U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from . . . . . . . . . . . . . . .
. . . . . to . . . . . . . . . . . . . . . . . . . . .
Commission file number 0-21087
Tollycraft Yacht Corporation
(Exact name of small business issuer as specified in its
charter)
Minnesota
(State or other jurisdiction of incorporation or
organization)
41-1735422
(IRS Employer Identification No.)
2200 Clinton Avenue, Kelso, Washington 98626
(Address of principal executive offices)
(360) 423-5160
(Issuer's telephone number)
Child Guard Corporation, 441 Crescent Drive, Albert Lea,
Minnesota 56007
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all the reports
required to be filed by Section 13 or 15(d) of the Exchange
Act during the past twelve 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___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuers classes of common equity, as of the latest practible
date: 50,000,000
Transitional Small Business Disclosure Format (check
one):
Yes _______ No __X____
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TOLLYCRAFT YACHT CORPORATION
Consolidated Balance Sheets
ASSETS
December 31, June 30,
1995 1996
Current assets:
Cash $ 20,022 $ 44
Accounts receivable 23,038 0
Raw material inventories 450,000 455,000
Costs incurred and income recognized in excess
of billings on uncompleted contracts 1,598,669 1,606,314
Other current assets 58,105 149,927
Total current assets 2,149,834 2,211,285
Equipment, net 2,786,908 2,841,219
Product rights 22,000 22,000
Net deferred tax assets 15,325 15,325
Totals assets $4,974,067 $ 5,089,829
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 771,661 1,113,285
Customer deposits 155,000 727,350
Work-in-process financing 2,942,287 3,000,000
Accrued payroll and payroll related liabilitie 1,635,480 2,389,817
Notes payable 2,708,986 3,258,117
Other accrued liabilities 248,304 413,900
Long-term debt, due within one year 254,300 254,300
Total current liabilities 8,716,018 11,156,769
Long-term debt 737,380 1,126,534
Stockholders' equity (deficit):
Common stock, no par value, 1,000,000 shares 1,581,267 1,581,267
authorized, issued and outstanding
Retained deficit (6,060,598) (8,774,741)
Total stockholders' equity (deficit) (4,479,331) (7,193,474)
Total liabilities and
stockholders'equity (deficit) $ 4,974,067 $ 5,089,829
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Consolidated Statements of Operations
Three Months Six Months
Ended June 30, Ended June 30,
1995 1996 1995 1996
Net sales $2,531,741 $1,168,033 $5,187,629 $3,765,623
Cost of sales 2,626,882 1,058,670 5,538,214 4,237,833
Gross margin (95,141) 109,363 (350,585) (472,210)
Selling expenses 137,905 44,469 317,964 268,588
General and
administrative
expenses 418,152 824,134 720,103 1,640,319
Loss from
operations (651,198) (759,240) (1,388,652) (2,381,117)
Other income
(expenses):
Interest, net (226,809) (176,722) (311,584) (332,548)
Other 0 (479) 0 (479)
Total other
income
(expenses) (226,809) (177,201) (311,584) (333,027)
Loss before
benefit for
income taxes (878,007) (936,441) (1,700,236) (2,714,144)
Benefit for income
taxes-deferred 15,325 0 15,325 0
Net loss $(862,682) $(936,441) $(1,684,911) $(2,714,144)
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Consolidated Statements of Cash Flows
Six Months
Ended June 30,
1995 1996
Cash, January 1, $ 265,664 $ 20,022
Cash flows from operating activities:
Net Loss (1,684,911) (2,714,144)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 157,174 176,535
Change in assets and liabilities:
Accounts receivable 23,038
Inventories (83,668) (5,000)
Costs incurred and income recognized
in excess of billings on uncompleted contracts 513,981 (7,645)
Other current assets (102,507) (91,821)
Accounts payable (341,939) 341,624
Customer deposits (730,535) 572,350
Accrued payroll liabilities 235,920 754,337
Other accrued liabilities 1,727 165,596
(2,034,758) (785,130)
Cash flows from investing activities:
Purchase of equipment (72,926) (230,846)
Investment in Purchase option (500) 0
(73,426) (230,846)
Cash flows from financing activities:
Proceeds from work-in-process financing 1,607,759 1,203,835
Proceeds from notes payable 1,072,732 1,261,791
Proceeds from long-term debt 41,838 406,615
Repayment of work-in-process financing 0 (1,146,122)
Repayment of notes payable (687,035) (712,660)
Repayment of long-term debt 0 (17,461)
2,035,294 995,998
Cash, June 30, $ 192,774 $ 44
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Notes to Consolidated Financial Statements
For the Three Months Ending June 30, 1996
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared
by Tollycraft Yacht Corporation without audit, pursuant
to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to
such rules and regulations.
The financial information presented herein reflects all
normal recurring adjustments which are, in the opinion of
management, necessary for fair presentation of the
results for the interim periods presented. The results
for the interim periods are not necessarily indicative of
the results to be expected for the full year.
The presentation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
reported amounts of assets, liabilities, income and
expenses and disclosure of other accounting information.
Future events could alter such estimates.
Note 2 - Summary of Significant Accounting Policies
The Company and Acquisitions
Tollycraft Yacht Corporation (the Company ) was
incorporated under the laws of the State of
Minnesota on December 7, 1992. The Company changed
its name from Child Guard Corporation in January
1996. Also in January 1996 the Company acquired
all of the outstanding common stock of Tollycraft
Acquisition Corporation ( TAC ), a Washington
corporation incorporated on February 4, 1994.
The acquisition by the Company of TAC has been
accounted for as a pooling of interests. Except
where otherwise indicated, references to the
Company in these financial statements and notes
thereto include the activities of TAC.
Nature of business
Tollycraft Yacht Corporation (the Company ), is
engaged in the manufacture and distribution of
luxury motor yachts.
Cash
The Company periodically throughout the period
maintained cash balances in its bank accounts in
excess of federally insured limits.
Inventories
Inventories are valued at the lower of average cost
or market.
Equipment
Equipment is valued at cost. Depreciation of
equipment is provided using the straight-line
method over the estimated useful lives of the
assets. Additions and improvements, including
patterns and molds for yacht production which have
been produced in house, are capitalized at cost.
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Notes to Consolidated Financial Statements (continued)
Note 1 - Summary of Significant Accounting Policies
(continued)
1.Estimated Warranties
The Company records an accrual at the time of sale
of each yacht for estimated warranty claims. There
is a general one year parts and labor warranty to
the original owner for defects in material and
workmanship. In addition, there is a 15 year
transferable limited warranty for structural
defects in all Tollycraft built hulls, deck
bridges, stringers, and bulkheads.
1. Revenue Recognition
Revenue is recognized using the percentage-of-
completion method. This method is measured by
comparing the percentage of costs incurred to date
to the estimated total cost for each finished
yacht. Yacht costs include all direct material
costs, direct labor costs, and indirect
manufacturing costs such as indirect labor,
supplies, small tools, and other indirect
manufacturing overhead costs. Selling, general and
administrative costs, and interest on indebtedness
are charged to expense as incurred.
Changes in job performance, job conditions, and
estimated profitability may result in revisions to
estimated costs and income, which are recognized in
the period in which the revisions are determined.
The current asset Costs incurred and income
recognized in excess of billings on uncompleted
contracts, represents costs and estimated contract
profits for yachts in process.
1. Pension and profit sharing plans
Union employees participate in a pension plan which
qualifies under Section 401(k) of the Internal
Revenue Code. The Company is required to make
annual contributions of $.05 per labor hour worked.
Non-union employees of the Company also participate
in a Section 401(k) pension plan. The Company is
not required and has not made any contributions to
the non-union plan.
Note 3 - Uncompleted Contracts
Costs incurred and billings on uncompleted contracts
consisted of the following:
Costs incurred on uncompleted contracts $ 1,449,727
Income (loss) recognized 156,587
$ 1,606,314
Note 4 - Equipment and Leasehold Improvements
Equipment consists of the following:
Manufacturing equipment $ 354,480
Office furniture and equipment 376,320
Molds and patterns 2,805,056
3,535,856
Less accumulated depreciation (694,637)
$ 2,841,219
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Notes to Consolidated Financial Statements (continued)
Note 4 - Work-in-process Financing
The Company has available a $3,000,000 line-of-credit
with Caterpillar Financial Services Corporation. Under
the terms of the agreement, borrowings are limited to 75%
of the dealer net price of each particular yacht.
Advances are made at 1/3 upon commencement of hull
lamination, 1/3 upon commencement of the assembly
process, and 1/3 upon installation of the engines.
Interest on borrowings are payable monthly at a variable
rate. Borrowings are collateralized by substantially all
assets. Outstanding borrowings at June 30, 1996 were $
3,000,000.
The Company is also required to maintain a minimum level
of stockholder s equity and a ratio of total liabilities
to stockholders equity. At June 30 31, 1996, the Company
was in violation of these minimum requirements.
Note 5 - Notes Payable
The Company has a line-of-credit with Vera Corporation
for working capital purposes. Interest on the borrowings
are payable monthly at a rate of 12% per annum.
Borrowings are collateralized by substantially all
assets. Outstanding borrowings at June 30, 1996 were $
3,258,117.
Note 6 - Other Accrued Liabilities
Other accrued liabilities consisted of the following:
Estimated liabilities for warranties $ 25,051
Interest 95,005
Accrued factory lease 59,000
Accrued employee medical insurance 50,250
Liability insurance contract payable 80,832
Excise taxes 40,750
Other current liabilities 63,012
$ 413,900
Note 7 - Long-term Debt
Long-term debt consists of various obligations assumed in
1994 by Tollycraft Acquisition Corporation in connection
with the purchase of the yacht manufacturing business,
tooling, molds, patterns and all rights and privileges to
the name Tollycraft .
Note 8 - Operating Lease Commitments
The Company leases certain vehicles and machinery under
non-cancelable operating leases. Minimum future lease
payments under these operating leases are as follows:
Years ending 1996 $ 19,836
1997 19,836
1998 6,612
$ 46,284
The Company also leases its manufacturing facilities and
effective October 1, 1995 has entered into a twenty year
lease at $29,500 per month. The agreement calls for 7%
increases at the end of each five year period of the
lease.
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Notes to Consolidated Financial Statements (continued)
Note 9 - Provision for Income Taxes
Deferred income taxes are recognized for all significant
temporary differences between the tax and financial
statement basis of assets and liabilities. The
classification of the resulting deferred tax assets and
liabilities is based upon the classification of the
related balance sheet asset or liability. Deferred tax
assets and liabilities result principally from the
Company s net operating loss carryforwards, differences
in depreciation methods for tax purposes and other
temporary differences. A valuation allowance has been
created for purposes of financial reporting.
Note 10 - Subsequent Events
Tollycraft Yacht Corporation has issued and is currently
offering in a private placement $3,000,000 of promissory
notes convertible into common stock. Additionally, the
Company has signed a letter of intent with a financing
consultant to provide investment banking and advisory
services in connection with a secondary offering of
$9,000,000 of common stock.
<PAGE>
Item 2. Management s Discussion and Analysis or Plan of
Operation
Tollycraft Acquisition Corporation ( TAC ) is the successor of
the original manufacturer of Tollycraft Yachts. The
stockholders of TAC formed a new management group with
specific goals including (1) The commitment to maintain
customer and dealer relationships, (2) Shape maximum customer
confidence, (3) Invest in updating and redesigning the
current product line, (4) Develop a new series of yachts,
(5) Streamline management, (6) Expand the dealer network.
Significant expenses have been incurred to implement these
goals.
In the fall of 1995 Tollycraft Acquisition Corporation was
actively seeking a business partner to raise funds in order to
continue with its business plan. As part of the business plan
Tollycraft Acquisition Corporation was acquired by Child Guard
Corporation in order to raise capital in the public market.
Results of Operations:
Current results reflect the difficulty of making significant
changes in the operations of a manufacturer of large goods
with heavy working capital requirements. Some improvement has
been seen in material cost containment and manufacturing labor
efficiencies. For the second quarter of 1996, the gross
margin improved to 9%. The improvement is the result of
increased labor efficiencies, material cost containment and
higher sales prices for finished goods.
Management continues to put emphasis on the following steps to
improve the operations of the Company:
1. Increased basic pricing on current models for
greater profit margins to reflect the higher
quality products being manufactured.
2. Select new materials to upgrade the quality of
interiors while emphasizing production efficiency.
3. Design a new line of yachts to augment the current
models offered. The new yachts are engineered for
more efficient production and priced at greater
profit margins.
4. Continue developing relationships with dealers that
are capable of providing their own inventory
financing.
5. Increase the dealer network for nationwide
marketing capability to increase sales volume and
reach economies of scale.
6. Redesign manufacturing processes to make production
more efficient.
7. Modernize the manufacturing plant for increased
capacity and efficiency of material flow.
8. Develop a labor tracking system to monitor and
reduce direct labor costs.
During the second quarter the Company continued to experience
problems relating to cash flow. Direct labor personnel were
cut back to reflect the availability of cash to meet payroll
needs. With the reduced manufacturing capacity a portion of
the overhead personnel were also given temporary lay off
notices pending the call back of direct labor to manufacture
at full capacity.
The decrease in manufacturing capacity resulted in a decrease
in revenues for the second quarter. Revenues declined 45%
from first quarter results of $2,596,358 to $1,168,033.
However, the gross margin improved from a negative ratio of -
17% to a positive ratio of approximately 9%.
<PAGE>
Financial Condition:
During the second quarter of 1996, the Company continued to
incur operating losses of $936,441 which increased the
negative net worth to -$8,774,741. The cumulative losses of
the Company continue to be financed through current
liabilities. Current liabilities of $11,156,769 exceed
current assets of $2,211,285 resulting in a current ratio of
.20 as compared to .29 at the end of the first quarter.
Current liabilities include a revolving credit facility of
$3,000,000 from a marine engine supplier to assist financing
of work-in-process inventories. The remaining current
liabilities are trade payables, another working capital loan,
deposits from customers, and accrued payroll related expenses
and undeposited payroll taxes.
TAC has not been able to make timely payments to trade
suppliers and various taxing authorities. Deferred payment
terms have been negotiated with the taxing authorities and the
vast majority of trade vendors. Material suppliers continue
to provide the Company with its raw material needs on a COD
basis and no orders have been canceled.
During the second quarter of 1996 union employees rejected a
one year contract recommended by union leadership.
Negotiations continue with the assistance of a federal
mediator. A favorable outcome is anticipated by management.
Long-term debt of $1,380,834 (including current maturities) is
mainly obligations assumed by TAC in exchange for
miscellaneous machinery and equipment as well as the molds and
tooling necessary to manufacture the current line of yachts.
Management believes the book value of these assets is
significantly understated when considering replacement cost
values and the potential earnings capability of the tooling.
Capital expenditures during the second quarter of 1996 were $
195,752 adding to a total investment in equipment and tooling
of $704,095 since the reorganization. A majority of the
expenditures in the second quarter relate to the construction
of molds and tooling for a new 48 pilothouse motoryacht.
This new yacht design is planned to improve manufacturing
processes and contribute a larger gross margin to the product
mix. Funds for these capital expenditures have been provided
through current operations with a corresponding increase in
current debt. In order to establish the Company as a viable
competitor in the industry, management has established an
aggressive time schedule to upgrade existing molds and tooling
and manufacture additional molds and tooling for the newly
designed line of yachts. Total capital expenditures necessary
for completion of the product line upgrade and expansion is
approximately $2,650,000. The Company is dependent on
external sources of funding to complete the plan.
The Company is considering various alternatives to improve its
financial position, meet ongoing trade obligations, pay
delinquent tax balances, and fund capital expenditure
requirements including converting current debt to equity
through the issuance of common shares, and the sale of common
shares to raise working capital. The Company has engaged the
services of professional advisors to perform these investment
activities. In addition, another supplier of marine engines
has expressed an interest in providing working capital funding
for projects that contain its products.
In order to increase production to a profitable level, the
Company is in need of additional capital to build production
tooling, finance inventory and provide working capital. The
Company is dependent on external sources of liquidity until
projected levels of production and improvements in direct
costs are achieved which will return the Company to
profitability and a positive cash flow. A material commitment
for capital expenditures and working capital is necessary to
meet the projected goals. The expected source for a majority
of the funds is from a private placement stock offering
closely followed by a public stock offering.
The Company has not realized additional working capital from
the private placement memorandum or the public stock offering.
Management anticipates the need to halt production in the
third quarter pending additional capital infusion in order to
continue manufacturing.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
All legal proceedings referenced involve Tollycraft
Acquisition Corporation ( TAC ).
Tollycraft Yachts Corp. (incorporated in Washington),
Bankruptcy Case No. 93-34273T, United States Bankruptcy
Court for the Western District of Washington at Tacoma
Litigation surrounding payment of claim for
attorney fees allegedly incurred by Transamerica
Commercial Financial Corp. in the bankruptcy case
involving the predecessor company. Ruling in favor
of Transamerica has been appealed to the 9th
circuit Bankruptcy appellate Panel. The parties
are finalizing a recently negotiated settlement.
Tollycraft Yachts Corp./California Factors & Finance and
Tollycraft Acquisition Corporation v. Frederick Paulsell,
Michael Coe, Thomas Cable, Nick Schmitt, et al.,
Bankruptcy Adversary No. 93-34595T, United States
Bankruptcy Court for the Western District of Washington
at Tacoma.
Complaint for breach of contract and interference
with contractual relationship. The parties are
finalizing a settlement.
Christine Marie Trujillo v. Tollycraft Yachts
Threatened litigation in Superior Court of
Washington for Cowlitz County
Claim for sexual harassment and wrongful
termination. Complaint asks for unspecified sum in
special damages for lost wages, benefits and
expenses and general damages for emotional distress
and attorney fees. The parties are negotiating a
resolution of the matter.
Item 2. Changes in Securities
No reportable events
Item 3. Defaults upon Senior Securities
No reportable events
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
No reportable events
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
Second Quarter 10 QSB [Signatures]
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Tollycraft Yacht Corporation
(Registrant)
Date: August 30, 1996
(Signature)
D.R. Cooley
President
Chief Executive Officer
(Signature)
William H. Lee
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1996, CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<CIK> 0001019867
<NAME> TOLLYCRAFT YACHT CORP.
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