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
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
ZEARL T. YOUNG, INC.
BALANCE SHEETS
DECEMBER 31,
ASSETS
-----------
1994 1993
------- -------
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
========== ==========
The accompanying notes are an integral part of the financial statements.
Page 35
ZEARL T. YOUNG, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1994 1993
------- -------
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)
=========== ============
The accompanying notes are an integral part of the financial statements.
Page 36
NO PAR
PREFERRED STOCK
- ------------------------------
Number Retained Total
of Paid-in Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
- ------- -------- -------- ----------- -----------
- $ - $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
========= ======== ========= ========= ===========
Page 37
ZEARL T. YOUNG, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1994 1993
------ ------
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 $ -
=========== ==========
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
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
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
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.
December 31,
------------
Receivables consist of: 1994 1993
----- -----
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
========== ===========
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
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:
December 31,
-----------
1994 1993
---- ----
Benefit $140,000 $ 60,152
Valuation allowance (79,848) -
-------- --------
$ 60,152 $ 60,152
======== ========
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:
December 31,
------------
1994 1993
---- ----
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
=========== ===========
Page 42
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:
December 31,
-----------
1994 1993
---- ----
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
========== ===========
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:
December 31,1994 December 31, 1993
---------------- -----------------
Current Noncurrent Total Current Noncurrent Total
------- ---------- ----- ------- ---------- -----
Stock $6,335 $ - $6,335 - - -
Notes - - - - - -
Accrued Interest - - - - - -
------ ------- ------ ------ --------- -----
$6,335 $ - $6,335 $ - $ - $ -
====== ======= ====== ====== ========= =====
Page 43
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE H - LONG TERM DEBT
--------------
December 31,
------------
1994 1993
----- -----
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 -
Page 44
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE H - LONG TERM DEBT (continued)
--------------------------
December 31,
------------
1994 1993
---- ----
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
Page 45
ZEARL T. YOUNG, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE H - LONG TERM DEBT (continued)
--------------------------
December 31,
------------
1994 1993
---- ----
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
=========== ==============
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
============
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
----------------------------
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
=========== =========
Page 46
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:
1994 1993
----- -----
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
========== ============
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
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
SUPPLEMENTARY INFORMATION
-------------------------
Page 49
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
ZEARL T. YOUNG, INC.
SELLING EXPENSES
YEAR ENDED DECEMBER 31,
1994 1993
---- ----
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
========= ==========
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ZEARL T. YOUNG, INC.
GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31,
1994 1993
------ -------
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
========== ==========
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