SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 0-12977
PEGASUS INDUSTRIES, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Nevada 95-3599648
- ------------------------ ----------------------
(State or other jurisdiction) (I.R.S. Employer
Identification Number)
400 N. St. Paul, Suite 950, Dallas, TX 75201
--------------------------------------------
(Address of principal executive offices)
(214) 520-8300
-------------------------------
(Registrant's telephone number)
Title of each class Name of each exchange on which
to be so registered each class is to be registered
- ------------------- ------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $0.01
----------------------------
(Title of Class)
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
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 this form 10-K or any amendment to this
form 10-K. [ X ]
<PAGE>
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
Yes X No
The number of shares of Common Stock outstanding as of December 31, 1997 was
14,343,091 shares, $0.01 par value.
2
<PAGE>
PEGASUS INDUSTRIES, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Pegasus Industries, Inc., formerly known as Pathfinder Corporation, a Nevada
corporation (the "Company") is a holding company that, prior to February 1995
had no operating activities. As discussed below, the Company made a series of
acquisitions prior to 1995 which were later rescinded, or alternatively are
inactive and carried at no value on the Company's financial statements. In
February 1995 the Company acquired Zearl T. Young, Incorporated ("ZTY") and
experienced a change in both management and ownership control in connection with
the acquisition. (See "Acquisition of ZTY" below).
The Company was originally incorporated as a Nevada corporation on November 1968
under the name Helistructures Corporation as a wholly owned subsidiary of
American International, Inc. (formerly American Mining and Development Company).
In January 1974, the Company changed its name from Helistructures Corporation to
Midas International and in 1982 the name was changed from Midas International,
Inc. to MII, Inc.
In December 1985 the Company filed for bankruptcy protection under Chapter 11 of
the U.S. Bankruptcy Code in the Central District of California. In December
1990, pursuant to the Plan of reorganization of the Company approved by the
Bankruptcy court, the Company issued 19,454,000 shares of common stock to
unsecured creditors for cancellation of $1,018,000 in debt. In August 1990 the
Company changed its name from MII, Inc. to Pathfinder Corporation. In 1990 the
Company initiated a reverse stock split whereby all outstanding shares were
reversed by a factor of 1 for 100 with the stipulation that no shareholder be
reduced to less than 10 post-split shares. In connection with this stipulation,
the Company issued 48,576 pre-split common shares. From 1973 to 1991 the
Company's activities consisted primarily of the management of its interests in
various uranium mining claims.
On March 13, 1995 the Company changed its name from Pathfinder Corporation to
Pegasus Industries, Inc. in connection with the acquisition of ZTY and the
resulting change of control. Additionally, the Company's executive offices were
moved to Dallas, Texas as a result of the change in control.
Acquisition and Disposition of Oil and Gas Interest
- ---------------------------------------------------
n September 1992 the Company acquired certain oil and gas producing properties
for 699,997 shares of its common stock. In 1994 the Company rescinded the
acquisition and cancelled the 699,997 shares of stock it issued due to
difficulties the Company encountered in obtaining clear title to the oil and gas
properties.
3
<PAGE>
In January 1994, the Company authorized the purchase of an office building
valued at $700,000 for 700,000 shares of common stock of the Company from
certain officers and directors of the Company. In February 1994 the Company
rescinded the transaction and cancelled all 700,000 shares of stock issued
related to the purchase.
Acquisition of Zearl T. Young, Incorporated and Change of Control
- -----------------------------------------------------------------
Effective February 28, 1995, the Company acquired 100% of the outstanding common
stock of Zearl T. Young, Incorporated ("ZTY") from Pegasus Ventures, Inc.
("Ventures"), a privately held Texas corporation, pursuant to a Stock Exchange
Agreement in exchange for the issuance of 11,500,000 shares of the Company's
common stock.
In connection with the transaction, Mr. Boudreau and Mr. Schleizer were elected
to fill two of the three seats of the Company's board of directors. Kevin
Chisholm, a certified public accountant in private practice, was elected to fill
the remaining seat. Mr. Boudreau was subsequently elected by the Company's
board to fill the positions of Chairman of the Board, President and Secretary of
the Company. Mr. Schleizer was elected Chief Financial Officer and Treasurer of
the Company. Mr. Boudreau resigned his position as President and Director
effective December 31, 1995. Mr. Chisholm resigned his position as director
effective the same date.
ZTY liquidated its assets in August and September 1997 under a Liquidation
Agreement with its primary secured lender. ZTY closed the remaining stores in
September 1997 after auctioning off its remaining assets.
The Company purchased certain written off accounts receivable from ZTY in
October 1995 for $300,000 which ZTY utilized to pay down its indebtedness as
part of a loan restructuring. The Company continues to collect those accounts
as its sole ongoing business activity.
Environmental Matters
- ---------------------
Compliance with the applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position.
Competition
- -----------
The retail merchandise trade in which ZTY was engaged is highly competitive.
ZTY was unable to successfully compete due to increased competition from
discount retailers and small loan companies. Despite several attempts to
restructure its indebtedness and raise equity, ZTY ceased operations in
September 1997.
4
<PAGE>
The Company continues to collect the accounts purchased in October 1995 from
ZTY. Inasmuch as the sole function of the Company is collection of bad debts
from specific customers, it faces no direct competition. The Company is
offering no new financing or products for sale.
Employees
- ---------
As of December 31, 1997, ZTY employed 1 person in New Mexico engaged in
collecting accounts. The Company currently has one employee in Dallas, Texas in
an executive capacity.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are at 400 N. St. Paul, Suite 950, Dallas, Texas
75201.
ZTY owned a 5,500 square foot office building in Hobbs, New Mexico that served
as its corporate office which it abandoned to the secured lender in September
1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through solicitation of proxies or
otherwise.
5
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock, $.01 par value ("Common Stock") is traded on an
interdealer basis under the symbol PIND (formerly "PTHF"). The following table
set forth the high and low bid price of the Common Stock for the period
indicated as quoted from the NASDAQ Bulletin Board Listing.
<TABLE>
<CAPTION>
Fiscal 1997 Low Bid High Bid
----------- ------- --------
<S> <C> <C>
1st Quarter .31 .31
2nd Quarter N/A N/A
3rd Quarter .03 .03
4th Quarter .03 .03
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996 Low Bid High Bid
----------- ------- --------
<S> <C> <C>
1st Quarter .12 .56
2nd Quarter .06 .06
3rd Quarter .06 .06
4th Quarter .07 .08
</TABLE>
There is an absence of an established public trading market, therefore the
market forthe Common Stock is limited, sporadic and highly volatile.
Though no dividend restrictions exist relative to the Company's paying cash
dividends, the Company has never paid cash dividends on its stock and does not
anticipate doing so in the foreseeable future. Rather,the Company has
determined to utilize any earnings in the operation of its business. Such
policy is subject to change based on current industry and market conditions, as
well as other factors beyond the control of the Company.
As of December 31, 1997, there were 6,221 shareholders of record of the Common
Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of significant factors
which have affected registrant's financial position and operations during the
year ended December 31, 1997 as compared to December 31, 1996.
6
<PAGE>
In September 1997 the Company liquidated the assets of its wholly owned
subsidiary Zearl T. Young, Inc. ("ZTY") under an agreement with ZTY's secured
lender. ZTY ceased operations on September 6, 1997. Accordingly, the following
discussions of the Company's Consolidated Statement of Operations and Liquidity
and Capital Resources has been restated for the years ended December 31, 1997
and December 31, 1996 reflecting the operation of ZTY as a loss from
discontinued operations.
Results of Operations
- ---------------------
Financing Income for the year ended December 31, 1997 was $123,006 as compared
to $162,079 for the prior year. The 24% decrease is primarily due to the
business disruption of the store closings of ZTY resulting in loss of employees
and a move to a new location in Hobbs, New Mexico.
Interest expense decreased from $23,465 to $15,855 for the year due to a
reduction in the Company's note payable.
Expenses were $64,085 for 1997 as compared to $77,511 for the prior year due to
reduced staff. Operating Income for 1997 was $43,066 compared to $61,103 for the
earlier year.
The Company reported a loss from discontinued operations in 1997 of $2,859,234
which was due primarily to the closing of ZTY's business in September 1997. The
loss included a $1,154,112 loss on the sale of ZTY's contract finance
receivables on August 5, 1997. ZTY sold the portfolio which has a face value of
$3,630,305 and a book value of $2,914,810 for $1,760,698 to World Acceptance
Corp., a company based in North Carolina. The loss compared to a restated loss
from discontinued operations of $2,376,722 reflecting ZTY's net operating
results for 1996.
Liquidity and Capital Resources
- -------------------------------
Total Assets for the year ended December 31, 1997 decreased to $37,751 from
$5,217,801 at December 31, 1996 reflecting the liquidation of substantially all
of the Company's assets which were held by ZTY.
Total liabilities at December 31, 1997 total $5,296,752 of which $5,165,637
represent unpaid obligations of ZTY for which the parent corporation is not
responsible for and is not obligated to pay. Liabilities of the Company,
excluding ZTY total $131,115 of which $129,821 represents a note payable by the
Company to a lender under a term agreement requiring payments of $5,000 per
month increasing to $8,000 per month by December 31, 1998. The Company is
current on its obligations at December 31, 1997.
7
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SELECTED FINANCIAL DATA
The following selected financial data of the Company for fiscal years 1997, 1996
and 1995 should be read in conjunction with the financial statements and related
notes included in Item 8 of this Form 10-K. (See "Financial Statements and
Notes Thereto").
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income Statement Data:
Revenues 123,006 162,079 57,080
Net Income (Loss) 40,221 61,863 110,198
Net Income (Loss) from
discontinued operations (2,859,234) (2,376,722) (1,565,664)
Net Income (Loss) per share (.20) (.16) (.10)
Dividends per share - - -
Weighted average shares
outstanding 14,343,091 14,347,621 14,352,151
Balance Sheet Data:
Total Assets 37,751 5,217,801 8,874,210
Long Term Debt -0- -0- 286,828
Stockholder's Equity (6,387,371) (3,568,358) (1,253,499)
</TABLE>
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for financial data for comparable periods.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTABILITY AND FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with its independent
auditors during the fiscal year ended December 31, 1997.
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
As of December 31, 1997, following were the directors and officers of the
Company:
<TABLE>
<CAPTION>
Name Age Position Term
- ---- --- -------- ----
<S> <C> <C> <C>
Robert W. Schleizer 44 President, Treasurer and Sole 1/95 - Present
Director
</TABLE>
8
<PAGE>
Compliance with Section 16(a)
- -----------------------------
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") requires
the Company's directors, officers and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Directors, officers and greater than ten percent beneficial owners are required
by applicable regulations to furnish the Company with copies of all forms they
file with the Commission pursuant to Section 16(a). The Company is not aware of
any beneficial owner of more than ten percent of its registered Common Stock for
purposes of Section 16(a).
Based solely upon a review of the copies of the forms furnished to the Company,
the Company believes that during 1997 all filing requirements applicable to its
directors and executive officers were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
Executives received compensation from the Company during 1997 as follows:
<TABLE>
<CAPTION>
Summary Compensation Table
---------------------------
Annual Compensation Long Term Compensation All other
------------------- --------------------------- Compensation
Awards Payouts ------------
Name and Other Restricted
Principal Annual Stock Options/LTIP
Position Year Salary($) Bonus($) Comp($) Award(s)(1) SARs(#) Payouts($)
- ---------- ----- --------- ------- ------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert W.
Schleizer,
President 1997 $100,000 -0- -0- -0- -0- -0-
David
Donahue
Chief Financial
Officer 1997 $17,500 -0- -0- -0- -0- -0-
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1997 there were 14,343,091 common shares of the Company, the
Company's only class of voting securities. The Company has no knowledge of any
arrangements which could affect the Company.
The following table will identify as of December 31, 1997, the number and
percentage of outstanding shares of common stock owned by (i) each person known
to the Company who owns more than five percent of the outstanding common stock,
(ii) each officer and director of the Company, and (iii) officers and directors
of the Company as a group:
9
<PAGE>
<TABLE>
<CAPTION>
Name of Beneficial Owner Amount of Ownership Percent of Class
<S> <C> <C>
Pegasus Ventures, Inc.* 6,495,000 45%
David Donahue -0- 0%
John R. Boudreau Separate
Property Living Trust* 1,995,840 14%
The Schleizer Family Trust* 1,995,840 14%
All Executive Officers/
Directors as a Group
(3 persons) 10,486,680 73%
</TABLE>
*Mssrs. Boudreau and Schleizer each beneficially own 50% of the common stock of
Ventures which owns the 45% interest in the Company per the above table. In
March 1996, Ventures distributed 1,995,840 shares of the Company stock to the
John R. Boudreau Separate Property Living Trust and 1,995,840 shares to The
Schleizer Family Trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases office space and equipment from an affiliated company owned
by a shareholder for $750 per month. The Company also utilizes the same
affiliate to perform accounting and administrative services on a contractual
basis. Compensation paid to such affiliate in 1997 was $3,905.
10
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS
ON FORM 8-K
Documents filed as part of this report:
(a) Financial Statements
Statement Name Page No.
Pegasus Industries, Inc.
Report of Independent Certified Public Accountants............ F-1
Balance Sheet................................................. F-2
Statement of Operations....................................... F-3
Statement of Stockholders' Equity............................. F-5
Statement of Cash Flows....................................... F-6
Notes to Financial Statements................................. F-8
(b) Reports on Form 8K
None
(c) Exhibits
Zearl T. Young, Incorporated
Liquidation Agreement................................................... 30
Zearl T. Young, Incorporated dba Western Auto Auction Sales Summaries .. 35
Norwest Letter - Sales of Accounts Receivable........................... 37
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 on March 2, 1998.
11
<PAGE>
PEGASUS INDUSTRIES, INC.
By: /s/ Robert W. Schleizer
------------------------------
Robert W. Schleizer, President
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 capacities and on the dates indicated.
/s/ Robert W. Schleizer
- ------------------------------
Robert W. Schleizer, President (1)
April 13, 1998
(1) Principal executive officer
12
<PAGE>
26th PLACE
2601 E. THOMAS RD. PHONE: (602) 266-2646
Clancy and Co., P.L.L.C. SUITE 110 FAX: (602)224-9496
Certified Public Accountants PHOENIX, AZ 85016 E-MAIL: [email protected]
INDEPENDENT AUDITORS REPORT
Board of Directors
Pegasus Industries, Inc.
Dallas, Texas 75201
We have audited the accompanying consolidated balance sheet of Pegasus
Industries, Inc., as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. these financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pegasus Industries, Inc., as of
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raises doubt about the Company's ability to continue
as a going concern. Management's plan in regard to these matters is also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Clancy and Co.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
March 3, 1998
F-1
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash $ 31,457 $ 132,162
Securities - Trading 6,039 0
Receivables (Note 3) 0 2,988,990
Inventories (Note 2) 0 624,141
Investment in Cooperative Securities 0 23,931
Prepaid Expenses 0 11,809
-------- -----------
Total Current Assets 37,496 3,781,033
Property and Equipment, Net (Note 5) 255 274,363
Other Assets
Noncurrent Portion of Financing Receivable
(Note 6) 0 1,102,395
Cash Value of Life Insurance, Net of Policy
Loans of $0 in 1997 and $1,027,894 in 1996,
(Face Value of Approximately $7,600,000)
(Note 9) 0 60,010
-------- -----------
Total Other Assets 0 1,612,405
-------- -----------
Total Assets $ 37,571 $5,217,801
======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Liabilities
Principal Subsidiary
Trade Accounts Payable (Note 8) $ 687,103 $ 556,144
Other Liabilities 135,640 133,105
Short-Term Debt (Note 9) 4,342,897 6,411,325
Accrued Expenses 0 367,523
----------- ------------
Total Principal Subsidiary Current Liabilities 5,165,640 7,468,097
Parent Company
Trade Accounts Payable (Note 9) 0 1,274
Short-Term Debt (Note 9) 129,821 172,803
Accrued Expenses 1,291 15,615
---------- ------------
Total Parent Company Current Liabilities 131,112 189,692
---------- ------------
Total Current Liabilities 5,296,572 7,657,789
---------- ------------
Total Liabilities 5,296,752 7,657,789
Preferred Stockholders' Equity in Subsidiary
(Note 10) 1,128,370 1,128,370
Stockholders' Equity
Common Stock, Par Value $.01, Authorized
50,000,000 Shares Issued and Outstanding,
14,343,091 Shares at December 31, 1997
and 14,343,091 at December 31, 1996 143,431 143,431
Additional Paid-In Capital 58,536 58,536
Retained Earnings - A Deficit (6,589,338) (3,770,325)
----------- -----------
Total Stockholders' Equity (6,387,371) (3,568,358)
----------- -----------
Total Liabilities and Stockholders Equity $ 37,571 $ 5,217,801
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Financing Income $ 123,006 $ 162,079
Cost of Financing
Interest Expense 15,855 23,465
----------- -----------
Net Financing Income 107,151 138,614
Expenses
General and Administrative 64,085 77,511
----------- -----------
Operating Income 43,066 61,103
Other Income (Expense)
Loss on Sale of Securities (1,606) 0
Temporary Decrease in Market Value of
Marketable Securities. (2,371) 0
Interest Income 1,132 760
Loss from Discontinued Operations (2,859,234) (2,376,722)
----------- -----------
Total Other Income (Expense) (2,862,079) (2,375,962)
----------- -----------
Net Loss $(2,819,013) $(2,314,859)
============ ============
Net Loss Per Share:
Continuing Operations $ (0.00) $ (0.00)
Discontinued Operations (0.20) (0.16)
------------ ------------
Net Loss (0.20) (0.16)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Paid-In Earnings-
Capital A Deficit Total
<S> <C> <C> <C> <C> <C>
Balance-
December 31,
1995 14,352,151 $ 143,521 $ 58,466 $(1,455,466) $(1,253,499)
Shares Canceled (9,060) (90) 90 0 0
Net Loss Year
Ended December
31, 1996 0 0 0 0 0
------ ------- ------- ------------ -----------
Balance-
December 31,
1996 14,343,151 143,431 58,536 (3,770,325) (3,568,358)
Net Loss Year
Ended December
31, 1997 (2,819,013) (2,819,013)
------ ------- ------- ----------- -----------
Balance-December
31, 1997 14,343,091 $143,431 $58,536 $(6,589,338) $(6,387,371)
========== ======== ======= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating
Activities
Net Loss $(2,819,013) $(2,134,859)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities
Depreciation 400 79,077
Changes in Operating Assets and Liabilities
Receivables 4,091,385 2,990,466
Inventories 624,141 402,350
Investment in Cooperative Securities 23,931 (7,381)
Prepaid Expenses 11,809 207,836
Cash Value of Life Insurance 60,010 (15,140)
Deferred Tax Benefit 0 60,152
Trade Accounts Payable 129,685 (237,907)
Other Liabilities 2,535 33,884
Accrued Expenses (381,847) 244,042
---------- ----------
Total Adjustments 4,562,049 3,757,379
---------- ----------
Net Cash Flows Provided by Operating Activities 1,743,036 1,442,520
Cash Flows From Investing Activities
Capital Expenditures 0 (2,571)
Sale of Capital Assets 273,708 0
Purchase of Securities (6,309) 0
--------- ----------
Net Cash Flows Provided by (Used In)
Investing Activities 267,669 (2,571)
Cash Flows From Financing Activities
Cash Received from Borrowings 0 63,436
Repayments on Long Term Debt (2,111,410) (1,445,005)
----------- -----------
Net Cash Flows Used in Financing Activities (2,111,410) (1,381,569)
Increase (Decrease) in Cash (100,705) 58,380
Cash, Beginning of Year 132,162 73,782
----------- ------------
Cash, End of Year $ 31,457 $ 132,162
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Supplemental Information:
Interest Expense Paid $ 725,937 $ 604,444
========= =========
Income Taxes Paid $ 0 $ 0
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - ORGANIZATION
------------
Pegasus Industries, Inc. (The Company), was incorporated under the name
Helistructures Corporation on November 25, 1968 under the laws of the State of
Nevada with an authorized capital of 2,500 shares of common stock with no par
value. On January 12, 1973, the Company filed restated Articles of Incorporation
changing its name to Midas International, Inc. and increasing its authorized
capital to 125,000 shares of common stock with a par value of $.20. The restated
articles supersede the original Articles of Incorporation and all amendments
heretofore made thereto prior to this date.
On December 14, 1982, the Company amended its Articles of Incorporation changing
its name to MII Holdings, Inc. and increasing its capital to 20,000,000 shares
of common stock with a par value of $.01.
In December, 1985, the Company applied for and was allowed protection under
Chapter 11 of the Bankruptcy Court in the Central District of California. On
December 19, 1989, the Bankruptcy court accepted the Order of Confirmation of
the Trustee's second amended Chapter 11 plan of Reorganization which in effect
returned all assets of the Company to creditors for cancellation of all debt.
The Company issued a total of 19,454,500 shares of common stock to the unsecured
creditors for cancellation of $1,018,000 of debt.
On January 19, 1990, the Company amended its Articles of Incorporation
increasing its authorized capital to 50,000,000 shares of common stock with a
value of $.01.
On August 7, 1990, the Company amended its Articles of Incorporation changing
its name to Pathfinder Corporation and authorizing a reverse split of 100 to 1
with the stipulation that no shareholders be reduced to less than 10 shares, the
Company issued an additional 48,576 shares to maintain the 10 share minimum.
On September 30, 1992, the Company acquired oil and gas producing properties for
699,997 shares of common stock. On September 12, 1994, the purchase agreement
was rescinded and the shares of common stock were returned and canceled.
On March 30, 1995, the Company amended its Articles of Incorporation changing
its name to Pegasus Industries, Inc.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses from
operations, has a net capital deficiency and is in several loan agreement items,
that raises doubt about the Company's ability to continue as a going concern.
F-8
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - ORGANIZATION (CONTINUED)
------------------------
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The Company's principal subsidiary ceased operations on September 6, 1997.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
A. Basis of Financial Statement Presentation
-----------------------------------------
The records of the Company (A Corporation) are maintained using the accrual
method of accounting.
B. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Zearl T. Young, Inc. Intercompany
transactions have been eliminated in consolidation.
C. Company's Activities and Operating Cycle
----------------------------------------
The Company's business consists of the sale of retail consumer products,
primarily consumer durable goods such as furniture, appliances, carpets and
electronics and the related financing of those purchases with consumer finance
contracts. The Company experiences the normal cyclical fluctuations of most
retailers with operations during the fourth quarter (October through December)
comprising a disproportionate portion of its annual revenues and gross profits.
D. Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash and cash equivalents.
E. Inventories
-----------
The Company determines its inventory using the lower of cost (first-in, first-
out) or market.
F-9
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
F. Property, Equipment and Depreciation
------------------------------------
The cost of property and equipment is depreciated over the useful lives of the
related assets. The straight line method is utilized for substantially all
assets for financial reporting, but accelerated methods are used for income tax
reporting. The estimated lives used in determining depreciation are:
<TABLE>
<CAPTION>
<S> <C>
Buildings and Improvements 30 Years
Furniture, Fixtures and Equipment 5-15 Years
Automobiles and Trucks 3-5 Years
</TABLE>
G. Investment in Life Insurance
----------------------------
The Company's investment in corporate owned life insurance policies is reported
net of policy loans. The net life insurance expense, including interest
expense, is included in General and Administrative Expense in the Statement of
Operations. The policies have been pledged to lenders. During September 1997,
the policies were assigned to lenders in connection with the closing of the
Company's principal segment.
H. Earnings or (Loss) Per Share
----------------------------
Earnings or (loss) per share is computed using the weighted averaged number of
shares of common stock outstanding.
I. Use of Estimates
----------------
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
J. Presentation
------------
Certain accounts from prior years have been reclassified to conform with the
current year's presentation.
K. Pending Accounting Pronouncements
---------------------------------
It is anticipated that current pending accounting pronouncements will not have
an adverse impact on the financial statements of the Company.
F-10
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 3 - RECEIVABLES
-----------
During the year ended December 31, 1996, the Company's revenue and receivables
were from retail sales to customers in the Lea County, New Mexico trade area
through several retail outlets selling a variety of merchandise and services.
During September 1997, this segment of the Company's business was closed.
Receivables consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Open Trade Accounts $ 25,947
Employees' Accounts 134,466
Less Allowance for Doubtful Receivables (11,302)
---------
149,111
Current Portion of Financing:
Contracts Receivable 3,097,684
Less Allowance for Doubtful Collections (257,805)
---------
2,839,879
---------
$2,988,990
==========
</TABLE>
The following is an aging of receivables at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Current $3,258,097
1-30 days 626,831
31-60 days 259,697
61-90 days 102,818
91 and over 212,582
----------
Total 4,460,025
Less Allowance for Doubtful Accounts (368,640)
----------
Total 4,091,385
==========
</TABLE>
NOTE 4 INVESTMENT IN COOPERATIVE SECURITIES
------------------------------------
In 1996, the Company did business with a supplier which operated as a
cooperative. Under the cooperative structure, purchasers received restricted
stock and notes. The stock and notes are recorded at cost by the Company. The
stock is subject to certain buy-sell restrictions. The notes have maturities
dated December 31,1999. During September 197, this segment of the Company's
business was discontinued. The balance is as follows at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Notes $ 3,480
Stock 20,451
-------
Total 23,931
=======
</TABLE>
F-11
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 5 PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Buildings $ $ 50,000
Leasehold Improvements 176,767
Equipment 501,376
Furniture and Fixtures 1,945 302,578
Automobiles and Trucks 241,191
----- ----------
Less Accumulated Depreciation 1,945 1,271,912
Net Book Value 1,690 997,549
----- ----------
$ 255 274,363
====== ==========
</TABLE>
Depreciation expense charged to operations in 1997 and 1996 was $400 and
$79,077, respectively.
Expenditures for repairs and maintenance and minor renewal and improvements are
charged to operations in the year incurred. Major renewals and improvements are
capitalized. During September 1997, all of the property and equipment of this
segment of the Company's business was sold.
NOTE 6 FINANCING CONTRACTS RECEIVABLE
------------------------------
The Company finances customer purchases on various terms not exceeding 36
months. Interest charged varies and currently is 21%. There were 9,699
customer contracts outstanding at December 31, 1996. The contracts are secured
by furniture, appliances or other consumer products purchased. On August 5,
1997, the Company sold all Financing Contracts receivable. During September
1997, this segment of the Company's business was discontinued. At December 31,
1996, the balance consists of:
<TABLE>
<CAPTION>
<S> <C>
Financing Contracts $ 5,435,629
Less Unearned Finance and Insurance Charges (975,604)
------------
4,460,025
Less Allowance for Doubtful Accounts (368,640)
------------
Total $4,091,385
============
Current Portion $2,988,990
Noncurrent Portion 1,102,395
------------
$4,091,385
============
</TABLE>
F-12
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 7 - INCOME TAXES
------------
As of December 31, 1997 and 1996, the Company has net operating losses of
approximately $8,946,990 and $6,127,977, which will expire in the years 2011 and
2012, if not utilized. The estimated deferred income tax benefit net of a
valuation allowance for doubtful realization, consists of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Benefit $ 2,270,588 $ 772,000
Valuation Allowance (2,270,588) (772,000)
------------ ----------
$ 0 $ 0
============ ==========
</TABLE>
NOTE 8 - ACCOUNTS PAYABLE
----------------
The following is an aging of accounts payable at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current $ $111,365
31-60 (4,661)
61-90 22,681
91 and Over 687,103 428,033
--------- --------
Total $ 687,103 $557,418
========= ========
</TABLE>
NOTE 9 - SHORT TERM DEBT
---------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revolving note of $10,000,000 with a
financing institution, secured by
substantially all assets of the Company's
principal subsidiary, bearing interest at
the institution's base rate plus 3/4% or
11% currently, the available loan amount
varies on a formula based upon the amount
of eligible contracts receivable, and the
amount of inventory on hand; interest is
payable monthly with the principal due
February 7, 1997. The loan agreement provides
for acceleration of the maturity date of the note
and certain other remedies upon occurrence as of
an Event of Default. Certain potential Events of
Default as that term is used in the loan agreement
have occurred as of and subsequent to December 31,
F-13
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NOTE 9 - SHORT TERM DEBT (CONTINUED)
---------------------------
1997 and 1996. The Company's subsidiary negotiated
an amendment to the loan agreement in October 1996,
when it sold approximately 1/3 of its finance contracts
to an affiliate of its lender. As of December 31, 1996,
the Company's subsidiary has breached the amended
loan covenants. The lender notified the Company's
subsidiary of the default in January 1997. A series of
short term amendments were negotiated through
March 1997. On May 5, 1997, the Company's subsidiary
entered into a liquidation agreement with its lender.
The agreement required management to sell the finance
contracts receivable to a third party no later than July
31, 1997, at which time the remaining assets of the
subsidiary were to be sold in a liquidation sale. The
finance contracts receivable were sold August 5, 1997.
The liquidation sales were completed on September 6,
1997. Balance due represents the unliquidated portion
of the unpaid account. $4,078,052 $6,136,079
Various unsecured notes payable of the Company's
principal subsidiary to pre-petition creditors, bearing
interest at 6.21% or 2.5%, due in quarterly and annual
payments of principal and interest of varying amounts
beginning March 15, 1994, with varying balloon payouts
due December 15, 1998. The death benefit of a $446,000
face value life insurance policy on the life of the majority
preferred stockholder in the subsidiary is pledged to pay
these notes payable. These notes are currently in arrears
in payment. 182,487 186,985
Note payable, secured by real estate, of the Company's
principal subsidiary, bearing interest at 6%, due in
monthly payments of principal and interest of $500 through
August, 2004. 37,409 37,409
</TABLE>
F-14
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NOTE 9 - SHORT TERM DEBT (CONTINUED)
---------------------------
Note payable, secured by equipment, of the Company's
principal subsidiary, bearing interest at 9.95%, due in
monthly payments of principal and interest of $268.25
beginning August 15, 1995 through August 15, 1998. 0 5,903
Note payable, Estate of Jerry Lewis, payable by the
Company's principal subsidiary, bearing interest at
6.12% per annum, due in quarterly payments of
$1,680,70. The loan is in default. 44,949 44,949
--------- ---------
Total Subsidiary Short Term Debt 4,342,897 6,411,325
Note payable, secured by credit insurance
commissions, dated August 4, 1995 bearing
interest at 10.75% with payments due quarterly,
and principal payments of $5,000 in 1997 and
$12,500 due monthly in 1996. Note is due
December 31, 1998. 128,821 172,803
--------- ---------
Total 4,472,718 6,584,128
Less Current Portion 4,472,718 6,584,128
--------- ---------
$ 0 $ 0
========= =========
</TABLE>
At December 31, 1996, the Company had available for future use a standby letter
of credit in the amount of $50,000. The maturity date on the standby letter of
credit is January 31, 1997. Note was renewed when matured. The Parent Company
has no responsibility for any of the debts of its principal subsidiary, Zearl T.
Young, Inc.
NOTE 10 - PREFERRED STOCKHOLDERS' EQUITY IN SUBSIDIARY
--------------------------------------------
As a part of the bankruptcy (Chapter 11) plan and quasi-reorganization of the
Company's subsidiary, all common shares of the then-existing shareholders of the
subsidiary were canceled, with the existing shareholders accepting preferred
shares in the subsidiary and allowing the subsidiary to issue new common stock
tot he new shareholders who purchased the subsidiary as of November 1, 1994, all
prior to the merger with the Company.
F-15
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 11 - TRANSACTIONS WITH RELATED PARTIES
---------------------------------
The Company's principal subsidiary rents all but one of its buildings from
Young's Investment Corporation. Young's Investment Corporation is 100% owned by
Zearl T. Young, who owns 50% of the Series A preferred stock of Zearl T. Young,
Inc., a wholly owned subsidiary of the Company. The amount of rent was $240,000
for the years ended December 31, 1997 and 1996. The Company was in arrears, in
rent payments, as of December 31, 1997 and 1996 in the amount of $181,275 and
$120,000. The Company pays certain expenses related to the buildings, such as
property taxes, insurance and repairs and maintenance.
The Company's principal subsidiary also pays management and director fees to
companies that are related through common ownership. These amounts totaled
$0 in 1997, $48,000 in 1996 and $72,000 in 1995.
NOTE 12 - DISCONTINUED OPERATIONS
------------------------
The following is a condensed balance sheet and statement of operations of its
wholly owned subsidiary, Zearl T. Young, Inc., at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Assets $ 0 $ 3,731,609
Property and Equipment 0 273,708
Other Assets 0 1,161,405
----------- -----------
Total Assets 0 5,166,722
=========== ===========
Total Current Liabilities $ 5,465,640 $ 7,759,965
Preferred Stockholders' Equity 1,128,370 1,128,370
Stockholders' Equity A Deficit (6,594,010) (3,721,613)
---------- -----------
Total Liabilities and Stockholders' Equity $ 0 $ 5,166,722
========== ===========
Sales $ 1,025,786 $ 4,531,905
Cost of Sales 1,265,804 3,336,214
----------- -----------
Gross Profit (240,018) 1,195,691
Financing Income 862,675 1,158,203
Cost of Financing
Interest Expense 420,148 744,069
Amortization of loan costs 0 211,730
----------- -----------
Net Financing Income 442,527 955,799
----------- -----------
</TABLE>
F-16
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 12 - DISCONTINUED OPERATIONS (CONTINUED)
-----------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Total Gross Income 202,509 1,798,095
Expense
General and Administrative 297,610 983,905
Selling 1,185,167 3,096,170
----------- -----------
Total Expenses 1,482,777 4,080,075
----------- -----------
Operating Loss (1,280,268) (2,281,980)
Other Income and Expense
Loss on Sale of Assets (1,578,966) (46,282)
Other Income 0 11,692
----------- -----------
Total Other Income and Expense (1,578,966) (34,590)
----------- -----------
Net Loss Before Taxes $(2,859,234) $(2,316,570)
Deferred Tax Benefit Canceled 0 (60,152)
----------- ------------
Net Loss from Discontinued Operations $(2,859,234) $(2,376,722)
=========== ============
</TABLE>
NOTE 13 - SUBSEQUENT EVENTS
-----------------
On March 6, 1996, the Board of Directors adopted a resolution to issue a new
class of preferred stock, with the rights, privileges and preferences to be
determined at a future date.
On September 6, 1997, the Company's principal subsidiary ceased operations and
sold all of its assets.
F-17
<PAGE>
LIQUIDATION AGREEMENT
This Agreement is entered into as of this 5th day of May, 1997 between
Norwest Bank Minnesota, National Association (the "Lender") and Zearl T. Young,
Incorporated (the "Company").
Recitals
- --------
A. The Company is indebted to the Lender pursuant to a Loan and Security
Agreement dated October 28, 1994, as amended, (the "Credit Agreement"). All
advances under the Credit Agreement, together with daily interest, fees, costs
and expenses and any other indebtedness of the Company to Lender, are
hereinafter collectively referred to as the "Indebtedness." The Credit Agreement
and all related documents in favor of the Lender are referred to herein as the
"Security Documents."
B. As of the close of business on May 4, 1997, the outstanding principal
amount of the Indebtedness was $6,055,473.65. In addition, interest, fees, costs
and expenses have accrued and are accruing.
C. The Indebtedness is secured by, among other things, a perfected
security interest in, without limitation, all inventory, receivables, accounts,
equipment and general intangibles of the Company (the "Collateral").
D. Robert W. Schleizer and John R. Boudreau (the "Guarantors") have each,
in their personal capacities, executed a Guaranty dated as of October 28, 1994,
as amended, and a Management Agreement dated as of October 28, 1994.
E. The Company is in default of its obligations under the Security
Documents. The Lender is entitled to exercise its rights and remedies.
F. The Company has acknowledged its financial difficulties and has
represented to the Lender its desire to liquidate its assets. The Company
desires to seek a buyer for its assets on a going concern basis for a limited
period of time, and, if the Company cannot sell its assets as a going concern,
to wind up its affairs through an orderly liquidation. The Company has
represented that the level of the Collateral will not materially deteriorate in
relationship to the level of Indebtedness while the Company seeks buyers for its
assets. The Lender has consented to a winding down of the Company's business and
orderly liquidation on the terms and conditions set forth below.
12
<PAGE>
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and for good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
each party, the parties agree as follows:
1. The Recitals are true and correct. The Indebtedness is due and owing,
without defense, offset or counterclaim.
2. The Company may continue its business operations to the extent
reasonably necessary to sell inventory and other assets, service existing
customers, collect receivables and wind down its affairs in a timely manner
until July 31, 1997, provided that it complies with the Budget attached hereto
as Exhibit A in all material respects. No item of Collateral with a value
greater than $5,000.00 may be sold, other than in the ordinary course of
business, by the Company without the prior approval of the Lender. The Company
shall pay the Indebtedness in full on or before July 31, 1997. Promptly after
July 15, 1997, unless the Company has located a buyer who will buy the Company's
assets on a going-concern basis, the Company will conduct a going out of
business sale or will otherwise sell its remaining inventory, equipment and
other assets, and shall either sell or collect its remaining receivables.
3. All proceeds from the sale of assets and from the collection of accounts
or otherwise collected or received by the Company shall be turned over to the
Lender in the form received for application to the Indebtedness in a manner to
be determined by the Lender in its sole discretion.
4. Except as set forth in paragraph 5 below, the Company shall not incur or
pay expenses or other obligations except expenses which are both (i) set forth
in the Budget and (ii) reasonably necessary to wind down its business. The
Lender, in its sole discretion, may fund advances required by the Company as set
forth in the Budget, and any amounts so advanced shall become part of the
Indebtedness. The Company shall achieve the collections and payments to the
Indebtedness as set forth in the Budget, and shall comply with the Budget in
every respect at the times and in the amounts set forth in the Budget. The
Company shall not accept consigned inventory unless the consignor has executed
an intercreditor agreement with the Lender, in form and substance acceptable to
the Lender, including, without limitation, provisions regarding the segregation
of consigned inventory and that no consigned inventory shall be sold on a
deferred payment basis unless such deferred payments are sold to a third party.
5. The Company has represented to the Lender that certain parties
("Consignors") may provide inventory to the Company on consignment (the
"Consignment Goods") for sale by the Company. The Lender has no objection to the
Company accepting Consigned Goods for sale, provided:
13
<PAGE>
(i) All Consigned Goods must be readily identifiable by marking or
labeling as constituting Consigned Goods.
(ii) All Consigned Goods that are not clearly marked or labeled as such
shall be deemed to be part of the Collateral.
(iii) The Company shall not sell any Consigned Goods for less than the
amount owing to the Consignor for such Consigned Goods.
(iv) The Company shall not sell any Consigned Goods other than for cash
unless the company has an agreement from an unrelated third party
to purchase any accounts receivable or chattel paper created by
such sales at face value.
(v) The Company will deliver to the Lender all payments made to the
Company on account of the sale of the Consigned Goods, including the
proceeds from the disposition of chattel paper or accounts
receivable resulting from the sale of Consigned Goods.
Provided that the Company meets its obligations herein and complies with the
foregoing, the Lender has no objection to the Company's payment to Consignors of
an amount equal to the cost of Consigned Goods sold by the Company,
notwithstanding that the Budget does not list any payments to Consignors for the
Sale of Consigned Goods.
6. The Company agrees to permit the Lender, and its respective officers,
employees and agents, to have full access to the Company's books, records and
properties for the purpose of verifying the Company's compliance with the terms
of the Security Documents and this Agreement.
7. Except as expressly modified by this Agreement, all provisions of the
Security Documents remain in full force and effect. The Lender reserves its
rights at any time to exercise all of its rights and remedies under the Security
Documents, whether or not the Company has complied with its covenants and
obligations under this Agreement, or the Security Documents. The Company shall,
upon request of the Lender, deliver all of the Collateral to the Lender and
shall permit the Lender to use the Company's premises for the purpose of
enforcement and foreclosure of the Lender's security interest in the Collateral.
Without limiting the generality of the foregoing, the Lender specifically
reserves its rights with respect to the Guarantors.
8. The Company shall also deliver the following to the Lender: (a) a
daily report setting forth the sales of inventory, equipment and other assets
and collection of receivables by 12:00 noon on the next business day and (b) a
revised weekly cash flow
14
<PAGE>
forecast comparing actual results to forecasted performance for the prior week,
along with a collateral\loan schedule, and a sales projection schedule, all to
be received by 12:00 noon on the Tuesday of the following week and reflecting
information through the close of business for the prior week. The Company shall
also deliver to the Lender by 12:00 noon on each Tuesday, a report with respect
to the Company's efforts with respect to the sale of its receivables portfolio,
including information regarding offers received, contacts made, and other
information relevant to the disposition of the Company's assets. The reports
shall also provide detailed information regarding the Company's efforts to sell
its store operations, and information regarding store performance including
sales, cash collections and expenses. The Company agrees to execute and deliver
such other and further documents or reports as the Lender may request from the
Company to execute, perfect, evidence or otherwise implement the agreements set
forth in this Agreement. In consideration of the Lender's willingness to provide
further advances to the Company and to provide the Company an opportunity to
liquidate its assets in an orderly fashion, the Company shall execute such
further financing statements, assignments, mortgages or other documents which
the Lender may require to create perfected security interests or liens on assets
of the Company.
9. If the Company permanently reduces the outstanding Indebtedness from
the proceeds of liquidation to $4,000,000 or less by no later than July 31,
1997, the Lender will not object if Company elects to pay the Guarantors a bonus
of $25,000 each. If the Company further permanently reduces the outstanding
Indebtedness from the proceeds of the liquidation below $4,000,000 by no later
than July 31, 1997, the Lender will not object to the Company's payment of an
additional bonus to each Guarantor, not to exceed $50,000 each (in addition to
the foregoing $25,000 bonus), equal to five percent (5%) of the amount such
permanent reduction is less than $4,000,000. If the Company further permanently
reduces the outstanding Indebtedness from the proceeds of liquidation below
$3,000,000 by no later than July 31, 1997, the Lender will not object to the
Company's payment of a bonus to each of Guarantors of ten percent (10%) of the
amount of such permanent reduction below $3,000,000, such bonus being in
addition to the foregoing described bonuses. For the purposes of the
calculations set forth in this paragraph 9 only, (i) the proceeds of liquidation
shall not include any proceeds received from life insurance policies, and (ii)
collateral monitoring fees, unused line fees and interest accruing after April
5, 1997 shall not be added to the Indebtedness.
10. In consideration of the execution of this Agreement, the Company, on
behalf of itself, its officers, agents, insurers, successors and assigns,
releases, acquits and forever discharges the Lender, and its respective
officers, directors, agents, attorneys, insurers, parents, affiliates,
successors and assigns, of and from any and all manner of action or actions,
suits, claims, damages, judgments, levies and executions, whether known or
unknown, liquidated or unliquidated, fixed, contingent, direct or indirect,
which the Company ever had, has, or may have or claim to have against the Lender
or its respective officers, agents, insurers, successors and assigns, for, upon
or by reason of any matter, act or thing prior to the date of execution of this
Agreement.
15
<PAGE>
11. No modifications or amendments to this Agreement may be made except in a
writing signed by all parties hereto.
12. This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument. Facsimiles or photocopies of executed signature pages to this
Agreement shall be considered originals.
13. This Agreement is made and entered into in the State of Minnesota, and
the laws of Minnesota shall govern its enforcement and performance.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
NORWEST BANK MINNESOTA
NATIONAL ASSOCIATION
By______________________________
Its___________________________
ZEARL T. YOUNG, INCORPORATED
By /s/
______________________________
Its President
____________________________
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 31,457
<SECURITIES> 6,039
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,496
<PP&E> 255
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,751
<CURRENT-LIABILITIES> 5,296,752
<BONDS> 0
0
1,128,370
<COMMON> 143,431
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,751
<SALES> 0
<TOTAL-REVENUES> 123,006
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,855
<INCOME-PRETAX> 107,151
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (2,859,234)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,819,013)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
NORWEST BANKS Norwest Bank Minnesota, N.A.
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479-0001
August 5, 1997
R. Harold Owens
President and Chief Operating Officer
World Acceptance Corporation
P.O. Box 6429
Greenville, SC 29806
Robert W. Schleizer
President
Zearl T. Young, Incorporated
400 North St. Paul, Suite 950
Dallas, Texas 75291
RE: Sale of Accounts Receivable
Gentlemen:
As you are aware, Norwest Bank Minnesota, National Association ("Norwest")
has a valid, perfected, first priority lien on, among other things, all accounts
receivable and other rights to payment of Zearl T. Young, Incorporated (the
"Company") pursuant to a Loan and Security Agreement dated October 28, 1994, as
amended from time to time.
Norwest has been informed that the Company would like to sell, and World
Acceptance Corporation (the "Purchaser") would like to buy, certain of the
Company's accounts receivable (the "Accounts"), all as more fully set forth in a
purchase agreement being executed between them. Norwest is willing to release
its lien on the Accounts on the terms and conditions set forth below.
The Purchaser shall pay an amount equal to $1,760,698.29 (the "Purchase
Price") equal to 48.5% of the face value of the Accounts on the Company's books
at the close of business Monday, August 4, 1997 (the "Closing Date"). All
collections of Accounts received on and prior to the Closing Date shall be wired
promptly in full directly to Norwest and shall remain subject to Norwest's lien.
All collections of Accounts received after the Closing Date and payment of the
Purchase Price shall be remitted promptly to the Purchaser and shall no longer
be subjectto Norwest's lien. The Purchase Price shall be wired by the Purchaser
directly to Norwest and applied in reduction of the Company's obligations to
Norwest The wiring instructions to Norwest are as follows:
<PAGE>
Norwest Bank Minnesota, National Association
ABA No. 091000019
Commercial Loan Clearing Account No. 840165
Attention: Alma McKenzie 612/673-8680
Reference: Zearl T. Young
We understand and agree that $50,000 of the Purchase Price may be reserved
by the Purchaser in a segregated account (the "Reserve Fund") for up to one year
solely for the purpose of paying any valid credit insurance premium refund
claims of account debtors whose accounts are sold to the Purchaser by the
Company where such credit insurance is actually in force on the closing date and
the premium has been fully paid; provided, however, that no refund claim shall
be paid from the Reserve fund in the event the account debtor renews, extends or
otherwise modifies an existing payment obligation and obtains additional or
replacement credit insurance to which the refund amount should be credited
against the new or additional premium.
Purchaser may not withdraw any funds from the Reserve Account without first
giving notice to Norwest of the intent to make such withdrawal, together with
evidence of the account debtor's right to receive a credit insurance premium
refund, and receiving written authorization for such withdrawal from Norwest. On
or before the first anniversary of the closing date of the sale of the Company's
accounts to the Purchaser, the Purchaser shall remit to Norwest the sum of
$50,000 or such balance as remains in the Reserve Fund after withdrawals
approved by Norwest.
Very truly yours,
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By /s/
------------------------
Its Assistant Vice President
------------------------
<PAGE>
James Cecil Auctioneers
P.O. Box 1947
Hobbs, NM 88241
(505) 393-4917
"WESTERN AUTO AUTOMOTIVE" Page: 24
Consignment Sales - Detail Sat Aug 23 06:21:49 1997
Consignment: A
Consignor: WESTERN AUTO AUTOMOTIVE
<TABLE>
<CAPTION>
Lot# Description Quan Bid# Comm. Unit Price Price
- ---- ----------- ---- ---- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
464 170 USED BATTERIES 170 85 0.90 153.00
465 2 TIRE RACKS 1 85 110.00
466 2 TIRE RACKS 1 85 110.00
467 2 TIRE RACKS 1 85 110.00
468 2 TIRE RACKS 1 85 110.00
469 1 TIRE RACK 1 3 55.00
470 1 TIRE RACK (OUTSIDE) 1 85 100.00
</TABLE>
PAGE TOTAL $748.00
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL ITEMS SOLD AT AUCTION $37,999.60
LESS EXPENSES:
LESS 10% COMMISSION $3,799.96
LESS TAX ON COMMISSION 228.00
LES ADVERTISING 2,500.00
---------
LESS TOTAL EXPENSES $6,527.96 6,527.96
---------
NET BALANCE $31,471,64
WITH MR. BOUDREAU'S APPROVAL, JAMES
CECIL AUCTIONEERS SOLD A COMMEMORATIVE
HIGH-DOLLAR GUN AT THE QUAILS UNLTD.
AUCTION AT THE HOBBS COUNTRY CLUB,
AUGUST 23, 1997. THE GUN WAS SOLD FOR
$2,100.00 WITH $100.00 OF THIS MONEY GOING
TO QUAILS UNLTD. $2,000.00 IS TO BE PAID TO
NORWEST, WITH NO COMMISSION CHARGED ON
THIS ITEM. 2,000.00
---------
NET BALANCE $33,471.64
</TABLE>
<PAGE>
James Cecil Auctioneers
P.O. Box 1947
Hobbs, NM 88241
(505) 393-4917
"TRUE VALUE HDWR/WAREHOUSE/MAIN" Page: 47
Consignment Sales - Detail Sun Sep 7 00:43:31 1997
Consignment: A
Consignor: ZEARL T. YOUNG, INC.
Lot# Description Quan Bid# Comm. Unit Price Price
- ----- ----------- ---- ---- ----- ---------- -----
---------------
Total for this Consignment 52296,40
0.0% Rate
LESS: Commissions: 0.00
----
0.00
Total Auction Charges 0.00
---------------
52296.40
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL SOLD AT AUCTION $52,296.40
LESS 10% COMMISSION $5,229.64
LESS TAX ON COMMISSION 313.78
LESS ADVERTISING 3,000.00
---------
LESS TOTAL $8,543.42 8,543.42
--------
NET BALANCE $43,752.98
</TABLE>
<PAGE>
