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, 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 March 31, 1998 is
5,179,352.
Transitional Small Business Disclosure Format (check one): Yes ... No .X.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tollycraft Yacht Corporation
First Quarter - 1998
Balance Sheet
December 31, March 31,
1997 1998
Current Assets
Cash 2,199 2,128
Accounts receivable 4,280 4,280
Inventory - Raw materials 303,508 303,508
Inventory - Work-in-process 96,909 96,909
Other current assets 385 154
407,281 406,979
Property and Equipment, net 2,478,855 2,462,565
Other Assets 382,000 382,000
Total Assets 3,268,136 3,251,544
Current Liabilities
Accounts payable 1,346,311 1,394,856
Accrued payroll & taxes 2,759,710 2,786,929
Notes payable 6,898,033 7,045,383
Other current liabilities 768,212 845,936
Customer deposits 598,000 598,000
Long-term debt - due within one year 451,627 452,000
12,821,893 13,123,104
Net Deferred Tax Liabilities 222,542 222,542
Long-term Debt 1,154,809 1,176,674
Stockholders Equity (Deficit)
Common Stock 4,366,171 4,480,303
Retained earnings (deficit) (15,297,279) (15,751,079)
(10,931,108) (11,270,776)
Total Liabilities and Stockholders Equity 3,268,136 3,251,544
Statement of Operations
Three Months
Ended March 31,
1997 1998
Net sales 514,955 0
Cost of sales 466,026 0
Gross Margin 48,929 0
Excess plant capacity 280,557 0
Selling expenses 53,283 0
General and administrative expenses 120,844 205,142
Income (loss) from operations (405,755) (205,142)
Other income (expenses):
Interest, net (246,972) (248,658)
Total other income (expenses) (246,972) (248,658)
Income (loss) before provision for income tax (652,727) (453,800)
Net income (loss) (652,727) (453,800)
Statement of Cash Flows
Three Months
Ended March 31,
1997 1998
Cash, January 1, 677 2,199
Cash flows from operating activities:
Net loss (652,727) (453,800)
Adjustments to reconcile net loss
to net cash used by operations
Depreciation 95,843 16,290
Change in assets and liabilities
Accounts receivable (8,000) 0
Material inventory (5,033) 0
Work-in-process inventory 168,070 0
Other current assets 356,733) 231
Accounts payable (137,939) 48,545
Accrued payroll & taxes 44,197 27,219
Other current liabilities (1,394,069) 77,724
(2,246,391) (223,791)
Cash flows from investing activities:
Purchase of other assets (52,960) 0
Purchases of equipment (146,135) 0
(199,095) 0
Cash flows from financing activities:
Proceeds from notes payable 316,429 147,350
Proceeds from long-term debt 617,354 22,238
Issuance of common stock 1,514,468 114,132
2,448,251 283,720
Net increase (decrease) in cash 2,765 (71)
Cash, March 31 3,442 2,128
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
For the Three Months Ended March 31, 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 $ 391,020
Office furniture and fixtures 486,126
Yacht molds and patterns 2,888,444
Vehicles 39,958
3,805,548
Less accumulated depreciation ( 1,342,983)
$ 2,462,565
Note 4 - Notes Payable
The Company has working capital loans with Vera Corporation, Commercial
Factors, California Factors and Finance, and Caterpillar Financial
Services Corporation. Interest on borrowings is payable monthly at
rates of 10% to 12%. Borrowings are secured by substantially all
assets. The Company is currently not in compliance with the payment and
borrowing terms required by the creditors.
Note 5 - 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 6 - 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
FORWARD LOOKING STATEMENTS This discussion may contain statements that could be
deemed forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform
Act, which statements are inherently subject to risks and uncertainties.
Forward-looking statements are statements that include projections, predictions,
expectations or beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often characterized by the
use of qualifying words (and their derivatives) such as "expect,"
"believe,""estimate," "plan," "project," "anticipate," or other statements
concerning opinions or judgment of the Company and its management about future
events. Factors that could influence the accuracy of such forward-looking
statements include, but are not limited to, the financial success or changing
strategies of the Company's customers, actions of government regulators, the
level of market interest rate and general economic conditions.
During the first quarter, the management of Tollycraft Yacht Corporation was
concentrating efforts on negotiating joint venture agreements with a Mexican
partner and relocating 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 to 24 month
period including:
1. Complete the plan of relocation and equity financing to restart
production operations in Mexico
2. Relocate corporate headquarters to southern Florida
3. Invest in updating and redesigning the current product line
4. Complete development of a new series of yachts
5. Maintain customer and dealer relationships
6. Shape maximum customer confidence
7. Expand the dealer network
8. Identify and purchase CNC equipment
9. 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. All
production has been discontinued and all non-essential personnel have been
laid off. A net loss of $(453,800) was incurred primarily due to the budgeted
fixed costs of management and other ongoing contractual financial obligations.
The majority of the manufacturing expenses incurred during the first quarter
of 1997 were fixed costs relating to overhead expenses. 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 $13,123,104 exceed current assets of
$406,979 resulting in a current ratio of .03.
Other assets include prepaid consulting fees of $360,000 purchased with the
issuance of common stock pursuant to an employee benefit plan.
The Company has not made timely payments to its debt holders, 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 preferred 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.
Lastly, 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
On February 23, 1998 the Company announced that it had signed three letters of
intent to joint venture with three marine oriented businesses in the State of
Yucatan, Mexico. The joint ventures will produce 39' to 125' Tollycraft
Yachts, provide repair facilities for pleasure and commercial craft to 150',
and develop a 125 slip marina and related retail marine facilities. The
ventures will also have an additional 15 acres of waterfront property for
future expansion.
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.
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 August 24,
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.
Southard v. Tollycraft Yacht Corporation
U.S. District Court
Claim for age discrimination and wrongful discharge. Settlement discussions
are in process.
Phil Gentile v. Tollycraft
Cowlitz County District Court
Complaint for breach of contract and negligence in the amount of $15,000. A
Notice of Appearance has been entered. Trial date set for August 13, 1998.
Settlement negotiations are continuing.
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 $2,661,209 including accrued interest in
arrears of $319,449.
Vera Corporation
The Company has not made timely payments as required by the debt
agreement. Total debt is $3,548,226 including accrued interest in
arrears of $1,006,654.
Commercial Factors of Portland
The Company has not made timely payments as required by the debt
agreement Total debt is $155,528 including accrued interest in arrears
of $35,528.
California Factors & Finance
The Company has not made timely payments as required by the debt
agreement. Total debt is $323,339 including accrued interest in arrears
of $70,248.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On February 25, 1998 the Board of Directors reserved for issuance up to
2,000,000 common shares for sale to Manuel Gomez Ramos, Attorney at Law, Trust
Account for up to $6,000,000 cash or other compensation in a regulation S.
transaction. The purchase price would be $3.00 per share. The Corporation
reserves the right to reject all or any part of such other compensation at its
sole discretion. The stock is being acquired specifically to be used in the
joint venture agreements that the Company is entering into; specifically, Zena
Atilleros Pergasa Marina Tortuga located in Progresso, Yucatan.
The Company issued 8,044 shares of common stock pursuant to the 1996 Employee
Stock Option Plan for contribution to the Tollycraft Union 401(k) Plan and
Trust. The contribution is for plan years 1993, 1995, and 1996 totaling
$24,132. The price is to be $3.oo per share.
The Company issued 20,000 of common stock to J.A. Overton Company as payment
for services rendered. The shares are part of the S-8 registration currently
in effect and filed with the Securities and Exchange Commission on December
12, 1997.
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: August 26, 1998
By:/s/_______________________________
D.R. Cooley, President
Chief Operating Officer
Chief Financial Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1998 CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
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