UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
[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: 0-19450
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 October 1, 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
PART 1 - FINANCIAL INFORMATION
THIS AMENDED 10-Q HAS BEEN FILED TO TREAT THE DISPOSITION OF THE NEW HEIGHTS
INVESTMENT IN JULY 2001 CONSISTENT WITH THE TREATMENT IN THE COMPANY'S FILING OF
ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED FEBRUARY 28, 2001.
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OAKHURST COMPANY, INC. AND SUBSIDIARIES
<Table>
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 Statement of Stockholders' (Deficit) Equity for the six month
period ended August 31, 2001............................................................ 6
Condensed Consolidated Statements of Cash Flows for the six month
periods ended August 31, 2001 and August 31, 2000....................................... 7
Notes to Condensed Consolidated Financial Statements.................................... 8
</Table>
2
OAKHURST COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
August 31,
ASSETS 2001 February 28,
(Unaudited) 2001
----------- ------------
Current assets:
Cash....................................................................... $ 307 $ 86
Contracts receivable....................................................... 17,800 --
Costs and estimated earnings in excess of billings......................... 2,701 --
Trade accounts receivable, less allowance of $585 and $191, respectively... 2,482 2,592
Inventories................................................................ 4,331 4,151
Deferred tax asset......................................................... 2,072 --
Other...................................................................... 257 151
-- --
Total current assets............................................. 29,950 6,980
-------- --------
Property and equipment, at cost................................................. 19,916 1,330
Less accumulated depreciation.............................................. (1,509) (938)
-------- --------
18,407 392
-------- --------
Investments:
Equity..................................................................... -- 4,170
Investment in Sterling Construction Company................................ -- 2,745
Note receivable - related party................................................. -- 1,330
Excess of cost over net assets acquired, net.................................... 6,284 135
Deferred tax asset.............................................................. 1,787 --
Other assets.................................................................... 280 27
-------- --------
8,351 8,407
-------- --------
$ 56,708 $ 15,779
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................................... $ 17,792 $ 4,407
Accrued compensation....................................................... 849 356
Accrued interest ($162 and $2,927 due to related party).................... 162 3,036
Billings in excess of costs and estimated earnings......................... 3,358 --
Current maturities of long-term obligations ($3,788 and $13,619 to
related parties)......................................................... 4,044 13,696
Short term borrowings...................................................... 3,328 --
Other accrued expenses..................................................... 360 317
-------- --------
Total current liabilities............................................. 29,893 21,812
-------- --------
Long-term obligations:
Long-term debt............................................................. 4,875 3,464
Long-term debt, related parties............................................ 11,131 1,000
Put liability.............................................................. 4,361 --
Other long term obligations................................................ 2,431 169
-------- --------
22,798 4,633
Minority interest............................................................... 2,209 --
Commitments and contingencies................................................... -- --
Stockholders' equity (deficit):
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................................................. 62,097 47,204
Deficit.................................................................... (60,337) (57,918)
Treasury stock, at cost, 207 common shares................................. (1) (1)
-------- --------
Total stockholders' equity (deficit).................................. 1,808 (10,666)
-------- --------
$ 56,708 $ 15,779
======== ========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
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
AUGUST 31, 2001 AUGUST 31, 2000
--------------- ---------------
Contract revenues ................................................... $ 18,401 $ --
Sales ............................................................... 5,263 5,285
Other income ........................................................ 126 262
----------- -----------
23,790 5,547
----------- -----------
Cost of contract revenues earned .................................... 16,783 --
Cost of goods sold, including occupancy and buying expenses ......... 4,152 4,238
Operating, selling and administrative expenses ...................... 2,469 1,106
Interest expense .................................................... 693 583
----------- -----------
24,097 5,927
----------- -----------
Loss before loss from equity investment, minority interest and income
taxes ............................................................... (307) (380)
----------- -----------
Loss from equity investment ......................................... (359) (667)
Minority interest in net earnings of subsidiary ..................... (83) --
Income tax expense .................................................. (1) --
----------- -----------
Net loss ............................................................ $ (750) $ (1,047)
=========== ===========
Basic and diluted net loss per share: ............................... $ (0.15) $ (0.21)
=========== ===========
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
4
OAKHURST COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED ENDED
AUGUST 31, 2001 AUGUST 31, 2000
--------------- ---------------
Contract revenues ................................................... $ 18,401 $ --
Sales ............................................................... 10,982 11,030
Other income ........................................................ 167 306
----------- -----------
29,550 11,336
----------- -----------
Cost of contract revenues earned .................................... 16,783 --
Cost of goods sold, including occupancy and buying expenses ......... 8,856 8,741
Operating, selling and administrative expenses ...................... 3,539 2,217
Interest expense .................................................... 1,424 1,155
----------- -----------
30,602 12,113
----------- -----------
Loss before loss from equity investment, minority interest and income
taxes ............................................................... (1,052) (777)
----------- -----------
Loss from equity investment ......................................... (1,280) (1,377)
Minority interest in net earnings of subsidiary ..................... (83) --
Income tax expense .................................................. (4) (2)
----------- -----------
Net loss ............................................................ $ (2,419) $ (2,156)
----------- ===========
Basic and diluted net loss per share ................................ $ (0.49) $ (0.44)
=========== ===========
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
5
OAKHURST COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
SIX MONTHS ENDED AUGUST 31, 2001
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Additional
Common Paid-In Treasury
stock Capital Deficit stock Totals
----- ------- ------- ----- ------
Balances, March 1, 2001 ............................... $49 $ 47,204 $(57,918) $ (1) $(10,666)
Cancellation of debt and return of equity investment... 14,520 (1,297) 13,223
Stock issued in Sterling acquisition .................. (81) 843 762
Sale of treasury stock ................................ 454 454 908
Net loss for the period ............................... -- -- (2,419) -- (2,419)
--- -------- -------- ------- --------
Balances, August 31, 2001 ............................. $49 $ 62,097 $(60,337) $ (1) $ 1,808
=== ======== ======== ======= ========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
OAKHURST COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Six months Six months
Ended Ended
August 31, August 31,
2001 2000
---------- -----------
Cash flows from operating activities:
Net loss ........................................................................ $(2,419) $(2,156)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization .............................................. 609 70
Bad debt expense ........................................................... 394 --
Loss from equity investment ................................................ 1,280 1,466
Deferred tax benefit ....................................................... (134) --
Minority interest in net earnings of subsidiary ............................ 83 --
Changes in operating assets and liabilities, net of effect of acquisition
of Sterling Construction Company:
(Increase) decrease in accounts receivable-trade ........................... (284) (371)
(Increase) decrease in contracts receivable ................................ 415 --
(Increase) decrease in inventories ......................................... (180) 721
(Increase) decrease in costs and estimated earnings in excess of billings on
uncompleted contracts ...................................................... 212 --
(Increase) decrease in prepaid expenses and other assets ................... 214 (54)
(Decrease) increase in trade payables ...................................... 3,049 (1,234)
(Decrease) increase in billings in excess of costs and estimated earnings on
uncompleted contracts ...................................................... (1,208) --
(Decrease) increase in accrued compensation and other
liabilities ................................................................ 400 641
------- -------
Net cash provided by (used in) operating activities .................................... 2,431 (917)
------- -------
Cash flows from investing activities:
Net cash paid upon acquisition of Sterling Construction
Company ......................................................................... (9,354) --
Additions to property and equipment ............................................. (378) (50)
Increase in investment .......................................................... -- (3,351)
------- -------
Net cash used in investing activities .................................................. (9,732) (3,401)
------- -------
Cash flows from financing activities:
Borrowings under long term obligations .......................................... 6,827 1,032
Proceeds from issuance of long term debt ........................................ -- 3,535
Principal payments on long-term obligations ..................................... (213) (52)
Sale of treasury stock .......................................................... 908 --
------- -------
Net cash provided by financing activities .............................................. 7,522 4,515
------- -------
Net decrease increase in cash .......................................................... 221 197
Cash at beginning of period ............................................................ 86 152
------- -------
Cash at end of period .................................................................. $ 307 $ 349
======= =======
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
OAKHURST COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED AUGUST 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 two facilities, in McKeesport, Pennsylvania
and 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 to become a fully integrated recycling and
waste-to-energy facility in Ford Heights, Illinois. In conjunction with OTI's
funding commitment to New Heights, Oakhurst entered into certain agreements with
KTI, Inc. ("KTI") (which subsequently 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.
In January 1999 OTI made a minority investment in Sterling Construction
Company ("Sterling"). Sterling is a heavy civil construction company based in
Houston that specializes in municipal and state highway contracts for paving,
bridge, water and sewer, and light rail. 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 was due to two officers
and directors of Oakhurst, and the remainder was due to certain directors and
management of Sterling. These notes were restructured as part of a transaction
in July 2001 (the "Sterling Transaction"), in which Oakhurst further increased
its equity position in Sterling from 12% to 80.1% (see Note 8 "Sterling
Transaction"). The Sterling Transaction, which was facilitated, in part, by the
Unwinding Agreements (which returned to the Company shares that had been owned
by KTI and eliminated the losses and most of the loans attributable to New
Heights), will enable the Company to share in any future profitable operations
of Sterling.
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.
8
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 and six months ended August 31, 2001
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.
Adoption of SFAS No. 133 had no effect on the Company's financial
statements.
3. NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS 142
is effective for fiscal years beginning after December 15, 2001; however,
certain provisions of this Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the Company are as
follows:
o all business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of accounting
is prohibited except for transactions initiated before July 1, 2001.
o intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability
o goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective the first day of the
fiscal year of SFAS 142 implementation all previously recognized goodwill
and intangible assets with indefinite lives will no longer be subject to
amortization.
o effective the first day of the fiscal year of SFAS 142 implementation,
goodwill and intangible assets with indefinite lives will be tested for
impairment annually and whenever there is an impairment indicator.
o all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
The Company will continue to amortize goodwill recognized prior to July
1, 2001, under its current method until the first day of the SFAS 142
implementation year, at which time annual and quarterly goodwill amortization of
$8,000 and $2,000 will no longer be recognized. By the last day of the SFAS 142
implementation year the Company will have completed a transitional fair value
based impairment test of goodwill as of the first day of the SFAS 142
implementation year. Impairment losses, if any, resulting from the transitional
testing will be recognized in the first quarter of the SFAS 142 implementation
year, as a cumulative effect of a change in accounting principle.
9
As required by SFAS 142, the approximately $6.1 million of goodwill
acquired in the Sterling Transaction will not be amortized. The Company does not
plan to early adopt any of the other provisions of SFAS 141 or 142.
4. SEGMENT INFORMATION
The Company has historically operated as a wholesale distributor of
automotive aftermarket accessories. Its 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 across its product lines (the "Distribution Segment").
In July 2001, the Company increased its equity investment in Sterling
from 12% to 80.1%. Sterling is a heavy civil construction company based in
Houston that specializes in municipal and state highway contracts for paving,
bridge, water and sewer, and light rail (the "Construction Segment").
Each of the Construction Segment and the Distribution Segment 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 the Distribution Segment and its
working capital needs to allocate financial resources. The operating
profitability of the Construction Segment is reviewed by Joseph P. Harper, its
President and Chief Financial Officer to determine its financial needs.
Allocation of resources among the Company's operating segments is determined by
Messrs. Harper and Hemsley.
The Company's operations are organized into the two operating segments
included in the following table (in thousands):
<Table>
<Caption>
Three months ended 8/31/2001 Consolidated
SEGMENTS Construction Distribution Other Total
------------ ------------ ----- -----
Revenues $18,401 $5,263 -- $23,664
Operating profit (loss) 867 (53) (428) $ 386
Interest expense $ (693)
Loss from equity investment (359) $ (359)
Minority interest expense $ (83)
-------
Pre-tax loss $ (749)
=======
Segment assets 39,213 7,193 10,302 $56,708
</Table>
<Table>
<Caption>
Distribution
------------
Three months ended 8/31/2000 SCPI SCPI Consolidated
SEGMENTS Auto Pet OTI Corporate Total
---- --- --- --------- -----
Net sales 4,700 585 -- -- $ 5,285
Operating profit (loss) 213 84 (83) (11) $ 203
Interest expense $ (583)
Loss from equity investment (667) $ (667)
-------
Pre-tax loss $(1,047)
=======
Segment assets 7,279 320 11,426 4,088 23,113
</Table>
<Table>
<Caption>
Six months ended 8/31/2001 Consolidated
SEGMENTS Construction Distribution Other Total
------------ ------------ ----- -----
Net sales $18,401 10,982 -- $ 29,383
Operating profit (loss) 867 163 (658) $ 372
Interest expense $ (1,424)
Loss from equity investment (1,280) $ (1,280)
Minority interest expense $ (83)
Pre-tax loss from continuing
operations $ (2,415)
========
Segment assets 39,213 7,193 10,302 $ 56,708
</Table>
10
<Table>
<Caption>
Distribution
------------
Six months ended 8/31/2000 SCPI SCPI Consolidated
SEGMENTS Auto Pet OTI Corporate Total
---- --- --- --------- -----
Net sales 9,817 1,213 -- -- $11,030
Operating profit (loss) 527 158 (147) (160) $ 378
Interest expense $(1,155)
Loss from equity investment $(1,377)
-------
Pre-tax loss $(2,154)
=======
Segment assets 7,279 320 11,426 4,088 $23,113
</Table>
5. SUMMARY FINANCIAL INFORMATION
As described in Note 1 "Interim Financial Statements", effective July
3, 2001, OTI returned its remaining equity interest in New Heights to KTI.
Summarized financial information is therefore provided herein for New Heights
for the month ended June 30, 2001 (through the date of disposition) and three
and six months ended August 31, 2000 (in thousands):
<Table>
<Caption>
June 30, 2001 August 31, 2000
------------- ---------------
Current assets...................................................... $ 3,720 $ 4,573
Non-current assets.................................................. 37,086 40,565
Current liabilities................................................. $24,457 $ 7,908
Non-current liabilities............................................. -- 9,293
Net equity.......................................................... 16,349 27,937
<Caption>
Month ended Three months ended
June 30, 2001 August 31, 2000
------------- ---------------
Total revenues...................................................... $ 1,583 $ 5,343
Net loss............................................................ (1,000) (2,428)
<Caption>
Four months ended Six months ended
June 30, 2001 August 31, 2000
------------- ---------------
Total revenues...................................................... $ 5,253 $ 5,913
Net loss............................................................ (3,586) (3,848)
</Table>
6. BORROWING ARRANGEMENT
In conjunction with the Sterling Transaction, Sterling increased the
size of its revolving credit agreement (the "Sterling Revolver") with an
institutional lender from $10.0 million to $13.0 million and borrowed $4.9
million, which was immediately loaned to the Company and used to fund part of
the Sterling Transaction. The outstanding balance at August 31, 2001 was $4.9
million. The Sterling Revolver carries interest at prime, subject to the
achievement of certain financial targets. The three-year agreement is secured by
all equipment at Sterling and is subject to compliance with certain financial
covenants. Sterling paid a fee of $125,000 in connection with the Sterling
Revolver, which will be amortized over the life of the loan.
In July 2001, SCPI completed a refinancing of its existing $4.5 million
revolving line of credit. The new revolving line of credit (the "SCPI 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, is secured by the
accounts receivable, inventory and all other assets of SCPI, is subject to the
maintenance of various financial covenants, and required a closing fee of
$50,000. The Company was relieved of all outstanding obligations under the
former line of credit upon completion of the refinancing.
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%.
11
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.
7. DISPOSITION OF NEW HEIGHTS
In April 2001, the Company entered into certain agreements (the
"Unwinding Agreements") with Casella Waste Systems, Inc. and KTI, Inc. ("KTI")
which provided for the transfer to KTI of the equity interest owned by the
Company's subsidiary, Oakhurst Technology, Inc. ("OTI") in New Heights Recovery
and Power, LLC ("New Heights") in return for (a) Oakhurst common stock held by
KTI, (b) cancellation of the KTI Loan and accrued interest thereon, except for
$1 million and (c) the issuance to KTI of Oakhurst warrants. These agreements
were finalized in July 2001. The net effect of the Unwinding Agreements is as
follows (in thousands):
<Table>
Cancellation of debt and accrued interest $17,064
Purchase of common stock into treasury 1,297
Transfer of equity interest in New Heights (2,891)
Issuance of new 4-year note at 12%, net of the
unamortized fair value of the warrants (950)
-------
Adjustment to paid-in capital $14,520
=======
</Table>
8. INVESTMENT IN AFFILIATED COMPANY ("STERLING TRANSACTION")
Following completion of the Unwinding Agreements (see Note 7 -
"Disposition of New Heights"), which returned to the Company shares that had
been owned by KTI and eliminated the losses and most of the loans attributable
to New Heights, on July 18, 2001, the Company completed the "Sterling
Transaction", in which it increased its equity ownership in Sterling from 12% to
80.1%. Sterling is a heavy civil construction company based in Houston that
specializes in municipal and state highway contracts for paving, bridge, water
and sewer, and light rail. The results of Sterling have been included since that
date. As a result of the acquisition, the Company is expected to be able to
benefit from the increase in infrastructure spending in Texas, although such
benefits cannot be assured, and to the extent such benefits result in profits
subject to federal income taxes, such taxes may, in large part, be sheltered by
the Company's substantial net operating loss carryforwards.
Total consideration for the increase in equity was $22.2 million,
including the Company's previous investment in Sterling of $2.7 million, and
consisted of (a) cash payment of $9.9 million, (b) conversion of a $1.3 million
Sterling subordinated note receivable into Sterling equity, (c) issuance of
subordinated notes and warrants, and (d) the sale of Oakhurst common stock. The
value of the 1,124,536 shares of common stock sold was determined based on the
average price of the Company's common shares over the 5-day period before and
after the closing date.
Additionally, the Company gave certain selling shareholders a "Put"
option for the remaining 19.9% of Sterling stock owned by them, pursuant to
which they have the right to sell the remaining Sterling shares to the Company
in July 2005 at a price of $105 per share. The Company recorded the fair value
of the Put as a $4.4 million liability at July 18, 2001. The fair value of the
Put is to be reviewed quarterly and any changes reflected as components of
pre-tax earnings. There was no significant change in the fair value of the Put
at August 31, 2001.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The Company is in
the process of obtaining valuations of certain intangible assets; thus, the
allocation of the purchase price is subject to refinement: (in thousands)
<Table>
<Caption>
At July 18, 2001
Current assets $22,213
Property, plant and equipment 18,242
Goodwill and intangible assets 6,153
Deferred tax asset 3,725
-------
Total assets acquired 50,333
Current liabilities (15,663)
Long-term debt (10,332)
-------
Total liabilities assumed (25,995)
Minority interest (2,126)
-------
$22,212
=======
</Table>
12
Funding for the cash portion of the Sterling Transaction was provided
principally through borrowings by Sterling under its bank revolving credit, and
by the Company through the issuance of notes and sale of common stock, as
follows (in thousands):
<Table>
Sterling Revolver $4,900
Subordinated notes 2,580
Short-term subordinated note payable 1,500
Sale of Oakhurst common stock 908
------
$9,888
======
</Table>
The following summary unaudited pro forma financial information for the
three and six months ended August 31, 2001 is presented as if the Unwinding
Agreements described in Note 7 and the Sterling Transaction had been completed
as of the beginning of fiscal 2000 (in thousands, except per share data).
<Table>
<Caption>
Second quarter ended
---------------------
August 31, 2001 August 31, 2000
--------------- ---------------
Total revenues $31,408 $25,821
Net (loss) income $ (414) $ 412
Net (loss) income per share $ (0.08) $ 0.08
</Table>
<Table>
<Caption>
Six months ended
----------------
August 31, 2001 August 31, 2000
--------------- ---------------
Total revenues $56,657 $47,390
Net (loss) income $ (426) $ 1,504
Net (loss) income per share $ (0.09) $ 0.30
</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.
9. SUBSEQUENT EVENT
On July 23, 2001, the Board of Directors recommended a name change of
the Company to more clearly reflect the change in nature of the businesses
conducted. The shareholders of the Company voted at its Annual Shareholders
Meeting on October 16, 2001 in favor of changing the name of the Company from
"Oakhurst Company, Inc." to "Sterling Construction Company, Inc."
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.
13
("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 dividends on such
preferred stock.
Oakhurst's principal business historically has been the distribution of
automotive aftermarket accessories. 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, together with 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
subsequently 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, and 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.
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 make a minority investment in Sterling Construction Company,
("Sterling"). Sterling is a heavy civil construction company based in Houston
that specializes in municipal and state highway contracts for paving, bridge,
water and sewer, and light rail. 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, formerly President and now Chief Financial Officer of Oakhurst, funded
$116,000 of the amount advanced by Mr. Davies pursuant to such Promissory Note.
The balance of the notes issued to acquire the second tranche is owed to certain
directors and management of Sterling, a portion of which was reflected as
adjustments to additional paid-in capital. These notes were restructured as part
of the Sterling Transaction whereby Oakhurst further increased its equity
percentage in Sterling from 12% to 80.1%. The Sterling Transaction was closed in
July 2001.
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 July 3, 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 was with a related party the
Company did not record a gain in connection with the Unwinding Agreements; the
effects of the agreements were recorded as adjustments to additional paid-in
capital.
Following completion of the Unwinding Agreements, which resulted, inter
alia, in the elimination of most of the loans attributable to New Heights,
Oakhurst completed the Sterling Transaction in July 2001, pursuant to which the
Company increased its investment in Sterling, from the 12% interest held at
February 28, 2001, to 80.1%.
14
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 former lender. The new two-year line of credit
provided for a maximum line of $5.0 million, subject to a borrowing base and
carried interest at prime plus 1%. Due to the bankruptcy filing of a significant
customer of SCPI in August 2001, which created a default under its terms, the
line of credit was amended in September 2001 to reduce the maximum borrowing
level, increase the interest rate and accelerate the term.
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 eleven months
ended August 2001 Sterling's results reflected revenues of $78 million, net
income of $1.5 million and EBITDA of $6.0 million.
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, and to the extent such profits are subject
to federal income taxes they may, in large part, be sheltered by the Company's
substantial net operating loss carryforwards. However, such future profitability
cannot be assured.
Following the acquisition of Sterling in the second quarter of fiscal
2002, Oakhurst now reports two operating segments, Construction and
Distribution. The Construction segment comprises Sterling Construction, which is
a heavy civil construction company based in Houston that specializes in
municipal and state highway contracts for paving, bridge, water and sewer, and
light rail.
The Distribution segment, comprising SCPI, operates under the trade
name Steel City Products, and 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.
Each of SCPI and Sterling is managed by its own decision makers and
comprises unique customers, suppliers and employees. Maarten Hemsley, the Chief
Financial Officer of the Company, reviews the operating profitability of the
distribution segment and its working capital needs to allocate financial
resources. The operating profitability of the construction segment is reviewed
by Joseph P. Harper, the Company's President and Sterling's President and Chief
Financial Officer to determine its financial needs. Allocation of resources
among the Company's operating segments is determined by Messrs. Harper and
Hemsley.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING
At Sterling, the level of working capital varies principally as a
result of changes in the levels of cost and estimated earnings in excess of
billings, and in billings in excess of cost and estimated earnings. Sterling's
cash requirements are also impacted by its needs for capital equipment, which in
the past have generally been financed from cash flow or from borrowings under
the Sterling Revolver, although occasionally Sterling may lease or rent
equipment.
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 August 31, 2001, the Company's debt consisted of (in thousands):
<Table>
Related party notes:
Subordinated debt $6,000
Zero coupon notes 5,083
Short-term subordinated note 1,500
Management/director notes 2,048
-------
14,631
Sterling revolver 4,875
SCPI revolver 3,328
Mortgage payable 1,429
KTI Loan 972
Equipment notes & capital leases 215
Other 359
-------
$25,809
=======
</Table>
15
Related Party Notes
Subordinated Debt
As part of the Sterling Transaction, certain shareholders of Sterling
were issued subordinated promissory notes in the amount of $6 million in partial
payment for shares of Sterling. These notes are repayable over three years in
equal quarterly installments and carry interest at 12% per annum.
Zero Coupon Notes
The Sterling Transaction was funded in part through the sale of zero
coupon notes and the issuance of zero coupon notes to certain selling
shareholders in Sterling. Warrants for Oakhurst common stock were issued in
connection with the zero coupon notes. The zero coupon notes are shown at their
present value, discounted at a rate of 12% and mature four years from the date
of closing. Warrants issued in connection with the notes become exercisable in
four years at $1.50 per share.
Short-term Subordinated Note
In order to facilitate the Sterling Transaction, Sterling borrowed $1.5
million from one of the Company's shareholders. The note is payable in two
installments on September 30, 2001 and December 31, 2001. The note bears
interest at 12%. The first installment was made on September 30, 2001.
Management/Director Notes
Notes with an aggregate face amount of $1.3 million issued in
connection with the October 1999 purchase of the second equity tranche of shares
of Sterling were restructured as part of the Sterling Transaction. Of the total,
notes for $800,00 were due to members of Sterling's management, including Joseph
P. Harper, since appointed President of Oakhurst. Notes totaling approximately
$550,000 were due to Robert Davies, former Chairman and Chief Executive Officer
of Oakhurst, and, through a participation agreement, Maarten Hemsley, formerly
President and now Chief Financial Officer of Oakhurst. In consideration for the
extension of the maturity dates of these notes, the face amounts were increased
by an aggregate of approximately $342,000. Furthermore, certain accrued amounts
due to Messrs. Davies and Hemsley aggregating approximately $355,000 were
converted into notes. All such notes mature over four years and carry interest
at 12%. Principal and interest may be paid only from defined cash flow of
Oakhurst and SCPI, or from proceeds of any sale of SCPI's business.
Sterling Revolver and SCPI Revolver
In conjunction with the Sterling Transaction, Sterling entered into a
three-year agreement providing for a revolving line of credit with a maximum
line of $13.0 million, subject to a borrowing base. The line of credit carries
interest at prime, subject to achievement of certain financial targets and is
secured by the equipment of Sterling.
Management believes that the Sterling Revolver will provide adequate
funding for Sterling's working capital, debt service and capital expenditure
requirements, including seasonal fluctuations.
16
Due to concerns stemming from SCPI's 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 carried an interest rate equal to prime plus
1%. Due to the bankruptcy filing of a significant customer of SCPI in August
2001, which created a default under its terms, the SCPI Revolver was amended in
September 2001 to reduce the maximum borrowing level to $3.75 million, increase
the interest rate to prime plus 1.5%, and accelerate the term to April 30, 2002.
Management believes that the SCPI Revolver will provide adequate
funding for SCPI's working capital, debt service and capital expenditure
requirements, including seasonal fluctuations.
KTI Loan
In December 1998, Oakhurst entered into a loan agreement with KTI, Inc.
(the "KTI Loan") pursuant to which KTI committed to fund 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.
Effective July 2001, all except $1,000,000 of the KTI Loan and accrued
interest thereon was cancelled pursuant to the Unwinding Agreements, with the
balance converted to a four year subordinated loan, with interest of 12% due at
maturity. The face value of the KTI Loan has been accounted for by a reduction
for the fair value of the approximately 494,000 warrants for Oakhurst common
stock issued to KTI, to be amortized over the life of the loan.
Sterling Mortgage
In June 2001, Sterling completed the construction of a new headquarters
building on land adjacent to its existing equipment repair facility in Houston.
The building was financed principally through an additional mortgage of $1.1
million on the land and facilities, at a rate of 7.75% per annum, repayable over
15 years. The new mortgage is cross-collateralized with an existing mortgage on
the land and facilities which was obtained in 1998 in the amount of $500,000,
repayable over 15 years with an interest rate of 9.3% per annum.
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 SCPI 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.
17
CASH FLOWS
Net cash provided by operating activities in the six months ended
August 31, 2001 increased by approximately $3.3 million compared with the six
months ended August 31, 2000. The increase was principally due to higher levels
of vendor payables and other accrued expenses.
In July 2001, the Company increased its investment in Sterling from 12%
to 80.1% and paid approximately $9.3 million for the acquisition. In the prior
year, the Company increased its investment in New Heights by $3.3 million. In
July 2001, the Company returned its equity investment to KTI in exchange for
cancellation of debt and return of stock.
In the six months ended August 31, 2001 and August 31, 2000, the
Company's financing activities provided cash of $7.5 million and $4.5 million,
respectively. The increase in the current year was primarily the result of the
debt issued to finance the Sterling Transaction and in the prior year, the
result of debt incurred to finance New Heights..
MATERIAL CHANGES IN FINANCIAL CONDITION
Except as described above, at August 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.
The effect of the Unwinding Agreements and the Sterling Transaction
have been, inter alia, to substantially improve the Company's shareholders'
equity, which was approximately $1.8 million at August 31, 2001 compared with
negative $12.1 million at the end of the preceding quarter.
In August 2001, a significant customer of the Company's SCPI subsidiary
filed for bankruptcy, and as a result, the lender under the SCPI Revolver
amended the credit agreement in September 2001. Provisions of the amendment
included the acceleration of the term of the SCPI Revolver to expire in April
2002. As a result, the SCPI Revolver is presented as a short-term liability.
RESULTS OF OPERATIONS
Operations include the consolidated results for SCPI, which through its
operating division, Steel City Products, headquartered in McKeesport,
Pennsylvania, distributes automotive accessories, non-food pet supplies and lawn
and garden products (the "Distribution Segment"). In July 2001, the Company
increased its investment in Sterling from 12% to 80.1%. Sterling is a heavy
civil construction company based in Houston that specializes in municipal and
state highway contracts for paving, bridge, water and sewer, and light rail.
Sterling's operations consist of one segment (the "Construction Segment"). Until
July 2001, OTI held investments in the construction industry and the
waste-to-energy industry.
THREE MONTHS ENDED AUGUST 31, 2001 COMPARED WITH THREE MONTHS ENDED AUGUST 31,
2000
CONSTRUCTION
Sterling became a majority-owned subsidiary of the Company on July 18,
2001. Sterling provides pipe-laying and road construction services primarily to
municipalities in Texas and to the Texas Department of Transportation. Revenues
on construction contracts in progress totaled $18.4 million since the date of
acquisition by the Company.
Gross profit for the period was $1.6 million, or 8.7% of contract
revenues.
Sterling reported pre-tax income of $674,000 in the period.
18
DISTRIBUTION
Automotive accessories
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 supplies
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 products
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.
OTI
Expenses at OTI decreased by approximately $74,000 mostly related to
the expiration of employment agreements and a reduction in personnel.
The loss from equity investment at New Heights decreased by $300,000
compared with the second quarter of the prior year. Due to substantial and
continuing losses at New Heights, the equity investment was returned to KTI
effective July 3, 2001.
CORPORATE
Expenses at the corporate level increased by approximately $115,000 due
primarily to fees resulting from the Unwinding Agreements and the Sterling
Transaction.
Interest expense decreased by $33,000 due to the cancellation of the
KTI Loan in July 2001.
SIX MONTHS ENDED AUGUST 31, 2001 COMPARED WITH SIX MONTHS ENDED AUGUST 31, 2000
CONSTRUCTION
Sterling became a majority-owned subsidiary of the Company on July 18,
2001. Sterling provides pipe-laying and road construction services primarily to
municipalities in Texas and to the Texas
19
Department of Transportation. Revenues on construction contracts in progress
totaled $18.4 million since the date of acquisition by the Company.
Gross profit for the period was $1.6 million, or 8.7% of contract
revenues.
Sterling reported pre-tax income of $674,000 in the period.
DISTRIBUTION
Automotive accessories
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 supplies
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 products
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.
OTI
Expenses at OTI decreased by approximately $150,000 mostly related to
the expiration of employment agreements and a reduction in personnel.
The loss from equity investment at New Heights decreased by $97,000
compared with the fist six months of the prior year. Due to substantial and
continuing losses at New Heights, the equity investment was returned to KTI
effective July 3, 2001.
20
CORPORATE
Expenses at the corporate level increased by approximately $140,000 due
primarily to fees resulting from the Unwinding Agreements and the Sterling
Transaction.
Interest expense increased by $269,000 due interest accrued on the KTI
Loan prior to its cancellation in July 2001 and to interest on the notes issued
in connection with the Sterling Transaction.
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 six months ended August 31, 2001 by
approximately $12,000.
As part of the Sterling Transaction, in July 2001 the Company gave
certain selling Sterling shareholders a "Put" option for the remaining 19.9% of
Sterling stock owned by them, pursuant to which they have the right to sell the
remaining Sterling shares to the Company in July 2005 at a price of $105 per
share. The Company recorded the fair value of the Put as a $4.4 million
liability at July 18, 2001. The fair value of the Put is to be reviewed
quarterly and any changes reflected as components of pre-tax earnings. There was
no significant change in the fair value of the Put at August 31, 2001.
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
10.3 Amendment to Revolving Credit Agreement dated September 12, 2001
between Steel City Products, Inc. and National City Bank of
Pennsylvania
(b) Current Report on Form 8-K dated July 31, 2001.
- ----------
*filed herewith
21
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: January 20, 2002 By: /s/ Joseph P. Harper, Sr.
----------------------------
Joseph P. Harper, Sr.
President
Date: January 20, 2002 By: /s/ Maarten D. Hemsley
----------------------------
Maarten D. Hemsley
Chief Financial Officer
22