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: May 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: 0-19450
OAKHURST COMPANY, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 25-1655321
(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 July 16, 2001, 4,943,018 shares of the Registrant's Common Stock,
$0.01 par value per share were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OAKHURST COMPANY, INC. AND SUBSIDIARIES
<Table>
Condensed Consolidated Balance Sheets at May 31, 2001
and February 28, 2001.................................................... 3
Condensed Consolidated Statements of Operations for the three month
periods ended May 31, 2001 and May 31, 2000.............................. 4
Condensed Consolidated Statements of Cash Flows for the three month
periods ended May 31, 2001 and May 31, 2000.............................. 5
Notes to Condensed Consolidated Financial Statements..................... 6
</Table>
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OAKHURST COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
ASSETS
May 31, February 28,
2001 2001
------------ ------------
Current assets:
Cash ........................................................................... $ 65 $ 86
Trade accounts receivable, less allowance of $199 and $191, respectively ....... 3,256 2,592
Inventories .................................................................... 4,471 4,151
Other .......................................................................... 209 151
------------ ------------
Total current assets ................................................. 8,001 6,980
------------ ------------
Property and equipment, at cost ..................................................... 1,286 1,330
Less accumulated depreciation .................................................. (965) (928)
------------ ------------
365 392
------------ ------------
Investments:
Equity - New Heights ........................................................... 3,251 4,170
Other .......................................................................... 2,745 2,745
Note receivable - related party ..................................................... 1,330 1,330
Excess of cost over net assets acquired, net ........................................ 133 135
Other assets ........................................................................ 27 27
------------ ------------
7,686 8,407
------------ ------------
$ 15,852 $ 15,779
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ............................................................... $ 5,151 $ 4,407
Accrued compensation ........................................................... 256 356
Current maturities of long-term obligations .................................... 79 77
Current maturities of long-term obligations, related parties ................... 13,597 13,619
Accrued interest ($3,506 and $2,927 due to related party) ...................... 3,634 3,036
Other accrued expenses ......................................................... 266 317
------------ ------------
Total current liabilities ................................................. 23,983 21,812
------------ ------------
Long-term obligations:
Long-term debt ................................................................. 4,054 3,464
Long-term debt, related parties ................................................ 1,000 1,000
Other long term obligations .................................................... 149 169
------------ ------------
4,203 4,633
------------ ------------
Commitments and contingencies ....................................................... -- --
Stockholders' deficiency:
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares,
none issued ................................................................ -- --
Common stock, par value $0.01 per share; authorized 14,000,000 shares,
4,943,018 shares issued ................................................... 49 49
Additional paid-in capital ..................................................... 47,204 47,204
Deficit ........................................................................ (59,586) (57,918)
Treasury stock, at cost, 207 common shares ..................................... (1) (1)
------------ ------------
Total stockholders' deficiency ............................................ (12,134) (10,666)
------------ ------------
$ 15,852 $ 15,779
============ ============
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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OAKHURST COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
MAY 31, 2001 MAY 31, 2000
------------- -------------
Sales ........................................................... $ 5,719 $ 5,745
Other income .................................................... 41 57
------------- -------------
5,760 5,802
------------- -------------
Cost of goods sold, including occupancy and buying expenses ..... 4,705 4,503
Operating, selling and administrative expenses .................. 1,060 1,111
Provision for doubtful accounts ................................. 8 13
Interest expense ................................................ 730 572
------------- -------------
6,503 6,199
------------- -------------
Loss before loss on equity investment and income
taxes ........................................................... (743) (397)
------------- -------------
Loss from equity investment ..................................... (922) (711)
Current income tax expense ...................................... (3) (2)
------------- -------------
Net loss ........................................................ $ (1,668) $ (1,110)
============= =============
Basic and diluted net loss per share ............................ $ (0.34) $ (0.22)
============= =============
Weighted average number of shares outstanding used in
computing basic and diluted per share amounts .............. 4,943,018 4,943,018
============= =============
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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OAKHURST COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Three months Three months
Ended Ended
May 31, 2001 May 31, 2000
------------ ------------
Cash flows from operating activities:
Net loss ....................................................... $ (1,668) $ (1,110)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization ............................... 36 34
Loss from equity investment ................................. 922 711
Other changes in operating assets and liabilities:
Accounts receivable ......................................... (664) 26
Inventories ................................................. (320) 352
Accounts payable ............................................ 744 (372)
Other ....................................................... 424 271
------------ ------------
Net cash (used in) provided by operating activities of:
Continuing operations .......................................... (526) (88)
Discontinued operations ........................................ -- 151
------------ ------------
Net cash (used in) provided by operating
activities ........................................................... (526) 63
------------ ------------
Cash flows from investing activities:
Additions to property and equipment ............................ -- (12)
Increase in investment ......................................... -- (2,020)
------------ ------------
Net cash used in investing activities ................................ -- (2,032)
------------ ------------
Cash flows from financing activities:
Net borrowings under revolving credit .......................... 590 55
agreement
Proceeds from issuance of long term debt ....................... -- 2,108
Principal payments on long-term obligations .................... (39) (38)
Deferred loan costs ............................................ (46) --
------------ ------------
Net cash provided by financing activities ............................ 505 2,125
------------ ------------
Net (decrease) increase in cash ...................................... (21) 156
Cash at beginning of period .......................................... 86 152
------------ ------------
Cash at end of period ................................................ $ 65 $ 308
============ ============
</Table>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2001
1. INTERIM FINANCIAL STATEMENTS
Oakhurst Company, Inc. ("Oakhurst" or the "Company") was formed as a
result of a merger transaction in fiscal 1992, in which Steel City Products,
Inc. ("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 SCPI's Series A Preferred Stock, and as a result, it owns 90% of the
voting stock of SCPI. The accompanying condensed consolidated financial
statements reflect this control and include the accounts of SCPI.
Oakhurst's historical principal business has been the distribution of
products to the automotive after-market, conducted by SCPI under the trade name
"Steel City Products". Although the primary business of Steel City Products
continues to be its automotive aftermarket accessories distribution business, in
recent years it has expanded its distribution offerings to include non-food pet
supplies and, in the fourth quarter of fiscal 2001, lawn and garden supplies.
Steel City Products operates from a facility in McKeesport, Pennsylvania and has
additional warehouse space in Glassport, Pennsylvania.
In December 1998 Oakhurst formed a wholly-owned subsidiary, Oakhurst
Technology, Inc. ("OTI") in order to invest in New Heights Recovery and Power,
LLC ("New Heights") which was expected to become a fully integrated recycling
and waste-to-energy facility in Ford Heights, Illinois. In conjunction with
OTI's commitment to New Heights, Oakhurst entered into certain agreements with
KTI, Inc. ("KTI") (which merged into Casella Waste Systems, Inc.) regarding the
funding of capital improvements and start-up losses at New Heights.
Due to significant and continuing losses incurred at New Heights, and
Casella's decision to exit certain non-core activities, of which New Heights was
deemed one, in April 2001, certain agreements (the "Unwinding Agreements") were
signed among the Company, OTI, Casella and KTI pursuant to which (a) all of
OTI's equity interest in New Heights was transferred to KTI, (b) the Oakhurst
common stock held by KTI was transferred to the Company, (c) all securities
pledged to KTI by the Company and/or OTI were released, (d) the KTI Loan,
including accrued interest thereon, aggregating approximately $16.1 million at
May 31, 2001, was cancelled, with the exception of $1 million, which sum was
converted into a four year subordinated promissory note bearing interest at 12%,
and (e) the Company issued to KTI a ten-year warrant to purchase 494,302 shares
of the Company's common stock at $1.50 per share. The Unwinding Agreements were
placed into escrow upon signing in April 2001 and became effective upon their
release from escrow on July 3, 2001. Because the Unwinding Agreements became
effective after the end of the first quarter ended May 31, 2001, the effect is
not reflected in the financial statements, but is included in the proforma
information in Note 7 "Subsequent Events".
In addition to the New Heights investment, in January 1999 OTI made a
minority investment in Sterling Construction Company ("Sterling"). Sterling is a
profitable, privately-held Texas-based pipe laying and road building contractor
that has benefited from increased infrastructure and highway spending in Texas.
In October 1999 certain shareholders of Sterling exercised their right to sell a
second tranche of equity to OTI. Cash for the second equity purchase was
obtained through the issuance of notes secured by the second equity tranche, of
which a part is due to two officers and directors of Oakhurst. These notes,
which became due in April 2001, were restructured as part of a transaction (the
"Sterling Transaction"), as a result of which Oakhurst increased its equity
position in Sterling from 12% to 80.1% in July 2001 (see Note 7"Subsequent
Events").
The accompanying condensed consolidated financial statements include
the accounts of subsidiaries in which the Company has a greater than 50%
ownership interest and all intercompany accounts and transactions have been
eliminated in consolidation.
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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 recommended that these
unaudited condensed consolidated financial statements be read in conjunction
with the audited consolidated 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 months ended May 31, 2001 and May 31,
2000 are not necessarily indicative of the results that may be expected for the
full fiscal 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 has historically operated as a wholesale distributor of
automotive aftermarket accessories. Its largest subsidiary, SCPI, continues as
one of the larger independent wholesale distributors of automotive accessories
in the Northeastern United States. In fiscal 1996, SCPI began the distribution
of non-food pet supplies, and in the fourth quarter of fiscal 2001, expanded its
product offerings to include lawn and garden products. SCPI's customer base of
discount retail chains, hardware, drug and supermarket retailers, is essentially
the same for all product lines carried. SCPI operates in three segments, SCPI
Auto, SCPI Pet and SCPI Lawn. In addition to SCPI, until fiscal 2000 the Company
operated Dowling's, a wholesale distributor of automotive radiators and related
products serving the Northeast. The transaction to sell Dowling's closed on
November 29, 2000. OTI was formed in December 1998 and holds investments
principally in the recycling and waste-to-energy business. Each entity is
managed by its own decision makers and is comprised of unique customers,
suppliers and employees. 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 Company's operations are
organized into the five operating segments included in the following table (in
thousands):
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<Table>
<Caption>
Three months ended May 31, 2001 SCPI SCPI SCPI Consolidated
SEGMENTS Auto Pet Lawn Dowling's OTI Corporate Total
---------- ---------- ---------- ------------ ---------- ------------ ------------
Net sales 4,597 681 441 -- -- -- $ 5,719
Operating profit (loss) 131 76 8 -- (22) (206) $ (13)
Interest expense $ (730)
Loss from equity investment (922) $ (922)
------------
Pre-tax loss $ (1,668)
============
Segment assets 7,470 379 466 -- 7,373 164 $ 15,852
</Table>
<Table>
<Caption>
Three months ended May 31, 2000 SCPI SCPI SCPI Consolidated
SEGMENTS Auto Pet Lawn Dowling's OTI Corporate Total
---------- ---------- ---------- ------------ ---------- ------------ ------------
Net sales 5,117 628 -- -- -- -- $ 5,745
Operating profit (loss) 313 75 -- -- (64) (149) $ 175
Interest expense $ (572)
Loss from equity investment (711) $ (711)
------------
Pre-tax loss $ (1,108)
============
Segment assets 7,046 305 -- 3,860 10,791 280 $ 22,282
</Table>
5. SUMMARY FINANCIAL INFORMATION
Summarized financial information is provided herein for New Heights for
the three months ended May 31, 2001 and May 31, 2000 (in thousands):
<Table>
<Caption>
May 31, 2001 May 31, 2000
------------------ ------------------
Current assets ................................................. $ 5,601 $ 2,482
Non-current assets ............................................. 37,731 38,881
Current liabilities ............................................ $ 25,983 $ 4,652
Non-current liabilities ........................................ -- 8,220
Net equity ..................................................... 17,349 28,491
</Table>
<Table>
<Caption>
Three months ended Three months ended
May 31, 2001 May 31, 2000
------------------ ------------------
Total revenues ................................................. $ 3,670 $ 570
Net loss ....................................................... (2,586) (1,420)
</Table>
At May 31, 2000 OTI owned 50% of New Heights, and at May 31, 2001 OTI
owned 37.5% of New Heights. At May 31, 2001, the Company had contributed cash of
$10.9 million to the New Heights project, financed through advances under the
KTI Loan and proceeds from the issuance and sale of Oakhurst common stock. As
part of the Unwinding Agreements, effective July 3, 2001, OTI released its
remaining interest in New Heights to KTI (See Note 7).
6. BORROWING ARRANGEMENT
In July 2001, SCPI completed a refinancing of its existing $4.5 million
revolving line of credit. The new two-year revolving line of credit (the "New
Revolver") provides for a maximum line of $5.0 million and carries interest at a
rate of prime plus 1%. The New Revolver is subject to a borrowing base, secured
by the accounts receivable, inventory and other assets of SCPI. The Company was
relieved of all outstanding obligations under the former line of credit upon
completion of the refinancing.
7. SUBSEQUENT EVENTS
New Heights - Unwinding Agreements
In April 2001 the Company entered into Unwinding Agreements with
Casella and KTI which were finalized in July 2001. The Unwinding Agreements
provided for the transfer to KTI of OTI's equity
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interest in New Heights in return for the Oakhurst common stock held by KTI,
cancellation of the KTI Loan and accrued interest thereon, except for $1
million, and the issuance to KTI of Oakhurst warrants.
Sterling Transaction
In May 2001, Oakhurst extended an offer to increase its investment in
Sterling from 12% to 80.1% (the "Sterling Transaction"). Oakhurst completed the
Sterling Transaction in July 2001. Consideration for the increase in ownership
of Sterling consisted of approximately 1,125,000 shares of Oakhurst common
stock, $9.9 million in cash, and approximately $2.4 million in four year
Oakhurst subordinated zero coupon notes (with a maturity value of approximately
$3.8 million). Funding for the cash portion of the Sterling Transaction was
provided principally by borrowings by Sterling under its bank revolving credit
agreement and other notes, and by the sale by Oakhurst of approximately 605,000
shares of its common stock and approximately $2.6 million of its subordinated
zero coupon notes (with a maturity value of approximately $4.1 million).
Oakhurst also issued, to existing shareholders of Sterling, warrants for
approximately 304,000 shares of its common stock at an exercise price of $1.50
per share, and to the purchaser of its common stock and zero-coupon notes,
warrants for approximately 323,000 shares of its common stock, also at an
exercise price of $1.50. Under the Sterling Transaction, the notes issued in
October 1999 to purchase the second tranche of equity in Sterling were
restructured, including the issuance of 123,000 warrants to one note holder. The
Sterling Transaction also includes a "Put" whereby the holders of the remaining
19.9% of Sterling shares are able to require Oakhurst to acquire those shares
after three years from the date that the Sterling Transaction was closed.
The following summary unaudited pro forma financial information for the
three months ended May 31, 2001 is presented as if the Unwinding Agreements and
the Sterling Transaction had been completed as of the beginning of fiscal 2001
(in thousands, except per share data). The allocation of the purchase price to
Sterling's assets and liabilities is subject to change.
<Table>
<Caption>
May 31, 2001
------------
Current assets $ 29,597
Property and equipment, net of accumulated depreciation 18,573
Goodwill, net of accumulated amortization 876
Deferred tax asset, long-term portion 3,000
Other assets 45
--
Total assets $ 52,091
=============
Accounts payable $ 15,042
Accrued expenses 6,498
Current maturities of long-term obligations 181
Current maturities of long-term obligations, related parties 6,908
-------------
Total current liabilities 28,629
Long-term debt 17,411
Long-term debt, related parties 2,524
Minority interest 2,160
Stockholders' equity 1,367
-------------
$ 52,091
=============
</Table>
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<Table>
<Caption>
First quarter ended
------------------------------
May 31, 2001 May 31, 2000
------------ ------------
Total revenues .................................................. $ 28,248 $ 21,582
Cost of goods sold, including buying and occupancy expenses ..... 25,176 18,326
Operating, selling and administrative expenses .................. 2,197 1,993
Interest expense ................................................ 790 686
------------ ------------
Income before income taxes ...................................... 85 577
Current income tax expense ...................................... 34 230
Minority interest ............................................... 65 102
------------ ------------
Net (loss) income ............................................... $ (14) $ 245
============ ============
Net (loss) income per share ..................................... $ (0.00) $ 0.05
============ ============
</Table>
The pro forma information is presented for informational purposes only
and is not necessarily indicative of the financial position and results of
operations that would have occurred had the Unwinding Agreements and the
Sterling Transaction been completed as of the above dates, nor may it be
indicative of the future financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The corporate structure resulting from the fiscal 1992 merger, whereby
Steel City Products, Inc. ("SCPI") became a special, limited purpose,
majority-owned subsidiary of Oakhurst Company, Inc. ("Oakhurst") was designed to
facilitate capital formation by Oakhurst while permitting Oakhurst and SCPI to
file consolidated tax returns so that both may utilize existing tax benefits,
including approximately $167 million of net operating loss carry-forwards.
Through Oakhurst's ownership of SCPI, primarily in the form of preferred stock,
Oakhurst retains the value of SCPI and receives substantially all of the benefit
of SCPI's operations through dividend on such preferred stock.
Oakhurst's principal business historically has been the distribution of
automotive aftermarket accessories. Its largest business, and its one remaining
automotive accessory distributor following the disposal of Dowling's in fiscal
2001 is conducted by SCPI under the trade name "Steel City Products" and
involves the distribution of automotive parts and accessories, non-food pet
supplies and lawn and garden products from facilities in McKeesport and
Glassport, Pennsylvania.
In December 1998, Oakhurst formed a wholly-owned subsidiary, Oakhurst
Technology, Inc. ("OTI") in order to take advantage of a restructuring
opportunity at New Heights Recovery and Power, LLC ("New Heights"). In
connection with the formation of OTI, Oakhurst and OTI completed certain
agreements with KTI, Inc. ("KTI") a waste-to-energy and recycling company that
merged into Casella Waste Systems, Inc. in December 1999.
The December 1998 agreements with KTI included the purchase by KTI of
approximately 1.7 million shares of Oakhurst's common stock at a price of $0.50
per share for gross proceeds of $865,000 (the "Equity Proceeds"). In conjunction
with the purchase of stock, KTI committed to lend Oakhurst under a loan
agreement (the "KTI Loan") up to a minimum of $11.5 million. In December 1998,
OTI initially acquired a 50% equity interest in, and became the managing member
of, New Heights, a fully-integrated recycling and waste-to-energy facility
located in Ford Heights, Illinois.
Through May 31, 2001, OTI invested approximately $10.9 million in the
New Heights project, reflecting the capital commitments and funding of start-up
losses required by the first two phases of the Business Plan. Such investment
was financed from the Equity Proceeds and borrowings under the KTI Loan.
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11
In addition to the New Heights investment, in January 1999 OTI utilized
an aggregate of approximately $2.7 million from the Equity Proceeds and the KTI
Loan to enable it to make a minority investment in Sterling Construction
Company, ("Sterling") a profitable, privately-held Texas-based pipe laying and
road building contractor that has benefited from increased infrastructure and
highway spending in Texas. In October 1999 certain Sterling shareholders
exercised their right to sell a second tranche of equity to OTI. Cash for the
second equity purchase was obtained through the issuance of notes secured by
such equity, of which $559,000 was due to Robert Davies, formerly Chairman and
Chief Executive Officer of Oakhurst. Under a Participation Agreement, Maarten
Hemsley, Chief Financial Officer of Oakhurst, funded $116,000 of the amount
advanced by Mr. Davies pursuant to such Promissory Note. These notes, which
became due in April 2001, were restructured as part of the Sterling Transaction
whereby Oakhurst increased its equity percentage in Sterling from 12% to 80.1%.
The Sterling Transaction was closed in July 2001.
In July 2000 Oakhurst, OTI and KTI completed a modification of the KTI
Loan (the "KTI Loan Modification") pursuant to which OTI's obligation to fund
the first two phases and certain Phase Three expenditures of the New Heights
Business Plan was limited to $9 million and KTI agreed to fund $3 million for
such purposes directly to New Heights. Accordingly, OTI's equity interest in the
investments of New Heights was decreased from 50% to 37.5%, with the reduction
of 12.5% being acquired by KTI in return for its $3 million direct investment in
New Heights. In addition, OTI's obligation to fund certain start-up losses at
New Heights was limited to 75% of those losses, funded through advances under
the KTI Loan, with the balance directly funded by KTI. Furthermore, the KTI Loan
Modification provided that any further capital expenditures be financed through
New Heights' internally generated cash and/or through financing raised by New
Heights.
In April 2001, certain agreements (the "Unwinding Agreements") were
signed among the Company, OTI, Casella and KTI pursuant to which (a) all of
OTI's interest in New Heights was transferred to KTI, (b) the Oakhurst common
stock held by KTI was transferred to the Company, (c) all securities pledged to
KTI by the Company and/or OTI were released, (d) the KTI Loan, including accrued
interest thereon, aggregating approximately $16.1 million at February 28, 2001,
was cancelled, with the exception of $1 million, which sum was converted into a
four year subordinated promissory note bearing interest at 12%, and (e) the
Company issued to KTI a ten-year warrant to purchase 494,302 shares of the
Company's common stock at $1.50 per share. The Unwinding Agreements were placed
into escrow upon signing in April, 2001 and became effective upon their release
from escrow on July 3, 2001. Because the transaction is with a related party the
Company will not record a gain in connection with the Unwinding Agreements.
Following completion of the Unwinding Agreements, Oakhurst completed
the Sterling Transaction in July 2001. Pursuant to the Sterling Transaction the
Company increased its investment in Sterling, from the 12% interest held at
February 28, 2001, to 80.1%.
As a condition to the completion of the Sterling Transaction, in July
2001, SCPI committed to change lenders on its revolving line of credit due to
the bankruptcy filing of its existing lender. The new two-year line of credit
provides for a maximum line of $5.0 million, subject to a borrowing base and
carries interest at prime plus 1%.
Activities of New Heights are reported on the equity method of
accounting. The investment in Sterling, through the date of the Sterling
Transaction, is reported on the cost method of accounting. OTI also had a $1.33
million subordinated note receivable from Sterling, which was convertible into
shares of common stock of Sterling, at any time at the option of OTI, or upon
the closing of a defined public offering of Sterling. Pursuant to the Sterling
Transaction, such subordinated note receivable was converted into Sterling
common shares.
For its fiscal year ended September 2000 Sterling's revenues were $76
million and net income was $3.6 million. Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") was $8.5 million. For the eight months
ended May 2001 Sterling's results reflected revenues of $52 million and EBITDA
of $4.7 million.
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12
Management believes the completion of the Unwinding Agreements
terminated the substantial negative impact on the Company of the continuing
losses at New Heights and allowed the Company, through the Sterling Transaction,
to be in a position to achieve profitability in the future. However, such
success cannot be assured.
Oakhurst reported four operating segments in the first quarter of
fiscal 2002, SCPI Auto, SCPI Pet, SCPI Lawn, and OTI. SCPI, operating under the
trade name Steel City Products, principally sells automotive accessories,
non-food pet supplies and lawn and garden products to discount retail chains,
hardware, drug and supermarket retailers and to automotive specialty stores. Its
customers are based primarily in the Northeastern United States. OTI, formed in
December 1998, holds investments principally in the recycling and
waste-to-energy business and as such, does not generate revenues. OTI's
investment in New Heights is recorded under the equity method of accounting, and
thus is presented as non-operating income or loss. In fiscal 2000, the Board of
Directors of Oakhurst decided to dispose of Dowling's, a wholesale distributor
of automotive radiators and related products; thus the results for Dowling's
have been presented as discontinued operations. Each segment is managed by its
own decision maker who assesses the operations of the segment based on seasonal
trends, market competition and growth potential. The allocation of financial
resources is determined by the President and Chief Operating Officer, Maarten
Hemsley, who reviews the segment information to determine the allocation of
resources.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING
In addition to cash derived from the operation of its subsidiaries,
Oakhurst's liquidity and financing requirements have historically been
determined principally by the working capital needed to support the level of
business, together with the need for capital expenditures and the cash required
to repay debt. At SCPI, the level of working capital needs varies primarily with
the amounts of inventory carried, which can change seasonally, the size and
timeliness of payment of receivables from customers and the amount of credit
extended by suppliers.
At May 31, 2001, Oakhurst's debt primarily consisted of (i) a balance
of $13.3 million outstanding under the KTI Loan; (ii) revolving debt under the
Revolver with a balance of approximately $4.1 million; (iii) the notes related
to the Sterling Second Tranche equity purchase (the "OTI Notes") of
approximately $1.4 million; and (v) the Subordinated Loan of $50,000.
Credit Facility and Revolver
In March 1996, Oakhurst and its subsidiaries obtained financing from an
institutional lender (the "Credit Facility"). The Credit Facility initially
provided for a revolving credit agreement (the "Revolver") and a term loan
secured on SCPI's warehouse. The term loan was repaid in fiscal 1998 upon SCPI's
sale of its warehouse. Over time, the Revolver was amended to provide for the
sale or disposition of certain of Oakhurst's subsidiaries, reducing the maximum
credit line, and to amend certain financial covenants.
In July 2000 Oakhurst and SCPI entered into an agreement with the
institutional lender to identify SCPI as the Borrower (cross-collateralized by
Oakhurst), to provide for a three year term and reduce the total Revolver to
$4.5 million, subject to a borrowing base. The Revolver carries an interest rate
equal to Citibank N.A. base rate plus 2%. The Company pays a renewal fee of 0.5%
of the entire line upon each anniversary.
Due to concerns stemming from the institutional lender's filing for
bankruptcy, and as a condition of the completion of the Sterling Transaction,
SCPI changed institutional lenders in July 2001 and entered into agreements for
a two-year revolving line of credit in the amount of $5.0 million, subject to a
borrowing base. The new revolver carries an interest rate equal to prime plus
1%.
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Management believes that the new revolver will provide adequate funding
for SCPI's working capital, debt service and capital expenditure requirements,
including seasonal fluctuations for at least the next twelve months.
KTI Loan
In December 1998, Oakhurst entered into a loan agreement with KTI, Inc.
(the "KTI Loan") pursuant to which KTI committed to fund up to a minimum of
$11.5 million for capital expenditures and start-up losses incurred by New
Heights. The KTI Loan carried interest at a fixed rate of 14%, payable quarterly
and was due, by its original terms, in April 2001. The KTI Loan was secured by a
pledge of all the capital stock of OTI and all of OTI's equity interest in New
Heights.
Also in December 1998 the Company's subsidiary, OTI, entered into an
Investment Agreement with New Heights pursuant to which OTI agreed to fund
defined capital expenditures, costs of obtaining permits, start-up losses and
working capital of the New Heights waste-to-energy facility in Ford Heights,
Illinois, and to receive in return an initial 50% equity interest in New
Heights.
Pursuant to the Investment Agreement, KTI agreed to provide, directly
or through OTI as its affiliate, the funding required to satisfy the New Heights
Business Plan. Accordingly, KTI and Oakhurst entered into the KTI Loan. Funds
drawn by Oakhurst under the KTI Loan were invested in OTI, principally to
facilitate the financing of the New Heights Business Plan. At May 31, 2001,
approximately $13.3 million had been borrowed, of which $10.1 million had been
invested in the New Heights project.
In addition to New Heights, in January 1999 OTI made a minority
investment totaling approximately $2.7 million in Sterling Construction Company,
("Sterling") a profitable, privately-held Texas-based pipe laying and road
building contractor that is benefiting from significant increases in
infrastructure and highway spending in Texas.
Recognizing its investment in Sterling and increases in the estimated
capital costs and start-up losses at New Heights, in July 2000 Oakhurst, OTI and
KTI completed a modification of the KTI Loan (the "KTI Loan Modification")
pursuant to which OTI's obligation to fund the first two phases and certain
Phase Three expenditures of the New Heights Business Plan was limited to $9
million and KTI agreed to fund $3 million for such purposes directly to New
Heights. Accordingly, OTI's equity interest in such investments in New Heights
was decreased from 50% to 37.5%, with the reduction of 12.5% being acquired by
KTI in return for its $3 million direct investment in New Heights. OTI's
obligation to fund certain start-up losses at New Heights was limited to 75% of
such losses, funded through advances under the KTI Loan, with the balance to be
funded directly by KTI. In addition, the KTI Loan was secured by a pledge of the
equity and debt investment in Sterling which were acquired in January 1999.
Effective July 2001, all except $1,000,000 of the KTI Loan and accrued
interest was cancelled pursuant to the Unwinding Agreements, with the balance
converted to a four year subordinated loan, with interest of 12% due at
maturity.
Other Debt
In October 1998, SCPI obtained from the Redevelopment Authority of the
City of McKeesport a low-interest loan (the "Subordinated Loan"), subordinated
to the Revolver, in the amount of $98,000 and carrying interest at 5% per annum.
The loan, which funded leasehold improvements at SCPI, is being repaid in
monthly installments through October 2003.
In October 1999 OTI increased its equity investment in Sterling from 7%
to approximately 12% when certain shareholders of Sterling exercised their right
to sell a second tranche of equity to OTI. The cost of the second equity tranche
was approximately $1.36 million and was obtained through the issuance of notes
that are secured by such equity. The notes bear interest at 14% and were due in
full in April 2001. Of the notes, $559,000 is due to Robert Davies, Chairman and
Chief Executive Officer of Oakhurst. Under a Participation Agreement, Maarten
Hemsley, President and Chief Financial Officer of Oakhurst, funded
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$116,000 of the amount advanced by Mr. Davies. These notes were restructured as
part of the Sterling Transaction, as a result of which Oakhurst increased its
equity position in Sterling to 80.1%.
CASH FLOWS
Net cash used by operating activities in the three months ended May 31,
2001 increased by $589,000 compared with the three months ended May 31, 2000.
The increase was principally due to higher receivables and inventory levels
offset by an increase in vendor payables.
No new investments were made by the Company in the New Heights facility
during the three months ended May 31, 2001, therefore cash used by investing
activities improved from the prior year by $2.0 million.
In the three months ended May 31, 2001 and May 31, 2000, the Company's
financing activities provided cash of $505,000 and $2.1 million, respectively.
The decrease was primarily the result of the pending disposition of the New
Heights facility, and no new funds were drawn under the KTI loan. Cash provided
under the revolving line of credit increased by $535,000, principally resulting
from the higher receivable and inventory levels in the current year.
MATERIAL CHANGES IN FINANCIAL CONDITION
Except as described above, at May 31, 2001, there had been no material
changes in the Company's financial condition since February 28, 2001, as
discussed in Item 7 of the Company's Annual Report on Form 10-K for fiscal 2001.
RESULTS OF OPERATIONS
Operations include the consolidated results for SCPI, which through its
operating division, Steel City Products, headquartered in McKeesport,
Pennsylvania, operates three segments, Auto, Pet and Lawn, together with OTI and
administrative costs.
THREE MONTHS ENDED MAY 31, 2001 COMPARED WITH THREE MONTHS ENDED MAY 31, 2000
Automotive segment
Sales of automotive accessories decreased by $520,000 in the first
quarter of the current year compared with sales in the same period last year.
Sales to existing customers decreased by $670,000, principally as a result of
customers that are purchasing product directly from the manufacturer, downsized
automotive departments, or are facing increased competition. Offsetting some of
this decrease were sales to new automotive customers of $150,000 in the first
quarter.
Gross profit in the first quarter of fiscal 2002 was $780,000, or 16.9%
of sales, compared with $1.0 million, or 20.4% of sales. The decrease of
$264,000 was due to the lower sales volume, combined with lower margins
attributable to a shift in the Company's customer base during the first three
months of the current fiscal year.
Operating profit for the automotive segment decreased from the prior
year by approximately $185,000, due primarily to lower margins earned, offset by
a reduction in salary expense and fewer sales subject to broker commissions.
Pet segment
Sales of non-food pet supplies in the first quarter were $681,000, an
increase of $53,000 compared with the first quarter of the prior year, due to
increased sales to existing customers.
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Gross profit was $200,000, essentially equal to gross profit in the
first quarter last year. The pet supply segment reported operating profit in the
first quarter of $76,000, approximately the same as in the first quarter 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 quarter of fiscal 2002 totaled
$441,000.
Gross profit was $33,000, or 7.5% of sales due to additional costs
associated with starting up this division . The lawn and garden segment reported
an operating profit of $8,000 in the first quarter.
OTI
Expenses at OTI decreased by approximately $42,000 mostly related to
the expiration of employment agreements and a reduction in personnel.
The loss from equity investment at New Heights increased by $222,000
compared with the first three months of the prior year, representing OTI's share
of New Heights' start up losses in the quarter.
Corporate
Expenses at the corporate level increased by approximately $27,000 due
to higher legal and professional fees resulting from the Unwinding Agreements
and the Sterling Transaction.
Interest expense increased by $158,000 due to interest associated with
the KTI Loan.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Oakhurst 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.
Oakhurst's primary market risk exposure is related to interest rate risk. The
Company manages its interest rate risk by attempting to balance its exposure
between fixed and variable rates while attempting to minimize its interest
costs. An increase of 1% in the market rate of interest would have increased the
Company's interest expense for the quarter ended May 31, 2001 by approximately
$12,000.
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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 Revolving Credit Agreement dated July 13, 2001
between Steel City Products, Inc. and National City
Bank of Pennsylvania
*10.2 Agreements dated July 18, 2001 between Sterling
Construction Company, Inc. and Oakhurst Company, Inc.
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
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*filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
OAKHURST COMPANY, INC.
Date: August 15, 2001 By: /s/ Joseph P. Harper, Sr.
-------------------------------------
Joseph P. Harper, Sr.
President
Date: August 15, 2001 By: /s/ Maarten D. Hemsley
-------------------------------------
Maarten D. Hemsley
Chief Financial Officer
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INDEX TO EXHIBITS
<Table>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.1 Revolving Credit Agreement dated July 13, 2001
between Steel City Products, Inc. and National City
Bank of Pennsylvania
*10.2 Agreements dated July 18, 2001 between Sterling
Construction Company, Inc. and Oakhurst Company, Inc.
</Table>
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*filed herewith