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, 1998
[ ] 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.)
8201 Peters Road, Plantation, Florida 33324
(Address of principal executive offices) (Zip Code)
(800) 999-9381
(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, 1998 is
5,209,352.
Transitional Small Business Disclosure Format (check one): Yes ... No .X.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tollycraft Yacht Corporation
Third Quarter - 1998
Balance Sheet
December 31, September 30,
1997 1998
Current Assets
Cash 2,199 2,200
Accounts receivable 4,280 0
Inventory - Raw materials 303,508 303,508
Inventory - Work-in-process 96,909 96,909
Other current assets 385 0
407,281 402,617
Property and Equipment, net 2,478,855 2,430,540
Other Assets 382,000 382,000
Total Assets 3,268,136 3,215,157
Current Liabilities
Accounts payable 1,346,311 0
Accrued payroll & taxes 2,759,710 0
Notes payable 6,898,033 0
Other current liabilities 768,212 3,910
Customer deposits 598,000 0
Long-term debt - due within one 451,627 0
12,821,893 3,910
Net Deferred Tax Liabilities 222,542 0
Long-term Debt 1,154,809 0
Stockholders Equity (Deficit)
Preferred Stock 0 14,968,176
Common Stock 4,366,171 4,550,303
Retained earnings (deficit) (15,297,279) (16,307,232)
(10,931,108) 3,211,147
Total Liabilities and
Stockholders Equity 3,268,136 3,215,157
Statement of Operations
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1998 1997 1998
Net sales 144,013 0 900,783 0
Cost of sales 194,118 0 868,907 0
Gross Margin (50,105) 0 31,876 0
Excess plant capacity 192,815 0 726,633 0
Selling expenses 3,469 0 81,189 0
General and
administrative expenses 132,678 30,242 400,917 370,227
Nonrecurring expense from
negotiated debt settlements 0 134,996 0 134,996
Income (loss)
from operations (379,147) (165,238) (1,176,863) (505,223)
Other income (expenses):
Interest, net (262,351) 0 (764,294) (504,732)
Gain on sale of assets 0 0 0 0
Other 0 0 0 0
Total other
income (expenses) (254,971) 0 (764,294) (504,732)
Income (loss) before
provision for (641,498) (165,238) (1,941,157) (1,009,955)
Provision for income
taxes - deferred 0 0 0 0
Net income (loss) (641,498) (165,238) (1,941,157) (1,009,955)
Statement of Cash Flows
Nine Months
Ended September 30,
1997 1998
Cash, January 1, 677 2,199
Cash flows from operating activities:
Net loss (1,941,157) (1,009,955)
Adjustments to reconcile net loss
to net cash used by operations
Depreciation 290,861 48,316
Change in assets and liabilities:
Accounts receivable (5,000) 4,280
Material inventory (3,695) 0
Work-in-process inventory 366,651 0
Other current assets (378,168) 385
Accounts payable (120,352) (1,346,311)
Accrued payroll & taxes 158,339 (2,759,710)
Customer deposits (77,200) (598,000)
Other current liabilities (1,239,824) (764,301)
Deferred tax liability 7,928 (222,542)
(2,941,617) (6,647,838)
Cash flows from investing activities:
Purchase of other assets (87,960) 0
Purchases of equipment (195,805) 0
(283,765) 0
Cash flows from financing activities:
Proceeds from notes payable 766,462 299,587
Repayment of notes payable 0 (7,197,620)
Proceeds from long-term debt 704,703 47,150
Repayment of long-term debt 0 (1,653,586)
Issuance of preferred stock 0 14,968,176
Issuance of common stock 1,764,468 184,132
3,235,633 6,647,839
Net increase (decrease) in cash 10,251 1
Cash, June 30, 10,928 2,200
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
For the Nine Months Ended September 30, 1998
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. 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. The Company also
changed its name from Child Guard Corporation to Tollycraft Yacht Corporation
in connection with the acquisition.
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.
Note 3 - Equipment
Equipment consists of the following
Manufacturing equipment $ 391,575
Office furniture and fixtures 486,126
Yacht molds and patterns 2,888,444
Vehicles 39,958
3,806,103
Less accumulated depreciation ( 1,375,563)
$ 2,430,540
Note 4 - Notes Payable and Long-term Debt
The Company had working capital loans with Vera Corporation, Commercial
Factors, California Factors and Finance, and Caterpillar Financial Services
Corporation. Interest on borrowings accrued monthly at rates of 10% to 12%.
Borrowings are secured by substantially all assets.
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".
Debt Conversion - On June 29, 1998, the Board of Directors of Tollycraft Yacht
Corporation resolved to convert all debt, secured and unsecured, to equity
through the issuance of capital stock. The Company will issue up to 1,500,000
shares of its authorized 5,000,000 preferred shares of its capital stock
proportionately to all debt holders of record as of June 29, 1998. Interest
was not accrued on any debt subsequent to the debt conversion. The financial
statements have been adjusted to show the issuance of the preferred shares.
Contingent Liability: Negotiations for the conversion of certain tax
liabilities payable to various taxing agencies that were included in the debt
conversion with the issuance of preferred stock have not been finalized. In
the event that a total agreement cannot be reached, an alternate payment plan
that may or may not include stock will be arranged which may include restating
the obligations as a debt.
Note 5 - 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, the management of Tollycraft Yacht Corporation was
concentrating efforts on finalizing joint venture agreements with the Mexican
partners and the acquisition of additional land parcels from the Mexican
government. These are the final steps in Tollycraft's plan of relocating the
production facilities to Mexico. Plans for the relocation of corporate
headquarters to southern Florida were also ongoing. The management group has
identified specific goals for the next 12 month period including:
Complete the plan of relocation and equity financing to restart production
operations in Mexico
Relocate corporate headquarters to southern Florida
Complete updating and redesigning of the current product line
Complete development of a new series of yachts
Maintain customer and dealer relationships
Shape maximum customer confidence
Expand the dealer network
Identify and purchase CNC equipment
Implement SCRIMP laminating process
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 obtain additional debt or equity financing.
Results of Operations
Current operating results were as expected and budgeted by management. With
domestic production discontinued, the majority of expenses incurred were
primarily due to the budgeted fixed costs of management and other ongoing
contractual financial obligations. Further expenses have been incurred in
connection with the costs of developing the current business plan and
negotiating joint venture agreements for production in Mexico.
The majority of the manufacturing expenses incurred during 1997 were fixed
costs relating to overhead expenses. These costs have been identified as
"Excess plant capacity" on the Statement of Operations.
Financial Condition
During the third quarter of 1998, Tollycraft Yacht Corporation completed
negotiations with the Company's largest secured creditors for the conversion
of debt to equity. On June 29, 1998 the Company announced that it would
convert its total debt of approximately $14,850,000 to equity in the form of
free trading preferred shares of Tollycraft Yacht Corporation stock. This
conversion will represent 100% payment to all of the Company's creditors as of
June 30, 1998. In addition to the preferred shares being issued each creditor
will receive warrants to purchase additional common shares of Tollycraft Yacht
Corporation. The warrant package will be available to preferred shareholders
as of specific dates over the next 36 months.
The Company has signed an Investment Banking Agreement with Lloyd Wade
Securities of Dallas, Texas, for a Private Placement of $2,500,000 to provide
the necessary capital for Tollycraft to go forward with its plans.
Other Information
The Company has previously announced three signed letters of intent for joint
ventures in the Yucatan. As of September 30, 1998 the Company has signed a
joint venture with Yachts of the Americas for the production of Tollycraft
Yachts in Progreso, Yucatan. Yachts of the Americas is building a 100,000
square foot facility in a new industrial park that has been a special project
of Governor C. Victor Manuel Cervera Pacheco. The park has been specifically
made for companies specializing in marine industries. Yachts of the Americas
is to be the anchor tenant within the complex which will be 6.5 acres of
waterfront land. There will be 240 feet of concrete frontage on the water
with docking to accommodate the use of a travel lift to launch vessels up to
120 feet in length
Tollycraft Yacht Corporation is to receive special production considerations
for being the magnet used to attract additional well known manufacturers to
the complex. The special considerations should be finalized by October 1,
1998. Negotiations are under way for Tollycraft Yacht Corporation to take an
equity interest in Yachts of the Americas.
Negotiations are still underway with Pergasa for large yacht and ship repair.
It is hoped that this agreement will be finalized by September 30, 1998.
Tollycraft management selected businesses in the State of Yucatan primarily
because of their close proximity to the USA markets. In addition, these
businesses have a 30 year history of steel and fiberglass vessel production
and repair.
The capabilities of these facilities and the expected 80% reduction in direct
labor production costs will allow the Company to competitively price its
products and services and assure it a place as a world leader in the marine
industry.
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 purchased 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.
As explained in "Other Information", Tollycraft's future plans are to
outsource the manufacturing of all yachts to facilities in Mexico under joint
venture agreements with Mexican businesses.
The Company plans to build 39' to 125' yachts in Mexico, with the yachts being
built to the same standards of quality control as the products previously
manufactured by Tollycraft. Materials used in construction would remain the
same quality, with a majority of the materials being shipped from the United
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.
Tollycraft Yacht Corporation has also announced that the Company's corporate
headquarters will be relocated from southwest Washington to southern Florida.
At this time a location in Miami is available with sufficient infrastructure
which will allow the Company to establish its offices including
administration, sales and marketing, engineering, purchasing and a
Warranty/Service Center. This southern Florida location will give Tollycraft
a much needed presence where high demand exists for yachts of Tollycraft
quality. An office in this area will also give the Company access to some of
the most talented marketing, engineering, design, and administrative employees
in the industry.
For marketing, the Company will continue utilizing the existing dealer network
and is also 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 could create a great deal of demand
for Tollycraft's products.
Tollycraft's management is very excited about the new alliances established
and the future production of Tollycraft Yachts. The capabilities of the new
joint venture partnerships and their related and production facilities coupled
with significantly reduced labor costs will place the Company as a world
leader in the marine industry.
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.
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. Negotiated
settlement in the amount of $90,000 in preferred shares to plaintiff.
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.
Southard v. Tollycraft Yacht Corporation
U.S. District Court
Claim for age discrimination and wrongful discharge. Negotiated settlement
calls for issuance of 3,334 of common shares to plaintiff.
Phil Gentile v. Tollycraft
Cowlitz County District Court
Complaint for breach of contract and negligence in the amount of $15,000. A
negotiated settlement calls for issuance of $10,000 of preferred shares to
plaintiff.
Dennis Pursley v. Tollycraft Yacht Corporation and 35 others
San Diego Superior Court
Claim for intentional misrepresentation, sale of security not qualified for
sale, and fraudulent transfer. The company believes the suit has no merit and
will defend itself vigorously.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
During the second quarter the Company resolved to issue preferred shares of
stock in Tollycraft Yacht Corporation in settlement of the outstanding debt to
senior creditors, and as such is no longer in default of the terms of the debt
instruments.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On June 29, 1998, the Board of Directors of Tollycraft Yacht Corporation
resolved to convert all debt, secured and unsecured, to equity through the
issuance of capital stock.
The Company will issue up to 1,500,000 shares of its authorized 5,000,000
preferred shares of its capital stock proportionately to all debt holders of
record as of June 29, 1998. Each preferred share to carry a series of
warrants convertible to one share of the Corporations common stock as follows:
"A" warrant exercisable at $2.25 after 12 months,
"B" warrant exercisable at $2.00 after 24 months,
"C" warrant exercisable at $1.25 after 36 months,
As previously discussed in "Legal Proceedings" the Company has been named as a
defendant in a nuisance law suit filed by Plaintiff, Dennis Pursley.
Tollycraft has been named along with approximately 35 other defendants in a
suit that alleges intentional misrepresentation, conspiracy to defraud, sale
of security not qualified for sale, money had and received, and fraudulent
transfer. The company believes the suit has absolutely no merit and will
defend itself vigorously.
While Mr. Pursley is a shareholder and a note holder in Tollycraft, he was
never contacted by any of the 35 defendants to invest in the Company. Mr.
Pursley's funds all came via the solicitation of his own registered stock
broker who was with a licensed brokerage firm. It is interesting to note that
neither the broker nor the firm has been named as defendants in the suit.
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: 11-30-98
By:/s/_______________________________
D.R. Cooley, President
Chief Operating Officer
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH AND
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
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<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 2,200 2,200
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 400,417 400,417
<CURRENT-ASSETS> 402,617 402,617
<PP&E> 3,806,103 3,806,103
<DEPRECIATION> (1,375,563) (1,375,563)
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<CURRENT-LIABILITIES> 3,910 3,910
<BONDS> 0 0
0 0
14,968,176 14,968,176
<COMMON> 4,550,303 4,550,303
<OTHER-SE> (16,307,232) (16,307,232)
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<OTHER-EXPENSES> 165,238 505,223
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 504,732
<INCOME-PRETAX> (165,238) (1,009,955)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (165,238) (1,009,955)
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<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (165,238) (1,009,955)
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