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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number: 2-98277C
THE COLONEL'S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3262264
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
620 SOUTH PLATT ROAD, MILAN, MICHIGAN 48160
(Address of principal executive offices) (Zip code)
(313) 439-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ___X___ No ______
Number of shares of the registrant's Common Stock, $0.01 par value,
outstanding as of November 13, 1997: 24,177,805
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The financial statements required under Item 1 or Part I are set
forth in Appendix A to this Report on Form 10-Q and are herein incorporated
by reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
BACKGROUND
Effective December 31, 1995, Brainerd International, Inc. ("Brainerd")
merged (the "Merger") with and into The Colonel's International, Inc. (the
"Company"). The Company was the surviving corporation in the Merger.
Prior to the Merger, Brainerd had 677,830 shares of its common stock
outstanding and traded on the Nasdaq SmallCap Market (symbol BIRI).
Pursuant to the Merger, these shares were converted into the same number of
shares of common stock in the Company.
Also effective December 31, 1995, Brainerd Merger Corporation, a
Michigan corporation and a wholly owned subsidiary of Brainerd, merged with
and into The Colonel's, Inc. ("The Colonel's"). The Colonel's was the
surviving corporation in this merger. In consideration of this merger, the
Company issued 23,500,000 shares of its common stock to Donald J.
Williamson and Patsy L. Williamson, who at the time were the sole
shareholders in The Colonel's. In addition, Brainerd transferred all of
its operating assets to its newly formed subsidiary, Brainerd International
Raceway, Inc., a Minnesota corporation ("BIR").
For accounting purposes, the transaction was treated as a
recapitalization of the Company with the Company as the acquirer (a reverse
acquisition). The effective date of the Merger was December 31, 1995.
Beginning January 1, 1996, the incomes of both The Colonel's and BIR are
reflected and reported as combined income in the consolidated income
statement.
The truck accessory division of The Colonel's was incorporated under
Michigan law as The Colonel's Truck Accessories, Inc. ("CTA") in January
1997 and became a wholly owned subsidiary of the Company.
As a result of these transactions, the Company has three wholly owned
subsidiaries: The Colonel's, CTA and BIR.
-2-
THE COLONEL'S, INC.
The Colonel's was organized in 1982 and began producing and selling
plastic bumpers and facias in 1983. By the start of 1996, The Colonel's
had grown through acquisitions, joint ventures and normal expansion to two
manufacturing plants, five distribution warehouses and a network of
independent distributors that sell The Colonel's products throughout the
United States, Canada, Mexico, Puerto Rico, the Bahamas and the District of
Columbia.
THE COLONEL'S TRUCK ACCESSORIES, INC.
CTA manufactures and sells pickup truck bedliners and tail gate covers
through a distributor network. In March 1997, CTA finalized its purchase
out of bankruptcy of the assets of Truckware, Inc., a truck accessories
warehouse and distributor located in California. Truckware was in the
business of selling such items to wholesale subdistributors and dealerships
and also offering installation services and direct sales to retail
customers. CTA plans to continue these activities and also to sell CTA's
manufactured bedliners and other truck accessories.
In September 1997, CTA opened another Truckware outlet store in
Charlotte, North Carolina. This facility will warehouse and sell bedliners
and other truck accessory products. Additionally, CTA purchased for
$250,000 and certain other consideration secured interests in the assets
of Horizon Coach, Inc., a manufacturing company located in Riverside,
California. This facility manufactures custom pick-up truck caps, sport
tops and tonneau covers. CTA operates this facility under the name "The
Colonel's Truck Accessories, Inc.," and uses it to supply products to CTA's
truck accessory outlet stores.
BRAINERD INTERNATIONAL RACEWAY, INC.
BIR operates a motor sports facility located approximately six miles
northwest of Brainerd, Minnesota. Substantially all of BIR's revenues are
obtained from motor sports racing events at the raceway. BIR schedules
racing and other events held at the racetrack during weekends in the months
of May through September of each year.
COMBINED OPERATIONS
The Colonel's Milan bumper manufacturing plant is a 350,000 square
foot facility (plus a 45,000 square foot covered crane bay) situated on a
62 acre site on the outskirts of Milan, Michigan. Milan is located
approximately 10 miles south of Ann Arbor, Michigan, 60 miles west of
Detroit, and 25 miles northwest of Toledo, Ohio. There is sufficient room
to expand the physical plant. The Colonel's manufactures aftermarket
bumper facias at the Milan facility. This facility is leased from a
company owned by Donald and Patsy Williamson.
-3-
CTA's bedliner manufacturing facility occupies a 210,000 square foot
building located on 27 acres on the outskirts of Owosso, Michigan. Owosso
is located about 100 miles northwest of Milan, Michigan and about 30 miles
northeast of Lansing, Michigan. The building has power capacities
exceeding current use and would permit expansion if necessary. This plant
manufactures truck accessories. It is also leased from a company owned by
Donald and Patsy Williamson.
BIR owns and operates a three-mile race track including a one-quarter
mile drag strip located approximately six miles northwest of Brainerd,
Minnesota. The terrain of the 600 acre site is slightly rolling hills and
is partially wooded. The track and various roads are composed of blacktop.
BIR's premises features several buildings, including a four-story tower
with twelve executive viewing suites, a control tower, various single story
buildings containing concession stands, rest rooms and storage and service
facilities located throughout the property. The buildings are concrete or
wood frame and are suitable for warm weather use only. Grandstand
bleachers for approximately 18,000 spectators are primarily located along
the drag strip.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated current assets increased from $13,638,000
at December 31, 1996 to $15,147,000 at September 30, 1997. Consolidated
current liabilities decreased from $16,660,000 at December 31, 1996 to
$11,777,000 at the end of the third quarter of 1997.
Cash increased from $321,000 at December 31, 1996 to $853,000 at
September 30, 1997, primarily due to an increased cash balance at BIR
following the completion of BIR's summer season of drag racing events.
The accounts receivable balance at September 30, 1997 is comparable to
the balance at December 31, 1996. Although accounts receivable decreased
at The Colonel's from December 31, 1996 to September 30, 1997, a
corresponding increase in accounts receivable was experienced at CTA due to
increased sales and fewer customers taking early-pay discounts.
A note receivable from the majority shareholder established during the
third quarter of 1997 for $1,060,000. In the Company's Report on Form 10-Q
for the quarter ended June 30, 1997, $870,000 of this amount was classified
as prepaid rent but was subsequently reclassified as a note receivable.
The note receivable bears interest at 10.5 percent annually.
The inventory balance at September 30, 1997 is comparable to the balance
at December 31, 1996. Inventory levels historically increase during the third
quarter and remain level through year-end due to anticipated winter sales.
-4-
Prepaid expenses decreased from December 31, 1996 to September 30,
1997 due to the amortization of prepaid insurance.
Property, plant and equipment increased by $1,500,000 from December
31, 1996 to September 30, 1997. During the third quarter, The Colonel's
added $722,000 in assets, including $370,000 for tooling. CTA added
approximately $475,000 in assets, including $145,000 for tooling and
$280,000 in assets relating to Horizon Coach, Inc., in Riverside,
California. Horizon Coach, Inc. is a manufacturer of custom pick-up truck
caps, sport tops and tonneau covers. BIR added $139,000 to property, plant
and equipment, consisting of improvements to the racetrack and surrounding
buildings. Depreciation expense was approximately $900,000 for the three
months ended September 30, 1997.
Deposits decreased from $1,157,000 at December 31, 1996 to $246,000 at
September 30, 1997. The $911,000 decrease relates to the completion of
various tools for The Colonel's and CTA that were put in service and
transferred to property, plant and equipment. During the three months ended
September 30, 1997, approximately $515,000 of completed tooling was
transferred from deposits to property, plant and equipment.
As a result of the Merger on December 31, 1995, the acquisition value
of BIR exceeded the value of the assets by $425,000. The associated
amortization expense for the twelve-month period ending December 31, 1997
will be $60,000. The decrease in goodwill from December 31, 1996 to
September 30, 1997 relates to the quarterly amortization of goodwill.
Accounts payable decreased from $3,533,000 at December 31, 1996 to
$1,082,000 at September 30, 1997. The $2,451,000 decrease is a result of
management's decision to borrow on the line of credit in order to make
payments on accounts payable and take advantage or early pay discounts.
Income taxes payable decreased from $1,195,000 at December 31, 1996
to $774,000 at September 30, 1997. The balance at December 31, 1996
represents income taxes due for the entire 1996 fiscal year. In July 1997,
the Company paid these federal and state income taxes. The balance at
September 30, 1997 represents estimated income taxes for the third quarter of
1997.
OUTSTANDING DEBT
On May 28, 1997, the Company's primary lending institution granted it
additional financing. The Company entered into a $7,000,000 term note
which requires monthly payments of $167,000 plus interest at prime plus .25
percent. The term note has a maturity date of November 1, 2000. The loan
is secured by all of the Company's assets and had a balance of $6,332,000
at September 30, 1997.
Proceeds from the $7,000,000 term note were used to pay the $2,200,000
balance due of a $6,000,000 facility obtained in April 1995, which called
-5-
for payments of $200,000 in principal plus interest on a monthly basis, and
to pay the $657,000 balance due on The Colonel's mortgage on its former
Owosso facility, as well as the $1,000,000 note payable obtained in November
1996.
The Company's line of credit was also renegotiated in the May 28, 1997
agreement. The Company's $4,500,000 line of credit was increased to
$6,000,000 and now expires in May 1998. The line of credit is secured
by all of the Company's assets. Interest is paid at prime on a monthly
basis. The outstanding balance on the line of credit was $4,650,000 at
September 30, 1997.
BIR has a $300,000 line of credit which is secured by all of its
assets; however, there was no outstanding balance on this line of credit at
September 30, 1997.
BIR has a mortgage with a balance of $350,000 at September 30, 1997,
which is secured by property. This loan requires quarterly interest payments
at 2 percent above prime and a single $50,000 principal payment in the third
quarter of each year through 2004.
In 1996, The Colonel's acquired three capital leases to finance
equipment for CTA. The Colonel's leased $6,435,000 worth of that equipment
under a six-year agreement with monthly payments of approximately $100,000.
Each lease includes an option to purchase the equipment for $1.00 upon
expiration of the lease term. The leases are collateralized by the
machinery. At September 30, 1997, the balance due on these three capital
leases was $5,357,000.
During 1997, the Company also entered into a 24-month lease extension
on the semi-tractor trailers that it was already leasing from its lending
institution. Pursuant to the extension agreement, the Company continues to
lease the vehicles for an aggregate monthly payment of $15,987. Under the
extension agreement, the Company has an option to buy the trailers for
$1.00 upon completion of the extended term. The balance on this capital
lease was $269,000 at September 30, 1997.
RESULTS OF OPERATIONS
Revenues for the Company were $12,987,000 for the quarter ending
September 30, 1997, compared to $11,211,000 for the same period in 1996.
The increase in 1997 was primarily due to sales by CTA. CTA had limited
bedliner sales during the third quarter of 1996 as the division was not at
full production levels at that time. Additionally, CTA's 1997 sales figure
includes sales generated by Truckware, the truck accessories retail store
in California. CTA did not acquire this store until March 1997.
-6-
Cost of sales decreased from 74 percent of sales for the three months
ended June 30, 1996, to 65 percent for the same three months in 1997. This
decrease is primarily due to the elimination of a second production shift at
The Colonel's during 1997, and increased efficiencies at CTA.
Selling, general and administrative expenses as a percentage of sales
for the third quarter of 1997 decreased over the same period of 1996 by
one percent. The three-month comparison shows a decrease from 15 to 14
percent.
Interest expense increased by $85,000 for the three months ending
September 30, 1997, over the same period of 1996. The increase is the
result of a higher average outstanding balance under the new term note added
in May, 1997 which replaced the previous term note.
To date, the Company has provided $1,877,000 in estimated federal
income taxes for fiscal year 1997, which reflects the Company's expected
effective tax rate of 36 percent.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The disclosures required under Item 1 of Part II are set forth in
Note 10 to the financial statements contained in Appendix A to this Report
on Form 10-Q and are herein incorporated by reference.
ITEM 5. OTHER INFORMATION.
On October 10, 1997, the Company's Board of Directors passed a
resolution to repurchase 20,817,080 shares of Common Stock from the
Company's majority shareholders, Donald and Patsy Williamson. Consummation
of this transaction is subject to the consent of the Company's lenders.
The $5,000,000 purchase price will be paid in 1998. When consummated, the
transaction will reduce the number of outstanding shares of Common Stock
from 24,177,805 to 3,360,725 and reduce the percentage of outstanding
Common Stock owned by Donald and Patsy Williamson from approximately
97% to approximately 82%.
-7-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following exhibits are filed as part of this
report.
EXHIBIT
NUMBER
_________
2.1 Agreement and Plan of Merger between The Colonel's, Inc. and
Brainerd Merger Corporation and joined in by Brainerd
International, Inc. Incorporated by reference from Exhibit A to
the Proxy Statement of Brainerd International, Inc. for the
Annual Meeting of Shareholders of Brainerd International, Inc.
held on November 21, 1995.
2.2 Agreement and Plan of Reorganization among Brainerd
International, Inc. and The Colonel's Holdings, Inc. Incorporated
by reference from Exhibit D to the Proxy Statement of Brainerd
International, Inc. for the Annual Meeting of Shareholders of
Brainerd International, Inc. held on November 21, 1995.
3.1 Articles of Incorporation of the Company, as amended.
Incorporated by reference from Exhibit 3.1 to the Company's
Report on Form 10-Q for the period ended March 31, 1997.
3.2 Bylaws, as amended. Incorporated by reference from Exhibit 3.2
to the Company's Report on Form 10-Q for the period ended March
31, 1997.
4.1 Articles of Incorporation. See Exhibit 3.1 above.
11.1 Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K. On July 2, 1997, the Company filed a
Report on Form 8-K relating to the termination of the Company's preliminary
agreement to acquire the Patsy Lou Williamson Group of automobile
dealerships.
-8-
SIGNATURES
Pursuant to the 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.
THE COLONEL'S INTERNATIONAL, INC.
Dated: November 14, 1997 By: /S/ RICHARD S. SCHOENFELDT
Richard S. Schoenfeldt
Vice President-Finance and Chief Financial
Officer
(Duly Authorized Officer and Principal
Financial Officer of the Registrant)
-9-
APPENDIX A
-10-
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(UNAUDITED) (AUDITED)
------------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 853,347 $ 321,486
Accounts receivable - trade (net of allowance
for doubtful accounts of $600,000 and $575,000
at September 30, 1997 and December 31, 1996,
respectively) 3,607,095 3,605,281
Note receivable from majority shareholder (Note 2) 1,060,000
Inventories (Note 3) 8,338,080 8,347,663
Prepaid expense 19,300 226,670
Deferred taxes - current 1,092,000 1,045,000
Current portion of deferred compensation 154,000 52,000
Other 22,838 40,000
----------- -----------
Total current assets 15,146,660 13,638,100
PROPERTY, PLANT, & EQUIPMENT - Net (Note 4) 28,592,654 27,028,350
OTHER ASSETS:
Long-term portion of deferred compensation 357,382 236,787
Deposits 246,287 1,156,868
Goodwill 320,897 366,497
Other 183,693 183,693
----------- -----------
Total other assets 1,108,259 1,943,845
TOTAL ASSETS $44,847,573 $42,610,295
=========== ===========
-11-
September 30, December 31,
1997 1996
(UNAUDITED) (AUDITED)
------------- ------------
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 6) $ 4,650,000 $ 5,450,000
Current portion of long-term obligations 3,118,734 3,868,733
Accounts payable - trade 1,081,997 3,532,752
Accrued expenses (Note 5) 1,998,206 2,561,361
Current portion of deferred compensation 154,000 52,000
Income taxes payable 774,288 1,195,000
----------- ----------
Total current liabilities 11,777,225 16,659,846
LONG-TERM OBLIGATIONS, NET OF
CURRENT PORTION (Note 7) 9,542,361 6,321,175
LONG-TERM PORTION OF DEFERRED
COMPENSATION 357,382 236,787
DEFERRED TAXES - LONG-TERM 4,312,000 3,949,000
SHAREHOLDERS' EQUITY:
Common stock: 35,000,000 shares authorized
at $0.01 par value, 24,177,805 shares issued
and outstanding 241,778 241,778
Additional paid-in-capital 5,621,284 5,606,239
Retained earnings 12,995,543 9,595,470
----------- -----------
Total shareholders' equity 18,858,605 15,443,487
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $44,847,573 $42,610,295
=========== ===========
-12-
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ending Three Months Ending
SEPTEMBER 30 SEPTEMBER 30
--------------------------------- ---------------------------------
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
SALES $ 35,043,522 $ 29,654,986 $ 12,986,633 $ 11,210,682
COST OF SALES 24,407,361 21,719,135 8,429,590 8,326,616
------------ ------------ ------------ ------------
GROSS PROFIT 10,636,161 7,935,851 4,557,043 2,884,066
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,728,331 4,207,152 1,754,079 1,670,519
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 5,907,830 3,728,699 2,802,964 1,213,547
OTHER INCOME (EXPENSE):
Interest expense (960,110) (775,532) (331,636) (246,643)
Interest income 107,549 54,615 55,816 10,985
Rental income 45,000 45,000 15,000 20,000
Other 176,390 76,047 152,521 18,061
------------ ------------ ------------ ------------
Other income (expense), net (631,171) (599,870) (108,299) (197,597)
NET INCOME BEFORE TAXES $ 5,276,659 $ 3,128,829 $ 2,694,665 $ 1,015,950
PROVISION FOR INCOME
TAXES (Note 8) 1,876,586 1,189,000 1,005,586 708,000
NET INCOME $ 3,400,073 $ 1,939,829 $ 1,689,079 $ 307,950
============ ============ ============ ============
EARNINGS PER SHARE (Note 9) $ 0.14 $ 0.08 $ 0.07 $ 0.01
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 24,177,805 24,177,830 24,177,805 24,177,830
-13-
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ending
SEPTEMBER 30
-----------------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,400,073 $ 1,939,829
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,813,019 2,985,532
Deferred tax provision 316,000 198,000
(Gain) loss on sale of property (17,407) 5,255
Changes in assets & liabilities that provided (used) cash:
Accounts receivable (1,814) 9,714
Inventories 9,583 (795,651)
Prepaid expenses 207,370 120,188
Other current assets 17,162
Accounts payable (2,450,755) (1,404,154)
Accrued expenses (563,155) (336,080)
Income taxes payable (420,712)
Net cash provided by operating activities 3,309,364 2,722,633
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant & equipment (1,762,731) (1,244,617)
Proceeds from sale of property, plant & equipment 21,500 19,500
Net change in deposits (1,310,799) (1,062,180)
Payments received on notes receivable- related party 490,000
Additions to notes receivable - related party (1,060,000) (770)
Payments received on notes receivable - other 303,170
Net cash (used in) investing activities (4,112,030) (1,494,897)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under notes payable (800,000) 320,000
Proceeds from long-term obligations 7,000,000 75,000
Principal payments on long-term debt (4,187,534) (1,618,932)
Principal payments on obligations under capital leases (692,984) (352,995)
Cash contribution from related party 15,045
Net cash provided by (used in) financing activities 1,334,527 (1,576,927)
-14-
NET INCREASE (DECREASE) IN CASH $ 531,861 $ (349,191)
=========== ===========
CASH, BEGINNING OF PERIOD 321,486 634,290
----------- -----------
CASH, END OF PERIOD $ 853,347 $ 285,099
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Transfer of deposits to property, plant and equipment
relating to property placed in service $ 2,221,380 $ 2,411,838
=========== ===========
Property additions from the issuance of capital leases $ 351,705 $ 2,404,358
=========== ===========
Increase in deposits from noncash financing $ 1,395,511
===========
-15-
THE COLONEL'S INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 BASIS OF PRESENTATION
The financial information included herein is unaudited; however such
information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of the results of operations,
financial position and cash flows for the periods presented.
The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results expected for the
full year.
Note 2 NOTES RECEIVABLE
During the third quarter of 1997, a note receivable from the
majority shareholder was established. The note bears interest at
10.5 percent.
Note 3 INVENTORIES
Inventories are summarized as follows: September 30, December 31,
1997 1996
------------- ------------
Finished products $ 6,682,135 $ 7,213,704
Raw materials 1,655,945 1,133,959
----------- -----------
Total inventories $ 8,338,080 $ 8,347,663
=========== ===========
Note 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized by major classification
as follows:
-16-
September 30, December 31,
1997 1996
------------- ------------
Land and improvements $ 3,619,717 $ 3,619,717
Track 1,533,760 1,533,760
Buildings 793,990 793,990
Leasehold improvements 1,558,024 707,076
Bleachers & fencing 731,886 731,886
Equipment 14,547,596 14,316,710
Transportation equipment 1,345,972 1,000,690
Furniture & fixtures 678,814 611,510
Tooling 25,679,181 23,229,532
Construction in progress 281,548
------------ ------------
Total 50,770,488 46,544,871
Less accumulated depreciation (22,177,834) (19,516,521)
------------ ------------
Net property, plant and equipment $ 28,592,654 $ 27,028,350
============ ============
Note 5 ACCRUED EXPENSES
Accrued expenses consist of the following: September 30, December 31,
1997 1996
------------- ------------
Accrued legal $ 761,221 $ 1,136,516
Accrued compensation for NuPar (Note 10) 100,000
Accrued environmental costs 598,717 598,717
Accrued taxes 496,561 417,165
Other 141,707 308,963
------------ ------------
Total $ 1,998,206 $ 2,561,361
============ ============
-17-
Note 6 NOTES PAYABLE
Notes payable consist of the following: September 30, December 31,
1997 1996
------------- ------------
Line of credit with a bank, interest is due monthly
at the bank's prime rate (8.5% at Sept. 30, 1997) $ 4,650,000 $ 4,450,000
Bridge note payable to a bank, interest is due monthly
at bank's prime rate plus 1/2%, due May 1997 0 1,000,000
------------ -----------
$ 4,650,000 $ 5,450,000
============ ===========
The Company has a line of credit with a bank which was renegotiated
in May 1997. Maximum borrowings were increased from $4,500,000 to
$6,000,000, and the line of credit expires in May 1998. The
line of credit is secured by all of the Company's assets.
Remaining availability under this line of credit at September 30,
1997 was $1,350,000.
The bridge note payable from a bank represents amounts advanced to
the Company for the purchase of land in Florida. The bridge note
payable was paid in full in May 1997 with the proceeds from a
$7,000,000 term note (see Note 7).
Note 7 LONG-TERM OBLIGATIONS
Long-term obligations consist of the following: September 30, December 31,
1997 1996
------------- ------------
Term note payable to a bank, monthly principal
payments of $167,000 plus interest at the bank's
prime rate plus 1/4% (effective rate of 8.75% at
September 30, 1997) through November 2000,
and secured by the Company's assets $ 6,332,000
Term note payable to a bank, monthly principal
payments of $200,000 plus interest at the bank's
prime rate plus 1/2% (effective rate of 8.75% at
December 31, 1996) through November 1997.
Paid in full in May 1997. $ 2,600,000
Mortgage payable to a bank, interest at 9.25%,
payable in monthly installments of $52,000 through
May 1998 and secured by underlying property. Paid
in full in May 1997. 796,908
-18-
Mortgage payable to a bank, interest at the bank's
prime rate plus 2% (effective rate of 10.5% at
September 30, 1997), annual principal payments
of $50,000 plus interest due quarterly, through
September 2004. Secured by underlying property. 350,000 400,000
Capital lease obligations through December 2002;
monthly installments of $62,771 including interest
at rates between 7.5% and 8.75%, collateralized
by the related machinery and equipment 5,357,334 5,967,897
Capital lease obligation through March 1999;
monthly installments of $15,987 including interest
at 8.5% 269,283
Vehicle financing 174,535 231,365
Other 177,943 193,738
------------ ------------
Total 12,661,095 10,189,908
Less current portion (3,118,734) (3,868,733)
------------ ------------
Long-term portion $ 9,542,361 $ 6,321,175
============ ============
On May 28, 1997, the Company executed a $7,000,000 term note which
requires monthly principal payments of $167,000 plus interest. The
proceeds from this term note were used to pay the remaining balance
due on the term note obtained in April 1995 which called for
payments of $200,000 plus interest on a monthly basis. The proceeds
were also used to pay the remaining balance due on a mortgage
payable, which required monthly installments of $52,000 through May
1998. The $7,000,000 term note proceeds were also used to pay a
$1,000,000 bridge note payable (see Note 6).
Note 8 INCOME TAXES
The provision for income taxes at September 30, 1997 reflects the
Company's expected estimated effective tax rate of approximately
36 percent.
Note 9 EARNINGS PER SHARE
The computation of earnings per share is based on the weighted
average number of shares of common stock outstanding during the
nine-month period ended September 30, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," effective for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 specifies the computation,
presentation and disclosure of earnings per share for entities with
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publicly held common stock or potential common stock (e.g.,
securities convertible into common stock). The Company will provide
the required disclosures in its year-end report. The effect of SFAS
No. 128 on the Company's earnings per share is not expected to be
material.
Note 10 LITIGATION
In connection with the acquisition of a facility in Florida (known
as "NuPar"), the Company signed employment agreements with the
former NuPar shareholders for the three-year period beginning
December 1991. In 1994, the former NuPar shareholders filed a
lawsuit against the Company for $1,800,000, claiming they had met
the conditions of the agreements and were therefore entitled to the
payments thereunder. In July 1995, the Company settled these
actions for $1.4 million, payable in installments through January
1997. In January 1997, the Company made the final payment toward
this settlement.
The Company was both a defendant and counter-plaintiff in a suit
filed December 5, 1995, in the United States District Court, Eastern
District of Michigan, in a private action seeking damages under the
federal antitrust statutes. In September 1996, the Company settled
this case for cash and merchandise deliverable through December
1997.
The Company has been served with various lawsuits pertaining to a
class action suit arising from the production of bedliners. The
suits allege that the bedliners insulate a gas can when filled which
may cause a static charge that could result in a fire. The Company
has formed a coalition with other bedliner manufacturers to defend
this class action suit. Though the Company did not produce
bedliners at the time of the alleged incidents, the Company has
elected to participate in the class action suit. As of September
30, 1997, the coalition was in settlement negotiations with the
plaintiffs in this case.
The Company recently settled a lawsuit by a competitor
pertaining to a possible infringement of their patent associated
with their bedliner and the Company's counterclaim alleging the
same competitor is infringing on the Company's bedliner patent.
The suit was settled in November 1997 for cash and the parties'
agreement to enter into a cross-licensing arrangement.
The Company and its subsidiaries are involved in various other legal
proceedings which have arisen in the normal course of their
operations. The Company has accrued its best estimate of the cost
of litigation based on known facts. It is possible that this
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estimate may change in the near term as the lawsuits progress.
Although the final resolution of any such matters could have a
material effect on the Company's operating results for the
particular reporting period in which an adjustment of the estimated
liability is recorded, the Company believes that any resulting
liability should not materially affect its financial position.
Note 11 ENVIRONMENTAL REMEDIATION
The Company is responsible for the remediation of hazardous
materials and ground contamination located at its former
manufacturing facility in Owosso, Michigan that was destroyed by
fire in June of 1993. In August 1993, the Michigan Department of
Natural Resources required that the Company perform a complete
hydrogeological study of the site to determine the extent of the
contamination. The Company engaged environmental consultants in the
summer of 1997 to determine the extent of the hazardous materials
located at this site, if any, and the cost of any remediation. The
Company has accrued its best estimate of the cost of remediation
based on known facts. It is possible that this estimate may change
in the near term as the project progresses. Although the final
resolution of any such matters could have a material effect on the
Company's operating results for the particular reporting period in
which an adjustment of the estimated liability is recorded, the
Company believes that any resulting liability should not materially
affect its financial position.
As part of the lease agreement with a related party for the Milan,
Michigan facility, the Company is also responsible for the
remediation of hazardous material, if any, up to an amount of
$2,000,000, which existed at this site prior to The Colonel's
entering into the lease in June 1993. The Company has accrued for
estimated remediation costs based on an environmental study of the
site. The Company has accrued its best estimate of the cost of
remediation based on known facts. It is possible that this estimate
may change in the near term as the project progresses. Although the
final resolution of any such matters could have a material effect on
the Company's operating results for the particular reporting period
in which an adjustment of the estimated liability is recorded, the
Company believes that any resulting liability should not materially
affect its financial position.
Note 12 SUBSEQUENT EVENTS
On October 10, 1997, the Board of Directors approved the repurchase
of 20,817,080 shares of Common Stock from the Company's majority
shareholders, Donald and Patsy Williamson. The $5,000,000 purchase
price will be paid in 1998, and a liability for this amount will be
established. When consummated, the transaction will reduce the
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number of outstanding shares of Common Stock from 24,177,805 to
3,360,725 and reduce the percentage of outstanding Common Stock
owned by the Williamsons from approximately 97 percent to
approximately 82 percent.
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EXHIBIT INDEX
2.1 Agreement and Plan of Merger between The Colonel's, Inc. and
Brainerd Merger Corporation and joined in by Brainerd International,
Inc. Incorporated by reference from Exhibit A to the Proxy
Statement of Brainerd International, Inc. for the Annual Meeting of
Shareholders of Brainerd International, Inc. held on November 21,
1995.
2.2 Agreement and Plan of Reorganization among Brainerd International,
Inc. and The Colonel's Holdings, Inc. Incorporated by reference from
Exhibit D to the Proxy Statement of Brainerd International, Inc. for
the Annual Meeting of Shareholders of Brainerd International, Inc.
held on November 21, 1995.
3.1 Articles of Incorporation of the Company, as amended. Incorporated
by reference from Exhibit 3.1 to the Company's Report on Form 10-Q
for the period ended March 31, 1997.
3.2 Bylaws, as amended. Incorporated by reference from Exhibit 3.2 to
the Company's Report on Form 10-Q for the period ended March 31,
1997.
4.1 Articles of Incorporation. See Exhibit 3.1 above.
11.1 Computation of Per Share Earnings
27.1 Financial Data Schedule
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