessor's bankruptcy. The amended agreements provide
for payments to be made for a period of fifteen years subsequent to January 1988
of $6,504, $5,508 and $1,896 per year for the three agreements, respectively.
-14-
<PAGE> 16
Mr. Allan. The Company has a three-year employment agreement with Mr.
Allan (sometimes hereinafter referred to as the "executive") commencing
September 1, 1993 that provides for a base salary of $115,050. The agreement
provides for the payment of an annual management bonus based upon the defined
profits of the Company's operating division. The aggregate amount of such
management bonus payable each year to the executive and to all other executives
is not to exceed 8% of such defined profits and the allocation thereof is made
by the Compensation Committee of the Company based on recommendations of Mr.
Frank as Chief Executive Officer. Mr. Allan is also entitled to an executive
bonus calculated as a percentage of defined annual profits of the Company that
exceed $2,000,000. The agreement was extended in September 1996 and is renewed
on a year-to-year basis.
In the event of non-renewal of the agreement, the executive is entitled
to an aliquot portion of the bonus he would have earned during the year of
non-renewal, since the contract year does not coincide with the fiscal year of
the Company. The agreement also provides that if the executive's employment
terminates by reason of his death or disability, he is entitled to the greater
of one years' salary or the salary for the balance of the term of the agreement
and the management bonus that would otherwise have been paid to him. If the
executive's employment is otherwise terminated without cause, he is entitled to
his salary and bonuses for the greater of one year or the balance of the term of
the agreement.
The agreement provides for a car allowance, and the executive is
eligible to participate in all defined contribution plans, survivor and
supplemental benefits, short and long-term disability benefits, and all other
benefit plans and perquisites available now or in the future to the senior
executives of the Company.
The agreement also provides for certain termination rights in the event
of a change in control of the Company. Change in control is defined to include
certain changes in the make-up of the Company's board of directors or a sale of
the Company's assets or business. The executive has the right to terminate his
employment within a defined period (ranging up to one year) following a change
in control and (i) to be paid his base salary for a period of up to 24 months
following such termination; (ii) to continue to receive for a like period the
benefits that he is entitled to receive under his agreement and (iii) to be paid
25% of base salary in lieu of all bonus entitlement. The agreement also provides
for substantially the same payments and benefits in the event the executive's
employment is terminated by the Company without cause as a result of a change in
control. In the event of any termination other than for cause, or voluntary
resignation in the absence of a change in control, the executive's options
become fully exercisable for a period of seven months following termination. If
a change in control had occurred on May 1, 1999, and if Mr. Allan had exercised
his rights of termination, payments by the Company would have been approximately
$302,500 in the aggregate.
STOCK OPTION GRANTS.
During fiscal 1999 no option grants relating to the Company's shares
were made to any of the named executives officers.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
During fiscal 1999, no options were exercised by any of the named
executive officers.
The following table sets forth certain information at February 28,
1999, the Company's fiscal year end, based upon (i) the average of the bid and
ask price per share of the Company's common stock ($0.03) on that date, and (ii)
the closing price per share of Oakhurst's common stock, ($1.56) on that date, as
they relate to stock options held at that date by each of the individuals named
in the Summary Compensation
-15-
<PAGE> 17
Table. The "value" of unexercised in-the-money options is the difference between
the market value of the common stock subject to the options at February 28, 1999
and the exercise (purchase) price of the option shares.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options at
Options at Fiscal Year End Fiscal Year End
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
THE COMPANY'S COMMON STOCK
Bernard H. Frank.................... 23,141 -- -- --
Terrance W. Allan................... 9,257 -- -- --
OAKHURST COMMON STOCK
Bernard H. Frank.................... 68,327 -- $6,200 --
Terrance W. Allan................... 29,331 -- $4,650 --
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION FOR THE FISCAL
YEAR ENDED FEBRUARY 28, 1999.
This report has been prepared by the Compensation Committee of the
Board of Directors of the Company and addresses the Company's compensation
policies with respect to the Chief Executive Officer and executive officers of
the Company in general for the 1999 fiscal year. Except for Mr. Frank, each
member of the Committee is a non-employee director.
COMPENSATION POLICY
The overall intent of the Committee in respect of executive officers is
to establish levels of compensation that provide appropriate incentives in order
to command high levels of individual performance and thereby increase the value
of the Company to its stockholders, and that are sufficiently competitive to
retain and attract the skills required for the success and profitability of the
Company. The principal components of executive compensation are salary and
bonus.
CHIEF EXECUTIVE OFFICER'S AND OTHER EXECUTIVE OFFICERS' COMPENSATION
Each executive officer is compensated under a written employment
agreement. The agreement was reviewed by Oakhurst's Compensation Committee and
approved by the Company's Compensation Committee with Mr. Frank abstaining from
voting on his own agreement.
MESSRS. FRANK AND ALLAN
Salary. Both executives are long term employees of the Company and its
predecessor, and Mr. Frank is a founder of the original business. Accordingly,
the salary of each executive was based on the level of his prior salary and the
subjective judgement of the members of the Committee as to the value of the
executive's past contribution and potential future contribution to the
profitability of the business.
Bonuses. Bonus are paid pursuant to the terms of each executive
officer's employment agreement described above under the heading "Compensation
Agreements."
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code (enacted in 1993) generally disallows a tax deduction
to public companies for compensation over $1 million paid to its chief executive
officer and its four other most highly compensated executives. The Company's
compensation payable to any one executive officer (including potential income
from outstanding
-16-
<PAGE> 18
stock options) is currently and for the foreseeable future unlikely to reach
that threshold. In addition, because of the significant net operating loss
carryforwards of the Company, the deductibility of compensation payments is not
currently an issue. However, should circumstances change, the Compensation
Committee will study the matter and make recommendations to the Board of
Directors.
The Compensation Committee: Robert M. Davies
Joel S. Lever
Bernard H. Frank
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Frank is a director, executive officer and employee of the Company
and a director and executive officer of Oakhurst. Messrs. Davies and Lever also
serve as directors of Oakhurst.
DIRECTORS' COMPENSATION
No fees are paid to directors for attendance at board or committee
meetings. However, board members are entitled to reimbursement of out-of-pocket
expenses incurred in attending such meetings.
The Performance Graph and the Report of the Compensation Committee on
Executive Compensation in this Item 11 are not and shall not be deemed
incorporated by reference into any filings of the Company with the Securities
and Exchange Commission by implication or by any reference in any such filings
to this Proxy Statement.
----------------------
PERFORMANCE GRAPH
The following graph assumes an investment of $100 on February 28, 1994
and compares annual changes thereafter in the market price of the Company's
Common Stock with (i) the Dow Jones Global US Market Index (a broad market
index), and (ii) the Dow Jones Retailers - Other Specialty Index, a group of
companies whose marketing strategy is focused on a limited product line, such as
automotive parts. Both indices are published in the Wall Street Journal.
[CHART]
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Steel City Products, Inc. 38.00 24.00 24.00 12.00 12.00
DJ Global US 84.51 120.29 164.95 246.73 252.93
Dow Jones Retailers - Other 89.97 94.52 126.68 120.68 96.65
</TABLE>
-17-
<PAGE> 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT.
The following tables set forth certain information regarding beneficial
ownership of the Common Stock at May 1, 1999. Except as otherwise indicated in
the footnotes, the Company believes that the beneficial owners of the Common
Stock listed in this Item 12, based on information furnished by such owners,
have sole investment and voting power with respect to the shares of Common Stock
shown as beneficially owned by them.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
This table sets forth certain information regarding beneficial
ownership of the Common Stock by each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock.
<TABLE>
<CAPTION>
Name and Address Number of Shares of Percentage of
of Beneficial Owner Series A Preferred Stock Class
- ------------------- ------------------------ --------------
<S> <C> <C>
Oakhurst Company, Inc. 1,938,526 100%
3513 Concord Pike Suite 3527
Wilmington, Delaware 19803
</TABLE>
<TABLE>
<CAPTION>
Name and Address Number of Shares of Percentage of
of Beneficial Owner Common Stock Class
- ------------------- ------------------------ --------------
<S> <C> <C>
Oakhurst Company, Inc. 286,955 10.0%
3513 Concord Pike Suite 3527
Wilmington, Delaware 19803
</TABLE>
- ----------------------
SECURITY OWNERSHIP OF MANAGEMENT
This table sets forth information regarding beneficial ownership of the
Company's Common Stock (including Common Stock issuable upon exercise of
outstanding options) by each director, each executive officer named in the
"Summary Compensation Table," in Item 11, above, and by all directors and
executive officers of the Company as a group. The information has been furnished
by the directors and officers of the Company themselves.
No director or officer owns any shares of Preferred Stock of the Company.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of
of Beneficial Owner of Common Stock Class
- ------------------- ------------------ -------------
<S> <C> <C>
Bernard H. Frank.......................................... 23,141 (1) *
Terrance W. Allan......................................... 9,257 (1) *
John D. Abernathy ........................................ -0- --
Mark Auerbach ............................................ 16,662 (1) *
Joel S. Lever ............................................ 40,819 1.3%
Robert M. Davies.......................................... -0- --
Maarten D. Hemsley........................................ 77,138 (1) 2.3%
All directors and.........................................
executive officers as a group, 5 persons.................. 126,198 (1) 5.0%
</TABLE>
- ----------------------
* Less than 1%
(1) These shares are purchasable under outstanding stock options, exercisable
at $0.625 per share.
-18-
<PAGE> 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to "Compensation of Directors" and "Compensation
Committee Interlocks and Insider Participation" in Item 11, above.
-19-
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
1. Financial Statements:
Independent Auditors' Report
Balance Sheets: February 28, 1999 and February 28, 1998
Statements of Operations for the fiscal years ended February 28, 1999,
February 28, 1998, and February 28, 1997
Statements of Stockholders' Equity for the fiscal years ended February
28, 1999, February 28, 1998, and February 28, 1997
Statements of Cash Flows for the fiscal years ended February 28, 1999,
February 28, 1998, and February 28, 1997
Notes to Financial Statements
2. The following Financial Statement Schedules for the fiscal years ended
February 28, 1999, February 28, 1998, and February 28, 1997 are
submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
the notes thereto.
3. Exhibits.
Exhibit No. Description
3.1 Restated Certificate of Incorporation (filed as Exhibit
3(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 27, 1993).
3.2 By-laws of the Company as amended through May 17, 1993
(filed as Exhibit 3.2 to the Company's Annual Report of
Form 10-K for the fiscal year ended February 26, 1994).
/*10.1 Employment Agreement with Bernard H. Frank dated as of
April 1, 1998.
/10.2 Employment Agreement with Terrance W. Allan dated as of
September 1, 1993 (filed as Exhibit 10.3 to the Company's
Annual Report of Form 10-K for the fiscal year ended
February 26, 1994).
/10.4 Form of Option Agreement dated August 29, 1991 with
directors and executive officers (filed as Exhibit 10(t)
to the Company's Annual report on Form 10-K for the fiscal
year ended February 29, 1992).
10.5 Note Agreements with William T. Apgar, Liquidating Trustee
for the Retail Acquisition Corp. Amended Plan of
Reorganization, (filed as Exhibit 10(w) the Company's
Annual Report on Form 10-K for the fiscal year ended
February 27, 1993).
10.6 Open-End Mortgage between Steel City Products, Inc. and
FINOVA Capital Corporation dated March 28, 1996, (filed as
exhibit #10.10 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 29, 1996).
10.7 Combined and Amended Promissory Note between Steel City
Products, Inc. and Oakhurst Company, Inc., dated March 28,
1996, (filed as exhibit #10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 29,
1996).
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<PAGE> 22
10.8 Trademark & Trade Name License Agreement between Oakhurst
Holdings, Inc. and Steel City Products, Inc., dated August
16, 1995, (filed as exhibit #10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 29,
1996).
/10.9 Corporate Services Agreement between Steel City Products,
Inc. and Oakhurst Management Corporation dated June 1,
1995, (filed as exhibit #10.13 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 29,
1996).
10.10 Agreement of Sale and Purchase by and between Steel City
Products, Inc. and Bearing Service Company of Pennsylvania
dated as of August 18, 1997, (filed as exhibit #10 to the
Company's Form 10-Q for the quarter ended August 31,
1997).
10.11 Addendums to the Agreement of Sale and Purchase by and
between Steen City Products, Inc. and Bearing Service
company of Pennsylvania dated October 18, 1997, and
December 17, 1997, respectively, (filed as exhibit #10 to
the Company's Form 10-Q for the quarter ended November 30,
1997).
10.12 Lease agreement by and between Regional Industrial
Development Corporation of Southwestern Pennsylvania and
Steel City Products, Inc., dated November 11, 1997- (filed
as exhibit #10 to the Company's Form 10-K for the year
ended February 28, 1998)
*18.1 Letter regarding change in accounting principle
*27 Financial Data Schedule (EDGAR transmission only).
*27.1 Restated Financial Data Schedule for the quarter ended
November 30, 1998 (filed as exhibit #27 to the Company's
Form 10-Q for the quarter ended November 30, 1998) (EDGAR
transmission only).
*27.2 Restated Financial Data Schedule for the quarter ended
August 31, 1998 (filed as exhibit #27 to the Company's
Form 10-Q for the quarter ended August 31, 1998) (EDGAR
transmission only).
*27.3 Restated Financial Data Schedule for the quarter ended May
31, 1998 (filed as exhibit #27 to the Company's Form 10-Q
for the quarter ended May 31, 1998) (EDGAR transmission
only).
*27.4 Restated Financial Data Schedule for the year ended
February 28, 1998 (filed as exhibit #27 to the Company's
Form 10-K for the year ended February 28, 1998) (EDGAR
transmission only).
*27.5 Restated Financial Data Schedule for the quarter ended
November 30, 1997 (filed as exhibit #27 to the Company's
Form 10-Q for the quarter ended November 30, 1997) (EDGAR
transmission only).
*27.6 Restated Financial Data Schedule for the quarter ended
August 31, 1997 (filed as exhibit #27 to the Company's
Form 10-Q for the quarter ended August 31, 1997) (EDGAR
transmission only).
*27.7 Restated Financial Data Schedule for the quarter ended May
31, 1997 (filed as exhibit #27 to the Company's Form 10-Q
for the quarter ended May 31, 1997) (EDGAR transmission
only).
*27.8 Restated Financial Data Schedule for the year ended
February 28, 1997 (filed as exhibit #27 to the Company's
Form 10-K for the year ended February 28, 1997) (EDGAR
transmission only).
-21-
<PAGE> 23
- -----------------
/Management contract or compensatory plan or arrangement.
* Filed herewith
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the last quarter of the fiscal year
ended February 28, 1999.
-22-
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
Dated: May 26, 1999 By: /s/ Bernard H. Frank
-----------------------------
Bernard H. Frank, Chief Executive
Officer (duly authorized officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLES DATE
- ---------- ------ ----
<S> <C> <C>
/s/ Bernard H. Frank Chairman of the Board May 26, 1999
- -------------------------------------------------- Chief Executive Officer
Bernard H. Frank Director (principal
executive officer)
/s/ Maarten D. Hemsley Chief Financial Officer May 26, 1999
- ------------------------------------------------- (principal financial and
Maarten D. Hemsley accounting officer)
Director
/s/ Terrance W. Allan Executive Vice President May 26, 1999
- ------------------------------------------------- Director
Terrance W. Allan
/s/ John D. Abernathy Director May 26, 1999
- -------------------------------------------------
John D. Abernathy
/s/ Mark Auerbach Director May 26, 1999
- -------------------------------------------------
Mark Auerbach
/s/ Robert M. Davies Director May 26, 1999
- -------------------------------------------------
Robert M. Davies
/s/ Joel S. Lever Director May 26, 1999
- -------------------------------------------------
Joel S. Lever
</TABLE>
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steel City Products, Inc.:
We have audited the accompanying balance sheets of Steel City Products, Inc. as
of February 28, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the years ended February 28, 1999,
1998, and 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Steel City Products, Inc. as of February
28, 1999 and 1998, and the results of its operations and its cash flows for the
years ended February 28, 1999, 1998, and 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the financial statements, during the year ended
February 28, 1999 Steel City Products, Inc. changed its method of accounting
for inventory.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
May 21, 1999
-F1-
<PAGE> 26
STEEL CITY PRODUCTS, INC.
BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS FEBRUARY 28, FEBRUARY 28,
1999 1998
(AS RESTATED)
------------ -------------
<S> <C> <C>
Current assets:
Cash .......................................................................... $ 2 $ 1
Trade accounts receivable, less allowance of $244 and $355, respectively ...... 2,173 2,698
Notes receivable - Oakhurst Company, Inc. ..................................... 328 293
Inventories ................................................................... 3,947 3,951
Other ......................................................................... 82 50
-------- --------
Total current assets ........................................ 6,532 6,993
-------- --------
Property and equipment, at cost .................................................... 1,128 951
Less accumulated depreciation ................................................. (710) (618)
-------- --------
418 333
-------- --------
Notes receivable - Oakhurst Company, Inc., long-term portion ....................... 393 723
Advances to Oakhurst Company, Inc. ................................................. 7,086 5,706
Other assets ....................................................................... 856 666
-------- --------
8,335 7,095
-------- --------
$ 15,285 $ 14,421
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 3,935 $ 3,926
Accrued compensation .......................................................... 354 380
Current maturities of long-term obligations ................................... 214 543
Due to affiliate .............................................................. 643 462
Other ......................................................................... 129 150
-------- --------
Total current liabilities ................................... 5,275 5,461
-------- --------
Long-term obligations:
Long-term debt ................................................................ 2,786 2,070
Other long-term obligations ................................................... 243 62
-------- --------
3,029 2,132
-------- --------
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) ...................................... (36,893) (37,046)
Treasury stock, at cost, 207 common shares .................................... (1) (1)
-------- --------
Total stockholders' equity .................................. 6,981 6,828
-------- --------
$ 15,285 $ 14,421
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-F2-
<PAGE> 27
STEEL CITY PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
(AS RESTATED) (AS RESTATED)
----------- ----------- -----------
<S> <C> <C> <C>
Sales .................................................. $ 18,092 $ 17,879 $ 18,031
Other income ........................................... 738 584 613
----------- ----------- -----------
18,830 18,463 18,644
----------- ----------- -----------
Cost of goods sold, including occupancy and
buying expenses .................................... 14,754 14,340 14,717
Operating, selling and administrative expenses ......... 3,795 4,150 3,951
Provision for doubtful accounts, net of recoveries ..... 26 138 (30)
Interest expense ....................................... 290 396 464
Gain on the sale of real estate ........................ -- (1,760) --
----------- ----------- -----------
18,865 17,264 19,102
----------- ----------- -----------
(Loss) income before undistributed earnings of
investment in affiliate and income taxes ........... (35) 1,199 (458)
----------- ----------- -----------
Undistributed earnings of investment in affiliate ...... 196 196 209
----------- ----------- -----------
Income taxes:
Current income tax expense ......................... 8 -- 9
Deferred income tax expense ........................ -- 1,000 1,093
----------- ----------- -----------
8 1,000 1,102
----------- ----------- -----------
Net income (loss) ...................................... 153 395 (1,351)
Effect of Series A Preferred Stock dividends ........... (1,014) (1,014) (1,014)
----------- ----------- -----------
Net loss attributable to common stockholders ........... $ (861) $ (619) $ (2,365)
=========== =========== ===========
Basic and diluted per share amounts:
Net loss attributable to common
stockholders after preferred stock dividends .... $ (0.27) $ (0.19) $ (0.73)
=========== =========== ===========
Weighted average number of shares outstanding
used in computing per share amounts ................ 3,238,061 3,238,061 3,238,061
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-F3-
<PAGE> 28
STEEL CITY PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PREFERRED COMMON PAID-IN EARNINGS TREASURY
STOCK STOCK CAPITAL (DEFICIT) STOCK TOTALS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 29, 1996 (AS RESTATED) .... $ 19 $ 32 $ 43,824 $(36,090) $ (1) $ 7,784
Net loss ...................................... (1,351) (1,351)
-------- -------- -------- -------- -------- --------
BALANCE AT FEBRUARY 28, 1997 (AS RESTATED) .... 19 32 43,824 (37,441) (1) 6,433
Net income .................................... 395 395
-------- -------- -------- -------- -------- --------
BALANCE AT FEBRUARY 28, 1998 (AS RESTATED) .... 19 32 43,824 (37,046) (1) 6,828
Net income .................................... 153 153
-------- -------- -------- -------- -------- --------
BALANCE AT FEBRUARY 28, 1999 .................. $ 19 $ 32 $ 43,824 $(36,893) $ (1) $ 6,981
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-F4-
<PAGE> 29
STEEL CITY PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
(AS RESTATED) (AS RESTATED)
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations ................................... $ 153 $ 395 $(1,351)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization ..................................... 99 173 276
Gain on the sale of real estate ................................... -- (1,760) --
Retirement of property and equipment .............................. -- 2 --
Deferred tax expense .............................................. -- 1,000 1,093
Undistributed earnings of investment in affiliate ................. (196) (196) (209)
Other changes in operating assets and liabilities:
Accounts receivable ............................................... 525 (140) (46)
Inventories ....................................................... 4 (333) 1,262
Accounts payable .................................................. 9 (159) 435
Other ............................................................. 20 296. 299
------- ------- -------
Net cash provided by (used in) operating activities of:
Continuing operations ...................................................... 614 (722) 1,759
Discontinued operations .................................................... (294) (294) (255)
------- ------- -------
Net cash provided by (used in) operating activities ............................. 320 (1,016) 1,504
------- ------- -------
Cash flows from investing activities:
Advances to Oakhurst Company, Inc. ......................................... (1,380) (306) (3,349)
Collection of note receivable - Oakhurst Company, Inc. ..................... 295 267 248
Proceeds from the sale of real estate ...................................... -- 2,656 --
Additions to property and equipment ........................................ (177) (280) (7)
Other ...................................................................... -- 52 --
------- ------- -------
Net cash (used in) provided by investing activities ............................. (1,262) 2,389 (3,108)
------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) under
revolving credit agreement .............................................. 716 (80) 2,150
Proceeds from long-term borrowings ......................................... 263 -- 1,500
Principal payments on long-term obligations ................................ (36) (1,294) (1,921)
Deferred loan costs ........................................................ -- -- (126)
------- ------- -------
Net cash provided by (used in) financing activities ............................. 943 (1,374) 1,603
------- ------- -------
Net increase (decrease) in cash ................................................. 1 (1) (1)
Cash at beginning of year ....................................................... 1 2 3
------- ------- -------
Cash at end of year ............................................................. $ 2 $ 1 $ 2
======= ======= =======
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest ................................................................ $ 337 $ 413 $ 439
======= ======= =======
Income taxes, net of refunds ............................................ $ -- $ -- $ 15
======= ======= =======
Supplemental schedule of non-cash financing activities:
Capital lease obligations incurred for new equipment .................... $ 144 $ -- $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-F5-
<PAGE> 30
STEEL CITY PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business Activities:
Steel City Products, Inc. ("SCPI" or "the Company") is a wholesale
distributor of primarily automotive accessories, operating under the trade name
Steel City Products, selling primarily to discount retail chains, hardware and
supermarket retailers and to automotive specialty stores, based principally in
the Northeastern United States. In fiscal 1997, SCPI also began distributing
non-food pet supplies, primarily to supermarket retailers. SCPI is a
majority-owned subsidiary of Oakhurst Company, Inc., ("Oakhurst") (see Note 2).
Use of Estimates:
The financial statements have been prepared in conformity with
generally accepted accounting principals, which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fiscal Year:
The Company's fiscal year ends on the last day of February.
Inventories:
SCPI changed its method of inventory valuation from the last-in
first-out (LIFO) method to the first-in first-out (FIFO) method during fiscal
1999. The change is reported as if it were effective the first day of the
Company's fiscal year 1997 (March 1, 1996). The accounting change was made
because the Company believes that this method of accounting will reflect
inventory at a value that more closely represents current costs.
The effect of the change in accounting principle was to increase the
net loss reported by $7,000 and $96,000 for fiscal 1998 and 1997, respectively.
There was no effect on the net loss per share for fiscal 1998 and an additional
loss of $0.03 per share for fiscal 1997. The effect of this restatement was to
increase retained earnings (deficit) as of March 1, 1996 by $388,000.
Property and Equipment:
Depreciation and amortization are computed using the straight-line
method. Estimated useful lives used for computing depreciation and amortization
are: leasehold improvements, 10 years; and office furniture and warehouse
equipment, 3-10 years. Depreciation expense was approximately $92,000, $104,000
and $199,000 in fiscal 1999, 1998 and 1997, respectively.
Other Assets:
Other assets include goodwill associated with the acquisition in 1969
of Steel City Products, which is being amortized over a 40 year period. The
unamortized values at February 28, 1999 and 1998 are approximately $147,000 and
$154,000, respectively.
SCPI periodically evaluates its long-lived assets to assess whether
the carrying values have been impaired, using the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". No such
write-downs due to
-F6-
<PAGE> 31
impairment were recorded in fiscal 1999, 1998 and 1997.
Revenue Recognition:
Revenues are recognized at the time products are shipped.
Federal Income Taxes:
SCPI utilizes an asset and liability approach to accounting for income
taxes. Deferred tax liabilities and assets are recognized for the future tax
consequences of events that have already been recognized in the financial
statements or tax returns. Net deferred tax assets are recognized to the extent
that management believes that realization of such benefits is more likely than
not. Changes in enacted tax rates or laws may result in adjustments to the
recorded deferred tax assets or liabilities in the period that the tax law is
enacted (see Note 7).
SCPI is included in the consolidated federal income tax return of
Oakhurst. For financial reporting purposes, income taxes are calculated on a
stand alone basis.
Earnings Per Share:
During fiscal 1998, SCPI adopted SFAS No. 128, "Earnings per Share".
This standard requires presentation of basic and diluted earnings per share and
restatement of all prior period earnings per share presented. Basic earnings or
loss per share is computed by dividing net earnings or loss by the weighted
average number of common shares outstanding during the year. The diluted
earnings per share calculation assumes the conversion of dilutive stock options
into common shares. Loss per share amounts do not include common stock
equivalents since that would have an antidilutive effect and reduce net loss
per share. At February 28, 1999, there were options to purchase 215,987 share
of common stock outstanding that were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market value of the common share.
Stock Based Compensation:
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
New Accounting Pronouncements:
As of March 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which established new rules for the reporting and display
of comprehensive income and its components. The adoption of SFAS No. 130 had no
impact on the Company's financial condition.
Effective March 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
established new standards for the way public companies report information about
operating segments in annual and interim financial statements. The Company
operates in a single segment and accordingly, no segment disclosures are
warranted for the fiscal years ended February 1999, 1998 and 1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 1999. The Company does
not anticipate that the adoption of SFAS No. 133 will have a significant effect
on its financial position or results of operations.
-F7-
<PAGE> 32
2. CORPORATE REORGANIZATION
In accordance with a merger transaction in 1991, SCPI issued to
Oakhurst 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 and
receives substantially all of the benefit of operations through dividends on
the preferred stock.
Under the merger transaction, SCPI was 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%. Revaluations required subsequent to fiscal 1994
have not yet been completed. Management expects that such revaluations, when
complete, will result in a cumulative decrease in the valuation of SCPI, and
that additional Series A Preferred shares outstanding and related dividends may
be canceled once such valuations are complete.
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. Through February 28, 1999,
dividends of approximately $8.2 million have accumulated since the effective
date of the merger; of this amount, approximately $3.6 million has been
declared by SCPI's Board of Directors and paid. Approximately $4.6 million of
undeclared dividends in arrears was outstanding at February 28, 1999.
3. NOTES RECEIVABLE AND ADVANCES - OAKHURST COMPANY, INC.
The Oakhurst Note bears interest at the prime rate plus 1.5% and
provides for eight quarterly principal and interest installments of $96,000
through March 31, 2000. The Oakhurst Note is secured by the capital stock of an
Oakhurst subsidiary, Dowling's Fleet Service, Co., Inc. ("Dowling's").
SCPI participates in a cash concentration system together with another
subsidiaries of Oakhurst. Available cash that has been transferred to Oakhurst
has been reflected as an addition to the advances to Oakhurst. Advances to
Oakhurst bear interest at the Citibank base rate plus 1.5%, and have been
classified as a long-term asset as repayment is not anticipated prior to March
1, 2000.
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1999 1998
------- -------
<S> <C> <C>
Leasehold improvements ...................... $ 316 302
Office furniture and warehouse equipment .... 812 649
------- -------
1,128 951
Less accumulated depreciation ............... (710) (618)
------- -------
$ 418 $ 333
======= =======
</TABLE>
In December 1997, SCPI sold its warehouse in Pittsburgh, Pennsylvania
for a sales price of approximately $2.8 million in cash. Accordingly, in the
fourth quarter of fiscal 1998 SCPI recorded a pre-tax gain of approximately
$1.8 million in connection with the sale. After repayment of the term loan
secured by the property, the net proceeds of approximately $1.6 million were
used to reduce revolving debt, to cover the expenses of moving to newer, leased
premises, and to make certain leasehold improvements to such premises.
-F8-
<PAGE> 33
5. LONG-TERM OBLIGATIONS AND OAKHURST LINE OF CREDIT
Long-term obligations, including the present value of the Creditor
Notes (see Note 8), consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1999 1998
------ ------
<S> <C> <C>
Revolving Credit Agreement due in April 2000 ....................... $2,786 $2,070
Capital lease obligations for computer and warehouse equipment,
due monthly through October 2003 ............................. 167 23
Creditor Notes (see Note 8) ........................................ 147 522
Subordinated loan for leasehold improvements,
due monthly through October 2003 ............................. 92 --
Other .............................................................. 51 60
------ ------
3,243 2,675
Less current portion ............................................... 214 543
------ ------
$3,029 $2,132
====== ======
</TABLE>
On March 28, 1996, Oakhurst and its subsidiaries, including SCPI,
entered into a two year revolving credit agreement with an institutional lender
that provided for a total facility for Oakhurst and its subsidiaries of $9.5
million, comprised of a SCPI term loan of $1.5 million (the "Fixed Asset
Loan"), secured by a mortgage on SCPI's real estate, and a maximum revolving
credit facility of $8 million (the "Revolver") (collectively, the "Credit
Facility").
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 had an initial term of two years, and contains
restrictive financial covenants, including among other things, the maintenance
of defined subsidiary and consolidated tangible net worth levels and
consolidated current ratio and limitations on annual cash dividends. The Credit
Facility is secured by the accounts receivable, inventories, and fixed assets
of Oakhurst and its subsidiaries, including SCPI, contains certain Revolver
prepayment penalties, and provides for the payment of loan management fees,
unused Revolver facility fees and examination fees.
In June 1997, Oakhurst and SCPI entered into an agreement with the
lender to amend the Credit Facility to reflect certain subsidiary dispositions
by Oakhurst. The agreement principally reduced the total amount available under
the Revolver to $7 million, and amended certain financial covenants, including
the elimination of the consolidated tangible net worth covenant. In September
1997, Oakhurst and its subsidiaries reached an agreement to extend the Revolver
beyond its initial two year term to March 1999, and paid a fee of $35,000 in
connection with the renewal. The Credit Agreement provided for subsequent
automatic renewal terms of one year each upon payment of a renewal fee of 0.5%
of the entire line, unless earlier terminated as provided for in the Agreement.
In March 1999, the Credit Agreement was again amended to increase
certain borrowing percentages, increase the interest rate to Citibank N.A. base
rate plus 2%, and amend the financial covenants to include a minimum level of
Earnings before interest, taxes, depreciation and amortization ("EBITDA"). The
amendment provided for the renewal of the facility until April 2000. At
February 28, 1999, the borrowing base under the Revolver was $4.9 million.
During fiscal 1999, the borrowing base ranged from approximately $4.5 million
to $5.5 million, and averaged approximately $5 million.
In December 1997, the Fixed Asset Loan was repaid in full, from the
proceeds of the sale of SCPI's warehouse.
-F9-
<PAGE> 34
In October 1998, SCPI obtained a low-interest loan from the
Redevelopment Authority of the City of McKeesport (the "Subordinated Loan").
The Subordinated Loan, which is subordinated to the Credit Facility, was in the
amount of $98,000 and bears interest at the rate of 5% per annum. The loan is
to be repaid in monthly installments through October 2003.
Long-term obligations, mature during each fiscal year as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL
------
<S> <C>
2000.............................. $ 214
2001.............................. 2,849
2002.............................. 65
2003.............................. 70
2004.............................. 45
------
$3,243
======
</TABLE>
6. FINANCIAL INSTRUMENTS
Financial instruments at February 28, 1999 and 1998 consist of the
following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, 1999 FEBRUARY 28, 1998
-------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revolver .......................... $ 2,786 $ 2,786 $ 2,070 $ 2,070
Oakhurst Notes..................... 721 721 1,016 1,016
Creditor Notes..................... 147 295 522 580
Subordinated Loan ................. 92 92 -- --
</TABLE>
The fair values of the instruments were based upon the rate available
to the Company for instruments of the same maturities.
7. INCOME TAXES AND DEFERRED TAX ASSET
As of February 28, 1999, SCPI and Oakhurst had, for tax reporting
purposes, net operating tax loss carry-forwards of approximately $154 million
which expire in the years 2001 through 2012. Under SFAS No. 109, SCPI records
as an asset the estimated future benefit of its net operating tax loss
carry-forwards and other tax benefits.
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 fiscal 1997, the Board of Directors of Oakhurst made the
decision to dispose of two of its subsidiaries, and the consolidated income of
Oakhurst decreased, which led to further increases of approximately $588,000
and $1.2 million in the valuation allowance of the deferred tax asset for the
periods ended February 28, 1998 and 1997 respectively, primarily due to the
loss of potential revenues pursuant to a tax sharing agreement between SCPI and
Oakhurst. If future profit levels exceed current expectations, and economic or
business changes warrant upward revisions in the estimate of the realizable
value of net operating tax loss carry-forwards, 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 aggregate charges of $3.3
million to deferred tax expense in prior years and any benefit in excess of
such charge would be reflected as an addition to paid-in capital. The
accounting treatment to increase paid-in capital results from SCPI's
quasi-reorganization accounting in fiscal 1990.
The deferred tax effects of temporary differences are not significant
and current income tax expense represents state income taxes.
-F10-
<PAGE> 35
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current tax expense ........................ $ 8 $ 412 $ 9
Current tax benefit from utilization of
net operating tax loss carry-forwards .... -- (412) --
------- ------- -------
8 -- 9
Increase in valuation allowance
of the deferred tax asset ................ -- 591 1,250
Deferred tax expense (benefit) ............. -- 409 (157)
------- ------- -------
Income tax expense ......................... $ 8 $ 1,000 $ 1,102
======= ======= =======
</TABLE>
The income tax provision differs from the amount using the statutory
federal income tax rate of 34% applied to income or loss from continuing
operations for the following reasons (in thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Tax expense (benefit) based on the
U.S. federal statutory rate ........... $ 55 $ 474 $ (85)
State income tax expense
net of refunds and federal benefit .... 10 -- 6
Undistributed investment income ......... (67) (67) (71)
Increase in deferred tax asset
valuation allowance ................... -- 591 1,250
Non-deductible costs .................... 10 2 2
------- ------- -------
Income tax expense .................. $ 8 $ 1,000 $ 1,102
======= ======= =======
</TABLE>
The availability of the net operating tax loss carry-forwards may be
adversely affected by future ownership changes of SCPI or Oakhurst; at this
time, such changes cannot be predicted. SCPI's and Oakhurst's estimated
operating tax loss carry-forwards at February 28, 1999 expire as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal
- ------
<S> <C>
2001 .......................... $ 12,000
2002 .......................... 52,000
2003 .......................... 22,000
2004 .......................... 49,000
2005 .......................... 13,000
2010........................... 1,000
2011........................... 2,000
2012 .......................... 3,000
---------
$ 154,000
=========
</TABLE>
8. DISCONTINUED RETAIL OPERATIONS
SCPI disposed of its former Retail Division to an unrelated company,
Retail Acquisition Corp. ("RAC") in September 1990 when RAC acquired
substantially all the assets of the former division and assumed substantially
all of its liabilities. SCPI remained contingently liable for certain of these
liabilities. Subsequently, RAC was forced into bankruptcy and in fiscal 1993,
SCPI participated in a global settlement pursuant to which SCPI issued $2.5
million of non-interest bearing notes (the "Creditor Notes") solely for
-F11-
<PAGE> 36
the benefit of contingent creditors. In return, SCPI and Oakhurst were relieved
of any further obligations to contingent creditors, except for payment on the
Creditor Notes.
The Creditor Notes, which were non-interest bearing, were payable upon
presentment in equal annual installments through July 1998. The Creditor Notes
have been discounted using an imputed interest rate of 7.5%. Imputed interest
expense of approximately $9,000, $34,000 and $56,000 is included in results of
continuing operations for fiscal 1999, 1998 and 1997, respectively. In
addition, income of approximately $127,000 associated with the expiration of
Creditor Notes is included in results of continuing operations for fiscal 1999.
The accompanying statement of cash flows reflect any cash payments
associated with the disposal of the former Retail Division as discontinued
operations.
9. STOCK OPTIONS
In fiscal 1992, the Board of Directors granted options to purchase
215,986 shares of common stock to key employees and to members of the Board of
Directors. The exercise price of the options, which was equal to the market
value of the stock at the date of the grant, is $0.625. As of February 28,
1999, no options had been exercised; all options are fully vested and will
remain exercisable through 2001.
10. EMPLOYEE PENSION PLAN
Steel City Products, together with Oakhurst and its other
subsidiaries, maintains a profit-sharing plan ("the Plan") covering
substantially all its employees, whereby employees may contribute a percentage
of compensation, limited to maximum allowed amounts under the Internal Revenue
Code. The Plan provides for discretionary employer contributions, the level of
which, if any, is to be determined annually by each company's Board of
Directors. There were no discretionary contributions made by the Company for
the years ended February 28, 1999, February 28, 1998 or February 28, 1997.
11. OPERATING LEASE
In December 1997, the Company entered into an operating lease for its
warehouse with an initial term that expires January 1, 2003, with one
additional five-year renewal option. The lease requires minimum rental payments
of $247,000 per annum, and payment by the Company of certain expenses such as
liability insurance, maintenance and other operating costs. Total rent expense
for the fiscal years ended February 28, 1999 and 1998 was approximately
$247,000 and $41,000, respectively.
12. COMMITMENTS AND CONTINGENCIES
SCPI has employment agreements with two senior executives that provide
termination rights in the event of a change in control of SCPI, as defined. The
rights include payments ranging from six to twenty-four months of the
executives' base salaries, along with continuation of benefits and certain
other payments to each executive. Each agreement also provides for
substantially the same provisions in the event that the executive's employment
were to be terminated by SCPI without cause. The agreements were extended in
August 1996 on a year to year basis, and will continue under the same terms
unless a notice of non-renewal is given by either party 90 days prior to the
anniversary date of such renewal, or unless replaced by a new agreement. In
April 1998 one senior executive entered into a new employment agreement which
provided for termination rights similar to those described above.
Management is unaware of any other significant contingencies.
-F12-
<PAGE> 37
13. MAJOR CUSTOMERS
Sales to major customers representing individually more than 10% of
sales were as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
February 28, 1999 February 28, 1998 February 28, 1997
----------------- ----------------- -----------------
% of % of % of
Sales Sales Sales Sales Sales Sales
-------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Ames $ 1,955 11% $ 2,178 12% $ 2,290 13%
</TABLE>
14. RELATED PARTY TRANSACTIONS
During fiscal 1996, SCPI transferred the rights to its Steel City
Products trademark and trade name to Oakhurst Holdings, Inc. ("OHI") in
exchange for 460 shares of stock of OHI, and SCPI entered into a trademark and
trade name license agreement with OHI whereby OHI granted SCPI the exclusive
right to use the trade name in transacting its business. The agreement provides
for a quarterly license fee equal to 1% of gross sales. This fee was
approximately $181,000, $178,000 and $186,000 for fiscal 1999, 1998 and 1997,
respectively. SCPI's investment income from OHI was approximately $196,000,
$196,000 and $209,000 in fiscal 1999, 1998 and 1997, respectively.
In June 1995, SCPI engaged Oakhurst Management Corporation ("OMC"), a
wholly-owned subsidiary of Oakhurst, to provide certain legal, management,
investor relations, accounting, and tax services. SCPI's results for the fiscal
years ended 1999, 1998 and 1997 include charges of approximately $367,000,
$582,000 and $461,000, respectively, for these services.
-F13-
<PAGE> 38
SCHEDULE II
STEEL CITY PRODUCTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------- ------------------------------ ------------- -------------
BALANCE AT CHARGED CHARGES TO BALANCE
BEGINNING TO COSTS OTHER ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF PERIOD AND EXPENSES - DESCRIBE - DESCRIBE OF PERIOD
============= ============= ============= ============= =============
Allowance for doubtful accounts deducted
from trade accounts receivable:
Years ended:
<S> <C> <C> <C> <C> <C>
February 28, 1999 .................... $ 355 $ 26 $ -- $ 138 $ 244
============= ============= ============= ============= =============
February 28, 1998 .................... $ 389 $ 138 $ -- $ 72 $ 355
============= ============= ============= ============= =============
February 28, 1997 .................... $ 419 $ (30) -- $ -- $ 389
============= ============= ============= ============= =============
</TABLE>
(A) Amounts were deemed uncollectible.
-F14-
<PAGE> 39
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Company's Annual Report
on Form 10-K for the fiscal year ended February 27, 1993).
3.2 By-laws of the Company as amended through May 17, 1993 (filed as Exhibit 3.2 to the
Company's Annual Report of Form 10-K for the fiscal year ended February 26, 1994).
/*10.1 Employment Agreement with Bernard H. Frank dated as of April 1, 1998.
/10.2 Employment Agreement with Terrance W. Allan dated as of September 1, 1993 (filed as Exhibit
10.3 to the Company's Annual Report of Form 10-K for the fiscal year ended February 26,
1994).
/10.4 Form of Option Agreement dated August 29, 1991 with directors and executive officers (filed
as Exhibit 10(t) to the Company's Annual report on Form 10-K for the fiscal year ended
February 29, 1992).
10.5 Note Agreements with William T. Apgar, Liquidating Trustee for the Retail Acquisition Corp.
Amended Plan of Reorganization, (filed as Exhibit 10(w) the Company's Annual Report on Form
10-K for the fiscal year ended February 27, 1993).
10.6 Open-End Mortgage between Steel City Products, Inc. and FINOVA Capital Corporation dated
March 28, 1996, (filed as exhibit #10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 29, 1996).
10.7 Combined and Amended Promissory Note between Steel City Products, Inc. and Oakhurst Company,
Inc., dated March 28, 1996, (filed as exhibit #10.11 to the Company's Annual Report on Form
10-K for the fiscal year ended February 29, 1996).
</TABLE>
<PAGE> 40
<TABLE>
<S> <C>
10.8 Trademark & Trade Name License Agreement between Oakhurst Holdings, Inc. and Steel City
Products, Inc., dated August 16, 1995, (filed as exhibit #10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 29, 1996).
/10.9 Corporate Services Agreement between Steel City Products, Inc. and Oakhurst Management
Corporation dated June 1, 1995, (filed as exhibit #10.13 to the Company's Annual Report on
Form 10-K for the fiscal year ended February 29, 1996).
10.10 Agreement of Sale and Purchase by and between Steel City Products, Inc. and Bearing Service
Company of Pennsylvania dated as of August 18, 1997, (filed as exhibit #10 to the Company's
Form 10-Q for the quarter ended August 31, 1997).
10.11 Addendums to the Agreement of Sale and Purchase by and between Steen City Products, Inc. and
Bearing Service company of Pennsylvania dated October 18, 1997, and December 17, 1997,
respectively, (filed as exhibit #10 to the Company's Form 10-Q for the quarter ended
November 30, 1997).
10.12 Lease agreement by and between Regional Industrial Development Corporation of Southwestern
Pennsylvania and Steel City Products, Inc., dated November 11, 1997- (filed as exhibit #10
to the Company's Form 10-K for the year ended February 28, 1998)
*18.1 Letter regarding change in accounting principle
*27 Financial Data Schedule (EDGAR transmission only).
*27.1 Restated Financial Data Schedule for the quarter ended November 30, 1998 (filed as exhibit
#27 to the Company's Form 10-Q for the quarter ended November 30, 1998) (EDGAR transmission
only).
*27.2 Restated Financial Data Schedule for the quarter ended August 31, 1998 (filed as exhibit #27
to the Company's Form 10-Q for the quarter ended August 31, 1998) (EDGAR transmission only).
*27.3 Restated Financial Data Schedule for the quarter ended May 31, 1998 (filed as exhibit #27 to
the Company's Form 10-Q for the quarter ended May 31, 1998) (EDGAR transmission only).
*27.4 Restated Financial Data Schedule for the year ended February 28, 1998 (filed as exhibit #27
to the Company's Form 10-K for the year ended February 28, 1998) (EDGAR transmission only).
*27.5 Restated Financial Data Schedule for the quarter ended November 30, 1997 (filed as exhibit
#27 to the Company's Form 10-Q for the quarter ended November 30, 1997) (EDGAR transmission
only).
*27.6 Restated Financial Data Schedule for the quarter ended August 31, 1997 (filed as exhibit #27
to the Company's Form 10-Q for the quarter ended August 31, 1997) (EDGAR transmission only).
*27.7 Restated Financial Data Schedule for the quarter ended May 31, 1997 (filed as exhibit #27 to
the Company's Form 10-Q for the quarter ended May 31, 1997) (EDGAR transmission only).
*27.8 Restated Financial Data Schedule for the year ended February 28, 1997 (filed as exhibit #27
to the Company's Form 10-K for the year ended February 28, 1997) (EDGAR transmission only).
</TABLE>
- -----------------
/Management contract or compensatory plan or arrangement.
*Filed herewith
<PAGE> 1
EXHIBIT 10.1
STEEL CITY PRODUCTS, INC.
BERNARD H. FRANK EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of this 1st day of April
1998 by and between BERNARD H. FRANK (hereinafter referred to as "Mr. Frank")
and STEEL CITY PRODUCTS, INC.(hereinafter referred to as the "Company").
1. BACKGROUND. Mr. Frank is currently an employee of the Company pursuant to
an agreement dated as of September 1, 1993 (the "Prior Agreement"), which
has been extended beyond its stated expiration. The parties now wish to
enter into this Agreement, which is intended to replace and supersede in
all respects the Prior Agreement.
2. CONSIDERATION. The parties are entering into this Agreement for and in
consideration of the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged.
3. TERM OF EMPLOYMENT.
a. Mr. Frank's employment hereunder shall commence on April 1, 1998
(the "Commencement Date.")
b. This Agreement shall expire (subject to the provisions of Section
16, below) on the earlier to occur of (i) a termination of Mr.
Frank's employment pursuant in Section 11, Section 12 or Section 13,
below; or (ii) the close of business on February 29, 2000 (the
"Expiration Date").
4. TITLE, REPORTING RELATIONSHIP & RESPONSIBILITIES.
a. So long as this Agreement is in effect, Mr. Frank shall be elected
Chairman of the Company's Board of Directors, and shall report to
the Board of Directors of the Company.
b. Mr. Frank shall perform all of the customary duties and fulfill all
of the customary responsibilities of a chairman of the board of a
publicly traded corporation. Mr. Frank shall determine in his own
discretion the amount of time that is required for him to fulfill
these duties and responsibilities and he shall carry them out to the
best of his abilities. Nothing herein shall be construed to prevent
Mr. Frank from serving as an officer or director or participating in
the activities of any family, religious, charitable, community
service or political activity so long as such participation does not
interfere with his carrying out his duties and responsibilities
hereunder.
5. COMPENSATION. Mr. Frank's compensation shall be as follows:
a. Base Salary. The Company shall pay Mr. Frank a base salary of no
less than $4,167 per month plus such merit increases as the Board of
Directors of the Company shall
Page 1 of 9
<PAGE> 2
determine from time to time in its sole discretion ("Base Salary").
Base Salary shall be paid in
Bernard H. Frank Employment Agreement
installments no less frequently than twice monthly at the same time
as other employees of the Company are paid.
b. Deferred Compensation. In recognition of the salary voluntarily
foregone by Mr. Frank since October 1995, the Company shall pay him
deferred compensation of $5,000 per month for 23 months (the
"Deferred Compensation"), commencing with the month of April 1998.
c. Special Bonus. The Board of Directors of the Company's parent in its
sole discretion may grant to Mr. Frank on a quarterly basis a
special bonus (the "Special Bonus") not to exceed, however, $25,000
in any fiscal year of the Company.
d. Annual Bonus.
i. Subject to the terms hereof, the Company shall pay to Mr.
Frank an annual cash bonus (the "Annual Bonus"), for each
calendar year on the March 15 following the conclusion of each
calendar year, from a bonus pool equal to 8% of the Company's
consolidated net income before interest, taxes, depreciation,
LIFO adjustments, corporate overhead, and inter-company
exchanges or charges, and amortization, prepared in accordance
with generally accepted accounting principles consistently
applied and in a manner consistent with bonus calculations for
the calendar year 1997. The bonus pool shall be divided
amongst the Company's executives by the Compensation Committee
of the Company's Board of Directors based upon the
recommendations of the Chairman of the Board of Directors of
the Company.
ii. Unless the Company shall have no earnings for a given calendar
year, Mr. Frank's Annual Bonus shall be not less than 15% of
his Base Salary, unless his employment terminates before the
end of a calendar year, in which event the provisions relating
to termination of employment shall govern the payment of his
Annual Bonus for such year.
6. BENEFITS.
a. Health, Insurance etc. Mr. Frank shall be entitled to the same
health and other benefits as are made available to the Company's
senior officers generally, and on the same terms and conditions.
b. The Company shall furnish Mr. Frank with the use of a Company-leased
automobile with a monthly rental rate not to exceed $500 per month
or a Company-owned automobile that, if leased, would have a monthly
lease rate of no more than $500; or in lieu of either of the
foregoing, the Company shall pay him a monthly automobile allowance
of $500. The cost of all insurance, maintenance and repairs for, and
gasoline consumed by, such automobile shall be paid or reimbursed
(as the case may be) to Mr. Frank other than the cost of gasoline
for his personal use of such automobile.
c. All of the benefits described in this Section 6 are hereinafter
referred to collectively as the "Benefits."
Page 2 of 9
<PAGE> 3
Bernard H. Frank Employment Agreement
7. BUSINESS EXPENSE REIMBURSEMENT. Mr. Frank shall be reimbursed in
accordance with Company policy from time to time in effect for all
reasonable business expenses incurred by him in the performance of his
duties hereunder.
8. INDEMNIFICATION. Mr. Frank shall be indemnified by the Company with
respect to claims made against him as a director, officer and/or employee
of the Company, of its parent, or of any of their subsidiaries (as the
case may be) to the fullest extent permitted by the Company's charter,
by-laws and the law of its state of incorporation.
9. CONFIDENTIAL INFORMATION.
a. During his employment by the Company and after his employment
terminates for whatever reason, Mr. Frank shall not disclose to any
person or entity Confidential Information (as defined below) except
in the proper performance of his duties and responsibilities under
this Agreement or except as may be expressly authorized by the Board
of Directors of the Company and shall not use Confidential
Information for the benefit of any person or entity other than the
Company. For purposes of this Agreement, "Confidential Information"
is defined as including trade secrets, customer names and lists,
vendor names and lists, product costs and selling prices, business
plans, marketing plans, non-public financial data, product
specifications and designs, the existence, nature, substance,
progress and results of research and development projects, concepts,
inventions, discoveries, formulae, processes, drawings, documents,
records, software, or any other information of the Company, its
parent or of any of their subsidiaries that is not generally
available, or any such information of any third party that is held
by the Company, its parent or any of their subsidiaries under an
obligation of confidentiality.
b. Mr. Frank's obligation of confidentiality shall not, however, relate
to any information --
i. that is or becomes publicly known through no act or fault of
Mr. Frank;
ii. that is received by Mr. Frank (without a breach of this or any
other agreement) from a third party with no restrictions as to
its disclosure; or
iii. that is required to be disclosed pursuant to applicable law, a
court order or a judicial proceeding, including a proceeding
to enforce this Agreement.
10. NON-COMPETE OBLIGATIONS.
a. Mr. Frank's obligations with respect to competing with the Company
and soliciting its employees shall be as follows:
i. Within the Market Area (as defined below) Mr. Frank shall not
render services or advice, whether for compensation or without
compensation and whether as an employee, officer, director,
principal or otherwise, to any person or organization with
respect to any product, service or process in existence or
under development
Page 3 of 9
<PAGE> 4
that is competitive with (1) the business of the Company on
the date hereof; (2) the business of the Company in which Mr.
Frank was actively engaged during his employment by the
Company or of which he has detailed knowledge; or with (3) any
planned business
Bernard H. Frank Employment Agreement
of the Company in which Mr. Frank had an active part in the
planning or of which he has detailed knowledge.
ii. Mr. Frank shall not either directly or indirectly as agent or
otherwise in any manner solicit influence or encourage any
customer of the Company to take away or to divert or direct
its business to Mr. Frank or to any person or entity by or
with which Mr. Frank is employed, associated, affiliated or
otherwise related, other than the Company.
iii. Mr. Frank shall not recruit or otherwise solicit or induce any
employee of the Company to terminate his or her employment or
otherwise cease his or her relationship with his or her
employer.
b. Mr. Frank's obligations under this Section 10 shall continue (i) so
long as he is an employee of the Company and (ii) after his
employment terminates, (whether by reason of the expiration of this
Agreement or pursuant to Section 11, Section 12 or Section 13,
below, or otherwise) for (x) a period of six months, or (y) for the
period, if any, during which the Company is obligated to continue to
pay, or as to which it has in a lump sum paid, Mr. Frank's Base
Salary, whichever period is longer.
c. Definitions.
i. "Market Area" is defined as an area within a 200 mile radius
of any facility of the Company.
ii. For purposes of this Section 10, the word "Company" shall
include the Company's parent and any subsidiary of the Company
or such parent.
11. TERMINATION BY THE COMPANY: Prior to the Expiration Date, the Company may
terminate Mr. Frank's employment only pursuant to the terms and conditions
contained in this Section 11.
a. Without Cause; Death; Disability. The Company may terminate Mr.
Frank's employment without Cause (as the word "Cause" is defined
below) or by reason of his death or permanent disability by giving
Mr. Frank written notice of such termination. In the event the
Company gives such notice, Company shall do the following:
i. continue to pay to Mr. Frank for each full calendar month in
the period between the date of such termination and the
Expiration Date; or for a period of 12 months, whichever
period is longer, one-twelfth of his Base Salary;
ii. pay to Mr. Frank any Deferred Compensation to which he is
entitled through the Expiration Date, but which has not been
paid to him;
iii. pay to Mr. Frank any Special Bonus awarded to him, but not
paid;
Page 4 of 9
<PAGE> 5
iv. after the end of the calendar year of the Company in which
such termination of employment occurs, pay to Mr. Frank any
Annual Bonus that, but for the termination of his employment,
would have been paid to him for such year, pro-rated, however,
for the number of days during such year that Mr. Frank was an
employee of the Company;
Bernard H. Frank Employment Agreement
v. provide to Mr. Frank the Benefits for the period during which
it is required to continue to pay him his Base Salary under
Section 11(a)(i), above; and
vi. cause all stock options held by Mr. Frank to become
exercisable in full and to remain exercisable until their
stated expiration date (without regard, for such purpose, to
the termination of his employment).
b. Insurance Payments. Any payments made to Mr. Frank under any
disability plans, the premiums for which were not paid by Mr. Frank,
shall serve to reduce the amounts payable under Section 11(a)(i),
above.
c. For Cause. The Company may terminate Mr. Frank's employment for
Cause by giving written notice thereof to Mr. Frank, in which event
the Company shall pay him any Base Salary accrued, but not paid
through the date of such termination; shall continue to pay him the
monthly installments of Deferred Compensation as provided in Section
5(b), above; and shall pay him any Special Bonus awarded prior to
the date of such termination, but not paid.
d. Definition of Cause. "Cause" shall mean gross or wilful misconduct
by Mr. Frank in connection with his employment; the breach by Mr.
Frank of any material obligation under this Agreement, including,
but not limited to the obligations set forth in Section 9 and
Section 10, above; a material breach in connection with the
performance by Mr. Frank of his employment responsibilities; any act
of dishonesty or fraud; or the commission by Mr. Frank of a felony.
e. Withholdings. All amounts payable to Mr. Frank under this Agreement
shall be subject to such withholdings therefrom as the Company is
legally required to make.
12. RESIGNATION BY MR. FRANK.
a. Mr. Frank may resign his employment with the Company on 30 days'
prior written notice to the Company.
b. The Company may deem any such notice given by Mr. Frank as a
resignation by him, effective upon the giving of such notice, of any
or all directorships and offices then held by him in the Company,
its parent and any of their subsidiaries, but the Company shall
nevertheless continue to pay to Mr. Frank (i) his Base Salary during
the thirty-day notice period; and (ii) the Deferred Compensation
until all twenty-three payments thereof have been made.
c. No Annual Bonus shall be payable to Mr. Frank with respect to the
fiscal year in which he resigns his employment with the Company.
Page 5 of 9
<PAGE> 6
Bernard H. Frank Employment Agreement
d. In the event of Mr. Frank's resignation, all stock options then held
by him shall remain in effect until their stated expiration date
(without regard, for such purpose, to the termination of his
employment).
13. CHANGE IN CONTROL.
a. Anything herein to the contrary notwithstanding, if after a Change
in Control (as defined below) either (i) Mr. Frank's employment is
terminated without Cause and other than by reason of his death or
permanent disability; or (ii) Mr. Frank resigns his employment
pursuant to Section12, above, by written notice given within his 180
days of the effective date of the Change in Control, the Company
shall pay and provide to Mr. Frank the amounts and benefits that it
is required to pay and provide in the case of a termination without
Cause under Section 11(a), above, except that --
i. All payments shall be made in a lump sum within 15 days of the
date of the termination of his employment, and the payment of
Base Salary shall be increased by 25%.
b. A "Change in Control" shall mean any transaction that results in a
sale of substantially all of the assets, business or common stock of
the Company to a third party or entity that is not controlled by the
senior managers of the Company or by a majority of the Board of
Directors of the parent of the Company on the date hereof.
14. NOTICES. All notices required or permitted under this Agreement shall be
in writing and shall be deemed given by a party when hand delivered to the
other party or when deposited with a delivery service that provides
next-business-day delivery and proof of delivery, addressed to the other
party as follows:
If to the Company: If to Mr. Frank:
At its headquarters address At his most recent residence address
attention of the President. on the books of the Company.
With a copy to: With a copy to:
Roger M. Barzun Mark Frank, Esq.
General Counsel Aderson, Frank & Steiner
60 Hubbard Street 2320 Grant Building
P.O. Box 767 Pittsburgh, PA 15219
Concord, Massachusetts 01742
or to such other address of a party as such party may by notice hereunder
designate to the other party.
15. SEVERABILITY. If any provision or part of a provision of this Agreement is
finally declared to be invalid by any tribunal of competent jurisdiction,
such part shall be deemed automatically adjusted, if possible, to conform
to the requirements for validity, but, if such adjustment is not possible,
it shall be deemed deleted from this Agreement as though it had never been
Page 6 of 9
<PAGE> 7
Bernard H. Frank Employment Agreement
included herein. In either case, the balance of any such provision and of
this Agreement shall remain in full force and effect. Notwithstanding the
foregoing, however, no provision shall be deleted if it is clearly
apparent under the circumstances that either or both of the parties would
not have entered into this Agreement without such provision.
16. SURVIVAL. Notwithstanding the expiration or earlier termination of this
Agreement or of Mr. Frank's employment for any reason, the terms and
conditions of Section 9 and Section 10 and any other obligations of the
parties that by their terms are to be performed or are to have continued
effect after such termination shall survive such expiration or
termination.
17. PRORATION. All amounts payable to Mr. Frank hereunder for a period shorter
than the period for which they are described herein shall be pro-rated on
a daily basis using a 365-day year.
18. INJUNCTIVE RELIEF. It is acknowledged and agreed that the Company shall
have the right to bring an action to enjoin any violation by Mr. Frank of
his obligations under Section 9 and Section 10, above, because a suit for
monetary damages alone would be an inadequate remedy.
19. ARBITRATION.
a. Except as otherwise provided below, this Agreement and any
controversy, claim or dispute between the parties directly or
indirectly concerning this Agreement or the breach hereof or the
subject matter hereof, including questions concerning the scope and
applicability of this Section 18 shall be finally settled by
arbitration held in Pittsburgh, Pennsylvania in accordance with the
provisions of this Section and the rules of commercial arbitration
then followed by the American Arbitration Association or any
successor to the functions thereof.
b. The arbitrator or arbitrators (the "arbitrators") shall be chosen in
accordance with such rules. A majority of the arbitrators shall have
the right and authority to determine how their decision or
determination as to each issue or matter in dispute may be
implemented or enforced. Any decision or award of a majority of the
arbitrators shall be final and conclusive on the parties to this
Agreement, and there shall be no appeal therefrom other than for
fraud or willful misconduct. Notwithstanding anything in this
Section 18 to the contrary, no arbitrator in any such proceeding
shall have authority or power to (i) modify or alter any express
condition or provision hereof by an award or otherwise; or (ii)
award punitive or exemplary damages for or against any party to any
such proceeding.
c. The parties hereto agree that an action to compel arbitration
pursuant to this Agreement may be brought in the appropriate court
of the Commonwealth of Pennsylvania sitting in Pittsburgh,
Pennsylvania. Application may also be made to such court for
confirmation of any decision or award of a majority of the
arbitrators, for an order of enforcement and for any other remedies
that may be necessary to effectuate such decision
Page 7 of 9
<PAGE> 8
Bernard H. Frank Employment Agreement
or award. Each of the parties hereto hereby consents to the
jurisdiction of the arbitrators and of such court and waives any
objection to the jurisdiction of such arbitrators and court.
d. Notwithstanding anything contained in this Section 18 to the
contrary, the parties hereby agree that this Section 18 shall not
apply to any action brought by a party seeking an injunction or
other equitable relief.
e. In any controversy, claim or dispute subject to arbitration under
the terms of this Section 18, the parties shall pay the fees and
expenses of the arbitrators in accordance with any decision or award
of a majority of the arbitrators.
20. MISCELLANEOUS.
a. This Agreement --
i. Supercedes and replaces in its entirety the Prior Agreement;
ii. contains the entire understanding of the parties on the
subject matter hereof;
iii. shall not be amended, and no term hereof shall be waived,
except by written agreement of the parties signed by each of
them;
iv. shall be binding upon and inure to the benefit of the parties
and their successors, personal representatives and permitted
assigns;
v. may be executed in one or more counterparts, each of which
shall be deemed an original hereof, but all of which shall
constitute but one and the same agreement; and
vi. shall not be assignable by either party without the prior
written consent of the other party, except that the Company
may assign this Agreement to any entity acquiring
substantially all of the stock, business or assets of the
Company, provided that the acquiror assumes all of the
Company's obligations hereunder.
b. The words "herein," "hereof," "hereunder," "hereby," "herewith" and
words of similar import when used in this Agreement shall be
construed to refer to this Agreement as a whole. The word
"including" shall mean including, but not limited to any one or more
enumerated items.
c. Each provision of this Agreement shall be interpreted and enforced
without the aid of any canon, custom or rule of law requiring or
suggestion construction against the party drafting or causing the
drafting of such provision.
d. No representation, affirmation of fact, course of prior dealings,
promise or condition in connection herewith or usage of the trade
not expressly incorporated herein shall be binding on the parties.
e. The failure to insist upon strict compliance with any term, covenant
or condition contained herein shall not be deemed a waiver of such
term, nor shall any waiver or
Page 8 of 9
<PAGE> 9
Bernard H. Frank Employment Agreement
relinquishment of any right at any one or more times be deemed a
waiver or relinquishment of such right at any other time or times.
f. The captions of the paragraphs herein are for convenience only and
shall not be used to construe or interpret this Agreement.
21. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the domestic laws of the Commonwealth of Pennsylvania
without giving effect to any choice of law or conflict of law provision or
rule (whether of the Commonwealth of Pennsylvania or of any other
jurisdiction) that would cause the application hereto of the laws of any
jurisdiction other than the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
STEEL CITY PRODUCTS, INC.
By: /s/ Joel S. Lever /s/ Bernard H. Frank
-------------------------------- -----------------------------------
Joel S. Lever BERNARD H. FRANK
Director
Page 9 of 9
<PAGE> 1
EXHIBIT 18.1
May 21, 1999
Steel City Products, Inc.
3513 Concord Pike
Suite 3527
Wilmington, DE
Dear Sirs/Madams:
We have audited the financial statements of Steel City Products, Inc. as of
February 28, 1999 and 1998, and for each of the three years in the period ended
February 28, 1999, included in your Annual Report on Form 10-K to the Securities
and Exchange Commission and have issued our report thereon dated May 21, 1999.
Note 1 to such financial statements contains a description of your adoption
during the year ended February 28, 1999 of the first-in, first-out method (FIFO)
of inventory costing. Prior to the year ended February 28, 1999, Steel City
Products, Inc. utilized the last-in, first-out method (LIFO) of inventory
costing. In our judgment, such change is to an alternative accounting principle
that is preferable under the circumstances.
Yours truly,
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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