10-Q 1 d91334e10-q.txt FORM 10-Q FOR QUARTER ENDED AUGUST 31, 2001 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: August 31, 2001 --------------- 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.) 2751 CENTERVILLE ROAD, SUITE 3131, WILMINGTON, DELAWARE ------------------------------------------------------- 19808 ----- (Address of principal executive offices) (Zip Code) (817) 416-0717 -------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed from 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of October 1, 2001, 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 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS STEEL CITY PRODUCTS, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets at August 31, 2001 and February 28, 2001 ............................................................... 3 Condensed Consolidated Statements of Operations for the three month periods ended August 31, 2001 and August 31, 2000 ........................................... 4 Condensed Consolidated Statements of Operations for the six month periods ended August 31, 2001 and August 31, 2000 ................................... 5 Condensed Consolidated Statements of Cash Flows for the six month periods ended August 31, 2001 and August 31, 2000 ................................... 6 Notes to Condensed Consolidated Financial Statements ................................ 7

2 STEEL CITY PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements 3 STEEL CITY PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements 4 STEEL CITY PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements 5 STEEL CITY PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements 6 STEEL CITY PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED AUGUST 31, 2001 1. INTERIM FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. All adjustments made are of a normal recurring nature. While the Company believes that the disclosures presented herein are adequate to make the information not misleading, it is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the audited financial statements for the fiscal year ended February 28, 2001 ("fiscal 2001") as filed in the Company's Annual Report on Form 10-K. Operating results for the three and six months ended August 31, 2001 are not necessarily indicative of the results that may be expected for the full year. 2. CHANGE IN METHOD OF ACCOUNTING Effective March 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". These standards require the Company to recognize all derivatives as either assets or liabilities at fair value in its balance sheet. The accounting for changes in the fair value of a derivative depends on the use of the derivative. There was no effect on the financial statements upon adoption of these new standards on March 1, 2001. 3. NEW ACCOUNTING PRONOUNCEMENTS During June 2001, the Financial Accounting Standards Board issued two new accounting standards, SFAS No. 141 "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangibles". SFAS No. 141 eliminates the pooling of interests method of accounting for business combinations initiated prior to July 2001. SFAS No. 142, which becomes effective March 1, 2002, discontinues the requirement for amortization of goodwill and indefinite-lived intangible assets, and instead requires an annual review for the impairment of those assets. Impairment is to be examined more frequently if certain indicators appear. Intangible assets with a determinable life will continue to be amortized. The Company is currently evaluating the impact the adoption of these statements will have on its financial statements. 4. SEGMENT INFORMATION The Company's historical business has been the distribution of automotive related accessories. The distribution of pet supplies was added as a product line in fiscal 1996, and in fiscal 2001, the Company began to distribute lawn and garden accessories. The Company operates in three operating segments, automotive products, ("Auto"), non-food pet products, ("Pet") and lawn and garden products ("Lawn"). Maarten Hemsley, the Chief Financial Officer of the Company, reviews the operating profitability of each segment and its working capital needs to allocate financial resources. The non-food pet operating segment assets and the lawn and garden segment assets consists solely of their respective inventories. 7

5. BORROWING ARRANGEMENT In July 2001, the Company completed a refinancing of its existing $4.5 million revolving line of credit. The new two-year revolving line of credit (the "Revolver") provided for a maximum line of $5.0 million and carried interest at a rate of prime plus 1%. The Revolver is subject to a borrowing base, secured by the accounts receivable, inventory and other assets of SCPI. Due to the bankruptcy filing of a significant customer in August 2001, SCPI defaulted on the terms of the Revolver. In order to cure the default, in September 2001 SCPI and its lender amended the Revolver to reduce the maximum line to $3.75 million and increase the interest rate to prime plus 1.5%. The maturity date of the loan was accelerated to April 1, 2002 and compliance under certain financial covenants was waived for the second quarter. SCPI paid a fee of $7,500 in connection with the restructuring. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Steel City Products, Inc. ("SCPI") is a special, limited purpose, majority-owned subsidiary of Oakhurst Company, Inc. ("Oakhurst"). SCPI is expected to concentrate on its historical distribution 8 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 that amount to approximately $167 million. LIQUIDITY AND CAPITAL RESOURCES In addition to cash derived from operations, SCPI's liquidity and financing requirements are determined principally by the working capital needed to support its level of business, together with the need for capital expenditures and the cash required to repay its debt. SCPI'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 with Oakhurst. Available cash that is transferred to Oakhurst is reflected as an addition to advances made to Oakhurst. At August 31, 2001, SCPI's debt consisted primarily of revolving debt of approximately $3.3 million, with availability on the Revolver of approximately $400,000. The revolving debt agreement was entered into in July 2001. Due to the bankruptcy filing of a significant customer of SCPI in August, which created a default under the terms of the Revolver at SCPI, the Revolver was amended in September 2001 to reduce the maximum borrowing level, increase the interest rate and accelerate the term. Management believes that the Revolver will provide adequate funding for SCPI's working capital requirements assuming no material deterioration in current sales levels or gross profit margin. CASH FLOWS Net cash provided by operations increased by $1.3 million in the six months ended August 31, 2001 compared with the six months ended August 31, 2000. The increase was due primarily to higher vendor payables. Cash used in financing activities increased in the current year period by $1.5 million, mostly as a result of a reduction in the Revolver in the current year to meet the terms of the line of credit. FORWARD LOOKING STATEMENTS 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 August 31, 2001, there had been no material changes in the Company's financial condition from February 28, 2001, discussed in Item 7 of the Company's Annual Report on Form 10-K for fiscal 2001. As discussed above, a significant customer of Company filed for bankruptcy in August 2001, and as a result, the Company's lender under its Revolver amended the credit agreement in September 2001. Provisions of the amendment included the acceleration of the term of the Revolver to expire in April 2002. 9 As a result, the Revolver is presented as a short-term liability, and thus, working capital for the six months ended August 31, 2001, is negative. 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, non-food pet supplies, and lawn and garden products, headquartered in McKeesport, Pennsylvania. THREE MONTHS ENDED AUGUST 31, 2001 COMPARED WITH THREE MONTHS ENDED AUGUST 31, 2000 Automotive segment Sales of automotive accessories decreased by $360,000 in the second quarter of the current year compared with sales in the same period last year. Sales to existing customers decreased by $559,000, principally as a result of the Chapter 11 bankruptcy filing in August 2001 of a significant customer. Reduced sales to this customer alone accounted for $310,000 of the decrease in sales. Offsetting some of this decrease were sales to new automotive customers of $199,000 in the second quarter. Gross profit in the second quarter of fiscal 2002 was $852,000, or 19.6% of sales, compared with $866,000, or 18.4% of sales. The decrease of $14,000 was due to the lower sales volume, but offset by higher margins due to promotions during the Company's summer road show. Operating profit for the automotive segment decreased from the prior year by approximately $405,000, due to an increase in bad debt expense to provide for the bankruptcy filing of a significant customer. Pet segment Sales of non-food pet supplies in the second quarter were $636,000, an increase of $52,000 compared with the second quarter of the prior year, due to increased sales to existing customers. Gross profit was $247,000, an increase of $65,000 compared with the second quarter of the prior year, due to higher margins earned on certain products, as well as the higher sales volume. The pet supply segment reported operating profit in the second quarter of $149,000. Lawn and garden segment SCPI began the distribution of lawn and garden products in the third quarter of fiscal 2001. Sales in the second quarter of fiscal 2002 totaled $286,000. Gross profit was $14,000, or 5.0% of sales due to additional costs associated with starting up this division. The lawn and garden segment reported an operating loss of $11,000 in the second quarter. Corporate Corporate expenses increased by approximately $150,000 compared with the second quarter of the prior year, principally due to higher fees related to the revolving line of credit and to the expiration in the second quarter last year of certain notes related to a 1991 restructuring which management determined would ultimately not be payable. 10 SIX MONTHS ENDED AUGUST 31, 2001 COMPARED WITH SIX MONTHS ENDED AUGUST 31, 2000 Automotive segment Sales of automotive accessories decreased by approximately $880,000 in the first six months of the current year compared with sales in the same period last year. Sales to existing customers decreased by $1.2 million, principally as a result of customers that are purchasing product directly from the manufacturer, that have downsized their automotive departments, or are facing increased competition from discount chains. In addition, in August 2001 a significant customer of the Company filed for bankruptcy protection. Reduced sales to this customer totaled approximately $600,000 for the six months compared with sales to the same customer last year. Offsetting some of this decrease were sales to new automotive customers of $320,000 in the first six months. Gross profit in the first half of fiscal 2002 was $1.6 million, or 18.3% of sales, compared with $1.9 million, or 19.5% of sales. The decrease of $279,000 was due to the lower sales volume, combined with lower margins attributed to a shift in the Company's customer base which were not offset by summer promotions. Operating profit for the automotive segment decreased from the prior year by approximately $586,000, due primarily to lower margins earned and to the increase in bad debt expense due to the bankruptcy filing of a significant customer. Pet segment Sales of non-food pet supplies in the first six months were $1.3 million, an increase of approximately $100,000 compared with the first six months of the prior year, due to increased sales to existing customers. Gross profit was $447,000, an increase of $68,000 compared with the first six months of the prior year due to the higher revenues and higher margins on certain products in the second quarter. The pet supply segment reported operating profit in the first half of $225,000, compared with a profit of $158,000 in the first six months of the prior year. Lawn and garden segment SCPI began the distribution of lawn and garden products in the third quarter of fiscal 2001. Sales in the first six months of fiscal 2002 totaled $727,000. Gross profit was $47,000, or 7.0% of sales due to additional costs associated with starting up this division. The lawn and garden segment reported an operating loss of $3,000 in the first six months. Corporate Corporate expenses increased by approximately $220,000 compared with the first six months of the prior year, principally due to higher fees related to the revolving line of credit and to the expiration in the second quarter last year of certain notes related to a 1991 restructuring which management determined would ultimately not be payable. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK SCPI is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company's policies do not permit active trading, 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. A change in the interest rate of 1% would have changed interest expense by approximately $9,000 for the six months ended August 31, 2001. 11 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material legal proceedings outstanding 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 *10.1 Amendment to the Revolving Credit Agreement dated September 12, 2001 between Steel City Products, Inc. and National City Bank of Pennsylvania (b) No reports on Form 8-K were filed during the quarter for which this report is filed. ---------- * filed herewith 12 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: October 5, 2001 By: /s/ Bernard H. Frank ------------------------------ Bernard H. Frank Chief Executive Officer Date: October 5, 2001 By: /s/ Maarten D. Hemsley ------------------------------ Maarten D. Hemsley Chief Financial Officer 13 EXHIBIT INDEX

STEEL CITY PRODUCTS INC 10-Q