<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ____________________
Commission file number: 0-2572
STEEL CITY PRODUCTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 55-0437067
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
3513 CONCORD PIKE, SUITE 3527, WILMINGTON, DELAWARE 19803
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(302) 478-9170
----------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At January 5, 1998, 3,238,061 shares of the Registrant's Common Stock,
$0.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
STEEL CITY PRODUCTS, INC.
<TABLE>
<S> <C>
Balance Sheets at November 30, 1998 (unaudited)
and February 28, 1998......................................................... 3
Statements of Operations for the three month periods ended
November 30, 1998 and November 30, 1997 (unaudited)........................... 4
Statements of Operations for the nine month periods ended
November 30, 1998 and November 30, 1997 (unaudited)........................... 5
Statement of Stockholders' Equity for the nine months
ended November 30, 1998 (unaudited) .......................................... 6
Statements of Cash Flows for the nine month periods ended
November 30, 1998 and November 30, 1997 (unaudited)............................ 7
Notes to Financial Statements (unaudited)....................................... 8
</TABLE>
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<PAGE> 3
STEEL CITY PRODUCTS, INC.
BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................................ $ 2 $ 1
Trade accounts receivable, less allowance of $302 and $355, respectively ............ 2,136 2,698
Notes receivable - Oakhurst Company, Inc ............................................ 321 293
Inventories ......................................................................... 2,381 3,666
Other ............................................................................... 105 50
-------- --------
Total current assets ................................................... 4,945 6,708
-------- --------
Property and equipment, at cost .......................................................... 1,109 951
Less accumulated depreciation ....................................................... (675) (618)
-------- --------
434 333
-------- --------
Notes receivable - Oakhurst Company, Inc., long-term portion ............................. 478 723
Advances to Oakhurst Company, Inc ........................................................ 6,537 5,706
Other assets ............................................................................. 813 666
-------- --------
7,828 7,095
-------- --------
$ 13,207 $ 14,136
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 2,799 $ 3,926
Accrued compensation ................................................................ 309 380
Current maturities of long-term obligations ......................................... 291 543
Due to affiliate .................................................................... 601 462
Other ............................................................................... 123 150
-------- --------
Total current liabilities .............................................. 4,123 5,461
-------- --------
Long-term obligations:
Long-term debt ...................................................................... 2,369 2,070
Other long-term obligations ......................................................... 260 62
-------- --------
2,629 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) ............................................ (37,419) (37,331)
Treasury stock, at cost, 207 common shares .......................................... (1) (1)
-------- --------
Total stockholders' equity ............................................. 6,455 6,543
-------- --------
$ 13,207 $ 14,136
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
STEEL CITY PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Sales ..................................................... $ 4,188 $ 4,289
Other income .............................................. 151 127
----------- -----------
4,339 4,416
----------- -----------
Cost of goods sold, including occupancy and
buying expenses ........................................ 3,502 3,550
Operating, selling and administrative expenses ............ 882 928
Provision for doubtful accounts ........................... 13 75
Interest expense .......................................... 71 108
----------- -----------
4,468 4,661
----------- -----------
Net loss before undistributed earnings of investment
in affiliate ........................................... (129) (245)
Income tax expense ........................................ (1) --
Undistributed earnings of investment in affiliate ......... 43 49
----------- -----------
Net loss .................................................. (87) (196)
Effect of Series A Preferred Stock dividends .............. (253) (253)
----------- -----------
Net loss attributable to common stockholders .............. $ (340) $ (449)
=========== ===========
Basic and diluted net loss per share attributable to common
stockholders after preferred stock dividends ........... $ (0.11) $ (0.14)
=========== ===========
Weighted average number of shares outstanding
used in computing per share amount ..................... 3,238,061 3,238,061
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
STEEL CITY PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997
----------- ------------
<S> <C> <C>
Sales ........................................................... $ 13,893 $ 14,038
Other income .................................................... 451 392
----------- -----------
14,344 14,430
----------- -----------
Cost of goods sold, including occupancy and
buying expenses .............................................. 11,476 11,396
Operating, selling and administrative expenses .................. 2,824 2,877
Provision for doubtful accounts ................................. 47 123
Interest expense ................................................ 230 331
----------- -----------
14,577 14,727
----------- -----------
Net loss before income taxes and
undistributed earnings of investment in affiliate ............ (233) (297)
Income tax expense .............................................. (7) -
Undistributed earnings of investment in affiliate ............... 152 152
----------- -----------
Net loss ........................................................ (88) (145)
Effect of Series A Preferred Stock dividends .................... (763) (759)
----------- -----------
Net loss attributable to common stockholders .................... $ (851) $ (904)
=========== ===========
Basic and diluted net loss per share attributable to common
stockholders after preferred stock dividends ................. $ (0.26) $ (0.28)
=========== ===========
Weighted average number of shares outstanding
used in computing per share amount ........................... 3,238,061 3,238,061
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
STEEL CITY PRODUCTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED NOVEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK
--------------------- --------------------- PAID-IN EARNINGS -----------------
SHARES PAR VALUE SHARES PAR VALUE CAPITAL (DEFICIT) SHARES COST
-------- --------- -------- --------- ------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, February 28, 1998 ....... 1,938,526 $ 19 3,238,061 $ 32 $ 43,824 $ (37,331) 207 $ (1)
Net loss for the period ........... (88)
---------- ----- ---------- ----- ---------- ---------- ----- ----
Balances, November 30, 1998 ....... 1,938,526 $ 19 3,238,061 $ 32 $ 43,824 $ (37,419) 207 $ (1)
========== ===== ========== ===== ========== ========== ===== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 7
STEEL CITY PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $ (88) $ (145)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization ............................... 80 144
Undistributed earnings of investment in affiliate ........... (152) (152)
Other changes in operating assets and liabilities:
Accounts receivable ......................................... 562 (192)
Inventories ................................................. 1,285 840
Accounts payable ............................................ (1,127) (933)
Other ....................................................... 18 148
------- -------
Net cash provided by (used in) operating activities of:
Continuing operations .............................................. 578 (290)
Discontinued operations ............................................ (330) (301)
------- -------
Net cash provided by (used in) operating activities ..................... 248 (591)
------- -------
Cash flows from investing activities:
Advances to Oakhurst Company, Inc .................................. (831) (139)
Collection of note receivable, Oakhurst Company, Inc ............... 217 198
Additions to property and equipment ................................ (27) (37)
------- -------
Net cash (used in) provided by investing activities ..................... (641) 22
------- -------
Cash flows from financing activities:
Net borrowings under revolving credit agreement .................... 299 785
Proceeds from issuance of long-term debt ........................... 132 -
Principal payments on long-term obligations ........................ (17) (217)
Deferred loan costs ................................................ (20) -
------- -------
Net cash provided by financing activities ............................... 394 568
------- -------
Net increase (decrease) in cash and cash equivalents .................... 1 (1)
Cash and cash equivalents at beginning of period ........................ 1 2
------- -------
Cash and cash equivalents at end of period .............................. $ 2 $ 1
======= =======
Supplemental schedule of non-cash investing and financing activities:
Nine months ended November 30, 1998:
Capital lease obligations of $131 were incurred in connection with
leases of new equipment.
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 8
STEEL CITY PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 1998
1. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
presented. All adjustments made are of a normal recurring nature.
While the Company believes that the disclosures presented herein are
adequate to make the information not misleading, it is suggested that these
unaudited financial statements be read in conjunction with the audited financial
statements for the fiscal year ended February 28, 1998 ("fiscal 1998") as filed
in the Company's Annual Report on Form 10-K.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting
comprehensive income and its components. SFAS No. 130 also requires that the
cumulative balance of these items of other comprehensive income be reported
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130
in the first quarter ended May 31, 1998 (unaudited) and the adoption did not
have a material impact on the Company's disclosures in its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related information". SFAS No. 131 establishes standards
for the way public companies report selected information about operating
segments in both quarterly and annual financial statements to their
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. This statement is
not required to be applied to interim financial statements in the initial year
of its application. The Company has not yet determined the effects, if any, that
SFAS No. 131 will have on the disclosures in its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair market
value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation of the hedge exposure. Depending on how the hedge is used and the
designation, the gain or loss due to changes in the fair value is reported
either in earnings or in other comprehensive income. The Company has not yet
determined the effects, if any, that SFAS No. 133 will have on the disclosures
in its financial statements.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Steel City Products, Inc. ("SCPI") is a special, limited purpose,
majority-owned subsidiary of Oakhurst Company, Inc. ("Oakhurst"). SCPI is
expected to concentrate on its historical line of business, while any future
growth and expansion opportunities are expected to be pursued by one or more
subsidiaries of Oakhurst. Through Oakhurst's ownership of SCPI, primarily in the
form of preferred stock, Oakhurst retains substantially all the value of SCPI,
and receives substantially all of the benefit of operations through dividends on
the preferred stock. Oakhurst's ownership of SCPI is designed to facilitate the
preservation and utilization of SCPI's and Oakhurst's net operating tax loss
carry-forwards which amount to approximately $155 million.
In addition to cash derived from operations, SCPI's liquidity and
financing requirements are determined principally by the working capital needed
to support its level of business, together with the need for capital
expenditures and the cash required to repay its debt. SCPI also receives cash
payments pursuant to a note receivable from Oakhurst, and from time to time,
repayments of advances to Oakhurst. SCPI's working capital needs fluctuate
primarily due to the amounts of inventory it carries which can change
seasonally, the size and timeliness of payment of receivables from its customers
to which from time to time SCPI grants extended payment terms for their seasonal
inventory builds, and the amount of credit extended to SCPI by its suppliers.
SCPI participates in a cash concentration system together with certain other
subsidiaries of Oakhurst. Available cash that is transferred to Oakhurst is
reflected as an addition to the advances to Oakhurst.
At November 30, 1998, SCPI's debt primarily consisted of notes payable
that were issued in connection with the settlement of certain contingent
liabilities related to SCPI's former retail division. SCPI also has revolving
debt of approximately $2.4 million which is offset entirely by advances
receivable from Oakhurst that bear interest at the same rate as the revolving
debt.
Oakhurst and its subsidiaries, including SCPI, have available financing
under a revolving credit facility (the "Revolver") from an institutional lender
up to a maximum of $7 million, subject to a borrowing base that is calculated
according to defined levels of the subsidiaries' accounts receivable and
inventories. At November 30, 1998, the borrowing base under the Revolver was
$4.5 million. In fiscal 1998, the Revolver was extended to April 1999, and
provides for subsequent 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. Management believes that the Revolver will provide adequate funding
for SCPI's working capital requirements for at least the next twelve months,
assuming no material deterioration in current sales levels or gross profit
margins, and continuation of normal levels of supplier credit.
From time to time the information provided by the Company or statements
made by its employees may contain so-called "forward looking" information that
involves risks and uncertainties. In particular, statements contained in this
Item 2 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are not historical facts (including, but not
limited to statements concerning anticipated sales, profit levels, customers and
cash flows) are forward looking statements. The Company's actual future results
may differ significantly from those stated in any forward looking statements.
Factors that may cause such differences include, but are not limited to the
factors discussed above as well as the accuracy of the Company's internal
estimates of revenue and operating expense levels. Each of these factors and
others are discussed from time to time in the Company's Securities and Exchange
Commission filings.
MATERIAL CHANGES IN FINANCIAL CONDITION
As of November 30, 1998, there had been no material changes in the
Company's financial condition from February 28, 1998, discussed in Item 7 of the
Company's Annual Report on Form 10-K for fiscal 1998.
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<PAGE> 10
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Operations include the results of SCPI's operating division, Steel City
Products, a distributor of automotive parts and accessories and of non-food pet
supplies based in McKeesport, Pennsylvania.
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED NOVEMBER
30, 1997
Sales in the third quarter of the current year decreased by $101,000
compared with the third quarter of the prior year. Sales to existing automotive
customers decreased by $334,000 due to a change in practice by certain customers
to purchase products directly from the manufacturer, to competitive pressures
faced by many smaller customers, and the bankruptcy of one customer in the
current year. Sales to new automotive customers totaled $103,000 for the
quarter.
Sales of non-food pet products totaled $507,000, an increase of
$130,000 compared with the third quarter of the prior year, due primarily to the
addition of new pet supply customers.
Gross profits decreased by $52,000 in the third quarter of the current
year compared with the third quarter of the prior year, due to the lower sales
volume, together with an increase of $21,000 in buying and occupancy expenses.
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 reflected a slight
decrease in the third quarter compared with prior year. Operating expenses were
lower due to expenses related to the move of facilities which were incurred last
year. These savings were offset by higher selling expenses in the current year
related to additional travel and higher broker's commissions on pet supply
products.
There was a decrease of $61,000 in the provision for doubtful accounts
in the third quarter of the current year compared to the prior year due to the
bankruptcy of one of the Company's customers in the prior year.
Interest expense decreased by $37,000, mainly due to SCPI's repayment
of a term loan in December 1997.
NINE MONTHS ENDED NOVEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED NOVEMBER 30,
1997
Sales in the current year period decreased by $147,000 compared with
the prior year, due to the sale of the "Wing-tech" division in first quarter of
the prior year. Sales attributable to the Wing-tech division in the prior year
were $117,000. Sales to existing automotive customers decreased by approximately
$927,000, primarily as a result of competitive pressures encountered by certain
of SCPI's customers, and because some customers have changed their buying
practices to obtain certain product lines direct from the manufacturer. Mostly
offsetting these decreases were sales to new automotive customers of
approximately $431,000, and increases in non-food pet supply sales.
Sales of non-food pet supplies were $1.4 million in the current year,
compared with $958,000 in the prior year. The increase in sales of $466,000
resulted from expanded sales to existing pet supply customers, together with
sales of $375,000 to new customers recently added.
Gross profits decreased by $227,000 in the current year period compared
with the prior year, due
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<PAGE> 11
to lower profits of $32,000 related to the Wing-tech division, a decrease in
gross margin of 1.0%, and an increase of $54,000 in buying and occupancy
expenses. The decrease in gross margin was principally 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.
There was a decrease of $76,000 in the provision for doubtful accounts
in the current year compared to the prior year due to the bankruptcy of one of
the Company's customers last year.
Interest expense decreased by $101,000, primarily due to SCPI's
repayment of a term loan in December 1997.
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<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter for which this report is filed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
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<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
STEEL CITY PRODUCTS, INC.
Date: January 8, 1999 By: /s/ Bernard H. Frank
-----------------------
Bernard H. Frank
Chief Executive Officer
Date: January 8, 1999 By: /s/ Maarten D. Hemsley
-------------------------
Maarten D. Hemsley
Chief Financial Officer
- 13 -
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 2,438
<ALLOWANCES> 302
<INVENTORY> 2,381
<CURRENT-ASSETS> 4,945
<PP&E> 1,109
<DEPRECIATION> 675
<TOTAL-ASSETS> 13,207
<CURRENT-LIABILITIES> 4,123
<BONDS> 2,629
0
19
<COMMON> 32
<OTHER-SE> 6,404
<TOTAL-LIABILITY-AND-EQUITY> 13,207
<SALES> 13,893
<TOTAL-REVENUES> 14,344
<CGS> 11,476
<TOTAL-COSTS> 11,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 47
<INTEREST-EXPENSE> 230
<INCOME-PRETAX> (233)
<INCOME-TAX> 7
<INCOME-CONTINUING> (88)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (851)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
