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 August 31, 1995
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
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(State of Incorporation) (I.R.S. Employer
Identification No.)
1001 SANTERRE DRIVE, GRAND PRAIRIE, TEXAS
75050
------------------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 660-4499
----------------------------------------------------
(Registrant's telephone number, including area code)
OAKHURST CAPITAL, INC.
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
----- -----
2
As of October 1, 1995, 3,195,235 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 I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OAKHURST COMPANY, INC. AND SUBSIDIARIES
Balance sheets at August 31, 1995 (unaudited)
and February 28, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of operations for the three months ended August 31, 1995
and the thirteen weeks ended August 27, 1994 (unaudited) . . . . . . . . . . . . 5
Statements of operations for the six months ended August 31, 1995
and the twenty-six weeks ended August 27, 1994 (unaudited) . . . . . . . . . . . 6
Statement of stockholders' equity for the six months
ended August 31, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of cash flows for the six months ended August 31, 1995
and the twenty-six weeks ended August 27, 1994 (unaudited) . . . . . . . . . . . 8
Notes to financial statements (unaudited) . . . . . . . . . . . . . . . . . . . . . 9
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OAKHURST COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
ASSETS August 31, February 28,
1995 1995
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents.............................. $ 302 $ 314
Trade accounts receivable, less allowance of $487 and
$282, respectively................................... 5,231 5,760
Commissions receivable................................. 224 226
Other receivables...................................... 209 498
Inventories............................................ 9,423 10,400
Deferred tax asset..................................... - 620
Other.................................................. 500 280
------------ ------------
Total current assets......................... 15,889 18,098
------------ ------------
Property and equipment, at cost.......................... 3,034 2,993
Less accumulated depreciation.......................... (876) (921)
------------ ------------
2,158 2,072
------------ ------------
Deferred tax asset....................................... 6,086 5,466
Excess of cost over net assets acquired, net............. 7,401 7,399
Other assets............................................. 268 266
------------ ------------
13,755 13,131
------------ ------------
$ 31,802 $ 33,301
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of revolving credit agreement....... $ 2,800 $ -
Note payable, related party............................ 287 532
Accounts payable....................................... 6,843 8,066
Accrued compensation................................... 475 757
Income taxes payable................................... - 109
Current maturities of long-term obligations............ 656 617
Current maturities of long-term obligations, related
parties.............................................. 740 800
Net obligation of discontinued business segment-
current portion...................................... 536 505
Other.................................................. 584 468
------------ ------------
Total current liabilities.................... 12,921 11,854
------------ ------------
Long-term obligations:
Net obligation of discontinued business segment........ 681 985
Long-term debt......................................... 1,391 3,237
Long-term debt, related parties........................ 1,960 1,800
Convertible debt, related parties...................... 532 517
Other long-term obligations............................ 111 73
------------ ------------
4,675 6,612
------------ ------------
Commitments and contingencies............................
Stockholders' equity:
Preferred stock, par value $0.01; authorized 1,000,000
shares, none issued.................................. - -
Common stock, par value $0.01 per share; authorized
14,000,000 shares; issued 3,195,235 and 3,189,326
shares, respectively................................ 32 32
Additional paid-in capital............................. 46,515 46,480
Deficit (Reorganized on August 26, 1989)............... (32,340) (31,676)
Treasury stock, at cost, 207 common shares............. (1) (1)
------------ ------------
Total stockholders' equity................... 14,206 14,835
------------ ------------
$ 31,802 $ 33,301
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Three Months Thirteen Weeks
Ended Ended
August 31, August 27,
1995 1994
------------ --------------
Sales......................................... $ 13,517 $ 9,891
Other income.................................. 151 217
------------ ------------
13,668 10,108
------------ ------------
Cost of goods sold, including occupancy and
buying expenses............................. 10,690 7,424
Operating, selling and administrative
expenses.................................... 2,945 1,991
Provision for doubtful accounts............... 205 -
Amortization of excess of costs over net asset
acquired.................................... 125 35
Interest expense.............................. 182 54
------------ ------------
14,147 9,504
------------ ------------
Income (loss) from continuing operations
before income taxes......................... (479) 604
Income taxes (benefit)........................ (30) 201
------------ ------------
Income (loss) from continuing operations...... (449) 403
Income from discontinued operations (net of
$34 income tax expense)..................... - 66
------------ ------------
Net income (loss) ............................ $ (449) $ 469
============ ============
Per share amounts:
Income (loss) from continuing operations.... $ (0.14) $ 0.13
Income from discontinued operations......... - 0.02
------------ ------------
Net income (loss) .......................... $ (0.14) $ 0.15
============ ============
Weighted average number of common shares
outstanding used in computing per share
amounts..................................... 3,195,235 3,034,650
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Six Months Twenty-six Weeks
Ended Ended
August 31, August 27,
1995 1994
------------ ----------------
Sales.............................................. $ 26,542 $ 19,760
Other income....................................... 197 228
------------ ------------
26,739 19,988
------------ ------------
Cost of goods sold, including occupancy and
buying expenses.................................. 20,828 14,876
Operating, selling and administrative expenses..... 5,660 3,883
Provision for doubtful accounts.................... 267 -
Amortization of excess of costs over net assets
acquired......................................... 262 50
Interest expense................................... 377 85
------------ ------------
27,394 18,894
------------ ------------
Income (loss) from continuing operations
before income taxes.............................. (655) 1,094
Income taxes....................................... 9 397
------------ ------------
Income (loss) from continuing operations........... (664) 697
Income from discontinued operations (net of
$34 income tax expense).......................... - 66
------------ ------------
Net income (loss).................................. $ (664) $ 763
============ ============
Per share amounts:
Income (loss) from continuing operations......... $ (0.21) $ 0.24
Income from discontinued operations.............. - 0.02
------------ ------------
Net income (loss)................................ $ (0.21) $ 0.26
============ ============
Weighted average number of common shares
outstanding used in computing per share amounts.. 3,192,832 2,949,777
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED AUGUST 31, 1995
(Dollars in thousands)
(Unaudited)
Common Stock Additional Retained Treasury Stock
-------------------- Paid-in Earnings -----------------
shares par value Capital (Deficit) shares cost
--------- --------- ---------- --------- ------ ----
Balances, February 28, 1995.......... 3,189,326 $32 $46,480 ($31,676) 207 ($1)
Net loss for the period.............. (664)
Employee stock awards................ 5,909 * 19
Other................................ 16
--------- --- ------- -------- --- ---
Balances, August 31, 1995............ 3,195,235 $32 $46,515 ($32,340) 207 ($1)
========= === ======= ======== === ===
* Rounds to less than $1,000
The accompanying notes are an integral part of these
consolidated financial statements
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OAKHURST COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Twenty-six Weeks
Ended Ended
August 31, August 27,
1995 1994
---------- ----------------
Cash flows from operating activities:
Income (loss) from continuing operations.............. $ (664) $ 294
Adjustments to reconcile income (loss) from continuing
operations to net cash (used in) provided by
operating activities:
Depreciation and amortization.................... 444 50
Deferred tax expense............................. - 152
Loss on retirement of asset...................... 10 -
Employee stock award............................. 19 -
Other changes in operating assets and liabilities:
Accounts receivable.............................. 529 (660)
Inventories...................................... 977 143
Accounts payable................................. (1,223) 1,692
Commissions receivable........................... 2 (26)
Other............................................ (177) 201
--------- ---------
Net cash (used in) provided by operating activities of:
Continuing operations................................. (83) 1,846
Discontinued operations............................... (273) 26
--------- ---------
Net cash (used in) provided by operating activities..... (356) 1,872
--------- ---------
Cash flows from investing activities:
Additions to property and equipment................... (216) (47)
Net change in the excess of cost over net assets
acquired............................................ (151) -
--------- ---------
Net cash used in investing activities................... (367) (47)
--------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit agreement....... 1,275 -
Repayment of note payable............................. (258) -
Principal payments on long-term obligations........... (306) (14)
--------- ---------
Net cash provided by (used in) financing activities..... 711 (14)
--------- ---------
Net (decrease) increase in cash and cash equivalents.... (12) 1,811
Cash and cash equivalents at beginning of period........ 314 1,071
--------- ---------
Cash and cash equivalents at end of period.............. $ 302 $ 2,882
========= =========
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations of $62 were incurred when the Company entered
into three leases for new computer and warehouse equipment.
Additional long-term debt of $100 was issued with a reduction of $13 to a
current note payable upon finalization of an acquisition in the prior
year.
The accompanying notes are an integral part of these
consolidated financial statements.
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
SIX MONTHS ENDED AUGUST 31, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
Oakhurst Company, Inc. ("Oakhurst" or "the Company") (formerly
Oakhurst Capital, Inc.) was formed as a result of a merger transaction (the
"merger") in fiscal 1992 between Steel City Products, Inc. ("SCPI") and an
Oakhurst subsidiary. The merger resulted in a restructuring of SCPI such that
it became a majority-owned subsidiary of Oakhurst. In accordance with the
merger, Oakhurst owns 10% of the outstanding common stock of SCPI and all of
SCPI's Series A Preferred Stock. The merger was structured such that the
aggregate fair market value of SCPI's common stock and Series A Preferred Stock
owned by Oakhurst would be approximately 90% of the aggregate fair market value
of SCPI. Accordingly, Oakhurst controls approximately 90% of the voting power
of SCPI. The accompanying financial statements reflect this control and
include the accounts of SCPI.
Oakhurst acquired all of the outstanding capital stock of H&H
Distributors d/b/a Harry Survis, ("H&H") in January 1994; accordingly, the
accompanying financial statements include the accounts of H&H.
Oakhurst acquired all of the outstanding capital stock of Dowling's
Fleet Service Co., Inc. ("Dowling's") and of Puma Products, Inc. ("Puma") in
August 1994 and October 1994, respectively; accordingly, the accompanying
consolidated financial statements include the accounts of these subsidiaries
for the respective periods of ownership.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position, results of operations and cash flows for the interim
periods presented. All adjustments made are of a normal, recurring nature.
While the Company believes that the disclosures presented herein are
adequate to make the information not misleading, it is suggested that these
unaudited consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the fiscal year ended February
28, 1995 ("fiscal 1995") as filed in the Company's Annual Report on Form 10-K.
2. LONG-TERM DEBT AND LINE OF CREDIT
In August 1994, Oakhurst entered into a two year revolving credit
agreement (the "Credit Agreement") that carried a floating interest rate of
prime plus 1% and provided for maximum borrowings of $3 million. Borrowings
may be limited by the borrowing base, as defined in the Credit Agreement, which
is calculated according to the level of Oakhurst's subsidiaries' accounts
receivable.
In August 1994, SCPI obtained a term loan in the amount of $2,560,000
(the "Term Loan"), in connection with Oakhurst's acquisition of Dowling's. The
Term Loan is secured by a mortgage on SCPI's real estate, is guaranteed by
Oakhurst and its subsidiaries, supported by a pledge of the capital stock of
Oakhurst's subsidiaries. The Term Loan is repayable over 48 months through
August 1998 and bears interest at a fixed rate of 9.25%.
The Term Loan and the Credit Agreement are cross-collateralized, and
contain various financial covenants. Following Oakhurst's acquisition of Puma
in the latter part of fiscal 1995, SCPI and Oakhurst negotiated amendments to
the Credit Agreement with the Bank; such amendments were finalized subsequent
to August 31, 1995 and provide for an increase in the line to $4 million, the
elimination of most of the financial covenants,
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and an increase in the interest rate from prime plus 1% to prime plus 1.5%.
The amended Credit Agreement will be secured by the accounts receivable,
inventory and capital stock of Oakhurst's subsidiaries.
3. ARBITRATION
On July 26, 1995 the Company initiated an arbitration proceeding with
the American Arbitration Association in connection with the August 1994
acquisition by the Company of Dowling's. The Company is seeking rescission of
the acquisition, or in the alternative, damages and indemnification in excess
of $1.6 million. The proceeding is based, among other things, on the Company's
belief that the seller breached certain provisions of the purchase and sale
agreement covering the acquisition by furnishing to the Company financial
information that was materially inaccurate. If the Company is successful in
obtaining a rescission of the purchase, the Company would receive back the
portion of the purchase price paid and other consideration given at the
closing, and would be relieved of the obligation to pay the balance of the
purchase price (approximately $1 million) over the three-year period following
the closing. In the event of a rescission of the acquisition, the Company
believes that in the near term it might earn less as a result of the repayment
of the debt that was incurred to make the acquisition and the investment of any
cash re-paid that is in excess of that debt than it might otherwise have
earned from the continued ownership of the Dowling's business.
Pending resolution of the arbitration, Oakhurst has exercised its
right of set-off, as defined in the Dowling's purchase agreement, against a
principal payment due of $350,000 on a related-party note payable issued in
connection with the Dowling's acquisition.
4. SUBSEQUENT EVENTS
During the second quarter of the current fiscal year, management
curtailed the level of credit allowed to Jamesway Corporation ("Jamesway"), one
of SCPI's largest customers, after becoming aware that Jamesway was
experiencing new financial difficulties. Although Jamesway had emerged from
bankruptcy as recently as January 1995, on October 6, 1995 it announced that it
is again considering filing for bankruptcy protection. Pending a further
announcement by Jamesway, SCPI suspended shipments to this customer in October
1995, and Oakhurst's consolidated second quarter results included a provision
of $150,000 in relation to the balances due from Jamesway.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's analysis of the significant factors that
have influenced the Company's financial position and results of operations
during the periods included in the accompanying consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's corporate structure permits Oakhurst Company, Inc.
("Oakhurst" or "the Company") (formerly Oakhurst Capital, Inc.) to file a
consolidated tax return so that both Oakhurst and Steel City Products, Inc.
("SCPI") may utilize the tax benefits (including approximately $148 million of
net operating loss carryforwards at December 31, 1994) attributable to SCPI.
SCPI is to concentrate on its historical line of business, while future growth
and expansion opportunities are to be pursued by Oakhurst or its other
subsidiaries. Through Oakhurst's ownership of SCPI, primarily in the form of
preferred stock, Oakhurst will retain substantially all the value of SCPI, and
will receive substantially all of the benefit of SCPI's operations through
dividends on such preferred stock. Oakhurst's ownership of SCPI is designed to
facilitate the preservation and utilization of the tax benefits.
In fiscal 1995, following Oakhurst's adoption of a program of
diversification and expansion, it acquired all the outstanding capital stock of
Dowling's Fleet Service Co., Inc. ("Dowling's"), a New York-headquartered
distributor of automotive radiators and related products, and of Puma Products,
Inc. ("Puma"), a Texas-based distributor of after- market products to the light
truck and van conversion industry. In connection with these acquisitions,
Oakhurst paid approximately $5.2 million in cash, and issued stock, convertible
debt, and notes and earn-outs payable of approximately $5 million in the
aggregate.
The notes payable outstanding include a two-year Dowling's note
payable of $700,000 that bears interest at prime and is due in two annual
installments beginning in August 1995, a two-year Puma note payable of $600,000
that bears interest at prime plus 1% and is due in two annual installments
beginning in October 1995 and a short-term Puma note payable with a current
balance of approximately $287,000 that bears interest at prime plus 1% and is
due in monthly installments of $100,000 through November 1995. Oakhurst has
exercised its right of set-off, as defined in the Dowling's purchase agreement,
against the first principal payment of $350,000 on the Dowling's note that was
due in August 1995, pending resolution of an arbitration proceeding (see
"Liquidity and Capital Resources - Significant Events - Arbitration").
The earn-out payments are due beginning in fiscal 1996, over two to
three years for Dowling's and over three to five years for Puma, and are
currently estimated at approximately $1.4 million, the current portion of which
is estimated at $90,000.
The convertible debt of $500,000 was issued to certain executives of
Dowling's, accrues interest at 6% and is convertible at the executives' option
into 120,346 shares of Oakhurst common stock on August 1, 1997.
These acquisitions, together with the acquisition of H&H Distributors,
d/b/a Harry Survis Auto Center ("H&H") that was completed in fiscal 1994, were
designed to enlarge Oakhurst's profit potential without over-leveraging the
Company or diluting the equity position of its shareholders. H&H, Dowling's
and Puma have been historically profitable and, despite a loss by Dowling's in
the first half of the current year (see "Results of Operations - Significant
Trends" below) are expected to continue to be so in the future. Although the
acquisitions resulted in a significant use of available cash and in the
issuance of long-term and short-term debt, the earnings potential of these new
subsidiaries is expected to enhance Oakhurst's liquidity and financial position
in the future.
Further acquisitions may be limited by the Company's available cash,
by its borrowing ability and by limitations on the amount of stock which the
Company may issue without jeopardizing the tax loss benefits.
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In August 1994, SCPI closed on a new term loan that was issued in
connection with Oakhurst's acquisition of Dowling's, in the amount of
$2,560,000 (the "Term Loan"), that is secured by a mortgage on SCPI's real
estate, guaranteed by Oakhurst and its subsidiaries, and supported by a pledge
of the capital stock of Oakhurst's subsidiaries. The Term Loan is repayable
over 48 months through August 1998 and bears interest at a fixed rate of 9.25%.
The Term Loan and the Oakhurst revolving credit agreement (the "Credit
Agreement") (see below) are cross- collateralized, and contain various
financial covenants. Subsequent to August 31, 1995, SCPI and Oakhurst
negotiated amendments to the Credit Agreement with the Bank (see "Liquidity and
Capital Resources - Line of Credit").
LINE OF CREDIT
In August 1994, Oakhurst entered into a two year revolving credit
agreement (the "Credit Agreement") that provided for maximum borrowings of $3
million and carried an interest rate of prime plus 1%. Borrowings may be
limited by the borrowing base, as defined in the Credit Agreement, which is
calculated according to the level of Oakhurst's subsidiaries' accounts
receivable. At current and expected levels of accounts receivable, any such
limitation is not expected to reduce the borrowing base below the maximum. The
Credit Agreement permits Oakhurst to make advances from time to time to each of
its subsidiaries.
The Term Loan and the Credit Agreement are cross-collateralized, and
contain various financial covenants. Because of the Puma acquisition that was
completed in the latter part of fiscal 1995, SCPI and Oakhurst negotiated
amendments to the Credit Agreement with the Bank; such amendments were
finalized subsequent to August 31, 1995 and provide for an increase in the line
from $3 million to $4 million, the elimination of most of the financial
covenants, and an increase in the interest rate from prime plus 1% to prime
plus 1.5%. The Credit Agreement, as amended, will be secured by the accounts
receivable, inventory and capital stock of Oakhurst's subsidiaries, including
SCPI.
Each of Oakhurst's subsidiaries encounters periodic fluctuations in
its working capital requirements, resulting principally from the need to
increase inventory to anticipate seasonal changes in demand, and also from
changes in the levels of accounts receivable and accounts payable. Management
believes that the Credit Agreement is adequate for the seasonal needs of its
businesses and will help facilitate the growth of those businesses.
At August 31, 1995, the amount outstanding under the Credit Agreement
was $2,800,000.
SIGNIFICANT EVENTS
Arbitration
On July 26, 1995 the Company initiated an arbitration proceeding with
the American Arbitration Association in connection with the August 1994
acquisition by the Company of Dowling's. The Company is seeking rescission of
the acquisition, or in the alternative, damages and indemnification in excess
of $1.6 million. The proceeding is based, among other things, on the Company's
belief that the seller breached certain provisions of the purchase and sale
agreement covering the acquisition by furnishing to the Company financial
information that was materially inaccurate. If the Company is successful in
obtaining a rescission of the purchase, the Company would receive back the
portion of the purchase price paid and other consideration given at the
closing, and would be relieved of the obligation to pay the balance of the
purchase price (approximately $1 million) over the three-year period following
the closing. In the event of a rescission of the acquisition, the Company
believes that in the near term it might earn less as a result of the repayment
of the debt that was incurred to make the acquisition and the investment of any
cash re-paid that is in excess of that debt than it might otherwise have
earned from the continued ownership of the Dowling's business.
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Major Customers
During the second quarter of the current fiscal year, management
curtailed the level of credit allowed to Jamesway Corporation ("Jamesway"), one
of SCPI's largest customers, after becoming aware that Jamesway was
experiencing new financial difficulties. Although Jamesway had emerged from
bankruptcy as recently as January 1995, on October 6, 1995 it announced that it
is again considering filing for bankruptcy protection. Pending a further
announcement by Jamesway, SCPI suspended shipments to this customer in October
1995, and included a provision of $150,000 in its second quarter results, in
relation to the balance due from Jamesway. The non-collection of this
receivable will not have a significant immediate effect on SCPI's working
capital, but if, as expected, Jamesway closes all its stores, SCPI would suffer
a significant reduction in its sales levels until replacement business could be
developed. In the seven-month period of March through September 1995, SCPI's
sales to Jamesway were about $4 million. Although SCPI recently added two new
large customers (NHD and Ames), the level of sales to such customers is
currently not sufficient to offset the loss of the Jamesway business.
In expectation of the loss of Jamesway's business, in October 1995
SCPI took steps to reduce its inventory levels and to eliminate certain
operating costs and overheads.
THE CREDITOR NOTES
The creditor notes that were issued by SCPI in connection with the
Retail Acquisition Corp. bankruptcy, (the "Creditor Notes") are payable in six
equal annual installments through July 1998, subject to a prepayment provision
whereby if defined cash flow exceeds $900,000, $1,000,000 and $1,100,000 in
each of fiscal 1995, 1996 and 1997, respectively, holders of the Creditor Notes
may tender for prepayment a portion thereof in the amount of the excess defined
cash flow, but not to exceed approximately $400,000 per annum. SCPI did not
meet the prepayment threshold in fiscal 1995. The Creditor Notes have been
discounted using an imputed interest rate of 7.5% and are included in the net
obligation of the discontinued business segment.
TAX LOSS CARRYFORWARDS
At December 31, 1994, SCPI had net operating loss carryforwards (the
"Tax Benefits") of approximately $148 million, which expire in the years 2001
through 2005. A change in control of SCPI or Oakhurst exceeding 50% in any
consecutive three-year testing period may lead to the loss of the majority of
the Tax Benefits. In order to reduce the likelihood of such a change of
control occurring, SCPI's and Oakhurst's Certificates of Incorporation include
restrictions on the registration of transfers of stock resulting in, or
increasing, individual holdings exceeding 4.5% of each company's common stock.
Since the regulations governing the Tax Benefits are highly complex
and may be changed from time to time, and since SCPI's and Oakhurst's attempts
to reduce the likelihood of a change of control occurring may not be
successful, management is unable to determine the likelihood of the continued
availability of the Tax Benefits. However, management believes that the Tax
Benefits are currently available in full and intends to take all appropriate
steps to help ensure that they remain available. Should the Tax Benefits
become unavailable to SCPI or Oakhurst, most future income of SCPI and any
consolidated affiliate would not be shielded from federal taxation, thus
reducing funds otherwise available for corporate purposes. In these
circumstances, Oakhurst would be required to record a significant reduction in
the book value of its deferred tax asset.
The operations of SCPI, while historically profitable, have not
enabled SCPI to take full advantage of the Tax Benefits. Managements of SCPI
and Oakhurst have been actively exploring growth and acquisition opportunities
in order to increase its profit base and during fiscal 1994 and 1995, Oakhurst
made three such acquisitions. Pursuant to a tax sharing agreement with SCPI,
Oakhurst will pay SCPI 20% of any tax savings realized as a result of the use
by Oakhurst of SCPI's tax loss carryforwards.
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RESULTS OF OPERATIONS
Operations in fiscal 1996 include the results of SCPI, H&H, Dowling's,
Puma, and the administrative costs of Oakhurst; operations in fiscal 1995
include SCPI and H&H, together with the results of Dowling's for the one-month
period of ownership, and the administrative costs of Oakhurst. In the current
year three-month and six-month periods, there were one and two fewer days than
in the prior year periods, respectively; the effect of this on results of
operations was not material.
SIGNIFICANT TRENDS
SCPI Subsidiary
SCPI's customers are continually affected by changes in the retail
environment, including the recent competitive ressures facing regional mass
merchandisers and the growing influence of automotive specialty chains. These
have led to fluctuations in the level of business that Steel City Products
enjoys with individual customers. In recent years, SCPI has lost some
significant customers and has suffered reductions in business as certain
customers have closed stores in the face of competition, have been forced into
bankruptcy, or have reduced their automotive merchandise selection.
Furthermore, some customers have changed their buying practices to acquire
certain merchandise direct from manufacturers rather than through distributors
such as SCPI.
In July 1993, SCPI's two then-largest customers filed for bankruptcy
protection. One of these customers closed all its stores in December 1993; the
other, Jamesway Corporation ("Jamesway") reorganized and emerged from Chapter
11 in January 1995. Jamesway continued to be one of SCPI's largest customers
throughout this period, but in October 1995, Jamesway announced that it is
again considering filing for bankruptcy protection. If, as expected, Jamesway
closes all its stores, SCPI will suffer a significant reduction in its sales
levels until replacement business can be developed. In the seven-month period
of March through September 1995, SCPI's sales to Jamesway were about $4
million.
In its efforts to offset these trends, SCPI strengthened its sales
team to help identify new customers and better serve existing customers,
expanded its product offerings to certain customers and enlarged the territory
that it serves. In the current year, SCPI has begun offering "hard parts" such
as brake rotors. During the second quarter of fiscal 1996, SCPI added two new
large customers (NHD and Ames), but the level of sales to such customers is
currently not sufficient to offset the loss of the Jamesway business.
Dowling's Subsidiary
During the first half of the current year, Dowling's was faced with
intense competitive pressures in one of its markets. Management's efforts to
overcome this competition succeeded in returning sales levels in the second
quarter to within 7% of prior year levels that Dowling's had achieved before
its acquisition by Oakhurst, and sales for August and September exceeded prior
year levels. This situation also placed pressure on Dowling's gross margins
through the first half, but management expects an improvement in gross margins
in the second half, although it does not expect that Dowling's will realize its
full profit potential in fiscal 1996 as a result of the first half situation.
Puma Subsidiary
Beginning in the first quarter of fiscal 1996, the strong retail
demand for light trucks and sport utility vehicles had an adverse impact on
sales by Puma, because vehicle manufacturers sought to satisfy dealer demand at
the expense of converters, which represent an important segment of Puma's
customers. During the second quarter, Puma's sales continued at slightly lower
levels than in the prior year. In reaction to this situation, and in
furtherance of Oakhurst's plans to develop the long-term potential of Puma,
management opened a second facility (in Elkhart, Indiana, center of the vehicle
conversion industry) during the second quarter of fiscal 1996, continued to
strengthen its management team, especially its sales department, and has
enlarged its product offering and introduced an extensive catalog. However, it
is too soon to say when Puma's
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sales trends will return to their historical growth patterns, and management
expects that Puma's profits in fiscal 1996 will be significantly lower than its
long-term potential.
THREE MONTHS ENDED AUGUST 31, 1995 COMPARED WITH THIRTEEN WEEKS ENDED AUGUST
27, 1994
Compared with the prior year, sales increased by $3.6 million, or
36.7%. Increased sales of $4.1 million resulted from the acquisitions by
Oakhurst during fiscal 1995 of Dowling's ($2.3 million) and of Puma ($1.8
million). Sales by existing businesses decreased by $440,000.
Sales attributable to SCPI decreased by about $250,000. There were
decreases in sales aggregating $1.8 million; $1.5 million of the decrease
resulted from lower sales to customers that are facing increasing competitive
pressures, have downsized or eliminated their automotive departments, or have
filed bankruptcy, and $350,000 of the sales decrease was attributable to two
customers that have changed their source of supply. These decreases were
largely offset by increases in sales of $1.6 million, of which new customers
added since the prior year accounted for $1 million. Sales to Jamesway
represented an increase of $220,000 over the prior year second quarter, but
sales to this customer were suspended in October 1995.
Notwithstanding the opening of a second location in September 1994,
sales attributable to H&H decreased by about $190,000. About one-half of the
decrease is attributed to reduced equipment sales and commission revenues
associated with H&H's cellular phone business as a result of aggressive
competition combined with a slightly reduced commission structure related to
cellular activations. The balance of the reduction results from lower sales
of car accessories.
Consolidated gross profits were $2.8 million (20.9% of sales),
compared with $2.5 million (25% of sales) last year. The increase in gross
profits resulted from the acquisitions, partially offset by gross profit
reductions from the existing business as a result of the decrease in sales,
combined with a slightly lower gross margin earned by SCPI and H&H of
approximately 1% and 0.5%, respectively. The reduction in consolidated gross
margin percentage is attributable primarily to Dowling's; its margins were
lower than those it achieved in the prior year due to aggressive competition.
Additionally, both Dowling's and Puma's gross margins were lower than those
earned by the Company's existing businesses in the prior year second quarter.
Operating, selling and administrative expenses increased by $954,000.
Approximately $735,000 is attributable to the two businesses acquired since the
first quarter last year; the remaining increase primarily reflects corporate
overheads necessitated by the larger company, together with higher selling
costs attributable to SCPI.
There was an increase in the provision for doubtful accounts of
$205,000 when compared with the prior year second quarter. The increase was
primarily related to the announcement in October 1995 by Jamesway (a large SCPI
customer) that it may file for bankruptcy protection.
Compared with the second quarter of the prior year, amortization of
the excess of costs over net assets acquired ("goodwill") increased by $90,000,
as a result of the acquisitions of Dowling's and Puma.
Interest expense increased by $128,000 principally as a result of the
debt incurred in connection with the acquisitions and higher working capital
borrowings.
In summary, there was a loss before taxes of $479,000 in the second
quarter this year, compared with income before taxes of $604,000 in the prior
year. Operating profits contributed by SCPI and H&H were $605,000 lower than
last year, due to the effect of reduced sales together with the large addition
by SCPI to its provision for doubtful accounts. Dowling's operating profit was
lower by $130,000 than in the prior year second quarter. Accordingly, despite
an additional Puma profit contribution, the results of the newly-acquired
companies were not sufficient to offset the increases in goodwill, interest and
overhead expenses which resulted from the acquisitions, combined with the
significant reduction in profit contribution by existing businesses.
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SIX MONTHS ENDED AUGUST 31, 1995 COMPARED WITH TWENTY-SIX WEEKS ENDED AUGUST
27, 1994
Compared with the prior year, sales increased by $6.8 million, or
34.3%. Increased sales of about $8 million resulted from the acquisitions by
Oakhurst during fiscal 1995 of Dowling's ($4.4 million) and of Puma ($3.6
million); sales by existing businesses decreased by $1.2 million.
Sales attributable to SCPI decreased by about $900,000. Sales
increases aggregating $2.1 resulted primarily from the addition of several new
customers, together with higher sales to several customers (including Jamesway,
but sales to this customer, which represented 12.6% of consolidated sales in
the first half of the current year, were suspended in October 1995). These
sales increases were offset by decreases of $3 million, with over half of the
reduction attributed to SCPI's small customer base and to reduced sales in the
Northeast market, resulting from intense competitive pressures being faced by
those customers, along with reduced sales of spring product lines due a rainy
spring season in the Northeast. The remainder of the decrease resulted from
lower sales to customers that have downsized or eliminated their automotive
departments, have filed bankruptcy, or that have changed their source of
supply.
Sales attributable to H&H decreased by about $380,000, despite the
opening of a second location in September 1994. Approximately $215,000 of the
decrease is attributed to reduced equipment sales and commission revenues
associated with H&H's cellular phone business as a result of aggressive
competition in the current year, combined with a slightly reduced commission
structure related to cellular activations. The balance of the reduction is
largely due to lower sales of car accessories.
Consolidated gross profits were $5.7 million (21.5% of sales),
compared with $4.9 million (24.7% of sales) last year. The increase in gross
profits resulted from the acquisitions. The reduction in gross margin
percentage is principally attributable to Dowling's, which was affected by
increased competition this year, so that its gross margins were lower than
those rates earned by the Company in the prior year.
Excluding the two acquisitions, gross profits on existing businesses
decreased by about $472,000, due to lower sales combined with a slight decrease
in gross margins.
Operating, selling and administrative expenses increased by $1.8
million. Approximately $1.5 million is attributable to the two businesses
acquired in the prior year; the balance of the increase primarily reflects
corporate overheads necessitated by the larger company.
There was an increase in the provision for doubtful accounts of
$267,000 when compared with the prior year, primarily attributable to SCPI; the
provision was increased by $150,000 in connection with the balances due from
Jamesway (one of SCPI's largest customers) at the end of the second quarter,
and by $107,000 for the bankruptcies of three of SCPI's small customers that
occurred during the current year.
Amortization of the excess of costs over net assets acquired
("goodwill") increased by $212,000 compared with the prior year, as a result of
the acquisitions of Dowling's and Puma.
Interest expense increased by $292,000 principally as a result of the
debt incurred in connection with the acquisitions and higher levels of working
capital borrowings.
In summary, there was a loss before taxes of $655,000 this year
compared with income before taxes of $1.1 million in the prior year. Operating
profits contributed by SCPI and H&H were about $975,000 lower than last year,
due primarily to the effect of reduced sales together with the large addition
by SCPI to its provision for doubtful accounts. Dowling's incurred a loss in
the current year, due to increased competition, adding approximately $255,000
to the profit variance. Accordingly, despite a profit contribution by Puma,
the results of the newly-acquired companies were not sufficient to offset the
increases in goodwill, interest and in overhead expense which resulted from the
acquisitions, combined with the significant reduction in profit contribution by
existing businesses.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 26, 1995 the Company initiated an arbitration proceeding with
the American Arbitration Association in connection with the August 1994
acquisition by the Company of Dowling's. The Company is seeking rescission of
the acquisition, or in the alternative, damages and indemnification in excess
of $1.6 million. The proceeding is based, among other things, on the Company's
belief that the seller breached certain provisions of the purchase and sale
agreement covering the acquisition by furnishing to the Company financial
information that was materially inaccurate. If the Company is successful in
obtaining a rescission of the purchase, the Company would receive back the
portion of the purchase price paid and other consideration given at the
closing, and would be relieved of the obligation to pay the balance of the
purchase price (approximately $1 million) over the three-year period following
the closing. In the event of a rescission of the acquisition, the Company
believes that in the near term it might earn less as a result of the repayment
of the debt that was incurred to make the acquisition and the investment of any
cash re-paid that is in excess of that debt than it might otherwise have
earned from the continued ownership of the Dowling's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 10, 1995 the Company held its Annual Meeting of
Stockholders. The matters considered at the meeting consisted of the
following:
The election of three Class III directors to serve for a term of three
years and until their successors are elected and qualified. The
results of the voting were as follows:
Nominee Votes For Votes Withheld
---------------------------- --------- --------------
Maarten D. Hemsley 1,885,045 121,495
Joel S. Lever 2,000,026 6,514
Anthony N. Puma 2,006,042 6,498
To consider the approval of an amendment to the Company's certificate
of incorporation to change its name to "Oakhurst Company, Inc."
For Against Abstain
--- ------- -------
1,996,175 5,088 5,277
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Restated and Amended Certificate of Incorporation, filed
on August 23, 1995
27. Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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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: October 13, 1995 By: /s/ Maarten D. Hemsley
---------------------------------
Maarten D. Hemsley
Chief Executive Officer
Chief Financial Officer
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Exhibit Index
Exhibit
Number Description
3. Restated and Amended Certificate of Incorporation, filed on
August 23, 1995
27. Financial Data Schedule