Edgar Filing: STERLING CONSTRUCTION CO INC

FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended .....................................

[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from March 1, 2001 to December 31, 2001

Commission file number: 0-19450

STERLING CONSTRUCTION COMPANY, INC.
(FORMERLY OAKHURST COMPANY, INC.)
(Exact name of registrant as specified in its charter)

Delaware 25-1655321
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification Number

2751 Centerville Road Suite 3131
Wilmington, Delaware 19803
Address of principal executive offices Zip Code

Registrant's telephone number, including area code: (817) 416-0717

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $0.01 par value per share
Preferred Shares Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Second 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]

Aggregate market value at March 1, 2002 of the voting stock held by
non-affiliates of the registrant: $4,462,070

At March 1, 2002, the registrant had 5,055,516 shares of common stock
outstanding

DOCUMENTS INCORPORATED BY REFERENCE
NONE

PART I

ITEM 1. BUSINESS

CAUTIONARY STATEMENT

This Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. The cautionary statements contained in
this Report should be read as being applicable to all related forward-looking
statements wherever they appear in this Report. The Company's actual results in
the future could differ materially from those discussed here. Important factors
that could cause or contribute to such differences include those discussed in
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS and elsewhere in this Report.

FORMATION AND HISTORY OF STERLING CONSTRUCTION COMPANY, INC. (FORMERLY OAKHURST
COMPANY, INC.)

Oakhurst Company, Inc. ("Oakhurst"), renamed Sterling Construction
Company, Inc. in November 2001 and hereinafter referred to as "Sterling" or "the
Company", was formed as part of a merger transaction in 1991, in which Steel
City Products, Inc. ("SCPI") became a majority-owned subsidiary of the Company.
In accordance with the merger agreement, Sterling owns 10% of SCPI's outstanding
common stock and all of SCPI's Series A Preferred Stock, with the result that
Sterling owns 90% of the voting stock of SCPI.

Because Sterling's ownership of SCPI is primarily in the form of
preferred stock Sterling retains most of the value of SCPI, and Sterling's
income from SCPI is determined by the Series A Preferred stock dividend. This
form of ownership was designed to facilitate the preservation of SCPI's net
operating tax loss carry-forwards and capital losses, which amounted to
approximately $161 million at December 31, 2001.

In December 1998 Sterling formed a wholly-owned subsidiary, Oakhurst
Technology, Inc. ("OTI") 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, Sterling entered into certain agreements with KTI, Inc. ("KTI")
(which subsequently merged into Casella Waste Systems, Inc. "Casella") 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 the Company, OTI, Casella and KTI entered into certain
agreements (the "Unwinding Agreements") pursuant to which (a) all of OTI's
equity interest in New Heights was transferred to KTI, (b) the Sterling common
stock held by KTI was transferred back to the Company, (c) all securities
pledged to KTI by the Company and/or OTI were released, (d) all but $1 million
of the KTI Loan, which included accrued interest and aggregated approximately
$16.1 million, was cancelled. The $1 million 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, Inc., which in connection with the renaming of the Company
was itself renamed Sterling Houston Holdings, Inc. (hereinafter referred to as
"SHH"). SHH is a heavy civil construction company based in Houston, Texas that
specializes in municipal and state contracts for highway paving, bridge, water
and sewer, and light rail projects. In October 1999 SHH achieved certain growth
objectives that triggered the right of certain shareholders of SHH to exercise
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
Sterling, and the remainder was due to certain directors and management of SHH.
These notes were restructured as part of a transaction in July 2001 (the
"Sterling Transaction"), in which Sterling further increased its equity position
in SHH from 12% to 80.1%. The original investments were recorded as an
investment using the cost method. The subsequent acquisition in July 2001
resulted in step-acquisition treatment of the original investments.

In November 2001, the Company changed its fiscal year end from the last
day of February to December 31. Accordingly, this report covers the period from
March 1, 2001 to December 31, 2001 ("Fiscal 2001"). Information about prior
fiscal years is referred to as "Fiscal 2000" (twelve months ended February 28,
2001); "Fiscal 1999 (twelve months ended February 29, 2000); "Fiscal 1998
(twelve months ended February 28, 1999) and "Fiscal 1997" (twelve months ended
February 28, 1998).

The name changes referred to above were effected in order to better
reflect the change of focus of the Company. The Company reports two operating
segments, "Construction", which consists of the operations of SHH, and
"Distribution" which consists of the operations of SCPI. OTI was dissolved in
December 2001. See Note 12 to the Consolidated Financial Statements for
additional segment information.

STERLING HOUSTON HOLDINGS, INC. ("SHH")

BACKGROUND

SHH was founded in Michigan in 1955 by two brothers James and Richard
Manning. In 1978, SHH relocated its business to Houston, Texas to participate in
the rapid economic and population growth in that region. SHH is now one of the
largest regional contractors of its kind in the Houston market engaged in the
construction of underground sanitary sewers, water mains, storm sewers and
paving. Recently, SHH expanded its business to include construction of portions
of a light rail system in the City of Houston.

In addition to its established operations in Houston, SHH has operated
in the Dallas/Fort Worth market for several years, and in 1999 entered the San
Antonio market. SHH is primarily engaged in working for local and county
municipalities and agencies, and to a lesser extent, the State of Texas. SHH
also occasionally undertakes projects for private developers and corporate
customers.

OPERATIONS

Most of the revenues of SHH are generated through the Houston municipal
market, which includes the City of Houston, the Houston Metropolitan Transit
Authority and Harris County. In 1999, SHH entered the state highway business, a
market that is expected to benefit from growth in federal highway spending.

SEASONALITY

Operations of SHH can be materially affected by poor weather
conditions, so that generally less business is generated in the winter months.
In particular, significant rainfall can cause construction delays affecting
revenues and margins on contracts in progress.

CUSTOMER BASE

SHH principally bids for contracts offered by local, city and county
municipalities and agencies, including the City of Houston, the Houston
Metropolitan Transit Authority, Harris County and the State of Texas. Major
customers also include the cities of San Antonio, Fort Worth and Dallas, and
suburban communities in these regions. Except for a limited amount of private
work, most contracts are subject to a competitive public tender process.

There are no foreign sales.

The following table shows contract revenues generated from SHH's
largest customers which accounted for more than 10% of consolidated revenues in
the period since completion of the Sterling Transaction in July 2001:

Six months ended December 31, 2001
----------------------------------
Contract revenues % of revenues
----------------- -------------

City of Houston $18,252 27.6%
Houston Metropolitan Transit Authority $15,593 23.6%

The above amounts reflect a large number of contracts for each
customer, each contract being obtained through a competitive bidding process.

BACKLOG

At December 31, 2001, the backlog at SHH totaled approximately $103
million. Of this amount, approximately $82 million is forecast to be completed
within fiscal 2002, and approximately $21 million to be completed in fiscal 2003
and beyond. SHH expects to add further contracts during 2002 for construction
during that year.

COMPETITION

The typical public contract selection process is by sealed bid with the
lowest bidder winning in a public selection process. SHH undertakes a
significant due diligence process in preparing each bid. Participants must post
bid bonds for up to 10% of the amount bid, and on successful bids must post
performance bonds for 100% of the contract amount. Contracts are priced for
labor, sub-contracting and materials against detailed specifications provided by
the customer.

SHH's competitors include large national and regional construction
companies as well as smaller contractors. Management is unable to determine the
relative size of most competitors, which are privately-owned, but believes that
SHH is one of the larger participants in its marketplace, and the largest non
state-highway contractor in Houston that is engaged in municipal civil
construction work.

SHH's size relative to its many smaller competitors in the municipal
construction market gives it several advantages, including greater flexibility
to manage its backlog to maximize its manpower and equipment resources, and the
cost effective purchasing of materials, insurance and bonds. Since SHH owns most
of the equipment required for such contracts and has the experienced manpower to
handle all types of municipal civil construction, it is able to bid
competitively on many categories of contract, especially complex multi-task
projects. In state highway work, SHH has encountered some difficulty in
penetrating the market, where most competitors are large, regional contractors,
due to the larger size of individual contracts and the different range of
specialized skills required as compared with its traditional municipal
contracts.

REGULATION

Management does not anticipate that existing or known pending
environmental legislation or other regulations will require major capital
expenditures or will adversely affect its operations. However, in the last two
years environmental issues have adversely impacted the rate at which certain
highway contracts have been let in the Houston market.

EMPLOYEES

SHH employs approximately 500 persons, of whom 26 are employed in the
headquarters in Houston. Most of the others are field personnel, some of whom
are hired on a job-by-job basis. No SHH employees are represented by a labor
union. Senior executives, including Patrick Manning (also Chief Executive of
Sterling) and Joseph Harper (also President of Sterling) have many years of
service with SHH and are employed under long-term contracts.

STEEL CITY PRODUCTS, INC. ("SCPI")

BACKGROUND

SCPI was incorporated in West Virginia in 1959 and in 1963 became known
as Heck's, Inc. Prior to 1990, Heck's Inc. operated a Retail Division consisting
of a chain of discount department stores. In September 1990, all of the assets
of the Retail Division were sold to Retail Acquisition Corp. ("RAC").

SCPI was reincorporated in Delaware under the name Hallwood Industries
Incorporated in fiscal 1991. The name was changed to Steel City Products, Inc.
in fiscal 1993.

The Steel City Products automotive distribution business was founded in
1947 and was acquired by SCPI in 1969. In fiscal 1996, SCPI established a
division to distribute non-food pet supplies and in fiscal 2000 SCPI broadened
its distribution business to include lawn and garden supplies.

OPERATIONS

SCPI primarily distributes automotive accessories. These products
include functional and decorative car and truck accessories (such as floor mats,
seat covers, mirrors, running boards, lights and wheel covers) car care products
(including waxes and paints) chemicals (such as antifreeze, windshield washer
fluid and motor oil) and car repair and maintenance items (including spark
plugs, windshield wipers and air and oil filters). In fiscal 1996, SCPI
introduced non-food pet supplies to its merchandise selection. Although the pet
supplies were not typical of SCPI's historical merchandise mix, management
determined that the availability of existing customers which sell both pet
supplies and automotive accessories, combined with SCPI's distribution expertise
and infrastructure, offered an opportunity for increased sales. Sales of pet
supplies represented approximately 17% of SCPI's annual revenues in fiscal 2001.
In fiscal 2000, management developed a plan to broaden its merchandise base
further with the introduction of lawn and garden products, and began
distributing these products in the third quarter of that year. SCPI's automotive
and pet operations are conducted from leased facilities in McKeesport,
Pennsylvania, and its lawn and garden operations are conducted from leased
facilities in Glassport, Pennsylvania.

SOURCES OF SUPPLY

SCPI acquires its merchandise from a large number of suppliers, the
largest of which accounted for 16% of its purchases for the ten months ended
December 31, 2001. Many of the products sold by SCPI carry nationally-advertised
brand names, but because of the diversity and number of suppliers and products
carried, the business is not generally dependent on the continued availability
of individual products or continued dealings with existing supply sources. From
time to time, market or seasonal conditions may affect the availability of
certain merchandise, but not to the extent that the Company believes would
materially impact its business.

Steel City Products generally carries in inventory only those products
that its customers have identified as necessary for their own merchandising
needs and does not acquire significant quantities of other merchandise.

SEASONALITY

SCPI's automotive and lawn and garden businesses are seasonal, being
slowest in the early winter months than at other times of the year. In
anticipation of higher sales volume in the spring and summer, SCPI carries
higher inventories of these products beginning in the winter months. As is
customary in the automotive aftermarket, and in the lawn and garden business,
suppliers generally allow extended payment terms to SCPI for these inventory
build-ups and in turn, SCPI grants extended payment terms to many of its
customers to facilitate their inventory build-ups.

Although SCPI's non-food pet supply business experiences different
seasonal trends from the automotive and lawn and garden businesses, the effect
of this is not material to the overall business.

SCPI's needs for working capital are affected by these seasonal
fluctuations (see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources").

CUSTOMER BASE

SCPI's customers include supermarket chains, drug stores, general
merchandise retail chains, automotive specialty stores, hardware stores, variety
stores and other automotive accessory distributors. Most customers are based in
the northeastern United States, although stores operated by some customers are
located outside of that area, and in February 2000 SCPI began selling to the
west coast distribution facility of one of its major customers. There are no
foreign sales.

SCPI's customers are continually affected by changes in the retail
environment, including the competitive pressures facing regional mass
merchandisers and the growing influence of national automotive specialty chains.
These have led to fluctuations in the level of business that SCPI enjoys with
individual customers. Some customers have changed their buying practices to
acquire certain merchandise direct from manufacturers rather than through
distributors such as SCPI.

In reaction to these trends, SCPI has added new customers, especially
in the supermarket and drug store sectors, has expanded its product offerings to
certain customers, has enlarged the territory that it serves and introduced new
categories of products. Management believes that these efforts have resulted in
a more diverse and financially secure customer base, although in August 2001
SCPI's largest remaining discount chain customer, Ames Department Stores, filed
for Chapter 11 bankruptcy protection.

Sales attributable to SCPI in fiscal 2001 represented 26% of the
Company's consolidated sales. Reflecting the acquisition of SHH in July 2001, no
single customer of SCPI accounted for more than 10% of Sterling's consolidated
revenues in fiscal 2001. However, prior to the completion of the Sterling
Transaction in July 2001, sales at SCPI represented 100% of consolidated
revenues. The following table shows sales to SCPI's customers that individually
accounted for more than 10% of SCPI's sales during any of the latest three
fiscal years (dollars in thousands):

Fiscal year ended
December 31, 2001 Fiscal year ended Fiscal year ended
(ten months) February 28, 2001 February 29, 2000
--------------------- ---------------------- --------------------
Sales % of sales Sales % of sales Sales % of sales
------ ---------- ------ ---------- ------ ----------

Ames $3,217 18% $3,746 18% $3,144 16%
Kroger $2,758 16% $2,057 10% $2,037 10%
Giant Eagle $2,313 13% $2,055 10% $1,523 8%
Warehouse Sales $2,193 13% * * * *
American Sales $1,863 11% * * * *

*sales did not exceed 10% in these years

As noted above, in August 2001, Ames Department Stores filed for
Chapter 11 protection. SCPI has continued to ship to Ames as
debtor-in-possession under strict payment terms. In fiscal 2001, pre-petition
sales to Ames (mostly of automotive products) totaled $1.5 million, of which
$686,000 was unpaid at the time of the Ames bankruptcy filing. Post-petition
sales to Ames through December 31, 2001 aggregated $1.7 million, primarily as a
result of the addition of sales of pet supplies.

SCPI's five largest customers accounted for approximately
three-quarters of its total sales in the ten months ended December 31, 2001.
Management has no reason to believe that its business with any of these
customers will be terminated in the foreseeable future, as evidenced by the
continuing increases in sales to each of them, although in the longer term
continued sales to Ames are dependent on that customer eventually developing a
successful reorganization plan and emerging from Chapter 11. In the event that
one of its largest customers ceased doing business with SCPI, the resulting
reduction in revenues could significantly reduce profitability unless a
replacement customer were identified.

None of SCPI's business is based on government contracts and there are
no long-term sales contracts with any customers.

COMPETITION

SCPI's distribution lines of automotive parts and accessories, non-food
pet supplies and lawn and garden products are highly competitive, with several
similar companies operating in SCPI's market place, and many of SCPI's suppliers
also offer their products directly to retailers. Management is unable to
quantify SCPI's relative size in relation to its competitors but believes it is
one of the larger independent distributors of automotive accessories in the
Northeastern United States. In recent years, a number of significant competitors
of SCPI have gone out of business and some of SCPI's customers have chosen to
purchase some products directly from manufacturers. SCPI competes on the basis
of its management's merchandise expertise, the breadth of merchandise offered,
prices, levels of service, order fill rates and order turnaround times.
Management believes that SCPI's long history, good reputation, experienced
management, product selection, service levels and traditionally high order fill
rates enable it to compete favorably with other distributors.

REGULATION

SCPI's management does not anticipate that existing or known pending
environmental legislation or other regulations will require major capital
expenditures or will affect its operations.

EMPLOYEES

SCPI employs approximately 50 persons, of whom about 40 are employed in
the headquarters office and distribution facility in McKeesport and the Glasport
distribution facility. The others are field personnel. Senior executives,
including the Chairman, Bernard H. Frank (a founder of Steel City Products) and
Terrance W. Allan, President have many years of service with SCPI and are
employed under long-term contracts.

Warehouse and certain office employees of SCPI are represented by Local
636 of the International Brotherhood of Teamsters. SCPI has experienced
generally good labor relations and no significant labor disputes have affected
its business for many years. The union contract was renewed in November 1999 for
a three-year term.

DISCONTINUED OPERATIONS - DOWLING'S FLEET SERVICE CO., INC.

Dowling's Fleet Service Co., Inc. was acquired by the Company in fiscal
1994 and was historically one of the largest regional distributors of
aftermarket automotive radiators in the northeastern United States. In
subsequent years, the radiator replacement market underwent significant changes,
including aggressive competition, industry consolidation and direct selling by
manufacturers to installers, and operating results at Dowling's declined. In
fiscal 1998, Dowling's reported a loss of approximately $400,000 and the
Company's Board of Directors decided to dispose of the business. In June 2000,
the Company entered into an agreement to sell Dowling's through a merger with an
importer of radiators for consideration equivalent to the amount owed at the
merger closing by Dowling's under its revolving credit agreement. The closing
took place on November 29, 2000.

ITEM 2. PROPERTIES

In June 2001, SHH relocated its headquarters in Houston from leased
facilities to a new, owned 15,000 square-foot building on a seven-acre parcel on
which its equipment repair center is located. It also leases small office space
in Grand Prairie, Texas and San Antonio.

Since December 1997, SCPI has operated its automotive and pet supply
businesses from a leased, 67,000 square-foot building located in an industrial
park in McKeesport, Pennsylvania. With the addition of lawn and garden
distribution business in the fourth quarter of fiscal 2000, SCPI leased an
additional 43,000 sq. ft. of warehouse space located in an industrial park in
nearby Glassport, Pennsylvania, commencing in December 2000.

ITEM 3. LEGAL PROCEEDINGS

There are no material legal proceedings pending against the Company or
to which the Company is a party or to which any of its property is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Shareholders on October 16,
2001. Shareholders (1) approved the election of each of the seven directors
listed in "Item 10. Directors and Executive Officers of the
Registrant-Directors", (2) ratified the adoption of the 1998 Stock Incentive
Plan by the Board of Directors, (3) ratified the adoption of the 2001 Stock
Incentive Plan by the Board of Directors and (4) approved changing the name of
the Company from "Oakhurst Company, Inc." to "Sterling Construction Company,
Inc.". The following table lists the number of votes cast for, against or
withheld for each matter and nominee, as well as the number of abstentions and
broker non-votes relating thereto (in thousands):

Matter For Against Withheld Abstentions Broker non-votes
------ --- ------- -------- ----------- ----------------

Election of directors:
John D. Abernathy 3,277,372 27,941
Robert M. Davies 3,277,378 28,000
Robert W. Frickel 3,277,319 27,941
Joseph P. Harper 3,277,378 27,941
Maarten D. Hemsley 3,277,308 28,011
Patrick T. Manning 3,277,378 27,941
Christopher H.B. Mills 3,277,378 27,041

Adoption of 1998 Stock Incentive Plan 1,533,565 181,695 1,386
Adoption of 2001 Stock Incentive Plan 1,522,063 193,273 1,310
Change of Company name 3,272,876 32,006 437

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock was listed and traded on the Nasdaq
Small-Cap Market under the symbol OAKC until February 10, 1998, when the Common
Stock was delisted from trading. The delisting was a result of the fall in the
Company's stock to below the Nasdaq minimum closing bid price of $1.00 per share
and the fall in the Company's net tangible assets to below Nasdaq's minimum
maintenance requirements. Commencing February 11, 1998, the Company's Common
Stock began trading on the OTC Bulletin Board, under the symbol OAKC.OB. As a
result of the Company's change of name in November 2001, the stock symbol on the
OTC Bulletin Board was changed to STCS.OB.

The following table sets forth the high and low bid prices by fiscal
quarter for the Company's common stock for fiscal years 2001 and 2000.

Fiscal 2001 Fiscal 2000
--------------------------------- -----------------------------------
Quarterly High Quarterly Low Quarterly High Quarterly Low
-------------- ------------- -------------- -------------

Quarter 1 $0.78 $0.75 $1.25 $1.03
Quarter 2 $1.50 $0.75 $1.31 $1.00
Quarter 3 $1.64 $1.25 $1.38 $1.13
Quarter 4 $1.70 $1.63 $1.19 $0.75

*Due to the Company's change of fiscal year end from the last day of February to
December 31, the fourth quarter of fiscal 2001 consisted of one month.

Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.

There were approximately 3,600 holders of record of the Company's
common stock on March 1, 2002.

No cash dividends were declared or paid in fiscal 2001, 2000 or 1999.
The Company does not anticipate the declaration of cash dividends in the
foreseeable future. The ability of the Company's operating subsidiaries, SHH and
SCPI, to upstream funds to Sterling for payment of dividends is limited by their
respective bank credit agreements.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial and other data of
Sterling Construction Company, Inc. (formerly Oakhurst Company, Inc.) and
subsidiaries and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations, which follows, and
the Consolidated Financial Statements and related Notes.

Fiscal 2001 December 31, Restated
December 31, 2000 Fiscal 2000
2001(d)(e) (ten months) February 28,
(ten months) (unaudited) 2001(a)(e)
------------ ------------ ------------
Dollar amounts in thousands, except per share data

Operating results:
Revenues ................................................... $ 66,121 $ 17,256 $ 20,694
============ ============ ============
(Loss) income from continuing operations
before income taxes ...................................... $ (1,965) $ (4,774) $ (7,044)
Minority interest(f) ....................................... (647) -- --
Current income tax expense ................................. (14) (5) (27)
Deferred income tax expense (c) ............................ -- -- --
------------ ------------ ------------
Loss from continuing operations ............................ (2,626) (4,779) (7,071)
Income (loss) from discontinued operations ................. -- 399 399
------------ ------------ ------------
Net loss ................................................... $ (2,626) $ (4,380) $ (6,672)
============ ============ ============

BASIC AND DILUTED PER SHARE AMOUNTS:
Loss from continuing operations ............................ $ (0.52) $ (0.97) $ (1.43)
Income (loss) from discontinued operations.................. $ -- $ 0.08 $ 0.09
------------ ------------ ------------
Net loss ................................................... $ (0.52) $ (0.89) $ (1.34)
============ ============ ============
Cash dividends declared .................................... $ (0.00) $ (0.00) $ (0.00)
============ ============ ============

BALANCE SHEET STATISTICS:
Total assets ............................................... $ 59,084 $ 17,103 $ 16,507
Long-term obligations ...................................... $ 30,241 $ 17,965 $ 4,633
Book value per share of common stock ....................... $ 1.20 $ (1.50) $ (2.01)

Restated Restated
Fiscal 1999 Fiscal 1998 Fiscal 1997
February 29, February 28, February 28,
2000(a)(e) 1999(a)(e) 1998(a)(b)
------------ ------------ ------------
Dollar amounts in thousands, except per share data

Operating results:
Revenues ................................................... $ 20,142 $ 18,092 $ 17,879
============ ============ ============
(Loss) income from continuing operations
before income taxes ...................................... $ (2,517) $ (804) $ 651
Minority interest(f) ....................................... -- -- --
Current income tax expense ................................. (10) (8) (3)
Deferred income tax expense (c) ............................ -- -- (1,000)
------------ ------------ ------------
Loss from continuing operations ............................ (2,527) (812) (352)
Income (loss) from discontinued operations ................. (2,456) (185) (63)
------------ ------------ ------------
Net loss ................................................... $ (4,983) $ (997) $ (415)
============ ============ ============

BASIC AND DILUTED PER SHARE AMOUNTS:
Loss from continuing operations ............................ $ (0.51) $ (0.16) $ (0.11)
Income (loss) from discontinued operations.................. $ (0.49) $ (0.05) $ (0.02)
------------ ------------ ------------
Net loss ................................................... $ (1.00) $ (0.21) $ (0.13)
============ ============ ============
Cash dividends declared .................................... $ (0.00) $ (0.00) $ (0.00)
============ ============ ============

BALANCE SHEET STATISTICS:
Total assets ............................................... $ 21,952 $ 16,925 $ 14,316
Long-term obligations ...................................... $ 13,428 $ 8,254 $ 4,318
Book value per share of common stock ....................... $ (0.66) $ 0.34 $ 0.63

(a) In fiscal 1999, the decision was made to dispose of Dowling's. Results
of operations for fiscal 1999 reflect a loss on the disposal of $2.0
million, relating primarily to the write-off of goodwill, together with
an operating loss of $428,000. Results for Dowling's have been
presented as discontinued operations for all periods shown. Upon
completion of the sale of Dowling's in fiscal 2000, the Company
recorded income of $399,000.

(b) In fiscal 1997, SCPI sold its former warehouse in Pittsburgh,
Pennsylvania for a gross sales price of approximately $2.8 million in
cash. SCPI recognized a pre-tax gain of approximately $1.8 million in
connection with the sale.

(c) Results for fiscal 1997 include net non-cash deferred tax charges of
approximately $1.0 million, primarily related to an increase in the
Company's valuation allowance of its deferred tax asset. In December
2001, the Company again recorded a deferred tax asset that exceeded its
valuation allowance (see Note 7 to the Consolidated Financial
Statements).

(d) In November 2001, the Board of Directors of the Company voted to change
its fiscal year end from the last day of February to December 31.
Accordingly, results for Fiscal 2001 are for the ten month period March
1 to December 31, 2001.

(e) In July 2001, the Company increased its percentage ownership in SHH
from 12% to 80.1%. The original investments were recorded as an
investment using the cost method. The subsequent acquisition in July
2001 resulted in step-acquisition treatment of the original
investments. Fiscal 2000, 1999 and 1998 have been restated to reflect
this treatment.

(f) Minority interest represents the 19.9% of SHH not owned by the Company.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The corporate structure resulting from the 1991 merger, whereby Steel
City Products, Inc. ("SCPI") became a special, limited purpose, majority-owned
subsidiary of Oakhurst Company, Inc. ("Oakhurst"), since renamed Sterling
Construction Company, Inc. (hereinafter referred to as "Sterling") was designed
to facilitate capital formation by Sterling while permitting Sterling and SCPI
to file consolidated tax returns so that both may utilize existing tax benefits,
including approximately $161 million of net operating loss carry-forwards.
Through Sterling's ownership of SCPI, primarily in the form of preferred stock,
Sterling retains the value of SCPI and receives substantially all of the benefit
of SCPI's operations through dividends on such preferred stock.

Sterling's principal business historically has been the distribution of
products to the automotive aftermarket, described herein as the "Distribution
Segment". The one remaining automotive distribution business (following the
disposal of Dowling's Fleet Service Company, Inc. in fiscal 2000, see below) is
conducted by SCPI under the trade name "Steel City Products" and involves the
distribution of automotive parts and accessories, non-food pet supplies and lawn
and garden products from facilities in McKeesport and Glassport, Pennsylvania.
SCPI is believed to be one of the largest independent wholesale distributors of
automotive accessories in the Northeastern United States.

Dowling's, a New York-headquartered distributor of automotive radiators
and related products, was acquired by Sterling in August 1994 for an aggregate
purchase price of $4.7 million. Due to operating losses at Dowling's of
approximately $400,000 in fiscal 1999, the Company's Board of Directors decided
to dispose of the business. In June 2000, the Company disposed of Dowling's
through a merger with an importer of radiators. The merger closed on November
29, 2000. The statement of operations for fiscal 2000 reflects a gain of
$399,000 from discontinued operations as a result of the completion of the
disposal of Dowling's.

Representing a significant change from its historical operating
business, in December 1998, Sterling formed a wholly-owned subsidiary, Oakhurst
Technology, Inc. ("OTI") 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, Sterling entered into certain agreements with KTI, Inc. ("KTI")
(which subsequently merged into Casella Waste Systems, Inc., "Casella")
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 Sterling
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 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, Inc., since renamed Sterling Houston Holdings, Inc. ("SHH"). SHH is a
heavy civil construction company based in Houston that specializes in municipal
and state contracts for highway paving, bridge, water and sewer, and light rail,
herein described as the "Construction Segment". Upon reaching certain
performance objectives, 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, then the Company's Chairman
and CEO. Under a Participation Agreement, Maarten Hemsley, then the Company's
President and CFO, funded $116,000 of the amount advanced by Mr. Davies pursuant
to such Promissory Note. These notes were restructured as part of the Sterling
Transaction in July 2001 whereby the Company increased its equity percentage in
SHH from 12% to 80.1%.

As the prior investment in SHH of $2.7 million accounted for less than
20% of SHH, the Company accounted for the investment under the cost method. The
acquisition in July 2001 resulted in step-acquisition treatment of the prior
balance. Accordingly, the results of operations of the Company have been
restated to reflect its ownership of SHH as if it had been reported as an equity
investment for fiscal 2001, fiscal 2000 and fiscal 1999. Equity investment
income generated by SHH for fiscal 2001, 2000 and 1999 was $63,000, $260,000 and
$506,000, respectively. In addition, goodwill expense of $25,000, $51,000 and
$36,000 was recorded as part of the step acquisition in fiscal 2001, 2000 and
1999, respectively. In fiscal 1999, beginning accumulated deficit was restated
for the equity earnings of SHH and related goodwill amortization in the
aggregate amount of $49,000.

Pursuant to the terms of the Sterling Transaction, in July 2001 Patrick
T. Manning, President and Chief Executive Officer of SHH was appointed Chairman
and Chief Executive Officer of the Company and Joseph P. Harper, Chief Financial
Officer, Treasurer and Secretary of SHH was appointed a director and President
of the Company. Robert W. Frickel and Christopher H.B. Mills were also appointed
to the Board at that time. Robert M. Davies, former Chairman and Chief Executive
Officer, remained a director of the Company, Maarten D. Hemsley continues as
Chief Financial Officer and a director of the Company and John D. Abernathy
remains a director of the Company. All incumbent directors were re-elected to
the Board at the Annual Stockholders' Meeting held in October 2001. Also at that
meeting stockholders approved the Company's name change to more accurately
reflect its current business. Messrs. Mark Auerbach, Bernard H. Frank and Joel
S. Lever resigned from the Company's Board upon completion of the Sterling
Transaction.

Management believes the completion of the Unwinding Agreements and the
Sterling Transaction terminated the substantial negative impact on the Company
of the losses at New Heights, and will allow the Company to be in a position to
achieve profitability in the future. However, such profitability cannot be
assured.

Each of the Distribution Segment and the Construction Segment is
managed by its own decision makers and is comprised of different customers,
suppliers and employees. Terry Allan, President of SCPI and Maarten Hemsley, the
Chief Financial Officer of the Company, review the operating profitability of
the Distribution Segment and its working capital needs to allocate financial
resources. The operating profitability and financial needs of the Construction
Segment are reviewed by Joseph Harper, the Company's President and the Chief
Financial Officer of SHH, to determine its financial needs. Allocation of
resources among the Company's operating segments is determined by Messrs. Harper
and Hemsley.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Our estimates, judgments and
assumptions are continually evaluated based on available information and
experience, however actual amounts could differ from those estimates. The
Company's significant accounting policies are described in Note 1 of the Notes
to Consolidated Financial Statements.

Certain of our accounting policies require higher degrees of
judgment than others in their application. These include the recognition of
revenue and earnings from construction contracts and the valuation of long-term
assets. Management evaluates all of its estimates and judgments on an on-going
basis.

Revenue Recognition: The Company uses the percentage of completion
accounting method for construction contracts in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts." Revenue and earnings on construction contracts are recognized on the
percentage of completion method in the ratio of costs incurred to estimated
final costs. Provisions are recognized in the statement of income for the full
amount of estimated losses on uncompleted contracts whenever evidence indicates
that the estimated total cost of a contract exceeds its estimated total revenue.

Factors that can contribute to changes in estimates of contract
profitability include, without limitation, site conditions that differ from
those assumed in the original bid to the extent that contract remedies are
unavailable, the availability and skill level of workers in the geographic
location of the project, the availability and proximity of materials, the
accuracy of the original bid, inclement weather and timing and coordination
issues inherent in all projects, including design/build. Contract cost consists
of direct costs on contracts; including labor and materials, amounts payable to
subcontractors, direct overhead costs and equipment expense (primarily
depreciation, fuel, maintenance and repairs). Depreciation is provided using
straight-line methods for construction equipment. Contract cost is recorded as
incurred and revisions in contract revenue and cost estimates are reflected in
the accounting period when known. If the Company projects a loss on the project
the estimated loss is immediately recognized. Claims for additional contract
revenue are recognized if it is probable that the claim will result in
additional revenue and the amount can be reliably estimated. The foregoing as
well as weather, stage of completion and mix of contracts at different margins
may cause fluctuations in gross profit between periods and these fluctuations
may be significant.

A significant portion of the Company's revenue is derived from
contracts that are "fixed unit price" under which the Company is committed to
provide materials or services required by a project at fixed unit prices (for
example, dollars per cubic yard of concrete or cubic yards of earth excavated).
Other contracts, including most design-build contracts, are priced on a lump-sum
basis under which the Company bears the risk that it may not be able to perform
all the work for the specified amount. All government contracts and many of the
Company's other contracts provide for termination of the contract for the
convenience of the party contracting with the Company, with provisions to pay
the Company for work performed through the date of termination.

Valuation of Long-Term Assets: Long-lived assets, which include
property, equipment and acquired identifiable intangibles, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment evaluations
involve management estimates of asset useful lives and future cash flows. Actual
useful lives and cash flows could be different from those estimated by
management and this could have a material effect on operating results and
financial position. Additionally, the Company had approximately $7.7 million in
goodwill at December 31, 2001, which must be reviewed for impairment at least
annually in accordance with Statement of Financial Accounting Standards No. 142
("SFAS 142"). The Company is required to complete its initial impairment review
for its goodwill in the first half of 2002 and management does not expect to
record an impairment charge. The impairment testing required by SFAS 142
requires considerable judgment and there can be no assurance that an impairment
charge will not be required in the future.

Deferred Taxes: Deferred tax assets and liabilities are recognized
based on the differences between the financial statement carrying amounts and
tax bases of assets and liabilities. The Company regularly reviews its deferred
tax assets for recoverability and establishes a valuation allowance based upon
historical losses, projected future taxable income and the expected timing of
the reversals of existing temporary differences. As a result of this review and
the related SHH acquisition, the Company reduced the valuation allowance against
the deferred tax asset related to the estimated utilization of the net operating
losses.

LIQUIDITY AND CAPITAL RESOURCES

At SHH, 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. SHH's cash requirements
are also impacted by its needs for capital equipment, which have generally been
financed from cash flow or from borrowings under its lines of credit.

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. SCPI's working capital needs not financed by suppliers
have been financed from cash flow and borrowings under its line of credit.

FINANCING

At December 31, 2001, the Company's debt consisted of (in thousands):

Related party notes:
Subordinated debt $ 6,000
Subordinated zero coupon notes 5,283
Convertible subordinated note 500
Management/director notes 1,984
-------
13,767
SHH revolver 10,000
SCPI revolver 2,535
Mortgage payable 1,388
KTI loan 1,016
Equipment notes and capital leases 175
Other 63
-------
$28,944
=======

Related Party Notes

Subordinated Debt

As part of the Sterling Transaction, certain shareholders of SHH were
issued subordinated promissory notes by SHH in the aggregate amount of $6
million in payment for certain of their SHH shares. These notes are repayable
over three years in equal quarterly installments and carry interest at 12% per
annum. The December 2001 installment on these notes was not made pending
completion of preliminary financial statements for SHH until February 2002.
Management expects that $2.5 million of this debt will be repaid during fiscal
2002.

Subordinated Zero Coupon Notes

The Sterling Transaction was funded in part through the sale of zero
coupon notes combined with the issuance of zero coupon notes to certain selling
shareholders of SHH. Warrants for Sterling 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 of the Sterling Transaction. Warrants issued in connection with the
notes are exercisable for ten years from closing and become exercisable four
years after issuance at $1.50 per share. Mr. Manning and Mr. Harper received
zero coupon notes in the face amount of $799,000 and $1.0 million, respectively
and warrants for 63,486 shares and 80,282 shares, respectively.

Short-term Subordinated Note

In order to facilitate the Sterling Transaction, SHH borrowed $1.5
million from one of the Company's shareholders. The note was repaid in two equal
installments on September 30, 2001 and December 31, 2001. The note carried
interest at 12%.

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 SHH were restructured as part of the Sterling Transaction. Of the total,
notes for $800,000 were due to several members of Sterling's management,
including Joseph P. Harper, since appointed the Company's President. Notes
totaling approximately $559,000 were due to Robert Davies, the Company's former
Chairman and Chief Executive Officer, and, through a participation agreement,
Maarten Hemsley, formerly the Company's President and now its Chief Financial
Officer. 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 amounts due by the Company 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 Sterling and SCPI, or from proceeds
of any sale of SCPI's business.

SHH Revolver and SCPI Revolver

In conjunction with the Sterling Transaction, SHH entered into a
three-year agreement providing for a bank revolving line of credit with a
maximum line of $13.0 million, subject to a borrowing base (the "SHH Revolver").
The line of credit carries interest at prime, subject to achievement of certain
financial targets and is secured by the equipment of SHH.

Management believes that the SHH Revolver will provide adequate funding
for SHH's working capital, debt service and capital expenditure requirements,
including seasonal fluctuations for at least the next twelve months.

Due to concerns stemming from the filing for bankruptcy by SCPI's
institutional lender, and as a condition of the completion of the Sterling
Transaction, SCPI changed institutional lenders in July 2001 and entered into an
agreement for a two-year bank revolving line of credit in the amount of $5.0
million, subject to a borrowing base (the "SCPI Revolver"). The new revolver
originally carried an interest rate equal to prime plus 1%. Following the
bankruptcy filing of Ames Department Stores, a significant customer of SCPI in
August 2001, which created a default under the terms of the Revolver, it 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 to accelerate the
maturity to April 30, 2002. Upon demonstrating SCPI's ability to generate new
business and maintain its relationships with customers and vendors, in December
2001 the SCPI Revolver was again amended to restore the maximum borrowing level
of $5.0 million and to extend the term to May 2003.

Convertible Subordinated Notes

In December 2001, conjunction with the December 2001 amendment to the
SCPI Revolver and in order to strengthen SCPI's working capital position through
the purchase of additional inventory, Sterling obtained funding principally from
members of management and directors (including Messrs. Frickel, Harper and
Hemsley, who contributed $155,000, $100,000 and $25,000, respectively)
aggregating $500,000 (the "Convertible Subordinated Notes"). In January 2002,
two other members of management, including Bernard Frank funded a further
$60,000, which was used for general corporate purposes. The notes evidencing
these advances are convertible at any time prior to the maturity date into the
Company's common stock at a price of $2.50 per share and mature and are payable
in full in December 2004. Interest at an annual rate of 12% is payable monthly.
The notes are senior to debt issued in connection with the Sterling Transaction.

Management believes that the SCPI Revolver and proceeds from the
Convertible Subordinated Notes will provide adequate funding for SCPI's working
capital, debt service and capital expenditure requirements, including seasonal
fluctuations for at least the next twelve months, assuming no material
deterioration in current sales or profit margins.

KTI Loan

In December 1998, Sterling entered into a loan agreement with KTI, Inc.
(the "KTI Loan") pursuant to which KTI committed to lend Sterling 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 Sterling entered into the KTI

Loan. Funds drawn by Sterling under the KTI Loan were invested in OTI,
principally to facilitate the financing of the New Heights Business Plan.

In 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 to reflect a
reduction for the fair value of the approximately 494,000 warrants for the
Company's common stock issued to KTI, to be amortized over the life of the loan.

SHH Mortgage

In June 2001, SHH 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 an interest 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 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.

CAPITAL EXPENDITURES

Capital expenditures made by Sterling and its subsidiaries during
fiscal 2001 totaled $1.2 million, consisting primarily of heavy construction
equipment and the new office building at SHH. At December 31, 2001 SHH had
commitments for further capital expenditures in the amount of $3 million, which
amount is expected to be funded from its revolving line of credit and operating
cash flows.

TAX LOSS CARRY-FORWARDS

At December 31, 2001, SCPI and Sterling had net operating tax loss
carry-forwards (the "Tax Benefits") of approximately $161 million, which expire
in the years 2002 through 2021 and which shelter most income of SCPI, Sterling
or its subsidiaries from federal income taxes. A change in control of SCPI or
Sterling exceeding 50% in any three-year 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 Sterling'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.
Shareholdings over 5% resulting from the Sterling Transaction were approved by
the Company's Board following receipt of required opinions that these would not
adversely affect the availability of the Tax Benefits. The shareholdings
exceeding 5% held by Messrs. Davies and Hemsley include options, the exercise of
which is subject to a standstill agreement which provides that they may not be
exercised except with Board approval following an opinion that such exercise
will not adversely affect the availability of the Tax Benefits.

Since the regulations governing the Tax Benefits are highly complex and
may be changed from time to time, and since SCPI's and Sterling'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 Sterling, most of their future income and that of any consolidated
affiliate would not be shielded from federal taxation, thus reducing funds
otherwise available for corporate purposes (see Note 8 to the Consolidated
Financial Statements).

CASH FLOWS

Net cash provided by operations for the ten-month period ended December
31, 2001 was $2.6 million, compared with cash used by operations of $214,000 in
fiscal 2000. The improvement was due to decreases in contracts and accounts
receivable offset by increases in trade payables.

Net cash used by operating activities for the fiscal years ended
February 28, 2001 and February 29, 2000 was $214,000 and $419,000, respectively.
The improvement was due to cash generated by the reduction of inventory in the
later year. In fiscal 2000, cash in the amount of $111,000 was used by the
discontinued operations of Dowling's to complete the disposal of the subsidiary,
while in fiscal 1999, cash was generated by Dowling's due to increases in vendor
payables.

Cash used in investing activities for the ten-month period ended
December 31, 2001 totaled $10.5 million, mostly related to the acquisition of
SHH in July 2001. Capital expenditures in the amount of $1.2 million were made
during the period, mostly related to purchases of heavy construction equipment
for SHH.

For fiscal 2000 and fiscal 1999, net cash used in investing activities
was $3.7 million and $7.4 million, respectively. The decrease was due to the
reduced investments in New Heights as a result of completion of certain
construction phases at New Heights.

Financing activities provided approximately $10.7 million in cash
during fiscal 2001, related to the acquisition of SHH and to increases in the
SHH Revolver. The SCPI revolver decreased during the period by approximately
$900,000. In addition, option exercises provided approximately $63,000 related
to the issuance of the Company's common stock.

For fiscal 2000 and fiscal 1999, the Company's financing activities
provided cash of $3.9 million and $7.7 million, respectively, principally from
the issuance of long-term debt of $3.7 million and $7.6 million, respectively,
principally to fund the Company's investment in New Heights.

Management does not believe that inflation has had a material negative
impact on the Company's operations or financial results during recent years.

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, pursuant to the
Sterling Transaction, the Company increased its investment in SHH from 12% to
80.1%. SHH is a heavy civil construction company based in Houston that
specializes in municipal and state contracts for highway paving, bridge, water
and sewer and light rail. Operations of SHH make up one segment (the
"Construction Segment"). Until July 2001, OTI held equity investments in the
construction industry and the waste-to-energy industry. OTI was dissolved in
December 2001.

FISCAL YEAR ENDED DECEMBER 31, 2001 (FISCAL 2001) COMPARED WITH FISCAL YEAR
ENDED FEBRUARY 28, 2001 (FISCAL 2000)

CONSTRUCTION

Revenues provided by the Construction Segment totaled approximately $49
million for the six months since its acquisition in July 2001.

Gross margin for the period was approximately 8% of revenues.

The segment reported an operating profit of $2.3 million for the six
month ownership period.

DISTRIBUTION

Total revenues for the Distribution segment for the ten months ended
December 31, 2001 were $17.5 million, a decrease of approximately $2.9 million
due in part to the shorter fiscal year and to lower sales of automotive
accessories, primarily related to the bankruptcy filing of Ames in August 2001.
Sales of pet supplies totaled $2.9 million, an increase of $344,000 compared
with fiscal 2000 which included twelve months. Most of the increase resulted
from sales to new customers, which included shipments to Ames after its
bankruptcy filing. Sales of lawn and garden products totaled $836,000 for its
first full year of operation.

Gross profit totaled $3.3 million, a decrease of approximately $700,000
compared with fiscal 2000, due to the lower sales resulting from the shorter
reporting period.

Operating profits decreased by approximately $487,000 due principally
to a significant charge to bad debt expense resulting from the Ames bankruptcy.

OTHER

The Company recorded a loss on its equity investment at New Heights,
through the date of its disposition in July 2001, of $1.3 million. Interest
expense was lower than the prior year by $495,000 due to lower interest rates
affecting the SCPI Revolver, and the elimination of the debt owed to KTI for the
New Heights investment.

RESULTS FOR THE TEN MONTHS ENDED DECEMBER 31, 2001 COMPARED WITH THE TEN MONTHS
ENDED DECEMBER 31, 2000 (UNAUDITED)

As Fiscal 2001 includes ten months compared with twelve months in Fiscal
2000, a separate discussion below compares results of Fiscal 2001 with the
comparable ten month period (unaudited) in Fiscal 2000.

(in thousands) December 31, December 31,
2001 2000
------------ ------------

Sales $66,121 $17,256
Gross profit $7,299 $3,550
Operating profit $1,445 $294

CONSTRUCTION

Revenues provided by the Construction Segment totaled approximately $49
million for the six months since its acquisition in July 2001.

Gross margin for the period was approximately 8% of revenues.

The segment reported an operating profit of $2.3 million for the six
month ownership period.

DISTRIBUTION

Comparing results for the ten months ended December 31, 2001 with the
ten months ended December 31, 2000, total sales increased by approximately
$212,000. Sales of automotive products decreased by $1.4 million, due primarily
to the bankruptcy filing of Ames Department Stores in August 2001. Sales of pet
products increased by $822,000 due to sales to new customers, which included
Ames after its bankruptcy filing. Sales of lawn garden products were $836,000.
Sales of this product line began in November 2000.

Gross profits decreased by approximately $212,000, due to the sales
decrease of automotive products and to pressure placed on the Company to reduce
margins to larger customers.

Although savings were realized in operating and selling expenses due to
a reduction in personnel, these were offset by an increase of approximately
$469,000 in bad debt expense due to the bankruptcy filing of Ames.

CORPORATE

For the ten months ended December 31, 2001, there was a loss from
equity investment of $1.2 million, compared with a loss in the prior unaudited
ten month period of $3.1 million, primarily related to New Heights. New Heights
was disposed of in July 2001. Interest expense decreased in the fiscal 2001
period by approximately $193,000, due to the disposition of New Heights.

FISCAL YEAR ENDED FEBRUARY 28, 2001 (FISCAL 2000) COMPARED WITH FISCAL YEAR
ENDED FEBRUARY 29, 2000 (FISCAL 1999)

DISTRIBUTION

For the fiscal year ended February 28, 2001, sales increased by
approximately $552,000 compared with the prior year. Sales of automotive
accessories decreased by approximately $218,000 compared with the prior year,
due principally to the loss of a customer late in fiscal 1999 that had been
acquired by another company, and to more customers purchasing product directly
from manufacturers. Sales of pet supplies increased by approximately 16%, due to
increased sales to existing customers. New customers generated approximately
$31,000 of additional revenues. The lawn and garden division generated
approximately $399,000 in sales during its first four months of operations.

Gross profits increased by approximately $268,000, due to lower freight
related costs, better margins earned on certain products and to the increased
sales.

Operating profits increased by approximately $179,000, due to
reductions in general office expenses and a reduction in staff. Offsetting some
of these savings were increased commissions paid to brokers for certain product
lines.

OTI

Expenses at OTI increased by approximately $70,000 mostly related to
accrued royalty fees for the cryogenic crumb rubber system that were to be paid
from any future operating profits of New Heights. Offsetting this increase were
savings resulting from a reduction in personnel.

The loss from equity investment at New Heights increased by $3.1
million compared with fiscal 1999, representing OTI's share of New Heights'
start up losses for the fiscal year.

CORPORATE

Interest expense increased by $1.4 million due to interest associated
with the KTI Loan.

ITEM 7(A). QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

The Company and its subsidiaries are 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. Sterling'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 in fiscal 2001 by
approximately $56,000.

Because the Company derives no revenues from foreign countries or
otherwise has no obligations in foreign currency, the Company experiences no
foreign currency exchange rate risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Certified Public Accountants...................................... 39

Consolidated Balance Sheets: December 31, 2001 and February 28, 2001.................... 41

Consolidated Statements of Operations for the fiscal periods ended
December 31, 2001, February 28, 2001 and February 29, 2000............................ 42

Consolidated Statements of Stockholders' Equity (Deficiency) for the fiscal periods
ended December 31, 2001, February 28, 2001 and February 29, 2000...................... 43

Consolidated Statements of Cash Flows for the fiscal periods ended
December 31, 2001, February 28, 2001 and February 29, 2000............................ 44

Notes to Consolidated Financial Statements.............................................. 46

Schedule II - Valuation and Qualifying Accounts......................................... 67

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On September 25, 2001, the Company's Board of Directors, acting on the
recommendation of its Audit Committee decided to no longer engage Deloitte &
Touche LLP ("Deloitte & Touche" or "DT") as the Company's independent public
accountants. This determination followed the Company's decision to seek
proposals from other independent accountants to audit the Company's consolidated
financial statements for the Transition Period ending December 31, 2002.

Deloitte & Touche's reports on the Company's consolidated financial
statements for the fiscal years ended February 28, 2001 and February 29, 2000
did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended February 28, 2001 and February 29, 2000
and through the date hereof, there were no disagreements with Deloitte & Touche
on any matter of accounting principle or practice, financial statement
disclosure, or auditing scope or procedure which, if not resolved to DT's
satisfaction, would have caused them to make reference to the subject matter in
connection with their report on the Company's consolidated financial statements
for such years; and there were no reportable events as defined in Item
304(a)(1)(v) of Regulation S-K.

The Company provided Deloitte & Touche with a copy of the foregoing
disclosures.

Effective September 26, 2001, the Board of Directors, based on upon a
recommendation of its Audit Committee, retained Grant Thornton LLP as its
independent auditors to audit the Company's consolidated financial statements
for the Transition Period ending December 31, 2001.

During the fiscal years ended February 28, 2001 and February 29, 2000
and through the date hereof, except as disclosed in the following paragraph, the
Company did not consult Grant Thornton LLP with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or any other matters or reportable events as
set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

During the week preceding September 26, 2001, the Company had
discussions with Grant Thornton regarding proforma presentation regarding the
Sterling Transaction.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS.

The by-laws of Sterling Construction Company, Inc. ("Sterling" or the
"Company") provide for such number of directors as is determined from time to
time by the Board of Directors and the Certificate of Incorporation of the
Company provides for the organization of directors into three classes, with
directors elected for three-year staggered terms. There are currently seven
directors.

Name Age at March 1, 2002 Current term expires* Director since Class
---- -------------------- --------------------- -------------- -----

John D. Abernathy 64 2003 1994 II
Robert M. Davies 51 2004 1996 III
Robert W. Frickel 59 2003 2001 II
Joseph P. Harper, Sr. 56 2002 2001 I
Maarten D. Hemsley 52 2004 1998 III
Patrick Manning 54 2002 2001 I
Christopher H.B. Mills 49 2004 2001 III

*the director also serves until a successor is elected

John D. Abernathy. Mr. Abernathy has been Chief Operating Officer of Patton
Boggs LLP, a Washington DC law firm, since January 1995. From March 1991 to
February 1994 he was the Managing Director of Summit, Solomon & Feldesman, a New
York City law firm and from July 1983 until June 1990, Mr. Abernathy was
Chairman and Chief Executive Partner of BDO Seidman, a public accounting firm.
He is a director of Pharmaceutical Resources, Inc., a generic drug manufacturer
and of the Company's majority owned subsidiary, Steel City Products, Inc.
("SCPI"). Mr. Abernathy is a certified public accountant.

Robert M. Davies. Mr. Davies was the Company's Chairman and Chief Executive
Officer from May 1997 to July 2001 and was its President from May 1997 to
January 1999. Mr. Davies had previously been a member of the Company's Board
from 1991 until 1994. Mr. Davies was a Vice President of Wexford Capital
Corporation, which acts as the investment manager to several private investment
funds, from 1994 to March 1997. From November 1995 to March 1997 Mr. Davies also
served as Executive Vice President of Wexford Management LLC, a private
investment management company. From September 1993 to May 1994 he was a Managing
Director of Steinhardt Enterprises, Inc., an investment banking company and from
1987 to August 1993, he was Executive Vice President of The Hallwood Group
Incorporated, a merchant banking firm. Mr. Davies is a director of SCPI. Mr.
Davies is a managing director of Menai Capital, L.L.C., a private equity
advisory company, and Managing Director of Greenwich Power, LLC.

Robert W. Frickel. Mr. Frickel is the founder and President of R.W. Frickel
Company, P.C., a certified public accounting firm that provides audit, tax and
consulting services primarily to the construction industry. Prior to the
founding of the R.W. Frickel Company in 1974, Mr. Frickel was employed by Ernst
& Ernst. He attained his CPA license in 1968 and holds a Bachelor of Business
Administration degree from the University of Michigan.

Joseph P. Harper, Sr.. President. Mr. Harper serves as CFO, Treasurer and
Secretary of Sterling Houston Holdings ("SHH") and has been with that company
since 1972. He has performed both estimating and project manager functions as
well as his primary role as CFO. Prior to joining SHH, Mr. Harper worked for
Price Waterhouse and attained his CPA license in 1970. He holds a Bachelor's
degree from St. Joseph College. Mr. Harper was elected the Company's President
in July 2001.

Maarten D. Hemsley. Mr. Hemsley was re-elected to the Board of Directors of the
Company and of SCPI in December 1998, having been an employee and director of
the Company or SCPI for many years prior to 1995. In

December 1995, he had resigned his positions with the Company and SCPI but
continued to provide consulting services to both companies through his
wholly-owned business, Bryanston Management, Ltd. Mr. Hemsley served as
President, Chief Operating Officer and Chief Financial Officer of the Company
until July 2001, and currently serves as Chief Financial Officer of both
Sterling and SCPI. Mr. Hemsley has been President of Bryanston Management, Ltd.,
a financial consultancy firm, since 1993.

Patrick T. Manning. Chairman and Chief Executive Officer. Mr. Manning joined SHH
in 1971 and led that company's move into the Houston market in 1978. He
currently serves as President and CEO of SHH. Before 1971, Mr. Manning was
President of Oakland Construction Company, a custom home builder in suburban
Detroit. Mr. Manning has served on a variety of construction industry
committees, including the Gulf Coast Trenchless Association and the Houston
Contractors' Association, where he served as a member of the Board of Directors
and as President from 1987 to 1993. He attended Michigan State University from
1969 to 1972. Mr. Manning is the brother of James Manning, a founder of SHH. Mr.
Manning was elected the Company's Chairman and Chief Executive Officer in July
2001.

Christopher H.B. Mills. Mr. Mills is Chief Investment Officer of J.O. Hambro
Capital Management, an investment fund based in the United Kingdom. Prior to his
founding of J.O. Hambro Capital Management in 1993, Mr. Mills was employed by
Montagu Investment Management and its successor company Invesco MIM as an
investment manager and director from 1975 to 1993. He is Chief Executive of
North Atlantic Smaller Companies Investment Trust plc, ("NASCIT", a 12%
shareholder in the Company) and of American Opportunity Trust plc. Mr. Mills
serves as a director and shareholder of J.O. Hambro Capital Management and of
Lesco, Inc., a company based in the United States which manufactures and sells
fertilizer and lawn products.

EXECUTIVE OFFICERS.

The following are the names, ages, positions and a brief description of
the business experience during the last five years of the executive officers of
the Company and its subsidiaries who are not also directors of the Company, all
of whom serve until they resign or are removed by the Board of Directors. The
business histories of executive officers who are also directors (Messrs. Harper,
Hemsley and Manning) are set forth above under the heading "Directors."

Roger M. Barzun (58): Vice President, Secretary and General Counsel. Mr. Barzun
has been a Vice President, Secretary and General Counsel of the Company since
August 1991 and was a Senior Vice President from May 1994 until July 2001. He is
also Secretary and General Counsel of SCPI. Mr. Barzun has been a lawyer since
1968 and is a member of the New York and Massachusetts bars.

Terrance W. Allan (48): President, Steel City Products, Inc. Mr. Allan has been
an officer of SCPI for more than the last five years. He was appointed President
of SCPI in May 2000.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities ("Insiders") to file reports
of beneficial ownership and certain changes in ownership with the Securities and
Exchange Commission and to furnish the Company with copies of those reports.

Based solely on a review of those reports and amendments thereto
furnished to the Company during the Transition Period or written representations
by Insiders that no reports were required to be filed, the Company believes that
during the Transition Period ended December 31, 2001 all Section 16(a) filing
requirements applicable to the Company's Insiders were satisfied, except as
noted in the following paragraphs.

NASCIT, a beneficial owner of greater than 10% of the Company's common
stock, did not timely report beneficial ownership of 605,520 shares of common
stock beneficially owned by it. Beneficial ownership of these shares was
reported on a Form 3 Report filed in February 2002.

Mr. Christopher Mills, a director of the Company, did not timely report
beneficial ownership of 605,520 shares of common stock beneficially owned by him
as an executive director and co-investment adviser of NASCIT and 12,000 options
granted to him on July 23, 2001. Beneficial ownership of these shares was
reported on a Form 3 Report filed in February 2002.

Mr. Joseph P. Harper, Sr., President and a director of the Company, did
not timely report beneficial ownership of 3,773 shares of common stock, a
warrant granted on July 19, 2001 for the right to acquire 46,236 shares of
common stock, and a warrant granted on October 31, 2001 for the right to acquire
1,019 shares of common stock. Beneficial ownership of these shares was reported
on a Form 4 Report filed in February 2002.

REPORT OF THE AUDIT COMMITTEE FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.

The Audit Committee reviews the Company's financial reporting process on
behalf of the Board of Directors. Three independent directors, Mr. Abernathy,
Mr. Frickel, and Mr. Mills are members of the Audit Committee. The Committee
operates under a written Charter adopted by the Board in June 2000. Management
has the primary responsibility for the financial statements and the reporting
process. The Company's independent auditors are responsible for expressing an
opinion on the conformity of the Company's financial statements with generally
accepted accounting principles and whether the Company's financial statements
present fairly, in all material respects, the financial position and results of
operations of the Company.

In this context, the Audit Committee has reviewed and discussed with
management and the independent auditors the audited financial statements. The
Audit Committee has discussed with the independent auditors the matters required
to be discussed by Statement on Accounting Standards No. 61 ("Communication with
Audit Committees"). In addition, the Audit Committee has received from the
independent auditors the written disclosures required by Independence Standards
Board No. 1 ("Independence Discussions with Audit Committees") and discussed
with them their independence from the Company and its management.

In September 2001, the Company elected to change its independent
auditors.

The following table sets forth the aggregate fees billed to the Company
for the year ended December 31, 2001 by its current independent auditors, Grant
Thornton LLP:

Audit fees $153,082
Financial information systems design and implementation --
All other fees $121,111

Audit fees include the fees for the separate audits of SCPI and SHH as
well as the consolidated audit of the Company and resolution of issues that
arose during the audit process.

Items included in the "all other" category include services related to
an audit of SHH as of September 30, 2001, acquisition issues and other matters.
The Audit Committee determined that services provided in the "all other"
category did not impair the independence of Grant Thornton, LLP.

In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors, and the Board has approved that
the audited financial statements be included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 for filing with the Securities
and Exchange Commission.

ITEM 11. EXECUTIVE COMPENSATION.

This item contains information about compensation, stock options and
awards, employment arrangements and other information concerning the executive
officers of the Company and of its subsidiaries, SHH and SCPI.

SUMMARY COMPENSATION TABLE.

The following table sets forth all compensation for the 2001, 2000 and
1999 fiscal years allocated or paid on or before December 31, 2001 to those who
served as the Company's Chief Executive Officer during fiscal 2001 and to the
other executive officers of the Company who were serving at the end of the 2001
fiscal year for services rendered in all capacities to the Company and its
subsidiaries and whose total annual salary and bonus exceeded $100,000 in fiscal
2001. Also included is the compensation paid to an executive officer of SCPI who
is not, however, an executive officer of the Company.

Annual Compensation Long-term compensation
-------------------------------------------------- ---------------------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation* Options/SARs Compensation
--------------------------- ------ ------------ ------------ ------------ ------------ ------------

Robert M. Davies(1) 2001 $ 22,395 -- -- -- --
Chairman & Chief Executive Officer 2000 $ 124,028 -- -- -- --
1999 $ 120,000 -- -- -- --

Patrick T. Manning(2) 2001 $ 98,077 -- -- 3,700
Chairman & Chief Executive Officer

Joseph P. Harper, Sr.(2) 2001 $ 98,077 -- -- 3,700
President

Maarten D. Hemsley(3) 2001 $ 65,146 -- -- -- --
Chief Financial Officer 2000 $ 129,392 -- -- -- --
1999 $ 125,000 -- -- -- --

Terrance W. Allan(4) 2001 $ 124,385 $ 40,771 -- -- --
President - SCPI 2000 $ 132,072 $ 60,515 -- -- --
1999 $ 115,885 $ 15,000 -- 9,750 --

* Excludes perquisites and other personal benefits if the aggregate amount of
such items of compensation was less than the lesser of either $50,000 or 10% of
the total annual salary and bonus of the named executive officer.

1. Mr. Davies was elected Chairman, Chief Executive Officer and President
in May 1997 and resigned those positions in July 2001. Mr. Davies
remains a director of the Company.

2. In July 2001, Mr. Manning was elected Chairman and Chief Executive
Officer of the Company. Mr. Manning is compensated by Texas-Sterling
Construction, LP, a subsidiary of SHH, under a long-term employment
agreement, except with respect to stock options and other stock awards.
Also in July 2001, Mr. Harper was elected President of the Company. Mr.
Harper is compensated by Texas-Sterling Construction, LP, a subsidiary
of SHH, under a long-term employment agreement, except with respect to
stock options and other stock awards. Compensation is included only for
the period of ownership of SHH by the Company since July 2001.

3. In December 1998, Mr. Hemsley was elected President, Chief Operating
Officer and Chief Financial Officer of the Company. Following the
Sterling Transaction in July 2001, he remains Chief Financial Officer
of the Company.

4. Mr. Allan is compensated only by SCPI, except with respect to stock
options and stock awards.

OPTION GRANTS IN THE LAST FISCAL YEAR.

Options were granted to individuals named in the Summary Compensation
Table, above, during the fiscal year ended December 31, 2001, as summarized in
the table below:

Option Grants in Fiscal Year Period

Potential Realized
value at Assumed
Annual Rates of
Stock Price
Individual Grants Appreciation for
Option Term
------------------------------------------------------ -----------------------------
% of Total
Number of Securities Options Granted Exercise
Underlying Options to Employees in Price Expiration
Name Granted(#) Fiscal 2001 ($/Share) Date 5%($) 10%($)
---- -------------------- --------------- ------------- ------------- ------------- -------------

Patrick T. Manning 3,700 3.8% $ 1.50 July 23, 2011 $ 3,490 $ 8,845

Joseph P. Harper, Sr. 3,700 3.8% $ 1.50 July 23, 2011 $ 3,490 $ 8,845

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES.

The following table sets forth certain information based upon the fair
market value per share of the Common Stock at December 31, 2001 ($1.68) or the
day closest to the Company's December 31, 2001 fiscal year end on which trades
were made, with respect to stock options held at that date by each of the
individuals named in the Summary Compensation Table, above. The "value" of
unexercised in-the-money options is the difference between the market value of
the Common Stock subject to the options at December 31, 2001 and the exercise
price of the option shares. During fiscal 2001, there were no option exercises
by any of these individuals.

Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Fiscal Year End Options at Fiscal Year End
-------------------------------------- --------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ------------- ------------- ------------- -------------

Robert M. Davies 535,992 9,000 $ 498,553 $ 1,620
Patrick T. Manning -- 3,700 -- $ 666
Joseph P. Harper, Sr -- 3,700 -- $ 666
Maarten D. Hemsley 436,424 -- $ 286,935 --
Terrance W. Allan 33,644 2,437 $ 11,423 $ 1,657

COMPENSATION OF DIRECTORS.

All non-employee directors receive annual stock option grants on May 1
each year under the Non-Employee Director Stock Option Plan covering 3,000
shares of Common Stock, which are immediately exercisable at an option price
equal to the market value on the date of grant. The maximum number of shares
issuable under the Plan was reached with the grants of options for an aggregate
of 7,000 shares to the five non-employee directors on May 1, 2001. In July 2001,
the three non-employee directors were issued options for 12,000 shares each
under the 2001 Stock Incentive Plan. During fiscal 2001, each non-employee
director who did not otherwise receive compensation from the Company was
entitled an annual director's fee of $12,500 and if he served as chairman of at
least one committee of the Board of Directors, an additional annual director's
fee of $2,500. All fees are payable quarterly in arrears. All directors are
entitled to reimbursement for out-of-pocket expenses incurred in attending
meetings.

See also "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements,".

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.

Mr. Davies. Mr. Davies was elected Chairman, President and Chief Executive
Officer of the Company in May 1997. He had previously been a director of the
Company from 1991 until 1994. He was compensated at the rate of $5,000 per month
under a one-year consulting agreement until June 1998, when he entered into an
employment agreement at the same rate. Mr. Davies also received reimbursement of
expenses incurred by him in carrying out his duties and responsibilities. In
October 1998, Mr. Davies voluntarily took a 10% salary reduction, which amount
was added to a subordinated note issued to him at the time of the Sterling
Transaction. In December 1998, Mr. Davies also entered into a two-year
employment agreement with OTI that provided for a base salary of $60,000, plus a
car allowance.

Both the Sterling and OTI employment agreements expired on February 28, 2001.
The Sterling employment agreement continued on a month-to-month basis until July
2001 when Mr. Davies resigned as an executive of the Company.

Mr. Manning. Mr. Manning is Chief Executive Officer of the Company.
Texas-Sterling Construction, LP, a subsidiary of SHH has a three-year employment
agreement with Mr. Manning dated July 18, 2001. The agreement provides for a
base annual salary of $200,000 per year and Mr. Manning is entitled to receive
an annual bonus of $100,000 in respect of any fiscal year during which SHH
achieves 75% or greater of approved budgeted EBITDA for such fiscal year, so
long as budgeted EBITDA is at least equal to actual EBITDA achieved in the prior
year. An additional incentive bonus is payable if actual performance exceeds
budget. The agreement provides that Mr. Manning shall be subject to a
non-compete provision for two years after employment with SHH ceases; payment
for which shall be $1,000 per month for the twenty-four month period.

Mr. Harper. Mr. Harper is President of the Company. Texas-Sterling Construction,
LP, a subsidiary of SHH has a three-year employment agreement with Mr. Harper
dated July 18, 2001. The agreement provides for a base annual salary of $200,000
per year for the first two years and $170,000 for the third year. Mr. Harper is
entitled to receive an annual bonus of $100,000 in respect of any fiscal year
during which SHH achieves 75% or greater of approved budgeted EBITDA for such
fiscal year, so long as budgeted EBITDA is at least equal to actual EBITDA
achieved in the prior year. An additional incentive bonus is payable if actual
performance exceeds budget. The agreement provides that Mr. Harper shall be
subject to a non-compete provision for two years after employment with SHH
ceases; payment for which shall be $1,000 per month for the twenty-four month
period.

Mr. Hemsley. Mr. Hemsley was employed by and was a director of the Company or
SCPI for several years prior to 1995. In 1995, he resigned his positions with
the Company and entered into a consulting agreement with the Company through his
wholly-owned company, Bryanston Management, Ltd. In December 1998, Mr. Hemsley
was elected to the Board of Directors and was appointed President, Chief
Operating Officer and Chief Financial Officer of the Company subject to an
employment agreement at the same rate of compensation as the Bryanston
consulting agreement of $85,000 per annum (of which 10% was later deferred under
a voluntary salary reduction, which deferral amount was converted into a
subordinated note in July 2001). In December 1998, Mr. Hemsley also entered into
a two-year employment agreement with OTI which provided for a base salary of
$40,000 annually, plus a car allowance. Both the Sterling and OTI employment
agreements expired on February 28, 2001. The Sterling employment agreement
continued on a month-to-month basis until July 2001, when the agreement was
amended to extend the employment period for one year at an annual rate of
$76,500.

Mr. Allan. SCPI has an employment agreement with Mr. Allan that commenced May 1,
2000 that provides for a base salary of $133,000 with annual salary increases.
The agreement provides for the payment of an annual management bonus based upon
the defined profits of the Company's operating division. The aggregate amount of
such management bonus payable each year to the executive and to all other
executives of SCPI is not to exceed 8% of such defined profits and the
allocation thereof is made by the Compensation Committee of the Company based on
recommendations of Mr. Frank as Chief Executive Officer. Mr. Allan is also
entitled to an executive bonus calculated as a percentage of defined annual
profits of the Company that exceed $2,000,000. The initial term of the agreement
expires on September 30, 2003, and may be extended on a year-to-year basis. In
September 2001, Mr. Allan voluntarily deferred his annual contractual salary
increase.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.

In the fiscal year ended December 31, 2001, Mr. Davies, Mr. Abernathy,
Mr. Ross Pirasteh and Mr. Lever were members of the Compensation Committees of
both the Company and of SCPI. Beginning in July 2001, Mr. Abernathy, Mr. Frickel
and Mr. Mills became the members of the Compensation Committees of the Company.
Mr. Abernathy and Mr. Davies serve on the Compensation Committee of SCPI. Prior
to that time, Mr. Davies was an executive officer of the Company, but none of
the Company's executive officers served as a director or member of the
Compensation Committee (or any other committee serving an equivalent function)
of any other entity, whose executive officers as a director or member of the
Company's Compensation Committee.

The Board of Directors intends that any transactions with officers,
directors and affiliates will be entered into on terms no less favorable to the
Company than could be obtained from unrelated third parties and that they will
be approved by a majority of the directors of the Company who are independent
and disinterested with respect to the proposed transaction.

In December 1998, KTI purchased approximately 1.7 million shares of the
Company's common stock, representing 35% of the common stock outstanding after
the purchase, at the market price of $0.50 per share. In conjunction with the
private placement of stock, KTI committed under a loan agreement to lend the
Company up to $11.5 million (see Notes 1 and 5 to the Consolidated Financial
Statements). Funding under the KTI Loan was used principally to enable OTI to
finance the Business Plan for New Heights, pursuant to an Investment Agreement
between New Heights, OTI and KTI (see Note 13 to the Consolidated Financial
Statements). In addition, KTI agreed to provide, directly or through OTI, the
funding requirements of the New Heights Business Plan. In December 1998, New
Heights appointed KTI to manage its facility, pursuant to an Operating and
Maintenance Agreement and OTI entered into a non-exclusive License Agreement for
the use of waste rubber recycling technology owned by KTI's subsidiary, KTI
Recycling.

Pursuant to these transactions, in January 1999, KTI nominated two
directors, Ross Pirasteh and Martin Sergi, to each of the Boards of Directors of
Sterling and OTI. In March 2000, Mr. Jack Polak was elected to the Company's
Board of Directors as KTI's third nominee under the Investment Agreement between
KTI and the Company. Pursuant to the Unwinding Agreements, the resignations of
Messrs Pirasteh, Sergi and Polak from the Boards of the Company and OTI became
effective on July 3, 2001.

In October 1999, certain shareholders of SHH exercised their right to
sell a second tranche of equity to OTI, thus increasing OTI's equity ownership
from 7% to 12%. The equity purchase was financed through the issuance of notes,
of which $559,000 was due to Mr. Davies and Mr. Hemsley in October 2000. The
notes which provided for interest payments at the rate of 14% per annum, were
extended by agreement until July 2001 when they were restructured pursuant to
the Sterling Transaction.

See also "Compensation of Directors", "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" and "Item 13.
Certain Relationships and Related Transactions."

REPORT ON EXECUTIVE COMPENSATION IN THE 2001 FISCAL YEAR.

This report has been prepared by the Compensation Committee of the
Board of Directors and addresses the Company's compensation policies with
respect to the Chief Executive Officer and executive officers of the Company in
general for the fiscal year ended December 31, 2001. The Company has no
operating business of its own, but is a holding company of operating businesses.
The Company has elected to include in the Summary Compensation Table certain
information concerning an executive officer of SCPI, who is not, however, an
executive officer of the Company and accordingly, a discussion of his
compensation is included here. Reference is made generally to the information
under the heading "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements".

Compensation Policy. The overall intent in respect of executive
officers is to establish levels of compensation that provide appropriate
incentives in order to command high levels of individual performance and thereby
increase the value of the Company to its stockholders and that are sufficiently
competitive to attract and retain the skills required for the success and
profitability of the Company. The principal components of executive compensation
are salary, bonus and stock options.

Chief Executive Officer's Compensation. The compensation for Mr. Davies
prior to July 2001 and Mr. Manning after July 2001 was determined to be
appropriate by the members of the Committees serving at the time based on the
nature of the position; the expertise and responsibility that the position
requires; the Chief Executive Officer's prior financial and accounting
experience in former employment; and the subjective judgement of the members of
the Committee of a reasonable level of compensation.

Other Executive Officers. Mr. Allan is included in the Company's
disclosures relating to compensation because of his importance to the success of
the Company on a consolidated basis. Mr. Allan's employment agreement was
reviewed and approved by the Company's Compensation Committee and by the SCPI
Compensation Committee.

Salary. Since all of the executive officers named in the Summary
Compensation Table are long-term employees of the Company and/or SCPI and SHH,
their salaries in fiscal 2001 were based on the level of their prior salaries
and the subjective judgement of the members of the Company's and SCPI's
Compensation Committees as to the value of the executive's past contribution and
potential future contribution to the business.

Bonuses. The bonus payable to Mr. Allan under his employment agreement
consists of an Annual Management Bonus and an additional Annual Executive Bonus.
The Annual Management Bonus is paid from a pool of funds equal to 8% of SCPI's
consolidated net income before interest, taxes, depreciation and amortization,
prepared in accordance with generally accepted accounting principles
consistently applied. The allocation of the bonus pool is based on
recommendations to SCPI's Compensation Committee.

The Annual Executive Bonus for Mr. Allan is equal to 1% of the amount
by which SCPI's consolidated net income (defined in the same manner as for the
Annual Management Bonus) exceeds $2,000,000. SCPI's defined net income did not
exceed the $2,000,000 threshold in fiscal 2001, 2000 or 1999 and accordingly no
Annual Executive Bonus was paid.

The bonus percentages and amounts contained in the executive's
employment agreement are based on the executive's years of service, his
perceived importance to the profitability of SCPI and the subjective judgement
of members of the SCPI Compensation Committee as to the best balance between
salary and bonus and what is fair and reasonable.

Bonuses payable to Mr. Manning and Mr. Harper are subject to
achievement of certain financial targets of SHH. In fiscal 2001, those
objectives were not met, and accordingly, no bonuses were paid.

Stock Options. The Committee believes that stock ownership by executive
officers is important in aligning management's and stockholders' interests in
the enhancement of stockholder value over the long term. The exercise price of
all outstanding stock option grants is equal to the market price of the Common
Stock on the date of grant. In Fiscal 2001 options were granted to certain
executives in recognition of their performance.

Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code, enacted in 1993, generally disallows a tax deduction
to public companies for compensation over $1 million paid to its chief executive
officer and its four other most highly compensated executives. The Company's
compensation payable to any one executive officer (including potential income
from outstanding stock options) is currently and for the foreseeable future
unlikely to reach that threshold. In addition, because of the Company's
significant net operating loss carryforwards, the deductibility of compensation
payments is not currently an issue. However, should circumstances change, the
Compensation Committee will study the matter and make recommendations to the
Board.

The Compensation Committee
John D. Abernathy
Robert W. Frickel
Christopher H.B. Mills

----------

The following Performance Graph and the foregoing Report of the Compensation
Committee on Executive Compensation in this Item 11 are not and shall not be
deemed incorporated by reference into any filings of the Company with the
Securities and Exchange Commission by implication or by any reference in any
such filings to this Annual Report on Form 10-K.

PERFORMANCE GRAPH.

The following graph compares the percentage change in the Company's
cumulative total stockholder return on Common Stock for the last five years with
(i) the Dow Jones Total Return Index (a broad market index) and (ii) the Dow
Jones Heavy Construction Index, a group of companies whose marketing strategy is
focused on a limited product line, such as civil construction, over the same
period. Both indices are published in the Wall Street Journal.

The returns are calculated assuming the value of an investment in the
Company's stock and each index of $100 on the Company's February 28, 1995 fiscal
year end and that all dividends were reinvested; however, the Company paid no
dividends during the periods shown. The graph lines merely connect the beginning
and end of the measuring periods and do not reflect fluctuations between those
dates. The historical stock performance shown on the graph is not intended to,
and may not be indicative of, future stock performance.

[PERFORMANCE GRAPH]

Dow Jones - Heavy Construction Dow Jones - Total Return Sterling Construction Company, Inc.

1996 100 100 100
1997 75 130 95
1998 90 163 95
1999 96 200 131
2000 113 181 63
2001 118 185 142

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT.

This item sets forth certain information regarding ownership of the
Company's common stock at March 1, 2002. Except as otherwise indicated in the
footnotes, the Company believes that the beneficial owners of the Common Stock
listed in the tables, based on information furnished by such owners, have sole
investment and voting power with respect to the shares of common stock shown as
beneficially owned by them. The numbers and percentages assume for each person
or group listed the exercise of all stock options held by such person or group
that are exercisable within 60 days of March 1, 2002, in accordance with Rule
13d-3(d)(1) of the Securities Exchange Act of 1934, but not the exercise of such
stock options owned by any other person.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.

This table sets forth each person, other than management, known by the
Company to own beneficially more than 5% of the outstanding common stock of the
Company.

NAME AND ADDRESS NUMBER OF SHARES OF COMMON
OF BENEFICIAL OWNER STOCK PERCENTAGE OF CLASS
------------------- -------------------------- -------------------

Anthony N. Puma (1)
214 Loma Metisse
Malibu, CA 90265 266,667 5.2%

North American Smaller Companies
Investment Trust plc
c/o JO Hambro Capital Management Limited
14 Ryder Street
Ryder Court SW1Y 6QB 605,520(2) 12.3%
London, England

JO Hambro Capital Management Group
Limited
14 Ryder Street
Ryder Court SW1Y 6QB
London, England 605,520(2) 12.3%

JO Hambro Capital Management Limited
c/o JO Hambro Capital Management Limited
14 Ryder Street
Ryder Court SW1Y 6QB
London, England 605,520(2) 12.3%

Christopher Harwood Bernard Mills
c/o JO Hambro Capital Management Limited
14 Ryder Street
Ryder Court SW1Y 6QB
London, England 608,520(3) 12.3%

Growth Financial Services Limited
c/o JO Hambro Capital Management Limited
14 Ryder Street
Ryder Court SW1Y 6QB
London, England 605,520(2) 12.3%

(1) These shares were issued as part of the purchase by the Company of Puma
Products, Inc. from Mr. Puma in fiscal 1995. In fiscal 1997, the
Company sold Puma Products, Inc. back to Mr. Puma.

(2) These shares were purchased at $1.50 per share in July 2001 as part of
the Sterling Transaction. JO Hambro Capital Management Group Limited,
JO Hambro Capital Management Limited, Christopher Harwood Bernard
Mills, Growth Financial Services Limited and North American Smaller
Companies Investment Trust plc claim shared voting power of these
shares pursuant to a Schedule 13G dated February 14, 2002.

(3) This number includes 3,000 shares issuable under outstanding stock
options that are exercisable at $1.50 per share. The remaining 605,520
shares were purchased at $1.50 per share in July 2001 as part of the
Sterling Transaction. JO Hambro Capital Management Group Limited, JO
Hambro Capital Management Limited, Christopher Harwood Bernard Mills,
Growth Financial Services Limited and North American Smaller Companies
Investment Trust plc claim shared voting power of these shares pursuant
to a Schedule 13G dated February 14, 2002.

SECURITY OWNERSHIP OF MANAGEMENT.

The following table sets forth information regarding beneficial
ownership of the Common Stock by each director, each individual named in the
Summary Compensation Table in Item 11 and by all directors, all such named
individuals and all executive officers of the Company as a group

Name of Beneficial Owner Shares of Common Stock Percentage of Class
------------------------ ---------------------- -------------------

John D. Abernathy 120,162(1) 2.3%
Robert M. Davies 730,492(2) 13.0%
Robert W. Frickel 3,000(3) *
Joseph P. Harper, Sr 297,031 5.9%
Maarten D. Hemsley 527,812(4) 9.6%
Patrick T. Manning 234,888 4.6%
Christopher H.B. Mills 608,520(3) 12.0%
Terrance W. Allan 37,144(5) *
All directors and executive
officers as a group (8 persons) 2,559,049(6) 41.2%

----------

* Less than 1%

1. All of these shares are issuable under outstanding stock options that
are presently exercisable at prices ranging from $0.75 to $3.375 per
share.

2. This number includes 545,992 shares are issuable under outstanding
stock options that are presently exercisable at prices ranging from
$0.50 to $2.75 per share. The options are subject to a standstill
agreement effective July 2001 which provides that the options may not
be exercised if the effect of such exercise would be to jeopardize the
Company's Tax benefits.

3. This number includes 3,000 shares issuable under outstanding stock
options that are exercisable at $1.50 per share.

4. This number includes 436,424 shares issuable under outstanding stock
options that are presently exercisable at prices ranging from $0.50 to
$2.75 per share. The options are subject to a standstill agreement
effective July 2001 which provides that the options may not be
exercised if the effect of such exercise would be to jeopardize the
Company's Tax benefits.

5. This number includes 36,644 shares issuable under outstanding stock
options that are exercisable at prices ranging from $1.00 to $2.00 per
share. Mr. Allan is an executive officer of the Company's subsidiary,
Steel City Products, Inc.

6. This number includes 1,117,222 shares issuable under outstanding stock
options that are exercisable within 60 days of March 1, 2002 at prices
ranging from $0.50 to $3.375 per share.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Pursuant to the agreements entered into between KTI, Inc. and the
Company in December 1998, KTI received the right to appoint directors to the
Boards of the Company and its subsidiary, Oakhurst Technology, Inc. Three
representatives from KTI were appointed to the Board of Directors of the
Company; Messrs. Pirasteh and Sergi in January 1999, and Mr. Polak in March
2000, and two KTI representatives were appointed to the Board of OTI. Pursuant
to the Unwinding Agreements, the resignations of Messrs Pirasteh, Sergi and
Polak from the Boards of the Company and OTI became effective on July 3, 2001.

In October 1999, certain shareholders of SHH exercised their right to
sell a second tranche of equity securities to OTI thereby increasing the
Company's consolidated equity ownership of SHH from 7% to 12%. The equity
purchase was financed through the issuance of two notes. One of these notes in
the amount of $559,000 was issued to Mr. Davies (the "First Note") in which Mr.
Hemsley had a participation of $116,000. The second note in the amount of
$800,000 (the "Manning Note") was issued to James D. Manning, the brother of
Patrick T. Manning

and one of the SHH shareholders who sold SHH equity securities to OTI. The First
Note provided for interest payable quarterly and was due in October 2000, but in
fact, no interest payments were made and the First Note was not repaid in
October 2000. In connection with the Sterling Transaction, accrued unpaid
interest on the First Note of $134,000 was added to the principal of the First
Note, the maturity date of the First Note was extended to July 2005, and the
interest rate was reduced to 12%. In connection with the Sterling Transaction,
the Company also issued an additional four-year 12% promissory note to each of
Messrs. Hemsley ($136,421) and Davies ($250,623) (the "Second Notes") to repay
certain amounts due to them by the Company or OTI, including deferred
compensation, the fee (and related interest) owed to them in connection with the
acquisition of the second tranche of SHH equity in October 1999, the fee due in
July 2001 to them in connection with the Sterling Transaction and a fee for the
extension of the First Note.

In connection with the Sterling Transaction, the maturity date of the
Manning Note also was extended to July 2005 and the interest rate was reduced to
12%. In consideration for the extension of the maturity date and interest rate
reduction, Mr. James D. Manning received a zero coupon promissory note payable
July 2005 with principal and interest payable at maturity in the aggregate
amount of $187,000. Interest and principal on the First Note, the Second Notes
and the Manning Note are payable prior to maturity only to the extent of cash
available to Sterling for these payments and as permitted by lenders to Sterling
or its subsidiaries.

After the Sterling Transaction, Mr. Harper purchased $300,000 of the
Manning Note from Mr. James D. Manning. As a result, Mr. Harper now holds a
separate note in the principal amount of $300,000 and Mr. James D. Manning holds
a note in the principal amount of $400,000, in each case, on the same terms and
conditions as the Manning Note.

Mr. James D. Manning is employed by an operating subsidiary of SHH
under a three-year employment agreement commencing January 1999 pursuant to
which he receives an annual salary of $75,000 plus $75.00 per hour for each hour
worked in excess of 1,000 hours during any calendar year. In addition, Mr.
Manning is entitled to receive incentive compensation in the amount of $50,000
if certain financial goals are met. The employment agreement limits the ability
of Mr. Manning to compete for a period of two years after he ceases to be an
employee if he terminated his employment without good cause or the company
terminated his employment for good cause, and for a period of one year after he
ceases to be an employee if he terminated his employment for good reason or the
company terminated his employment without good cause; provided that these
non-competition obligations may be avoided by Mr. Manning if the company
terminates the employment agreement other than for good cause.

In 1996, Mr. Patrick Manning, Mr. Harper and Mr. James D. Manning
loaned $864,000 to SHH pursuant to notes bearing interest at the prime rate plus
2%. The final principal installments on these loans were paid in October 2001 to
(i) to Mr. James D. Manning in the amount of $240,000 plus accrued interest and
(ii) to each of Mr. Patrick Manning and Mr. Harper in the amount of $24,000 plus
accrued interest.

NASCIT lent $1,500,000 to SHH in connection with the Sterling
Transaction pursuant to a short-term promissory note bearing interest at 12%.
The note was paid in full on December 31, 2001. Mr. Mills is Chief Executive of
NASCIT and was elected a director of SHH in January 1999, representing funds
managed by J. O. Hambro Capital Management.

Since March 2001 Mr. Hemsley has provided consulting services to J. O.
Hambro Capital Management in respect of Leisure and Media Venture Capital Trust
plc, a fund that was not an investor in the Sterling Transaction.

In December 2001, in order to strengthen SCPI's working capital
position, Sterling obtained funding in the amount of $500,000 from members of
management and directors, including Messrs. Frickel, Harper and Hemsley, who
contributed $155,000, $100,000 and $25,000, respectively. These notes are
convertible into common shares of the Company at a conversion price of $2.50 per
share at any time prior to the maturity date of December 2004. The notes, which
rank senior to debt incurred in the Sterling Transaction, bear interest at 12%
which is payable monthly.

In July 2001, Mr. Robert Frickel was elected to the Board of Directors.
Mr. Frickel serves as President of R.W. Frickel Company, P.C., an accounting
firm based in Michigan. R.W. Frickel Company has performed certain

accounting and tax services for SHH. Fees paid or accrued to R.W. Frickel
Company for the period of ownership to December 31, 2001 were approximately
$88,650.

Reference is made to information contained under the headings "Compensation of
Directors," "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements," and "Compensation Committee Interlocks and
Insider Participation," in Item 11.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as a part of this report.

1. Financial Statements:

Report of Independent Certified Public Accountants

Consolidated Balance Sheets: December 31, 2001 and February
28, 2001

Consolidated Statements of Operations for the fiscal periods
ended December 31, 2001, February 28, 2001, and
February 29, 2000

Consolidated Statements of Stockholders' Equity (Deficiency)
for the fiscal periods ended December 31, 2001,
February 28, 2001 and February 29, 2000

Consolidated Statements of Cash Flows for the fiscal periods
ended December 31, 2001, February 28, 2001, and
February 29, 2000

Notes to Consolidated Financial Statements

2. The following Financial Statement Schedules for the fiscal periods
ended

December 31, 2001, February 28, 2001 and
February 29, 2000 are submitted herewith:

Schedule II - Valuation and Qualifying Accounts

All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or the
notes thereto.

3. Exhibits

Exhibit No. Description

2.1 Agreement and Plan of Merger dated as of May 20, 1991 (filed as
Appendix A to the Proxy Statement/Prospectus dated April 16, 1991 of
the Company and Steel City Products, Inc. [SEC Commission file number
0-2572).

2.2 Transaction Agreement, dated as of July 18, 2001, by and among Oakhurst
Company, Inc., Sterling Construction Company and Certain Stockholders
of Sterling Construction Company (filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
May 31, 2001).

3.1 Restated and Amended Certificate of Incorporation (filed as Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 1996).

3.2 By-laws, as amended through January 13, 1998 (filed as Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998).

4.1 Certificate of Designations of Series A Junior Participating Preferred
Stock dated as of February 10, 1998 (filed as Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended February
28, 1998).

4.2 Warrant to Purchase Common Stock of Oakhurst Company, Inc. issued to
KTI, Inc., dated July 3, 2001 (filed as Exhibit B to Exhibit 10.26 to
the Company's Annual Report on Form 10-K405 for the fiscal year ended
February 21, 2001).

4.3*# Form of Warrant to Purchase Common Stock of Oakhurst Company, Inc.,
dated July 18, 2001.

10.1# Form of Option Agreement dated August 29, 1991 with directors and
executive officers (filed as Exhibit 10(b) to the Company's Annual
report on Form 10-K for the fiscal year ended February 29, 1992 [SEC
Commission file number 33-39954).

10.2 The 1994 Omnibus Stock Plan with form of option agreement (filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1995 [SEC Commission file number
0-19450).

10.3# The 1994 Non-Employee director Stock Option Plan with form of option
agreement (filed as Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 1995 [SEC Commission
file number 0-19450).

10.4 Lease agreement between Regional Industrial Development Corporation of
Southwestern Pennsylvania and Steel City Products, Inc. dated as of
November 11, 1997 (filed as Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 1998).

10.5 Rights Agreement, dated as of December 29, 1998 between Oakhurst
Company, Inc. and American Stock Transfer and Trust Company, including
the form of Certificate of Designation, the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A, B and C,
respectively filed as Exhibit 99.1 to the Company's Registration
Statement on Form 8-A filed on January 5, 1999.

10.6# Amendment to the 1994 Omnibus Stock Plan, amended as of December 18,
1998 (filed as Exhibit 10.21 to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1999).

10.7 Merger Agreement dated June 30, 2000 between Oakhurst Company, A.C.F.
Imports, Inc., A.C.F. Acquisition, Inc. and Dowling's Fleet Service
Co., Inc. (filed as Exhibit 10.33 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 2000).

10.8 Lease Agreement by and between SPEDD, Inc. and Steel City Products,
Inc., dated November 21, 2000 (filed as Exhibit 10.24 to the Company's
Annual Report on Form 10-K405 for the fiscal year ended February 28,
2001).

10.9 Wind-Up Agreement, dated as of April 19, 2001 by and between KTI, Inc.,
Casella Waste Systems, Inc., Oakhurst Company, Inc. and Oakhurst
Technology, Inc. (filed as Exhibit 10.26 to the Company's Annual Report
on Form 10-K405 for the fiscal year ended February 28, 2001).

10.10*# Subordinated Promissory Note, dated July 18, 2001, by Sterling
Construction Company to Patrick T. Manning.

10.11*# Subordinated Promissory Note, dated July 18, 2001, by Sterling
Construction Company to Joseph P. Harper, Sr.

10.12*# Subordinated Promissory Note, dated July 18, 2001, by Oakhurst Company,
Inc. to Patrick T. Manning.

10.13*# Subordinated Promissory Note, dated July 18, 2001, by Oakhurst Company,
Inc. to Joseph P. Harper, Sr.

10.14*# Secured Promissory Note, dated July 19, 2001, by Oakhurst Technology,
Inc. to Joseph P. Harper, Sr.

10.15*# Subordinated Promissory Note, dated July 19, 2001, by Oakhurst Company,
Inc. to Joseph P. Harper, Sr.

10.16# Secured Promissory Note, dated October 18, 1999, by Oakhurst
Technology, Inc. to Robert M. Davies,

10.17*# Amendment to Secured Promissory Note dated October 18, 1999, dated July
13, 2001, by and between Oakhurst Technology, Inc. and Robert M.
Davies.

10.18*# Subordinated Promissory Note, dated July 13, 2001, by Oakhurst Company,
Inc. to Robert M. Davies.

10.19*# Amendment No. 1 to Subordinated Promissory Note dated July 13, 2001,
dated July 19, 2001, by and between Oakhurst Company, Inc. and Robert
M. Davies.

10.20*# Subordinated Promissory Note, dated July 13, 2001, by Oakhurst Company
Inc. to Maarten D. Hemsley.

10.21*# Amendment No. 1 to Subordinated Promissory Note dated July 13, 2001,
dated July 19, 2001, by and between Oakhurst Company, Inc. and Maarten
D. Hemsley.

10.22*# Amended and Restated Executive Employment Agreement, dated July 18,
2001, by and between Sterling Construction Company and Patrick T.
Manning.

10.23*# Amended and Restated Executive Employment Agreement, dated July 18,
2001, by and between Sterling Construction Company and Joseph P.
Harper, Sr.

10.24*# Executive Employment Agreement, dated July 18, 2001, by and between
Oakhurst Company, Inc. and Patrick T. Manning.

10.25*# Executive Employment Agreement, dated July 18, 2001, by and between
Oakhurst Company, Inc. and Joseph P. Harper, Sr.

10.26# Employment Agreement, dated May 1, 2000, by and between Sterling
Construction Company and Terrance W. Allan (filed as Exhibit 10.25 to
the Company's Annual Report on Form 10-K405 for the fiscal year ended
February 28, 2001).

10.27* Subordinated Promissory Note, dated July 18, 2001, by Oakhurst Company,
Inc. to North Atlantic Smaller Companies Investment Trust Plc.

10.28* Oakhurst Group Tax Sharing Agreement, dated July 18, 2001, by and among
Oakhurst Company, Inc., Sterling Construction Company, Steel City
Products, Inc., and such other companies set forth therein.

10.29 Securities Purchase Agreement, dated as of July 18, 2001, by and among
JO Capital Management Ltd A/C A, JO Capital Management Ltd A/C B, JO
Capital Management Ltd A/C C, Orynx International Growth Fund Limited,
Invesco English & International Trust Plc, North Atlantic Small
Companies Investment Trust Plc, Oakhurst Company, Inc. and Sterling
Construction Company (filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 31, 2001).

10.30*# Stock Pledge Agreement, dated July 19, 2001, by and between Oakhurst
Company, Inc. and Joseph P. Harper, Sr.

10.31* Amended and Restated Revolving Credit Loan Agreement, dated July 18,
2001, between Comerica Bank-Texas and Sterling Construction Company

10.32* Amendment to Amended and Restated Revolving Credit Loan Agreement,
effective July 18, 2001, between Comerica Bank-Texas and Sterling
Construction Company

10.33 Credit Agreement, dated as of July 13, 2001, by and between National
City Bank of Pennsylvania and Steel City Products, Inc. (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 2001).

10.34 Amendment to Revolving Credit Agreement, dated September 12, 2001
between National City Bank of Pennsylvania and Steel City Products,
Inc. (filed as Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended May 31, 2001).

10.35* Amendment No. 2 to Revolving Credit Agreement, effective December 13,
2001 between National City Bank of Pennsylvania and Steel City
Products, Inc.

10.36*# Convertible Subordinated Note, dated December 31, 2001, by Sterling
Construction Company, Inc. to Robert W. Frickel.

10.37*# Convertible Subordinated Note, dated December 31, 2001, by Sterling
Construction Company, Inc. to Joseph P. Harper, Sr.

10.38*# Convertible Subordinated Note, dated December 31, 2001, by Sterling
Construction Company, Inc. to Maarten D. Hemsley.

10.39*# Convertible Subordinated Note, dated January 2, 2002, by Sterling
Construction Company, Inc. to Bernard Frank.

16 Deloitte & Touche LLP letter to Securities and Exchange Commission
dated October 1, 2001 (filed as Exhibit 16 to Form 8-K/A, filed October
5, 2001.)

21 Subsidiaries at December 31, 2001:
Steel City Products, Inc. - Delaware
Oakhurst Management Corporation - Texas
Sterling Houston Holdings, Inc. -- Delaware

# Management contract or compensatory plan or arrangement.

* Filed herewith

(b) Reports on Form 8-K:

1. Form 8-K filed with the SEC on October 1, 2001

2. Form 8-K/A filed with the SEC on October 1, 2001

3. Form 8-K filed with the SEC on October 5, 2001

4. Form 8-K filed with the SEC on November 13, 2001

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Sterling Construction Company, Inc.

We have audited the accompanying consolidated balance sheet of Sterling
Construction Company, Inc. and its subsidiaries as of December 31, 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the ten months then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sterling
Construction Company, Inc. and its subsidiaries as of December 31, 2001 and the
results of their operations and their cash flows for the ten months then ended
in conformity with accounting principles generally accepted in the United States
of America.

The consolidated financial statements of Sterling Construction Company, Inc. and
its subsidiaries as of February 28, 2001, and for each of the two years then
ended, have been restated to give effect to accounting for the investment in
Sterling Houston Holdings, Inc. under the equity method of accounting in
accordance with the step-acquisition method of accounting for the acquisition of
a subsidiary. The consolidated financial statements as of February 28, 2001 and
for each of the two years then ended prior to such restatement were audited by
other auditors whose report thereon expressed an unqualified opinion on those
statements. We audited the change in the accumulated deficit at February 28,
1999, the changes in the Company's investment in Sterling Houston Holdings and
its accumulated deficit as of February 28, 2001, and the changes in its income
from equity investment in Sterling Houston Holdings and the related
amortization of goodwill for each of the two years ended February 28, 2001,
which adjustments were necessary to restate the investment in Sterling Houston
Holdings from the cost method to the equity method of accounting in accordance
with the step-acquisition method of accounting for the acquisition of a
subsidiary, and in our opinion, such adjustments have been properly reflected in
the restated consolidated financial statements.

We also audited Schedule II for the ten months ended December 31, 2001. In our
opinion, this schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information therein.

/s/ Grant Thornton LLP

Houston, Texas
April 1, 2002

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Sterling Construction Company, Inc.

We have audited the consolidated balance sheet of Sterling Construction Company,
Inc., formerly Oakhurst Company, Inc., and subsidiaries as of February 28, 2001
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for the years ended February 28, 2001 and February
29, 2000 (none of which are presented herein). Our audits also included the
consolidated financial statement schedule listed at Item 14(a)(2) for the years
ended February 28, 2001 and February 29, 2000. These consolidated financial
statements and consolidated financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and consolidated financial statement schedule
based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sterling Construction Company, Inc.
and subsidiaries as of February 28, 2001, and the results of their operations
and their cash flows for the years ended February 28, 2001 and February 29, 2000
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the consolidated financial statement schedule,
for years ended February 28, 2001 and February 29, 2000 when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania
July 6, 2001

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(FORMERLY OAKHURST COMPANY, INC.)
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS (RESTATED)
December 31, February 28,
2001 2001
------------ ------------

Current assets:
Cash ......................................................................... $ 2,884 $ 86
Contracts receivable ......................................................... 15,195 --
Costs and estimated earnings in excess of billings ........................... 1,732 --
Trade accounts receivable, less allowance of $588 and $191, respectively ..... 1,963 2,592
Inventories .................................................................. 4,126 4,151
Deferred tax asset ........................................................... 1,545 --
Other ........................................................................ 800 151
------------ ------------
Total current assets .................................................... 28,245 6,980
------------ ------------

Property and equipment, at cost .................................................... 20,540 1,330
Less accumulated depreciation ................................................ (2,539) (938)
------------ ------------
18,001 392
------------ ------------
Investments:
Equity - New Heights ......................................................... -- 4,170
Equity - Sterling Houston Holdings ........................................... -- 3,473
Note receivable - related party .................................................... -- 1,330
Goodwill, net ...................................................................... 7,740 135
Deferred tax asset (long-term) ..................................................... 4,769 --
Other assets ....................................................................... 383 27
------------ ------------
12,892 9,135
------------ ------------
$ 59,138 $ 16,507
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable ............................................................. $ 12,270 $ 4,407
Accrued interest ............................................................. 120 3,036
Billings in excess of cost and estimated earnings ............................ 4,013 --
Current maturities of long-term obligations .................................. 259 877
Current maturities of long-term obligations, related parties ................. 2,500 12,819
Other accrued expenses ....................................................... 829 673
------------ ------------
Total current liabilities ............................................... 19,991 21,812
------------ ------------

Long-term obligations:
Long-term debt ............................................................... 13,551 3,464
Long-term debt, related parties .............................................. 11,268 1,000
Put liability ................................................................ 4,056 --
Other long term obligations .................................................. 1,366 169
------------ ------------
30,241 4,633
------------ ------------

Minority interest .................................................................. 2,773 --
Commitments and contingencies ...................................................... -- --
Stockholders' equity (deficiency):
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares,
none issued .............................................................. -- --
Common stock, par value $0.01 per share; authorized 14,000,000 shares,
5,055,516 shares issued ................................................. 50 49
Additional paid-in capital ................................................... 65,900 47,204
Accumulated deficit .......................................................... (59,816) (57,190)
Treasury stock, at cost, 207 common shares ................................... (1) (1)
------------ ------------
Total stockholders' equity (deficiency) ................................. 6,133 (9,938)
------------ ------------
$ 59,138 $ 16,507
============ ============

The accompanying notes are an integral part of these consolidated
financial statements

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(FORMERLY OAKHURST COMPANY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)

FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
2001 2001 2000
(TEN MONTHS) (RESTATED) (RESTATED)
------------- ------------- -------------

Contract revenues ............................................. $ 48,654 $ -- $ --
Distribution revenues ......................................... 17,467 20,694 20,142
Other income .................................................. 157 565 379
------------- ------------- -------------
66,278 21,259 20,521
------------- ------------- -------------

Cost of contract revenues earned .............................. 44,694 -- --
Cost of goods sold, including occupancy and buying expenses ... 14,128 16,538 16,254
Operating, selling and administrative expenses ................ 5,528 4,490 4,255
Provision for doubtful accounts ............................... 483 30 58
Interest expense .............................................. 2,193 2,688 1,243
------------- ------------- -------------
67,026 23,746 21,810
------------- ------------- -------------
Loss from continuing operations before loss from equity
investment and income taxes ................................... (748) (2,487) (1,289)

Income (loss) from equity investment:
Investment in Sterling Houston Holdings .................. 63 260 506
Investment in New Heights ................................ (1,280) (4,817) (1,734)
------------- ------------- -------------
Loss from equity investments .................................. (1,217) (4,557) (1,228)
Minority interest ............................................. (647) -- --
------------- ------------- -------------
Loss before income taxes ...................................... (2,612) (7,044) (2,517)

Current income tax expense .................................... (14) (27) (10)
------------- ------------- -------------

Loss from continuing operations ............................... (2,626) (7,071) (2,527)
------------- ------------- -------------

Discontinued operations
Loss from operations .................................... -- -- (428)
Income (loss) on disposal ............................... -- 399 (2,028)
------------- ------------- -------------

Net loss ...................................................... $ (2,626) $ (6,672) $ (4,983)
============= ============= =============

Basic and diluted net loss per share:
Continuing operations ................................... $ (0.52) $ (1.43) $ (0.51)
Discontinued operations ................................. -- 0.09 (0.49)
------------- ------------- -------------
Net loss per share ...................................... $ (0.52) $ (1.34) $ (1.00)
============= ============= =============

Weighted average number of shares outstanding used in
computing basic and diluted per share amounts ............ 5,055,516 4,943,018 4,943,018
============= ============= =============

The accompanying notes are an integral part of these consolidated
financial statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(FORMERLY OAKHURST COMPANY, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)

Common Additional Accumulated Treasury
stock paid-in capital Deficit stock Totals
------- --------------- ----------- -------- -------

Balance at February 28, 1999 (as reported) .................. $ 49 $ 47,204 $ (45,584) $ (1) $ 1,668
Conversion to equity for step-acquisition of
Sterling Houston Holdings .................................... -- -- 49 -- 49
------- -------------- ----------- -------- -------
Adjusted February 28, 1999 balance ........................... $ 49 $ 47,204 $ (45,535) $ (1) $ 1,717

Net loss ..................................................... -- -- (4,983) -- (4,983)
------- -------------- ----------- -------- -------

Restated balance at February 29, 2000 ........................ 49 47,204 (50,518) (3,266)
(1)

Net loss ..................................................... -- -- (6,672) -- (6,672)
------- -------------- ----------- -------- -------

Restated balance at February 28, 2001 ........................ 49 47,204 (57,190) (9,938)
(1)

Cancellation of debt and return of equity
investment ................................................... 14,520 (1,297) 13,223
Stock issued for acquisition of Sterling Houston
Holdings ..................................................... (81) 843 762
Sale of treasury stock ....................................... 454 454 908
Stock issued upon option exercise ............................ 1 62 63
Deferred tax benefit resulting from a reduction in the
valuation allowance of the deferred tax asset ................ 3,741 3,741
Net loss ..................................................... -- -- (2,626) -- (2,626)
------- -------------- ----------- -------- -------

Balance at December 31, 2001 ................................. $ 50 $ 65,900 $ (59,816) $ 6,133
======= ============== =========== =======
$ (1)
========

The accompanying notes are an integral part of these
consolidated financial statements

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(FORMERLY OAKHURST COMPANY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)

Fiscal year Fiscal year Fiscal year
Ended Ended Ended
December 31, 2001 February 28, 2001 February 29, 2000
(ten months) (Restated) (Restated)
----------------- ----------------- -----------------

Cash flows from operating activities:
Loss from continuing operations ................................. $ (2,626) $ (7,071) $ (2,527)
Adjustments to reconcile loss from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization .............................. 1,706 201 248
Bad debt expense ........................................... 483 -- --
Loss from equity investments ............................... 1,217 4,557 1,228
Loss on disposal of property and equipment ................. 163 -- --
Minority interest in net earnings of subsidiary ............ 647 -- --
Other changes in operating assets and liabilities, net of
effect from acquisition of Sterling Houston Holdings:
Decrease (increase) in accounts receivable ................. 146 (98) (279)
Decrease (increase) in contracts receivable ................ 3,020 -- --
Decrease (increase) in inventories ......................... 25 645 (850)
Decrease (increase) in costs and estimated earnings
in excess of billings on uncompleted contracts ............. 1,181 -- --
(Increase) decrease in prepaid expense and other assets .... (343) -- --
(Decrease) increase in trade payables ...................... (2,473) (477) 842
(Decrease) increase in billings in excess of costs and
estimated earnings on uncompleted contracts ................ (553) -- --
(Decrease)increase in accrued compensation and other
liabilities ................................................ (22) 2,140 584
------------- ------------- -------------
Net cash (used in) provided by operating activities of:
Continuing operations ........................................... 2,571 (103) (754)
Discontinued operations ......................................... -- (111) 335
------------- ------------- -------------
Net cash provided by (used in) operating activities .................... 2,571 (214) (419)
------------- ------------- -------------

Cash flows from investing activities:
Net cash paid upon acquisition of Sterling Houston Holdings ..... (9,354) -- --
Additions to property and equipment ............................. (1,204) (59) (71)
Proceeds from sale of property and equipment .................... 65 -- --
Increase in investment in New Heights ........................... -- (3,651) (7,311)
------------- ------------- -------------
Net cash used in investing activities .................................. (10,493) (3,710) (7,382)
------------- ------------- -------------

Cash flows from financing activities:
Borrowings under long term obligations .......................... 10,349 292 386
Proceeds from issuance of long term debt ........................ 500 3,742 7,555
Issuance of common stock, net of expenses ....................... 63 -- --
Principal payments on long-term obligations ..................... (1,100) (156) (154)
Sale of treasury stock .......................................... 908
Deferred loan costs ............................................. -- (20) (75)
------------- ------------- -------------
Net cash provided by financing activities .............................. 10,720 3,858 7,712
------------- ------------- -------------

Net increase (decrease) in cash ........................................ 2,798 (66) (89)
Cash at beginning of period ............................................ 86 152 241
------------- ------------- -------------
Cash at end of period .................................................. $ 2,884 $ 86 $ 152
============= ============= =============

Fiscal year Fiscal year Fiscal year
Ended Ended Ended
December 31, 2001 February 28, 2001 February 29, 2000
(ten months) (Restated) (Restated)
----------------- ----------------- -----------------

Supplemental disclosures of cash flow information:

Cash paid during the period for operating activities from
continuing operations:
Interest ........................................................ $ 1,384 $ 470 $ 466
============= ============= =============
Income taxes, net of refunds received ........................... $ -- $ 1 $ 1
============= ============= =============

Supplemental disclosure of non-cash financing activities:
Capital lease obligations for new equipment ..................... $ -- $ 71 $ --
============= ============= =============

The accompanying notes are an integral part of these consolidated
financial statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(FORMERLY OAKHURST COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The accompanying consolidated financial statements include the
accounts of subsidiaries for which the Company has a greater than 50% ownership
interest and all significant intercompany accounts and transactions have been
eliminated in consolidation.

Continuing operations

Oakhurst Company, Inc. ("Oakhurst"), renamed Sterling Construction
Company, Inc. in October 2001, (hereinafter referred to as "Sterling" or "the
Company") was formed as part of a merger transaction in 1991, in which Steel
City Products, Inc. ("SCPI") became a majority-owned subsidiary of the Company.
In accordance with the merger agreement, Sterling owns 10% of SCPI's outstanding
common stock and all of the SCPI Series A Preferred Stock, and as a result, it
owns 90% of the voting stock of SCPI.

In December 1998 Sterling formed a wholly-owned subsidiary, Oakhurst
Technology, Inc. ("OTI") 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, Sterling entered into certain agreements with KTI, Inc. ("KTI")
(which subsequently merged into Casella Waste Systems, Inc., "Casella")
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 Sterling
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, 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, Inc., renamed Sterling Houston Holdings, Inc. in October
2001 (hereinafter referred to as "SHH"). SHH is a heavy civil construction
company based in Houston that specializes in municipal and state contracts for
highway paving, bridge, water and sewer, and light rail. In October 1999 SHH
achieved certain growth objectives that triggered the right of certain
shareholders of SHH to exercise 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 Sterling, and the remainder was due to certain
directors and management of SHH. These notes were restructured as part of a
transaction in July 2001 (the "Sterling Transaction"), in which Sterling further
increased its equity position in SHH from 12% to 80.1%. The original investments
were recorded as an investment using the cost method. The subsequent acquisition
in July 2001 resulted in step-acquisition treatment of the original investment.
Accordingly, the results of operations of the Company have been restated to
reflect its ownership of

SHH as if it had been reported as an equity investment for fiscal 2001, fiscal
2000 and fiscal 1999. Equity investment income generated by SHH for fiscal 2001,
2000 and 1999 was $63,000, $260,000 and $506,000, respectively. In addition,
goodwill expense of $25,000, $51,000 and $36,000 was recorded as part of the
step acquisition in fiscal 2001, 2000 and 1999, respectively. In fiscal 1999,
beginning accumulated deficit was restated for the equity earnings of SHH and
related goodwill amortization in the aggregate amount of $49,000.

To better reflect the change of focus of the Company, in October
2001 the shareholders of Oakhurst approved a name change to Sterling
Construction Company, Inc and at the same time the subsidiary formerly carrying
that name was renamed Sterling Houston Holdings, Inc. The Company reports two
operating segments, "Construction", which consists of the operations of SHH, and
"Distribution" which consists of the operations of SCPI. OTI was dissolved in
December 2001.

In March 1995, Oakhurst formed Oakhurst Management Corporation
("OMC"), a wholly-owned subsidiary, to coordinate the provision of certain
corporate administrative, legal and accounting services to the Company and its
subsidiaries.

Discontinued operations

During fiscal 1999, the Board of Directors decided to sell Dowling's
Fleet Service Co., Inc. ("Dowling's"). In June 2000, Oakhurst entered into an
agreement to sell Dowling's through a merger with an importer of radiators. The
merger closed on November 29, 2000. Accordingly, results for Dowling's have been
presented as discontinued operations in the statement of operations and the
statement of cash flows.

Use of Estimates:

The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amount of revenues and expenses during the reporting period. Significant
estimates included in the Company's financial statements include the allowance
for doubtful accounts and estimates for the use of the Company's net operating
loss carryforwards. Actual results could differ from those estimates.

Business Activities:

The Company's continuing operations at December 31, 2001 consisted
of two businesses, Construction and Distribution. Construction is comprised of
SHH, a heavy civil construction company based in Houston that specializes in
municipal and state contracts for highway paving, bridge, water and sewer, and
light rail. Distribution is comprised of SCPI, a wholesale distributor operating
under the trade name Steel City Products which principally sells automotive
accessories, primarily to drug and supermarket retailers, discount retail
chains, hardware and automotive stores, based mainly in the Northeastern United
States. SCPI also distributes non-food pet supplies primarily to supermarket
retailers. In the third quarter of fiscal 2000, SCPI began the distribution of
lawn and garden supplies.

Fiscal Year:

Historically, the Company's fiscal year ended on the last day of
February. In November 2001, the Board of Directors voted to change the Company's
fiscal year end to December 31. Accordingly, the transition period ended
December 31, 2001 includes the ten months from March 1 to December 31, 2001. The
year ended December 31, 2001 is referred to herein as fiscal 2001 and the year
ended February 28, 2001 is referred to as fiscal 2000.

Revenue Recognition:

Construction

The Company's primary business since July 2001 has been as a general
contractor in the State of Texas where it engages in various types of heavy
civil construction projects for both public and private owners. Credit risk is
minimal with public (government) owners since the Company ascertains that funds
have been appropriated by the governmental project owner prior to commencing
work on public projects. Most public contracts are subject to termination at the
election of the government. However, in the event of termination, the Company is
entitled to receive the contract price on completed work and reimbursement of
termination-related costs. Credit risk with private owners is minimized because
of statutory mechanics liens, which give the Company high priority in the event
of lien foreclosures following financial difficulties of private owners.

The construction industry is highly competitive and lacks firms
with dominant market power. A substantial portion of the Company's business
involves construction contracts obtained through competitive bidding. The volume
and profitability of the Company's construction work depends to a significant
extent upon the general state of the economies of Texas and especially the
Houston area and the volume of work available to contractors. The Company's
construction operations could be adversely affected by labor stoppages or
shortages, adverse weather conditions, shortages of supplies or other
governmental action.

Revenues are recognized on the percentage-of-completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract.

Contract costs include all direct material, labor, subcontract and
other costs and those indirect costs related to contract performance, such as
indirect salaries and wages, equipment repairs and depreciation, insurance and
payroll taxes. Administrative and general expenses are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions and estimated profitability, including those arising from contract
penalty provisions and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. An amount equal to costs attributable to contract claims is included
in revenues when realization is probable and the amount can be reliably
estimated.

The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The liability "Billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues recognized.

Distribution

Revenue is recognized when all of the following criteria are met:

- Persuasive evidence of an arrangement exists

- Delivery has occurred or service has been rendered

- The seller's price to the buyer is fixed or
determinable, and

- Collectibility is reasonably assured.

The Company provides appropriate provisions for uncollectible
accounts and credit for returns.

Inventories:

The Company's inventories are stated at the lower of cost as
determined by the first-in first-out (FIFO) method, or market.

Property and Equipment:

Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method. The estimated useful
lives used for computing depreciation and amortization are:

Building and improvements 15-39 years
Construction equipment 5-15 years
Leasehold improvements 3-10 years
Transportation equipment 5 years
Furniture and fixtures 5 years
Office furniture, warehouse
equipment and vehicles 3-10 years

Depreciation expense for continuing operations was approximately
$1,609,000, $123,000 and $115,000 in fiscal 2001, 2000 and 1999, respectively
and for discontinued operations was approximately $186,000 in fiscal 1999.

Deferred Loan Costs:

Deferred loan costs represent loan origination fees paid to the
lender and related professional fees. These fees are amortized over the term of
the loan. Amortization expense for fiscal 2001 was $65,000. In fiscal 2000 and
1999, amortization expense was $91,000 and $25,000, respectively.

Investments:

Sterling accounts for investments of more than 20% in affiliated
companies and in which it exerts significant influence on the equity basis of
accounting and accordingly, consolidated results of operations include
Sterling's share of the loss from New Heights, from December 1998 to July 3,
2001, the date of disposition.

Sterling utilizes the cost method of accounting for investments in
which it has less than a 20% ownership interest, does not exert significant
influence, and where there is no readily determinable market value. Sterling
accounted for its investment in SHH prior to the Sterling Transaction utilizing
the cost method, but was restated to the equity method at the transaction date
in July 2001. Accordingly, the Company's investment in SHH was restated at
February 28, 2001 to reflect SHH as an equity investment.

Management performs a review of investments whenever events or
changes in circumstances occur which may indicate that there is other than a
temporary decline in the value of the investments. In performing this review,
management considers numerous factors including the financial condition and
prospects of the investee and the Company's intention and ability with respect
to retaining the investment.

Goodwill:

Goodwill acquired prior to June 30, 2001 is being amortized over 40
years until the complete adoption of SFAS No. 141 "Business Combinations" and
SFAS No. 142 "Goodwill and other Intangibles". In accordance with the provisions
of SFAS No. 142, goodwill acquired subsequent to June 30, 2001 is not being
amortized.

Resulting from the step acquisition of SHH in July 2001, whereby the
Company increased its investment in SHH from 12% to 80.1%, the Company restated
its investment in SHH to provide for goodwill prior to the July 2001 transaction
date. Results of operations for fiscal 2001, 2000 and 1999 have been restated to
amortize the Company's goodwill in SHH, reflecting expense of $25,000, $51,000
and $36,000 respectively.

The carrying value at December 31, 2001 and February 28, 2001 is net
of accumulated amortization of approximately $126,000 and $121,000,
respectively.

Sterling periodically evaluates its long-lived assets to assess
whether the carrying values have been impaired, using the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for

the Impairment of Long-Lived Assets to be Disposed Of." Results of discontinued
operations for fiscal 1999 include the write-off of approximately $1.7 million
of the goodwill related to the acquisition of Dowling's in fiscal 1994.

Equipment Under Capital Leases:

The Company accounts for capital leases, which transfer
substantially all the benefits and risks incident to the ownership of the
property to the Company, as the acquisition of an asset and the incurrence of an
obligation. Under this method of accounting, the cost of the leased asset is
amortized principally using the straight-line method over its estimated useful
life and the obligation, including interest thereon, is liquidated over the life
of the lease. Depreciation expense on leased equipment and the related
accumulated depreciation is included with that of owned equipment.

Shipping and Handling Costs:

Shipping costs are recorded in cost of goods sold. Expenses incurred
for handling goods in preparation for shipment to customers totaled $658,000,
$815,000 and $790,000 during fiscal 2001, 2000 and 1999, respectively. These
expenses are primarily related to warehouse personnel and are presented in the
financial statements as part of operating, selling and administrative expenses.

Federal and State Income Taxes:

Sterling accounts for income taxes using an asset and liability
approach. Deferred tax liabilities and assets are recognized for the future tax
consequences of events that have already been recognized in the financial
statements or tax returns. Net deferred tax assets are recognized to the extent
that management believes that realization of such benefits is considered more
likely than not. Changes in enacted tax rates or laws may result in adjustments
to the recorded deferred tax assets or liabilities in the period that the tax
law is enacted (see Note 7).

Stock-Based Compensation:

The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.

Earnings Per Share:

Basic earnings or loss per share is computed by dividing net
earnings or loss by the weighted average number of common shares outstanding
during the period. Loss per share amounts do not include common stock issuable
upon the exercise of stock options since that would have an antidilutive effect
and reduce net loss per share. At December 31, 2001, February 28, 2001 and
February 29, 2000 there were options outstanding to purchase 1,720,259,
1,745,457 and 1,730,257 shares of common stock, respectively.

Change in Method of Accounting:

Effective March 1, 2001, the company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities".
These standards require the Company to recognize all derivatives as either
assets or liabilities at fair value in its balance sheet. The accounting for
changes in the fair value of a derivative depends on the use of the derivative.

There was no effect on the financial statements upon adoption of
these new standards on March 1, 2001.

New Accounting Pronouncements:

In June 2001, the Financial Accounting Standards Board issued two
new accounting standards, SFAS No. 141 "Business Combinations" and SFAS No. 142
"Goodwill and Other Intangibles".

SFAS No. 141 eliminates the pooling of interests method of
accounting for business combinations initiated after July 2001. SFAS No. 142,
which becomes effective March 1, 2002, discontinues the requirement for
amortization of goodwill and indefinite-lived intangible assets, and instead
requires an annual review for the impairment of those assets. Impairment is to
be examined more frequently if certain indicators appear. Intangible assets with
a determinable life will continue to be amortized. The Company is currently
evaluating the impact the complete adoption of these statements will have on its
financial statements.

In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is effective for fiscal years
beginning after June 15, 2002. The Company does not expect this pronouncement to
have an impact on its consolidated financial statements.

In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses implementation
issues related to SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". This standard is effective
for fiscal years beginning after December 31, 2001. The Company does not expect
this pronouncement to have an impact on its consolidated financial statements.

2. SALE OF SUBSIDIARY

In fiscal 1999, Sterling's Board of Directors decided to dispose of
Dowling's. In June 2000, the Company entered into an agreement to sell Dowling's
through a merger with an importer of radiators for consideration equivalent to
the amount owed at the merger closing by Dowling's under its revolving credit
agreement. The merger closed on November 29, 2000.

In fiscal 1999, the Company recorded a loss on disposal of Dowling's
of $2.0 million, principally reflecting the write-off of $1.6 million related to
the excess of cost over net assets acquired and a $400,000 provision for
expected operating losses through the closing date.

The statement of operations for fiscal 2000 reflects a gain of
$399,000 from discontinued operations as a result of the completion of the
disposal of Dowling's.

3. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows (in thousands):

December 31, 2001 February 28, 2001

Construction equipment ..................................... $ 14,922 $ --
Transportation equipment ................................... 2,213 --
Buildings .................................................. 1,549 --
Leasehold improvements ..................................... 359 337
Office furniture, warehouse equipment and vehicles ......... 1,315 993
Land ....................................................... 182 --
-------------- --------------
20,540 1,330
Less accumulated depreciation .............................. (2,539) (938)
-------------- --------------
$ 18,001 $ 392
============== ==============

Warehouse equipment financed under capital leases amounted to
$284,750 and $253,900 at December 31, 2001 and February 28, 2001, respectively
and accumulated depreciation related to such leased assets was $164,790 and
$138,376.

4. DISPOSITION OF NEW HEIGHTS

In December 1998, OTI acquired an initial 50% interest in, and
became the managing member of, New Heights in exchange for its commitment to
fund through equity investment up to a minimum of $11.5 million. No accounting
recognition was afforded this initial commitment. Based upon the carrying value
of the net assets of New Heights accounted for under fresh start accounting, a
50% interest in New Heights would have been valued at approximately $11.2
million at the date of acquisition.

Due to significant and continuing losses at New Heights, in April
2001, the Company entered into the Unwinding Agreements with Casella Waste
Systems, Inc. and KTI which provided for the transfer to KTI of the equity
interest owned by OTI in New Heights in return for (a) the Company's 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 494,302 warrants
to acquire the Company's stock. These agreements were finalized in July 2001.
The net effect of the Unwinding Agreements is as follows (in thousands):

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
============

5. INVESTMENT IN AFFILIATED COMPANY ("STERLING TRANSACTION")

Following completion of the Unwinding Agreements (see Note 4 -
"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
Construction Company (since renamed Sterling Houston Holdings, or "SHH") from
12% to 80.1%. SHH is a heavy civil construction company based in Houston that
specializes in municipal and state contracts for highway paving, bridge, water
and sewer, and light rail. The results of SHH have been included in the
Company's results since that date.

Total consideration for the increase in equity was $24.6 million,
including the Company's previous investment in SHH of $3.5 million, and
consisted of (a) cash payment of $9.9 million, (b) conversion of a $1.3 million
SHH subordinated note receivable into Sterling equity, (c) issuance of
subordinated notes and warrants, and (d) the sale and issuance of the Company's
common stock. For accounting purposes, 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.

As part of the Sterling Transaction, the Company granted certain
selling shareholders a "Put" option for the remaining 19.9% of SHH stock owned
by them, pursuant to which they have the right to sell the remaining SHH shares
to the Company between July 2004 and July 2005 at a price of $105 per share. The
Company recorded the fair value of the Put as a $4.1 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.

The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of the Sterling Transaction,
(in thousands):

At July 18, 2001

Current assets $ 21,920
Property, plant and equipment 18,242
Goodwill 7,637
Deferred tax asset 4,757
-------------
Total assets acquired 52,556
Current liabilities (16,017)
Long-term liabilities (9,756)
-------------
Total liabilities assumed (25,773)
Minority interest (2,126)
-------------
$ 24,657
=============

At the time of the acquisition, management re-evaluated the need for
a valuation allowance on the Company's deferred tax asset. Based on the
reversing effects of deferred tax liabilities and projected future income of SHH
and SCPI, management reduced the valuation allowance by a total of $8.2 million,
with $4.7 million recorded as a reduction to goodwill and $3.5 million as an
adjustment to paid in capital. (See note 8.)

Management has determined that the value of intangibles, such as
non-compete agreements and contracts in place are not significant.

Funding for the cash portion of the Sterling Transaction was
provided principally through borrowings by SHH under its bank revolving credit,
and by the Company through the issuance of notes and the sale of common stock,
as follows (in thousands):

SHH Revolver $ 4,900
Subordinated notes 2,580
Short-term subordinated note payable 1,500
Sale of Sterling common stock 908
------------
$ 9,888
============

The following summary unaudited pro forma financial information for
the periods ended December 31, 2001 and February 28, 2001 is presented as if the
Unwinding Agreements described in Note 4 and the Sterling Transaction had been
completed as of the beginning of fiscal 2000 (in thousands, except per share
data).

Fiscal 2001 Fiscal 2000
------------ ------------

Total revenues $ 96,175 $ 92,185

Net (loss) income $ (442) $ 798

Net (loss) income per share $ (0.09) $ 0.16

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 beginning of fiscal 2000, nor may
it be indicative of the future financial position or results of operations.

6. LINE OF CREDIT AND LONG-TERM OBLIGATIONS

Long-term obligations consist of the following (in thousands):

December 31, 2001 February 28, 2001
----------------- -----------------

SHH Revolving Credit Agreement, due March 2004 $ 10,000 --
Subordinated debt, due quarterly through September 2004 6,000 --
Subordinated zero coupon notes, due July 2005 5,283 --
SCPI Revolving Credit Agreement, due May 2003 2,535 3,464
Management/director notes due July 2005 1,984 1,359
Mortgage payable, due monthly through June 2016 1,388 --
KTI Loan, due July 2005 1,016 13,237
Convertible subordinated notes, due December 2004 500 --
Other 238 269
------------- -------------
28,944 18,329
Less current portion (2,759) (13,696)
------------- -------------
Net long-term portion $ 26,185 $ 4,633
============= =============

Related Party Notes

Subordinated Debt

As part of the Sterling Transaction, certain shareholders of SHH
were issued subordinated promissory notes by SHH in the aggregate amount of $6
million in payment for certain of their SHH shares. These notes are repayable
over three years in equal quarterly installments and carry interest at 12% per
annum. The December 2001 installment on these notes was not made until February
2002. Management expects that $2.5 million of this debt will be repaid during
fiscal 2002.

Subordinated Zero Coupon Notes

The Sterling Transaction was funded in part through the sale of zero
coupon notes combined with the issuance of zero coupon notes to certain selling
shareholders of SHH. Warrants for the Company's 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 of the Sterling Transaction. Warrants issued in connection with the
notes are exercisable for ten years from closing and become exercisable four
years after issuance at $1.50 per share. Mr. Manning and Mr. Harper received
notes for the face value of $799,000 and $1.0 million, respectively and warrants
for 63,486 shares and 80,282 shares, respectively.

Short-term Subordinated Note

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 SHH were restructured as part of the Sterling Transaction. Of the total,
notes for $800,000 were due to members of Sterling's management, including
Joseph P. Harper Sr., since appointed the Company's President. Notes totaling
approximately $550,000 were due to Robert Davies, the Company's former Chairman
and Chief Executive Officer, and, through a participation agreement, Maarten
Hemsley, formerly the Company's President and now its Chief Financial Officer.
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 amounts due by the Company 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 SHH and SCPI, or from proceeds of any sale
of SCPI's business.

Convertible Subordinated Notes

In December 2001, in order to strengthen SCPI's working capital
position, Sterling obtained funding in the amount of $500,000 principally from
members of management and directors (including Messrs. Frickel, Harper and
Hemsley, who contributed $155,000, $100,000 and $25,000, respectively) (the
"Convertible Subordinated Notes"). In January 2002, two other members of
management funded a further $60,000 that was used for general corporate
purposes. The notes, which are convertible at any time prior to the maturity
date into the Company's common stock at a price of $2.50 per share, mature and
are payable in full in December 2004. Interest at 12% is payable monthly. The
notes are senior to debt issued in connection with the Sterling Transaction.

SHH Revolver and SCPI Revolver

In conjunction with the Sterling Transaction, SHH entered into a
three-year bank 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 the prime rate, subject to achievement of certain financial
targets and is secured by the equipment of SHH.

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 an
bank agreement 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 the prime rate plus 1%. Following 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. Upon demonstrating SCPI's ability to
generate new business and maintain its relationships with customers and vendors,
in December 2001 the SCPI Revolver was again amended to restore the maximum
borrowing level of $5.0 million and extend the term to May 2003.

KTI Loan

In December 1998, Sterling entered into a loan agreement with KTI,
Inc. (the "KTI Loan") pursuant to which KTI committed to lend Sterling 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.

Pursuant to the Investment Agreement, KTI agreed to provide,
directly or through OTI, the funding required to satisfy the New Heights
Business Plan. Accordingly, KTI and Sterling entered into the KTI Loan. Funds
drawn by Sterling 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 such 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 to
reflect a reduction for the fair value of the approximately 494,000 warrants for
Sterling common stock issued to KTI, to be amortized over the life of the loan.

SHH Mortgage

In June 2001, SHH completed the construction of a new 15,000
square-foot headquarters on a seven acre parcel in Houston on which its existing
equipment repair facility is located. 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 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.

The Company's long-term obligations mature during each fiscal year
as follows (in thousands):

Fiscal Year

2002 $ 2,759
2003 4,729
2004 12,139
2005 8,419
2006 124
Thereafter 774
------------
$ 28,944
============

7. FINANCIAL INSTRUMENTS

The carrying value of the Company's financial instruments, which
include accounts receivable, accounts payable, the SHH and SCPI Revolver,
capital lease obligations, the Convertible Subordinated Note and the
Subordinated Loan approximate their fair value at December 31, 2001 and February
28, 2001.

8. INCOME TAXES AND DEFERRED TAX ASSET

Deferred tax assets and liabilities consist of the following:

(in thousands) December 31, 2001 February 28, 2001
------------------------------ ------------------------------
Current Long Term Current Long Term
------------ ------------ ------------ ------------

ASSETS
Net operating loss carryforwards $ 17,595 $ 37,310 $ 3,914 $ 54,905
Reserve for bad debts 159 -- -- --
------------ ------------ ------------ ------------
17,754 37,310 3,914 54,905
LIABILITIES
Depreciation of property and equipment -- 2,496 -- --
------------ ------------ ------------ ------------
Net asset before valuation allowance 17,754 34,814 3,914 54,905
Less: valuation allowance (16,209) (30,045) (3,914) (54,905)
------------ ------------ ------------ ------------
Net asset $ 1,545 $ 4,769 $ -- $ --
============ ============ ============ ============

During fiscal 2001, the valuation allowance decreased by $12.6
million due to the following:

Utilization of net operating loss carryforwards against current taxable income $ 4,062
Expiration of net operating loss carryforwards 275
Recognition of deferred tax asset as a result of the acquisition of SHH:
Recorded through goodwill 4,757
Recorded through additional paid in capital 3,471
------------
$ 12,565
============

As a result of the acquisition of SHH, the Company evaluated the
valuation allowance on its net deferred tax asset. Management believes that more
likely than not, the deferred assets will be realized based on the future
earnings of both SHH and SCPI.

During fiscal 2000, the valuation allowance increased by
approximately $5.1 million due to additional net operating losses of the
Company.

Fluctuations in market conditions and trends and other changes in
the Company's earnings base, such as subsidiary acquisitions and disposals,
warrant periodic management reviews of the recorded tax asset to determine if an
increase or decrease in the recorded valuation allowance is necessary to change
the tax asset to an amount that management believes will more likely than not be
realized.

In fiscal 1990, SCPI underwent a quasi-reorganization. As a result
of this quasi-reorganization, any subsequent recognition of net operating loss
carryforwards generated before the quasi-reorganization resulted in an
adjustment to paid-in capital. At February 28, 2001, the Company had
approximately $147 million in net operating losses generated before the
quasi-reorganization. Of this amount, approximately $18 million had previously
been recognized and then subsequently re-reserved, resulting in a charge to
earnings of approximately $6.1 million in prior years. During fiscal 2001, most
of these net operating loss carryforwards were either utilized to offset current
taxable income or the valuation allowance was reduced based on the evaluation of
the deferred tax assets during the SHH acquisition. At December 31, 2001, the
Company has approximately $120 million of net operating losses that are fully
reserved that relate to the period prior to the quasi-reorganization. Any
subsequent reduction in the valuation allowance related to the loss
carryforwards would result in an adjustment to paid-in capital.

If future profit levels exceed current expectations and economic or
business changes warrant upward revisions in the estimate of the realizable
value of net operating tax loss carry-forwards, the consequent reduction in the
valuation allowance would result in a corresponding deferred tax benefit in
future results of operations to the extent of the aggregate charges of
approximately $2 million to deferred tax expense in prior years, and any benefit
in excess of such charge would be reflected as an addition to paid-in capital.
The accounting treatment to increase paid-in capital results from SCPI's
quasi-reorganization accounting in fiscal 1990.

The deferred tax effects of temporary differences are not
significant, and current income taxes payable represent state income taxes.

Income tax expense from continuing operations consists of the
following (in thousands):

Fiscal Year Ended
-------------------------------------------------------------
December 31, 2001 February 28, 2001 February 29, 2000
----------------- ----------------- -----------------

Current tax expense .................... $ 14 $ 27 $ 10
(Decrease) increase in valuation
allowance for the deferred tax asset ... (4,062) 2,475 1,019
Deferred tax expense (benefit) ......... 4,062 (2,475) (1,019)
------------- ------------- -------------
Income tax expense ..................... $ 14 $ 27 $ 10
============= ============= =============

The income tax provision differs from the amount using the statutory
federal income tax rate of 34% applied to income or loss from continuing
operations for the following reasons (in thousands):

Fiscal Year Ended
--------------------------------------------------------------
December 31, 2001 February 29, 2000 February 29, 2000
----------------- ----------------- ------------------

Tax benefit at the U.S. federal statutory rate ....... $ (893) $ (2,475) $ (1,019)
State income tax expense, net of refunds and
federal benefits ..................................... 14 27 10
Gain on disposal of equity investment ................ 4,937 -- --
(Decrease) increase in deferred tax asset
valuation allowance .................................. (4,062) 2,475 1,019
Non-deductible costs ................................. 18 -- --
------------- ------------- -------------
Income tax expense ................................... $ 14 $ 27 $ 10
============= ============= =============

The availability of the net operating tax loss carry-forwards may be
adversely affected by future ownership changes of SCPI or Sterling; at this
time, such changes cannot be predicted. Sterling's estimated net operating tax
loss carry-forwards at December 31, 2001 expire as follows (in thousands):

Fiscal Year
-------------

2002 $ 52,000
2003 22,000
2004 49,000
2005 13,000
2010 1,000
2011 2,000
2012 3,000
2018 1,000
Thereafter 18,000
-------------
$ 161,000
=============

3. COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS

Costs and billings on uncompleted contracts at December 31, 2001 are as
follows (in thousands):

Costs incurred on uncompleted contracts $ 75,316
Billings on uncompleted contracts (77,597)
-------------
$ (2,281)
=============
Included in accompanying balance sheets under the following captions:

Costs in excess of billings on uncompleted contracts $ 1,732
Billings in excess of costs on uncompleted contracts (4,013)
-------------
$ (2,281)
=============

4. STOCK OPTIONS

In fiscal 1991, the Board of Directors granted ten-year options to
purchase 194,388 shares of the Company's common stock to key employees and to
certain members of the Board of Directors. The exercise price of the options,
which was equal to the market value of the stock at the date of the grant, was
$2.75 and in fiscal 1996, the exercise price of 49,984 of such options was
reduced to $2.00 per share. These options are fully vested and will remain
exercisable through January 2002. 84,420 of these options are subject to a
standstill agreement executed as part of the Sterling Transaction. Each
employee's options expire upon such employee's resignation.

In fiscal 1994, the Board of Directors and shareholders approved two
stock option plans, the 1994 Omnibus Stock Plan (the "1994 Omnibus Plan") and
the 1994 Non-Employee Director Stock Option Plan (the "Director Plan"). Under
both plans, the exercise price of the option granted may not be less than the
fair market value of the common stock on the date of the grant and the term of
the grant may not exceed ten years.

The 1994 Omnibus Plan initially provided for the issuance of a
maximum of 350,000 shares of the Company's common stock pursuant to the grant of
incentive stock options to employees of Sterling and its subsidiaries and the
grant of non-qualified stock options, stock or restricted stock to employees,
consultants, directors and officers of Sterling and its subsidiaries.
Subsequently, the number of options available under the plan was increased to
1,150,000 shares. The options generally vest over a four year period and expire
ten years from the date of the grant. None of these options has been exercised.

The Director Plan (a "formula plan") provides for the issuance of up
to 100,000 shares of common stock pursuant to options granted to directors who
are not employees of the Company. The plan provides that on every May 1, each
non-employee director holding office on such date shall receive a
fully-exercisable, fully vested, ten-year option to purchase 3,000 shares at the
market value on such date. Each director's options expire upon such director's
resignation. Seven thousand options which remained under the plan were issued in
May 2001. Messrs. Pirasteh, Polak and Sergi, following their resignations from
the Board of Directors in July 2001, exercised their options under the director
plan aggregating 12,498 shares, at prices ranging from $0.50 to $0.84 per share,
for net proceeds to the Company of $12,164.

In December 1998, the Board of Directors approved the 1998 Omnibus
Stock Plan (the "1998 Omnibus Plan"). Under the 1998 Omnibus Plan, the exercise
price of the options granted may not be less than the fair market value of the
common stock on the date of grant and the term of the grant may not exceed ten
years. The 1998 Omnibus Plan provides for the issuance of 700,000 shares. The
options generally vest over a three-year period. Messrs. Pirasteh and Sergi
exercised the options granted to them under the plan following their resignation
from the Board in July 2001, for an aggregate of 100,000 shares, for net
proceeds to the Company of $50,000.

In fiscal 2001, the shareholders ratified the 1998 Omnibus Stock
Plan and the Board of Directors approved the 2001 Stock Incentive Plan (the
"2001 Stock Incentive Plan"). The 2001 Stock Incentive Plan provides for the
issuance of options for up to 500,000 shares, which may be granted at an
exercise price not less than the fair market value of the common stock on the
date of grant. The Company's and its subsidiaries' officers, employees,
directors, consultants and advisors are eligible to be granted awards under the
plan. The options generally vest over time and can be exercised no more than 10
years after the date of the grant. In July 2001, 97,400 options were granted to
certain employees of SHH and to non-employee directors.

The following tables summarize the activity under the five plans:

1991 Plan Director Plan 1994 Omnibus Plan
-------------------------- -------------------------- --------------------------
Shares Price range Shares Price range Shares Price range
---------- ----------- ---------- ----------- ---------- -----------

Outstanding at 2/99: 128,573 $2.00-2.75 66,000 $0.84-3.38 895,784 $0.88-3.88
Granted 9,000 $0.84
Expired/forfeited -- -- (2,100) $3.38-3.88
---------- ---------- ----------
Outstanding at 2/00: 128,573 $2.00-2.75 75,000 $0.84-3.38 893,684 $0.88-3.88
Granted 18,000 $1.06 13,500 $1.07
Expired/forfeited -- -- (16,300) $0.88-3.88
---------- ---------- ----------
Outstanding at 2/01: 128,573 $2.00-2.75 93,000 $0.84-3.38 890,884 $0.88-3.88
Granted 7,000 $0.75
Exercised (12,498) $0.75-1.06
Expired/forfeited -- -- (24,600) $1.00-3.38
---------- ---------- ----------
Outstanding at 12/01: 128,573 $2.00-2.75 87,502 $0.75-3.38 866,284 $0.88-3.88
========== ========== ==========

1998 Omnibus Plan(a) 2001 Stock Incentive Plan
------------------------------ -----------------------------
Shares Price range Shares Price range
------------ ------------ ------------ ------------

Outstanding at 2/99: 600,000 $0.50
Granted 41,000 $1.00
Expired/forfeited --
------------
Outstanding at 2/00: 641,000 $0.50-1.00
Granted
Expired/forfeited --
------------
Outstanding at 2/01: 641,000 $0.50-1.00
Granted 97,400 $1.50
Exercised (100,000) $0.50
Expired/forfeited (500) $100 --
------------ ------------
Outstanding at 12/01: 540,500 $0.50-1.00 97,400 $1.50
============ ============

(a) Of the 600,000 options issued in fiscal 1999, one third were
immediately exercisable, one third vested in December 1999 and one
third vested in December 2000. The 41,000 options issued in fiscal
2000 vest over a four year period, with one quarter of the total
being immediately exercisable.

The following table summarizes information about stock options
outstanding and exercisable at December 31, 2001:

Options outstanding Options exercisable
--------------------------------------------------- -------------------------------
Weighted average Weighted average Weighted average
Range of exercise Number of remaining contractual exercise price Number of exercise price
price per share shares life (years) per share shares per share
----------------- --------- --------------------- ---------------- ------------ ----------------

$0.88 - $3.88 866,284 4.08 $ 1.47 866,284 $ 1.44
$0.50 - $1.00 540,500 6.93 $ 0.54 530,375 $ 0.53
$0.84 - $3.38 87,502 4.73 $ 1.74 87,502 $ 1.74
$1.50 97,400 9.57 $ 1.50 12,000 $ 1.50
$2.00 - $2.75 128,573 0.08 $ 2.58 128,573 $ 2.58
---------- ------------
1,720,259 $ 1.28 1,624,734 $ 1.25
========== ============

At February 28, 2001, 1,499,832 options were exercisable at a
weighted average exercise price of $1.34 per share.

As described in Note 1, the Company accounts for its stock-based
compensation using the intrinsic value method. The net loss during fiscal 2001,
2000 and 1999 would have increased by approximately $80,000, $112,000 and
$35,000 or $0.02, $0.02 and $0.01 per share, respectively, had the Company used
the fair value method to determine compensation costs instead of the intrinsic
value method. The weighted average fair value per share of the options granted
during fiscal 2001, 2000 and 1999 was $0.83, $0.27 and $0.84, respectively. The
pro forma adjustments were calculated using the Black-Scholes option pricing
model using the following assumptions in each year:

Fiscal 2001 Fiscal 2000 Fiscal 1999
------------ ------------ ------------

Risk free interest rate 4.50% 6.00% 6.00%
Expected volatility 35.1% 79.0% 78.0%
Expected life of option 10.0 years 9.00 years 10.00 years
Expected dividends none none none

5. EMPLOYEE PENSION PLAN

Sterling and its subsidiaries maintain a profit-sharing plan (the
"Plan") covering substantially all persons employed by the Company and its
subsidiaries, whereby employees may contribute a percentage of compensation,
limited to maximum allowed amounts under the Internal Revenue Code. The Plan
provides for discretionary employer contributions, the level of which, if any,
may vary by subsidiary and is determined annually by each company's Board of
Directors. Total plan related expense was approximately $74,000, $19,000 and
$20,000 in fiscal 2001, 2000 and 1999, respectively.

12. OPERATING LEASES

In December 1997, SCPI entered into an operating lease for its
warehouse with an initial term that expires January 1, 2003, with one additional
five-year renewal option. The lease requires minimum rental payments of $247,000
per annum, and payment by SCPI of certain expenses such as liability insurance,
maintenance and other operating costs. With the addition of lawn and garden
business in fiscal 2001, SCPI entered into a lease agreement for additional
warehouse and office space with an initial term of seven years, expiring
December 2007, with one three-year renewal option.

Operations of SHH are conducted from a owned building in Houston,
Texas. SHH also leases office space in Fort Worth, Texas for an initial term of
two years, commencing October, 2001. In January 2002, SHH entered into a lease
agreement for office space in San Antonio, Texas for a term of two years.

Minimum annual rentals for all operating leases having initial
non-cancelable lease terms in excess of one year are as follows (in thousands):

Fiscal Year

2002 ................................... $ 420
2003 ................................... 192
2004 ................................... 171
2005 ................................... 182
2006 ................................... 192
Thereafter ............................. 193
------------
Total future minimum rental payments ... $ 1,350
============

Total rent expense for all operating leases amounted to
approximately $313,000, $268,000 and $247,000 for continuing operations in
fiscal 2001, 2000 and 1999, respectively, and $342,000 for discontinued
operations in fiscal 1999.

13. SEGMENT INFORMATION

The Company has historically operated as a wholesale distributor of
automotive aftermarket accessories (the "Distribution Segment"). Its subsidiary,
SCPI, is 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 third quarter of fiscal 2000,
expanded its product offerings to include lawn and garden products. SCPI's
customer base of drug and supermarket retailers, discount retail chains,
hardware, and automotive chains is largely the same across its product lines
(the "Distribution Segment").

In July 2001, the Company increased its equity investment in SHH
from 12% to 80.1%. SHH is a heavy civil construction company based in Houston
that specializes in municipal and state contracts for highway paving, bridge,
water and sewer, and light rail (the "Construction Segment").

Each of the Distribution Segment and the Construction Segment is
managed by its own decision makers and is comprised of unique customers,
suppliers and employees. Terry Allan, President of SCPI and Maarten Hemsley, the
Chief Financial Officer of the Company, review 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 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. Prior year segment information has
been restated to conform to the current management of the business (in
thousands):

Fiscal 2001 - ten months Consolidated
Segments Construction Distribution Other Total
---------------------------------------------- ------------ ------------ ------------ ------------

Revenues $ 48,654 $ 17,467 $ 66,121
============ ============ ============
Operating profit (loss) 2,293 481 (1,329) 1,445
Interest expense 2,193
------------
Loss before equity investment and income taxes (748)
Net loss from equity affiliates (1,217) (1,217)
Minority interest expense (647) (647)

Net loss (2,626)
============
Depreciation and amortization $ 1,553 $ 125 $ 28 $ 1,706
Segment assets $ 37,241 $ 7,134 $ 14,763 $ 59,138

Capital expenditures $ 1,175 $ 29 -- $ 1,204

Fiscal 2000 (Restated) Consolidated
Segments Distribution Dowling's OTI Corporate Total
---------------------------------------------- ------------ ----------- ----------- ----------- ------------

Net sales $ 20,694 $ 20,694
=========== ===========
Operating profit (loss) $ 1,018 $ (313) $ (504) $ 201
Interest expense $ 2,688
-----------
Loss before equity investment and income taxes
$ (2,487)
Net loss in equity affiliates $ (4,557) $ (4,557)
Loss from continuing operations $ (7,071)
Income from disposal of discontinued business
segment $ 399 $ 399
-----------
Net loss $ (6,672)
===========
Depreciation and amortization $ 118 $ 53 $ 30 $ 201
Segment assets $ 7,290 $ 9,030 $ 187 $ 16,507
Investment in SHH $ 3,473 $ 3,473
Net investment in New Heights $ 4,170 $ 4,170
Capital expenditures $ 126 $ 4 $ 130

Fiscal 1999 (Restated) Consolidated
Segments Distribution Dowling's OTI Corporate Total
--------------------------------------------- ------------ ---------- ---------- ---------- ------------

Net sales $ 20,142 $ 20,142
============ ============
Operating profit (loss) $ 842 $ (228) $ (660) $ (46)
Interest expense $ 1,243
------------
Loss before equity investment and income taxes
$ (1,289)
Net loss in equity affiliates $ (1,228) $ (1,228)
Loss from continuing operations $ (2,527)
Loss from discontinued operations $ (428) $ (428)
Loss from disposal of discontinued business
segment $ (2,028) $ (2,028)
------------
Net loss $ (4,983)
============
Depreciation and amortization $ 109 $ 38 $ 101 $ 248
Segment assets $ 7,757 $ 3,986 $ 9,966 $ 243 $ 21,952
Investment in SHH $ 3,264 $ 3,264
Investment in New Heights $ 5,336 $ 5,336
Capital expenditures $ 69 $ 2 $ 71

Six months ended December 31, 2001
-------------------------------------------
Contract revenues % of revenues
----------------- -------------

City of Houston $18,252 27.6%
Houston Metropolitan Transit Authority $15,593 23.6%

Following the discontinuance of the Dowling's segment in fiscal 1999
and prior to the acquisition of SHH in July 2001, sales attributable to SCPI
represented 100% of Sterling's consolidated sales. The following table shows
sales to SCPI's customers that individually accounted for more than 10% of sales
during any of the latest three fiscal years (dollars in thousands):

Fiscal year ended Fiscal year ended Fiscal year ended
December 31, 2001 February 28, 2001 February 29, 2000
-------------------------- -------------------------- --------------------------
(ten months)
Sales % of sales Sales % of sales Sales % of sales
----------- ----------- ----------- ----------- ----------- -----------

Ames $ 3,217 18% $ 3,746 18% $ 3,144 16%
Kroger $ 2,758 16% $ 2,057 13% $ 2,037 10%
Giant Eagle $ 2,313 13% $ 2,055 12% $ 1,523 8%
Warehouse Sales $ 2,193 13% * * * *
American Sales $ 1,863 11% * * * *

*sales did not exceed 10% of total sales

14. COMMITMENTS AND CONTINGENCIES

SCPI has an employment agreement with Mr. Allan that provides
termination rights in the event of a change in control of SCPI, as defined. The
rights include payments of up to twenty-four months of Mr. Allan's base salary,
along with continuation of benefits and certain other payments. The agreement
also provides for substantially the same provisions in the event that Mr.
Allan's employment were terminated by SCPI without cause.

Messrs. Harper and Manning have employment agreements with a
subsidiary of SHH which provide for payments of annual salary and benefits if
the executive's employment were terminated without cause.

SHH is self-insured for employee health claims. Their policy is
to accrue the estimated liability for claims through December 31, 2001. The
Company has obtained reinsurance coverage for the policy period from June 1,
2001 through May 31, 2002 as follows:

o Specific excess reinsurance coverage for medical and prescription
drug claims in excess of $20,000 with a maximum lifetime
reimbursable of $980,000.

o Aggregate reinsurance coverage for medical, dental and prescription
drug claims with a plan year maximum of $1,000,000 for claims in
excess of approximately $357,000 which is estimated based on the
number of employees.

For the three months ended December 31, 2001, the Company incurred
approximately $126,000 in expenses related to this plan.

15. MINORITY INTEREST

Under the fiscal 1992 merger (see Note 1) SCPI was required for a
period of five years following the merger to issue to the Company (or cancel)
such number of shares of Series A Preferred Stock and/or common stock as were
necessary, in accordance with periodic determinations, to maintain the Company's
aggregate stock ownership of SCPI at 90%.

During fiscal 1993, the cumulative dividends on SCPI's Series A
Preferred Stock exceeded SCPI's net income for that year, thus creating a loss
attributable to SCPI's common stockholders in excess of the minority interest,
and accordingly, the Company reduced to zero the minority interest related to
SCPI. At such time as SCPI's cumulative net income attributable to common
stockholders from the effective date of the merger exceeds the cumulative Series
A Preferred Stock dividends in arrears, the Company will again reflect the
appropriate minority interest liability.

In July 2001, the Company increased its investment in SHH from 12%
to 80.1%. Accordingly, a minority interest liability of $2.8 million is
reflected in the consolidated balance sheet, and for the fiscal year ended
December 31, 2001, minority interest expense of approximately $647,000 is
reflected in the consolidated results of operations.

16. UNAUDITED SELECTED FINANCIAL DATA

In November 2001, the Company elected to change its fiscal year end
to December 31. The following tables present condensed consolidated financial
information for the fiscal year ended December 31, 2001, which includes ten
months and certain unaudited condensed consolidated financial information for
the ten months ended December 31, 2000 (in thousands):

Consolidated Statements of Operations

December 31, 2000
December 31, 2001 (ten months)
(ten months) (unaudited)
----------------- -----------------

Net sales ..................................................... $ 66,121 $ 17,256
Expenses, including interest expense, net of other income ..... 66,869 19,152
------------- -------------
Loss before loss on equity investment and income taxes ........ (748) (1,896)
Income from investment in SHH ................................. 63 228
Loss from investment in New Heights ........................... (1,280) (3,106)
------------- -------------
Loss on equity investment ..................................... (1,217) (2,878)
Minority interest ............................................. (647) --
Current income tax expense .................................... (14) (5)
------------- -------------
Net loss from continuing operations ........................... $ (2,626) $ (4,779)
Income from discontinued operations ........................... -- 399
------------- -------------
Net loss ...................................................... $ (2,626) $ (4,380)
============= =============

Basic and diluted per share amounts:
Net loss from continuing operations ........................ $ (0.52) $ (0.97)
Income from discontinued operations ........................ -- 0.08
------------- -------------
Net loss ................................................... $ (0.52) $ (0.89)
============= =============
Weighted average shares outstanding ........................... 5,055,516 4,943,018

17. RELATED PARTY TRANSACTIONS

The Sterling Transaction was funded in part through the issuance of
zero coupon notes and warrants to certain members of SHH's management, including
Messrs. Manning and Harper. The zero coupon notes carry an imputed rate of
interest of 12%, compounded annually, and mature in July 2005. Also as part of
the Sterling Transaction, additional notes were issued to Mr. Harper and another
member of SHH's management, which carry interest at 12% and mature in July 2005.
The notes are subordinated to the SHH Revolver and the SCPI Revolver. Payments
made on the additional notes are restricted to defined cash flows of SHH and
SCPI.

In October 1999, to fund the second tranche of equity, notes were
issued to Messrs. Davies and Hemsley which were to mature in April 2001. These
notes were extended and restructured as part of the Sterling Transaction, now
carry interest at 12% and mature in July 2005. Payment on the notes is
restricted to defined cash flows of SHH and SCPI.

In December 2001, in conjunction with an amendment to the SCPI
Revolver and in order to strengthen SCPI's working capital position through the
purchase of additional inventory, Sterling obtained funding in the amount of
$500,000 principally from members of management and directors (including Messrs.
Frickel, Harper and Hemsley, who contributed $155,000, $100,000 and $25,000,
respectively) (the "Convertible Subordinated Notes"). In January 2002, two other
members of management funded a further $60,000 that was used for general
corporate purposes. The notes, which are convertible at any time prior to the
maturity date into the Company's common stock at a price of $2.50 per share,
mature and are payable in full in December 2004. Interest at 12% is payable
monthly. The notes are senior to debt issued in connection with the Sterling
Transaction.

Mr. R.W. Frickel was named and elected a director of the Company in
July 2001. Mr. Frickel's company, the R.W. Frickel Company, P.C. has provided
services to SHH for many years and provided services to SHH in the period July
2001 to December 31, 2001, primarily related to accounting and tax issues. SHH
incurred fees for such services in the amount of $88,000, which SHH and the
Company believe were reasonable and competitive in the marketplace.

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(Dollar amounts in thousands, except per share data)

Fiscal 2001 quarter ended May 31 August 31 November 30* December 31* Total
------------------------- ------------ ------------ ------------ ------------ ----------

Revenues $ 5,719 $ 23,664 $ 30,270 $ 6,468 $ 66,121
Gross profit 1,014 2,729 3,295 261 7,299
(Loss) income before minority interest and taxes
(1,665) (665) 721 (356) (1,965)
Net (loss) income $ (1,668) $ (750) 63 $ (271) $ (2,626)

Net (loss) income per share: $ (0.34) $ (0.15) $ 0.02 $ (0.04) $ (0.52)

Fiscal 2000 quarter ended (restated) May 31 August 31 November 30(a) February 28(b) Total
------------------------------------ ------------ ------------ -------------- -------------- -----------

Sales $ 5,745 $ 5,285 $ 4,631 $ 5,033 $ 20,694
Gross profit 1,243 1,047 892 974 4,156
Loss from continuing operations (1,086) (1,009) (1,786) (3,190) (7,071)
Net loss $ (1,086) $ (1,009) $ (1,387) $ (3,190) $ (6,672)

Per share:
Continuing operations $ (0.22) $ (0.20) $ (0.36) $ (0.65) $ (1.43)
Net loss $ (0.22) $ (0.20) $ (0.27) $ (0.65) $ (1.34)

*In fiscal 2001, the Board of Directors voted to change the Company's fiscal
year end from the last day of February to December 31. There was no separately
reported third quarter. Results for December 31 include only one month.

a. as restated in amended quarterly filing

b. the fourth quarter fiscal 2000 net loss from continuing operations
includes $2.4 million loss from equity investment

c. the fourth quarter fiscal 2000 net loss includes a loss on disposal
of Dowling's of $2.0 million

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

STERLING CONSTRUCTION COMPANY, INC.

Dated: April 1, 2002 By: /s/ Patrick Manning
------------------------------
Patrick Manning
(duly authorized officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

SIGNATURES TITLES DATE
---------- ------ ----

/s/ Patrick Manning Chairman of the Board April 1, 2002
------------------------------------------------- Chief Executive Officer
Patrick Manning Director (principal
executive officer)

/s/ Maarten D. Hemsley Chief Financial Officer April 1, 2002
------------------------------------------------- (principal financial and
Maarten D. Hemsley accounting officer)
Director

/s/ Joseph P. Harper President, April 1, 2002
------------------------------------------------- Director
Joseph P. Harper

/s/ John D. Abernathy Director April 1, 2002
-------------------------------------------------
John D. Abernathy

/s/ Robert M. Davies Director April 1, 2002
-------------------------------------------------
Robert M. Davies

/s/ Robert W. Frickel Director April 1, 2002
-------------------------------------------------
Robert W. Frickel

/s/ Christopher H.B. Mills Director April 1, 2002
-------------------------------------------------
Christopher H.B. Mills

SCHEDULE II

STERLING CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)

Column A Column B Column C Column D Column E
-------- -------- -------------------------------------- ------------ --------------
Balance at Charges to other
beginning of Charged to costs accounts - Deductions - Balance at end
Description period and expenses describe describe(A) of period
----------- ------------ ---------------- ---------------- ------------ --------------

Allowance for doubtful accounts deducted from trade
accounts receivable: Years ended:

December 31, 2001 $191 483(C) -- 86 $588

February 28, 2001 $367 30 137(B) 69 $191

February 29, 2000 $388 136 -- 157 $367

(A) Amounts were deemed uncollectible

(B) Relates to the disposal of Dowling's

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------ -----------