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 March 31, 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, March 31,
1995 1996
Current assets:
Cash $ 20,022 $ 84,170
Accounts receivable 23,038 23,038
Raw material inventories 450,000 450,000
Costs incurred and income recognized in
excess of billings on uncompleted
contracts 1,598,669 2,573,307
Other current assets 58,105 29,168
Total current assets 2,149,834 3,159,683
Equipment, net 2,786,908 2,736,892
Product rights 22,000 22,000
Net deferred tax assets 15,325 15,325
Totals assets 4,974,067 5,933,900
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 771,661 1,357,058
Customer deposits 155,000 823,000
Work-in-process financing 2,942,287 3,081,933
Accrued payroll and payroll related
liabilities 1,635,480 2,060,645
Notes payable 2,708,986 3,165,637
Other accrued liabilities 248,304 317,844
Long-term debt, due within one year 254,300 254,300
Total current liabilities 8,716,018 11,060,417
Long-term debt 737,380 1,130,995
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) (7,838,779)
Total stockholders'
equity (deficit) (4,479,331) (6,257,512)
Total liabilities and
stockholders' equity (deficit) $4,974,067 5,933,900
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Consolidated Statements of Operations
Three Months
Ended March 31,
1995 1996
Net sales
Cost of sales 2,911,331 3,179,163
Gross margin (255,443) (582,805)
Selling expenses 180,059 222,035
General and administrative expenses 301,952 818,270
Loss from operations (737,454) (1,623,110)
Other income (expenses):
Interest, net (84,775) (155,551)
Other 0 479
Total other income(expenses) (84,775) (155,072)
Loss before benefit for income taxes (822,229) (1,778,182)
Benefit for income taxes-deferred 0 0
Net loss $(822,229) (1,778,182)
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Consolidated Statements of Cash Flows
Three Months
Ended March 31,
1995 1996
Cash, January 1, $ 265,664 $ 20,022
Cash flows from operating activities:
Net Loss (822,229) (1,778,182)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 78,587 85,110
Change in assets and liabilities:
Inventories (7,510) 0
Costs incurred and income recognized
in excess of billings on uncompleted contrac 871,790 (974,638)
Other current assets (134,245) 28,938
Accounts payable 181,754 585,397
Customer deposits (590,535) 668,000
Accrued payroll liabilities 140,451 425,165
Other accrued liabilities 102,510 69,540
(179,427) (890,670)
Cash flows from investing activities:
Purchase of equipment (52,624) (35,094)
Disposal of equipment, net 0
Investment in Purchase option (500) 0
(53,124) (35,094)
Cash flows from financing activities:
Proceeds from work-in-process financing 155,118 1,055,215
Proceeds from notes payable 524,391 456,651
Proceeds from long-term debt 7,000 406,615
Repayment of work-in-process financing 0 (915,569)
Repayment of notes payable (663,902) 0
Repayment of long-term debt 0 (13,000)
22,607 989,912
Cash, March 31, $ 55,720 $ 84,170
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Notes to Consolidated Financial Statements
For the Three Months Ending March 31, 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 to
Tollycraft Yacht 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)
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.
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.
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 at
March 31, 1996 consisted of the following:
Costs incurred on uncompleted contracts $ 2,425,739
Income (loss) recognized 147,568
$ 2,573,307
Note 4 - Equipment and Leasehold Improvements
Equipment consists of the following:
Manufacturing equipment $ 354,480
Office furniture and equipment 376,320
Molds and patterns 2,609,304
3,340,104
Less accumulated depreciation (603,212)
$ 2,736,892
<PAGE>
TOLLYCRAFT YACHT CORPORATION
Notes to Consolidated Financial Statements (continued)
Note 5 - 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
March 31, 1996 were $ 3,081,933.
The Company is also required to maintain a minimum
level of stockholder's equity and a ratio of total
liabilities to stockholders equity. At March 31, 1996,
the Company was in violation of these minimum
requirements.
Note 6 - 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 March 31, 1996
were $ 3,165,637.
Note 7 - Other Accrued Liabilities
Other accrued liabilities consisted of the following:
Estimated liabilities for warranties $ 47,331
Interest 108,061
Reserve for sales discounts 114,122
Excise taxes 48,330
$ 317,844
Note 8 - 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. Managements Discussion and Analysis or Plan of
Operation
In January Child Guard Corporation acquired Tollycraft
Acquisition Corporation (a manufacturer of luxury motor
yachts). Subsequent to the transaction, Child Guard
Corporation changed its name to Tollycraft Yacht
Corporation. Effective with the acquisition, the Company's
main line of business is the production of luxury motor
yachts from 48 feet to 90 feet in length.
Tollycraft Acquisition Corporation ("TAC") is the successor
of the original manufacturer of Tollycraft Yachts. The
stockholders of TAC formed a new management group. Key
decisions by the management group include (1) The commitment
to maintain customer and dealer relationships by completing
all unfinished yacht contracts even though it meant TAC
would absorb substantial losses, (2) Shape maximum customer
confidence, (3) Invest in updating and redesigning its
current product line, (4) Develop a new series of yachts,
(5) Streamline management, (6) Expand its dealer network.
Significant expenses have been incurred to implement these
decisions.
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 operations reflect the costs of ongoing improvement
and expansion that has been implemented by the Company. For
the first quarter of 1996, the gross margin was -17%. Many
factors have contributed to the negative gross margin on
sales. In order to improve quality additional materials
have been incorporated into the yachts and manufacturing
processes were modified to meet specific procedural
criteria. To update the previously neglected product line,
the yachts were redesigned with more luxurious interiors and
more expensive materials have been selected with an emphasis
on quality and manufacturing efficiency. The resulting
higher material costs and an increase in direct labor caused
by retraining and developing new manufacturing procedures
has had a significant impact on gross margins. In addition,
it was necessary to schedule high levels of direct labor
overtime wages during the first quarter in order to
accelerate the production schedules to complete specific
yachts for their debut at the winter season international
boat shows. Previous pricing commitments to the existing
dealers also contributed to a lack of profitability.
Management has taken the following steps to improve the
operations of the Company:
1. Increased basic pricing on current models an average
24% for greater profit margins to reflect the higher
quality products being manufactured.
2. Selected new materials to upgrade the quality of
interiors while emphasizing production efficiency.
3 Designed 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. Established relationships with dealers that are
capable of providing their own inventory financing.
5. Increased the dealer network for nationwide
marketing capability to increase sales volume and
reach economies of scale.
<PAGE>
6. Redesigned manufacturing processes to make
production more efficient.
7. Modernized the manufacturing plant for increased
capacity and efficiency of material flow.
8. Developed a labor tracking system to monitor and
reduce direct labor costs.
The Company's leased manufacturing facility has recently
undergone a $2,000,000 renovation and expansion which was
financed by the owner of the real estate. Company
expenditures for the improvements were not material.
From a management standpoint, the main focuses have been to
introduce new engineering and construction techniques to
reduce direct manufacturing costs, and streamline its
management structure. The enlarged facility and new
management techniques make it possible to double production
with very little increases in fixed costs.
Financial Condition:
Implementing and making the improvements has been an
expensive proposition. Many one time costs in training and
manufacturing modifications to improve plant efficiency have
been paid through current operations. In addition, the
yachts have been extensively marketed at trade shows to
establish Tollycraft as a legitimate competitor in the east
coast yacht market. These circumstances have resulted in
large operating losses, the impact of which can be seen in
the current financial condition of the Company.
At March 31, 1996, the Company had a negative net worth of -
$7,838,779. The cumulative losses of the Company have
recently been financed through current liabilities. Current
liabilities of $11,060-417 exceed current assets of
$3,159,683 resulting in a current ratio of .29. 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.
Long-term debt of $1,385,295 (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 first quarter of 1996 were $
35,094 adding to a total investment in new equipment and
tooling of $508,343 since the Company was organized. 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.
<PAGE>
With the redesigning of existing yachts and the announcement
of new designs, the Company's yachts have been regularly
featured in trade magazines and journals including receiving
very favorable reviews from industry insiders. Increased
market exposure has enabled the Company to recruit and
expand its dealer network. With the recent addition of the
largest yacht dealer on the east coast Tollycraft also
received the largest single production order (approximately
$8 million wholesale) in its history. With this new
relationship and order, the Company now has dealer
representation nationwide.
Industry experts are seeing steady increases in the sale of
large luxury yachts. Many are optimistic that yacht sales
will continue to cruise along into the 21st century.
According to a recent article in the San Diego Union, there
are significant reasons for this steady increase: Baby
boomers are now turning 50 and are buying more expensive
luxury items; consumer attitudes have improved over the past
few years; lower interest rates; and the repeal of the
luxury tax. This trend in the industry is clearly reflected
in Tollycraft's production order backlog. With a current
wholesale value of approximately $25 million, it is the
highest ever.
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.
With an expanded dealer network, increased pricing, updated
and improved product lines, new yacht designs under
development, and significant improvements in manufacturing
and management techniques, Tollycraft Yachts is positioned
for the future. A future that capitalizes on the 60 year
history of the Company.
<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
Special meeting held January 29, 1996
Four proposals were brought to a vote as follows:
1. Vote taken to combine Child Guard Corporation with
Tollycraft Acquisition Corporation
5,140,320 votes for
0 votes against
500 votes abstained
2. Vote taken for new Board of Directors
New directors were elected as follows:
Tonny Tulleners
Jon Holt
D.R. Cooley
5,640,320 voted for
0 voted against
0 abstained
<PAGE>
3. Vote taken to change the name of Child Guard
Corporation to Tollycraft Yacht Corporation
5,140,320 voted for
0 voted against
500 votes abstained
4. Vote taken to increase the authorized number of
shares to 100,000,000 common and 5,000,000 preferred.
5,140,320 votes for
0 votes against
500 votes abstained
Item 5. Other Information
No reportable events
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 2. Agreement and Plan of Reorganization.
Exhibit 27. Financial Data Schedule.
(b) No reports on Form 8-K were filed during the
quarter Index
First 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 26, 1996
(Signature)
D.R. Cooley
President
Chief Executive Officer
(Signature)
William H. Lee
Controller
<PAGE>
EXHIBIT 2
AGREEMENT AND
PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of
January 1, 1996, between CHILD GUARD CORPORATION, a
Minnesota corporation ("CGC") and TOLLYCRAFT ACQUISITION
CORPORATION, a Washington corporation ("TAC").
WHEREAS the officers of CGC and TAC have negotiated and
deem it advisable and in the best interests of their
respective stockholders to consummate the business
combination transaction provided for herein in which TAC
would be acquired by CGC on the terms and subject to the
conditions contained in this Agreement; and
WHEREAS, for Federal income tax purposes, it is
intended that the acquisition shall qualify as a
reorganization under Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the foregoing and
the respective representations, warranties, covenants, and
agreements set forth herein, THE PARTIES HERETO AGREE AS
FOLLOWS:
ARTICLE 2.
REORGANIZATION
1. Reorganization. Subject to all of the terms and
conditions of this Agreement, at Closing, TAC shall be
acquired by CGC.
2. Conversion of Shares and Assumption of Options.
CGC agrees to issue 43,891,864 fully paid and non-assessable
shares of its common stock in exchange for all of the shares
of TAC common stock issued and outstanding. The common
stock will be issued directly to the shareholders of TAC in
the amounts shown on Exhibit 1.2 hereof effective at the
Closing. CGC will not assume responsibility for or reserve
shares for any unexercised stock options previously issued
by TAC.
3. Exemption from Registration. The parties hereto
intend that the common stock to be issued by CGC to TAC
shareholders shall be exempt from the registration
requirements of the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4 and/or 3 of the Act and the
rules and regulations promulgated thereunder. Such
securities will be restricted under Rule 144 of the
Securities Act of 1933, and as such cannot be resold in any
public market except in compliance with such Rule, or any
exemption thereof.
4. Status of Shares Deliverable. The shares of stock
of CGC deliverable pursuant to this Agreement, when issued
and delivered as provided in this Agreement, will be validly
issued and outstanding shares of voting Common Stock of CGC,
fully paid and nonassessable.
5. Dissenting Shareholders. Any shareholder of CGC or
TAC who shall have lawfully dissented from the
reorganization in accordance with applicable state law, and
who shall have timely demanded payment of the value of his
shares and submitted such shares for endorsement as provided
in such applicable law, shall thereafter have only such
rights as are provided a dissenting shareholder in
accordance with said applicable law and shall have no other
rights under this Agreement.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF TAC
TAC hereby represents and warrants to CGC that to the
best of its knowledge:
1. Organization and Good Standing. TAC is a
corporation duly organized, validly existing, and in good
standing under the laws of Washington, has all necessary
corporate powers to own its properties and to carry on its
business as now owned and operated by it, and is duly
qualified to do business as a corporation and is in good
standing in each of the states in which the failure to
qualify would have a material adverse effect on its business
or properties.
2. Capitalization. The authorized capital stock of
TAC consists of 1,000,000 shares of $1.00 par value common
stock of which 1,000,000 shares will be issued and
outstanding as of Closing. There are no outstanding
subscriptions, options, rights, warrants, convertible
securities, or other agreements or commitments obligating
TAC to issue or to transfer from treasury or to repurchase
any shares of its capital stock of any class.
3. Subsidiaries. As of the date hereof, TAC does not
have any subsidiaries or own any interest in any other
enterprise (whether or not such enterprise is a
corporation), except as disclosed in Exhibit 2.3.
4. Financial Statements. Exhibit 2.4 hereof consists
of the financial statements of TAC prepared by management as
of October 31, 1995, containing the Balance Sheet and the
related Statements of Operations, Changes in Stockholders'
Equity and Changes in Financial Position for the period then
ended.
5. Absence of Certain Changes. Since the date of the
most recent Balance Sheet set forth in Exhibit 2.4 hereof,
there has not been any change in the financial condition, or
operations of TAC, which, individually or in the aggregate,
has been materially adverse, except as disclosed in Exhibit
2.5.
6. Absence of Undisclosed Liabilities. TAC, as of the
date hereof, is not subject to any material debt, liability,
or obligation of any nature, whether accrued, absolute,
contingent, or otherwise, and whether due or to become due,
that is not reflected in the financial statements specified
in Exhibit 2.4 or as otherwise disclosed in Exhibit 2.5
hereof.
7. Taxes and Assessments. Except as described in
Exhibit 2.7 hereof, within the times and in the manner
prescribed by law, TAC has filed all federal, state and
local tax returns required by law or has filed proper
extensions, and has paid all taxes, assessments, and
penalties due and payable other than those presently payable
without penalty or interest. The provisions for taxes, if
any, reflected in the balance sheet included in Exhibit 2.4
are adequate for any and all federal, state, county and
local taxes for the period ending on the date of that
balance sheet and for all prior periods, whether or not
disputed. There are no present disputes as to taxes of any
nature payable by TAC, provided, however, various returns
remain subject to audit.
8. Investigation of Financial Condition. Subject to
provisions regarding confidentiality, CGC and/or its
attorneys and accountants shall have the opportunity to meet
with TAC attorneys and accountants to discuss the business
and financial condition of TAC, and TAC shall make available
to CGC and/or its attorneys and accountants all books and
records of TAC once reasonable notice of such request has
been given.
9. Trade Names and Rights. TAC owns or has the right
to use all patents, trademarks, service marks, trade names,
inventions, processes, know-how, trade secrets, copyrights,
licenses and other rights necessary to its business as now
conducted or proposed to be conducted, including without
limitation, those set forth on Exhibit 2.9 hereof, and to
the best knowledge of TAC, TAC is not infringing upon or
otherwise acting adversely to the right or claimed right of
any person under or with respect to any of the foregoing.
10. Compliance with Laws. TAC has complied with, and
is not in violation of, applicable federal, state or local
statutes, laws and regulations (including, without
limitation, any applicable building, zoning, or other law,
ordinance, or regulation) affecting its properties or the
operation of its business.
11. Litigation. TAC is not a party to any suit,
action, arbitration, or legal, administrative, or other
proceeding, or governmental investigation pending or, to the
best knowledge of TAC, threatened against or affecting TAC
or its business, assets, or financial condition, except as
set forth in Exhibit 2.11 hereof. TAC is not in default
with respect to any order, writ, injunction, or decree of
any federal, state, local, or foreign court, department
agency, or instrumentality applicable to it. TAC is not
engaged in any legal action to recover monies due to it,
except as set forth in Exhibit 2.11 hereof.
12. Ability to Carry Out Obligations. The execution
and delivery of this Agreement by TAC and the performance by
TAC of its obligations hereunder will not cause, constitute,
or conflict with or result in (i) any breach or violation of
any of the provisions of or constitute a default under any
license, indenture, mortgage, charter, instrument, articles
of incorporation, bylaw, or other agreement or instrument to
which TAC is a party, or by which it may be bound, nor will
any consents or authorizations of any party other than those
hereto be required, (ii) an event that would permit any
party to any agreement or instrument to terminate it or to
accelerate the maturity of any indebtedness or other
obligation of TAC, or (iii) an event that would result in
the creation or imposition of any lien, charge, or
encumbrance on any asset of TAC.
13. Property and Assets. TAC has good and marketable
title to all of its property and assets, real, personal,
mixed or intangible, reflected on its most recent Balance
Sheet, free and clear of any and all liens, claims and
encumbrances of any nature, form or description, except as
described in Exhibit 2.13 hereof.
14. Contracts and Agreements. Except as listed in
Exhibit 2.14 hereof, TAC is not a party to any oral or
written agreement, arrangement, commitment, or potential
obligation which individually, or collectively, materially
affect TAC or its business.
15. Defaults. TAC has performed in all material
respects all of the material obligations required to be
performed to date, and is not in default in any material
respect under any agreements, leases, contracts or other
documents to which it is a party, the effect of which, in
the aggregate, would have a material adverse effect on the
business, financial condition or results of operations of
TAC. To the knowledge of TAC, no party with whom TAC has an
agreement which is of material importance to TAC is in
material default thereunder.
16. Material Facts. None of the representations and
warranties made by TAC herein, or in any certificate to be
furnished by TAC at Closing contains or will contain any
untrue statement of material fact, or omit to state any
material fact necessary in order to make the statements
contained therein not misleading.
17. Indemnification. TAC agrees to indemnify, defend
and hold CGC harmless against and in respect of any and all
claims, demands, losses, costs, expenses, obligations,
liabilities, damages, recoveries and deficiencies, including
interest, penalties, and reasonable attorney fees, that any
of them shall incur or suffer, which arise out of, result
from or relate to any breach of, or failure by TAC to
perform any of its representations, warranties, covenants or
agreements in this Agreement or in any instrument to be
furnished by TAC under this agreement at Closing.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF CGC
CGC represents and warrants to TAC that:
1. Organization and Good Standing. CGC is a
corporation duly organized, validly existing, and in good
standing under the laws of Minnesota, has all necessary
corporate powers to own its properties and to carry on its
business as now owned and operated by it, and is duly
qualified to do business as a foreign corporation and
is in good standing in each of the states in which the
failure to qualify would have a material adverse effect on
its business or properties.
2. Capital. The authorized capital stock of CGC
consists of 50,000,000 shares of no par value common
stock of which 6,108,136 shares are currently issued and
outstanding. All of the issued and outstanding shares are
duly and validly issued, fully paid and non-assessable.
There are no outstanding subscriptions, options, rights,
warrants, convertible securities, or other agreements or
commitments obligating CGC to issue or to transfer from
treasury any additional shares of its capital stock of any
class.
3. Subsidiaries. CGC does not have any subsidiaries
or own any interest in any other enterprise (whether or not
such enterprise is a corporation)
4. Taxes and Assessments. Except as described in
Exhibit 3.4 hereof, within the times and in the manner
prescribed by law, CGC has filed all federal, state and
local tax returns required by law or has filed proper
extensions, and has paid all taxes, assessments, and
penalties due and payable other than those presently payable
without penalty or interest.
5. Compliance with Laws. CGC has complied with, and
is not in violation of, applicable federal, state or local
statutes, laws and regulations (including, without
limitation, any applicable building, zoning, or other law,
ordinance, or regulation) affecting its properties or the
operation of its business.
6. Litigation. CGC is not a party to any suit,
action, arbitration, or legal, administrative, or other
proceeding, or governmental investigation pending or, to the
best knowledge of CGC, threatened against or affecting CGC
or its business, assets, or financial condition, except as
set forth in Exhibit 3.6 hereof. CGC is not in default with
respect to any order, writ, injunction, or decree of any
federal, state, local, or foreign court, department agency,
or instrumentality applicable to it. CGC is not engaged in
any legal action to recover monies due to it, except as set
forth in Exhibit 3.6 hereof.
7. Ability to Carry Out Obligations. The execution
and delivery of this Agreement by CGC and the performance by
CGC of their obligations hereunder the thereunder will not
cause, constitute, or conflict with or result in (i) any
breach or violation of any of the provisions of or
constitute a default under any license, indenture, mortgage,
charter, instrument, articles of incorporation, bylaw, or
other agreement or instrument to which CGC is a party, or by
which it may be bound, nor will any consents or
authorizations of any party other than those hereto be
required,
(ii) an event that would permit any party to any agreement
or instrument to terminate it or to accelerate the maturity
of any indebtedness or other obligation of CGC, or (iii) an
event that would result in the creation or imposition of any
lien, charge, or encumbrance on any asset of CGC.
8. Property and Assets. CGC has good and marketable
title to all of its property and assets, real, personal,
mixed or intangible, free and clear of any and all liens,
claims and encumbrances of any nature, form or description,
except as described in Exhibit 3.8 hereof.
9. Contracts and Agreements. CGC is not a party to
any oral or written agreement, arrangement, commitment, or
potential obligation which individually, or collectively,
materially affect CGC or its business.
10. Defaults. CGC has performed in all material
respects all of the material obligations required to be
performed to date, and is not in default in any material
respect under any of agreements, leases, contracts or other
documents to which it is a party, the effect of which, in
the aggregate, would have a material adverse effect on the
business, financial condition or results of operations of
CGC. To the knowledge of CGC, no party with whom CGC has an
agreement which is of material importance to CGC is in
material default thereunder.
11. Material Facts. None of the representations and
warranties made by CGC herein, or in any certificate to be
furnished by CGC at Closing contains or will contain any
untrue statement of material fact, or omit to state any
material fact necessary in order to make the statements
contained therein not misleading.
12. Indemnification. CGC agrees to indemnify, defend
and hold TAC harmless against and in respect of any and all
claims, demands, losses, costs, expenses, obligations,
liabilities, damages, recoveries and deficiencies, including
interest, penalties, and reasonable attorney fees, that any
of them shall incur or suffer, which arise out of, result
from or relate to any breach of, or failure by CGC to
perform any of its representations
warranties, covenants or agreements in this Agreement or in
any instrument to be furnished by CGC under this agreement
at Closing.
13. Public Status of Securities.
1. Certain of the outstanding common shares
of CGC have achieved public free trading status in that they
were issued pursuant to a registered offering in the State
of Minnesota and were exempt from registration under the
Securities Act of 1933. Such public status of these
securities allows brokers or dealers to publish quotations
for CGC securities pursuant to Rule 15c2-11 of the
Securities Exchange Act of 1934. No order preventing or
suspending the publishing of such quotations has ever been
issued by the Securities and Exchange Commission. The
Information Statement prepared pursuant to Rule 15c2-11,
conformed in all material respects to the requirements of
the Act and the rules and regulations of the Commission
thereunder and did not contain an untrue statement of a
material fact or omit to state a material fact required to
be stated therein or necessary to make the statements
therein not misleading.
2. CGC is in compliance with all applicable state
blue sky laws. No order preventing or suspending the
secondary sale of CGC securities quotations has ever been
issued by a state securities administrator.
14. Trading. None of CGC, its officers, directors,
control persons and affiliates have engaged in, or in any
manner whatsoever participated in, any transaction involving
any security of CGC except in compliance with all applicable
securities laws, including without limitation, the Act and
the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
ARTICLE 5.
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF TAC
TAC further represents and warrants to CGC that:
1. Investment Intent. Each TAC shareholder
understands and acknowledges that the shares of CGC common
stock (the "CGC Shares") are being offered for exchange in
reliance upon the exemption provided in Section (2) of the
Act and Rule 506 of Regulation D adopted thereunder, for
nonpublic offerings; and. the Shareholder makes the
following representations and warranties with the intent
that the same may be relied upon in determining the
suitability of such Shareholder as a purchaser of
securities.
1. The CGC shares are being acquired solely for
the account of each TAC shareholder, for investment purposes
only, and not with a view to, or for sale in connection
with, any distribution thereof and with no present intention
of distributing or reselling any part of the CGC Shares.
2. Each TAC shareholder agrees not to dispose of
his CGC Shares or any portion thereof in violation of the
Act, the Exchange Act, the rules and regulations thereunder
or any applicable state securities laws.
3. Each TAC shareholder (together with his
qualified purchaser representative, if any) is knowledgeable
and experienced in making and evaluating investments of this
nature and desires to accept the Exchange Offer on the terms
and conditions set forth herein.
4. Each TAC shareholder is able to bear the
economic risk of an investment, as a result of the Exchange
Offer, in the CGC Shares.
2. Legend. Each TAC shareholder agrees that the
certificates evidencing the CGC Shares acquired pursuant to
this Agreement will have the following:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE
WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED."
Such legend shall be removed (i) if the shares represented
by such certificate shall have been effectively registered
under the Act or otherwise lawfully sold in a public
transaction, or (ii) if the holder of such shares shall have
provided CGC with an opinion of counsel, in form and
substance reasonably acceptable to CGC and its counsel and
from attorneys reasonably acceptable to CGC and its counsel,
stating that a public sale, transfer or assignment of such
shares may be made without registration.
ARTICLE 6.
CONDITIONS PRECEDENT
1. Conditions. The respective obligation's of each
party hereunder shall be subject to the satisfaction, at or
before Closing, of the following conditions:
1. Approval of Directors and Shareholders. This
Agreement and Plan of Reorganization will be submitted to
the Board of Directors and Shareholders of each party for
their approval.
2. Accuracy of Representations. Except as
otherwise permitted by this Agreement, all representations
and warranties by each party in this Agreement or in any
written statement that shall be delivered by any party under
this Agreement at Closing shall be true and accurate on and
as of Closing as though made at that time.
3. Performance. Each party shall have
performed, satisfied, and complied with all covenants,
agreements, and conditions required by this Agreement to be
performed or complied- with by it, on or before Closing.
4. Absence of Litigation. No action, suit or
proceeding before any court or any governmental body or
authority, pertaining to the transaction contemplated by
this Agreement or to its consummation, shall have been
instituted or threatened against any party on or before
Closing.
5. Financial Condition. On the Closing Date,
except as disclosed on the appropriate Exhibit hereof, the
assets and liabilities of each party shall not be
significantly different than as shown of its most recent
audited Balance Sheet included in the appropriate Exhibit
hereof.
2. Conditions to Obligations of TAC. The obligations
of TAC to effect the transaction are subject to the
satisfaction of the following conditions:
1. Opinion of Counsel for CGC Re:Stock
Tradeability have prepared and presented at Closing an
opinion letter from counsel for CGC, dated the Closing date,
in form and substance satisfactory to TAC and its counsel,
to the effect that CGC is a public company and that a
certain portion of CGC's outstanding common stock is freely
tradeable.
2. Officers and Directors. Effective immediately
upon Closing, the directors and officers of CGC shall have
resigned and the board of directors of CGC shall be lawfully
constituted with, and the executive offices lawfully held by
the persons as set forth in Exhibit 5.2.2.
3. Bank Accounts. Effective immediately upon
Closing, the authority of all persons theretofore authorized
to effect transactions with respect to all bank accounts
shall have been rescinded.
4. Corporate Proceedings. All CGC corporate and
other proceedings in connection with the transaction
contemplated hereby and all documents and instruments
incidental to such
transactions shall be in satisfactory form and substance.
5. Records. CGC shall have delivered to the
President as stated in Section 5.2.2, all of the books and
records of CGC.
ARTICLE 7.
CLOSING
1. Closing. The closing of this transaction shall be
held at the offices of Robert C. Weaver, Jr., Esquire, or
such other place as shall be mutually agreed upon, on such
date as shall be mutually agreed upon by the parties, but in
no event later than June 1, 1996.
2. Documents to Be Delivered at Closing. The parties
shall deliver, or cause to be delivered, all documents or
certificates called for in this Agreement, along with such
other documents or certificates as may be necessary, in the
reasonable opinion of counsel, to effectuate the transaction
called for hereunder.
3. Effective Time of Merger. This transaction shall
be consummated when all necessary documents are properly
executed, certified and filed in accordance with applicable
state laws after Closing.
ARTICLE 8.
AMENDMENT, WAIVER AND TERMINATION
1. Amendment. This Agreement and any provision
hereof, may not be waived, changed, modified, or discharged
orally, but it can be changed by an agreement in writing
signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
2. Waiver. Except as otherwise expressly provided
herein, waiver of any covenant, condition provision of
this Agreement
be deemed to have been made unless expressly in writing and
signed by the party against whom such waiver is charged; and
(i) the failure of any party to insist in any one or more
cases upon the performance of this Agreement or to exercise
any option herein contained shall not be construed as a
waiver or relinquishment for the future of any such
provisions, covenants or conditions, (ii) the acceptance
of performance of anything required by this Agreement to be
performed with knowledge of the breach or failure of a
covenant, condition or provision hereof shall not be deemed
a waiver of such breach or failure, and (iii) no waiver by
any party of none breach by another part shall be construed
as a waiver with respect to any other or subsequent breach
3. Termination. This Agreement may be terminated at
any time prior to the Closing Date: (i) by mutual consent of
the parties; (ii) by any party in the event it appears
reasonably certain that any of the conditions precedent set
forth in Article VI and VII hereof cannot be substantially
satisfied or waived by the Closing Date. In the event the
Closing Date shall not have occurred on or before January
31, 1996, this Agreement shall automatically terminate
without any action, notice or consent by any party.
4. Effect of Termination. In the event this Agreement
is terminated or abandoned pursuant to the foregoing
provisions, this Agreement shall become void and shall have
no further force or effect, and shall not impose any
liability on the part of any party hereto.
ARTICLE 9.
MISCELLANEOUS
1. Captions and Headings. The article and paragraph
headings throughout this Agreement are for convenience and
reference only, and shall in no way be deemed to define,
limit, or add to the meaning of any provision of this
Agreement.
2. Time of Essence. Time is of the essence of this
Agreement and of each and every provision hereof.
3. Entire Agreement. This Agreement contains the
entire Agreement and understanding between the parties
hereto and supersedes all prior agreements and
understandings.
4. Choice of Law. Except as otherwise limited by
Federal law, this Agreement shall. be interpreted, construed
and enforced according to the laws of the State of
Minnesota.
5. Counterparts. This Agreement may be executed
simultaneously in one or more counterparts, each of which
shall be deemed an original, but all of which together shall
constitute one
and the same instrument.
6. Notices. All notices, requests, demands and other
communications under this Agreement shall have been in
writing and shall be deemed to have been duly given on the
date of service if served personally on the party to whom
notice is to be given, or on the third business day after
mailing if mailed to the party to whom notice is to be
given, by first class mail, registered or certified,
postage prepaid, and properly addressed as follows:
CGC: CHILD GUARD CORPORATION
441 Crescent Drive
Albert Lea, MN 56007
TAC: TOLLYCRAFT ACQUISITION CORPORATION
2200 Clinton Avenue
Kelso, WA 48626
7. Binding Effect. This Agreement shall inure to and
be binding upon the heirs, executors, personal
representatives, successors and assigns of each of the
parties to this Agreement.
8. Assignment Except with the written consent of the
other party, the obligations under this Agreement shall not
be assignable by any party. Nothing herein expressed or
implied is intended to confer upon any person, other than
the parties hereto or their respective successors, assigns,
heirs and legal representatives,
any rights, remedies, or liabilities under or by reason of
this Agreement.
9. Mutual Cooperation. The parties hereto shall
cooperate with each other to achieve the purposes of this
Agreement, and shall execute such other and further
documents and take such other and further actions as may be
necessary or convenient to effect the provisions hereof.
10. Brokers. The parties hereto represent that no
finder's fee has been paid or is payable by any party. Each
of the parties hereto shall indemnify and hold the other
harmless against any and all claims, losses, liabilities or
expenses which may be asserted against it as a result of its
dealings, arrangements or agreements with any such other
broker or person
11. Announcements. Each party will consult and
cooperate with each other as to the timing and content of
any announcements of the transactions contemplated hereby to
the general public or to employees, customers or suppliers.
12. Expenses. Each party shall pay their respective
expenses, including legal, accounting and any other out-of-
pocket expenses incurred in connection with this
transaction, whether or not the transaction contemplated
hereby is consummated.
13. Survival of Representations. The
representations, warranties, covenants and agreements of the
parties set forth in this Agreement or in any instrument,
certificate, opinion, or other writing provided for in it,
shall survive the Closing irrespective of any investigation
made by or on behalf of any party.
14. Exhibits. The exhibits attached hereto are an
integral part of this Agreement and each such exhibit shall
be applicable as if set forth in full in the text hereof
only with respect to the sections of this Agreement to which
it is cross-referenced. Any material changes to the Exhibits
shall be immediately disclosed to the other party.
15. Attorneys' Fees. If any legal action or other
proceeding is brought for the enforcement of this Agreement,
or
because of an alleged dispute, breach, default or
misrepresentation in connection with any of the provisions
of this Agreement, the successful or prevailing party or
parties shall be entitled to recover reasonable attorney's
fees and other costs incurred in that action or proceeding,
including the collection of a judgement resulting therefrom,
in addition to any other relief to which it or they may be
entitled.
AGREED TO AND ACCEPTED as of the date first above written.
CHILD GUARD CORPORATION
By:
President
By:
Secretary
TOLLYCRAFT ACQUISITION CORPORATION
By:
President
By:
Secretary
