U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
TOLLYCRAFT YACHT CORPORATION
(Name of small business issuer in its charter)
Nevada 0-21087 86-0849925
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File No.) Identification No.)
8201 Peters Road, Suite 1000, Plantation, Florida 33324
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (253) 884-5750
Securities registered pursuant to Section 12(b) of the Act: NONE
Name of each exchange on which registered: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE (Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 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 ...
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [x]
State issuer's revenues for its most recent fiscal year: $ NONE
The aggregate market value of the voting and non-voting common equity held by
non-affiliates was $43,437,483 computed by reference to the average bid and
asked price of such common equity, as of December 31, 1998, was $6 9/16.
The number of shares outstanding of the issuer's common stock, as of December
31, 1998 was 8,087,476.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes ... No .X.
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-KSB
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21A OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE
"SAFE HARBOR" PROVISIONS THEREOF. THEREFORE THE COMPANY IS INCLUDING THIS
STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF
SUCH SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS. IN THIS REPORT, THE WORDS
"ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED TO
CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY
AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY
ARISE AFTER THE DATE HEREOF.
PART I
Item 1. Description of Business.
General
TOLLYCRAFT YACHT CORPORATION was originally incorporated in December 1992 in
the State of Minnesota as Child Guard Corporation. The Company changed its
name from Child Guard Corporation to Tollycraft Yacht Corporation concurrent
with the merger on January 1, 1996 of Child Guard Corporation and Tollycraft
Acquisition Corporation, a company registered in the State of Washington. In
1994 Tollycraft Acquisition Corporation had purchased substantially all of the
operating assets of the original Tollycraft Corporation, a Washington
corporation which was operating under a confirmed Chapter 11 bankruptcy plan
of reorganization. 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.
History and Acquisition
Child Guard Corporation was formed in 1992 as a development stage company to
develop and market a child monitoring device. The developed product was not
marketed and in 1995 the Company began merger talks with Tollycraft
Acquisition Corporation.
Tollycraft as a business entity has existed in various forms since 1936. The
original corporation was wholly owned by R.M. Tollefson and was first
incorporated in the State of Washington in 1936 under the name of Central
Lumber Company ("CLC"). CLC manufactured fine furniture and cabinetry. As an
adjunct to this regular line of business, Mr. Tollefson also produced several
custom boats for friends and himself.
As the reputation of his boat building talents spread, the demand for custom
manufactured boats surpassed the demand for furniture and cabinets. With a
dedicated group of proficient cabinetmakers and his own expert knowledge of
yacht design a complete line of wooden cruisers was launched. Mr. Tollefson
subsequently transferred the assets of his pleasure boat manufacturing
operations, "Tollycraft", to CLC in 1955. Concurrently, the name of CLC was
changed to Tollycraft Corporation.
For more than fifty years Mr. Tollefson actively designed and built pleasure
cruisers and yachts to meet the specialized needs of cruising enthusiasts.
His understanding of the demands of extended voyages came from personal
experiences on the water cruising yachts, which bear his name. Suggestions
gathered from fellow boaters also were incorporated into the many Tollycraft
models produced over the history of the Company.
A chronological synopsis of "Tollycraft" is as follows:
1932 - Mr. Tollefson, while involved in the cabinets business, started
building boats for himself.
1936 - Tollycraft commenced pleasure boat manufacturing as a sole
proprietorship in Kelso, Washington, after building and selling the first boat
which exhibited the quality he demanded.
1941 - World War II interrupted boat building while Mr. Tollefson served in
the U.S. Coast Guard.
1946 - Central Lumber Company was incorporated in the State of Washington.
1952 - A fire destroyed Central Lumber Company's plant and equipment; after
that the company narrowed the scope of its business activities to boat
manufacturing.
1955 - The assets of the sole proprietorship boat manufacturing operations
were transferred to Central Lumber Company, Mr. Tollefson's wholly owned
company; concurrently the name was changed to Tollycraft Corporation.
1958 - Tollycraft built a plant in the Kelso Industrial Park on 14 acres of
land and commenced operations in the new 65,000 square foot building in 1959.
1967 - Tollycraft Yachts began manufacturing fiberglass hulls starting with
the conversion of the 24', 28', 30', and 34' wooden hull designs into
fiberglass.
1970 - The last wooden hull boat was built. The very successful 34' Sedan was
the first "keel up" fiberglass design, which sold 194 units in 11 years, and
set the Tollycraft design trend for the 1970's.
1987 - Mr. Tollefson retired from Tollycraft and took a relaxed role in the
marine industry as Chairman Emeritus of Tollycraft. Tollycraft Corporation, a
then public company, was taken private and merged through a leveraged buyout,
into Olympic Equities, Inc. Thereafter, Olympic Equities, Inc. changed its
name to Tollycraft Yachts Corporation. As with many leveraged buyouts of the
1980's, the transaction was ill fated and threatened the long term financial
stability of the Company.
1989 - A group of investors purchased Tollycraft and provided capital to
reduce debt and increase working capital for continued operations. However,
the economic downturn and the passage of the 10 percent luxury tax caused
Tollycraft, as well as every other luxury boat builder in the United States,
to sustain substantial operating losses. The Company subsequently filed for
protection under Chapter 11 of the U.S. Bankruptcy Code on November 5,1993.
1994 - A group of investors formed Tollycraft Acquisition Corporation and
effective June 6, 1994 purchased substantially all of the operating assets of
the old company.
1996 - January 31, Tollycraft Acquisition Corporation was acquired, in a
merger transaction, by Child Guard Corporation which concurrently changed its
name to Tollycraft Yacht Corporation.
1996 - November, Kramfors Unlimited/Peter Hobbs obtained voting control of
Tollycraft in order to effectively conduct a turn around for the Company.
1997 - Tollycraft management closes the Washington manufacturing plant and
begins planning to relocate Corporate Offices to Florida and to either
outsource its production domestically or overseas to Taiwan and/or to relocate
production facilities to an marine oriented industrial complex in Mexico.
1998 - Tollycraft Board of Directors resolved to convert all debt to equity
through issuance of preferred shares of capital stock.
Tollycraft enters into joint venture with Yachts of America for production of
Tollycraft Yachts in Progresso, Yucatan, Mexico.
Business
Tollycraft Yacht Corporation is a builder of high quality cruising motor
yachts. The yachts are luxuriously equipped and built with the highest
structural integrity to ensure safe, long range cruising. The current line of
yachts is as follows:
48' Cockpit Motor Yacht
57' Pilothouse Walkaround Motor Yacht
57' Pilothouse Widebody Motor Yacht
65' Pilothouse Motor Yacht
Current plans for new products include the following:
48' Convertible Motor Yacht
48' Pilothouse Motor Yacht
52' Pilothouse Motor Yacht
54' Convertible Motor Yacht
76' - 82' Pilothouse Motor Yacht
Long-term plans for new products include the following:
30' - 44' 4 models of Motor Yachts
30' - 44' 4 models of Convertible Motor Yachts
92' - 150' Semi-custom and Custom Motor Yacht
Engineering design drawings and plans are completed for the 48' Pilothouse. A
hull mold has been built.
Design drawings and plans for the 52', 54', and 76' - 82' models have been
completed. The hull form for each model has also been tank tested.
All Tollycraft yachts have a 15-year transferable hull warranty, the longest
and most comprehensive warranty in the industry. To date, there has never
been a manufacturing related hull failure. Tollycraft Yachts are designed for
owner convenience and overall functionality. The electrical and mechanical
systems are laid out and installed for ease of use and maintenance.
Tollycraft incorporates intelligent engineering, manufacturing integrity,
quality craftsmanship, and the patented "Quadralift Hull" construction into
all its vessels, thus ensuring to Tollycraft customers a truly seaworthy
yacht.
Intelligent Engineering
Recent advancements have been made in controls, steering engines and gears
designed for use in large motoryachts. While Tollycraft exercises due caution
in adopting new systems until they are thoroughly tested and proven, the most
reliable of these are offered as standard or optional equipment.
State of the art components such as MMC electronic controls, custom AC/ DC
electrical, central chilled water heating and air conditioning, vacuum bagged
divinycell cored hull and deck structures, fully integrated electrical panels
and switches, Hynautic hydraulic steering, fuel distribution manifolds, and
oil lubricated shaft stuffing boxes are but a few of the advanced systems
utilized in Tollycraft yachts.
Modern systems are of little benefit however, if they are improperly
integrated into the complete yacht. That is why Tollycraft engineers are
careful to match technology with function.
Critical components, such as engines and generator sets (gensets) are matched
to the specific needs of each vessel and each owner. Engine selections
include MAN, Caterpillar, Detroit Diesel and MTU products. Either ONAN or
Northern Lights manufacture Gensets.
All fiberglass lay-up schedules are verified by an outside consulting engineer
and tested by an independent laboratory. All lamination takes place in a
controlled environment. Temperature and humidity conditions are continuously
monitored and recorded to ensure materials are applied within the
manufacturer's specifications. Core materials are vacuum bagged to the
laminate to ensure proper bonding and structural integrity.
Wiring systems have been redesigned and simplified. Wire harnesses have been
developed which meet or exceed all industry standards. Plug type connectors,
designed to withstand the marine environment, have been incorporated to ease
installation and minimize owner maintenance. All Tollycraft wire harnesses
are color coded in accordance with NMMA and ABYC specifications.
New products are ergonomically designed. Line of sight, ease of passage and
mobility restriction is just a few of the human factors Tollycraft's designers
consider on every new project. Primary consideration is given to safety and
functionality. Tollycraft's engineering department is committed to product
excellence. Every aspect of the final product must function as well as it
looks.
Engineering staff and production personnel scrutinize every phase of the
production process. New techniques and processes are developed and
implemented to achieve cost savings, quality and product integrity.
Cooperative efforts maximize the efficiency of both departments.
Product standardization and documentation ensure Tollycraft's ability to
purchase and manufactured accurately and efficiently. Whenever possible,
common parts and processes are employed throughout the various models to
minimize training and maximize productivity.
New Tollycraft yachts feature an impressive list of standard equipment. In
addition, many options are available for the customer to choose from. If
owners wish to further personalize their yacht, Tollycraft's engineering
department will create custom designs upon request. Custom options are not
inexpensive, but they afford the owner an opportunity to create a truly unique
and personal yacht while maintaining the advantages and savings of a
standardized production process.
Manufacturing Integrity
New ideas and designs are worth little if they do not stand up to the
structural mechanical and electrical integrity that is the foundation for
Tollycraft cruising yachts' reputation. Tollycraft's manufacturing integrity
gives the owner justifiable confidence in his vessel. Over 60 years of
building cruising yachts has taught us it takes more than words to instill
confidence in a skipper who invests his money and the safety of his crew in a
yacht.
Tollycraft's are known as seaworthy yachts. Everyday cruising takes the
yachts into waters that test a hull rigorously and it takes more than a tough
hull to survive rough sea conditions. Accordingly, every stringer is
encapsulated into the hull, every bulkhead is fiberglassed to the hull, every
wood component is glued and reinforced with screws, and wiring and plumbing
are fastened every few inches. Any component, whether purchased or
manufactured is proven to withstand the rigors of the marine environment.
Dry rot, once the bane of wooden boats, still attacks modern yachts if
precautions are not taken. For this reason, Tollycraft uses premium
straight-grained mahogany for deck, cabinet and bulkhead framing. This rot
resistant wood is then encapsulated with fiberglass wherever it might be
exposed to bilge water.
Engines, generators and other mechanical equipment are securely installed,
with special strengthening given to areas of extra stress such as rudder posts
and shaft logs. The entire mechanical structure is electronically bonded with
a heavy copper strap that employs a shaft sweep to make positive electrical
contact to external metal parts.
For strength and waterproofing, the hull deck and cabin structures are bonded
and screwed through overlapping fiberglass. Specially designed window frames
overlap their cabin side openings, which eliminates the possibility of
leakage.
Decks are cored with closed cell foam for stiffening and to eliminate any
feeling of resilience underfoot. Even shower stalls are laid up of heavy
fiberglass so they don't creak or bend when used by a normal sized adult.
Integrity is much more than a slogan at Tollycraft. It is the foundation of
our customers' confidence in our vessels.
The Quadralift Hull
Editors of boating magazines have been exposed to every claim about hull
design that the mind can dream up. Naturally they are skeptical when
reviewing the sea trials on any new hull. However, almost without exception,
editors who have tested Tollycraft's have reported that the Quadralift hull
works as claimed.
Naval Architect Ed Monk Jr., who designed the original "Quadralift" hull for
the Tollycraft 61' Motor Yacht, won't call his design revolutionary, but
rather the "latest in hull technology ... the culmination of everything we've
learned about hulls over the years."
While Quadralift varies from model to model its cupped dual chine separates
this hull from others. With the waterline midway between the two chines, the
Quadralift acts as an effective spray knocker, throwing spray horizontally
away from the hull. Deflecting the spray not only delivers a dry ride, but
increases efficiency by reducing the amount of wetted surface (drag) along the
hull.
The design of the Quadralift provides extra buoyancy at the bow, permitting a
finer entry and reducing the tendency to broach in a following sea. In a
chop, or at anchor, the Quadralift has a roll dampening effect, and with this
extra stability comes extra comfort. But the most dramatic demonstration of
this remarkable hull comes when you ease the throttles forward and feel your
Tollycraft rise effortlessly onto plane and handle smoothly at any speed. A
nearly full-length keel aids the tracking through turns and gives you
excellent control during slow speed maneuvering.
Product Line Enhancements
Tollycraft management believes that improvement is a process, not a project
and should be accomplished on an incremental basis. Accordingly, key tactics
supporting this strategy focus on developing and maintaining a process that
empowers Tollycraft employees, contractors, vendors, dealers and customers to
provide input for product improvement on a continuous basis.
The Company is planning to expand its existing product line with new
complementary products. Existing models have been redesigned and additional
reengineering for modular assembly will improve the quality of finished
yachts. Exterior and interior styling is an ongoing process to provide
Tollycraft customers with up to date design enhancements. An additional
benefit will be lower manufacturing costs.
The most significant enhancement by the Company to its product line will be
the implementation of a relatively new fiberglass laminating technique named
for its developers. SCRIMP (Seeman Composites Resin Infusion Molding Process)
is a procedure which eliminates 90% of harmful V.O.C. emissions while
dramatically lowering labor and material costs. This process allows the skins
and structural stiffeners of the yacht to be infused in a one step process.
This method of construction replaces the traditional labor intensive multi-
step multi-layer laminating process previously used by the Company and still
used by the vast majority of yacht builders within the industry. The process
allows dry lay-up of materials resulting in a cleaner, healthier work
environment. Exposure to wet resins and accompanying harmful emissions are
minimized. Direct labor costs are reduced significantly. Productions cost
savings are also realized with reduced expenses for costly protective clothing
and expensive air handling and emission filtration systems. Testing by the
U.S. Navy using standard ASTM tests has shown that the use of SCRIMP based
manufacturing methods has virtually eliminated detectable voids in finished
laminates. This level of quality and structural integrity are inherently
difficult to obtain using older multi-step layer laminating techniques.
The Company through its joint venture partner, Yachts of America will be
utilizing a 5 AXIS high speed CNC router system. This machine would allow the
production of plugs and molds in 60 days rather than the typical 9 to 15 month
schedule required when building molds and tooling by hand. The machine will
process digital information generated by the Company's CAD system and that of
outside naval architects and cut a mold or plug with little labor costs
incurred. The Company plans on producing molds and plugs for their own use as
a priority. Building molds could also generate additional revenue; tooling
and completed parts for other companies and custom yacht builders.
The Company plans to lead the industry in the production of yachts, molds and
tooling utilizing these methods.
Industry Analysis and Competition
The U.S. market for pleasure boats has undergone many changes over the last
decade. In 1986, 1987 and 1988 sales of pleasure boats skyrocketed by 18.7%,
28.5%, and 14.9%, respectively. Consumer confidence was high and U.S. exports
of pleasure boats were booming. In total, manufacturers' sales of pleasure
boats expanded by over 75% in those three years.
Manufacturers' sales of inboard/outdrive boats finished out a six-year growth
surge with total growth of approximately 160% between 1984 and 1988. Outboard
and inboard motorboats also increased, with total manufacturers' sales growth
of 87.9% and 96.3%, respectively, during the same period. The only pleasure
boats that did not benefit from this prosperity were sailboats, a market that
continued to suffer from declining demand.
The last cyclical downturn in the economy (the recession of 1989-1991) hit the
industry hard, as a number of factors combined to set the stage for a severe
slump in manufacturers' sales. Among the factors significantly impacting the
market for pleasure boats in the U.S. were the collapse of the financing
structure of the industry, savings and loan crisis, changing consumer
confidence in the economy, and fluctuating U.S. pleasure boat exports.
Making matters worse for pleasure boat manufacturers, in 1991 Congress passed
a 10% luxury tax on all pleasure boats costing more than $100,000. Although
this tax was repealed in 1993, the damage was already done.
In 1992 the positive effects of the recovering U. S. economy reached the
pleasure boat industry. Consumer confidence in the economy was starting on
its upward climb towards a significant height in 1993, and banks began to
loosen the credit restraints on boat loans as interest rates continued to
decline. Consumers began to buy new boats again. Disposable income was up,
the luxury tax was repealed, and consumers had a rosier outlook on the
economy.
The market for pleasure boats embarked on its recovery as manufacturers' sales
increased by 9.8% to $3.1 billion during 1992. Two more good years followed
in 1993 and 1994, when sales rose by 11.8% and 9.4%, respectively. In 1995,
sales in the pleasure boat industry grew faster than they had since 1988,
increasing by 12.1% to 4.3 billion dollars. Business Trend Analysts have
estimated annual growth rates in the value of manufacturers sales in both 1996
and 1997 at over 4.4 billion dollars.
Overall growth in manufacturers' sales of pleasure boats over the next ten
years is projected at 6.9% annually. Business Trend Analysts expects the
total manufacturers' market for pleasure boats to climb to just above $7.746
billion by 2006. The following table shows the annual sales of such boats:
U.S. MANUFACTURERS' SALES OF PLEASURE BOATS ($ Millions)
Year Value
1986 $3,406
1987 $4,378
1988 $5,029
1989 $4,775
1990 $3,894
1991 $2,840
1992 $3,118
1993 $3,487
1994 $3,813
1995 $4,274
1996 $4,439
1997 E $4,677
1998 E $4,905
2006 P $7,746
E - Estimate
P - Projection
Source: The U.S. Market for Pleasure Boats, @ Business Trend Analysts Inc.,
1998
Primary Competitors
Tollycraft's primary competition can be divided into two categories, Domestic
and Foreign
Domestic: Tollycraft's main competition is from Hatteras, Viking, and, to a
lesser extent, Bertram, Sea Ray, Ocean and Carver. Hatteras is the perceived
market leader, on the East Coast (including the Great Lakes and Gulf of
Mexico) and its dealer network is very strong. They have a full line of
yachts both in the cruiser and yacht fisher segments. Hatteras' yachts are
priced anywhere from 10 to 20 percent higher than Tollycraft on the East
Coast.
Foreign: Tollycraft has competition from the Taiwanese manufactured Ocean
Alexander and to a lesser extent, various Canadian manufacturers. These
competitors have built a reputation for emulating Tollycraft's products using
extremely cheap labor and trying to under price and undercut Tollycraft's
market on the West Coast. The offshore competitors basically sell a lower
quality product for a lower price. In addition, Canadian competitors reappear
with the cyclical swings of the Canadian dollar. These include Sunship by
Westbay, and Queenship. Tollycraft competes well against these manufacturers.
The Company believes that foreign competition is the greatest challenge to
increasing current market share. From 1991 to 1997, imports of pleasure boats
into the United States have increased from $212,496,000 to $1,177,003,000
respectively. Foreign companies all have significantly lower labor rates and
overall manufacturing costs. Some receive financial support from governments.
Although a majority of the products offered by foreign competitors are
substandard, some manufacturers are increasing their quality every year.
Competitive Advantage
Tollycraft's primary competitive advantage results from the high quality of
its product. The Company has never had a manufacturing related hull failure
and customers have shown themselves willing to pay a premium for this quality.
Tollycraft's products have historically had a high resale value and have
proven to be a good investment for customers.
Tollycraft Yacht Resale Values
1988 Model Year - Resale Value as of March 1998
Model Resale Price* 1988 Price Percent
30' Sport Cruiser $65,000 96,500 67%
34' Sport Sedan 117,550 170,390 69%
34' Sundeck Cruiser 131,600 171,290 77%
40' Sundeck Motor Yacht 159,700 175,530 91%
40' Sport Sedan 203,700 259,330 79%
44' Cockpit Motor Yacht 230,150 268,570 86%
53' Motor Yacht 454,550 563,406 81%
57' Cockpit Motor Yacht 536,800 636,206 84%
61' Pilothouse Motor Yacht 669,150 741,410 90%
Average resale value as a percent of original sales price after 10 years 80%.
* (NADA Average)
Source: NADA Appraisal Guide
Tollycraft's Prospects within the Industry
Sales of large luxury motor yachts have rebounded significantly since the
repeal of the luxury tax. Tollycraft's plan is to position itself for this
continued growth. Changing U.S. demographics will also help expand the
customer base for Tollycraft yachts (see the Tollycraft Customer profile
section that follows). The Company expects to do more than maintain its share
of the growing market.
An article in Powerboat reports, "The Consumer Resource for the Powercraft
Owner reported in its feature article that Tollycraft is tops in owner
satisfaction: Tollycraft scored an A+ in overall satisfaction and a 90 percent
would buy again index... The highest marks so far in Powerboat Reports
Ownership Survey... Not one Tollycraft owner was dissatisfied enough to say
he wouldn't consider buying another...This is unmatched in other surveys.
Tollycraft managed to show itself a winner in both quality and value
categories. Overall satisfaction scored an impressive A+, easily outranking
all other boats in Powerboat Reports' survey."
Customer Profile
Tollycraft's customers typically have an annual income of $150,000 or higher,
with a net worth of $500,000 or more. Based on these figures, the average
potential Tollycraft customer, nationwide, has the following profile
(Mendelsohn Media Research, Inc., New York, 1991 annual survey of affluent
households.):
Age: 48.4 years old Number of homes owned: 1.8
Value of principal residence: $363,200
Value of other real estate owned: $223,000
In addition, 45 percent have assets in their business or profession, with the
mean value of their equity being $312,303. Only 12 percent of the homeowners
have a home mortgage.
(U.S. Department of Commerce Survey of Income and Program Participation,
households with net worth over $500,000)
Changing U.S. demographics mean that the large "baby boom" generation is
entering the average age of Tollycraft's customers resulting in a greater
number of qualified, potential customers in the coming decade. Resident
population in the 35 to 54 year old age groups has been growing at a very
strong rate. Since 1994 it has been the largest age category in the country.
In 1980 there were 48.5 million people between the ages of 35 and 54
accounting for 21.4% of the population. By 1998 the number is estimated to
grow to 78.9 million people representing 29.2% of the U.S. population. In the
year 2000 this segment will top 81.7 million people.
Distribution Network
Tollycraft is currently represented by 5 dealers in 10 locations: Seattle,
Portland, California, Michigan, and Florida (6). Representation is being
targeted in Toronto, San Francisco, Cape Cod, Chicago, New York, and
Annapolis. Once the domestic dealer network is established the Company will
also seek international representation for its products.
Intellectual Property and Royalties
The Company has the following trademarks:
"TOLLYCRAFT" (Stylized), U. S. Trademark Registration # 855,456
"QUADRALIFT" and Design, U. S. Trademark Registration # 1,514,520
"T and Design", U. S. Trademark Registration # 855,455
The Company has the following patent:
Yacht, Serial No. 444,604, Filing Date: April 2, 1991, Patent No. D315, 892;
Expires: April 2, 2005. The loss of said patent, at the time of its
expiration, would not have a significant impact on the business of the
Company.
Item 2. Description of Property.
Tollycraft Yacht Corporation has signed a Joint Venture Agreement with Yachts
of Americas, a Mexico Corporation to produce the yachts in a new 100,000
square foot facility presently being designed for Tollycraft. The building
will be situated on 8 acres located in a new marine business park. The site
has 240 feet of waterfront and will feature wharfs as well as a rail system
for the loading and hauling of vessels up to 150'.
Prior to August 1997, the Company leased manufacturing and office space in an
industrial park in Kelso, Washington. The plant facilities included two
buildings totaling 180,000 square feet. In September the Company shipped out
all finished goods and ceased domestic production. The Company returned
possession of the Washington facilities to the property owner.
Item 3. Legal Proceedings.
D & C Lemmons v. Tollycraft
Cowlitz County, Washington
Stipulated Judgement in the amount of $291,048.00
Tollycraft believes it has a substantial offsetting claim against D & C
Lemmons for unlawfully conducting a landlord's lien foreclosure. Based upon
the law regarding landlord liens, the Company has been advised by counsel that
it has a strong chance of success in its claim against D&C Lemmons.
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.
Dennis Pursley v. Tollycraft Yacht Corporation and 35 others
San Diego Superior Court, San Diego County, California
Claim for intentional misrepresentation, sale of security not qualified for
sale, and fraudulent transfer. 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 stockbroker 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. The Company believes the suit has no merit and will
defend itself vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock has been traded in the over-the-counter market
since 1993. It is currently is traded in the over-the-counter market and is
quoted on the OTC Electronic Bulletin Board (symbol "TLLR") maintained by
NASDAQ. The market for TLLR's Common Stock has often been sporadic and
limited.
The following table sets forth the high and low bid prices for the Company's
common stock as reported by NASDAQ during the past two years and current year.
The prices reflect interdealer quotations, without retail markup, markdown or
commissions and may not represent actual transactions.
On December 9, 1996, the Company's security holders approved a 25 for 1
reverse stock split. The amounts in the table set forth below have been
restated for comparative purposes to reflect the associated change in value
caused by the reverse split.
Low High
Bid Bid
1997
March 31 7 11
June 30 4 4
September 30 4 5
December 31 5 5/8 5 5/8
1998
March 31 5 1/4 7 3/4
June 30 6 6 5/8
September 30 2 49/50 4 5/16
December 31 6 1/8 7
As of December 31, 1998, the closing bid price of the Company's common shares
was $6 9/16. As of December 31, 1998, there were 190 holders of record of the
Company's shares.
No dividends have been declared with respect to the Company's common shares
since inception. The Company is not likely to pay any dividends in the
foreseeable future. The Company intends to reinvest any earnings in its
operations.
During the year ended December 31, 1997, the Company sold 22,120 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.
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" warrants exercisable at $2.25 after 12 months,
"B" warrants exercisable at $2.00 after 24 months,
"C" warrants exercisable at $1.25 after 36 months,
Item 6. Management's Discussion and Analysis or Plan of Operation.
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.
Since August of 1997 and throughout 1998 the company was continued its efforts
in relocating their manufacturing facilities to Merida, Yucatan, Mexico and
its corporate administrative and sales offices to Plantation, Florida. The
Company was not involved with manufacturing activities. For a more complete
discussion of the Company's relocation plans see the Sections entitled
"Relocation of Corporate Headquarters" and "Relocation of Manufacturing and
Production".
The Company has also redesigned existing yachts, added complementary models to
the product line and developed manufacturing systems and procedures to greatly
reduce total costs of yacht construction.
Improvements are outlined as follows:
- - Consolidated existing yacht models so the Company produces yachts that
have an acceptable profit margin.
- - Designed and tested new yacht models that enhance the existing product
line and have a projected profit margin of at least 20%
- - Developed production sequencing, staging, tasking, and man loading
systems that management believes will greatly increase production
efficiency and overall quality of the yachts while reducing direct costs
- - Developed a management information system that will track labor and
material costs for each yacht under construction and produce internal
reports for proper control of production costs
- - Identified key personnel positions with necessary experience to
implement and manage improved production methods
- - Identified subcontractors who are capable of supplying major pre-
manufactured components. Component manufacturing and modular
construction techniques will greatly reduce direct labor costs and
overall costs of construction
- - Prepared to implement environmentally safe SCRIMP laminating process for
additional labor and material cost savings
- - Developed plan through Yachts of the Americas, it's joint venture
partner in Mexico, to utilize CNC router equipment to dramatically speed
up design and construction of molds and tooling at significantly lower
costs
- - Redesigned and upgraded interior fit and finish of the yachts and
modernized mechanical and electrical systems in all models.
- - Prior to plant shutdown, generated a backlog of $30,000,000 in orders
for new yachts at prices up to 40% higher than ever before charged in
the history of the Company. These prices have been realized while only
increasing the direct cost of the yachts by a modest 10%
The internal and external costs of developing these improvements to
Tollycraft's product line and manufacturing processes have been expensed when
incurred in prior financial periods.
Relocation of Corporate Headquarters to Florida
In recent years, 80% of the larger yachts produced by the Company have been
sold to clients located on the East Coast. The majority of these yachts were
delivered into Florida. Florida is well known throughout the world as "The
Yacht Capital of the World".
Tollycraft Yacht Corporation has announced that the Company's corporate
headquarters will be relocated from southwest Washington to southern Florida.
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.
Relocation of Manufacturing and Production to Mexico
In the past, the Company's manufacturing employees have been organized under a
union contract. Even with concessions negotiated in the most recent labor
contract, research has determined that existing contract rates are still among
the highest in the industry. With thousands of man-hours required to produce
each vessel, Tollycraft's yachts would become some of the most expensive
yachts to produce in their class. With retail prices increased to cover these
costs it became evident that Tollycraft must reduce costs or price itself out
of existence.
The most significant costs savings available to Tollycraft Yacht Corporation
will result from the Company's planned relocation of it's manufacturing
facilities from southwest Washington to a marine oriented industrial complex
in Progresso, Mexico. Tollycraft has been exploring several international
locations and has selected Progresso, Mexico over other sites considered for
several reasons.
1. Location on the Gulf of Mexico and proximity to Florida
2. The availability of an adequately trained work force
3. The area work force has a labor rate equivalent of $1.051 to $2.50 US
dollars per hour
4. Governmental and investor support to develop facilities to Tollycraft
specifications.
5. An approximate 50% reduction in the burdened costs of comparable
facilities in the U.S
Joint Venture
Once the decision was made to relocate the Company to Mexico under NAFTA,
Tollycraft then needed to determine whether a Joint Venture with an existing
boat builder was going to be a viable option. Unfortunately after almost 6
months it was determined that either the candidates were to weak financially
or lacked the sophistication to be able to go forward with such a project.
Instead a group of Mexican businessmen put together a company called Yachts
of the Americas, S.A. de C.V. and with Tollycraft's expertise and name have
acquired land and are building a state of the art manufacturing facility to
begin and attract production from not just Tollycraft but other USA yacht
manufacturers.
Tollycraft Yacht Corporation has signed a Joint Venture Agreement with "Yachts
of the Americas" a Mexican Corporation to produce its vessels in Progreso,
Mexico. The vessels will be produced in a new 100,000-sq. ft. facility
presently being designed for Tollycraft. The building will be situated on *
acres located in a new marine business park that is presently being developed
by the Governor of the State of Yucatan. The property comes with 240 feet of
waterfront that will feature an all-concrete wharf as well as a rail system
for the launching and haul out of vessels up to 150' in length. The joint
venture partners will provide the following:
- Construct manufacturing space in a new marine orientated to Tollycraft
specifications.
- Locate and prescreen the local work force to fill required production
hourly and salaried positions with adequately trained workers
- Fund manufacturing labor costs and provide payroll and other
administrative functions relating to the local work force as well as
obtain all necessary government permits
Tollycraft Yacht Corporation projects a fully burdened labor rate of $4.00 to
$8.00 US per hour. Fully burdened labor rates include hourly and salaried
employees in the Mexico facilities, manufacturing facilities costs,
electricity and utilities, Mexico MRO expenses, communication, and travel
expenses. This compares to Tollycraft's previous fully burdened labor rate at
its closed U.S. facility of approximately $27.00 per labor hour. It is
anticipated that the Mexican joint venture will fund all of the direct labor
and costs of the production buildings in Mexico.
As part of the joint venture agreement, 2,000,000 shares of Tollycraft Yacht
Corporation common stock was issued to Yachts of America. Yachts of America
have credited the company $2,000,000 in prepaid manufacturing costs.
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.
While the electronic, auto, appliance and textile industries have been part of
NAFTA and have had plants for years in Mexico this is a first for a premier
yacht builder. Tollycraft vessels have long enjoyed an excellent reputation
for quality this move will more then insure that it will enjoy a reputation as
an excellent value as well.
Results of Operations
During the year ended December 31, 1998, the Company incurred a net loss of
$(1,150,783) which consisted primarily of general and administrative expenses
of $523,581 and interest expense of $504,718. For the year ended December 31,
1997, the net loss was $(3,041,401). Included in the net loss in 1997 was
interest expense of $1,000,491, which compares to interest expense in 1998
considering that substantially all of the Company's debt was converted to
preferred stock in July 1998. The Company also incurred a negative cash flow
from operations of $(2,054) for the year ended December 31, 1998. The
negative cash flow from operations $(893,012) for the year ended December 31,
1997.
In 1997, the Company's continuing operating loss was a reflection of an
inadequate gross profit margin and low sales volume resulting from the
suspension of manufacturing operations at the beginning of the third quarter.
Gross Margins were ($401,013) for the year ended 1997. In 1997, there was a
minor amount of manufacturing activity. The majority of the manufacturing
expenses incurred during 1997 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.
Administrative overhead costs have been reduced to minimum requirements.
Management has emphasized the following areas to improve the operations of the
Company:
- - Relocate manufacturing operations to the Yucatan Peninsula area of
Mexico which will result in a projected 80% reduction in labor costs.
- - Relocate administrative offices to southern Florida.
- - 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.
- - Utilize CNC equipment to lower costs and expedite manufacturing of
molds and tooling and production of finished yachts.
- - Implements new SCRIMP laminating process to reduce labor and material
production costs.
Tollycraft Yacht Corporation, in its various business forms, has been
manufacturing high quality watercraft for over 64 years. In that period of
time the Company has produced some of the finest motor yachts available.
However, historically unprofitable operations and the circumstances
surrounding the Company's manufacturing facilities and landlord, require
Tollycraft management to make significant changes to the way it does business.
Financial Condition
The management of Tollycraft is continuing efforts to raise funds in order to
proceed with this business plan. Alternatives being considered to improve the
Company's financial position include converting current debt to equity through
the issuance of preferred shares and the sale of common shares to raise
working capital.
In June 1998, the Company offered each debtor one share of preferred stock for
each $10 of debt they were owed. Notes payable, accounts payable, accrued
liabilities, and long-term debtors were offered this conversion. The offering
required a majority of the debtors to agree to the terms of the conversion.
In July 1998, a majority of the debtors agreed tot he offering and,
accordingly, all of the then outstanding debt was converted to preferred
stock. The Company is in the process of authorizing and issuing the preferred
stock.
In 1998, the Company converted substantially all of its liabilities to
preferred stock. As of December 31, 1998, the Company's current assets
equaled $400,562. In 1997, the Company's internally generated cash flow has
not been sufficient to finance its operations. The cumulative losses of the
Company continued to be financed through current liabilities. Current
liabilities of $12,821,893 exceed current assets of $407,281.
As part of the "turnaround process" it had always been recognized that after
the final decision was made as to the location of the facility then the next
crucial step had to be the clean up of the balance sheet and the financial
obligations. The company had a stockholders deficit in 1997 of $10,931,108.00.
With a plan to reduce costs and the ability to produce boats at a profitable
level has been achieved the next step was to be able to attract working
capital preferably in the form of equity. There were only a limited number of
options available. With no net worth and a staggering debt the options were to
either filing a Chapter 11 or because of the fact that Tollycraft is a
publicly held company a plan be put into effect that would convert the debt to
equity. It was decided that even under a Chapter 11 filing a plan would
include a debt conversion to equity. As a consequence management decided to
proceed with the conversion on its own. Because Tollycraft is a publicly held
company it was and is not the same as if the conversion were to take place
with a privately held company. The shares being offered were in the form of
Units that carry a preferred share with a value of $10.00 and additional
options for the holder of the units or shares on specific dates into the
future. These units/shares will be registered and it is the intent of the
company to have them trading as soon as possible. While a creditor may want
liquidity the units/shares were set up to be an attractive investment for
investors. The holders of the shares on dates 12, 24 and 36 months from the
original issue date are entitled to acquire common shares (see below). This is
a way to attract long term investors so that liquidity if so desired could be
gained by the creditors within a short period of time. Over this time frame
additional value will be added to the company as it begins production at
profitable levels. Trading of the units/preferred shares would have minimal
impact on the common. With the majority of the creditors representing the
largest amount of the debt the Board of Directors on June 29th, 1998 resolved
that all debt, secured and unsecured convert to equity through the issuance of
capital stock.
Despite the Company's past difficulties in making timely payments to its
creditors, the Company does not expect any difficulties in obtaining raw
materials once production returns to a regular level.
There were no significant capital expenditures for equipment during the year
ended December 31, 1998 and 1997.
In order to begin production at regular capacity the Company continues to be
in need of additional capital to build production tooling, finance inventory
and provide working capital. The Company is dependent on external sources of
liquidity until projected levels of production and improvements in direct
costs and production efficiencies are achieved which will return the Company
to profitability and a positive cash flow. A material commitment for capital
expenditures and working capital is necessary to meet the projected sales and
production goals. The expected source for a majority of the funds is from
financing provided by joint venture production partners for Mexico
manufacturing activities. There can be no assurance that the Company can
achieve the anticipated aforementioned improvements in operations on
acceptable terms.
In 1997 the Company 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.
Tollycraft Yacht Corporation management feels that the Company is in the best
position possible in recent history. Marketing efforts will begin again in
the spring of 1999. The new manufacturing facilities are expected to be
operational by early summer 1999 when the Company expects to begin
manufacturing once again. 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 very profitable, debt free, and for the first time have a surplus of
cash in the bank.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as the computer
operation of virtually every company will be affected in some way.
The Company, like most owners of computer software, will be required to modify
significant potions of its software so that it will function properly in the
Year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $5,000 to $10,000. Maintenance or
modification costs will be expensed as incurred, while the costs of new
software will be capitalized and amortized over the software's useful life.
Since the Company mainly uses third party "off-the-shelf" software, it does
not anticipate a problem in resolving the Year 2000 problem in a timely
manner. The Company is currently taking steps to ensure that its computer
systems and services will continue to operate on and after January 1, 2000.
However, there can be no assurance that Year 2000 problems will not occur with
respect to the Company's computer systems. Furthermore, the Year 2000 problem
may impact other entities with which the Company transacts business, and the
Company cannot predict the effect of the Year 2000 problem on such entities or
the resulting effect on the Company. The cost to be incurred by the Company
related to externally maintained systems is expected to be minimal.
Item 7. Financial Statements.
The financial statements required by this item begin immediately
following the exhibit pages of this report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
There were no changes or disagreements with our accounting firm.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with 16(a) of the Exchange Act.
Peter D. Hobbs 53 Chairman, Chief Executive Officer,
Secretary, Director
D.R. Cooley 43 President, Chief Operating Officer
Chief Financial Officer, Director
Peter Hobbs: Involved in investment banking and capital raising since 1972.
Worked for several overseas companies actively involved in raising capital for
both domestic and overseas entities. One of these companies presently
controls the majority of voting stock of Tollycraft.
D.R. Cooley: Held positions in business and finance with responsibility in
investment banking, financing, and management of closely held businesses since
1977. Experienced in manufacturing entities, management buyouts, and turn
around activities.
Compliance with 16(a) of the Exchange Act. Federal securities laws require
the Company's directors, certain of its officers, and persons owning
beneficially more than ten percent (10%) of a registered class of the
Company's equity securities, to file initial reports of ownership and reports
of changes in ownership with the Commission. The Company is required to
disclose any failure of persons, who at any time during the fiscal year, were
directors, officers required to report, or more than ten percent (10%)
beneficial owners, to file timely those reports during the fiscal year. The
Company undertakes the responsibility to file all required reports on behalf
of its directors and officers. To the Company's knowledge, based solely upon
information furnished to the Company by its directors and certain of its
officers, during the fiscal year ended December 31, 19196, all of the
Company's directors, officers required to report, and greater than ten percent
(10%) beneficial owners made all such filings on a timely basis.
Item 10. Executive Compensation.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long
Term Compensation
---------------------
- ----------------------------
Annual Compensation Awards
Payouts
------------------------------------- ---------------------
- ----------------------------
(a) (b) (c) (d) (e) (f) (g)
(h) (i)
<S> <C> <C> <C> <C> <C> <C>
<C> <C>
Other
Securities
Name Annual Restricted Under-
All Other
and Compen- Stock lying
LTIP Compen-
Principal Fiscal sation Award(s)
Options/ Payouts sation
Position Year Salary ($) Bonus ($) ($) ($) SARs
(#) ($) ($)
Peter D. Hobbs 1998 ---
Chairman, Chief 1997 ---
Executive Officer 1996 ---
Secretary
D.R. Cooley 1998 $48,000 (1) $60,000*
President, 1997 $96,000 $--
Chief Executive 1996 $96,000 $--
$120,000 $40,000
Officer, Chief
Financial Officer
</TABLE>
(1) Accrued at $8,000 per month from January through June 1998.
* 20,000 shares of common stock valued at $3.00 per share.
Option Grants
There were no option grants in 1998.The following table shows information
regarding grants of stock options in 1996 to the executive officers named in
the Summary Compensation Table.
There were no stock option and SARs exercised by the named executive officers
during 1998.
The table shows the aggregate number of unexercised options and SARs that were
exercisable and unexercisable as of December 31, 1998, and the values of "in-
the-money" stock options and SARs on December 31, 1998, which represent the
positive difference between the market price of the Company's Common Stock and
the exercise price of such options/SARs.
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
December 31, 1998 December 31, 1998 (3)
Name Exercisable Unexercisable Exercisable Unexercisable
Peter D. Hobbs ...
D.R. Cooley 120,000 (1) 0 (3) (3)
40,000 (2) 0 (3) (3)
Footnotes
(1) Stock Option Agreement, adjusted for reverse split, expires 24 months
after the debt owed by the Company to Vera Corporation is fully paid and no
longer outstanding or is bargained, sold, assigned, transferred or conveyed to
a third party, and written notice from the Company of such payoff or transfer
is given to the Optionee.
(2) Incentive Stock Option Agreement, adjusted for reverse split, exercisable
as follows: (1.1) Up to 10,000 shares at $9.25 per share, which is the fair
value at the time this option is granted, on or before 12/31/96; (1.2) Any
unexercised shares issuable pursuant to Section 1.1 herein and up to 10,000
additional shares, all at $12.50 per share on or before 12/31/97; (1.3) Any
unexercised shares issuable pursuant to Sections 1.1 and 1.2 herein and up to
10,000 additional shares, all at 50% of the bid price of the stock as quoted at
the time notice of exercise is given, on or before 12/31/98; (1.4) Any
unexercised shares issuable pursuant to Sections 1.1, 1.2, and 1.3 herein and
up to 10,000 additional shares, all at 50% of the bid price of the stock as
quoted at the time notice of exercise is given, on or before 12/31/99.
(3) There were no option/SAR exercises in last fiscal year and FY-End
Option/SAR Values are $0 since the options are not "in-the-money".
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of December 18, 1998, the stock ownership of
each Named Executive Officer (see Item 10), directors, all executive officers
and directors of the Company as a group, and of each person known by the
Company to be a beneficial owner of 5% or more of its Common Stock. Except as
otherwise noted, each person listed below is the sole beneficial owner of the
shares and has sole investment and voting power of such shares. No person
listed below has any option, warrant or other right to acquire additional
securities of the Company except as otherwise noted.
Name and Amount and
Address of Nature of
Beneficial Beneficial Percent
Owner Ownership of Class
Peter D. Hobbs 1,448,431 (1) 17.9%
7825 Fay Ave.#200
La Jolla, CA 92037
D.R. Cooley 20,000 0.02%
8201 Peters Road #1000
Plantation, FL 33324
Named Officers and 1,468,431 17.9%
Directors As a Group
(1) As Voting Trustee on behalf of Kramfors Limited, 2 Ice House Street, Suite
202,
Central Hong Kong.
Item 12. Certain Relationships and Related Transactions.
Peter D. Hobbs, Chairman, Secretary, Director of the Company is also an
employee of Kramfors Limited. Kramfors Limited has identified Mr. Hobbs as
the voting trustee of 17.9% of the common shares of the Company.
During 1998, Corporate Developers of America provided consulting and management
services
to Tollycraft Yacht Corporation. Mr. Hobbs is the Executive Director of
Corporate Developers
of America.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibit Table.
2 Plan of Acquisition, reorg. (3)
3.1 Articles of Incorporation (3)
3.2 By-Laws (3)
5 Instruments defining the rights of security holders (4)
9.1 Voting Trust Agreement (2)
9.2 Assignment of Voting Trust Agreement (5)
10.1 1996 Employee Stock Option Plan (3)
10.2 Consulting Agreement between Tollycraft and Kramfors Limited (5)
10.3 Incentive Stock Option Agreement between Tollycraft and D.R. Cooley (1)
10.4 Stock Option Agreement between Tollycraft and D.R. Cooley (1)
10.5 ASSEMBLY (MAQUILA) AND TECHNICAL ASSISTANCE AGREEMENT (*)
10.6 AGREEMENT FOR PAYMENT OF TAX OBLIGATIONS (*)
21 Subsidiaries of the registrant (*)
23 Consent of experts and counsel (*)
24 Power of attorney (*)
27 Financial Data Schedule (*)
____________________
(*) Filed herewith.
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed electronically on October 28, 1996.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K/A
as filed electronically on February 20, 1997.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB as filed electronically on July 23, 1996.
(5) Incorporated by reference to the Registrant's Quarterly Report for the
period ended September 30, 1996 on Form 10-QSB as filed electronically on
November 27, 1996.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1998.
None.
TOLLYCRAFT YACHT CORPORATION
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
WITH
REPORT OF INDEPENDENT AUDITOR
TOLLYCRAFT YACHT CORPORATION
Years ended December 31, 1998 and 1997
Contents
Page
Report of Independent Auditor 1
Financial Statements:
Balance sheets 2
Statements of operations 3
Statement of changes in stockholders' equity (deficit) 4
Statements of cash flows 5
Notes to financial statements 6 - 13
Timothy L. Steers
Certified Public Accountant, LLC
the River Forum
4380 S.W. Macadam, Suite 520
Portland, Oregon 97201-6403
Phone: 503/274-6296
Fax: 503/274-6297
E-mail: [email protected]
REPORT OF INDEPENDENT AUDITOR
To the Stockholders
Tollycraft Yacht Corporation
I have audited the accompanying balance sheets of Tollycraft Yacht Corporation
as of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tollycraft Yacht Corporation
as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in accordance with generally accepted
accounting principles.
As more fully described in Note 12, the Company's previous landlord has seized
certain work-in-process inventories, raw material inventories, and equipment.
No adjustments have been made in the accompanying financial statements for
this event, as the outcome of this matter is uncertain.
/s/
March 26, 1999
TOLLYCRAFT YACHT CORPORATION
Balance Sheets
December 31
1998 1997
ASSETS
Current assets:
Cash $ 145 $ 2,199
Accounts receivable - 4,280
Raw material inventories 303,508 303,508
Work-in-progress inventories 96,909 96,909
Prepaid expenses - 385
Total current assets 400,562 407,281
Equipment, net 2,374,292 2,478,855
Other assets 2,382,000 382,000
$ 5,156,854 $ 3,268,136
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes Payable $ - $ 6,898,033
Accounts payable - 1,346,311
Accrued payroll and payroll liabilities - 2,759,710
Other accrued liabilities - 768,212
Customer deposits - 598,000
Long-term debt, due within one year - 451,627
Total current liabilities - 12,821,893
Long-term debt 1,154,809
Net deferred tax liabilities 30,498 222,542
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock to be issued 11,616,300 -
Common stock, no par value; authorized
100,000,000 shares, issued and outstanding
8,087,476 shares in 1998 (3,145,383 shares
in 1997) 9,654,206 4,366,171
Retained deficit (16,444,150) (15,297,279)
Stockholders' equity (deficit) 4,826,356 (10,931,108)
$ 5,156,854 $ 3,268,136
See accompanying notes.
TOLLYCRAFT YACHT CORPORATION
Statements of Operations
Years ended December 31
1998 1997
Net sales $ - $ 903,235
Cost of sales - 1,304,248
Gross margin (401,013)
Excess plant capacity - 482,393
Selling expenses 87,332
General and administrative expenses 519,669 508,938
Operating loss (519,669) (1,479,676)
Other income (expense):
Interest expense, net (504,718) (1,000,491)
Loss on disposal of assets (14,528) -
Nonrecurring restructuring of debt (463,138)
Other - 262
Total other income (expense) (519,246) (1,463,367)
Loss before provision for income taxes (1,038,915) (2,943,043)
Provision for income taxes - deferred 107,956 98,358
Net loss $(1,146,871) $(3,041,401)
Net loss per common share $ (.229) (.989)
See accompanying notes.
<TABLE>
TOLLYCRAFT YACHT CORPORATION
<CAPTION>
Statements of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1997
Preferred stock Common stock Retained
Stockholders'
to be issued Shares Amount deficit
equity (deficil)
<S> <C> <C> <C> <C>
<C>
Balance at
December 31, 1996 2,781,854 $2,829,703
($12,255,878 $ (9,426,175)
Common shares issued
for equipment at $6.00
per share 24,356 146,136
146,136
Common shares issued
for prepaid professional
services at $6.00 per
share 60,000 360,000
360,000
Common shares issued
in exchange for debt 56,000 228,000
228,000
Common shares issued for
cash at $6.00 per share 130,055 802,332
802,332
Common shares issued
to employees 93,118
Net loss
(3,041,401) (3.041.401)
Balance at
December 31, 1997 3,145,383 4,366,171
(15,297,279) (10,931,168)
Common shares issued
in exchange for prepaid
manufacturing at $1 .O0
per share 2,000,000 2,000,000
2,000,000
Common shares issued
in exchange for debt 3,000,000 3,103,903
3,103,903
Common shares issued
in exchange for debt at
$3.00 per share 8,044 24,132
24,132
Common shares issued
in exchange for services
at $3.00 per share 53,333 160,000
160,000
Preferred shares to be
issued in exchange for
debt 11,616,300
11,616,300
Common shares
cancelled (119,284)
Net loss (1,146,871)
(1,146,871)
Balance at
December 31, 1998 $11.616.300 8,087,476 $9,654,206 $(16,444,150)
$ 4.826.356
</TABLE>
See accompanying notes.
TOLLYCRAFT YACHT CORPORATION
Statements of Cash Flows
Years ended December 31
1998 1997
Cash flows from operating activities:
Net loss $(1,146,871) $(3,041,401)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 65,160 542,645
Loss on disposal of assets 14,528
Nonrecurring restructuring of debt 463,138
Changes in assets and liabilities:
Accounts receivable 4,280 27,720
Inventories 361,066
Prepaid expenses 385 7,364
Checks issued in excess of bank balances (22,569)
Accounts payable 952,508 (57,764)
Accrued liabilities 808,431
Customer deposits (80,000)
Deferred income taxes 107.956 98.358
(2,054) (893,012)
Cash flows from investing activities - purchase of equipment (19,712)
Cash flows from financing activities: -
Repayment of long-term debt - (386)
Proceeds from issuance of convertible notes payable
and debentures 112,300
Proceeds from sale of common stock 802,332
914,246
Net increase (decrease) in cash (2,O54) 1,522
Cash at beginning of year 2,199 677
Cash at end of year 145 $2,199
See accompanying notes.
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1998
1. Nature of business and summary of significant accounting policies
Nature of business: Tollycraft Yacht Corporation, (the "Company") is
engaged in the manufacture and distribution of luxury motor yachts. The
Company grants credit to its customers. The ability to collect its
accounts receivable is affected by economic fluctuations in the
geographic areas served by the Company.
Cash flows: For statement of cash flow purposes, cash paid for interest
during 1997 was approximately $1,000. Supplemental disclosure of
noncash investing and financing activities are as follows:
Issuance of $2,000,000 of common stock in exchange for prepaid
manufacturing.
Issuance of $24,132 of common stock in exchange for accrued pension
contributions.
Issuance of $3,103,903 of common stock in exchange for the accrued
liabilities and long-term debt of the Internal Revenue Service.
Issuance of $160,000 of common stock in exchange for services during 1998.
Conversion of $11,616,300 of notes payable, accounts payable, accrued
liabilities and long-term debt for preferred stock to be issued.
Issuance of $360,000 of common stock for prepaid professional services in
1997.
Issuance of $146,136 of common stock for equipment in 1997.
Conversion of $228,000 of notes payable into common stock in 1997.
Exchange of $1,394,829 of work-in-progress inventories in lieu of
payment for notes payable in 1997.
Issuance of $29,958 of long-term debt for equipment acquired in 1997.
Inventories: Inventories are valued at the lower of average cost of
market.
Equipment: Equipment is carried at cost. Additions and improvements to
jigs, patterns and molds are capitalized. Depreciation is computed
using the straight-line method over the estimated useful lived of the
assets, which range from three to ten years.
Revenue recognition: Revenue is recognized upon completion, shipment and
title transfer of each yacht. Accordingly, revenue and costs of
individual yachts are included in operations in the year during which
they are completed.
Estimated warranties: The Company records a warranty accrual at the time
of sale for estimated claims, based on actual claims experience. There
is a general one-year parts and labor warranty to the original owner for
defects in all Tollycraft built hulls, desk bridges, stringers and
bulkheads.
Advertising: The Company expenses the cost of advertising as incurred.
Advertising expenses for 1997 was approximately $3,000.
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1998
1. Summary of significant accounting policies (continued)
Pension and profit sharing plan: Union employees of the Company
participate in a pension plan, which qualifies under Section 401 (k) of
the Internal Revenue Code. The Company is required by the union
contract to make annual contributions of $.05 per labor hour. The
Company contributed $24,132 to the plan in 1998. No contributions were
made to the plan in 1997. The Company is in the process of terminating
the pension and profit sharing plans.
Income taxes: Income taxes are accounted for and reported using an asset
and liability approach. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
effect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change
during the year in deferred tax assets and liabilities.
Deferred tax assets result principally from the Company's differences
for recording warranty reserves for financial statement purposes and
from net operating losses not yet utilized for tax purposes. Valuation
allowances have been provided for those deferred tax assets as their
utilization are uncertain. Deferred tax liabilities result principally
from the use of accelerated depreciation for tax purposes.
Net loss per common share: Net loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding
during the period. The weighted average number of common stock shares
outstanding was 5,018,273 for 1998 (3,074,699 for 1997). Preferred
stock to be issued and convertible notes, debentures, options and
warrants are not considered common stock equivalents, as the affect
would be anti-divutive.
Significant risks and uncertainties: The process of preparing financial
statements in conformity with generally accepted accounting principles
requires the use of estimates and assumptions regarding certain types of
assets, liabilities, revenues and expenses. Management of the Company
has made certain estimates and assumptions regarding the reserve for
warranty expenses, costs of work-in-process inventory, contingent
liabilities regarding their inventories and equipment, and federal
penalties on unpaid payroll taxes. Such estimates and assumptions
primarily relate to unsettled transactions and events as of the date of
the financial statements. Accordingly, upon settlement, actual results
may differ from estimated amounts.
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1998
2. Operations
The Company has devoted substantial efforts during 1998 in relocating
their corporate administrative and sales offices to Plantation, Florida,
its manufacturing facilities to Merida, Yucatan, Mexico and
restructuring debt, rather than in the marketing and manufacturing of
luxury motor yachts. Management believes that the efficiencies expected
to be achieved by relocating to the Eastern United States, which is
closer to the geographic area most served by the Company, and the lower
operating overhead expected by relocating their manufacturing to Mexico
will enable the Company to achieve profitably. The Company expects the
construction of their new manufacturing plant to be completed by the
third quarter of fiscal 1999. At that time the Company will be able to
commence manufacturing again. Marketing efforts will begin in the
spring of 1999.
The accompanying financial statements have been prepared on a basis of
going concern, which basis contemplates the realization of assets and
the satisfaction of liabilities as they become due through continuing
operations. No adjustments have been made to the accompanying financial
statements should the Company be unable to continue in existence, as the
outcome of management's plan is uncertain.
3. Other assets
Other assets were as follows at December 31:
1998 1997
Prepaid manufacturing expenses $2,000,000 $ -
Prepaid consulting services 360,000 360,000
Product rights not used in operations 22,000 22,000
Total other assets $2,382,000 $2,382,000
4. Equipment
Equipment were as follows at December 31:
1998 1997
Manufacturing equipment $ 486,126 $ 486,126
Office furniture and fixtures 391,575 391,020
Molds and patterns 2,888,444 2,888,444
Vehicles - 39,958
3,766,145 3,805,548
Less accumulated depreciation (1,391,853) (1,326,693)
Equipment, net $ 2,374,292 $ 2,478,855
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1998
5. Notes payable
Notes payable were as follows at December 31:
1998 1997
Note payable to Caterpillar Financial
Services
Corporation. $ - $2,341,760
Note payable to Vera Corporation. - 3,444,792
Note payable to Commercial Factors of
Portland, Inc. - 150,993
Note payable to California Factors &
Finance. - 313,958
Note payable to Voyager Select IPO Fund. - 508,219
Total notes payable $ - $6,898,033
6. Other accrued liabilities
Other accrued liabilities were as follows at December 31:
1998
1997
Property taxes $ - $ 53,462
Estimated liabilities for warranties - 109,688
Interest - 345,689
Excise taxes - 53,209
Other - 206,164
Total other accrued liabilities $ - $768,212
7. Long-term debt
Long-term debt were as follows at December 31:
1998
1997
Non-interest bearing note payable to
supplier. $ - $ 19,090
8% note payable to the Internal Revenue
Service. - 314,503
8% note payable to the Washington State
Labor, and Industries Division. -
9,878
8% note payable to Transamerica. - 50,000
Non-interest bearing note payable to
supplier. - 50,884
8% note payable to Cowlitz County,
Washington. - 7,874
Non-interest bearing note payable to
suppliers. - 509,056
Non-interest bearing unsecured note
payable to vendor. - 94,254
$ -
$1,055,539
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1998
7. Long-term debt (continued)
1998
1997
$ - $1,055,539
Non-interest bearing unsecured note
payable to a related party. - 56,901
11.5% contract payable to GMAC. -
7,874
10% convertible debenture payable. - 18,700
Convertible notes payable to individuals. - 445,724
-
1,606,436
Less amount due within one year -
451,627
Total Long-term debt $ - $1,154,809
8. Income taxes
Net deferred tax liabilities were as follows at December 31:
1998 1997
Deferred tax assets:
Net operating loss carryovers $ 6,983,795 $ 6,634,626
Other - 7,928
6,983,795 6,642,554
Valuation allowance for deferred tax
assets (6,983,795)
(6,634,626)
-
7,928
Deferred tax liabilities:
Depreciation (330,498)
(225,479)
Other - (4,991)
(330,498)
(230,470)
Net deferred tax liabilities $ (330,498) $ (222,542)
The Company had net operating loss carryovers as of December 31, 1998 of
approximately $20,540,000 ($19,510,000 for 1997) available to offset
future taxable income, if any. In the event of ownership changes
aggregating 50% or more in any three-year period, the amount of loss
carryovers that become available for utilization in any year may be
limited. If not utilized against future taxable income, the tax loss
carryovers will expire $3,100,000 in 2010; $2,000,000 in 2011;
$11,500,000 in 2012; $2,910,000 in 2013; and $1,030,000 in 2014.
9. Major customers
The Company distributes its yachts through a select group of nationwide
dealers. Sales to one of these dealers in 1997 represented 100% of net
sales.
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1998
10. Stock options
The Company has an employee stock option plan and has reserved 600,000
shares of common stock for issuance to key employees under the plan.
Options are generally granted at an exercise price approximating fair
market value on the date of grant and are exercisable over a five-year
period.
Outstanding options were as follows at December 31:
Shares
1998 1997
Outstanding options at beginning of year 315,000 -
Options granted - 360,000
Options exercised - -
Options expired - (45,000)
Options outstanding at end of year 315,000 315,000
Common shares available for grant 240,000 240,000
Expiration dates 02/2002 02/2002
Average per share exercise price $6.00 $6.00
Aggregate amount if fully exercised $1,890,000 $1,890,000
An officer of the Company was granted an option to purchase 120,000
shares of common stock at $9.25 per share, exercisable over a period of
two years beginning on the date the note payable with Vera Corporation
is fully paid.
This same officer has been granted an option to purchase 40,000 shares
of common stock exercisable as follows: up to 10,000 shares at $9.25 per
share by December 31, 1996; any unexercised shares and up to 10,000
additional shares at $12.50 per share by December 31,1997; any
unexercised shares and up to 10,000 additional shares at a per share
price equal to 50% of the bid price on the date exercised by December
31,1998; any unexercised shares and up to 10,000 additional shares at a
per share price of 50% of the bid price on the date exercised per share
by December 31,1999. Any unexercised shares expire on December 31,1999.
As of December 31, 1998, no shares had been exercised and 30,000 shares
of the Company's common stock was exercisable at a minimum aggregate
purchase price of $217,500.
11. Capital stock
The Company is authorized to issue 5,000,000 shares of no stated value
preferred stock.
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1998
11. Capital stock (continued)
In June 1998, the Company offered each debtor one share of preferred stock
of the Company for each ten dollars of debt they were owed. Notes payable,
accounts payable, accurued liabilities, convertible promissory notes payable,
and other long-term debtors were offered the conversion. The offering
required a majority of the debtors to agree to the terms of the conversion.
In July 1998, a majority of the debtors agreed to the offering and,
accordingly, all of the then outstanding debt was converted to preferred
stock. The Company is in the process of authorizing and issuing the
preferred stock.
In October 1998, the Company entered into an "Agreement for Payment of
Tax Obligations" with a Mexican corporation known as Grupo Clima S.A
DE C.V. ("Grupo"). Under the agreement, the Company issued 3,000,000
shares of the common stock to Grupo. In exchange, Grupo has agreed to
satisfy all of the claims with the Federal, State of Washington, Cowlitz
County, Washington, and any local taxing authorities against the Company.
Grupo intends to negotiate a settlement with each of the taxing
authorities, sale the common stock and use the proceeds to satisfy the
tax claims, and obtain a full release of liability for the Company and
any of its officers. Under the agreement, no additional shares may be
issued should the amount of the claims exceed the proceeds form the sale
of the common stock, nor is Grupo obligated to return to the Company any
proceeds in excess of the aggregate calims. The Company may be
contingently iliable for some or all of the taxing authorities claims
should Grupo not be able to obtain a full release of liability for the
Company and any of its officers.
In 1997, in a private placement, the Company issued $550,350 of notes
payable net of $104,626 of deferred financing costs. In 1998, the
Company converted the notes payable to preferred stock as part of the
debt conversion.
12. Commitment and contingencies
In September 1998, the Company entered into an agreement with a
Mexican corporation known as Yachts of the Americas' S.A. DE C.V.
("Yachts of the Americas"). Under the agreement, Yachts of the
Americas has agreed to build a manufacturing plant and facilities
and to manufacture boats and luxury motor yachts in strict compliance
with the specifications of the Company. The plant and all machinery
it builds or purchaes will remain in the ownership of Yachts of the
Americas. The primary reason for entering into this agreement by the
Company and Yachts of the Americas is to take advantage of the NAFTA
treaty benefits between the two countries. The Company expects to be
more competitive in the United States markets as a results of this
manufacturing agreement.
TOLLYCRAFT YACHT CORPORATION
Notes to Financial Statements
December 31, 1998
12. Commitment and contingencies (continued)
During 1998, the Company issued to Yachts of the Americas, 2,000,000
shares of its common stock in accorance with the agreement. In
exchange, Yachts of Americas has agreed to provide to the Company
$2,000,000 of future manufacturing services at their cost plus 20%.
In October 1997, the previous landlord of the building in which the
Company leased its office and manufacturing facilities seized
substantially all of the Company's personal property consisting of all
work-in-process inventories, raw material inventories and all
manufacturing equipment, office furniture and fixtures, and molds and
patterns for failure to pay rent under their lease agreement. The
landlord also filed a claim against the Company for approximately
$291,000. In December 1997, the landlord held a lien foreclosure sale
and sold all personal property it had seized.
The company believes it has a substantial claim against the landlord for
unlawfully conducting a landlord's lien foreclosure sale at a time after
the landlord's lien had expired. The Company also believes that certain
equipment; molds and patterns sold had preferential liens against them.
Based on a third party appraisal, the value of the molds and patterns
alone was approximately $5,900,000. The Company is vigorously pursuing
the matter and believes it has a reasonable possibility of a favorable
outcome. No adjustments have been made in the accompanying financial
statements for any gain or loss contingency, as the outcome of the
matter is uncertain.
In February 1997, the Company entered into a retainer agreement relating
to legal services for securities matters with compensation at a rate of
$6,000 per month payable either in common stock of the Company
registered with the Securities and Exchange Commission under Regulation
S-8, if available, and valued at the lowest bid price during the month
payable, or in restricted common stock valued at 50% of the lowest bid
during the month payable.
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby authorizes
D.R. Cooley, the agent for service named in this Report, with full power to
act alone, to file one or more amendments to this Report, which amendments may
make such changes in this Report as such agent for service deems appropriate,
and the Registrant and each such person hereby appoints such agent for service
as attorney-in-fact, with full power to act alone, to execute in the name and
in behalf of the Registrant and any such person, individually and in each
capacity stated below, any such amendments to this Report.
[SIGNATURES]
In accordance with Section 13 or 15(d) 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)
By: /s/_______________________________
Peter D. Hobbs, Chairman, Chief
Executive Officer, Secretary
By: /s/_______________________________
D.R. Cooley, President,
Chief Operating Officer
Chief Financial Officer
Date: 4-21-98
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/_______________________________ 4-21-98
D.R. Cooley President, Chief
Operating Officer,
Chief Financial
Officer, Director
/s/_______________________________ 4-21-98
Peter D. Hobbs Chairman, Chief
Executive Officer,
Secretary, Director
ASSEMBLY (MAQUILA) AND TECHNICAL ASSISTANCE AGREEMENT
This Agreement is entered into on this 1st. day of September of 1998, by and
between TOLLYCRAFT YACHT CORPORATION, a corporation with offices in the United
States of America, represented by Mr. Peter D. Hobbs, hereinafter referred to
as the "COMPANY", and YACHTS OF THE AMERICAS, S.A. DE C.V. referred to as the
"CONTRACTOR", represented by Mr. Manuel Gomez, in his capacity as Sole
Administrator, pursuant to the following Recitals and Clauses:
R E C I T A L S :
a) That on March 11, of this year, stock certificate number 3649 representing
2,000,000 shares of Tollycraft Yacht Corporation stock, was issued in favor
of Manuel Gomez Ramos, trust account; said certificate was surrendered and
on the 14th of May of this year, certificates number 3686 through 3710
representing in total the same amount of shares as certificate 3649 were
issued in favor of Manuel Gomez Ramos, Client Trust Account, Noman, S. de
R.L. client trust account, Petrugo Importaciones, S.A. de C.V. client trust
account, Nora Torres Client Trust Account and Daniel Trujillo Client Trust
Account.
b) Yachts of the Americas, S.A. de C.V. is a Mexican corporation owned by
several Mexican nationals as well as several Mexican corporations.
It was specifically formed by these Mexican entities because of Reg S
shares that have been distributed to them as an inducement for their
participation in the formation of the above company. As a result Yachts of
the Americas has agreed to the building of a plant and facility in a
location directed by Tollycraft Yachts Inc. The facility itself will be
designed and constructed in conformance to plans developed by Tollycraft
Yachts. In addition the facility will be equiped with a five axle roter
tooling machine capable of the production of molds for Tollycraft. The
plant and all machinery will remain in the ownership of Yachts of the
Americas.
c) The COMPANY states that it desires that the CONTRACTOR manufacture for it,
in the CONTRACTOR's industrial facilities in Merida, Yucatan, Mexico, boats
and yachts of any type.
d) The CONTRACTOR states it is willing to manufacture for the COMPANY such
boats and yachts of any type, under the terms and conditions hereinafter
mentioned.
e) One of the primary reasons for which the CONTRACTOR entered into this
agreement is the use of the COMPANY's name in attracting other major boat
manufacturers to it's facilities in Mexico.
f) The COMPANY's primary reason for entering into this agreement, is the
ability to take advantage of the NAFTA treaty benefits, allowing it to be
more competitive in the United States market.
HAVING STATED THE FOREGOING, THE PARTIES AGREE ON THE FOLLOWING:
C L A U S E S :
FIRST. The CONTRACTOR covenants and agrees to contract, with the COMPANY, for
the manufacture of boats and yachts of any type, as the COMPANY may wish to
have manufactured in Merida, Yucatan, United Mexican States, utilizing
equipment and machinery (tools and spare parts) which have been provided or
which henceforth shall be provided by the COMPANY, as well as its own, which
are to be used exclusively in and for the work that is to be carried out by
the CONTRACTOR for the COMPANY. The CONTRACTOR guarantees that the manufacture
of such products shall be carried out in strict compliance with the
instructions and specifications of the COMPANY.
SECOND. Those articles, materials, and component parts for the products
referred to above, for the purposes indicated in Clause First above, are and
at all times shall continue to be, the sole and exclusive property of the
COMPANY, and once the components and products covered by this Contract have
been in Mexico, they must be returned by the CONTRACTOR to the COMPANY, to
such places and destinations as the COMPANY may determine. The COMPANY shall
bear the corresponding shipping charges, freight cartage and insurance while
in transit to and from Mexico, and duties on importation into the United
States of America.
THIRD. The CONTRACTOR may not, under any circumstances or for any reason sell,
or in any other manner dispose of, any of the component parts or any of the
repaired and/or manufactured products hereinabove referred to, within the
United Mexican States or the United States of America or any other place.
FOURTH. Any samples of the product officially requested by an agency or
department of the Federal Government of the United Mexican States, may only be
delivered upon written authorization of the COMPANY and only when official
receipt is given by the requesting agency or department.
FIFTH. The COMPANY shall determine at its sole discretion at all times, what
products will be repaired and/or manufactured by the CONTRACTOR, as well as in
what amounts, numbers or quantities and the types and qualities of materials
that will be used by the CONTRACTOR in performing the work hereby contracted.
SIXTH. The COMPANY shall notify the CONTRACTOR, whenever possible of its
expected production schedule of the various components and/or products and the
parts required therefor, for a period of one year, at least thirty (30) days
in advance, so that the CONTRACTOR may obtain the necessary permits or
licenses from the Federal Government of the United Mexican States for the
import of such component parts.
SEVENTH. In consideration of shares delivered, the CONTRACTOR agrees to pay to
the COMPANY the sum of $2,000,000.00 dollars in services, to be applied at
cost plus 20%. The manufacture of Boats and Yachts by the CONTRACTOR for the
COMPANY at the CONTRACTOR's facilities in Mexico shall never be higher than
50% of the total production of the CONTRACTOR, unless otherwise agreed to by
the parties.
EIGHTH. This Contract shall continue in force, for a maximum of 5 (five) years
or until terminated by either party. The CONTRACTOR shall continue to build
boats at cost for the COMPANY, for as long as this contract is in force.
NINETH. It is agreed between the parties that the COMPANY shall make available
to the CONTRACTOR the benefit of the knowledge know-how and commercial,
technical and practical experience, useful in the organization, management and
operation of the CONTRACTOR's facilities, and shall render certain management
assistance and services to the CONTRACTOR in connection therewith, so that:
a) All the obligations assumed by the CONTRACTOR in accordance herewith are
properly and efficiently complied with;
b) The COMPANY may be assured that all the materials, parts and components
delivered to the CONTRACTOR for the purposes indicated in Clause First
hereof are effectively utilized exclusively for such purposes;
c) The facility may be staffed by qualified management and technical
personnel; and
d) All efforts may be devoted to the achievement of maximum long-range profits
and growth of the COMPANY and the CONTRACTOR.
TENTH. The assistance and services to be rendered and performed by the COMPANY
in the fulfillment of the foregoing undertaking shall include the following:
a) Advise and assist in determining the number and types of employees
necessary to operate and manage the CONTRACTOR's facilities, and the scope
and requirements of assignments and positions;
b) Advise and assist in the establishment of purchasing procedures and in the
procurement of raw materials and other supplies;
c) Advise and assist in the operation of the CONTRACTOR's facilities,
including the scheduling of production, the establishment and maintenance
of production, quality and inventory controls;
d) Advise with respect to the packaging and storing of all materials;
e) Advise and assist in the establishment of maintenance practices and
procedures and in the development of an inventory control for materials;
f) Advise and assist in the establishment and maintenance of accounting,
auditing and budget procedures, cost analysis and capital and operating
cost controls;
g) Advise and assist in obtaining financing and the revision of capital
structure when needed, to provide for growth of the business;
h) Provide training for supervisory and production personnel;
i) Provide quality control services for components and finished products; and
j) Advise and assist in the installation of and operational training for new
equipment.
The above assistance and services shall be rendered by those employees which
the COMPANY may consider appropriate. The individuals involved in the
rendering of such assistance shall at all times be employees of the COMPANY
and the CONTRACTOR assumes no liability for their salaries and other benefits
which shall be covered at all times and in their entirety by the COMPANY.
Those individuals shall under no circumstances be considered to be
subordinated to the CONTRACTOR.
ELEVENTH. The COMPANY will be liable and assumes all responsibility that may
derive from the invasion, damage, affectation, or loss that may be caused to
any third party's intangible right with regard to the technical assistance to
be provided under the terms hereunder.
TWELFTH. The CONTRACTOR covenants and agrees to comply with all existing laws
and regulations in the United Mexican States in order to avoid penalties or
Government action, so as to hold all machinery, equipment, materials, parts
and tools, of any type or nature, or finished products, which are owned by the
COMPANY, free of any liens, claims or charges by any agency or department of
the Federal, State or Municipal Governments.
THIRTEENTH. The COMPANY hereby grants its full consent for the CONTRACTOR to
use the COMPANY's name, during the period that this contract is in force
without any limitation or remuneration owed to the COMPANY.
FOURTEENTH. For the interpretation and compliance of this Agreement, the
parties hereto expressly submit themselves to the competent Courts of the
state of Yucatan, Mexico, waiving any right that they may have to any other
jurisdiction, by reason of their present or future domiciles.
FIFTEENTH. This Agreement shall substitute any and all agreements previously
entered into between the parties and which might be opposed to the provisions
hereof. The parties agree that this Agreement is to be construed under the
laws of the United Mexican States, and no changes will be valid except when
made in writing by both parties.
HAVING READ THE ABOVE AGREEMENT, the parties accepted and ratified it, and
signed it in Merida, Yucatan, Mexico.
The COMPANY The CONTRACTOR
TOLLYCRAFT YACHT CORPORATION YACHTS OF THE AMERICAS,
S.A. DE C.V.
By: By:
Peter D. Hobbs Manuel Gomez
Chairman, CEO Sole Administrator
AGREEMENT FOR PAYMENT
OF TAX OBLIGATIONS
1. Effective Date: October 9, 1998.
2. Parties: Tollycraft Yacht Corp. Inc., a
Nevada Corporation, hereinafter
Referred to as TOLLY; and
GRUPO CLIMA, S.A. DE C.V.
a Mexican corporation, hereinafter
referred to as GC.
3. Recitals:
A. TOLLY is a Nevada corporation, in good standing, with all fees and licenses
paid for.
B. GC is a Mexican corporation, in good standing, with all fees and licenses
paid for.
C. TOLLY was formerly a Washington corporation, with its principal place of
business located in Kelso, Cowlitz County, Washington.
D. TOLLY is a manufacturer of yachts, and while manufacturing yachts at its
former principal place of business in Kelso, Cowlitz County, Washington,
incurred debt in the form of unpaid employee withholding taxes, workers
compensation premiums, personal property taxes and other associated tax
obligations that are now due and payable to the U.S. Government, the State of
Washington and Cowlitz County, Washington.
E. Both the U.S. Government and the State of Washington have commenced
enforcement action against TOLLY and its officers and directors in an effort
to collect the outstanding tax obligations from the assets of TOLLY or from
the assets of TOLLY's officers and directors as allowed by their respective
statutes, rules and regulations.
F. TOLLY has undertaken a restructuring plan by which it has converted its
outstanding trade debt to preferred stock of the company, however, due to the
nature of the tax obligations, TOLLY cannot convert the presently due tax
obligations to preferred stock as it has done with substantially all of its
outstanding trade debt obligations.
G. GC has agreed to negotiate with and purchase the claims of all of the
taxing authorities as part of TOLLY's restructuring in exchange for the
compensation set fourth below, and TOLLY and GC desire to set forth their
respective duties and responsibilities herein.
NOW, THEREFORE in consideration of the mutual covenants and promises of the
parties hereto, the parties agree as follows:
1. The Recitals set forth above are incorporated herein by this reference.
2. TOLLY shall transfer to GC three million (3,000,000) shares of 144 common
stock TOLLY to be liquidated by GC to satisfy the claims of any and all
Federal, State, County and/or Municipal taxing authority that has a claim
against TOLLY and/or any of TOLLY's officers or directors for and such tax
incurred by TOLLY, including any tax obligations assumed by TOLLY from any of
its predecessors in interest.
3. GC acknowledges that the 144 stock transferred to GC by SEC regulation,
bears a restriction preventing the stock from being traded during a one year
period after the date is issued to GC hereinafter "the RESTRICTED PERIOD".
4. During the RESTRICTED PERIOD, GC shall negotiate with each and every taxing
authority for the payment of its claim from the liquidation of the 144 stock
and shall obtain, as part of the settlement of the taxing authority's claim, a
full release of liability for TOLLY and any and all of TOLLY's past or present
officers and/or directors who may have been assessed with personal liability
for any such claim.
5. GC shall not enter into any payment agreement with any taxing authority
without first obtaining the approval of the Board of Directors of TOLLY and
approval shall not be unreasonably withheld.
6. Once GC has procured agreements for payments of the taxes and for releases
for TOLLY and any and all officers and/or directors who may be individually
liable for any such tax from the taxing authorities, and the RESTRICTED PERIOD
has lapsed, GC may begin to liquidate the common stock to pay the claims of
the taxing authorities.
7. GC shall provide TOLLY with a full accounting of the liquidation of the 144
stock, the payments made to each taxing authority and the balance remaining to
be paid on each claim on a quarterly basis, or more often as requested by TOLLY.
8. To the extent that GC is able to negotiate discounts with the taxing
authorities and it is not necessary to liquidate the full number of shares to
fully satisfy the claims of the taxing authorities and obtain complete
releases for TOLLY and any and all of its current and past officers and/or
directors who may have individual liability for such tax, GC shall be entitled
to retain the balance of the stock as compensation for its efforts.
9. This Agreeement shall be governed by the laws of the State of Washington
and any action to enforce the terms of this Agreement shall be brought in the
Superior Court of Clark County, Washington. The prevailing party (ies) in any
such litigation shall be entitled to a reasonable sum for its attorneys fees
as determined by the court in such litigation, together with the costs of
suit. In the event that any party incurs any expenses in enforcing any of the
provisions of this Agreement, whether in or out of court, the other party
agrees to pay such expenses including a reasonable attorneys fee.
10. This Agreement shall be binding upon and shall Inure to the benefit of
the parties hereto and their respective legal representatives, successors and
assigns. GC cannot assign its rights or responsibilities under this agreement
without the approval of TOLLY, which approval may be withheld by TOLLY for
any reason or for no reason at all.
11. This Agreement shall constitute the entire agreement among the parties to
this Agreement with respect to the subject matter set forth above, and
supersedes all prior agreements or understandings, written or oral, of all of
the parties. Any modifications or alteration of this agreement shall be in
writing and shall not be enforceable unless and until it executed by both
parties to this Agreement. Failure of any party to this Agreement to enforce
at any time any of the provisions of this Agreement shall in no way be
construed to be a waiver of such provisions, nor in any way affect the
validity of this Agreement or any party thereto or any right of any party
thereafter to enforce each and every provision of this Agreement. No waiver of
any breach of this Agreement shall be held to be a waiver of any other
subsequent breach.
IN WITNESS WHEREOF, the parties executed this Agreement at Tijuana, B.C.
Mexico on the date set forth above.
TOLLYCRAFT YACHT CORP., INC. GRUPO CLIMA, S.A. DE C.V.
By: By: Jos, de Jesos Esparza Pe a
Its: Its: Legal Representative.
21 Subsidiaries of the registrant
Tollycraft Yacht Corporation - Minnesota
Tollycraft Acquisition Corporation - Washington
CONSENT OF INDEPENDENT AUDITOR
I consent to the reference of my report dated March 26, 1999 on the financial
statements of Tollycraft Yacht Corporation for the year ended December 31, 1998
included in the 1998 Annual Report to the Shareholders on Form 10-KSB.
/s/
Timothy L. Steers
Certified Public Accountant, LLC
Portland, Oregon
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1998 CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE-MONTH
PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 145
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 400,417
<CURRENT-ASSETS> 400,562
<PP&E> 2,374,292
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,156,854
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
11,616,300
<COMMON> 9,654,206
<OTHER-SE> (16,444,150)
<TOTAL-LIABILITY-AND-EQUITY> 5,156,854
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 519,669
<LOSS-PROVISION> 14,528
<INTEREST-EXPENSE> 504,718
<INCOME-PRETAX> (1,038,915)
<INCOME-TAX> 107,956
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,146,871)
<EPS-PRIMARY> (.229)
<EPS-DILUTED> (.229)
</TABLE>
