<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-6683
SONOMA INTERNATIONAL
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
NEVADA 94-0880052
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3000 LEXINGTON FINANCIAL CENTER, 40507
LEXINGTON, KY (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (606) 281-0000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<C> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------------------------- ----------------------------------------------
</TABLE>
Securities registered Under 12(g) of the Exchange Act:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
State issuer's revenues for its most recent fiscal year: $4,157,734.
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked price of
such stock, as of a specified date within the past 60 days; As of December 31,
1996 -- $0.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of December 31, 1996 there
were 2,300,000 shares of Common Stock outstanding.
The following described documents are incorporated by reference in the part
of this Form 10-KSB noted after said description: Information Statement sent to
the stockholders of the Company on or about November 14, 1996. (PART II) and
Registration Statement on Form SB2 as filed with the Commission on January 21,
1997, Registration No. 333-20037 and Amendment No. 1 thereto as filed with the
Commission on March 25, 1997 (PART III).
================================================================================
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
DEVELOPMENT OF THE COMPANY
Sonoma is a Nevada corporation (the "Company") 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. Since 1994, the
Company primarily focused on locating merger candidates or assets that could be
acquired to allow the Company to restart operations.
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 1,369,025 shares of Common Stock of the Company. In
addition and as a condition to the acquisition, pre-acquisition obligations of
Jamestown in the amount of $1,213,837 were relieved through the issuance of
330,975 shares of Common Stock of the Company. The creditors released their
Notes either through letter releases or by marking their obligations paid in
full. In October 1996, the Company also entered into an agreement with the
stockholders of Key West to acquire all of the capital stock of Key West. In
return for all the capital stock of Key West, the Key West stockholders received
300,000 shares of Common Stock and a demand note for $175,000. Both transactions
closed on December 9, 1996, with Jamestown and Key West becoming wholly owned
subsidiaries of the Company.
CURRENT BUSINESS
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 1988 with the original term of the lease ending in December 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 U.S. 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.
A portion of Jamestown 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 (the "Commonwealth") after Jamestown
entered into a development agreement with the Commonwealth in June 1988 whereby
Jamestown agreed to construct certain resort improvements and to pay the
Commonwealth 1% of its gross revenues annually.
1
<PAGE> 3
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. The average slip rents for $2,235 annually and
the marina is currently 90% occupied.
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. The Company
operates each of these facilities.
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.
Currently the average nightly rental for the suites is $122.00 and for the
Cabins is $87.50. Occupancy rate in 1996 for both types of accommodations during
the season was 72%. The Corps has approved a development plan for 52 privately
owned condominiums which will be financed and built by a third party contractor
on land adjacent to Jamestown. The contractor has agreed to allow Jamestown to
sell and manage the condominiums in return for a fee equal to a net 40% of the
revenues from the condominium rentals. 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 and are operated
by the renters. The houseboat rental is $226.50 per night and were occupied
63.3% of the time during the normal summer season in 1996. 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).
2
<PAGE> 4
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 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 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. The average slip rental for all leased slips is $747.00
per day and for all transit slips is $820.00 per day. The 1996 occupancy rate
for the Marina was 99% during the peak season of December to June.
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. Key West recently completed construction of an 800 sq. ft. two story
building to be used for marina operations, restroom facility and a small
convenience store, which Key West operates. The project is still in development
with food and beverage service (restaurant), and small retail shops planned for
the future, however no specific construction plans or costs estimates have been
completed.
Key West employs six full time employees.
ITEM 2. DESCRIPTION OF PROPERTY
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 expires on December 31, 2012,
however, the original 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 1996, the
Company paid $70,000 and $68,000 in rent, respectively. The lease prohibits
gambling on the premises. The Company pays a one percent annual revenue fee to
the Commonwealth in exchange for improvements to the island and causeway, which
fee was $40,000 in both 1995 and 1996. The improvements to Jamestown are subject
to a first mortgage in a total amount $6,220,619 owed to NationsCredit
Commercial Corporation, with a variable rate equal to the commercial paper rate
plus 4.25% and which matures in 2001, and a second mortgage in the principal
amount of $1,852,777 with a interest rate of 1 1/2% over the variable prime
lending rate which is due on demand owed to the Webb Family Trust.
3
<PAGE> 5
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 a first mortgage totalling $3,224,185 with a variable interest rate
of 1% over TIB Bank of the Keys N.A.'s index rate, (currently the interest rate
is 9.0%). The mortgage matures in April 2016.
The Company leases its corporate executive offices located in Lexington,
Kentucky on an annual basis and its current lease expires June 30, 1997 with
lease payments of $500.00 per month.
Management believes that the properties described above are adequately
insured.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material legal proceedings pending, except that with the
acquisition of Jamestown Resort & Marina, Ltd., the Company became a defendant
in two lawsuits; one involving former employees and one liability claim.
Management believes that an adverse resolution of these lawsuits will not have a
material impact on the financial condition of the Company as almost all the
potential loss from said lawsuits is covered by insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Information Statement sent to the stockholders of the Company on or
about November 14, 1996 is incorporated in its entirety by reference.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company has not been traded for more than two years
prior to June 30, 1996 due to the Company's inactivity. The Company filed an
offering on Form SB-2 with the Commission on February 21, 1997, however there
can be no assurance that the offering will be successful or if successful, that
a market for the Company's common stock will develop.
As of December 31, 1996 there were approximately 977 stockholders of record
of the common stock of the Company.
No cash dividends on the common stock of the Company have been declared or
paid during the two years ending December 31, 1996, and there are currently no
plans to pay a cash dividend.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the years ended December 31, 1995 and
1996. This discussion should be read in conjunction with the consolidated
financial statements of the Company and the related notes thereto appearing
elsewhere in this annual report. 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. 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, it has not had material operations
since 1988. Between 1988 and 1994 the Company's directors restructured the
Company with the purpose of making the Company attractive to potential merger or
acquisition candidates. In 1994 the Company began in earnest to search for
acquisition or merger candidates which would restore Sonoma to an operating
entity and in September 1996 entered into an agreement with the general partner
of Jamestown Resort & Marina, Ltd. to acquire all the
4
<PAGE> 6
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. The Company also entered into a similar agreement with
stockholders of Key West Conch Harbor, Inc. in October 1996 to acquire all of
the outstanding common stock of Key West in return for Common Stock. Both the
Jamestown and Key West acquisition transactions were closed on December 9, 1996.
For accounting purposes, as the Jamestown Limited Partners and its General
Partner end up with the majority of Sonoma's stock, the acquisition by Sonoma of
all of the limited partnership interests and general partnership interest was
accounted for as a recapitalization of Jamestown with Jamestown as the acquirer
(a reverse acquisition). Accordingly, the financial statements prior to the
acquisition of Sonoma and Key West included herein are those of Jamestown. The
transaction with Key West was accounted for using the purchase method. The
results of operations of Key West and Sonoma have been included in the
consolidated statements of operations from the acquisition dates.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31,
1996
REVENUES
Revenues for the year ended December 31, 1996 increased $137,712 or 3% from
the same period in 1995. On December 9, 1996, Sonoma acquired Key West and
accordingly revenues include one month of Key West operations totaling $147,636.
If Key West revenue is excluded, Jamestown revenues are essentially the same for
1995 and 1996.
Slip rental fees increased by 3 1/2% for the 1997 calendar year at
Jamestown. Additional revenues are expected in 1997 due to a change in
management's 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 paddle boat revenues.
Revenue increases resulting from the acquisition of Key West are expected
to be approximately $1,836,000 during calendar 1997.
COST OF REVENUES
During the year ended December 31, 1996, cost of revenues decreased
$111,241 ($204,105 excluding the Key West costs of revenues of $92,864).
Excluding the effect of Key West, the decrease in cost of revenues was 11%. The
primary reason for the decline in 1996 cost of revenues was a decrease of
$102,321 due to major repairs and maintenance in the rental boat department
incurred in 1995. Cost of revenues as a percentage of revenues declined from 47%
for the year ended December 31, 1995 to 42% compared to the same period in 1996.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $52,836 or 4% over
1995 to $1,331,224. Included in this increase are $21,410 attributed to Key West
operations for December 1996. The costs of Jamestown utilities and lease expense
resulted in $50,247 of the increase. The increase was due to increased
consumption, higher rates and fewer recoveries from slip rentals. In addition
property taxes increased $11,597 due to increases in the tax base of certain
assets. These increases were off set by decreases in various fees totaling
$16,450 which are no longer payable after the consummation of the acquisition
transactions discussed previously.
As a result of Sonoma now providing management services to its
subsidiaries, Jamestown will not incur certain management fees in the future,
which amounted to approximately $194,000 in 1996. This reduction at Jamestown
will be off set by an increase in management salaries of approximately the same
amount at Sonoma.
5
<PAGE> 7
INTEREST EXPENSE
Interest expense increased from $867,346 for the year ended December 31,
1995 to $1,025,784 for the year ended December 31, 1996. The increase of
$158,438 was due to an increase of $30,036 related to the Key West acquisition
with the majority of the remaining difference due to increases in interest rates
resulting from the refinancing of certain debt in January 1996. Interest expense
is expected to decrease to approximately $915,000 in 1997 after paying off
approximately $5,168,000 of debt with the proceeds from the Company's
anticipated public offering however, there can be no assurance that such an
offering will be successful.
GAIN ON REDUCTION OF OBLIGATIONS
In January 1996 the Company refinanced its primary debt resulting in an
extraordinary gain of $2,518,486 (net of income taxes of zero).
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased $21,661 or 4% to $630,516
from 1995 to 1996, including the amortization of goodwill which increased
$54,171 in 1996. This increase was primarily due to an increase in the
amortization of deferred costs related to the loan refinancing in January, 1996.
The increase was partially offset by a decrease in depreciation of fixed assets
which are fully depreciated.
LIQUIDITY AND CAPITAL RESOURCES
The Company refinanced Jamestown's primary debt in January 1996 which
resulted in a reduction of indebtedness of approximately $2,518,000. The Company
believes this reduction and related decrease in interest payments will increase
cash available for operations and debt servicing.
Negative working capital at December 31, 1995 was $6,733,208 as compared to
negative working capital at December 31, 1996 of $5,721,567. The Company
believes that the net proceeds from its anticipated offering will provide
$14,700,000 in funds. Of these proceeds approximately $4,090,000 and $1,077,000
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, however, there can be no assurance that the offering will be
successful.
The Company has a mortgage note amounting to $6,220,691 at December 31,
1996 on the Jamestown property with an interest rate of 4 1/4% over the
commercial paper lending rate. The mortgage matures on February 1, 2001 and
requires monthly payments of approximately $72,000 until maturity. These
payments include $8,000 per month for deposit into a property tax and capital
improvement escrow account. The Company has a mortgage note amounting to
$3,224,185 on the Key West property with an interest rate of 9%. The mortgage
matures on April 1, 2016 and requires monthly payments of approximately $30,000
during 1997. The Company has a note payable of $1,852,777 with a related party
with an interest rate of 1 1/2% over the prime lending rate and which is due on
demand.
The Company currently does not have a line of credit.
Cash flows provided by operations were $524,745 in 1995, compared to
$125,583 in 1996. This decrease was due to a number of factors, but was
significantly affected by deferral of payment of accrued interest and management
fees in 1996, which was offset by a combination of a number of other items. Cash
used in investing activities of $603,820 in 1995 and $32,224 in 1996 was
primarily used to purchase property and equipment. The decrease in 1996 was due
to major purchases and improvements being performed in 1995 at the Jamestown
facility. Cash provided by financing activities was $85,119 in 1995 and $1,366
in 1996. During 1995, the Company borrowed $1,250,700 from and repaid $844,175
to various entities. In addition, the Company repaid obligations under capital
leases and incurred refinancing costs. During 1996, the Company borrowed
$7,183,976 from and repaid $6,329,077 to various entities. Included in this
amount was a refinancing
6
<PAGE> 8
amount totaling $6,300,000 related to the Jamestown debt refinancing in January
1996. In addition, the Company repaid obligations under capital leases and
incurred refinancing costs.
Management believes that the current facilities at Jamestown and Key West
are in excellent condition and will not require substantial capital renovations
in the near term.
The Company has identified some potential acquisition candidates but has
not entered into any negotiations, nor does it currently have plans to make any
specific 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 anticipated offering or bank borrowings.
There can be no assurance that the Company's anticipated offering will be
successful or that the Company's operations 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.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements identified in the index to Financial
Statements appearing under "Item 13. Exhibits and Reports on Form 8-K" are
incorporated by reference.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCING
DISCLOSURE.
Effective September 12, 1996, the Company, by act of its board of
directors, engaged King Griffin & Adamson 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 certain
acquisition agreements and the acquisition by the Company of Jamestown and Key
West. The Company had not consulted with the newly engaged independent
accountant on accounting matters prior to its engagement.
By act of its board of directors the Company has changed its fiscal year
end from June 30 to December 31.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
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
7
<PAGE> 9
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 reorganizational bankruptcy filings of several
real estate ventures which Mr. Webb was involved in with Kentucky Central in 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.
8
<PAGE> 10
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.
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.
ITEM 10. 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 with
any cash payments. 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this annual report,
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
NAME OF BENEFICIAL --------------------------
OWNER OR GROUP(1) NUMBER PERCENTAGE
------------------ ----------- -----------
<S> <C> <C>
The Webb Family Trust(2).................................... 915,197 39.8%
Dawn Irrevocable Trust(2)................................... 201,800 8.8%
Frederick Skomp............................................. 117,300 5.1%
L. Barrett Bernard.......................................... 91,081 4.0%
Edwin Nighbert.............................................. 20,679 0.1%
Irvin Stumler............................................... 10,339 0.05%
Glenn Hoskins............................................... 9,977 0.04%
Marla Collins Webb(2)....................................... 182,700 7.9%
Directors/Executive Officers as a Group (11 persons)........ 1,546,273 67.2%
</TABLE>
- ---------------
(1) The address for all the persons or entities named above is 3000 Lexington
Financial Center, Lexington, Kentucky 40507.
9
<PAGE> 11
(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 also the daughter of Martha Layne Collins, Vice Chairman of
the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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.
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. In
addition, there may be opportunities which the Company and the Webb Companies
may wish to be jointly involved in and from which both companies expect to make
a profit. Consequently, should either event occur, Mr. Webb has orally agreed in
statements to the Board of Directors of the Company 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 (i) to the Webb Family Trust
in the form of several notes in an approximate aggregate amount of $2,760,277
which are due on demand and are subject to varying interest rates with the
largest note bearing an interest rate of 1 1/2% over the prime lending rate and
is collateralized by a second mortgage on the Jamestown property improvements
and (ii) to Mr. A. Frederick Skomp in the approximate amount of $100,000,
payable upon demand at a variable interest rate of 1% over prime and a second
note in the principal of $175,000 payable on demand at no interest. Both
obligations are to be repaid with proceeds of the Company's anticipated public
offering.
10
<PAGE> 12
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits filed with Amendment No. 1 to Form SB-2 as filed with the
Commission on March 25, 1997 by the Company are incorporated herein by this
reference.
Consolidated Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Data Schedule filed herewith.
(b) Form 8-K
No reports on Form 8-K were filed in the last quarter of the period covered
by this report.
11
<PAGE> 13
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders'
Deficit................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders
Sonoma International
We have audited the accompanying consolidated balance sheets of Sonoma
International and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated 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 consolidated financial position of Sonoma
International and subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
March 7, 1997
F-2
<PAGE> 15
SONOMA INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 9,628 $ 104,353
Escrow funds.............................................. 26,673 88,400
Receivables:
Trade (net of allowance for doubtful accounts of $3,876
for each year)......................................... 47,653 54,492
Other................................................... 34,199 27,008
Inventory................................................. 75,400 85,668
Prepaid expenses.......................................... 46,456 17,651
----------- -----------
Total current assets................................ 240,009 377,572
----------- -----------
PROPERTY AND EQUIPMENT
Buildings and improvements................................ 2,352,561 2,599,885
Land...................................................... -- 3,150,000
Land improvements......................................... 79,737 293,831
Docks and floating buildings.............................. 7,180,728 8,220,250
Boats and improvements.................................... 782,105 2,116,453
Furnishings, fixtures and equipment....................... 1,640,722 1,692,566
Houseboats and pontoons under capital lease............... 1,373,649 --
Computers under capital lease............................. 161,734 193,171
Fuel tanks and containment buildings...................... -- 151,132
Vehicles.................................................. 22,482 22,482
Construction in progress.................................. 240,931 140,178
----------- -----------
13,834,649 18,579,948
Less accumulated depreciation and amortization.............. 3,987,745 4,537,677
----------- -----------
Net property and equipment.................................. 9,846,904 14,042,271
----------- -----------
OTHER ASSETS
Deferred loan fees, net of accumulated amortization of
$11,827 and $77,593..................................... 106,438 322,858
Goodwill, net of accumulated amortization of $165,825 and
$184,250................................................ 571,175 1,006,310
Deferred offering costs................................... -- 336,632
----------- -----------
Total other assets.................................. 677,613 1,665,800
----------- -----------
TOTAL ASSETS................................................ $10,764,526 $16,085,643
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt (including $3,410,277
and $4,052,778 to related parties)...................... $ 3,819,067 $ 4,395,941
Current portion of obligations under capital leases....... 198,391 --
Accounts payable.......................................... 188,555 453,522
Accrued interest (including $272,272 and $57,240 to
related parties)........................................ 1,246,452 150,733
Accrued liabilities....................................... 141,387 299,802
Security deposits......................................... 29,074 49,319
Deferred revenue.......................................... 633,190 696,622
Payable to related party.................................. -- 53,200
Accrued management fees -- related party.................. 581,301 --
Accrued guarantee fees -- related party................... 60,000 --
Deferred gain on sale leaseback........................... 75,800 --
----------- -----------
Total current liabilities........................... 6,973,217 6,099,139
----------- -----------
LONG-TERM LIABILITIES
Long-term debt, less current maturities (including
$114,830 in 1996 due to related parties)................ 7,421,234 10,263,786
Obligations under capital leases, less current
obligations............................................. 417,638 --
----------- -----------
Total long-term liabilities......................... 7,838,872 10,263,786
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes D, E, F, G, H, I and M)
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; authorized 20,000,000;
issued and outstanding shares 1,369,025 and 2,300,000... 1,369 2,300
Additional paid-in capital................................ -- 1,392,346
Accumulated deficit....................................... (4,048,932) (1,671,928)
----------- -----------
Total stockholders' deficit......................... (4,047,563) (277,282)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $10,764,526 $16,085,643
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 16
SONOMA INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
REVENUES
Slip fees................................................. $ 1,168,041 $ 1,272,986
Boat rental............................................... 748,941 667,750
Lodge..................................................... 683,251 683,045
Fuel...................................................... 531,120 666,182
Convenience store and merchandise......................... 381,123 355,446
Restaurant................................................ 372,473 357,523
Other..................................................... 135,073 154,802
----------- -----------
Total revenues.................................... 4,020,022 4,157,734
----------- -----------
COST OF REVENUES
Slip...................................................... 165,634 135,413
Boat rental............................................... 396,916 203,767
Lodge..................................................... 235,082 224,243
Fuel...................................................... 351,029 467,323
Convenience store and merchandise......................... 288,498 284,986
Restaurant................................................ 329,982 287,856
Other..................................................... 109,350 161,662
----------- -----------
Total cost of revenues............................ 1,876,491 1,765,250
----------- -----------
GROSS PROFIT................................................ 2,143,531 2,392,484
SELLING, GENERAL AND ADMINISTRATIVE (including related
party amounts for management and guarantee fees of
$220,540 and $210,482)................................. 1,278,390 1,331,226
AMORTIZATION OF GOODWILL.................................... 30,252 84,423
DEPRECIATION AND AMORTIZATION............................... 578,603 546,093
----------- -----------
INCOME FROM OPERATIONS...................................... 256,286 430,742
INTEREST EXPENSE (including interest to related parties of
$260,716 and $293,430)................................. 867,346 1,025,784
----------- -----------
NET LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS........ (611,060) (595,042)
Income taxes........................................... -- 453,560
----------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEMS......................... (611,060) (141,482)
EXTRAORDINARY ITEMS
Gain on extinguishment of debt, net of income tax of $0... -- 2,518,486
----------- -----------
NET INCOME (LOSS)........................................... $ (611,060) $ 2,377,004
=========== ===========
Net income (loss) per common share before extraordinary
items.................................................. $ (0.45) $ (0.10)
=========== ===========
Net income (loss) per common share.......................... $ (0.45) $ 1.67
=========== ===========
Weighted average shares outstanding......................... 1,369,025 1,425,917
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 17
SONOMA INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Deficit at January 1, 1995......... 1,369,025 $1,369 $ -- $(3,437,872) $(3,436,503)
Net loss for the year ended
December 31, 1995................ -- -- -- (611,060) (611,060)
--------- ------ ---------- ----------- -----------
Deficit at December 31, 1995....... 1,369,025 1,369 -- (4,048,932) (4,047,563)
Acquisition transactions
Fair value of assets and
liabilities at date of
acquisition................... 600,000 600 178,840 -- 179,440
Issuance of stock to relieve
obligations...................... 330,975 331 1,213,506 -- 1,213,837
Net income for the year ended
December 31, 1996................ -- -- -- 2,377,004 2,377,004
--------- ------ ---------- ----------- -----------
Deficit at December 31, 1996....... 2,300,000 $2,300 $1,392,346 $(1,671,928) $ (277,282)
========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 18
SONOMA INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ (611,060) $ 2,377,004
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of fixed assets.......... 578,603 546,093
Amortization of goodwill............................... 30,252 84,425
Deferred income taxes.................................. -- (453,560)
Amortization of deferred gain on sale leaseback........ (6,105) (75,800)
Gain on debt extinguishment............................ -- (2,518,486)
Non cash issuance of stock to the employee incentive
plan.................................................. -- 100,000
Non cash portion of guarantee and management fees...... -- 41,529
Changes in assets and liabilities (net of
acquisitions):
Decrease (increase) in escrow funds.................. 16,589 (61,727)
Decrease (increase) in trade receivables............. (854) 2,287
Decrease (increase) in other receivables............. (11,088) 7,191
Decrease (increase) in inventory..................... 6,911 25,906
Decrease (increase) in prepaid expenses.............. 25,463 58,205
Decrease (increase) in other assets.................. -- (90,864)
Increase (decrease) in accounts payable.............. (86,235) 99,432
Increase (decrease) in accrued interest.............. 450,506 19,625
Increase (decrease) in accrued liabilities........... (107,927) (26,491)
Increase (decrease) in security deposits............. (5,384) 20,245
Increase (decrease) in related party loan............ -- (53,242)
Increase (decrease) in deferred revenue.............. 101,779 23,811
Increase (decrease) in accrued guarantee fees........ 20,000 --
Increase (decrease) in accrued management fees....... 123,295
----------- -----------
Net cash provided by operating activities......... 524,745 125,583
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (603,820) (104,708)
Proceeds from the sale of property and equipment.......... -- 49,159
Balance of cash in Key West and Sonoma when acquired...... -- 23,325
----------- -----------
Net cash used by investing activities............. (603,820) (32,224)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank and related party loans................ 1,250,700 7,183,976
Repayments of borrowings.................................. (844,175) (6,329,077)
Repayments of obligation under capital lease.............. (202,601) (616,029)
Organization and loan costs Jamestown..................... (118,805) (237,504)
----------- -----------
Net cash provided by financing activities......... 85,119 1,366
----------- -----------
NET INCREASE IN CASH........................................ 6,044 94,725
Cash at beginning of the year............................. 3,584 9,628
----------- -----------
Cash at end of the year................................... $ 9,628 $ 104,353
=========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest.................. $ 430,908 $ 948,689
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Issuance of debt in connection with the acquisition of Key
West................................................... $ -- $ 175,000
=========== ===========
Stock issued to satisfy Jamestown obligations............. $ -- $ 1,213,506
=========== ===========
Stock issued to acquire Key West and Sonoma............... $ -- $ 178,840
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 19
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE A -- ORGANIZATION
Sonoma Quicksilver Mines, Inc., a public company, was incorporated under
the laws of the State of Nevada on June 10, 1940. The name was subsequently
changed to Sonoma International ("Sonoma"). Sonoma had several failed business
operations and since 1988 its only activity had been to search for a company or
assets to acquire.
September 12, 1996, Sonoma entered into an agreement (the "Agreement") with
Clear Creek Investments, LLC, a Kentucky Limited Liability Company ("Clear
Creek") and owner of the general partner of Jamestown Resort & Marina, LTD
("Jamestown"), 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. The Agreement, effective
on December 9, 1996, incorporates the payment of the preference payments due
(Note I) through the issuance of shares of Sonoma. In addition, the Agreement
required that Sonoma effect a one for two hundred reverse split (and increase
authorized shares to 20,000,000 (post 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
consolidated 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
shares on a retroactive basis.
October 31, 1996, Key West Conch Harbor, Inc. ("Key West"), by consent of
its shareholders, entered into an agreement (the "Agreement") with Sonoma. The
Agreement required 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 and a
demand note for $175,000. The transaction was completed effective December 9,
1996.
For accounting purposes, as the Jamestown Limited partners and general
partner end up with the majority of Sonoma's stock, the acquisition by Sonoma of
all of the Jamestown limited partnership interests and general partnership
interest was accounted for as a recapitalization of Jamestown with Jamestown as
the acquirer (a reverse acquisition). Accordingly, the financial statements
prior to the acquisition of Sonoma and Key West included herein are those of
Jamestown. The transaction with Key West was accounted for using the purchase
method. The results of operations of Key West and Sonoma have been included in
the consolidated statements of operations from the acquisition dates.
Jamestown was formed as a limited partnership organized under the laws of
the State of Kentucky by Jamestown Resort & Marina, Inc., the general partner,
on November 1, 1987. It owns a resort and marina facility near Jamestown,
Kentucky on Lake Cumberland.
Key West 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
Principles of Consolidation
The consolidated financial statements include the accounts of Sonoma
International and its subsidiaries ("the Company"). All significant intercompany
transactions and balances have been eliminated in consolidation.
Statement of Cash Flows
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
F-7
<PAGE> 20
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
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>
MAJOR CLASS LIFE IN 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.
Goodwill
Goodwill relates to the original purchase in 1988 of the Jamestown marina
and the U.S. Army Corps of Engineers lease and the purchase of Key West
effective December 9, 1996 (see Note A) and represents the excess of cost over
fair value of net assets acquired and is being amortized using the straight-line
method over 40 years. Management reviews recoverability, the valuation and
amortization of goodwill on an on-going basis. As part of this review,
management considers the undiscounted projected future net earnings in
evaluating the value of goodwill. If the undiscounted projected future net
earnings were less than the stated value, the goodwill would be written down to
its fair value.
Deferred Loan Fees
Loan fees are capitalized and amortized over the life of the loan using the
straight-line method.
Deferred offering costs
Deferred offering costs are capitalized and will be recorded as a reduction
to stockholders equity upon completion of the Company's public offering or
expensed if the offering is unsuccessful (Note D).
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
F-8
<PAGE> 21
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
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
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 outstanding common shares for all periods presented after giving
retroactive effect to a one for two hundred reverse split of the Company's
common stock (See Note A).
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE C -- ACQUISITIONS
As discussed in Note A, Sonoma and Key West were acquired effective
December 9, 1996. The public company's stock is not considered to be actively
trading, therefore the assets and liabilities of Sonoma and Key West were valued
at fair market value.
A summary of the fair value of assets acquired and liabilities assumed is
as follows:
<TABLE>
<S> <C>
Current assets including cash of $23,325.................... $ 68,626
Land, docks and improvements and other fixed assets......... 4,675,905
Other assets................................................ 319,964
Goodwill.................................................... 453,560
Current liabilities......................................... (550,881)
Deferred tax liability...................................... (453,560)
Debt........................................................ (4,159,774)
----------
353,840
Less note issued in connection with acquisitions............ (175,000)
----------
Estimated fair value of common stock issued................. $ 178,840
==========
</TABLE>
Unaudited pro forma financial information for the years ended December 31,
1995 and 1996 as though the acquisitions had occurred on January 1, 1995 is as
follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Revenues.................................................... $4,674,000 $5,580,000
Net loss before extraordinary item.......................... (829,000) (159,000)
Net income (loss)........................................... (411,000) 2,464,000
Net loss per share before extraordinary item................ (0.42) (0.08)
Net income (loss) per share................................. (0.21) 1.24
</TABLE>
F-9
<PAGE> 22
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE D -- SUBORDINATION OF RELATED PARTY DEBT AND PUBLIC OFFERING
As reflected in the consolidated statements of operations, the Company
incurred net losses before extraordinary items of approximately $611,000 and
$141,000 in 1995 and 1996, respectively. At December 31, 1996 current
liabilities exceed current assets by approximately $5,722,000. During 1995 and
1996 respectively, the Company generated positive cash from operating activities
of approximately $525,000 and $126,000 and an overall increase in cash of
approximately $6,000 and $95,000. Net income (loss) before extraordinary items
and depreciation and amortization was approximately a loss of $2,000 for 1995
and $489,000 (including deferred tax benefit of 454,000) of income for 1996. In
addition, the Company has entered into an agreement with the holders of
$3,277,577 of the notes payable to defer payments of principal and interest if
necessary for the Company to meet other obligations.
The acquisition of Key West in December, 1996 and operational charges at
Jamestown, as well as economies of scale realized by the combined operations of
Jamestown and Key West is also expected to improve operating cash flows.
In addition, in January, 1997, the Company filed a registration statement
with the Securities and Exchange commission to raise $16,500,000 (not including
underwriters discounts and warrants) through 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 meet its obligations.
NOTE E -- DEVELOPMENT AGREEMENT WITH THE TRANSPORTATION CABINET OF THE
COMMONWEALTH OF KENTUCKY
The Company and the Transportation Cabinet of the Commonwealth of Kentucky
("Transportation Cabinet") are parties to an agreement for development of the
Jamestown marina facilities. Jamestown 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.
Jamestown agreed to pay the Transportation Cabinet one percent of the gross
revenues received by the Jamestown resort and marina facilities in perpetuity.
The fees under the agreement totaled $40,000 in 1995 and 1996.
NOTE F -- LEASE RIGHTS
The Company leases approximately 299 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 the original term of the lease ending in December 2012. In August 1988 the
Company entered into a supplemental agreement renewing the lease for an
additional 25-years without interruption. The renewal is subjected to the
satisfactory compliance with all lease conditions during the original term and
approval by the Government. Rental amounts due under the lease are contingent
upon a variety of factors, primarily gross revenues. Rent expense was
approximately $70,000 in 1995 and $68,000 in 1996.
F-10
<PAGE> 23
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE G -- NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Mortgage one................................................ $ 7,194,005 $ -
Note payable one............................................ -- 6,220,691
Mortgage two................................................ -- 3,224,185
Demand note -- related party................................ 1,852,777 1,852,777
Note payable three.......................................... -- 800,332
Former General Partner note................................. 1,197,500 707,500
Former Limited Partner notes................................ 360,000 360,000
Paddleboat notes............................................ 209,736 170,318
Yacht Club note -- related party............................ 223,624 200,000
Executive Boats note........................................ 159,671 --
Generators note............................................. 42,988 --
Note payable two............................................ -- 144,553
First note payable to stockholder........................... -- 175,000
Second notes payable to stockholder......................... -- 100,000
Third note payable to former stockholder.................... -- 140,201
Fourth note payable to stockholder.......................... -- 517,300
Other....................................................... -- 46,869
----------- -----------
Total............................................. 11,240,301 14,659,727
Less current maturities..................................... (3,819,069) (4,395,941)
----------- -----------
Long-term portion........................................... $ 7,421,234 $10,263,786
=========== ===========
</TABLE>
Mortgage one and note payable one. On December 31, 1988 Jamestown 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 Jamestown property. Thereafter, the Company 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.
On January 29, 1996, the Company refinanced the mortgage one note by
entering 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 were used
to settle the $5,631,000 mortgage and to settle a boat lease obligation and
related loan origination fees in the amount of $678,000. 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 lender requires the Company to
maintain an escrow cash account to pay for improvements and property taxes.
The Company recognized a $2,518,000 gain (net of income taxes of $0) on
debt extinguishment as a result of the mortgage one refinancing discussed above.
The extraordinary gain consisted primarily of forgiveness of $1,844,000 in
outstanding principal and $748,000 of accrued interest.
Mortgage Two. The note payable to a financial institution was assumed in
connection with the acquisition of Key West. The note requires monthly interest
payments only until May 1, 1998 at which time thirty-six
F-11
<PAGE> 24
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
principal plus interest payments are due totaling $30,208 per month with
interest at 9% for these 36 payments and at 1% over prime thereafter with
monthly payments increasing to $30,624 until maturity on April 1, 2016.
Demand Notes -- related party. Jamestown 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 marina and by certain items of the Webb Family Trust, an entity related
to the former general partner. A 1% guarantee amount based on the outstanding
balance was payable to the Webb Family Trust as compensation for pledging its
collateral (See Note I). The Company defaulted on the note several times and on
January 15, 1993 the note was converted to a demand note. In March 1994, the
Company again defaulted under the terms of the note and the Webb Family Trust
collateral was liquidated by the bank to satisfy the note. The Company
subsequently became obligated to the Webb Family Trust under the same terms as
the demand note. The Webb Family Trust has waived all defaults on this note.
Note payable three. On January 29, 1996, Jamestown assumed a 7.39% note to
a financial institution to satisfy obligations arising from funds provided to
the Company to cover differences in the mortgage refinancing discussed
previously. Interest expense was $54,558 during 1996 and accrued interest was
$24,286 at December 31, 1996. The note matures on October 22, 2001.
Former General Partner Note. The Webb Family Trust loaned the Company
$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. The Webb Family Trust has waived all defaults on this
note.
Former Limited Partner Notes. On March 6, 1992, loans totaling $360,000
were made by the original limited partners in Jamestown 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 Notes. Webb Cruise Lines, Inc. (WCL), an entity controlled by
the former general partner of Jamestown, 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
was collateralized by five (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. Jamestown assumed both notes and title to
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 Note -- related party. Webb Lexington Ventures, Inc., an entity
controlled by the former general partner of Jamestown, entered into a 11%
mortgage note with a bank for $278,000 to purchase the Yacht Club. The Yacht
Club was acquired by Jamestown by assuming the note, which approximated the fair
market value of the Yacht Club. The note was collateralized by property of the
former general partner and matured on July 1, 1996. The former general partner
of Jamestown funded the pay off of the note and assumed the obligation from the
Company. All defaults on this note have been waived.
Executive Boats Note. On February 8, 1990, Jamestown entered into a note
with a bank to finance its executive boats. The note is collateralized by the
two houseboats. The note was renewed on October 30, 1995 and provided for
monthly principal payments of $4,000, interest at 11%. The note was paid off in
connection with the refinancing discussed previously.
Generators Note. On May 26, 1995, Jamestown entered into a note with a bank
for $53,200 at a fixed rate of 10.5% maturing on October 1, 1997. The note was
collateralized by 12 boat generators. Interest and
F-12
<PAGE> 25
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
principal of $3,000 were paid monthly beginning on July 1, 1995 through October
1, 1995. The note was paid off on January 29, 1996 in connection with the
refinancing of the mortgage note discussed previously.
Note payable two. This $200,000 promissory note with a financial
institution was assumed in connection with the purchase of Key West and matures
on February 3, 1999, with a variable interest rate of 1 3/4% above the financial
institutions base rate. Monthly interest payments are required. Accrued interest
at December 31, 1996 was $1,348.
First Note payable to stockholder. The Company issued a $175,000 note
payable, which is due on demand and bears no interest, and 300,000 shares to
former owners of Key West to acquire all of the stock of Key West (Note A).
Second Notes Payable to stockholder. In connection with the acquisition of
Key West, the Company assumed a $100,000 note payable to a stockholder which
matured December 31, 1996 and is now due on demand, and bears interest at a
variable rate of 1% over prime. Accrued interest at December 31, 1996 was
$7,883.
Third note payable to former stockholder. In connection with the
acquisition of Key West, the Company assumed a note payable of $500,000 and a
note payable of $150,000. The $500,000 note payable which was due to a former
stockholder was paid off in October, 1996. The $150,000 note matures in August,
2001 and bears interest at 10%.
Fourth note payable to stockholder. In connection with the acquisition of
Key West, the Company assumed a note payable to a stockholder. The note was for
$900,000, is due on demand, and bears no interest. The note payable was reduced
by payments of $382,700 in 1996. Accrued interest at December 31, 1996 was
$29,250.
Aggregate maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................ $ 4,395,941
1998............................................ 493,403
1999............................................ 507,874
2000............................................ 446,047
2001............................................ 5,906,549
Thereafter...................................... 2,909,913
-----------
Total...................................... $14,659,727
===========
</TABLE>
NOTE H -- OBLIGATIONS UNDER CAPITAL LEASES
Jamestown leased certain boats and computer equipment under capital leases.
In 1991, Jamestown 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 Company recorded a deferred gain
of $104,000. This gain was being amortized as a offset to amortization expense
over the term of the lease. On January 29, 1996, the Company settled the boat
lease obligation and took title of the boats. See Note G. The remaining deferred
gain of $75,800 was credited to income. Amortization expense was $65,000 and
$5,700 for 1995 and 1996, respectively.
NOTE I -- RELATED PARTY TRANSACTIONS
On December 9, 1996, in connection with the reverse acquisition transaction
with Sonoma, the Company issued 304,285 (included within the 330,975 shares
issued to relieve obligations in the accompanying consolidated statement of
changes in Stockholders' deficit) shares of Sonoma common stock to the
F-13
<PAGE> 26
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
Jamestown former general and limited partners and various other related parties
to satisfy accrued guarantee fees of $70,000, accrued management fees of
$622,355 and accrued interest of $421,482. The average effective share price for
the 304,285 common shares ranged from $3.57 to $3.78. After December 9, 1996, no
additional guarantee and management fees will be accrued or paid. Additional
interest of $20,107 on shareholder loans was accrued after December 9, 1996 and
will be paid using cash.
The former general partner of Jamestown had 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 was payable to the general partner at
a rate $4,000 per month, plus direct costs and expenses associated with its
management of the former Partnership. The remainder of the fee was accrued.
Accrued management fees at December 31, 1995 and 1996 were $581,000 and $0,
respectively. Management fees paid in 1995 and 1996 were $48,000 and management
fee expense was $201,000 and $195,636, respectively.
The former general partner of Jamestown guaranteed the Demand Note (Note G)
and prior to the acquisitions (See Note A) received as compensation a fee of 1%
of the outstanding note balance annually. Such fee amounted to $20,000 and
$10,000 during 1995 and 1996, respectively. The accrued guarantee fee was
$60,000 and $0 at December 31, 1995 and 1996, respectively. Subsequent to the
acquisitions, this fee is no longer payable.
Accrued interest due to the former partners of Jamestown was $272,000 and
$0 at December 31, 1995 and 1996, respectively. Interest expense to related
parties was $261,000 and $285,550 during 1995 and 1996, respectively.
Accrued interest due to the Key West stockholders was $37,133 at December
31, 1996. Interest expense in connection with notes subsequent to the
acquisition due to stockholders was $7,880.
Also see Note G.
NOTE J -- INCOME TAXES
Prior to the acquisition transactions described in Note A, Jamestown, a
limited partnership, and Key West, an S Corporation for Federal income tax
purposes, were not subject to income taxes at the entity level. Subsequent to
the acquisitions through December 31, 1996, the Company generated operating
losses for financial reporting and income tax reporting purposes. Any existing
available net operating losses of Sonoma were limited upon consummation of the
acquisition transactions described in Note A.
The components of the income tax benefit for the year ended December 31,
1996 are as follows:
<TABLE>
<S> <C>
Federal
Current tax expense (benefit)............................. $ --
Deferred tax (benefit).................................... (453,560)
---------
$ 453,560
---------
</TABLE>
F-14
<PAGE> 27
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
The Company's income tax benefit for the year ended December 31, 1996
differed from the statutory Federal rate of 34% as follows:
<TABLE>
<S> <C>
Statutory rate applied to net loss before income taxes and
extraordinary items....................................... $(202,314)
Increase in income tax benefit resulting from change in tax
status of Jamestown (Note A).............................. (476,000)
Decrease in income tax benefit resulting from net losses
generated prior to acquisition transactions which losses
are not deductible........................................ 161,846
Increase in valuation allowance............................. 62,908
---------
$(453,560)
=========
</TABLE>
Deferred tax assets and liabilities at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Current deferred tax asset.................................. $ --
Current deferred tax liability.............................. --
--------
--
--------
Non-current deferred tax asset.............................. $505,669
Non-current deferred tax liability.......................... 453,560
Valuation allowance......................................... (52,109)
--------
Net non-current deferred taxes............................ $ --
========
</TABLE>
The non-current deferred tax asset consists primarily of the temporary
difference arising from the effective change of tax status of Jamestown upon
consummation of the transaction with Sonoma (see Note A) which results in
Jamestown being included in the Sonoma consolidated Federal income tax return
beginning December 9, 1996. This amount (net of a small valuation allowance) was
recorded as a benefit to deferred income taxes in the accompanying statement of
operations. The deferred tax asset also includes an insignificant amount of
net-operating losses. The non-current deferred tax liability consists
principally of differences for financial reporting and income tax reporting
purposes of assets and liabilities acquired of Key West. (see Note A).
NOTE K -- PARTNERSHIP AGREEMENT -- JAMESTOWN
The net loss for Jamestown for the year ended December 31, 1995 and for the
period in 1996 prior to the acquisition transaction described in Note A, 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-15
<PAGE> 28
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
The carrying amount and fair value of notes payable and long-term debt are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
Variable rate debt................................ $10,577,048 $10,577,048
Demand notes...................................... 3,120,277 3,120,277
Fixed rate debt................................... 962,402 744,460
</TABLE>
The fair values 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 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, results
of operations or cash flows.
F-16
<PAGE> 29
SONOMA INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Sonoma International, Inc.
(Registrant)
By: /s/ JAMES L. FRYE, PRESIDENT
------------------------------------
James L. Frye, President
Date: 03/28/97
Pursuant to the requirements of the Securities Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ JAMES L. FRYE, C.E.O.
----------------------------------
James L. Frye, Chief Executive
Officer
Date: 03/28/97
By: /s/ PETER SACKMANN, C.F.O.
----------------------------------
Peter Sackmann, Chief Financial
Officer
Date: 03/28/97
<PAGE> 30
INDEX TO EXHIBITS
EXHIBIT
-------
27.1 FINANCIAL DATA SCHEDULE
<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>
