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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, 1996
/ / 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: None
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 31, 1997, was $14,777,000, based on the average bid and ask
prices during the quarter ended March 1997.
The issuer had 10,716,182 shares of common stock outstanding as of July 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.
The bank with which CRI had its credit line agreement was seized by the FDIC on
January 31, 1992. At the time of the seizure, CRI had an outstanding balance of
$1,491,000 which was $491,000 over its $1,000,000 credit limit, although the
bank had approved the extended credit and CRI was in the process of obtaining an
increase in the line of credit. Subsequent to the seizure, the FDIC ceased
issuing advances to CRI under the credit line.
The FDIC refusal to issue credit line advances to CRI for inventory and
receivables, coupled with the inability of CRI to find suitable replacement
financing until October 1994, ultimately caused a cash flow shortage leading to
CRI being unable to fulfill certain large contracts and unable to accept certain
large orders. The result was a decline in CRI gross revenues from $8,269,800 in
1993 to $5,327,200 in 1994, $1,979,600 in 1995, and $1,036,600 for 1996. CRI
lost substantially all of its airline business during this decline. CRI's
remaining business was substantially hotel related.
Final settlement was reached between CRI and the FDIC in early 1996 whereby the
balance owed was agreed to be $541,300 and whereby the FDIC agreed to accept
CRI's March 1996 payment of $54,000 in full settlement of the debt.
Accordingly, CRI recorded a gain of $487,300 during 1996 for settlement of the
debt.
In July 1997, CRI entered into an asset sale agreement with one of its major
vendors for the sale of the CRI hotel buisness. The buyer is familiar with the
CRI product line and with CRI customers. Under the agreement, the buyer is
required to: (1) use remaining CRI inventories, at cost, to fulfill orders from
former CRI customers, and (2) pay a royalty to CRI for sales to former CRI
customers which were recorded as backlog as of the closing and for sales to new
customers brought to the buyer by CRI.
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CRI will continue in the amenity and specialty product business, but is barred
from competing with the buyer for hotel business.
CRI has an asset-based line of credit which had a balance due of $585,400 as of
the closing. The credit line is guaranteed by the Registrant, Murray W.
Goldenberg, President of the Registrant, and Leslie I. Handler, a director of
the Registrant. CRI believes that proceeds from collection of its accounts
receivable, liquidatation of non-hotel inventory, and payments from the buyer
for inventory and royalties will be sufficient to pay the line of credit.
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.
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.
FEI operated the buisness however projections were never realized and losses
were incurred. Therefore, under an asset sale agreement the business was
subsequently sold in November 1994 for a short-term receivable of $50,000, cash
of $25,000, and a non-interest bearing note of $150,000 which was recorded at
present value of future cash flows of $92,200. The buyer resold the business
assets to a foreign purchaser during 1995. At December 31, 1995, the short-term
receivable had not been paid and the note was in default. Both amounts were
still unpaid at December 31, 1996. The foreign buyer has not paid the original
buyer because certain international patents which were a part of the sale have
not yet been obtained. The original buyer has not paid FEI because the foreign
buyer is withholding payment. Although FEI expects to receive payment during
1997, the Registrant has written down its investment in FEI to zero because the
receivables are delinquent.
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 FEI 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 1996 or 1995
with respect to the oil and gas lease.
During 1996, FEI was re-named First Colonial Real Estate, Ltd. ("FCREL").
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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
construction and sale of homes on the lots.
The Mississippi corporation has been unable to raise the cash necessary to pay
certain 1995 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. The sellers have indicated a
willingness to continue to work with the Mississippi corporation and have not
taken any steps to cancel the contract. The Registrant has written down its
investment in Sherwood to zero until the Sherwood financial condition improves
and the land sale contract is no longer in default. Sherwood conducted no
operations during 1996 or 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 was in
default at December 31, 1995 and continues to be 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 1996 or 1995.
Also in July 1995, the Registrant acquired 50% of the stock of First Colonial
Funds, Ltd., a non-public Nevada business development company, 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, 1996 and
1995, was shares of the Registrant.
During 1996 the Registrant decided to discontinue its relationship with First
Colonial Funds, Ltd. which had also acted as manager for Colonial Funds,
Limited. Although final agreement has not been
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reached, in June 1997 First Colonial Funds, Ltd. relinquished its shares in
Colonial Funds, Limited in exchange for the First Colonial Funds, Ltd. shares
held by the Registrant. Accordingly, YPE, Inc. became 100% owner of Colonial
Funds, Limited.
During March 1996, in exchange for 400,000 shares of its common stock the
Registrant acquired a 10% interest in a non-public Florida corporation, And In
Justice For All, Inc., which operates a nation-wide membership organization
providing its members with access to attorney services at discounted rates.
During 1997, the Registrant agreed to increase its investment in And In Justice
For All, Inc. to a total of 15%. The agreement required the Registrant to issue
an additional 515,235 shares of its common stock and required And In Justice For
All, Inc. to assume the Registrant's convertible debenture payable of $210,000
plus accrued interest of approximately $55,000. The agreement further provides
that And In Justice For All, Inc. has the option to reacquire the additional 5%
interest from the Registrant for a fixed price of $266,666 at any time prior to
July 31, 1999.
During August 1996, in exchange for shares of its common stock equal to $350,000
the Registrant acquired a one-third interest in a non-public California
corporation, TND/Medical International, Inc., which owns and operates, subject
to a third-party management agreement, a magnetic resonance imaging center
located in San Diego, California. At December 31, 1996, $220,000 of the
purchase price was unpaid.
On September 1, 1996 , the Registrant reached an agreement in principal with
members of Acclaim Stuidos, LLC, a California limited liability company, for the
acquisition of certain assets and liabilities of Acclaim in exchange for 180,000
shares of the Registrant's unregistered common stock which shares have not yet
been issued. During November 1996, the Registrant formed a non-public,
wholly-owned Nevada corporation, First Colonial Studios, Inc., dba Acclaim,
("Acclaim") which acquired certain assets and liabilities consisting of
substantially all of the operations of Acclaim Studios, LLC, operating in Studio
City, California, in the business of video production and post production.
During May 1997, in exchange for 1,000,000 shares of its common stock, the
Registrant acquired all of the outstanding common stock of Dryden Energy, Inc.,
a Utah corporation ("Dryden"), which was a wholly-owned subsidiary of a
non-public Texas corporation, Pilares Oil & Gas, Inc., ("Pilares"). Dryden owns
an assignment of six oil, gas and mineral leases pertaining to properties
located in Coleman County, Texas. The acquisition agreement requires Pilares to
reopen the six capped natural gas wells on the property, drill ten new wells,
and operate the project. The six capped wells have been reopened and are
operating. The Registrant has issued approximately 190,000 shares and under the
agreement.
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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.
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
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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.
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
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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.
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
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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;
(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
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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 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
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
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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 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
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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.
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.
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MANAGERIAL ASSISTANCE
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 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.
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(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.
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
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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.
At December 31, 1995, the Registrant may not have compied with Section 55 of the
Investment Company Act with respect to the 70% test as a result of its
investment in Colonial Funds, Limited. Any 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 any non-compliance with Section 55 has been corrected.
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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 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
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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 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
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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.
(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, and operating oil and gas property located in Coleman County, Texas.
RESIDENTIAL REAL ESTATE SUBDIVISION
Through its 50% owned investee, Sherwood, the Registrant owns an
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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, 1996, 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."
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 years ended December 31, 1996 or 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.
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The following table sets forth bid and ask prices during the quarter for the
Registrant's common stock for the quarters ending December 31, 1996:
Common Stock Bid Ask
--------- ---------
January to March, 1996 1 7/8 3
April to June, 1995 2 7/8 3 1/4
July to September, 1995 1 3/8 2
October to December, 1995 1/2 3
The following table sets forth high and low sales prices during the quarter for
the Registrant's common stock for the quarters ending December 31, 1995:
High Low
Common Stock Price Price
--------- ---------
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
(b) Holders:
Approximate Number
of Record Holders
Title of Class (as of March 31, 1997)
-------------- ----------------------
Common Stock,
$.001 Par Value 750
---------------
(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
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(a) Plan of Operation
Not Applicable
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations - 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 years ended December 31, 1996 and 1995 were $
316,000 and $531,600, respectively. These expenses were high in 1995 due to the
Gerant litigation and settlement recorded in 1995, and 1995 interest accrued on
the CRI note which was paid off in 1996.
The Registrant's net investment loss after taxes was $ 316,800 and $528,400 for
the years ended December 31, 1996 and 1995.
In addition, unrealized losses on investments in the amounts of $3,000 and
$484,462 for the years ended December 31, 1996 and 1995, respectively, were
recorded in connection with the valuations of the Registrant's investments in
FEI, Gulf Coast, Sherwood, Baja Pacific, and Gerant.
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, 1996 and 1995. The Registrant's qualifying
investments at fair value totaled $3,522,000 and $3,147,900 at December 31, 1996
and 1995. The increase in qualifying investments was substantially due to the
acquisitions of Acclaim, And In Justice For All, and TND/Medical of $941,200,
offset by the decrease in YPE of $881,600.
The Registrant's non-qualifying investment at fair value in First Colonial
Funds, Ltd. was zero at December 31, 1996 and $750,000 at December 31, 1995.
Notes receivable from the sale of common stock were $1,691,600 and $529,200 at
December 31, 1996 and 1995, respectively.
Liabilities totaled $1,894,500 and $2,095,400 at December 31, 1996 and 1995,
respectively. The decrease was substantially due to the payoff of the CRI note
payable of $500,000 offset by additional debt pertaining to the acquisition of
TND/Medical of $220,000.
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Registrant had substantial working capital deficits at both December 31, 1996
and 1995.
The following transactions involving shares of Registrant's common stock
occurred during the years ended December 31, 1996 and 1995:
On January 4, 1996, the Registrant effected a 1 for 20 reverse stock split.
All disclosures pertaining to shares of common stock have been restated to
reflect the January 4, 1996 stock split.
During 1994, pursuant to Regulation S the Registrant 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 which was
paid during 1995 and 1996.
During 1994, pursuant to Regulation S the Registrant 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.
During April 1995, pursuant to Section 4(2) the Registrant 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 Registrant issued 100,000
shares in subject to a stock purchase agreement. These shares were stolen
during 1995 and the Registrant received nothing for them. Accordingly, the
Registrant recorded a reduction in paid in capital for the par value of these
shares.
During July 1995, pursuant to Section 4(2) the Registrant 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 Registrant 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 Registrant issued 10,000
shares to Colonial Funds, Limited subject to a stock purchase agreement in the
amount of $200,000.
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During December 1995, pursuant to Regulation E the Registrant issued 60,000
shares to Colonial Funds, Ltd. subject to a stock purchase agreement in the
amount of $600,000.
During October 1994, the Registrant 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 February 1996, pursuant to Regulation E the Registrant issued
3,200,000 shares to Colonial Funds, Limited subject to a stock purchase
agreement in the amount of $2,400,000.
During February 1996, pursuant to Regulation E the Registrant issued
2,100,000 shares to Colonial Funds, Limited subject to a stock purchase
agreement in the amount of $2,100,000.
During December 1993, the Registrant 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 Registrant, 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.
Registrant's wholly-owned investee, CRI, results of operations and
financial condition. CRI reported sales of $1,036,600 and $1,979,600, for the
years ended December 31, 1996 and 1995, respectively, and cost of sales of
$842,500 and $1,777,800, respectively, for the same years. Gross profit was
$194,100 (19%) and $201,800 (11%) 1996 and 1995, 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 $478,200 (46% of
sales) and $819,300 (41% of sales) for the years ended December 31, 1996 and
1995, respectively. The increase in these expenses is attributable to the
inability of the lower sales volume to cover fixed expenses.
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CRI recorded net income of $112,600 for 1996 due to a gain of $487,300
pertaining to the settlement of debt owed to its former bank which had been
seized by the FDIC.
ITEM 7. FINANCIAL STATEMENTS
The financial statements for the years ended December 31, 1996 and 1995 are
listed under Item 13.
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.
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.
On May 1, 1997 the Registrant filed Form 8-K reporting acquisition of First
Colonial Studios, Inc.
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, 1996. 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.
Name Age Position(s) Director Since
- ---- --- ----------- --------------
Murray W. Goldenberg 56 President,
Treasurer,
Secretary,
and Director September 1, 1987
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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
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 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
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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).
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
Name and Principal
Principal Annual All Other
Position Year Compensation Compensation
- --------- ---- ------------ ------------
Murray W. Goldenberg, 1996 $165,000
President 1995 162,000
1994 132,500 (1)
1993 61,000
1992 54,000
Leslie I. Handler, 1996 -
Director 1995 -
1994 - (2)
(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, 1996, 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
$165,000 for the year ending December 31, 1997, exclusive of any bonus that may
be paid.
28
<PAGE>
Board of Directors:
Directors of the Company receive no compensation for serving as Directors
of the Company. During the year ended December 31, 1996, there were no meetings
of the Board of Directors. All necessary board approvals and actions were
obtained by unanimous written consent. The Directors met on May 28, 1997. The
Company had no audit, nominating or compensation or committees performing
similar functions during the year ended December 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As used in this section, the term beneficial ownership with respect 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"), 10,716,182 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.
29
<PAGE>
Amount and
Name and Nature of Percent of
Address of Beneficial Shares of
Beneficial Owner Ownership Common Stock
- -------------------------- ----------- ------------
Murray W. Goldenberg 107,303(1) 1.00%
President, Treasurer,
Secretary and Director
6151 W. Century Blvd #1018
Los Angeles
California 90045
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
Los Vegas
Nevada 89139
(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:
30
<PAGE>
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 (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
31
<PAGE>
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
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
21 Subsidiaries of the registrant
(b) Reports on Form 8-K:
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) Filed October 26, 1995, for change in accountants dismissing
Kellog & Andelson and appointing Beckman Hollander & Associates.
3) Filed February 21, 1996, to amend the 8-K filed on October 26,
1995.
4) Filed May 1, 1997, for acquisition of specific assets and
liabilities comprising substantially all of the operations of Acclaim Studios,
LLC, a California limited liability company, by Registrant's non-public,
wholly-owned investee, First Colonial Studios, Inc., a Nevada corporation.
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: September 5, 1997
By: /s/ Murray W. Goldenberg
------------------------
Murray W. Goldenberg
President
32
<PAGE>
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:
Signature Title
- --------- -----
Date
- ----
September 5, 1997
/s/ Murray W. Goldenberg
- ------------------------
Murray W. Goldenberg, C.A. Chairman
President, Treasurer,
Secretary and Director
(Chief Executive, Financial
and Accounting Officer)
September 5, 1997
/s/ Leslie I. Handler Director
- ---------------------
Leslie I. Handler
September 5, 1997
/s/ Douglas A. Pearson Director
- ----------------------
Douglas A. Pearson
33
<PAGE>
FIRST COLONIAL VENTURES, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE
INVESTMENT COMPANY
Independent Auditor's Report F-2,F-3
Balance Sheets - December 31, 1996 and 1995 F-4
Statement of Operations -
For the Years Ended December 31, 1996 and 1995 F-5
Statement of Stockholders' Equity -
For the Years Ended December 31, 1996 and 1995 F-6
Statement of Cash Flows -
For the Years Ended December 31, 1996 and 1995 F-7
Notes to the Financial Statements F-8,F-21
F-1
<PAGE>
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 sheets of First Colonial Ventures, Ltd.
(The "Company") as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
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 audits 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, 1996 and 1995, and the results of its operations and its cash flows
for the years 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 to the
financial statements, the Company has experienced recurring losses from
operations and has a working capital deficiency. These conditions raise
substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As explained in Notes 5 and 6, the accompanying balance sheet includes
investments valued at $3,522,000 (68% 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
F-2
<PAGE>
Report of Independent Auditor, continued
August 13, 1997
Page 2
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.
J. PAUL KENOTE, CPA, P.C.
August 13, 1997
Portland, Oregon
F-3
<PAGE>
FIRST COLONIAL VENTURES, LTD.
BALANCE SHEETS
December 31
-------------------------
1996 1995
----------- -----------
(Restated
Note 15)
ASSETS
Investments at fair value (cost - $4,222,541
1996 and $3,732,852 1995) (Note 5) $ 3,522,006 $ 3,147,931
Other investments at fair value (cost - $4,304
1996 and $754,304 1995) (Note 6) -- 750,000
Notes receivable from sale of common stock (Note 7) 1,691,633 529,212
Cash 2,872 11,061
Other receivables (Note 11) 8,275 11,525
----------- -----------
TOTAL ASSETS $ 5,224,786 $ 4,449,729
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable (Notes 7 & 11) $ 487,563 $ 460,396
Accounts payable and accrued liabilities (Note 11) 178,457 165,042
Related party debt (Note 7) 1,057,456 1,330,435
Management fees payable to officer (Note 11) 171,000 109,500
Settlement payable (Note 10) -- 30,000
----------- -----------
Total liabilities 1,894,476 2,095,373
----------- -----------
Commitments and contingencies (Notes 12 and 13)
Stockholders' Equity:
Common stock ($.001 par value; 500,000,000 shares
authorized; outstanding - 10,716,182 shares
1996 and 4,466,083 shares 1995 (Note 8 & 4) 10,716 4,466
Preferred stock (no par value; 10,000,000 shares
authorized; none outstanding) -- --
Additional paid-in capital 8,963,252 7,673,752
Accumulated deficit:
Accumulated (deficit) before becoming a BDC (3,508,063) (3,508,063)
Accumulated net investment (loss) (845,172) (528,355)
Accumulated net unrealized (loss) (1,290,423) (1,287,444)
----------- -----------
Total stockholders' equity (net asset value per
share - $.31 1996 and $.53 1995) 3,330,310 2,354,356
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,224,786 $ 4,449,729
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
FIRST COLONIAL VENTURES, LTD.
STATEMENTS OF OPERATIONS
For The
Years Ended December 31
-------------------------
1996 1995
----------- -----------
Revenues:
Interest income $ -- $ 3,250
----------- -----------
Expenses:
Salaries & consulting fees (Note 11) 187,200 214,950
Other general & administrative expenses 52,345 74,336
Legal & accounting fees 21,133 97,024
Legal settlement (Note 10) -- 30,000
Interest (Note 11) 55,339 114,495
----------- -----------
Operating expenses 316,017 530,805
----------- -----------
Net investment (loss) (316,017) (527,555)
Less income tax provision (Note 9) (800) (800)
----------- -----------
Net investment (loss) after income taxes (316,817) (528,355)
(Increase) in unrealized loss on investments (2,979) (484,462)
----------- -----------
(Loss) before cumulative effect of a
change in accounting principle (319,796) (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 $ (319,796) $(1,815,799)
----------- -----------
----------- -----------
Loss per share:
Weighted average number of shares
(restated for 1995 - Note 4) 7,035,942 2,551,042
----------- -----------
(Loss) before cumulative effect of a
change in accounting principal $ (.05) $ (.39)
Cumulative effect of a change in
accounting principle -- (.32)
----------- -----------
Net (loss) per share $ (.05) $ (.71)
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
FIRST COLONIAL VENTURES, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1996 and 1995
ACCUMULATED DEFICIT
---------------------------------------
Pre-BDC Accumulated Unrealized
Accumulated Investment Investment
Deficit Loss Loss
----------- ----------- -----------
Balance - January 1, 1995 $(3,508,063) $ -- $ --
Loss - year ended 1995 -- (528,355) (1,287,444)
----------- ----------- -----------
Balance - December 31, 1995 (3,508,063) (528,355) (1,287,444)
Loss - year ended 1996 -- (316,817) (2,979)
----------- ----------- -----------
Balance - December 31, 1996 $(3,508,063) $ (845,172) $(1,290,423)
----------- ----------- -----------
----------- ----------- -----------
COMMON STOCK AND PAID-IN CAPITAL
---------------------------------------
Common Stock
------------------------- Paid-in
Shares Par Value Capital
----------- ----------- -----------
Balance - January 1, 1995 11,005,000 $ 11,005 $ 2,278,343
Change in accounting (Note 4) -- -- 1,358,700
Stock split (Note 8) (10,454,750) (10,455) 10,455
----------- ----------- -----------
Balance - January 1, 1995 (restated) 550,250 550 3,647,498
Stock issued (Note 8) 3,915,833 3,916 3,983,865
Debt reclassified (Note 7) -- -- 42,389
----------- ----------- -----------
Balance - December 31, 1995 4,466,083 4,466 7,673,752
Stock issued (Note 8) 6,250,099 6,250 1,289,500
----------- ----------- -----------
Balance - December 31, 1996 10,716,182 $ 10,716 $ 8,963,252
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
FIRST COLONIAL VENTURES, LTD.
STATEMENTS OF CASH FLOWS
For The
Years Ended December 31
-------------------------
1996 1995
----------- -----------
Cash flows from operating activities:
Net investment loss $ (316,814) $ (528,355)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Cumulative effect of change
in valuation of investments -- (802,982)
Unrealized loss on investments (10,000) (484,462)
Unrealized gain on investments 7,021 --
(Decrease) Increase in receivables 3,250 (6,750)
Increase in accounts payable
and accrued expenses 44,915 232,467
----------- -----------
Net cash (used) in operating activities (271,628) (1,590,082)
----------- -----------
Cash flows from investing activities:
Investment in qualifying assets (1,255,708) (2,505,000)
Investment in non-qualifying asset 750,000 (746,247)
Reduction in value of investments 881,633 1,162,691
----------- -----------
Net cash provided (used) in investing activities 375,925 (2,088,556)
----------- -----------
Cash flows from Financing activities:
Proceeds from borrowing 27,167 235,396
Repayment of note payable -- (20,000)
Repayment of related party debt (500,000) --
Proceeds from related party borrowing 227,021 --
Proceeds from issuance of common stock 1,295,750 3,987,781
Notes receivable from sale of stock (1,162,421) (529,212)
----------- -----------
Net cash provided (used) by financing activities (112,483) 3,673,965
----------- -----------
Net (decrease) in cash (8,189) (4,673)
Cash - Beginning of year 11,061 15,734
----------- -----------
Cash - End of year $ 2,872 $ 11,061
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 28,172 $ 39,991
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS HISTORY -
First Colonial Ventures, Ltd. ("FCVL" or "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.
In December 1994, the Company purchased the rights to 50% 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 business development company, and 25% of the
stock of First Colonial Funds' 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. The Company's Colonial Funds holding
was subsequently acquired by the Company's wholly owned investee, YPE, Inc.
F-8
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
MAJOR INVESTMENTS (CONTINUED) -
During March 1996, the Company acquired a 10% interest in a non-public
investee, And Justice For All, Inc., a Florida corporation which operates a
nation-wide membership organization providing access to attorney services at
discounted rates.
During August 1996, the Company acquired a one-third interest in a
non-public investee, TND/Medical International, Inc., a California corporation
("TND") which owns, subject to a third-party management agreement, a magnetic
resonance imaging center located in San Diego, California.
During November 1996, the Company formed a non-public, wholly-owned
investee, First Colonial Studios, Inc., a Nevada corporation, dba Acclaim,
("Acclaim") for the purpose of acquiring by asset purchase certain assets and
liabilities comprising substantially all of the business operations of Acclaim
Studios, LLC, a California limited liability company, which operated in the
business of video production.
FINANCIAL STATEMENTS -
The financial statements include only the accounts of FCVL because,
pursuant to industry practice, an investee of a business development company is
not consolidated unless such investee is a small business investment company or
a wholly-owned business development company. 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.
(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.
F-9
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
BUSINESS DEVELOPMENT COMPANY CONSIDERATIONS (CONTINUED)-
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.
(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.
F-10
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVESTMENT VALUATION (CONTINUED) -
(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
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 return. 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 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.
F-11
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 - UNCERTAINTIES (CONTINUED):
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 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 took
corrective action.
Colonial Funds, Limited is a Commonwealth of the Bahamas corporation
operating as an off-shore fund. Accordingly, a direct investment in Colonial
Funds, Limited did not satisfy the requirements of a "Qualifying Asset" because
Colonial Funds, Limited was not organized in the United States.
Therefore during August 1996, the Company entered into a rescission
agreement with Colonial Funds, Limited for the purpose of correcting any
non-compliance with the qualifying asset requirements. 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.
F-12
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - INVESTMENTS:
The following table lists the Company's investment in qualifying assets at
December 31, 1996:
Number of Cost
Shares and/or Fair
Owned Equity Value
----------- ----------- -----------
Company
- ------------------------------------
Wholly-Owned Portfolio Companies:
Contemporary Resources, Inc.-
Common stock, appraisal method 13,700 $ 773,115 $ 649,952
First Colonial Real Estate, Inc.-
Common stock, appraisal method 10,000 1,630,130 1,620,000
Advances, at cost n/a 228,085 --
Baja Pacific International, Inc.-
Common stock, appraisal method 10,000 7,600 7,500
YPE, Inc.-
Common stock, cost method 10,011 3,367 3,367
First Colonial Studios, Inc. -
Common stock, appraisal method 500 690,000 690,000
Advances, at cost n/a 1,187 1,187
- -------------------------------------
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, appraisal method 1,875 209,782 --
Advances, at cost n/a 50,000 --
- -------------------------------------
Other Portfolio Companies:
TND/Medical International, Inc. -
Common stock, cost method 666,666 350,000 350,000
And In Justice For All, Inc. -
Common stock, cost method 450,000 200,000 200,000
Gerant Industries, Inc. -
Common stock, appraisal method 2,500 4,356 --
----------- -----------
Investments - December 31, 1996 $ 4,222,541 $ 3,522,006
----------- -----------
----------- -----------
F-13
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - INVESTMENTS (CONTINUED):
The following table lists the Company's investment in qualifying assets at
December 31, 1995:
Number of Cost
Shares and/or Fair
Owned Equity Value
----------- ----------- -----------
Company
- ------------------------------------
Wholly-Owned Portfolio Companies:
Contemporary Resources, Inc.-
Common stock, appraisal method 13,700 $ 660,480 $ 642,931
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, appraisal 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 --
- -------------------------------------
Other Portfolio Companies:
Gerant Industries, Inc. -
Common stock, cost method 2,500 4,356 --
----------- -----------
Investments - December 31, 1995 $ 3,732,852 $ 3,147,931
----------- -----------
----------- -----------
CONTEMPORARY RESOURCES - Contemporary Resources had revenues of $1,036,600 and
$1,979,600 for the years ended December 31, 1996 and 1995, respectively, and net
income of $112,600 for 1996 and net loss of $696,400 for 1995. CRI net income
for 1996 was due to a gain of $487,300 pertaining to the settlement of debt owed
by CRI to its former bank which had been seized by the Federal Deposit Insurance
Corporation. See Note 15 regarding restatement of the 1995 amount for CRI due
to the Company's change in presentation for its investment in CRI.
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 1996 and 1995.
F-14
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN QUALIFYING ASSETS (CONTINUED):
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 1996 and 1995.
FIRST COLONIAL REAL ESTATE, INC. - 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 1996 or 1995 with respect to the oil and
gas lease.
YPE, INC. - At December 31, 1996 and 1995, YPE owned all of the Class B common
stock of Colonial Funds, Limited, representing approximately 93% of equity
attributable to holders of common stock. First Colonial Funds, Ltd. owned all
of the Class A common stock of Colonial Funds, Limited, representing the
remaining 7% of equity attributable to holders of common stock. The Company
also owns 50% of First Colonial Funds, Ltd., therefore directly and indirectly,
the Company has a 96% interest in equity attributable to holders of the common
stock of Colonial Funds, Limited.
FIRST COLONIAL STUDIOS, INC., DBA, ACCLAIM - Acclaim conducts operations in
Studio City, California, in video production and post production. Acclaim
operations were acquired in exchange for 180,000 shares of the Company's common
stock, however, these shares have not yet been issued. The investment in
Acclaim was valued based upon agreed values for the assets acquired and
liabilities assumed which included equipment appraisal.
TND/MEDICAL INTERNATIONAL, INC. - TND was acquired during 1996 for a price of
$350,000 to be paid through issuance of the Company's common stock. During 1996
the Company paid $10,000 cash and 120,000 shares of stock for which the Company
received a total of $130,000 credit toward the purchase price.
AND IN JUSTICE FOR ALL, INC. - During 1996, the Company acquired a 10% interest
in And In Justice For All, Inc. in exchange for 400,000 shares of the Company's
common stock. During 1997, the Company agreed to increase its investment in And
In Justice For All, Inc. to 15%. The agreement required the Company to pay an
additional 515,235 shares of common stock and required And In Justice For All,
Inc. to assume the Company's convertible debenture payable, described in Note 7,
plus accrued interest. The agreement further provides that And In Justice For
All, Inc. may reacquire the additional 5% interest at a fixed price of $266,666
prior to July 31, 1999. The value of the Company's investment in And In Justice
For All, Inc. at December 31, 1996 was determined based upon management's
appraisal.
F-15
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 - OTHER INVESTMENTS:
The following table lists the Company's investment in non-qualifying assets
at December 31, 1996:
Number of Cost
Shares and/or Fair
Owned Equity Value
----------- ----------- -----------
Company
- ------------------------------------
First Colonial Funds, Ltd. -
Common stock, appraisal method 50,000 $ -- $ --
Advances, at cost n/a 4,304 --
----------- -----------
Other investments - December 31, 1996 $ 114,304 $ --
----------- -----------
----------- -----------
The following table lists the Company's investment in non-qualifying assets
at December 31, 1995:
Number of Cost
Shares and/or Fair
Owned Equity Value
----------- ----------- -----------
Company
- ------------------------------------
First Colonial Funds, Ltd. -
Common stock, appraisal method 50,000 $ 750,000 $ 750,000
Advances, at cost n/a 4,304 --
----------- -----------
Other investments - December 31, 1995 $ 750,304 $ 750,000
----------- -----------
----------- -----------
First Colonial Funds, Ltd. conducted very little business during 1996. In
1997 the Company decided to discontinue its relationship with First Colonial
Funds, Ltd. in an agreement which included YPE, Inc. becoming the sole equity
owner of Colonial Funds Limited. The agreement between the parties has not yet
been concluded, however, the Class A common stock of Colonial Funds Limited has
been tendered to YPE, Inc.
The Company valued its investment in First Colonial Funds, Ltd. at December
31, 1995, based upon reviewing bid prices for the securities held by Colonial
Funds, Limited and applying appropriate discounts. First Colonial Funds, Ltd.
had no value to the Company at December 31, 1996.
NOTE 7 - NOTES PAYABLE AND RELATED PARTY DEBT:
Certain notes payable and accrued interest totaling $505,889 which arose in
connection with the 1988 acquisition of Contemporary Health Systems, Inc. were
not required to be paid. At December 31, 1993 a portion of this debt totaling
$361,700 became statute-barred under Section 337(1) of the California Code of
Civil Procedure and was reclassified as paid-in capital. During 1994 and 1995,
$101,800 and $42,389, respectively, became statute-barred and were reclassified
to paid-in capital.
F-16
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE AND RELATED PARTY DEBT (CONTINUED):
Notes payable included the following at December 31, 1996 and 1995:
1996 1995
----------- -----------
CONVERTIBLE DEBENTURE -
loan made by private investor,
due upon demand, with interest
at 15%, convertible at the option
of the note holder $ 210,000 $ 210,000
INVESTOR LOAN -
loan made by private investor, due
upon demand, with interest at 2%
over Bank of America prime rate 277,563 250,396
----------- -----------
Total notes payable $ 487,563 $ 460,396
----------- -----------
----------- -----------
Related party debt included the following at December 31, 1996 and 1995:
CONTEMPORARY RESOURCES, INC. -
Note payable for advances made to the
Company by CRI, due upon demand,
with interest at 10% per annum $ -- $ 500,000
Accrued interest payable 187,504 187,504
Advances made to the Company by
CRI, payable upon demand 649,952 642,931
TND/MEDICAL INTERNATIONAL, INC. -
Amount payable to complete the Company's
investment in TND 220,000 --
----------- -----------
Total related party debt $ 1,057,456 $ 1,330,435
----------- -----------
----------- -----------
NOTE 8 - 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 reflect the January 4, 1996 stock split.
The following transactions involving shares of the Company's common stock
occurred during the years ended December 31, 1995 and 1996:
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 in consideration for the oil and gas lease
assignment described in Note 6. The remaining 10,762 shares were issued
subject to a stock purchase agreement in the amount of $140,000 which was
paid during 1995 and 1996.
F-17
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8 - CAPITAL STOCK (CONTINUED):
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.
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 subject to a stock purchase agreement. Those shares were stolen
during 1995 and the Company received nothing for them, therefore, the
Company recorded a reduction in paid in capital for the par value of the
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 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 1994, 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 February 1996, pursuant to Regulation E the Company issued 3,200,000
shares to Colonial Funds, Limited subject to a stock purchase agreement in
the amount of $2,400,000.
During February 1996, pursuant to Regulation E the Company issued 2,100,000
shares to Colonial Funds, Limited subject to a stock purchase agreement in
the amount of $2,100,000.
At December 31, 1996 and 1995, Colonial Funds, Limited held 1,884,422 and
70,750 shares, respectively, of the Company's common stock issued pursuant to
Regulation E and subject to stock purchase agreements. Notes receivable from
sale of common stock are notes payable from Colonial Funds, Limited to the
Company pertaining to shares held by Colonial Funds, Limited and pertaining to
transactions not yet completed by Colonial Funds, Limited. Such notes
receivable totaled $1,691,633 and $529,212 at December 31, 1996 and 1995,
respectively.
F-18
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES:
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, 1996 and 1995 are as follows:
1996 1995
----------- -----------
Net operating loss carryforward $ 846,000 $ 738,900
Unrealized investment losses 361,300 360,500
Valuation allowance (1,207,900) (1,099,400)
----------- -----------
Net deferred tax assets $ -- $ --
----------- -----------
----------- -----------
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, 1996
and 1995, the Company established a valuation allowance against net deferred tax
assets of $ 1,315,000 and $1,099,400, respectively.
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 or 1996 consolidated income tax
returns. The Company realized losses during 1995 and 1996 and does not expect
to owe any income taxes with the filing of the tax returns. The tax provisions
for the years ended December 31, 1996 and 1995, represent the California minimum
tax.
NOTE 10 - 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.
F-19
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - 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, 1996 and
1995, accrued management fees payable under the agreement were $170,000 and
$109,500, respectively.
The Company had amounts owed to related parties as disclosed in Note 7.
At December 31, 1996 and 1995, advances totaling $8,275 owing from a
director of the Company were included in other receivables.
At December 31, 1996 and 1995, Colonial funds, Limited owned a substantial
number of shares of the Company as further described in Note 8. The values for
YPE, Inc. 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 12 - COMMITMENTS:
The Company guarantees the asset-based bank line of credit for Contemporary
Resources, Inc. At December 31, 1996 and 1995, a total of $685,140 and
$702,351, respectively, was borrowed by CRI 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
(also see Note 14).
As described in Note 5, the Company has commitments to issue 180,000 shares
of its common stock in connection with the acquisition of Acclaim, and $220,000
worth of its common stock in connection with the acquisition of TND.
NOTE 13 - 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 14 - SUBSEQUENT EVENTS:
During 1997, the Company agreed to increase its investment in And Justice
For All, Inc. as described in Note 5.
In July 1997, the Company concluded an agreement for the sale of
substantially all operations of CRI. Under the agreement, the buyer must first
purchase, at cost, existing CRI inventories, and pay commissions to CRI on
backlog sales. The Company believes that these arrangements will provide
sufficient funds to payoff the CRI line of credit (see Note 12).
During June 1997, the Company's investee, Acclaim, reached an agreement in
principal for the acquisition of a production/post production company located in
West Los Angeles, California, in exchange for approximately 750,000 shares of
the Company's unregistered stock.
F-20
<PAGE>
FIRST COLONIAL VENTURES, LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (CONTINUED):
During 1996, the Company formed Dryden Energy, Inc., a Texas Corporation
("Dryden"), for the purpose of acquiring sub-leases for the oil, gas & mineral
rights for various properties located in Coleman County, Texas. The properties
include six natural gas wells which were previously capped and which Dryden has
subsequently opened and is operating. Subject to the availability of capital,
Dryden plans to drill such additional wells as may be productive.
NOTE 15 - RESTATEMENT:
During 1996 the Company changed its financial statement reporting for its
investment in Contemporary Resources, Inc. Previously, the Company's investment
in CRI had been offset by intercompany payables exclusive of notes payable. The
Company's investment in CRI is currently reported as an asset and included with
Investments at fair value on the balance sheet, and the Company's intercompany
payables to CRI are reported as liabilities and included with Related party debt
on the balance sheet. The 1995 balance sheet has been restated to conform with
the 1996 reporting.
F-21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<INVESTMENTS-AT-COST> 4,222,541 3,732,852
<INVESTMENTS-AT-VALUE> 3,522,006 3,147,931
<RECEIVABLES> 1,691,633 529,212
<ASSETS-OTHER> 11,147 22,586
<OTHER-ITEMS-ASSETS> 0 0
<TOTAL-ASSETS> 5,224,786 4,449,729
<PAYABLE-FOR-SECURITIES> 220,000 0
<SENIOR-LONG-TERM-DEBT> 0 0
<OTHER-ITEMS-LIABILITIES> 1,674,476 2,095,373
<TOTAL-LIABILITIES> 1,894,476 2,095,373
<SENIOR-EQUITY> 0 0
<PAID-IN-CAPITAL-COMMON> 8,963,252 7,673,752
<SHARES-COMMON-STOCK> 10,716,182 4,466,083
<SHARES-COMMON-PRIOR> 4,466,083 11,005,000
<ACCUMULATED-NII-CURRENT> (845,172) (528,355)
<OVERDISTRIBUTION-NII> 0 0
<ACCUMULATED-NET-GAINS> 0 0
<OVERDISTRIBUTION-GAINS> 0 0
<ACCUM-APPREC-OR-DEPREC> (1,290,423) (1,287,444)
<NET-ASSETS> 3,330,310 2,354,356
<DIVIDEND-INCOME> 0 0
<INTEREST-INCOME> 0 3,250
<OTHER-INCOME> 0 0
<EXPENSES-NET> 316,817 531,605
<NET-INVESTMENT-INCOME> 0 0
<REALIZED-GAINS-CURRENT> 0 0
<APPREC-INCREASE-CURRENT> (2,979) (484,462)
<NET-CHANGE-FROM-OPS> (319,796) (1,012,817)
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> 0 0
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 6,250,099 8,406,663
<NUMBER-OF-SHARES-REDEEMED> 0 0
<SHARES-REINVESTED> 0 0
<NET-CHANGE-IN-ASSETS> 975,954 0
<ACCUMULATED-NII-PRIOR> (528,355) 0
<ACCUMULATED-GAINS-PRIOR> (1,287,444) 0
<OVERDISTRIB-NII-PRIOR> 0 0
<OVERDIST-NET-GAINS-PRIOR> 0 0
<GROSS-ADVISORY-FEES> 0 0
<INTEREST-EXPENSE> 55,339 114,495
<GROSS-EXPENSE> 316,817 531,605
<AVERAGE-NET-ASSETS> 2,842,333 0
<PER-SHARE-NAV-BEGIN> .53 0.0
<PER-SHARE-NII> (.05) (.71)
<PER-SHARE-GAIN-APPREC> 0 0
<PER-SHARE-DIVIDEND> 0 0
<PER-SHARE-DISTRIBUTIONS> 0 0
<RETURNS-OF-CAPITAL> 0 0
<PER-SHARE-NAV-END> .31 .53
<EXPENSE-RATIO> .06 .23
<AVG-DEBT-OUTSTANDING> 1,700,000 2,100,000
<AVG-DEBT-PER-SHARE> .16 .47
</TABLE>
