U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934 For the transition period from . . . . to . . . .
Commission file number 0-21087
Tollycraft Yacht Corporation
Exact name of small business issuer as specified in its charter)
Nevada 86-0849925
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 Horton Plaza, Suite 251, San Diego, CA 92101
(Address of principal executive offices) (Zip Code)
(360) 414-5910
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all the reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes .X. No ...
The number of shares of common stock outstanding as of June 30, 1997 is
2,270,368.
Transitional Small Business Disclosure Format (check one): Yes ... No .X.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Effective for the year ending December 31, 1996, the Company changed its
method of accounting for the recognition of revenue. In previous years,
revenue was recognized using the percentage-of-completion method which
recognizes income based on the percentage of costs completed to the total
estimated cost of each yacht as production progresses.
The Company now records production costs of each yacht in a work-in-process
inventory account and records deposits and billings on each yacht in a
liability account. Income and direct production costs are recognized on the
Statement of Operations when a yacht is completed, shipped and title
transferred.
The accompanying comparative financial statements for 1996 have been restated
to give effect for this change and are comparable to the 1997 statements.
Tollycraft Yacht Corporation
Second Quarter - 1997
Balance Sheet
December 31, June 30,
1996 1997
Current Assets
Cash 677 9,988
Accounts receivable 32,000 40,000
Inventory - Raw materials 288,313 292,009
Inventory - Work-in-process 1,867,999 1,582,296
Other current assets 7,749 376,578
2,196,738 2,300,871
Property and Equipment, net 2,731,394 2,730,282
Other Assets 274,594 337,554
Total Assets 5,202,726 5,368,707
Current Liabilities
Accounts payable 1,426,644 1,353,504
Accrued payroll & taxes 2,077,250 2,181,835
Notes payable 7,195,747 7,730,601
Other current liabilities 1,652,186 361,197
Customer deposits 678,000 662,800
Long-term debt - due within one 940,601 1,046,701
13,970,428 13,336,638
Net Deferred Tax Liabilities 124,184 132,112
Long-term Debt 534,289 1,111,323
Stockholders Equity (Deficit)
Common Stock 2,829,703 4,344,171
Retained earnings (deficit) (12,255,878) (13,555,537)
(9,426,175) (9,211,366)
Total Liabilities and
Stockholders Equity 5,202,726 5,368,707
<TABLE>
<CAPTION>
Statement of Operations
Three Months Six Months
Ended June 30, Ended June 30,
1996 1997 1996
1997
<S> <C> <C> <C>
<C>
Net sales 1,169,283 241,816 3,769,044
756,770
Cost of sales 1,549,926 208,763 5,205,151
674,790
Gross Margin (380,643) 33,053 (1,436,107)
81,980
Excess plant capacity 211,999 253,182 211,999
533,737
Selling expenses 44,469 24,437 268,588
77,721
General and administrative expenses 310,412 147,395 629,811
268,238
Income (loss) from operations (947,523) (391,961) (2,546,505)
(797,716)
Other income (expenses):
Interest, net (236,932) (254,971) (441,496)
(501,943)
Gain on sale of assets 0 0 0
0
Other 0 0 (3,015)
0
Total other income (expense (236,932) (254,971) (444,511)
(501,943)
Income (loss) before provision for (1,184,455) (646,932) (2,991,016)
(1,299,659)
Provision for income taxes - deferr 7,721 0 64,457
0
Net income (loss) (1,192,176) (646,932) (3,055,473)
(1,299,659)
Statement of Cash Flows
Six Months
Ended June 30,
1996 1997
Cash, January 1, 19,878 677
Cash flows from operating activities:
Net loss (3,055,473) (1,299,659)
Adjustments to reconcile net loss
to net cash used by operations
Depreciation 182,547 193,019
Change in assets and liabilities:
Accounts receivable 23,038 (8,000)
Material inventory (5,000) (3,695)
Work-in-process inventory 156,937 285,703
Other current assets (91,820) (368,829)
Accounts payable 345,262 (73,140)
Accrued payroll & taxes 737,153 104,585
Customer deposits 572,350 (15,200)
Other current liabilities 298,937 (1,290,989)
Deferred tax liability 59,000 7,928
(777,069) (2,468,277)
Cash flows from investing activities:
Purchase of other assets 5,457 (62,960)
Purchases of equipment (235,646) (191,908)
(230,189) (254,868)
Cash flows from financing activities:
Proceeds from notes payable 1,778,445 534,854
Repayment of notes payable (1,181,021) 0
Proceeds from long-term debt 413,000 683,134
Repayment of long-term debt (23,000) 0
Issuance of common stock 0 1,514,468
987,424 2,732,456
Net increase (decrease) in cash (19,834) 9,311
Cash, June 30, 44 9,988
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
For the Three Months Ended June 30, 1997
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared by Tollycraft Yacht
Corporation without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared using generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.
The financial information presented herein reflects all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results for the interim periods presented. The results
for the interim period are not necessarily indicative of the results to be
expected for the full year.
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of assets, liabilities, income and expenses and
disclosure of accounting information. Future events could alter such
estimates.
Note 2 - Summary of Significant Accounting Policies
The Company and Acquisitions
Tollycraft Yacht Corporation (the Company) was incorporated under the
laws of the State of Minnesota on December 7, 1992. In January of 1996,
the Company acquired all of the outstanding stock of Tollycraft
Acquisition Corporation (TAC), a Washington corporation incorporated on
February 4, 1994. The Company also changed its name from Child Guard
Corporation to Tollycraft Yacht Corporation in connection with the
acquisition.
The acquisition by the Company of TAC has been accounted for as a
purchase. Except where otherwise indicated, all references to the
Company in these financial statements and notes thereto include the
activities of TAC.
Nature of Business
The Company is engaged in the manufacture and distribution of luxury
motor yachts.
Cash
The Company periodically throughout the period maintained cash balances
in its bank accounts in excess of federally insured limits.
Inventories
Raw material inventories are valued at the lower of average cost or
market. Work-in-process inventories are valued at actual costs incurred
including an allocation for manufacturing overhead.
Equipment
Equipment is valued at cost. Depreciation of equipment is provided
using the straight line method over the estimated useful life of the
assets. Additions and improvements, including patterns and molds for
yacht production which have been produced internally, are capitalized at
cost.
Accrued Warranty Reserve
The Company records an accrual on the sale of each yacht for estimated
warranty claims. There is a general one year warranty for parts and
labor to the original owner for defects in material and workmanship.
There is also a transferable 15 year warranty for structural defects in
all Tollycraft built hulls, deck bridges, stringers, and bulkheads.
Revenue Recognition
The Company records production costs of each yacht in a work-in-process
inventory account and records deposits and billings on each yacht in a
liability account. Income and direct production costs are recognized on
the Statement of Operations when a yacht is completed, shipped and title
transferred.
Pension and Profit Sharing Plans
Union and non-union employees participate in a pension plan which
qualifies under Section 401(k) of the Internal Revenue Code.
Note 3 - Equipment
Equipment consists of the following
Manufacturing equipment $ 391,020
Office furniture and fixtures 485,915
Yacht molds and patterns 2,884,757
Vehicles 39,958
3,801,650
Less accumulated depreciation - 1,071,368
$ 2,730,282
Note 4 - Work-in-process Financing
The Company has a $3,000,000 line-of-credit with Caterpillar Financial
Services Corporation (CFSC). Under the terms of the agreement,
borrowings are available to 75% of the dealer net price of each yacht.
Advances are made at 1/3 upon commencement of the hull lamination, 1/3
upon commencement of the assembly process, and 1/3 upon installation of
the engines. Interest on borrowings is payable monthly at a variable
rate. Borrowings are collateralized by specific vessels with assigned
hull numbers upon which CFSC has advanced funds and filed specific UCC-
1's. Outstanding borrowings at June 30, 1997 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 June
30, 1997, the Company was in violation of these minimum requirements.
Note 5 - Notes Payable
The Company has other lines-of-credit with Vera Corporation, Commercial
Factors, and California Factors and Finance for working capital
purposes. Interest on borrowings is payable monthly at a rate of 12%.
Borrowings are collateralized by substantially all assets.
Note 6 - Long-term Debt
Long-term debt consists of various obligations assumed in 1994 by
Tollycraft Acquisition Corporation in connection with the purchase of
the yacht manufacturing business, tooling, molds, patterns and all
rights and privileges to the name "Tollycraft".
Note 7 - Leases
The Company leases its manufacturing facilities in Kelso, Washington.
Effective October 1, 1995, the Company entered into a twenty year lease
at $29,500 per month. The agreement calls for 7% increases at the end
of each five year period of the lease.
Note 8 - Provision for Income Taxes
Deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement basis of assets and
liabilities. The classification of the resulting deferred tax assets
and liabilities is based upon the classification of the related balance
sheet asset or liability. Deferred tax assets and liabilities result
principally from the Company's net operating loss carryforwards,
differences in depreciation methods for tax purposes and other temporary
differences.
Item 2. Management's Discussion and Analysis or Plan of Operation
During the second quarter of 1997, 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:
1. Obtain additional debt or equity financing to continue operations
2. Maintain customer and dealer relationships
3. Shape maximum customer confidence
4. Invest in updating and redesigning the current product line
5. Complete development of a new series of yachts
6. 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.
Results of Operations
Current results reflect the difficulty the Company has had in raising the
necessary working capital to proceed with its plan to restart production at a
profitable level.
In June, the Company negotiated the sale of a partially completed motor yacht
with an accompanying contract to complete the construction to Tollycraft
standards. Accordingly, net sales for the quarter were $241,816. The
construction contract revenue will be recognized in the third quarter. Sales
for the corresponding quarter in 1996 were $1,169,283.
Excess plant capacity expenses for the second quarter were categorized and
amounted to $253,182. First quarter excess plant capacity expenses were
$280,557. Ongoing fixed costs and wages for essential employees resulted in a
quarterly net loss of $(646,932). This compares to a net loss of $(1,192,176)
for the comparative period in 1996.
Financial Condition
The cumulative losses of the Company continue to be financed with accompanying
increases to current liabilities. Current liabilities of $13,336,638 exceed
current assets of $2,300,871 resulting in a current ratio of .17. The current
ratio at December 31, 1996 was .16. The improvement was realized in the first
quarter when the Company issued 270,411 shares of common stock pursuant to an
employee benefit plan. The value of the stock issued was $1,514,468 and
proceeds were used to retire employee related liabilities and pay for future
services by consultants and advisors. In addition, a deferred payment
arrangement was negotiated with the State Department of Labor and Industries
and the State Department of Employment Security. Payroll related liabilities
of $479,299 were reclassified as long-term debt.
When the Company is able to raise the necessary working capital to begin
production, management is planning an emphasis on improvement in the following
areas.
1. Increase basic pricing on each yacht to reflect the improved product
being produced.
2. Select new materials to continue upgrading the quality of each yacht
while emphasizing production efficiency.
3. Redesign manufacturing processes to produce yachts more efficiently
and with greater profit margins.
4. 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.
5. Develop relationships with dealers that are able to provide their own
inventory financing.
6. Increase the dealer network to increase sales volume and reach
economies of scale.
7. Implement a labor tracking information system to monitor and reduce
direct labor costs.
Necessary investments in capital assets have been slowed down or postponed due
to a lack of capital. In order to establish the Company as a viable
competitor in the industry, management has developed a plan to upgrade
existing tooling and molds and manufacture new tooling and molds for a newly
designed line of yachts. Total capital expenditures necessary for the
completion of the product line upgrade and expansion is $2,650,000. The
Company is dependent on external sources of funding to complete the capital
expenditure plan.
The Company is unable to make timely payments to its landlord, trade
suppliers, material vendors, and various taxing authorities. When production
resumes, most trade vendors will continue to supply the Company on a COD
basis. There is no expectation that material shortages will occur since
materials used are available from many sources. Deferred payment terms are
being negotiated with various taxing authorities. State and local taxing
authorities have agreed to payment terms on respective delinquent tax
liabilities. Federal authorities have not approved a recently negotiated
payment schedule and negotiations continue for payment of federal tax
obligations.
The Company is considering numerous alternatives to improve its financial
position, meet trade obligations, pay delinquent tax balances, and fund
capital expenditure requirements. These include converting current debt to
equity through the issuance of common shares and the sale of common shares to
raise working capital. The Company has engaged the services of professional
advisors to perform the financing activities.
In order to begin production, the Company is in need of additional funding to
acquire material inventory, and provide working capital. The Company is
dependent on external sources for financing until projected levels of
production and improvements in direct costs are achieved which will return the
Company to profitability and a positive cash flow. A material commitment for
capital expenditures is necessary to meet the projected levels of production.
The expected source for a majority of the funds is from private placement
financing arrangements and a public offering of common shares.
PART II - OTHER INFORMATION
Item 1. 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 2. Changes in Securities and Use of Proceeds
During the quarter ended June 30, 1997, the Company sold 2,720 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 3. Defaults Upon Senior Securities
Caterpillar Financial Services Corporation
The Company has not made timely payments as required by the debt
agreement. Total debt is $3,342,421 including accrued interest in
arrears of $342,421.
Vera Corporation
The Company has not made timely payments as required by the debt
agreement. Total debt is $3,242,616 including accrued interest in
arrears of $667,979.
Commercial Factors of Portland
The Company has not made timely payments as required by the debt
agreement. Total debt is $142,182 including accrued interest in arrears
of $22,182.
California Factors & Finance
The Company has not made timely payments as required by the debt
agreement. Total debt is $295,517 including accrued interest in arrears
of $45,417.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Table:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
[Signatures]
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Tollycraft Yacht Corporation
(Registrant)
Date: 11-18-97
By:/s/_______________________________
D.R. Cooley, President
Chief Operating Officer
Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1997 CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> MAR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 9,988 9,988
<SECURITIES> 0 0
<RECEIVABLES> 40,000 40,000
<ALLOWANCES> 0 0
<INVENTORY> 1,874,305 1,874,305
<CURRENT-ASSETS> 2,300,871 2,300,871
<PP&E> 2,730,282 2,730,282
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 5,368,707 5,368,707
<CURRENT-LIABILITIES> 13,336,638 13,336,638
<BONDS> 1,111,323 1,111,323
0 0
0 0
<COMMON> 4,344,171 4,344,171
<OTHER-SE> (13,555,537) (13,555,537)
<TOTAL-LIABILITY-AND-EQUITY> 5,368,707 5,368,707
<SALES> 241,816 756,770
<TOTAL-REVENUES> 241,816 756,770
<CGS> 208,763 674,790
<TOTAL-COSTS> 208,763 674,790
<OTHER-EXPENSES> 425,014 879,696
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 254,971 501,943
<INCOME-PRETAX> (646,932) (1,299,659)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (646,932) (1,299,659)
<EPS-PRIMARY> (.28) (.57)
<EPS-DILUTED> (.28) (.57)
</TABLE>
