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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 June 30, 1998
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 (I.R.S. employer
of incorporation or organization identification no.)
620 SOUTH PLATT ROAD, MILAN, MICHIGAN 48160
(Address of principal executive offices) (Zip code)
(734) 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 August 10, 1998: 24,631,832
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The financial statements required under Item 1 of 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
As discussed herein, The Colonel's International, Inc. (the "Company")
has four subsidiaries: The Colonel's, Inc. ("The Colonel's"), The Colonel's
Truck Accessories, Inc. ("CTA"), The Colonel's Rugged Liner, Inc. ("CRL")
and Brainerd International Raceway, Inc. ("BIR"). CRL was formed in March
1998, in connection with the acquisition of four Pennsylvania corporations
engaged in the truck accessories business. This acquisition was completed
in April 1998.
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 (located in Dallas,
Texas; Houston, Texas; Glendale (Phoenix), Arizona; West Memphis, Arkansas;
and Totowa, New Jersey), 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.
CTA opened other Truckware outlet stores in Charlotte, North Carolina
and Flint, Michigan. In 1997, CTA purchased certain assets of Eastern Off
Road Equipment, Inc. with retail outlet stores located in Pennsylvania,
-2-
Maryland, Virginia and West Virginia. Recently, CTA purchased the assets
of the following: Road and Truck, which is located in Thousand Oaks,
California; Dealers Choice, which is located in Collinsville, Illinois and
serves the St. Louis metropolitan area; Duraliner of Nashville in
Nashville, Tennessee; Sun Shade Custom located in Franklin, Tennessee; Wild
Bill's Truck Accessories in Upland, California; Bedliner Kingdom in Los
Angeles, California; and Southland Shell in Pomona, California. These
facilities will warehouse and sell bedliners, caps, tonneau covers and
other purchased truck accessory products to the wholesale and retail
markets.
Additionally, CTA purchased 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.
These various acquisitions are not material to the financial position
or results of operations of the Company.
THE COLONEL'S RUGGED LINER, INC.
CRL was formed in March 1998 in connection with the acquisition by
merger of four Pennsylvania corporations: Rugged Liner, Inc., Triad
Management Group, Inc., Aerocover, Inc., and Ground Force, Inc.
(collectively, the "Rugged Liner Companies"). In this acquisition, which
was consummated in April 1998, each of the Rugged Liner Companies merged
with and into CRL, with CRL being the surviving corporation. The Rugged
Liner Companies, which are located in Uniontown, Pennsylvania, manufacture
non-skid bedliners and bed mats, as well as ground lowering kits for sport
utility vehicles (SUVs). CRL has a distribution warehouse/service center
in Pomona, California. CRL, as successor to the Rugged Liner Companies,
will concentrate its efforts on export sales.
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.
ACQUISITIONS THIS PERIOD
CTA made four acquisitions during the second quarter of 1998: the
Rugged Liner Companies, as described above; Sun Shade Custom, in Franklin,
Tennessee; Dealers Choice Distribution, Inc., in Collinsville, Illinois;
and DC Sales, Inc. in Collinsville, Illinois.
-3-
FACILITIES
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. The Colonel's
manufactures aftermarket bumper facias at the Milan facility, which has
sufficient expansion room. This facility is leased from a company owned by
Donald and Patsy Williamson, the majority shareholders of the Company.
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.
CRL manufactures bedliners for export and SUV ground lowering kits in
a 160,000 square foot building in Uniontown, Pennsylvania, about one hour
southeast of Pittsburgh, Pennsylvania. This facility also serves as a
master warehouse for the Eastern Off Road retail outlet stores.
BIR owns and operates a three-mile race track including a one-quarter
mile drag strip located approximately six miles northwest of Brainerd,
Minnesota. BIR's premises feature 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 36,000 spectators are primarily
located along the drag strip.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated current assets increased from $16,267,000
at December 31, 1997 to $19,896,000 at June 30, 1998. Consolidated current
liabilities increased from $13,160,000 at December 31, 1997 to $17,599,000
at the end of the second quarter of 1998.
Cash decreased from $1,723,000 at December 31, 1997 to $583,000 at
June 30, 1998, primarily due to the sale of the Company's Boynton Beach,
Florida property, which occurred on the last day of December, 1997. The
proceeds from this sale ($1,025,000) were used to pay down accounts payable
and other debt.
-4-
The accounts receivable balance at June 30, 1998 increased by
approximately $1,509,000 compared to December 31, 1997, primarily due to
the acquisition of CRL, which added $1,287,000, and other additional
businesses that were acquired or started during the second quarter of 1998.
A note receivable from the majority shareholder was established during
the third quarter of 1997 for $1,060,000. The note receivable bears
interest at 8 percent annually.
The inventory balance increased from $9,214,000 at December 31, 1997
to $12,398,000 as of June 30, 1998. This was primarily due to the addition
of new locations and the broadening of inventories at Eastern Off Road to a
more optimum level.
Prepaid expenses increased by $24,000 from December 31, 1997 to June
30, 1998, due to the normal expense of prepaid insurance, offset by advance
rentals and security deposits for new CTA warehouses.
Property, plant and equipment increased by $2,620,000 between December
31, 1997 and June 30, 1998. During the second quarter of 1998, The
Colonel's added $4,614,000 in fixed assets. Depreciation expense was
approximately $1,023,000 for the three months ended June 30, 1998. The
Company used the best estimates and available information to preliminarily
allocate the purchase price to the net assets acquired in the Rugged Liner
acquisition. Any subsequent adjustments that may be required will be
offset to goodwill.
Deposits increased from $630,000 at December 31, 1997 to $2,247,000 at
June 30, 1998. The increase relates to progress payments toward various
new tools that are on order for The Colonel's and CTA. The Company holds
payments toward uncompleted tools in deposits until the tool is completed,
at which time the tool is transferred to property, plant and equipment.
Goodwill increased from $379,000 as of December 31, 1997 to $3,227,000
at June 30, 1998. The $2,848,000 increase is related to the acquisition of
the Rugged Liner Companies and is being amortized over seven years.
Notes payable increased by $579,000 as the Company drew down on the
line of credit to purchase the balance of its interest in Dealers Choice.
Accounts payable increased from $1,837,000 at December 31, 1997 to
$3,459,000 at June 30, 1998. The increase is a result of the acquired
accounts payable of $575,000 from the Rugged Liner Companies and $339,000
from the acquisition of Dealers Choice, Road and Truck and Duraliner, plus
an increase in inventory levels.
Accrued expenses increased $396,000 due to a credit for merchandise
granted in connection with an asset acquisition and an increase in advance
ticket sales by BIR.
-5-
OUTSTANDING DEBT
In May 1997, the Company entered into a $7,000,000 term note
which requires monthly payments of $167,000 plus interest at prime plus
0.25 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
$4,829,000 at June 30, 1998.
The Company's line of credit was renegotiated in April 1998. The
Company's $6,000,000 line of credit was increased to $8,000,000 and now
expires in May 1999. The line of credit is secured by all of the Company's
assets. Interest is paid at prime on a monthly basis. From time to time
the Company funds its line of credit with Eurodollars that allow the
Company to borrow at a rate below prime for a fixed period of time. The
outstanding balance on the line of credit was $6,579,000 at June 30, 1998.
BIR has a $300,000 line of credit which is secured by all of its
assets. There was a balance of $40,000 at June 30, 1998.
BIR has a mortgage with a balance of $469,000 at June 30, 1998, 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 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 June 30, 1998, the balance due on these three capital leases
was $4,815,000.
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 $15,000. 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 $226,000 at June 30, 1998.
In April 1998, the Company secured a $7,500,000 acquisition line of
credit with its primary lending institution, part of which was utilized in
the acquisition of the Rugged Liner Companies. The Company will pay
interest only on the outstanding balance until December 1998 when the
balance will be rolled into a term note where monthly payments of both
principal and interest will be due. The interest rate is equal to prime.
The balance at June 30, 1998 was $4,075,000.
-6-
In connection with the purchase of Dealers Choice, the Company assumed
a Small Business Administration (SBA) loan. The balance on this loan as of
June 30, 1998 was $210,000. Also, the Company assumed a real estate loan
with the balance of $145,000 at June 30, 1998. The Company plans to pay
both loans off in the near future.
The Company has financed vehicles to be used at the sales retail
outlet stores. The collective balance on these vehicles at June 30, 1998
was $204,000. The collective balance on financed vehicles for all other
operations at June 30, 1998 was $111,000.
The Company anticipates that future capital requirements and
acquisitions will be financed through earnings from operations, amounts
under its line of credit, and amounts available on the acquisition line of
credit.
RESULTS OF OPERATIONS
Revenues for the Company were $14,409,000 for the quarter ending
June 30, 1998, compared to $11,119,000 for the same period in 1997. The
increase in 1998 was primarily due to increased sales by CTA, and from
acquisitions. Revenues for The Colonel's for the first six months of 1998
were $3,500,000 less than for the same period in 1997, primarily due to
unseasonably warm winter conditions that resulted in less than normal
snowfall, thus lowering the number of automobile accidents.
Cost of sales decreased from 76 percent of sales for the three months
ended June 30, 1997, to 71 percent for the same three-month period in 1998.
This decrease is primarily due to poor bumper sales resulting from mild
conditions in the snow belt during the 1997-1998 winter and the Company's
decision to cut back production costs.
Selling, general and administrative expenses as a percentage of sales
for the second quarter of 1998 grew to 17 percent compared to 14 percent of
sales in the same period of 1997.
Net income increased $195,000 for the three months ended June 30, 1998
as compared to the three months ended June 30, 1997.
Interest expense increased by $245,000 for the three months ending
June 30, 1998, over the same period of 1997. The increase is the result of
a higher average outstanding balance under the new term note added in May
1997 that replaced the previous term note, and the interest associated with
the acquisition line of credit obtained in April 1998.
-7-
The Company's income tax liability for the second quarter of 1998 was
approximately $320,000.
Earnings per share during the second quarter of 1998, as compared to
the second quarter of 1997, was $0.04 per share and $0.03 per share,
respectively.
FORWARD-LOOKING STATEMENTS
With the exception of historical matters, the matters discussed in
this Report on Form 10-Q include certain statements that may be considered
forward-looking statements under securities laws. These statements are
subject to a number of important risks and uncertainties that could cause
actual results to differ materially including, but not limited to,
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. The Company
undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events or
otherwise.
-8-
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 23, 1998, the Company, through its newly formed wholly owned
subsidiary CRL, acquired by merger (the "Mergers") the Rugged Liner
Companies. In the Mergers, each of the Rugged Liner Companies merged with
and into CRL. CRL was the surviving corporation in the Mergers. Pursuant
to the Mergers, CRL's name was changed to "Rugged Liner, Inc." Articles of
Merger were filed with and deemed effective by the Commonwealth of
Pennsylvania on April 24, 1998.
The Mergers were conducted pursuant to an Agreement and Plan of Merger
dated March 13, 1998, as amended by a First Amendment to Merger Agreement
dated April 23, 1998 (collectively, the "Merger Agreement"). Under the
Merger Agreement, the former shareholders of the Rugged Liner Companies
were to receive, prior to adjustments, an aggregate total of $8,500,000
in cash and shares of Common Stock. These persons received, after
adjustments, certain amounts of cash and an aggregate total of 454,027
shares of the Company's Common Stock, all totaling $7,954,000 in accordance
with the Merger Agreement. These shares of Common Stock were
issued pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 29, 1998 the Company held its 1998 Annual Meeting of
Shareholders at its corporate offices in Milan, Michigan. The purpose of
the meeting was to elect four Directors to the Board of Directors.
Four candidates nominated by management were elected by the
shareholders to serve as Directors of the Company at the meeting. The
following sets forth the results of the voting with respect to each
candidate:
-9-
NAME OF CANDIDATE SHARES VOTED
- ----------------- ------------
Donald J. Williamson For 24,068,619
Against 0
Authority Withheld 2,540
Broker Non-Votes 0
Donald R. Gorman For 24,068,619
Against 0
Authority Withheld 2,540
Broker Non-Votes 0
Ted M. Gans For 24,068,619
Against 0
Authority Withheld 2,540
Broker Non-Votes 0
Mark German For 24,068,619
Against 0
Authority Withheld 2,540
Broker Non-Votes 0
Mark D. Stevens remained as a Director of the Company with a term
expiring in 2000. J. Daniel Frisina and Ben C. Parr remained as Directors
of the Company with terms expiring in 1999. Thus, the expiration dates of
the Directors' current terms of office are as follows:
DIRECTOR YEAR TERM EXPIRES
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Donald J. Williamson 2001
Donald R. Gorman 2001
Ted M. Gans 2001
Mark German 2001
Mark D. Stevens 2000
J. Daniel Frisina 1999
Ben C. Parr 1999
-10-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following exhibits are filed as part of this
report.
EXHIBIT
NUMBER ITEM
- ------ ----
2.1 Agreement and Plan of Merger by and among The Colonel's
International, Inc., The Colonel's Rugged Liner, Inc., Rugged
Liner, Inc., Triad Management Group, Inc., Aerocover, Inc.,
Ground Force, Inc., and certain shareholders of the foregoing,
dated March 13, 1998. Incorporated by reference to Exhibit 2(a)
to the Registrant's Current Report on Form 8-K dated May 8, 1998.
2.2 First Amendment to Agreement and Plan of Merger, by and among The
Colonel's International, Inc., The Colonel's Rugged Liner, Inc.,
Rugged Liner, Inc., Triad Management Group, Inc., Aerocover,
Inc., Ground Force, Inc., and certain shareholders of the
foregoing, dated April 23, 1998. Incorporated by reference to
Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated
May 8, 1998.
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 of the Company, 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 of the Company, as amended. See
Exhibit 3.1 above.
4.2 Bylaws of the Company, as amended. See Exhibit 3.2 above.
10.1 Employment Agreement dated as of April 23, 1998 between the
Colonel's Rugged Liner, Inc. and Mark German.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. During the second quarter of 1998, the
Registrant filed a Report on Form 8-K dated May 8, 1998 to report its
acquisition of the Rugged Liner Companies (as defined above). No financial
statements were required to be included in such report.
-11-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE COLONEL'S INTERNATIONAL, INC.
Dated: August 18, 1998 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)
-12-
APPENDIX A
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
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(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 583,195 $ 1,723,652
Accounts receivable - trade (net of allowance
for doubtful accounts of $423,000 and $575,000
at June 30, 1998 and December 31, 1997,
respectively) 5,482,684 3,973,528
Note receivable from majority shareholder (Note 2) 200,000 200,000
Inventories (Note 3) 12,398,861 9,214,557
Prepaid expense 449,984 425,476
Deferred taxes - current 686,000 635,000
Current portion of deferred compensation/ other 95,667 95,667
----------- -----------
Total current assets 19,896,391 16,267,880
PROPERTY, PLANT, & EQUIPMENT - Net (Note 4) 28,948,140 26,328,039
OTHER ASSETS:
Note receivable from majority shareholder (Note 2) 844,956 844,956
Long-term portion of deferred compensation 228,176 255,857
Deposits 2,247,436 630,486
Goodwill 3,227,734 379,816
Land, held for investment purposes 745,000
Other 231,921 233,246
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Total other assets 7,525,223 2,344,361
TOTAL ASSETS $56,369,754 $44,940,280
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-13-
JUNE 30, DECEMBER 31,
1998 1997
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(UNAUDITED) (AUDITED)
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 6) $ 6,579,498 $ 6,000,000
Current portion of long-term obligations 4,630,365 3,166,741
Accounts payable - trade 3,459,789 1,837,528
Accrued expenses (Note 5) 1,530,998 1,134,637
Current portion of deferred compensation 95,668 95,667
Income taxes payable 1,303,037 925,549
----------- -----------
Total current liabilities 17,599,355 13,160,122
LONG-TERM OBLIGATIONS, NET OF
CURRENT PORTION (Note 7) 10,354,575 8,844,055
LONG-TERM PORTION OF DEFERRED
COMPENSATION 228,176 255,857
DEFERRED TAXES - LONG-TERM 3,765,000 3,828,000
SHAREHOLDERS' EQUITY:
Common stock: 35,000,000 shares authorized
at $0.01 par value, 24,631,832 and
24,177,805 issued and outstanding, respectively 246,318 241,778
Additional paid-in-capital 9,230,912 5,606,239
Retained earnings 14,945,418 13,004,229
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Total shareholders' equity 24,422,648 18,852,246
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $56,369,754 $44,940,280
=========== ===========
-14-
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDING THREE MONTHS ENDING
JUNE 30 JUNE 30
------------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
SALES $26,040,841 $22,056,889 $14,409,886 $11,119,756
COST OF SALES 18,434,805 15,977,771 10,199,375 8,420,377
----------- ----------- ----------- -----------
GROSS PROFIT 7,606,036 6,079,118 4,210,511 2,699,379
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,111,584 2,974,252 2,483,976 1,451,540
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 3,494,452 3,104,866 1,726,535 1,247,839
OTHER INCOME (EXPENSE):
Interest expense (931,027) (628,474) (549,205) (279,309)
Interest income 0 51,733 0 27,971
Rental income 31,250 30,000 16,000 15,000
Other 6,540 23,869 2,172 7,950
----------- ----------- ----------- -----------
Other income (expense), net (893,237) (522,872) (531,033) (228,388)
NET INCOME BEFORE TAXES $ 2,601,215 $ 2,581,994 $ 1,195,502 $ 1,019,451
PROVISION FOR INCOME
TAXES (Note 8) 660,026 871,000 320,000 339,000
NET INCOME $ 1,941,189 $ 1,710,994 $ 875,502 $ 680,451
=========== =========== =========== ===========
EARNINGS PER SHARE (Note 9) $ 0.08 $ 0.07 $ 0.04 $ 0.03
=========== =========== =========== ===========
-15-
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDING
JUNE 30
--------------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,941,189 $ 1,710,994
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,268,441 1,874,946
Deferred tax provision (114,000) 315,000
Gain on sale of property (17,407)
Changes in assets & liabilities that provided (used) cash,
net of effects of acquisitions:
Accounts receivable (252,270) 272,169
Inventories (1,410,249) 75,123
Prepaid expenses 19,288 (701,096)
Other current assets 6,571
Accounts payable 708,618 (786,189)
Accrued expenses (282,596) 217,654
Goodwill 26,700
Income taxes payable 377,488 (744,000)
Net cash provided by investing activities 3,289,180 2,217,194
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of consolidated subsidiaries,
net of cash acquired (4,328,565)
Expenditures for property, plant & equipment (1,391,315) (874,933)
Proceeds from sale of property, plant & equipment 21,500
Net change in deposits (1,599,311) (1,122,422)
Payment to stockholder for deposit on land (48,406)
Net cash used in investing activities (7,367,597) (1,975,855)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under notes payable 579,498 (2,300,000)
Proceeds from long-term obligations 4,075,152 7,000,000
Principal payments on long-term debt (1,317,169) (3,606,050)
Principal payments on obligations under capital leases (399,521) (460,241)
Cash contribution from related party 86,785
-16-
Net cash provided by financing activities 2,937,960 720,494
NET INCREASE (DECREASE) IN CASH $(1,140,457) $ 961,833
=========== ===========
CASH, BEGINNING OF PERIOD $ 1,723,652 321,486
----------- -----------
CASH, END OF PERIOD $ 583,195 $ 1,283,319
=========== ===========
Supplemental Schedule of noncash investing and financing activities:
Notes payable and future inventory credits issued in
connection with acquisitions (See Note 12) $ 621,955 $ 0
=========== ===========
Common stock issued in connection with the acquisition
of the Rugged Liner Companies (See Note 12) $ 3,677,619 $ 0
=========== ===========
Transfer of deposits to property, plant and equipment
relating to property placed in service $ 0 $ 1,776,555
=========== ===========
Property additions from the issuance of capital leases $ 0 $ 351,705
=========== ===========
-17-
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 three months and six months ended
June 30, 1998 are not necessarily indicative of the results expected
for the full year.
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", which is effective for
fiscal years beginning after December 15, 1997. The statement
changes the reporting of certain items currently reported in the
shareholders' equity section of the balance sheet and establishes
standards for reporting of comprehensive income and its components
in a full set of general purpose financial statements. The effect
of SFAS No. 130 is not material to the financial position or
results of operations of the Company.
SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related Information" applies to all public entities and is
effective for financial statement periods beginning after December
15, 1997. However, SFAS No. 131 is not required to be applied to
interim financial statements in the initial year of application.
Therefore, the Company has elected not to adopt SFAS No. 131 at
this time.
Note 2 NOTE RECEIVABLE FROM MAJORITY SHAREHOLDER
During the third quarter of 1997, a note receivable from the
majority shareholder of $1,044,956 was established.
-18-
Note 3 INVENTORIES
Inventories are summarized as follows: JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------- ----------
Finished products $11,549,845 $8,644,944
Raw materials 849,016 569,613
----------- ----------
Total inventories $12,398,861 $9,214,557
=========== ==========
Note 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized by major
classification as follows:
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
------------ ------------
Land and improvements $ 2,541,216 $ 2,504,400
Track 1,598,180 1,533,760
Buildings 1,216,763 930,393
Leasehold improvements 1,764,491 1,684,643
Bleachers & fencing 755,662 755,662
Equipment 15,186,174 15,016,019
Transportation equipment 1,473,105 1,090,030
Furniture & fixtures 1,267,820 741,373
Tooling 28,917,610 25,709,982
Construction in progress 222,739 88,956
------------ ------------
Total 54,943,760 50,055,218
Less accumulated depreciation (25,995,620) (23,727,179)
------------ ------------
Net property, plant and equipment $ 28,948,140 $ 26,328,039
============ ============
-19-
Note 5 ACCRUED EXPENSES
Accrued expenses consist of the following: JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
---------- ------------
Accrued legal $ 496,540 $ 513,977
Accrued environmental costs 100,000 100,000
Accrued taxes 99,115 55,301
Advance ticket sales 771,028 23,826
Other 64,315 441,533
---------- ----------
Total $1,530,998 $1,134,637
========== ==========
Note 6 NOTE PAYABLE
Note payable consists of the following: JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
---------- ------------
Line of credit with a bank, interest is due monthly
at the bank's prime rate (8.5% at June 30, 1998) $6,579,498 $6,000,000
========== ==========
The Company has a line of credit with a bank which was
renegotiated in April 1998 extending the maximum borrowing base
from $6,000,000 to $8,000,000, and expires in May 1999. The line
of credit is secured by all of the Company's assets. Remaining
availability under this line of credit at June 30, 1998 was
$1,420,503.
-20-
Note 7 LONG-TERM OBLIGATIONS
Long-term obligations consist of the following: JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------- ------------
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
June 30, 1998) through November 2000,
and secured by the Company's assets $ 4,829,000 $ 5,831,000
Mortgage payable to a bank, interest at the bank's
prime rate plus 2% (effective rate of 10.5% at
June 30, 1998), annual principal payments
of $50,000 plus interest due quarterly, through
September 2004. Secured by underlying property. 350,000 350,000
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 4,815,345 5,214,866
Capital lease obligation through March 1999;
monthly installments of $15,987 including interest
at 8.5% 226,744 226,744
Acquisition line of credit. Interest at bank's prime
rate (8.5% at June 30, 1998) 4,075,152 --
Vehicle financing 315,278 212,065
Other 373,421 176,121
----------- -----------
Total 14,984,940 12,010,796
Less current portion (4,630,365) (3,166,741)
----------- -----------
Long-term portion $10,354,575 $ 8,844,055
=========== ===========
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, to pay the
remaining balances due on a mortgage note payable and to pay a
$1,000,000 bridge note payable.
-21-
Note 8 INCOME TAXES
The Company's income tax liability for the second quarter of 1998
was approximately $320,000.
Note 9 EARNINGS PER SHARE
In accordance with SFAS 128, basic earnings per share for June 30,
1998 and 1997 calculated as net income divided by the weighted
average number of common shares outstanding of 24,355,904 and
24,177,805, respectively. Diluted earnings per share was calculated
as net income divided by the weighted average number of common
shares outstanding of 24,363,655 and 24,178,506, respectively, which
has been increased by the number of additional common shares that would
have been outstanding if the dilutive shares had been issued
(7,751) and (701) for 1998 and 1997 respectively. Due to the
small number of additional potentially dilutive shares, there was
no material effect on earnings per share, therefore basic and
diluted earnings per share are the same.
Note 10 LITIGATION
No material developments in the litigation discussed in the
Company's Report on Form 10-K for the year ended December 31, 1997
occurred during the first two quarters of 1998.
Note 11 ENVIRONMENTAL
No material developments in the environmental matters discussed in
the Company's Report on Form 10-K for the year ended December 31,
1997 occurred during the first two quarters of 1998.
Note 12 ACQUISITIONS
During 1998, the Company acquired inventory of $875,000, accounts
receivable of $206,000, property of $700,000, other assets of
$33,000, debt of $432,000, accounts payable of $339,000 and other
liabilities of $16,000 as a result of the purchase of Dealers
Choice Distribution, Inc., DC Sales, Inc., Road and Truck and
Duraliner of Nashville. The total cash paid for the purchases
was $425,000. In addition to the cash paid, the Company issued
a note payable of $108,733, and provided the Seller with future
credits for the purchase of $513,222 of the Company's inventory.
Goodwill of approximately $20,000 has been recorded as a result
of these acquisitions and is being amortized over seven years.
The acquisitions have been accounted for under the purchase
method, and accordingly the results of operations are included
in the consolidated operating results since the date of acquisition.
-22-
In April 1998, the Company also acquired the Rugged Liner Companies.
The acquisition has been accounted for under the purchase method,
and accordingly the results of operations are included in the
consolidated operating results since the date of acquisition. A
preliminary allocation of the purchase price to the net assets
acquired resulted in the Company acquiring inventory of $899,000,
accounts receivable of $1,052,000 property of $3,542,000, other
assets of $360,000, debt of $74,000, accounts payable of $575,000
and other liabilities of $150,000. The total cash, stock and other
consideration paid for the assets, exclusive of the liabilities
assumed, was $7,908,000. Goodwill of approximately $2,854,000 has
been recorded as a result of this acquisition and is being amortized
over seven years. The portions of the allocation that relate to
data that was not available will subsequently be adjusted to
reflect the finally determined amounts, with a corresponding
adjustment of goodwill.
Note 13 SUBSEQUENT EVENTS
The Company has issued tender offers and purchase commitments for
three additional acquisitions, and expects to close on these
within the next 30 days. The aggregate purchase price for all
three proposed acquisitions is not expected to exceed $500,000.
-23-
EXHIBIT INDEX
EXHIBIT
NUMBER ITEM
- ------ -----
2.1 Agreement and Plan of Merger by and among The Colonel's
International, Inc., The Colonel's Rugged Liner, Inc., Rugged
Liner, Inc., Triad Management Group, Inc., Aerocover, Inc.,
Ground Force, Inc., and certain shareholders of the foregoing,
dated March 13, 1998. Incorporated by reference to Exhibit 2(a)
to the Registrant's Current Report on Form 8-K dated May 8, 1998.
2.2 First Amendment to Agreement and Plan of Merger, by and among The
Colonel's International, Inc., The Colonel's Rugged Liner, Inc.,
Rugged Liner, Inc., Triad Management Group, Inc., Aerocover,
Inc., Ground Force, Inc., and certain shareholders of the
foregoing, dated April 23, 1998. Incorporated by reference to
Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated
May 8, 1998.
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 of the Company, 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 of the Company, as amended. See
Exhibit 3.1 above.
4.2 Bylaws of the Company, as amended. See Exhibit 3.2 above.
10.1 Employment Agreement dated as of April 23, 1998 between the
Colonel's Rugged Liner, Inc. and Mark German.
27 Financial Data Schedule