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, 1995 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>
The aggregate market value of the voting stock held by non-affiliates as of
March 26, 1998 was $448,504.72.
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 March 26, 1998 was
14,352,151 shares, $0.01 par value.
Page 2
<PAGE>
PEGASUS INDUSTRIES, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
- ------------
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
- ---------------------------------------------------
In 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
Page 3
<PAGE>
699,997 shares of stock it issued due to difficulties the Company encountered in
obtaining clear title to the oil and gas properties.
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. ZTY currently operates a nine store retail and consumer finance
concern in Hobbs, New Mexico. ZTY has assets of over $11 million and generated
revenues in fiscal 1994 in excess of $9 million. Ventures is a wholly owned
subsidiary of Boudreau & Associates, Inc. ("BAI") formed in 1992 by John R.
Boudreau and Robert W. Schleizer, officers and directors of the Company, to
acquire undermanaged and undervalued companies.
In connection with the transaction, Mr. Boudreau and Mr. Schleizer were elected
to fill two of the three seats on the Company's board of directors. Kevin
Chisholm, a certified public accountant in private practice, was elected to fill
the remaining seat. The Company's prior directors, James M. Richards, Allen C.
Stout and Kenneth Mock resigned. 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 Offficer
and Treasurer of the Company.
The ZTY transaction is the initial step in an aggressive long-term program to
diversify the Company's activities and expand its operations under the new
management team.
Business of Zearl T. Young, Incorporated
- ----------------------------------------
ZTY was founded in 1955 as a single location Western Auto store in Hobbs, New
Mexico and was incorporated as a New Mexico corporation in 1958. Since that
time it has grown to nine separate retail locations as well as a consumer
finance company.
In October 1993, ZTY was acquired by Pegasus Ventures, Inc. ("Ventures") as part
of a successful plan of reorganization under Chapter 11 of the U.S. Bankruptcy
Code. Ventures completed a substantial restructuring of ZTY's business
activities in 1994 as part of the restructuring and secured a $10,000,000 line
of credit for ZTY.
ZTY is engaged in the retail sale at its nine locations of a diverse range of
products including: (1) furniture; (2) home electronics; (3) household
appliances; (4) hardware; (5) home
Page 4
<PAGE>
improvement supplies; (6) household and commercial floor coverings and
installation thereof; (7) sporting goods and recreational equipment; (8)
automotive parts, supplies and accessories; (9) automotive repair services; and
(10) toys. ZTY's stores include a Western Auto affiliated store and a True
Value Hardware store.
ZTY operates its business from nine retail locations in Hobbs, New Mexico. The
diversified retail concern draws customers from a 100 mile radius area in
southeastern New Mexico and western Texas. The company generates 74% of its
revenues from sales of retail merchandise.
Approximately 26% of ZTY's revenues are derived from the financing of consumer
purchases. ZTY offers its customers a variety of programs to finance purchases
which provides the company with the unique ability to draw customers from a
broad economic and geographic base.
The Company had no operations in 1993 or 1994. With the acquisition of ZTY
effective February 28, 1995, the Company has entered into the retail sales and
consumer finance business.
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
- -----------
ZTY offers its customers a variety of finance programs to purchase goods at all
of its stores and supports its sales with convenient service centers, free
delivery and in-home repairs.
The retail merchandise trade in which ZTY is engaged is highly competitive. ZTY
has successfully competed in Hobbs, New Mexico despite the influx of retail
discounters such as Kmart and Walmart several years ago. ZTY has eliminated
operations that compete directly with the strengths of the large discount
operations focusing on its strength; customer service and in-house financing.
Large warehouse stores and various small, independent stores also provide
competition to the Company.
Employees
- ---------
As of December 31, 1995, ZTY employed 105 people in New Mexico, 82 of which
engaged in operating the retail operation, 19 operating the consumer finance
business and 4 in administrative support positions. The Company currently has
four employees in Dallas, Texas in administrative and executive capacities.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are at 400 N. St. Paul, Suite 950, Dallas, Texas
75201.
Page 5
<PAGE>
ZTY, which the Company acquired in February 1995, has nine retail locations in
Hobbs, New Mexico occupying 140,000 square feet of retail space. The Company
also has an additional 40,000 square feet of retail space available for
expansion under the same master lease agreement. ZTY also leases 50,000 square
feet of warehouse space under the master lease. The master lease expires in
November 2012. The master lease was negotiated on an arm's length basis with a
company owned by some of ZTY's preferred shareholders. As part of the lease
negotiations, ZTY obtained an option to purchase the properties for $500,000
plus any outstanding indebtedness on the building at any time prior to the
expiration of the lease.
ZTY owns a 5,500 square foot office building in Hobbs, New Mexico that serves as
its corporate office.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending litigation or other legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fiscal year covered by this report to a
vote of security holders, through solicitation of proxies or otherwise.
Page 6
<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 1995 Low Bid High Bid
----------- ------- --------
<S> <C> <C>
1st Quarter .06 .25
2nd Quarter .25 1.00
3rd Quarter .25 1.00
4th Quarter .25 .75
Fiscal 1994 Low Bid High Bid
----------- ------- --------
1st Quarter .05 .05
2nd Quarter .12 .50
3rd Quarter .25 .25
4th Quarter .06 .25
</TABLE>
There is an absence of an established public trading market, therefore the
market for the 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 March 26, 1998, there were 6,222 shareholders of record of the Common
Stock.
Page 7
<PAGE>
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, 1995 as compared to December 31, 1994.
The Company had no operations in 1994.
In a reverse acquisition, Pegasus Ventures, Inc. ("Ventures") acquired
11,500,000 shares or 80.1% of the Company's common stock in exchange for 100% of
the common stock of ZTY in February 1995.
Results of Operations
- ---------------------
Comparison of year ended December 31, 1995 to year ended December 31, 1994.
Pegasus had no operations in the year ended December 31, 1994. The Company's
Statement of Operations herein reflect solely the operations of ZTY, its wholly
owned subsidiary which was acquired in February 1995. ZTY's revenues decreased
$1,658,709 for the year ended December 31, 1995 as compared to December 31,
1994, a 23% decrease. The decrease is due to the closing of four stores in 1995
due to unprofitable operations. Gross profits declined 43% or $1,287,350 for
the same period. Reduced sales and difficulty obtaining current inventory due
to insufficient working capital caused the decline.
Financing income decreased from $2,024,464 to $2,000,153 for the year ended
December 31, 1995 as compared to the year ended December 31, 1994, a 1%
decrease.
The Company reported a net loss of $1,455,466 for the year as compared to a net
profit of $137,478 for 1994. The loss from discontinued operations of $458,716
recognized in the third quarter of 1995 combined with the significant decline in
sales due to low inventory levels were the primary factors contributing to the
losses.
Liquidity and Capital Resources
- -------------------------------
Current liabilities as of December 31, 1995 of $8,999,399 exceeded current
assets by $3,206,250. The Company experienced significant working capital
shortages resulting in the inability to purchase sufficient inventory to
maintain sales.
The Company was in default on certain financial covenants of its senior loan
agreement including shareholder equity, collateral base and profitability
provisions. Management negotiated a daily working agreement for short term cash
needs. Notice of the default was given to the Company on
February 22, 1996.
ITEM 7. FINANCIAL STATEMENTS AND SELECTED FINANCIAL DATA
The following selected financial data of the Company for fiscal years 1995, 1994
and 1993 should be read in conjunction with the financial statements and related
notes appended to this Form 10-K beginning with page F-1. The Company's 1995
financials have been prepared by William L. Clancy, CPA. Duane V. Midgley, the
Company's former accountant, and Johnson, Miller & Co, the auditors for Zearl T.
Young, Inc., were dismissed by the Company on March 16, 1996. This event
will be reported in detail on a subsequent Form 8-K, a copy of which is attached
hereto. (See "Financial Statements and Notes Thereto").
Page 8
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Income Statement Data:
Revenues 7,622,010 -0- -0-
Net Income (Loss) (1,455,460) -0- -0-
Net Income (Loss) per share (.09) -0- (.0001)
Dividends per share - - -
Weighted average shares
outstanding 14,352,151 2,781,151 3,552,148
Balance Sheet Data:
Total Assets 8,874,210 -0- 4,571,997
Long Term Debt 286,828 -0- -0-
Stockholder's Equity (1,253,499) -0- 4,497,747
</TABLE>
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for ZTY financial data for comparable periods.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTABILITY AND FINANCIAL DISCLOSURE
There have been no changes in accountants in 1995, nor have their been any
disagreements regarding accounting and financial disclosure. The Company's 1995
financials have been prepared by William L. Clancy, CPA. Duane V. Midgley, the
Company's former accountant, and Johnson, Miller & Co, the auditors for Zearl T.
Young, Inc., were dismissed by the Company on March 16, 1996. This event will
be reported in detail on a subsequent Form 8-K, a copy of which is attached
hereto.
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
In January 1995, in connection with the acquisition of ZTY by the Company, all
officers and directors of the Company resigned and the shareholders elected the
following officers and directors.
Name Age Position Term
John R. Boudreau 70 President, Secretary and Chairman 1/95 - 12/31/95
of the Board of Directors
Robert W. Schleizer 42 Chief Financial Officer, Treasurer 1/95 - Present
and Director
Kevin Chisholm 53 Director 1/95 - 12/31/95
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
Page 9
<PAGE>
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 1995 all filing requirements applicable to its
directors and executive officers were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
Executives received compensation from the Company during 1995 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>
John R.
Boudreau,
President 1995 $100,000 -0- -0- -0- -0- -0-
Robert W.
Schleizer,
Chief Financial
Officer 1995 $100,000 -0- -0- -0- -0- -0-
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1995 there were 14,352,151 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.
In conjunction with the acquisition of ZTY by the Company on February 28, 1995,
11,500,000 shares of common stock were issued to Pegasus Ventures, Inc.
("Ventures") in exchange for all of the common stock of ZTY. The following
table will identify as of December 31, 1995, 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:
<TABLE>
<CAPTION>
Name of Beneficial Owner Amount of Ownership Percent of Class
<S> <C> <C>
Pegasus Ventures, Inc.* 11,500,000 80%
Kevin Chisholm -0- -0-
All Executive Officers/Directors
as a Group (3 persons) 11,500,000 80%
*Mssrs. Boudreau and Schleizer each beneficially own 49.5% of the common stock
of Ventures which owns the 80% interest in the Company per the above table.
</TABLE>
Page 10
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases substantially all of its buildings from Young's Investment
Corporation ("YIC") an affiliated entity. Zearl T. Young and family own 100% of
the stock of YIC and also own 100% of the series A preferred stock of ZTY, a
wholly owned subsidiary of the Company.
Page 11
<PAGE>
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-4
Statement of Stockholders' Equity...........................F-5
Statement of Cash Flows.....................................F-7
Notes to Financial Statements...............................F-9
(b) Reports on Form 8K
A report on Form 8K dated March 12, 1996 will be filed subsequent to this
Form 10-K, changing Registrant's certifying accountant and reporting a
transfer of shares owned by Pegasus Ventures, Inc..............30
(c) Exhibits
Zearl T. Young, Incorporated -1994 and 1993 Financial Statements
Report of Independent Certified Public Accountant.............33
Balance Sheet.................................................35
Statement of Operations.......................................36
Statement of Stockholders' Equity.............................37
Statement of Cash Flows.......................................38
Notes to Financial Statements.................................39
Page 12
<PAGE>
WILLIAM L. CLANCY
CERTIFIED PUBLIC ACCOUNTANTS
CENTRAL PLAZA
SUITE 890
4041 NORTH CENTRAL AVENUE
P.O. BOX 16627 (85011-6627) (602) 266-2646
PHOENIX, ARIZONA 85012 (602) 266-2402
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pegasus Industries, Inc.
Dallas, Texas 75201
I have audited the accompanying consolidated balance sheet of Pegasus
Industries, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders, equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit. The financial statements of Pegasus Industries,
Inc. as of December 31, 1994 were audited by other auditors whose report dated
March 31, 1995, expressed an unqualified opinion on those statements.
I conducted our audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit of the financial statements provides a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Pegasus Industries, Inc. as of
December 31, 1995 and 1994 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
net capital deficiency that raises doubt about the Company's ability to continue
as a going concern. Management's plan regard to these matters is also describe
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ William L. Clancy
- ---------------------------------
April 30, 1996 (except for
Note 9, the date is May 10, 1996)
F-1
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1995 and 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current Assets
Cash $ 73,782 $ 0
Receivables - Note 3 4,456,621 0
Inventories at Cost - Note 2 1,026,491 0
Investment in Cooperative
Securities - Note 4 16,550 0
Prepaid Expenses 219,645 0
--------- --------
Total Current Assets 5,793,089 0
Property and Equipment - Note 5
Property and Equipment 1,269,341 0
Less Accumulated Depreciation 918,472 0
--------- --------
Net Book Value 350,869 0
Deferred Tax Benefit - Note 7 60,152
Other Assets
Noncurrent Portion of Financing
Receivable - Note 6 2,625,230
Cash Value of Life Insurance,
Net of Policy Loans of $915,894
In 1995, and $765,658 in 1994
(Face Value of Approximately
$7,600,000) - Note 9 44,870 0
---------- ---------
Total Other Assets 2,670,100 0
---------- ---------
Total Assets $ 8,874,210 $ 0
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current Liabilities
Trade Accounts Payable - Note 8 $ 795,324 $ 0
Other Liabilities 99,221 0
Note Payable and Current
Portion of Long-Term Debt -
Note 9 7,678,870 0
Accrued Expenses 139,096 0
---------- --------
Total Current Liabilities 8,712,511 0
Long-Term Debt - Note 9 286,828 0
---------- --------
Total Liabilities 8,999,339 0
Preferred Stockholders, Equity
In Subsidiary - Note 10 1,128,370 0
Stockholders' Equity
Common Stock, Par Value $.01
Authorized 50,000,000 shares;
Issued and Outstanding,
14,352,151 Shares at December
31, 1995 and 2,851,151 at
December 31, 1994 143,521 28,521
Additional Paid-In Capital 58,446 3,522,602
Retained Earnings - A Deficit (1,455,446) (3,551,123)
----------- -----------
Total Stockholders' Equity (1,253,499) 0
----------- -----------
Total Liabilities and Stockholders' Equity $ 8,874,210 0
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Sales $ 5,621,857 $ 0
Cost of Sales 4,071,915 0
--------- -------
Gross Profit 1,549,942 0
Financing Income 2,000,153 0
Cost of Financing
Interest Expense 875,892 0
Amortization of loan costs 156,680 0
--------- -------
1,032,572
---------
Net Financing Income 967,581 0
-------- -------
Total Gross Income 2,517,523 0
Expenses
Selling 1,418,933 0
General and Administrative 2,590,856 0
--------- -------
Total Expenses 4,009,769 0
--------- -------
Operating Loss (1,492,246) 0
Other Income and Expense
Gain on Sale of Equipment 6,521 0
Receipt from Bankruptcy Court
In Connection With Reorganization 108,631 0
Other Income 18,394 0
Depreciation Expense 96,766 0
--------- -------
Total Other Income and Expense 36,780 0
--------- -------
Net Loss $(1,455,466) $ 0
========= =======
Net Loss Per Share $ ( .09) $ NIL
========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Paid-In Earnings -
Capital A Deficit
<S> <C> <C> <C> <C>
Balance,
December 31, 1992 3,151,998 $ 31,521 $ 5,495,350 $ (1,047,123)
Transfer Agent
Adjustments 150 0
Issuance of Common
Stock For Finders Fee,
January 4, 1993 400,000 4,000
Net Loss Year Ended
December 31, 1993 (4,000)
--------- -------- ----------- -----------
Balance -
December 31, 1993 3,552,148 35,521 5,495,349 (1,051,123)
Issuance of Common
Stock For Building
January 4, 1994 700,000 7,000 693,000
Cancellation of
Issuance of Common
Stock For Building
On February 22, 1994 (700,000) (7,000) 693,000
Cancellation of Common
Stock In Connection
With Rescission Of Oil
and Gas Acquisition on
September 12, 1994 (699,997) (7,000) (1,972,747)
Net Loss Year Ended
December 31, 1994 (2,500,000)
--------- --------- ------------ ------------
Balance -
December 31, 1994 2,852,151 28,521 3,522,602 (3,551,123)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings -
Shares Amount Capital A Deficit
<S> <C> <C> <C> <C>
Issuance of Shares in
Connection With
Acquisition Of 100%
of the Outstanding
Common Shares of
Zearl T. Young, Inc.
and Recording of
Quasi-Reorganization
Effective
February 28, 1995 11,500,000 115,000 (3,464,156) 3,551,123
Net Loss Year Ended
December 31, 1995 (1,455,466)
---------- -------- ------------ ------------
Balance -
December 31, 1995 14,352,151 $ 143,521 58,446 $(1,253,499)
========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Year Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash Flows From Operating Activities
Net Income or (Loss) $(1,455,466) $(2,500,000)
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Depreciation 96,766 0
Changes in Operating Assets and Liabilities
Abandonment of Patents, Trademarks
and Marketing Rights 2,500,000
Receivables (7,081,851) 0
Inventories at Cost (1,026,491) 0
Investment in Cooperative Securities (16,550) 0
Prepaid Expenses (219,645) 0
Cash Value of Life Insurance (44,870) 0
Deferred Tax Benefit (60,152) 0
Trade Accounts Payable 795,324 0
Other Liabilities 99,221 0
Accrued Expenses 139,096 0
----------- ---------
Total Adjustments (7,319,152) 2,500,000
----------- ---------
Net Cash Flows Provided by Operating
Activities (8,774,618) 0
Cash Flows From Investing Activities
Capital Expenditures 447,635 0
----------- ---------
Net Cash Flows From Investing
Activities (447,635) 0
Cash Flows From Financing Activities
Cash Received from Borrowings 7,965,698 0
Preferred Stockholders' Equity
In Subsidiary 1,128,370 0
Common Stock 201,967 0
----------- ---------
Net Cash Provided by Financing
Activities 9,296,035 0
----------- ---------
Increase (Decrease) in cash 73,782 0
Cash beginning of period 0 0
Cash end of period $ 73,782 0
=========== =========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-7
<PAGE>
PEGASUS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Year Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental Information
Interest Expense Paid $ 604,444 $ 0
========= ======
Income Taxes Paid $ 0 $ 0
========= ======
Noncash investing and Financing activities
Acquisition of 100% Interest In Subsidiary
In Exchange for Issuance of Common Stock $ 115,000 $ 0
========= ======
A Quasi-Reorganization reduced beginning
retained earnings - a deficit to zero
with a charge to paid-in capital. $ 3,551,123 $ 0
========= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
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 pay
value. On January 12, 1973, the Company filed restated Articles of Incorporation
changing it's name to Midas International, Inc. and increasing it's 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 it's Articles of Incorporation
changing it's name to MII and increasing it's authorized 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 it's Articles of Incorporation
increasing it's authorized capital to 50,000,000 shares of common stock with a
par value of $.01.
On August 7, 1990, the Company amended it's Articles of Incorporation changing
it's 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. Due
to the stipulation that no shareholder 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 cancelled.
On March 30, 1995, the Company amended it's Articles of Incorporation changing
it's 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 default on several loan
agreement items, that raises doubt about the Company's ability to continue as a
going concern.
F-9
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - ORGANIZATION (CONTINUED)
------------------------
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
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 it's 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 consist 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 it's 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
-----------
As of December 31, 1994, the Company changed it's method of determining the cost
of merchandise inventory from the retail inventory method to the lower of cost
(first-in, first out) or market.
F. Depreciation
------------
The cost of property and equipment is depreciated over useful lives of the
related assets. The straight line method is utilized for substantially all
assets for financial reporting, but accelerated methods are used income tax
reporting. The estimated lives used in determining depreciation are:
F-10
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
F. Depreciation (Continued)
------------------------
Buildings and Improvements 30 Years
Furniture, Fixtures and Equipment 5-15 Years
Automobiles and Trucks 3-5 Years
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.
H. Earnings or (Loss) Per Share
----------------------------
Earnings or (loss) per share is computed using the weighted average number of
shares of common stock outstanding.
NOTE 3 - RECEIVABLES
-----------
The Company's revenue and receivables are from retail sales to customers in the
Lea County, New Mexico trade area through several retail outlets selling a
variety of merchandise and services.
<TABLE>
<CAPTION>
December 31,
1995
<S> <C>
Receivables consist of:
Open Trade Accounts $ 108,963
Employees' Accounts 60,875
---------
Less Allowance for Doubtful Receivables (6,586)
----------
163,252
Current Portion of Financing
Contracts Receivable 4,425,091
Less Allowance for Doubtful Collections (131,722)
----------
4,293,369
----------
$ 4,456,621
==========
The following is an aging of receivables at December 31, 1995.
Current $ 2,820,811
1-30 days 889,083
31-60 323,301
61-90 128,529
91 and over 433,205
----------
Total 4,594,929
Less Allowance for Doubtful Accounts (138,308)
-----------
$ 4,456,621
===========
</TABLE>
F-11
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 4 - INVESTMENT IN COOPERATIVE SECURITIES
------------------------------------
The Company does business with a supplier which operates as a cooperative. Under
the cooperative structure, purchasers receive 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. The balance is as follows at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Notes $ 4,640
Stock 11,910
-------
Total $16,550
=======
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
----------------------
<TABLE>
<CAPTION>
December 31,
1995
<S> <C>
Buildings $ 50,000
Leasehold Improvements 176,767
Equipment 501,376
Furniture and Fixtures 300,007
Automobiles and Trucks 241,191
-------------
1,269,341
Less Accumulated Depreciation 918,472
-------------
Net Book Value $ 350,869
=============
</TABLE>
Expenditures for repairs and maintenance and minor renewal and betterments are
charged to operations in the year incurred. Major renewals and betterments are
capitalized.
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, 1995. The contracts are secured by
furniture, appliances or other consumer products purchased. The balance consist
of:
<TABLE>
<CAPTION>
December 31
1995
<S> <C>
Financing Contracts $ 8,407,283
Less Unearned Finance and Insurance Charges (1,285,734)
--------------
7,121,549
Less Allowance for Doubtful Accounts (212,950)
--------------
$ 6,908,599
==============
</TABLE>
F-12
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 6 - FINANCING CONTRACTS RECEIVABLE
------------------------------
<TABLE>
<CAPTION>
<S> <C>
Current Portion $ 4,283,369
Noncurrent Portion 2,625,230
-----------
$ 6,908,599
===========
</TABLE>
NOTE 7 - INCOME TAXES
------------
As of December 31, 1995, the Company has net operating loss of approximately
$3,813,117 which will expire in the years 2009 and 2010, if not utilized. The
estimated deferred income tax benefit net of a valuation allowance for doubtful
realization, consist of:
<TABLE>
<CAPTION>
December 31,
1995
<S> <C>
Benefit $ 772,000
Valuation Allowance (711,848)
------------
60,152
</TABLE>
NOTE 8 - ACCOUNTS PAYABLE
----------------
The following is an aging of accounts payable at December 31, 1995.
<TABLE>
<CAPTION>
<S> <C>
Current $ 327,602
31-60 74,009
61-90 3,267
91 and Over 390,446
---------
Total $795,324
</TABLE>
Note 9 - LONG-TERM DEBT
--------------
Revolving note of $10,000,000 with a financial
institution, secured by substantially all assets
of the Company, bearing interest at the
institution's base rate plus 2.5% 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 principle due December 31,
1996. The loan agreement provides for acceleration
of the maturity date of the
F-13
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
December 31, 1995 and 1994
NOTE 9 - NOTES PAYABLE (CONTINUED)
-------------------------
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, 1995. The Company was
officially notified of the defaults on February 22, 1996.
As of May 10, 1996, the lender has not accelerated maturity
and has agreed to renegotiate the note with revised Events
of Default. $ 7,403,085
Various unsecured notes payable 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. 260,871
Note payable, secured by real estate, bearing interest at 6%,
due in monthly payments of principal and interest of $500
through August, 2004. 41,046
Note payable, secured by equipment, bearing interest at 7.9%,
due in monthly payments of principal and interest of $540
through September, 1995. 540
Note payable, secured by equipment, bearing interest at 7.9%,
due in monthly payments of principal and interest of $461 through
December, 1995. 1,303
Note payable, secured by equipment, bearing interest at 9.95%,
due in monthly payments of principal and interest of $268.25
beginning August 15, 1995 through August 15, 1998. 8,853
F-14
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 9 - LONG-TERM DEBT (CONTINUED)
--------------------------
Note payable, secured by credit insurance commissions,
dated August 4, 1995 bearing interest at 10.75% with
payments due quarterly, and principal payments of $12,500
due monthly. Note is due September 4, 1996. 250,000
------------
Total 7,965,698
Less Current Portion 7,678,870
------------
$ 286,828
============
At December 31, 1995, there were two letters of credit outstanding with a
financial institution in the amount of $ 100,000 each, maturing June 1, 1996.
The annual maturities and for the five years ended December 31, 2000, and in the
aggregate are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 7,698,870
1997 29,501
1998 29,960
1999 17,983
2000 13,443
Thereafter 195,941
----------
$ 7,965,698
==========
</TABLE>
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 cancelled, with the existing shareholders accepting
preferred shares in the subsidiary and allowing the subsidiary to issue new
common stock to the new shareholders that purchased the subsidiary as of
December 31, 1994, all prior to the merger with the Company.
NOTE 11 - TRANSACTIONS WITH RELATED PARTIES
---------------------------------
The Company rents all but one of it's 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 year ended
December 31, 1995. The Company was in arrears, in rent payments, as of December
31, 1995 in the amount of $31,500. The Company pays certain expenses related to
the buildings such as property taxes, insurance, and repairs and maintenance.
F-15
<PAGE>
PEGASUS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 11 - TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
---------------------------------------------
The Company also pays management and director fees to companies that are related
through common ownership. These amounts totaled $72,000 in 1995.
NOTE 12 - SUBSEQUENT EVENTS
-----------------
On March 6, 1996, the Board of Directors adopted a resolution to issue a new
class of preferred stock, with the rights, privileged and preferences to be
determined at a future date.
F-16
<PAGE>
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.
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)
March 26, 1998
(1) Principal executive officer
Page 13
<PAGE>
JOHNSON, MILLER & CO.
Certified Public Accountants
A Professional Corporation
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Zearl T. Young, Inc.
Hobbs, New Mexico
We have audited the accompanying balance sheets of Zearl T. Young, Inc. as of
December 31, 1994 and 1993, and the related 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the 'financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zearl T. Young, Inc. as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As explained in NOTE A to the financial statements, for the year ending December
31, 1994, the Company has changed accounting methods for determining the cost of
inventory, from the retail method to the first-in first-out. The Company has
determined that this change will more accurately match revenues with expenses
and we agree with this conclusion.
As explained in NOTE B to the financial statements, on May 14,,1993, the Company
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of
New Mexico and emerged from the reorganization proceedings on August 11, 1993,
with a Bankruptcy Court approved plan of reorganization. Also as reported in the
financial statements and explained in NOTE B to the financial statements, the
Company is required to comply with the provisions of the plan of reorganization
and certain restrictive covenants of notes payable and security agreements.
225 E. Bender - P.O. Drawer 220 - Hobbs, New Mexico 88241 - (505) 393-2171 -
FAX (505) 397-4301
Page 33
<PAGE>
Report Of Independent Certified Public Accountants (continued)
- --------------------------------------------------------------
As explained in NOTE B to the financial statements, on December 31, 1994 the
Company, as a result of restructuring, underwent a quasi -reorganization. In
connection therewith, certain assets and liabilities were revalued.
Hobbs, New Mexico /s/ Johnson, Miller & Co.
April 28, 1995 (except for
NOTE H, as to which the
date is July 17, 1995)
Page 34
<PAGE>
ZEARL T. YOUNG, INC.
BALANCE SHEETS
DECEMBER 31,
ASSETS
-----------
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
CURRENT ASSETS
Cash $ 99,759 $ -
Receivables (NOTES C AND H) 5,413,357 5,610,407
Inventories at cost (NOTES A AND H) 1,637,910 2,551,157
Investment in cooperative securities (NOTE G) 6,335 -
Prepaid expenses 319,113 22,278
---------- ----------
Total current assets 7,476,474 8,183,842
---------- ----------
PROPERTY AND EQUIPMENT (NOTES F AND H) 404,201 373,512
---------- ----------
DEFERRED TAX BENEFIT (NOTES D AND J) 60,152 60,152
---------- ----------
OTHER ASSETS
Non-current portion of financing contracts
receivable (NOTES E AND H) 2,538,124 2,655,190
Cash value of life insurance, net of policy
loans of $765,658 in 1994 and $493,749
in 1993 (face value of approximately
$7,600,000) (NOTE H) 94,576 119,257
Other assets - 2,679
--------- ---------
2,632,700 2,777,126
--------- ---------
$10,573,527 $11,394,632
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ - $ 71,727
Trade accounts payable 655,080 299,247
Other liabilities 158,205 260,854
Notes payable and current portion
of long-term debt (NOTE H) 107,999 269,107
Accrued interest 88,407 95,918
---------- ----------
Total current liabilities 1,009,691 996,853
LONG-TERM DEBT (NOTE H) 8,233,499 9,742,662
STOCKHOLDERS' EQUITY 1,330,337 655,117
---------- ----------
$10,573,527 $11,394,632
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 35
<PAGE>
ZEARL T. YOUNG, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
SALES $ 7,280,566 $ 9,295,040
COST OF SALES 4,543,274 6,845,112
Gross profit 2,737,292 2,449,928
FINANCING INCOME 2,024,464 2,099,705
----------- -----------
4,761,756 4,549,633
----------- -----------
SELLING EXPENSES 1,233,039 l,535,382
GENERAL AND ADMINISTRATIVE EXPENSES
(including interest of $813,135 for 1994
and $731,477 for 1993; and depreciation
of $97,078 for 1994 and $69,690 for 1993) 3,391,239 4,200,345
----------- ------------
4,624,278 5,735,727
----------- -----------
Earnings (loss) from operations 137,478 (1,186,094)
OTHER LOSS AND EXPENSE
Legal and professional expenses of bankruptcy
reorganization (NOTE D) - (445,882)
----------- ------------
Net earnings (loss) before income taxes $ 137,478 $ (1,631,976)
INCOME TAXES (NOTE J) - $ 60,152
----------- -----------
Net earnings (loss) $ 137,478 $ (1,571,824)
=========== ============
EARNINGS (LOSS) PER COMMON SHARE (NOTE N) $ 68.74 $ (1027.00)
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 36
<PAGE>
<TABLE>
<CAPTION>
NO PAR
PREFERRED STOCK
- ------------------------------
Number Retained Total
of Paid-in Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
- ------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C>
- $ - $1,061,269 $1,062,754 $2,245,023
- - - 121,000 -
- - - - 100,000
1,000,000 400,000 (400,000) - -
- - - (118,082) (118,082)
- - - (1,571,824) (1,571,824)
1,000,000 400,000 661,269 (506,152) 655,117
- - - - 1,128,370
- - (590,628) - (590,628)
- (400,000) 400,000 - -
- - (368,674) 368,674 -
- - - 137,478 137,478
- --------- --------- --------- --------- -----------
1,000,000 $ - $ 101,967 $ - $ 1,330,337
========= ======== ========= ========= ===========
</TABLE>
Page 37
<PAGE>
ZEARL T. YOUNG, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (NOTE L)
Cash received from customers $ 9,145,477 $ 11,869,303
Cash paid to suppliers and employees (8,691,341) (10,753,669)
Interest paid (820,646) (614,139)
------------ ----------
(366,510) 501,495
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (112,085) (255,918)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Stockholder distributions - (115,082)
Cash received from additional borrowings 2,904,561 378,329
Cash paid to reduce debt (2,326,207) (508,824)
------------ -----------
578,354 (245,577)
------------ ----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS 99,759 -
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - -
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 99,759 $ -
=========== ==========
</TABLE>
Noncash investing and financing activities:
As a result of the Bankruptcy Court's approved plan of reorganization, the
Company transacted the following noncash activities during the year ended
December 31, 1993:
Issued notes payable and long-term debt of $1,890,638, net of the investment in
cooperative securities of $367,384, as payment of accounts payable, leases and
accrued interest of $2,222,095 with a gain on debt forgiveness of $35,927,
Issued a note payable in payment of a capital lease of $104,819.
Issued common stock to reduce accrued professional fees of $100,000,
Issued preferred stock to the former stockholders of the Company in the amount
of $400,000, and canceled $121,000 of $100 par common stock.
The Company transacted the following noncash activities during 1994:
Restructured long-term debt which resulted in debt reduction of $2,320,352,
issuance of preferred stock of $1,128,370, and a gain on debt forgiveness of
$1,191,982 (NOTE B).
The accompanying notes are an integral part of the financial statements.
Page 38
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES
------------------------------
This summary of significant accounting policies of Zearl T. Young, Inc.
(the Company) is presented to assist in understanding the Company's financial
statements. These accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of the
financial statements.
Inventories
- ------------
As of December 31, 1994, the Company changed its method of determining the
cost of merchandise inventory from the retail inventory method to the lower of
cost (first-in, first-out) or market. The Company believes that with the
implementation of a new inventory management system, the use of the first-in,
first-out method results in A better matching of costs and revenues.
The cumulative effect of the change in this accounting method on prior years
is not determinable because the detailed information required to make the
calculation is not readily available from the Company's accounting records.
Depreciation
- -------------
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight line method of depreciation 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:
Buildings and improvements 30 years
Furniture, fixtures and equipment 5-15 years
Automobiles 3-7 years
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 Expenses in the Statements of
Operations.
NOTE B - BANKRUPTCY AND QUASI-REORGANIZATION
-----------------------------------
On May 14, 1993, (the petition date), Zearl T. Young, Inc. (the Company), filed
a voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code (Chapter 11) in the United States Bankruptcy Court for the
District of New Mexico (the Bankruptcy Court). The Company emerged from the
bankruptcy reorganization on August 11, 1993, with a Bankruptcy Court approved
plan of reorganization (the Plan). The voluntary reorganization under Chapter 11
was a continuation of the Company's restructuring of the Company's business and
finances initiated by management in 1992. During 1992, the Company liquidated
over two million dollars of obsolete inventory and closed an unprofitable
clothing store. Management also eliminated a significant amount of the remaining
obsolete inventory contributing to its net loss in 1993 and closed another
unprofitable store in 1993. Inventory levels were reduced to $2,551,157 at
December 31, 1993, from $4,055,460 at December 31, 1992.
Page 39
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE B - BANKRUPTCY AND QUASI-REORGANIZATION (continued)
-----------------------------------------------
During 1993, in addition to liquidating inventory, management attempted to
extend and restructure its secured debt. When unable to extend or restructure
the debt, management filed for reorganization and included in the Plan, the
sale of the Company's common-stock to new owners and the restructuring of debt
as described below.
During 1993, the Company issued approximately $1.9 million in notes payable
which are to be paid over various terms through the year 2001 in settlement of
pre-petition amounts due to pre-petition unsecured creditors (NOTE H). The
Company also restructured its bank notes and financing agreement which are to be
paid through 1998 (NOTE H). The restructured agreement and notes contained
certain restrictive covenants with which the Company must comply.
Under the Plan, all shares of existing common stock were canceled. The Company
amended its articles of incorporation and issued 2,000 shares of common stock to
the corporation purchasing the Company and 1,000,000 shares of redeemable
preferred stock to previously existing stockholders in accordance with the Plan
(NOTE 0).
As of December 31, 1994 the Company underwent a quasi -reorganization. A quasi-
reorganization is an elective accounting procedure (not requiring shareholder
approval in New Mexico) intended to restate assets and liabilities to current
values and eliminate any accumulated deficit in retained earnings.
Accordingly, the various debt and preferred stock settlements and asset
valuation adjustments that occurred during 1994 have been reported as direct
stockholders' equity transactions, rather than as results of operations, and the
Company's accumulated deficit as of December 31, 1994 has been eliminated
against paid-in capital. The book value for property and equipment is considered
to be current value and no valuation adjustment has been made.
The impact of the quasi -reorganization on stockholders' equity of the
settlements and reorganization transactions described above was as follows:
1. Bank debt settlement
Debt before settlement $ 2,044,298
Cash settlement (750,000)
Series B preferred stock issued, 40,000 shares (NOTE 0) (200,000)
-----------
$1,094,298
2. Settlement on debt to pre-petition creditors
Debt before settlement 1,314,692
Cash settlement (22,690)
Series B preferred stock issued, 185,764 shares (NOTE 0) (928,370)
Debt after settlement (265,948)
----------
97,684
Page 40
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE B - BANKRUPTCY AND QUASI-REORGANIZATION (continued)
-----------------------------------------------
3. Adjustment of assets to current value
Receivables (468,178)
Inventories (1,314,432)
------------
(1,782,610)
-----------
$ (590,628)
----------
Since the Company has emerged from the bankruptcy reorganization the financial
statements have been prepared on a going concern basis, which contemplates
continuity of operations, realization of assets, and liquidation of liabilities
in the ordinary course of business. The appropriateness of using the going
concern basis depends on, among other things, compliance with all requirements
in the Plan, future profitable operations, the ability to comply with the
restrictive covenants in the restructured debt and the ability to generate
sufficient cash from operations and financing sources to purchase inventory and
meet obligations.
NOTE C - RECEIVABLES
-----------
The Company's revenue and receivables are from retail sales to customers within
the Lea County, New Mexico trade area through several retail outlets selling a
variety of merchandise and services.
<TABLE>
<CAPTION>
December 31,
------------
Receivables consist of: 1994 1993
----- -----
<S> <C> <C>
Open trade accounts (NOTE M) $ 154,249 $ 90,087
Employees' accounts 190,859 220,939
---------- -----------
345,108 311,026
Less allowance for doubtful receivables (8,000) (11,000)
---------- -----------
337,108 300,026
Current portion of financing contracts
receivable (NOTE E) 5,076,249 5,310,381
---------- -----------
$5,413,357 $5,610,407
========== ===========
</TABLE>
NOTE D - INCOME TAXES
------------
Through September 30, 1993, income taxes on net earnings were payable personally
by the stockholders pursuant to an election under Subchapter S of the Internal
Revenue Code not to have the Company taxed as a corporation. Accordingly, no
provision was required or was made for federal or state income taxes from
January 1, 1993, through September 30, 1993.
From September 30, 1993, through December 31, 1993, and for the year ended
December 31, 1994, the Company provided for income taxes based on income
reported for financial statement purposes.
Page 41
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE D - INCOME TAXES (continued)
------------------------
The Company became a C Corporation on September 30, 1993. The 1993 loss of
$1,631,976 includes $445,882 of bankruptcy reorganization costs which is not a
deductible expense under the Internal Revenue Code. As a result, the income tax
net operating loss of $1,186,095 is to be divided between the period before and
after September 30, 1993. The income tax loss for the period prior to September
30, 1993, is allocable to the shareholders. The income tax loss from September
30, 1993, through December 31, 1993, is allocable to the Corporation. This
portion of the net operating loss is available to be carried forward to offset
future earnings and will expire in the year 2008 if not utilized. The estimated
deferred income tax benefit of $60,152 from utilization of this carryforward
is reported as an asset on the balance sheet as of December 31, 1993.
As of December 31, 1994, the Company has a net operating loss of approximately
$700,000 which will expire in the year 2009 if not utilized. The estimated
deferred income tax benefit net of a valuation allowance for doubtful
realization, consists of:
<TABLE>
<CAPTION>
December 31,
-----------
1994 1993
---- ----
<S> <C> <C>
Benefit $140,000 $ 60,152
Valuation allowance (79,848) -
-------- --------
$ 60,152 $ 60,152
======== ========
</TABLE>
NOTE E - FINANCING CONTRACTS RECEIVABLE
------------------------------
The Company finances customer purchases on various terms not exceeding 36
months. Interest charged varies and is currently 21%. There were 11,399 customer
contracts outstanding at December 31, 1994, and 12,077 customer contracts
outstanding at December 31, 1993. The contracts are secured by furniture,
appliances or other consumer products purchased. The balances consist of:
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
<S> <C> <C>
Financing contracts $ 9,466,491 $ 9,830,072
Less unearned finance and insurance charges (1,568,118) (1,520,501)
------------ -----------
7,898,373 8,309,571
Less allowance for doubtful collection (284,000) (344,000)
------------ -----------
$ 7,614,373 $ 7,965,571
============ ============
Current portion $ 5,076,249 $ 5,310,381
Noncurrent portion 2,538,124 2,655,190
----------- -----------
$ 7,614,373 $ 7,965,571
=========== ===========
</TABLE>
Page 42
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE F - PROPERTY AND EQUIPMENT
----------------------
Property and equipment are reported at cost less accumulated depreciation as
follows:
<TABLE>
<CAPTION>
December 31,
-----------
1994 1993
---- ----
<S> <C> <C>
Buildings $ 50,000 $ 50,000
Equipment 483,093 450,384
Furniture and fixtures 300,007 299,747
Automobiles 223,507 223,507
Leasehold improvements 169,300 90,184
---------- -----------
1,225,907 1,113,822
Less accumulated depreciation (821,706) (740,310)
---------- -----------
$ 404,201 $ 373,512
========== ===========
</TABLE>
Depreciation expense was $97,078 for 1994 and $69,690 for 1993.
NOTE G - INVESTMENT IN COOPERATIVE SECURITIES
------------------------------------
The Company does business with a supplier which operates as a cooperative. Under
the cooperative structure, purchasers receive 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 from 1993 to 1995.
During 1993 in accordance with the Company's approved reorganization plan, all
stocks and notes from the Cooperative were offset against the debt owed to the
Cooperative. The balances are as follows:
<TABLE>
<CAPTION>
December 31,1994 December 31, 1993
---------------- -----------------
Current Noncurrent Total Current Noncurrent Total
------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Stock $6,335 $ - $6,335 - - -
Notes - - - - - -
Accrued Interest - - - - - -
------ ------- ------ ------ --------- -----
$6,335 $ - $6,335 $ - $ - $ -
====== ======= ====== ====== ========= =====
</TABLE>
Page 43
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE H - LONG TERM DEBT
--------------
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
----- -----
<S> <C> <C>
Revolving note of $10,000,000.00 with a financial
institution, secured by substantially all assets of the
Company, bearing interest at the institution's base rate
plus 2.5%, the available 1oan amount varies on a formula
based upon the amount of eligible contracts receivable;
interest is payable monthly with the principal due December
1996. The loan agreement provides for acceleration of
the maturity of the note and certain other remedies upon
occurrence 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, 1994. As of
July 17, 1995, the lender is aware of these events, has not
accelerated maturity and has agreed to renegotiate the note
with revised Events of Default. $7,950,411 $ -
Various unsecured notes payable 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 $451,000 face
value life insurance policy on the life of the majority
preferred stockholder is pledged to partially pay these
notes payable. 265,948 617,087
Note payable to a related party, bearing interest at 11%,
monthly principal payments determined by accounts receivable
collections, secured by prior year written-off accounts
receivable. 69,000 -
Note payable, secured by real estate, bearing interest at
6%, due in monthly payments of principal and interest of
$500 through August, 2004. 44,211 46,787
Note payable, secured by equipment,, bearing interest at
7.9%, due in monthly payments of principal and interest of
$540 through September, 1995. 5,228 10,538
Note payable, secured by equipment, bearing interest at
7.9%, due in monthly payments of principal and interest of
$461 with a final payment due December, 1995. 4,700 10,134
Unsecured note payable to a related party, bearing interest
at 11%, variable monthly payments. 2,000 -
</TABLE>
Page 44
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE H - LONG TERM DEBT (continued)
--------------------------
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
<S> <C> <C>
Financing agreement with a consumer receivable financing
company, secured by all receivables, a life insurance policy
on Dollie Dimple Young, a second lien on inventory and the
personal guarantees of Zearl T. Young and Dollie Dimple
Young, bearing interest at prime rates plus 2.75%, the
available loan amount varies on a formula based upon the
amount of eligible contracts receivable; interest is payable
monthly with the principal due August 11, 1995, with an
option to renew for one year. Certain potential events of
default as that term is used in the loan agreement have
occurred and have been waived by the lender as of December
31, 1993. - 6,318,622
Bank notes payable, secured by certain mortgages on property
in Lea County, New Mexico; all inventory; second lien on all
receivables; insurance policies on the lives of two former
officer-stockholders; all common and preferred stock of the
Company; and personal guarantees of three former officer-
stockholders, bearing interest at 6.21%, due in quarterly
payments of principal and interest of $53,720 beginning
February 15, 1994, and a final payment of $1,511,320 due
December 31, 1998. A provision of the loan agreement
requiring principal payments on this note when the inventory
borrowing base falls below $3,000,000 has been waived by the
lender as of December 31, 1993. - 1,999,591
Unsecured note payable to a large pre-petition creditor,
guaranteed by a majority of the preferred stockholders,
bearing interest at 6.21%, due in monthly payments of
principal and interest of $7,531 beginning March 15, 1994,
through February 15, 2000. - 459,353
Unsecured note payable to a large pre-petition creditor,
bearing interest at 8% which is waived if the Company
purchases in excess of $1,500,000 in merchandise annually,
due in monthly payments of $3,632 beginning March 15, 1994,
through February 15, 2001. - 305,753
Note payable to financing company, bearing interest at
6.21%, due in quarterly payments of principal and interest
of $2,142 beginning March 15, 1994, with a final payment of
$93,752 due December 15, 1998. - 103,904
Unsecured note payable to a consumer receivable financing
company, bearing interest at 6.21%, due in monthly payments
of principal and interest of $987 beginning March 15, 1994,
with a final payment of $71,003 due November 15, 1998. 100,000
</TABLE>
Page 45
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE H - LONG TERM DEBT (continued)
--------------------------
December 31,
------------
1994 1993
---- ----
<TABLE>
<CAPTION>
<S> <C> <C>
Unsecured note payable to a related party, with
interest of $4,000 due in February, 1994, and
monthly principal payments of $20,000 through
February, 1994. - 40,000
---------- --------------
Less current portion 8,341,498 10,011,769
---------- --------------
$ 8,233,499 $ 9,742,662
=========== ==============
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Future maturities on these notes are:
For year ending December 31,
1995 $ 107,999
1996 7,975,496
1997 26,282
1998 27,545
1999 17,983
Thereafter 186,193
------------
$ 8,341,498
============
</TABLE>
NOTE I - CAPITAL LEASES
--------------
The Company leased computer and office equipment under capital leases. The
leases were converted to notes payable during 1993 as a result of the bankruptcy
reorganization, and are included in NOTE H.
NOTE J - INCOME TAX (EXPENSE) BENEFIT
----------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Income tax (expense) benefit consists of:
Year Ended December 31,
-----------------------
1994 1993
---- ----
Federal income tax on financial statement income
at statutory rate $ (48,117) $ -
State income tax (6,874) -
Deferred benefit resulting from:
Income tax reporting of debt forgiveness and
asset adjustments in 1994 118,126 -
1993 net operating loss incurred after
termination of S election (NOTE D) - 60,152
Adjustment of valuation allowance for
deferred tax assets (63,135) -
----------- ---------
$ - $60,152
=========== =========
</TABLE>
Page 46
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE K - PENSION PLAN
------------
The Company sponsors a defined contribution Profit Sharing Plan which covers
substantially all of its employees. Employees must be employed full time, must
have worked for the Company continuously for six months and must be at least
twenty-one years old. Discretionary contributions by the employer to the Plan
are decided annually. There were no discretionary contributions for the years
ended December 31, 1994 and 1993. The Plan also provides that employees can
contribute to the plan by reducing their salary by 3%. These salary reductions
resulted in profit sharing contributions of $6,683 in 1994 and $2,674 in 1993.
The Plan has received. a favorable determination letter from the Internal
Revenue Service.
NOTE L - STATEMENT OF CASH FLOWS
-----------------------
Cash and cash equivalents include petty cash, bank checking accounts and all
highly liquid investments purchased with a maturity of three months or less.
The following reconciles net income (loss) to the cash flows provided from (used
by) operating activities reported on the statements of cash flows:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
NET INCOME (LOSS) $ 137,478 $(1,571,824)
Depreciation 81,396 69,690
Expense paid by issuance of common stock - 100,000
Debt forgiveness income - (64,988)
Noncash income recognized (6,335) -
NET CHANGE IN
Inventories (401,185) 1,504,304
Accounts receivable (154,062) 343,898
Other assets 27,360 (37,242)
Prepaid expenses (296,835) (22,278)
Accounts payable 355,833 28,884
Other current liabilities (102,649) 93,865
Accrued interest (7,511) 117,338
Deferred income taxes - (60,152)
---------- -----------
CASH FLOWS PROVIDED FROM (USED BY)
OPERATING ACTIVITIES $(366,510) $501,495
========== ============
</TABLE>
NOTE M - RELATED PARTY TRANSACTION
-------------------------
The Company 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. The amount of
rent was $238,450 for the year ended December 31, 1994, and $164,441 for the
year ended December 31, 1993. Zearl T. Young, Inc. also paid certain expenses
related to the buildings such as property taxes and repairs and maintenance for
the years ended December 31, 1994, and 1993.
The Company also pays management and director fees to companies that are related
to the Company through common ownership. These amounts totaled $47,000 in 1994,
and $14,000 in 1993.
Page 47
<PAGE>
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE M - RELATED PARTY TRANSACTION (continued)
-------------------------------------
During 1994, the Company sold inventory to Young's Rent To Own, a related
Company on an open trade account. At December 31, 1994; the balance of the
account receivable was $67,809.
NOTE N - EARNINGS (LOSS) PER COMMON SHARE
--------------------------------
Earnings per common share are based on the weighted average number of common
shares outstanding (2,000 in 1994 and 1,530 in 1993).
There were no common stock equivalents or potentially dilutive securities during
1994 or 1993.
NOTE 0 - COMMON AND PREFERRED STOCK
--------------------------
The Company has three classes of stock; common, no-par preferred (Series A) and
$5 par preferred (Series B). Common stock is authorized at 5,000 shares with no
par value and 2,000 of those shares are issued and outstanding at December 31,
1994 and 1993.
Series A preferred stock is authorized at 1,000,000 shares with no par value.
All of which are issued and outstanding at December 31, 1994. The Series A
preferred stock has voting power limited to one advisory director to the Board
of Directors; is redeemable at the option of the Board of Directors, pays 5%
non-cumulative dividends annually based on an assumed value of $1 per share and
has a liquidation preference of 75% of the first $250,000 of the net value of
the Company's assets, 60% of the next $250,000 of the net value of the Company's
assets and 50% of the remaining net asset value.
The carrying amount of the Series A preferred stock-was reduced to zero at the
time of the quasi-reorganization since the Company does not intend to redeem the
Series A preferred stock at the $.40 per share as was anticipated prior to the
quasi-reorganization.
Series B preferred stock is authorized at 300,000 shares. The Series B preferred
stock has no voting rights and the Company is not required at any time or for
any reason to redeem this stock. The Series B preferred stock is preferred up to
$5 per share in event of liquidation or dissolution before any payments are made
to holders of common or Series A preferred stock. The Series B preferred stock
is entitled to cumulative dividends of $.25 per share annually. The Series B
preferred stock can be converted to common stock only in the event of certain
merger transactions and subject to limitations.
No dividends have been declared or paid on the common or preferred stock during
the years ended December 31, 1994 and 1993.
NOTE P - SUBSEQUENT EVENT
----------------
On February 28, 1995, the common stockholders of Zearl T. Young, Inc. exchanged
100% of the outstanding common stock of Zearl T. Young, Inc. for 80% of the
outstanding common stock of Pathfinder Corporation, a Nevada Corporation. As a
result of this transaction, Zearl T. Young, Inc. has become a wholly owned
subsidiary of Pathfinder Corporation.
Page 48
<PAGE>
SUPPLEMENTARY INFORMATION
-------------------------
Page 49
<PAGE>
JOHNSON, MILLER & CO.
Certified Public Accountants
A Professional Corporation
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
ON SUPPLEMENTARY INFORMATION
----------------------------
The Board of Directors
Zearl T. Young, Inc.
Hobbs, New Mexico
Our audits were conducted for the purpose of forming an opinion on the financial
statements of Zearl T. Young, Inc. as of December 31, 1994, and 1993.
The supplementary schedules of selling expenses and general and administrative
expenses are presented for purposes of additional analysis and are not a
required part of the financial statements. Such information has been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/Johnson, Miller & Co.
Hobbs, New Mexico
April 28, 1995
225 E. Bender - P.O. Drawer 220 - Hobbs, New Mexico 88241 - (505) 393-2171 -
FAX (505) 397-4301
Page 50
<PAGE>
ZEARL T. YOUNG, INC.
SELLING EXPENSES
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Salaries - sales $ 616,939 $ 758,697
Advertising 418,770 428,354
Salaries - warehouse 151,278 280,255
Sales and promotion 46,052 68,076
--------- ----------
$1,233,039 $ 1,535,382
========= ==========
</TABLE>
Page 51
<PAGE>
ZEARL T. YOUNG, INC.
GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
------ -------
<S> <C> <C>
Interest expense $ 813,135 $ 731,477
Salaries - administration 665,342 489,772
Salaries - general 285,212 438,997
Professional fees 242,702 399,171
Rent 238,450 164,441
Taxes - payroll 139,849 189,517
Utilities 114,508 137,730
Depreciation 97,078 69,690
Insurance - property and liability 85,993 167,200
Miscellaneous expense 78,853 57,816
Travel and meal expense 75,069 53,284
Telephone 64,255 69,113
Supplies 58,406 85,896
Bad debts 52,369 700,476
Insurance - workers' compensation 48,702 63,271
Directors and management fees 47,000 14,000
Gas and oil 39,621 49,529
Officers' life insurance 36,624 56,463
Postage 31,737 22,770
Insurance - health 30,346 39,908
Amortization of loan fees 23,077 -
Equipment rental 21,836 15,947
Bank charges 17,501 8,970
Taxes - property 12,403 12,981
Temporary labor 12,123 62,438
Repairs and maintenance - equipment 9,119 35,544
Employee expense 9,104 -
Computer expense 8,203 7,302
Profit sharing 6,683 2,674
Repairs and maintenance - buildings 6,358 22,830
Other taxes and licenses 5,352 1,001
Repairs and maintenance - merchandise 4,640 8,639
Dues and subscription 3,970 12,043
Penalties 2,336 1,798
Laundry and uniforms 1,878 5,380
Contributions 1,405 2,277
---------- ----------
$3,391,239 $4,200,345
========== ==========
</TABLE>
Page 52
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 73,782
<SECURITIES> 16,550
<RECEIVABLES> 4,456,621
<ALLOWANCES> 0
<INVENTORY> 1,026,491
<CURRENT-ASSETS> 5,793,089
<PP&E> 1,269,341
<DEPRECIATION> 918,472
<TOTAL-ASSETS> 8,874,210
<CURRENT-LIABILITIES> 8,712,511
<BONDS> 0
0
0
<COMMON> 143,521
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,874,210
<SALES> 5,621,857
<TOTAL-REVENUES> 5,621,857
<CGS> 4,071,915
<TOTAL-COSTS> 4,071,915
<OTHER-EXPENSES> 4,009,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 604,444
<INCOME-PRETAX> (1,455,466)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,455,466)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
