[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Bradley Enterprises, Inc.
Centralia, Washington
We have audited the accompanying balance sheet of Bradley Enterprises, Inc. as
of September 30, 1996 and the related statements of operations and retained
earnings, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bradley Enterprises, Inc., as
of September 30, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Balukoff, Lindstrom & Co., P.A.
November 14, 1996
Boise, Idaho
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BRADLEY ENTERPRISES, INC.
BALANCE SHEET
September 30, 1996
ASSETS
CURRENT ASSETS
Cash $ 46,019
Accounts receivable and notes receivable 411,925
Inventories 1,001,900
Prepaid expenses and other current assets 96,776
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TOTAL CURRENT ASSETS 1,556,620
PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 276,980
Furniture and equipment 537,158
Vehicles 408,418
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1,222,556
Accumulated depreciation (694,996)
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527,560
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$ 2,084,180
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 415,480
Accounts payable 292,906
Accrued liabilities 154,459
Income taxes payable 40,628
Current portion of long-term debt 121,503
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TOTAL CURRENT LIABILITIES 1,024,976
LONG-TERM DEBT, less current portion 224,516
SHAREHOLDERS' EQUITY
Common stock, Class A voting, $10 par value;
50 shares authorized, issued and outstanding 500
Common stock, Class B non-voting, $10 par
value; 4,950 shares authorized, 1,150 issued
and outstanding 11,500
Retained earnings 822,688
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834,688
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$ 2,084,180
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See accompanying notes
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BRADLEY ENTERPRISES, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended September 30, 1996
Sales (net of returns and allowances)
Axles and tires $ 9,674,186
Accessories and siding 2,839,782
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TOTAL SALES 12,513,968
Costs of goods sold 11,189,622
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GROSS MARGIN 1,324,346
Selling, general and administrative expenses 1,080,773
Interest expense 87,777
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1,168,550
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OPERATING INCOME 155,796
Other income 5,481
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INCOME BEFORE INCOME TAXES 161,277
Income taxes 54,490
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NET INCOME 106,787
RETAINED EARNINGS AT BEGINNING
OF YEAR 715,901
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RETAINED EARNINGS AT END OF YEAR $ 822,688
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See accompanying notes
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BRADLEY ENTERRPISES, INC.
STATEMENT OF CASH FLOWS
Year Ended September 30, 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 106,787
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 155,798
Gain on sale of equipment (106)
Changes in assets and liabilities
Accounts receivable (22,584)
Inventories (167,976)
Prepaid expenses and other current assets (2,525)
Accounts payable (123,252)
Accrued liabilities 101,612
Income taxes payable 34,193
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 81,947
CASH FLOW FROM INVESTING ACTIVITIES
Issuance of notes receivable (1,976)
Payments on notes receivable 81,102
Additions to property and equipment (84,810)
Proceeds from sale of equipment 4,299
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NET CASH USED BY
INVESTING ACTIVITIES (1,385)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on line of credit (11,805,124)
Borrowings on line of credit 11,813,000
Payments on debt (112,552)
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NET CASH USED BY
FINANCING ACTIVITIES (104,676)
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NET DECREASE IN CASH (24,114)
CASH AT BEGINNING OF YEAR 70,133
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CASH AT END OF YEAR $ 46,019
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 88,328
Income taxes paid $ 19,176
Noncash financing transactions:
Purchase of equipment with long term debt $ 63,217
See accompanying notes
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BRADLEY ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company is engaged in the business of repairing and reconditioning axles and
tires for the manufactured housing industry. The Company also sells skirting
and other aftermarket accessory products to manufactured housing dealers. The
Company grants credit to customers primarily in Oregon and Washington,
substantially all of whom are manufactured housing factories and suppliers and
new site-built home construction contractors.
MAJOR CUSTOMERS AND SUPPLIERS
The Company's primary customers for reconditioned axles and tires are Fleetwood
of Oregon, Goldenwest Homes, and Redman Homes, three major manufactured housing
producers. These customers represented approximately 16%, 14%, and 13% of total
Company sales in 1996.
The Company purchases axles and tires from one major supplier, Dean Wheelon.
This supplier provided approximately $1,381,000 of total Company inventory
purchases in 1996.
CASH
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE BAD DEBTS
The Company performs credit history checks and limited financial analysis before
credit terms are offered to customers. Accounts receivable are generally
unsecured. Bad debts are accounted for using the direct write-off method.
Expense is recognized only when a specific account is determined to be
uncollectible. The effects of using this method approximate those of the
allowance method.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Inventories consist of the following:
Raw materials $ 290,475
Finished goods 711,425
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$ 1,001,900
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BRADLEY ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated on the basis of cost. Depreciation is
calculated using accelerated methods over the estimated useful life of the
assets for financial and tax reporting purposes.
VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at September 30, 1996, does not differ materially from the aggregate
carrying values of its financial instruments recorded in the accompanying
balance sheet. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is necessarily required in interpreting
market data to develop the estimates of fair value, and, accordingly,
the estimates are not necessarily indicative of the amounts that the Company
could realize in a current market exchange.
SIGNIFICANT ESTIMATES
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and reported
revenues and expenses. Significant estimates used in preparing these financial
statements include those assumed in determining the collectibility of
receivables, and determining the lower of cost or market and obsolescence on
inventories. It is at least reasonably possible that the significant estimates
will change within the next year.
NOTE B - LEASES
The Company leases administrative office space, certain buildings, and yard
space from MBFI, a related party. The leases, which expire December 1996 and
March 1998 are classified as operating leases.
Future minimum payments, by fiscal year and in the aggregate, under the current
noncancellable operating leases consist of the following at September 30, 1996:
1997 $ 93,600
1998 45,000
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$ 138,600
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Rental expense and rent paid to related parties for the year ended September 30,
1996 was $104,400.
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BRADLEY ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
NOTE C - LINE OF CREDIT
Line of credit consists of the following:
Payable to bank under a revolving
line of credit; limit $600,000, expires
February 1, 1997 at prime plus 1.25%,
(9.50% as of September 30, 1996)
secured by receivables, inventories,
equipment and vehicles $ 415,480
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Under the restrictive covenants of the debt agreements, the Company must
maintain a net worth of $650,000, keep the indebtedness to net worth ratio less
than 2.25, maintain a current ratio not less than 1.3 to 1.0, and hold annual
capital expenditures under $150,000. At September 30, 1996, the Company was in
compliance with the restrictive covenants.
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
Note payable to bank for purchase of
equipment, monthly payments of
$7,488 including interest at prime
plus 1.5% (9.75% at September 30,
1996) due March 1999, secured by
equipment $ 194,759
Note payable to bank for purchase of
vehicle, monthly payments of $603
including interest at 8.75%, due September
1998, secured by vehicle 13,065
Note payable to financial institution
for purchase of vehicle,
monthly payments of $496 including
interest at 8.75%, due November 1997,
secured by vehicle 6,098
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BRADLEY ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note payable to financial institution
for purchase of vehicle,
monthly payments of $488 including
interest at 8.25%, due July 1999,
secured by vehicle 14,762
Note payable to financial institution
for purchase of vehicle,
monthly payments of $473 including
interest at 10.25%, due May 2000,
secured by vehicle 17,281
Note payable to financial institution
for purchase of vehicle,
monthly payments of $760 including
interest at 8.75%, due September 2000,
secured by vehicle 30,093
Note payable to financial institution
for purchase of equipment,
monthly payments of $591 including
interest at prime plus 1.5% (9.75 at
September 30,1996), due December
1999, secured by equipment 19,831
Note payable to financial institution
for purchase of equipment,
monthly payments of $435 including
interest at 9.69%, due January 2000,
secured by equipment 14,546
Note payable to financial institution
for purchase of vehicle
monthly payments of $568 including
interest at 8.25%, due June 1999,
secured by vehicle 16,725
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BRADLEY ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note payable to financial institution
for purchase of vehicle
monthly payments of $553 including
interest at 8.25%, due December 1999,
secured by vehicle 18,859
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346,019
Less current portion (121,503)
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$ 224,516
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Subsequent maturities of long-term debt at September 30, 1996 are as follows:
1997 $ 121,503
1998 127,971
1999 79,197
2000 17,348
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$ 346,019
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NOTE E - INCOME TAXES
The components of income tax expense for the year ended September 30, 1996 are
as follows:
1996
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Current
Federal $ 53,154
State 2,457
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55,611
Deferred
Federal (1,018)
State (103)
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(1,121)
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$ 54,490
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The following reconciles the federal tax provision with the expected tax
provision by applying graduated rates to income before income taxes as of
September 30, 1996:
Federal tax expense $ 46,150
Nondeductible expenses 5,986
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$ 52,136
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BRADLEY ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
NOTE F- RELATED PARTY TRANSACTIONS
The Company leases its administrative office space, certain buildings and yard
space from MBFI, a company owned by members of management. During the year the
Company paid $104,000 of rent expense to MBFI. During the year, MBFI paid the
Company $79,144 on a note receivable.
During the year the Company made a $30,000 loan to one of its shareholders. The
loan was paid off during the year with accrued interest.
The Company purchases inventory from a supplier that is owned by a partnership
in which members of the Company's management are involved as partners. The
Company purchased $258,876 from the supplier during the year ended September 30,
1996.
NOTE G- EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) retirement plan effective October 1, 1995. The
plan covers all employees who have completed one year of service. The Plan
allows employees to make elective deferrals of up to 15% subject to Federal
maximum contribution limits. The employer contributions for matching elective
deferrals, if any, are at the discretion of the Board of Directors on an annual
basis. In addition, the Company makes discretionary profit sharing
contributions. Total Company contributions for 1996 were $45,000.
NOTE H- SUBSEQUENT EVENTS
Effective November 14, 1996, the Company was acquired by T.J.T., Inc., an axle
and tire recycler headquartered in Emmett, Idaho. The Company shareholders
exchanged all Company stock for $500,000 and 940,000 shares of restricted
T.J.T., Inc. common stock. T.J.T., Inc. is a publicly traded company registered
with Nasdaq SmallCap Market and Boston Stock Exchange.
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