SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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)
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 re-
quired to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days.
Yes No X
As of June 30, 1997, there were 14,343,041 shares of Common Stock outstanding.
1
<PAGE>
PEGASUS INDUSTRIES, INC.
INDEX
Page No.
________
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial
Statements 3
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statement of
Income - Three Months Ended June 30, 1997
and June 30, 1996 6
Condensed Consolidated Statement of
Income - Six Months Ended June 30, 1997
and June 30, 1996 6
Condensed Consolidated Statement of
Cash Flows - Six Months Ended June 30, 1997
and June 30, 1996 8
Item 2. Managements' Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
2
<PAGE>
PART I
ITEM I. PEGASUS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
In the opinion of management, the information set forth in the Condensed
Consolidated Balance Sheets is fairly stated in all material aspects in relation
to the consolidated balance sheets from which it has been derived.
<TABLE>
<CAPTION>
Unaudited
June 30, December 31,
1997 (1) 1996 (1)
_________ ____________
<S> <C> <C>
Current Assets:
Cash $ 103,080 $ 132,162
Financing Contract Receivables
Current Portion 2,595,980 2,988,990
Inventories 413,605 624,141
Prepaid Expenses and Other 5,598 35,740
_________ ___________
Total Current Assets
3,118,263 3,781,033
Property and Equipment, net of
accumulated depreciation of
$1,035,507 and $997,549 236,913 274,363
Financing Contracts Receivable -
non current portion 648,995 1,102,395
Other Assets 69,799 60,010
_________ __________
$ 4,073,970 $ 5,217,801
_________ __________
</TABLE>
The accompanying notes are an integral part of
the Condensed Consolidated Balance Sheets
3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1997 (1) 1996 (1)
__________ ____________
<C> <C>
Current Liabilities:
Accounts Payable $ 626,783 $ 557,418
Accrued Expenses 235,275 516,243
Current maturities of long
term debt 6,118,625 6,584,128
__________ ___________
Total Current Liabilities 6,980,683 7,657,789
Long-term debt, less current maturities 35,045 -
__________ ___________
7,015,728 7,657,789
Preferred Stockholders' Equity in
Subsidiary 1,128,370 (2) 1,128,370 (2)
Stockholders' Equity
Common stock, $.01 par value,
50,000,000 shares authorized;
14,343,091 shares issued and
outstanding at June 30, 1997 and
14,434,091 shares issued and out-
standing at December 31, 1996 143,091 143,431
Additional Paid in Capital 58,536 58,536
Accumulated Loss (4,272,095) (3,770,325)
___________ ___________
(4,070,128) (3,568,358)
___________ ___________
4,073,970 5,217,801
___________ ___________
</TABLE>
The accompanying notes are an integral part of
the Condensed Consolidated Balance Sheets
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED BALANCE SHEET
(1) The unaudited condensed consolidated balance sheet represent the consoli-
dated assets, liabilities and stockholders' equity of the Company and its wholly
owned subsidiary, Zearl T. Young, Incorporated ("ZTY").
(2) Reflects the preferred stockholders' equity interest in ZTY as a result of
a reorganization in 1994. The preferred stock, issued as part of the reorgani-
zation, has a $5.00 par value and 5% cumulative dividend.
5
<PAGE>
CONSOLIDATED CONDENSED STATEMENT OF INCOME
The interim consolidated condensed statement of income contained herein
reflect all adjustments which, in the opinion of management, are necessary for a
fair statement of the results of operations for the periods presented.
Operating results for the three month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. However, under an agreement with its secured lender, Zearl
T. Young, Incorporated, a wholly owned subsidiary of the Company initiated a
liquidation.
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
1997 1996
___________ ___________
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $ 382,488 $ 1,117,109
Cost of Sales 292,842 793,394
___________ ___________
Gross Profit 89,646 323,715
Financing Income 370,563 477,916
___________ ___________
460,209 801,631
Selling, General and Administrative
Expenses 570,626 801,631
___________ ___________
Operating Income (110,417) (170,910)
Interest Expense 165,959 235,866
___________ ___________
(276,376) (406,776)
Other Income 8,805 -
___________ ___________
Net Income $ (267,571) $ (406,776)
Loss per Common Share (0.02) (0.028)
___________ ___________
Weighted Average Common Shares 14,343,091 14,343,091
___________ ___________
</TABLE>
6
<PAGE>
CONSOLIDATED CONDENSED STATEMENT OF INCOME
The interim consolidated condensed statement of income contained herein re-
flect all adjustments which, in the opinion of management, are necessary for a
fair statement of the results of operations for the periods presented. Opera-
ting results for the three month period ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997.
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1997 1996
___________ ___________
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $ 684,709 $ 1,950,073
Cost of Sales 632,236 1,339,549
___________ ___________
Gross Profit 52,383 610,524
Financing Income 944,334 989,238
___________ ___________
996,717 1,599,762
Selling, General and Administrative
Expenses 1,177,716 1,896,031
___________ ___________
Operating Income (180,999) (296,269)
Interest Expense 334,307 452,212
___________ ___________
(515,306) (748,481)
Other Income 13,536 -
___________ ___________
Net Loss $ (501,770) $ (748,481)
Loss per Common Share (0.03) (0.05)
___________ ___________
Weighted Average Common Shares 14,343,091 14,343,091
___________ ___________
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1997 1996
___________ ___________
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flow provided by (used in)
operating activities:
Net income /(loss) (501,770) (748,481)
Adjustments to reconcile net cash
provided (used in) operating activities:
Depreciation and amortization 37,450 38,548
(Increase)decrease in finance contract
receivables 846,410 964,842
(Increase)decrease in inventories 210,536 2,401
(Increase)decrease in prepaid expenses 30,142 92,656
Increase(decrease) in accounts payable 69,365 (115,181)
Increase(decrease) in accrued expenses (280,968) 104,354
___________ ___________
Net cash provided by (used) in
operating activities 912,935 339,139
Cash flows (used in) investing activities:
(Increase)decrease in property and
equipment - 1,543
(Increase)decrease in other assets (9,789) (8,008)
___________ ___________
Net cash (used in) investing activities (9,789) (6,465)
Cash flows (used in) financing activities:
Increase(decrease) in debt (430,458) (388,615)
___________ ___________
Net cash (used in) financing activities (430,458) (388,615)
___________ ___________
Net Increase in Cash (29,082) (55,941)
Cash - beginning of period 132,162 73,782
___________ ___________
Cash - end of period 103,080 17,842
___________ ___________
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's business consists of the sale of retail consumer products,
primarily consumer durable goods such as furniture, appliances, carpet and e-
lectronics and the related financing of those purchases with consumer finance
contracts.
The Company's wholly owned subsidiary, Zearl T. Young, Incorporated ("ZTY")
experienced working capital shortages for the previous several quarters. Con-
tinuing operating losses necessitated management to initiate a program to close
stores, reduce staff and restructure operations while it attempted to raise
equity. Attempts to secure equity were unsuccessful and consequently, ZTY's
operations were reduced to the size where its ability to continue as a going
concern ended.
On May 4, 1997, ZTY's management executed a liquidation agreement with the
primary lender whereby, the lender would provide short term operating working
capital while management sought buyers for its stores and finance contracts re-
ceivable. Management believed it would be successful in selling the finance
contracts receivable. If the stores could not be sold, management agreed to
continue to consolidate inventory for a liquidation of its assets in the third
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES - JUNE 30, 1996 COMPARED TO DECEMBER 31, 1995
During the six months ended June 30, 1997, ZTY's current assets decreased
by $662,770 primarily due to a decrease of $393,010 in the current portion of
finance contract receivables. In April 1997, ZTY's lender discontinued finan-
cing any newly generated finance contracts. Management, therefore, limited
sales to cash only unless the finance contracts could be immediately sold to a
third party finance company. As a result, ZTY's finance contracts reduced a
total of $846,410 during the quarter or 24%. Inventories decreased $210,536
from December 31, 1996 to June 30, 1997. ZTY was unable to purchase new in-
ventory during the quarter except in very limited quantities. Management con-
tinued consolidating inventory and discounting prices in anticipation of a
liquidation. Cash balances decreased $29,082. Current liabilities decreased
$642,061 primarily due to the decrease in accrued liabilities and due to the
$465,503 reduction in current maturities in long term debt. Long term debt
increased $35,045 during the six month period.
9
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1996
The Company's Statements of Income for the three months ended June 30,
1997 and the Statement of Income for June 30, 1996 consist of the operations
of the Company and ZTY, its wholly owned subsidiary.
Net sales for the second fiscal quarter decreased from $1,117,109 in 1996
to $382,488 in 1997, a 66% decrease while gross profit declined $234,069, a 71%
decrease. Gross profit decreased due to sales discounts to sell aged inventory
due to liquidation of inventory.
Financing income for the quarter decreased $107,353 compared to the three
month period a year earlier, an 22% decrease primarily due to lower retail sales
and reduced base of finance contract receivables. Selling, general and admini-
strative expenses for the quarter decreased by $231,005 compared to the prior
year. The company had an operating loss of $110,417 for the three months ended
June 30, 1997 as compared to operating loss of $170,910 for the same period a
year earlier. The operating loss was primarily due to reduced sales caused by
working capital shortages.
RESULTS IN OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1996
ZTY's sales during the six months ended June 30, 1996 were $1,950,073
compared to $684,709 for the current period, a decrease of $1,265,364. Gross
profit for the six months decreased $558,141 or 91%. Financing income decreased
$44,904 a 5% decrease. Selling, general and administrative expenses decreased
$718,315, a 38% decrease due to the additional store closings. The Company re-
ported a net loss of $748,481 for the six months ended June 30, 1996 as compared
to a net loss of $501,770 for the current six month period.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Zearl T. Young, Incorporated
Liquidation Agreement...........................................12
(b) There are no reports on Form 8-K
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 6, 1998.
PEGASUS INDUSTRIES, INC.
/s/ Robert W. Schleizer
-------------------------------
By: Robert W. Schleizer, President
11
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 103,080
<SECURITIES> 0
<RECEIVABLES> 2,595,980
<ALLOWANCES> 0
<INVENTORY> 413,605
<CURRENT-ASSETS> 3,118,263
<PP&E> 236,913
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,073,970
<CURRENT-LIABILITIES> 6,980,683
<BONDS> 0
0
1,128,370
<COMMON> 143,091
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,073,970
<SALES> 684,709
<TOTAL-REVENUES> 684,709
<CGS> 632,236
<TOTAL-COSTS> 632,236
<OTHER-EXPENSES> 1,177,716
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 334,307
<INCOME-PRETAX> (501,770)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (501,770)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
