<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1997.
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SONOMA INTERNATIONAL
(Name of Small Business Issuer in its Charter)
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<S> <C> <C>
NEVADA 4493 94-0880052
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3000 LEXINGTON FINANCIAL CENTER
LEXINGTON, KENTUCKY 40507
(606) 281-0000
(Address and telephone number of registrant's principal executive offices)
JAMES L. FRYE
SONOMA INTERNATIONAL
3000 LEXINGTON FINANCIAL CENTER
LEXINGTON, KENTUCKY 40507
(606) 281-0000
(Name, address and telephone number of agent for service)
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Copies to:
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<S> <C>
RICHARD F. DAHLSON
CRAIG G. ONGLEY ALAN I. ANNEX
JACKSON WALKER, L.L.P. CAMHY KARLINSKY & STEIN LLP
901 MAIN STREET, SUITE 6000 1740 BROADWAY, 16TH FL.
DALLAS, TX 75202 NEW YORK, N.Y. 10019-4315
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following
box: [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) FEE
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Common Stock, $.001 par value............. shares $17,500,000 $5,303.02
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Representative's Warrants to purchase
Common Stock............................ $.0001 (2)
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Common Stock underlying Representative's
Warrants(3)............................. shares $1,800,000 $545.45
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Total....................................................................... $19,300,000 $5,848.47
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended (the
"Securities Act") and includes shares subject to the exercise of the
Over-Allotment Option.
(2) No fee is required pursuant to Rule 457(g) under the Securities Act.
(3) Issuable upon the exercise of the Representative's Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 21, 1997
SHARES
SONOMA INTERNATIONAL
COMMON STOCK
All of the shares of common stock, $.001 par value, (the "Common Stock")
offered hereby (the "Offering") are being issued and sold by SONOMA
INTERNATIONAL (the "Company"). Although the Company is a public reporting
company through a prior registration, prior to the Offering, there has been no
material public trading market for the Common Stock and there can be no
assurance that such a market will develop after completion of the Offering or,
if developed, that it will be maintained. It is currently anticipated that the
initial public offering price will be between $ and $ per
share of Common Stock. For information regarding the factors considered in
determining the public offering price of the Common Stock, see "Underwriting."
The Company intends to apply to have the Common Stock quoted on the Nasdaq
National Market under the proposed symbol "SNMA."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE ENTIRE
LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 4 AND "DILUTION"
AT PAGE 9.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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==============================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share............................... $ $ $
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Total(3)................................ $ $ $
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(1) Does not include additional compensation payable to National Securities
Corporation, the Representative (the "Representative") of the several
Underwriters (as defined herein), in the form of a non-accountable expense
allowance or the value of the Representative's Warrants granted to
Representative to purchase up to shares of Common Stock and
which were sold to Representative at a nominal price. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements with the Underwriters and other compensation payable to the
Representative.
(2) Before deducting expenses estimated to be $1,500,000 payable by the Company
including the Underwriter's non-accountable expense allowance.
(3) The Company has granted to the Underwriters an option (the "Over-Allotment
Option"), exercisable within 45 days from the date of this Prospectus, to
purchase up to additional shares of Common Stock upon the
same terms and conditions as set forth above solely to cover
over-allotments, if any. If the option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by their Counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify this Offering and to reject any order in whole or in part. It is
expected that the delivery of the shares will be made at the offices of National
Securities Corporation in Seattle, Washington on or about , 1997.
NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus assumes no exercise of
the Over-Allotment Option or the Representative's Warrants (as defined).
Potential investors should carefully consider the information set forth under
"Risk Factors."
THE COMPANY
Sonoma International (the "Company" or "Sonoma") operates and manages
leisure oriented real estate properties. It currently controls two facilities,
the Jamestown Resort & Marina and the Key West Conch Harbor. The Jamestown
Resort & Marina ("Jamestown"), located on Lake Cumberland in South Central
Kentucky, comprises approximately 291 acres of land and water leased from the
U.S. Army Corps of Engineers. Jamestown's facilities include (i) a marina
consisting of 805 slips, 645 of which are annual rentals to the public and the
remaining 160 of which are used for transient rentals and to house the Company's
Jamestown rental watercraft fleet; (ii) the ship's store (which sells groceries,
sundries and gifts); (iii) a restaurant; (iv) a fuel depot; (v) yacht club and
snack bar; (vi) lodging rentals consisting of 18 individual cabins and 40 suites
in a hotel setting called the "Lodge" and (vii) boat rentals comprising 19
pontoon boats, 30 house boats and the Jamestown Queen, a 140 passenger
paddle-wheel boat used primarily for sight seeing and dinner cruises. Gross
revenues from Jamestown operations were $3,683,807, and $4,020,022 for the
twelve month period ended December 31, 1994 and 1995 respectively and $3,541,102
for the nine month period ending September 30, 1996. During the twelve months
ending December 31, 1995, marina slip rentals accounted for 29.1% of the
Jamestown gross revenues and boat rentals, lodging and fuel sales comprised
18.6%, 17.0% and 13.2%, respectively, with the restaurant, ship's store and
miscellaneous sales responsible for the remainder.
Key West Conch Harbor ("Key West") is located on approximately two acres of
land, owned by the Company, in Key West Florida's "Old Town" preservation
district and has approximately 251 feet of frontage on a city street on one end
and 221 feet of water front on the opposite end. Key West is primarily a
commercial dock and fueling facility which currently consists of a 450 foot
newly constructed dock, two 100 foot finger piers and a Texaco Star Port(R)
fueling dock. The Company plans to continue the development of Key West by
constructing a two story building on the existing dock to house marina
operations, fuel service, a small retail grocery and sundry convenience store
along with lavatory and shower facilities. Also planned is a restaurant and
beverage facility and several retail shops, which the Company intends to lease
to third parties. Gross revenues from Key West operations were $166,390 and
$653,913 for the twelve month period ending December 31, 1994 and 1995
respectively, and $1,147,701 for the nine month period ending September 30,
1996. Substantially all Key West's gross revenues are from fueling sales and
slip rentals.
Sonoma's business strategy is to utilize the Jamestown and Key West
facilities as cornerstone properties to provide a base from which to expand its
operations through future development and acquisition of leisure oriented real
estate properties including hotels, resorts, spas, marinas and other commercial
real property. The objective of the strategy is to attempt to balance out uneven
cash flow caused by seasonality of the resort and marina business by acquiring
properties whose "off " seasons are opposite of each other, and to utilize
economies of scale including reducing management personnel, quantity discounts
for goods the Company resells and supplies the Company uses in its day to day
operations.
Through continuing acquisitions, the Company believes that it will develop
additional synergies and cost savings which will provide the Company a greater
opportunity to earn a profit.
Although Sonoma was formed as a Nevada corporation in 1940 it has had no
material operations within recent years until it acquired Jamestown Resort &
Marina, Inc. and Key West Conch Harbor, Inc. in December of 1996. See
"Business." Unless the context otherwise requires, all references to the Company
or Sonoma contained in this Prospectus shall be deemed to refer to the Company
and its affiliates, Key West and Jamestown. The Company's principal executive
offices are located at 3000 Lexington Financial Center, Lexington, Kentucky
40507, and its telephone number is (606) 281-0000.
1
<PAGE> 5
THE OFFERING
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Offering Price..................................... per share
Common Stock offered by the Company................ shares
Common Stock to be outstanding after the
Offering(1)...................................... shares
Use of proceeds by the Company..................... For general corporate purposes,
including the retirement of debt, the
payment of certain contingent and other
obligations with respect to the
acquisition of certain assets and to
finance the expansion of the Company.
See "Use of Proceeds."
Proposed Nasdaq symbol............................. "SNMA"
</TABLE>
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(1) Does not give effect to shares of Common Stock issuable upon exercise of the
Over-Allotment Option, exercise of the Representative's Warrants, or to the
350,000 shares of Common Stock reserved by the Company which may be issued
pursuant to the 1996 Long-Term Incentive Plan adopted by the Company. See
"Underwriting" and "Management -- Employee Benefit Plans."
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of
risk and immediate dilution. Investors should carefully consider the information
presented under the caption "Risk Factors" and "Dilution" in this Prospectus,
including risks related to the Company's limited operating history, future
business expansion and the risks inherent with the Company's business, among
others.
2
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SUMMARY FINANCIAL DATA
The following table summarizes certain selected financial data of the
Company and is qualified in its entirety by the more detailed combined financial
statements contained elsewhere in this Prospectus. The summary financial data
contained in the following table is derived from and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and related notes
thereto appearing elsewhere in this Prospectus. Pro forma data is presented as
if certain events occurred on the date(s) stated.
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<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- -----------------------------------------
HISTORICAL PROFORMA(1)(4) HISTORICAL PROFORMA(1)(4)
------------------------ -------------- ------------------------ --------------
1994 1995 1995 1995 1996 1996
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<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................ $3,850,197 $4,673,935 $4,673,935 $4,065,879 $4,688,803 $4,688,803
Costs and expenses
Costs of revenues............. 1,725,202 2,260,132 2,260,132 1,946,742 2,257,181 2,257,181
Selling, general and
administrative.............. 1,227,059 1,482,672 1,562,672 1,026,374 1,147,425 1,207,425
Amortization of goodwill...... 18,426 30,252 30,252 22,689 55,774 55,774
Depreciation and
amortization................ 648,220 624,360 624,360 456,751 395,263 395,263
--------- --------- --------- --------- --------- ---------
Total costs and
expenses................ 3,618,907 4,397,416 4,477,416 3,452,556 3,855,643 3,915,643
Gain on reduction of
obligations................... -- 447,062 28,363 418,699 2,461,159 --
Interest expense................ 968,498 1,134,742 904,562 836,600 978,981 670,571
--------- --------- --------- --------- --------- ---------
Net income (loss)............... $ (737,208) $ (411,161) $ (679,680) $ 195,422 $2,315,338 $ 102,589
========= ========= ========= ========= ========= =========
Income (loss) per share......... $ (0.48) $ (0.27) $ $ 0.13 $ 1.36 $ --
Weight-average shares
outstanding................... 1,535,000 1,549,342 (1)(2) 1,535,000 1,707,100 --(1)(2)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
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PROFORMA AS
HISTORICAL HISTORICAL ADJUSTED(1)(2)(3)(4)
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1995 1996 1996
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash..................................... $ 30,527 $ 453,896 $ --
Current assets........................... 289,935 1,444,874 --
Total assets............................. 13,745,106 15,218,033 --
Current liabilities...................... 9,651,404 6,801,777 --
Long term debt........................... 8,947,583 10,745,576 --
Owners' equity (deficit)................. (4,853,881) (2,329,320) --
</TABLE>
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(1) Adjusted to reflect the sale of the Common Stock offered hereby and the
application of the estimated net proceeds therefrom (assuming an initial
public offering price of $ per share). See "Capitalization" and "Use of
Proceeds."
Unless otherwise indicated, all information in this Prospectus assumes that
there is no exercise of the Over-Allotment Option or the Representative's
Warrants and does not give effect to the 350,000 shares of Common Stock
which are reserved by the Company and may be issued pursuant to the 1996
Long-Term Incentive Plan. See "Underwriting" and "Management -- Employee
Benefit Plans."
(2) Includes (a) the issuance of 304,172 shares of Common Stock to relieve
related party debt totaling $1,326,382, (b) the issuance of 261,563 shares
of Common Stock to a related party in connection with commission and
incentive fees related to the purchase of Jamestown by Sonoma and (c) the
issuance of 26,969 shares of Common Stock to an incentive plan for Jamestown
creditors and employees.
(3) Includes effect of conversion of debt to equity amounting to $514,826.
(4) Includes effect of a) reduction in interest for paydown of debt
(1995-$230,180; 1996-$308,410), b) reduction in fees included in selling,
general and administrative expenses (1995-$20,000; 1996-$15,000 and c)
increase in selling, general and administrative expenses to reflect
increased professional fees and incentive stock plan expenses
(1995-$100,000; 1996-$75,000).
3
<PAGE> 7
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK, INCLUDING THE RISKS DESCRIBED BELOW. IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS RELATING TO THE BUSINESS OF THE COMPANY AND THE
OFFERING TOGETHER WITH ALL THE INFORMATION AND FINANCIAL DATA SET FORTH IN THIS
PROSPECTUS. COMMON STOCK SHOULD BE PURCHASED ONLY BY INVESTORS WHOSE FINANCIAL
POSITION AND RESOURCES ARE SUFFICIENT TO ENABLE THEM TO ASSUME SUCH RISKS OF
LOSS.
FINANCIAL CONDITION; ABILITY TO CONTINUE AS A GOING CONCERN; EARLY STAGES OF
DEVELOPMENT
The Company recently acquired Jamestown and Key West and intends to
continue to acquire primarily leisure oriented properties. As a result, the
Company is in the early stages of implementation of its business plan. In
addition, Key West is currently under continuing development with its commercial
dock and fueling facilities completed in 1996. Accordingly, it is anticipated
that, even upon repayment of certain debt and the corresponding decrease of the
interest expense, the Company will continue to incur losses until revenues
generated by expanded operations are sufficient to offset usual operating and
expansion costs. Consequently, the report of the Company's independent auditors
with respect to the Company's combined financial statements for the year ended
December 31, 1995 contains an explanatory paragraph to the effect that
conditions exist that raise substantial doubt about the Company's ability to
continue as a going concern. There can be no assurance that the Company will
ever generate sufficient revenues to meet its operating expenses, to permit
projected expansion or to operate profitably. See "Business", "Financial
Statements", and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
HISTORY OF LOSSES
The Company has incurred net losses in each year since its inception with a
net loss of $411,161 for the year ended December 31, 1995 and a loss of $737,208
for the previous fiscal year. There can be no assurance that the Company will
ever achieve or be able to sustain profitability. See "Financial Statements."
RISKS ASSOCIATED WITH GROWTH AND ACQUISITIONS
The Company intends to grow internally through the opening of additional
facilities, as well as through strategic acquisitions. There can be no assurance
that the Company will be able to identify, acquire or profitably manage acquired
companies or successfully integrate such operations into the Company without
substantial costs, delays or other problems. In addition, there can be no
assurance that companies acquired in the future will be profitable at the time
of their acquisition or will achieve levels of profitability that justify the
investment therein. Acquisitions may involve a number of special risks,
including adverse short-term effects on the Company's reported operating
results, diversion of management's attention, dependence on retaining, hiring
and training key personnel, and risks associated with unanticipated problems or
legal liabilities, some or all of which could have a material adverse effect on
the Company's financial condition and results of operations. See
"Business -- Business Strategy."
ECONOMIC AND SEASONAL CONDITIONS
The Company's business is seasonal in nature and is also subject to
economic fluctuations. Use of the Company's facilities and purchase of its
products and services is leisure oriented and thus discretionary and is likely
to decline during recessionary periods when disposable income is lower. Any
significant declines in general economic conditions or uncertainties regarding
future economic prospects affecting consumer spending habits could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Use of the Company's services declines during certain times of the year
depending upon weather conditions. The Company's operations at Jamestown
normally decline in the winter, while use of the
4
<PAGE> 8
Company's Key West facilities normally declines slightly in the summer months.
Such seasonal variations can materially affect the Company's ability to sell its
services, resulting in uneven operational cash flow among fiscal quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ENVIRONMENTAL REGULATIONS AND LIABILITY
The industry in which Sonoma operates is subject to numerous environmental
laws and regulations at federal, state and local government levels. Primary
among these are those which affect (i) the Company's fuel storage and retail
fueling operations and (ii) the Company's ability to develop additional
facilities, including increasing dockage may require permits or approval due to
the environmental impact on inland or coastal waterways. The Company's
profitability and business strategy are dependent upon the Company's ability to
maintain its operations within the confines of numerous environmental rules and
regulations, including any future changes in such rules and regulations. Should
the Company be liable for any significant fuel spill, fuel tank leakage or other
environmental hazard which in turn would require the Company to expend
significant financial resources to clean up or rectify such a problem or pay
damages or substantial fines, such expenditures could materially adversely
affect the Company's financial condition to the point that the Company could no
longer continue to be solvent.
POTENTIAL LEGAL LIABILITY
The Company's ownership, operation and management of all or a portion of
its resort and marina facilities expose the Company to potential third-party
claims or litigation by the users of the facilities for personal injury or other
damages arising from their use of the Company leased or owned facilities
including possible damage to user owned watercraft from the negligence of the
Company's employees, agents or contractors. The Company maintains an insurance
program that provides coverage for certain liability risks faced by the Company
including personal injury, bodily injury, death or property damage to a third
party where the Company is found negligent. There can be no assurance, however,
that the Company's insurance will be adequate to cover potential third party
claims, can be maintained economically or will be adequate to cover all
potential liabilities which the Company may experience. To the extent the
Company's insurance should prove to be inadequate, any short fall would have a
negative impact upon the Company's financial condition and results of
operations. See "Business."
COMPETITION
The Company competes primarily on the basis of the quality and range of
services offered, desirability of its facilities, location to its customers, its
experience in managing its facilities and its ability to offer an economic value
to its customers. In any given market, the Company may have several direct
competitors offering similar services to those of the Company. Some of these
competitors may have greater financial, operating or management resources than
the Company. See "Competition."
WEATHER RISKS
The Company's current facilities are located on or near large bodies of
water which makes them subject to a substantial risk of damage due to adverse
weather, including storms. Key West is located in a geographical area which has
a significant history of hurricanes.
The potential damage to the Company from such adverse weather is both
physical and economic. The physical damage could consist of damage to a number
of the Company's properties and their improvements including but not limited to
docks, Company owned watercraft, guest accommodations, fuel pumps and storage
tanks. Economic damage would include lost revenues due to i) damaged facilities
not being available for use and ii) cancellation of accommodations, boat
reservations, and a decreased use of other facilities by customers in response
to the threat of bad weather or as a result of adverse weather. Although the
Company currently maintains casualty insurance, there can be no assurance that
the Company will maintain such insurance in the future, that such insurance will
be available or that such insurance will have sufficient limits
5
<PAGE> 9
to adequately cover the Company's cost and expenses to repair or replace damaged
improvements or personal property. Any significant damage over and above the
Company's insurance policy limits, if any, may have a substantial negative
impact on the Company's profitability or cause the Company to cease as a going
concern.
SAFETY AND HEALTH RISKS
The Company operates certain facilities such as its dock, fueling stations,
rental watercraft and the Jamestown Queen paddle-wheel excursion boat where
there can be no assurance that customers of the Company's facilities will not
suffer a substantial or fatal injury due to negligence of other customers or
users of the Company's facilities, negligent operations by the Company, or
failure or malfunction of machinery or other mechanical devices. The Company
currently maintains liability insurance, however, there is no assurance that the
Company will maintain such insurance in the future or that such insurance will
have sufficient limits to adequately cover the Company's costs and expenses of
litigation and its liability for damages sustained by one or more of its
customers. Any significant damage award or settlement, over and above the
Company's insurance policy limits, if any, may have a substantial negative
impact on the Company's profitability or cause the Company to cease as an
operating concern.
BROAD DISCRETION OVER APPLICATION OF PROCEEDS
The Company intends to use approximately $ million of the net proceeds
of the Offering for working capital and future acquisitions/expansion of the
Company, however, there is no specific amount allocated to these purposes.
Consequently, management of the Company will have broad discretion in
determining the manner in which a substantial portion of the net proceeds of the
Offering are used or applied.
SHARES ELIGIBLE FOR FUTURE SALE
An aggregate of 1,546,273 shares of Common Stock owned by the principal
stockholders of the Company and an aggregate of 453,727 shares of Common Stock
owned by a group of 26 stockholders are restricted securities and will be
eligible for sale in the public market pursuant to Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act") in December, 1998.
An additional 207,893 shares are held by numerous stockholders and are
restricted shares currently eligible for sale in the public market pursuant to
Rule 144 of the Securities Act. Although the principal stockholders have advised
the Company that they have no present intention of disposing of any shares of
Common Stock, the principal stockholders may (either individually or as a group)
in the future seek to dispose of all or a portion of such shares through a
registered public offering or otherwise. The principal stockholders and certain
other holders of the Common Stock (totaling shares) have entered into
lock-up agreements whereby they have agreed not to, directly or indirectly,
agree or offer to sell, sell, transfer, assign, distribute, grant an option for
purchase or sale of, pledge, hypothecate or otherwise encumber or dispose of any
beneficial interest in such Common Stock for a period of 12 months following the
date of this Prospectus without the prior written consent of the Representative.
See "Shares Eligible for Future Sale." A decision by a significant number of
principal stockholders to effect a disposition of their shares could adversely
affect the prevailing market price of the Common Stock as well as impair the
Company's ability to raise capital through the issuance of additional equity or
debt securities. See "Principal Stockholders."
In addition, the Company has reserved 350,000 shares of Common Stock for
future issuance under the Company's 1996 Long-Term Incentive Plan. Sales of a
substantial number of shares issued under the Company's 1996 Long-Term Incentive
Plan could adversely affect the prevailing market price of the Common Stock and
cause further dilution. See "Management -- Compensation of Directors",
"Management -- Employee Benefit Plans" and "Dilution."
ABSENCE OF PRIOR MARKET FOR COMMON STOCK
Prior to the Offering, there has been no active public market for the
Common Stock. There can be no assurance that an active public market for the
Common Stock will develop or be sustained after the Offering. If no active
market in the Common Stock develops, it may be difficult for investors to resell
their Common Stock. The initial public offering price has been determined by
negotiations between the Company and the
6
<PAGE> 10
Representative, and may bear no relationship to the market price for the Common
Stock after the Offering. Prices for the Common Stock will be determined by the
market and may be influenced by a number of factors, including the depth and
liquidity of the market for the Company's Common Stock, investor perceptions of
the Company and general economic and other conditions. See "Underwriting."
IMMEDIATE SUBSTANTIAL DILUTION; DISPROPORTIONATE RISK OF LOSS
Upon the completion of the Offering, there will be an immediate dilution to
public investors in that the net tangible book value of the Common Stock will be
approximately $ per share less than the public offering price of $ per
share. Accordingly, the public investors will bear the preponderant part of the
financial risk associated with the Company's business, while effective control
will remain with the Principal Stockholders. See "Dilution", "Description of
Capital Stock" and "Capitalization."
LIMITED CAPITAL; NEED FOR SIGNIFICANT ADDITIONAL FINANCING
The Company has met its capital and operating requirements to date through
private sales of equity, through borrowings from affiliates and unaffiliated
third parties and from operational cash flow. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Liquidity and
Capital Resources." Based upon the Company's business strategy, management
believes that the proceeds from the Offering will be sufficient to meet the
Company's cash requirements for approximately twelve months following completion
of the Offering. See "Use of Proceeds." The Company's continued operations and
expansion plans thereafter will depend upon revenues, if any, from operations
and the availability of significant future equity or debt financing. The Company
has no commitments for additional financing and there can be no assurance that
the Company will have sufficient revenues or be able to obtain additional
financing on satisfactory terms or that it will be able to maintain profitable
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business -- Business Strategy" and "Financial
Statements."
POSSIBLE VOLATILITY OF COMMON STOCK
From time to time after the Offering, there may be significant volatility
in the market place of the Common Stock. If the Company is unable to operate its
facilities profitably or develop facilities at a pace that reflects the
expectations of the market, investors could sell shares of the Common Stock at
or after the time that it becomes apparent that such expectations may not be
realized, resulting in a decrease in the market price of the Common Stock. In
addition to the operating results of the Company, changes in earnings estimated
by analysts, changes in general conditions in the economy or the financial
markets or other developments affecting the Company could cause the market price
of the Common Stock to fluctuate substantially. In recent years, the stock
market has experienced extreme price and volume fluctuations. This volatility
has had a significant effect on the market prices of securities issued by many
companies for reasons unrelated to their operating performance.
NO DIVIDENDS ANTICIPATED
The Company has never paid any cash dividends on its Common Stock. The
Company anticipates that in the future, earnings, if any, will be retained for
use in the business and that cash dividends with respect to the Common Stock
will not be paid. See "Dividend Policy."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS
This Prospectus contains forward-looking statements regarding the plans and
objectives of management for future operations including plans and objectives
relating to the further development of Key West and the acquisition of other
business oriented real property. When used in this Prospectus the words
"anticipate", "believe", "estimate", "expect" and "projected" and similar
expressions as they relate to the Company or management of the Company are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and
7
<PAGE> 11
assumptions, including, but not limited to, the risk factors described in this
Prospectus. Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove to be incorrect, actual results may vary
materially from those described herein. The Company does not intend to update
these forward-looking statements.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sales of shares of
Common Stock offered hereby, after deducting the underwriting discount and the
estimated expenses of the Offering are expected to be approximately $13,725,000
or $ if the Over-allotment Option is exercised in full (in each case,
assuming a public offering price of $ per share.)
The Company anticipates that the proceeds of the Offering will be used as
follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
APPLICATION OF NET PROCEEDS AMOUNT PERCENT
------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Repayment of Long Term Debt(1).............................. $ 5,027,820 %
Repayment of accrued interest on Long Term Debt............. $ 204,500 %
Expansion of Company's Business including Acquisitions and
Working Capital........................................... $ %
</TABLE>
- ---------------
(1) The following table details the debt to be repaid as of September 30, 1996:
<TABLE>
<CAPTION>
AMOUNT TO
DESCRIPTION MATURITY DATE INTEREST RATE BE REPAID
- --------------------------------- ---------------- ---------------------------- ----------
<S> <C> <C> <C>
Jamestown:
Webb Family Trust.............. On Demand 1 1/2% over prime $1,852,777
Bank of Mt. Vernon............. April 30, 2000 2% over prime 177,071
Vine Street Trust Co. ......... On Demand 11% 200,000
Jamestown Limited Partners..... On Demand 1% over prime 360,000
Caterpillar Financial.......... Oct. 22, 2001 7.4% 823,251
Webb Family Trust.............. On Demand 10.0% 707,500
----------
$4,120,599
----------
Key West:
Joseph H. Roth................. January 5, 2004 8.00% 500,000
Joseph H. Roth................. January 5, 2004 8.00% 146,110
Community Bank of
1 3/4% over the banks base
Homestead...................... February 3, 1999 rate 161,111
A. Frederick Skomp............. On Demand 1% over prime and
2% over prime 100,000
----------
$ 907,221
----------
TOTAL.................. $5,027,820
==========
</TABLE>
The Company estimates that the indebtedness to be repaid with a portion of
the proceeds of the Offering will have a weighted average interest rate of
approximately 9.2% and a weighted average maturity of approximately 1.9 years as
of September 30, 1996. See "Certain Transactions."
Assuming the Over-allotment Option and Representative's Warrants are not
exercised, the Company intends to use approximately $5,027,820 of the proceeds
from the Offering to repay outstanding long term debt of the Company,
$ to finance expansion of the Company's business through additional
development of current properties or acquisition of additional facilities and
properties and for general working capital. The Company, as part of its
expansion plans, may take advantage of future acquisition opportunities,
although the
8
<PAGE> 12
Company has not identified any specific businesses that it will seek to acquire
and has not entered into negotiations with respect to any acquisition. See
"Business -- Business Strategy."
Until utilized for the above purposes the net proceeds from the Offering
will be invested in short-term investment grade securities.
DIVIDEND POLICY
The Company currently plans to retain all available earnings, if any,
generated by its operations for the future development and growth of its
business and does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to dividend policy will be made at the
discretion of the Board of Directors of the Company and will depend on a number
of factors, including future earnings, capital requirements, cash availability,
financial condition, loan covenants and future prospects of the Company and such
other factors as the Board of Directors deems relevant.
DILUTION
As of September 30, 1996, the pro forma net tangible book value of the
Common Stock was $(0.65) per share. Net tangible book value per share is equal
to the Company's total tangible assets less liabilities, divided by the number
of outstanding shares of Common Stock. After giving effect to the sale by the
Company of the shares of Common Stock offered hereby at the estimated
public offering price of $ per share and the application of the net proceeds
as set forth under "Use of Proceeds", the pro forma net tangible book value of
the Common Stock at September 30, 1996 would have been $ or $ per
share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing shareholders and an immediate dilution in
pro forma net tangible book value of $ per share to persons purchasing shares
at the public offering price in the Offering ("New Stockholders"). The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price....................................... $ --
Pro forma net tangible book value per share before the
Offering(1).................................................... $(0.65)
Increase in net tangible book value per share attributable to New
Stockholders................................................... $ --
Pro forma net tangible book value per share after the Offering......
-----
Dilution per share to New Stockholders(2)........................... $
=====
</TABLE>
- ---------------
(1) After giving effect to the acquisition of Jamestown and Key West, the
issuance by the Company of the Common Stock in return for such acquisitions,
the issuance of 304,172 shares of Common Stock to relieve amounts due to
related parties, the issuance of 261,563 shares of Common Stock to a related
party in connection with commissions and incentive fees regarding the sale
of Jamestown, the issuance of 26,969 shares of Common Stock to an incentive
plan for Jamestown creditors and employees, the conversion of debt to equity
amounting to $514,826 and a 1 for 200 reverse split of the Common Stock
outstanding prior to the acquisitions, but without giving effect to the
Offering. See "Business -- Development of the Company."
(2) Dilution is determined by subtracting pro forma net tangible book value per
share, after giving effect to the Offering, from the assumed initial
offering price per share.
9
<PAGE> 13
The following table summarizes on a pro forma basis as of September 30,
1996, the difference between the existing shareholders and the New Stockholders
with respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT(S) PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 2,300,000 -- % $ 6,544,839(1) 30.1% $2.85
New Stockholders................. -- -- % $15,225,000 69.9% $ --(2)
--------- ----- ----------- -----
Total.................. -- 100.0% $21,769,839 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Includes original capital contribution to Jamestown ($2,000,000), the full
paid-in capital of Sonoma ($4,334,616) and Key West ($210,223).
(2) Assuming a public offering price of $ per share and no exercise of the
over-allotment option or exercise of the Representative's Warrants.
Assuming the Over-allotment Option is exercised in full, such pro forma net
tangible book value after the Offering would be $ per share, the
immediate increase in pro forma net tangible book value of shares owned by the
existing shareholders would be $ per share and the immediate dilution
to the New Stockholders would be $ per share.
10
<PAGE> 14
CAPITALIZATION
The following table sets forth the long-term debt and capitalization of the
Company as of September 30, 1996 on a historical basis, on a pro forma basis,
and as adjusted to give effect to the Offering, the sale of the shares
of Common Stock offered by the Company hereby and the application of the
estimated net proceeds therefrom.
The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------
HISTORICAL PRO FORMA(1) AS ADJUSTED(2)
----------- ------------ --------------
<S> <C> <C> <C>
Long Term Debt including current maturities:
Notes Payable...................................... $11,098,542 $10,836,151 $ --
Shareholder Note(s)................................ 3,666,386 3,666,386 --
----------- ----------- -----------
Total Long-Term Debt....................... 14,764,928 14,502,537 --
----------- ----------- -----------
Shareholders' Equity (Deficit)
Common Stock, par value $.001 per share; 20,000,000
shares authorized
1,707,100 shares issued and outstanding;
2,300,000
pro forma; as adjusted(3)............. 1,707 2,300 --
Additional paid-in capital (deficiency).............. 265,971 2,101,297 --
Accumulated deficit.................................. (2,596,998) (2,591,709)
----------- ----------- -----------
Total Shareholders' Equity (Deficit)....... (2,329,320) (488,112) --
----------- ----------- -----------
Total Capitalization....................... $12,435,608 $14,014,425 $ --
=========== =========== ===========
</TABLE>
- ---------------
(1) Gives effect to (a) the acquisitions of Jamestown and Key West, the Common
Stock issued by the Company in return for the acquisitions, the issuance of
304,172 shares of Common Stock to relieve amounts due to related parties
totaling $1,326,382 (b) the issuance of 261,563 shares of Common Stock to a
related party in connection with commission and incentive fees related to
sale of Jamestown, (c) the issuance of 26,969 shares of Common Stock to an
incentive plan for Jamestown creditors and employees, (d) the conversion of
debt to equity amounting to $514,826 and (e) the 1 for 200 reverse split of
the Common Stock outstanding prior to the closing of the acquisitions, but
excludes the effect of sale of shares from the Offering and application of
the net proceeds therefrom.
(2) Adjusted to give effect to the acquisitions and reverse split explained in
(1) above and to the sale of the shares offered hereby and the application
of the net proceeds therefrom (assuming public offering price of $ per
share). See "Use of Proceeds."
(3) Excludes 350,000 shares of Common Stock to be reserved for issuance pursuant
to the Company's 1996 Long-Term Incentive Plan which the Company plans to
implement after completion of the Offering. See "Management -- Compensation
of Directors" and "Employee Benefit Plans."
11
<PAGE> 15
SELECTED FINANCIAL DATA
Selected financial data shown below for the twelve months ended December
31, 1994 and 1995 were derived from the audited combined financial statements of
the Company. The selected financial data for the period ending September 30,
1996 were derived from unaudited combined financial statements that include, in
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information set forth
therein. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Financial
Statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................ $3,850,197 $4,673,935 $4,065,879 $4,688,803
Costs and expenses
Costs of revenues.................... 1,725,202 2,260,132 1,946,742 2,257,181
Selling, general and
administrative..................... 1,227,059 1,482,672 1,026,374 1,147,425
Amortization of goodwill............. 18,426 30,252 22,689 55,774
Depreciation and amortization........ 648,220 624,360 456,751 395,263
---------- ---------- ---------- ----------
Total costs and expenses........ 3,618,907 4,397,416 3,452,556 3,855,643
Gain on reduction of obligations........ -- 447,062 418,699 2,461,159
Interest expense........................ 968,498 1,134,742 836,600 978,981
---------- ---------- ---------- ----------
Net Income (loss)....................... $ (737,208) $ (411,161) $ 195,422 $2,315,338
========== ========== ========== ==========
Income (loss) per share................. $ (0.48) $ (0.27) $ 0.13 $ 1.36
Weight-average shares outstanding....... 1,535,000 1,549,342 1,535,000 1,707,100
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
1995 30, 1996
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash............................................................ $ 30,527 $ 453,896
Current assets.................................................. 289,935 1,444,874
Total assets.................................................... 13,745,106 15,218,033
Current liabilities............................................. 9,651,404 6,801,777
Long term debt.................................................. 8,947,583 10,745,576
Owners' equity (deficit)........................................ (4,853,881) (2,329,320)
</TABLE>
12
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company, Jamestown and Key West for the nine months ended
September 30, 1996 and 1995 and the years ended December 31, 1995 and 1994. This
discussion should be read in conjunction with the financial statements of the
Company, Jamestown and Key West and the related notes thereto appearing
elsewhere in this registration statement. In addition, this discussion contains
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including, but not limited to, the risk factors
described in this Prospectus. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove to be incorrect, actual
results may vary materially from those described herein.
OVERVIEW
Although the Company was formed in 1940, the Company has not had material
operations since 1985 when the Company's directors restructured the Company with
the purpose of finding an acquisition which would restore the Company to an
operating entity. The Company was unsuccessful until September of 1996 when it
entered into an agreement with the general partner of Jamestown Resort & Marina,
Ltd. to acquire all the capital stock of Jamestown Resort & Marina, Inc. and a
similar agreement with the limited partners to acquire all of the limited
partnership units in return for Common Stock of the Company. The Company also
entered into a similar agreement with stockholders of Key West Conch Harbor,
Inc. in October of 1996 and acquired all of the outstanding common stock of Key
West in return for Common Stock of the Company. Both the Jamestown and Key West
acquisition transactions were closed on December 9, 1996.
The Company's recognition of revenue for boat slip rental sales lags behind
the cash receipts from the pre-paid slip rental agreements resulting in
significant deferred revenue at certain times during the year (October through
May). Revenue from slip rental sales is recognized on a straight line basis over
the length of the rental period (usually twelve months) even though the full
amount of the annual slip rental is collected in advance and deposited in the
Company's account.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES
Revenues for the nine months ended September 30, 1996 increased $622,924 or
15% from the same period in 1995. The increase was primarily due to increased
slip rentals of $151,202 and fuel sales of $504,522 at Key West. Key West
revenues increased principally due to Key West not assuming the operations of
the marina until the second quarter of 1995 (previously leased to a related
party) and the on-going expansion of the fueling facility and the rental slips
pier. Jamestown experienced a small decrease in revenues of $35,653 for the nine
months ended September 30, 1996 compared to the same period in 1995.
Slip rental fees were increased by 3 1/2% for the 1997 calendar year at
Jamestown. Additional revenues are also expected in 1997 due to a change in
marketing strategy by focusing on attracting tour groups and conventions during
the off boating season. The largest impact of this marketing focus will be to
increase lodging rentals and paddleboat revenues.
Management estimates that after completion of the additional Key West
rental slips, there will be approximately 48 to 50 slips. The 48 to 50 slips
include 20 to 22 slips still to be constructed. Seven rental agreements for the
new slips have been entered into which will result in $84,252 in additional
annual revenues. Management believes that there is sufficient demand for the
remaining slips which will result in full occupancy of the slips being
constructed. Key West will set aside six to eight of the additional slips as
transient or overnight rentals which will generate approximately $500 per night
when rented to capacity.
13
<PAGE> 17
COSTS OF REVENUES
During the nine months ended September 30, 1996, costs of revenues
increased $310,439 or 16%. The increase resulted primarily from increased fuel
costs at Key West of $442,131 as a result of Key West assuming the operations of
the marina and the expansion of the fueling facility, and the related increase
in revenues. Cost of revenues as a percentage of revenues was consistent at 48%
for the nine months ended September 30, 1996 compared to the same period in
1995. Jamestown offset this increase by reducing total costs of revenues by
$124,206. This decrease resulted from decreases in various non-recurring
expenses.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $121,051 or 12% to
$1,147,425. The increase was primarily due to assuming all operations of the Key
West marina and expansion of the fueling facility (and the related increase in
revenues), which accounted for $92,424 of the change. Selling, general and
administrative expenses at Jamestown were $995,146 and $946,893 for the nine
months ended September 30, 1996 and 1995, respectively. Total selling, general
and administrative expenses as a percentage of revenues was consistent at 25%
for the nine months ended September 30, 1996 compared to the same period in
1995.
As a result of Sonoma providing management services to its subsidiaries,
Jamestown will not incur management fees in the future, which amounted to
$177,055 for the nine months ended September 30, 1996. This reduction at
Jamestown will be offset by an increase in management salaries of approximately
the same amount at Sonoma.
DEPRECIATION AND AMORTIZATION
During the nine months ended September 30, 1996 depreciation and
amortization expenses decreased $28,403, or 6% to $451,037. The decrease was
primarily the result of several Jamestown assets becoming fully depreciated.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH FISCAL YEAR ENDED DECEMBER
31, 1994
REVENUES
Revenues for the year ended December 31, 1995 increased $823,738 or 21%
from the same period in 1994. The increase was primarily due to increased annual
slip fees of $170,846 and fuel sales of $42,635 at Jamestown and increased slip
rentals of $69,727 and fuel sales of $507,914 at Key West. The increase in
Jamestown annual slip fees are attributable to an increase in the number of
slips and increased fuel sales due to additional boat traffic. Key West revenues
increased principally due to Key West assuming all operations of the marina
during April 1995 (previously leased to a related party) and expansion of the
fueling facility and the rental slips pier.
As a result of the Key West fuel facility expansion completed in April
1996, management expects fuel revenues to increase to approximately $1,200,000
per year, which is approximately a $692,000 increase over fuel revenues of
$507,914 reported for the year ended December 31, 1995.
COSTS OF REVENUES
During the year ended December 31, 1995, costs of revenues increased
$534,930 or 31%. The increase resulted primarily from increased fuel costs at
Key West of $372,660 as a result of Key West assuming the operations of the
marina and the expansion of the fueling facility. Cost of revenues as a
percentage of revenues increased to 48% for the year ended December 31, 1995 as
compared to 45% for the same period in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $255,613 or 21% over
1994 expenses to $1,227,059. The increase was due primarily to assuming all
operations of the Key West marina and expansion of the fueling facility, which
accounted for $91,529 of the change. Selling, general and administrative
expenses
14
<PAGE> 18
at Jamestown were $1,278,390 and $1,089,981 for the years ended December 31,
1995, and 1994, respectively. Total selling, general and administrative expenses
as a percentage of revenues was consistent at 32% for the year ended December
31, 1995 as compared to the same period in 1994.
The Company incurred approximately $50,000 in a one time repair and
maintenance expense to repair the heating and air conditioning units in the
Jamestown ship's store during the year ended December 31, 1995. Further,
management successfully negotiated an annual reduction in insurance premiums for
the period from June 1, 1996 through May 31, 1997 of $43,703.
As a result of Sonoma providing management services to its subsidiaries,
Jamestown will not incur management fees in the future, which amounted to
$201,001 for the year ended December 31, 1995. This reduction at Jamestown will
be offset by an increase in management salaries of approximately the same amount
at Sonoma.
DEPRECIATION AND AMORTIZATION
During the year ended December 31, 1995, depreciation and amortization
expenses decreased $23,860, or 2.0% to $654,612. The decrease was primarily the
result of several Jamestown assets becoming fully depreciated. Additional assets
will become fully depreciated in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Both Jamestown and Key West refinanced their primary debt in 1996 which
resulted in a reduction of indebtedness of approximately $2,600,000. The Company
believes this reduction and the related decrease in interest payments will
increase cash available for operations and debt servicing.
Negative working capital at December 31, 1995 was $9,361,469 as compared to
negative working capital at September 30, 1996 of $5,356,903. The Company
believes that the net proceeds from the Offering will provide $15,225,000 in
funds. Of these proceeds, $1,500,000 will be used to pay issuance costs and
legal fees, and approximately $4,121,000 and $907,200 will reduce the secondary
debt of Jamestown and Key West, respectively. The reduction of this debt will
further decrease interest payments and will increase cash available for
operations. The remaining funds will be used to satisfy the Company's capital
expansion, working capital requirements and future acquisitions. The Company
believes that the net proceeds from the Offering and cash provided by operating
activities will be sufficient to fund its operations through 1998.
Management believes that the current facilities at Jamestown are in
excellent condition and will not require substantial capital improvements in the
near term. Other than the capital expansion now under way at Key West, there are
no additional capital improvements required at the Key West facility in the near
future.
The Company has not identified any potential acquisition candidates, nor
does it currently have plans to make any acquisitions. It is the intention of
management to seek viable acquisitions and in the event a candidate is
identified, the Company would, depending on the size of the target company and
other factors, consider using the proceeds from the Offering or bank borrowings.
There can be no assurance that the Offering will be successful or that the
Company will ever be profitable, nor can there be any assurance that the Company
will not require additional equity or debt financing in the near future, and if
needed, it will be available on terms satisfactory to the Company or at all.
SEASONALITY
Jamestown's business is seasonal in nature with the peak boating season
falling in June, July and August. These months historically have accounted for
approximately 57.5% of the yearly revenue. The impact on liquidity and capital
resources of this seasonality is reduced by incentives offered to slip customers
to pre-pay their annual fees during the fall and winter seasons. In addition the
seasonal nature of Jamestown will be positively impacted by the increased
marketing efforts to provide off season tours and conventions.
Key West operations are impacted slightly by seasonality since their
activity increases during the winter months due to winter vacations. However,
the majority of the business is commercial fuel sales which is not seasonal.
15
<PAGE> 19
BUSINESS
DEVELOPMENT OF THE COMPANY
Sonoma is a Nevada corporation formed in 1940 which principally engaged in
the quicksilver (mercury) mining business until the mid 1970s when its
operations ceased. Thereafter, the Company undertook several other operations
that did not materialize as anticipated. From 1988 through September 1996, the
Company focused on locating merger candidates or assets that could be acquired
to allow the Company to restart operations.
In 1995, the Company agreed to obtain releases from all of its then present
creditors as a prerequisite for the Company to acquire certain assets. Although
the Company came to an agreement with its creditors, such acquisition did not
materialize.
During 1996, the Company entered into an agreement with Clear Creek
Investments, L.L.C. to acquire all of the limited partnership interests of
Jamestown Resort & Marina, Ltd. and all the common stock of Jamestown Resort &
Marina, Inc. in return for Common Stock of the Company. In October of 1996 the
Company also entered into an agreement with the stockholders of Key West to
acquire all of the capital stock of Key West. Both transactions closed on
December 9, 1996 with Jamestown and Key West becoming wholly owned subsidiaries
of the Company.
CURRENT BUSINESS
On September 12, 1996, the Company entered into an agreement with Clear
Creek Investments, L.L.C., a Kentucky limited liability company, and all the
limited partners in Jamestown Resort & Marina, Ltd. to acquire all the capital
stock of Jamestown Resort & Marina, Inc. (the entity which operates and manages
Jamestown) and all the limited partnership interests of Jamestown Resort &
Marina, Ltd. (the entity which holds the lease and owns the improvements
constituting Jamestown). Shortly thereafter the Company, on October 31, 1996,
agreed to acquire the Key West Conch Harbor Marina through its acquisition of
all the capital stock of Key West Conch Harbor, Inc.
JAMESTOWN
Jamestown is located on the north shore of Lake Cumberland approximately
three miles east of Jamestown, Kentucky on 299 acres of land and water leased
from the U.S. Army Corps of Engineers (the "Corps"). Lake Cumberland is a 53,000
acre, 101 mile long lake situated in southern Kentucky with the Jamestown
facilities located within a two hour drive of the metropolitan areas of
Lexington and Louisville, Kentucky and Nashville, Tennessee.
Jamestown acquired the original lease comprising minimal facilities in
February of 1988 with the original term of the lease ending in December of 2012.
The lease was later amended by mutual agreement to allow the lease to be
renewable for an additional 25 year term subject to i) Jamestown's satisfactory
compliance with all lease conditions during its original term and ii) approval
by the Government. Since obtaining the lease Jamestown has been under
development with a number of facilities and improvements being completed in 1988
and the 40 unit all-suite lodge being completed in 1989.
Part of the resort is centered on an island around which the marina was
constructed. The island is connected to the mainland by a $2,000,000 causeway
built by the Commonwealth of Kentucky after Jamestown entered into a development
agreement with the Commonwealth in June of 1988 whereby Jamestown agreed to
construct certain resort improvements and to pay the Commonwealth 1% of its
gross revenues annually.
16
<PAGE> 20
Jamestown's facilities include:
MARINA
Jamestown has 805 total wet slips, 645 of which are subject to annual
rental, many of which are covered, and range in size from 22 feet by 70 feet to
10 feet by 20 feet. Most of the slips have separately metered water,
electricity, cable television and telephone connections. The remaining 160 slips
are used for temporary overnight ship rentals and Jamestown's rental fleet. The
marina is "U" shaped and is built around the island to maximize the use of the
available water acreage and is constructed using a floating dock system which
allows the facility to operate at all levels of the lake, which fluctuates as
much as 80 feet during the year.
SHIP'S STORE, RESTAURANT AND FUEL
The 8,000 square foot Ship's Store is part of the head boat facility which
is the main building on the floating dock, and is centered immediately off the
island. The ship's store derives its revenues principally from the sale of
groceries, marine supplies, clothing and gifts. The full service restaurant has
a 120 seat capacity and operates daily during the boating season. There are five
fueling slips which are located adjacent to the ship's store and are 20 feet by
60 feet in size and in aggregate contain eight fuel pump stations and a sanitary
sewer pump-out facility. Three fiberglass fuel tanks, two 12,000 gallon tanks
and one 6,000 gallon tank are installed in the ground on the island.
YACHT CLUB AND SNACK BAR
Jamestown's Yacht Club facility, which is located near the ship's store,
has 2,500 square feet with an additional 900 square feet of covered patio for
outdoor dining and special events. The snack bar and ice cream store has 720
square feet and has open patio type seating.
GUEST ACCOMMODATIONS
Jamestown rents 40 suites in the all-suite Lodge and 18 individual cabins.
It also manages and currently has for sale, a two-story model condominium. The
Corps has approved a development plan for 52 privately owned condominiums which
will be built by a third party contractor who has agreed to allow Jamestown to
sell and manage the condominiums in return for a net 40% of the revenues from
the condominium rentals as a management fee. The condominium project is
projected to be completed within the next five to ten years depending on
marketing conditions.
BOAT RENTALS
The Jamestown rental fleet consists of 19 pontoon boats and 30 houseboats
with 27 of the houseboats being considered "luxurious" having amenities such as
air conditioning, complete kitchens and full service bathrooms. The Jamestown
Queen is a 140 passenger stern paddle wheel boat which is chartered for sight
seeing, dinner and party cruises. The "Queen" is equipped for dining, dancing
and is marketed toward catered social events for groups rather than scheduled
service for the general public.
OTHER SERVICES
Jamestown also derives revenues from the maintenance and repair of boats,
boat brokering services, telephone service and miniature golf. Jamestown employs
20 full time employees throughout the year and augments its work force during
the most active seasons with approximately 30 additional employees on staff
during fall and spring and a total of 150 employees on staff during the summer
months (Memorial Day to Labor Day).
KEY WEST CONCH HARBOR MARINA
The Key West Conch Harbor Marina is located on the northwest corner of
Caroline and Grinnell Streets in the "Old Town" preservation district located in
Key West, Florida. The approximately two acre or 82,000
17
<PAGE> 21
square foot site has an estimated 251 feet of frontage on Caroline Street and
221 feet of shore line along a waterway known as the Key West Bight.
Development of Key West began in May of 1995 with construction of the dock
and the fueling facility including double wall fuel lines, the on-shore fuel
containment area and the new Texaco Star Port(R) fueling dock. The Marina has a
new 450 foot dock with two 100 foot finger piers. The fueling facility is
located at the end of a "T"-dock.
In August 1995, Key West entered into an agreement with the City of Key
West whereby Key West granted the City an easement to allow the proposed
"Harborwalk" (a pedestrian boardwalk encircling the Key West Bight) to proceed
without interruption across Key West's property. The Company believes that the
Harborwalk will enhance the marina property by providing customer access to and
from the marina and other sections of "Old Town" Key West.
Fueling operations began in February, 1996 and marina rental operations
began in July 1996. Unlike Jamestown which is primarily designated to service
personal watercraft, Key West was designed as a commercial dock servicing
commercial watercraft such as the Dixie Duck Gambling Boat which rents
approximately 200 feet of dock space and commercial day rate deep water fishing
boats. Key West's revenues result primarily from its fuel operations and
commercial slip rentals.
A portion of the dock has been designated for "transient" slips which are
available at a day rental rate and cater to the non-commercial pleasure boat
customer. The project is still in development with food and beverage service
(restaurant), retail stores (small convenience store and small retail shops) and
marina office space planned for the future.
Key West employs six full time employees.
BUSINESS STRATEGY
The Company's business strategy is designed to achieve revenue and profit
growth by first completing development of Key West and Jamestown and by
acquiring additional leisure properties and commercial real estate.
Completion of the Key West development will include construction of (i)
office space for marina operations, (ii) shower and restroom facilities, and
(iii) restaurant and retail shop space. Key West currently has $700,000 in a
loan escrow to put toward the cost of the improvements. It is anticipated that
Key West will lease the restaurant and retail shop space to third parties for a
monthly rental plus a percentage of the lessee's gross business. Jamestown's
physical development will be minimal and primarily center on its management of
the condominium units to be built on land constituting part of the Jamestown
lease and marketing the facilities for year around use by corporate and
convention business.
Further, Company growth, if any, will primarily come from the continued
acquisition of leisure properties and commercial real estate by the Company.
Although the Company has not yet entered into any agreements with specific
targets, the Company feels confident that it will be able to acquire properties
that meet its strategy in the future. The Company's growth will be financed from
the proceeds of the Offering, cash from operations (if the Company is
profitable), possible future offerings of debt or equity securities and possible
future lines of secured or unsecured credit. There can be no assurance that such
funding will be available to the Company or, if available, will be at
competitive rates. To the extent such funds are not available or are too
expensive for the Company to utilize, the Company's growth plans will not
materialize.
If the Company is successful in its growth strategy such success could
result in the issuance of additional Common Stock of the Company either for sale
to finance acquisitions or to be used in exchange for stock or assets of the
acquired companies. In either event, the then existing stockholders of the
Company will experience a dilution of their holdings in the Company with the
extent of the dilution dependent upon the number of shares sold or exchanged.
18
<PAGE> 22
FACILITIES AND LOCATION
The Company leases approximately 299 acres three miles east of Jamestown,
Kentucky, including water and land on which the Jamestown Resort is located,
from the Corps. The original term of the lease was to end on December 31, 2012,
however, the term may be renewed upon certain conditions, for an additional 25
year term. The Company may terminate the lease at any lease year upon six months
notice, and the Corps may terminate the lease if the Company violates the lease
and continues to do so for 60 days after notice of the violation in writing.
Rent on the Jamestown lease is calculated based upon an assumed break even
point. The Company must pay 0.75% of all sales and 2.25% of all rents and
services below the assumed break even point. Gross income between the assumed
break even point and twice the assumed break even point requires the payment of
2.25% of sales and 6.75% of rents and services. Gross revenues in excess of
twice such break even point requires the payment of 3.00% of sales and 7.00% of
rents and services. For the calendar years ended December 31, 1995 and 1994, the
Company paid $67,788 and $64,461 in rent, respectively. The lease prohibits
gambling on the premises. The Company pays a one percent annual revenue fee to
the Commonwealth of Kentucky in exchange for improvements to the island and
causeway, which were $40,108 and $37,046 in 1995 and 1994, respectively.
The Company owns approximately two acres of land in Key West, Florida where
the Key West facility is located. The Company purchased this land and original
improvements in 1994 and owns the land in fee simple subject to the
restrictions, easements and encumbrances of record. The Key West property is
subject to first and second mortgages totalling $3,370,294 with a variable
interest rate of 1% over TIB Bank of the Keys N.A.'s index rate, (currently the
interest rate is 9.25%) for the first mortgage and 8% fixed rate for the second
mortgage. The maturity dates are June 29, 2010 and January 5, 2004 for the first
and second mortgages respectively.
The Company leases its corporate executive offices located in Lexington,
Kentucky on an annual basis and its current lease expires June 30, 1997.
Management believes that the properties described above are adequately
insured.
LEGAL PROCEEDINGS
The Company has no material legal proceedings pending, except the Company's
wholly owned subsidiary, Key West, is currently involved in a quiet title legal
proceeding which it initiated in 1994 with an agency of the State of Florida
whereby Key West is attempting to have the court declare that certain land at
the bottom of Key West Bight belongs to Key West and not to the State of
Florida. The State of Florida Circuit Court of the 16th Judicial Circuit in and
for Monroe County Florida found in favor of Key West and the State of Florida
has appealed to the State of Florida Third District Court of Appeal. On December
13, 1996, the Court of Appeal found in favor of Key West. The Company does not
know whether the State of Florida will further appeal the dispute to the Florida
Supreme Court. With the acquisition of Jamestown Resort & Marina, Ltd., the
Company became a defendant in two lawsuits; one involving former employees and
one a liability claim. Management believes that the adverse resolution of these
lawsuits will not have a material impact on the financial condition of the
Company as any potential loss from said lawsuits is covered by insurance.
GOVERNMENT REGULATIONS
The Company's operations are subject to significant federal, state and
local government environmental regulations. By far the Company's most
significant regulated activities involve its fueling facilities, watercraft and
food and beverage facilities, although numerous other parts of its facilities
and operations are also regulated by a number of governmental entities.
Of special concern are the various federal, state and local laws and
regulations relating to the environment, especially those dealing with the
storage and dispensing of motor fuels. Violation of any of these statutes,
regulations or orders issued thereunder could result in civil or criminal
enforcement actions including the closure of the fueling facilities. Closure of
the fueling facilities at either Jamestown or Key West would
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<PAGE> 23
have a significantly negative impact on the Company's revenues which most likely
would result in the insolvency of the Company.
In addition, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, provides for cleanup of geographical
locations upon which there has been a release or threatened release of hazardous
substances and authorizes the Environmental Protection Agency (EPA) to take any
necessary response including requiring potentially responsible parties to take
or pay for such actions.
The Company is not aware of any potentially material environmental
liability relating to any property in which the Company has an interest;
however, there can be no assurance that no such liability exists, or that future
developments will not result in material costs and liabilities being imposed on
the Company.
The Company is also subject to the regulations of the U.S. Coast Guard for
its facilities and operations but especially in its ownership and operation of
the Jamestown Queen, the 140-passenger paddle-wheel boat that is rented by
customers of the Company for sightseeing, dinner and party cruises. In addition,
the Company's food and beverage operations are subject to state and local health
and sanitation regulations. Failure of the Company to properly observe such
regulations could result in the offending facilities or operations to be shut
down until such time as they are brought into proper compliance. Should any
significant delay occur, the revenues of the Company would be adversely
impacted.
Management believes that the Company's current facilities and operations
meet or exceed the requirements of all material federal, state of local statutes
and regulations.
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Set forth below are the names, ages and positions of the executive
officers, key employees and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------
<S> <C> <C>
R. Dudley Webb........................... 53 Director and Chairman of the Board
Martha Layne Collins..................... 60 Director and Vice Chairman
Dr. Barrett Bernard, M.D................. 47 Director
Charles W. Henne......................... 58 Director
Dr. Edwin Nighbert, M.D.................. 56 Director
Irvin Stumler............................ 61 Director
James L. Frye............................ 37 Director, President and Chief Executive
Officer
Fred Skomp............................... 53 Director and Vice
President -- Development
Peter Sackmann........................... 55 Treasurer and Chief Financial Officer
Glenn Hoskins............................ 42 Director and Secretary
</TABLE>
The principal occupations and positions for the past five years of each of
the Directors and Executive Officers of the Company are as follows:
R. DUDLEY WEBB became a Director and Chairman of the Board on December 9,
1996. Mr. Webb has been a partner in the law firm of Webb, Hoskins, Glover &
Stafford, P.S.C. since 1972, which was the same year he, along with his brother,
Donald, founded a number of real estate ventures which eventually became The
Webb Companies, a consolidation of a number of real estate, construction and
commercial property management companies. Mr. Webb currently serves as Chairman
of the Board of The Webb Companies, a position which he has held since 1982, and
Chairman of the Board and Chief Executive Officer of Jamestown Resort & Marina,
Inc. In 1992 Mr. Webb became involved in several lawsuits and involved in a
controversy with the Rehabilitator/Liquidator of Kentucky Central Life Insurance
Company, which resulted in the bankruptcy filings of several real estate
ventures which Mr. Webb was involved in with Kentucky Central in
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<PAGE> 24
the United States Bankruptcy District Court for the Eastern District of
Kentucky. The bankruptcies have since been dismissed although related
non-bankruptcy litigation continues. Mr. Webb holds a B.A. Degree from
Georgetown College and a J.D. Degree from the University of Kentucky College of
Law.
MARTHA LAYNE COLLINS began serving as a Director and Vice-Chairman of the
Board on December 9, 1996. Ms. Collins is currently the Director of the
International Business & Management Center, University of Kentucky, a position
which she has held since July 1996, and beginning in January 1988 has served as
President of Martha Layne Collins & Associates, a consulting firm. Prior to her
current position at the University of Kentucky, she was the President of St.
Catherine College, Springfield, Kentucky from July 1990 to June 1996, and
Governor of the Commonwealth of Kentucky from December 1983 to December 1987.
Ms. Collins is currently serving as a director for Eastman Kodak Company,
Incorporated, R.R. Donnelley and Sons Company, Incorporated and the Bank of
Louisville, Louisville, Kentucky. She is also an Advisory Board Director for the
Norfolk Southern Corporation. She is a graduate of the University of Kentucky.
L. BARRETT BERNARD, M.D. joined the Company as a Director on December 9,
1996. Dr. Bernard is currently the Medical Director-Emergency Services,
Greenview Regional Hospital, Bowling Green, Kentucky and has held this position
since 1989. He holds a B.S. Degree from Western Kentucky University and received
his Doctorate of Medicine from the University of Louisville School of Medicine,
Louisville, Kentucky.
CHARLES W. HENNE has been a Director and served as interim President of the
Company since October 9, 1996. As of December 9, 1996, Mr. Henne resigned as
President but remains a Director of the Company. He is currently President of
C.W. Henne Companies, Inc., a real estate management and venture firm which has
had a direct involvement in a wide range of development projects including
office, industrial, shopping and residential properties since 1973. Mr. Henne is
a graduate of the University of Louisville where he received his B.S. Degree.
EDWIN NIGHBERT, M.D., a Director of the Company since December 9, 1996, has
been a surgeon with Surgical Associates of Lexington, P.S.C. for the last 23
years. Dr. Nighbert was a director of Surgical Care Affiliates, Inc. from 1984
until its acquisition by Health South, Inc. in 1996 and a director of Healthwise
America, Inc. from 1993 until its acquisition by United Health Corporation in
1996. He received his Doctorate of Medicine from the University of Kentucky in
1966.
IRVIN STUMLER became a Director on December 9, 1996. He is currently a
Director and President of Eurotax Systems, Inc., positions he has held since
1994 and is also currently a Director and President of Profit Concepts, Inc., a
company which he has been with since 1983. Mr. Stumler holds a B.A. from
Bellarmine College which he received in 1962 and a J.D. degree from the
University of Louisville School of Law.
JAMES L. FRYE became a Director, Chief Executive Officer and President of
the Company on December 9, 1996. Prior to joining the Company Mr. Frye was Area
Vice President for the Southeast Region of Westrec Marina Management, Inc., a
position he has held since 1989. While with Westrec, Mr. Frye had responsibility
for marina properties located in Florida, Georgia, Alabama and Mississippi
including eight million dollars in development projects. The properties
generated twenty three million dollars in 1995 sales. Prior to joining Westrec,
Mr. Frye was employed by O'Connell Management Company as the Managing Director
of Marina Bay Yacht Basin in North Quincy, Massachusetts, a 440 acre facility
with 675 boat slips, residential and commercial/retail space. Mr. Frye holds a
B.S. degree from the University of Massachusetts at Amherst.
A. FREDERICK SKOMP is a Director and Vice President of Development for the
Company. He began his current positions with the Company on December 9, 1996.
Since 1989 Mr. Skomp has been the owner/broker of Southernmost Real Estate,
Inc., a commercial real estate brokerage in Key West, Florida and has been the
President of Key West Conch Harbor, Inc. since December, 1993.
PETER SACKMANN serves as the Company Treasurer and Chief Financial Officer.
Mr. Sackmann was employed as Chief Financial Officer of The Webb Companies from
1990 until December, 1996 and as Vice President, Treasurer and CFO of The Sterns
Company, a real estate investment and development company, a position he held
from 1981 to 1990. Mr. Sackmann is a Certified Public Accountant receiving his
B.S. and M.B.A. from Florida State University. Mr. Sackmann has been with the
Company since December 9, 1996.
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<PAGE> 25
GLENN HOSKINS has been a Director and the Company's Secretary since
December 9, 1996. During the last five years Mr. Hoskins has been a lawyer in
private practice in Lexington, Kentucky and a Director and Secretary of
Lexington Building & Supply Co., Inc., positions he has held since 1978. He also
holds directorships in several other privately held companies located in
Kentucky. Mr. Hoskins has a B.S. degree from Vanderbilt University and a J.D.
degree from the University of Kentucky College of Law.
RELATIONSHIPS
None of the aforementioned directors and officers are related by blood,
however, Martha Lane Collins is the mother-in-law of R. Dudley Webb.
EMPLOYMENT CONTRACT
The Company has entered into an employment agreement with its President and
Chief Executive Officer, James L. Frye. The agreement provides for a two year
term ending December 31, 1998 with an annual salary of $100,000, medical and
health insurance and fringe benefits consistent with his position. He will be
eligible to receive additional incentives through the Company's 1996 Long-Term
Incentive Plan. The agreement also provides that he will serve as a director of
the Company.
The Company, as of the date of the Offering, does not intend to enter into
any employment agreements with any of its other officers.
INDEMNIFICATION ARRANGEMENTS
The Company's Bylaws provide for the indemnification of, and the
advancement of expenses to, the directors and officers of the Company in
connection with proceedings and claims arising out of their status as such to
the fullest extent permitted by the laws of the State of Nevada. In addition,
the Bylaws contain certain provisions intended to facilitate receipt of such
benefits. The Company also intends to purchase customary directors' and
officers' liability insurance policies for its directors and officers, if such
insurance is available at a cost that the Board of Directors deems prudent.
EXECUTIVE COMPENSATION
The Company has had no significant or material operations since 1985 and
consequently since that time has not compensated any employees or officers.
Sonoma intends to initially compensate its President and Chief Executive
Officer, James L. Frye and Treasurer and Chief Financial Officer, Peter
Sackmann, at an annual salary of $100,000 and $50,000 respectively. No other
compensation has been decided upon for any of the Company's other executive
officers by the Company's Board of Directors although it is anticipated that
other executive salaries will be added should the Company be successful in its
expansion plans.
COMPENSATION OF DIRECTORS
Directors of the Company do not currently receive compensation for their
services as directors, although they are reimbursed for travel and lodging
expenses in connection with their attendance at board meetings. The Company
expects to pay an annual fee in the amount of $1,000 and meeting fees of $500
per meeting plus reasonable travel expenses, to its directors who are not
employees or affiliates of the Company.
EMPLOYEE BENEFIT PLANS
1996 LONG-TERM INCENTIVE PLAN
As a performance incentive and in order to encourage ownership of Common
Stock, the Company adopted its 1996 Long-Term Incentive Plan ("Plan") as of
December 9, 1996. An aggregate of 350,000 shares of Common Stock has been
authorized and reserved for issuance under the Plan pursuant to the exercise of
options or the grant of restricted stock awards. The Plan is intended to qualify
for favorable treatment under Section 16 of the Securities Exchange Act of 1934,
as amended ("Exchange Act"), pursuant to Rule 16b-3 promulgated thereunder
("Rule 16B-3").
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<PAGE> 26
The Plan provides for the grant of "incentive stock options," as defined in
Section 442 of the Internal Revenue Code of 1986, as amended ("Code"),
nonqualified stock options, restricted stock awards and stock appreciation
rights (collectively referred to as "Awards"). The Plan will be administered by
a committee of the Board of Directors ("Committee"), which committee will
consist of two or more directors who are deemed "disinterested" within the
meaning of Rule 16b-3. The Committee has, subject to the terms of the Plan, the
sole authority to grant Awards under the Plan, to construe and interpret the
Plan and to make all other determinations and take any and all actions necessary
or advisable or the administration of the Plan.
All of the Company's employees, independent directors and advisors are
eligible to receive Awards under the Plan, but only employees of the Company are
eligible to receive incentive stock options. Options will be exercisable during
the period specified in each option agreement and will generally be exercisable
in installments pursuant to a vesting schedule to be designated by the
Committee. Restricted stock awards will give the recipient the right to receive
a specified number of shares of Common Stock contingent upon remaining a Company
employee for a specified period, as determined by the Committee. Notwithstanding
the provisions of any option agreement or restricted stock agreement, options
will become immediately exercisable and all restrictions will immediately lapse
with respect to any award of restricted stock in the event of a change or
threatened change in control of the Company and in the event of certain mergers
and reorganizations of the Company. No option will remain exercisable later than
ten years after the date of grant. In addition, options may be subject to early
termination within a designated period following the optionee's cessation of
service with the Company.
The aggregate fair market value of Common Stock with respect to which
incentive stock options are exercisable for the first time by any individual
during any calendar year may not exceed $100,000. The exercise price for
incentive stock options granted under the Plan may be no less than the fair
market value of the Common Stock on the date of grant (or 110% in the case of
incentive stock options granted to employees owning more than 10% of the Common
Stock). The exercise price for nonqualified options granted under the Plan will
be in the discretion of the Committee.
The Plan provides for automatic grants of nonqualified options to purchase
1,000 shares of Common Stock to independent directors upon each such director's
initial election to the Board of Directors and nonqualified options to purchase
1,000 shares of Common Stock annually thereafter. Each such option (i) entitles
the director to purchase shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant, (ii) is
exercisable in three installments beginning on the first anniversary from the
date of grant and (iii) terminates on the tenth anniversary of the date of
grant.
CERTAIN TRANSACTIONS
PRE-ACQUISITION STOCKHOLDERS
Affiliates of Mr. Gary V. Sutley, the Company's sole director prior to May
1995, were issued an aggregate of 91,937 shares of Common Stock, and Mr. Sutley
directed the issuance of an additional 75,000 shares of Common Stock to
unaffiliated individuals or entities, in connection with approximately $310,000
in consulting services rendered to the Company. These shares were included in
the 1 for 200 reverse split and thus are a part of the 300,000 shares of Common
Stock being retained by the pre-acquisition Sonoma stockholders.
POST-ACQUISITION STOCKHOLDERS
As a result of the acquisition of Jamestown and Key West, the Company
issued i) a total of 1,700,000 post split common shares to the holders of all
the limited partnership interests of Jamestown Resort & Marina, Ltd., the
members of Clear Creek Investments LLC and certain creditors of Jamestown in
return for those interests and ii) 300,000 post split common shares to the
stockholders of Key West Conch Harbor, Inc. for all the outstanding and issued
common shares of that corporation.
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<PAGE> 27
CONFLICTS OF INTEREST
R. Dudley Webb, Chairman of the Board, is the principal shareholder,
Chairman and Chief Executive Officer of The Webb Companies, a real estate
concern located in Lexington, Kentucky which develops, manages and owns portions
of a number of commercial real estate projects. Although the Company and The
Webb Companies have separate real estate investment objectives with the
Company's objective being leisure oriented properties and The Webb Companies'
primarily being office buildings, there can be no assurance that there may be a
property or investment opportunity in which both companies may be interested.
Consequently, should that event occur, Mr. Webb has agreed that The Webb
Companies will not pursue any conflicting property or opportunity and that he
will abstain from any voting by the Board of Directors concerning such
opportunities or properties.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
The Company does not currently engage in any transactions affiliated with
any of the directors or officers of the Company except the loans described below
and the Company's lease of space in an office building in which R. Dudley Webb,
the Company's Chairman of the Board, has an investment interest and which is
managed by the Webb Companies (a company owned by R. Dudley Webb). The Company
believes that all transactions involving The Webb Companies or their affiliates
are on terms substantially equivalent to those that could be obtained from
unaffiliated third parties.
The Company is obligated to repay indebtedness to the Webb Family Trust in
the approximate amount of $1,850,000 and to Mr. A. Frederick Skomp in the
approximate amount of $100,000. Both obligations are to be repaid with proceeds
of the Offering. See "Use of Proceeds."
FUTURE TRANSACTIONS
All future transactions and loans between the Company and officers,
directors or 5% or more stockholders will be on terms no less favorable than
could be obtained from independent third paries and will be approved by a
majority of the independent, disinterested directors of the Company.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, and
after giving effect to the Offering, certain information regarding the
beneficial ownership of the Common Stock by (i) each person who is known to the
Company to beneficially own more than 5% of the Common Stock, (ii) each of the
directors and executive officers of the Company individually and (iii) by the
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES BENEFICIALLY
OFFERING OWNED AFTER THE OFFERING
NAME OF BENEFICIAL ------------------------- -------------------------
OWNER OR GROUP(1) NUMBER PERCENTAGE NUMBER PERCENTAGE
- --------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
The Webb Family Trust(2)..................... 915,197 39.8% 915,197
Dawn Irrevocable Trust....................... 200,000 8.7% 200,000
Frederick Skomp.............................. 117,300 5.1% 117,300
L. Barrett Bernard........................... 91,081 4.0% 91,081
Edwin Nighbert............................... 20,679 0.1% 20,679
Irvin Stumler................................ 10,339 0.05% 10,339
Glenn Hoskins................................ 8,977 0.04% 8,977
Marla Collins Webb(2)........................ 182,700 7.9% 182,700
Directors/Executive Officers as a Group (11
persons)................................... 1,546,273 67.2% 1,546,273
</TABLE>
- ---------------
(1) The address for all the persons or entities named above is 3000 Lexington
Financial Center, Lexington, Kentucky 40507.
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<PAGE> 28
(2) Dawn Irrevocable Trust is a Cook Island Trust for which Marla Collins Webb,
spouse of R. Dudley Webb, Chairman of the Board, is the trustee and is
likely to vote its shares in a beneficial manner to R. Dudley Webb. The Webb
Family Trust, even though it is administered by an independent trustee, is
likely to vote its shares in a manner beneficial to R. Dudley Webb. Marla
Collins Webb is the spouse of R. Dudley Webb.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $0.001 per share. Upon completion of the Offering
shares of common stock (without giving effect to the Over-Allotment
Option or exercise of the Representative's Warrants) will be outstanding.
COMMON STOCK
The holders of Common Stock of the Company are entitled to one vote per
share on all matters submitted to a vote of the stockholders. Cumulative voting
of shares of Common Stock is prohibited. The holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefore.
Subject to the prior rights of creditors, all shares of Common Stock are
entitled in the event of liquidation to participate ratably in the distribution
of all remaining assets of the company.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
The Company's Articles of Incorporation and Bylaws provide that the Company
will indemnify its directors and officers to the fullest extent provided by
Nevada law. In addition, the Articles of Incorporation contain a provision
limiting a director's and officer's liability for monetary damages to the
fullest extent permitted by Nevada law.
Furthermore, Section 78.751 of the Nevada General Corporation Law (the
"NGCL") contains provisions relating to indemnification of officers and
directors. Section 78.751(1) provides that a corporation may indemnify any
person who was or is a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except for an action by or in right of the corporation by reason of the fact
that he was a director, officer, employee or agent of the corporation. In order
to indemnify, it must be shown that he acted in good faith and in a manner he
reasonably believed to be in the best interest of the corporation. Generally, no
indemnification may be made where the person has been determined to be negligent
or guilty of misconduct in the performance of his duty to the corporation.
Section 78.751(2) of the NGCL further allows the corporation to indemnify
any person who was or is a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee, or agent
of the corporation, including amounts paid in settlement and attorneys' fees if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. Indemnification may not be
made for any claim, issue or matter to which a court of competent jurisdiction
has adjudged an officer or director liable to the corporation, unless and only
to the extent that a court of competent jurisdiction determines that in view of
the circumstances of the case, the person is fairly and reasonably entitled to
indemnify for such expenses.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding discussed in the preceding paragraphs, Section 78.751(3) of the NGCL
provides that he must be indemnified by the corporation against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the defense.
Except when indemnification is required by a court of competent
jurisdiction, Section 78.751(4) of the NGCL states that the corporation shall
only indemnify upon a determination of (i) the shareholders; (ii) majority vote
of the board that were not parties to the action; (iii) if ordered by a majority
vote of a quorum of directors who were not parties to the action, suit or
proceeding, by independent legal counsel in a
25
<PAGE> 29
written opinion; or (iv) by independent legal counsel in a written opinion if no
quorum of directors who were not parties to the action may be obtained.
Unless ordered by a court of competent jurisdiction, indemnification may
not be made to or on behalf of any officer or director if a final adjudication
establishes that his acts or omissions involved intentional misconduct, fraud or
a knowing violation of the law and were material to the cause of action.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of
Common Stock outstanding. Of these shares, the shares sold in the
Offering and a small number, approximately 92,207 from the Company's original
public offering will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased at any
time by an "affiliate" of the Company (as that term is defined in the rules and
regulations under the Securities Act). All of the remaining shares of Common
Stock outstanding (2,207,893) are held by existing stockholders and were sold
without registration under the Securities Act in reliance upon an exemption from
registration and will be "restricted" securities within the meaning of Rule 144,
2,000,000 of which will be eligible for sale in December of 1998, and the
remainder are currently eligible for sale. The Directors and Officers of the
Company, and certain other stockholders who in the aggregate own 2,000,000
shares of restricted Common Stock, have agreed with the Underwriters not to
offer, sell or otherwise dispose of any shares of Common Stock beneficially
owned or controlled by them (including subsequently acquired shares) for a
period of one year from the date of this Prospectus without the prior written
consent of the Representative.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted" shares for
at least two years is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Common Stock ( shares immediately after the Offering) or the
average weekly trading volume in the Common Stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain manner of sale provision, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to be an "affiliate" of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned "restricted" shares for at least three years, would be
entitled to sell such shares under Rule 144 without regard to the volume or
manner of sale limitations referred to above.
The Company can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price for
the Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices.
The Company has not yet issued options to purchase shares of Common Stock
under its 1996 Long-Term Incentive Plan. However, 350,000 shares of Common Stock
are reserved by the Company for issuance under the Plan. See
"Management -- Employee Benefit Plans." The Company intends to file a
registration statement on Form S-8 covering sales of shares issued upon any
securities issued under the Plan.
The Company, as of the date of this Prospectus, has approximately
stockholders of record.
Although the Company is a reporting company pursuant the Securities Act,
its Common Stock is not actively traded and there does not currently exist any
market makers for the Common Stock of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, New York, New York.
26
<PAGE> 30
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective September 12, 1996, the Company, by act of its board of
directors, engaged King Burns & Co. P.C. as its principal accountant to audit
the Company's financial statements, replacing Skeehan & Company in that
capacity. This decision was made in conjunction with the execution of an
agreement to transfer assets into the Company such that the Company could
thereby have operating assets.
Skeehan & Company audited the Company's financial statements for the years
ended June 30, 1994 and 1995. The opinions rendered by Skeehan & Company in
connection with those audits was qualified because there was "substantial doubt
about the Company's ability to continue as a going concern." During the
registrant's two most recent fiscal years and any subsequent interim period,
there have not been any disagreements with the former accountant on any matter
of accounting principals or practices, financial statement disclosures, or
auditing scope or procedures, and there have been no "reportable events" as
defined in Item 304(a)(1)(v) of Regulation S-K. The Company had not consulted
with the newly engaged independent accountant on accounting matters prior to its
engagement.
UNDERWRITING
The underwriters named below, (the "Underwriters") for whom National
Securities Corporation is acting as representative (in such capacity the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement, to purchase from the Company and the Company has
agreed to sell to the Underwriters on a firm commitment basis the respective
number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
National Securities Corporation..............................................
</TABLE>
The Underwriters are committed to purchase all the shares of Common Stock
offered hereby, if any such securities are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Common Stock to the public at the initial
offering price set forth on the cover page of this Prospectus and to certain
dealers at such prices less a concession of not in excess of $ per
share of Common Stock. Such dealers may re-allow a concession not in excess of
$ per share of Common Stock to certain other dealers. After the
commencement of the Offering, the public offering prices, concession and
reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriter nay be required to make. The Company has also
agreed to pay the Representative an expense allowance on a nonaccountable basis
equal to 3.0% of the gross proceeds derived from the sale of the Common Stock
underwritten, of which $ has been paid to date.
The Company has granted the Underwriters an Over-Allotment Option,
exercisable within 45 days of the date of this Prospectus to purchase up to an
additional shares of Common Stock at the public offering price per
share of Common Stock, offered hereby, less underwriting discounts and the non-
accountable expense allowance. Such option may be exercised only for the purpose
of covering overallotments, if any, incurred in the sale of the Common Stock
offered hereby. To the extent such option is exercised, in whole or in part,
each Underwriter will have a firm commitment, subject to certain conditions, to
purchase the number of the additional shares of Common Stock proportionate to
its initial commitment.
27
<PAGE> 31
In connection with the Offering the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
up to shares of Common Stock (the "Representatives Warrants"). The
Representative's Warrants are initially exercisable at a price of $ per
share [120% of the initial offering price per share of Common Stock] for a
four-year period commencing on the first anniversary of the issuance of such
warrants. The Representative's Warrants may not be sold, transferred, assigned
or hypothecated for a period of one year following the date of this Prospectus,
except to officers of the Representative, Underwriters or members of the selling
group. The Representative's Warrants provide for adjustments in the number of
shares of Common Stock issuable upon the exercise thereof and in the exercise
price of the Representative's Warrants as a result of certain events, including
subdivisions and combinations of the Common Stock. The Representative's Warrants
grant to the holders thereof certain rights of registration for the Common Stock
issuable upon exercise of the Representative's Warrants.
The Company and certain holders of its Common Stock have entered into
lock-up agreements with the Underwriters, including the Representative. See
"Shares Eligible for Future Sale."
Prior to the Offering, there has been no active public market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiation between the Company and the
Representative and does not necessarily bear any relationship to the Company's
asset value, net worth, and other established criteria of value. The factors
considered in such negotiations, in addition to prevailing market conditions,
include the history of and the prospects for the industry in which the Company
competes, an assessment of the Company's management and the prospects of the
Company, the Company's capital structure and certain other factors as were
deemed relevant.
The foregoing is a summary of the agreement described above and does not
purport to be complete. Reference is made to a copy of each such agreement which
are filed as exhibits to the Registration Statement of which this Prospectus is
a part. See "Additional Information."
LEGAL MATTERS
The validity of the issuance of certain of the shares of Common Stock
offered hereby and certain other legal matters will be passed upon for the
Company by Jackson Walker, L.L.P., Dallas, Texas. Certain legal matters in
connection with the Offering with respect to Nevada law will be passed upon for
the Company by . Certain legal matters in connection with
the Offering hereby will be passed upon for the Underwriters by Camhy Karlinsky
& Stein LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 30,
1994 and 1995 and for each of the years in the two-year period ended December
30, 1995, have been included herein and in the registration statement in
reliance upon the reports, included herein, of King, Burns & Company, PC,
independent public accountants, and upon the authority of said firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York
10048. Copies of these materials can also be obtained from the Commission at
prescribed rates by writing to the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement may
also be accessed on the World Wide Web through the Commission's Internet address
at "http://www.sec.gov".
28
<PAGE> 32
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission by the
Company, are incorporated herein by reference and made a part hereof: (i) Annual
Report on Form 10-KSB for the year ended June 30, 1996, and (ii) Information
Statement in compliance with Section 14C of the Securities Exchange Act of 1934
(the "Exchange Act"), dated November 8, 1996, relating to the Company's
acquisition of Jamestown and Key West, Amendment to its Articles of
Incorporation and approval of the 1996 Long-Term Incentive Plan.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of Common Stock to be made hereunder
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of filing thereof. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for all purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated herein or in the Registration
Statement by reference (other than exhibits and schedules thereto, unless such
exhibits or schedules are specifically incorporated by reference into the
information that this Prospectus incorporates). Written or telephonic requests
for copies should be directed to the Company's principal office: 3000 Lexington
Financial Center Lexington, Kentucky 40507 (606) 281-0000.
29
<PAGE> 33
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Combined Financial Statements
Report of Independent Certified Public Accountants.................................. F-2
Combined Balance Sheets............................................................. F-3
Combined Statements of Operations................................................... F-4
Combined Statements of Changes in Stockholders' Deficit............................. F-5
Combined Statements of Cash Flows................................................... F-6
Notes to the Combined Financial Statements.......................................... F-7
Sonoma International
Report of Independent Certified Public Accountants.................................. F-20
Balance Sheet....................................................................... F-21
Statements of Operations............................................................ F-22
Statements of Changes in Stockholders' Deficit...................................... F-23
Statements of Cash Flows............................................................ F-24
Notes to Financial Statements....................................................... F-25
Jamestown Resort & Marina, Ltd.
Report of Independent Certified Public Accountants.................................. F-29
Balance Sheets...................................................................... F-30
Statements of Operations............................................................ F-31
Statements of Changes in Partners' Deficit.......................................... F-32
Statements of Cash Flows............................................................ F-33
Notes to Financial Statements....................................................... F-34
Key West Conch Harbor, Inc.
Report of Independent Certified Public Accountants.................................. F-41
Balance Sheets...................................................................... F-42
Statements of Operations............................................................ F-43
Statements of Changes in Stockholders' Deficit...................................... F-44
Statements of Cash Flows............................................................ F-45
Notes to Financial Statements....................................................... F-46
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders
Sonoma International, Jamestown Resort & Marina, Ltd. and Key West Conch Harbor,
Inc.
We have audited the accompanying combined balance sheets of Sonoma
International and affiliates (Jamestown Resort & Marina, Ltd. and Key West Conch
Harbor, Inc.) as of December 31, 1995 and 1994, and the related combined
statements of operations, stockholders' deficit, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Sonoma
International and affiliates as of December 31, 1995 and 1994, and the combined
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The combined financial statements have been prepared assuming that Sonoma
International and affiliates will continue as a going concern. As discussed in
Note C to the financial statements, Sonoma International and affiliates have
incurred losses and at December 31, 1995, their combined current liabilities
exceeded their current assets by approximately $9,361,000. These factors raise
substantial doubt as to Sonoma International and Affiliates' ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note C. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KING, BURNS & COMPANY, P.C.
Dallas, Texas
October 18, 1996, except as to
Note N, which is as of December 9, 1996
F-2
<PAGE> 35
SONOMA INTERNATIONAL AND AFFILIATES
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash............................................................................ $ 453,896 $ 30,527 $ 7,241
Escrow funds.................................................................... 46,897 26,673 43,262
Receivables:
Trade (net of allowance for doubtful accounts of $3,876 for each year)........ 120,398 54,105 55,658
Other......................................................................... 151,906 34,199 23,111
Notes receivable................................................................ 500,000 -- --
Inventory....................................................................... 102,535 84,116 82,311
Prepaid expenses................................................................ 69,242 60,315 72,419
----------- ----------- -----------
Total current assets...................................................... 1,444,874 289,935 284,002
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Buildings and improvements...................................................... 2,197,989 2,352,561 2,249,862
Land............................................................................ 1,816,298 1,810,818 1,786,640
Land improvements............................................................... 267,702 201,542 174,888
Docks and floating buildings.................................................... 8,305,910 7,968,744 7,400,724
Boats and improvements.......................................................... 2,177,004 782,105 717,688
Furnishings, fixtures and equipment............................................. 1,813,262 1,660,900 1,522,130
Houseboats and pontoons under capital lease..................................... -- 1,373,649 1,373,649
Computers under capital lease................................................... 161,734 161,734 161,734
Fuel tanks and containment buildings............................................ 155,994 72,609 --
Vehicles........................................................................ 22,482 22,482 20,642
Construction in progress........................................................ 378,173 412,164 148,931
----------- ----------- -----------
17,296,548 16,819,308 15,556,888
Less accumulated depreciation and amortization.................................... 4,519,514 4,058,462 3,432,755
----------- ----------- -----------
Net property and equipment........................................................ 12,777,034 12,760,846 12,124,133
----------- ----------- -----------
OTHER ASSETS
Deferred loan fees, net of accumulated amortization of $64,455, $17,588 and
$1,002........................................................................ 438,768 123,150 13,545
Goodwill, net of accumulated amortization of $179,643, $165,825 and $147,400.... 557,357 571,175 589,600
----------- ----------- -----------
Total other assets........................................................ 996,125 694,325 603,145
----------- ----------- -----------
TOTAL ASSETS.............................................................. $15,218,033 $13,745,106 $13,011,280
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt (including $3,116,318, $3,788,861 and
$2,354,939 to related parties)................................................ $ 4,019,352 $ 6,010,042 $12,545,774
Current portion of obligations under capital leases............................. -- 198,391 203,793
Accounts payable................................................................ 346,517 212,452 346,582
Accrued interest (including $538,627, $382,677 and $125,460 to related
parties)...................................................................... 948,917 1,636,241 1,091,775
Accrued liabilities............................................................. 273,528 195,653 350,001
Security deposits............................................................... 55,060 29,074 44,458
Deferred revenue................................................................ 324,047 652,450 531,411
Accrued management fees -- related party........................................ 759,356 581,301 458,006
Accrued guarantee fees -- related party......................................... 75,000 60,000 40,000
Deferred gain on sale leaseback................................................. -- 75,800 81,905
----------- ----------- -----------
Total current liabilities................................................. 6,801,777 9,651,404 15,693,705
----------- ----------- -----------
LONG-TERM LIABILITIES
Long-term debt.................................................................. 10,745,576 8,529,945 1,202,377
Long-term portion of obligations under capital leases........................... -- 417,638 614,838
----------- ----------- -----------
Total long-term liabilities............................................... 10,745,576 8,947,583 1,817,215
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes C, D, E, F, G, H, M and N)
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value, authorized, 20,000,000, issued and outstanding
shares, 1,707,100, 1,707,100 and 1,535,000.................................... 1,707 1,707 1,535
Additional paid-in capital...................................................... 265,971 56,748 --
Accumulated deficit............................................................. (2,596,998) (4,912,336) (4,501,175)
----------- ----------- -----------
Total stockholders' deficit............................................... (2,329,320) (4,853,881) (4,499,640)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT............................... $15,218,033 $13,745,106 $13,011,280
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 36
SONOMA INTERNATIONAL AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES
Slip fees............................................. $ 1,156,814 $1,311,483 $1,070,910
Boat rental........................................... 694,093 748,941 753,835
Lodge................................................. 619,728 683,251 677,905
Fuel.................................................. 1,422,880 1,039,034 488,485
Convenience store and merchandise..................... 342,757 381,123 340,724
Restaurant............................................ 341,547 372,473 349,001
Other................................................. 110,984 137,630 169,337
----------- ---------- ----------
Total revenues................................ 4,688,803 4,673,935 3,850,197
----------- ---------- ----------
COST OF REVENUES
Slip.................................................. 111,644 176,615 140,486
Boat rental........................................... 245,247 396,916 439,154
Lodge................................................. 191,867 235,082 209,793
Fuel.................................................. 1,101,121 723,689 310,084
Convenience store and merchandise..................... 267,691 288,498 269,061
Restaurant............................................ 267,162 329,982 276,638
Other................................................. 72,449 109,350 79,986
----------- ---------- ----------
Total cost of revenues........................ 2,257,181 2,260,132 1,725,202
----------- ---------- ----------
GROSS PROFIT............................................ 2,431,622 2,413,803 2,124,995
GAIN ON REDUCTION OF OBLIGATIONS........................ -- 28,363 --
SELLING, GENERAL AND ADMINISTRATIVE (including related
party amounts for management and guarantee fees of
$177,055, $220,540 and $205,229)...................... 1,147,425 1,482,672 1,227,059
AMORTIZATION OF OTHER ASSETS............................ 55,774 30,252 18,426
DEPRECIATION AND AMORTIZATION........................... 395,263 624,360 648,220
----------- ---------- ----------
INCOME FROM OPERATIONS.................................. 833,160 304,882 231,290
INTEREST EXPENSE (including interest to related parties
of $279,768, $355,066 and $306,524)................... 978,981 1,134,742 968,498
----------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEMS..................... (145,821) (829,860) (737,208)
EXTRAORDINARY ITEMS
Gain on extinguishment of debt........................ 2,461,159 418,699 --
----------- ---------- ----------
NET INCOME (LOSS)....................................... $ 2,315,338 $ (411,161) $ (737,208)
=========== ========== ==========
Net income (loss) per common share before extraordinary
items................................................. $ (0.09) $ (0.54) $ (0.48)
=========== ========== ==========
Net income (loss) per common share...................... $ 1.36 $ (0.27) $ (0.48)
=========== ========== ==========
Weighted average shares outstanding..................... 1,707,100 1,549,342 1,535,000
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 37
SONOMA INTERNATIONAL AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Deficit at January 1, 1994.......... 1,535,000 $1,535 $ -- $(3,763,967) $(3,762,432)
Net loss for the year ended December
31, 1994.......................... -- -- -- (737,208) (737,208)
--------- ------ --------- ----------- -----------
Deficit at December 31, 1994........ 1,535,000 1,535 -- (4,501,175) (4,499,640)
Stock issued for debt and other
obligations....................... 172,100 172 34,248 -- 34,420
Capital contributions resulting from
obligations being settled by
shareholders on behalf of the
Company........................... -- -- 22,500 -- 22,500
Net loss for the year ended December
31, 1995.......................... -- -- -- (411,161) (411,161)
--------- ------ --------- ----------- -----------
Deficit at December 31, 1995........ 1,707,100 1,707 56,748 (4,912,336) (4,853,881)
Contribution of capital
(unaudited)....................... -- -- 209,223 -- 209,223
Net income for the nine months ended
September 30, 1996 (unaudited).... -- -- -- 2,315,338 2,315,338
--------- ------ --------- ----------- -----------
Deficit at September 30, 1996
(unaudited)....................... 1,707,100 $1,707 $ 265,971 $(2,596,998) $(2,329,320)
========= ====== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 38
SONOMA INTERNATIONAL AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $ 2,315,338 $ (411,161) $ (737,208)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization of fixed assets.... 390,351 619,601 647,218
Amortization of other assets..................... 60,686 35,011 19,428
Amortization of deferred gain on sale
leaseback...................................... (75,800) (6,105) (6,105)
Gain on conversion of debt to equity............. -- (418,699) --
Gain on debt extinguishment and related accrued
interest....................................... (2,461,159) -- --
Gain on reduction of obligations................. -- (28,363) --
Changes in assets and liabilities:
Decrease (increase) in escrow funds............ (20,224) 16,589 41,409
Decrease (increase) in trade receivables....... (66,293) 1,553 (3,478)
Decrease (increase) in other receivables....... (117,707) (11,088) 48,761
Decrease (increase) in notes receivable........ (500,000) -- --
Decrease (increase) in inventory............... (18,419) (1,805) (7,279)
Decrease (increase) in prepaid expenses........ (8,927) 12,104 6,450
Increase (decrease) in accounts payable........ 134,065 (134,130) 225,795
Increase (decrease) in accrued interest........ 267,201 544,466 429,034
Increase (decrease) in accrued liabilities..... 77,875 (99,812) 184,300
Increase (decrease) in security deposits....... 25,986 (15,384) 1,553
Increase (decrease) in stockholder advance for
services.................................... -- 37,500 75,000
Increase (decrease) in deferred revenue........ (328,403) 121,039 46,890
Increase (decrease) in accrued guarantee
fees........................................ 15,000 20,000 20,000
Increase (decrease) in accrued management
fees........................................ 178,055 123,295 84,943
------------ ----------- -----------
Net cash provided (used) by operating
activities................................ (132,375) 404,611 1,076,711
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................. (477,240) (1,256,313) (3,043,968)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank and related party loans.......... 9,563,658 2,048,495 2,239,500
Repayments of borrowings......................... (7,749,556) (844,715) (152,884)
Repayments of obligation under capital lease..... (616,029) (202,601) (189,195)
Proceed from capital contributions............... 209,223 -- --
Proceed from the issuance of common stock........ -- -- 1,000
Organization and loan costs...................... (374,312) (126,191) (14,547)
------------ ----------- -----------
Net cash provided by financing activities............. 1,032,984 874,988 1,883,874
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH....................... 423,369 23,286 (83,383)
Cash at beginning of the period..................... 30,527 7,241 90,624
------------ ----------- -----------
Cash at end of the period........................... $ 453,896 $ 30,527 $ 7,241
============ =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest............ $ 671,845 $ 679,049 $ 524,266
============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Assumption of debt in connection with the purchase
of property and equipment........................ $ 332,977 $ 652,493 $ 2,852,185
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 39
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
NOTE A -- ORGANIZATION
Sonoma Quicksilver Mines, Inc. was incorporated under the laws of the State
of Nevada on June 10, 1940. The name was subsequently changed to Sonoma
International ("Sonoma"). The Company had several failed business operations and
from 1988 through the date of this report its only activity was the search for a
company or assets to acquire.
Jamestown Resort & Marina, Ltd. (the "Partnership" or "Jamestown") is a
limited partnership organized under the laws of the State of Kentucky by
Jamestown Resort & Marina, Inc. ("JRMI"), the general partner, on November 1,
1987. The Partnership owns a resort and marina facility near Jamestown, Kentucky
on Lake Cumberland.
Key West Conch Harbor, Inc. ("Key West") a subchapter S corporation for
Federal income tax purposes, was incorporated in the State of Florida on
December 23, 1993 for the purposes of acquiring, developing, and operating a
marina facility in Key West, Florida.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Combination
These combined financial statements include Sonoma, Jamestown, and Key
West. Jamestown and Key West will become wholly-owned subsidiaries of Sonoma
upon completion of a reverse merger transaction and are collectively referred to
as Company (see Note N). Any intercompany transactions and balances have been
eliminated.
Statement of Cash Flows
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of three months or less when purchased.
Inventory
Inventory is stated at the lower of cost or market and consists of food,
beverages, clothing, fuel and boat parts. Cost is determined on the first-in,
first-out ("FIFO") method of accounting.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation on the straight-line method over the estimated useful lives of the
related assets. Assets held under capital leases are amortized using the
straight-line method over the estimated useful lives of the related assets.
Major classes of property and equipment and their related lives are as follows:
<TABLE>
<CAPTION>
LIFE IN
MAJOR CLASS YEARS
-------------------------------------------------------------------------- ---------
<S> <C>
Docks, floating buildings and buildings on land........................... 20 - 31.5
Houseboats and pontoons................................................... 20
Land improvements......................................................... 15 - 20
Signage................................................................... 10
Furniture, fixtures and equipment......................................... 7
Computers................................................................. 5
</TABLE>
Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized.
F-7
<PAGE> 40
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
Goodwill
Goodwill relates to the original purchase of the Jamestown marina and the
U.S. Army Corps of Engineers lease and represents the excess of cost over fair
value of net assets acquired which is being amortized using the straight-line
method over 40 years. On an on-going basis, management reviews recoverability,
the valuation and amortization of goodwill. As part of this review, management
considers the undiscounted value of the projected future net earnings in
evaluating the value of goodwill. If the undiscounted value of the projected
future net earnings is less than the stated value, the goodwill would be written
down to its fair value. Management also considers the appraised value of the
marina facility in evaluating goodwill.
Deferred Loan Fees
Loan fees are capitalized and amortized over the life of the loan using the
straight-line method.
Revenue Recognition
Annual or seasonal slip rentals received are recognized as deferred revenue
and amortized into income over the life of the rental contract using the
straight-line method. All other revenues are recognized at the time the rental
occurs or the delivery of the product or service takes place.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Income Taxes
Sonoma accounts for income taxes in accordance with the asset and liability
approach. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Taxable income or loss of Jamestown is allocated to the partners in
accordance with the provisions of the Partnership agreement. The Partnership
qualifies as a limited partnership and as such, Federal income taxes accrue to
the partners rather than to the Partnership. Accordingly, the statements of
operations of the Partnership include no provision for income taxes.
Taxable income or loss of Key West is allocated to the shareholders in
accordance with the provisions of the Stockholders agreement. Prior to its
acquisition by Sonoma, Key West qualified as a subchapter S corporation for
Federal income tax purposes and as such, Federal income taxes accrued to the
shareholders rather than to Key West. Accordingly, the statements of operations
of Key West include no provision for Federal income taxes.
F-8
<PAGE> 41
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
Income (loss) per share
(Income) loss per share of common stock is based upon the weighted average
number of outstanding common shares of Sonoma for all periods presented after
giving retroactive effect to a one for two hundred reverse split of Sonoma's
common stock. (See Note N).
Lease income
During 1994 all fuel operations of Key West were leased to a related party
who made lease payments of all interest on the first mortgage. Income recorded
in 1994 from these payments was $92,675.
Accounting Standards Not Yet Adopted
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation expense
in the income statement, or the pro forma effect on net income and earnings per
share of such compensation expense to be disclosed in the footnotes to the
Company's financial statements commencing with the Company's 1996 fiscal year.
The Company expects to adopt SFAS 123 on a disclosure basis only. As such,
implementation of SFAS 123 is not expected to impact the Company's balance sheet
or statement of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Unaudited Period
The financial information as of September 30, 1996 and for the nine months
ended September 30, 1996 is unaudited. In the opinion of management, such
information contains all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for such period.
The results of operations for the interim period is not necessarily indicative
of the results of operations for the full fiscal year.
NOTE C -- GOING CONCERN UNCERTAINTY
As reflected in the combined statements of operations, the Company incurred
net losses of approximately $411,000 and $737,000 in 1995 and 1994,
respectively. At December 31, 1995 current liabilities exceed current assets by
approximately $9,361,000. These factors, among others, raise substantial doubt
as to the Company's ability to continue as a going concern.
The Company is in the process of completing a public offering, a portion of
the proceeds of which will be used to pay down debt and provide additional
liquidity to fund operations and growth.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classification of liabilities which may result from the possible
inability of the Company to continue as a going concern.
NOTE D -- DEVELOPMENT AGREEMENT WITH THE TRANSPORTATION CABINET OF THE
COMMONWEALTH OF KENTUCKY
Jamestown and the Transportation Cabinet of the Commonwealth of Kentucky
("Transportation Cabinet") are parties to an agreement for development of the
marina facilities. The Partnership agreed to construct a new resort and marina
and the Transportation Cabinet agreed to construct an extension of Kentucky
Highway 92 to the island upon which the Partnership constructed its lodge.
F-9
<PAGE> 42
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
The Partnership agreed to pay the Transportation Cabinet one percent of the
gross revenues received by the Partnership from the resort and marina facilities
in perpetuity. The fees under the agreement totaled $40,000 in 1995 and $37,000
in 1994.
NOTE E -- LEASE RIGHTS
The Partnership leases approximately 290 acres of land and water from the
U.S. Army Corps of Engineers. The lease has a 25-year term beginning January 1,
1988 with an option for a 25-year extension which has been exercised. Rental
amounts due under the lease are contingent upon a variety of factors, primarily
gross revenues. Rent expense was $70,000 in 1995 and $64,000 in 1994.
NOTE F -- NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Sonoma:
Note payable 1.................................................. $ 60,974 $ 60,974
Note payable 2.................................................. 45,861 45,861
Note payable 3.................................................. -- 5,000
Sunwest Bank.................................................... 43,556 43,556
Stockholders loans.............................................. -- 406,945
Garfield Bank................................................... 112,000 112,000
----------- -----------
Total notes payable..................................... 262,391 674,336
----------- -----------
Jamestown:
Mortgage........................................................ 7,194,005 7,944,005
Demand Note (related party)..................................... 1,852,777 1,846,239
General Partner note............................................ 1,197,500 --
Limited Partner notes........................................... 360,000 360,000
Paddleboat notes................................................ 209,736 270,066
Yacht Club note................................................. 223,624 227,041
Executive Boats note............................................ 159,671 186,964
Generators note................................................. 42,988 --
----------- -----------
11,240,301 10,834,315
----------- -----------
Key West:
First mortgage.................................................. 1,550,000 1,100,000
Second mortgage -- stockholder.................................. 500,000 500,000
Third mortgage -- related party................................. 200,000 200,000
First note -- stockholder....................................... 245,000 245,000
Second note -- stockholder...................................... 125,000 125,000
Working capital note -- stockholder............................. 57,295 69,500
First note payable.............................................. 200,000 --
Second note payable -- stockholders............................. 160,000 --
----------- -----------
3,037,295 2,239,500
----------- -----------
Total................................................... 14,539,987 13,748,151
Less current maturities........................................... 6,010,042 12,545,774
----------- -----------
Long-term portion................................................. $ 8,529,945 $ 1,202,377
=========== ===========
</TABLE>
F-10
<PAGE> 43
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
SONOMA:
Note payable 1. Note payable 1 is dated June 12, 1991, due on demand to an
individual bearing interest at 15% per annum; unsecured. Interest of $44,316 has
been accrued through September 27, 1995. On September 27, 1995 a conditional
settlement agreement was reached relieving Sonoma of the principal and accrued
interest in exchange for 800,000 common shares of Sonoma. This settlement
agreement is contingent upon Sonoma stock obtaining a market value and that the
stock can be liquidated.
Note payable 2. Note payable 2 to two individuals, is due on demand and
unsecured. Interest of $15,861 has been accrued through the settlement date. On
July 25, 1995, a conditional settlement agreement was reached releasing Sonoma
of principal and accrued interest in exchange for 200,000 shares of the Company.
This settlement agreement is contingent upon Sonoma stock obtaining a market
value and that the stock can be liquidated.
Note payable 3. On August 25, 1986 the Sonoma entered into a 6% note
agreement for $5,000 with a former officer. The note and related accrued
interest of $2,700 was paid off in September 1995 with 50,000 shares of Sonoma's
common stock.
Sunwest Bank. Note payable to Sunwest Bank, due on demand with interest
accruing at 10.5%; unsecured. Interest of $42,557 has been accrued through the
settlement date. On September 7, 1995, a conditional settlement agreement was
reached relieving Sonoma of the outstanding principal and accrued interest in
exchange for a nominal cash amount and the issuance of 200,000 shares of Sonoma
common stock. This settlement is conditioned upon Sonoma common stock being
listed on the National Bulletin Board and having a market value and that the
stock can be liquidated.
Garfield Bank. Note payable to Garfield Bank, due on demand with interest
accruing at 16%; unsecured. Interest of $164,997 has been accrued through the
settlement date. On September 8, 1995, a conditional settlement agreement had
been reached relieving Sonoma of the principal amount owed and all accrued
interest thereon conditioned on 850,000 shares of Sonoma common stock being
transferred into the name of Garfield Bank (from other shareholders) and Sonoma
common stock having a market value that can be liquidated.
Stockholders loans. Sonoma entered into two notes payable to stockholders
in consideration for time, services, and personal expenditures. The note
balances total $406,946 at December 31, 1994 and $444,445 at June 30, 1995. The
notes were settled in 1995 for $444,445 through the issuance of common stock.
Also see Note H.
JAMESTOWN:
Mortgage. On December 31, 1988 the Partnership entered into two notes with
banks to finance the resort and marina project. The first note was for
$5,625,000 maturing on January 1, 1995. The note required monthly payments of
principal in the amount of $53,568 and interest at a rate of 11%, adjusted to 3%
above the weekly auction average rate of T-Securities, with a 3 year maturity on
November 1. The second note was for $2,375,000 maturing on January 1, 1995. The
note required monthly payments of principal in the amount of $6,000 and interest
at a rate of 1% over the Base Lending rate as defined. Both notes were secured
by Partnership property. Thereafter, the Partnership defaulted on the notes, and
the bank became insolvent. The loan was subsequently assumed by the Resolution
Trust Corporation ("RTC"). The note was consolidated with several other notes
and sold to a second bank in March, 1993.
Accrued interest was $748,240 and $708,240 at December 31, 1995 and 1994,
respectfully.
On August 11, 1995, The Partnership entered into a written agreement with
the second bank whereby the notes held could be paid off by the Partnership for
$6,100,000, plus accrued interest of $240,000. The amount
F-11
<PAGE> 44
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
was refinanced on January 29, 1996 (Note N). The classification of the note
payable (long-term and short-term portions) is based on the refinanced terms.
This agreement was conditional on the ability of the Partnership to make an
initial payment of $1,000,000 at the closing of the loan modification and being
able to repay the remaining $5,100,000 by May 1, 1996. The Partnership made a
payment of $750,000 on September 1995. These funds were obtained from related
parties and bear interest at 10%. The remaining $250,000 was rolled over into
the final settlement. See Note L.
Demand Note. The Partnership originally entered into a note agreement with
a bank for $2,000,000 on November 16, 1989, at 1 1/2% over the prime lending
rate which was collateralized by a second mortgage on the assets of the
Partnership and by certain items of the Webb Family Trust, an entity related to
the general partner. A 1% guarantee amount based on the outstanding balance is
payable to the Webb Family Trust as compensation for pledging its collateral
(See Note H). The Partnership defaulted on the note several times and on January
15, 1993 the note was converted to a demand note. In March 1994, the Partnership
again defaulted under the terms of the note and the Webb Family Trust collateral
was liquidated by the bank to satisfy the note. The Partnership subsequently
became obligated to the Webb Family Trust under the same terms as the demand
note.
General Partner Loans. The Webb Family Trust loaned the Partnership
$477,500 at various dates in 1995 and $750,000 in September 1995 at 10% under a
promissory note entered into on August 10, 1995. The note matured on May 1, 1996
and is due on demand.
Limited Partner Loans. On March 6, 1992, loans totaling $360,000 were made
by limited partners at 1% plus prime for operating shortfalls and capital
improvements. The notes are payable on demand. The notes may be extended each
year for a fee of 1% of the note balance.
Paddleboat. Webb Cruise Lines, Inc. (WCL) an entity controlled by the
general partner originally purchased the Jamestown Queen, a paddleboat, by
obtaining financing from two banks. On April 21, 1989 WCL entered into the first
note with a bank for $325,000. On October 30, 1994 the note was renewed for
$251,303 at 2% plus prime maturing on April 30, 2000. The note requires monthly
payments of $5,309 of principal and interest. The loan is collateralized by five
shares (5.6%) of the limited Partnership units, the Paddleboat and guaranteed by
the Webb Family Trust. On May 8, 1989, WCL entered into a 13.5% variable note
with a second bank amounting to $75,000 with interest and principal due on June
22, 1995. The Partnership paid a monthly rent of $7,260 to WCL for the use of
the boat. The Partnership assumed both notes and title of the boat from WCL in
May 1994 for the balance of both notes of $282,346 which approximated the fair
value of the Paddleboat.
Yacht Club. Webb Lexington Ventures, Inc., an entity controlled by the
general partner, entered into a 11% mortgage note with a bank for $278,000 to
purchase the Yacht Club. The note matures on July 1, 1996 and interest is
payable quarterly in October, January, April and July. Principal payments
consist of two installments, $23,757 on January 1, 1996 and $200,000 on July 1,
1996. The note is collateralized by the property of the general partner. The
Yacht Club was acquired by the Partnership by assuming the note, which
approximated the fair market value of the Yacht Club.
Executive Boats. On February 8, 1990, the Partnership entered into a note
with a bank to finance its executive boats and is collateralized by the two
houseboats. The note was renewed on October 30, 1995 and provides for monthly
principal payments of $4,000 and interest at 11% and matures on October 28,
1999.
Generators. On May 26, 1995, the Partnership entered into a note with a
bank for $53,200 at a fixed rate of 10.5% maturing on October 1, 1997. The note
is collateralized by 12 boat generators. Interest and principal of $3,000 are
paid monthly beginning on July 1, 1995 through October 1, 1995. Payments will
resume each year on March 1 through October 1.
F-12
<PAGE> 45
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
KEY WEST:
First Mortgage. On December 29, 1993 Key West entered into a note payable
for $1,100,000 with a financial institution to purchase the marina. The note is
collateralized by the property. The mortgage is at a variable rate of 1 1/2%
above the banks prime rate and matures on June 29, 2010. Payments of interest
were required from January 29, 1994 through July 29, 1995, thereafter monthly
payment of principal and interest were required to fully amortize the note
through the maturity date.
On March 27, 1995 Key West renegotiated the variable rate note with the
financial institution for $1,550,000 (which included unpaid interest). This note
matures with all the principal due on October 1, 1996 and requires monthly
interest payments beginning on May 1, 1995, at a rate of 1% over the banks
index. (See Note N).
Prepaid interest on this note was $13,359 at December 31, 1995.
Second Mortgage. On December 28, 1993 Key West entered into a $500,000
promissory note with a stockholder, at a fixed rate of 8%, collateralized by a
second mortgage on the property. Annual payments are required for principal and
interest totaling $50,000 commencing on January 5, 1995 and continuing until the
maturity date of January 5, 2004. Principal and interest payments due on January
5, 1995, were deferred. Accrued interest was $44,257 and $40,000 at December 31,
1995 and 1994, respectfully.
Third Mortgage. As part of the original purchase Key West entered into a
$200,000 promissory note with a related party. This note had a fixed rate of 10%
and matures on March 15, 1997. (See Note N).
On January 13, 1995, Key West renewed the $200,000 promissory note,
subordinate to the first and second mortgage, with a stockholder, at a fixed
rate of 10%. The note matures on January 13, 1997 and requires monthly interest
payments.
First Note to Stockholder. On December 28, 1993 Key West entered into a
$245,000 promissory note with a stockholder, at a fixed rate of 8%. Annual
payments are required of $50,000 (principal and interest) commencing January 5,
1995 and continuing until the maturity date of January 5, 2004. Principal and
interest payments due on January 5, 1995, were deferred. At December 31, 1995
and 1994 accrued interest was $39,200 and $19,600, respectively. (See Note N).
Second Note to Stockholder. On December 28, 1993 Key West entered into a
$125,000 promissory note with a stockholder, at a fixed rate of 8% with a
maturity date in July 2001. Annual interest payments are required commencing on
January 5, 1995 and continuing until the maturity date in July 2001. Interest
due on January 5, 1995 was deferred. At December 31, 1995 and 1994 accrued
interest was $20,000 and $10,000, respectively. (See Note N).
Working Capital Note to Stockholder. During 1994, working capital of
$69,500 was provided to Key West by a stockholder at a fixed rate of 8%. The
timing of the repayment of the note payable is at the discretion of Key West and
is classified as current maturities in the accompanying balance sheets. The
balance outstanding at December 31, 1995 and 1994 was $57,295 and $69,500,
respectively. At December 31, 1995 and 1994 accrued interest was $6,948 and
$2,198, respectively.
First Note payable. On August 3, 1995, Key West entered into a $200,000
promissory note with a financial institution maturing on February 3, 1999, at a
variable rate of 1 3/4% above the financial institutions base rate. Monthly
interest payments are required.
Second Note Payable. The following two notes were entered into by
stockholders of Key West to provide operating funds.
F-13
<PAGE> 46
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
On October 2, 1995 the stockholders entered into a note payable for
$100,000 with the principal maturing on October 2, 1996, at a variable rate of
1% over prime. Monthly interest payments commencing on November 2, 1995 are
required.
On December 27, 1995 the stockholders entered into a second note payable
for $100,000 with the principal maturing on November 27, 1996, at a variable
rate of 2% over prime. Monthly interest payments commencing on January 27, 1995
are required. At December 31, 1995 $60,000 had been drawn and is outstanding
under this note payable.
Aggregate maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................ $ 6,010,042
1997............................................ 502,622
1998............................................ 305,061
1999............................................ 524,781
2000............................................ 267,536
Thereafter...................................... 6,929,945
Total................................. $14,539,987
</TABLE>
NOTE G -- OBLIGATIONS UNDER CAPITAL LEASES
Jamestown leases certain boats and computer equipment under capital leases.
In 1991, the Partnership sold 25 houseboats and 20 pontoon boats for $1,374,000
to a bank and subsequently leased back the boats under a capital lease. In
connection with this sale and lease-back transaction, the Partnership recorded a
deferred gain of $104,000. This gain is being amortized as a offset to
amortization expense over the term of the lease. The lease term is for six years
and monthly payments of $30,000 are required from March through October of each
year. The lease also has a purchase option of $202,000 at the end of the lease.
The Partnership entered into a sale and leaseback transaction for computer
equipment in 1990 for $161,000. The computer lease matured in 1994. The
Partnership is required to pay future minimum payments related to these leases
as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
1996.............................................................. $239,710
1997.............................................................. 443,938
--------
683,648
Amount representing interest...................................... (67,619)
--------
Present value of net minimum lease payments....................... 616,029
Current portion................................................... 198,391
--------
Total................................................... $417,638
========
</TABLE>
The weighted average interest rate on the capital leases approximates 10%
at December 31, 1995.
Accumulated amortization for leased boats and computer equipment at
December 31, 1995 and 1994 was $456,000 and $384,000 , respectively.
Amortization expense, net of the deferred gain amortization of $6,000 each year,
for the leased boats and computer equipment was approximately $65,000 and
$95,000 during 1995 and 1994, respectively.
In connection with the boat lease, the bank requires a monthly deposit of
$3,761 into an escrow account for repairs and maintenance of the boats. This
account has a balance of approximately $26,000 and $43,000, at
F-14
<PAGE> 47
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
December 31, 1995 and 1994, respectively, which is included in escrow funds in
the accompanying balance sheets.
NOTE H -- RELATED PARTY TRANSACTIONS
From 1989 through June 30, 1995, officers of Sonoma paid expenses and/or
liabilities of Sonoma. Additionally, officers of Sonoma were owed consulting
fees from Sonoma for current and past services rendered. During the year ended
December 31, 1995, Sonoma and the officers have agreed to settle the outstanding
amounts owed to them of $444,445 through the issuance of common stock. See Note
J.
The general partner of Jamestown has a management agreement with the
Partnership to provide management services to the Partnership for a fee equal to
5% of the annual gross revenues. Such fee is payable to the general partner at a
rate $4,000 per month, plus direct costs and expenses associated with its
management of the Partnership. The remainder of the fee is accrued. Accrued
management fees at 1995 and 1994 were $581,000 and $458,000, respectively.
Management fees paid in 1995 and 1994 were $48,000 and management fee expense
was $201,000 and $185,000, respectively.
The general partner guaranteed the Demand Note (Note F) and receives as
compensation a fee of 1% of the outstanding note balance annually. Such fee
amounted to $20,000 during 1995 and 1994, respectively. The accrued guarantee
fee was $60,000 and $40,000 at December 31, 1995 and 1994, respectively.
Accrued interest due to the partners of Jamestown was $272,000 and $54,000
at December 31, 1995 and 1994, respectively. Interest expense payable to related
parties was $261,000 and $215,000 during 1995 and 1994, respectively.
Accounts receivable (other) of $25,000 related to Jamestown at December 31,
1995 and 1994, from related parties, are recorded as a reduction of accrued
management fees and are primarily for reimbursable expenses.
The Partnership rents a portion of land to the general partner for $441 per
year.
Key West has a $9,381 payable to a stockholder related to commissions
earned in conjunction with the purchase of the marina on December 28, 1993. In
addition, Key West has a $30,000 payable to a stockholder for a finders fee in
conjunction with the purchase of the marina.
During 1995 and 1994, Key West entered into various notes payable with
stockholders of Key West. See Note F.
Accrued interest due to the Key West stockholders was $110,405 and $71,798
at December 31, 1995 and 1994, respectively. Interest expense in connection with
notes due to stockholders was $94,350 and $91,800 during 1995 and 1994,
respectively.
Upon formation of the S Corporation, Key West purchased the Key West
facility for approximately $2,300,000 from a stockholder. This purchase price
approximated the fair market value of the property.
Also see Notes F and J.
NOTE I -- INCOME TAXES
Sonoma generated negligible taxable income and/or net operating losses
during the years ended December 31, 1995 and 1994. Any existing available net
operating losses at December 31, 1995 would be lost upon consummation of the
acquisition transaction described in Note N. At December 31, 1995, Sonoma has a
deferred tax asset of approximately $86,000 relating to amounts deducted for
financial reporting losses not deducted for income tax reporting purposes. This
asset has a valuation allowance recorded against it due to the
F-15
<PAGE> 48
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
uncertainty of generating future taxable income. There was no significant change
in the valuation allowance from 1994.
NOTE J -- STOCKHOLDERS' DEFICIT
In 1995, Sonoma entered into numerous conditional settlement agreements
with various creditors in an attempt to settle all long term debt of Sonoma.
Many of the settlement agreements are in the form of debt relief in exchange for
common stock of Sonoma and conditioned upon Sonoma's common stock being listed
on the National Bulletin Board and having a market value so that the stock can
be liquidated.
On July 18, 1995, a settlement agreement was reached related to the
unsecured 6% note payable that was in default with a former officer relieving
Sonoma of the principal amount owed of $5,000 with $2,700 accrued interest,
accounts payable of $22,000 with $7,335 of accrued interest by issuing 272,597
shares of Sonoma common stock.
During the year ended June 30, 1996 Sonoma reached agreements with two
shareholders who were prior officers of Sonoma to settle amounts due to them
approximating $444,445 through the issuance of 33,347,553 of Sonoma's common
stock.
During the year ended June 30, 1996, Sonoma reached agreements with two
individuals to settle amounts due to them approximating $8,800 through the
transfer of 40,000 of Sonoma's common stock (transferred from other
shareholders).
Professional fees of $13,700 were paid on behalf of Sonoma by certain
shareholders. These expenses paid on behalf of Sonoma were accounted for as
contributions to additional paid-in capital.
NOTE K -- PARTNERSHIP AGREEMENT -- JAMESTOWN
The general partner is required to manage the affairs of the Partnership
but is not required to make a capital contribution for its interest in the
Partnership. For Federal income tax purposes, the special limited partners
received an assigned value of $200,000 (equivalent to eight units) for
contributing their interest in the Sale and Purchase Agreement with Jamestown
Dock, Inc. Eighty units had been sold to limited partners.
The special limited and limited partners are entitled to an annual
Preference Payment of 10% of their capital contributions to the extent that cash
flow exceeds operating expenses, debt service and funds set aside in a working
capital reserve. All unpaid Preference Payments accumulate and may be paid in
future years out of available cash flow. Remaining cash flow, after the
Preference Payment, is distributable to the limited partners and to the general
partner in proportion to their interests in partnership profits. No cash
distributions have been made to the partners. Accumulated but unpaid Preference
Payments totaled $1,372,917 at December 31, 1995 and $1,152,917 at December 31,
1994 (Note N).
The net loss for the years ended December 31, 1995 and 1994 was allocated
in accordance with the Partnership Agreement. No loss is allocated to the
special limited partners because of their nil capital account balances. In
accordance with the Partnership agreement, limited partners are allocated 80% of
net losses to the extent that they have positive capital account balances, and
the general partner is allocated the remaining loss.
NOTE L -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. Cash
and escrow funds, accounts receivable, accounts payable and other liabilities
are carried at amounts that reasonably approximate their fair values.
F-16
<PAGE> 49
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
The carrying amount and fair value of notes payable and long-term debt
(excluding capital leases) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Jamestown:
Mortgage debt............................................. $7,194,000 $5,350,000
Demand note............................................... 1,853,000 1,853,000
Variable rate debt........................................ 570,000 570,000
Other current debt........................................ 1,677,000 1,677,000
Key West:
Variable rate debt........................................ $1,910,000 $1,910,000
Fixed rate debt........................................... 1,070,000 1,151,250
Demand note............................................... 57,296 57,296
</TABLE>
The fair value of the Company's fixed rate debt have been estimated based
upon relative changes in the Company's variable borrowing rates since
origination of the fixed rate debt. Fair values of variable rate debt and demand
notes are deemed to approximate the carrying amount.
NOTE M -- CONTINGENT LIABILITIES
In the normal course of its business, the Companies are subject to
litigation. Management of the Companies, based on discussions with their outside
legal counsel, do not believe any claims, individually or in the aggregate, will
have a material adverse impact on the Companies' financial position.
NOTE N -- SUBSEQUENT EVENTS
On January 29, 1996, Jamestown entered into a loan agreement for $6,300,000
maturing on February 1, 2001. The agreement requires monthly payments of
principal and interest at a variable rate equal to the commercial paper rate
plus 4.25%. Proceeds of $5,800,000 was used to settle the $5,631,000 mortgage
note described in Note F, and $678,000 was used to settle the boat lease
obligation and related loan origination fees. Other short term borrowings were
obtained to finance the difference between amounts paid and the $5,800,000
proceeds used from the $6,300,000 loan agreement. On March 28, 1996 the
remaining $500,000 was drawn on the note. The balance due on the note at June
30, 1996 was $6,261,000.
On April 8, 1996, Key West entered into a loan agreement for $2,724,185
maturing on April 1, 2016. This agreement renewed and consolidated the first
mortgage of $1,550,000 with an additional amount of $1,174,185 which was used to
pay off the third mortgage, the second note payable, to provide operating funds
and to fund expansion of the fuel system. The agreement requires twenty-four
monthly interest payments beginning May 1, 1996 at a rate of 9% and two hundred
and sixteen monthly principal and interest payments of $25,510 beginning May 1,
1998 at a rate of 9% during the first 36 payments and 1% over prime thereafter.
On July 25, 1996 the former majority stockholder of Key West sold 73.625
shares to a third party which resulted in a change in control of Key West in
exchange for $1,700,000. Subsequently, effective October 31, 1996, Key West, by
consent of its stockholders, entered into an agreement (the "Agreement") with
Sonoma, a public company. The Agreement requires the transfer and assignment to
Sonoma of all of the common stock of Key West in exchange for 300,000 shares of
common stock of Sonoma. The transaction was completed effective December 9,
1996.
F-17
<PAGE> 50
SONOMA INTERNATIONAL AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
As of September 12, 1996, Sonoma entered into an agreement (the
"Agreement") with Clear Creek Investments, LLC, a Kentucky Limited Liability
Company ("Clear Creek"), and holders of the limited partnership interests in
Jamestown. The Agreement required the transfer and assignment to Sonoma of
Jamestown's general partner and all limited partnership interests. There are
several conditions to closing including the delivery to the Company of an
appraisal which states that the assets of JRML as of the date of the appraisal
have a fair market value of not less than $10,000,000. That appraisal has been
delivered to Sonoma. The agreement incorporates the payment of the preference
payments due (Note K) through the issuance of shares of Sonoma. In addition, the
Agreement requires that the Company effect a one for two hundred reverse split,
leaving 300,000 shares issued and outstanding, and issue 1,700,000 shares to
Clear Creek and affiliated and related entities or individuals for the
acquisition of Jamestown. The combined financial statements including all
references to the number of shares of common stock and all per share
information, have been adjusted to reflect the common stock reverse split and
the revised authorized number of common shares on a retroactive basis.
NOTE O -- EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITOR
(unaudited)
On December 9, 1996, the transaction described in Note N between Sonoma,
Jamestown and Key West was consummated as described.
F-18
<PAGE> 51
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Sonoma International
We have audited the accompanying balance sheets of Sonoma International as
of December 31, 1995 and 1994, and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sonoma International as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note C to the financial statements,
the Company has no assets to pay its obligations and has been inactive for a
number of years. These factors raise substantial doubt as to the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note C. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
KING, BURNS & COMPANY, P.C.
Dallas, Texas
September 6, 1996, except as to
Note H, which is as of December 9, 1996
F-19
<PAGE> 52
SONOMA INTERNATIONAL
BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
TOTAL ASSETS........................................ $ -- $ -- $ --
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accrued liabilities............................... $ 24,307 $ 5,633 $ 45,395
Accrued interest.................................. 252,435 252,435 224,031
Notes payable..................................... 262,391 262,391 674,336
----------- ----------- -----------
Total current liabilities................. 539,133 520,459 943,762
----------- ----------- -----------
Total liabilities......................... 539,133 520,459 943,762
----------- ----------- -----------
Commitments and contingencies (Notes C and E)
Stockholders' deficit
Common stock, $.001 par value, 20,000,000
authorized, 300,000, 300,000 and 127,899 issued
and outstanding shares......................... 300 300 128
Additional paid-in capital........................ 4,334,316 4,334,316 4,277,568
Accumulated deficit............................... (4,873,749) (4,855,075) (5,221,458)
----------- ----------- -----------
Total Stockholders' Deficit............... (539,133) (520,459) (943,762)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT................................. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 53
SONOMA INTERNATIONAL
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND YEARS ENDED DECEMBER 31,
1995 AND 1994
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
------------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenue................................................. $ -- $ -- $ --
-------- -------- ---------
Expenses
Professional fees..................................... 24,302 13,975 --
Consulting fees....................................... -- 37,500 75,000
Interest.............................................. -- 28,404 34,200
State taxes........................................... (5,628) 800 1,600
-------- -------- ---------
Total expenses................................ 18,674 80,679 110,800
Gain on the reduction of obligations.................... -- 28,363 --
-------- -------- ---------
Net loss before extraordinary item...................... (18,674) (52,316) (110,800)
Extraordinary item
Gain from conversion of debt to equity net of income
taxes of $-0-...................................... -- 418,699 --
-------- -------- ---------
Net income (loss)....................................... $ (18,674) $366,383 $(110,800)
======== ======== =========
Net loss per common share before extraordinary item..... $ (0.06) $ (0.38) $ (0.86)
======== ======== =========
Net income (loss) per common share...................... $ (0.06) $ 2.65 $ (0.86)
======== ======== =========
Weighted average shares outstanding..................... 300,000 138,442 127,899
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 54
SONOMA INTERNATIONAL
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994........... 127,899 $128 $4,277,568 $(5,110,658) $(832,962)
Net loss............................. -- -- -- (110,800) (110,800)
------- ---- ---------- ----------- ---------
Balance at December 31, 1994......... 127,899 128 4,277,568 (5,221,458) (943,762)
Stock issued for debt and other
obligations........................ 172,101 172 34,248 -- 34,420
Capital contributions resulting from
obligations settled by shareholders
on behalf of the Company........... -- -- 22,500 -- 22,500
Net income........................... -- -- -- 366,383 366,383
------- ---- ---------- ----------- ---------
Balance at December 31, 1995......... 300,000 300 4,334,316 (4,855,075) (520,459)
Net income (unaudited)............... -- -- -- (18,674) (18,674)
------- ---- ---------- ----------- ---------
Balance at September 30, 1996
(unaudited)........................ 300,000 $300 $4,334,316 $(4,873,749) $(539,133)
======= ==== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 55
SONOMA INTERNATIONAL
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------
1996 1995 1994
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ (18,674) $ 366,383 $(110,800)
Expenses paid through contributions of additional
paid-in capital................................... -- 13,975 34,200
Gain on conversion of debt to equity................. -- (418,699) --
Gain on reduction of obligations..................... -- (28,363) --
Increase (decrease) in accounts payable and taxes.... (5,628) 800 1,600
Increase (decrease) in accrued interest.............. 24,302 28,404 --
Increase in stockholder advances..................... -- 37,500 75,000
--------- --------- ---------
Net cash provided by operations.............. -- -- --
Cash at beginning of period.................. -- -- --
--------- --------- ---------
Cash at end of period........................ $ -- $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 56
SONOMA INTERNATIONAL
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
NOTE A -- ORGANIZATION
Sonoma Quicksilver Mines, Inc. was incorporated under the laws of the State
of Nevada on June 10, 1940. The name was subsequently changed to Sonoma
International (the "Company" or "Sonoma"). The Company had several failed
business operations and since 1988 its only activity has been to search for a
company or assets to acquire.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company accounts for income taxes in accordance with the asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Income (loss) per share
Income (loss) per share of common stock is based upon the weighted average
number of common shares outstanding for all periods presented after giving
retroactive effect to a one for two hundred reverse split of the Company's
common stock (See Note H).
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Accounting Standards Not Yet Adopted
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation expense
in the income statement, or the pro forma effect on net income and earnings per
share of such compensation expense to be disclosed in the footnotes to the
Company's financial statements commencing with the Company's 1996 fiscal year.
The Company expects to adopt SFAS 123 on a disclosure basis only. As such,
implementation of SFAS 123 is not expected to impact the Company's balance sheet
or statement of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Unaudited Period
The financial information as of September 30, 1996 and for the nine months
ended September 30, 1996 is unaudited. In the opinion of management, such
information contains all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for such period.
The results of operations for the interim period is not necessarily indicative
of the results of operations for the full fiscal year.
F-24
<PAGE> 57
SONOMA INTERNATIONAL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
NOTE C -- GOING CONCERN UNCERTAINTY
Sonoma has been inactive for a number of years and its continued existence
is in doubt. The Company has no assets to pay its current obligations or
additional obligations arising from incidental administrative expenses and
interest expenses.
The Company plans to reduce its liabilities and acquire income producing
assets through the issuance of additional stock and a merger with an operating
partnership (Note H). The ability of the Company to continue in existence is
dependent on the success of these plans.
NOTE D -- NOTES PAYABLE
Notes payable consists of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Note payable dated June 12, 1991, due on demand to an individual bearing
interest at 15% per annum; unsecured. Interest of $44,316 has been
accrued through the settlement date. On September 27, 1995 a
conditional settlement agreement was reached relieving Sonoma of the
principal and accrued interest in exchange for 800,000 common shares
of Sonoma. This settlement agreement is contingent upon Sonoma stock
obtaining a market value and that the stock can be liquidated......... $ 60,974 $ 60,974
Note payable to two individuals, due on demand and unsecured. Interest
of $15,861 has been accrued through the settlement date. On July 25,
1995, a conditional settlement agreement was reached releasing Sonoma
of principal and accrued interest in exchange for 200,000 shares of
the Company. This settlement agreement is contingent upon Sonoma stock
obtaining a market value and that the stock can be liquidated......... 45,861 45,861
Note payable to an individual settled in September, 1995................ -- 5,000
Note payable to Sunwest Bank, due on demand with interest accruing at
10.5%; unsecured. Interest of $42,557 has been accrued through the
settlement date. On September 7, 1995, a conditional settlement
agreement was reached relieving Sonoma of the outstanding principal
and accrued interest in exchange for a nominal cash amount and the
issuance of 200,000 shares of Sonoma common stock. This settlement is
conditioned upon Sonoma common stock being listed on the National
Bulletin Board and having a market value and that the stock can be
liquidated............................................................ 43,556 43,556
Stockholders loans (see Notes E and F).................................. -- 406,945
Note payable to Garfield Bank, due on demand with interest accruing at
16%; unsecured. Interest of $164,997 has been accrued through the
settlement date. On September 8, 1995, a conditional settlement
agreement had been reached relieving Sonoma of the principal amount
owed and all accrued interest thereon conditioned on 850,000 shares of
Sonoma common stock being transferred into the name of Garfield Bank
(from other shareholders) and Sonoma common stock having a market
value that can be liquidated.......................................... 112,000 112,000
-------- --------
Total notes payable..................................................... $262,391 $674,336
======== ========
</TABLE>
F-25
<PAGE> 58
SONOMA INTERNATIONAL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
NOTE E -- STOCKHOLDERS DEFICIT
In 1995, the Company entered into numerous conditional settlement
agreements with various creditors in an attempt to settle all long term debt of
Sonoma. Many of the settlement agreements are in the form of debt relief in
exchange for common stock of the Company and conditioned upon the Company's
common stock being listed on the National Bulletin Board and having a market
value so that the stock can be liquidated.
On July 18, 1995, a settlement agreement was reached related to the
unsecured 6% note payable that was in default with a former officer relieving
Sonoma of the principal amount owed of $5,000 with $2,700 accrued interest,
accounts payable of $22,000 with $7,335 of accrued interest by issuing 272,597
shares of Sonoma common stock.
During the year ended December 31, 1995 Sonoma reached agreements with two
shareholders who were prior officers of the Company to settle amounts due to
them approximating $444,445 through the issuance of 33,347,553 of the Company's
common stock.
During the year ended December 31, 1995, Sonoma reached agreements with two
individuals to settle amounts due to them approximating $8,800 through the
transfer of 40,000 of the Company's common stock (transferred from other
shareholders).
Professional fees of $13,700 were paid on behalf of Sonoma by certain
shareholders. These expenses paid on behalf of the Company were accounted for as
contributions to additional paid-in capital.
NOTE F -- RELATED PARTY TRANSACTIONS
From 1989 through December 31, 1995, officers of the Company paid expenses
and/or liabilities of Sonoma. Additionally, officers of Sonoma were owed
consulting fees from the Company for current and past services rendered. During
the year ended December 31, 1995, Sonoma and the officers have agreed to settle
the outstanding amounts owed to them of $444,445 through the issuance of common
stock. See Note E.
NOTE G -- INCOME TAXES
The Company generated negligible taxable income and/or net operating losses
during the years ended December 31, 1995 and 1994. Any existing available net
operating losses at December 31, 1995 would be lost upon consummation of the
acquisition transaction described in Note H. At December 31, 1995, the Company
has a deferred tax asset of approximately $86,000 relating to amounts deducted
for financial reporting losses not deducted for income tax reporting purposes.
This asset has a valuation allowance recorded against it due to the uncertainty
of generating future taxable income. There was no significant change in the
valuation allowance from 1994.
NOTE H -- SUBSEQUENT EVENT
As of September 12, 1996, the Company entered into an agreement (the
"Agreement") with Clear Creek Investments, LLC, a Kentucky Limited Liability
Company ("Clear Creek"), and holders of the limited partnership interests in
Jamestown Resort & Marina, Ltd, a Kentucky limited partnership ("JRML"). JRML
owns a resort and marina located on the Cumberland Lake in south central
Kentucky.
The Agreement requires the transfer and assignment to Sonoma of JRML's
general partner and all limited partnership interests. There are several
conditions to closing including the delivery to the Company of an appraisal
which states that the assets of JRML as of the date of the appraisal have a fair
market value of not less than $10,000,000. That appraisal has been delivered to
the Company. In addition, the Agreement requires that the Company effect a one
for two hundred reverse split, leaving 300,000 shares issued and outstanding,
and issue 1,700,000 shares to Clear Creek and affiliated and related entities or
individuals for the
F-26
<PAGE> 59
SONOMA INTERNATIONAL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
acquisition of JRML. The financial statements, including all references to the
number of shares of common stock and all per share information, have been
adjusted to reflect the common stock reverse split and the revised authorized
number of common shares on a retroactive basis.
NOTE I -- EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITOR (unaudited)
On December 9, 1996, the transaction described in Note H was consummated as
described.
F-27
<PAGE> 60
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
Jamestown Resort & Marina, Ltd.
We have audited the accompanying balance sheets of Jamestown Resort &
Marina, Ltd. (a Kentucky Limited Partnership) as of December 31, 1995 and 1994,
and the related statements of operations, partners' deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jamestown Resort & Marina,
Ltd. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
The financial statements have been prepared assuming that the Partnership
will continue as a going concern. As discussed in Note C to the financial
statements, the Partnership has incurred losses since its inception and at
December 31, 1995, its current liabilities exceeded current assets by
approximately $6,733,000. These factors raise substantial doubt as to the
Partnership's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note C. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KING, BURNS & COMPANY, P.C.
Dallas, Texas
September 6, 1996
F-28
<PAGE> 61
JAMESTOWN RESORT & MARINA, LTD.
BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash.................................................................. $ 13,363 $ 9,628 $ 3,584
Escrow funds.......................................................... 46,897 26,673 43,262
Receivables:
Trade (net of allowance for doubtful accounts of $3,876 in 1996,
1995 and 1994).................................................... 109,933 47,653 46,799
Other............................................................... 151,906 34,199 23,111
Inventory............................................................. 78,271 75,400 82,311
Prepaid expenses...................................................... 38,872 46,456 71,919
----------- ----------- -----------
Total current assets........................................... 439,242 240,009 270,986
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Buildings and improvements............................................ 2,197,989 2,352,561 2,249,862
Land improvements..................................................... 79,962 79,737 73,623
Docks and floating buildings.......................................... 7,200,353 7,180,728 6,957,013
Boats and improvements................................................ 813,355 782,105 717,688
Furnishings, fixtures and equipment................................... 1,764,425 1,640,722 1,521,580
Houseboats and pontoons under capital lease........................... 1,363,649 1,373,649 1,373,649
Computers under capital lease......................................... 161,734 161,734 161,734
Vehicles.............................................................. 22,482 22,482 20,642
Construction in progress.............................................. 374,963 240,931 148,931
----------- ----------- -----------
13,978,912 13,834,649 13,224,722
Less accumulated depreciation and amortization.......................... 4,404,629 3,987,745 3,403,036
----------- ----------- -----------
Net property and equipment.............................................. 9,574,283 9,846,904 9,821,686
----------- ----------- -----------
OTHER ASSETS
Deferred loan fees, net of accumulated amortization of $53,782 in 1996
and $11,827 in 1995................................................. 379,820 106,438 --
----------- ----------- -----------
Goodwill, net of accumulated amortization of $179,643, $165,825 and
$147,400............................................................ 557,357 571,175 589,600
----------- ----------- -----------
Total other assets............................................. 937,177 677,613 589,600
----------- ----------- -----------
TOTAL ASSETS................................................... $10,950,702 $10,764,526 $10,682,272
=========== =========== ===========
LIABILITIES AND PARTNER'S DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt (including $2,920,277, $3,410,277
and $2,206,239 to related parties).................................. 3$,457,920... $ 3,819,067 $10,622,738
Current portion of obligations under capital leases................... -- 198,391 203,793
Accounts payable...................................................... 344,094 188,555 274,790
Accrued interest (including $492,026, $272,272 and $53,662 to related
parties)............................................................ 534,015 1,246,452 795,946
Accrued liabilities................................................... 209,892 141,387 249,313
Security deposits..................................................... 25,560 29,074 34,458
Deferred revenue...................................................... 306,382 633,190 531,411
Accrued management fees -- related party.............................. 759,356 581,301 458,006
Accrued guarantee fees -- related party............................... 75,000 60,000 40,000
Deferred gain on sale leaseback....................................... -- 75,800 81,905
----------- ----------- -----------
Total current liabilities...................................... 5,712,219 6,973,217 13,292,360
----------- ----------- -----------
LONG-TERM LIABILITIES
Long-term debt........................................................ 6,899,881 7,421,234 211,577
Long-term portion of obligations under capital leases................. -- 417,638 614,838
----------- ----------- -----------
Total long-term liabilities.................................... 6,899,881 7,838,872 826,415
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes C, D, E, F, G, H, K and L)
PARTNERS' DEFICIT....................................................... (1,661,398) (4,047,563) (3,436,503)
----------- ----------- -----------
TOTAL LIABILITIES AND PARTNERS' DEFICIT................................. $10,950,702 $10,764,526 $10,682,272
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 62
JAMESTOWN RESORT & MARINA, LTD.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------
1996 1995 1994
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES
Slip fees........................................... $ 929,990 $1,168,041 $ 997,195
Boat rental......................................... 694,093 748,941 753,835
Lodge............................................... 619,728 683,251 677,905
Fuel................................................ 529,671 531,120 488,485
Convenience store and merchandise................... 342,757 381,123 340,724
Restaurant.......................................... 341,547 372,473 349,001
Other............................................... 83,316 135,073 76,662
----------- ---------- ----------
Total revenues.............................. 3,541,102 4,020,022 3,683,807
----------- ---------- ----------
COST OF REVENUES
Slip................................................ 102,356 165,634 129,395
Boat rental......................................... 245,247 396,916 439,154
Lodge............................................... 191,867 235,082 209,793
Fuel................................................ 356,606 351,029 310,084
Convenience store and merchandise................... 267,691 288,498 269,061
Restaurant.......................................... 267,162 329,982 276,638
Other............................................... 72,449 109,350 79,986
----------- ---------- ----------
Total cost of revenues...................... 1,503,378 1,876,491 1,714,111
----------- ---------- ----------
GROSS PROFIT.......................................... 2,037,724 2,143,531 1,969,696
SELLING, GENERAL AND ADMINISTRATIVE (including related
party amounts for management and guarantee fees of
$177,055, $220,540 and $205,229).................... 995,146 1,278,390 1,089,981
AMORTIZATION OF GOODWILL.............................. 55,774 30,252 18,426
DEPRECIATION AND AMORTIZATION......................... 325,060 578,603 617,499
----------- ---------- ----------
INCOME FROM OPERATIONS................................ 661,744 256,286 243,790
INTEREST EXPENSE (including interest to related
parties of $219,754, $260,716 and $214,724)......... 736,738 867,346 749,823
----------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEMS................... (74,994) $ (611,060) $ (506,033)
EXTRAORDINARY ITEMS
Gain on extinguishment of debt...................... 2,461,159 -- --
----------- ---------- ----------
NET INCOME (LOSS)..................................... $ 2,386,165 $ (611,060) $ (506,033)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 63
JAMESTOWN RESORT & MARINA, LTD.
STATEMENT OF CHANGES IN PARTNERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
SPECIAL
GENERAL LIMITED LIMITED
PARTNER PARTNERS PARTNERS TOTAL
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
Deficit at January 1, 1994..................... $(2,913,099) $(17,371) $ -- $(2,930,470)
Net loss for the year ended December 31,
1994......................................... (506,033) -- -- (506,033)
----------- -------- --- -----------
Deficit at December 31, 1994................... (3,419,132) (17,371) -- (3,436,503)
Net loss for the year ended December 31,
1995......................................... (611,060) -- -- (611,060)
----------- -------- --- -----------
Deficit at December 31, 1995................... (4,030,192) (17,371) -- (4,047,563)
Net income for the nine months ended September
30, 1996 (unaudited)......................... 2,386,165 -- -- 2,386,165
----------- -------- --- -----------
Deficit at September 30, 1996 (unaudited)...... $(1,644,027) $(17,371) $ -- $(1,661,398)
=========== ======== === ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 64
JAMESTOWN RESORT & MARINA, LTD.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995 1994
----------------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $ 2,386,165 $ (611,060) $(506,033)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on extinguishment of debt................... (2,461,159) -- --
Depreciation and amortization of fixed assets.... 325,060 578,603 617,499
Amortization of goodwill......................... 55,774 30,252 18,426
Amortization of deferred gain on sale
leaseback...................................... (75,800) (6,105) (6,105)
Changes in assets and liabilities:
Decrease (increase) in escrow funds............ (20,224) 16,589 41,409
Decrease (increase) in trade receivables....... (62,280) (854) (3,478)
Decrease (increase) in other receivables....... (117,707) (11,088) 57,620
Decrease (increase) in inventory............... (2,871) 6,911 (7,279)
Decrease (increase) in prepaid expenses........ 7,584 25,463 6,950
Increase (decrease) in accounts payable........ 155,539 (86,235) 152,403
Increase (decrease) in accrued interest........ 242,088 450,506 357,236
Increase (decrease) in accrued liabilities..... 68,505 (107,927) 94,807
Increase (decrease) in security deposits....... (3,514) (5,384) (8,447)
Increase (decrease) in deferred revenue........ (326,808) 101,779 46,890
Increase (decrease) in accrued guarantee
fees........................................ 15,000 20,000 20,000
Increase (decrease) in accrued management
fees........................................ 178,055 123,295 84,943
----------- ---------- ---------
Net cash provided by operating activities... 363,407 524,745 966,841
----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................. (144,263) (603,820) (711,802)
----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank and related party loans.......... 7,897,626 1,250,700 --
Repayments of borrowings............................ (7,169,482) (844,715) (152,884)
Repayments of obligation under capital lease........ (616,029) (202,601) (189,195)
Organization and loan costs......................... (321,164) (118,265) --
----------- ---------- ---------
Net cash provided (used) by financing
activities................................ (215,409) 85,119 (342,079)
----------- ---------- ---------
NET INCREASE (DECREASE) IN CASH....................... 3,735 6,044 (87,040)
Cash at beginning of the period..................... 9,628 3,584 90,624
----------- ---------- ---------
Cash at end of the period........................... $ 13,363 $ 9,628 $ 3,584
=========== ========== =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest............ $ 454,715 $ 430,908 $ 411,592
=========== ========== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Assumption of debt in connection with the purchase
of property and equipment........................ $ -- $ -- $ 520,019
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 65
JAMESTOWN RESORT & MARINA, LTD
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
NOTE A -- ORGANIZATION
General
Jamestown Resort & Marina, Ltd. (the "Partnership") is a limited
partnership organized under the laws of the State of Kentucky by Jamestown
Resort & Marina, Inc. ("JRMI"), the general partner, on November 1, 1987. The
Partnership owns a resort and marina facility near Jamestown, Kentucky on Lake
Cumberland.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original of 3 months or less when purchased.
Inventory
Inventory is stated at the lower of cost or market and consists of food,
beverages, clothing, fuel and boat parts. Cost is determined on the first-in,
first-out ("FIFO") method of accounting.
Property and Equipment
Property and equipment are stated at cost. The Partnership provides for
depreciation on the straight-line method over the estimated useful lives of the
related assets. Assets held under capital leases are amortized using the
straight-line method over the estimated useful lives of the related assets.
Major classes of property and equipment and their related lives are as follows:
<TABLE>
<CAPTION>
LIFE IN
MAJOR CLASS YEARS
----------------------------------------------------------------------------- -------
<S> <C>
Docks, floating buildings and buildings on land.............................. 31.5
Houseboats and pontoons...................................................... 20.0
Land improvements............................................................ 15.0
Signage...................................................................... 10.0
Furnishings.................................................................. 7.0
Computers under capital lease................................................ 5.0
</TABLE>
Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized.
Goodwill
Goodwill relates to the original purchase of the marina and the U.S. Army
Corps of Engineers lease and represents the excess of cost over fair value of
net assets acquired which is being amortized using the straight-line method over
40 years. On an on-going basis, management reviews recoverability, the valuation
and amortization of goodwill. As part of this review, management considers the
undiscounted value of the projected future net earnings in evaluating the value
of goodwill. If the undiscounted value of the projected future net earnings is
less than the stated value, the goodwill would be written down to its fair
value. Management also considers the appraised value of the marina facility in
evaluating goodwill.
Deferred Loan Fees
Loan fees are capitalized and amortized over the life of the loan using the
straight-line method.
F-33
<PAGE> 66
JAMESTOWN RESORT & MARINA, LTD
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
Revenue Recognition
Annual or seasonal slip rentals received are recognized as deferred revenue
and amortized into income over the life of the rental contract using the
straight-line method. All other revenues are recognized at the time the rental
occurs or the delivery of the product or service takes place.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Income Taxes
Taxable income or loss of the Partnership is allocated to the partners in
accordance with the provisions of the Partnership agreement. The Partnership
qualifies as a limited partnership and as such, Federal income taxes accrue to
the partners rather than to the Partnership. Accordingly, the accompanying
statements of operations of the Partnership include no provision for income
taxes.
Other
Advertising costs are expensed as incurred and amounted to $58,000 and
$43,000 in 1995 and 1994, respectively.
Unaudited Period
The financial information as of September 30, 1996 and for the nine months
ended September 30, 1996 is unaudited. In the opinion of management, such
information contains all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for such period.
The results of operations for the interim period is not necessarily indicative
of the results of operations for the full fiscal year.
NOTE C -- GOING CONCERN UNCERTAINTY
As reflected in the statements of operations, the Partnership incurred net
losses of approximately $611,000 and $506,000 in 1995 and 1994, respectively. At
December 31, 1995, current liabilities exceed current assets by approximately
$6,733,000. These factors, among others, raise substantial doubt as to the
Partnership's ability to continue as a going concern.
Management has been successful in the past in negotiating delays in the
payment of the Company's loans and was successful in refinancing the mortgage
debt (Notes F and L) and paid off the obligations under the capital leases
subsequent to December 31, 1995 (Note L). Management is also in the process of
merging with a public shell (Note L), and has plans to raise sufficient
additional capital in the public market after the merger to pay off certain of
the short and long term debt and to provide additional liquidity to fund
operations and growth.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classification of liabilities which may result from the possible
inability of the Partnership to continue as a going concern.
F-34
<PAGE> 67
JAMESTOWN RESORT & MARINA, LTD
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
NOTE D -- DEVELOPMENT AGREEMENT WITH THE TRANSPORTATION CABINET OF THE
COMMONWEALTH OF KENTUCKY
The Partnership and the Transportation Cabinet of the Commonwealth of
Kentucky ("Transportation Cabinet") are parties to an agreement for development
of the marina facilities. The Partnership agreed to construct a new resort and
marina and the Transportation Cabinet agreed to construct an extension of
Kentucky Highway 92 to the island upon which the Partnership constructed its
lodge.
The Partnership agreed to pay the Transportation Cabinet one percent of the
gross revenues received by the Partnership from the resort and marina facilities
in perpetuity. The fees under the agreement totaled $40,000 in 1995 and $37,000
in 1994.
NOTE E -- LEASE RIGHTS
The Partnership leases approximately 290 acres of land and water from the
U.S. Army Corps of Engineers. The lease has a 25-year term beginning January 1,
1988 with an option for a 25-year extension which has been exercised. Rental
amounts due under the lease are contingent upon a variety of factors, primarily
gross revenues. Rent expense was $70,000 in 1995 and $64,000 in 1994.
NOTE F -- NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
----------- ------------
<S> <C> <C>
Mortgage......................................................... $ 7,194,005 $ 7,944,005
Demand Note (related party)...................................... 1,852,777 1,846,239
General Partner note............................................. 1,197,500 --
Limited Partner notes............................................ 360,000 360,000
Paddleboat notes................................................. 209,736 270,066
Yacht Club note.................................................. 223,624 227,041
Executive Boats note............................................. 159,671 186,964
Generators note.................................................. 42,988 --
----------- ------------
11,240,301 10,834,315
Less current maturities.......................................... (3,819,067) (10,622,738)
----------- ------------
Long-term portion................................................ $ 7,421,234 $ 211,577
=========== ============
</TABLE>
Mortgage. On December 31, 1988 the Partnership entered into two notes with
banks to finance the resort and marina project. The first note was for
$5,625,000 maturing on January 1, 1995. The note required monthly payments of
principal in the amount of $53,568 and interest at a rate of 11%, adjusted to 3%
above the weekly auction average rate of T-Securities, with a 3 year maturity on
November 1. The second note was for $2,375,000 maturing on January 1, 1995. The
note required monthly payments of principal in the amount of $6,000 and interest
at a rate of 1% over the Base Lending rate as defined. Both notes were secured
by Partnership property. Thereafter, the Partnership defaulted on the notes, and
the bank became insolvent. The loan was subsequently assumed by the Resolution
Trust Corporation ("RTC"). The note was consolidated with several other notes
and sold to a second bank in March, 1993.
Accrued interest was $748,240 and $708,240 at December 31, 1995 and 1994,
respectfully.
On August 11, 1995, The Partnership entered into a written agreement with
the second bank whereby the notes held could be paid off by the Partnership for
$6,100,000, plus accrued interest of $240,000. The amount was refinanced on
January 29, 1996 (Note L). The classification of the note payable (long-term and
short-
F-35
<PAGE> 68
JAMESTOWN RESORT & MARINA, LTD
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
term portions) is based on the refinanced terms. This agreement was conditional
on the ability of the Partnership to make an initial payment of $1,000,000 at
the closing of the loan modification and being able to repay the remaining
$5,100,000 by May 1, 1996. The Partnership made a payment of $750,000 on
September 1995. These funds were obtained from related parties and bear interest
at 10%. The remaining $250,000 was rolled over into the final settlement. See
Note L.
Demand Note. The Partnership originally entered into a note agreement with
a bank for $2,000,000 on November 16, 1989, at 1 1/2% over the prime lending
rate which was collateralized by a second mortgage on the assets of the
Partnership and by certain items of the Webb Family Trust, an entity related to
the general partner. A 1% guarantee amount based on the outstanding balance is
payable to the Webb Family Trust as compensation for pledging its collateral
(See Note H). The Partnership defaulted on the note several times and on January
15, 1993 the note was converted to a demand note. In March 1994, the Partnership
again defaulted under the terms of the note and the Webb Family Trust collateral
was liquidated by the bank to satisfy the note. The Partnership subsequently
became obligated to the Webb Family Trust under the same terms as the demand
note.
General Partner Loans. The Webb Family Trust loaned the Partnership
$477,500 at various dates in 1995 and $750,000 in September 1995 at 10% under a
promissory note entered into on August 10, 1995. The note matured on May 1, 1996
and is due on demand.
Limited Partner Loans. On March 6, 1992, loans totaling $360,000 were made
by limited partners at 1% plus prime for operating shortfalls and capital
improvements. The notes are payable on demand. The notes may be extended each
year for a fee of 1% of the note balance.
Paddleboat. Webb Cruise Lines, Inc. (WCL) an entity controlled by the
general partner originally purchased the Jamestown Queen, a paddleboat, by
obtaining financing from two banks. On April 21, 1989 WCL entered into the first
note with a bank for $325,000. On October 30, 1994 the note was renewed for
$251,303 at 2% plus prime maturing on April 30, 2000. The note requires monthly
payments of $5,309 of principal and interest. The loan is collateralized by five
shares (5.6%) of the limited Partnership units, the Paddleboat and guaranteed by
the Webb Family Trust. On May 8, 1989, WCL entered into a 13.5% variable note
with a second bank amounting to $75,000 with interest and principal due on June
22, 1995. The Partnership paid a monthly rent of $7,260 to WCL for the use of
the boat. The Partnership assumed both notes and title of the boat from WCL in
May 1994 for the balance of both notes of $282,346 which approximated the fair
value of the Paddleboat.
Yacht Club. Webb Lexington Ventures, Inc., an entity controlled by the
general partner, entered into a 11% mortgage note with a bank for $278,000 to
purchase the Yacht Club. The note matures on July 1, 1996 and interest is
payable quarterly in October, January, April and July. Principal payments
consist of two installments, $23,757 on January 1, 1996 and $200,000 on July 1,
1996. The note is collateralized by the property of the general partner. The
Yacht Club was acquired by the Partnership by assuming the note, which
approximated the fair market value of the Yacht Club.
Executive Boats. On February 8, 1990, the Partnership entered into a note
with a bank to finance its executive boats and is collateralized by the two
houseboats. The note was renewed on October 30, 1995 and provides for monthly
principal payments of $4,000 and interest at 11% and matures on October 28,
1999.
Generators. On May 26, 1995, the Partnership entered into a note with a
bank for $53,200 at a fixed rate of 10.5% maturing on October 1, 1997. The note
is collateralized by 12 boat generators. Interest and principal of $3,000 are
paid monthly beginning on July 1, 1995 through October 1, 1995. Payments will
resume each year on March 1 through October 1.
F-36
<PAGE> 69
JAMESTOWN RESORT & MARINA, LTD
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
Aggregate maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................ $ 3,819,067
1997............................................ 217,870
1998............................................ 217,425
1999............................................ 234,021
2000............................................ 173,393
Thereafter...................................... 6,578,525
-----------
Total................................. $11,240,301
===========
</TABLE>
NOTE G -- OBLIGATIONS UNDER CAPITAL LEASES
The Partnership leases certain boats and computer equipment under capital
leases. In 1991, the Partnership sold 25 houseboats and 20 pontoon boats for
$1,374,000 to a bank and subsequently leased back the boats under a capital
lease. In connection with this sale and lease-back transaction, the Partnership
recorded a deferred gain of $104,000. This gain is being amortized as a offset
to amortization expense over the term of the lease. The lease term is for six
years and monthly payments of $30,000 are required from March through October of
each year. The lease also has a purchase option of $202,000 at the end of the
lease. The Partnership entered into a sale and leaseback transaction for
computer equipment in 1990 for $161,000. The computer lease matured in 1994. The
Partnership is required to pay future minimum payments related to these leases
as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
1996.............................................................. $239,710
1997.............................................................. 443,938
--------
683,648
Amount representing interest...................................... (67,619)
--------
Present value of net minimum lease payments....................... 616,029
Current portion................................................... 198,391
--------
Total................................................... $417,638
========
</TABLE>
The weighted average interest rate on the capital leases approximates 10%
at December 31, 1995.
Accumulated amortization for leased boats and computer equipment at
December 31, 1995 and 1994 was $456,000 and $384,000 , respectively.
Amortization expense, net of the deferred gain amortization of $6,000 each year,
for the leased boats and computer equipment was approximately $65,000 and
$95,000 during 1995 and 1994, respectively.
In connection with the boat lease, the bank requires a monthly deposit of
$3,761 into an escrow account for repairs and maintenance of the boats. This
account has a balance of approximately $26,000 and $43,000, at December 31, 1995
and 1994, respectively, which is included in escrow funds in the accompanying
balance sheets.
NOTE H -- RELATED PARTY TRANSACTIONS
The general partner has a management agreement with the Partnership to
provide management services to the Partnership for a fee equal to 5% of the
annual gross revenues. Such fee is payable to the general partner at a rate
$4,000 per month, plus direct costs and expenses associated with its management
of the Partnership. The remainder of the fee is accrued. Accrued management fees
at 1995 and 1994 were $581,000 and
F-37
<PAGE> 70
JAMESTOWN RESORT & MARINA, LTD
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
$458,000, respectively. Management fees paid in 1995 and 1994 were $48,000 and
management fee expense was $201,000 and $185,000, respectively.
The general partner guaranteed the Demand Note (Note F) and receives as
compensation a fee of 1% of the outstanding note balance annually. Such fee
amounted to $20,000 during 1995 and 1994, respectively. The accrued guarantee
fee was $60,000 and $40,000 at December 31, 1995 and 1994, respectively.
Accrued interest due to the partners was $272,000 and $54,000 at December
31, 1995 and 1994, respectively. Interest expense payable to related parties was
$261,000 and $215,000 during 1995 and 1994, respectively.
Accounts receivable (other) of $25,000 at December 31, 1995 and 1994, from
related parties, are recorded as a reduction of accrued management fees and are
primarily for reimbursable expenses.
The Partnership rents a portion of land to the general partner for $441 per
year.
Also see Note F.
NOTE I -- PARTNERSHIP AGREEMENT
The general partner is required to manage the affairs of the Partnership
but is not required to make a capital contribution for its interest in the
Partnership. For Federal income tax purposes, the special limited partners
received an assigned value of $200,000 (equivalent to eight units) for
contributing their interest in the Sale and Purchase Agreement with Jamestown
Dock, Inc. Eighty units had been sold to limited partners.
The special limited and limited partners are entitled to an annual
Preference Payment of 10% of their capital contributions to the extent that cash
flow exceeds operating expenses, debt service and funds set aside in a working
capital reserve. All unpaid Preference Payments accumulate and may be paid in
future years out of available cash flow. Remaining cash flow, after the
Preference Payment, is distributable to the limited partners and to the general
partner in proportion to their interests in partnership profits. No cash
distributions have been made to the partners. Accumulated but unpaid Preference
Payments totaled $1,372,917 at December 31, 1995 and $1,152,917 at December 31,
1994 (Note L).
The net loss for the years ended December 31, 1995 and 1994 was allocated
in accordance with the Partnership Agreement. No loss is allocated to the
special limited partners because of their nil capital account balances. In
accordance with the Partnership agreement, limited partners are allocated 80% of
net losses to the extent that they have positive capital account balances, and
the general partner is allocated the remaining loss.
NOTE J -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. Cash
and escrow funds, accounts receivable, accounts payable and other liabilities
are carried at amounts that reasonably approximate their fair values.
F-38
<PAGE> 71
JAMESTOWN RESORT & MARINA, LTD
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
The carrying amount and fair value of notes payable and long-term debt
(excluding capital leases) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Mortgage debt............................................... $7,194,000 $5,350,000
Demand note................................................. 1,853,000 1,853,000
Variable rate debt.......................................... 570,000 570,000
Other current debt.......................................... 1,677,000 1,677,000
</TABLE>
NOTE K -- CONTINGENT LIABILITIES
In the normal course of its business, the Partnership is subject to
litigation. Management of the Partnership, based on discussions with its outside
legal counsel, does not believe any claims, individually or in the aggregate,
will have a material adverse impact on the Partnership's financial position.
NOTE L -- SUBSEQUENT EVENTS
On January 29, 1996, the Partnership entered into a loan agreement for
$6,300,000 maturing on February 1, 2001. The agreement requires monthly payments
of principal and interest at a variable rate equal to the commercial paper rate
plus 4.25%. Proceeds of $5,800,000 was used to settle the $5,631,000 mortgage
note described in Note F, and $678,000 was used to settle the boat lease
obligation (Note F) and related loan origination fees. Other short term
borrowings were obtained to finance the difference between amounts paid and the
$5,800,000 proceeds used from the $6,300,000 loan agreement. On March 28, 1996
the remaining $500,000 was drawn on the note. The balance due on the note at
June 30, 1996 was $6,261,000.
As of September 12, 1996, the Partnership, by consent of the JRMI and the
limited partners, entered into an agreement (the "Agreement") with Sonoma
International ("Sonoma"), a public company with no operations. The Agreement
requires the transfer and assignment to Sonoma of all of the common stock of
JRMI and all limited partnership interests in exchange for 1,700,000 shares of
common stock of Sonoma. There are several conditions to closing including the
delivery to Sonoma of an appraisal which states that the assets of the
Partnership, as of the date of the appraisal, have a fair market value of not
less than $10,000,000. That appraisal has been delivered to Sonoma. The
agreement incorporates the payment of the preference payments due (Note I)
through the issuance of shares of Sonoma.
NOTE M -- EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITOR
(unaudited)
On December 9, 1996, the transaction described in Note L was consummated as
described.
F-39
<PAGE> 72
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders
Key West Conch Harbor, Inc.
We have audited the accompanying balance sheets of Key West Conch Harbor,
Inc. as of December 31, 1995 and 1994, and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Key West Conch Harbor, Inc.
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note C to the financial statements,
the Company has incurred losses since its inception and at December 31, 1995,
its current liabilities exceeded current assets by approximately $2,107,802.
These factors raise substantial doubt as to the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note C. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KING, BURNS & COMPANY, P.C.
Dallas, Texas
October 18, 1996
F-40
<PAGE> 73
KEY WEST CONCH HARBOR, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------------
1996 1995 1994
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash..................................................... $ 440,533 $ 20,899 $ 3,657
Receivables.............................................. 10,465 6,452 8,859
Notes receivable......................................... 500,000 -- --
Inventory................................................ 24,264 8,716 --
Prepaid expenses and other............................... 30,370 13,859 500
---------- ---------- ----------
Total current assets............................. 1,005,632 49,926 13,016
---------- ---------- ----------
PROPERTY AND EQUIPMENT
Land..................................................... 1,816,298 1,810,818 1,786,640
Land improvements........................................ 187,740 121,805 101,265
Docks.................................................... 1,105,557 788,016 443,711
Fuel Tanks............................................... 155,994 72,609 --
Furniture, fixtures and equipment........................ 48,837 20,178 550
Construction in progress................................. 3,210 171,233 --
---------- ---------- ----------
3,317,636 2,984,659 2,332,166
Less accumulated depreciation and amortization............. 114,885 70,717 29,719
---------- ---------- ----------
Net property and equipment................................. 3,202,751 2,913,942 2,302,447
---------- ---------- ----------
OTHER ASSETS
Deferred loan fees, net of accumulated amortization of
$10,673, $5,761 and $1,002............................ 58,948 16,712 13,545
---------- ---------- ----------
Total other assets............................... 58,948 16,712 13,545
---------- ---------- ----------
TOTAL ASSETS..................................... $ 4,267,331 $2,980,580 $2,329,008
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt (including $196,041,
$378,584 and $148,700 to related parties)............. $ 299,041 $1,928,584 $1,248,700
Accounts payable......................................... 2,423 23,897 71,792
Accrued interest (including $46,241, $110,405 and $71,798
to related parties)................................... 162,467 137,354 71,798
Accrued liabilities...................................... 39,329 48,633 55,293
Security deposits........................................ 29,500 -- 10,000
Deferred revenue......................................... 17,665 19,260 --
---------- ---------- ----------
Total current liabilities........................ 550,425 2,157,728 1,457,583
---------- ---------- ----------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities (including
$673,959, $908,711 and $990,800 to related parties)...... 3,845,695 1,108,711 990,800
---------- ---------- ----------
Total long-term liabilities...................... 3,845,695 1,108,711 990,800
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes C, D, G and H)
STOCKHOLDERS' DEFICIT
Common stock; $10 par value; 100 shares authorized,
issued and outstanding................................ 1,000 1,000 1,000
Additional paid-in capital............................... 209,223 -- --
Accumulated deficit...................................... (339,012) (286,859) (120,375)
---------- ---------- ----------
Total stockholders' deficit...................... (128,789) (285,859) (119,375)
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT...... $ 4,267,331 $2,980,580 $2,329,008
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 74
KEY WEST CONCH HARBOR, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
NINE MONTHS ENDED 31,
SEPTEMBER 30, -----------------------
1996 1995 1994
----------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES
Slip fees........................................ $ 226,824 $ 143,442 $ 73,715
Lease income from related party.................. -- -- 92,675
Fuel............................................. 893,209 507,914 --
Other............................................ 27,668 2,557 --
----------- --------- ---------
Total revenues........................... 1,147,701 653,913 166,390
----------- --------- ---------
COST OF REVENUES
Slip............................................. 9,288 10,981 11,091
Fuel............................................. 744,515 372,660 --
----------- --------- ---------
Total cost of revenues................... 753,803 383,641 11,091
----------- --------- ---------
GROSS PROFIT....................................... 393,898 270,272 155,299
SELLING, GENERAL AND ADMINISTRATIVE................ 133,605 152,007 60,478
DEPRECIATION AND AMORTIZATION...................... 70,203 45,757 30,721
----------- --------- ---------
INCOME FROM OPERATIONS............................. 190,090 72,508 64,100
INTEREST EXPENSE (including interest to related
parties of $66,014, $94,350 and $91,800)......... 242,243 238,992 184,475
----------- --------- ---------
NET INCOME (LOSS).................................. $ 52,153 $(166,484) $(120,375)
=========== ========= =========
Net loss per common share.......................... $ (521) $ (1,665) $ (1,204)
=========== ========= =========
Weighted average shares outstanding................ 100 100 100
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 75
KEY WEST CONCH HARBOR, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................. 100 $1,000 $ -- $ -- $ 1,000
Net loss for the year ended December 31,
1994..................................... -- -- -- (120,375) (120,375)
--- ------ --------- --------- ---------
Balance at December 31, 1994............... 100 1,000 -- (120,375) (119,375)
Net loss for the year ended December 31,
1995..................................... -- -- -- (166,484) (166,484)
--- ------ --------- --------- ---------
Balance at December 31, 1995............... 100 1,000 -- (286,859) (285,859)
Net loss for the nine months ended
September 30, 1996 (unaudited)........... -- -- -- (52,153) (52,153)
Contribution of capital (unaudited)........ -- -- 209,223 -- 209,223
--- ------ --------- --------- ---------
Balance at September 30, 1996
(unaudited).............................. 100 $1,000 $ 209,223 $(339,012) $(128,789)
=== ====== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 76
KEY WEST CONCH HARBOR, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------
1996 1995 1994
----------------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (52,153) $(166,484) $ (120,375)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization................... 65,291 40,998 29,719
Amortization of deferred loan fees.............. 4,912 4,759 1,002
Changes in assets and liabilities:
Receivables..................................... (4,013) 2,407 (8,859)
Inventory....................................... (15,548) (8,716) --
Prepaid expenses and other...................... (16,511) (13,359) (500)
Notes receivable................................ (500,000) -- --
Accounts payable................................ (21,474) (47,895) 71,792
Accrued interest................................ 25,113 65,556 71,798
Accrued liabilities............................. (9,304) (6,660) 55,293
Security deposits............................... 29,500 (10,000) 10,000
Deferred revenue................................ (1,595) 19,260 --
----------- --------- -----------
Net cash provided (used) by operating
activities............................ (495,782) (120,134) 109,870
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............. (332,977) (652,493) (2,332,166)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank and related party loans...... 1,666,392 797,795 2,239,500
Repayments of borrowings........................ (580,074) -- --
Organization and loan costs..................... (47,148) (7,926) (14,547)
Proceeds from capital contributions............. 209,223 -- --
Proceeds from issuance of common stock.......... -- -- 1,000
----------- --------- -----------
Net cash provided by financing
activities............................ 1,248,393 789,869 2,225,953
----------- --------- -----------
NET INCREASE IN CASH.............................. 419,634 17,242 3,657
Cash at beginning of the period................... 20,899 3,657 --
----------- --------- -----------
Cash at end of the period......................... $ 440,533 $ 20,899 $ 3,657
=========== ========= ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest.......... $ 217,130 $ 248,141 $ 112,674
=========== ========= ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Assumption of debt in connection with the purchase
of property and equipment....................... $ 332,977 $ 652,493 $ 2,332,166
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 77
KEY WEST CONCH HARBOR, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
NOTE A -- ORGANIZATION
General
Key West Conch Harbor, Inc. (the "Company") is a S-Corporation,
incorporated in the State of Florida on December 23, 1993 for the purposes of
acquiring, developing, and operating a marina facility in Key West, Florida.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
Inventory
Inventory is stated at the lower of cost or market and consists of fuel.
Cost is determined on the first-in, first-out ("FIFO") method of accounting.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation on the straight-line method over the estimated useful lives of the
related assets. Major classes of property and equipment and their related useful
lives are as follows:
<TABLE>
<CAPTION>
LIFE IN
MAJOR CLASS YEARS
--------------------------------------------------------------------- -------
<S> <C>
Land improvements.................................................... 20
Docks................................................................ 20
Furniture, fixtures and equipment.................................... 7
Computer equipment................................................... 5
</TABLE>
Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized.
Deferred Loan Fees
Loan fees are capitalized and amortized over the life of the loan using the
straight-line method.
Revenue Recognition
Annual or seasonal slip rentals received are recognized as deferred revenue
and amortized into income over the life of the rental contract using the
straight-line method. All other revenues are recognized at the time the rental
occurs or the delivery of the product or service takes place.
Lease income
During 1994 all fuel operations where leased to a related party who made
lease payments of all interest on the first mortgage. Income recorded in 1994
from these payments was $92,675.
F-45
<PAGE> 78
KEY WEST CONCH HARBOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
Loss per share
Loss per share of common stock is based upon the weighted average number of
common shares outstanding. There is no effect on loss per share after giving
effect to proforma income taxes as if the Company was taxed as a C-Corporation.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Income Taxes
Taxable income or loss of the S-Corporation is allocated to the
shareholders in accordance with the provisions of the Stockholders agreement.
The Company qualifies as a S-Corporation and as such, Federal income taxes
accrue to the shareholders rather than to the Company. Accordingly, the
accompanying statements of operations of the Company include no provision for
Federal income taxes.
Unaudited Period
The financial information as of September 30, 1996 and for the nine months
ended September 30, 1996 is unaudited. In the opinion of management, such
information contains all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for such period.
The results of operations for the interim period is not necessarily indicative
of the results of operations for the full fiscal year.
NOTE C -- GOING CONCERN UNCERTAINTY
As reflected in the statements of operations, the Company incurred net
losses of $166,484 and $120,375 in 1995 and 1994, respectively. At December 31,
1995, current liabilities exceed current assets by $2,107,802. These factors,
among others, raise substantial doubt as to the Company's ability to continue as
a going concern.
Management has been successful in the past in negotiating delays in the
payment of the Company's loans and was successful in refinancing the mortgage
debt (Notes D and H) subsequent to December 31, 1995. Management is also
negotiating to transfer ownership and control of the Company to a public company
(Note H). The public company has plans to raise additional capital in the public
market after the acquisition.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classification of liabilities which may result from the possible
inability of the Company to continue as a going concern.
F-46
<PAGE> 79
KEY WEST CONCH HARBOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
NOTE D -- NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
First mortgage...................................................... $1,550,000 $1,100,000
Second mortgage -- stockholder...................................... 500,000 500,000
Third mortgage -- related party..................................... 200,000 200,000
First note -- stockholder........................................... 245,000 245,000
Second note -- stockholder.......................................... 125,000 125,000
Working capital note -- stockholder................................. 57,295 69,500
First note payable.................................................. 200,000 --
Second note payable -- stockholders................................. 160,000 --
---------- ----------
3,037,295 2,239,500
Less current maturities............................................. 1,928,584 1,248,700
---------- ----------
Long-term portion................................................... $1,108,711 $ 990,800
========== ==========
</TABLE>
First Mortgage. On December 29, 1993 the Company entered into a note
payable for $1,100,000 with a financial institution to purchase the marina. The
note is collateralized by the property. The mortgage is at a variable rate of
1 1/2% above the banks prime rate and matures on June 29, 2010. Payments of
interest were required from January 29, 1994 through July 29, 1995, thereafter
monthly payment of principal and interest were required to fully amortize the
note through the maturity date.
On March 27, 1995 the Company renegotiated the variable rate note with the
financial institution for $1,550,000 (which included unpaid interest). This note
matures with all the principal due on October 1, 1996 and requires monthly
interest payments beginning on May 1, 1995, at a rate of 1% over the banks
index. (See Note H).
Prepaid interest on this note was $13,359 at December 31, 1995.
Second Mortgage. On December 28, 1993 the Company entered into a $500,000
promissory note with a stockholder, at a fixed rate of 8%, collateralized by a
second mortgage on the property. Annual payments are required for principal and
interest totaling $50,000 commencing on January 5, 1995 and continuing until the
maturity date of January 5, 2004. Principal and interest payments due on January
5, 1995, were deferred. Accrued interest was $44,257 and $40,000 at December 31,
1995 and 1994, respectfully.
Third Mortgage. As part of the original purchase the Company entered into a
$200,000 promissory note with a related party. This note had a fixed rate of 10%
and matures on March 15, 1997. (See Note H).
On January 13, 1995 the Company renewed the $200,000 promissory note,
subordinate to the first and second mortgage, with a stockholder, at a fixed
rate of 10%. The note matures on January 13, 1997 and requires monthly interest
payments.
First Note to Stockholder. On December 28, 1993 the Company entered into a
$245,000 promissory note with a stockholder, at a fixed rate of 8%. Annual
payments are required of $50,000 (principal and interest) commencing January 5,
1995 and continuing until the maturity date of January 5, 2004. Principal and
interest payments due on January 5, 1995, were deferred. At December 31, 1995
and 1994 accrued interest was $39,200 and $19,600, respectively. (See Note H).
Second Note to Stockholder. On December 28, 1993 the Company entered into a
$125,000 promissory note with a stockholder, at a fixed rate of 8% with a
maturity date in July 2001. Annual interest payments are required commencing on
January 5, 1995 and continuing until the maturity date in July 2001. Interest
due on
F-47
<PAGE> 80
KEY WEST CONCH HARBOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
January 5, 1995 was deferred. At December 31, 1995 and 1994 accrued interest was
$20,000 and $10,000, respectively. (See Note H).
Working Capital Note to Stockholder. During 1994, working capital of
$69,500 was provided to the Company by a stockholder at a fixed rate of 8%. The
timing of the repayment of the note payable is at the discretion of the Company
and is classified as current maturities in the accompanying balance sheets. The
balance outstanding at December 31, 1995 and 1994 was $57,295 and $69,500,
respectively. At December 31, 1995 and 1994 accrued interest was $6,948 and
$2,198, respectively.
First Note payable. On August 3, 1995 the Company entered into a $200,000
promissory note with a financial institution maturing on February 3, 1999, at a
variable rate of 1 3/4% above the financial institutions base rate. Monthly
interest payments are required.
Second Note Payable. The following two notes were entered into by
stockholders of the Company to provide operating funds.
On October 2, 1995 the stockholders entered into a note payable for
$100,000 with the principal maturing on October 2, 1996, at a variable rate of
1% over prime. Monthly interest payments commencing on November 2, 1995 are
required.
On December 27, 1995 the stockholders entered into a second note payable
for $100,000 with the principal maturing on November 27, 1996, at a variable
rate of 2% over prime. Monthly interest payments commencing on January 27, 1995
are required. At December 31, 1995 $60,000 had been drawn and is outstanding
under this note payable.
Aggregate maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................. $1,928,584
1997............................................. 284,752
1998............................................. 87,636
1999............................................. 290,760
2000............................................. 94,143
Thereafter....................................... 351,420
----------
Total.................................. $3,037,295
==========
</TABLE>
NOTE E -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. Cash,
accounts receivable, accounts payable and other liabilities are carried at
amounts that reasonably approximate their fair values.
The carrying amount and fair value of notes payable and long-term debt are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Variable rate debt.................................. $1,910,000 $1,910,000
Fixed rate debt..................................... 1,070,000 1,151,250
Demand note......................................... 57,296 57,296
</TABLE>
F-48
<PAGE> 81
KEY WEST CONCH HARBOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
The fair value of the Company's fixed rate debt have been estimated based
upon relative changes in the Company's variable borrowing rates since
origination of the fixed rate debt. Fair values of variable rate debt and demand
notes are deemed to approximate carrying amount.
NOTE F -- RELATED PARTY TRANSACTIONS
The Company has a $9,381 payable to a stockholder related to commissions
earned in conjunction with the purchase of the marina on December 28, 1993. In
addition, the Company has a $30,000 payable to a stockholder for a finders fee
in conjunction with the purchase of the marina.
During 1995 and 1994, the Company entered into various notes payable with
stockholders of the Company. See Note D.
Accrued interest due to the stockholders was $110,405 and $71,798 at
December 31, 1995 and 1994, respectively. Interest expense in connection with
notes due to stockholders was $94,350 and $91,800 during 1995 and 1994,
respectively.
Upon formation of the S Corporation, the Company purchased the Key West
facility for approximately $2,300,000 from a stockholder. This purchase price
approximated the fair market value of the property.
NOTE G -- CONTINGENT LIABILITIES
In the normal course of its business, the Company is subject to litigation.
Management of the Company, based on discussions with its outside legal counsel,
does not believe any claims, individually or in the aggregate, will have a
material adverse impact on the Company's financial position.
NOTE H -- SUBSEQUENT EVENTS
On July 25, 1996 the majority stockholder sold 73.625 shares to a third
party which resulted in a change in control of the Company in exchange for
$1,700,000.
On April 8, 1996, the Company entered into a loan agreement for $2,724,185
maturing on April 1, 2016. This agreement renewed and consolidated the first
mortgage of $1,550,000 with an additional amount of $1,174,185 which was used to
pay off the third mortgage, the second note payable, to provide operating funds
and to fund expansion of the fuel system. The agreement requires twenty-four
monthly interest payments beginning May 1, 1996 at a rate of 9% and two hundred
and sixteen monthly principal and interest payments of $25,510 beginning May 1,
1998 at a rate of 9% during the first 36 payments and 1% over prime thereafter.
Effective of October 31, 1996, the Company, by consent of the stockholders,
entered into an agreement (the "Agreement") with Sonoma International
("Sonoma"), a public company. The Agreement requires the transfer and assignment
to Sonoma of all of the common stock of the Company in exchange for 300,000
shares of common stock of Sonoma.
NOTE I -- EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITOR
(unaudited)
On December 9, 1996, the transaction described in Note H was consummated as
described.
F-49
<PAGE> 82
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
The Company...........................
Use of Proceeds....................... 8
Dividend Policy....................... 9
Dilution.............................. 9
Capitalization........................ 11
Selected Financial Information........ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 16
Management............................ 20
Certain Transactions.................. 23
Principal Shareholders................ 24
Description of Capital Stock.......... 25
Shares Eligible for Future Sale....... 26
Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure................ 27
Underwriting.......................... 27
Legal Matters......................... 28
Experts............................... 28
Additional Information................ 28
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
SHARES
SONOMA
INTERNATIONAL
COMMON STOCK
---------------------------------
PROSPECTUS
---------------------------------
NATIONAL SECURITIES CORPORATION
, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE> 83
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation and Bylaws provide that the Company
will indemnify its directors and officers to the fullest extent provided by
Nevada law. In addition, the Articles of Incorporation contain a provision
limiting a director's and officer's liability for monetary damages to the
fullest extent permitted by Nevada law.
Furthermore, Section 78.751 of the Nevada General Corporation Law (the
"NGCL") contains provisions relating to indemnification of officers and
directors. Section 78.751(1) provides that a corporation may indemnify any
person who was or is a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except for an action by or in right of the corporation by reason of the fact
that he was a director, officer, employee or agent of the corporation. In order
to indemnify, it must be shown that he acted in good faith and in a manner he
reasonably believed to be in the best interest of the corporation. Generally, no
indemnification may be made where the person has been determined to be negligent
or guilty of misconduct in the performance of his duty to the corporation.
Section 78.751(2) of the NGCL further allows the corporation to indemnify
any person who was or is a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee, or agent
of the corporation, including amounts paid in settlement and attorneys' fees if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. Indemnification may not be
made for any claim, issue or matter to which a court of competent jurisdiction
has adjudged an officer or director liable to the corporation, unless and only
to the extent that a court of competent jurisdiction determines that in view of
the circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding discussed in the preceding paragraphs, Section 78.751(3) of the NGCL
provides that he must be indemnified by the corporation against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the defense.
Except when indemnification is required by a court of competent
jurisdiction, Section 78.751(4) of the NGCL states that the corporation shall
only indemnify upon a determination of (i) the shareholders; (ii) majority vote
of the board that were not parties to the action; (iii) if ordered by a majority
vote of a quorum of directors who were not parties to the action, suit or
proceeding, by independent legal counsel in a written opinion; or (iv) by
independent legal counsel in a written opinion if no quorum of directors who
were not parties to the action may be obtained.
Unless ordered by a court of competent jurisdiction, indemnification may
not be made to or on behalf of any officer or director if a final adjudication
establishes that his acts or omissions involved intentional misconduct, fraud or
a knowing violation of the law and were material to the cause of action.
II-1
<PAGE> 84
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred in connection with the issuance and
distribution of the Common Stock covered by this Registration Statement, all of
which will be paid by the Company are as follows:
<TABLE>
<S> <C>
Registration Fees..................................................... $ 5,848.47
Accounting Fees and Expenses.......................................... 150,000.00
Printing Expenses..................................................... 150,000.00
Legal Fees and Expenses............................................... 300,000.00
Miscellaneous......................................................... $ 425,000.00
-------------
Total....................................................... $1,030,848.47
=============
</TABLE>
ITEM 26. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR.
As a result of the closing of the acquisition of Jamestown and Key West, a
total of 2,000,000 shares of Common Stock were issued on December 9, 1996. The
Company issued 1,700,000 of the aforementioned shares to the holders of all the
limited partnership interests of Jamestown Resort & Marina, Ltd. in exchange for
those limited partnership interests and all the outstanding shares of Jamestown
Resort & Marina, Inc. A total of 300,000 of the above described shares were
issued to the stockholders of Key West Conch Harbor, Inc. in exchange for all
the issued and outstanding shares of Common Stock in Key West. In September 1995
a total of 172,101 shares of Common Stock were issued to Gary V. Sutley for
management services rendered to the Company and in lieu of salary.
ITEM 27. INDEX TO EXHIBITS.
The following is a list of all exhibits filed as a part of this
Registration Statement on Form SB-1, including those incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
1.1 -- Underwriting Agreement**
3.1 -- Articles of Incorporation of the Company, as amended to date.**
3.2 -- Bylaws of the Company.**
4.1 -- Specimen Common Stock Certificate.**
5.1 -- Opinion re: legality.**
10.1 -- Jamestown Lease with Corps.**
10.2 -- Texaco Star Port Agreement.**
10.3 -- Jamestown/Commonwealth of Kentucky Development Agreement.**
10.4 -- NationsBank Promissory Note.**
10.5 -- James Frye Employment Agreement.**
21.1 -- Subsidiaries**
23.1 -- Consent of Jackson & Walker, L.L.P.**
23.2 -- Consent of Camby Karlinsky & Stein LLP.**
23.3 -- Consent of King, Burns & Company, P.C.**
24.1 -- Power of Attorney (Included on II-5 and II-6).*
27.1 -- Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by Amendment.
II-2
<PAGE> 85
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE> 86
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lexington, State of Kentucky, on January 17, 1997.
SONOMA INTERNATIONAL
By: /s/ JAMES L. FRYE
----------------------------------
James L. Frye,
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form SB-2 has been signed below by the following
persons on behalf of the Registrant in the capacities indicated on January 17,
1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------- --------------------------------------------
<C> <S>
/s/ JAMES L. FRYE President and Chief Executive Office and
- -------------------------------------------- Director (Principal Executive Officer)
James L. Frye
/s/ PETER SACKMANN Chief Financial Officer (Principal Financial
- -------------------------------------------- and Accounting Officer)
Peter Sackmann
/s/ R. DUDLEY WEBB Director, Chairman of Board
- --------------------------------------------
R. Dudley Webb
/s/ MARTHA LAYNE COLLINS Director, Vice Chairman of Board
- --------------------------------------------
Martha Layne Collins
/s/ DR. BARRETT BERNARD, M.D. Director
- --------------------------------------------
Dr. Barrett Bernard, M.D.
/s/ CHARLES W. HENNE Director
- --------------------------------------------
Charles W. Henne
/s/ GLENN HOSKINS Director, Secretary
- --------------------------------------------
Glenn Hoskins
/s/ DR. EDWIN NIGHBERT, M.D. Director
- --------------------------------------------
Dr. Edwin Nighbert, M.D.
/s/ FRED SKOMP Director, Vice President -- Development
- --------------------------------------------
Fred Skomp
/s/ IRVIN STUMLER Director
- --------------------------------------------
Irvin Stumler
</TABLE>
II-4
<PAGE> 87
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Officers and
Directors of Sonoma International (the "Company") hereby constitutes and
appoints James L. Frye or Peter Sackmann (with full power to act alone), his
true and lawful attorney-in-fact and agent, with full power of substitution, for
him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute, and file any and all documents relating to this
Registration Statement, including any and all amendments, exhibits and
supplements thereto, with any regulatory authority, granting unto said attorney
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he himself might or
could do if personally present, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on January 17, 1997.
SONOMA INTERNATIONAL
By: /s/ JAMES L. FRYE
----------------------------------
James L. Frye
President and Chief Executive
Officer
By: /s/ PETER SACKMANN
----------------------------------
Peter Sackmann
Chief Financial Officer (Principal
Financial and Accounting
Officer)
By: /s/ R. DUDLEY WEBB
----------------------------------
R. Dudley Webb
Director, Chairman of Board
By: /s/ MARTHA LAYNE COLLINS
----------------------------------
Martha Layne Collins
Director, Vice Chairman of Board
By: /s/ DR. BARNETT BERNARD, M.D.
----------------------------------
Dr. Barnett Bernard, M.D.
Director
By: /s/ CHARLES W. HENNE
----------------------------------
Charles W. Henne
Director
II-5
<PAGE> 88
By: /s/ GLENN HOSKINS
--------------------------------
Glenn Hoskins
Director, Secretary
By: /s/ DR. EDWIN NIGHBERT, M.D.
--------------------------------
Dr. Edwin Nighbert, M.D.
Director
By: /s/ FRED SKOMP
--------------------------------
Fred Skomp
Director, Vice
President -- Development
By: /s/ IRVIN STUMLER
--------------------------------
Irvin Stumler
Director
II-6
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
1.1 -- Underwriting Agreement**
3.1 -- Articles of Incorporation of the Company, as amended to date.**
3.2 -- Bylaws of the Company.**
4.1 -- Specimen Common Stock Certificate.**
5.1 -- Opinion re: legality.**
10.1 -- Jamestown Lease with Corps.**
10.2 -- Texaco Star Port Agreement.**
10.3 -- Jamestown/Commonwealth of Kentucky Development Agreement.**
10.4 -- NationsBank Promissory Note.**
10.5 -- James Frye Employment Agreement.**
21.1 -- Subsidiaries**
23.1 -- Consent of Jackson & Walker, L.L.P.**
23.2 -- Consent of Camby Karlinsky & Stein LLP.**
23.3 -- Consent of King, Burns & Company, P.C.**
24.1 -- Power of Attorney (Included on II-5 and II-6).*
27.1 -- Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by Amendment.
II-7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SONOMA
INTERNATIONAL AND AFFILIATES COMBINED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH SB-2.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 DEC-31-1995
<CASH> 500,793 57,200
<SECURITIES> 0 0
<RECEIVABLES> 776,180 92,180
<ALLOWANCES> 3,876 3,876
<INVENTORY> 102,535 84,116
<CURRENT-ASSETS> 1,444,874 289,935
<PP&E> 17,296,548 16,819,308
<DEPRECIATION> 4,519,514 4,058,462
<TOTAL-ASSETS> 15,218,033 13,745,106
<CURRENT-LIABILITIES> 6,801,777 9,651,404
<BONDS> 0 0
0 0
0 0
<COMMON> 1,707 1,707
<OTHER-SE> (2,331,027) (4,855,588)
<TOTAL-LIABILITY-AND-EQUITY> 15,218,033 13,745,106
<SALES> 2,107,184 1,792,630
<TOTAL-REVENUES> 4,688,803 4,673,935
<CGS> 1,635,974 1,342,169
<TOTAL-COSTS> 3,404,606 3,742,804
<OTHER-EXPENSES> 451,037 654,612
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 978,981 1,134,742
<INCOME-PRETAX> (145,821) (829,860)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (145,821) (829,860)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 2,461,159 418,699
<CHANGES> 0 0
<NET-INCOME> 2,315,338 (411,161)
<EPS-PRIMARY> 1.36 (0.27)
<EPS-DILUTED> 1.36 (0.27)
</TABLE>
