1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1995
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number: 0-19450
OAKHURST COMPANY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 25-1655321
- ------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
1001 SANTERRE DRIVE, GRAND PRAIRIE, TEXAS
75050
-----------------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 660-4499
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
----- -----
As of January 1, 1996, 3,195,235 shares of the Registrant's Common
Stock, $0.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OAKHURST COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets at November 30, 1995 (unaudited)
and February 28, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months ended
November 30, 1995 and the thirteen weeks ended November 26, 1994
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations for the nine months ended
November 30, 1995 and the thirty-nine weeks ended November 26, 1994
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Stockholders' Equity for the nine months
ended November 30, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the nine months ended
November 30, 1995 and the thirty-nine weeks ended November 26, 1994
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to consolidated financial statements (unaudited) . . . . . . . . . . 8
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OAKHURST COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
ASSETS November 30, February 28,
1995 1995
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents................................ $ 311 $ 314
Trade accounts receivable, less allowance of $477 and
$282, respectively.................................... 4,584 5,760
Commissions receivable................................... 209 226
Other receivables........................................ 347 498
Inventories.............................................. 8,380 10,400
Deferred tax asset....................................... - 620
Other.................................................... 543 280
---------- -----------
Total current assets........................... 14,374 18,098
---------- -----------
Property and equipment, at cost............................ 3,121 2,993
Less accumulated depreciation............................ (968) (921)
---------- -----------
2,153 2,072
---------- -----------
Deferred tax asset......................................... 4,086 5,466
Excess of cost over net assets acquired, net............... 7,135 7,399
Other assets............................................... 175 266
---------- -----------
11,396 13,131
---------- -----------
$ 27,923 $ 33,301
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of revolving credit agreement......... $ 2,500 $ -
Term loan, current....................................... 1,814 585
Note payable, related party.............................. 90 532
Accounts payable......................................... 5,986 8,066
Accrued compensation..................................... 536 757
Accrued interest......................................... 217 85
Income taxes payable..................................... - 109
Current maturities of long-term obligations.............. 56 32
Current maturities of long-term obligations, related
parties............................................... 1,360 800
Net obligation of discontinued business segment-current
portion............................................... 558 505
Other.................................................... 507 383
---------- -----------
Total current liabilities...................... 13,624 11,854
---------- -----------
Long-term obligations:
Net obligation of discontinued business segment.......... 637 985
Long-term debt........................................... 83 3,237
Long-term debt, related parties.......................... 1,185 1,800
Convertible debt, related parties........................ 540 517
Other long-term obligations.............................. 61 73
---------- -----------
2,506 6,612
---------- -----------
Commitments and contingencies..............................
Stockholders' equity:
Preferred stock, par value $0.01; authorized 1,000,000
shares, none issued................................... - -
Common stock, par value $0.01 per share; authorized
14,000,000 shares; issued 3,195,235 and 3,189,326
shares, respectively.................................. 32 32
Additional paid-in capital............................... 46,522 46,480
Deficit (Reorganized on August 26, 1989)................. (34,760) (31,676)
Treasury stock, at cost, 207 common shares............... (1) (1)
---------- -----------
Total stockholders' equity..................... 11,793 14,835
---------- -----------
$ 27,923 $ 33,301
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Three Months Thirteen Weeks
Ended Ended
November 30, November 26,
1995 1994
------------ --------------
Sales.......................................... $ 11,580 $ 11,329
Other income................................... 59 246
------------ -----------
11,639 11,575
------------ -----------
Cost of goods sold, including occupancy and
buying expenses.............................. 9,100 8,383
Operating, selling and administrative expenses. 2,684 2,320
Provision for doubtful accounts................ 21 -
Amortization of excess of costs over net assets
acquired.................................... 119 110
Interest expense............................... 181 141
------------ -----------
12,105 10,954
------------ -----------
Income (loss) from continuing operations
before income taxes.......................... (466) 621
Income taxes:
Current tax (benefit) expense................ (46) 12
Deferred tax expense......................... 2,000 248
------------ -----------
Income (loss) from continuing operations....... (2,420) 361
Income from discontinued operations (net of
$12 income tax expense)...................... - 24
------------ -----------
Net (loss) income ............................. $ (2,420) $ 385
============ ===========
Per share amounts:
Income (loss) from continuing operations..... $ (0.76) $ 0.11
Income from discontinued operations.......... - 0.01
------------ -----------
Net (loss) income ........................... $ (0.76) $ 0.12
============ ===========
Weighted average number of common shares
outstanding used in computing per share
amounts...................................... 3,195,235 3,318,073
============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollarr amounts in thousands, except per share data)
(Unaudited)
Nine Months Thirty-nine Weeks
Ended Ended
November 30, November 26,
1995 1994
------------ ----------------
Sales............................................ $ 38,122 $ 31,089
Other income..................................... 256 474
-------------- ------------
38,378 31,563
-------------- ------------
Cost of goods sold, including occupancy and
buying expenses................................ 29,929 23,259
Operating, selling and administrative expenses... 8,336 6,203
Provision for doubtful accounts.................. 288 -
Amortization of excess of costs over net assets
acquired...................................... 379 160
Interest expense................................. 567 226
-------------- ------------
39,499 29,848
-------------- ------------
Income (loss) from continuing operations
before income taxes............................ (1,121) 1,715
Income taxes:
Current tax (benefit) expense.................. (37) 82
Deferred tax expense........................... 2,000 575
-------------- ------------
Income (loss) from continuing operations......... (3,084) 1,058
Income from discontinued operations (net of
$46 income tax expense)........................ - 90
-------------- ------------
Net (loss) income................................ $ (3,084) $ 1,148
============== ============
Per share amounts:
Income (loss) from continuing operations....... $ (0.97) $ 0.34
Income from discontinued operations............ - 0.03
-------------- ------------
Net (loss) income.............................. $ (0.97) $ 0.37
============== ============
Weighted average number of common shares
outstanding used in computing per share
amounts........................................ 3,193,633 3,064,085
============== ============
The accompanying notes are an integral part of these
consolidated financial statements.
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED NOVEMBER 30, 1995
(Dollars in thousands)
(Unaudited)
Common Stock Additional Retained Treasury Stock
---------------------- Paid-in Earnings -------------------
shares par value Capital (Deficit) shares cost
--------- --------- ---------- --------- ------ -----
Balances, February 28, 1995.............. 3,189,326 $32 $46,480 ($31,676) 207 ($1)
Net loss for the period.................. (3,084)
Employee stock awards.................... 5,909 * 19
Other.................................... 23
--------- --- ------- -------- --- ---
Balances, November 30, 1995.............. 3,195,235 $32 $46,522 ($34,760) 207 ($1)
========= === ======= ======== === ===
* Rounds to less than $1,000
The accompanying notes are an integral part of these
consolidated financial statements.
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OAKHURST COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Nine Months Thirty-nine Weeks
Ended Ended
November 30, November 26,
1995 1994
------------ ----------------
Cash flows from operating activities:
Income (loss) from continuing operations........... $ (3,084) $ 1,058
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities:
Depreciation and amortization................. 676 379
Deferred tax expense.......................... 2,000 592
Loss on retirement of asset................... 28 -
Employee stock award.......................... 19 -
Other......................................... 23 -
Other changes in operating assets and liabilities:
Accounts receivable........................... 1,176 347
Inventories................................... 2,020 2
Accounts payable.............................. (2,080) (1,148)
Other......................................... (55) 231
---------- -----------
Net cash provided (used) by operating activities of:
Continuing operations.............................. 723 1,461
Discontinued operations............................ (295) (116)
---------- -----------
Net cash provided by operating activities............ 428 1,345
---------- -----------
Cash flows from investing activities:
Additions to property and equipment................ (330) (386)
Acquisition of subsidiary, net of cash acquired.... - (5,082)
Net change in the excess of cost over net assets
acquired........................................ (154) -
---------- -----------
Net cash used in investing activities................ (484) (5,468)
---------- -----------
Cash flows from financing activities:
Exercise of warrants............................... - 331
Proceeds from issuance of long-term debt........... - 2,560
Net borrowings under revolving credit agreement.... 975 1,800
Repayment of note payable.......................... (458) (165)
Payment of distribution payable.................... - (500)
Principal payments on long-term obligations and
term loan....................................... (464) (205)
Deferred financing costs........................... - (58)
---------- -----------
Net cash provided by financing activities............ 53 3,763
---------- -----------
Net decrease in cash and cash equivalents............ (3) (360)
Cash and cash equivalents at beginning of period..... 314 1,071
---------- -----------
Cash and cash equivalents at end of period........... $ 311 $ 711
========== ===========
Supplemental schedule of non-cash investing and financing activities:
Nine months ended November 30, 1995:
Capital lease obligations of $76 were incurred when the Company entered into
three leases for new computer and warehouse equipment.
Thirty-nine weeks ended November 26, 1994:
Convertible debt of $500, notes and earn-outs payable totaling $3.6 million,
and common stock of $1 million were issued in connection with the
acquisition of subsidiaries.
The accompanying notes are an integral part of these
consolidated financial statements
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OAKHURST COMPANY, INC. AND SUBSIDIARIES
NINE MONTHS ENDED NOVEMBER 30, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
Oakhurst Company, Inc. ("Oakhurst" or "the Company") was formed as a
result of a merger transaction (the "merger") in fiscal 1992 between Steel City
Products, Inc. ("SCPI") and an Oakhurst subsidiary. The merger resulted in a
restructuring of SCPI such that it became a majority-owned subsidiary of
Oakhurst. In accordance with the merger, Oakhurst owns 10% of the outstanding
common stock of SCPI and all of SCPI's Series A Preferred Stock. The merger was
structured such that the aggregate fair market value of SCPI's common stock and
Series A Preferred Stock owned by Oakhurst would be approximately 90% of the
aggregate fair market value of SCPI. Accordingly, Oakhurst controls
approximately 90% of the voting power of SCPI. The accompanying financial
statements reflect this control and include the accounts of SCPI.
Oakhurst acquired all of the outstanding capital stock of H&H
Distributors d/b/a Harry Survis, ("H&H") in January 1994; accordingly, the
accompanying financial statements include the accounts of H&H.
Oakhurst acquired all of the outstanding capital stock of Dowling's
Fleet Service Co., Inc. ("Dowling's") and of Puma Products, Inc. ("Puma") in
August 1994 and October 1994, respectively; accordingly, the accompanying
consolidated financial statements include the accounts of these subsidiaries
for the respective periods of ownership.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position, results of operations and cash flows for the interim
periods presented. All adjustments made are of a normal, recurring nature.
While the Company believes that the disclosures presented herein are
adequate to make the information not misleading, it is suggested that these
unaudited consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the fiscal year ended February
28, 1995 ("fiscal 1995") as filed in the Company's Annual Report on Form 10-K.
2. PROVISION FOR DOUBTFUL ACCOUNTS
During the second quarter of the current fiscal year, SCPI curtailed
the level of credit allowed to Jamesway Corporation ("Jamesway"), one of its
largest customers, after becoming aware that Jamesway was experiencing new
financial difficulties. Although Jamesway had emerged from bankruptcy as
recently as January 1995, in October 1995 it again filed for protection under
the U.S. Bankruptcy Code. Accordingly, Oakhurst's consolidated results for
the nine month period ending November 30, 1995 include a second quarter
provision of $150,000 related to the balances due from Jamesway.
3. DEFERRED TAX ASSET
As of December 31, 1994, Oakhurst had, for tax reporting purposes, net
operating tax loss carryforwards of approximately $146 million which expire in
the years 2001 through 2005. Under SFAS 109, Oakhurst is required to recognize
currently the estimated realizable value of the future benefit of its net
operating tax loss carryforwards along with other tax benefits. At February
28, 1995, Oakhurst had a remaining deferred tax asset of approximately $50.3
million, less a valuation allowance of $44.2 million. The amount of the
valuation allowance was determined by, among other things, management's
estimate of Oakhurst's ability to utilize the net operating tax loss
carryforwards prior to their expiration based on the then current market
conditions and trends. Subsequent fluctuations in market conditions and trends
warrant periodic management
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reviews of the recorded valuation allowance to determine if an increase or
decrease in such allowance would be appropriate.
One of the Company's subsidiaries, SCPI, has begun to experience
significant changes in its customer base. In October 1995, SCPI lost one of
its largest customers to bankruptcy (see Note 2), and was informed by another
of its largest customers that it had decided to change its source of supply,
with such change expected to be phased in over the next several months. SCPI
has not yet identified replacement customers sufficient to offset the lost
business. In addition, the Company's other operating subsidiaries have
encountered lower sales and profits in the current fiscal year than had been
anticipated.
Management is currently determining the impact of the lost business on
SCPI's future levels of revenues, and is evaluating future customer and product
opportunities to project whether, and if so when, SCPI may expect a return to
its historical levels of sales. Management is also undertaking a strategic
evaluation of SCPI's operations to determine how they may be restructured to
reflect the current level of SCPI's sales. In addition, management is
currently analyzing its other subsidiaries' businesses to better anticipate the
future revenue and profit levels that are likely to be realized by such
subsidiaries.
While this analysis is expected to be completed during the fourth
quarter of the current fiscal year, management's initial estimate of the
current impact of these events on the deferred tax asset valuation allowance
resulted in an increase of $2 million in such allowance with a corresponding
charge to deferred tax expense in the third quarter of the current fiscal year.
If future profit levels exceed current expectations, 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 aforementioned charge to
deferred tax expense.
As of November 30, 1995, Oakhurst is required to earn approximately
$12 million of consolidated pre-tax income primarily through fiscal 2007 to
realize the net recorded tax benefit, as adjusted.
4. LONG-TERM DEBT AND LINE OF CREDIT
In August 1994, Oakhurst entered into a two year revolving credit
agreement (the "Credit Agreement") that, until its amendment, carried a
floating interest rate of prime plus 1% and provided for maximum borrowings of
$3 million. Borrowings may be limited by the borrowing base, as defined in the
Credit Agreement, that is calculated according to the level of Oakhurst's
subsidiaries' accounts receivable.
In August 1994, SCPI obtained a four year term loan in the amount of
$2,560,000 (the "Term Loan"), in connection with Oakhurst's acquisition of
Dowling's. The Term Loan is secured by a mortgage on SCPI's real estate, is
guaranteed by Oakhurst and its subsidiaries, supported by a pledge of the
capital stock of Oakhurst's subsidiaries. The Term Loan provides for monthly
repayments beginning in September 1994 and bears interest at a fixed rate of
9.25%.
The Term Loan and the Credit Agreement are cross-collateralized, and
contain various financial covenants. The Credit Agreement was amended during
the third quarter of the current fiscal year to reflect the Puma acquisition
that occurred in the latter part of fiscal 1995. The amendment to the Credit
Agreement provides for maximum borrowings of $4 million, subject to the
borrowing base, and eliminated all of the financial covenants, except for
certain amended subsidiary and consolidated net worth requirements. The Term
Loan was also amended to reflect such revised covenants. Borrowings under the
amended Credit Agreement bear interest at prime plus 1.5%, and are secured by
the accounts receivable, inventory and capital stock of Oakhurst's subsidiaries.
At November 30, 1995, Oakhurst did not meet the amended consolidated
net worth covenant, and requested a modification of such covenant. The
modification was granted by the bank on January 3, 1996, in exchange for
Oakhurst's and SCPI's agreement to accelerate the maturity date of the Term
Loan to July 31, 1996, and to increase the interest rates on the Term Loan and
on borrowings under the Credit Agreement by 1.25% and 1%, respectively,
effective February 28, 1996. Accordingly, the Term Loan has been presented as
a current liability until replacement financing is finalized.
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In December 1995, Oakhurst initiated negotiations with several lenders
to obtain replacement financing and on January 8, 1996 accepted a letter of
intent for financing from an institutional lender which is expected to provide
a significant increase in the level of financing available to Oakhurst and its
subsidiaries based upon essentially similar collateral as provided under the
existing bank financing. Management expects that Oakhurst and SCPI will obtain
a letter of commitment on and close such refinancing prior to February 29,
1996.
5. ARBITRATION
On July 26, 1995 the Company initiated an arbitration proceeding with
the American Arbitration Association in connection with the August 1994
acquisition by the Company of Dowling's. The Company is seeking rescission of
the acquisition, or in the alternative, damages and indemnification in excess
of $1.6 million. The proceeding is based, among other things, on the Company's
belief that the seller breached certain provisions of the purchase and sale
agreement covering the acquisition by furnishing to the Company financial
information that was materially inaccurate. The seller has denied the
Company's allegation and is seeking payment of amounts due under the purchase
and sale agreement. Arbitration hearings in the matter are scheduled to
commence in early February 1996. If the Company is successful in obtaining a
rescission of the purchase, the Company would receive back the portion of the
purchase price paid and other consideration given at the closing, and would be
relieved of the obligation to pay the balance of the purchase price
(approximately $1 million) over the three-year period following the closing.
Pending resolution of the arbitration, Oakhurst has exercised its
right of set-off, as defined in the Dowling's purchase and sale agreement,
against a principal payment due of $350,000 on a related-party note payable, an
earn-out payment of $30,000, and against salary payments due to the seller of
approximately $8,000.
6. RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Standards No., 123, "Accounting for Stock-Based
Compensation," which requires adoption no later than fiscal years beginning
after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and similar equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period.
Pursuant to the new standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note to the
financial statements pro forma net income and, if presented, earnings per share
as if the company had applied the new method of accounting.
The accounting requirements of the new method are effective for all
employee awards granted after the beginning of the fiscal year of adoption.
The Company has not yet determined if it will elect to change to the fair value
method, however, it has determined that should it elect to make such a change,
the effect of the new standard will not have a material impact on net income
and earnings per share in year of adoption, nor would it have any effect on the
Company's cash flows.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's analysis of the significant factors that
have influenced the Company's financial position and results of operations
during the periods included in the accompanying consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's corporate structure permits Oakhurst Company, Inc.
("Oakhurst" or "the Company") (formerly Oakhurst Capital, Inc.) to file a
consolidated tax return so that both Oakhurst and Steel City Products, Inc.
("SCPI") may utilize the tax benefits (including approximately $148 million of
net operating loss carryforwards at December 31, 1994) attributable to SCPI.
SCPI is to concentrate on its historical line of business, while future growth
and expansion opportunities are to be pursued by Oakhurst or its other
subsidiaries. Through Oakhurst's ownership of SCPI, primarily in the form of
preferred stock, Oakhurst will retain substantially all the value of SCPI, and
will receive substantially all of the benefit of SCPI's operations through
dividends on such preferred stock. Oakhurst's ownership of SCPI is designed to
facilitate the preservation and utilization of the tax benefits.
In fiscal 1995, following Oakhurst's adoption of a program of
diversification and expansion, it acquired all the outstanding capital stock of
Dowling's Fleet Service Co., Inc. ("Dowling's"), a New York-headquartered
distributor of automotive radiators and related products, and of Puma Products,
Inc. ("Puma"), a Texas-based distributor of after- market products to the light
truck and van conversion industry. In connection with these acquisitions,
Oakhurst paid approximately $5.2 million in cash, and issued stock, convertible
debt, and notes and earn-outs payable of approximately $5 million in the
aggregate.
The notes payable outstanding include a two-year Dowling's note
payable of $700,000 that bears interest at prime and is due in two annual
installments beginning in August 1995, a two-year Puma note payable of $600,000
that bears interest at prime plus 1% and is due in two annual installments
beginning in October 1995 and a short-term Puma note payable with a current
balance of approximately $90,000 that bears interest at prime plus 1%.
Oakhurst has exercised its right of set-off, as defined in the Dowling's
purchase and sale agreement, against the first principal payment of $350,000 on
the Dowling's note that was due in August 1995, pending resolution of an
arbitration proceeding (see "Liquidity and Capital Resources - Significant
Events and Trends - Arbitration").
The earn-out payments are due beginning in fiscal 1996, over two to
three years for Dowling's and over three to five years for Puma, and are
currently estimated at approximately $1.3 million, the current portion of which
is estimated at $60,000. Oakhurst has exercised its right of set-off against
the current amount of the Dowling's earn-out of $30,000 that was due in October
1995.
The convertible debt of $500,000 was issued to certain executives of
Dowling's, accrues interest at 6% and is convertible at the executives' option
into 120,346 shares of Oakhurst common stock on August 1, 1997.
These acquisitions, together with the acquisition of H&H Distributors,
d/b/a Harry Survis Auto Center ("H&H") that was completed in fiscal 1994, were
designed to enlarge Oakhurst's profit potential without over-leveraging the
Company or diluting the equity position of its shareholders. H&H, Dowling's and
Puma have been historically profitable and, despite lower than expected
operating results by these subsidiaries in the current fiscal year, (see
"Results of Operations - Significant Trends" below) are expected to be
profitable in the future. Although the acquisitions resulted in a significant
use of available cash and in the issuance of long-term and short-term debt, the
earnings potential of these subsidiaries is expected to enhance Oakhurst's
liquidity and financial position in the future.
Further acquisitions may be limited by the Company's available cash,
by its borrowing ability and by limitations on the amount of stock which the
Company may issue without jeopardizing the tax benefits.
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TERM LOAN AND LINE OF CREDIT
In August 1994, SCPI obtained a four year term loan in the amount of
$2,560,000 in connection with Oakhurst's acquisition of Dowling's (the "Term
Loan"), secured by a mortgage on SCPI's real estate, guaranteed by Oakhurst and
its subsidiaries, and supported by a pledge of the capital stock of Oakhurst's
subsidiaries. The Term Loan provides for monthly repayments beginning in
September 1994 and bears interest at a fixed rate of 9.25%.
In August 1994, Oakhurst entered into a two year revolving credit
agreement (the "Credit Agreement") that, until its amendment, provided for
maximum borrowings of $3 million, subject to a borrowing base, and carried an
interest rate of prime plus 1%. The Credit Agreement permits Oakhurst to make
advances from time to time to each of its subsidiaries. At November 30, 1995,
the amount outstanding under the Credit Agreement was $2,500,000.
The Term Loan and the Credit Agreement are cross-collateralized, and
contain various financial covenants. The Credit Agreement was amended during
the third quarter of the current fiscal year to provide for maximum borrowings
of $4 million and to eliminate of all of the financial covenants except for
certain amended subsidiary and consolidated net worth requirements. The Term
Loan was also amended to reflect such revised covenants. Borrowings under the
amended Credit Agreement bear interest at prime plus 1.5%, and are secured by
the accounts receivable, inventory and capital stock of Oakhurst's
subsidiaries. Borrowings may be limited by the borrowing base, as defined in
the Credit Agreement, which is calculated according to the level of Oakhurst's
subsidiaries' accounts receivable. At current and expected levels of accounts
receivable, any such limitation is not expected to reduce the borrowing base
below the maximum.
At November 30, 1995, Oakhurst did not meet the amended consolidated
net worth covenant, and requested a modification of such covenant. The
modification was granted by the bank on January 3, 1996 in exchange for
Oakhurst's and SCPI's agreement to accelerate the maturity date of the Term
Loan to July 31, 1996, and to increase the interest rates on the Term Loan and
borrowings under the Credit Agreement by 1.25% and 1%, respectively, effective
February 28, 1996. Accordingly, the Term Loan has been presented as a current
liability until replacement financing is finalized.
In December 1995, Oakhurst initiated negotiations with several lenders
to obtain replacement financing and on January 8, 1996 accepted a letter of
intent for financing from an institutional lender which is expected to provide
a significant increase in the level of financing available to Oakhurst and its
subsidiaries based upon essentially similar collateral as provided under the
existing bank financing.
Each of Oakhurst's subsidiaries encounters periodic fluctuations in
its working capital requirements, resulting principally from the need to
increase inventory to anticipate seasonal changes in demand, and also from
changes in the levels of accounts receivable and accounts payable. Management
believes that the Credit Agreement is currently adequate for the seasonal needs
of its businesses, and that Oakhurst and SCPI will secure a letter of
commitment on and close a refinancing before February 29, 1996 to replace the
existing bank financing.
THE CREDITOR NOTES
The creditor notes that were issued by SCPI in connection with the
Retail Acquisition Corp. bankruptcy, (the "Creditor Notes") are payable in six
equal annual installments through July 1998, subject to a prepayment provision
whereby if defined cash flow exceeds $900,000, $1,000,000 and $1,100,000 in
each of fiscal 1995, 1996 and 1997, respectively, holders of the Creditor Notes
may tender for prepayment a portion thereof in the amount of the excess defined
cash flow, but not to exceed approximately $400,000 per annum. SCPI did not
meet the prepayment threshold in fiscal 1995, nor does it expect to meet the
fiscal 1996 threshold. The Creditor Notes were discounted using an imputed
interest rate of 7.5% and are included in the net obligation of the
discontinued business segment.
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13
SIGNIFICANT EVENTS AND TRENDS
Arbitration
On July 26, 1995 the Company initiated an arbitration proceeding with
the American Arbitration Association in connection with the August 1994
acquisition by the Company of Dowling's. The Company is seeking rescission of
the acquisition, or in the alternative, damages and indemnification in excess
of $1.6 million. The proceeding is based, among other things, on the Company's
belief that the seller breached certain provisions of the purchase and sale
agreement covering the acquisition by furnishing to the Company financial
information that was materially inaccurate. The seller has denied the
Company's allegation and is seeking payment of amounts due under the purchase
and sale agreement. Arbitration hearings in the matter are scheduled to
commence in early February 1996. If the Company is successful in obtaining a
rescission of the purchase, the Company would receive back the portion of the
purchase price paid and other consideration given at the closing, and would be
relieved of the obligation to pay the balance of the purchase price
(approximately $1 million) over the three-year period following the closing.
SCPI Subsidiary
SCPI's customers are continually affected by changes in the retail
environment, including the recent competitive pressures facing regional mass
merchandisers and the growing influence of automotive specialty chains. These
have led to fluctuations in the level of business that SCPI enjoys with
individual customers. In recent years, SCPI has lost some significant
customers and has suffered reductions in business as certain customers have
closed stores in the face of competition, have been forced into bankruptcy, or
have reduced their automotive merchandise selection. Furthermore, some
customers have changed their buying practices to acquire certain merchandise
direct from manufacturers rather than through distributors such as SCPI.
In July 1993, SCPI's two then largest customers filed for bankruptcy
protection. One of these customers closed all its stores in December 1993; the
other, Jamesway Corporation ("Jamesway") reorganized and emerged from Chapter
11 in January 1995. Jamesway continued to be one of SCPI's largest customers
throughout this period until the second quarter of the current fiscal year,
when management curtailed the level of credit allowed to Jamesway after
becoming aware that it was experiencing new financial difficulties. In October
1995, Jamesway again filed for protection under the U.S. Bankruptcy Code, and
Oakhurst's consolidated results for the nine-month period ending November 30,
1995 include a second quarter provision of $150,000 in relation to the balances
due from Jamesway. The non-collection of this receivable will not have a
significant effect on Oakhurst's working capital. In the seven-month period of
March through September 1995, when sales to Jamesway ended, sales to this
customer were approximately $3.9 million (10% of consolidated sales).
During the third quarter of the current fiscal year, another of SCPI's
largest customers, Forest City Auto Parts, Inc. ("Forest City"), informed SCPI
that it had decided to change its source of supply. Although such change did
not impact the third quarter sales levels, it is expected to be phased in over
the next several months. In the nine month period ending November 30, 1995,
sales to Forest City were approximately $4.3 million (11.3% of consolidated
sales).
In its efforts to help offset these trends, SCPI strengthened its
sales team to help identify new customers and better serve existing customers,
expanded its product offerings to certain customers and enlarged the territory
that it serves. In the current year, SCPI has begun offering "hard parts" such
as brake rotors, and is actively exploring the feasibility of new product
lines. During the current year second quarter, SCPI added two new large
customers (NHD and Ames), but the level of sales to these customers is
currently not sufficient to offset the loss of the Jamesway and Forest City
business. Without further SCPI customer additions, the loss of these two SCPI
customers would lead to a decrease of about 7% in consolidated sales levels in
fiscal 1997 compared with expected consolidated sales levels for the current
fiscal year. In anticipation of such sales reduction, management has taken
immediate steps to reduce SCPI's inventory levels and to eliminate certain
operating expenses and overheads, and has begun a strategic evaluation of
SCPI's existing operating structure.
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14
Dowling's Subsidiary
During the first half of the current year, Dowling's was faced with
intense competitive pressures in one of its markets. Management's efforts to
overcome this competition succeeded in returning sales levels in the second
quarter to within 7% of prior year levels that were achieved by Dowling's
before its acquisition by Oakhurst, and sales results for third quarter of the
current fiscal year exceeded those in the prior year third quarter. This
situation placed pressure on Dowling's gross margins throughout the current
fiscal year, but margins began to improve during the third quarter, when
monthly results demonstrated an upward trend in gross margins earned by
Dowling's. Nevertheless, management does not expect that Dowling's will
realize its full profit potential in fiscal 1996 as a result of this situation.
Puma Subsidiary
Beginning in the first quarter of fiscal 1996, the strong retail
demand for light trucks and sport utility vehicles had an adverse impact on
sales by Puma, because vehicle manufacturers sought to satisfy dealer demand at
the expense of converters, which represent an important segment of Puma's
customers. During the second and third quarters of the current fiscal year,
Puma's sales continued at lower levels than in the prior year. In reaction to
this situation, and in furtherance of Oakhurst's plans to develop the long-term
potential of Puma, management opened a second facility (in Elkhart, Indiana,
center of the vehicle conversion industry) during the second quarter of fiscal
1996, continued to strengthen its management team, especially its sales
department, and has enlarged its product offering and introduced an extensive
catalog. However, management expects that Puma's profits in fiscal 1996 will
be much lower than in the prior year.
H&H Subsidiary
Despite the opening of a new facility in September 1994, sales at H&H
have generally not maintained the levels of the prior year, due to reduced
demand for car accessories and increased competition in the cellular phone
business, combined with a decrease in the rate of cellular phone activation
commissions. These factors have placed pressure on gross margins, although
some improvement in margins has been seen in the third quarter. Management has
increased advertising and promotions for car accessories and has introduced new
accessories to help improve sales.
TAX LOSS CARRYFORWARDS
At December 31, 1994, SCPI had net operating loss carryforwards (the
"Tax Benefits") of approximately $148 million, which expire in the years 2001
through 2005. A change in control of SCPI or Oakhurst exceeding 50% in any
consecutive three-year testing period may lead to the loss of the majority of
the Tax Benefits. In order to reduce the likelihood of such a change of
control occurring, SCPI's and Oakhurst's Certificates of Incorporation include
restrictions on the registration of transfers of stock resulting in, or
increasing, individual holdings exceeding 4.5% of each company's common stock.
Since the regulations governing the Tax Benefits are highly complex
and may be changed from time to time, and since SCPI's and Oakhurst's attempts
to reduce the likelihood of a change of control occurring may not be
successful, management is unable to determine the likelihood of the continued
availability of the Tax Benefits. However, management believes that the Tax
Benefits are currently available in full and intends to take all appropriate
steps to help ensure that they remain available. Should the Tax Benefits
become unavailable to SCPI or Oakhurst, most future income of SCPI and any
consolidated affiliate would not be shielded from federal taxation, thus
reducing funds otherwise available for corporate purposes. In these
circumstances, Oakhurst would be required to record a significant reduction in
the book value of its deferred tax asset.
Oakhurst adopted SFAS 109 effective as of the beginning of 1994, when
it recognized a deferred tax asset, net of a valuation allowance, and recorded
a corresponding increase in additional paid-in-capital. The accounting
treatment to increase additional paid-in-capital results from SCPI's
quasi-reorganization accounting
- 14 -
15
in fiscal 1990. The amount of the valuation allowance was determined by, among
other things, management's estimate of Oakhurst's ability to utilize the net
operating tax loss carryforwards prior to their expiration based on market
conditions at that time. Management performs periodic reviews of the valuation
allowance based on the then current market conditions and trends to determine
if an increase or decrease in its estimate of the recorded valuation allowance
would be appropriate. At February 28, 1995, Oakhurst had a remaining deferred
tax asset of approximately $6.1 million, net of the valuation allowance.
Management is currently evaluating the impact of recent trends
affecting the Company's subsidiaries (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Significant Events and
Trends"). This analysis is being undertaken to determine the likely future
level of SCPI's revenues, to evaluate future customer and product opportunities
to project whether, and if so when, SCPI may expect a return to its historical
levels of sales. Management is also undertaking a strategic evaluation of
SCPI's operations to determine how they may be restructured to reflect the
current level of SCPI's sales, and is currently analyzing Oakhurst's other
subsidiaries' businesses to better anticipate the future revenue and profit
levels that are likely to be realized by such subsidiaries.
While these evaluations are expected to be completed during the fourth
quarter of the current fiscal year, management's initial estimate of the
current impact of these events on the deferred tax asset valuation allowance
resulted in an increase of $2 million in such allowance, with a corresponding
charge to deferred tax expense in third quarter of the current fiscal year. If
future profit levels exceed current expectations, 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 aforementioned charge to
deferred tax expense.
RESULTS OF OPERATIONS
Operations in fiscal 1996 include the results of SCPI, H&H, Dowling's,
Puma, and the administrative costs of Oakhurst; operations in fiscal 1995
include SCPI and H&H, together with the results of Dowling's and Puma for the
four-month and two-month periods of ownership, respectively, and the
administrative costs of Oakhurst. In the nine-month period of the current
fiscal year, there were two fewer days than in the prior year period; the
effect of this on results of operations was not material.
THREE MONTHS ENDED NOVEMBER 30, 1995 COMPARED WITH THIRTEEN WEEKS ENDED
NOVEMBER 26, 1994
Compared with the prior year, sales increased by $251,000. Increased
sales of $75,000 resulted from the Oakhurst acquisition of Puma during fiscal
1995, with the remaining increase attributable to sales by existing businesses.
Sales attributable to SCPI increased by $382,000 in the current year
third quarter when compared to the prior year third quarter. New customers
added since the prior year accounted for $910,000 during the quarter and sales
increases to existing customers were $322,000. SCPI's sales to Jamesway
represented an increase of $150,000 over the prior year, but sales to this
customer were suspended in October 1995, and the remaining sales increases to
SCPI's existing customers resulted from expanded sales efforts. Sales
decreases attributable to SCPI aggregating $850,000 resulted from lower sales
to customers that are facing increasing competitive pressures, have downsized
or eliminated their automotive departments, or that have filed bankruptcy, and
to two of its customers that have changed their source of supply. Sales
attributable to Dowling's increased over the prior year by approximately
$60,000.
These increases were partially offset by decreases in sales
attributable to H&H of about $265,000, with approximately 70% of the decrease
attributed to reduced equipment sales and commission revenues associated with
H&H's cellular phone business, as a result of aggressive competition combined
with a reduced commission structure related to cellular activations. The
balance of the reduction results from lower sales of car accessories due to
soft demand.
- 15 -
16
Other income decreased by $187,000 compared with the prior year third
quarter, in which SCPI recovered $175,000 that had been placed into escrow as a
part of SCPI's predecessor's 1989 bankruptcy proceeding.
Consolidated gross profits were $2.5 million (21.4% of sales),
compared with $2.9 million (26% of sales) last year. The decrease in gross
profits was largely due to lower contributed gross profits by H&H and Puma, of
$200,000 and $115,000, respectively. The decrease in gross profit attributable
to H&H resulted from lower sales combined with lower gross margins, primarily
due to increased promotions. The decreased profits attributable to Puma
resulted from lower gross margins, as Puma sought to offset reduced demand from
its converter customers while absorbing increased costs from certain
manufacturers. A further reduction in consolidated gross margin percentage was
attributable to Dowling's; its margins were lower by over 4% than those it
achieved in the prior year due to aggressive competition, although this
situation had begun to improve during the third quarter.
Operating, selling and administrative expenses increased by $364,000.
Approximately $130,000 is attributable to Puma, which was acquired during the
third quarter of the prior year, and $115,000 is attributable to SCPI.
Increased operating and selling expenses resulted from SCPI's efforts to
increase sales levels together with expenses necessary to support the higher
sales volume in the current year third quarter, but this was partially offset
by lower administrative expense, reduced profit sharing contributions, and
lower executive salaries attributable to SCPI. The remaining increase
primarily reflects corporate overheads necessitated by the larger company.
Interest expense increased by $40,000 principally as a result of the
debt incurred in connection with the acquisitions and higher working capital
borrowings.
In summary, there was a loss before taxes of $466,000 in the third
quarter this year, compared with income before taxes of $621,000 in the prior
year. Operating profits contributed by existing businesses was $633,000 lower
than in the prior year, due to a non-recurring recovery of $175,000 in the
prior year, to the effect of reduced sales by H&H, combined with lower margins
earned by SCPI and H&H, and to higher SCPI operating and selling expenses.
Although the period of ownership of Puma was one month less in the prior year,
its profit contribution was $255,000 lower in the current year third quarter,
due primarily to lower gross margins. There were also small increases in
goodwill amortization, interest and overhead expenses, which resulted primarily
from the acquisitions.
Although there was a loss from continuing operations in the current
year third quarter, compared with income in the prior year, income tax expense
increased by $1.7 million because of a charge to deferred tax expense of $2
million that resulted from an increase in the valuation allowance of the
deferred tax asset.
NINE MONTHS ENDED NOVEMBER 30, 1995 COMPARED WITH THIRTY-NINE WEEKS ENDED
NOVEMBER 26, 1994
Compared with the prior year, sales increased by approximately $7
million, or 22.6%. Increased sales of about $8.2 million resulted from the
acquisitions by Oakhurst during fiscal 1995 of Dowling's ($4.5 million) and of
Puma ($3.7 million). Sales by existing businesses decreased by approximately
$1.2 million.
Compared with the prior year, sales attributable to SCPI decreased by
about $510,000. SCPI sales increases aggregating $2.9 million resulted
primarily from the addition of several new customers, together with higher
sales to several customers, including Jamesway, but sales to this customer
ended in September 1995. These sales increases were offset by decreases by
SCPI of $3.4 million, with over half of the reduction attributable to SCPI's
smaller customers, and to reduced sales in the Northeast market. These reduced
sales resulted from intense competitive pressures on those customers, and
reduced sales of spring product lines due to a rainy spring season. The
remainder of the decrease resulted from lower sales to customers that have
downsized or eliminated their automotive departments, have filed bankruptcy, or
that have changed their source of supply.
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Sales attributable to H&H decreased by about $650,000, despite the
opening of a second location in September 1994. Approximately 60% of the
decrease is attributed to reduced equipment sales and commission revenues
associated with H&H's cellular phone business as a result of aggressive
competition in the current year, combined with a reduced commission structure
related to cellular activations. The balance of the reduction is due to lower
sales of car accessories and lower installation fees earned.
Consolidated gross profits were $8.2 million (21.5% of sales),
compared with $7.8 million (25.2% of sales) last year. The increase in gross
profits resulted from the acquisitions. However, the decrease in the gross
margin is also attributable to profits earned by the acquired subsidiaries;
such profits were at lower rates than had been earned by the Company in the
prior year. Dowling's was affected by increased competition this year, and
Puma lowered pricing to many of its customers, while absorbing certain
manufacturers' price increases.
Excluding the two acquisitions, gross profits on existing businesses
decreased by about $700,000, due to lower sales combined with a decrease in
gross margins. The decrease in gross margin largely resulted from lower
margins earned by H&H, primarily because of increased promotions.
Operating, selling and administrative expenses increased by $2.1
million. Approximately $1.6 million is attributable to the two businesses
acquired in the prior year. SCPI's operating and selling expenses increased by
$113,000, and resulted from SCPI's efforts to increase sales levels, but this
was partially offset by lower administrative expense, reduced profit sharing
contributions, and lower executive salaries attributable to SCPI. The
remaining increase primarily reflects corporate overheads necessitated by the
larger company.
There was an increase in the provision for doubtful accounts of
$288,000 when compared with the prior year, primarily attributable to SCPI; the
provision was increased by $150,000 in connection with the balances due from
Jamesway (one of SCPI's largest customers) at the end of the current year
second quarter, and by $117,000 for the bankruptcies of four of SCPI's small
customers that occurred during the current fiscal year.
Amortization of the excess of costs over net assets acquired
("goodwill") increased by $219,000 compared with the prior year, as a result of
the acquisitions in fiscal 1995.
Interest expense increased by $341,000 principally as a result of the
debt incurred in connection with the acquisitions and higher levels of working
capital borrowings.
In summary, there was a loss before taxes of $1.1 million this year
compared with income before taxes of $1.7 million in the prior year. Operating
profits contributed by SCPI and H&H were about $1.4 million lower than last
year, due primarily to the effect of reduced sales, reduced margins earned by
H&H, increased SCPI selling expenses, and a large addition by SCPI to its
provision for doubtful accounts. Dowling's incurred a small loss in the
current year period, due to increased competition, compared with a profit in
the prior year, adding approximately $395,000 to the profit variance.
Accordingly, the results of the newly-acquired companies were more than offset
by the increases in goodwill amortization, interest and overhead expense which
resulted from the acquisitions, and there was a significant reduction in profit
contribution by existing businesses.
Although there was a loss from continuing operations in the current
fiscal year, compared with income in the prior year, income tax expense
increased by $1.3 million because of a current year charge to deferred tax
expense of $2 million that resulted from an increase in the valuation allowance
of the deferred tax asset.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the legal proceeding that was
reported in the Company's Form 10-Q for the period ended August 31, 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter for which this report is filed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter agreement dated January 3, 1996 between SCPI
and Integra Bank Pittsburgh amending the Credit
Agreement, dated August 1, 1994 between SCPI and
Integra - filed as exhibit #10.17 to Oakhurst's
Registration Statement on Form S-1, file number
#333-00173, filed on January 12, 1996.
10.2 Letter agreement dated January 3, 1996 between
Oakhurst and Integra Bank Pittsburgh amending the
Credit Agreement, dated August 1, 1994 between
Oakhurst and Integra - filed as exhibit #10.16 to
Oakhurst's Registration Statement on Form S-1, file
number #333-00173, filed on January 12, 1996.
27. Financial Data Schedule (EDGAR transmission only)
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
OAKHURST COMPANY, INC.
Date: January 18, 1996 By: /s/ Mark Auerbach
--------------------------------
Mr. Mark Auerbach
Chief Executive Officer
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
10.1 Letter agreement dated January 3, 1996 between SCPI and
Integra Bank Pittsburgh amending the Credit Agreement, dated
August 1, 1994 between SCPI and Integra - filed as exhibit
#10.17 to Oakhurst's Registration Statement on Form S-1, file
number #333-00173, filed on January 12, 1996.
10.2 Letter agreement dated January 3, 1996 between Oakhurst and
Integra Bank Pittsburgh amending the Credit Agreement, dated
August 1, 1994 between Oakhurst and Integra - filed as exhibit
#10.16 to Oakhurst's Registration Statement on Form S-1, file
number #333-00173, filed on January 12, 1996.
27. Financial Data Schedule (EDGAR transmission only)