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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: DECEMBER 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For transition period from _________ to _________
Commission File Number: BDC 814-178
FIRST COLONIAL VENTURES, LTD.
(Name of small business issuer in its charter)
UTAH 87-0421903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6151 WEST CENTURY BOULEVARD, SUITE #1018, LOS ANGELES, CA. 90045
(Address of principal executive offices)(Zip code)
Issuer's telephone number: (310) 642-0200
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.001 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 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 / / No /X/
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained in this form, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10 KSB: / /
Issuer's revenues for its most recent fiscal year: $3,250
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 31, 1997, was $18,356,311, based on the average selling
price for the month of December 1996.
The issuer had 10,716,182 shares of common stock outstanding as of March 31,
1997.
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format: Yes / / No /X/
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) General Development of Business
(1) First Colonial Ventures, Ltd. (the "Registrant") is a Business
Development Company ("BDC") which is a form of closed-end, non-diversified
investment company under the Investment Company Act of 1940 (the "Investment
Company Act"). A BDC generally must maintain 70% of its assets in new,
financially troubled or otherwise qualified companies and offer significant
managerial assistance to such companies. A BDC is not subject to the full
extent of regulation under the Investment Company Act. The Registrant primarily
is engaged in the business of investing in and providing managerial assistance
to developing companies which, in its opinion, would have a significant
potential for growth. The Registrant's investment objective is to achieve long-
term capital appreciation, rather than current income on its investments. There
is no assurance that the Company's investment objective will be achieved.
The Registrant was organized under the laws of the State of Utah in 1985 for the
purpose of acquiring a participating interest in one or more businesses.
Through its year ended December 31, 1994, the Registrant conducted business
through various wholly-owned subsidiaries until electing in 1995 to become a
BDC. In January 1995, the Registrant elected to become an Investment Company
pursuant to the Investment Company Act of 1940. In June 1995, the Registrant
terminated its Investment Company election and elected to become a BDC, as
defined in the Small Business Investment Incentive Act of 1980, which Act is an
amendment to the Investment Company Act of 1940. The election resulted in the
Registrant becoming a specialized type of investment company. Consistent with
this change in type of business entity, during the year ended December 31, 1995,
the Registrant changed its method of financial reporting and valuation of
investments from cost to fair value.
The 1987 acquisition of Contemporary Resources, Inc. ("CRI") by the Registrant
was accounted for as a reverse acquisition. Therefore, through December 31,
1994, the Registrant presented consolidated financial statements with the equity
section including the outstanding common stock of the Registrant and the
accumulated deficit of CRI. However, in conjunction with the 1995 change in
type of entity and change in accounting method, the financial statements of the
Registrant for December 31, 1995, include only the accounts of the Registrant,
First Colonial Ventures, Ltd., because pursuant to industry practice, wholly-
owned subsidiaries which are neither investment companies or business
development companies are not consolidated.
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Registrant's Board of Directors declared a 1 for 100 reverse stock split in
October 1991, and a 1 for 20 reverse stock split in December 1995. All common
share amounts stated herein have been restated to give effect to these stock
splits.
On May 1, 1987, the Registrant acquired 100% of the outstanding capital stock of
Contemporary Resources, Inc., a California corporation that was formerly known
as A.J.H. Corporation, Inc., dba Michaud ("CRI"), in a stock purchase
transaction pursuant to which the Registrant issued 120,000 shares of its Common
Stock. CRI is engaged in the distribution of disposable items to the airline
and hotel industries. The Registrant accounted for this acquisition as a
reverse purchase.
The acquisition was treated as an acquisition of the net assets of the
Registrant by CRI. As a result of the reverse acquisition, the equity section
of the December 31, 1994, and prior consolidated financial statements reflected
the outstanding common stock of the Registrant and the accumulated deficit of
CRI since its inception.
On October 15, 1993, the Registrant and its then newly-formed wholly-owned
subsidiary, Flower Environments, Inc., a Nevada corporation ("FEI"), entered
into an Asset Purchase Agreement to acquire certain assets that it intended to
utilize to commence the operation of a flower display irrigation equipment
business. The agreement provided for the payment of $10,000 and the issuance of
50,000 shares of the Registrant's restricted stock to the seller. The business
was subsequently sold to a foreign buyer in November 1994 for a short term
receivable of $50,000, cash of $25,000 cash and a non-interest bearing note of
$150,000 (recorded at present value of future cash flows of $92,200). At
December 31, 1995, the note was in default. The foreign buyer is withholding
payment until certain U.S. patents included in the sale have been transferred to
the buyer's name. The Registrant expects this to occur during 1997.
In conjunction with the Asset Purchase Agreement, the Registrant also entered
into a Consulting agreement with the prior owner of the assets purchased. The
Consulting agreement was to expire in April 1995, and provided for base
compensation for the years ending December 31, 1994 and 1995 of $84,000 and
$32,000, respectively. The consulting agreement was terminated July 25, 1994.
During 1996, FEI was re-named First Colonial Real Estate, Ltd. ("FCREL").
On August 10, 1994, the Registrant acquired the rights to 50% of the stock of
Sherwood Properties, Inc. ("Sherwood"), a non-public Nevada company incorporated
in February 1995, in exchange for common stock. Sherwood was formed to hold 50%
of the stock of a Mississippi corporation that owns, subject to a land sale
contract, certain residential lots and is a joint venture partner in the
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construction and sale of homes on the lots. The Mississippi corporation has
been unable to pay certain installments required by the land sale contract,
accordingly, that contract is in default. The contract provides the sellers
with the option to cancel the contract should default occur. For these reasons,
the Registrant has written down its investment in Sherwood to zero until the
Sherwood financial condition improves. Sherwood conducted no operations during
1995.
In December 1994 the Registrant acquired a 50% interest in Gulf Coast Hotels,
Inc. ("Gulf Coast") in exchange for common stock. Gulf Coast has a contract to
acquire 1.435 acres of waterfront real estate in Biloxi, Mississippi for the
purpose of constructing a commercial high rise hotel and condominium. The
property has 250 feet of frontage along the Gulf of Mexico. Gulf Coast has been
unable to raise the approximately $1,000,000 necessary to complete the down
payment, and although the seller has provided extensions, the contract is in
default. For these reasons, the Registrant has written down its investment in
Gulf Coast to zero until the Gulf Coast financial condition improves. Gulf
Coast conducted no operations during 1995.
On July 13, 1995, the Registrant acquired a 100% interest, consisting of an
assignment of a lease, in the oil and gas rights to property located in Concho
County, Texas, in exchange for common stock. The Registrant assigned its rights
in the lease to its wholly-owned investee. First Colonial Real Estate, Ltd.,
("FCREL") which intends to find a partner or otherwise raise the capital
necessary to drill wells, extract and sell the oil and natural gas located on
the property. No business activity was conducted during 1995 with respect to
the oil and gas lease.
Also in July 1995, the Registrant acquired 50% of the stock of First Colonial
Funds, Ltd., a non-public Nevada investment adviser, and 25% of the stock of
First Colonial Fund's subsidiary, Colonial Funds, Limited, a non-public
Commonwealth of the Bahamas off-shore fund with investments in various
companies, in an exchange of common stock. During 1996, the Colonial Funds,
Limited stock was acquired by the Registrant's wholly-owned investee, YPE, Inc,
to conform with BDC requirements. Due to its 50% ownership of First Colonial
Funds, Ltd., which owns 75% of Colonial Funds, Limited, and its 100% ownership
of YPE, Inc., which owns 25% of Colonial Funds, Limited, the Registrant controls
62.5% of Colonial Funds, Limited. The most significant asset owned by both
First Colonial Funds, Ltd. and Colonial Funds, Limited, at December 31, 1995,
was shares of the Registrant.
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(b) Industry Segments
Through the Company's wholly-owned subsidiary, CRI, the Company operated in one
reportable segment during the years ended December 31, 1994 and 1995.
Information with regard to the business and operations of the Company is
presented below.
CRI:
CRI supplies specialty items including toiletries, amenity kits and disposables
to the airline and hotel industries. CRI grants credit on open account to its
customers, all of which are based in the United States. CRI's operations are
located adjacent to Los Angeles International Airport and its customers include
various airlines and national and international hotel chains.
Typically, CRI negotiates a sales contract with each customer, which specifies
the delivery dates for the ensuing year. After CRI has entered into these
contracts, CRI then negotiates a contract of a like-term with its foreign
suppliers containing prices valid for a specified period of time and delivery
dates that generally correspond to the dates when CRI is to supply the products
to its customers.
All of CRI's products are sold through in-house sales representatives, and are
either delivered direct from the manufacturer in Asia to the customer or, if it
is necessary to inventory the merchandise, the inventory is held in a public
warehouse facility for delivery to the customer on demand.
Approximately, 90% of CRI's suppliers are located in South Korea, Taiwan, Hong
Kong and China. Except for suppliers in Korea, letters of credit generally are
not required.
CRI operates in a highly competitive industry against competitors of various
sizes, most of which are larger and better capitalized than CRI. Competition
occurs in several forms, including price, terms, selection and delivery time.
CRI's sales and purchases generally are highly concentrated. During the year
ended December 31, 1995, CRI had sales to four customers representing 21%, 16%,
12%, and 12% of total sales, respectively. During the year ended December 31,
1994, CRI had sales to two customers representing 25% and 10% of total sales,
respectively. During the year ended December 31, 1995, CRI has purchases from
three vendors representing 17%, 15%, and 13% of inventory purchases,
respectively. During the year ended December 31, 1994, CRI had purchases from
three vendors representing 37%, 13%, and 12% of inventory purchases,
respectively.
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FEI:
FEI acquired the patents and technology to a system of storing and displaying
fresh cut flowers in water in a proprietary fixture. The fixture pumps water
through a system that emphasizes the sound of falling water, and an ultra-violet
light located in the base of the fixture, combined with proper additives and
regular replacement of the water, can keep the water free of harmful levels of
microbial contamination. Otherwise, the same water, if stagnant, would become a
breeding ground for microbes to multiply, occupy the stem and cause flower
death. The fixture also prevents the slime and bad odors that can develop from
stagnant water.
FEI's long-range plan was to offer various versions of such fixtures for sale to
end users such as supermarkets and flower shops. Three models were available.
As an additional line of business, FEI had established a flower route system
whereby a small version of the fixture is placed in locations that have never
sold flowers before. FEI provided flowers in those fixtures on a consignment
basis and shared the revenues with the stores. FEI had 45 such fixtures
outstanding. In addition, FEI wanted to sell distributorships for such fixtures
along geographic lines.
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Employees:
As of December 31, 1995, the Registrant had no employees. CRI had a total of
eight full-time employees, certain of which also provided services to the
Registrant. None of the CRI's employees are subject to a collective bargaining
agreement, and the Company has not experienced any slow-downs, strikes or work
stoppages due to labor difficulties. The Company considers its employee
relations to be satisfactory.
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Transactions with Turbo, Inc:
Effective March 31, 1992, Turbo, Inc., a Nevada corporation ("Turbo"), then a
newly-formed, wholly-owned subsidiary of Gerant Industries, Inc.
("Gerant")(formerly known as L.A. Entertainment, Inc.), acquired 100% of the
outstanding common stock of CRI from the Company. In exchange, the Company
received 49% of the outstanding common stock of Turbo and a $500,000 note made
by Turbo in favor of the Company. The note accrued interest at 10% per annum,
and was payable on demand. As a condition of the acquisition, the $500,000 note
was to be collateral to secure the intercompany debt of the Company to CRI. On
May 22, 1992, the Company liquidated its $500,000 debt to CRI by assigning the
$500,000 note to CRI. Also, the Company agreed to convert the subordinated note
due from CRI of $550,000 to contributed capital.
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As incentive for the Company to exchange its 100% interest in CRI for a 49%
interest in Turbo, Gerant agreed to capitalize Turbo at $1,500,000 by issuing
4,383,710 shares of its restricted common stock to Turbo valued at the fair
market value of $.31 per share. In conjunction with this transaction, Gerant
was required to register the shares of common stock for sale to the public by
December 31, 1992, failing which the acquisition agreement would be
automatically rescinded.
Effective June 30, 1992, the Company and Gerant sold their aggregate 100%
shareholder interest in Turbo (the parent of CRI) for a combined 80% equity
interest in Lucky Chance Mining Company, Inc., a publicly-held Arizona
Corporation ("Lucky"), with Turbo thus becoming a wholly-owned subsidiary of
Lucky. Lucky had filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code on August 22, 1989, and operated as debtor-in-
possession. Lucky confirmed its Second Amended Plan of Reorganization on June
8, 1992, and the Order Confirming Debtor's Second Amended Plan of Reorganization
was entered by the Bankruptcy Court on June 17, 1992. Lucky subsequently merged
with and into Turbo, resulting in Turbo being the surviving public company ("New
Turbo"). Daniel Lezak, Gerant's President and Director, was Lucky's President
and controlling shareholder from July 1989 through June 30, 1992. Murray W.
Goldenberg, the President of the Company, CRI and Turbo, was subsequently
appointed as the President of New Turbo.
Effective September 30, 1992, Gerant completed its obligation to provide
$500,000 of additional funding to New Turbo by issuing 2,285,715 shares of its
restricted common stock at the then fair market value of $.22 per share, in
exchange for which Gerant was to receive 10,000,000 shares of New Turbo's
restricted common stock.
In conjunction with the aforedescribed transactions, New Turbo received an
aggregate of 7,124,425 shares of common stock of Gerant valued at $2,000,000.
On or about March 31, 1993, New Turbo sold 3,000,000 shares of such common stock
for $216,000. During June 1993, New Turbo sold an additional 250,000 shares of
such common stock for $20,000.
As of December 31, 1992, Gerant had not registered the shares of common stock
issued to Turbo. This failure resulted in the automatic rescission of the
original agreement effective March 31, 1992. Subsequent to December 31, 1992,
in response to requests from Gerant, the Company negotiated with Gerant
concerning a possible restructuring of the original agreement, but no agreement
could be reached. Therefore, in the opinion of the Company's management, the
original agreement was never consummated, the December 31, 1992 rescission was
effective, and CRI continues to be a wholly-owned subsidiary of the Company.
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On April 6, 1994, Gerant filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code.
On August 26, 1994 Gerant filed suit against Murray W. Goldenberg, First
Colonial Ventures, Ltd., CRI and Turbo, Inc. The adversary proceeding in the
bankruptcy court was dismissed with prejudice on February 22, 1995 and without
prejudice as to their right to file a new action in a court other than the
bankruptcy court.
On March 1, 1996, a new complaint was filed, however, prior to trial the matter
was settled on June 26, 1996, at a cost of $30,000 to the Registrant.
(4) Narrative Description of Business
The Registrant is a close-end, non-diversified investment company under the
Investment Company Act and has elected to become a business development company
under that act. The Registrant's investment objective is to achieve long-term
capital appreciation, rather than current income, on its investment. There can
be no assurance that this objective will be realized. The Registrant's
investment decisions are made by its management in accordance with policies
approved by its board of directors. The Registrant does not have a registered
investment advisor. In addition, the Registrant does not operate pursuant to a
written investment advisory agreement that must be approved periodically by
shareholders. The Registrant relies solely upon its management, particularly
its officers on a day to day basis, and also on the experience of its directors,
in making investment decisions.
In accordance with this objective, the Registrant consults with its investees
with respect to obtaining capital and offers managerial assistance to selected
businesses that, in the opinion of the Registrant's management, have a
significant potential for growth.
In addition to acquiring investment positions in new and developing companies,
the Registrant also seeks investees in more mature privately and publicly-held
companies which the Registrant believes could be further developed or
revitalized, some of which may be experiencing financial difficulties.
The Registrant plans to take advantage of other opportunities to maintain and
create independent companies with a significant potential for growth. The
Registrant's priorities for the future will be to (1) maximize the value and
liquidity of its present investees, (2) increase its cash flow, sources of
income tax benefits and intermediate term value through the acquisition of
securities or assets of more established companies, (3) make new investments in
more mature companies, and (4) to a lesser degree, make a few small higher risk
investments in new and developing companies.
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The Registrant has no fixed policy as to the business or industry group in
which it may invest or as to the amount or type of securities or assets that it
may acquire. 1995 was the Registrant's first year as a BDC, and the Registrant
made investments in new and developing companies whose securities had no
established public market. These companies were unable to obtain significant
capital on reasonable terms from conventional sources. However, in future years
the Registrant anticipates seeking out and evaluating investments in more mature
companies. The Registrant endeavors to assist its investee companies and
management teams in devising realistic business strategies and obtaining
necessary financing.
The Registrant does not currently intend to pay cash dividends.
The Registrant believes that the key to achieving its objectives is finding and
supporting business executives who have the ability, entrepreneurial motivation
and experience required to build independent companies with a significant
potential for growth. In the Registrant's view, it is more difficult to locate
and attract capable executives than to identify, select and finance promising
investment opportunities.
Business development is by nature a high-risk activity that can result in
substantial losses. The companies in which the Registrant invests and will
invest, especially in the early stages of an investment, often lack effective
management, face operating problems and incur substantial losses. However, the
Registrant is seeking out and evaluating investments in more mature companies.
Potential investees include established businesses which may be experiencing
severe financial or operating difficulties or may, in the opinion of management,
be ineffectively managed or have the potential for substantial growth or
reorganization into separate independent companies.
The Registrant attempts to reduce the level of its investment risks through one
or more of the following:
(i) carefully investigating potential investees;
(ii) financing only what it believes to be practical business opportunities
as contrasted with research projects;
(iii) selecting effective, entrepreneurial management for its investees;
(iv) providing active managerial assistance and support to investees;
(v) obtaining, alone or with others, actual or working control of its
investees;
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(vi) supporting the investees in obtaining necessary financing and
arranging major contracts, joint ventures or mergers and acquisitions where
feasible; and
(vii) maintaining sufficient capital resources to make follow-up investments
where necessary, appropriate and feasible.
Investment Policies:
The Registrant has elected to be regulated as a business development company and
is subject to the provisions of Sections 55 through 65 of the Investment Company
Act made applicable to business development companies by Section 59 of the
Investment Company Act. In accordance with those provisions, the Registrant's
investment policies are defined and subject to certain limitations.
Furthermore, under Section 58 of the Investment Company Act, the Registrant may
not withdraw its election to be so regulated without the consent of a majority
of its stockholders. If the Registrant were to withdraw its election to be
regulated as a BDC, it may be subject full regulation under of the Investment
Company Act as if it were a closed-end investment company.
The Registrant has no fixed policy as to the business or industry group in which
it may invest or as to the amount or type of securities or assets that it may
acquire. However, the Registrant, at this time, is seeking out and evaluating
investments in more mature companies. During 1995, the Registrant invested in
assets that are not qualifying assets under Section 55 of the Investment Company
Act; however, such unqualified investment was inadvertent. The Registrant does
not intend to fall below the 70% requirement as set forth in Section 55.
The Registrant endeavors to achieve its objectives in accordance with the
following general policies:
(i) The Registrant acquires securities through negotiated private
placement transactions directly from the investee company, its affiliates, or
third parties, or through open market transactions.
(ii) The Registrant attempts to acquire, consistent with the Registrant's
capital resources, a large or controlling interest in its investees through
purchases of equity securities with loans, guarantees, and common stock of the
Registrant.
(iii) The Registrant may make additional or "follow-on" investments in or
loans to its investees when appropriate to sustain the investees or to enhance
or protect the Registrant's existing investment.
(iv) The Registrant determines the length of time it will retain its
investment by evaluating the facts and circumstances of
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each investee and its relationship with such investee. The Registrant
anticipates retaining investments for a relatively long period, generally many
years, with the result that portfolio turnover will be low. Investments are
retained until, in the opinion of the Registrant, the investee company has a
demonstrated record of successful operations and there is a meaningful public
market for its securities which reflects the investment value the Registrant
sought (or such a market can be readily established) or until the Registrant
decides that its investment is not likely to result in future long-term capital
appreciation.
Valuation Policy Guidelines
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The Registrant's Board of Directors is responsible for the valuation of the
Registrant's assets in accordance with its approved guidelines. The
registrant's Board of Directors is responsible for (1) recommending overall
valuation guidelines and (2) the valuation of specific investments.
There is a range of values which are reasonable for an investment at any
particular time. Fair value is generally defined as the price at which the
investment in question could change hands, assuming that both parties to the
transaction are under no unusual pressure to buy or sell and both have
reasonable knowledge of all the relevant facts. To increase objectivity in
valuing the securities, the Registrant uses the best information available
including the following criteria.
The Registrant uses four basic methods of valuation for its investments and
there are variations within each of these methods. The Registrant's Board of
Directors has determined that the Registrant's four basic valuation methods
constitute fair value. As an investee evolves, its progress usually requires
changes in the Registrant's method of valuing the investee's securities. The
Registrant's investment is separated into its component parts (such as debt,
preferred stock, common stock or warrants), and each component is valued
separately to arrive at total value. The Company believes that a mixture of
valuation methods is often essential to represent fairly the value of the
Registrant's investment position in an investee. For example, one method may be
appropriate for the equity securities of a company while another method may be
appropriate for the senior securities of the same company.
The cost method values an investment based on its original cost to the Company,
adjusted for the amortization of original issue discount, accrued interest and
certain capitalized expenditures of the Company. While the cost method is the
simplest method of valuation, it is often the most unreliable because it is
applied in the early stages of an investee's development and is often not
directly tied to objective measurements. The original cost may be adjusted by
the Board of Directors in good faith taking into
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account such factors as available financial information of the investee, the
nature and duration of any restrictions as to resale and other factors which
influence the market in which a security is purchased or sold. All investments
are carried at cost until significant positive or adverse events subsequent to
the date of the original investment call for a change to another method. Some
examples of such events are: (1) a major recapitalization; (2) a major
refinancing; (3) a significant third-party transaction; (4) the development of
a meaningful public market for the investee's common stock; and (5) material
positive or adverse changes in the investee's business.
The appraisal method is used to value an investment position based upon a
careful analysis of the best available outside information when there is no
established public or private market in the investee company's own securities
and it is no longer appropriate to use the cost method. Comparisons are made
using factors (such as earnings, sales or net worth) that influence the market
value of similar public companies or that are used in the pricing of private
transactions of comparable companies. Major discounts are considered when
private companies are appraised by comparing them to similar public companies.
Liquidation value may be used when an investee is performing substantially below
plan and it's continuation as an operating entity is in doubt. Under the
appraisal method, the differences among companies in terms of the source and
type of revenues, quality of earnings, and capital structure, are carefully
considered.
An appraisal value can be defined as the price at which the investment in
question could change hands, assuming that both parties to the transaction are
under no unusual pressure to buy or sell and both have reasonable knowledge of
all the relevant facts. In the case of start-up companies where the entire
assets may consist of only one or more of the following: a marketing plan,
management or a pilot operation, an evaluation may be established by
capitalizing the amount of the investment that could reasonably be obtained for
a predetermined percentage of the company. Valuations under the appraisal
method are considered to be more subjective than the cost, public market or
private market methods.
The private market method uses third-party transactions (actual or proposed) in
the investee's securities as the basis for valuation. This method is considered
to be an objective measure of value since it depends upon the judgment of a
sophisticated, independent investor. Actual firm offers are used as well as
historical transactions, provided that any offer used was seriously considered
and well documented and adjusted (if applicable) by the Board of Directors in
good faith taking into account such factors as available financial information
of the investee, the nature and duration of any restrictions as to resale and
other factors which influence the market in which a security is purchased or
sold.
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The public market method is the preferred method of valuation when there is an
established public market for the investee's common stock, since that market
provides the most objective basis for valuation. In determining whether the
public market is sufficiently established for valuation purposes, the Registrant
examines the trading volumes, the number of shareholders and the number of
market makers. Under the public market method, as well as under the other
valuation methods, the Registrant discounts investment positions that are
subject to significant legal, contractual or practical restrictions and
appropriate adjustments may be made by the Board of Directors in good faith
taking into account such other factors as available financial information of the
investee, the nature and duration of any restrictions as to resale and other
factors which influence the market in which a security is purchased or sold.
When an investee's common stock is valued under the public market method, common
stock equivalents such as presently exercisable warrants or options are valued
based on the difference between the exercise price and the market value of the
underlying common stock. Although the Registrant believes that a public market
could be created for the options and warrants of certain of its investees,
thereby possibly increasing the value of these rights for their arbitrage value,
the Registrant does not reflect this possibility in its valuation.
Managerial Assistance
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The Registrant believes that providing managerial assistance to its investees is
critical to its business development activities. "Making available significant
managerial assistance" as defined in the Investment Company Act with respect to
a business development company such as the Registrant means (a) any arrangement
whereby a business development company, through its directors, officers,
employees or general partners, offers to provide, and, if accepted, does so
provide, significant guidance and counsel concerning the management, operations,
or business objectives and policies of a portfolio company; or (b) the exercise
by a business development company of a controlling influence over the management
or policies of a portfolio company by the business development company acting
individually or as a part of a group acting together which controls such
portfolio company. The Registrant is required by the Investment Company Act to
make significant managerial assistance available at least with respect to
investee companies that the Registrant treats as qualifying assets for purposes
of the 70% test. The nature, timing and amount of managerial assistance
provided by the Registrant vary depending upon the particular requirements of
each investee company.
The Registrant may be involved with its investees in recruiting management,
product planning, marketing and advertising and the development of financial
plans, operating strategies and corporate goals. In this connection, the
Registrant may assist clients in
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developing and utilizing accounting procedures to efficiently and accurately
record transactions in books of account which will facilitate asset and cost
control and the ready determination of results of operations. The Registrant
also seeks capital for its investees from other potential investors and
occasionally subordinates its own investment to those of other investors. The
Registrant introduces its investees to potential suppliers, customers and joint
venture partners and assists its investees in establishing relationships with
commercial and investment bankers and other professionals, including management
consultants, recruiters, legal counsel and independent accountants. The
Registrant also assists with joint ventures, acquisitions and mergers.
In connection with its managerial assistance, the Registrant may be represented
by one or more of its officers or directors on the board of directors of an
investee. As an investment matures and the investee develops management depth
and experience, the Registrant's role will become progressively less active.
However, when the Registrant owns or on a pro forma basis could acquire a
substantial proportion of a more mature investee company's equity, the
Registrant remains active in and will frequently initiate planning of major
transactions by the investee. The Registrant's goal is to assist each investee
company in establishing its own independent and effective board of directors and
management.
(4) Although the Registrant does not directly compete with any single company,
individual or organization, the Registrant is subject to substantial competition
from business development companies, venture capital firms, new product
development companies, marketing companies and diversified manufacturers, most
of whom are larger than the Registrant and have significantly larger net worth
and financial and personnel resources than the Registrant. In addition, the
Registrant competes with companies and individuals engaged in the business of
providing management consulting services.
(5) The Registrant does not require raw materials.
(6) the Registrant's business is not dependent upon a single customer, or a few
customers, the loss of any one or more of which would have a material adverse
effect on the Registrant.
(7) The Registrant holds no patents or trademarks, and has no interest in any
franchises, concessions, royalty agreements or labor contracts.
(8)(9) Regulation - Business Development Companies. The following is a summary
description of the Investment Company Act as applied to business development
companies. This description is qualified in its entirety by reference to the
full text of the Investment Company Act and the rules adopted thereunder by the
SEC.
15
<PAGE>
The Small Business Investment Incentive Act of 1980 modified the provisions of
the Investment Company Act that are applicable to a company, such as the
Registrant, which elects to be treated as a "Business Development Company"
("BDC"). The Registrant elected to be treated as a business development company
in July 1995. The Registrant may not withdraw its election without first
obtaining the approval of a majority of its outstanding voting securities.
A BDC must be operated for the purpose of investing in the securities of certain
present and former "eligible portfolio companies" and certain bankrupt or
insolvent companies and must make available significant managerial assistance to
its investee companies. An eligible portfolio company generally is a United
States company that is not an investment company (except for wholly-owned SBIC's
licensed by the Small Business Administration) and (1) does not have a class of
securities included in the Federal Reserve Board's over-the-counter margin list,
(2) is actively controlled by the business development company and has an
affiliate of the business development company on its board of directors, or (3)
meets such other criteria as may be established by the SEC. Control, under the
Investment Company Act, is presumed to exist where the business development
company owns 25% or more of the outstanding voting securities of the investee.
The Investment Company Act prohibits or restricts the Registrant from investing
in certain types of companies, such as brokerage firms, insurance companies,
investment banking firms and investment companies. Moreover, the Investment
Company Act limits the type of assets that the Registrant may acquire to
"qualifying assets" and certain assets necessary for its operations (such as
office furniture, equipment and facilities) if, at the time of the acquisition,
less than 70% of the value of the Registrant's assets consists of qualifying
assets. The effect of the regulation is to require that at least 70% of a
business development company's assets be maintained in qualifying assets.
Qualifying assets include: (1) securities of companies that were eligible
portfolio companies at the time the Registrant acquired their securities, (2)
securities of bankrupt or insolvent companies that are not otherwise eligible
portfolio companies, (3) securities acquired as follow-on investments in
companies that were eligible at the time of the Registrant's initial acquisition
of their securities but are no longer eligible, provided that the Registrant has
maintained a substantial portion of its initial investment in those companies,
(4) securities received in exchange for or distributed on or with respect to any
of the forgoing, and (5) cash items, government securities and high-quality
short-term debt. The Investment Company act also places restrictions on the
nature of the transactions in which, and the persons from whom, securities can
be purchased in order for the securities to be considered to be qualifying
assets.
16
<PAGE>
At December 31, 1995, the Registrant did not comply with Section 55 of the
Investment Company Act with respect to the 70% test as a result of its
investment in Colonial Funds, Limited. The non-compliance was inadvertent and
the Registrant took corrective action by transferring the investment to YPE,
Inc., Registrant's wholly-owned investee.
Colonial Funds, Limited is a Commonwealth of the Bahamas corporation operating
as an off-shore fund. This investment does not satisfy the requirements of a
"Qualifying Asset" because Colonial Funds, Limited is not organized in the
United States.
During August 1996, the Registrant entered into a recision agreement with
Colonial Funds, Limited for the purpose of correcting the non-compliance so that
the form of this investment would comply with the requirements of a qualifying
asset. The Registrant returned the shares of Colonial Funds, Limited Class B
common stock and received and canceled the shares which it had issued for such
stock. Concurrently, the Registrant acquired a 100% interest in YPE, Inc., a
non-public Nevada corporation, in exchange for 3,333,333 shares of FCVL common
stock which YPE, Inc. exchanged for 25,000 Class B common shares of Colonial
Funds, Limited.
Registrant believes the non-compliance with Section 55 has been corrected.
The Registrant is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock if its asset coverage, as defined in the Investment Company Act,
is at least 200% after the issuance of the debt or the preferred stock. The
Registrant currently has no policy regarding issuing multiple classes of senior
debt or a class of preferred stock.
The Registrant may issue in limited amounts, warrants, options and rights to
purchase its securities to its directors, officers and employees (and provide
loans to those persons for the exercise thereof) in connection with an executive
compensation plan if certain conditions are met. These conditions include the
authorization of such issuance by a majority of the Registrant's voting shares
and the approval of a majority of the independent members of the Board of
Directors and a majority of the directors who have no financial interest in the
transaction. The issuance of options, warrants or rights to directors who are
not also officers requires the prior approval of the SEC.
The Registrant may sell its securities at a price that is below the prevailing
net asset value per share only upon the approval of the policy by the holders of
a majority of its voting securities, including a majority of the voting
securities held by non-affiliated persons, at its last annual meeting or within
one year
17
<PAGE>
prior to the transaction. In addition, the Registrant may repurchase its Common
Stock, subject to the restrictions of the Investment Company Act. The
Registrant at this time does not contemplate selling its securities at a price
below prevailing net asset value per share or repurchasing its Common Stock.
In accordance with the Investment Company Act, a majority of the members of the
Registrant's Board of Directors must not be "interested persons" of the
Registrant as that term is defined in the Investment Company Act. Generally,
"interested persons" of the Registrant include all affiliated persons of the
Registrant and members of their immediate families, any "interested person" of
an underwriter or of an "investment advisor" to the Registrant, any person who
has acted as legal counsel to the Registrant within the last two years, or any
broker or dealer, or affiliate of a broker or dealer.
Most of the transactions involving the Registrant and its affiliates (as well as
affiliates of those affiliates) which were prohibited without the prior approval
of the SEC under the Investment Company Act prior to its amendment by the Small
Business Investment Incentive Act now require the prior approval of a majority
of the Registrant's independent directors and a majority of the directors having
no financial interest in the transactions. The effect of the amendment is that
the Registrant may engage in certain affiliated transactions that would be
prohibited absent SEC approval in the case of investment companies which are not
business development companies. However, transactions involving certain closely
affiliated persons of the Registrant, including its directors, officers and
employees, still require the prior approval of the SEC. In general, "affiliated
persons" of a person include: (a) any person who owns, controls or holds with
power to vote, more than five percent of the Registrant's outstanding Common
Stock (b) any director, executive officer or general partner of that person, (c)
any person who directly or indirectly controls, is controlled by, or is under
common control with, that person, and (d) any person five percent or more of
whose outstanding voting securities are directly or indirectly owned, controlled
or held with power to vote, by such other person. Such persons generally must
obtain the prior approval of a majority of the Registrant's independent
directors and, in some situations, the prior approval of the SEC, before
engaging in certain transactions involving the Registrant or any company
controlled by the Registrant. The Investment Company Act generally does not
restrict transactions between the Registrant and its investee companies.
Finally, notwithstanding restrictions imposed under federal securities laws, it
is anticipated that the Registrant will acquire securities of investee companies
pursuant to stock purchase agreements or other agreements that may further limit
the Registrant's ability to distribute, or sell or transfer such securities;
and, as a practical matter, even if such transfers are
18
<PAGE>
legally or contractually permissible, there may be no market, or a very limited
market, for the securities and economic conditions may make the price and terms
of a sale or transfer unattractive.
Other Securities Law Considerations
- -----------------------------------
In addition to the above-described provisions of the Investment Company Act,
there are a number of other provisions of the federal securities laws which
affect the Registrant's operations. for example, restrictions imposed by the
federal securities laws, in addition to possible contractual provisions, may
affect adversely the ability of the Registrant to sell or otherwise distribute
its portfolio securities.
Most if not all securities which the Registrant acquires as venture capital
investments will be "restricted securities" within the meaning of the Securities
Act of 1933 ("Securities Act") and will not be permitted to be resold without
compliance with the Securities Act. Thus, the Registrant will not be permitted
to resell portfolio securities unless a registration statement has been declared
effective by the SEC with respect to such securities or the Registrant is able
to rely on an available exemption from such registration requirements. In most
cases the Registrant will endeavor to obtain from its investee companies
"registration rights" pursuant to which the Registrant would be able to demand
that an investee company register the securities owned by the Registrant at the
expense of the investee company. Even if the investee company bears this
expense, however, the registration of the securities owned by the Registrant is
likely to be a time-consuming process, and the Registrant always bears the risk,
because of these delays, that it will be unable to resell such securities, or
that it will not be able to obtain an attractive price for the securities.
Sometimes the Registrant will not register portfolio securities for sale but
will seek to rely upon an exemption from registration. The most likely
exemption available to the Registrant is section 4(1) of the Securities Act
which, in effect exempts sales of securities not involving a distribution of the
securities. This exemption will likely be available to permit a private sale of
portfolio securities, and, in some cases, a public sale, if the provisions of
Rule 144 under the Securities Act are satisfied. Among other things, Rule 144
requires that securities be sold in "broker transactions", and imposes a two-
year holding period prior to the sale of restricted securities.
(10) During the last three years the Registrant spent no amounts on Registrant-
sponsored or customer-sponsored research and development activities.
19
<PAGE>
(11) The Registrant is not subject to any federal, state or local provisions
which have been enacted or adopted regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment.
ITEM 2. DESCRIPTION OF PROPERTY
Office
- ------
The Registrant's executive and administrative office is located at 6151 West
Century Boulevard, Suite 1018, Los Angeles, California 90045. The Registrant
leases this space, consisting of approximately 3,000 square feet, on a month-to-
month basis from its wholly-owned investee, CRI. Currently, the monthly rental
is $3,000. The Registrant believes the rental terms to be no less favorable
than those which could be obtained from a non-affiliated party for similar
facilities in the same area.
Oil and Gas Interests
- ---------------------
Through its wholly-owned investee, FCREL, the Registrant owns an interest in
exploratory oil and gas property in Concho County, Texas, which is currently
inactive.
Residential Real Estate Subdivision
- -----------------------------------
Through its 50% owned investee, Sherwood, the Registrant owns an interest in a
residential sub division consisting of raw land sub divided into lots located
near Biloxi, Mississippi.
These lots are available for sale and, in conjunction with a joint venture
agreement, the design and construction of custom homes on the lots are also
available.
Through December 31, 1995, no lots were sold and no homes were constructed on
the property.
ITEM 3. LEGAL PROCEEDINGS
During the year ended December 31, 1995, neither the Company nor its
subsidiaries were a party to or the subject of any material legal proceedings,
except as described below.
For information regarding the Company's dispute with Gerant Industries, Inc.,
see "ITEM 1. DESCRIPTION OF BUSINESS - Transactions with Turbo, Inc."
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security holders during
the year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information:
The equity securities of the Company have been quoted on the National Quotation
Service Pink Sheets since January, 1986, however the stock was unpriced from
July 1989 to October 1994. On October 18, 1994 the Company completed the
documentation necessary to resume trading. The Company's equity securities were
originally issued in units. Each unit consisted of (1) 100 shares of common
stock, (ii) 100 A warrants to purchase 100 shares of common stock at 0.02 per
share exercisable any time within one year of the effective date of the
offering, (iii) 100 B warrants to purchase 100 shares of common stock at 0.03
per share exercisable any time within one year of the effective date of the
offering, and (iv) 50 C warrants to purchase 50 shares of common stock at 0.04
per share exercisable at any time within two years of the effective date of the
offering. After the offering the company extended the exercise period for the A
and B warrants to December 10, 1987 and for the C warrants to December 10, 1988.
By March 1986, all of the A and B warrants had been exercised.
The following table sets forth high and low sales price during the quarter for
the Registrant's common stock for the quarters ending December 31, 1995:
<TABLE>
<CAPTION>
High Low
Common Stock Price Price
----- -----
<S> <C> <C>
January to March, 1995 5 3/4 1
April to June, 1995 3 3/4
July to September, 1995 4 1 3/8
October to December, 1995 4 1/4
</TABLE>
(b) Holders:
Approximate Number
of Record Holders
Title of Class (as of March 31, 1997)
- ---------------- ----------------------
Common Stock,
$.001 Par Value 750
- -----------------
21
<PAGE>
(c) Dividends:
The Company has never paid cash dividends on its common stock. The declaration
and payment of dividends is within the discretion of the Company's board of
directors and will depend, among other factors, on earnings and debt service
requirements, as well as the operating and financial condition of the Company.
At the present time, the Company's anticipated working capital requirements are
such that it intends to follow a policy of retaining earnings in order to
finance the development of its business. Accordingly, the Company does not
expect to pay a cash dividend within the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(a) Plan of Operation
Not Applicable
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operations
Due to the change in accounting method from cost to fair value during 1995
in connection with Registrant's election to become a BDC, the financial
statements for the year ended December 31, 1995 are not comparable with the
consolidated financial statements for the year ended December 31, 1994.
Results of Operations - December 31, 1995. Revenues for the year ended December
31, 1995 were $3,250, consisting of interest on notes receivable from the sale
of stock to Colonial Funds, Limited. Although significant management assistance
is rendered to various investees, the Registrant does not charge management fees
until an investee is operating according to plan.
Investment expenses for the year ended December 31, 1995 were $531,605;
consisting of salaries, consulting fees, and administrative expenses of
$289,286, legal and accounting fees of $97,024, a charge of $30,000 in
connection with settlement of the Turbo litigation, and interest expense of
$114,495. Interest expense included $50,000 payable to CRI.
The Registrant's net investment loss after taxes was $528,355 for the year ended
December 31, 1995.
In addition, unrealized losses on investments in the amount of $484,462 for the
year ended December 31, 1995 was recorded in connection with the write down to
zero of the Registrant's investments in FEI, Gulf Coast, Sherwood, Baja Pacific,
and Gerant.
22
<PAGE>
Also, for the year ended December 31, 1995 a loss of $802,982 was recorded for
the cumulative effect on prior years of changing from the historical cost to
fair value method of accounting for investments. This was a one-time adjustment
pertaining primarily to CRI.
Financial Condition - December 31, 1995. The Registrant's qualifying
investments at fair value totaled $2,505,000 at December 31, 1995 and included
FCREL ($1,620,000) and Colonial Funds, Limited ($885,000). All other qualifying
investments were written down to zero subject to these investments obtaining
additional financing and/or profitable operations.
The Registrant's non-qualifying investment at fair value in First Colonial
Funds, Ltd. was $750,000 at December 31, 1995.
Notes receivable from the sale of common stock were $529,212 at December 31,
1995. During 1996, cash and an investment were received in satisfaction of
these notes receivable.
Liabilities totaled $1,452,442 at December 31, 1995 including a note payable to
CRI ($500,000), accrued interest on the note payable to CRI ($187,504), accrued
management fee payable to Registrant's president ($109,500), legal settlement
payable in connection with the Turbo litigation ($30,000), and a note payable
convertible to stock at the option of the note holder ($210,000).
Registrant had a working capital deficit of approximately $1,200,000 at December
31, 1995.
On January 4, 1996, the Company effected a 1 for 20 reverse stock split. All
disclosures in the accompanying financial statements and footnotes pertaining to
shares of common stock have been restated to reflect the January 4, 1996 stock
split.
The following transactions involving shares of Registrant's common stock
occurred during the year ended December 31, 1995:
During 1994, pursuant to Regulation S the Company issued 190,000 shares
subject to a stock purchase agreement and accounted for the shares at December
31, 1994, as common stock subscribed. During July 1995, 179,238 of those shares
were issued to an unaffiliated corporation as consideration for the oil and gas
lease subsequently assigned to FCREL. The remaining 10,762 shares were issued
subject to a stock subscription agreement in the amount of $140,000, $90,000 of
which had been paid by December 31, 1995.
During 1994, pursuant to Regulation S the Company issued 12,500 shares
subject to a stock purchase agreement and accounted for the shares at December
31, 1994, as common stock subscribed. During June 1995, these shares were sold
for the total consideration of $24,572.
23
<PAGE>
During April 1995, pursuant to Section 4(2) the Company issued 200,000
restricted shares subject to a stock purchase agreement. In January 1996, these
shares were returned to the Company and canceled.
During April 1995, pursuant to Regulation S the Company issued 100,000
shares in subject to a stock purchase agreement. These shares were stolen
during 1995 and the Company received nothing for them. Accordingly, the company
recorded a reduction in paid in capital for the par value of these shares.
During July 1995, pursuant to Section 4(2) the Company issued 3,333,333
restricted shares to Colonial Funds, Limited in exchange for 25,000 shares Class
B common stock of Colonial Funds. This transaction was canceled in 1996 and the
shares were issued to YPE, Inc. to comply with BDC requirements.
During July 1995, pursuant to Section 4(2) the Company issued 10,000
restricted shares to First Colonial Funds, Ltd. in exchange for 50,000 shares
Class A common stock of First Colonial Funds.
During October 1995, pursuant to Regulation E the Company issued 10,000
shares to Colonial Funds, Limited subject to a stock purchase agreement in the
amount of $200,000.
During December 1995, pursuant to Regulation E the Company issued 60,000
shares to Colonial Funds, Ltd. subject to a stock purchase agreement in the
amount of $600,000.
During October 1995, the Company entered into agreements with two unrelated
individuals to grant them options to acquire 7,500 and 75,000 shares of common
stock at the price of $.001 per share. These options would have expired on
October 2, 1996, however they were extended until October 2, 1998.
During December 1993, the Company determined that a portion of the $344,900
of notes payable to related parties (consisting of $200,000 to Robert Wang, a
shareholder of the Company, and $144,900 to the previous CHS shareholders) and
the related accrued interest of $160,900, to be statute-barred under Section
337(1) of the California Code of Civil Procedure. The amounts of notes payable
and related accrued interest determined to be statute-barred were $253,700
(consisting of $200,000 to Robert Wang and $53,700 to the previous CHS
shareholders) and $108,000, respectively, and such aggregate amount of
$361,700 was recorded as a contribution to additional paid-in-capital during
December 1993. During the year ended December 31, 1994 an additional $101,800
became statute-barred and was recorded as a contribution to additional paid-in
capital, and during the year ended December 31, 1995, the remaining $42,389
became statute-barred and was recorded as additional paid-in capital.
24
<PAGE>
Registrant's wholly-owned investee, CRI, results of operations and financial
condition. CRI reported sales of $1,979,600 and $5,361,500, for the years ended
December 31, 1995 and 1994, respectively, and cost of sales of $1,777,800 and
$4,657,700, respectively, for the same years. Gross profit was $201,800 (10%)
and $703,800 (13%) for 1995 and 1994, respectively. The decline in sales and
cost of sales was attributable to the lack of available working capital to
service large contracts due to the 1992 seizure of Registrant's bank by the
Federal Deposit Insurance Corporation and subsequent "freeze" of the
Registrant's line of credit.
Selling, general and administrative expenses for CRI was $819,300 (41% of sales)
and $792,700 (15% of sales) for the years ended December 31, 1995 and 1994,
respectively. The increase in these expenses is attributable to the inability
of the lower sales volume to cover fixed expenses, and the write-off of prepaid
commissions and customer development costs.
CRI recorded interest income of $50,000 for both years ended December 31, 1995
and 1994 for interest accrued on CRI's note receivable from the Registrant. CRI
interest expense totaled $173,000 for 1995 and $137,700 for 1994. The increase
was due to higher average bank borrowing plus a high rate of interest on non-
bank financing.
CRI's working capital decreased by $499,900 to deficit working capital of
($350,600) at December 31, 1995 from working capital of $149,300 at December 31,
1994. This decrease was due to the CRI net loss for the year ended December 31,
1995 of ($696,400).
At December 31, 1995 CRI was in default of certain covenants contained in its
bank borrowing agreement. CRI's bank borrowings are guaranteed personally by
the Registrant's President, Murray W. Goldenberg, and Director, Leslie I.
Handler.
ITEM 7. FINANCIAL STATEMENTS
The financial statements for the year ended December 31, 1995 are listed
under Item 13. The financial statements for the years ended December 31, 1994
and 1993 are also listed under Item 13.
Due to the change in accounting method from cost to fair value during 1995 in
connection with Registrant's election to become a BDC, the financial statements
for the year ended December 31, 1995 are not comparable with the consolidated
financial statements for the year ended December 31, 1994.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with accountants during the most recent
two fiscal years.
25
<PAGE>
On October 26, 1995 the Registrant filed Form 8-K reporting dismissal of
accountants Kellogg & Andelson and appointment of accountants Beckman Hollander
& Associates.
On November 27, 1996 the Registrant filed Form 8-K reporting dismissal of
accountants Beckman Hollander & Associates and appointment of accountant J. Paul
Kenote, P.C.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSON; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table and text sets forth the names and ages of all directors
and executive officers of the Company and their positions and offices with the
Company as of December 31, 1995. All of the directors will serve until the next
annual meeting of the shareholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Officers serve at the discretion of the Board of Directors. A brief description
of the business experience of each director and executive officer during the
past five years and an indication of directorships held by each director in
other companies subject to the reporting requirements under the federal
securities laws is also provided.
<TABLE>
<CAPTION>
Name Age Position(s) Director Since
<S> <C> <C> <C>
- ---- --- ----------- --------------
Murray W. Goldenberg 56 President,
Treasurer,
Secretary,
and Director September 1, 1987
Leslie I. Handler 57 Director August 27, 1991
Douglas A. Pearson 53 Director October 18, 1993
David L. Mitchell 43 Director May 24, 1996
Michael A. Sunstein 53 Director May 24, 1996
</TABLE>
There are no family relationships among directors and executive officers.
Biographies of Directors and/or Officers:
Murray W. Goldenberg - President, Treasurer, Secretary and Director -
Murray W. Goldenberg has been Secretary, Treasurer and a director of the Company
since September 1, 1987, and President of
26
<PAGE>
the Company since October 1, 1988. Mr. Goldenberg has been a financial
consultant to numerous troubled companies in various industries, including the
garment and heavy equipment manufacturing industries. Mr. Goldenberg has also
acted as a trustee in bankruptcy. Mr. Goldenberg is a Chartered Accountant
under the laws of Canada and the Province of Manitoba.
Leslie I. Handler - Director - Leslie I. Handler has been a Director of the
Company since August 27, 1991. From 1988 to 1992, Mr. Handler was president of
Far West Commercial Finance Company, Los Angeles, California, the asset-based
lending subsidiary of Far West Federal Bank, Portland, Oregon. Mr. Handler is
an experienced senior manager with more than 30 years of experience with asset-
based lending organizations. Since 1993, Mr. Handler has been a consultant to
the banking industry.
Douglas A. Pearson - Director - Douglas A. Pearson has been a Director of
the Company since October 18, 1993. Since 1988, Mr. Pearson has owned and
operated Massey & Co. Ltd., a Calgary, Alberta-based company whose principal
activity is management. Mr. Pearson is an senior manager with 25 years
experience in the banking industry in the United States.
David L. Mitchell - Director - David L. Mitchell has been a director of the
Company since May 24, 1996. Since 1974, Mr. Mitchell has owned and operated
ground and air transport companies, and a speciality products company, and since
1987, Mr. Mitchell has owned and operated a real estate
broker/developer/principal business.
Michael A. Sunstein - Director - Michael A. Sunstein has been a director of
the Company since May 24, 1996. From 1968 to 1976, Mr. Sunstein was employed by
Kaufman and Broad Homes, Inc. where he became the President of Midwestern
Operations. In 1976, Mr. Sunstein owned and operated a residential real estate
development business. In 1989, Mr. Sunstein founded Tri-National Development
Corporation and is currently a director and Chief Executive Officer. Tri-
National is a publicly traded developer and manager of international resort
related real estate projects.
Compliance with Section 16(a) of the Exchange Act:
The Company does not have any class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
Accordingly, during the year ended December 31, 1993, no Forms 3,4, or 5 and
amendments thereto were required to be furnished to the Company pursuant to Rule
16(a) - 3(e).
27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Summary Compensation Table
Name and Principal
Principal Annual All Other
Position Year Compensation Compensation
- --------- ---- ------------- -------------
<S> <C> <C> <C>
Murray W. Goldenberg, 1995 $162,000
President 1994 132,500 (1)
1993 61,000
1992 54,000
Leslie I. Handler, 1995 -
Director 1994 - (2)
</TABLE>
(1) During the year ended December 31, 1994, Mr. Goldenberg and his family were
issued 1,400,511 shares of the Company's common stock valued at $.001 per share
in exchange for the issuance of their continuing personal guarantee and the
hypothecation of their residence for CRI's bank line of credit.
(2) During the year ended December 31, 1994, Mr. Leslie I. Handler and his
family were issued 1,400,511 shares of the Company's common stock valued at
$.001 per share in exchange for the issuance of their continuing personal
guarantee and the hypothecation of their residence for CRI's bank line of
credit.
Compensation Arrangements:
During the year ended December 31, 1995, Murray W. Goldenberg was
compensated pursuant to a month-to-month consulting agreement. Compensation to
Mr. Goldenberg pursuant to this consulting agreement will be approximately
$162,000 for the year ending December 31, 1996, exclusive of any bonus that may
be paid.
Board of Directors:
Directors of the Company receive no compensation for serving as Directors
of the Company. During the year ended December 31, 1995, there were no meetings
of the Board of Directors; all necessary board approvals and actions were
obtained by unanimous written consent. The Company had no audit, nominating or
compensation or committees performing similar functions during the year ended
December 31, 1995.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As used in this section, the term beneficial ownership with respect
28
<PAGE>
to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934
as consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the power to
dispose of or direct the disposition of) with respect to a security through any
contract, arrangement, understanding, relationship or otherwise, subject to
community property laws.
As of December 31, 1995, the company had authorized 500,000,000 shares of its
common stock, $.001 par value (the "common stock"), 4,466,083 shares of which
were issued, and 10,000,000 shares of its preferred stock, no par value, none of
which were issued. The Company's Board of Directors has the authority, without
approval of the shareholders, to issue all or any portion of the authorized
shares of preferred stock in one or more series, and to determine the
preferences as to dividends, redemption and liquidation, conversion rights, and
other rights of such series, which may carry rights superior to those of the
common stock. The holders of shares of preferred stock shall not have any
voting rights except as specifically required by law.
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of March 31, 1997. Listed below are (a) the
name and address of each beneficial owner of more than five percent (5%) of the
Company's common stock known to the Company, the number of shares of common
stock beneficially owned by each such person or entity, and the percent of the
Company's common stock so owned; and (b) the number of shares of common stock of
the Company beneficially owned, and the percentage of the Company's common stock
so owned, by each director and by all directors and officers of the Company as a
group. Each such person or entity has sole voting and investment power with
respect to the shares of common stock, except as otherwise indicated.
Beneficial ownership consists of a direct interest in the shares of common
stock, except as otherwise indicated.
<TABLE>
<CAPTION>
Amount and
Name and Nature of Percent of
Address of Beneficial Shares of
Beneficial Owner Ownership Common Stock
- -------------------------- ---------- ------------
<S> <C> <C>
Murray W. Goldenberg 107,303(1) 1.00%
President, Treasurer,
Secretary and Director
6151 W. Century Blvd #1018
Los Angeles
California 90045
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Leslie I. Handler 82,026 .77%
Director
1108 Via Zumaya
Palos Verdes Estates
California 90274
Douglas A. Pearson 2,500 .02%
Director
#407-3420 50th Street N.W.
Calgary, Alberta
Canada T3A 2E1
All Directors and 191,829 1.79%
Officers as a Group
(3 persons)
Sherwood Properties, Inc. 71,930 .67%
920 Cedar Lake Road Ste. M
Biloxi
Mississippi 39532
YPE, Inc. 3,466,667 32.35%
6151 W. Century Blvd #1018
Los Angeles
California 90045
First Colonial Funds, Ltd. 133,333 1.24%
7651 Schuster
Las Vegas
Nevada 89139
</TABLE>
(1) Includes 30,000 shares owned by Mr. Goldenberg's three adult children, as
to which Mr. Goldenberg has neither voting nor investment power and
disclaims beneficial ownership.
Changes in Control:
There are no contractual or other arrangements currently in effect or
contemplated that may later result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During December 1993, the Company determined that a portion of the $344,900 of
notes payable to related parties (consisting of $200,000 to Robert Wang,
shareholder of the Company, and $144,900 to the previous CHS shareholders) and
the related accrued interest of $160,900, to be statute-barred under Section
337(1) of the California Code of Civil Procedure. The amounts of notes payable
and related interest determined to be statute-barred were $253,700
30
<PAGE>
(consisting of $200,000 to Robert Wang and $53,700 to the previous CHS
shareholders) and $108,000, respectively, and such aggregate amounts of
$361,700, $101,800, and $42,389 were recorded as a contribution to additional
paid-in-capital during December 1993, 1994, and 1995, respectively.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
3(i)(1) Articles of Incorporation - March 25, 1985 (1)
3(i)(2) Amendment to Articles of Incorporation-August 12, 1985 (1)
3(i)(3) Amendment to Articles of Incorporation-September 3, 1985 (1)
3(i)(4) Amendment to Articles of Incorporation-February 3, 1992 (1)
3(ii) Bylaws (1)
10.1 Lease Agreement between Airport Center Associates Limited Partnership,
a Connecticut limited partnership, as Landlord, and Contemporary Resources,
Inc., a California corporation, as Tenant (1)
10.2 Amendment to Lease Agreement between Airport Center Associates Limited
Partnership, a Connecticut limited partnership, and Contemporary Resources,
Inc., a California corporation - July 31, 1993 (1)
10.3 Promissory Note from Contemporary Resources, Inc. to Independence Bank
- - February 20, 1991 (1)
10.4 Asset Purchase Agreement among John E. Ferris, Flower Environments,
Inc., a Nevada corporation, and First Colonial Ventures, Ltd., a Utah
corporation - October 15, 1993 (2)
10.5 Consulting Agreement among First Colonial Ventures, Ltd., a Utah
corporation, Flower Environments, Inc., a Nevada corporation, and John E. Ferris
- - October 15, 1993 (2)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
31
<PAGE>
1) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1992, and incorporated herein
by reference.
2) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994, and incorporated herein
by reference.
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.
FIRST COLONIAL VENTURES, LTD.
(Registrant)
Date: May 2, 1997
By: /s/ Murray W. Goldenberg
------------------------
Murray W. Goldenberg
President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated:
32
<PAGE>
Signature Title
- --------- -----
Date
- ----
May 2, 1997
/s/ Murray W. Goldenberg
- ------------------------
Murray W. Goldenberg, C.A. Chairman
President, Treasurer,
Secretary and Director
(Chief Executive, Financial
and Accounting Officer)
May 2, 1997
/s/ Leslie I. Handler Director
- ---------------------
Leslie I. Handler
May 2, 1997
/s/ Douglas A. Pearson Director
- ----------------------
Douglas A. Pearson
33
<PAGE>
<TABLE>
<CAPTION>
FIRST COLONIAL VENTURES, LTD.
INDEX TO FINANCIAL STATEMENTS
Page
--------
INVESTMENT COMPANY
------------------
<S> <C>
Independent Auditor's Report F-3,F-4
Balance Sheet - December 31, 1995 F-5,F-6
Statement of Operations -
For the Year Ended December 31, 1995 F-7
Statement of Stockholders' Equity -
For the Year Ended December 31, 1995 F-8
Statement of Cash Flows -
For the Year Ended December 31, 1995 F-9
Notes to the Financial Statements -
December 31, 1995 F-10,F-25
OPERATING COMPANY
-----------------
Independent Auditor's Report F-27,F-28
Consolidated Balance Sheet - December 31, 1994 F-29
Consolidated Statements of Operations -
For the Years Ended December 31, 1994 and 1993 F-30
Consolidated Statements of Stockholders' Equity (Deficit) -
For the Years Ended December 31, 1994 and 1993 F-31
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1994 and 1993 F-32,F-33
Notes to Consolidated Financial Statements F-34,F-45
Independent Auditor's Report -
RE: Supplementary Information F-47
Consolidating Balance Sheets - December 31, 1994 F-48
Consolidating Statements of Operations and Accumulated
Deficit - For the Year Ended December 31, 1994 F-49
Consolidating Statements of Cash Flows -
For the Year Ended December 31, 1994 F-50
</TABLE>
F-1
<PAGE>
FIRST COLONIAL VENTURES, LTD.
(A Business Development Company )
FINANCIAL STATEMENTS
December 31, 1995
J. PAUL KENOTE
Certified Public Accountant, P.C.
F-2
<PAGE>
J. PAUL KENOTE
--------------
CERTIFIED PUBLIC ACCOUNTANT, P.C.
1618 S.W. First Avenue, Suite 215
Portland, Oregon 97201
(503) 241-2977
Fax (503) 224-9049
Message (503) 248-7849
REPORT OF INDEPENDENT AUDITOR
-----------------------------
To the Stockholders and the
Board of Directors of First Colonial Ventures, Ltd.
Los Angeles, California
I have audited the accompanying balance sheet of First Colonial Ventures, Ltd.
(The "Company") as of December 31, 1995, and the related statements of
operations, stockholders' equity, and cash flows for the year 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 audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. 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 audit provides 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 First Colonial Ventures, Ltd. as of
December 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has experienced recurring losses from operations and has a working capital
deficiency. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
F-3
<PAGE>
As explained in Notes 5 and 6, the accompanying balance sheet includes
investments valued at $3,255,000 (86% of total assets) whose values have been
estimated by management in the absence of readily ascertainable market values.
I reviewed the procedures used by management in arriving at their estimate of
value of such investments and have inspected underlying documentation, and, in
the circumstances, I believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for the investments existed, and the differences could
be material.
As discussed in Notes 1 and 4, during 1995 the Company elected to be a business
development company under the Investment Company Act of 1940. Accordingly, the
Company changed from reporting at historical cost to a fair value basis. The
1994 consolidated financial statements are not comparable to the 1995 financial
statements and, accordingly, are presented separately, together with the opinion
of other accountants following the 1995 financial statements.
/s/ J. Paul Kenote, CPA, P.C.
- -----------------------------
J. PAUL KENOTE, CPA, P.C.
March 26, 1997
Portland, Oregon
F-4
<PAGE>
FIRST COLONIAL VENTURES, LTD.
BALANCE SHEET
(Page 1 of 2)
December 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments at fair value (cost $3,338,141) (Note 5) $ 2,505,000
Other investment at fair value (cost $754,303) (Note 6) 750,000
Cash 11,061
Notes receivable from sale of common stock (Note 7) 529,212
Other receivables (Note 12) 11,525
------------
TOTAL ASSETS $ 3,806,798
============
</TABLE>
F-5
The accompanying notes are an integral part of these financial statements
<PAGE>
FIRST COLONIAL VENTURES, LTD.
BALANCE SHEET
(Page 2 of 2)
December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Liabilities:
<S> <C>
Notes payable (Notes 8 & 12) $ 960,396
Accounts payable and accrued liabilities (Note 12) 352,546
Management fees payable to officer (Note 12) 109,500
Settlement payable (Note 11) 30,000
------------
Total liabilities 1,452,442
------------
Commitments and contingencies (Notes 13 and 14)
Stockholders' Equity:
Common stock ($.001 par value; 25,000,000 shares
authorized; 4,466,083 shares issued and outstanding (Note 9) 4,466
Preferred stock (no par value; 10,000,000 shares
authorized; none issued nor outstanding) --
Additional paid-in capital 7,673,752
Accumulated deficit:
Accumulated (deficit) before becoming a BDC (3,508,063)
Accumulated net investment (loss) (528,355)
Accumulated net unrealized (loss) on investments (1, 287,444)
------------
Total stockholders' equity (net asset value per share
of $.53 at December 31, 1995) 2,354,356
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,806,798
============
</TABLE>
F-6
The accompanying notes are an integral part of these financial statements
<PAGE>
FIRST COLONIAL VENTURES, LTD.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Revenues:
<S> <C>
Interest income $ 3,250
--------
Expenses:
Salaries and consulting fees (Note 12) 214,950
Other general and administrative expenses 74,336
Legal and accounting fees 97,024
Legal settlement (Note 11) 30,000
Interest (Note 12) 114,495
--------
Operating expenses 530,805
--------
Net investment (loss) (527,555)
Less income tax provision (Note 10) (800)
--------
Net investment (loss) after income taxes (528,355)
(Increase) in unrealized loss on investments (484,462)
--------
(Loss) before cumulative effect of a change in
accounting principle (1,012,817)
Cumulative effect on prior years of changes from
historical cost accounting to the fair valuation
method for investments (Note 4) (802,982)
--------
Net loss $ (1,815,799)
============
Earnings per share:
Weighted average number of shares 2,568,792
============
(Loss) before cumulative effect of a change
in accounting principle $ (.39)
Cumulative effect of a change in accounting principle (.32)
------------
Net (loss) per share $ (.71)
============
</TABLE>
F-7
The accompanying notes are an integral part of these financial statements
<PAGE>
FIRST COLONIAL VENTURES, LTD.
STATEMENT OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1995
<TABLE>
<CAPTION>
ACCUMULATED DEFICIT
------------------------------------------
<S> <C> <C> <C>
Pre-BDC Accumulated Unrealized
Accumulated Investment Investment
Deficit Loss Loss
------------ ------------ ------------
Balance - January 1, 1995 $ (3,508,063) $ -- $ --
Net loss -- (528,355) (1,287,444)
------------ ------------ ------------
Balance - December 31, 1995 $ (3,508,063) $ (528,355) $ (1,287,444)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK AND PAID-IN CAPITAL
--------------------------------------------------------
Common Stock
------------------------------------ Paid-in
Shares Par Value Capital
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance - January 1, 1995 11,005,000 $ 11,005 $ 2,278,343
Adjustment - accounting change (Note 4) -- -- 1,358,700
Adjustment - stock split (Note 9) (10,454,750) (10,455) 10,455
---------------- ---------------- ----------------
Balance - January 1, 1995 (as restated) 550,250 550 3,647,498
Stock issued (Note 9) 3,915,833 3,916 3,983,865
Debt reclassified (Note 8) -- -- 42,389
---------------- ---------------- ----------------
Balance - December 31, 1995 4,466,083 $ 4,466 $ 7,673,752
================ ================ ================
</TABLE>
F-8
The accompanying notes are an integral part of these financial statements
<PAGE>
FIRST COLONIAL VENTURES, LTD.
STATEMENT OF CASH FLOWS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net investment loss $ (528,355)
Adjustments to reconcile net income to net
cash used in operating activities:
Cumulative effect of change in valuation of investments (802,982)
Decrease in value of investments (484,462)
Increase in other receivables (6,750)
Increase in accounts payable and accrued expenses 232,467
-------------
Net cash used in operating activities (1,590,082)
-------------
Cash flows from investing activities:
Investment in qualifying assets (2,505,000)
Investment in non-qualifying asset (746,247)
Reduction in value of investments 1,162,691
-------------
Net cash used in investing activities (2,088,556)
-------------
Cash flows from financing activities:
Proceeds from borrowing 235,396
Repayment of note payable (20,000)
Proceeds from issuance of common stock 3,987,781
Notes receivable from sale of common stock (529,212)
-------------
Net cash provided by financing activities 3,673,965
-------------
Net (decrease) in cash (4,673)
Cash - January 1, 1995 15,734
-------------
Cash - December 31, 1995 $ 11,061
=============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 39,991
=============
</TABLE>
F-9
The accompanying notes are an integral part of these financial statements
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------
Business History -
- ------------------
First Colonial Ventures, Ltd. (FCVL or the "Company") was incorporated
under the laws of the State of Utah on March 25, 1985, for the purpose of
acquiring interests in various business opportunities.
On January 10, 1995, FCVL elected to become an Investment Company pursuant
to the Investment Company Act of 1940. On June 27, 1995, FCVL elected to become
a "Business Development Company" (BDC), as that term is defined in the Small
Business Investment Incentive Act of 1980, which Act is an amendment to the
Investment Company Act of 1940. The election resulted in FCVL becoming a
specialized type of investment company. Consistent with this change in type of
business entity, the Company changed its method of financial reporting and
valuation of investments from cost to fair value.
Major Investments -
- -------------------
On May 1, 1987, the Company acquired 100% of the stock of Contemporary
Resources, Inc. (CRI), a distributor of specialty and disposable items including
glassware, china, flatware, toiletries, and amenity kits to the airline, hotel
and cruise line industries.
During September 1993, the Company established Flower Environments, Inc.
(FEI), a Nevada corporation, as a wholly-owned subsidiary. FEI was formed to
develop and market flower display irrigation equipment. In November 1994, the
Company sold substantially all of the assets of FEI and renamed the corporation
First Colonial Real Estate, Ltd.
On July 13, 1995, the Company acquired a 100% interest, consisting of an
assignment of a lease, in the oil and gas rights to property located in Concho
County, Texas, in exchange for common stock. The Company assigned its rights in
the lease to its wholly-owned subsidiary, First Colonial Real Estate, Ltd.,
which intends to find a partner or otherwise raise the capital necessary to
drill wells, extract and sell the natural gas located on the property.
On August 10, 1994, the Company acquired the rights to 50% of the stock of
Sherwood Properties, Inc. (Sherwood), a non-public Nevada company incorporated
in February 1995. Sherwood was formed to hold 50% of the stock of a Mississippi
corporation that owns, subject to a land sale contract, certain residential lots
and is a joint venture partner in the construction and sale of homes on the
lots.
F-10
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ---------------------------------------------------------------
Major Investments (Continued) -
- -------------------------------
In December 1994, the Company purchased the rights to 50% of the stock of
Gulf Coast Hotels, Inc. (Gulf Coast), a non-public Nevada company incorporated
in February 1995. Gulf Coast was formed to purchase the rights to approximately
1.4 acres in Biloxi, Mississippi, and to develop on that site a high-rise
condominium hotel.
Also in July 1995, the Company acquired 50% of the stock of First Colonial
Funds, Ltd., a non-public Nevada investment adviser, and 25% of the stock of
First Colonial Fund's subsidiary, Colonial Funds, Limited, a non-public
Commonwealth of the Bahamas off-shore fund with investments in various
companies, in an exchange of common stock. Colonial Funds was subsequently
acquired by the Company's wholly owned investee, YPE, Inc.
Financial Statements -
- ----------------------
The 1995 financial statements include only the accounts of FCVL because,
pursuant to industry practice, wholly-owned subsidiaries which are neither small
business investment companies or business development companies are not
consolidated. The consolidated financial statements for 1994 and prior included
the accounts of FCVL and its wholly-owned subsidiaries.
Business Development Company Considerations -
- ---------------------------------------------
As a BDC, FCVL may only acquire "Qualifying Assets" unless, at the time the
acquisition is made, qualifying assets represent at least 70% of the value of
FCVL's total assets (the 70% test). The principal categories of qualifying
assets relevant to the business of the Company are:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible portfolio
company. An eligible portfolio company is defined to include any issuer that
(a) is organized and has its principal place of business in the United States,
(b) is not an investment company other than a Small Business Investment Company
wholly-owned by the BDC, and (c) does not have any class of publicly traded
securities with respect to which a broker may extend margin credit.
(2) Securities received in exchange for or distributed with respect to
securities described in (1), above, or pursuant to the exchange of options,
warrants or rights relating to such securities.
F-11
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------------------
Business Development Company Considerations (Continued) -
- ---------------------------------------------------------
(3) Cash, cash items, government securities, or high quality debt
securities (within the meaning of the 1940 Act) maturing in one year or less
from the time of investment.
In addition, to treating securities described in (1) and (2), above, as
Qualifying Assets for the purpose of the 70% test, a BDC must make available to
the issuer of those securities Significant Managerial Assistance. Making
available significant managerial assistance means, among other things, (i) any
arrangement whereby the BDC, through its directors, officers or employees,
offers to provide, and, if accepted, does provide, significant guidance and
counsel concerning the management, operations or business objectives and
policies of a portfolio company, or (ii) in the case of an SBIC, making loans to
a portfolio company. Managerial assistance is made available to the portfolio
companies by FCVL's directors and officers who are highly experienced in
providing managerial assistance to small businesses.
Investment Valuation -
- ----------------------
The fair value method adopted in 1995 provides for the Company's Board of
Directors to be responsible for the valuation of the Company's investments,
including notes receivable and interest receivable. Fair value is the value
which could reasonably be expected to be realized in a current arm's length
sale. Investments are carried at fair value using the following four basic
methods of valuation:
(1) Cost - The cost method is based on the original cost to the Company
adjusted for amortization of original issue discounts, accrued interest for
certain capitalized expenditures of the corporation, and other adjustments as
determined to be appropriate by the Board of Directors in good faith taking into
consideration such factors as available financial information of the investee,
the nature and duration of any restrictions as to resale, and other factors
which influence the market in which a security is purchased and sold. Such
method is to be applied in the early stages of an investee's development until
significant positive or adverse events subsequent to the date of the original
investment require a change to another method.
F-12
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------------------
Investment Valuation (Continued) -
- ----------------------------------
(2) Private market - The private market method uses actual or proposed
third party transactions in the investee's securities as a basis for valuation,
utilizing actual firm offers as well as historical transactions, provided that
any offer used is seriously considered and well documented by the investee, and
adjusted (if applicable) by the Board of Directors in good faith taking into
consideration such factors as available financial information of the investee,
the nature and duration of any restrictions as to resale, and other factors
which influence the market in which a security is purchased and sold.
(3) Public market - The public market method is the preferred method of
valuation when there is an established public market for the investee's
securities. In determining whether the public market method is sufficiently
established for valuation purposes, the Company examines the trading volume, the
number of shareholders and the number of market makers in the investee's
securities, along with the trend in trading volume as compared to the Company's
proportionate share of the investee's securities.
(4) Appraisal - The appraisal method is used to value an investment
position after analysis of the best available outside information where there is
no established public or private market in the investee's securities.
Statement of Cash Flows -
- -------------------------
Consistent with the reporting requirements of a BDC, cash and cash
equivalents consist only of demand deposits in banks and cash on hand.
Financial statement account categories such as investments and notes receivable,
which relate to the Company's activity as a BDC, are included as operating
activities in the statement of cash flows.
Income Taxes -
- --------------
The Company is not entitled to the special treatment available to regulated
investment companies and is taxed as a regular corporation for federal and state
income tax purposes. Effective January 1, 1993, the Company adopted FASB
Statement No. 109, "Accounting for Income Taxes". This Statement requires a
company to recognize deferred tax liabilities and assets for the expected future
tax consequences of events that have been recognized in a company's financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.
F-13
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 2 - UNCERTAINTIES:
- ----------------------
The Company's continued existence is dependent upon its ability to obtain
profitable operations from its investments and additional capital. During the
last five years, the Company's wholly-owned subsidiaries have experienced losses
from continuing operations, negative working capital and losses from
discontinued operations.
The Company's investments in Sherwood and Gulf Coast involve contracts
which are in default as described in more detail in Note 5. In addition,
realization of the Company's investment in its oil and gas lease is dependent
upon the Company finding a partner or otherwise raising the financing necessary
to drill gas wells on the property as described in more detail in Note 5, and
further dependent upon those wells being productive. These investments are not
liquid, they are not producing income for the Company, and they require
substantial additional capital before they might be in a position to produce
income. Furthermore, the Company may loose its entire investment in these assets
if substantial additional capital is not obtained.
While management anticipates that cash flow from operations will be
sufficient to meet obligations and liabilities as they mature, there is no
assurance that the Company will be successful in generating sufficient cash from
operations to avoid depletion of its capital resources. Management is
negotiating to obtain additional sources of capital needed by the Company's
various investments, however there is no assurance that the Company will be
successful in obtaining additional capital. The financial statements do not
reflect adjustments relating to the recoverability and classification of
recorded asset amounts, or the amounts and classifications of liabilities that
would be necessary should the Company not be able to continue in existence.
NOTE 3 - BDC REQUIREMENTS:
- -------------------------
At December 31, 1995, the Company was in not in technical compliance with
Section 55 of the Investment Company Act with respect to the 70% test as a
result of its investment in Colonial Funds, Limited which is described in more
detail in Note 5. The non-compliance was inadvertent and the Company has taken
corrective action.
Colonial Funds, Limited is a Commonwealth of the Bahamas corporation
operating as an off-shore fund. This investment does not satisfy the
requirements of a "Qualifying Asset" because Colonial Funds, Limited is not
organized in the United States.
F-14
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 3 - BDC REQUIREMENTS (Continued):
- -------------------------------------
During August 1996, the Company entered into a rescission agreement with
Colonial Funds, Limited for the purpose of correcting the non-compliance so that
the form of this investment would comply with the requirements of a qualifying
asset. The Company returned the shares of Colonial Funds, Limited Class B
common stock, and received and canceled the shares which it had issued for such
stock. Concurrently, the Company acquired a 100% interest in YPE, Inc., a non-
public Colorado corporation, in exchange for 3,333,333 shares of FCVL common
stock which YPE, Inc. exchanged for 25,000 Class B common shares of Colonial
Funds, Limited.
Management believes the non-compliance with Section 55 has been corrected
and is unaware of the effects, if any, which this violation may have on its BDC
election. These financial statements were prepared based on the Company having a
valid BDC election as of December 31, 1995, and accordingly, do not include
adjustments which would be necessary should the Company not be a BDC.
NOTE 4 - CHANGE IN ACCOUNTING PRINCIPLE:
- ---------------------------------------
During 1995, the Company changed from the historical cost basis of
accounting to the fair value method of accounting consistent with its becoming a
BDC.
As a result of this change in accounting principle, the Company recorded a
$802,982 loss to the 1995 operations representing the cumulative effect on prior
years of the change in accounting. This adjustment related to the depreciation
of the Company's investments in Flower Environments, Inc. and Contemporary
Resources, Inc.
NOTE 5 - INVESTMENTS:
- --------------------
Investment in eligible portfolio companies included securities of and
advances to six privately held companies. Five of these companies requires
substantial additional capital for working capital or development purposes. The
Company has representation on the board of directors of each of its privately
held investee companies.
F-15
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 5 - INVESTMENTS (Continued):
- --------------------------------
The following table lists the Company's qualifying investments at December
31, 1995:
<TABLE>
<CAPTION>
Number of Cost
Shares and/or Fair
Company Owned Equity Value
- ------- --------- --------------- ---------------
<S> <C> <C> <C>
- - - - - - - - - - - - - - - - - - - - - -
Wholly-Owned Portfolio Companies:
Contemporary Resources, Inc. -
Common stock, appraisal method 13,700 $ 715,769 $ --
First Colonial Real Estate, Inc. -
Common stock, appraisal method 10,000 1,630,130 1,620,000
Advances, at cost n/a 218,085 --
Baja Pacific International, Inc. -
Common stock, equity method 10,000 100 --
YPE, Inc. -
Common stock, appraisal method 10,011 885,000 885,000
- - - - - - - - - - - - - - - - - - - - - -
Controlled (50%) Portfolio Companies:
Sherwood Properties, Inc. -
Common stock, appraisal method 12,500 1,919 --
Advances, at cost n/a 73,000 --
Gulf Coast Hotels, Inc. -
Common stock, equity method 1,875 209,782 --
Advances, at cost n/a 50,000 --
- - - - - - - - - - - - - - - - - - - - - -
Unaffiliated Public Company:
Gerant Industries, Inc. -
Common stock, cost method 2,500 4,356 --
---------- ----------
Investments $3,788,141 $2,505,000
========== ==========
</TABLE>
F-16
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 5 - INVESTMENT IN QUALIFYING ASSETS (Continued):
- ----------------------------------------------------
Contemporary Resources - Contemporary Resources had product sales of $1,985,900
- ----------------------
and $5,327,300 for the years ended December 31, 1995 and 1994, respectively, and
operating losses of $696,435 and $169,200, respectively, for those same years.
The Company has written down its investment in CRI to zero until the CRI
financial condition improves.
Sherwood - Sherwood acquired a 50% interest in the capital stock of a
- --------
Mississippi corporation which had purchased certain lots in a residential
subdivision subject to a land sale contract, and entered a joint venture
agreement to share in the profits of constructing personal residences on the
home sites. The Mississippi corporation has been unable to pay certain
installments required by the land sale contract, accordingly, that contract is
in default. The contract provides the sellers with the option to cancel the
contract should default occur. For these reasons, the Company has written down
its investment in Sherwood to zero until the Sherwood financial condition
improves. There is no assurance that the Mississippi corporation will be
successful in raising the capital necessary to cure the default, and Sherwood
may loose its investment if substantial capital is not obtained. Sherwood
conducted no operations during 1995.
Gulf Coast - Gulf Coast entered into a Purchase and Sale Agreement in November
- ----------
1994 to acquire land for the development of a high-rise condominium hotel. Gulf
Coast has been unable to raise the approximately $1,000,000 necessary to
complete the down payment. The seller has provided extensions to Gulf Coast,
however, the agreement is in default. For these reasons, the Company has
written down its investment in Gulf Coast to zero until the Gulf Coast financial
condition improves. There is no assurance that Gulf Coast will be successful in
raising capital, and Gulf Coast may loose its investment if substantial capital
is not obtained. Gulf Coast conducted no operations during 1995.
First Colonial Real Estate - First Colonial Real Estate acquired an assignment
- --------------------------
of a Texas oil and gas lease in July 1995. The underlying two year lease was
dated December 1994, and was renewed, as was the assignment, for an additional
two years in January 1996. Fair value of this investment was determined by the
Company based upon the Statement of Reserve Values prepared by a petroleum
geologist in November 1995, and after deductions for costs to open the wells and
federal income taxes. Realization of this investment would require the Company
to locate the capital necessary to open four wells and lay pipeline on the
property. In addition, gas production from the wells and gas prices would have
a significant effect upon realization of the investment. No business activity
was conducted during 1995 with respect to the oil and gas lease.
F-17
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 5 - INVESTMENT IN QUALIFYING ASSETS (Continued):
- ----------------------------------------------------
YPE, Inc. - YPE owns 25% of Colonial Funds, Limited. The other 75% of Colonial
- --------
Funds is owned by First Colonial Funds, Ltd. The Company also owns 50% of First
Colonial Funds, Ltd., therefore directly and indirectly, the Company has a 62.5%
interest in Colonial Funds, Limited. Colonial Funds, Limited is an off-shore
fund with investments in securities stated at value and comprising approximately
90% of its total assets. The following table from the audited financial
statements of Colonial Funds, Limited lists its investment in securities at
December 31, 1995:
<TABLE>
<CAPTION>
Number of Cost
Shares and/or Fair
Security Owned Equity Value
-------- ----------- ----------- ---------
<S> <C> <C> <C>
First Colonial Ventures, Ltd. 4,343,999 $ 5,510,236 $ 8,542,794
Baja Pacific International, Inc. 1,648,300 16,483 16,483
Banyon Corporation 1,714,286 6,000,000 6,000,000
Brain Tech, Inc. 950,000 180,000 180,000
Brooks Resources, Inc. 10,000 3,434 3,600
----------- -----------
$11,710,153 $14,742,877
=========== ===========
</TABLE>
The preceding table represents that a substantial portion of the cost and
fair value of investments held by Colonial Funds, Limited at December 31, 1995
was based upon shares of the Company (First Colonial Ventures, Ltd.).
The Company valued its investment in YPE, Inc. as of December 31, 1995,
based upon a review of the subsequent bid prices for FCVL and Banyon common
shares. Consequently, the Company adjusted the total value of Colonial Fund's
investments, as shown in the table above, downward to $9,942,000 for purposes of
the valuation of its investment in YPE, Inc. Also see Note 6, following.
NOTE 6 - OTHER INVESTMENT:
- -------------------------
In July 1995, the Company acquired a 50% interest in First Colonial Funds,
Ltd., a Nevada investment advisor. First Colonial Funds, Ltd. owns 75% of the
common stock of Colonial Funds, Limited. Accordingly, through its investments
in YPE, Inc. and First Colonial Funds, Ltd., the Company indirectly owns 62.5%
of Colonial Funds, Limited.
F-18
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 6 - OTHER INVESTMENT (Continued):
- -------------------------------------
The following table lists the Company's investment in non-qualifying assets
at December 31, 1995:
<TABLE>
<CAPTION>
Number of Cost
Shares and/or Fair
Investment Owned Equity Value
---------- --------- ---------------- --------------
<S> <C> <C> <C>
First Colonial Funds, Ltd. -
Common stock, appraisal method 50,000 $ 750,000 $ 750,000
Advances, at cost n/a 4,304 --
------------ ------------
Other investment $ 754,304 $ 750,000
============ ============
</TABLE>
The Company valued its investment in First Colonial Funds, Ltd. as of December
31, 1995, based entirely on First Colonial Funds, Ltd. holdings in Colonial
Funds, Limited, after appropriate discounts.
NOTE 7 - NOTES RECEIVABLE FROM SALE OF COMMON STOCK:
- ---------------------------------------------------
Notes receivable from sale of the Company's common stock included the
following amounts at December 31, 1995:
Colonial Funds, Limited - note dated 12/13/95
-----------------------
in the original amount of $600,000, payable on or
before 12/14/99, with interest at 6.5% per annum,
and secured by 60,000 shares of FCVL stock 479,212
Note receivable - loan dated 5/1/95 in the original
---------------
amount of $140,000, due upon demand, with no
interest, and secured by 10,750 shares of FCVL stock 50,000
------------
Total notes receivable from sale of stock $ 529,212
============
F-19
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 8 - NOTES PAYABLE:
- ----------------------
The Company was not required to pay certain notes payable issued in
connection with the 1988 acquisition of Contemporary Health Systems, Inc.
During December 1993, the balance of these notes and accrued interest totaled
$505,889. At that time the Company determined that collection of a portion of
the total amount was statute-barred under Section 337(1) of the California Code
of Civil Procedure, and reclassified that portion, $361,700, to paid-in capital.
During 1994, an additional $101,800 became statute-barred and was reclassified
to paid-in capital, and during 1995, the remaining $42,389 was reclassified to
paid-in capital.
Notes payable at December 31, 1995, included the following amounts:
<TABLE>
<CAPTION>
<S> <C>
Contemporary Resources, Inc. - loans and
----------------------------
advances made to the Company by CRI, due
upon demand, with interest at 10% per annum $ 500,000
Convertible Debenture - loan made by private
---------------------
investor, due upon demand, with interest at
15%, convertible at the option of the note
holder 210,000
Investor Loan - loan made by private
-------------
investor, due upon demand, with interest
at 2% over Bank of America prime rate 250,396
------------
Total notes payable $ 960,396
============
</TABLE>
NOTE 9 - COMMON STOCK:
- ---------------------
On January 4, 1996, the Company effected a 1 for 20 reverse stock split.
All disclosures in the accompanying financial statements and footnotes
pertaining to shares of common stock have been restated to reflect the January
4, 1996 stock split.
F-20
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 9 - CAPITAL STOCK (Continued):
- ----------------------------------
The following transactions involving shares of the Company's common stock
occurred during the year ended December 31, 1995:
During 1994, pursuant to Regulation S the Company issued 190,000 shares
subject to a stock subscription agreement and accounted for the shares at
December 31, 1994, as common stock subscribed. During July 1995, 179,238 of
those shares were issued to an unaffiliated corporation as consideration
for the oil and gas lease assignment described in Note 6. The remaining
10,762 shares were issued subject to a stock subscription agreement in the
amount of $140,000, $90,000 of which had been paid by December 31, 1995.
During 1994, pursuant to Regulation S the Company issued 12,500 shares
subject to a stock subscription agreement and accounted for the shares at
December 31, 1994, as common stock subscribed. During June 1995, these
shares were sold for the total consideration of $24,572.
During April 1995, pursuant to Section 4(2) the Company issued 200,000
restricted shares subject to a stock subscription agreement. In January
1996, these shares were returned to the Company and canceled.
During April 1995, pursuant to Regulation S the Company issued 100,000
shares in subject to a stock subscription agreement. These shares were
stolen during 1995 and the Company received nothing for them. Accordingly,
the Company recorded a reduction in paid in capital for the par value of
these shares.
During July 1995, pursuant to Section 4(2) the Company issued 3,333,333
restricted shares to Colonial Funds, Limited in exchange for 25,000 shares
Class B common stock of Colonial Funds.
During July 1995, pursuant to Section 4(2) the Company issued 10,000
restricted shares to First Colonial Funds, Ltd. in exchange for 50,000
shares Class A common stock of First Colonial Funds.
During October 1995, pursuant to Regulation E the Company issued 10,000
shares to Colonial Funds, Limited subject to a stock subscription agreement
in the amount of $200,000.
F-21
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 9 - CAPITAL STOCK (Continued):
- ----------------------------------
During December 1995, pursuant to Regulation E the Company issued 60,000
shares to Colonial Funds, Ltd. subject to a stock subscription agreement in
the amount of $600,000.
During October 1995, the Company entered into agreements with two unrelated
individuals to grant them options to acquire 7,500 and 75,000 shares of
common stock at the price of $.001 per share. These options would have
expired on October 2, 1996, however they were extended until October 2,
1998.
NOTE 10 - INCOME TAXES:
- -----------------------
The Company files consolidated tax returns with its wholly-owned
investments. The Company's 1987 acquisition of Contemporary Resources, Inc., was
a reverse purchase with CRI acquiring the assets of FCVL in accordance with APB
Opinion No. 16 "Business Combinations". Accordingly, the consolidated tax
returns are filed in the name of CRI.
During 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
The significant components of the net deferred tax assets as of December
31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss carryforward $ 738,900
Unrealized investment losses 360,500
Valuation allowance (1,099,400)
-----------
Net deferred tax assets $ --
===========
</TABLE>
SFAS 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. At December 31, 1995,
the Company has established a valuation allowance against net deferred tax
assets of $1,099,400.
F-22
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 10 - INCOME TAXES (Continued):
- ----------------------------------
As of December 31, 1994, the Company has available for federal income tax
reporting purposes net operating losses of approximately $2,173,000. These net
operating losses expire in the years 1998 through 2009.
The Company has not yet filed its 1995 consolidated income tax returns. The
Company did not realized losses during 1995, and does not expect to owe any
income taxes with the filing of the 1995 returns. The tax provision for the year
ended December 31, 1995, represents California's minimum tax.
NOTE 11 - LITIGATION:
- --------------------
During 1992, the Company entered into an agreement to sell its wholly-owned
subsidiary, Contemporary Resources, Inc. The acquiring company filed a
voluntary petition in U. S. Bankruptcy Court seeking reorganization under
Chapter 11, and while in bankruptcy filed a civil complaint on August 26, 1994,
against the Company and its president. On February 22, 1995, the bankruptcy
court dismissed the complaint with prejudice, but without prejudice as to their
right to file a new action in a court other than the bankruptcy court. On March
1, 1996, a new complaint was filed, however prior to trial, the matter was
settled on June 26, 1996, at a cost of $30,000 to the Company. The cost of this
settlement was included in expense for the year ended December 31, 1995.
NOTE 12 - RELATED PARTY TRANSACTIONS:
- -------------------------------------
The Company pays a monthly management fee of $13,500 to its president
pursuant to a month-to-month consulting agreement. At December 31, 1995,
accrued management fees payable under the agreement was $109,500.
The Company has a note payable to its wholly-owned investee, Contemporary
Resources, Inc. in the amount of $500,000. At December 31, 1995, accrued
interest payable on the note to CRI was $187,504.
The Company had two outstanding stock purchase agreements with Colonial
Funds, Limited as described in Note 9. At December 31, 1995, notes receivable
from Colonial Funds, Limited were $479,212. Also at December 31, 1995, other
receivables included $3,250 accrued interest on these notes receivable.
F-23
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 12 - RELATED PARTY TRANSACTIONS (Continued):
- ------------------------------------------------
At December 31, 1995, advances totaling $8,275 owing from a director of the
Company were included in other receivables.
At December 31, 1995, Colonial Funds, Limited owned a substantial number of
shares of the Company as further described in Note 5. The values for Colonial
Funds, Limited and First Colonial Funds, Ltd. at December 31, 1995, were based,
in substantial part, upon the investments of Colonial Funds, Limited and these
investments included the Company's own common stock.
NOTE 13 - COMMITMENTS:
- ---------------------
The Company guarantees the asset-based bank line of credit for Contemporary
Resources, Inc. At December 31, 1995, a total of $702,351 was borrowed by
Contemporary from the bank. It is the opinion of management that the assets of
CRI pledged under the line of credit, principally inventories and receivables,
are sufficient to repay the amount outstanding.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK:
- ---------------------------------------
The Company and its subsidiaries place their cash in financial institutions
and, at times, cash held in checking accounts may be in excess of the FDIC
insurance limit.
NOTE 15 - SUBSEQUENT EVENTS:
- ---------------------------
As described in Note 9, the Company effected a 1 for 20 reverse stock split
on January 4, 1996.
As also described in Note 9, a stock subscription agreement dated April
1995, for the sale of 200,000 shares of common stock was terminated. During
January 1996, the shares were returned to the Company and canceled.
F-24
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1995
NOTE 15 - SUBSEQUENT EVENTS (Continued):
- ---------------------------------------
As described in Note 11, on June 26, 1996, the Company settled its
litigation in connection with the failed 1992 sale of Contemporary Resources,
Inc.
In September, 1996, the Company formed its wholly-owned investee, First
Colonial Studios, Inc., which acquired all of the tangible and intangible
operating assets and certain liabilities of Acclaim Studios, LLC, in exchange
for 180,000 shares of FCVL common stock. Acclaim operated a full service post
production facility located in Studio City, California. Under the purchase
agreement, the First Colonial Studios, Inc. also acquired employment agreements
and non-competition agreements with Acclaim's senior management.
NOTE 16 - BUSINESS SEGMENT INFORMATION:
- --------------------------------------
FCVL's portfolio investments include only one operating company,
Contemporary Resources Inc. (CRI). CRI operates in one reportable segment,
distribution of table top items to major airlines, and various amenities to
hotels and cruise lines.
F-25
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
F-26
<PAGE>
KELLOGG & ANDELSON
Accountancy Corporation
Board of Directors and Stockholders
First Colonial Ventures, Ltd. and Subsidiaries
Los Angeles, California
Independent Auditor's Report
We have audited the accompanying consolidated balance sheet of First Colonial
Ventures, Ltd. and Subsidiaries as of December 31, 1994 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 1994 and 1993. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express and opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also included assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial positions of First
Colonial Ventures, Ltd. and Subsidiaries as of December 31, 1994 and the results
of their operations, stockholders' equity (deficit) and cash flows for the years
ended December 31, 1994 and 1993 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company and its subsidiaries will continue as a going concern. As
discussed in Note C to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a working capital deficiency.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MEMBERS AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
California Society of Certified Public Accountants
C.P.A. Asociates Offices in Principal Cities
14724 Ventura Blvd Second Floor, Sherman Oaks, California 91403
Phone (818) 971-5100 Fax (818) 971-5155
F-27
<PAGE>
Also, as discussed in Note C, during 1992 the Company entered into an agreement
to sell its subsidiary, Contemporary Resources, Inc., in exchange for a 49%
interest in the acquiring company. The acquiring company and its parent company
were to fulfill certain commitments prior to December 31, 1992, otherwise the
original agreement would be rescinded. The Company believes that the acquiring
company and its parent company did not fulfill their commitments, and that the
agreement was automatically rescinded. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainly should it be ultimately determined that the agreement was not
rescinded and therefore that Contemporary Resources, Inc. was sold in 1992 and
its operations should not be included in the consolidated financial statements
of First Colonial Ventures, ltd. as of December 31, 1994 and 1993.
/S/ Kellogg & Andelson
- ----------------------
February 3, 1995, except for Note C,
as to which the date is February 22, 1995
F-28
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 14,600
Accounts receivable, less allowance of $47,300 693,100
Inventories (Note A) 727,200
Current portion of long-term note receivable (Note D) 20,000
Other receivables (Note E) 158,400
Prepaid expenses and other current assets 165,400
----------
Total current assets 1,778,700
NOTE RECEIVABLE, net of current portion (Note D) 181,800
INVESTMENTS (Notes F and K) 233,000
PROPERTY AND EQUIPMENT, net (Note G) 113,300
OTHER ASSETS:
Deferred financing costs, less amortization of $2,540 (Note A) 76,200
Other assets 7,800
----------
$2,390,800
==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Accounts payable and accrued expenses (Note H) $ 642,500
Current portion of loans payable - bank (Note I) 978,000
Notes payable - related parties (Note B) 26,800
Current portion of note payable - other (Note J) 250,200
-----------
Total current liabilities 1,897,500
LOAN PAYABLE - BANK, net of current portion (Note I) 491,000
NOTES PAYABLE - OTHER, net of current portion (Note J) 18,600
COMMITMENTS (Note N) -
-----------
Total liabilities 2,407,100
-----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value, 500,000,000 shares authorized;
11,005,000 shares issued and outstanding (Note K) 10,900
Preferred stock, no par value, 10,000,000 shares authorized;
no shares issued and outstanding -
Additional paid-in-capital (Note B) 3,533,500
Accumulated deficit (3,560,700)
-----------
Total stockholders' (deficit) (16,300)
-----------
$2,390,800
==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-29
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
REVENUES $5,361,500 $8,285,900
COST OF SALES 4,657,700 7,094,000
---------- ----------
Gross profit 703,800 1,191,000
---------- ----------
OPERATING EXPENSES:
Selling expenses 240,500 317,400
General and administrative expenses 839,400 729,500
---------- ----------
Total operating expenses 1,079,900 1,046,900
---------- ----------
(LOSS) INCOME FROM OPERATIONS (376,100) 145,000
OTHER INCOME (EXPENSE):
Interest expense (158,900) (176,000)
---------- ----------
(LOSS) BEFORE INCOME TAX PROVISION (535,000) (31,000)
INCOME TAX (BENEFIT) REVISION (Note M) (8,400) 2,400
---------- ----------
(LOSS) BEFORE DISCOUNTED OPERATION
AND EXTRAORDINARY ITEM (526,600) (33,400)
DISCOUNTED OPERATIONS (Note P):
Net loss from operations, net of income tax (126,900) (17,200)
Loss on disposal, net of income tax (10,200) 0
---------- ----------
NET (LOSS) FROM DISCONTINUED OPERATIONS (137,100) (17,200)
---------- ----------
(LOSS) BEFORE EXTRAORDINARY ITEM (663,700) (50,600)
EXTRAORDINARY GAIN FROM EXTINGUISHMENT
OF DEBT, net of income tax (Note I) 384,000 -
---------- ----------
NET (LOSS) $ (279,700) $ (50,600)
========== ==========
(LOSS) PER SHARE:
Continuing operations $ (.06) $ (.01)
Discontinued operations (.01) -
Extraordinary item .04 -
---------- ----------
Net (loss) per share $ (.03) $ (.01)
========== ==========
Weighted average number of common shares outstanding 9,013,000 4,847,800
---------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-30
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------ Paid-In Accumulated Stockholder
Shares Amount Capital Deficit Deficiency
------------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 4,847,800 $ 4,800 $ 3,073,600 $ (3,230,400) $ (152,000)
Capital contributions resulting from
a portion of certain related party
debt becoming statute-barred (Note B) - - 361,700 - 361,700
Net loss for the year
ended December 31, 1993 - - - (50,600) (50,600)
---------- ------- ----------- ----------- -----------
Balance, December 31, 1993 4,847,800 4,800 3,435,300 (3,281,000) 159,100
Common stock issuance for personal
guarantees of bank loan 1,032,200 1,000 (1,000) - -
Common stock issuance as consideration
to complete FEI's acquisition in 1993 130,000 100 - - 100
Common stock issuance for personal
guarantees of bank loan 1,768,800 1,800 (1,800) - -
Common stock issuance in exchange
for delivery to a third party of the
Company's shares of common stock 840,000 800 (800) - -
Common stock issuance for fees
and bonuses 210,000 200 - - 200
Common stock issuance for
investment in another company 1,918,000 1,900 - - 1,900
Common stock issuance as payment for
various fees in investment acquisition 258,100 300 - - 300
Subscribed common stock 4,050,000 4,100 - - 4,100
Common stock
subscription receivable (4,050,000) (4,100) - - (4,100)
Capital contributions resulting from
a portion of certain related party
debt becoming statute-barred (Note B) - - 101,800 - 101,800
Net loss for the year
ended December 31, 1994 - - - (279,700) (279,700)
---------- ------- ----------- ------------ -----------
Balance, December 31, 1994 11,005,000 $10,900 $3,533,500 $ (3,560,700) $ (16,300)
---------- ------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-31
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) $ (279,700) $ (50,600)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 84,300 37,900
Loss on sale of discontinued operations 10,200 -
Extraordinary gain on debt settlement (384,000) -
Changes in assets and liabilities:
Decrease (increase) in accounts receivables 406,000 (408,100)
Decrease in inventories 55,900 87,100
(Increase) decrease in other receivables (248,900) 78,800
(Increase) in prepaid expenses and other current assets (65,800) (5,600)
(Increase) in other assets (24,100) (101,200)
(Decrease) increase in accounts payable and accrued expenses (334,400) (684,300)
----------- -----------
Net cash provided by (used in) operating activities (780,500) 322,600
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (42,700) (104,300)
Pre-opening costs incurred - Flower Environments, Inc. - (91,500)
Flower Environments, Inc.'s asset purchase agreement - (10,000)
Proceeds from sale of discontinued operations 25,000 -
----------- -----------
Net cash (used in) investing activities (17,700) (205,800)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: 2,433,600 -
Proceeds from loans payable - bank
Payments on loans payable - bank (2,336,400) -
Payments on note payable - other (7,000) -
Proceeds from issuance of common stock 600 -
(Increase) decrease in deferred financing costs (78,500) 13,000
Proceeds from note payable - other 245,000 28,500
Net borrowing under line of credit agreement - 143,600
----------- -----------
Net cash provided by financing activities 257,300 185,100
----------- -----------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS (540,900) 301,900
CASH AND CASH EQUIVALENTS:
Beginning of year 555,500 253,600
----------- -----------
End of year $ 14,600 $ 555,500
----------- -----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-32
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1993
-------- -------
<S> <C> <C>
CASH PAID DURING THE YEAR FOR:
Interest $ 48,500 $ 200
Income taxes -- 18,100
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In December 1993, FCVL had note payable and accrued interest to related parties
totaling $505,800. For the years ended December 31, 1994 and 1993, the Company
determined that $101,800 and $361,700, respectively, of the debt had become
statue-barred, and has been reclassified to additional paid-in-capital (see Note
B).
In November 1994, the Company sold substantially all of the net assets of flower
Environments, Inc. (FEI) amounting to $177,400. As consideration, the Company
received a non-interest bearing note receivable of $150,000 (recorded at a
present value of future cash flows of $92,200), a short-term receivable of
$50,000, cash of $25,000 and recognized a loss on sale of discontinued
operations of $10,200.
During 1994, the Company acquired approximately 50% stock ownership of two
separate companies. In connection with the acquisition of these companies, the
Company reversed other receivables of $231,100 and issued 1,918,000 shares of
common stock (see Notes F and K).
Also during 1994, the Company reclassified certain accounts receivable of
$109,600 to notes receivable from two of its customers (see Note D).
DISCLOSURES OF ACCOUNTING POLICY:
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid instruments purchased with a maturity of three months or less
to be cash equivalents.
The accompanying notes are an integral part
of the consolidated financial statements.
F-33
<PAGE>
FIRST COLONIAL VENTURES, LTD
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
Operations
- ----------
First Colonial Ventures, Ltd. (FCVL or "Company") was incorporated under the
laws of the State of Utah on March 25, 1985 to acquire interests in various
business opportunities.
On May 1, 1987, FCVL acquired 100% of the stock of Contemporary Resources, Inc.
(CRI) in a stock purchase transaction. CRI is engaged in the distribution of
table top items to the airline industry and various amenities to the hotel and
cruise line industries.
During September 1993, FCVL created a new wholly-owned subsidiary entitled
Flower Environments, Inc. (FEI), a Nevada corporation, to develop and market
flower display irrigation equipment. In November 1994, the Company sold
substantially all of the net assets of FEI (see Note P).
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of First
Colonial Ventures, Ltd. and its wholly-owned subsidiaries, Contemporary
Resources, Inc. and Flower Environments, Inc. All significant intercompany
transactions and balances have been eliminated. The equity method of accounting
is used when the company has a 20% to 50% interest in other companies. Under
the equity method, original investments are recorded at cost and adjusted by the
Company's share of undistributed earnings or losses of these companies.
Investments that account for less than 20% interest in other companies are
stated at cost, which approximates fair value as of December 31, 1994.
Inventories
- -----------
Inventories are recorded at the lower of cost (moving average) or market on a
first-in, first-out basis. At December 31, 1994 the inventories were comprised
entirely of CRI finished goods.
Property and Equipment
- ----------------------
Property and equipment is stated at cost and depreciated by straight-line and
accelerated methods over the estimated useful lives of the assets.
F-34
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
CONTINUED
---------
Other Assets
- ------------
Deferred financing costs consists of bank and legal fees incurred in obtaining a
revolving line of credit with a bank. These costs are being amortized on a
straight-line basis over a sixty month period.
Concentration of Credit Risk
- ----------------------------
Financial investments which potentially expose the Company to a concentration of
credit risk, as defined by Statement of financial Standards No. 105, consist
primarily of cash and accounts and note receivable. The Company places its cash
with high credit quality institutions. At times such investment may be in
excess of the FDIC insurance limit. Concentration of credit risk with respect
to trade receivables are limited. Generally, the Company does not require
collateral or other security to support customer receivables. Management
continually monitors the financial condition of these companies to reduce the
risk of loss.
Income Taxes
- ------------
In calendar year 1993, the company adopted Statement of financial Accounting
Standard No. 109, "Accounting for Income Taxes". SFAS 109 requires a Company to
recognize deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in a Company's financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.
NOTE B - CONTINGENCY
-----------
During December 1993, the Company determined that a portion of FCVL's notes
payable to related parties which totaled $344,900, and the related accrued
interest of $160,900, to be statute-barred under Section 337(1) of the
California Code of Civil Procedure. The amounts of notes payable and accrued
interest determined to be statute-barred for the years ended December 31, 1994
and 1993 were $101,800 and $361,700, respectively. These amounts were
reclassified to additional paid-in capital. As of December 31, 1994,
outstanding notes payable to related parties was $26,800 and related accrued
interest was $15,600.
F-35
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - UNCERTAINTY
-----------
The Company's continued existence is dependent upon its ability to obtain
profitable operations on a consolidated basis. During the last five years, the
company has experienced losses from continuing operations, negative working
capital and substantial losses from discontinued operations on a consolidated
basis. Management is currently negotiating to obtain additional sources of
financing and capital.
While management anticipates that cash flow from operations will be sufficient
to meet obligations and liabilities as they mature, there is no assurance that
the company will be successful in generating cash from operations to avoid
depletion of its capital resources. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts nor the amounts and classifications of liabilities that
might be necessary should the Company not be able to continue in existence.
Also during 1992 the company entered into an agreement to sell its subsidiary,
CRI, in exchange for a 49% interest in the acquiring company. The acquiring
company and its parent company were to fulfill certain commitments prior to
December 31, 1992, otherwise the original agreement would be rescinded. The
Company believes that the acquiring company and its parent company did not
fulfill their commitments, and that the agreement was automatically rescinded.
On August 26, 1994 the acquiring company filed suit against the Company and its
president. The adversary proceeding in the bankruptcy court was dismissed with
prejudice on February 22, 1995 and without prejudice as to their right to file a
new action in a court other than the bankruptcy court. In the event that the
acquiring company should bring the matter in another court and prevail, the
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty should it be ultimately determined
that the agreement was not rescinded and therefore that CRI was sold in 1992 and
its operations should not be included in the consolidated financial statements
of FCVL as of December 31, 1994 and 1993.
NOTE D - NOTE RECEIVABLE
---------------
A summary of notes receivable is as follows:
Notes receivable $ 201,800
Amounts due within one year 20,000
-----------
$ 181,800
===========
F-36
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - NOTE RECEIVABLE - CONTINUED
---------------------------
The notes receivable include three notes ($92,200, $83,600 and $26,000). The
final maturities of the notes are November 2003, July 2001 and November 2000,
respectively, with interest rates of 13% (imputed), 9.06% (imputed) and 8%,
respectively.
The first note was part of the consideration received by the Company on the sale
of the net assets of FEI, the Company received a non-interest bearing note of
$150,000. The note was recorded at the present value of the future cash flows,
utilizing an imputed interest rate of 13%, which equates to $92,200. The note
is payable to the Company in annual installments of $20,000 to commence on
November 1, 1995 continuing each year for 7 years with a final installment of
$10,000 on November 1, 2003. The note is secured by all of the assets sold by
the Company.
NOTE E - OTHER RECEIVABLES
-----------------
As of December 31, 1994, other receivables include $123,000 of advances to an
unrelated party for prospective real estate acquisitions.
NOTE F - INVESTMENTS
-----------
As of December 31, 1994, investments which are all accounted for on the
equity method consisted of the following:
During August 1994, the Company acquired 50% of Sherwood
Properties, Inc. (Sherwood), a company incorporated after
December 31, 1994, in return for 1,918,141 shares of
restricted common stock of the Company. Sherwood had no
operations during the year ended December 31, 1994. $ 1,900
During December 1994, the Company acquired 50% investment
in Gulf Coast Hotels, Inc. As of December 31, 1994, the
amount of investment represents the Company's share in the
net assets of Gulf Coast which consisted only of land for
future hotel site. Gulf Coast had no operations during
the year ended December 31, 1994. 231,100
-----------
$ 233,000
===========
F-37
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - PROPERTY AND EQUIPMENT
----------------------
As of December 31, 1994, property and equipment consisted of:
<TABLE>
<CAPTION>
Depreciable
Life in
Years
-----------
<S> <C> <C>
Computer equipment $ 147,400 5
Furniture and fixtures 67,600 7
Vehicle 32,500 5
Leasehold improvements 9,700 31.5
-----------
Total $ 257,200
Accumulated depreciation 143,900
-----------
$ 113,300
===========
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1993 was
$84,300 and $37,900, respectively.
NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
As of December 31, 1994 accounts payable and accrued expenses consisted of:
Accounts payable - trade $ 493,100
Accrued legal and accounting 110,800
Accrued interest 15,600
Accrued management fee 15,500
Income taxes payable 7,500
----------
$ 642,500
==========
F-38
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - LOANS PAYABLE - BANK
--------------------
As of December 31, 1994, loans payable - bank consisted of the following:
Line of credit up to $1,400,000, secured by assets
of the Company and personal assets of the president
and a stockholder, interest rate as of December 31,
1994 was 13.25%, maturing October 28, 1995. $ 978,000
Promissory note payable, unsecured, interest rate
of 10.5% to commence on April 28, 1995, principal
and interest due on October 28, 1997. 491,000
-----------
1,469,000
Less current portion 978,000
-----------
Long-term portion $ 491,000
-----------
During 1994, the Company settled its loan payable of $1,491,400 principal and
accrued interest of $383,600 to a bank that was seized by the FDIC on January
31, 1992. The Company paid $1,000,000 (the cash obtained out of the line of
credit with another bank), issued a promissory note of $491,000 and recognized
an extraordinary gain on debt settlement of $384,000. Income tax expense of
approximately $166,300 was not incurred in this transaction due to the net loss
incurred for 1994 and the carryforward of prior years' net operating losses.
NOTE J - NOTES PAYABLE - OTHER
---------------------
As of December 31, 1994, notes payable - other consisted of the following:
Promissory note dated May 6, 1994, unsecured,
interest at 10%, matured on November 6, 1994. The
Company subsequently paid-off the loan in January
1995. $ 20,000
Promissory note dated April 29, 1994, secured by
assets of the Company, interest payable monthly at
a bank's prime rate (8.5% as of December 31, 1994)
plus 2% commencing May 1, 1994. Principal and
unpaid interest was due on October 1, 1994. As of
the date of this report, the note is still outstanding. 225,000
F-39
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - NOTES PAYABLE - OTHER - CONTINUED
---------------------------------
Vehicle installment contract payable dated December
31, 1993, secured by vehicle financed, interest at
9.25%, monthly installments of principal and
interest of $600, maturing December 1998. 23,800
-----------
268,800
Less current portion 250,200
-----------
Long-term portion $ 18,600
===========
NOTE K - STOCKHOLDERS' EQUITY
--------------------
During the year ended December 31, 1994, the company issued the following shares
of restricted common stock:
During February 1994, the Company issued an aggregate of 1,032,200 shares,
consisting of 516,100 shares to the president and 516,100 to a director in
exchange for their continuing personal guarantees of CRI's previous bank
line of credit.
During August 1994, the Company issued an aggregate of 130,000 shares to
certain unrelated individuals as consideration to complete the purchase of
certain assets and patents related to FEI, and for finder's fees related to
the FEI transaction.
During August 1994, the Company issued an aggregate of 1,768,800 shares,
consisting of 884,400 shares to the president and his wife, and 884,400
shares to a director and his wife, in exchange for personal guarantees of
CRI's new bank line of credit.
During August 1994, the Company issued an aggregate of 840,000 shares,
consisting of 600,000 shares to the president's children, and 240,000
shares to a director, in exchange for the delivery to a third party of
120,000 shares and 80,000 shares of restricted common stock provided by the
president's children and the director, respectively.
During August 1994, the Company issued an aggregate of 210,000 shares as
fees and bonuses, consisting of 50,000 shares to a director, 110,000 shares
to the Company's attorneys and 50,000 shares to an individual.
F-40
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - STOCKHOLDERS' EQUITY - CONTINUED
--------------------------------
During December 1994, the Company issued 1,918,141 shares to
an unaffiliated company for the acquisition of a 50% interest
in another company. Also, the Company issued 258,100 shares
as payment for various fees associated with this acquisition.
(see Note F).
During January and July 1994, the Company issued 4,050,000
shares of common stock into two escrow accounts pursuant to
stock subscription agreements. The common stock is to be
released on a pro rate basis from the escrow account upon the
payment to the Company of $4,750,000, which is net of
commissions and allowable expenses. Since the Company had not
received any consideration as of December 31, 1994, the
4,050,000 shares of common stock subscription receivable at
the par value of $0.001 per share, and are shown as a
reduction to stockholder's equity (deficit).
On October 3, 1994, the Company entered into agreements with two unrelated
individuals to sell them options to acquire 150,000 and 1,500,000 shares of
common stock at a price of $.001 per share. Because the Company's stock had not
traded, no cost was attributed to these options which are exercisable at any
time before October 2, 1996.
NOTE L - RELATED PARTY TRANSACTIONS
--------------------------
The Company pays a monthly management fee of $1,500 to its president. For the
years ended December 31, 1994 and 1993 total management fee included in general
and administrative expenses amounted to $18,000 for both years. As of December
31, 1994 accrued management fee was $15,500.
Also, during the year ended December 31, 1994, the president was compensated
pursuant to a month-to-month consulting agreement. Compensation to the
president pursuant to this consulting agreement will be approximately $165,000
for the year ending December 31, 1995, exclusive of any bonus that may be paid.
F-41
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - INCOME TAXES
------------
The components of income tax (benefit) provision are as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Current:
Federal $ (10,800) $ --
State 2,400 2,400
Deferred -- --
---------- ----------
$ ( 8,400) $ 2,400
========== ==========
</TABLE>
As of December 31, 1994, the components of deferred tax assets and deferred tax
asset valuation allowances are as follows:
Deferred tax assets:
Bad debts $ 20,481
Depreciation (33,978)
Contributions carryover (441)
Net operating loss carryforward 1,097,231
State income taxes 37,507
-----------
Total deferred tax assets 1,120,800
Less: Valuation allowance (1,120,000)
$ --
===========
The actual provision for income tax differs from the expected tax provision
(benefit), computed by applying the Federal corporate tax rate of 34% to loss
before income taxes, as follows:
Expected statutory tax benefit $ (98,532)
State income tax, net of federal tax effect 1,584
Increase in deferred tax asset valuation allowance 122,342
Reversing timing differences (33,794)
-----------
Actual income tax benefit $ (8,400)
===========
FCVL files consolidated tax return with CRI and FEI. The consolidated group has
federal and state net operating loss carryforwards of approximately $2,847,100
and $1,293,700, respectively, available through December 21, 2009 and 2000,
respectively.
F-42
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS
-----------
Operating Lease
---------------
During 1993, CRI re-negotiated its operating lease for office space which
expires in July 2001. The net rental payments are currently $2,700, with
scheduled increases to reach a maximum of $6,800 per month during the term of
the lease. The Company also leases office equipment under operating leases.
The office rental expense charged to operations for the years ended December 31,
1994 and 1993 was $35,000 and $32,000, respectively.
The minimum future rental payments under the above lease as of December 31, 1994
are as follows:
1995 $ 35,900
1996 40,600
1997 49,600
1998 62,300
1999 and thereafter 198,700
-----------
$ 378,100
===========
Letter of Intent to Acquire Assets
----------------------------------
The company entered into a letter of intent (Letter of Intent) dated November
28, 1994 to acquire the net assets of a certain company. The Letter of Intent
includes a purchase price of $25,000 and 600,000 shares of common stock,
employment agreement to hire the president of the seller for 2 years at an
annual salary of $40,000 and a covenant not to compete. The purchase is pending
certain requirements including the seller's review of the Company's December 31,
1994 financial statements.
NOTE O - BUSINESS SEGMENT INFORMATION
----------------------------
Major Customers
---------------
CRI operates in one reportable segment, distribution of table top items to major
airlines, and various amenities to hotels and cruise lines. CRI grants credit
to these companies, principally based in the Unites States. The following
information relates to customers accounting for 10% or more of CRI's revenues.
F-43
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - BUSINESS SEGMENT INFORMATION - CONTINUED
----------------------------------------
<TABLE>
<CAPTION>
Major Customers - Continued
---------------------------
Sales percentage
-------------------
1994 1993
---- ----
<S> <C> <C>
Customer A 25 % 54 %
Customer B 10 11
Customer C -- 14
--- ---
35 % 79 %
=== ===
</TABLE>
As of December 31, 1994, accounts receivable from the above customers amounted
to $470,700, $134,668 and $0, respectively.
Major Vendors
-------------
The following information relates to vendors accounting for 10% or more of CRI's
purchases.
<TABLE>
<CAPTION>
Purchases percentage
--------------------
1994 1993
---- ----
<S> <C> <C>
Vendor A 37 % 35 %
Vendor B 12 --
Vednor C 13 --
Vendor D -- 11
--- ---
62 % 46 %
=== ===
</TABLE>
As of December 31, 1994, accounts payable to the above vendor amounted to
$12,600, $85,700, $0, respectively.
NOTE P - DISCONTINUED OPERATIONS
-----------------------
In November 1994, the Company sold substantially all of the net assets of Flower
Environments, Inc. (FEI) amounting to $177,400. As consideration, the Company
received a non-interest bearing note receivable of $150,000 (recorded at a
present value of future cash flows of $92,200), a short-term receivable of
$50,000, cash of $25,000 and recognized a loss on sales of discontinued
operations of $10,200. Income tax benefit of approximately $4,400 was not
F-44
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - DISCONTINUED OPERATIONS - CONTINUED
-----------------------------------
recognized in this transaction due to the net loss incurred for 1994 and
carryforward of prior years' net operating losses. The result of FEI's
operations have been reported separately as a component or discontinued
operations in the consolidated statements of operations. Prior year
consolidated financial statements have been restated to present FEI as a
discontinued operation. Summarized results of FEI's operations are as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Revenues $ 118,600 $ 10,200
Cost of sales 91,500 9,700
---------- ----------
Gross profit 27,100 500
---------- ----------
Operating expenses:
Selling expenses 61,000 500
General and administrative 91,700 16,400
---------- ----------
Total operating expense 153,200 16,900
---------- ----------
Loss from discontinued operations
before income tax provision (126,100) (16,400)
Provision for income taxes 800 800
---------- ----------
Loss from discontinued
operations (126,900) (17,200)
Loss on sale of FEI assets (10,200) --
---------- ----------
Total loss related to
discontinued FEI $ (137,100) $ (17,700)
========== ==========
</TABLE>
F-45
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
DECEMBER 31, 1994
F-46
<PAGE>
KELLOGG & ANDELSON
ACCOUNTANCY CORPORATION
Board of Directors
First Colonial Ventures, Ltd. and Subsidiaries
Los Angeles, California
Independent Auditor's Report
Re: Supplementary Information as of December 31, 1994
Our examinations were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying
supplementary information has been subjected to the auditing procedures applied
in the examination of the basic consolidated financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relating to the basic financial statements taken as a
whole.
The accompanying consolidated financial statements have been prepared assuring
that the Company and its subsidiaries will continue as a going concern. As
discussed in Note C to the consolidated financial statements, the Company has
suffered recurring losses from operations and has working capital deficiency.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainly.
/S/ Kellogg & Andelson
- ----------------------
February 3, 1995
MEMBERS AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
CALIFORNIA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
C.P.A. ASOCIATES OFFICES IN PRINCIPAL CITIES
14724 VENTURA BLVD SECOND FLOOR, SHERMAN OAKS, CALIFORNIA 91403
PHONE (818) 971-5100 FAX (818) 971-5155
F-47
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1994
ASSETS
<TABLE>
<CAPTION>
First
Colonial Contemporary Flowers
Ventures Resources, Environment
Ltd. Inc. Inc. Eliminations Consolidated
-------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,700 $ (1,700) $ 600 $ - $ 14,600
Accounts receivable - net - 693,100 - - 693,100
Inventories - 727,200 - - 727,200
Current portion of long-term note receivable - 12,000 8,000 - 20,000
Other receivables 134,100 24,300 - - 158,400
Prepaid expenses and other current assets 2,200 163,200 - - 165,400
-------- ------------ ----------- ------------- ------------
Total current assets 152,000 1,618,100 8,600 - 1,778,700
NOTE RECEIVABLE, net of current portion - 97,600 84,200 - 181,800
INTERCOMPANY RECEIVABLE 424,300 1,432,900 - (1,857,200) -
INVESTMENTS 243,100 - - (10,100) 233,000
PROPERTY AND EQUIPMENT - net - 87,900 25,400 - 133,300
OTHER ASSETS:
Pre-opening costs - - - - -
Deferred financing costs - net - 76,200 - - 76,200
Other assets - 5,800 2,000 - 7,800
-------- ------------ ----------- ------------- ------------
$819,400 $ 3,318,500 $ 120,200 $ (1,867,300) $ 2,390,800
-------- ------------ ----------- ------------- ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C>
Accounts payable and accrued expenses $ 137,600 $ 490,800 $ 13,200 $ 900 $ 642,500
Current portion of loans payable bank - 980,000 - - 978,000
Notes payable - related parties 26,800 - - - 26,800
Current portion of note payable other 245,000 - 52,000 - 250,200
------------- ------------ ----------- ------------- ------------
Total current liabilities 409,400 1,468,800 18,400 900 1,897,500
LOANS PAYABLE - BANK,
net of current portion - 491,000 - - 491,000
NOTE PAYABLE - OTHER,
net of current portion - - 18,600 - 18,600
INTERCOMPANY PAYABLE 1,628,800 - 227,400 (1,856,200) -
------------- ------------ ----------- ------------- ------------
Total liabilities 2,038,200 1,959,800 264,400 (1,855,300) 2,407,100
------------- ------------ ----------- ------------- ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock 5,500 40,000 10,000 (44,600) 10,900
Additional paid-in-capital 2,281,300 1,209,800 100 42,300 3,533,500
Accumulated deficit (3,505,600) 108,900 (154,300) (9,700) (3,560,700)
------------- ------------ ----------- ------------- ------------
Total stockholders's equity
deficiency $ 819,400 $3,318,500 $ 120,200 $ 1,867,300 $ 2,390,800
------------- ------------ ----------- ------------- ------------
</TABLE>
F-48
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
First
Colonial Contemporary Flowers
Ventures Resources, Environment
Ltd. Inc. Inc. Eliminations Consolidated
--------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ - $ 5,361,500 $ 118,600 $ (118,600) $ 5,361,500
COST OF SALES - 4,657,700 91,600 (91,500) 4,657,700
--------------- ------------ ----------- ------------- ------------
Gross profit - 703,800 27,100 (27,100) 703,800
--------------- ------------ ----------- ------------- ------------
OPERATING EXPENSES:
Selling expenses - 240,500 61,500 (61,500) 240,500
General and administrative expenses 286,000 552,200 91,800 (90,600) 839,400
--------------- ------------ ----------- ------------- ------------
Total operating expenses 286,000 792,700 153,300 (152,100) 1,079,900
--------------- ------------ ----------- ------------- ------------
INCOME (LOSS) FROM OPERATIONS (286,000) (88,900) (126,200) 125,000 (376,100)
RELATED PARTY INTEREST INCOME - 50,000 - (50,000) -
INTEREST (EXPENSE) INCOME (65,600) (143,300) 100 49,900 (158,900)
--------------- ------------ ----------- ------------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (351,600) (182,200) (126,100) 125,000 (376,000)
Income tax (benefit) provision 3,800 (13,000) 800 - (8,400)
--------------- ------------ ----------- ------------- ------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (355,400) (169,200) (126,900) 124,900 (526,600)
--------------- ------------ ----------- ------------- ------------
DISCONTINUED OPERATION:
Net loss from operations - - - (126,900) (126,900)
Loss on disposal - - (10,200) - (10.200)
--------------- ------------ ----------- ------------- ------------
Net (loss) from discontinued
operation - - (10,200) (126,900) (137,100)
--------------- ------------ ----------- ------------- ------------
NET (LOSS) BEFORE
EXTRAORDINARY ITEM (355,400) (169,200) (137,100) (2,000) (663,700)
EXTRAORDINARY GAIN FROM
EXTINGUISHMENT OF DEBT - 384,000 - - 384,000
--------------- ------------ ----------- ------------- ------------
NET (LOSS) INCOME (355,400) 214,800 (137,100) (2,000) (279,700)
ACCUMULATED DEFICIT
-December 31, 1993 (3,150,200) (105,900) (17,200) (7,700) (3,281,000)
--------------- ------------ ----------- ------------- ------------
ACCUMULATED DEFICIT
-December 31, 1994 $ (3,505,600) $ 108,900 $ (154,300) $ (9,700) $ (3,560,700)
--------------- ------------ ----------- ------------- ------------
</TABLE>
F-49
<PAGE>
FIRST COLONIAL VENTURES, LTD.
AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
First
Colonial Contemporary Flower
Ventures Resources Environment
Ltd. Inc. Inc. Eliminations Consolidated
----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (355,400) $ 212,800 $ (137,100) $ - $ (279,700)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization - 74,800 9,500 - 84,300
Loss on sale of discontinued operations - - 10,200 - 10,200
Extraordinary gain on debt settlement - (384,000) - - (384,000)
Changes in assets and liabilities:
Decrease in accounts receivable - 401,700 4,300 - 406,000
Decrease (increase) in inventories - 87,300 (31,400) - 55,900
(Increase) in other receivables (155,100) (93,800) - - (248,900)
(Increase) in prepaid expenses
and other current assets (2,200) (63,600) - - (65,800)
(Increase) in other assets - (1,500) (22,600) - (24,100)
Increase (decrease) in accounts
payable and accrued expenses 38,900 (348,900) (24,400) - (344,400)
Increase (decrease) in intercompany
payable (241,400) (414,700) 173,300 - -
----------- ------------- ------------ ------------ ------------
Net cash (used in) operating activities (233,400) (529,900) (18,200) - (780,500)
----------- ------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - (39,800) (2,900) - (42,700)
Proceeds from sales of discontinued
operation - - 25,000 - 25,000
----------- ------------- ------------ ------------ ------------
Net cash (used in) provided by investing
activities - (39,800) 22,100 - (17,700)
----------- ------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable - bank - 2,433,600 - - 2,433,600
Payments on loans payable - bank - (2,336,400) - - (2,336,400)
Payments on note payable - other - - (7,000) - (7,000)
(Increase) in deferred financing costs - (78,500) - - (78,500)
Proceeds from note payable - other 245,000 - - - 245,000
Proceeds from issuance of common stock 600 - - - 600
----------- ------------- ------------ ------------ ------------
Net cash provided by (used in)
financing activities 245,000 18,700 (7,000) - (257,300)
----------- ----------- --------- ----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 13,200 (551,000) (3,100) - (540,900)
CASH AND CASH EQUIVALENTS:
Beginning of year 2,500 549,300 3,700 - 555,500
----------- ------------- ------------ ------------ ------------
End of year $ 15,700 $ (1,700) $ 600 $ - $ 14,600
----------- ------------- ------------ ------------ ------------
</TABLE>
F-50
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 3,338,141
<INVESTMENTS-AT-VALUE> 2,505,000
<RECEIVABLES> 0
<ASSETS-OTHER> 1,301,798
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,806,798
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,452,442
<TOTAL-LIABILITIES> 1,452,442
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,673,752
<SHARES-COMMON-STOCK> 4,466,083
<SHARES-COMMON-PRIOR> 11,005,000
<ACCUMULATED-NII-CURRENT> (528,355)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (528,355)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,287,444)
<NET-ASSETS> 2,354,356
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,250
<OTHER-INCOME> 0
<EXPENSES-NET> 531,605
<NET-INVESTMENT-INCOME> (528,355)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (484,462)
<NET-CHANGE-FROM-OPS> (1,012,817)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,406,663
<NUMBER-OF-SHARES-REDEEMED> 21,522,254
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 2,360,000
<PER-SHARE-NAV-BEGIN> .00
<PER-SHARE-NII> (.71)
<PER-SHARE-GAIN-APPREC> (.71)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> .53
<EXPENSE-RATIO> .23
<AVG-DEBT-OUTSTANDING> 1,400,000
<AVG-DEBT-PER-SHARE> .31
</TABLE>
