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 September 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 September 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
Third Quarter - 1997
Balance Sheet
December 31, September 30,
1996 1997
Current Assets
Cash 677 10,928
Accounts receivable 32,000 37,000
Inventory - Raw materials 288,313 292,008
Inventory - Work-in-process 1,867,999 1,501,348
Other current assets 7,749 385,917
2,196,738 2,227,201
Property and Equipment, net 2,731,394 2,636,338
Other Assets 274,594 362,554
Total Assets 5,202,726 5,226,093
Current Liabilities
Accounts payable 1,426,644 1,306,292
Accrued payroll & taxes 2,077,250 2,235,589
Notes payable 7,195,747 7,962,208
Other current liabilities 1,652,186 412,362
Customer deposits 678,000 600,800
Long-term debt - due within one 940,601 1,046,701
13,970,428 13,563,952
Net Deferred Tax Liabilities 124,184 132,112
Long-term Debt 534,289 1,132,893
Stockholders Equity (Deficit)
Common Stock 2,829,703 4,594,171
Retained earnings (deficit) (12,255,878) (14,197,035)
(9,426,175) (9,602,864)
Total Liabilities and
Stockholders' Equity 5,202,726 5,226,093
<TABLE>
<CAPTION>
Statement of Operations
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Net sales 155,919 144,013 3,924,963 900,783
Cost of sales 148,896 194,118 5,354,045 868,907
Gross Margin 7,023 (50,105) (1,429,082) 31,876
Excess plant capacity 166,182 192,895 378,181 726,633
Selling expenses 69,479 3,469 338,069 81,189
General and administrative expenses 250,957 132,678 880,768 400,917
Income (loss) from operations (479,595) (379,147) (3,026,100) (1,176,863)
Other income (expenses):
Interest, net (248,012) (262,351) (689,508) (764,294)
Gain on sale of assets 0 0 0 0
Other 12,305 0 9,290 0
Total other income (expense (235,707) (262,351) (680,218) (764,294)
Income (loss) before provision for (715,302) (641,498) (3,706,318) (1,941,157)
Provision for income taxes - deferred 4,663 0 69,120 0
Net income (loss) (719,965) (641,498) (3,775,438) (1,941,157)
</TABLE>
Statement of Cash Flows
Nine Months
Ended September 30,
1996 1997
Cash, January 1, 19,878 677
Cash flows from operating activities:
Net loss (3,775,438) (1,941,157)
Adjustments to reconcile net loss
to net cash used by operations
Depreciation 280,887 290,861
Change in assets and liabilities
Accounts receivable 23,038 (5,000)
Material inventory (1,687) (3,695)
Work-in-process inventory 155,814 366,651
Other current assets (31,867) (378,168)
Accounts payable 469,879 (120,352)
Accrued payroll & taxes 811,439 158,339
Customer deposits 573,000 (77,200)
Other current liabilities 640,695 (1,239,824)
Deferred tax liability 63,265 7,928
(790,975) (2,941,617)
Cash flows from investing activities:
Purchase of other assets 5,855 (87,960)
Purchases of equipment (235,646) (195,805)
(229,791) (283,765)
Cash flows from financing activities:
Proceeds from notes payable 1,811,817 766,462
Repayment of notes payable (1,199,893) 0
Proceeds from long-term debt 413,000 704,703
Repayment of long-term debt (23,000) 0
Issuance of common stock 0 1,764,468
1,001,924 3,235,633
Net increase (decrease) in cash (18,842) 10,251
Cash, September 30, 1,036 10,928
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
For the Three Months Ended September 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 486,126
Yacht molds and patterns 2,888,444
Vehicles 39,958
3,805,548
Less accumulated depreciation - 1,169,210
$ 2,636,338
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 September 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
September 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 third quarter, 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.
Third quarter operations included some construction activity on a contract
basis on an incomplete yacht sold in June 1997. A short period of production
proceeded during July through September in order to finish the vessel to
Tollycraft standards. Production of the yacht was financed through
progressive payments from the owner.
Results of Operations
Current results reflect the difficulty the Company has had in raising the
necessary working capital A net loss of $(641,498) was incurred on net sales
of $144,013. The revenue resulted from a construction contract to complete a
partially constructed yacht sold in June.
The majority of the manufacturing expenses incurred during the third quarter
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.
Financial Condition
The cumulative losses of the Company continue to be financed with current
liabilities. Current liabilities of $13,563,952 exceed current assets of
$2,227,201 resulting in a current ratio of .16.
Current assets include prepaid consulting fees $360,000 financed by the
issuance of common stock pursuant to an employee benefit plan.
The Company is unable to make timely payments to its landlord, trade
suppliers, material vendors, and various taxing authorities. 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.
Other Information
During the third quarter the Company has experienced an attempt by its
landlord to take over the Company through a forced liquidation. The property
owner, who had been a member of the Company's "Capital Formation Committee",
had agreed to accept stock in Tollycraft for his lease payments. On July 2,
1997 the Company was served with a "Writ To Vacate" for failure to make
payments under the terms of the lease. Prior to serving the Company with the
"Writ", the landlord notified certain key vendors, customers, and debtors of
his intentions for the takeover.
On the day of the court hearing for the Writ to Vacate, the landlord produced
a document whereby Tollycraft Yacht Corporation and its officers would agree
not to sue him for tortuous interference as a direct result of his actions.
The document also required that Tollycraft not file a class action shareholder
lawsuit against him, again as a result of his actions. Tollycraft Yacht
Corporation and its officers opted to not sign any such agreement indicating
it would not be in the best interest for the Company or its shareholders. In
August, 1997 the Company vacated the manufacturing plant and surrendered the
property to the landlord. A reduced level of operations were relocated to a
local warehouse to complete the current active construction contract
As a result of the Writ being served, Cowlitz County filed a notice of
distraint on August 22, 1997 for the non payment of personal property tax.
This prompted the IRS to also begin proceeding against the Company for unpaid
taxes and withholdings. Vera Corporation, the senior secured debt holder for
Tollycraft, has filed a notice to the taxing authorities informing them of
their right to any of the assets of Tollycraft based on their UCC filing. The
assets of the Company are being held in storage pending a resolution of the
financial rights of the creditors involved. Cowlitz County subsequently filed
a release of distraint on the assets on October 17, 1997. Negotiations
continue with the Internal Revenue Service.
Tollycraft's Future
The following narration outlines a program for Tollycraft Yacht Corporation to
continue as a builder of luxury motor yachts, and also to be an attractive
investment for the capital markets. It contains certain forward-looking
statements within the meaning of the Private Litigation Reform Act of 1995
with respect to the financial condition, results of operations and business of
the company. these forward-looking statements involve certain risks and
uncertainties, and as such may involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the company to be materially different from any future
results, performance or achievements express or implied by such
forward-looking statements. Such forward-looking statements speak only as of
the date of this document. The company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
Tollycraft has been in business for 63 years and has produced some of the
finest motor yachts available. However, the Company has operated as a Union
Shop and typically had the highest labor rates in the industry. Even with the
concessions in the current labor contract recent research has determined that
other manufacturers labor rates are much less. Thousands of man-hours go into
the production of each vessel. These circumstances have contributed to
Tollycraft Yachts becoming some of the most expensive yachts in their class.
While these retail prices have not diminished demand for the finished product
it is only evident that at some point in the future, Tollycraft would price
itself out of existence.
In order to move into the 21st century and beyond Tollycraft is making some
massive changes in its organization, manufacturing, marketing, and sales. The
boating industry itself is maturing with many companies being purchase or
merging with other entities. This consolidation process is being recognized
as a healthy improvement in the yacht building industry. Just as important is
the perceived favorable climate for the yacht consumer.
Tollycraft's future plans are to outsource the manufacturing of all yachts.
While this process is not new, it will allow Tollycraft to concentrate on its
financial posture during 1995.
The Company plans to build the smaller 18' to 57' yachts in Mexico. With the
yachts being built to the same standards of quality control as Tollycraft
requires the cost savings are projected to be as much as 30%. Materials used
in construction would remain the same, with inventory being shipped from the
Unites States. Major savings would result from lower direct labor costs as
well as cost reductions in general and administrative expenses. In addition,
this will allow the Company to broaden its product line and again offer
smaller Tollycraft vessels that had previously been discontinued because
domestic manufacturing costs became prohibitive. The Company is also looking
toward one of the largest producers of 100' and over powerboats to manufacture
its 65' and larger sized vessels. This builder is located in Florida, where
90% of the 65' Tollycraft yachts have been sold.
The Company also plans to relocate its corporate offices to south Florida.
Administrative functions, new designs and engineering and all promotional and
marketing support for the sale of Tollycraft yachts would be headquartered in
a location considered to be the yacht capital of the world.
For marketing, the Company is considering a strategic alliance with a major
franchised yacht broker. This broker anticipates 50 major yacht dealerships
across the United States and the rest of the world. Each franchisee would be
required to carry an inventory of Tollycraft vessels. This would propel
Tollycrafts' gross sales to over $100MM in a very fast time frame. In this
business, the size of production facilities limit sales. By outsourcing yacht
production to reputable manufacturers expansion may be realized without the
enormous capital outlays necessary for plant expansion and improvements.
With the Mexican connection, Tollycraft Yacht Corporation interest on being
listed on the Mexican stock exchange. This would be the first U.S. Company to
go in this direction. It is anticipated that funds may be generated from an
offering in Mexico that would be solely used for production of vessels in
Mexico.
Additionally, four new models are in various stages of design and testing.
The new models will have significantly higher profit margins when fully
developed. This would allow the Company to become extremely competitive.
Being able to offer $30,000,000 in wholesale production has generated
inquiries from experienced, interested parties and discussions continue. The
yachts would be built to the same quality standards that Tollycraft customers
demand.
Lastly, the Company has signed an Investment Banking Agreement with Lloyd Wade
Securities of Dallas, Texas, for a Private Placement of $3,000,000 to provide
the necessary capital for Tollycraft to go forward with its plans. The
Company also plans on doing a registration of its stock to convert all of its
debt to equity and to repay all vendors and noteholders at 100%. This will
leave the Company debt free with a positive equity section and funding for
operations.
In general Tollycraft management feels that the Company is in its best
position in recent history. The months ahead will set the course for the next
decade of Tollycraft Yachts. It is the goal of management to have a company
that is debt free and for the first time have a surplus of cash in the bank.
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.
D & C Lemmons Enterprises, L.L.C. v. Tollycraft Acquisition Corporation
Superior Court of Washington for Cowlitz County
Original File Date: July 14, 1997
Object of action is to terminate lease of manufacturing plant leased by
Tollycraft, payment of delinquent rent and property taxes of $250,768, plus
interest on all unpaid sums. Scheduled for trial on October 29, 1997
Judith A. Southard v. Tollycraft Acquisition Corporation
United States District Court for the Western District of Washington, No. C97-
5400-FDB
Original File Date: July 9, 1997
Plaintiff alleges employment discrimination on the basis of age and sex.
Seeks sustained wage loss of $39,250 plus compensatory and punitive damages in
the amount of $1,300,000
Item 2. Changes in Securities
None.
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 $3,422,921 including accrued interest in
arrears of $422,921.
Vera Corporation
The Company has not made timely payments as required by the debt
agreement. Total debt is $3,342,930, including accrued interest in
arrears of $768,293.
Commercial Factors of Portland
The Company has not made timely payments as required by the debt
agreement. Total debt is $146,493 including accrued interest in arrears
of $26,493.
California Factors & Finance
The Company has not made timely payments as required by the debt
agreement. Total debt is $304,561 including accrued interest in arrears
of $54,461.
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) 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> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD
ENDED STEPTEMBER 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 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 10,928 10,928
<SECURITIES> 0 0
<RECEIVABLES> 37,000 37,000
<ALLOWANCES> 0 0
<INVENTORY> 1,793,356 1,793,356
<CURRENT-ASSETS> 2,227,201 2,227,201
<PP&E> 2,636,338 2,636,338
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 5,226,093 5,226,093
<CURRENT-LIABILITIES> 13,563,952 13,563,952
<BONDS> 1,132,893 1,132,893
0 0
0 0
<COMMON> 4,594,171 4,594,171
<OTHER-SE> (14,197,035) (14,197,035)
<TOTAL-LIABILITY-AND-EQUITY> (9,602,864) (9,602,864)
<SALES> 144,013 900,783
<TOTAL-REVENUES> 144,013 900,783
<CGS> 194,118 868,907
<TOTAL-COSTS> 194,118 868,907
<OTHER-EXPENSES> 329,042 1,208,739
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 262,351 764,294
<INCOME-PRETAX> (641,498) (1,941,157)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (641,496) (1,941,157)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (641,496) (1,941,157)
<EPS-PRIMARY> (.28) (.85)
<EPS-DILUTED> (.28) (.85)
</TABLE>
