SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-KSB
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ______________ to _________________
Commission file number 1-12668
HOLLY PRODUCTS, INC.
(Name of Small Business Issuer in its charter)
New Jersey 22-3172149
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
200 Monument Road, Suite 10, Bala Cynwyd, Pennsylvania 19004
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (610) 617-0400
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
on Which Registered
Common Stock, no par value Boston Stock Exchange
Common Stock Purchase Warrants Boston Stock Exchange
Convertible Preferred D, $10 par value Boston Stock Exchange
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
(Title of Class)
Check whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Exchange Act during the past
12 months (or the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes __X___ No _____
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB.
State the issuer's revenues for its most recent fiscal year. $ 4,110,413
The aggregate market value at July 3, 1996 of shares of the
issuer's Common Stock, no par value (based upon the average bid
and asked price per share of such stock on the National Association
of Securities Dealers, Inc. Automated Quotation ("Nasdaq") Stock
Market's Small Cap Market (the "Nasdaq Small Cap Market") held
by non-affiliates of the Registrant was approximately $8,874,449.
Solely for the purposes of this calculation, shares held by directors
and officers of the issuer have been excluded. Such exclusion should
not be deemed a determination or an admission by the issuer that
such individuals are, in fact, affiliates of the issuer.
Indicate the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable date:
At July 3, 1996, there were outstanding 30,762,600 shares of the
issuer's Common Stock, no par value.
Documents incorporated by reference:
Document Form 10-KSB Reference
Certain Previously Filed Exhibits IV
Transitional Small Business Disclosure Format (check one):
Yes _____ No _____
PART I
Description of Business
Item 1
General
The Company was incorporated in New Jersey in 1992. The Company,
through its wholly owned subsidiary, HollyWood Manufacturing, Inc., used to
manufacture wood cabinetry and fixtures. Due to continued losses, the Company
ceased ongoing operations of the woodworking business effective September
1995. In June 1994, the Company consummated the acquisition of Navtech
Industries, Inc. In July 1995, the Company acquired a majority of shares of
Common Stock of Country World Casinos, Inc.
Strategy
Navtech Industries, Inc.
On June 30, 1994, the Company acquired all of the issued and
outstanding shares of Navtech Industries, Inc.("Navtech"). Navtech is an
electronic cable and contract assembly company located in Shiprock, New Mexico
with calendar 1994 sales of over $8,000,000. Navtech provides independent
manufacturing services to original equipment manufacturers in industries such
as gaming, medical equipment, security systems, computer peripherals, in-room
hotel mini-bars and electronic musical systems. In addition, Navtech owns an
interest in Room Systems Inc. ("RoomSystems"), a manufacturer of credit card
activated in-room hotel mini-bars.
Navtech's relationship with Room Systems began in early 1992 when it
built 450 mini-bars on a turnkey basis. Later in 1993, Navtech extended credit
to RoomSystems, so RoomSystems would have 50 units for a test marketing program
with a national hotel chain. During 1994, Navtech and RoomSystems expanded
their relationship. Beginning in March 1994, Navtech entered into a series of
agreements through which it purchased 26.7% of the issued and outstanding stock
of RoomSystems for $282,000, which $278,000 was provided to Navtech by the
Company. In addition, in April 1994, Navtech and RoomSystems entered into an
agreement granting Navtech exclusive rights to manufacture RoomSystems' in-room
hotel mini-bars, provided Navtech meets certain quality, production and related
criteria. The agreement terminates on March 31, 1999, but will be extended
automatically for successive one year terms unless either party acts to
terminate. In April 1996, RoomSystems initiated action to cancel the agreement
due to price and quality issues. Navtech continues to manufacture for
RoomSystems while both companies seek to negotiate a settlement to their
respective differences.
In order to support Navtech's backlog of $6,500,000 and anticipated
growth for this year, the Company has negotiated a lease for an existing
facility with the Navajo Nation in Shiprock, New Mexico. This facility totals
54,000 square feet under one roof as compared to the 20,000 square feet Navtech
previously occupied in three separate facilities in Blanding, Utah. It is
anticipated that this facility will allow for the Company's planned growth for
the next three years and will provide for substantial cost savings in the areas
supervision, transportation, utilities and training provided by the Navajo
Nation, as well as, rebates provided by the Federal Government for employing
members of the Navajo Nation. The move to this new facility was completed in
April 1996. In order to finance Navtech's current backlog, the Company has
successfully negotiated a receivable and inventory line of credit with First
National Bank of Farmington for a one year term in the amount of $1,500,000.
Further anticipated growth will require additional funding and to this end, the
Company recently completed a private equity placement of the Company's Series E
Preferred Stock in the amount of $7.67 million.
Country World Casinos, Inc.
On April 20, 1995, the Company acquired 5,000,000 shares of Common
Stock of Country World Casinos, Inc. ("Country World") in exchange for the
cancellation of $1,000,000 of indebtedness owed by Country World to the
Company. The Company also acquired 16,667 shares of Country World Common
Stock in a separate transaction for $50,000. Country World has purchased real
estate located in the gaming district of Black Hawk, Colorado, on which it
seeks to construct the Casino. In addition, the Company acquired an additional
2,250,453 shares of Common Stock of Country World from certain existing
shareholders of Country World, in exchange for 744,592 shares of the Company's
Common Stock. As of March 31, 1996, the Company owns the 66.3% of the
outstanding shares of Country World Common Stock and 54.9% of the total
voting stock (Common and Preferred) of Country World.
Country World intends to develop a 200,000 square foot country western
motif casino complex in the gaming district of Black Hawk, Colorado, which is
located approximately 35 miles west of Denver, including a 79,000 square foot
casino (the "Casino") for limited stakes gambling (that is, gambling in which
bets are limited to a $5.00 maximum by Colorado law). Country World purchased
the real property on which the Casino is to be constructed from New Allied for
approximately $11,500,000, consisting of $550,000 in cash, approximately
$7,500,000 in preferred stock and approximately $3,500,000 in the form of a
promissory note.
On June 28, 1995, Tommyknocker, a subsidiary of New Allied, filed a
Rule 120 Motion in the District Court, City and County of Denver, Colorado.
This action sought foreclosure on the property. On October 3, 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, 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. The foreclosure has been stayed pending certain
conditions.
The Company, on behalf of Country World, has obtained a 5 million
dollars ($5,000,000) financing package, which will enable Country World to
repay all of its outstanding indebtedness and emerge from Bankruptcy. This
financing package has been approved by the Bankruptcy Court and the Company
will utilize the funds in accordance with the Court's order.
Country World anticipates that it will require an additional approximately
$27,350,000 to construct an operational and licensed Casino. At present, the
Company has secured construction financing and 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.
Products
Navtech Industries, Inc.
The Company, through its wholly owned subsidiary Navtech, offers
independent manufacturing services to original equipment manufacturers in a
variety of industries. The Company supplies printed circuit boards and wire
harness assemblies for slot machine tracking systems and signage, and is the
manufacturer for RoomSystems, providing a complete credit card activated
in-room hotel mini-bar.
Customers
Navtech Industries, Inc.
Navtech provides contract assembly services for a small group of
preferred companies in the electronics industry. In the casino related products
industry, its products are sold to Casino Data Systems, Inc., of Las Vegas,
Nevada, which in turn installs the product into a slot machine tracking system.
In the hospitality industry, Navtech's products are sold to Room Systems,
Inc. of St. George, Utah, which in turn installs the finished products in
various hotel chains.
For the 12 months ended March 31, 1996, the two aforementioned
companies were the only customers which accounted for more than 10% of
Navtech's revenue, approximately 63% and 13%, respectively.
Marketing and Sales
Navtech Industries, Inc.
Navtech continues to perform contract assembly projects as described
above and in an effort to reduce its reliance on a few customers has
aggressively sought new markets for its products. In that regard, Navtech has
received an order in excess of $4.5 million from DHL, Inc. of Los Angeles,
California, for electronic ballast assemblies which are currently in the design
and testing stage.
Manufacturing and Assembly
Navtech Industries, Inc.
Through March 1996, Navtech manufactured its products in a leased
11,000 square foot facility, as well as two smaller facilities totaling 9,000
square feet in Blanding, Utah. Navtech has moved to a 54,000 square foot
facility in Shiprock, New Mexico in April 1996, to facilitate greater
efficiency in the manufacturing process. Earlier this year Navtech acquired its
first piece of computerized surface mount technology equipment to reduce its
overall cost of direct labor and in April 1996, acquired its second machine.
Navtech's new Fuji high-speed chip shooter will assemble computer boards
approximately three times faster. Additionally, Navtech recently completed the
installation of a total network computer system which will be integrated into
the manufacturing process.
Raw Materials and Supplies
All of the Company's products utilize a variety of off-the-shelf items,
purchased from numerous suppliers, and are readily available. One supplier
accounts for more than 10% of the Company's materials, although any supplier
terminating its relationship for any reason would have no adverse affect on the
Company's ability to procure material at comparable prices as there is an
abundant supply of same.
Competition
The electronic contract assembly industry is highly competitive. Navtech
competes with a number of foreign and domestic firms, including large
electronic manufacturers, such as IBM, Westinghouse and Texas Instruments. The
majority of Navtech's competitors have substantially greater manufacturing,
financial, engineering and marketing resources than Navtech. Navtech believes,
however, that most larger manufacturers and foreign assembly firms focus on
high volume consumer electronic products, not on Navtech's target market of
complex, mid-volume products which require greater flexibility in
pecifications and lead times. Navtech believes that its ability to meet
customer needs for schedule changes, timely delivery and quality products, from
a relatively convenient location and at a competitive price, will allow it to
continue to compete successfully in its market.
If the Casino were constructed, it would face intense competition from
other casinos, in the Black Hawk area and elsewhere.
Backlog
At March 31, 1996, the Company's backlog was approximately
$6,500,000 as compared to approximately $2,500,000 at March 31, 1995. Of such
backlog, all relates to Navtech. The backlog consists of 16 firm orders. All of
the orders are for requested deliveries through March 31, 1997.
Employees
At March 31, 1996, the Company had 153 full time employees including
5 executive officers. At March 31, 1996, Navtech had 145 full-time employees
including 124 engaged in manufacturing, three in marketing, and 18 in
management and administrative functions. The Company considers its relations
with its employees to be satisfactory.
Insurance
The Company's insurance coverage includes property and casualty
insurance, liability insurance, including products liability, and excess
liability coverage, key man life insurance on Mr. Berman, the Company's Chief
Executive Officer and Mr. Patrowicz, the Company's President, and directors and
officers liability insurance. Based both upon its experience and industry
standards, the Company believes that the types and amounts of its coverage are
adequate.
Item 2 - Properties
The Company's executive offices are presently contained within an office
complex in Bala Cynwyd, Pennsylvania and is approximately 2,000 square feet.
The offices are leased for a period of three years, commencing January 1996, at
a net monthly rental of $2,400.
Navtech's operations are housed in a leased 54,000 square foot facility
in Ship Rock, New Mexico at a gross monthly rental of $4,050. Navtech has
signed a 10 year lease with the Navajo Nation for this facility which began in
January 1996.
Item 3 - 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, who are former board members of CWC, Roger LeClerc,
President of CWC, William Patrowicz and David Singer, current directors 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 stock 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.
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 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.
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 4 - Submission of Matters to a Vote of Security Holders
On June 5, 1996, by written consent of a majority of the Company's
stockholders without a meeting, action was taken to amend the Company's
Certificate of Incorporation to increase the authorized number of shares of
Common Stock from 20 million to 50 million shares. The foregoing was
approved by the holders of 9,907,467 shares of the Company's Common Stock,
constituting approximately 85.2% of such stock outstanding on April 30,1996,
the record date.
PART II
Item 5 - Market for Common Equity and Related Stock Holder Matters
The Company's Common Stock, Warrants and Series D Preferred Stock
are currently traded in the NASDAQ SmallCap Market under the respective
symbols "HOPR", "HOPRW" and "HOPRP".
<TABLE>
The following table sets forth the high and low prices for such
securities on the NASDAQ SmallCap Market during the quarters indicated.
<CAPTION>
Common Stock Warrants Preferred
Period High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
December 20 to December 31, 1993 5 3/4 5 3/8 3/4 3/8 - -
Quarter Ended March 31, 1994 6 1/4 5 1/2 1 5/8 - -
Quarter Ended June 30, 1994 6 3/4 5 3/4 1 5/8 1 - -
Quarter Ended September 30, 1994 8 1/8 6 1/2 4 1/8 1 7/8 - -
Quarter Ended December 31, 1994 8 1/8 6 1/2 4 1/4 1 7/8 16 11
Quarter Ended March 31, 1995 7 1/4 5 4 1/8 2 3/8 16 10
Quarter Ended June 30, 1995 7 3/8 5 4 2 3/8 15 1/4 10
Quarter Ended September 30, 1995 5 7/8 2 3/4 2 1/4 5/8 12 5 1/2
Quarter Ended December 31, 1995 3 7/8 1 1 5/8 5/8 8 2 1/4
Quarter Ended March 31, 1996 2 11/16 11/16 1 1/4 7/16 6 2 5/8
On July 3, 1996, the closing price of the Common Stock, Warrants and
Preferred Stock were 11/32, 5/16 and 2 1/4, respectively.
On July 3, 1996, there were 220 holders of record of the Company's
Common Stock, 32 holders of record of the Warrants and 15 holders of record of
the Series D Preferred Stock. The Company believes that there are in excess of
1,000 beneficial owners of Common Stock, Warrants and Series D Preferred
Stock.
</TABLE>
DIVIDEND POLICY
The Company does not anticipate that it will pay cash dividends on
the Common Stock in the foreseeable future. The payment of such dividends by
the Company will depend on its earnings, if any, and financial condition and
such other factors as the Board of Directors of the Company may consider
relevant. The Company currently intends to retain any earnings to provide for
the development and growth of the Company.
Holders of shares of Series D Preferred Stock receive dividends of
10% per annum. Such dividends accrue and are cumulative from the date of
original issue and are payable quarterly in arrears on October 1, January 1,
April 1 and July 1 of each year. Dividends on the shares of Series D Preferred
Stock are payable prior to any dividends to be paid on the Common Stock. The
Company intends to pay dividends on the Series D Preferred Stock to the extent
its earnings are sufficient, as determined in the discretion of the Board of
Directors of the Company. Under New Jersey law, the Company is not permitted to
pay dividends if either (i) it would be unable to pay its debts as they become
due in the ordinary course of business or (ii) its total assets would be less
than its total liabilities. Accordingly, dividend payments have not been made
since July 1, 1995, as the Company is investigating the legality of such
payment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Plan for Elimination of Losses
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 anticipate that the new facility would allow
Navtech to expand its revenues to $50,000,000 annually. Additionally, during
the Company's first quarter of 1996 (April - June) the Company has changed the
management of the Company with a parred down more cost conscious group of
professionals to carry out the Company's plan and meet targeted budgets for the
upcoming 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 item #3 Legal Proceedings) 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.
General
On June 30, 1994, the Company acquired all of the issued and
outstanding shares of Navtech Industries, Inc. ("Navtech"). Navtech is an
electronic cable and contract assembly company located in Blanding, Utah.
Navtech provides independent manufacturing services to OEM's in industries such
as gaming, medical equipment, security systems, computer peripherals, in-room
hotel mini-bars, and electronic musical systems. In addition, Navtech owns
27.6% of the issued and outstanding stock in RoomSystems, Inc.("RoomSystems"),
a manufacturer of credit card activated in-room hotel mini-bars.
Navtech's relationship with RoomSystems began in early 1992 when it
built 450 mini-bars on a turnkey basis. Later in 1993, Navtech extended credit
to RoomSystems, so that RoomSystems would have 50 units for a test marketing
with a national hotel chain. During 1994, Navtech and RoomSystems expanded
their relationship. Beginning in March 1994, Navtech entered into a series of
agreements through which Navtech purchased 26.7% of the issued and
outstanding stock of RoomSystems for $282,000, which $278,000 was provided
to Navtech by the Company. In addition, in April 1994, Navtech and Room
Systems entered into an agreement granting Navtech exclusive rights to
manufacture RoomSystems in-room hotel mini-bars, provided Navtech meets
certain quality, production and related criteria. The agreement terminates on
March 31, 1999, but is extended automatically for successive one year terms
unless either party acts to terminate. In April 1996, RoomSystems initiated
action to cancel the agreement due to price and quality issues. Navtech
continues to manufacture for RoomSystems while both companies seek to negotiate
a settlement to their respective differences.
The Company has issued 500,000 shares of Common Stock to the former
shareholders of Navtech in exchange for all outstanding shares of Navtech. Of
such 500,000 shares, 166,667 shares are held in escrow pending Navtech
achieving either: (a) $6 million in net sales, with net pre-tax profit of
$500,000, for the 12 month period following the June 30, 1994 closing of the
Navtech Acquisition or (b) $14 million in net sales, with net pre-tax profit of
$1.2 million, for the 24 month period following such closing. If neither
condition is satisfied, the 166,667 shares revert to the Company. In
March 1996, the Company elected to terminate the escrow agreement and returned
the escrow shares to the former shareholders of Navtech.
In order to support Navtech's current backlog of $6,500,000 and
anticipated growth for the upcoming year 1996, the Company has negotiated a
lease for an existing facility with the Navajo Nation in Shiprock, New Mexico.
This facility totals 54,000 square feet under one roof as compared to the
20,000 square feet Navtech currently occupies in three separate facilities in
Blanding, Utah. It is anticipated that this facility will allow for the
Company's planned growth for the next three years and will provide for
substantial cost savings in the areas supervision, transportation, utilities
and training provided by the Navajo Nation, as well as, rebates provided by the
federal government for employing members of the Navajo Nation. The move to this
new facility was completed in April 1996. In order to finance Navtech's current
backlog, the Company has successfully negotiated a receivable and inventory
line of credit with First National Bank of Farmington for a one year term in
the amount of $1,500,000. Further anticipated growth will require additional
funding and to this end, the Company recently completed a private equity
placement of the Company's Series E Preferred Stock, in the amount of $7.67
million.
On April 20, 1995, the Company acquired 5,000,000 shares of Common
Stock of Country World Casinos, Inc. ("Country World"), in exchange for the
cancellation of $1,000,000 of indebtedness owed by Country World to the
Company. The Company also acquired 16,667 shares of Country World Common
Stock in a separate transaction for $50,000. Country World has purchased real
estate located in the gaming district of Black Hawk, Colorado, on which it
seeks to construct the Casino. In addition, the Company acquired an additional
2,250,453 shares of Common Stock of Country World from certain existing
shareholders of Country World, in exchange for 744,592 shares of the Company's
Common Stock. As of March 31, 1996, the Company owns 66.3% of the
outstanding shares of Country World Common Stock and 54.9% of the total
voting stock (Common and Preferred) of Country World.
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.
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
Twelve Months Ended March 31, 1996 Compared to Twelve Months Ended
March 31, 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 twelve months ended March 31, 1996 were $4,110,443
as compared to $5,279,766 for the twelve months ended March 31, 1995. The
decrease in revenues is a result of the inability of the Company to fund
increased sales.
Cost of sales for the twelve months ended March 31, 1996 was
$5,143,819 as compared to $4,013,435 for the twelve months ended March 31,
1995. This increase of $1,130,384 was primarily a result of costs associated
with the operations of Navtech and one time costs associated with reduction and
elimination of inventory.
Gross (loss) profits were $(1,033,376) for the twelve months ended
March 31, 1996, as compared to $1,266,331 for the twelve months ended March
31, 1995, as a result of the reasons described above.
Total operating expenses for the twelve months ended March 31, 1996
were $5,213,760 as compared to $1,371,189 for the comparable period ended
March 31, 1995. This increase of was related to the operation and moving into
new facilities of Navtech, the acquisition and development of Country World and
to increased legal and other administrative fees associated with the closing of
the woodworking business, raising of working capital, Country World's Chapter
11 proceedings and consulting, as well as promotional fees.
Operating losses totaled $6,247,136 for the twelve months ended March
31, 1996, as compared to an operating loss of $104,858 for the same period in
1995 for the reasons described above.
Interest expense for the twelve months ended March 31, 1996 was
$468,483 as compared to $265,272 for the twelve months ended March 31, 1995.
This increase is substantially due to funds borrowed to complete the Country
World Acquisition and settle outstanding litigation.
Liquidity and Capital Resources
To date, the Company has met its cash requirements through funds
generated by the IPO, the offering of the Series D 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 a new 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 $7,670,000 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.
To fund cash shortages, the Company has had to borrow money at very
high interest rates. In September 1994, the Company entered into a credit
facility with Riviera Finance of Illinois, which replaced the UJB Facility,
under which the Company was in default. The terms of the replacement facility
were for a receivable line of credit in an amount not to exceed $650,000, of
which $590,000 was borrowed ($250,000 of which was immediately applied to the
repayment in full of the outstanding debt with United Jersey Bank). This
indebtedness was paid down to $190,000 out of the proceeds of the Series D
Offering. Under this facility, the Company paid interest at the rate of 36% per
annum, and had granted a security interest in its receivables. The facility
expired on February 28, 1995 and had been extended informally since that time
on a month to month basis at an interest rate of 22% per annum. In May 1995,
the Company entered into a written agreement with Riviera Finance increasing
the facility to a total of $1,200,000 to run for one year and to be renewable
thereafter from year to year. As a result of HollyWood ceasing its operations,
Riviera Finance declared the Company in default of its agreement and made
demand for payment in full of the outstanding balance from the Company. The
Company paid Riviera Finance from the proceeds of the liquidation of HollyWood
and collection of HollyWood's outstanding receivables. As of the date hereof,
the Company is no longer indebted to Riviera Finance. 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 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 has failed to comply with the terms of
the amended agreement. The Trust 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 will defend itself vigorously.
In July 1994, Norlar, Inc. converted $240,000 of indebtedness owed to
it by the Company into 240,000 shares of Series C Preferred Stock and in July
1995, converted $100,000 of indebtedness into 100,000 shares of Series C
Preferred Stock, in order to reduce the Company's indebtedness. Additionally,
July 25, 1995, Norlar, Inc. converted 75,000 shares of Series B Preferred Stock
into 450,000 shares of Series C Preferred Stock. The Series C Preferred Stock
carried a $.125 per share per annum dividend (equivalent to a 12.5% annual
interest rate on the converted indebtedness) and a $1.00 liquidation value per
share. Each share was convertible into four shares of Common Stock and had
voting rights equal to four votes per share. On December 16, 1994, Norlar
converted the 240,000 shares of Series C Preferred Stock, pursuant to the terms
thereof, into 960,000 shares of Common Stock. In August 1995, converted
450,000 shares of Series C Preferred Stock into 1,800,000 shares of Common
Stock and in December 1995, 100,000 shares of Series C Preferred Stock into
400,000 shares of Common Stock. Upon the consummation of the Series D Offering
in November 1994, certain indebtedness of the Company in the amount of $240,000
owed to the former Vice-Chairman, was purchased equally by Samanda, Inc. and
Sunrise Group, Inc. On December 19, 1994, Samanda and Sunrise each converted
$90,000 of such debt into 90,000 shares of Series C Preferred Stock, thus
relieving the Company of such indebtedness, and on December 30, 1994 converted
such preferred stock, pursuant to the terms thereof into 360,000 shares of
Common Stock each. On August 22, 1995, Samanda, Inc. converted its remaining
$30,000 debt into 30,000 shares of Series C Preferred Stock and on December 11,
1995, into 120,000 shares of Common Stock.
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
is due. 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. The Company
has secured construction financing and has a commitment letter for the
permanent financing of the project, however there can be no assurance that
the closing of such financing will be obtained.
In 1994, the Company made available to Navtech working capital of up
to $1,700,000. Of such amount, approximately $838,000 was expended out of the
Company's net proceeds from the Series D Offering as follows: (a) an amount
(approximately $434,000) representing pre-tax profits earned by Navtech for the
period from April 1,1994 to June 30, 1994 (the date of the Navtech Acquisition)
, as $342,000 was paid in cash, $50,000 of such indebtedness was converted to
Series C Preferred Stock and subsequently, in October 1995, was converted into
200,000 shares of Common Stock and approximately $42,000 of debt was
converted to equity through the issuance of Common Stock, (b) an amount
(approximately $239,000) to satisfy certain outstanding obligations of Navtech
and an amount ($178,000) for the remaining balance of the $278,000 exercise
price of the RoomSystems Option. The balance (approximately $862,000) was
made available to Navtech for working capital purposes, through an increase in
its bank line credit, relieving outstanding debt and allowing Navtech to retain
and re-invest interim profits.
An aggregate of 300,000 shares of Common Stock of the Company were
placed in escrow in connection with the IPO, pending the Company's attainment
of certain minimum annual earnings thresholds. The holders of these shares
consist of (a) Norlar, Inc. (b) Mr. Cary Berman, the son of Mr. Larry Berman
and certain other shareholders of the Company, none of whom are officers,
directors, employees, consultants or contractors to the Company or otherwise
affiliated with the Company. In the event the Company's earnings before income
tax as reported in the Company's audited financial statements exceed $800,000
for the fiscal year ended March 31, 1995, then all 300,000 shares would have
been released from escrow and delivered to such shareholders. If Minimum
Pre-Tax Earnings for such year had been less than $800,000 but more than
$400,000, then 150,000 shares would have been released. No shares were
released, however, as such earnings levels were not met. If cumulative Minimum
Pre-Tax Earnings for the two years ending March 31, 1996 shall exceed
$1,000,000, then any shares then remaining in escrow shall be released. In the
event any of the shares are released from escrow to officers and other
employees of the Company, the release will be treated, for financial reporting
purposes, as compensation expense to the Company. In the event the Company
attains any of the earnings thresholds required for the release of the escrow
shares, the release of the escrowed shares to such officers and other employees
(an aggregate of 200,000 shares in this case) will be deemed additional
compensation expense to the Company. Accordingly, the Company will, in the
event of the release of the escrowed shares, recognize during the period in
which the earnings thresholds are met, what could be a substantial charge which
would substantially increase the Company's loss or reduce or eliminate
earnings, if any, at such time. The amount of this charge will be equal to the
difference between the aggregate market price of such shares at the time of the
release from escrow and the aggregate original issue price thereof (between
$.07 and $.08 per share). The amount of compensation expense recognized by the
Company will not affect the Company's total stockholders' equity. In November
1995, due to the acquisition of Navtech in June 1994 and acquisition of
majority interest in Country World in April 1995, significantly changing the
overall company, the Board of Directors voted to eliminate the escrow agreement
and return such shares accordingly.
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 December 1995, the Company issued 300,000 shares of its Common
Stock to Mr. Irwin Schneider in return for services rendered in connection with
the liquidation of its woodworking subsidiary and the reorganization of Country
World Casinos, Inc.
In October 1995, the Company issued 15,000 shares of its Common
Stock each to Mr. Herbert Sommer, Esq. and Mr. Joel Schneider, Esq. as a
retainer for legal services to be performed through July 1996.
In August 1995, the Company issued 12,500 shares of its Common Stock
each to Mr. Herbert Sommer, Esq. and Mr. Joel Schneider, Esq. in return for
legal services performed. Additionally, the Company issued 3,750 shares of its
Common Stock each to Mr. Morton Shapiro, Esq. and Mr. Richard Shapiro, Esq.
in return for legal services performed.
In January 1996, the Company issued 50,000 shares of its Common Stock
to the Law firm of Sommer & Schneider LLP in return for legal services
performed.
On January 24, 1996, the Company hired Corporate Relations Group,
Inc. ("CRG") to act as the Company's financial public relations firm. The
agreed fee for these services was $350,000 payable in cash or, at the Company's
option 273,437 shares of the Company's Common Stock. Norlar, Inc. a company
owned by Mr. Larry Berman, the Company's Chairman, and his spouse, assumed the
Company's obligations under the agreement and transferred to CRG 273,437
shares of the Company's Common Stock. The Company has agreed to repay
Norlar, Inc. at the discretion of the Board of Directors either $350,000 ($1.28
per share) or 273,437 shares of the Company's Common Stock prior to July 31,
1996. On February 26, 1996, the Company paid Norlar, Inc. $350,000 in lieu of
issuing additional shares of stock.
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 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.
Item #7 Financial Statements - See Page F-1
Item #8 Changes in and disagreements with accountants on accounting and
financial disclosure. - Not applicable
PART III
Item #9 Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
The executive officer and directors of the Company are as follows:
Name Age Position with the Company
Larry S. Berman 61 Chairman, Chief Executive Officer,
Secretary, and Director
William H. Patrowicz 48 President, Chief Operating Officer,
Treasurer, and Director
Cary Brett Berman 35 Vice President and Director
Harold Goldstein 65 Director
LARRY S. BERMAN has served as Chairman, Secretary, and Director
of the Company since June 1992. Since 1982, Mr. Berman has been Vice
President of Coastal Leasing and Investment, Inc. where he is responsible for
restructuring and otherwise assisting companies raise debt and equity funds.
WILLIAM H. PATROWICZ has served as President, Chief Operating
Officer, and Director of the Company since June 1992. From 1982 to December
1991, Mr. Patrowicz was employed by Gunnebo Fastening Corp., most recently
as Senior Vice President of Operations.
CARY BRETT BERMAN served as a Sales Representative for the
Company from December 1992 until December 1993 when he was promoted to
Vice President. Prior to joining the Company, Mr. Berman was President of
Active American Apparel, Inc., a New York based clothing company, from 1985
to December 1992. Mr. Berman is the son of Larry S. Berman.
HAROLD GOLDSTEIN has served as a Director of the Company since
March 1996. Since 1982, Mr. Goldstein has been President of Coastal Leasing
and Investment, Inc., where he is responsible for restructuring and otherwise
assisting companies raise debt and equity funds.
Directors hold office until the next annual meeting of stockholders
following their elections, or until their successors are elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
Item #10
Executive Compensation
The following table sets forth the cash compensation paid by the Company to its
chief executive officer and each of its executive officers whose total cash
compensation exceeded $100,000 for the fiscal period ended March 31, 1996,
1995 and 1994, respectively:
Name and Fiscal Other
Principal Annual
Position Year Salary ($) Bonus ($) Compensation
Larry S. Berman 1994 26,000(1) 0 0
Chairman and Chief 1995 117,000(2) 0 0
Executive Officer 1996 156,000 0 0
William H. Patrowicz 1994 104,000 0 0
President and Chief 1995 110,500(3) 0 0
Operating Officer 1996 130,000 0 0
(1) Until December 31, 1993, Mr. Berman served for no compensation.
From January 1, 1994 until January 1, 1995, his compensation has
been equivalent to the compensation of Mr. Patrowicz.
(2) Includes a portion of a $156,000 annual salary which took effect
January 1, 1995.
(3) Includes a portion of a $130,000 annual salary which took effect
January 1, 1995.
The value of personal benefits furnished to Mr. Patrowicz and Mr.
Berman did not exceed 10% of their respective cash compensation.
The Company has no stock option, defined benefit or restricted stock
award plans.
The Company estimates that prior to January 1, 1994, Mr. Larry Berman
spent approximately 5% to 10% of his time advising the Company with respect
to its affairs. Since January 1, 1994, Mr. Berman has spent a substantial
majority of his time in management activities relating to the Company. Mr.
Berman will not receive any compensation for previously rendered services.
In August 1994, the Company entered into a consulting agreement with
Mr. Alfred Abrams, the former Vice Chairman and Director of the Company.
Additionally, Mr. Berman entered into an agreement with Mr. Abrams regarding
the purchase of Mr. Abrams' equity and debt interests in the Company upon the
consummation of the Series D Offering. In December 1995, such consulting
agreement was terminated.
In February 1996, the Company and Mr. Lloyd Kartchner, Chief
Executive Officer and Director of Navtech, agreed to a mutual separation of the
parties under certain terms and conditions. Among the most important terms
being, Mr. Kartchner has agreed not to compete with the Company for a period
of three years in return for a buy out of his employment contract in the amount
of $150,000, release of his personal guarantees associated with the Company's
business, release of the Escrow Agreement, registration of his Holly Products,
Inc. shares of Common Stock and indemnification for any claims, past or future.
Item #11 Security Ownership of Certain Beneficial Owners and Management.
Set forth below is information at March 31, 1996, concerning the
beneficial ownership of Common Stock by (I) all persons known by the Company
to own beneficially 5% or more of the Company's Common Stock, (ii) each
director of the Company and (iii) all directors and executive officers of the
Company as a group.
Shares Beneficially Owned
Name (1)(2)(3)(4)(5) Number Percent
Larry S. Berman (3)(4)(5) 2,364,363 7.7%
Chairman, Chief Executive
Officer, Secretary, and
Director of the Company
Cary Brett Berman -- --
Vice President and Director
William H. Patrowicz -- --
President, Chief Operating
Officer, Treasurer,
and Director
Harold Goldstein -- --
Director
All Directors and Executive 2,364,363 7.7%
Officers as a Group (4 persons)
(1) Except as indicated below, all of such persons and entities have sole
investment and voting power over the shares listed as being owned by
them.
(2) The addresses of certain of such persons are:
Larry Berman
Cary Brett Berman
William H. Patrowicz
Harold Goldstein
Holly Products, Inc.
200 Monument Road, Suite 10
Bala Cynwyd, Pennsylvania 19004
(3) Norlar, Inc. is the record holder of a portion of such shares.
(4) Includes 200,000 shares held by Mr. Cary Brett Berman for which Larry
Berman has full voting and dispositive powers.
(5) Upon the effectiveness of a future Registration Statement, Norlar,
Inc. shall transfer to The Calvin Black Trust the greater of 200,000
shares of the Company's Common Stock or $348,000 worth of the
Company's Common Stock as part of the settlement of a certain lawsuit
between the Company and The Calvin Black Trust.
In June 1994, in connection with the Navtech Acquisition, 166,667
shares of the 500,000 shares of Common Stock issued to the sellers of the
Navtech stock were placed in escrow (the "Navtech Escrow Shares"). In March
1996, all such shares were released from escrow by the Company as a part of a
separation agreement with Mr. Lloyd Kartchner, former CEO of Navtech.
Item 12 CERTAIN TRANSACTIONS
The Company entered into a Consulting Agreement, dated as of August
12, 1994, with Alfred Abrams, the former Vice Chairman and Director of the
Company, pursuant to which Mr. Abrams is to devote up to ten hours a week to
soliciting business for the Company and participating in its marketing and long
term planning efforts, among other things. The Consulting Agreement
memorialized a verbal arrangement negotiated between the Company and Mr.
Abrams in January 1994. Such agreement was terminated in December 1995.
In November 1994, Mr. Abrams sold to Norlar, Inc. 250,000 shares of
the Company's Common Stock plus 100,000 shares of Common Stock subject to
the Escrow Agreement for $350,000, and 37,500 shares of the Company's Series
B Preferred Stock for $225,000. Simultaneously therewith, Sunrise and Samanda,
upon assignment from Mr. Larry Berman, purchased equally from Jefacor, Inc.,
a corporation owned by Mr. Abrams and his spouse, a promissory note of the
Company in the original principal amount of $240,000 for a like sum. On
December 19, 1994, Sunrise and Samanda each converted $90,000 of the
purchased indebtedness into 90,000 Shares of Series C Preferred Stock, thus
relieving the Company of such indebtedness. The shares of Series C Preferred
Stock were converted on December 30, 1994, in accordance with their terms, into
360,000 shares of Common Stock each. Samanda is owned by the spouse of Mr.
Norman Berman, Mr. Larry Berman's brother, and Sunrise is owned by an existing
stockholder of the Company which is not otherwise affiliated with the Company
or any officer or director thereof. Subsequently, on August 22, 1995, Samanda,
Inc. converted its remaining $30,000 debt into 30,000 shares of Series C
Preferred Stock and on December 11, 1995 into 120,000 shares of Common Stock.
In July 1994, in order to reduce the Company's indebtedness, the
$240,000 of indebtedness owed by the Company to Norlar, Inc. was converted
into 240,000 shares of Series C Preferred Stock, which in December 1994 were
converted pursuant to their terms into 960,000 shares of Common Stock. In
January 1995, Mr. Larry Berman sold 720,000 of such shares of Common Stock
for $1 per share. In July 1995, Norlar, Inc. converted $100,000 of indebtedness
into 100,000 shares of Series C Preferred Stock and in December 1995, converted
such into 400,000 shares of Common Stock.
In October 1993, certain indebtedness owed to Norlar, Inc. (upon
assignment from Mr. Cary Brett Berman, the son of Mr. Larry Berman) and to
Mr. Alfred Abrams, in the aggregate amount of $450,000, was converted into
75,000 shares of Series A Preferred Stock. The indebtedness resulted from
capital provided to the Company by Messrs. Abrams and Berman. The conversion
was effected at the request of Messrs. Berman and Abrams pursuant to written
agreement, pursuant to which the shares of Series A Preferred Stock were issued
and the promissory notes relating thereto were delivered to and canceled by the
Company. The Series A Preferred Stock carried a $.75 per share per annum
dividend rate (equivalent to a 12.5% annual interest rate on the converted
indebtedness), no voting rights or conversion features, and had a $6.00
liquidation value per share. Dividends on the Series A Preferred Stock were
cumulative and were payable before any dividends could be declared and paid
upon or set aside for any shares of Common Stock in any such year when and as
declared by the Board of Directors. The Company had the right, at its option,
to redeem the Series A Preferred Stock, including on a pro rata basis if not
all such shares were redeemed, commencing August 1, 1994 at an amount equal to
the liquidation preference thereof plus accrued and unpaid dividends. In
December 1993 the Series A Preferred Stock was exchanged for an equivalent
number of shares of the Series B Preferred Stock after which the outstanding
shares of Series A Preferred Stock were canceled and are therefore no longer
outstanding. As stated above, in November 1994, in connection with the
resignation of Mr. Abrams his 37,500 shares of Series B Preferred Stock was
purchased by Norlar, Inc. for $225,000. Subsequently, in July 1995, the 75,000
shares of Series B Preferred Stock, held by Norlar, Inc., were converted into
450,000 shares of Series C Preferred Stock, pursuant to the terms thereof, and
accordingly converted into 1,800,000 shares of Common Stock.
In private placement in May 1994, the Company sold warrants to
purchase 4,000,000 shares of the Company's Common Stock to six persons not
affiliated with the Company for an aggregate consideration of $300,000. These
warrants are exercisable at any time through December 19, 1998 at a price of
$5.75 per share and were, along with the underlying shares of Common Stock,
subsequently registered in November 1994.
In June 1994, the Company issued 500,000 shares of its Common Stock
for the acquisition of 100% of the outstanding stock of Navtech. In connection
with the Navtech Acquisition, the Company issued 15,000 shares of its Common
Stock to Trinity American, a stockholder not otherwise affiliated with the
Company, as compensation for its assistance in the Navtech Acquisition.
In May 1995, in order to reduce the Company's indebtedness, the
Company issued 50,000 shares of Series C Preferred Stock to Mr. Lloyd
Kartchner, former CEO of Navtech and a director of the Company, in exchange
for the Company's note in the amount of $50,000. In October 1995, Mr.
Kartchner converted such shares into 200,000 shares of the Company's Common
Stock.
No underwriters were involved in connection with the above
transactions and, consequently, there were no underwriting discounts or
commissions.
Mr. Cary Brett Berman, the son of Mr. Larry Berman, the Chairman of
the Company, owns 200,000 shares of Common Stock. In July 1992, sole voting
and dispositive power with respect to such stock was transferred to Mr. Larry
Berman by a written instrument transferring such rights until May 1995, which
date was subsequently extended to December 20, 1995, two years from the IPO
and was again extended to December 20, 1996.
On April 20, 1995, the Company acquired 5,000,000 shares of Common
Stock of Country World Casinos, Inc. ("Country World"), in exchange for the
cancellation of $1,000,000 of indebtedness owed by Country World to the
Company. The Company also acquired 16,667 shares of Country World Common
Stock in a separate transaction for $50,000. Country World has purchased real
estate located in the gaming district of Black Hawk, Colorado, on which it
seeks to construct the Casino. In addition, the Company acquired an additional
2,250,453 shares of Common Stock of Country World from certain existing
shareholders of Country World, in exchange for 744,592 shares of the Company's
Common Stock. As of March 31, 1996, the Company owns 66.3% of the
outstanding shares of Country World Common Stock and 54.9% of the total
voting stock (Common and Preferred) of Country World.
From December 1995 to March 1996, the Company sold 767,000 shares
of its Series E Convertible Preferred Stock for $10.00 per share. This
transaction was done in accordance with Regulation S of the Securities Act of
1933. The Series E Preferred Stock is convertible into the Company's Common
Stock at the lesser of 75% of the bid price on the date of closing or 65% of
the bid price on the five days preceding the conversion date. The Company
received net proceeds from this transaction of approximately $6,628,000. The
proceeds 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.
In December 1995, the Company committed to guaranty a $5 million
loan for Country World for use in paying the secured and unsecured creditors of
Country World. The loan is approved by the U.S. Bankruptcy Court for the
District of Colorado and said funds are to be distributed in accordance with
the Court's Order.
In December 1995, the Company committed to guaranty a $27.35 million
loan for Country World in the form of permanent financing to replace
construction financing to construct the largest casino in the state of
Colorado.
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 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.
On January 24, 1996, the Company hired Corporate Relations Group,
Inc. ("CRG") to act as the Company's financial public relations firm. The
agreed fee for these services was $350,000 payable in cash or, at the Company's
option 273,437 shares of the Company's Common Stock. Norlar, Inc. a company
owned by Mr. Larry Berman, the Company's Chairman, and his spouse, assumed the
Company's obligations under the agreement and transferred to CRG 273,437
shares of the Company's Common Stock. The Company has agreed to repay
Norlar, Inc. at the discretion of the Board of Directors either $350,000 ($1.28
per share) or 273,437 shares of the Company's Common Stock prior to July 31,
1996. On February 26, 1996, the Company paid Norlar, Inc. $350,000 in lieu of
issuing additional shares of stock.
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 Company filed for approval with the State of New
Jersey, pursuant to the provisions of Section 14A:7-2(2) of the New Jersey
Business Corporation Act, a Certificate of Amendment to its Certificate of
Incorporation to authorize the issuance of 555,000 of Preferred Stock of the
Corporation to be designated Class Z Preferred Stock, $0.25 par value. Such
designation was approved by the State in April 1996. The reason for such
authorization is due to the Company, its Board of Directors and management team
as a whole, submitting to a licensing procedure enforced by the State of
Colorado Gaming Commission. Under the terms of the licensing procedure, all
parties must be licensed prior to opening operations of Country World Casinos
and if there was to be a sudden change in control in the Board of Directors or
management team, the Casino would be forced to close until new personnel could
be licensed, quite possibly bankrupting the Company.
Therefore, in the best interest of all the shareholders investment,
the Company has seen fit to file an Amendment to its Certificate of Amendment
to its Certificate of Incorporation to authorize the Class Z Preferred Stock,
which through its conversion will maintain the voting balance of the Company
such that a take over and or buy out of large blocks of stock will not disrupt
the planned building and licensing of Country World Casinos or disturb ongoing
operations once the Casino is completed.
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.
ITEM #13 - EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
Signatures
In accordance with Section 13 or 15 (d) of the Exchange Act of 1934,
the issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HOLLY PRODUCTS, INC.
Dated: August 2, 1996
/s/Larry S. Berman
Larry S. Berman
Chairman of the Board,
Executive Officer,
Secretary and Director
Dated: August 2, 1996
/s/ William H. Patrowicz
William H. Patrowicz
President, Chief Operating
Officer, Treasurer and Director
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.
/s/ Larry S. Berman August 2, 1996
Larry S. Berman
Chairman, Chief Executive Officer
Secretary and Director
/s/ William H. Patrowicz August 2, 1996
William H. Patrowicz
President, Chief Operating Officer,
Treasurer and Director
/s/ Cary Brett Berman August 2, 1996
Cary Brett Berman
Vice President and Director
/s/ Harold Goldstein August 2, 1996
Harold Goldstein
Director
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Holly Products, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying
consolidated balance sheet of Holly Products, Inc. and its
subsidiaries as of March 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for
each of the two fiscal years in the period ended March 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance
with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects,
the consolidated financial position of Holly Products, Inc. and its
subsidiaries as of March 31, 1996, and the consolidated results of
their operations and their cash flows for each of the two fiscal years
in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial
statements have been prepared assuming Holly Products, Inc. will
continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company's recurring losses
from operations, accumulated deficit, recurring negative cash flows
from operations, pending litigation involving one of its subsidiaries
and the related filing of a bankruptcy petition under Chapter 11 by
that subsidiary raise substantial doubt about Holly Products, Inc.'s
ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. These consolidated
financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
June 21, 1996
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996.
Assets:
Current Assets:
Cash and Cash Equivalents $ 934,462
Accounts Receivable Trade - [Net of Allowance for Doubtful
Accounts of $157,893] 378,450
Inventory 915,512
Prepaid Expenses 446,980
Other Current Assets 4,534
Total Current Assets 2,679,938
Property and Equipment - [Net of Accumulated
Depreciation and Amortization of $152,851] 9,687,312
Deposits 246,462
Investment at Equity 266,076
Intangible Assets - Net 685,137
Other Assets 343,436
Total Assets $13,908,361
See Notes to Consolidated Financial Statements.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996.
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable - Related Party $ 3,896,504
Demand Notes Payable - Bank 858,353
Notes Payable - Others 680,396
Accounts Payable 1,535,888
Accrued Expenses 1,400,833
Payroll Taxes Payable 81,823
Current Portion of Long-Term Debt 58,748
Current Portion of Capital Lease Obligations 61,237
Other Current Liabilities 14,182
Net Liabilities of Discontinued Operations 575,007
Total Current Liabilities 9,162,971
Long-Term Debt 61,765
Long-Term Portion of Capital Lease Obligations 165,081
Minority Interest 2,217,191
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, 587,000
Shares Issued and Outstanding 5,870,000
Additional Paid-in Capital [Preferred] (1,939,548)
Common Stock - No Par Value, Authorized 20,000,000 Shares,
10,350,460 Shares Issued and Outstanding 10,214,387
Additional Paid-in Capital [Common] (83,947)
Accumulated [Deficit] (15,659,289)
Total Stockholders' Equity 2,301,353
Total Liabilities and Stockholders' Equity $ 13,908,361
See Notes to Consolidated Financial Statements.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
March 31,
1 9 9 6 1 9 9 5
Net Sales $ $ 4,110,443 $ 5,279,766
Cost of Sales 4,805,819 4,013,435
Inventory Reserve 338,000 --
Total Cost of Sales 5,143,819 4,013,435
Gross Profit [Loss] (1,033,376) 1,266,331
Operating Expenses:
General, Selling and Administrative 4,779,264 1,362,308
Bad Debt Expense 434,496 8,881
Total Operating Expenses 5,213,760 1,371,189
Operating [Loss] (6,247,136) (104,858)
Other [Expense]:
Other Expenses (24,469) (8,264)
Interest Expense (468,483) (265,272)
Other [Expense] - Net (492,952) (273,536)
Equity in Earnings of Investee 85,355 --
Minority Interest Share in Loss of Subsidiary 143,101 --
[Loss] Income from Continuing Operations (6,511,632) (378,394)
Discontinued Operations:
[Loss] from Operations of Woodworking Business (2,196,078) (2,276,863)
Estimated [Loss] on Disposal of Woodworking
Business Including Provision of $666,224
for Operating Losses During the Phase
Out Period (2,709,280) --
Net [Loss] (11,416,990) (2,655,257)
Preferred Stock Dividends 439,479 219,250
Net [Loss] Available to Common
Stockholders $(11,856,469) $(2,874,507)
Loss Per Common Share:
[Loss] from Continuing Operations $ (.97) $ (.14)
[Loss] from Discontinued Operations $ (.33) $ (.86)
Estimated [Loss] on Disposal of
Woodworking Business $ (.40) $ --
Net Income [Loss] Per Common Share $ (1.76) $ (1.08)
Weighted Average Number of Common
Shares Outstanding 6,739,161 2,649,874
See Notes to Consolidated Financial Statements
<TABLE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Preferred Stock
Series B Series C Series D Series E
Additional
Number Number Number Number Paid-in
of Shares Amount of Shares Amount of Shares Amount of Shares Amount Capital Sub-total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1994 75,000 $ 7,500 -- $ -- -- $ -- -- $ -- $ 442,500 $ 450,000
Shares Issued for Acquisition -- -- -- -- -- -- -- -- -- --
Proceeds from Sale of Warrant -- -- -- -- -- -- -- -- -- --
Dividends Paid -- -- -- -- -- -- -- -- -- --
Shares Issued in Exchange
for Existing Debt -- -- 240,000 240,000 -- -- -- -- -- 240,000
Conversion to Common Stock -- -- (240,000) (240,000) -- -- -- -- -- (240,000)
Shares Issued in Exchange for
Existing Debt -- -- 180,000 180,000 -- -- -- -- -- 180,000
Conversion to Common Stock -- -- (180,000) (180,000) -- -- -- -- -- (180,000)
Issuance of Preferred Stock -
Series D -- -- -- -- 402,500 4,025,000 -- --(1,174,920) (2,850,080)
Net [Loss] for the Period -- -- -- -- -- -- -- -- -- --
Issuance of Common Stock
in Lieu of Interest -- -- -- -- -- -- -- -- -- --
Balance - March 31, 1995 75,000 7,500 -- -- 402,500 4,025,000 -- -- (732,420) 3,300,080
Dividends Paid -- -- -- -- -- -- -- -- -- --
Shares Issued in Acquisition -- -- -- -- -- -- -- -- -- --
Shares Issued in Exchange
for Existing Debt -- -- 180,000 180,000 -- -- -- -- -- 180,000
Conversion to Preferred Stock (75,000) (7,500) 450,000 7,500 -- -- -- -- -- --
Conversion to Common Stock -- -- (450,000) (7,500) -- -- -- -- (442,500) (450,000)
Shares Issued for Litigation
Settlement -- -- -- -- -- -- -- -- -- --
Shares Issued for Services
Rendered -- -- -- -- -- -- -- -- -- --
Shares Issued for Services
Rendered -- -- -- -- -- -- -- -- -- --
Conversion to Common Stock -- -- (180,000) (180,000) -- -- -- -- -- (180,000)
Shares Issued for Services
Rendered -- -- -- -- -- -- -- -- -- --
Shares Issued for Services
Rendered -- -- -- -- -- -- -- -- -- --
Shares Issued for Services
Rendered -- -- -- -- -- -- -- -- -- --
Shares Issued in Exchange for
Existing Debt -- -- -- -- -- -- -- -- -- --
Shares Issued for Services
Rendered -- -- -- -- -- -- -- -- -- --
Issuance of Series E Preferred
Stock -- -- -- -- -- -- 747,000 7,470,000 1,020,401 6,449,599
Conversion to Common Stock -- -- -- -- (12,525) (125,250) (160,000)(1,600,000) 255,773 1,469,477
Net [Loss] for the Period -- -- -- -- -- -- -- -- -- --
Balance - March 31, 1996 -- $ -- -- $ -- 389,975 $3,899,750 587,000 $5,870,000 $(1,939,548) $7,830,202
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Additional Total
Sub-Total Number Paid-in Accumulated Stockholders'
Forwarded of Shares Amount Capital [Deficit] Equity
<S> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1994 450,000 1,764,600 $2,984,384 $(383,947) $(1,337,938) $ 1,712,499
Shares Issued for Acquisition -- 515,000 1,044,999 -- -- 1,044,999
Proceeds from Sale of Warrants -- -- -- 300,000 -- 300,000
Dividends Paid -- -- -- -- (111,500) (111,500)
Shares Issued in Exchange
for Existing Debt 240,000 -- -- -- -- 240,000
Conversion to Common Stock (240,000) 960,000 240,000 -- -- --
Shares Issued in Exchange for
Existing Debt 180,000 -- -- -- -- 180,000
Conversion to Common Stock (180,000) 720,000 180,000 -- -- --
Issuance of Preferred Stock -
Series D 2,850,080 -- -- -- -- 2,850,080
Net [Loss] for the Period -- -- -- -- (2,655,257) (2,655,257)
Issuance of Common Stock
in Lieu of Interest -- 150,000 150,000 -- -- 150,000
Balance - March 31, 1995 3,300,080 4,109,600 4,599,383 (83,947) (4,104,695) 3,710,821
Dividends Paid -- -- -- -- (137,604) (137,604)
Shares Issued in Acquisition -- 744,592 2,187,733 -- -- 2,187,733
Shares Issued in Exchange
for Existing Debt 180,000 -- -- -- -- 180,000
Conversion to Preferred Stock -- -- -- -- -- --
Conversion to Common Stock (450,000) 1,800,000 450,000 -- -- --
Shares Issued for Litigation Settlement -- 25,000 75,000 -- -- 75,000
Shares Issued for Services Rendered -- 7,500 11,250 -- -- 11,250
Shares Issued for Services Rendered -- 25,000 87,500 -- -- 87,500
Conversion to Common Stock (180,000) 720,000 180,000 -- -- --
Shares Issued for Services Rendered -- 30,000 78,750 -- -- 78,750
Shares Issued for Services Rendered -- 300,000 862,500 -- -- 862,500
Shares Issued for Services Rendered -- 50,000 128,100 -- -- 128,100
Shares Issued in Exchange for
Existing Debt -- 27,932 38,756 -- -- 38,756
Shares Issued for Services Rendered -- 35,000 45,938 -- -- 45,938
Issuance of Series E Preferred Stock 6,449,599 -- -- -- -- 6,449,599
Conversion to Common Stock (1,469,477) 2,475,836 1,469,477 -- -- --
Net [Loss] for the Period -- -- -- -- (11,416,990) (11,416,990)
Balance - March 31, 1996 7,830,202 10,350,460 $10,214,387 $ (83,947) $(15,659,289) $2,301,353
See Notes to Consolidated Financial Statements.
</TABLE>
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
March 31,
1 9 9 6 1 9 9 5
Operating Activities:
[Loss] From Continuing Operations $(6,511,632) $ (378,394)
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 221,211 165,416
Amortization of Deferred Financing Activities 112,500 37,500
Bad Debt 434,496 8,881
Equity in Earnings of Unconsolidated Affiliate (85,355) --
Changes in Assets and Liabilities:
[Increase] Decrease in: Accounts Receivable 379,928 (916,271)
Inventory (86,493) (829,019)
Other Current Assets (2,800) (4,509)
Deposits (238,734) --
Prepaid Expenses (446,980) --
Other Assets (246,157) (3,926)
Intangible Assets (149,000) --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 1,285,789 377,417
Payroll Taxes Payable 59,395 22,428
Other Current Liabilities (28,954) --
Total Adjustments 1,208,846 (1,142,083)
Net Cash - Continuing Operations - Forward (5,302,786) (1,520,477)
Discontinued Operations:
Net [Loss] From Discontinued Operations (2,196,078) (2,276,863)
Adjustments to Reconcile Net [Loss] to Net
Cash Operations:
Depreciation and Amortization 59,540 124,341
Bad Debts -- 38,563
Changes in Net Assets, Liabilities and Loss 4,556,730 1,513,154
Estimated Loss in Disposal of Woodworking
Business (2,709,280) --
Net Cash - Discontinued Operations - Forward (289,088) (500,805)
Investing Activities - Continuing Operations:
Acquisition of Assets (534,396) (260,693)
Issuance of Note Receivable -- (1,100,000)
Purchase of Navtech - Net of Cash -- (72,005)
Investment in Room Systems -- (194,685)
Net Cash - Investing Activities - Continuing Operations -
Forward (534,396) (1,627,383)
Investing Activities - Discontinued Operations - Forward:
Acquisition of Assets $ -- $ (74,838)
See Notes to Consolidated Financial Statements.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended
March 31,
1 9 9 6 1 9 9 5
Net Cash - Continuing Operations - Forwarded $(5,302,786) $(1,520,477)
Net Cash - Discontinued Operations - Forwarded (289,088) (500,805)
Net Cash - Investing Activities - Continuing
Operations - Forwarded (534,396) (1,627,383)
Net Investing Activities - Discontinued
Operations - Forwarded -- (74,838)
Financing Activities - Continuing Operations:
Proceeds from Demand Notes Payable 500,000 --
Payment of Notes Payable - Other (500,000) --
Proceeds from Demand Notes Payable - Stockholders
and Related Parties 1,771,000 626,000
Payment of Demand Notes Payable - Stockholders
and Related Parties (1,396,157) (626,000)
Proceeds of Demand Note Payable - Banks 858,353 --
Payment of Demand Note Payable - Banks (300,000) --
Proceeds from Sale of Warrants -- 300,000
Proceeds from Issuance of Preferred Stock 6,449,599 2,850,080
Dividends Paid (137,604) (111,500)
Net Cash - Financing Activities - Continuing
Operations 7,245,191 3,038,580
Financing Activities - Discontinued Operations:
Proceeds from Demand Notes Payable -- 2,897,615
Proceeds from Demand Notes Payable - Stockholders
and Related Parties -- --
Payment of Demand Notes Payable - Stockholders
and Related Parties -- --
Payment of Demand Notes Payable and Capital
Lease Obligation -- (2,137,961)
Payment of Demand Notes Payable (373,639) --
Net Cash - Financing Activities - Discontinued
Operations (373,639) 759,654
Net Increase in Cash and Cash Equivalents 745,282 74,731
Cash and Cash Equivalents - Beginning of Years 189,180 114,449
Cash and Cash Equivalents - End of Years $ 934,462 189,180
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 409,483 $ 257,102
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.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Organization and Business
Nature of Operations - Holly Products, Inc. [the "Company"] through its
wholly-owned subsidiary, Navtech Industries, Inc. ["Navtech"] manufactures
electronic components such as circuit boards and hotel mini-bar systems for
customers located throughout the United States. During fiscal 1996, the
Company acquired approximately 66.3% of the outstanding common stock of
Country World Casino,Inc. ["Country World"]. Country World intends to
develop a casino complex in the gaming district of Black Hawk, Colorado for
limited-stakes gambling.
Country World has purchased land and has begun construction of a hotel and
casino. The land and development costs are recorded at cost and no
depreciation will be taken until such time as the Company places the casino
into operation. Interest capitalized during the year ended March 31, 1996
amounted to approximately $258,000. Financing for the completion of the
casino development has not yet been finalized.
As of March 31, 1996, Country World has not completed construction of its
planned principal operation and has not realized any revenue from its planned
operations. Accordingly, it is considered to be in the development stage.
Discontinued Operations - HollyWood Manufacturing - In September 1995,
the Company determined to discontinue its woodworking business. The
Company was unsuccessful in its attempts to divest itself of that 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 liquidated its assets. The lease for the facility housing the
woodworking business expired on December 31, 1995 at which time the
Company vacated the premises. The Company used the funds raised through
the liquidation of assets, the collection of outstanding receivables and
advances from a related party to satisfy a secured credit facility.
[2] Summary of Significant Accounting Policies
Consolidation - The accompanying consolidated financial statements include
the accounts of the Company and its subsidiaries, Navtech and Country
World. All material intercompany transactions and balances have been
eliminated in consolidation. The Company's other subsidiary, HollyWood
Manufacturing has been discontinued [See Note 1].
Cash and Cash Equivalents - Cash equivalents are comprised of certain
highly liquid investments with a maturity of three months or less when
purchased.
Accounts Receivable - The allowance for doubtful accounts has been
computed based on an assessment of the collectibility of accounts receivable.
The allowance at March 31, 1996 was $157,893.
Inventory - Inventory, which consists of work-in-process and raw material, is
stated at the lower of cost [first-in, first-out method] or market.
Intangible Assets - The Company has organizational costs and a patent which
are being amortized. In addition, the Company has goodwill and a customer
list, which were acquired in connection with the purchase of Navtech. The
Company has determined to amortize the cost of intangible assets [See Note
[8] on a straight-line basis over the period the Company expects to
receive benefits as follows:
Years
Goodwill 7
Customer List 5
Covenant Not-to-Compete 3
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[2] Summary of Significant Accounting Policies [Continued]
Intangible Assets [Continued] - Management of the Company evaluates the
periods of intangible asset amortization to determine whether later events and
circumstances warrant revised estimates of useful lives. Management also
evaluates whether the carrying value of such assets has become impaired.
This evaluation is done by analyzing the projected undiscounted net cash
flow from related operations.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is determined using the straight-line method over the estimated
useful lives of the related assets or the remaining lease term [See Note 6].
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
[3] Going Concern
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
As reflected in the consolidated financial statements, the Company has
incurred recurring net losses from operations, an accumulated
deficit, and recurring negative cash flows from operations. Additionally,
certain litigation related to Country World has caused that subsidiary to file
a bankruptcy petition under Chapter 11. These factors all raise substantial
doubt about the ability of the Company to continue as a going
concern.
The continuation of the Company as a going concern is dependent upon its
ability to reduce operating losses and to obtain additional financing to enable
Country World to emerge from bankruptcy. The Company experienced a
substantial net loss for the year ended March 31, 1996. Approximately
$4,900,000 of such loss was attributable to the woodworking business, which
has been discontinued. In April 1996, the Company moved its wholly-
owned subsidiary, Navtech, 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 substantially
lower 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 will allow Navtech to expand its revenues substantially.
Additionally, the Company has replaced the management of Navtech with a
parred down more cost conscious group of professionals to carry out
Navtech's plan and meet targeted budgets for fiscal 1997.
In May 1996, the Company closed on a $5,000,000 financing package for
Country World. It is anticipated that Country World will be able to emerge
from Chapter 11 proceedings in the immediate future including repayment of
all outstanding indebtedness, therefore eliminating substantial legal, travel
and management expense associated with these proceedings. Further,
with the simultaneous settlement of certain outstanding litigation [See Note
23] 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.
There can be no assurance that management's plans to reduce operating losses
or settle litigation and have Country World emerge from bankruptcy will be
successful. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[4] Fair Value of Financial Instruments
Effective March 31, 1996, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments," which requires disclosing fair value to the extent practicable
for financial instruments which are recognized or unrecognized in the balance
sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled, nor
does the fair value amount consider the tax consequences of realization or
settlement.
In assessing the fair value of these financial instruments, the Company was
required to make assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash, cash equivalents, accounts receivable, accounts payable and short-term
debt, the carrying amount approximates fair value for the majority of these
instruments because of their short maturities. The fair value of the long-term
debt is approximately $15,000 less than the carrying amount. Management
estimates that the carrying amount of long-term related party indebtedness
approximates fair value.
[5] Inventory
Inventory consists of the following as of March 31, 1996:
Work-in-Process $ 165,372
Raw Materials 1,088,140
Total 1,253,512
Less: Reserves (338,000)
Total $ 915,512
During the fourth quarter, the Company recorded an inventory reserve
of $338,000.
[6] Property and Equipment
The following is a summary of property and equipment as of March 31, 1996:
Estimated
Useful Life
Land $ 5,023,893 --
Machinery Equipment 169,500 5-7 Years
Office Furniture and Equipment 120,142 5-7 Years
Leasehold Improvements 3,713 2 Years
Equipment under Capital Leases 349,311 5-7 Years
Vehicles 49,387 5-7 Years
Construction of Navtech Facility 600,000 20 Years
Casino Under Development 3,524,217 --
Total $ 9,840,163
Less: Accumulated Depreciation 152,851
Property and Equipment - Net $ 9,687,312
Depreciation expense amounted to $111,567 and $36,086 for the years ended
March 31, 1996 and 1995, respectively, of which $54,817 and $28,673 was
attributed to equipment under capital leases.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[7] Investment at Equity
Navtech owns 26.7% of the stock in RoomSystems, Inc., a manufacturer of
hotel in-room "mini bar" systems. Summarized financial information of
RoomSystems, Inc., accounted for by the equity method, is as follows:
December 31,
1 9 9 5 1 9 9 4
Net Sales $ 2,939,148 $ 1,048,142
Gross Profit $ 1,168,835 $ 455,254
Net Income $ 319,684 $ 13,179
Company's Share of Net Income $ 85,355 $ 3,519
Assets:
Current Assets $ 1,454,300 $ 743,809
Other Assets 444,337 456,025
Total Assets $ 1,898,637 $ 1,199,834
Liabilities and Equity:
Current Liabilities $ 902,096 $ 522,976
Equity 996,541 676,858
Total Liabilities and Equity $ 1,898,637 $ 1,199,834
Company's Share of Equity $ 266,076 $ 180,721
[8] Intangible Assets
Intangible assets consist of the following at March 31, 1996:
Accumulated
Cost Amortization Net
Goodwill $ 99,759 $ 24,939 $ 74,820
Customer List 725,000 253,750 471,250
Covenant Not-to-Compete 149,000 9,933 139,067
Totals $ 973,759 $ 288,622 $ 685,137
In February 1996, the Company paid $149,000 to the former director of
Navtech in exchange for his covenant not-to-compete with Navtech in the
continental United States for three years. The cost of intangible assets are
amortized over the expected useful life of the related assets [See Note 2].
Amortization expense charged to operations for 1996 and 1995 was $169,184
and $129,330, respectively.
[9] Demand Note Payable - Bank
Navtech has an operating line of credit from a financial institution in the
amount of $1,500,000 which is collateralized by inventory and accounts
receivable and bears interest at a monthly floating interest rate of 1.5% over
prime. The prime rate was approximately 9% at March 31, 1996. The
Company has a principal balance outstanding of $858,353 at March 31, 1996.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[10] Notes Payable - Other
[A] In January 1995, the Company borrowed, on an unsecured basis, an
aggregate of $1,000,000 [evidenced by notes payable] from three individuals
and entities at 15% annual interest. The fifteen percent [15%] notes were due
and payable on January 13, 1996. The maturity date was extended based on a
loan extension agreement. The terms of the agreement provided for a
payment of $500,000 [which was paid in March 1996] and transfer of
370,000 shares of the Company's common stock to the note holders [See
Note 26]. As of March 31, 1996, a $400,000 principal balance was owed on
the notes payable.
[B] In May 1995, the Company borrowed $500,000 from the Calvin Black
Trust ["Trust"]. Original repayment terms provided for an initial interest
payment of $10,643 and an additional four monthly interest payments of
$10,000 each. The $500,000 principal balance had a maturity date of
October 1, 1995. At October 1, 1995, the Company defaulted on the
borrowing by failing to pay the $500,000 principal balance. On January 15,
1996, the Company, the Calvin Black Trust, and Norlar, Inc., owned by the
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 owned 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 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 Agreement. In January 1996,
Norlar made a $250,000 cash payment to the Trust. As of March 31, 1996,
the Company owed a $250,000 principal balance to the Trust plus
accrued interest and legal fees as required under the default provision of the
note payable [See Note 26].
[C] As of March 31, 1996, the Company had a principal balance outstanding
of approximately $400 on a $10,542 note payable bearing interest at 12.00%
per annum payable in $500 monthly installments.
[D] At March 31, 1996, the Company was indebted to Sunrise, Inc., in the
amount of $30,000. The note contains a 15% interest rate and is due on
demand.
[E] The weighted average interest rate on demand note payable, notes
payable - other, and notes payable - related party [See Note 22] was
approximately 15% at March 31, 1996.
[11] Long-Term Debt
Long-term debt consists of the following:
Note payable due in monthly installments of $1,660
through March 1997, including interest at 10.00%. $ 21,851
Note payable due in monthly installments of $452 through
June 1999, including interest at 8.50%. The debt is
collateralized by a vehicle. 16,401
Note payable due in monthly installments of $300 through
July 1998, including interest at 10.75%. The debt is
collateralized by a vehicle. 7,253
Note payable due in monthly installments of $4,667 through
September 15, 1997, including interest at 15.50%. 75,008
Total Long-Term Debt 120,513
Less: Current Maturities 58,748
Net Long-Term Debt $ 61,765
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[11] Long-Term Debt [Continued]
Future principal maturities for the above notes at March 31, 1996 are as
follows:
Year ended
March 31,
1997 $ 58,748
1998 53,669
1999 6,257
2000 1,839
2001 --
Thereafter --
Total Long-Term Debt $ 120,513
[12] Capital Lease Obligations
The Company leases certain office and production equipment under various
long-term capital leases which meet the criteria of capital leases and,
accordingly, have been recorded as assets. Obligations under capital leases
are stated on the balance sheet at the present value of future minimum lease
payments. The leases started between 1994 and 1996, are noncancellable,
and expire through the year 2001. The following is a schedule of leased
property under the capital leases:
Equipment - At Cost $ 349,311
Less: Accumulated Depreciation 74,765
Net Capitalized Equipment $ 274,546
The following is a schedule by years of future minimum lease payments
under the capital lease together with the present value of the net minimum lease
payments as of March 31, 1996:
Year ended
March 31,
1997 $ 101,917
1998 76,884
1999 71,306
2000 56,246
2001 5,967
Thereafter --
Total Minimum Lease Payments 312,320
Less: Amount Representing Interest 86,002
Present Value of Net Minimum Lease Payments $ 226,318
Current Portion $ 61,237
Non-Current Portion 165,081
Present Value of Net Minimum Lease Payments $ 226,318
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[13] Capital Transactions
[A] Preferred Stock - Series D - At March 31, 1996, the Company had
outstanding 389,975 shares of 10% Convertible Cumulative Series D
Preferred Stock, $10 per value per share. Dividends on the Convertible
Preferred Stock are due quarterly and are in arrears. The Convertible
Preferred Stock has a liquidation preference of $10 per share and is
convertible into two [2] Shares of common stock. Holders of Convertible
Preferred Stock are not entitled to vote on any matter, except as required by
law. In February 1995, the Company paid $40,250 in dividends to holders of
the Series D Preferred Stock. At March 31, 1996, dividends in arrears on
such stock amounted to $402,500 or approximately $1.00 per share.
[B] Preferred Stock - Series E - During fiscal 1996, the Company
consummated a Private Placement of 747,000 shares of its Series E
Convertible Preferred Stock resulting in gross and net proceeds of $7,470,000
and $6,449,599, respectively. The proceeds of this offering were utilized for
repayment of debt, settlement of litigation and working capital for the
Company and Navtech. Each share of Series E Preferred Stock is non-voting,
does not pay a dividend, and 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 of the subscription or 65% of the average closing bid price for
the five [5] trading days immediately preceding the close of conversion.
[C] Country World Acquisition - During fiscal 1996, the Company issued
744,592 shares of common stock valued at $2,187,733 toward the purchase
of Country World.
[D] Debt to Equity Conversions - In May 1995, certain related party
indebtedness aggregating $50,000 was converted into 50,000 shares of Series
C Preferred Stock. In July 1995, certain related party indebtedness
aggregating $100,000 was converted into 100,000 shares of Series C
Preferred Stock. In August 1995, indebtedness in the amount of $30,000 was
converted into 30,000 shares of Series C Preferred Stock. During fiscal 1996,
$4,167 in dividends were paid to the holders of the Series C Preferred Stock.
In October and December 1995, such shares of Series C Preferred Stock were
converted, pursuant to the terms thereof, into an aggregate of 720,000 shares
of Company common stock.
[E] Preferred to Common Conversion - In July 1995, certain related party
Series B Preferred Stock was converted into 450,000 shares of Series C
Preferred Stock. During fiscal 1996, $32,812 in dividends was paid to the
holders of Series B Preferred Stock. In August 1995, such preferred stock
was converted [pursuant to the terms thereof] into 1,800,000 shares of
common stock.
[F] Legal Settlement - In August 1995, the Company issued 25,000 shares of
its common stock relating to a legal settlement. The Company has reflected a
charge to the statement of operations of $75,000 to reflect settlement.
[G] Exchange for Services - In August 1995, the Company issued 12,500
shares of its common stock to each of two individuals in return for legal
services performed. Additionally, the Company issued 7,500 shares of its
common stock in return for other legal services performed. The statement of
operations reflects a charge of $98,750 to reflect the estimated fair value of
such services. In October 1995, the Company issued 30,000 shares of its
common stock to two individuals as a retainer for legal services to be
performed through July 1996. The estimated fair value of such
services was $78,750. The statement of operations reflects a charge of
$43,750 for the expensed portion of the retainer.
In December 1995, the Company issued 300,000 shares of its common stock
in return for services rendered in connection with the liquidation of its
woodworking subsidiary and the reorganization of Country World Casinos,
Inc. The Company has reflected a charge to the statement of operations of
$862,500 to reflect the estimated fair value of such services.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[13] Capital Transactions [Continued]
[G] Exchange for Services [Continued] - In January 1996, the Company
issued 50,000 shares of its common stock in return for legal services
performed. The Company reflected a charge to the statement of operations of
$128,100 to reflect the estimated fair value of such services. In February
1996, the Company hired Martin Janis & Company to act as agent for the
Company in providing public relations for a three month period. The
Company issued 35,000 shares of its common stock for such services.
[H] Debt to Equity Conversion - In January 1996, certain related party
indebtedness aggregating $38,756 was converted into 27,932 shares of
Company common stock.
[I] Preferred to Common Conversion - During the fourth quarter of the
current fiscal year, 12,525 shares of Series D Preferred Stock and 160,000
shares of Series E Preferred Stock were converted, pursuant to the terms
thereof, into 25,050 shares and 2,450,786 shares, respectively, of Company
common stock.
[J] Authorized Common and Preferred Stock - In December 1994, the
Company increased its authorized Preferred and Common stock to 2,000,000
and 20,000,000 shares, respectively. The Company increased the number of
authorized shares of Series C Preferred Stock from 450,000 to 1,000,000
shares.
[K] Outstanding Warrants - At March 31, 1996, 4,805,000 common stock
purchase warrants were outstanding. Each warrant entitles the holder to
purchase one share of Company common stock at any time through
December 20, 1998 at a price of $5.75.
[14] Public Relations Agreement
In January 1996, the Company hired Corporate Relations Group, Inc.
["CRG"] to act as the Company's financial public relations firm through July
1996. The agreed fee for these services was $350,000 payable in cash, or at
the Company's option, by delivering 273,437 shares of its common stock. In
connection with such hiring, Norlar, Inc., a company owned by the
Company's Chairman and his spouse, transferred to CRG the 273,437 shares.
In February 1996, the Company paid Norlar, Inc. $350,000 in lieu of issuing
additional shares of stock to replace the shares transferred to CRG.
[15] Loss Per Share
Loss per share for the years ended March 31, 1996 and 1995 are based on
6,739,161 and 2,649,874, respectively, weighted average shares outstanding.
The effect of outstanding warrants were not included in the calculation as
their effect would be anti-dilutive. As supplementary primary loss per share
information, had the conversions to common stock described in Note 13
taken place at the beginning of the year, loss per share would have been
affected as follows:
Pro Forma:
Year ended
March 31, 1996
Loss Per Common Share:
Loss from Continuing Operations $ (.66)
Loss from Discontinued Operations $ (.22)
Estimated Loss on Disposal of Woodworking Business $ (.27)
Net Loss Per Common Share $ (1.20)
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[16] Commitments and Contingencies
[A] Leases - The Company entered into several noncancelable operating
leases for office and production space in Colorado, New Mexico and
Pennsylvania. These operating leases will expire on various dates through
October 2005. The rent expense amounted to $266,182 and $205,726 for the
years ended March 31, 1996 and 1995, respectively.
The lease for the office and production facilities in New Mexico is with the
Navajo Nation. Under the terms of this lease, the Company is eligible to
receive credit against the rental payments of $4,900 per month during years
one through ten for costs incurred in the performance of specific
improvements to the leased facility. As of March 31, 1996, the Company had
incurred costs related to these improvements in excess of the total rent
expense for the ten year lease term.
The Company entered into various noncancelable automobile leases on a
month-to-month basis.
[A] Leases [Continued] - Future minimum lease payments for the next five
years are as follows:
Office and
Production Auto
Facilities Leases
March 31,
1997 $ 43,142 $ 40,747
1998 24,000 16,733
1999 -- 9,349
2000 -- --
2001 -- --
Thereafter -- --
Totals $ 67,142 $ 66,829
[B] Guaranty - In December 1995, the Company committed to guaranty a
$27.35 million loan for Country World in the form of permanent financing to
replace construction financing to construct a casino in the state of Colorado.
[C] Construction Loan - On November 20, 1995, the Company obtained a
$600,000 construction loan to finance the renovation of Navtech's New
Mexico facility. Repayment of the principal and interest at 1.55% above the
First National Bank of Farmington 2 year prime CD are due in 120
monthly installments of $5,000 plus interest beginning December 20, 1996.
Loan proceeds are to be disbursed directly to the renovating contractor upon
submission of an application and certificate for payment by the contractor.
Construction of all leasehold improvements were substantially completed by
March 31, 1996. At that date, $600,000 is included in accrued expenses and
construction in progress. However, as no application or certificates for
payment were submitted by March 31, 1996, the construction loan had no
principal balance outstanding.
[D] SEC Investigation - In 1994, Country World was informed by the
Securities and Exchange Commission [the "SEC"] that the SEC has instituted
a formal order of investigation concerning the possibility of violations of the
federal securities laws by the Company. To the best of the Company's
knowledge, the investigation by the SEC is continuing, and the Company has
not been notified of any action being instituted by the SEC against the
Company. Consequently, the Company is unable to assess the ultimate effect
of this action. Although no member of the Company's current management
was affiliated with the Company during the time period the SEC is
investigating, the tendency of such investigation, and the initiation of any
action by the SEC, has impeded, and could continue to impede, the
Company's efforts to obtain financing and accomplish other tasks necessary
to commence operations.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[17] Income Taxes
The Company has net operating loss carryovers of approximately
$14,900,000 as of March 31, 1996, expiring in the years 2008 through 2011.
However, utilization of the loss carryovers is subject to Internal Revenue
regulations where the corporation has issued substantial additional
stock. Accordingly, a portion of this loss carryover may not be available to
the Company. Generally Accepted Accounting Principles require the
establishment of a deferred tax asset for all deductible temporary differences
and operating loss carryforwards. The deferred tax asset attributable to
operating loss carryforwards amounted to approximately $5,960,000 at
March 31, 1996. Because of the uncertainties discussed in Note 3, however,
any deferred tax asset established for utilization of the Company's tax loss
carryforwards would correspondingly require a valuation allowance of the
same amount pursuant to SFAS No. 109. Accordingly, no deferred tax asset
is reflected in these financial statements.
[18] Credit Risk
Financial instruments which potentially subject to the Company to a
concentration of credit risk principally consist of cash and cash equivalents
and accounts receivable. The Company maintains its cash balances in bank
deposit accounts which, at times, exceed federally insured limits. Accounts at
each institution [which are located throughout the United States] are insured
by the Federal Deposit Insurance Corporation ["FDIC"] up to $100,000. At
March 31, 1996, the Company had no cash amounts in excess of FDIC
insurance limits. Additionally, cash equivalents held at a brokerage house
amounting to approximately $728,000 at March 31, 1996 are insured by the
Securities Investor Protection Corporation.
The Company provides services to customers concentrated in the electronics
industry located throughout the United States. To reduce credit risk, the
Company performs ongoing credit evaluations of its customers' financial
conditions but does not generally require collateral. Allowances are
maintained for potential credit losses, and such losses have been within
management's estimates. Actual results could differ from those estimates and
as such are subject to change in the near term.
[19] Major Customers
Customers which individually accounted for more than 10% of total revenues
are as follows:
Navtech
Industries, Inc.
March 31,
1 9 9 6 1 9 9 5
Casino Data Systems 51% 78%
RoomSystems, Inc. 22% 16%
If the Company is not successful in attracting new customers for its products,
the loss of any one significant customer, or group of customers, will have a
severe negative impact on the Company in the near term.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[20] Business Combination
On April 20, 1995, the Company acquired 5,000,000 shares of common stock
of Country World Casinos, Inc. ["Country World"], in exchange for the
cancellation of $1,000,000 of indebtedness owed by Country World to the
Company. The results of operations of Country World are included in the
consolidated statements of operations from that date. The Company also
acquired 16,667 shares of Country World common stock in a separate
transaction for $50,000. Country World has purchased real estate located in
the gaming district of Black Hawk, Colorado, on which it seeks to construct
the casino. In addition, the Company acquired an additional 2,250,453 shares
of common stock of Country World from certain existing shareholders of
Country World, in exchange for 744,592 shares of the Company's common
stock. As of March 31, 1996, the Company owns 66.3% of the outstanding
shares of Country World common stock and 54.9% of the total voting stock
[common and preferred] of Country World. Country World intends to
develop a 200,000 square foot country western motif casino complex
in the gaming district of Black Hawk, Colorado, which is located
approximately 35 miles west of Denver, including a 79,000 square foot
casino [the "Casino"] for limited-stakes gambling [that is, gambling in which
bets are limited to a $5.00 maximum by Colorado law].
The following summarized pro forma [unaudited] information assumes the
acquisition occurred April 1, 1994:
March 31,
1 9 9 6 1 9 9 5
Net Sales $ 4,110,443 $ 5,279,766
Net Loss Available to Common Stockholders $ (11,856,469) $ (3,382,139)
Net Loss Per Share Available to Common
Stockholders $ (1.76) $ (1.00)
The minority interest represents the portion of Country World not owned by
the Company. At March 31, 1996, substantially all of the minority interest is
represented by preferred stockholders of Country World. There are no
dividend requirements related to the preferred stock. The Company owns no
Country World preferred stock. As shown in the statements of operations for
the year ended March 31, 1996, approximately $143,000 of the loss from
operations of Country World for such period has been attributed to the
minority interest.
[21] Casino Under Development
In August 1993, Country World closed on an acquisition of approximately
79,000 square feet of vacant land located within the city of Black Hawk,
Gilpin County, Colorado. Country World paid $550,000 cash, delivered a
promissory note [See Note 22B] in the amount of $3,450,000, and delivered
2,250,000 shares of its Convertible Preferred stock which is convertible to
common stock on a 1 for 1 basis. The acquisition of the land was subject to a
first deed of trust in the amount of $475,000. The Company is obligated to
file a registration statement to cover the distribution of the Convertible
Preferred stock to the shareholders of the selling entity, which is a publicly-
held corporation based in Denver, Colorado. Subsequently, the Company
closed on an acquisition to an additional 375,000 square feet of vacant land
located in close proximity to the original land purchased. The Company paid
$200,000 cash, delivered a promissory note [See Note 22C] in the amount of
$725,000, and delivered 250,000 shares of its common stock.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
[22] Transactions with Related Parties
[A] Notes Payable - During the year ended March 31, 1996, the Company
entered into several notes payable totaling approximately $1,771,000 from
Norlar, Inc., a company owned by the Chief Executive Officer of the
Company and his spouse. Each note payable provided for 12% interest and a
90 day maturity period. As of March 31, 1996, two notes payable with
aggregate principal balance totaling $508,639 were outstanding.
[B] Note Payable - At March 31, 1996, Country World had outstanding a
balance of $2,662,865 under a note payable due holders of its preferred stock.
The terms of the note call for interest at 8% and principal payments in the
form of equal monthly installments over ten years. The note is collateralized
by a deed of trust on real property [See Note 21]. Default provisions provide
for the entire principal balance and accrued interest be due on demand. An
additional provision provides for a default rate of interest of 18% on the
outstanding principal balance starting from the default date and payable
monthly [See Note 23].
[C] Note Payable - At March 31, 1996, Country World had outstanding a
$725,000 note payable due holders of its preferred stock. The terms of the
note call for interest at 8% and principal payments in the form of equal
monthly installments over ten years. The note is collateralized by a deed of
trust on real property [See Note 21]. Default provisions provide for the
entire principal and accrued interest be due on demand. An additional
provision provides for a default rate of interest of 18% on the outstanding
principal balance starting from the default date and payable monthly [See
Note 23].
[23] Litigation
In May 1995, the Company's majority owned subsidiary, Country World,
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 Country World from the defendants. Country World is seeking monetary
damages and declaratory relief. In August 1995, Tommyknocker and New
Allied filed a counterclaim in the aforementioned action against Country
World and the Company. The counterclaim alleges that Country World is
in default under the promissory note issued to Tommyknocker in connection
with the acquisition of certain real property [See Note 22B], that Country
World failed to register stock on behalf of Tommyknocker and that the
Company has acquired control of Country World 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 on 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, Country World 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 Country World 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 Country World's financing proposal and certain other
conditions. In March 1996, the Court approved Country World's financing
proposal. The plan of reorganization submitted to the Court is pending [See
Note 26].
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
[23] Litigation [Continued]
The Company is subject to various other claims and lawsuits arising in the
normal course of its business. The amount of liability, if any, beyond
amounts accrued from the claims cannot be estimated. Nevertheless, due to
uncertainties inherent in the legal process, it is at least reasonably possible
that management's view of the outcome will change in the near term.
[24] Industry Segments
The relative contributions to net sales, income from continuing operations
and identifiable assets of the Company's two industry segments are as
follows:
March 31,
1 9 9 6 1 9 9 5 [3]
Net Sales:
Casino Gaming $ -- $ --
Electronics Manufacturing 4,110,443 5,279,766
Consolidated Net Sales $ 4,110,443 $ 5,279,766
Income [Loss] from Operations:
Casino Gaming $ (290,539) $ --
Electronics Manufacturing (2,913,254) 90,041
Equity in Net Income of RoomSystems, Inc.:
Casino Gaming -- --
Electronic Manufacturing 85,355 3,519
Subtotal (3,118,438) 93,560
Corporate and Other [1] (3,393,194) (471,954)
Consolidated Loss from Continuing
Operations $ (6,511,632) $ (378,394)
Identifiable Assets [2]:
Casino Gaming $ 8,577,140 $ --
Electronics Manufacturing 3,448,393 2,685,201
Investment in Net Assets of RoomSystems, Inc.:
Casino Gaming -- --
Electronic Manufacturing 266,076 180,721
Subtotal 12,291,609 2,865,922
Corporate and Other 1,616,752 488,599
Consolidated Assets $ 13,908,361 $ 3,354,521
Depreciation and Amortization:
Casino Gaming $ 4,951 $ --
Electronics Manufacturing $ 87,709 $ 36,085
Capital Expenditures:
Casino Gaming $ 433,356 $ --
Electronics Manufacturing $ 701,040 $ 260,382
Revenues from Each Customer Which Exceeds 10% of Total Revenues:
Casino Gaming $ -- $ --
Electronics Manufacturing:
Customer - Casino Data Systems $ 2,096,326 $ 4,118,217
Customer - RoomSystems, Inc. $ 9,042,975 $ 844,763
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
[24] Industry Segments [Continued]
[1] Corporate and other includes interest expense and other non-operating
income and expenses.
[2] Identifiable assets by industry segment exclude intercompany advances
and investments. Corporate assets are principally cash, investments and
intangible assets.
[3] The casino gaming segment is only included in the consolidated
financial statements for 1996, the year of purchase by the Company.
During the year ended March 31, 1996, the casino gaming segment was in a
developmental stage and as such had no revenue.
[25] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," in March of 1995. SFAS No. 121 established accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. SFAS No. 121 is
effective for financial statements issued for fiscal years beginning after
December 15, 1995. Based on management's current plans, the adoption of
SFAS No. 121 is not expected to have a material impact on the Company's
financial statements.
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based
method of accounting for stock options and similar equity instruments as
contrasted to the intrinsic valued based method of accounting prescribed by
Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has not decided if it will adopt
SFAS No. 123 or continue to apply APB Opinion No. 25 for financial
reporting purposes. SFAS No. 123 will have to be adopted for financial note
disclosure purposes in any event. The accounting requirements of SFAS No.
123 are effective for transactions entered into in fiscal years that begin after
December 15, 1995; the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December
15, 1995. The Company has not assessed the effect SFAS No. 123 is
expected to have on its financial statements.
[26] Subsequent Events
In April 1996, the agreement referred to in Note 10B was amended. Pursuant
to said amendment, the Company paid the Trust $150,000. The Trust applied
the payment first to costs and expenses then to interest and then to principal
on the note. In addition, the Company agreed to refile the Registration
Statement on or before June 15, 1996. Lastly, Norlar agreed that within
three days after the Registration Statement becomes effective to deliver the
greater of 200,000 shares of the Company's stock or the number of shares
whose total market value equals $348,000. The agreement also provides that
an event of default occur if the Registration Statement is not effective by
October 11, 1996.
In April 1996, 550,000 of the 2,000,000 authorized shares of preferred stock
of the Corporation was designated Class "Z" Voting Preferred Stock, $.25 par
value.
On May 31, 1996, the Company closed on a $5,000,000 finance package
related to the Chapter 11 Bankruptcy of Country World. The Company
anticipates it will repay all outstanding indebtedness and emerge from
bankruptcy. In June 1996, the Company filed a status report and
joint motion to distribute the uncontested portion of loan proceeds and
motion to schedule claims hearing.
In June 1996, the Company increased its authorized common stock to
50,000,000 shares.
HOLLY PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
[26] Subsequent Events [Continued]
Subsequent to March 31, 1996, 497,000 shares of Series E Preferred Stock
were converted pursuant to the terms thereof into 19,112,140 shares of
Company common stock. As supplementary information, had this
conversion together with the conversion described in Note 13 taken place at
April 1, 1995, loss per share would have been affected as follows:
Pro Forma:
Year ended
March 31, 1996
Loss Per Common Share:
Loss from Continuing Operations $ (.22)
Loss from Discontinued Operations $ (.08)
Estimated Loss on Disposal of Woodworking Business $ (.09)
Net Loss Per Common Share $ (.41)
In June 1996, the Company issued 1,300,000 shares of its common stock to
three individuals in return for certain services they performed for the Company.
The maturity date of the notes payable described in Note 10A has been
extended to August 9,
1996.
. . . . . . . .
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 934,462
<SECURITIES> 0
<RECEIVABLES> 536,343
<ALLOWANCES> 157,893
<INVENTORY> 915,512
<CURRENT-ASSETS> 2,679,938
<PP&E> 9,840,163
<DEPRECIATION> 152,851
<TOTAL-ASSETS> 13,908,361
<CURRENT-LIABILITIES> 9,162,971
<BONDS> 0
0
7,830,202
<COMMON> 10,130,440
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<TOTAL-LIABILITY-AND-EQUITY> 13,908,361
<SALES> 4,110,443
<TOTAL-REVENUES> 4,110,443
<CGS> 5,143,819
<TOTAL-COSTS> 10,357,579
<OTHER-EXPENSES> (203,987)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 468,483
<INCOME-PRETAX> (11,416,990)
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<INCOME-CONTINUING> (6,511,632)
<DISCONTINUED> (4,905,358)
<EXTRAORDINARY> 0
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