Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
For Quarter Ended _____________ Commission File Number 1-12668
HOLLY PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3172149
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
200 Monument Road, Suite 10, Bala Cynwyd, Pennsylvania 19004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 617-0400
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1996: 40,481,570
<PAGE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
INDEX
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 [Unaudited] 1, 2
Consolidated Statements of Operations for
the three and six months ended
September 30, 1996 and 1995 [Unaudited] 3
Consolidated Statements of Cash Flows for
the six months ended September 30, 1996
and 1995 [Unaudited] 4, 5
Notes to Consolidated Financial Statements [Unaudited] 6, 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8, 9, 10
Part II: OTHER INFORMATION
Items 1: Legal Proceedings 11
Item 2: Exhibits & Reports on Form 8-K 11
Signature Page 12
<PAGE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (UNAUDITED)
Assets:
Current Assets:
Cash and Cash Equivalents $ 2,104,592
Accounts Receivable Trade - [Net of Allowance
for Doubtful Accounts of $153,982] 1,640,687
Inventory 690,274
Prepaid Expenses 617,885
Total Current Assets 5,053,408
Property and Equipment - [Net of Accumulated
Depreciation and Amortization of $226,336] 11,328,403
Deposits 51,582
Intangible Assets - Net 585,583
Other Assets 175,531
Deferred Financing Costs 500,000
Total Assets $ 17,694,507
See Notes to Consolidated Financial Statements.
<PAGE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (UNAUDITED)
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable - Related Party $ 2,001,165
Demand Notes Payable - Bank 1,443,972
Notes Payable - Others 5,413,446
Accounts Payable 1,439,102
Accrued Expenses 868,816
Payroll Taxes Payable 48,190
Current Portion of Long-Term Debt 143,083
Current Portion of Capital Lease Obligations 61,237
Net Liabilities of Discontinued Operations 110,771
Total Current Liabilities 11,529,782
Long-Term Debt 529,779
Long-Term Portion of Capital Lease Obligations 563,281
Minority Interest 2,108,450
Commitments and Contingencies ---
Stockholders' Equity:
Preferred Stock - Authorized 2,000,000 Shares:
Series D: Convertible $10.00 Par Value, $1.00
Per Share Per Annum Cumulative
Dividends, 389,975 Shares Issued
and Outstanding 3,899,750
Series E: Convertible $10.00 Par Value, 115,000
Shares Issued and Outstanding 1,150,000
Series Z: Convertible $0.25 Par Value, 1,013,628
Shares Issued and Outstanding 253,407
Additional Paid-in Capital [Preferred] (1,318,640)
Common Stock - No Par Value, Authorized 50,000,000
Shares, 40,481,570 Shares Issued
and Outstanding 16,175,299
Additional Paid-in Capital [Common] (83,947)
Accumulated [Deficit] (17,112,654)
Total Stockholders' Equity 2,963,215
Total Liabilities and Stockholders' Equity $ 17,694,507
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $1,244,036 $1,392,098 $3,038,233 $2,389,874
Cost of Sales 683,799 1,772,335 2,000,569 2,616,512
Gross Profit [Loss] 560,237 (380,237) 1,037,664 (266,648)
Operating Expenses:
General, Selling and Administrative 1,532,682 809,579 2,771,609 1,596,661
Operating [Loss] (972,445) (1,189,816) (1,733,945) (1,823,309)
Other [Expense]:
Other Income 38,943 29,212 43,438 52,866
Interest Expense (137,611) (65,245) (221,784) (150,650)
Other [Expense] - Net (98,668) (36,033) (178,346) (97,874)
Minority Interest Share in Loss of Subsidiary 46,944 37,153 106,071 70,935
[Loss] Income from Continuing Operations (1,024,169) (1,188,696) (1,806,220)
(1,850,155)
Discontinued Operations:
Income [Loss] from Operations of
Woodworking Business 336,267 (1,026,269) 327,664 (2,196,078)
Estimated [Loss] on disposal of
Woodworking Business -- (841,423) -- (841,423)
Net [Loss] (687,902) (3,056,388) (1,478,556) (4,887,656)
Preferred Stock Dividends 0 0 0 100,625
Net [Loss] Available to Common
Stockholders $ (687,902) $(3,056,388) $ (1,482,556) $(4,988,281)
Loss Per Common Share:
[Loss] from Continuing Operations $ (.03) $ (.23) $ (.07) $ (.35)
Income [Loss] from Discontinued
Operations $ .01 $ (.19) $ .01 $ (.42)
Estimated Loss on Disposal of
Woodworking Business $ -- $ (.16) $ -- $ (.16)
Net [Loss] Per Common Share $ (.02) $ (.58) $ (.06) $ (.93)
Weighted Average Number of
Common Shares Outstanding 34,536,701 5,279,554 25,088,081
5,279,554
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION> Six months ended
September 30,
1996 1995
<S> <C> <C>
Operating Activities:
[Loss] From Continuing Operations $ (1,806,220) $ (1,188,696)
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 73,485 --
Amortization of Deferred Financing Activities 37,866 --
Minority Interest (46,944) --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,264,237) (253,384)
Inventory 225,238 (308,368)
Other Current Assets 4,534 2,702
Due from Stockholders & Related Parties -- 25,000
Note Receivable -- 1,050,000
Deposits 194,880 --
Prepaid Expenses 239,000 --
Other Assets 167,905
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (321,343) 783,544
Payroll Taxes Payable (33,633) 30,098
Other Current Liabilities (14,182) --
Total Adjustments (737,431) 1,408,605
Net Cash - Continuing Operations - Forward (2,543,651) 219,909
Discontinued Operations:
Net [Loss] From Discontinued Operations -- (2,196,078)
Adjustments to Reconcile Net [Loss] to Net Cash Operations:
Depreciation and Amortization -- 59,540
Changes in Net Assets, Liabilities and Losses 336,267 371,753
Estimated Loss in Disposal of Woodworking Business -- (841,423)
Net Cash - Discontinued Operations - Forward 336,267 (2,606,208)
Investing Activities - Continuing Operations:
Acquisition of Assets (12,610) 0
Purchase of Navtech - Net of Cash 0 (8,081)
Net Cash - Investing Activities - Continuing Operations - Forward (12,610)
(8,081)
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED]
<CAPTION>
Six months ended
September 30,
1996 1995
<S> <C> <C>
Net Cash - Continuing Operations - Forwarded ($ 2,543,651) $ 219,909
Net Cash - Discontinued Operations - Forwarded 336,267 (2,606,208)
Net Cash - Investing Activities - Continuing
Operations - Forwarded (12,610) (8,081)
Financing Activities - Continuing Operations:
Proceeds from Notes Payable-Other 3,740,980 560,019
Payment of Notes Payable - Other (150,000) --
Proceeds from Demand Notes Payable - Stockholders
and Related Parties -- 297,000
Payment of Demand Notes Payable - Stockholders
and Related Parties (1,925,339) --
Proceeds of Demand Note Payable - Banks 585,164 975,000
Proceeds from Issuance of Preferred Stock 1,139,319 0
Dividends Paid -- (100,625)
Net Cash - Financing Activities - Continuing Operations 3,390,124 1,731,394
Financing Activities - Discontinued Operations:
Proceeds from Demand Note Payable -- 511,035
Net Cash - Financing Activities - Discontinued Operations -- 511,035
Net Increase in Cash and Cash Equivalents 1,170,130 (151,951)
Cash and Cash Equivalents - Beginning of Periods 934,462 189,180
Cash and Cash Equivalents - End of Periods $ 2,104,592 $ 37,229
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest 170,871 $ 225,443
Income Taxes -- $ --
Supplemental Schedule of Non-Cash Investing and Financing Activities:
See notes to consolidated financial statements for details of certain
non-cash investing and financing activities.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[1] Summary of Significant Accounting Policies
Significant accounting policies of Holly Products, Inc. are set forth in the
Company's Form 10-KSB for the period ended March 31, 1996, as filed with the
Securities and Exchange Commission.
[2] Business of Reporting
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such statements include
all adjustments [consisting of normal recurring items] which are considered
necessary for a fair presentation. Operating results for the three and six
months ended September 30, 1996 and 1995 are not necessarily indicative of the
results that may be expected for the year ended March 31, 1997. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes for the period ended March 31, 1996, included
in the Holly Products, Inc. Form 10-KSB.
[3] Inventory
At September 30, 1996 inventory consisted of the following:
Work-in-Process $ 55,320
Raw Materials 972,954
Total 1,028,274
Less Reserve (338,000)
Total $ 690,274
Inventory is stated at the lower of cost [first-in, first-out method] or
market.
[4] Earnings Per Share
Earnings per share are based on 35,536,701 and 5,279,554 shares outstanding
for the three months ended September 30, 1996 and 1995, respectively, and
25,088,081 and 5,279,554 for the six months ended September 30, 1996 and 1995,
respectively. Such amounts of shares represent the weighted average number of
shares outstanding for the periods. Shares in escrow and the effect of
outstanding warrants were not included in the calculations, as their effect
would be anti-dilutive.
[5] Equity Transactions
During the quarter, 270,000 shares of Series E Preferred Stock were converted
pursuant to the terms thereof into 11,476,393 shares of Company common stock.
In August and September 1996, the Company issued 115,500 shares of Series E
Preferred Stock resulting in gross proceeds of $1,150,000. In September 1996,
the Company issued 573,333 shares of Common Stock to N & A Promotions in
return for certain services performed for the company. In September 1996,
$30,000 of debt owed to Sunrise, Inc. was converted into 30,000 shares of
Series C Preferred Stock and pursuant to the terms thereof into 120,000 shares
of Common stock.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company experienced a substantial loss for the year ended March 31,
1996, such loss was attributable primarily to its woodworking business, which
was conducted through its wholly owned subsidiary, HollyWood Manufacturing,
Inc. ("HollyWood"). The Company explored ways to reduce future losses,
including divesting itself of its woodworking business while continuing the
sales operations. The Company held discussions with potential purchasers of
its woodworking business. An offer had been presented but, the potential
buyer was unable or unwilling to make a firm commitment regarding same. The
Company was unsuccessful in its attempts to divest itself of its woodworking
business or find a suitable manufacturer for its products and consequently,
ceased ongoing operations of the woodworking business to reduce its losses.
The Company dismissed the entire staff and management of its woodworking
operation and has liquidated its assets. The lease for the facility housing
HollyWood expired on December 31, 1995 at which time the Company vacated the
premises. The Company used the funds raised through the liquidation of assets
and collection of outstanding receivables to satisfy a secured credit facility
with Riviera Finance of Chicago, Illinois.
In April 1996, the company moved its wholly owned subsidiary, Navtech
Industries, Inc., from Blanding, Utah to Shiprock, New Mexico. The move
allowed Navtech to operate from one facility totaling 54,000 square feet in
lieu of three facilities totaling 20,000 square feet. This will enable the
company to operate with greater efficiency and substantial less cost through
consolidation of functions, elimination of transportation and reduction in
management and supervisory staff. In its new location in Shiprock, New
Mexico, Navtech is located on the Navajo Reservation which allows for rebates
in employing Native Americans, reduced energy costs and a forgiveness of rent
payments on the new facility until such time as the move and refurbishing
costs to the building are fully paid. It is estimated that this process will
take approximately 10 years. It is anticipated that the new facility would
allow Navtech to expand its revenues substantially. Additionally, during the
Company's first quarter of 1996 (April - June) the Company had changed the
management of the Company with a lean and qualified group of professionals to
carry out Navtech's plan and meet targeted budgets for the upcoming year.
The six months results for this subsidiary show a significant turnaround to
its income statement as compared to a $2 million loss last year.
With the closing of the $5 million financing package for Country World
Casinos, Inc., in May 1996, it is anticipated that Country World will be able
to emerge from Chapter 11 proceedings in the immediate future, therefore
eliminating substantial legal, travel and management expense associated with
these proceedings. Further, with the simultaneous settlement of all
outstanding State litigation (see Part II, Item 1) as a part of the Chapter 11
proceedings, it is anticipated that Country World will recover monetary
damages and be able to move forward with its plans to construct the Casino.
Additionally, Country World has moved to smaller, less expensive quarters
substantially reducing its operating costs and plans to eliminate its office
requirements in Denver during this fiscal year.
In late October 1995, Country World petitioned the U.S. Bankruptcy Court
for the District of Colorado for protection under the rules of Chapter 11 of
the Bankruptcy Code in order to stop the foreclosure on the property
identified as Millsites 12, 13 and the Smith Mining Claim by Tommyknocker, a
subsidiary of New Allied Development Corporation ("New Allied"). In May 1995,
Country World filed suit against New Allied in State Court for amongst other
things, failure to satisfy a first deed of trust obligation, overcharges in
conjunction with an EPA remediation plan and action taken by a New Allied
officer and related parties requiring Securities and Exchange Commission
sanctions which in turn could jeopardize Country World's ability to obtain a
gaming license. In June 1995, New Allied filed a counterclaim to this action.
The Company, on behalf of Country World, has obtained a financing
commitment for 5 million dollars ($5,000,000) which will enable Country World
to repay all of its outstanding indebtedness and emerge from Bankruptcy. This
financing proposal has been approved by the Bankruptcy Court and the Company
has acquired the funds and distribution will be made in accordance with the
Court's order. Final settlement hearings were held in late September and the
company received final rulings from the court. The Court's order finds that
Tommyknocker Casino Corporation/New Allied Development Corporation is not
entitled to default interest at the rate of 18%, however Country World is
ordered to pay 8% per annum on the unpaid balance due Tommyknocker and Country
World is not obligated to pay attorneys fees, as each party has been directed
by the court to pay their own accordingly.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Court further finds that Country World Casinos, Inc. is not in
default of its Agreement with Tommyknocker/New Allied Development Corporation
with regard to filing a registration statement for its preferred stock and
until Tommyknocker/NADC files such registration statement and Country World
fails to pay for its cost, Country World is not in breach of the agreement.
Lastly, the Court's order upheld Tommyknockers/New Allied's claim that
Country World was not entitled to an offset on the environmental clean up as
the work had been completed and Country World paid all clean up costs without
objection prior to the take over by Holly Products, Inc.
Both parties are ordered to confer and agree on a specific dollar amount
by November 15th else the Court will set forth a hearing, determining the
amount and assess costs and attorneys' fees to the prevailing party.
Country World anticipates that it will require an additional
approximately $27,350,000 to construct an operational and licensed Casino. At
present, a letter of intent for the permanent financing is in place to fund
the Casino after construction, however there can be no assurance that the
closing of such financing will be obtained.
Results of Operations
Six Months Ended September 30, 1996 Compared to Six Months Ended September 30,
1995
Based on the following results of operations and the substantial losses
attributable to HollyWood, the Company decided to cease ongoing operations of
this segment of the Company's business. Due to the plan of discontinuance for
HollyWood, revenues and net losses have been eliminated from the statement of
operations. The following comparison, therefore, does not include the results
attributable to HollyWood, but contains the costs of discontinued operations.
Revenues for the six months ended September 30, 1996 were $3,038,233 as
compared to $2,389,874 for the six months ended September 30, 1995. The
increase in revenues is a result of the ability of the Company to fund
increased sales through funds raised earlier this year.
Cost of sales for the six months ended September 30, 1996 was $2,000,569
as compared to $2,616,512 for the six months ended September 30, 1995. This
decrease was primarily the result of selling items with a higher gross profit
margin.
Gross profit was $1,037,664 for the six months ended September 30, 1996,
as compared to a $266,648 gross loss for the six months ended September 30,
1995. This increase of $1,304,312 in gross profit is attributable to
increased sales for the period, as well as the improvements and adjustments in
cost of sales.
Total operating expenses for the six months ended September 30, 1996 were
$2,771,609 as compared to $1,596,661 for the comparable period ended September
30, 1995. The majority of these expenses are attributable to one time costs
associated with the reorganization of Navtech, closing costs for the $5
million funding associated with the Country World Chapter 11 Proceedings,
increased legal and other professional fees, raising of working capital,
consulting, stock expenses, as well as promotional fees.
Operating losses totaled $1,733,945 for the six months ended September
30, 1996, as compared to an operating loss of $1,823,309 for the same period
in 1995 for the reasons described above.
Discontinued operations showed a income of $327,664 for the six months
ended September 30, 1996 as compared to a loss of $2,196,078 for the six
months ended September 30, 1995. The change was a result of the close down
of this aspect of operations during the prior year. In the current period,
income was primarily a result of the Company being able to settle past debt of
the closed down operations at a substantial discount.
Interest expense for the six months ended September 30, 1996 was $221,784
as compared to $150,650 for the six months ended September 30, 1995. This
cost is primarily attributable to the Navtech revolving line of credit with a
local lending institution in Farmington, New Mexico.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Revenues for the three months ended September 30, 1996 were $1,244,036 as
compared to $1,392,098 for the three months ended September 30, 1995. The
decrease in revenues is a result of the Company focusing in on products with a
higher gross profit margin.
Cost of sales for the three months ended September 30, 1996 was $683,799
as compared to $1,722,335 for the three months ended September 30, 1995. This
decrease was primarily the result of selling items with a higher gross profit
margin and the decrease in sales.
Gross profit was $560,237 for the three months ended September 30, 1996,
as compared to a $380,237 gross loss for the three months ended September 30,
1995. This increase in gross profit is attributable to increased gross profit
percentage for the period due to a better selection of product sales.
Total operating expenses for the three months ended September 30, 1996
was $1,532,682, as compared to $809,579 for the three months ended September
30, 1995. This increase of $723,103 is attributable to costs associated with
increase legal and professional fees, raising of working capital, consulting,
stock expenses, as well as promotional fees.
Operating losses totaled $1,024,169 for the three months ended September
30, 1996 as compared to an operating loss of $1,188,696 for the period ended
September 30, 1995, a decrease of $164,527.
Interest expense for the three months ended September 30, 1996 was
$137,611 as compared to $65,245 for the comparable period in 1995. The
increase is primarily attributable to the Navtech revolving line of credit
with a local lending institution in New Mexico.
Discontinued operations showed a income of $336,267 for the three months
ended September 30, 1996 as compared to a loss of $1,026,269 for the three
months ended September 30, 1995. The change was a result of the close down
of this aspect of operations during the prior year. In the current period,
income was primarily a result of the Company being able to settle past debt of
the closed down operations at a substantial discount.
Liquidity and Capital Resources
To date, the Company has met its cash requirements through funds
generated by the IPO, the offerings of the Series D and Series E Preferred
Stock, borrowings and other equity investments. The Company experienced a
severe cash shortage and sustained substantial operating losses. Additional
funds will be required during the current fiscal year to satisfy the Company's
cash requirements. To the extent the Company has ceased operations of its
woodworking business, its cash requirements have diminished accordingly, and
an extended line of credit has been secured to fund Navtech's operations with
The First National Bank of Farmington in Farmington, New Mexico. The terms of
this facility are for a receivable and inventory line of credit in an amount
not to exceed $1,500,000 with a monthly floating interest rate of 1.5% over
prime. Additionally, the Company raised $8,995,000 through a private equity
placement of the Company's Series E Preferred Stock. Unless and until the
Company improves its financial results sufficiently and maintains such
improved results, the Company may have to borrow or raise additional capital
to fund any cash shortages as a result of the Company's continuing losses.
In May 1995, the Company borrowed $500,000 from the Calvin Black Trust,
which was due October 1, 1995. The note paid 2% interest per month, payable
monthly. The Company defaulted in its obligation to repay the debt to the
Calvin Black Trust by October 1, 1995 and was subsequently declared to be in
default of its obligation under the terms of the note and agreement. The
Calvin Black Trust filed a complaint in Federal Court in the District of Utah
for repayment of the debt. On January 15, 1996 the Company, The Calvin Black
Trust and Norlar, Inc., a corporation owned by Mr. Larry Berman, the Chairman
and Chief Executive Officer of the Company, and his spouse, entered into a
Sale and Forbearance Agreement pursuant to which The Calvin Black Trust sold
to Norlar $250,000 of the indebtedness owed by the Company in exchange for
$250,000 from Norlar and Norlar agreed to deliver to the Calvin Black Trust
upon the effectiveness of this Registration Statement either 250,000 shares of
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
the Company's Common Stock or $500,000 worth of the Company's Common Stock
whichever be greater. In exchange, The Calvin Black Trust agreed to forbear
from taking any further actions for a period of six months from the date of
the Sale and Forbearance. The Company will repay Norlar the $250,000 and
replace the shares of the Company's Common Stock that Norlar is required to
deliver to The Calvin Black Trust. In April 1996, the Agreement was amended
and the Trust was paid an additional $150,000 and Norlar agreed to deliver to
the Trust, upon effectiveness of a registration statement, either 200,000
shares of the Company's Common Stock or $348,000 worth of the Company's Common
Stock, whichever be greater, for an extension of time to file a registration
statement. The Company failed to comply with the terms of the amended
agreement. The Trust put the Company on notice that it intended to pursue
this matter and seek collection of the remaining balance due under the note.
The Company believed that the delay in filing the Registration Statement was
in part caused by the Trustee and defended itself vigorously. Following
extensive negotiations, the company and The Trust reached settlement by the
Company delivering shares of stock in RoomSystems, Inc. in lieu of payments.
Upon such delivery, the lawsuit was dismissed.
In January 1995, the Company borrowed, on an unsecured basis, an
aggregate of $1,000,000 from three individuals and entities at 15% annual
interest. In lieu of such interest, the Company issued to such note holders an
aggregate of 150,000 shares of Common Stock. The principal amount of such
notes was due and payable on January 13, 1996, and in March 1996, the Company
entered into an extension agreement with the three individuals whereas the
Company made a partial payment of $500,000 and Mr. Larry Berman, the Company's
Chairman, gave 370,000 shares of his personal stock for an extension until
August 9, 1996 at which time a balance payment of $400,000 was due. It has
been agreed between the parties to extend the August 9th deadline until such
time as Country World emerges from the Chapter 11 Proceedings. The Company
utilized the $1,000,000 to make a loan to Country World, which indebtedness
was canceled in exchange for the issuance of 5,000,000 shares of Country World
common stock to the Company. The Company plans to invest up to an additional
$35 million to develop and construct the casino and hotel complex in Black
Hawk, Colorado. At present, a letter of intent for the permanent financing is
in place to fund the Casino after construction, however, there can be no
assurance that the closing of such financing will be obtained.
The Company consummated a Private Placement of 767,000 shares of its
Series E Convertible Preferred Stock in March of 1996, resulting in gross and
net proceeds of $7,670,000 and $6,628,000, respectively. The proceeds of this
offering were utilized for repayment of debt, settlement of litigation fees
associated with securing financing for Country World Casinos, Inc. and working
capital for the Company and Navtech. Each share of Series E Preferred Stock
is convertible into shares of the Company's Common Stock at the rate
determined by dividing $10.00 by the lesser of 75% of the closing bid price as
reported by NASDAQ, of the Company's Common Stock on the date of the closing
of the subscription or 65% of the average closing bid price for the five (5)
trading days immediately preceding the date of conversion. In August and
September 1996, the Company consummated a second placement of 115,000 shares
of its Series E Convertible Preferred Stock under the same terms described
above.
In February 1996, the Company hired Martin Janis & Company to act as
agent for the Company in providing additional public relations services for a
three month period. The Company issued 35,000 shares of its Common Stock for
such services and in May 1996, paid an additional fee of approximately $24,000
for such three month period. Additionally, the Company will retain limited
services from Martin Janis & Company for the next nine months at a fee of
$3,000 per month.
In April 1996, the State of New Jersey approved the issuance of 555,000
shares of Series Z Preferred Stock in accordance with the Company's
Certificate of designation. In September 1996, such authorization was
increased to 1,050,000 shares and issued in exchange for debt.
In June 1996, the Company issued an aggregate of 1,300,000 shares of its
Common Stock to Messrs. Irwin Schneider, Eugene Lombardo and Scott Schneider
in return for certain services performed by these individuals on behalf of
the Company.
In August 1996, the Company received formal notification from the
Securities and Exchange Commission with regard to its majority owned
subsidiary, Country World Casinos, Inc., that a formal investigation, which
began in June 1994, had been terminated and no enforcement action is
forthcoming.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In September 1996, the Company issued 573,333 shares of Common Stock to N
& A Promotions in return for certain services performed for the Company.
In September 1996, a debt of $30,000 owed to Sunrise, Inc. was converted
into 30,000 shares of Series C Preferred Stock and pursuant to the terms
thereof, into 120,000 shares of Common Stock.
<PAGE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On May 26, 1995, the Company's majority owned subsidiary Country World
Casinos, Inc. ("CWC") commenced a lawsuit against Tommyknocker Casino Corp.
("Tommyknocker") and New Allied Development Corporation ("New Allied") in the
District Court of Denver, County of Denver, Colorado, case number 95CV 2310.
This action is primarily for breach of contract in connection with the
acquisition of certain real property by CWC from the defendants. CWC is
seeking monetary damages and declaratory relief.
On August 15, 1995, Tommyknocker and New Allied filed a counterclaim in
the aforementioned action against CWC, the Company, Ronald Nathan, Sal Lauria
and David Singer who are former board members of CWC, Roger LeClerc, President
of CWC and William Patrowicz director of CWC. The counterclaim alleges that
CWC is in default under the Promissory Note issued by CWC to Tommyknocker in
connection with the acquisition of the real property, CWC failed to register sto
ck on behalf of Tommyknocker and that the Company has acquired control of CWC
to the detriment of Tommyknocker and New Allied.
In a related action on June 28, 1995, Tommyknocker filed a Rule 120
Motion in the District Court, City and County of Denver, Colorado, case number
95CV 2799. This motion sought foreclosure of the real property discussed
above. On October 4, 1995, the magistrate in this case granted Tommyknocker's
motion and authorized the sale of the property pursuant to the foreclosure on
October 12, 1995.
On October 12, 1995, CWC filed a bankruptcy petition under Chapter 11 of
Title 11 of the United States Code. The case was filed in the United States
Bankruptcy Court, District of Colorado, case number 95-20563rjb. Pursuant to
the filing of the Bankruptcy, an automatic stay went into effect pursuant to
11 U.S.C. Section 362 prohibiting the foreclosure sale. Tommyknocker filed a
Motion for Relief from the stay and a hearing on this matter was held on
December 22, 1995. On January 3, 1996, the Court ruled that CWC should be
given an opportunity to proceed with its Bankruptcy proceedings in a diligent
and timely fashion. The Court conditioned continuation of the stay pending
the approval or denial as the case may be of CWC's financing proposal and
certain other conditions. In March 1996, the Court approved CWC's financing
proposal and in May 1996, CWC submitted a plan of reorganization to the Court
which is pending. In September 1996, the Court heard testimony in a claims
hearing between the parties. In early November 1996, the Company received
final rulings from the Court.
The Court's order finds that Tommyknocker Casino Corporation/New Allied
Development Corporation is not entitled to default interest at the rate of
18%, however Country World is ordered to pay 8% per annum on the unpaid
balance due Tommyknocker and Country World is not obligated to pay attorneys
fees as each party has been directed by the court to pay their own
accordingly.
The Court further finds that Country World Casinos, Inc. is not in
default of its Agreement with Tommyknocker/New Allied Development Corporation
with regard to filing a registration statement for its preferred stock and
until Tommyknocker/NADC files such registration statement and Country World
fails to pay for its cost, Country World is not in breach of the agreement.
Lastly, the Court's order upheld Tommyknockers/New Allied's claim that
Country World was not entitled to an offset on the environmental clean up as
the work had been completed and Country World paid all clean up costs without
objection prior to the take over by Holly Products, Inc.
Both parties are ordered to confer and agree on a specific dollar amount
by November 15th else the Court will set forth a hearing, determining the
amount and assess costs and attorneys' fees to the prevailing party.
On October 10, 1995, Phil B. Acton, Trustee of the Calvin Black Trust
commenced a lawsuit against the Company in the United States District Court
for the District of Utah, Central Division, case number 95CV 09305. This
action seeks repayment of a promissory note in the principal amount of
$500,000. On January 15, 1996 the Company, the Calvin Black Trust and Norlar,
Inc. a corporation owned by Mr. Larry Berman, the Chairman and Chief Executive
Officer of the Company and his spouse entered into a Sale and Forbearance
Agreement pursuant to which The Calvin Black Trust sold to Norlar $250,000 of
the indebtedness owed by the Company in exchange for $250,000 in cash from
Norlar and Norlar agreed to deliver to the Calvin Black Trust upon the
effectiveness of a Registration Statement either 250,000 shares of the
Company's Common Stock or $500,000 worth of the
<PAGE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Company's Common Stock whichever be greater. In exchange, The Calvin Black
Trust agreed to forbear from taking any further actions for a period of six
months from the date of the Sale and Forbearance. The Company will repay
Norlar the $250,000 and replace the shares of the Company's Common Stock that
Norlar is required to deliver to The Calvin Black Trust pursuant to the terms
of the Sale and Forbearance Agreement in either cash or the Company's
securities as determined by the Company's Board of Directors. In April 1996,
the Agreement was amended and the Trust was paid an additional $150,000 and
Norlar agreed to deliver to the Trust, upon effectiveness of a Registration
Statement, either 200,000 shares of the Company's Common Stock or $348,000
worth of the Company's Common Stock, whichever be greater, for an extension of
time to file a registration statement. The Company has failed to comply with
the terms of the amended agreement. The Plaintiff has put the Company on
notice that it intends to pursue this matter and seek collection of the
remaining balance due under the Note. The Company believes that the delay in
filing the Registration Statement was in part caused by the Trustee and
intends on defending itself vigorously. Following extensive negotiations, the
Company and the Trust reached settlement by the Company delivering shares of
stock in RoomSystems, Inc. in lieu of payment. Upon such delivery, the
lawsuit was dismissed.
The negative outcome of any of these actions will have a material impact
on the operations of the Company and would result in a disruption of the
Company's business.
Item 2 - Exhibits & Reports on Form 8-K
(A) There are no exhibits to be filed at this time.
(B) No reports on Form 8-K were filed during the quarter for which this
report is filed.
<PAGE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLY PRODUCTS, INC.
__/s/ William H. Patrowicz_____________________________
By: William H. Patrowicz
President, Chief Operating Officer, Treasurer
(Principal Financial and Accounting Officer) and Director
Date: November 19, 1996
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