U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from . . . to . . . .
Commission file number: 0-21087
Name of small business issuer in its charter): Tollycraft Yacht Corporation
(State or other jurisdiction of incorporation or organization) Nevada
(I.R.S. Employer Identification No.): 86-0849925
(Address of principal executive offices)(Zip Code):
17 Horton Plaza, Suite 251, San Diego, CA 92101
(Registrant's telephone number, including area code): (360) 423-5910
Securities registered pursuant to Section 12(b) of the Act: NONE
Name of each exchange on which registered: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes .X. No ...
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $3,993,517
The aggregate market value of the voting and non-voting common equity held by
non-affiliates was $3,698,717 computed by reference to the average bid and
asked price of such common equity, as of September 30, 1997, which was $4.50.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ... No ...
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of the issuer's common stock, as of September
30, 1997 was 2,270,368
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in Part III of this Form
10-KSB to the extent stated herein. Except with respect to information
specifically incorporated by reference herein, these documents are not deemed
to be filed as a part hereof: Registrant's Current Report on Form 8-K as filed
electronically on October 28, 1996, Registrant's Current Report on Form 8-K/A
as filed electronically on February 20, 1997, Registrant's Registration
Statement on Form 10-SB as filed electronically on July 23, 1996, Registrant's
Quarterly Report for the period ended September 30, 1996 on Form 10-QSB as
filed electronically on November 27, 1996.
Transitional Small Business Disclosure Format (check one): Yes ... No .X.
PART I
Item 1. Description of Business.
(a) General
TOLLYCRAFT YACHT CORPORATION was originally incorporated in December 1992 in
the State of Minnesota as Child Guard Corporation. The Company changed its
name from Child Guard Corporation to Tollycraft Yacht Corporation concurrent
with the merger on January 1, 1996 of Child Guard Corporation and Tollycraft
Acquisition Corporation, a company registered in the State of Washington. In
1994 Tollycraft Acquisition Corporation had purchased substantially all of the
operating assets of the original Tollycraft Corporation, a Washington
corporation which was operating under a confirmed Chapter 11 bankruptcy plan
of reorganization. On December 12, 1996 the Company changed its state of
registration from Minnesota and is now duly organized and registered in the
State of Nevada.
History and Acquisition
Child Guard Corporation was formed in 1992 as a development stage company to
develop and market a child monitoring device. The developed product was not
marketed and in 1995 the Company began merger talks with Tollycraft
Acquisition Corporation.
Tollycraft as a business entity has existed in various forms since 1936. The
original Tollycraft Corporation was first incorporated in the State of
Washington in 1936 under the name of Central Lumber Company ("CLC"). CLC was
wholly owned by R.M. Tollefson. The Company began as a small manufacturing
operation producing fine furniture and cabinetry. As an adjunct to his
regular business, Mr. Tollefson produced several custom boats for friends and
himself.
As the reputation of his boat building talents spread, Mr. Tollefson began
selling more boats than cabinets and eventual demand allowed him to direct his
attentions solely to boat manufacturing. With a dedicated group of proficient
cabinet makers and his own expert knowledge of yacht design a complete line of
wooden cruisers was launched. Mr. Tollefson subsequently transferred the
assets of his pleasure boat manufacturing operations, "Tollycraft", to CLC in
1955. Concurrently, the name of CLC was changed to Tollycraft Corporation.
For more than fifty years Mr. Tollefson actively designed and built pleasure
cruisers and yachts to meet the needs of the cruising enthusiasts. His
understanding of the demands of extended voyages came from personal
experiences on the water cruising yachts which bear his name. Gathering input
from fellow boater's, Tollefson incorporated their many comments and
suggestions into new or existing models.
A chronological synopsis of Tollycraft operations during Mr. Tollefson's
career is as follows:
1932 Mr. Tollefson, while involved in the cabinets business, started building
boats for himself.
1936 Tollycraft commenced pleasure boat manufacturing as a sole proprietorship
in Kelso, Washington, after building and selling the first boat which
exhibited the quality he demanded.
1941 World War II interrupted boat building while Mr. Tollefson served in the
U.S. Coast Guard.
1946 Central Lumber Company was incorporated in the State of Washington.
1952 A fire destroyed Central Lumber Company's plant and equipment; after that
the company narrowed the scope of its business activities to boat
manufacturing.
1955 The assets of the sole proprietorship boat manufacturing operations were
transferred to Central Lumber Company, Mr. Tollefson's wholly owned company;
concurrently the name was changed to Tollycraft Corporation.
1958 Tollycraft built a plant in the Kelso Industrial Park on 14 acres of land
and commenced operations in the new 65,000 square foot building in 1959.
1967 Tollycraft Yachts began manufacturing fiberglass hulls starting with the
conversion of the 24', 28', 30', and 34' wooden hull designs into fiberglass.
1970 The last wooden hull boat was built. The very successful 34' Sedan was
the first "keel up" fiberglass design, which sold 194 units in 11 years, and
set the Tollycraft design trend for the 1970's.
In 1987, Mr. Tollefson retired from Tollycraft and took a relaxed role in the
marine industry as Chairman Emeritus of Tollycraft. Tollycraft Corporation, a
then public company, was taken private and merged through a leveraged buyout,
into Olympic Equities, Inc. Thereafter, Olympic Equities, Inc. changed its
name to Tollycraft Yachts Corporation. As with many leveraged buyouts of the
1980's, the transaction was ill-fated and threatened the long term financial
stability of the Company.
In 1989, a group of investors purchased Tollycraft and provided capital to
reduce debt and increase working capital for continued operations. However,
the economic downturn and the passage of the 10 percent luxury tax caused
Tollycraft, as well as every other luxury boat builder in the United States,
to sustain substantial operating losses. The Company subsequently filed for
protection under Chapter 11 of the U.S. Bankruptcy Code on November 5,1993.
In February of 1994, a group of investors formed Tollycraft Acquisition
Corporation ("TAC") and effective June 6, 1994 purchased substantially all of
the operating assets of the old company.
In January of 1996, TAC was acquired, in a merger transaction, by Child Guard
Corporation which concurrently changed its name to Tollycraft Yacht
Corporation.
(b)
Tollycraft Yacht Corporation is a builder of high quality cruising motor
yachts. The yachts are luxuriously equipped and built with the highest
structural integrity to ensure safe, long range cruising. The current line of
yachts consists of the following:
48' Cockpit Motor Yacht
57' Pilothouse Walkaround Motor Yacht
57' Pilothouse Widebody Motor Yacht
65' Pilothouse Motor Yacht
Current plans for new products include the following:
48' Convertible Motor Yacht
48' Pilothouse Motor Yacht
52' Pilothouse Motor Yacht
54' Convertible Motor Yacht
76' - 82' Pilothouse Motor Yacht
The 48' Pilothouse has completed engineering design drawings and plans. A
hull mold has been built and the deck mold is in process.
The 52', 54', and 76' - 82' models have completed design drawings and plans.
The hull form for each model has also been tank tested.
All Tollycraft yachts have a 15 year transferable hull warranty, the longest
and most comprehensive warranty in the industry. To date, there has never
been a manufacturing related hull failure. Tollycraft Yachts are designed for
owner convenience and overall functionality. The electrical and mechanical
systems are laid out and installed for ease of use and maintenance.
Tollycraft incorporates intelligent engineering, manufacturing integrity,
quality craftsmanship, and the patented "Quadralift Hull" construction into
all its vessels, thus ensuring to Tollycraft customers a truly seaworthy
yacht.
Intelligent Engineering
Great strides have been made in controls, steering engines and gears. While
Tollycraft exercises due caution in adopting new systems until they are
thoroughly tested and proven, the most reliable of these are now offered.
State of the art components such as MMC electronic controls, custom AC/ DC
electrical, central chilled water heating and air conditioning, vacuum bagged
divinycell cored hull and deck structures, fully integrated electrical panels
and switches, Hynautic hydraulic steering, fuel distribution manifolds, and
oil lubricated shaft stuffing boxes are but a few of the advanced systems
offered.
Modern systems are of little benefit however, if they are improperly
integrated into the complete yacht. That is why Tollycraft engineers are
careful to match technology with function.
Critical components, such as engines and generator sets (gensets) are matched
to the specific needs of each vessel and each owner. Engine selections
include MAN, Caterpillar, Detroit Diesel and MTU products. Gensets are
manufactured by either ONAN or Northern Lights.
All fiberglass lay-up schedules are verified by an outside consulting engineer
and tested by an independent laboratory. All lamination takes place in a
controlled environment. Temperature and humidity conditions are continuously
monitored and recorded to ensure materials are applied within the
manufacturer's specifications. Core materials are vacuum bagged to the
laminate to ensure proper bonding and structural integrity.
Wiring systems have been redesigned and simplified. Wire harnesses have been
developed which meet or exceed all industry standards. Plug type connectors,
designed to withstand the marine environment, have been incorporated to ease
installation and minimize owner maintenance. All Tollycraft wire harnesses
are color coded in accordance with NMMA and ABYC specifications.
New products are ergonomically designed. Line of sight, ease of passage and
mobility restriction are just a few of the human factors Tollycraft's
designers consider on every new project. Primary consideration is given to
safety and functionality. Tollycraft's engineering department is committed to
product excellence. Every aspect of the final product must function as well
as it looks.
Every phase of the production process is scrutinized by engineering staff and
production personnel. New techniques and processes are developed and
implemented to achieve cost savings, quality and product integrity.
Cooperative efforts maximize the efficiency of both departments.
Product standardization and documentation ensure Tollycraft's ability to
purchase and manufactured accurately and efficiently. Whenever possible,
common parts and processes are employed throughout the various models to
minimize training and maximize productivity.
New Tollycraft yachts feature an impressive list of standard equipment. In
addition, many options are available for the customer to choose from. If
owners wish to further personalize their yacht, Tollycraft's engineering
department will create custom designs upon request. Custom options are not
inexpensive, but they afford the owner an opportunity to create a truly unique
and personal yacht while maintaining the advantages and savings of a
standardized production process.
Manufacturing Integrity
New ideas and designs are worth little if they do not stand up to the
structural mechanical and electrical integrity that is the foundation for
Tollycraft cruising yachts' reputation. Tollycraft's manufacturing integrity
gives the owner justifiable confidence in his vessel. Over 60 years of
building cruising yachts has taught us it takes more than words to instill
confidence in a skipper who invests his money and the safety of his crew in a
yacht.
Tollycrafts are known as seaworthy yachts. Everyday cruising takes a
Tollycraft into waters that test a hull incessantly. Tollycraft knows that it
takes more than a tough hull to survive sea conditions. Accordingly, every
stringer must be encapsulated into the hull, every bulkhead fiberglassed to
the hull, every wood component is glued together (reinforced with screws)
wiring and plumbing fastened every few inches. Any component, whether
purchased or manufactured by Tollycraft, must be proven to withstand the
rigors of the marine environment.
Dry rot, once the bane of wooden boats, still attacks modern yachts if
precautions are not taken. For this reason, Tollycraft uses premium
straight-grained mahogany for deck, cabinet and bulkhead framing. This rot
resistant wood is then encapsulated with fiberglass wherever it might be
exposed to bilge water.
Engines, generators and other mechanical equipment are securely installed,
with special strengthening given to areas of extra stress such as rudder posts
and shaft logs. The entire mechanical structure is electronically bonded with
a heavy copper strap that employs a shaft sweep to make positive electrical
contact to external metal parts.
For strength and waterproofing, the hull deck and cabin structures are bonded
and screwed through overlapping fiberglass. Specially designed window frames
overlap their cabin side openings which eliminates the possibility of leakage.
Decks are cored with closed cell foam for stiffening and to eliminate any
feeling of resilience underfoot. Even shower stalls are laid up of heavy
fiberglass so they don't creak or bend when used by a normal sized adult.
Integrity is much more than a slogan at Tollycraft. It is the foundation of
our customers' confidence in our vessels.
The Quadralift Hull
Editors of boating magazines have been exposed to every claim about hull
design that the mind can dream up. Naturally they are skeptical when sea
trialing any new hull. However, almost without exception, editors who have
tested Tollycraft's have reported that the Quadralift hull works as claimed.
Naval Architect Ed Monk Jr., who designed the original "Quadralift" hull for
the Tollycraft 61' Motor Yacht, won't call his design revolutionary, but
rather the "latest in hull technology ... the culmination of everything we've
learned about hulls over the years."
While Quadralift varies from model to model its cupped dual chine separates
this hull from others. With the waterline midway between the two chines, the
Quadralift acts as an effective spray knocker, throwing spray horizontally
away from the hull. Deflecting the spray not only delivers a dry ride, but
increases efficiency by reducing the amount of wetted surface (drag) along the
hull.
The design of the Quadralift provides extra buoyancy at the bow, permitting a
finer entry and reducing the tendency to broach in a following sea. In a
chop, or at anchor, the Quadralift has a roll dampening effect, and with this
extra stability comes extra comfort. But the most dramatic demonstration of
this remarkable hull comes when you ease the throttles forward and feel your
Tollycraft rise effortlessly onto plane and handle smoothly at any speed. A
nearly full length keel aids the tracking through turns and gives you
excellent control during slow speed maneuvering.
Product Line Enhancements
Tollycraft management believes that improvement is a process, not a project
and should be accomplished on an incremental basis. Accordingly, key tactics
supporting this strategy focus on developing and maintaining a process which
empowers Tollycraft employees, contractors, vendors, dealers and customers to
provide input for product improvement on a continuous basis.
The Company is planning to expand its existing product line with new
complementary products and redesign existing products to update exterior and
interior styling. An additional benefit will be lower manufacturing costs.
The Pilothouse Motor Yacht has become noticeably popular. The East Coast
area, particularly Florida, is showing strong demand for this design. The
Pilothouse may be used to fish as well as cruise and it offers an escape from
the weather with a full lower interior station. Design is nearing completion
on new a 52' planing hull, pilothouse motor yacht and sports sedan which will
include three staterooms and two heads. The yacht will be convenient to dock
and ease of handling will enhance port to port cruising. This model is
expected to retail at $795,000. Tollycraft's new fiberglass/wood liner system
will be used in its construction. The boats will be lighter, have a
significantly improved ride, and higher performance levels. The new design is
expected to simultaneously lower material and labor costs in the manufacturing
process. Tollycraft's new 52' Pilothouse will fill a gap in the Tollycraft
line as well as meet customer demand. There are hundreds of 44' and 45'
Tollycraft owners currently without the upgrade option that this yacht will
make available to them.
Due to numerous customer requests, the Company also plans to introduce yachts
between 76' and 82' called the "Champagne Series." These boats will retail
between $2.7 million and $3.1 million each.
Tollycraft's 40' Sports Sedan has been discontinued and a new 48' Convertible
Sedan is being developed. This boat will incorporate many of the popular
features of the previous 40' model but the additional 8' in length will allow
the yacht to have an enlarged galley and a spacious master stateroom.
Command bridges and radar arches of all the existing models are being restyled
with more contemporary lines. The redesign will include preformed wire chases
and mechanical runs which will also significantly reduce installation costs.
A professional yacht design firm has updated Tollycraft's standard interiors
to meet customer demand for upscale, modem interior styles, layouts and
materials.
Industry Analysis and Competition
The U.S. market for pleasure boats has undergone many changes over the last
decade. In 1986, 1987 and 1988 sales of pleasure boats skyrocketed by 18.7%,
28.5%, and 14.9%, respectively. Consumer confidence was high and U.S. exports
of pleasure boats were booming. In total, manufacturers' sales of pleasure
boats expanded by over 75% in those three years.
Manufacturers' sales of inboard/outdrive boats finished out a six year growth
surge with total growth of approximately 160% between 1984 and 1988. Outboard
and inboard motorboats also increased, with total manufacturers' sales growth
of 87.9% and 96.3%, respectively, during the same period. The only pleasure
boats that did not benefit from this prosperity were sailboats, a market which
continued to suffer from declining demand.
The last cyclical downturn in the economy (the recession of 1989-1991) hit the
industry hard, as a number of factors combined to set the stage for a severe
slump in manufacturers' sales. Among the factors significantly impacting the
market for pleasure boats in the U.S. were the collapse of the financing
structure of the industry, savings and loan crisis, changing consumer
confidence in the economy, and fluctuating U.S. pleasure boat exports.
Making matters worse for pleasure boat manufacturers, in 1991 Congress passed
a 10% luxury tax on all pleasure boats costing more than $100,000. Although
this tax was repealed in 1993, the damage was already done.
In 1992 the positive effects of the recovering U. S. economy reached the
pleasure boat industry. Consumer confidence in the economy was starting on
its upward climb towards a significant height in 1993, and banks began to
loosen the credit restraints on boat loans as interest rates continued to
decline. Consumers began to buy new boats again. Disposable income was up,
the luxury tax was repealed, and consumers had a rosier outlook on the
economy.
The market for pleasure boats embarked on its recovery as manufacturers' sales
increased by 9.8% to $3.1 billion during 1992. Two more good years followed
in 1993 and 1994, when sales rose by 11.8% and 9.4%, respectively. Business
Trend Analysts estimated the total pleasure boat market at $3.8 billion in
1994 and $4.1 billion in 1995. (Source: The U.S. Market for Pleasure Boats, @
Business Trend Analysts Inc., 1995)
Overall growth in manufacturers' sales of pleasure boats over the next ten
years is projected at 6.9% annually. Business Trend Analysts expects the
total manufacturers' market for pleasure boats to climb just above $7.4
billion by 2004. The following table shows the annual sales of such boats:
U.S. MANUFACTURERS' SALES OF PLEASURE BOATS ($ Millions)
Year Value
1986 $3,406
1987 $4,378
1988 $5,029
1989 $4,775
1990 $3,894
1991 $2,840
1992 $3,118
1993 $3,487
1994 $3,813
1995 E $4,124
2004 P $7,450
E - Estimate
P - Projection
Source: The U.S. Market for Pleasure Boats, @ Business Trend Analysts Inc.,
1995
Primary Competitors
Tollycraft's primary competition can be divided into two categories, the West
Coast and East Coast of the United States.
West Coast: Tollycraft's main competition is from the Taiwanese "knock-offs":
Ocean Alexander and, to a lesser extent, American Marine (Grand Banks). These
competitors have built a reputation for emulating Tollycraft's products using
extremely cheap labor and trying to underprice and undercut Tollycraft's
market on the West Coast. The offshore competitors basically sell a lower
quality product for a lower price. In addition, Canadian competition has
begun to appear because of the weakness of the Canadian dollar. These include
Sunship by Westbay, and Queenship. Tollycraft competes well against these
manufacturers.
East Coast: Tollycraft has a great deal more competition from Viking,
Hatteras and, to a lesser extent, Bertram, Sea Ray, Ocean and Carver.
Hatteras is the perceived market leader, on the East Coast (including the
Great Lakes and Gulf of Mexico) and its dealer network is very strong. They
have a full line of yachts both in the cruiser and yacht fisher segments.
Hatteras' product is priced anywhere from 10 to 20 percent higher than
Tollycraft on the East Coast.
Tollycraft's Market Position
Competitive Advantage
Tollycraft's primary competitive advantage results from the high quality of
its product. The Company has never had a manufacturing related hull failure
and customers have shown themselves willing to pay a premium for this quality.
Tollycraft's products have historically had a high resale value and have
proven to be a good investment for customers.
Tollycraft Yacht Resale Values
1989 Model Year
December 1994 Resale Value
Model Sales Price Dealer Cost* Percentage
30' Sport Cruiser $77,275 60,700 79%
34' Sport Sedan 126,420 112,750 89%
34' Sundeck Cruiser 124,327 117,300 94%
40' Sundeck Motor Yacht 174,649 137,500 79%
40' Sport Sedan 186,347 144,100 77%
44' Cockpit Motor Yacht 201,753 224,500 111%
48' Cockpit Motor Yacht 320,000 275,000 86%
53' Motor Yacht 464,312 370,550 80%
57' Cockpit Motor Yacht 535,475 451,850 84%
61' Pilothouse Motor Yacht 687,454 551,300 80%
Average resale value as a percent of original sales price after 5 years 86%.
* (NADA Average)
Source: NADA Appraisal Guide
Tollycraft's Prospects Within the Industry
Sales of large luxury motor yachts have rebounded significantly since the
repeal of the luxury tax. Tollycraft's plan is to position itself for this
continued growth. Changing U.S. demographics will also help expand the
customer base for Tollycraft yachts (see the Tollycraft Customer profile
section which follows). The Company expects to do more than maintain its
share of the growing market.
The May 1993 issue of Powerboat Reports, "The Consumer Resource for the
Powercraft Owner reported in its feature article that Tollycraft is tops in
owner satisfaction: Tollycraft scored an A+ in overall satisfaction and a 90
percent would buy again index... The highest marks so far in Powerboat
Reports Ownership Survey... Not one Tollycraft owner was dissatisfied enough
to say he wouldn't consider buying another...This is unmatched in other
surveys. Tollycraft managed to show itself a winner in both quality and value
categories. Overall satisfaction scored an impressive A+, easily outranking
all other boats in Powerboat Reports' survey."
Customer Profile
Tollycraft's customers typically have an annual income of $150,000 or higher,
with a net worth of $500,000 or more. Based on these figures, the average
potential Tollycraft customer, nationwide, has the following profile
(Mendelsohn Media Research, Inc., New York, 1991 annual survey of affluent
households.):
Age: 48.4 years old Number of homes owned: 1.8
Value of principal residence: $363,200
Value of other real estate owned: $223,000
In addition, 45 percent have assets in their business or profession, with the
mean value of their equity being $312,303. Only 12 percent of the homeowners
have a home mortgage.
(U.S. Department of Commerce Survey of Income and Program Participation, 1988,
households with net worth over $500,000)
Changing U.S. demographics mean that the large "baby boom" generation is
entering the average age of Tollycraft's customers resulting in a greater
number of qualified, potential customers in the coming decade.
Distribution Network
Tollycraft is currently represented by 5 dealers in 10 locations: Seattle,
Portland, California, Michigan, and Florida (6). Representation is being
targeted in Toronto, San Francisco, Cape Cod, Chicago, New York, and
Annapolis. Once the domestic dealer network is established the Company will
also seek international representation for its products.
Market Promotion
Company tactics designed to help achieve a strategy of promoting Tollycraft
include the following:
Dealer Manual: These have been designed to include policies and procedures,
as well as a selling reference for brokers. Dealer bulletins are issued as
needed to keep manuals current.
Plant Tours: A periodic open house with all staff on hand for customers and
dealers.
Retail Sales Display: A portable display for all major boat shows has been
developed.
Trade Shows and Conventions: The Company is an attendee at major nonsponsored
yacht and boat shows including Superyachts Northwest, and Ft. Lauderdale, St.
Petersburg, Seattle, and Miami.
Videos: Promotional videos are complete for the 57 and 82' series along with
a complete plant tour. The Company is currently working on a video for the
new 57' and 65' lines.
Communication with Dealers: Sales staff are providing at east weekly updates
to each dealer, building relationships and helping to sell our products.
Dealer Meeting: This initiative is focused on creating enthusiasm for our
organization and building relationships.
Tolly University: Each year in August, a two day training seminar educates
our dealers and brokers on Tollycraft products. The meetings cover comparison
to other products, broker motivation and promoting new products.
Advertising: The advertising strategy is targeted at new buyers. Key tactics
include:
Specification Sheets: These have been recently reconfigured and now contain
new designs with current 1996 options and new standard equipment pricing.
Brochures: New brochures have been developed for all lines and are easily
updated.
Line Drawings: New computer generated line drawings for brokers and
advertising have been completed.
Newsletter: A Tollycraft sponsored quarterly newsletter promoting Tollycraft
and informing readers of current events has been introduced. Production cost
is fully paid for by trade advertising.
Public Relations Media Kits: Released quarterly to help promote the
Tollycraft image, inform the press, and generate editorial commentary.
Advertising Campaign: Designed to involve dealers in co-op advertising and
increase advertising exposure.
Internet: Internet address at "http://usa.nia.com/tollycraft."
Customer Support: Tollycraft believes it is imperative to support existing
and past Tollycraft owners. They tend to upgrade their boats periodically and
a personal recommendation is one of the Company's most effective sales tools.
Rendezvous': The factory participates in regional "Tolly Rendezvous"
gatherings including Northern California, Portland, Seattle and the Great
Lakes
Factory Visits: Prospective customers are encouraged to tour our facilities
and meet our staff.
Mailing List: The Company is currently updating the last five years of
Tollycraft owners by hull number and plans to market directly to them.
Show Leads: Computer listings of prospective clients are sent to dealers
across the country during and after each boat show with active follow up by
the Company's marketing staff.
Intellectual Property and Royalties
The Company has the following trademarks:
"TOLLYCRAFT" (Stylized), U. S. Trademark Registration # 855,456
"QUADRALIFT" and Design, U. S. Trademark Registration # 1,514,520
"T and Design", U. S. Trademark Registration # 855,455
The Company has the following patent:
Yacht, Serial No. 444,604, Filing Date: April 2, 1991, Patent No. D315,892;
Expires: April 2, 2005. The loss of said patent, at the time of its
expiration, would not have a significant impact on the business of the
Company.
The Company has granted to Pinacle Clothiers in Seattle a license to produce
the Tollycraft Clothing Line in return for a five percent royalty.
Tollycraft meets environmental and safety regulations through a regular
program of inspections. All hazardous material is removed from the facility
on a regular basis with the appropriate documentation. Continuing efforts are
being made to reduce the use of potentially hazardous or unsafe materials.
The Company is not aware of any material capital expenditures required to be
in compliance with the laws for the protection of the environment. The
manufacturing facility is also regularly inspected by the Washington State
Department of Ecology at their discretion.
Plant capacity usage and the number of employees varies during the year.
During 1996, the highest number of employees working at one time was
approximately 180. Employment varies with a limitation currently caused by a
lack of working capital.
Item 2. Description of Property.
In 1996 the Company leased manufacturing and office space in an industrial
park in Kelso, Washington. The plant facilities consists of two buildings
totaling 180,000 square feet. The smaller 40,000 square foot building houses
the fiberglass fabrication operations and is equipped with overhead cranes to
facilitate movement of completed fiberglass components. The larger building
of 140,000 square feet houses several subassembly areas, the final assembly
lines, raw material and parts inventory storage, and administrative offices.
Each subassembly area is equipped with overhead cranes, compressed air and
electrical systems. Plant layout includes deck level work areas and
production line capability which supports efficient production methods. The
larger building was recently renovated and modernized. At the end of 1996,
the Company was behind in rental payments to the landlord.
Item 3. Legal Proceedings.
Kenneth N. Findley and Island Dreamer, Inc. v. Tollycraft Yacht Corporation
125th Judicial District, Harris County, Texas
Original File Date: 1995
Claim for breach of express and implied warranties resulting from water damage
caused by plugged drains and associated loss of market value. Default judgment
set aside. Amended petition relief sought in the amount of $100,000 plus
three times actual damages and legal costs.. Set for trial on May 25, 1998.
Larry and Vicki Castello v. Searock, Inc., d/b/a The Allied Marine Group,
Tollycraft Yachts, and D.R. Cooley, individually.
17th Judicial Circuit Court, Broward County, Florida
Original File Date : October 11, 1996
Claim for treble damages in excess of $2,700,000 plus attorney fees and costs
for failure to deliver a 57 foot yacht as scheduled. Answers by all
Defendants have been filed and motions to dismiss have been filed and heard.
No decision has been rendered on the Defendants Motion to Dismiss.
Estate of Nora Folkenflik v. Tollycraft Yacht Corporation
King County, Washington Superior Court,
Original File Date: January 13, 1997
Alleged wrongful death suit relating to liquor liability as a result of an
individual's auto accident after attending an open house co-sponsored by
Tollycraft. Relief sought to be determined by the court.
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting of the shareholders was held on December 9, 1996. The
information about the matters submitted to voting security holders at that
meeting are incorporated by reference to the Company's Schedule 14C Definitive
Information Statement filed on November 18, 1997, Form 8-K filed on February
7, 1997, and Form 8-K/A filed on February 20, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock has been traded in the over-the-counter market
since 1993. It is currently listed on the NASDAQ Bulletin Board under the
symbol TLLR.
The following table sets forth the high and low bid prices for the Company's
common stock as reported by NASDAQ during the past two years and current year.
The prices reflect interdealer quotations, without retail markup, mark-down or
commissions and may not represent actual transactions.
On December 9, 1996, the Company's security holders approved a 25 for 1
reverse stock split. The amounts in the table set forth below have been
restated for comparative purposes to reflect the associated change in value
caused by the reverse split.
Low High
Bid Bid
1994
March 31 3 1/8 6 1/4
June 30 6 1/4 6 1/4
September 30 3 1/8 6 1/4
December 31 1 9/16 6 1/4
1995
March 31 1 9/16 1 9/16
June 30 1 9/16 9 3/8
September 30 6 1/4 9 3/8
December 31 6 1/4 9 3/8
1996
March 31 9 3/8 11
June 30 6 11
September 30 6 11
December 31 6 11
As of December 31, 1996, the closing bid price of the Company's common shares
was $ 11.00. As of December 31, 1996, there were 290 holders of record of the
Company's shares.
No dividends have been declared with respect to the Company's common shares
since inception. The Company is not likely to pay any dividends in the
foreseeable future. The Company intends to reinvest any earnings in its
operations.
During the quarter ended December 31, 1996, the Company sold 7,950 Units in a
private offering to accredited investors in accordance with Rule 505
promulgated under the Securities Act. Each Unit was priced at $5.00 with
selling agent/finders fees of $.50 deducted therefrom. Each Unit consists of
one common share, one "C" warrant exercisable until March 5, 1998 for one
common share at $6.00 and one "D" warrant exercisable until March 5, 1999 for
one common share at $8.00. The proceeds were used for general working
capital.
Item 6. Management's Discussion and Analysis or Plan of Operation.
At the end of 1996, Tollycraft Yacht Corporation was operating at limited
capacity as a result of insufficient working capital and ongoing financial
difficulties. The management group has identified specific goals for the next
12 to 24 month period including:
Obtain additional debt or equity financing to continue operations
Maintain customer and dealer relationships
Shape maximum customer confidence
Invest in updating and redesigning the current product line
Complete development of a new series of yachts
Expand the dealer network
Significant expenses have been incurred to date to implement these goals. In
order for the Company to meet its cash requirements and continue operating,
the Company must achieve profitable operations and/or obtain additional debt
or equity financing.
Tollycraft Yacht Corporation management is continuing efforts to raise funds
in order to proceed with its business 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. Alternatives being considered include converting current debt
to equity through the issuance of common shares, the sale of common shares to
raise working capital, and additional debt financing. The Company has engaged
the services of professional advisors to perform these investment activities.
Chairman and Chief Executive Officer Peter Hobbs announced the organization of
the Capital Formation Committee with the priority goal of generating new
capital funding for the Company. Mr. Hobbs will be assisted by President and
Chief Operating Officer D.R. Cooley and additional individuals from business
and international investment banking communities.
Results of Operations:
The Company has reduced manufacturing operations during the first six months
of the year. The reduction can be attributed to unprofitable operations and
the resulting lack of working capital to finance ongoing manufacturing
operations at a reasonable capacity throughout the year. In July,
manufacturing employees and non-essential support staff were laid off and
manufacturing was discontinued until December. At year-end a limited number
of employees were constructing one 48' Classic Motor Yacht scheduled for
delivery in January 1997.
During the year ended December 31, 1996, the Company incurred a net loss of
$(11,633,426) which included excess plant capacity charges of $1,755,861 and a
one time charge of $6,727,893 for the purchase of Tollycraft Acquisition
Corporation. Exclusive of the purchase costs the net loss would be
$(4,905,533). For the year ended December 31, 1995, the net loss was
$(3,660,332). The Company also incurred a negative cash flow from operations
of $(1,312,053) for 1996. This compares to a negative cash flow from
operations of $(2,275,500) for the year ended December 31, 1995.
Deeper operating losses are a reflection of the Company's inadequate gross
margin and the suspension of manufacturing operations at the beginning of the
third quarter. Gross Margins were -$577,691 or -14.5% of net sales for 1996
and -$1,428,320 or -11.7% of net sales for 1995. The Company's efforts to
modernize the yacht interiors with more luxurious appointments while honoring
previous price commitments contributed to the negative gross margin. There
was a small amount of manufacturing activity prior to the end of the year.
The majority of the manufacturing expenses incurred during the third and
fourth quarters were fixed costs relating to plant overhead expenses and some
wages for essential personnel. These costs have been identified as "Excess
plant capacity" on the Statement of Operations.
Management has emphasized the following areas to improve the operations of the
Company:
Increase basic pricing on each yacht to improve gross margins and
reflect the improved product being manufactured.
Redefine manufacturing processes to produce yachts more efficiently and
with greater profit margins.
Select new materials to continue upgrading the quality of each yacht
while emphasizing production efficiency.
Implement a labor tracking information system to monitor and reduce
direct labor costs.
Design a new line of yachts to augment the current models offered. The
new yachts will utilize updated manufacturing techniques and have greater
profit margins.
Develop relationships with dealers that are able to provide their own
inventory financing.
Increase the dealer network to increase sales volume and reach economies
of scale.
Financial Condition:
The Company's internally generated cash flow has not been sufficient to
finance its operations. The cumulative losses of the Company continue to be
financed through current liabilities. Current liabilities of $13,970,428
exceed current assets of $2,196,738 resulting in a current ratio of .157 at
December 31, 1996. The current ratio at December 31, 1995 was .232. Current
liabilities include a revolving credit amount of $3,000,000 from a marine
engine supplier to assist financing of work-in-process inventories and other
working capital loans from finance companies. The remaining current
liabilities are trade payables, advance deposits from customers, accrued
payroll and related expenses, and undeposited payroll taxes and penalties.
The Company has not been able to make timely payments to its landlord, trade
suppliers, material vendors, and various taxing authorities. Deferred payment
terms are being negotiated with the taxing authorities. During the short
periods of production trade vendors and material suppliers have provided the
Company with its raw material needs on a COD basis. The Company does not
expect any difficulties in obtaining raw materials once financing is obtained
and production returns to a regular level.
Long-term debt of $1,474,890 (including current maturities) are mainly
obligations assumed in exchange for plant machinery and equipment as well as
molds and tooling necessary to manufacture the current line of yachts.
Management believes the book value of these assets is understated when
considering replacement cost values and the potential earnings capability of
the tooling.
There were no capital expenditures during the third and fourth quarters of
1996. In prior quarters approximately $310,000 was invested in the
construction of molds and tooling for a new 48' pilothouse motor yacht. This
new yacht design is planned to improve manufacturing processes and contribute
a larger gross margin to the product mix.
Funds for the capital expenditures and financing of the negative cash flows
were provided by a corresponding increase in current liabilities. 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.
In order to begin production at regular capacity 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 and
production efficiencies 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 sales and
production goals. The expected source for a majority of the funds is from
private placement investment offerings and a future public stock offering.
There can be no assurance that the anticipated aforementioned improvements in
operations can be achieved or additional financing or equity capital may be
obtained by the Company on acceptable terms.
During the third quarter of 1996 union employees accepted a contract effective
through June of 1998. After several weeks of negotiations, the members passed
a contract calling for:
Average wage reductions of 20%
Elimination of certain holiday
Reduction of vacation benefits
Employee contributions to medical plans
A reduction of union work categories
The concessions are expected to result in direct labor savings of
approximately 23%.
Item 7. Financial Statements.
Independent Auditor's Report
October 2, 1997
To the Stockholders
Tollycraft Yacht Corporation
Kelso, Washington
We have audited the accompanying balance sheet of Tollycraft Yacht
Corporation, as of December 31, 1996 and the related statement of operations,
stockholders' equity (deficit), and cash flows for the period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
Except as discussed in the following paragraph, we conducted our audit
in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
The Company's work-in-process inventory is priced on the basis of direct
material costs estimated by management rather than invoices or other
documentation of actual costs incurred. The Company's accounting records did
not permit us to extend our auditing procedures sufficiently to satisfy
ourselves about inventory costs, stated at $1,867,999 in the accompanying
balance sheet.
In our opinion, except for the effects of such adjustments, if any, as
might have been determined to be necessary had the accounting records been
adequate for us to satisfy ourselves about the inventory recorded in the
financial statements, the financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Tollycraft Yacht Corporation as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
As described in Note 1 to the financial statements, the Company changed
its method of accounting for contracts from the percentage-of-completion
method to recognizing revenues when completed yachts are shipped.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company has a net loss for the year, a working
capital deficit, and a net capital deficiency that raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Isler & Co., L.L.C.
Portland, Oregon
TOLLYCRAFT YACHT CORPORATION
Balance Sheet
December 31, 1996
ASSETS
Current assets:
Cash $ 677
Accounts receivable 32,000
Raw material inventories 288,313
Work-in-process inventory 1,867,999
Prepaid expenses 7,749
Total current assets 2,196,738
Equipment, net 2,731,394
Other assets 274,594
Total assets $ 5,202,726
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Checks issued in excess of bank deposits $ 22,569
Notes payable 7,195,747
Accounts payable 1,404,075
Accrued payroll and payroll related liabilities 2,077,250
Other accrued liabilities 1,652,186
Customer deposits 678,000
Long-term debt, due within one year 940,601
Total current liabilities 13,970,428
Net deferred tax liabilities 124,184
Long-term debt 534,289
Stockholders' equity (deficit):
Common stock, par value, 50,000,000 shares
authorized, 1999,957 shares issued and
outstanding 2,829,703
Retained deficit (12,255,878)
Total stockholders' equity (deficit) (9,426,175)
Total liabilities and stockholders
equity (deficit) $ 5,202,726
See accompanying notes to financial statements.
TOLLYCRAFT YACHT CORPORATION
Statement of Operations
Year Ended December 31, 1996
Net sales $ 3,993,517
Cost of sales 4,571,208
Gross margin (577,691)
Excess plant capacity 1,755,861
Selling expenses 559,317
General and administrative expenses 1,001,232
Nonrecurring excess costs over net
assets acquired (Note 3) 6,727,893
(10,621,994)
Other income (expenses)
Interest, net (950,081)
Gain on sale of assets 11,290
Other 5,080
(933,711)
Loss before provision for income taxes (11,555,705)
Provision for income taxes - deferred 77,721
Net loss $ (11,633,426)
Net loss per share $ (5.72)
See accompanying notes to financial statements.
TOLLYCRAFT YACHT CORPORATION
Statement of Stockholder's Equity (Deficit)
Year Ended December 31, 1996
Total
Common Stock Retained stockholders
Shares Amount (deficit) equity
Balance,
December 31, 1995 6,107,061 $ 635,110 $ (630,445) $ 4,665
Stock issued 43,891,864 $2,194,593 - 2,194,593
Effect of
1 for 25
stock split (47,998,968) - - -
Effect of
accounting change - - 7,993 7,993
Net loss (11,633,426) (11,633,426)
Balance,
December 31, 96 1,999,957 $ 2,829,703 $(12,255,878) $ (9,426,175)
See accompanying notes to financial statements.
TOLLYCRAFT YACHT CORPORATION
Statement of Cash Flows
Year Ended December 31, 1996
Cash flows from operating activities:
Net loss $ (11,633,426)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 374,515
Gain on sale of assets (11,290)
Nonrecurring excess costs over net
assets acquired 6,727,893
Change in assets and liabilities, net of effects
from purchase of Tollycraft Acquisition Corporation:
Accounts receivable (3,224)
Inventories 161,687
Prepaid expenses 231,774
Work-in-process inventory (416,337)
Checks issued in excess of deposits 22,569
Accounts payable and accrued liabilities 2,478,065
Deposits 678,000
Deferred income tax 77,721
(1,312,053)
Cash flows from investing activities:
Proceeds from sale of assets 14,305
Purchase of equipment (309,533)
Payment for purchase of Tollycraft
Acquisition Corporation, net of cash
acquired 19,879
(275,349)
Cash flow from financing activities:
Proceeds from notes payable 3,360,044
Repayment of notes payable (1,815,569)
Repayment of long-term debt 43,460
1,587,935
Net increase in cash 533
Cash, December 31, 1995 144
Cash, December 31, 1996 $ 677
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 342,674
Supplemental disclosure of noncash financing
activities:
Issuance of notes payable for professional
services received $ 228,000
Common stock issued for Tollycraft
Acquisition Corporation $ 2,194,593
See accompanying notes to financial statements.
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1996
Note 1 - Summary of significant accounting policies
Nature of business
Tollycraft Yacht Corporation, "the Company", is engaged in the
manufacture and distribution of luxury motor yachts.
Concentrations of cash
The Company maintains cash deposits in bank accounts which, at
times, exceed federally insured limits. The Company has not experienced
any losses in such accounts.
Inventories
Inventories are valued at the lower of average cost or market.
Equipment
Equipment is carried at cost. Depreciation of equipment is
provided using the straight-line method over the estimated useful lives
of the assets. Additions and improvements, including jigs, patterns and
molds, are capitalized. The estimated useful lives of the assets are as
follows:
Years
Manufacturing equipment 5-7
Office furniture and equipment 5-7
Molds and patterns 10
Revenue recognition
With effect from the beginning of 1996, the Company discontinued
its method of accounting for contracts using the percentage-of-
completion method. The Company now recognizes revenue upon the
completion, shipment, and title transfer of each yacht. The Company
believes, in view of the uncertainty involved in long-term contracts,
that this is a more prudent method. The Company also believes this
method is more in conformity with industry practices. The effect of
this change for 1996 is $7,993.
Accordingly, revenue and costs of individual yachts are included
in operations in the year during which they are completed. Losses
expected to be incurred on contracts in progress are charges to
operations in the period such losses are determined. The aggregate of
costs of uncompleted yachts in process is shown as a current asset, and
the aggregate of billings on uncompleted yachts in process is shown as a
current liability.
Estimated warranties
The Company records a warranty accrual at the time of sale for
estimated claims, based on actual claims experience. 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.
Pension and profit sharing plans
Union employees of the Company participate in a pension plan which
qualifies under Section 401(k) if the Internal Revenue Code. The
Company is required by the union contract to make annual contributions
of $.05 per labor hour. There was no contribution made to the plan for
the year ended December 31, 1996.
Non-union employees of the Company also participate in a pension
plan which qualifies under Section 401(k) of the Internal Revenue Code.
The Company is not required and has not made any contributions to the
non-union plan.
Net loss per share
Net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period.
The weighted average number of common shares outstanding was 2,033,290
for the year ended December 31, 1996.
Income Taxes
Income taxes are accounted for and reported using an asset and
liability approach. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and
tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
effect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the year in deferred tax 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 result principally from the Company's
differences for recording warranty reserves for financial statement
purposes. Deferred tax liabilities result principally from the use of
accelerated depreciation for tax purposes.
Significant risks and uncertainties
The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of estimates
and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Management of the Company has estimated the
reserves for warranty expenses, costs of work-in-process inventory and
federal tax penalties on unpaid payroll taxes. Such estimates primarily
relate to unsettled transactions and events as of the date of the
financial statements. Accordingly, upon settlement, actual results may
differ from the estimated amounts.
Collective bargaining arrangements
Substantially all of the Company's non-management employees are
covered by a collective bargaining agreement. If the Company and the
production workers are unable to agree on a new contract prior to
expiration of the current contract, a work stoppage may occur that could
adversely affect results of operations.
Advertising costs
The Company expenses the cost of advertising as it is incurred.
The amount charges to selling expense for 1996 is $103,222.
Note 2 - Continued operations
During the year ended December 31, 1996, the Company incurred a net loss
of $11,633,426, which included a one time charge of $6,727,893 for the cost of
the acquisition of Tollycraft Acquisition Corporation (discussed further in
Note 3). As of that date, the Company's current liabilities exceeded its
current assets by $11,773,690 and its total liabilities exceeded its total
assets by $9,426,175. The Company incurred layoffs and shut downs throughout
most of the year. These factors, among others, indicate that the Company may
be unable to continue its operations without the procurement of alternative
financing and ultimately the successful marketing of the Company's products.
As discussed further in Note 12, the Company is in the process of
raising additional equity capital. A portion of the equity capital will be
used to enhance working capital, gain operating efficiencies, and expand the
Company's product lines.
The accompanying financial statements have been prepared on a basis of a
going concern, which contemplates the realization of assets through continuing
operations. No adjustments have been made to reflect potentially lower
realizable values of assets should the Company be unable to continue its
operations as the outcome of the above matters is not currently determinable.
Note 3 - Business combination
On January 1, 1996, the Company acquired the assets of Tollycraft
Acquisition Corporation in a business combination accounted for as a purchase.
100% of the voting shares in Tollycraft Acquisition Corporation were
acquired. The Company changed its name from Child Guard Corporation as of
that date to Tollycraft Yacht Corporation. The Company assumed liabilities in
connection with the purchase aggregating $9,338,932. The results of
operations of Tollycraft Acquisition Corporation is included in the
accompanying financial statements since the date of acquisition. The total
cost of the acquisition was $2,194,593 which exceeded the fair value of the
net assets of Tollycraft Acquisition Corporation by $6,727,893. The excess
was written off during the year.
Cash required, net of cash acquired, for the purchase of Tollycraft
Acquisition Corporation was as follows:
Fair value of net assets acquired:
Accounts receivable $ 28,776
Raw material inventories 450,000
Equipment 2,796,377
Prepaid expenses 52,367
Deferred tax assets 14,564
Work-in-process inventory 1,443,669
Liabilities assumed (9,338,932)
Excess cost over net assets acquired 6,727,893
2,174,714
Value of common stock issued 2,194,593
Net of cash acquired $ 19,879
The following summarized proforma information represents Tollycraft
Acquisition Corporation's financial position, earnings and cash flows for the
year ended December 31, 1995:
ASSETS
Current assets:
Cash $ 19,879
Accounts receivable 28,775
Raw material inventories 450,000
Work-in-process inventory 1,500,426
Prepaid expenses 52,367
Total current assets 2,051,447
Equipment, net 2,796,377
Total assets $ 4,847,824
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable 5,651,273
Accounts payable 768,167
Accrued payroll and payroll related liabilities 1,016,802
Other accrued liabilities 866,982
Customer deposits 155,000
Long-term debt, due within one year 400,597
Total current liabilities 8,858,821
Net deferred tax liabilities 46,463
Long-term debt 574,083
Stockholders' equity (deficit):
Common stock, par value, 50,000,000 shares
authorized, 1999,957 shares issued and
outstanding 786,157
Additional paid-in-capital 160,000
Retained deficit (5,577,700)
Total stockholders' equity (deficit) (4,631,543)
Total liabilities and
stockholders equity (deficit) $ 4,847,824
OPERATIONS
Net sales $ 12,176,166
Cost of sales 13,604,486
Gross margin (1,428,320)
Selling expenses 697,902
General and administrative expenses 1,287,961
(3,414,183)
Other income (expenses)
Interest, net (674,246)
Gain on sale of assets 7,700
Other 466,860
(199,866)
Loss before provision for income taxes (3,613,869)
Provision for income taxes - deferred 46,463
Net loss $ (3,660,332)
Net loss per share $ (3.66)
CASH FLOWS
Cash flows from operating activities:
Net loss $ (3,660,332)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 426,145
Change in assets and liabilities
Accounts receivable (24,776)
Raw material inventories (22,358)
Prepaid expenses (52,367)
Work-in-process inventory (383,060)
Deposits 155,000
Accounts payable and accrued liabilities 1,239,785
Deferred income tax 44,463
(2,275,500)
Cash flows from investing activities:
Purchase of equipment (311,958)
Cash flow from financing activities:
Proceeds from notes payable 6,937,377
Repayment of notes payable (3,926,218)
Proceeds from long-term debt 48,631
Repayment of long-term debt (711,501)
2,348,289
Net increase in cash (239,169)
Cash, December 31, 1994 259,048
Cash, December 31, 1995 $ 19,879
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 571,881
Note 4 - Equipment and leasehold improvements
Equipment consisted of the following:
Manufacturing equipment $ 413,072
Office furniture and equipment 35,344
Molds and patterns 3,161,326
3,609,742
Less accumulated depreciation (878,348)
$ 2,731,394
Depreciation expense was $374,515 for the year.
Note 5 - Other accrued liabilities
Other accrued liabilities consisted of the following:
Property taxes $ 34,212
Estimated liabilities for warranties 116,844
Interest 339,032
Excise taxes 48,671
Vacation payable 160,679
Workers compensation 538,811
Other $ 413,937
$ 1,652,186
Note 6 - Notes payable
The Company has available a $3,000,000 line-of-credit with Caterpillar
Financial Services Corporation for the manufacture of yachts. Under the terms
of the agreement, borrowings are limited to 75% of the dealer net price of
each particular yacht, and are advanced 1/3 upon commencement of hull
lamination, 1/3 upon commencement of assembly and 1/3 upon completion of
engine installation. Interest on borrowings are payable monthly at a variable
rate (which was 10.25% per annum at December 31, 1996). Borrowings are
collateralized by substantially all assets. Outstanding borrowings as of
December 31, 1996 were $3,000,000.
The Company is also required to maintain a minimum level of
stockholders' equity and a ratio of total liabilities to stockholders' equity.
At December 31, 1996, the Company was in violation of these minimum
requirements.
The Company also has a line-of credit with Vera Corporation for working
capital purposes. Interest on borrowings are payable at a rate of 12% per
annum. Borrowings are collateralized by substantially all assets.
Outstanding borrowings at December 31, 1996 were $3,055,317.
The Company also has a line-of-credit with Commercial Factors of
Portland, Inc. for working capital purposes. Interest on borrowings are
payable monthly at a variable rate (which was 13.6% per annum at December 31,
1996). Borrowings are collateralized by substantially all assets.
Outstanding borrowings at December 31, 1996 were $133,969.
The Company also has a line-of-credit with California Factors & Finance
for working capital purposes. Interest on borrowings are payable monthly at a
rate of 12% per annum. Borrowings are collateralized by substantially all
assets. Outstanding borrowings at December 31, 1996 were $278,461.
The Company issued notes payable in exchange for services received
during the year totaling $228,000. The Company intends to convert these notes
payable into common stock during 1997.
The Company issued notes payable of $500,000 to Voyager Select IPO Fund
during the year. The notes are collateralized by certain assets of the
Company and bear interest at 24% per annum. The principal and accrues interest
are due on April 6, 1997. These notes may be converted into common stock of
the Company at a conversion price equal to 50% of the closing bid price of the
common stock on the conversion date.
Note 7 - Long-term debt
Long-term debt at December 31, 1996, consisted of the following:
Non-interest bearing note payable to supplier, due
June 1996, secured by inventories $ 19,090
8% note payable to the Internal Revenue Service,
payable in semi-annual installments of $70,646,
including interest, due July 1996 314,503
10% Debentures payable, interest payable in semi-
annual payments for 4 years. The debentures are
convertible to common stock of the Company at a rate
of $.75 per share 17,000
8% note payable to the Washington State Labor and
Industries Division, payable in semi-annual payments
of $2,219 including interest, due July 1996 9,878
8% note payable to Transamerica, payable in monthly
installments of $3,500 including interest, due July
1996, secured by personal property, inventories and
accounts receivable 50,000
Notes payable to individuals, due at various times
during 1997, bearing variable interest rate (Wall
Street prime plus 1%). The notes are convertible to
one restricted common share of the Company, one "A"
warrant to purchase one common share exercisable until
January. 15, 1997 at $4 per share and one "B" warrant
to purchase one common share exercisable until January
15, 1998 at $6 per share. The rate of conversion
equals 50% of the average public bid price of the
Company's common stock for the 10 days preceding the
call conversion. 439,750
Non-interest bearing note payable to supplier, payable
in monthly installments of $1,032, due June 1999,
secured by inventories 50,884
8% note payable to Cowlitz County, payable in monthly
installments of $160 including interest, due June 1999
secured by personal property 7,874
Non-interest bearing notes payable to suppliers, due
July 1999, discounted at an interest rate of 8% 426,236
Non-interest bearing unsecured notes payable to
vendor, due July 1999, discounted at an interest rate
of 8% 88,469
Non-interest bearing unsecured note payable at an
interest rate of 8% 51,206
1,474,890
Less amount due within one year (940,601)
$ 534,289
Following are maturities of long-term debt for each of the years ending
subsequent to December 31, 1997.
Years ending May 31:
1998 $ 59,091
1999 445,836
2000 29,362
$ 534,289
Note 8 - Major customers
The Company distributes its yachts through a select group of dealers
nationwide. Sales to the three largest dealers represented 57%, 24% and 11%
of sales for the year ended December 31, 1996.
Note 9 - Provision for income taxes
Net deferred tax liabilities as of December 31, 1996 consisted of the
following:
Deferred tax asset:
Net operating loss carryover $ 5,635,699
Other 7,928
5,643,627
Deferred tax liability:
Depreciation (127,121)
Other (4,991)
(132,112)
Valuation allowance for
deferred tax asset (5,635,699)
Net deferred tax liability $ (124,184)
As of December 31, 1996, the Company had net operating loss carryovers
of approximately $16,575,586 available to offset future federal taxable
income, if any. In the event of ownership changes aggregating fifty percent
or more in any three-year period, the amount of loss carryovers that become
available for utilization in any year may be limited. Tax loss carryovers of
$3,083,000, if not utilized against taxable income, will expire in the year
2010, $1,989,819 will expire in 2011 and $11,502,767 will expire in 2012.
Note 10 - Common stock
Shares outstanding
During November 1996, the Company issued 5,000,000 (pre-split)
share of its common stock to Gemini Financial Services, Ltd. In exchange
for participation in the Gemini Capital Fund. The transaction was
rescinded in December 1996 by both parties. Gemini Financial Services,
Ltd. Still has possession of the stock certificates. The Company did
not record this transaction on its books and is not reflected in these
financial statements.
Stock options
On January 11, 1996, the Company granted to an officer of the
Company an option to purchase 120,000 shares of common stock at $9.25
per share, exercisable over a period of two years beginning on that date
that the line-of-credit from Vera Corporation is fully paid and no
longer outstanding.
Also on January 11, 1996, the Company granted to an officer of the
Company an option to purchase 40,000 shares of common stock as follows:
up to 10,000 shares at $9.25 per share on or before December 31, 1996;
any unexercised shares from above and up to 10,000 additional; shares at
$12.50 per share on or before December 31, 1997; any unexercised shares
from above and up to 10,000 additional shares at 50% of bid price on
date exercised on or before December 31, 1998; any unexercised shares
from above and up to 10,000 additional shares at 50% of bid price on
date exercised on or before December 31, 1999.
On June 26, 1996, the Company granted to key persons options to
purchase a combined total of 3,800 shares of common stock at 50% of
market value on the date exercised, exercisable over a period of two
years.
On December 9, 1996, the Company approved an employee stock option
plan. The plan provides for the granting of 600,000 shares of common
stock to key employees.
Stock split
On December 9, 1996, the Board of Directors authorized a 1-for-25
stock split, thereby decreasing the number of issued and outstanding
shares to 1,999,957. The outstanding stock options listed above have
been adjusted to account for this stock split.
Note 11 - 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.
On January 28, 1997, the Company reserved for issuance up to 500,000
shares of common stock for up to $2,000,000 cash in a Regulation S
transaction. The purchase price would be $4 per share. During August 1997,
$250,000 was received relating to this reservation.
On February 13, 1997, the Company authorized the call of its Convertible
Promissory Notes for conversion as their terms so allow. Each note is
convertible into one common share of the Company, one "A" warrant to purchase
one common share until January 15, 1997 at $4 per share and one "B" warrant to
purchase one common share until January 15, 1998 at $6 per share.
On February 28, 1997, the Company extended the exercise period for the
warrants issuable pursuant to the conversion of certain promissory notes. The
"A" warrant is extended to January 15, 1998 and the "B" warrant is extended to
January 15, 1999.
Also on February 28, 1997, the Company authorized the issuance of up to
$3,000,000 of securities designated as 600,000 units at $5 per unit. Each
unit shall consist of one common share, one "C" warrant exercisable until
March 5, 1998 to purchase one common share at $6 per share, and one "D"
warrant exercisable until March 15, 1999 to purchase one common share at $8
per share.
Also on February 28, 1997, the Company entered into a retainer agreement
relating to legal services for securities matters with compensation at a rate
of $6,000 per month, payable as follows: (a) in S-8 registered common shares,
if available, valued at the lowest bid price during the month payable, or, (b)
if S-8 is unavailable, in restricted stock at 50% of the lowest bid price
during the month payable.
Also on February 28, 1997, the Company issued 10,000 common shares
registerable under S-8 in cancellation of an existing debt of 40,000 pre-split
common shares owed for services rendered.
Also on February 28, 1997, the Company granted stock options to purchase
315,000 shares of common stock to key persons pursuant to the 1996 Employee
Stock Option Plan. The options are exercisable at $6 per share over the next
five years.
On March 20, 1997, the Company granted stock options pursuant to the
1996 Employee Stock Option Plan to key persons for the purchase of 45,000
common shares at $6 per share, exercisable over six months.
Subsequent to year end, the Company borrowed approximately $28,000 from
key persons and is payable on demand.
Also subsequent to year end, the Company received $97,000 from the
issuance of convertible promissory notes.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with 16(a) of the Exchange Act.
Peter D. Hobbs 52 Chairman, Chief Executive Officer,
Secretary, Director
D.R. Cooley 42 President, Chief Operating Officer
Chief Financial Officer, Director
Peter Hobbs: Involved in investment banking and capital raising since 1972.
Worked for several overseas companies actively involved in raising capital for
both domestic and overseas entities. One of these companies presently
controls the majority of voting stock of Tollycraft.
D.R. Cooley: Held positions in business and finance with responsibility in
investment banking, financing, and management of closely held businesses since
1977. Experienced in manufacturing entities, management buyouts, and turn
around activities.
Compliance with 16(a) of the Exchange Act. Federal securities laws require
the Company's directors, certain of its officers, and persons owning
beneficially more than ten percent (10%) of a registered class of the
Company's equity securities, to file initial reports of ownership and reports
of changes in ownership with the Commission. The Company is required to
disclose any failure of persons, who at any time during the fiscal year, were
directors, officers required to report, or more than ten percent (10%)
beneficial owners, to file timely those reports during the fiscal year. The
Company undertakes the responsibility to file all required reports on behalf
of its directors and officers. To the Company's knowledge, based solely upon
information furnished to the Company by its directors and certain of its
officers, during the fiscal year ended December 31, 19196, all of the
Company's directors, officers required to report, and greater than ten percent
(10%) beneficial owners made all such filings on a timely basis, except for
the following: Peter Hobbs, D.R. Cooley, Kramfors Limited.
Item 10. Executive Compensation.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name Annual Restricted Under- All Other
and Compen- Stock lying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary ($) Bonus ($) ($) ($) SARs (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter D. Hobbs 1996 ...
Chairman, Chief 1995 ...
Executive Officer
Secretary
D.R. Cooley 1996 $96,000 $0 $120,000 $40,000
President, 1995 $96,000 $0
Chief Executive
Officer, Chief
Financial Officer
</TABLE>
1996 Option Grants. The following table shows information regarding grants of
stock options in 1996 to the executive officers named in the Summary
Compensation Table.
Individual Grants
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base Expiration
Name Granted (#) In Fiscal Year Price ($/Sh) Date
Peter D. Hobbs ...
D.R. Cooley 120,000 50% $9.25/Share variable (1)
40,000 50% $9.25/Share 12/31/99 (2)
Footnotes
(1) Stock Option Agreement, adjusted for reverse split, expires 24
months after the debt owed by the Company to Vera Corporation is fully paid
and no longer outstanding or is bargained, sold, assigned, transferred or
conveyed to a third party, and written notice from the Company of such payoff
or transfer is given to the Optionee.
(2) Incentive Stock Option Agreement, adjusted for reverse split,
exercisable as follows: (1.1) Up to 10,000 shares at $9.25 per share, which is
the fair value at the time this option is granted, on or before 12/31/96;
(1.2) Any unexercised shares issuable pursuant to Section 1.1 herein and up to
10,000 additional shares, all at $12.50 per share on or before 12/31/97; (1.3)
Any unexercised shares issuable pursuant to Sections 1.1 and 1.2 herein and up
to 10,000 additional shares, all at 50% of the bid price of the stock as
quoted at the time notice of exercise is given, on or before 12/31/98; (1.4)
Any unexercised shares issuable pursuant to Sections 1.1, 1.2, and 1.3 herein
and up to 10,000 additional shares, all at 50% of the bid price of the stock
as quoted at the time notice of exercise is given, on or before 12/31/99.
The following table illustrates stock option and SARs exercised by the named
executive officers during 1996 and the aggregate amounts realized by e4ach
such officer. In addition, the table shows the aggregate number of
unexercised options and SARs that were exercisable and unexercisable as of
December 31, 1996, and the values of "in-the-money" stock options and SARs on
December 31, 1996, which represent the positive difference between the market
price of the Company's Common Stock and the exercise price of such
options/SARs.
There were no option/SAR exercises in last fiscal year and FY-End Option/SAR
Values are $0 since the options are not "in-the-money".
There was no compensation paid in 1996 for services as a director of the
Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The table below sets forth the only entities known to the Company to be the
beneficial owner of more than five percent of the outstanding Common Stock of
the Company.
Name and Amount and
Address of Nature of
Beneficial Beneficial Percent
Owner Ownership of Class
Kramfors Limited, 1,448,431 72.42%
2 Ice House Street, Option to
Suite 202, acquire,
Central Hong Kong voting power*
*subject to a Voting Trust Agreement wherein Peter D. Hobbs is voting trustee
on behalf of Kramfors Limited.
The following table sets forth the number of shares of Common Stock of the
Company beneficially owned at December 31, 1996, by each director, by each of
the executive officers included in the Summary Compensation Table, and by all
directors and executive officers of the Company as a group, and the percentage
of the outstanding shares of Common Stock so owned by each such person and
such group.
Name and Amount and
Address of Nature of
Beneficial Beneficial Percent
Owner Ownership of Class
Peter D. Hobbs 1,448,431 72.42%
Voting Trustee
D.R. Cooley 0 0%
Total 1,448,431 72.42%
Item 12. Certain Relationships and Related Transactions.
Peter D. Hobbs, Chairman, Secretary, Director:
Mr. Hobbs is an employee of Kramfors Limited. Kramfors Limited has identified
Mr. Hobbs as the voting trustee of 72.42% of the common shares of the Company.
During 1996, Corporate Developers of America provided consulting and
management services to Tollycraft Yacht Corporation. Mr. Hobbs is the
Executive Director of Corporate Developers of America.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibit Table.
2 Plan of Acquisition, reorg. (3)
3.1 Articles of Incorporation (3)
3.2 By-Laws (3)
5 Instruments defining the rights of security holders (4)
9.1 Voting Trust Agreement (2)
9.2 Assignment of Voting Trust Agreement (5)
10.1 *1996 Employee Stock Option Plan (3)
10.2 *Consulting Agreement between Tollycraft and Kramfors Limited (5)
10.3 *Incentive Stock Option Agreement between Tollycraft and D.R. Cooley (1)
10.4 *Stock Option Agreement between Tollycraft and D.R. Cooley (1)
21 Subsidiaries of the registrant (1)
23 Consent of experts and counsel (1)
24 Power of attorney (1)
27 Financial Data Schedule (1)
____________________
(1) Filed herewith.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
as filed electronically on October 28, 1996.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K/A
as filed electronically on February 20, 1997.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB as filed electronically on July 23, 1996.
(5) Incorporated by reference to the Registrant's Quarterly Report for the
period ended September 30, 1996 on Form 10-QSB as filed electronically on
November 27, 1996.
*Compensatory plan or arrangement
(b) The following reports on Form 8-K were filed during the quarter ended
December 31, 1996:
October 28, 1996 Item 1,5
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby authorizes
D.R. Cooley, the agent for service named in this Report, with full power to
act alone, to file one or more amendments to this Report, which amendments may
make such changes in this Report as such agent for service deems appropriate,
and the Registrant and each such person hereby appoints such agent for service
as attorney-in-fact, with full power to act alone, to execute in the name and
in behalf of the Registrant and any such person, individually and in each
capacity stated below, any such amendments to this Report.
[SIGNATURES]
In accordance with Section 13 or 15(d) 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)
By: /s/_______________________________
Peter D. Hobbs, Chairman, Chief
Executive Officer, Secretary
By: /s/_______________________________
D.R. Cooley, President,
Chief Operating Officer
Chief Financial Officer
Date: 11-18-97
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/_______________________________ 11-18-97
D.R. Cooley President, Chief
Operating Officer,
Chief Financial
Officer, Director
/s/_______________________________ 11-18-97
Peter D. Hobbs Chairman, Chief
Executive Officer,
Secretary, Director
10.3 Incentive Stock Option Agreement between Tollycraft and D.R. Cooley
TOLLYCRAFT YACHT CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
January 11, 1996
(Date of Grant)
TOLLYCRAFT YACHT CORPORATION, a Minnesota corporation ("Company"),
pursuant to its desire to create employee benefit plans to retain and motivate
outstanding employees and to align such employees interests with the interests
of the Company, hereby grants to D. R. Cooley("Optionee"), an option
("Option") to purchase a total of 1,000,000 shares of the common stock of the
Company ("Common Stock") at the price of per share on the terms and conditions
set forth herein.
1. Exercisable in Installments. This Option is effective as of the date of
grant set forth above and shall be exercisable as follows:
1.1 Up to 250,000 shares at $.37 per share, which is the fair value at
the time this option is granted, on or before 12-31-96.
1.2 Any unexercised shares issuable pursuant to Section 1.1 herein and
up to 250,000 additional shares, all at $.50 per share on or before 12-31-97.
1.3 Any unexercised shares issuable pursuant to Sections 1.1 and 1.2
herein and up to 250,000 additional shares, all at 50% of the bid price of the
stock as quoted at the time notice of exercise is given, on or before 12-31-98
1.4 Any unexercised shares issuable pursuant to Sections 1.1, 1.2, and
1.3 herein and up to 250,000 additional shares, all at 50% of the bid price of
the stock as quoted at the time notice of exercise is given, on or before 12-
31-99
In no event shall this Option be exercisable in whole or in part after
December 31, 1999.
2. Restrictions on Transfer and Legend of Certificates. The Company intends
to register the Common Stock subject to this Option with the Securities and
Exchange Commission using Form S-8 when appropriate, although the Company
makes no assurance of such registration. Accordingly, the Optionee warrants,
represents and agrees that unless a registration statement under the
Securities Act of 1933 is effective with respect to the Option and/or the
Common Stock, he has acquired the Option and will acquire any of the Common
Stock underlying this Option for his own account, with no view to any
distribution thereof, and that he will not make any distribution thereof other
than pursuant to an exemption from registration under the Securities Act of
1933. The Company shall have the right to place upon any certificate
evidencing shares issuable upon the exercise of this Option such legend as the
Board of Directors may prescribe restricting the transferability of such
shares.
3. Certain Rights Not Conferred by Option. The Optionee shall not, by virtue
of holding this Option, be entitled to any of the rights of a stockholder in
the Company.
4. Expenses. The Company shall pay all original issue and transfer taxes with
respect to the issuance and transfer of shares of Common Stock pursuant to
this Agreement and all other fees and expenses necessarily incurred by the
Company in connection therewith.
5. Exercise of Option.
5.1 The Option shall be exercisable only by delivering written notice of
exercise in a form specified by the Company to the Secretary of the Company at
its principal office within the time specified in Section 1 hereof, together
with payment as hereinafter described. Payment shall be in cash, except that
the Board of Directors, may, upon application of the Optionee, permit the
Optionee to pay the option price all or in part with shares of Common Stock
(other than shares acquired within the preceding two-year period by way of
exercise of an incentive stock option). The fair market value of the shares as
of the date of delivery of the certificates therefor to the Secretary of the
Company (as determined by the Board of Directors), accompanied by a stock
power executed in blank with signature guaranteed by a national bank, shall be
utilized as the basis for determining how much of the option price was paid
with such shares. The notice shall specify the number of shares for which the
Option is being exercised (which number, if less than all of the shares then
subject to exercise under the Option, shall be 100 or a multiple thereof not
resulting in any fractional shares) and shall be accompanied by payment in
full of the purchase price of the shares of Common Stock with respect to which
the Option is being exercised. No shares shall be delivered upon any exercise
of the Option until there has been compliance with all applicable laws, rules
and regulations. If a registration statement under the Securities Act of 1933
is not then in effect with respect to the shares issuable upon such exercise,
the person exercising the Option shall represent and warrant at the time of
any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required under
the Securities Act of 1933 or any other applicable federal, state or foreign
law, or any regulation or rule of any governmental agency, and make such other
representations as the Company reasonably may determine to be necessary.
Except as provided in Section 6 hereof, the Option may be exercised only if,
at all times during the period beginning on the date of the granting of the
Option and ending on the day of exercise, the Optionee was an employee of
either the Company (or a parent or subsidiary corporation of the Company) or a
corporation (or a parent or subsidiary corporation of such corporation).
5.2 Upon and after any exercise of the Option, the Company shall be
entitled to withhold such amounts from any wages or other sums due the
Optionee necessary in order for the Company to satisfy any federal, state or
foreign income, employment or other withholding tax requirements. If the
amount required to be withheld exceeds 30% of the wages and other amounts then
owed to the Optionee, the Company at its election may determine that the
exercise of the Option shall not apply to some portion or all of the number of
shares designated in the notice of exercise unless the Optionee pays to the
Company in cash the amount necessary in order for the Company to satisfy the
withholding requirements.
5.3 Until the Optionee becomes a shareholder of record, no right to vote
or to receive dividends or any other rights as a shareholder shall exist with
respect to shares of Common Stock notwithstanding the exercise of the Option.
No adjustment shall be made for dividend or other rights as to which the
record date precedes the date the Optionee becomes a shareholder of record,
except as provided in Section 9 hereof.
6. Termination of Option. To the extent it is not exercised, the Option
granted hereunder shall terminate (i) upon breach by the Optionee of any
provision of this Agreement or (ii) upon the termination of Optionee's
employment for any reason, including voluntary or involuntary termination with
or without cause, with the Company, a parent or subsidiary corporation of the
Company, or a corporation (or a parent or subsidiary corporation of such
corporation).
6.1 In the case of death of the Optionee who was employed by the Company
at the date of death, the Option may be exercised (to the extent accrued at
the date of death) within six months after the death of the Optionee, by (and
only by) the person or persons to whom the rights of the Optionee under the
Option shall have passed by will or by the applicable laws of descent and
distribution.
6.2 In the event of termination of employment of the Optionee for any
reason, this Option shall be deemed to have terminated thirty days after the
date such Optionee ceases, for any reason, to be an employee of the Company,
its parents or subsidiaries.
7. The Effect of Sale or Other Disposition of the Company. In the event the
Company or its shareholders enter into an agreement, plan of reorganization or
other arrangement to dispose of all or substantially all of the assets or
stock of the Company by means of a sale, reorganization, liquidation, or
otherwise, the Option shall become exercisable with respect to the full number
of shares subject to the Option, whether or not otherwise then accrued, during
the period commencing as of the date of such agreement, plan of reorganization
or other arrangement and ending the day before its consummation or
termination. All options which have not been exercised upon such consummation
thereupon shall terminate.
8. Non-assignability of Option. Neither this Option nor any part thereof or
interest therein may be sold, pledged, assigned or transferred in any manner
otherwise than by will or by the laws of descent and distribution, and may be
exercised during the lifetime of the Optionee only by the Optionee.
9. Adjustments Upon Changes in Capitalization. If all or any portion of the
Option is exercised subsequent to any stock dividend, split up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, separation, reorganization, or liquidation,
as a result of which shares of Common Stock shall be changed into the same or
a different number of shares of the same or another class or classes, the
person or persons exercising the Option shall receive for the aggregate price
payable upon such exercise of the Option, the aggregate number and class of
shares which, if shares of Common Stock (as authorized at the date of grant of
the Option) had been purchased at the date of grant of the Option for the same
aggregate price (on the basis of the price per share provided in the Option)
and had not been disposed of, such person or persons would be holding at the
time of such exercise, as a result of such purchase and any such stock
dividend, split up, recapitalization, combination or exchange of shares,
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation; provided, however, that no fractional share
shall be issued upon any such exercise, and the aggregate price paid shall be
appropriately reduced on account of any fractional share not issued. In the
event of any such change in the outstanding Common Stock of the Company, the
aggregate number and class of shares remaining available under the Option
shall be that number and class which a person, to whom an option had been
granted for all of the available shares under the Option on the date preceding
such change, would be entitled to receive as provided in the first sentence of
the second paragraph of this Section 9.
10. Reservation of Shares and Common Stock. The Company, during the term of
the Option, shall at all times reserve and keep available, and shall seek or
obtain from any regulatory body having jurisdiction any requisite authority in
order to issue and sell such number of the shares of Common Stock as shall be
sufficient to satisfy the requirements of the Option. Inability of the
Company to obtain from any regulatory body having jurisdiction authority
deemed by counsel for the Company to be necessary to the lawful issuance and
sale of any shares of its stock hereunder shall relieve the Company of any
liability with respect to the nonissuance or sale of such share(s) as to which
such requisite authority shall not have been obtained.
TOLLYCRAFT YACHT CORPORATION
By /s/ Tony Tulleners
Title: Chairman of the Board
Accepted as of the date set forth above
_____/s/___________________________
D. R. Cooley
10.4 Stock Option Agreement between Tollycraft and D.R. Cooley
TOLLYCRAFT YACHT CORPORATION
STOCK OPTION
Date Option Granted: January 11, 1996
Name of Optionee: Donald Ray Cooley, Jr.
Residence Address: 2440 Paradise Drive
City and State: Longview, WA 98632-5762
THIS STOCK OPTION made as of the date set forth above, by TOLLYCRAFT
YACHT CORPORATION, a Minnesota corporation (the "Company"), located at 2200
Clinton Avenue, Kelso, WA 48626.
The Board of Directors of the Company, or a duly appointed Stock Option
or Compensation Committee (collectively the "Committee") thereof, has
determined that it is to the advantage and interest of the Company and its
stockholders to grant the option provided for herein to the Optionee for
services rendered to the Company and in consideration of the mutual covenants
herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company grants to the Optionee the right and option
(the "Option") to purchase on the terms and conditions hereinafter set forth
all or any part of an aggregate of 3,000,000 shares (the "Shares") of the
presently authorized and unissued common stock, no par value, of the Company
("Stock") at the purchase price of $.37 per share.
2. Exercise Period. This option shall be exercisable in whole or in part as
to any and all shares for a period of sixty (60) days from the date that (i)
the debt owed by the Company to Vera Corporation is fully paid and no longer
outstanding, and (ii) written notice of such payoff is given to the Optionee.
3. Method of Exercise.
a. To the extent that the right to purchase shares has accrued
hereunder, the Option may be exercised from time to time by written notice to
the Company stating the number of Shares with respect to which the Option is
being exercised, and the time of the delivery thereof, which shall be at least
fifteen (15) days after the giving of such notice unless an earlier date shall
have been mutually agreed upon.
b. If requested by the Committee, prior to the delivery of any Shares
the Optionee, or any other person entitled to exercise the Option, shall
supply the Committee with a representation that the Shares are not being
acquired with a view to distribution and will be sold or otherwise disposed of
only in accordance with the applicable Federal and state statutes, rules and
regulations.
c. As a condition to the exercise of the Option, in whole or in part,
the Committee may in its sole discretion require the Optionee to pay, in
addition to the purchase price of the Shares covered by the Option, an amount
equal to any Federal, state or local taxes that may be required to be withheld
in connection with the exercise of the Option.
d. At the time specified in such notice, or as soon thereafter as the
Company is reasonably able to comply, the Company shall, without transfer or
issue tax to the Optionee or other person entitled to exercise the Option,
deliver to the Optionee or such other person, at the main office of the
Company or such other place that shall be mutually acceptable, a certificate
or certificates for such Shares of Common Stock, as the Company may elect,
against payment in full, in United States currency, by cash or by certified or
cashier's check payable to the order of the Company, of the purchase price for
the number of Shares to be delivered and of any Federal, state or local taxes
that the Committee has determined are required to be withheld.
e. Payment of the purchase price for the number of Shares to be
delivered, but not of the amount of any withholding taxes, may be made in
whole or in part with shares of the Stock of the Company. If payment is made
with Stock of the Company, the Optionee or other person entitled to exercise
the Option shall deliver to the Company certificates representing the number
of shares of Stock in payment for the Shares, duly endorsed for transfer to
the Company. If requested by the committee, prior to the acceptance of such
certificates in payment for the Shares, the Optionee or any other person
entitled to exercise the Option shall supply the Committee with a written
representation and warranty that he has good and marketable title to the
shares represented by the certificate(s), free and clear of liens and
encumbrances. The value of the shares of Stock tendered in payment for the
Shares being purchased shall be their bid price in the public securities
marketplace on the date of the Optionee's notice of exercise.
f. If the Optionee, or other person entitled to exercise the Option,
fails to accept delivery of and pay for all or any portion of the Shares
specified in such notice upon tender of delivery thereof, the Committee shall
have the right to terminate the Option with respect to such Shares.
g. The Optionee may exercise the Option for less than the total number
of Shares for which the Option is exercisable, provided that a partial
exercise may not be for less than one hundred (100) Shares, except during the
final year of the Option, and shall not include any fractional Shares.
4. Adjustments. If there are any changes in the capitalization of the Company
affecting in any manner the number or kind of outstanding shares of Stock of
the Company, and such changes have been occasioned by reorganization,
combination of shares, declaration of stock dividends, stock splits,
reclassifications or recapitalizations of such stock, the merger or
consolidation of the Company with some other corporation (and provided the
Option does not thereby terminate pursuant to Section 5 hereof or other
similar transaction, then the number and kind of Shares then subject to the
Option and the price to be paid therefor shall be appropriately adjusted by
the Committee, provided, however, that in no event shall any such adjustment
result in the Company being required to sell or issue a fractional share of
stock.
5. Cessation of Corporate Existence. Upon the dissolution or liquidation of
the Company, or upon a reorganization, merger or consolidation of the Company
with one or more corporations as a result of which the Company is not the
surviving corporation, or upon a sale of substantially all the assets of the
Company or of more than 80% of the then outstanding stock of the Company to
another corporation or entity, the Option granted hereunder shall terminate on
the day before the consummation of such transaction and the Committee shall
have the right, but shall not be obligated, to accelerate the time in which
the Option may be exercised, unless provision be made in writing in connection
with such transaction for the assumption of the Option or for the substitution
for the Option of a new option to purchase the stock of a successor employer
corporation, or a parent or subsidiary thereof, with appropriate adjustments
as to number and kind of shares and the option price thereof, in which event
the option granted herein shall continue in the manner and under the terms so
provided.
6. Non-Transferability. The Option is not assignable or transferable, either
voluntarily or by operation of law, otherwise than by will or by the laws of
decent and distribution, and is exercisable, during the Optionee's lifetime,
only by the Optionee.
7. No Attachment. Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy, or similar process or assignment by operation
of law, and any attempt, voluntary or involuntary, to effect any such action
shall be null, void and of no effect.
8. No Shareholder Rights. The Optionee or other person entitled to exercise
the Option shall have no rights as a stockholder with respect to any shares
subject hereto until the Optionee or such person has become the holder of
record of such shares and no adjustment (except such adjustments as may be
effected pursuant to the provisions of Section 4. hereof) shall be made for
dividends or distributions of rights in respect of such shares for which the
record date is prior to the date on which the Optionee or such person becomes
the holder of record.
9. Representations by Optionee. As a condition to the exercise of any of this
Option, the Optionee shall represent, warrant and agree with the Company as
follows:
a. He is purchasing the Stock with respect to which such Option is being
exercised for his own account for investment purposes and not with any present
intention to resell or distribute the same.
b. He has been advised that the issuance of said Stock has not been
registered under the Securities Act of 1933, as amended (hereinafter referred
to as the "Act"), and that said Stock must be held indefinitely unless (i)
distribution of said Stock has been made registered under the Act, (ii) a sale
of said Stock is made in conformity with the provisions of Rule 144, or (iii)
in the opinion of counsel acceptable to the Company some other exemption from
registration is available.
c. He will not make any sale, transfer or other disposition of said
Stock except in compliance with the Act and Rules and Regulations thereunder.
d. He is familiar with all of the provisions of Rule 144 including
(without limitation) the holding periods thereunder.
e. He understands that the Company is under no obligation to register
the sale, transfer or other disposition of said Stock by him or on his behalf
or to take any other action necessary in order to make compliance with an
exemption from registration available.
f. He understands that stop transfer instructions will be given to the
Company transfer agent with respect to said Stock and that there will be a
restrictive legend placed on the certificates for said Stock stating in
substance:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and may not be sold, pledged, or
otherwise transferred except pursuant to an effective registration statement
under said Act, SEC Rule 144 or an opinion of counsel acceptable to the
Company that some other exemption from registration is available."
EXECUTED this 11th of January, 1996 at Kelso, Washington.
TOLLYCRAFT YACHT CORPORATION
By: /s/Tony Tulleners
Title: Chairman of the Board
Accepted as of the date set forth above
_____/s/______________________________________
D. R. Cooley
21 Subsidiaries of the registrant
Tollycraft Yacht Corporation - Minnesota
Tollycraft Acquisition Corporation - Washington
23 Consent of experts and counsel
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Tollycraft Yacht Corporation on Form S-8 of our report dated October 2, 1997,
appearing in the Annual Report on Form 10-K of Tollycraft Yacht Corporation
for the year ended December 31, 1996 and to the reference to us under the
heading "Experts" in the Prospectus, which is part of this Registration
Statement.
Isler & Co., LLC
Portland, Oregon
November 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1996 CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE-MONTH
PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1998
<CASH> 677
<SECURITIES> 0
<RECEIVABLES> 32,000
<ALLOWANCES> 0
<INVENTORY> 2,156,312
<CURRENT-ASSETS> 2,196,738
<PP&E> 2,731,394
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,202,726
<CURRENT-LIABILITIES> 13,970,428
<BONDS> 534,239
0
0
<COMMON> 2,829,703
<OTHER-SE> (12,255,878)
<TOTAL-LIABILITY-AND-EQUITY> 5,202,726
<SALES> 3,993,517
<TOTAL-REVENUES> 3,993,517
<CGS> 4,571,208
<TOTAL-COSTS> 4,571,208
<OTHER-EXPENSES> 3,316,410
<LOSS-PROVISION> 6,727,893
<INTEREST-EXPENSE> 950,081
<INCOME-PRETAX> (11,555,705)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,633,426)
<EPS-PRIMARY> (5.72)
<EPS-DILUTED> (5.72)
</TABLE>
