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 March 31, 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 March 31, 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
First Quarter - 1997
Balance Sheet
December 31, March 31,
1996 1997
Current Assets
Cash 677 3,442
Accounts receivable 32,000 40,000
Inventory - Raw materials 288,313 293,346
Inventory - Work-in-process 1,867,999 1,699,929
Other current assets 7,749 364,482
2,196,738 2,401,199
Property and Equipment, net 2,731,394 2,781,686
Other Assets 274,594 327,554
Total Assets 5,202,726 5,510,439
Current Liabilities
Accounts payable 1,426,644 1,288,705
Accrued payroll & taxes 2,077,250 2,121,447
Notes payable 7,195,747 7,512,176
Other current liabilities 1,652,186 250,189
Customer deposits 678,000 678,000
Long-term debt - due within one year 940,601 1,035,101
13,970,428 12,885,618
Net Deferred Tax Liabilities 124,184 132,112
Long-term Debt 534,289 1,057,143
Stockholders Equity (Deficit)
Common Stock 2,829,703 4,344,171
Retained earnings (deficit) (12,255,878) (12,908,605)
(9,426,175) (8,564,434)
Total Liabilities and Stockholders Equity 5,202,726 5,510,439
Statement of Operations
Three Months
Ended March 31,
1996 1997
Net sales 2,599,761 514,955
Cost of sales 3,655,225 466,026
Gross Margin (1,055,464) 48,929
Excess plant capacity 0 280,557
Selling expenses 224,119 53,283
General and administrative expenses 319,399 120,844
Income (loss) from operations (1,598,982) (405,755)
Other income (expenses):
Interest, net (204,564) (246,972)
Gain on sale of assets 0 0
Other (3,015) 0
Total other income (expenses) (207,579) (246,972)
Income (loss) before provision for income t (1,806,561) (652,727)
Provision for income taxes - deferred 56,736 0
Net income (loss) (1,863,297) (652,727)
Statement of Cash Flows
Three Months
Ended March 31,
1996 1997
Cash, January 1, 19,878 677
Cash flows from operating activities:
Net loss (1,863,297) (652,727)
Adjustments to reconcile net loss
to net cash used by operations
Depreciation 89,009 95,843
Gain on sale of assets 0 0
Change in assets and liabilities
Accounts receivable 0 (8,000)
Material inventory 0 (5,033)
Work-in-process inventory (997,474) 168,070
Other current assets 28,937 (356,733)
Accounts payable 589,035 (137,939)
Accrued payroll & taxes 427,714 44,197
Customer deposits 668,000 0
Other current liabilities 229,000 (1,394,069)
Deferred tax liability 51,892 0
(777,184) (2,246,391)
Cash flows from investing activities:
Purchase of other assets 4,844 (52,960)
Purchases of equipment (39,894) (146,135)
(35,050) (199,095)
Cash flows from financing activities:
Proceeds from notes payable 1,409,501 316,429
Repayment of notes payable (915,569) 0
Proceeds from long-term debt 392,595 617,354
Repayment of long-term debt (10,000) 0
Issuance of common stock 0 1,514,468
876,527 2,448,251
Net increase (decrease) in cash 64,293 2,765
Cash, March 31 84,171 3,442
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
For the Three Months Ended March 31, 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 2,878,943
3,755,878
Less accumulated depreciation - 974,192
$ 2,781,686
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
March 31, 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 March 31,
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
At the beginning 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:
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.
Results of Operations
First quarter operations saw the completion of one 48' Classic Motor Yacht.
Net sales for the first quarter of 1997 were $514,955 as compared to
$2,599,761 for the comparable period in 1996. Full production capacity was
not achieved because of a shortage of working capital. A short term period of
production began in December of 1996 and concluded with the shipment of the
yacht in January 1997. Production of the yacht was financed with a new
working capital loan.
First quarter results reflect the difficulty the Company has had in raising
the necessary working capital to proceed with its plan to restart production
at a reasonable level. A net loss of $(652,727) was incurred during the
quarter, which increased the negative net worth of the Company to
$(12,908,605). The cumulative losses of the Company continue to be financed
with current liabilities.
Management has elected to categorize ongoing fixed manufacturing costs during
shut down periods as excess plant capacity expenses. For the year ended
December 31, 1996, the costs were $1,755,861. First quarter excess plant
capacity expenses were $280,557.
Financial Condition
A small improvement in the Company's current ratio was realized from the
efforts of management to minimize expenses and obtain additional financing to
improve the financial condition of the Company. Current liabilities of
$12,885,618 exceed current assets of $2,401,199 resulting in a current ratio
of .19. The current ratio at December 31, 1996 was .16. The improvement was
realized 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 has planned to emphasis improvements in the following
areas:
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.
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 trade suppliers 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 inventory
shortages will occur since materials used are available from many sources.
Deferred payment terms have been or are being negotiated with various taxing
authorities. State and local taxing authorities have agreed to payment terms
while negotiations continue with federal authorities.
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 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 March 31, 1997, the Company sold 19,400 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 $3,262,796 including accrued interest in arrears of $262,796.
Vera Corporation
The Company has not made timely payments as required by the debt agreement.
Total debt is $3,147,056 including accrued interest in arrears of $572,419.
Commercial Factors of Portland
The Company has not made timely payments as required by the debt agreement.
Total debt is $127,992 including accrued interest in arrears of $17,992.
California Factors & Finance
The Company has not made timely payments as required by the debt agreement.
Total debt is $283,914 including accrued interest in arrears of $33,814.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Table:
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter:
February 7, 1997 - Items 5,7,9
February 20, 1997 - Items 5,7,9
[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> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1997 CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
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<PERIOD-START> JAN-01-1997
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<CGS> 466,026
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